[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
THE ADMINISTRATION'S PRESCRIPTION DRUG PROPOSAL
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MAY 11, 2000
__________
Serial 106-104
__________
Printed for the use of the Committee on Ways and Means
__________
U.S. GOVERNMENT PRINTING OFFICE
69-982 WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Health
BILL THOMAS, California, Chairman
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
JIM McCRERY, Louisiana GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Illinois JOHN LEWIS, Georgia
SAM JOHNSON, Texas JIM McDERMOTT, Washington
DAVE CAMP, Michigan KAREN L. THURMAN, Florida
JIM RAMSTAD, Minnesota
PHILIP S. ENGLISH, Pennsylvania
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C O N T E N T S
__________
Page
Advisory of May 4, 2000, announcing the hearing.................. 2
WITNESSES
Health Care Financing Administration, Hon. Nancy-Ann Min DeParle,
Administrator.................................................. 8
U.S. General Accounting Office, William J. Scanlon, Ph.D.,
Director, Health Financing and Public Health Issues, Health,
Education, and Human Services Division......................... 26
Congressional Budget Office, Dan L. Crippen, Ph.D., Director;
accompanied by Steve Lieberman, Executive Associate Director... 35
SUBMISSIONS FOR THE RECORD
American College of Physicians-American Society of Internal
Medicine, statement and attachment............................. 68
National Alliance for the Mentally Ill, Arlington, VA, Jacqueline
Shannon, statement............................................. 71
THE ADMINISTRATION'S PRESCRIPTION DRUG PROPOSAL
----------
THURSDAY, MAY 11, 2000
House of Representatives,
Committee on Ways and Means,
Subcommittee on Health,
Washington, D.C.
The Subcommittee met, pursuant to call, at 9:31 a.m. in
room 1100, Longworth House Office Building, Hon. William M.
Thomas, (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH
Contact: (202) 225-3943
FOR IMMEDIATE RELEASE
May 4, 2000
No. HL-14
Thomas Announces Hearing on
Administration's Prescription Drug Proposal
Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of
the Committee on Ways and Means, today announced that the Subcommittee
will hold a hearing on the Clinton Administration's prescription drug
proposal.T2The hearing will take place on Thursday, May 11, 2000, in
the main Committee hearing room, 1100 Longworth House Office Building,
beginning at 9:30 a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include representatives from the Administration, the
Congressional Budget Office, as well as other interested parties
knowledgeable on the structure and financing of a Medicare prescription
drug benefit. However, any individual or organization not scheduled for
an oral appearance may submit a written statement for consideration by
the Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
Although Medicare currently offers a range of health care benefits,
it differs significantly from other Federal health care programs and
private sector health insurance in that it does not generally offer its
enrollees coverage for outpatient prescription drugs. This is
significant given that, on average, seniors currently spend in excess
of $600 annually on prescription drugs. However, in the absence of
Medicare prescription drug coverage, beneficiaries have come to rely
upon several other sources of prescription drug benefits, such as
employer-sponsored retiree health insurance, Medicaid or other State-
sponsored health programs, and managed care plans offered through the
Medicare+Choice program. In total, recent data indicates that
approximately two-thirds of beneficiaries have coverage through these
alternate sources, thus leaving more that 10 million beneficiaries
without coverage.
In February, the Administration presented a proposal in its budget
to provide for a Medicare prescription drug benefit. Seniors would pay
a monthly premium to enroll in a new Part D program, in which
beneficiaries and the Federal Government would split prescription drug
costs up to a certain amount. This new program, administered by the
Federal Government, would be accompanied by a proposed budgetary
reserve fund for catastrophic drug expenses starting in 2006, allocated
only after Congress and the Administration agree on a structure to
provide for these costs.
In announcing the hearing, Chairman Thomas stated: ``The purpose of
this hearing is to examine the President's proposal for providing
prescription drug coverage for Medicare beneficiaries. Now that the
President's plan has been put into legislative form and analyzed by the
Congressional Budget Office, the Subcommittee can better understand the
probable implications of the President's approach to this vexing
problem.''
