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Remarks on Legislative Proposals for Medicare

April 24, 2008

Remarks of Pete Sepp, Vice President for Policy and Communications
National Taxpayers Union
to the Committee on Finance, United States Senate
on Legislative Proposals for the Medicare Program


Dear Chairman Baucus, Ranking Member Grassley, and Members of the Committee:

On behalf of the National Taxpayers Union's (NTU's) 362,000 members, I write to alert you about what will be one of the most important debates of the 110th Congress: the future of the Medicare program.

Legislative circumstances, such as impending expiration of the physician fee payment program's reauthorization, mean that many Medicare issues could come before the Committee as stand-alone legislation or as part of a package.

Owing to the gravity of Medicare's future financial condition, America's taxpayers need prompt action from Congress on cost-controlling measures to avoid tax hikes or government bailouts. Accordingly, I wish to provide our views on several proposals.

Common-Sense Coverage Reforms

The type of services for which Medicare will reimburse providers has long been a source of dispute. Yet this friction should not serve as a reason to abandon coverage adjustments altogether. Congress can take numerous small but sensible steps to deliver savings to taxpayers. The following is but one illustration of the potential benefits from this approach.

Medicare currently serves as the secondary payer for a patient undergoing dialysis for End Stage Renal Disease (ESRD) during the first 30 months of treatment. The beneficiary's own private insurance plan provides primary payment during that time. Curiously, patients are forced to switch to Medicare as their primary provider after 30 months of treatment -- regardless of their age. This payment arrangement exists for only one disease -- ESRD -- and is unknown anywhere else in the federal government’s health insurance system.

Apparently this strange process is a relic of a time when private facilities for dialysis, and private coverage of their services, was thought to be inadequate. That is definitely not true today. As is so often the case with America's services sector, community-based clinics have opened to provide dialysis patients with more comfortable surroundings and more flexible payment options.

We find the current policy of forcing privately insured ESRD patients undergoing dialysis treatments onto the Medicare rolls after 30 months to be fiscally unwise as well as disdainful toward consumers who may wish to remain under their primary carrier's coverage. We agree with the Administration's position that changing this rule should be a part of any effort to "rationalize Medicare payment policy" and in so doing save taxpayers considerable outlays. The Administration has proposed extending the period of private insurance coverage from 30 to 60 months.

Even the name for this policy -- Medicare Secondary Payer -- sounds like it was designed for Washington policymakers, not Medicare patients. Extending the period of private insurance coverage should more accurately be called the Patient Coverage Extension (PCE).

In fact, the Congressional Budget Office (CBO) has scored the PCE, and the savings available to Medicare and taxpayers are significant. The 2007 CBO Budget Options publication includes an analysis of extending the PCE period from 30 to 60 months, a change CBO determined would save Medicare $1.02 billion over five years and $3.07 billion over 10 years.

CBO has also scored the Children's Health and Medicare Protection (CHAMP) Act of 2007's PCE provision, which extends the PCE period from 30 to 42 months, as saving $400 million over five years and $1.2 billion over 10 years.

As you may know, NTU could not support the House-passed CHAMP Act (H.R. 3162) for several reasons, such as its call for a massive tax increase, its unwarranted expansion of State Children's Health Insurance Program (SCHIP) benefits, and its overall impact on future outlays for the troubled Medicare system. We believe the President was right to oppose this legislation as it was drafted, and we fully supported his decision to veto a bill (H.R. 976, the State Children's Health Insurance Program Reauthorization Act of 2007) that had some provisions similar to those found in H.R. 3162. Nonetheless, H.R. 3162's PCE provision is sound policy worth salvaging for follow-on legislation the Committee may consider.

Like many other proposed changes to Medicare that should be non-controversial, supporters of the current ESRD policy doggedly cling to fearful predictions of chaos if this burden to taxpayers is lightened. One common assertion is that extending the 30-month coverage period would amount to a "cost shift" that would severely disrupt private employers' insurance plans. General Motors, for example, attests that extending primary payer coverage for ESRD by 12 months (to 42 months total) would increase their insurance costs.

