THE WHITE HOUSE
Office of the Press Secretary
PRESS BRIEFING BY
NATIONAL ECONOMIC ADVISOR GENE SPERLING
AND DEPUTY ASSISTANT TO THE PRESIDENT FOR HEALTH POLICY
CHRIS JENNINGS
The Roosevelt Room
10:20 A.M. EDT
MR. SPERLING: Hi, I'm Gene Sperling. I'm the President's National Economic Advisor. This is Chris Jennings, who is the Deputy Domestic Policy Advisor and President's lead health care expert at the White House. We will do our best to go through this plan.
I think that, particularly when you see the longer document that will, hopefully, be out, at least by tomorrow in some detail -- (laughter) -- I'm talking about a real long document -- I think you will see that this is a very serious and comprehensive plan to improve health care and modernize the Medicare system. It is a plan that has -- it's a plan that starts not with any particular fiscal test, as much as the question of what is the best way we can provide better health care for our family members in their senior years, and that we can make Medicare truly stronger and more modern and efficient for the next century.
There are, obviously, a few big items that people are interested in -- there are also a number of details in almost each and every area. Chris and I will do our best to try to hit a medium round here. We can be here for a while and we will do our best to answer other questions.
There is a five-pager we'll hand out, but let me walk through what I see as the basic structure of our plan. This is a plan, as I said, to modernize and strengthen Medicare for the 21st century. The initiative can be thought of in three parts: an effort to make Medicare more competitive and efficient, one; two, to modernize and reform the Medicare beneficiary structure, including a prescription drug benefit; and three, to make an unprecedented, long-term commitment to the financing and solvency of Medicare. Our initiative will extend the life of the Medicare Trust Fund until 2027.
There are many details in the -- talking about how we'd make Medicare more competitive and efficient. One aspect is certainly to make the traditional Medicare fee-for-service program more competitive and efficient by giving it new private-sector purchasing and quality improvement tools. Right now, Medicare is denied many of the purchasing, contracting and bidding policies that allow other elements of our health care industry to get lower prices. That has never made much sense to us, and in this proposal we would have $25 billion in savings over 10 years through measures that would allow HICFA, the Medicare system, have more competitive pricing.
We can go into more detail, but for example, right now, if a major industry were to decide -- if a major university and a community were to decide that they wanted to buy a specific piece of medical equipment, and there were many suppliers out there, they could go price-shop, do competitive bidding, get the lowest possible price, best quality at the best price. Medicare right now, however, pays on a set, prescribed fee. It is denied the same ability that virtually any other purchaser would be, to seek out the best price at the best quality. It makes no sense for us to handcuff our own program from getting the type of savings and focus on price efficiency and quality that any other purchaser could do.
Through a variety of practices like that, which we can go into more, we believe we can save -- it is estimated that our program will save $25 billion over 10 years.
The second form of competition that I wanted to stress is on the managed care side. And I know that this has gotten a lot of attention. We are calling -- we are proposing what we are calling a competitive defined benefit plan to provide more choice, more competition, more efficiency in the managed care part of Medicare.
Our plan would call for -- the way that this would essentially work is that Medicare would, on the managed care side, pay -- well, let me just explain. Right now, managed Medicare gets 96 cents on the dollar for what the traditional fee for service would be. A person who chooses to pay to go into a managed care plan at 96 percent would pay the exact same premium that they would pay in the traditional program. If, however, there was a plan that could provide the exact same defined benefit at a cheaper price, the beneficiary would get 75 percent of the savings from the premium, and the government would get 25 percent. If the beneficiary chose a more expensive plan, they would have to pay all of the higher premium.
In that sense -- and so what this would be doing is injecting a degree of price and quality competition into Medicare managed care that does not exist at this time. So right now, the way the system works is that Medicare managed care gets 96 percent of what fee for service does, regardless of their costs. In managed care, there is not an ability for managed care providers to compete on the basis of price on a defined, specific benefit. Everybody gets paid the same amount, regardless of their cost, regardless of how efficient they could provide the service.
So what happens is that if a managed care could provide it at a cheaper amount, they add benefits to their plan. The problem with this is a few-fold, which is, one, it prevents true effective price competition because the consumer, the beneficiaries looking at this, have no capacity to compare apples to apples. Each plan has a different mix. And so the price and quality competition that you could get from having beneficiaries be able to compare two equal similar packages is lost. Consumers never would have enough information to truly be able to compare a variety of different plans that have a variety of different benefits, et cetera.
So in this plan -- every plan has to provide a specific defined benefit plan, and that's why I call it a competitive defined benefit plan. And so they have to compete on quality and price and the consumer, the beneficiary, is able to judge and compare.
