A Track Record of Poor Performance

House and Senate liberals have objected to the proposal that any future prescription benefit be placed under private-sector management, and they have strived to label private-sector health plans or entities risky or unreliable.² This congressional hostility to private health plans emerged as a key feature of the recent congressional debate regarding Medicare. But Members of Congress should keep in mind (and seniors should be aware) that the current Medicare program faces mounting managerial problems. For example:

• The Medicare bureaucracy ranks at or near the bottom with regard to key measures of managerial performance.
  Among many federal agencies that are often considered sluggish by private-sector standards, the GAO found that the CMS ranked dead last in terms of the percentage of managers who reported having key performance measures for their work.
  
  
• The Medicare bureaucracy ranks near the bottom in measures of customer service.
  The GAO ranked the CMS next to last in having a measure for customer service as part of its managerial culture. Just 16 percent of CMS managers reported having customer service measures to a "great extent" or "a very great extent."³ Only the Nuclear Regulatory Commission (with 14 percent of managers reporting the presence of such measures) scored lower. Clearly, customer service is not a key feature of the managerial culture at the CMS. No private firm that provides vital services to the public and depends on consumer choice and satisfaction for continued operation could survive with such a management culture.
  
  
• The Medicare bureaucracy ranks near the bottom in measures of accountability for results.
  The GAO found that the CMS ranked next to last among federal agencies in having a management team that was held accountable to performance measures.⁴ In contrast, major private firms rely on measures of performance in staffing and allocating resources.

The Need for a Better Program

For years, the Medicare trustees and responsible officials at the GAO and the Congressional Budget Office (CBO) have warned Congress that it would be a profound mistake simply to add a prescription drug benefit to the current Medicare program in the absence of serious structural reform. Not only would such an additional responsibility aggravate the growing financial pressures on the program, but it would also complicate what has already become a serious, and largely neglected, managerial problem.

Among a dozen recommendations offered to improve the governance of the Medicare program, a philosophically diverse panel of the National Academy of Social Insurance (NASI) has stated:

In the absence of a decision by Congress to fundamentally reform Medicare or provide substantial new investment of resources, both financial and human, the study panel urges Congress not to enact major changes in the program in the near term because CMS does not currently have either the resources or the capacity to implement such changes in a timely fashion while managing the existing program and the changes enacted in the last few years.⁵

The Best Option

The best solution would be to change the fundamental Medicare structure and transform the program into one that more closely resembles the popular and successful Federal Employees Health Benefits Program (FEHBP), which covers members of Congress, federal workers, and retirees. Those enrolled in this program have access to reliable prescription drug coverage in a modern health care program and are able to choose an alternative health plan that better meets their needs if they wish to do so.

Seniors should be aware that the GAO ranked the Office of Personnel Management (OPM)-the agency that administers the FEHBP-highest among federal agencies in terms of the percentage of federal managers who reported that they had the authority to get results. The OPM also ranked first among agencies with regard to the use of performance information in managing program responsibilities.⁶

Intermediate Steps to Reform.
If Congress is reluctant to re-create the Medicare program according to the FEHBP model in a single major legislative act, it could take intermediate steps toward the transformation to a new and better system. It could do so by allowing new retirees to keep their private health plan and drug coverage as their primary coverage if they wish to do so, with the government contributing premium support to offset its costs.

Congress could thus phase in Medicare reform gradually, enabling the first wave of retirees in the huge 77-million-strong baby boom generation to take advantage of a flexible new program that provides a spectrum of plans with varied benefits. Over time, Congress would have the opportunity to make any necessary adjustments in the program to expand such coverage to more retirees.

In addition, Congress should scale back the responsibilities given to the Medicare bureaucracy regarding Medicare Part C-the Medicare+Choice program of private health plans that serve senior citizens. Congress could create a separate agency to negotiate rates and benefits with these health plans, just as the OPM currently does with health plans in the FEHBP.⁷ Congress could, thereby, help the CMS function more effectively, allowing its staff to concentrate its time, energy, and resources on efforts to improve the efficiency of the traditional Medicare fee-for-service program.