As an organization that has long criticized the imposition of costly federal mandates on the private sector, we take great exception to such an argument. First, and most obvious, taxpayers are currently shouldering the burden for this outmoded and restrictive method of coverage. Medicare Part A's outlays come directly from wage-earners' pockets (in the form of the 1.45 percent payroll tax) and, for Part B and Part D, partially and indirectly from all the other revenues taxpayers are forced to send to Washington.

Granted, insurance choice is limited, and we support legislation to provide more options for Americans. Yet the fact remains that consumers, employers, and small businesses have at least a few voluntary options for seeking and negotiating health care coverage. In seeking and negotiating their federal tax liabilities, however, Americans have but two choices: pay what they lawfully owe or face prosecution.

This stark contrast means that Congress has a special responsibility to protect taxpayers from unnecessary expenditures of their hard-earned money. PCE coverage for ESRD is an example of where Congress can more effectively fulfill this responsibility.

Setting aside this point, what of predictions that the expenses Medicare incurs will simply be loaded dollar for dollar onto private insurers, thereby having no net effect on the overall economy?

Here again, words can be deceiving. According to U.S. Renal Disease System statistics cited in an analysis by Kidney Care Partners, the average dialysis patient cost amounts to $180,000 per year. By that standard, GM's estimate would have to assume an average cost of four times that amount, for an average number of patients 2-1/2 times greater than those typically found in the general population.

It is also important to compare the large fiscal and patient benefit that would come from PCE reform versus the impact it would have on health insurance. Congress has enacted similar PCE four times since Medicare was made the primary payer for kidney dialysis and transplant services in 1972, with no discernible harm to employer coverage. Current market analyses note that approximately 3 percent of all kidney patients would be affected by the PCE, a share that translates to an estimated total of 8,100 kidney patients. According to the U.S. Census Bureau (August 2007 report), 201.7 million Americans have private insurance, and of those, 135 million are covered by large group health plans, the only plans to which the PCE would apply. Clearly, the fiscal pluses to taxpayers would be direct and substantial, and the effect on health insurance costs would be less significant.

Nonetheless, NTU has never dismissed employer overhead as trivial. Assuming there is a cost shift -- even a net increase in overall expenses versus those under the current ESRD rule -- how long would this remain the case? In our opinion, not long, if at all. Private insurers and employers know that it is in their own best interests to provide wellness programs for workers that emphasize preventive care and lifestyle choices. The results are lower costs for chronic care for those who do become sick, more controllable insurance premiums, and more money saved through greater employee productivity. The Medicare system provides no equivalent.

Moreover, the private sector has been on the forefront of efforts to contain costs without risking patients, through "disease management" strategies that reduce non-drug health costs like hospitalization and surgery with closely monitored long-term pharmaceutical therapies. A November 2003 study for NTU cites two of many cases -- the PacifiCare Health Systems initiatives for renal and heart disease and the "CarePatterns" Disease Management Program for diabetes -- that demonstrate the viability of consumer-based alternatives to rigid government programs.

As these examples show, the private sector has greater incentives and greater flexibility to deliver services that consumers want at a price they can afford. Thus, the result of allowing a small number of patients to retain their private insurance as primary coverage for an extra 12 months is likely to lower net costs for the economy, relative to the expense that Medicare currently bears. Here again, the PCE is a common-sense approach to reforming Medicare ESRD policy for the benefit of taxpayers, patients, and the Medicare program.

This is all the more pressing when a study by Congress's own Joint Economic Committee is taken into account. The 2000 study determined that the cost to the economy of raising $1 in additional taxes for new federal programs is $1.40 -- after factoring in "deadweight losses" such as compliance and opportunity costs. In essence, a dollar incurred in the public sector is more expensive to the economy than one assumed by the private sector.

Some would retort that in the case of Medicare, such an equation would not apply because the government's programs have more regulations and controls to keep costs down than the rest of our health care sector. This blatantly ignorant argument needs no long treatise to demolish, as the next section will attest.