The second problem with the way the current system works is that when Medicare providers can add benefits as a way of supplementing their plan it allows for a type of selection risk that allows people to try to manipulate who comes into their plans. So, for example, if you were a managed care plan right now and you could provide the Medicare plan at 85 cents on the dollar, you're going to get paid 96 cents on the dollar, and so you're going to supplement and compete by adding benefits.
If one of the benefits you add is membership at the five most chic health clubs in your neighborhood, that is a subtle way of trying to attract a younger, healthier Medicare population. Or, if you add significant preventative benefits -- routine health care, those -- routine checkups -- those are all things that would tend to be more desirable to people who are already healthy. So by allowing people to compete on the type of benefits that they supplement, you both deny people the ability to truly shop apples to apples, price competition, and you allow for a type of self-selection where people can add benefits in a way that's designed to manipulate and attract a healthier population.
Now, what this plan does is say, is that if somebody can provide a defined -- the one precise defined-benefit package for 85 cents on the dollar -- they can, for the first time, offer the beneficiary actual savings. For every dollar that is saved, they can offer the Medicare beneficiary 75 cents reduction in their premium, and then 25 percent goes to the government. So there's both a -- this gives the beneficiary an incentive to choose a -- if they want, a plan that can be provided in a more efficient way, because they're able to pocket 75 cents of the savings. So this allows managed care providers to now compete on price, and, to the degree that there are extra savings, it allows the beneficiary to have more choice, because now they can choose what additional health care benefits they would like to use with their additional savings.
We think that this is a very sound and good way for us to be trying to modernize Medicare, bring more price competition, more quality competition, and more choice, into the managed Medicare system.
A main difference between this proposal and the one proposed by the Commission, however, is that under this plan the fee-for-service premium is completely protected. In the Medicare Commission majority recommendation, they would allow the -- they would allow for the Medicare premium in the traditional program to rise. Our concern is that we want people to choose, have more choice, and if they're choosing a managed-care option, it should be because that option was more attractive than the existing system. It should be choice, not financial coercion.
If you have a system which allows the premium to rise in the traditional program, the traditional fee-for-service program, then many people may feel compelled to choose a managed-care option, not because they found it more attractive, but because we made the traditional program more expensive. So in our defined competitive benefit plan, anybody who wants to stay in the traditional fee-for-service plan can do so without any increase in their premium. Then, if there are managed-care options that have savings, and they want to take advantage of those savings and have a less premium, or use some of their savings to buy specific other benefits, they can.
This plan, because it is implemented -- you know, will be phased in -- has $8 billion in savings over 10 years, starting in 2003. But I think that we believe that by setting in place a competitive dynamic of price and quality competition into managed care, that one cannot be sure of the full extent of the benefits, when one sets in motion an effective price and quality competition.
Chris, do you want to go through the BBA issues?
MR. JENNINGS: Sure. I think that those two, by any definition, that Gene just went through, would be defined as true structural reforms of the program, and they would benefit both, we think, beneficiaries as well as the program -- and, in fact, health plans in particular. And when we get to the Qs and As, we can talk a little bit about that.
But the other issue that has been raised quite a bit around the Medicare legislation has been the issue of provider savings, how much traditional provider savings should contribute to the overall package, and whether or not there should be any type of mid-term adjustments following the implementation of the Balanced Budget Act 1997 provisions -- many of you have been following concerns raised by providers that the BBA 1997 provisions went too tight, in terms of its constraints.
First, though, we look at this in sort of a two-phased approach. One is, under any scenario, in the out-years, after the BBA '97 provisions expire -- most of the provisions expire at the end of 2002 -- the projections are that costs will go back up, they will increase in the Medicare program. To have any type of pragmatic, realistic financing structure, we have to address that fact, and we do in this proposal have savings from providers that amount to about $39 billion over 10 years -- all of which, starting in 2003 and beyond. So there will be no additional savings for providers in the window of the Balanced Budget Act through 2002, but where health care costs are projected to increase again, we do have savings.
Now, they are not pure Balanced Budget Act extenders that were enacted in 1997. We explicitly address issues of concern to providers in the out years by recognizing that home health care and nursing home constraints have been working very significantly. We've implemented perspective payment systems or in the process of doing so, and in so doing, the projections are that costs will not be increasing in 2003 and beyond; therefore, we will not have home health and nursing home savings in that window.
We also address concerns of the hospital community by not extending provisions reducing disproportionate share payments, as well as so-called out-patient department reductions -- that if we extended BBAs those would continue.
All of which is to say that we're doing what we can to moderate those out-year costs based on the evidence we have about those, but we recognize that there will be a need for savings. As such, there will be savings from the remainder of the extenders, including hospitals and traditional BBA extenders, all the way from durable medical equipment to ambulance and a host of issues that you'll see in our longer document. And those will account and achieve real savings. And there will be people who will think that those are too tight or we shouldn't be contemplating them. Our belief is that in the out years you have to deal with the growth projections and that must be part of any package.
