Testimony – Medicare Reform

Chairman Roth, Senator Moynihan, distinguished Committee Members, thank you for inviting me to testify on the topic of Medicare financing. I am pleased to represent the nation’s Governors on an issue of such importance.

One of the most important responsibilities we have as policymakers is to protect and improve the health and welfare of our nation’s citizens. To this end, the Medicare and Medicaid programs have been tremendously successful. Together these federal and state programs provide health insurance for one in four Americans and are responsible for more than one third of the nation’s health care expenditures.

Medicare has given seniors and adults with disabilities access to mainstream medicine, and it has prevented many individuals from falling into poverty through illness or disability. Moreover, Medicare has given American families the assurance that they will not have to bear by themselves the burden of illness of their elderly or disabled parents or other family members.

Despite Medicare’s success, the program faces enormous challenges on two fronts. First, the gaps that have always existed in Medicare coverage – for preventive care, outpatient prescription drugs, and long-term care – are widening. In fact, Medicare now covers only about half of seniors’ health care costs. Second, as you are well aware, Medicare expenditures have risen faster than the rate of overall economic growth since the program’s inception. Government officials project that Medicare spending will surge over the next quarter century from 12% of federal expenditures to more than 25%.

I am here today because the challenges facing Medicare are as important to Governors as they are to you.

For low-income Medicare beneficiaries, Medicaid fills the gaps in Medicare coverage by providing assistance for Medicare premiums and cost sharing expenses, and through coverage of outpatient prescription drugs and long-term care. Medicaid serves not only low-income Medicare beneficiaries, but also higher income individuals as well, who turn to Medicaid after exhausting their own resources to pay for their care.

States are affected by the same factors that are driving up Medicare spending. The rising cost of medical care leads to higher beneficiary premiums and cost-sharing expenses, which in turn drive up Medicaid spending for low-income beneficiaries. Additionally, the aging baby boom population and medical advances are leading to an increasing number of chronically ill beneficiaries who need long-term care and support with basic activities of daily living, such as eating, bathing, and dressing. These factors will place an enormous strain on state Medicaid budgets in the years to come.

Moreover, because Medicaid’s role in providing coverage for these individuals is supplementary to Medicare, states are in the unreasonable position of sharing responsibility for providing coverage, without any way to affect the policies that govern Medicare or to manage the up-front primary and acute care treatment decisions that drive beneficiaries’ use of long-term care services and Medicaid spending.

These factors alone are cause for substantial concern. Yet they are compounded by the fact that states – through Medicaid and other state-funded programs for elderly and disabled individuals – are susceptible to tremendous cost shifting from Medicare.

For example, the Balanced Budget Act of 1997, which included immediate cuts in Medicare provider payments, has led directly to increases in state spending for Medicare beneficiaries. As states, we view these cuts as the tip of the iceberg, and are alarmed at the prospect that more extensive Medicare reform may have many times the impact on state spending that the BBA has already had.

You must know that any time you change Medicare, it affects Medicaid and other state-funded programs, typically through a combination of unfunded mandates and other forms of cost shifting. As you embark on the difficult task of reforming Medicare, I urge you not do so at the expense of states!

Dually Eligible Beneficiaries

Although states play a key role in funding services provided to many low-income seniors, the most evident connection between Medicare and states is for individuals eligible for both Medicare and Medicaid coverage. According to the Health Care Financing Administration, fifteen percent of Medicare beneficiaries are also eligible for Medicaid. These dually eligible beneficiaries, however, account for thirty percent of all Medicare spending.

Dually eligible beneficiaries are also an expensive population for Medicaid programs. Although they account for only sixteen percent of Medicaid recipients, dual eligibles account for thirty-five percent of Medicaid expenditures.

Medicare and Medicaid spend about the same amount for dually eligible beneficiaries. In 1997, Medicare spending for dually eligible beneficiaries totaled $62 billion. That same year, Medicaid spending for this population totaled $58 billion. Combined Medicare and Medicaid spending for dually eligible beneficiaries averages more than $20,000 per person.