Funding Oversight

The Committee is commendably aware and concerned about reports of some $13 billion in improper payments for Fiscal Year (FY) 2006 within the fee-for-service component of Medicare alone. Our research affiliate's bimonthly newsletter, Capital Ideas, has frequently recounted Medicare-related items in its "Outrage! of the Month" column. Just a sample includes:

  • Nearly 1,100 individuals participating in Medicare were deported on criminal charges as serious as attempted murder in 1998-1999. That would simply be another law enforcement statistic were it not for the fact that 43 percent of the deportees received Medicare benefit payments after they were ordered to leave the country.
  • Between 2001 and 2003, Medicare paid twice on 203,377 claims for inpatient ambulance firms at a cost to taxpayers of $21.7 million.
  • Among recent instances of the estimated $2.5 billion in fraud committed against Medicare, 38 individuals in Florida were accused last year of robbing taxpayers of $142 million. Much of this scam involved the creation of fictitious providers, who billed a combined $400,000 after the Health and Human Services Department’s Inspector General exposed them as fakes.

This popular feature, which asks 60,000 fiscally astute readers to pick the worst of three examples of government waste, is one indicator of informed citizen opinion. Each of the items cited above reflected a 10-year period and received numerous votes in their respective contests.

There are other measurements of public dissatisfaction with government mismanagement. In February, a HarrisInteractive survey of 1,652 adults commissioned by the Association of Government Accountants determined that public trust in government's financial processes is quite low. For example, "73 percent of American adults believe that it is very important for the federal government to be open and honest in its spending practices, yet only 5 percent say [the government is] meeting these expectations."

Given trends such as these, it is all the more puzzling -- and all the less defensible -- that Congress would even contemplate the termination of any initiative that protects tax dollars.

As you may remember, NTU opposed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) in its totality because of the legislation's potential to add to the mountain of medical liabilities looming over taxpayers. Besides the provisions for expanded Health Savings Accounts, we believe that one of the few desirable features in the MMA was contained in Section 306 -- which directed the Secretary of Health and Human Services to conduct a demonstration program using Recovery Audit Contractors (RACs) to identify improper payments to Medicare reimbursement recipients.

Just five firms were retained to audit past claims and current operations of Medicare Fee-for Service Providers in three states consuming about one-fourth of the program's payments. However, many types of Medicare claims, such as home care and physician management services, were excluded from examination.

Even within these limited parameters, the results of this pilot program have been nothing less than spectacular. According to the Secretary's 2006 and 2007 reports on the effectiveness of the program, during operations in Fiscal Years 2006 and 2007 alone, RACs corrected nearly $443 million of improper payments within their areas of investigation. More than 90 percent of this amount involved overpayments rather than underpayments. Of this sum, $425 million had already been collected at the time the report was issued.

Although such amounts may seem small in a program that spends nearly $1 billion every day, in subsequent periods RACs have added hundreds of millions more to the total recovered for taxpayers. In addition, the program has proven remarkably cost efficient. Every dollar paid to RAC entities has so far resulted in $15 of identified improper payments and $4 of recovered overpayments. Instances of RAC findings include:

  • Triple-billing for a single session of speech therapy;
  • Seven appendectomies in one day for the same patient;
  • Three gall bladder removal surgeries in the same day for the same patient;
  • Back therapy inpatient reimbursement claims for what should have been outpatient treatment; and
  • Claiming two blood transfusions for the same patient in one day.

The conclusion of the Secretary's report bears repeating here:

The RAC demonstration program has proven to be successful in returning dollars to the Medicare Trust Funds and identifying monies that need to be returned to providers. The program returned significant dollars to the Medicare Trust Funds without unnecessarily burdening the provider community or the Medicare claims processing contractor workflow. CMS [the Centers for Medicare and Medicaid Services] views the RAC demonstration as a value-added adjunct to its present programs.

Unfortunately, some Members of Congress would seek to destroy this program through a perennial political tactic: death by study. H.R. 4105 would suspend the RAC initiative for a year, pending further "study" of the program's effectiveness.