Now, however, we believe that we need to recognize the issues of the early year concerns that have been raised by the providers to the extent that there is evidence that there is a real impact on the provision of quality service, or access to the services or quality of services to beneficiaries. Every decision that we're making in the early years are based on whether or not we have any evidence suggesting that there are problems.
First, we are taking a host of administrative actions that we can do without legislation. These will be listed in your longer document. A couple of examples that I'll just give you -- there is, for example, implementation of something called the hospital transfer policy. We are delaying the implementation of that policy for two years, which would reduce cuts that would otherwise be projected to be included in this proposal under current law for about $1.5 billion over 10 years, most of those costs occurring in the early years.
We are also looking at other administrative changes for nursing homes and other providers. Those will all be outlined in this package. But, secondly, we look at legislative interventions. There is one proposal that we include in this package that is budget-neutral, and that is carving out disproportionate share payments that would normally go to managed care and have those paid directly to the hospitals who are disproportionately providing care to uncompensated care patients, uninsured patients.
That policy has been a high priority of the hospital community, in particular, and teaching facilities specifically. It is something that we had advocated back in 1996 and '7. We hope that it can be included in any legislative package that goes on the Hill.
Lastly I just mention, for specific provider issues that have been raised from every single community -- whether it be nursing home, hospital, home health care, academic health centers, managed care -- we have taken the position that in the absence of specific information that could inform us to make thoughtful policy to address concerns, and evidence that really validated that there are really issues, that we should not include in this package specific policy changes in the early years.
However, the President felt very strongly that there is enough evidence that there are concerns out there that we know are worth addressing, or will need to be addressed in combination with, and consultation with, members of Congress on both sides of the aisle, as this Medicare reform package continues. So he has signaled on Friday, and he will signal again today, his desire to smooth out BBA 1997 proposals, to the extent we have evidence to do so, and in a good-faith effort to move that agenda, he is including in this package a $7.5 billion set-aside account, a quality assurance fund, that can be utilized for that purpose. So it will be explicitly dollars paid for within this package.
Why don't I stop there.
MR. SPERLING: So, just on that, there were $39 billion over 10 years of savings through extenders, increasing similar policies. But then there was -- one can subtract from that $7.5 billion that is being set aside for potential fixes on some of the issues that have been raised concerning the Balanced Budget Act of '97.
Q Does that mean the net savings is going to be less the $7.5 billion?
MR. SPERLING: That's correct -- $7.5 billion less than $39 billion.
The second component of the President's Medicare plan is modernizing Medicare's benefit. And we will -- I will get to the prescription drug plan, but just to say that that is one, it is an important, very important, but it is one component of the steps we are taking. The President will also be eliminating all cost-sharing for all preventative benefits in Medicare, and instituting a major health-care education campaign.
So existing co-payments and deductibles for preventative services that now exist for bone-mass requirements, pelvic exams, prostate cancer screenings, diabetes self-management, and mammographies -- all of those co-payments and deductibles for preventative care would be waived. And this is part of an effort, we believe reflecting the consensus in the health care community, and basically just common-sense, that we should be doing everything possible to encouraging preventative care that saves our government money over time and, more importantly, saves families the heartbreak of more serious illnesses over time.
We also will be having two cost-sharing items. The President will be adding a 20 percent co-payment for clinical lab services. This modest co-payment would prevent overuse, reduce fraud, and has been advocated by MEDPAC and others.
We also would be indexing the Part B deductible for inflation. The Part B deductible has been $100 for many years. It has never been adjusted for inflation. If we're going to be putting forward a 10-year plan, it only makes sense to ensure that the Part B deductible is at least adjusted for inflation.
These two programs together would -- these two cost-sharing policies would save $11 billion over 10 years. We obviously believe that beneficiaries, as well as providers, need to share in the savings, and in making the Medicare program more efficient.
Q Does that include co-pays for preventative stuff?
MR. SPERLING: No, $11 billion is how much the 20 percent co-pay for clinical labs and the indexing of Part B deductible for inflation save. And then there's a $3 billion cost to eliminating the preventative benefits in Medicare.
Q Over 10 years?
MR. SPERLING: Over 10 years.
Q If you had indexed the $100 deductible from the start, what would it be now?
MR. SPERLING: That's a good question. I can put it to you this way, that the deductible has fallen from 43 percent of Part B per capita costs in 1967 to 3 percent in 1999. And so, we think this is a reasonable policy, and a reasonable thing to ask of beneficiaries, particularly in the context of a very significant expansion of prescription drugs.
Q -- be retroactive, or just be on the affected --
MR. SPERLING: No. It would be starting now.
Q Linked to consumer prices or medical prices?
MR. SPERLING: The CPI.