MicroManaged and Overwhelmed

The less than impressive CMS showing in meeting the performance objectives of the Government Performance and Results Act of 1993 is evidence of systemic structural weaknesses. It is also another indication that the Medicare bureaucracy today is simply overwhelmed by congressionally imposed responsibilities. This latter view is also broadly shared by prominent health policy analysts-regardless of their views on Medicare reform or their political or philosophical differences.¹⁶

In recent years, the CMS's regulatory responsibilities have multiplied. According to a recent report of the National Academy of Social Insurance, the Balanced Budget Act of 1997 alone included 359 actions that required CMS implementation; the Balanced Budget Refinement Act of 1999 included an additional 126 provisions that required CMS implementation; and the Medicare, Medicaid, and SCHIP Benefits Improvement Act of 2000 included another 152 provisions that required CMS implementation.¹⁷ As the authors of the NASI report also note, in recent years, congressional statutory construction has become increasingly specific, narrowing the agency's options and undercutting its ability to react and respond to the rapidly changing environment in which it must operate.

While no academic or public policy institution has yet released an analysis of the projected CMS managerial requirements under the various House and Senate Medicare prescription drug proposals debated in 2002, seniors can be certain that they would be formidable.

Steps Congress Can Take to Ensure Superior Medicare Drug Management

Medicare's serious managerial problems have crucial implications for the prospects of a Medicare prescription drug policy. Rather than massively increasing the regulatory obligations of CMS in the administration of a complex prescription drug benefit under a new Part D Medicare program, Members of Congress should look for a less expensive, quicker, more reliable, and more efficient way to deliver prescription drugs to senior citizens, independent of an agency that is struggling with its existing responsibilities.

STEP #1. Target dollars to poor seniors who do not have access to drug coverage.
The best short-term option is to create a federally subsidized system of prescription drug accounts for low- and moderate-income seniors that can be accessed through a Medicare prescription drug debit card. The card could be used to purchase prescription drugs directly at a pharmacy or through a health plan of choice. This system has the advantage of maximizing flexibility and innovation in the delivery of prescription drugs while targeting taxpayers' dollars to seniors who need the most help. In comparison to most other Medicare drug proposals, it is administratively simple. Moreover, it would not displace existing drug coverage for seniors and would allow for adjustments to the program over time. Health policy analysts at the American Enterprise Institute and the Galen Institute have developed plans for such a program at a cost, estimated by Price/Waterhouse/Coopers, of $302 billion over a ten-year period.¹⁸

STEP #2. Scale back CMS management responsibilities and allow the agency to focus on traditional Medicare.
The CMS has a responsibility to comply with the Government Performance and Results Act of 1993, as other federal agencies do. When overwhelmed with a variety of disparate responsibilities, it is hard for the CMS managers and staff to make headway in transforming their organizational culture, as the GAO urges, "to improve decision-making, maximize performance, and assure accountability.¹⁹

The CMS is supposed to accomplish this transformation while administering or overseeing a variety of disparate health care programs: Medicaid, the huge federal-state health care program for the poor and the indigent; the State Children's Health Insurance Program (SCHIP); the enforcement of certain provisions of the Health Insurance Portability and Accountability Act of 1996 ( HIPAA); and the administration of Medicare Part C, the Medicare+Choice program, a heavily regulated system of private health plans for seniors.

Congress should at least scale back CMS management responsibilities such as those under Part C, the beleaguered Medicare+Choice Program. The best way to do this would be to create a separate agency that would negotiate rates and benefits with competing plans in the Medicare+Choice program, just as the high-performing U.S. Office of Personnel Management currently does with private health plans in the FEHBP. This would allow the CMS to concentrate on administering the huge and complicated Part A and Part B components of the traditional fee-for-service program more effectively.

It is worth noting that the House of Representatives has already taken a major step in this direction with the recent passage of the Medicare Modernization and Prescription Drug Act of 2002 (H.R. 4954). The House bill would create a Medicare Benefits Administration that would both oversee the implementation of a prescription drug benefit through private-sector entities and plans and improve the administration of the troubled Medicare+Choice program. Under the House bill, there is also a limited demonstration program for an FEHBP-type payment formula for competing health plans in several areas of the country.