Apparently certain members of the hospital community in states where the RAC demonstration project was sited (especially California) are complaining about the additional costs associated with providing records for auditors. Such a claim is fatuous on its face. Notwithstanding the fact that hospitals are reimbursed for the records requested pursuant to the statutory formula set by Congress, are hospitals seriously arguing that taxpayers should carry the equivalent of "mug money" -- simply tolerate the loss of hundreds of millions of their hard-earned dollars because insisting on adherence to the law is too much of a burden? If reimbursement recordkeeping is such a problem, then hospitals should be lobbying more stringently for streamlined procedures rather than arguing to avoid them when it's "too hard" to comply.

Given the motives of H.R. 4105's sponsors, it is difficult to believe that the study provided under the bill would be objective. The success of the program seems self-evident in Medicare funds that have been returned to taxpayers.

For these reasons, NTU vehemently opposes H.R. 4105, and urges the Committee to reject any attempt to insert the bill’s provisions in legislation you may craft. Furthermore, NTU implores Members of the Committee to take proactive steps aimed at expanding oversight of the Medicare system. This includes system-wide implementation of RACs, additional resources for the government's own auditors, and greater latitude to access reimbursement information and records from providers. Furthermore, we believe that Congress was prudent to make the RAC program permanent and nationwide, as per Section 302 of the Tax Relief and Health Care Act of 2006 (despite other flaws in the overall legislation).

Accountability Measures

Another small but critical facet of the MMA was its built-in "alarm bell." Section 801 of the legislation requires the Trustees of Medicare to issue a "funding warning" if overall funding from general revenues exceeds a 45 percent share in two consecutive annual reports.

Last year, several versions of SCHIP expansion legislation attempted to silence that alarm bell by nullifying Section 801 of the MMA. Proponents of the move argued that Section 801 restricted policymakers' "flexibility" to deal with future financing problems. To some, "flexibility" apparently means the option to further burden taxpayers' incomes, as the Center for Budget and Policy Priorities (CBPP) noted in a July 30, 2007 report:

It would effectively rule out an increase in progressive income taxes as a part of a long-term solution for Medicare, since an increase in general revenues would conflict with keeping the general-fund share of Medicare financing from rising above 45 percent. In contrast, Congress would be permitted to raise regressive payroll taxes …

While NTU would applaud "ruling out" an income tax increase to shore up Medicare, CBPP (likely inadvertently) makes an important point. A payroll tax increase would do little more than provide another temporary cash infusion at the expense of workers' livelihoods, especially those at the bottom of the income scale. Indeed, neither the 1983 Social Security Act Amendments nor the removal of the income cap on the 1.45 percent Medicare payroll tax through the 1993 Omnibus Budget Reconciliation Act have "solved" the two programs' systemic financing problems as their advocates originally predicted. This is because both Social Security's and Medicare's woes are driven by demographics and political decisions to expand benefit payouts.

A more thoughtful argument for repealing Section 801 of the MMA is that the provision's "Medicare Funding Warning" trigger rests on a flawed measurement, namely the share of general revenues. Some argue that a more meaningful index by which to judge the program should be found, while others would do away with any measurement altogether. Again, as CBPP contends:

That more than 45 percent of Medicare financing may come from general revenues poses no more of a problem by itself than the fact that 100 percent of the financing for defense, veterans' benefits, education, health research, or most other federal programs is financed from general revenues.

Once more, however, CBPP seems to have only reinforced the opposite conclusion by accident. Most of the programs CBPP enumerates in the quote above are either financed by yearly appropriations or are often subject to authorization activity. As a pure entitlement program, Medicare is specifically designed to avoid those processes, and perhaps unconsciously intended to escape regular scrutiny. Because of this key difference, some kind of mechanism must be designed to prompt more regular and deliberate policy discussions over Medicare's financing. While we would concede that other triggers could be fashioned to rely on data such as the program's share of GDP, we note that no Member has stepped forward and aggressively offered such an alternative. In its absence, NTU opposes any attempt to repeal Section 801.

Systemic Changes

While the preceding points have concentrated on what should, in our opinion, be easy actions for the Committee to take, pending deliberations would offer an excellent opportunity to at least discuss bipartisan comity on larger reforms. First and foremost among these is the concept of means-testing.