MR. JENNINGS: And it would begin in 2002, in conjunction with the implementation of the prescription drug benefit.
MR. SPERLING: On the prescription drugs, we will be establishing a new voluntary Medicare Part D, for prescription drugs, that will be affordable and available to all beneficiaries.
I know that none of you know any of the details of this. (Laughter.) We've kept this a complete, utter secret. But let me confirm some of the things that have gone out, and let me clarify some of the others.
This plan would give every Medicare beneficiary the option, the voluntary option, of paying a modest premium. That premium would cost about $24 in the year 2002, and would rise to $44 when it is fully phased in in 2008.
The benefit that it would provide is twofold. It would pay for half of a beneficiary's drug cost up to $5,000 when fully phased in. So, in other words, just to be clear, a beneficiary who had $5,000 in drug costs when fully phased in would be reimbursed for $2,500.
And so this proposal has a very simple and clear message: If you choose to pay a modest premium, the Medicare program will pay half of your prescription drug costs up to $5,000. There is no deductible. It's very plain and simple, from the first dollar, from the first time you have any prescription drug cost, and every time up to $5,000, half of your cost will be spared.
We also believe that each beneficiary would get a discount, an average discount of 10 percent, in that range, for prescriptions purchased throughout -- at any level. And we believe that is simply by giving at the local and regional level the same ability to pursue reasonable discounts that Blue Cross/Blue Shield and others are able to now use. It will not involve price controls; there are no price controls in this and there is no use of an accumulated bargaining power by HICFA overall. This is simply at the local and regional level, allowing the Medicare program to get the same discounts for their beneficiaries that every other insurance provider can currently get for their beneficiaries.
Beneficiaries below 135 percent of the poverty would not have to pay either the premium or the cost sharing. And those with incomes between 135 percent and 150 percent of poverty would receive some premium assistance as well -- 135 percent of the poverty is $11,000 currently for a single, and $17,000 for a couple.
We felt it was important to not only offer the premiums for people below 135 percent of the poverty, but because we were using a 50-percent cost sharing, we felt it was important to cover that as well.
Lastly, we would provide financial incentives for employers who are currently providing retiree health coverage for prescription drugs to maintain that. And so an employer who felt that they wanted to keep their existing plan because it was more generous, because of continuity, because of keeping commitment to their employees or retirees, we would offer a substantial subsidy to encourage a voluntary maintenance of effort.
The cost of this plan over the next 10 years would be $118 billion. Of this, of the different savings we've gone through, $72 billion of the $118 billion would be paid for through the savings within the Medicare program that we have put forward. So over 60 percent of the costs of the prescription drugs would be paid for with Medicare savings, internal Medicare savings. And then an additional $45.5 billion would funded out of the surplus.
Q Gene, what would be the annual cost of this once it's fully phased in?
MR. SPERLING: The annual cost? We'll get that for you. Why don't we just finish briefly, and then we can take questions.
There are reforms of the Medigap program in the President's proposal. We are including the same Medicare buy-in proposal that the President has previously proposed, which we can go through. In terms of the financing, there is over 15 years, there is $794 billion of the surplus committed to Medicare -- 90 percent of which would be going to solvency, the remainder to assisting in the prescription drugs. That would allow an extension of solvency to 2027.
You may remember that when we first put forward our proposal, Medicare was projected to go insolvent in 2008. Our proposal would have extended it 12 years beyond that, to 2020. Since then, the more positive projections moved the solvency to 2015. Again, our proposal still increases solvency 12 years beyond that, until 2027. That is still not a long time. But when one considers that when the President came into office, Medicare was projected to go insolvent this year, in 1999, taking efforts to use the surplus right now to meet our existing obligation to Medicare beneficiaries, and to help close the projected and expected deficit in Medicare financing is fiscally responsible, and the right thing to be doing with our surplus.
So with that, Chris or I are happy to take any questions.
Q Was your trade-off here on the means -- I take it that the means-testing that you were considering, at one point, was of the Part B premium.
MR. SPERLING: Right.
Q And was that designed to extend the life of the program beyond 2027, or what was the whole design here? And we sort of understand politically why you didn't do it, but how -- what was the design of it?
MR. SPERLING: Well, the design was -- right now, Medicare Part B is subsidized 75 percent. So people pay 25 percent of the cost in their premium, and then 75 percent is paid for out of general revenues.
The argument is, is that for people of higher incomes, they do not need -- or one could argue that people of very high incomes do not need as great of a subsidy. And so in the past the President has proposed that, for people making over $100,000, that rather than receiving a 75 percent subsidy, they would receive something more like a 25 percent subsidy. One still wants to provide some subsidy, because one doesn't want to have a program that leads higher income, who tend to be healthier people, to withdraw from the program.
So we felt that was -- the President, in his Putting People First in '92, and in the health care plan in 1997, had proposed reducing that subsidy for quite high-income Medicare beneficiaries, those making over $100,000.