STEP # 3. Start the process of Medicare reform by allowing new retirees to bring their private coverage into retirement with them and receive support to offset the cost of premiums.
Medicare patients would be far better served by a managerial system and climate that rewards performance, innovation, and customer service. That kind of system can best be achieved through the discipline of market competition, where patients can pick and choose their health plans so that health plans could maintain their market share only by providing quality, service, and customer satisfaction.

Paradoxically, in the area of health insurance today, this sort of direct accountability to customers prevails not in conventional private-sector health insurance managed by employers, but in the unique public-sector Federal Employees Health Benefits Program. By allowing newly retired Americans to keep their private health care coverage-including drug coverage-and bring it into retirement as their primary coverage, Congress could start the process of transforming Medicare into a program that resembles the FEHBP.

For the next generation of seniors, in particular, there is much to be gained from such a transformation. For one thing, the management and administration of the program could be conducted by a high-performing agency such as the Office of Personnel Management, the agency that administers the FEHBP. The OPM does not pump out tens of thousands of pages of rules and regulations, bury doctors in paperwork, or micromanage every facet of the financing and delivery of health care for FEHBP enrollees as the CMS does today with regard to those enrolled in the Medicare program. The OPM, in effect, shares the administration of the FEHBP with private plans that have powerful economic incentives to perform in a highly competitive environment. Performance measures are often a key to success for private firms, for whom failure to get results means lost revenues.

In an open, pluralistic, and competitive system, Medicare patients would have the right to choose the health plan that best meets their needs. If patients were dissatisfied with a health plan's quality, service, or benefit package (including its drug coverage), they could secure a better one. In this scenario, health plans would have a powerful incentive to respond to patients' wishes. In a competitive environment, poor performance or unresponsiveness to customers is quickly punished by a loss of market share.

Conclusion

Seniors rarely, if ever, come face to face with an employee of the CMS, the powerful regulatory agency that runs the Medicare program upon which they depend. In this sense, the Medicare bureaucracy is largely insulated from its "customers." For the most part, the agency's interaction with senior citizens is indirect-its interaction is with Medicare contractors and the doctors, hospital officials, and other health care professionals who deliver medical services to senior citizens.

But seniors' insulation from the Medicare bureaucracy is superficial. Seniors today are, in fact, profoundly affected by what officials of the CMS do or do not do and how well they do it. Seniors cannot escape the managerial culture that pervades the powerful regulatory apparatus governing the Medicare program. The impact of the CMS on their personal lives will be even greater if the agency is entrusted with the management of financing and delivering their prescriptions, if it is given broad authority to regulate the drugs to which they will have access, and if it is allowed to determine what kinds of formularies will be used in controlling the costs of drugs or how drugs will be priced.

Medicare's financial and managerial problems are broadly acknowledged among health policy analysts, regardless of their political opinions or philosophical leanings. In addition, there is strong evidence that an unhealthy managerial culture and climate also lies beneath Medicare's programmatic difficulties. The management of the Medicare bureaucracy is far below that of other federal agencies. It is the weakest in terms of having standards for efficiency, and it ranks well below the rest of federal agencies in having measurable standards for performance-particularly, in terms of achieving results, in measures of quality, and in customer satisfaction.

However, in spite of Medicare's work overload and management problems, many Members of Congress still hold fast to the unfounded belief that the CMS would somehow outperform private organizations in managing a drug benefit within the current structure of the Medicare program. Too many view the Medicare management problem as primarily a problem of resources. However, Capitol Hill partisans of the Medicare bureaucracy are profoundly mistaken if they believe that the answer to Medicare's serious management problems is simply an increase in CMS funding and staff.

If Congress wants to ensure reliable prescription drug coverage for the nation's senior citizens and guarantee that this coverage will be managed efficiently with a clear focus on patient satisfaction, it should design a new system that incorporates personal choice and market competition, as the FEHBP does. Medicare patients should have the right to choose a better health plan. They should have the means to choose one that best meets their needs and secure the drug coverage that their doctors think is best for them. These crucial decisions should not be entrusted to a Medicare bureaucracy that, even now, is overwhelmed and facing a managerial crisis.

Robert E. Moffit, Ph.D., is Director of Domestic Policy Studies at The Heritage Foundation.