As we have argued previously, tax increases should not be an option for resolving Medicare's increased strain on the nation's finances. According to an estimate by the Federal Reserve, taxation would have to increase by one-third -- from 18 percent of GDP to 24 percent of GDP -- within roughly the next two decades to address Medicare's long-term challenges. This estimate does not account for other entitlement programs.

Nor should policymakers seek false Medicare economies through the imposition of price controls on prescription drugs through direct regulatory action or "importation" schemes. In opposing the overall MMA legislation, we noted that once a federal entitlement would be established, the government would simply build upon it as justification to further expand the state’s role in the pharmaceutical market.

However cheap it is to manufacture pills, private firms first undertake a tremendous financial gamble in order to formulate a drug breakthrough. According to the Tufts Center for the Study of Drug Development, a drug's formula costs pharmaceutical companies an average of $800 million, with a typical development and approval time of 14 years. For just one drug to be approved by the Food and Drug Administration, a company typically needs to screen between 5,000 and 10,000 compounds.

In a truly free-market economy, these long odds only make sense because risk-takers can reap the rewards when their hard work pays off. In addition, American drug breakthroughs have had a documented effect in lowering other health care costs by shortening hospital stays and obviating the need for expensive surgeries.

A study by NTU Adjunct Scholars William Orzechowski, Ph.D. and Robert C. Walker provides a great deal of research to support the notion that innovative drugs can control costs in state and federal programs over the long term and increase productivity throughout the economy because of better worker health. According to the authors:

[E]conomist Frank Lichtenberg has found that hospital time and surgical procedures declined fastest for patients with the greatest increase in the total number of drugs prescribed and with greater utilization of new drugs. … A $1 increase in pharmaceutical expenditures is associated with approximately a $4 reduction in other health expenditures. Incredibly, he found that in the absence of pharmaceutical innovation there would be no increase and perhaps a decrease in mean age at death. A one-time $15 billion expenditure of drug R&D [research and development] subsequently saves about 1.6 million life years per year whose annual value is about $27 billion.

Unless the American tradition of free markets -- which rewards risk-takers for products that benefit society -- is upheld now, these cost savings could soon be a thing of the past.

Indeed, our entire health system, including Medicare, would benefit from less government involvement in purchasing decisions. One bill NTU strongly supports in this regard is the Health Care Choice Act (S. 2477). By allowing consumers to purchase health care from out-of-state providers, this legislation would greatly expand the variety of insurance choices in the marketplace, thus reducing the effect of onerous state regulations and bringing costs down.

The number of Americans lacking health insurance is of great concern to many, but it should not serve as a pretext for larger, more intrusive government. The Health Care Choice Act simply opens up restricted state markets and gives consumers additional coverage options -- without the creation of yet another federal program or bureaucracy. This approach addresses the problem while respecting markets and personal freedom.

Some states force their residents to pay for policies that include benefits for such "vital" services as hair prostheses (wigs), infertility treatments, acupuncture, and massage therapy. These mandates raise prices for everyone, despite the fact that the vast majority of Americans have no need for such services. The Council for Affordable Health Insurance estimated that these mandates can hike insurance prices between 20 percent and 45 percent, yet current law erects a barrier by preventing citizens from seeking lower-cost policies in other states.

The Health Care Choice Act would remove that barrier and harness the power of the marketplace in three important ways. By giving access to a broader range of plans, consumers will have more choices at lower costs. By spurring competition among policymakers, states will have incentives to create the most consumer-friendly regulatory structures and enforcement regimes possible. Finally, by creating a robust, nationwide health insurance market, the Health Care Choice Act will promote efficiency of scale and innovative business models. These developments in turn could enhance the level of service in the health care industry by making insurance more responsive to those purchasing it.

One other systemic change that could be implemented with modest impact now and deliver large savings in the future is, paradoxically, among the most controversial: means-testing.

Congress has long debated the wisdom of either increasing premiums or reducing benefits for Medicare recipients with higher incomes, but you may not be aware that NTU has pursued the issue for the better part of two decades. A 1992 paper authored for our research affiliate by generational economist Neil Howe argued that a comprehensive means-test for entitlements "could achieve large, equitable, and permanent annual savings in the federal budget by the mid-1990s. It offers near-term fiscal breathing room in which America could re-grow its savings and productivity performance while reconsidering and reordering its longer-term budget priorities."