When we were -- we looked at many different options. That was an option that we certainly considered, many of us thought was reasonable. But when we -- and we were doing that for savings that we thought would help pay for the prescription drug plan, and in doing so, allow more money to go -- more of the surplus to go to solvency.
When we went through consultations, which we did with both Democrats and Republicans, and various other interests, it became our opinion that putting that specifically in the proposal would draw -- was controversial enough with both Republicans and Democrats that it would actually distract from moving Medicare reform forward, and building a bipartisan consensus moving forward. And so what we decided to do is, in the interest of trying to have a proposal that could move a bipartisan process forward, to not include that in our initial proposal.
But I think it's also clear that if, as the process of Medicare reform goes forward, that was something that Democrats and Republicans could come together on, it is a policy that the President would and could support.
Q Gene, this is not a Congress that has done very much of what the administration wanted this year. You've been briefing members of Congress on this plan. What do you think the real prospects are that action takes place on this plan you're unveiling today?
MR. SPERLING: I'm quite -- I personally am quite optimistic, but then that tends to be my role.
But I think there is a serious reason for optimism, for the following reasons. One, the American people understand that when you have -- whether you're a family, or a business, or the government -- when extra funds come in, you do first what you have to do, then you do what you want to do. You first make sure you have saved enough for the education of your children, or the health care of your family; then you think about what you can afford for a new car, or a vacation.
We, as the federal government right now, have significant projected surplus. But we also have projected long-term deficits in both Social Security and Medicare. We have unfunded liabilities in these two crucial programs. And I think the American people understand that it makes most sense to first strengthen the Medicare program that is supposed to go insolvent in just 15 year, before one goes off and considers new spending or new tax relief programs.
So I think that there will be tremendous public pressure to ensure that people are setting aside the resources necessary for strengthening and modernizing Medicare before they go on to other priorities.
Secondly, the need for a prescription drug benefit in Medicare is just basic common sense. When we say -- again, nobody who was designing Medicare from scratch today would even think about devising a plan that didn't include prescription drugs. You cannot talk about having a modern Medicare proposal without looking at the role of prescription drugs. And I think that when you look at the number and the diversity of people who are hurting because of prescription drugs, there will be a need, and a call, for this that will affect members of Congress from both parties.
And so I think that what we've tried to do is put forward a proposal that balanced these two basic objectives: one, to ensure that we're being fiscally responsible about extending the solvency of Medicare, while modernizing the benefit structure. By taking the steps that we have, to make sure that we have more competition, more price competition in the managed-care side, that we have substantial savings, we've put forward a balanced and fiscally responsible Medicare plan. And I think that it will be hard for people to want to run away from this when the President's been willing to put out this degree of specifics, to get this process moving forward.
Q Could you give us a sense of what the effects are going to be on different classes of beneficiaries, from this sort of effect of giving to them, on the one hand, and taking away on another? You're subsidizing the Part B -- more cost-sharing for clinical labs, you have co-payments, or eliminating the co-payments for preventive services.
MR. SPERLING: Let's take for example --
Q -- obviously people are going to be affected very differently by all of that.
MR. SPERLING: Let's take, hypothetically, for example, of a woman who has $4,500 in prescription drug costs for high blood pressure, and her and her husband make only $13,000-$14,000. I'm using your case from your show yesterday. I think that for beneficiaries, this is not a close call. You're talking about, on the Part B deductible, you're talking about something that would raise the deductible perhaps $2 or $3 a year. And in fact -- Robert asked whether it was CPI or health -- only doing a CPI adjustment, in fact, still makes the program attractive, compared to what actual price of health care costs are going up. So asking for a few dollar adjustment, for CPI adjustment and Part B deductible is basic common sense, and it's a minimal amount of money each year.
The skill labs, there is no co-payment there now. There is a lot of evidence that it's over-used, that there is abuse. The amount of money that would come out of people's pocket from this is relatively small, some of it is covered by Medigap -- $5 or $6.
Compare that seriously with the person that you had on your show yesterday who would be about at the poverty line and has $4,500 of health
care costs -- that person would probably be eligible for premium assistance and cost-sharing assistance. They would get $4,500 of assistance, which in the example you had yesterday was one-third of that couple's income. For a middle-income retired family who even has $1,500 in prescription drug costs, for a premium that might cost them $300 or $360, they would be getting $750 of cost sharing that year, while still having the insurance that if they had an even worse year at some time that drove their costs to $4,000 or $5,000, they could do even better.
So I think what we're asking beneficiaries is very reasonable and is just a fraction of the benefit that they get from the prescription drug plan.
Q -- over $5,000 a year, is there any plan for that?