The majority of the six million dually eligible beneficiaries, about 5.4 million, receive full Medicaid coverage. Medicaid provides coverage for their Medicare premium and cost sharing expenses and for services not covered by Medicare, including long-term care and outpatient prescription drugs.

The remaining 600,000 beneficiaries are not eligible for full Medicaid coverage, but do receive Medicaid assistance with Medicare premiums and/or cost sharing. They include individuals with incomes up to 120% of the poverty level (“Qualified Medicare Beneficiaries” and “Specified Low-income Medicare Beneficiaries”) and, at least through 2002, individuals with incomes between 120% and 175% of the poverty level (“Qualified Individuals”).

Not included in these population figures are low-income Medicare beneficiaries who are eligible for Medicaid coverage, but who decide to forgo such assistance or who are not aware that assistance is available. HCFA and the states are working together to identify effective outreach methods, but in many cases the cost of outreach exceeds the value of the benefit to an individual. One option that deserves serious consideration would have the QI-1 and QI-2 programs, which are fully federally funded, administered by the Social Security Administration or another federal agency. Assistance could be provided to beneficiaries in the form of cash payments.

Dually eligible beneficiaries are a particularly vulnerable and high-cost group of individuals. Compared to other Medicare beneficiaries, dual eligibles are more likely to suffer from chronic illness and to require significant long-term care and social support services. They are also more likely to live alone or in a nursing facility and less likely to have a spouse still living. Of course, dually eligible beneficiaries are much poorer, on average, than other Medicare beneficiaries: 80 percent have annual incomes of less than $10,000.

These differences are a function of Medicaid eligibility criteria, which restrict coverage to individuals with low incomes and those who are medically needy – that is, individuals whose medical care costs are so great that they spend down to qualify for Medicaid. Generally, such individuals have chronic and complex care needs, and most require long-term care in a nursing facility.

Dually eligible beneficiaries are also different from other Medicare beneficiaries in another, very important way: they do not have the same financial incentive to choose among fee-for-service and managed care options based on differences in price and benefits, because Medicaid programs cover their out-of-pocket costs and provide comprehensive coverage. In fact, national data show that dual eligibles are 75% less likely than other Medicare beneficiaries to enroll in a managed care plan.

Cost Shifting

Because of pressure to contain costs, both Medicare and Medicaid have incentives to shift costs to one another. States are especially susceptible to cost shifts from Medicare.

For example, recent cuts in provider payments under the Balanced Budget Act of 1997 have shifted significant costs to Medicaid and other state programs and are increasing pressure on states to increase Medicaid provider rates. In Massachusetts, the number of home health visits covered by Medicare dropped by 26 percent in the year following the introduction of the Interim Payment System for home health. Medicare payments decreased by $130 million, and fifteen agencies went out of business. This has had a direct impact on the demand for Medicaid and state-funded home care services, which saw a 250 percent increase in the number of clients served.

More important is the impact on the 10,000 individuals who lost their coverage for Medicare home health as a result of these changes – a drop of 15 percent. It will cost the state more than $1 million a month to provide the extra services that will allow 4,000 seniors to remain in their homes. Other beneficiaries will have to pay out-of-pocket for their care, and many are expected to go without care. Inevitably, some of these individuals will end up in nursing homes and on Medicaid.

Efforts to redirect federal payments to low-cost areas, as well as reductions in Medicare funding for graduate medical education (GME) are also putting pressure on state budgets, as providers turn to states to make up for lower Medicare payments. States particularly affected by cuts in Medicare GME funding are those with a concentration of large teaching hospitals, such as California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Texas, Virginia, and Wisconsin. Teaching hospitals in Massachusetts and elsewhere have been the vanguard of important medical advances and continue to provide an array of specialized services to Medicare beneficiaries. Any reduction of federal support for medical education would compromise this important social mission at the very time when teaching hospitals must respond to the pressures of an increasingly competitive marketplace.