If only policymakers had recognized the wisdom of this approach 16 years ago. Although more than 50 percent of American households are in some manner invested in stocks or bonds, and private-sector retirement vehicles have become far more common, the habit of debt accumulation among most households has yet to be tamed. Much more distressing is that Washington has done virtually nothing since 1992 in prioritizing federal spending ... and has arguably done worse.

Dr. Howe's paper used economic modeling, Census Bureau figures, and official government data to produce staggering illustrations of how the federal entitlement system does far more than simply lift the poor out of poverty. At the time, he concluded that during the previous decade, the average constant-dollar full-cash and in-kind benefit received by poor households (under $10,000 in 1990 dollars) declined 6 percent, while it doubled for wealthier households (above $150,000 in 1990 dollars). That trend has not reversed itself dramatically, even after the poorly designed expansion of the tax on Social Security benefits was enacted in 1993 legislation.

Howe proposed that to rectify this situation, policymakers could consider a modest remedy. Under this path, cash and in-kind benefits would be reduced 7.5 percent to the extent they cause household income to exceed $30,000 and an additional 5 percent would be withheld for each subsequent $10,000 of income above the threshold. This formula would continue to a maximum reduction of 85 percent of benefits, at a household income of $190,000 or more. Even up to $50,000, no bracket would see a reduction of more than 7 percent in its cash and in-kind benefits.

Please bear in mind that all of the figures mentioned above were calculated in 1991 dollars. In today's dollars, those means-testing thresholds would leave households with up to $46,000 of income with their full benefits, while the 85 percent reduction would only occur for households bringing in $295,000 or more. Howe projected that under this option, five-year budget savings from FY 1992 through FY 1996 would equate to $198 billion. Again, think of these savings in modern, 2008 dollars: $308 billion.

Last year, our late President John Berthoud wrote an eloquent treatise on means-testing for a symposium held by the Center for the American Experiment. In it, he argued that means-testing appealed both to liberals who advocate "fairness" in federal fiscal policy, and conservatives who advocate discipline in fiscal policy. One of his prescriptions included the following proposal:

The upshot of Medicare means-testing is a reduction in taxpayer subsidies to beneficiaries as income rises. Congress began this in 2003 by slightly raising the Medicare Part B premiums for wealthier senior households. The federal government could expand this initiative in Part B by introducing something of a sliding scale so that even seniors who aren’t in the top bracket pay at least a little more of the cost of Part B than they do currently (25 percent) and the wealthiest seniors pay a higher share than they have since 2003 (50 percent).

Some would argue that such increases would constitute an effective "tax hike" on seniors, but we disagree. Supplementary Medical Insurance (SMI) is a voluntary program whose funding comes, in part, from the Treasury. Indeed, it is the alarming growth of SMI's subsidy from the general budget that is a "tax" on Americans. From FY 2002 through FY 2007, outlays for SMI have more than doubled. Offsetting the cost of this $200 billion liability with higher premiums would bring lighter, not heavier, burdens for taxpayers. In addition, bringing SMI more into line with market-based costs could encourage consumers to more carefully weigh the costs and benefits of SMI with other Medigap options.


As they have for more than a decade, the Medicare Trustees noted the deteriorating condition of the program in their 2008 report. While the figures themselves are well known to Members of this Committee, it is valuable to repeat the Trustees' warning:

These projections demonstrate the need for timely and effective action to address Medicare's financial challenges. Consideration of such reforms should occur in the relatively near future. The sooner the solutions are enacted, the more flexible and gradual they can be. Moreover, the early introduction of reforms increases the time available for affected individuals and organizations -- including health care providers, beneficiaries, and taxpayers -- to adjust their expectations.

Our 362,000 members hope you will take these words to heart and craft the bipartisan remedies we have outlined for Medicare's woes into public policy. To this end, you can be assured of our full cooperation and support. Please do not hesitate to contact us if we can be of any assistance.