MR. SPERLING: Well, that's a good question. The first answer is that through the price discount at least people would be able to get prescription drugs for probably anywhere from a 10-15 percent discount because they would be being purchased through PBMs and similar entities. But I think that while the number of costs over $5,000 may just be just 2 or 3 percent of the public, I think that is something that we would be willing to work with members of Congress on to see if there was a way of addressing that that could be done in a reasonable way. It's certainly a legitimate concern and something that we would be open to.
Q You said you're not going to be extending some of the payments, and I thought you suggested you're going to be moving some payments hospitals normally get to someplace else.
MR. JENNINGS: Let me just briefly say, there is a number of things -- one is, you may recall that the Medicare Commission recommended pulling out the Medicare GME payments from the mandatory to the discretionary side, or certainly out of the Medicare program. That will not be in this package. That is one important priority for the teaching facilities and academic health centers, and we recognize that as a legitimate concern.
Secondly, one issue that was addressed in Medicare BBA was to carve out medical education payments that used to go directly to managed care, now go directly to the hospitals. That's under current law. But, in addition, we have a proposal in this package to carve out the disproportionate share payments that now go through managed care plans and are supposed to go back to hospitals. But teaching facilities and academic health centers question whether those dollars are passing through, and we think it's much more efficient to have those payments go directly back to the provider.
Lastly, we did not include an extension of the disproportionate share cuts in the Medicare extenders that we are assuming, starting in 2003 and beyond, primarily because we have a growing concern that with the growing number of uninsured in this country, placing a growing burden on facilities, that it would be inappropriate and ill-advised to provide additional reductions in payments to hospitals who are directly serving that population.
Q So you're giving the hospitals this in the $39 billion in savings extending the BBA -- the BBA extenders -- how much are you taking back from hospitals?
MR. JENNINGS: I don't have the aggregate hospital -- but they certainly -- a significant majority of the savings would be coming from hospitals, primarily because hospitals make up 65 percent of the Medicare costs anyway. So it would be -- there's no doubt that under any Medicare package you would have savings, you would have more savings coming from hospitals.
Recognizing the issues that they have raised, however, we have taken administrative actions and we've made those additional modifications to the extenders and have decided not to have any additional savings until 2003 and beyond.
Q Gene, you said the first dollar of drug costs would be paid for. Is that for any drug your doctor would prescribe, or will there be formularies or how will that work? Will the government set up formularies?
MR. SPERLING: There would be formularies, but we would be assuming that any reasonable prescription drugs would be covered.
MR. JENNINGS: The way it would work, of course, would be just as it is for all of us in this room. For all of us in this room we have private sector purchasers who generally utilize formularies and other approaches to constrained costs. We would anticipate that Medicare would contract with these private entities and utilize similar purchasing mechanisms.
However, we would require that every therapeutic class be covered by any type of such a formulary, and moreover, we would require that physicians would be able to access drugs that were not on that formulary if it was medically appropriate to do so. And we will have specific language around that available. By the way, that is very similar practice that you'll note in the private sector as well.
Q Isn't that subjected to some kind of possible over-use that you're concerned about with lab tests that doctors or HMOs might prescribe for a patient that is not absolutely necessary?
MR. JENNINGS: Well, first, let me say that clearly the issue of over-utilization of drugs isn't an issue. Let me just first say that Medicare beneficiaries are now dramatically under-utilizing prescription drugs because they don't have access to them, and as a consequence, they are incurring significant and sometimes potentially life-threatening health care costs and physical burdens as a result.
But there is concern, there always will be concern about coverage and over utilization of any benefit, but let's remember that in the benefit structure we have a 50-percent co-payment associated with the drug benefit. There are not many Medicare beneficiaries who are going to go down to the local pharmacy to buy a drug or urge their physician to prescribe a drug they do not need so that they could pay a 50-percent co-payment for that prescription.
MR. SPERLING: I think that's a very important point, which is that this -- while this is a benefit that we believe would be one-half to one-third the cost of a similar benefit in the private sector Medigap policies, while we think it is one-half to one-third the cost and, therefore, a very good deal for a Medicare beneficiary, it's not at any point a free lunch. A person has to choose to pay a modest premium and they do -- for those over 135 percent of poverty, they are going to be sharing in half of the costs at all times. And that, by almost any study, should prevent any kind of abuse in terms of over-utilization.
Before I go on, I just wanted to give an example on the managed care competition which might make it easier for people to explain to others. Which is, for next year, in 2000, the Medicare Part B premium is assumed to be $48.50. If you'll indulge us in making the example a little easier, let's assume it's $50. So let's assume that $50 is what the Medicare Part B premium would be for next year.
If the amount of payment to a Medicare managed care plan is $450, then a plan that is at the 96 percent level -- so a managed Medicare plan will cost 96 percent of fee for service would by your base. And a person then would be paying exactly what they pay for -- premium wise. They would pay $50 for that plan and the federal government would pay $450 to the managed care plan.