Institutional Bias

Cost shifting is not the only concern of states. Another major concern is the degree of institutional bias under the current system. Senior consumers generally prefer to live in their own homes and remain as independent as possible, yet current federal eligibility, coverage and payment policies are biased toward institutional care. Also, existing distinctions between Medicare and Medicaid policies related to coverage of and eligibility for nursing facilities and home- and community-based care are particularly complicated and often favor institutionalization.

Although institutional care must be available and affordable to those who need it, federal policies must be redesigned to eliminate the institutional bias of the Medicare and Medicaid programs. Such policies must encourage the availability of a continuum of services, including home- and community-based long-term care when cost-effective. The independence of the individual must be maintained and enhanced to the maximum extent possible; family efforts to assist the individual must also be supported.

Lack of Care Coordination

An equally severe problem for dually eligible beneficiaries is the lack of coordination among primary, acute and long-term care providers. In general, seniors needing long-term care also need a great deal of acute care. Yet our health care system focuses on addressing specific service needs and does a poor job of addressing the interaction of acute and chronic needs. Primary and acute care providers are often unaware of the full range of private and publicly-funded long-term care and social support options available to their patients, or may lack knowledge about the social and environmental circumstances of their patients that can be critical to the onset or progression of disease or disabling conditions.

As a result of the lack of clinical care coordination, primary care physicians or specialists are frequently unaware when their patients are admitted to nursing facilities, and home care case managers are often not informed when their clients are hospitalized. This fragmentation of care and a lack of accountability for health outcomes contribute to higher rates of preventable hospitalizations and to nursing facility admissions. Ultimately, poor clinical outcomes and service decisions that are reimbursement-driven lead to higher expenditures for both Medicare and Medicaid.

Separate Management of Medicare and Medicaid

Additionally, for dual-eligible seniors, the lack of coordination between the Medicare and Medicaid programs contributes to fragmentation of acute and long-term care. It is currently impossible for Medicaid to participate in the acute care decisions made when Medicare is the primary payer. Medicare’s current managed care program is incapable of addressing these issues, because participating Managed Care Organizations are neither responsible for providing long-term care services, nor accountable for the cost of such services.

These problems cannot be solved unless greater attention is paid to the interactions between Medicare and Medicaid. The simple fact is that separate management of the two programs does not work for frail beneficiaries. One reason is that the two programs operate under different financial incentives. Medicare costs are higher when frail seniors receive care in the community than when these individuals receive their care in a nursing facility. By contrast, Medicaid costs are higher for frail seniors who reside in a nursing facility. A second reason that separate management doesn’t work is that it prevents either program from holding health plans and providers accountable for health outcomes.

Integrating Acute and Long-Term Care

There are many personal tragedies that illustrate the human cost of the current system to beneficiaries and their families. Along with my testimony, I am submitting a copy of an article titled “Saving Medicare: Why Medicaid Must Be Part of the Solution.” This article, which highlights many of the problems with the current system, includes the story of an elderly woman who was, in her daughter’s words, “bounced around (in the current system) like a ping pong ball,” until she finally lost her independence and was confined to a nursing facility.

For the sake of all Americans, we can and must do better.

More effective coordination of acute and long-term care services must occur if we are to serve our beneficiaries better and to prevent decline in disability. Case management is one approach to coordinating care more effectively. A more comprehensive approach to improving the coordination of care for consumers is through contracting with integrated care plans to cover the full range of acute and long-term care benefits covered by Medicare and Medicaid.

Integrated Medicare/Medicaid programs are the best way to both improve health outcomes for consumers and control spending. The benefits of integrated programs include: a comprehensive service package that recognizes the interaction of acute and chronic needs; greater flexibility for providers and consumers to design a care plan that meets the individual’s needs and that is unencumbered by fee-for-service reimbursement restrictions; and an emphasis on prevention and coordination of care across providers and settings, including the coordination of medical services with social support services. Integrated programs also offer HCFA and states an opportunity to hold a single entity accountable for quality of care and health outcomes.