If the person decided to go to a plan that cost $10 less per month -- so it cost $490, instead of $500 -- they would get 75 percent of the benefits. So of that $10 cheaper, their premium would be reduced by $7.50. So in the first example, the kind of base example, the plan cost $500 a month; the beneficiary in the year 2000 pays $50 for it; and the Medicare program pays $450 to the managed care plan.
If it goes -- if somebody offers a plan that meets the defined benefits standards for $490, the premium would go down to $42.50, so the beneficiary would get $7.50 of that benefit and $2 -- and the government's cost would be reduced by $2.50, so they'd pay $447.50. So by doing it $10 cheaper, the person saves $7.50 per month and the government saves $250. That's a pretty powerful incentive for people -- for price and quality competition. If one was able to offer a quality plan at $433, the beneficiary would pay no premium at all because, as one can see, at $67 less, the percentage that the beneficiary would save would be more than $50, and so they would have zero cost.
So a low-price plan at $433 would have the beneficiary paying zero premium per month and the federal government paying $433.33. So of the savings they would get $17 and the beneficiary would get $50. So this is a serious new change that would offer much more serious price and quality competition in a way that would dramatically -- could dramatically affect the pocketbook of beneficiaries.
Those who chose to pay a -- go into a higher, more expensive plan, however, would have to pay 100 percent of the difference. So if somebody chose a $520 plan, that person, the beneficiary would have to pay the full $20 themselves.
Q -- for the full phase-in costs after 2008 per year?
MR. JENNINGS: For drugs?
Q For the drug program, yes.
MR. JENNINGS: The 10-year numbers, as Gene mentioned, I think was $118 billion. It phases up, I guess, on the average in that 10 year window would be about $15 billion a year. It starts lower and then gets higher. You know, obviously in the out years it will grow; so, too, will our savings from our BBA provisions and certainly our dedication of the surplus to the Medicare program. So there's your answer.
Q Would the benefits be phased in --
MR. JENNINGS: Yes. The only part that will be phased in will be the cap to $5000 or the $2,500 in full government contribution. And that will be phased in, in the following way. I'll just -- in 2002, it starts, it will be $2,000, $2,000, $3,000, $3,000, $4,000, $4,000, $5,000. And in 2008, it will be fully phased in to the $5,000 cap.
Q So you would only cover up to $2,000 in the first two years?
MR. JENNINGS: That's correct. And can I -- can I just -- I just want to supplement one thing that Gene said. I think it's a very important part, about the competitive defined benefit proposal.
One of the major reasons why Medicare beneficiaries choose managed care is for -- they want to have access to additional benefits. One of the great benefits to both beneficiaries and to managed care plans through this new proposal is that there will now be a certainty of a prescription drug benefit in all plans, fee-for-service and managed-care alike, as well as the preventive services package that Gene outlined. Both of those are some of the very reasons why people go in.
However, so now -- but you're going to have apples-to-apples comparisons, so people can choose not on benefits, but now on costs. They can see, I want that benefit, but I want it -- if they can do it cheaper, then I may want to go into it. I know the value because the benefits are apples to apples.
Two other points, though. Because we are offering a percentage of the fee-for-service payment to the managed care plans, they are actually now directly subsidized for the provision of those prescription drug benefits, and the provision of the preventive benefits -- unlike they are today. Today, there's not direct subsidies; they get a percentage of the fee-for-service, but the fee-for-service doesn't pay for those benefits. Now, they will be. That's a very, very important benefit.
And for people --
Q Could you go over that again? How exactly are you going to integrate the benefit of -- the drug benefit into the managed care --
MR. JENNINGS: Because the managed care plan will now provide the same benefit that is outlined in the fee-for-service plan that we've just outlined. They will now --
Q So Part D benefits have to be offered by the managed care --
MR. JENNINGS: That's correct.
MR. SPERLING: That is part of the standardized package, which is the apple that -- they'll be comparing an apple to apple --
Q They could offer more generous coverage --
MR. JENNINGS: That's an important question. The plans, the managed care plans, could supplement cost-sharing, and that is going to be available in -- as they do today, they will be able to do that. And in addition, if they want to offer additional benefits over and above what is currently offered -- if they want to provide a catastrophic coverage plan, if they want to provide eyeglasses, if they want -- you know, you pick your benefit that isn't covered by Medicare -- for the savings? If they can do that efficiently, they can offer that to beneficiaries through a supplemental policy, as a separate offering. In other words, we're not prohibiting the ability of those plans to offer.
But, in terms of the negotiation, in terms of the -- for the competition, excuse me, for the beneficiaries, you start with that core package, with those cost-sharing flexibilities for plans to compete against, and then you supplement those above that, if a plan so chooses to do.
Q -- BBA savings diminished in the out-years. And yet I thought I understood a minute ago that you were counting on more BBA savings to help the drug program and Medicare reform in the out-years.
MR. JENNINGS: Yes. Yes, let me explain that.
The Balanced Budget Act of 1997, most of the provisions in that legislation expire at the end of 2002. As a consequence, the actuaries and all other health care experts project a return to higher growth in the out-years beyond 2003, okay?
What we're saying is that in order to be a prudent manager of the Medicare program, we need to constrain that growth in the out-years. And that's why we have these additional savings starting in 2003, and not until 2003.
Q On the issue of these lab, the 20 percent co-payments for the lab fees, people who have chronic conditions that require constant lab monitoring, are some of them going to be worse off than they are now? And if that's the case, is there some other thought of how to deal with them?
MR. JENNINGS: Yes, let me -- firstly, one of -- the vast majority of Medicare beneficiaries also purchase Medigap plans. Medigap plans almost inevitably will continue, as they do today, wrap around and pay for much of those costs. So there may be a population that it may burden over a period of time, and we'll be watching that carefully, particularly in the low-income area.
I think the most important thing to do, though, is when you look at this, you have to look at the package as a whole to that population. People who tend to be utilizing clinical lab services significantly are also those people who are likely to be utilizing prescription drug benefits significantly. The net benefit of this package to the cost-sharing increase that would be potentially a part of this overall package, I think, would be by almost every definition a net winner for the beneficiary. There might be a few examples where it wouldn't be, but it would be rare.
Q A lot of the savings that you've built in here are kind of projections, maybe even wishful thinking. Is there any mechanism built in here that, if the savings do not come out as expected, that there will be some kind of review, or any, perhaps something that would kick in to --
MR. SPERLING: I guess what has to hit both of us as you say that is that obviously, with the 1997 balanced budget agreement, most people feel that to the degree it's been off, the estimates, it's been the other way -- they've been bringing in more savings than have been projected.
Q Can you explain a little more on how they discount -- how you assure that these 10-percent discounts will be available without imposing control?
MR. JENNINGS: Sure. And let me just say, that is an average amount. It may well be a little bit more than that, we'll get the projections from the actuary. But it is not at all inconsistent with the practices and the lessons we've learned from our discussions with private sector purchasers throughout the country, that when they utilize these purchasing mechanisms, these market oriented approaches to constrain costs, that through volume purchasing and through the use of formularies with adequate quality protections, they can still obtain significant discounts -- at least 10 percent.
We think that that is conservative and we think it's -- but we think it's a prudent number and I think most people who are familiar with these managers would recognize that that is not an excessively high discount assumption.
Q Aren't pharmaceutical companies likely to consider that basically amounting to a price control?
MR. SPERLING: There are some people who haven't gotten in at all yet --
Q Thank you. What do you think of the effect that this combination of policies will be on the number of Medicare beneficiaries who select managed care?
MR. JENNINGS: Well, frankly, I think it will be a sigh of relief, to some extent, because they will know that there now is an explicit subsidy to provide for a prescription drug benefit over a period of time. And they're seeing right now in the marketplace significant declines in those offerings or the value of those offerings.
I think it's an important structural benefit to beneficiaries that provide for real competition for them to make informed choices for the first time in the marketplace.
Q -- accelerate or decelerate the rate at which beneficiaries --
MR. SPERLING: I think the important thing is that you're setting up a structure where, to the degree people choose it, they choose it for the right reason. And I think a lot of the projection will be on whether or not the new managed care plans are successful in meeting the quality and price test by which beneficiaries and consumers will judge them.
I think what we didn't want is a situation where people were going into managed care for the wrong reasons, which would be because they were feeling financially coerced to do so because the premium was being driven up in the traditional fee for service program. That was our problem with the commission recommendation.
And then what also Chris was saying is that you don't want to have a system where we're essentially subsidizing some people's prescription drugs, but not others, depending on what part of the country you live in. This would certainly hurt people in rural America.
So I think what you want to do is set -- I think what you want to do is you want to set in line a competitive dynamic with effective price and quality competition where people have the capacity to compare, which is very hard now when every managed care plan has a slight, different mix which makes it very hard for people the do apples to apples price competition; or where people feel that this is the only way they can get subsidized prescription drug coverage.
So I think that what we feel is, let's put a competitive dynamic in place and then let's see if you have -- an effective market will be one in which the consumer, the Medicare beneficiary, has good information, can judge what the development is and decide for themselves whether they think these options are better or not than the traditional fee-for-service program.
I mean, I believe right now that we're around 15 to 17 percent and the projection is to go to about 20 percent in the next year or two.
MR. SIEWERT: There's a briefing -- after the event today there will be a briefing in the briefing room. You can ask more questions after that.
END 11:23 A.M. EDT