The Program of All-Inclusive Care for the Elderly (PACE) is one model of an integrated care program. The BBA expanded PACE, and it is now a permanent part of the Medicare and Medicaid programs. In my state, we found that a local PACE program was able to cut in half the number of hospital admissions due to preventable conditions. Despite the tremendous success of PACE, it is only available to low-income, frail seniors who meet strict clinical eligibility standards. We need an approach that addresses the needs of middle- and low-income seniors before they become frail and dependent on Medicaid.

Among the Medicare options available to beneficiaries — which currently include traditional fee-for-service, Medicare+Choice plans, and Medical Savings Accounts — should be the option to enroll in an integrated program. In particular, federal policies should allow seniors to use their Medicare benefit to enroll in an integrated program administered by a federal/state partnership. States should have the flexibility to determine whether Medicare’s contribution would be paid directly to the integrated plan or collected by the state which would then pay a single combined Medicare/Medicaid payment to the integrated plan.

States are in a strong position to take the lead in administering and managing integrated programs through federal/state partnerships, especially if Congress decides to adopt a “defined contribution” plan patterned after the Federal Employee Health Benefit Plan. One reason for states’ readiness is that many publicly-funded health programs are operated at the state-level, as detailed above. A second reason is that states have already developed expertise in the area of managing health plans to improve quality and health outcomes while controlling costs. In addition, states have shown that they can target long-term care services appropriately while maintaining informal support in the home or community.

Barriers to Integration

Unfortunately, a number of significant obstacles, both statutory and administrative, have arisen to conducting effective coordinated care demonstrations. Among the major administrative obstacles is a lengthy and complicated federal review process for demonstration waivers. Other barriers include arbitrary Medicare and Medicaid budget neutrality requirements, difficulty coordinating program oversight, including HCFA’s reluctance to deviate from Medicare+Choice policies without the clear support of Congress, and low Medicare payments to managed care plans for frail, community-dwelling beneficiaries, relative to Medicare fee-for-service expenditures for this population.

As a result, only one state – Minnesota – is currently operating an integrated care program that is available to the full range of unimpaired, moderately impaired, and severely impaired dual-eligible seniors. Many more states, however, have expressed an interest in developing integrated programs. They include California, Colorado, Connecticut, Delaware, Florida, Maine, Maryland, Massachusetts, New Hampshire, New York, Oregon, Rhode Island, Texas, Vermont, Virginia, and Washington.

If these states are to make case management and integrated programs broadly available to low-income seniors, Congress and the administration will have to address federal barriers to the timely development of such programs. The authority to test new approaches could be clarified either through explicit legislative authorization or through the creation of Medicare waiver authority similar to the waiver options that exist in Medicaid. In addition, stronger partnerships between HCFA and states are needed to strengthen the coordination of Medicare and Medicaid. I understand that several states have drafted legislative language that would address some of these problems, and that this language is being reviewed by the National Association of State Medicaid Directors.


The nation’s Governors support Medicare reform to ensure the long-term solvency of the program, as well as to improve the quality of the program for all beneficiaries. As reform measures are considered, however, they must be assessed for their impact on dual eligibles and on Medicaid and other state-funded programs. Medicare reform must not create unfunded state mandates or otherwise shift costs to states. Such reform must also account for the fact that dual eligibles, who account for 30 percent of program expenditures, have no incentive to select a health plan based on price because their out-of-pocket costs are paid for by Medicaid. In addition, Medicare reform should support state flexibility to develop mechanisms to contain growth in Medicaid spending. Finally, Medicare reform should support federal-state partnerships to coordinate and integrate Medicare and Medicaid to ensure greater accountability for health outcomes.

As the baby-boom generation begins to retire in 2010, the need for sensible solutions to the senior health care crisis will grow dramatically. Federal and state action is needed now to plan for this certainty. Some time remains to develop and assess policies that could lead to cost-efficient, quality medical and support services. However, if this time is not used wisely, the cost in terms of quality of life for individuals and their families, and in state and federal spending, could be quite substantial. The nation’s Governors support Medicare reform and we are eager to work with Congress toward this goal.

I thank you again for the opportunity to be a part of this hearing. I look forward to answering any questions you may have.