FOCUS OF THE HEARING:
The hearing will examine the Administration's proposal to provide
access to prescription drugs for Medicare beneficiaries and how it will
affect the financing of Medicare and its implications for beneficiary
care.
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Chairman Thomas. The Subcommittee will come to order.
Today the Subcommittee will continue its hearings on the
important issue of expanding Medicare to provide coverage for
outpatient prescription drugs for Medicare beneficiaries. Today
we will examine the President's proposal for addressing this
problem. Every Member of this Committee understands the
importance of this issue to Medicare beneficiaries.
Increasingly, in today's world medicines are the preferred
method of treatment for a variety of ailments. This is
particularly true for many chronic conditions that
disproportionately impact the Medicare benefit community.
Nevertheless, since its inception in 1965, the Medicare
Program has generally excluded coverage of outpatient
prescription drugs; however, as care givers turn increasingly
to many of today's miracle drugs to manage chronic ailments and
new and more-expensive biotech treatments come on the market,
the financial pressures grow, caused by the Medicare Program's
lack of a drug benefit, and that pressure will only continue to
grow.
We have had a number of anecdotal examples of beneficiaries
spending down life savings, forced to make difficult choices,
and without the kind of protection that we have been discussing
on both sides of the aisle, they are more frequently exposed to
catastrophic drug costs that can leave them destitute if they
buy the drugs or create very difficult life choices, and,
probably most insidious of all, practice one of the most
negative aspects of current prescription drug medicine, and
that is do it piecemeal--start a program and then determine
their own regimen based upon finances rather than on medical
efficacy.
Seniors need a program of access to prescription drugs.
Incidentally, the Medicare Program, as a whole, needs
modernization so that we will be able to meet the needs of
today's retirees, but also those retiring in the future. This
is why, in part, republicans announced last month the outline
of a plan to provide prescription drug benefit for Medicare
beneficiaries and modernizations.
We have pledged to Speaker Hastert that this Subcommittee
will work closely to make sure that legislative language can be
taken up by the House late this spring or early this summer.
This, of course, brings us to today. The object of this
particular hearing is to better understand and try to lean from
the President's proposal.
Recently, there have been important developments on this
issue. First, the President's bill has been drafted into
legislative language, and this is very helpful. It enables us
to examine the details and better understand how the proposal
would actually work.
Second, the Congressional Budget Office has updated its
score of the proposal, and I believe they actually announce
some further refinements here today in testimony, and if that
is not the case I certainly hope by making that statement we
will try to get them to.
It is really critical, because a lot of these decisions are
tied intrinsically to financial implications of the policy, and
changes made in the policy sometimes have significant financial
implications.
Third, the Congress has passed a budget resolution that set
aside $40 billion over the next 5 years to finance reforms in
Medicare and a prescription drug program. This is slightly more
than the President's initial program would cost, based upon
CBO's last estimate. This level of spending was supported by
leaders in both parties, and they were both included in the
republican and in the democrat budget resolutions.
Finally, if you watched the video media last night and
yesterday morning's paper, you know the that President and the
Congressional democrats have already begun to rethink the
President's initial proposal.
Yesterday morning, at a press event at the White House, the
democrats acknowledged one of the perceived flaws with the
President's original plan and expanded on the President's offer
of dealing with the catastrophic costs, or a real insurance
benefit that protects seniors who encounter serious illness and
the possibility of exorbitantly high drug bills through no
fault of their own. This is good news. It means that
republicans and democrats are moving toward each other on the
issue.
Yesterday, the President said he wants to work with the
republican leadership in Congress to get a bill passed this
year. This is also good news, for if we are going to pass
legislation to help seniors and disabled beneficiaries with
their drug costs this year, we have got to work together, and
ultimately Congress and the President have to agree.
Yesterday, Chairman Archer and I wrote the President a
letter to tell him just how seriously we take this issue and
how we are committed to working in good faith to get a
prescription drug benefit signed into law before Congress
adjourns. It is my hope that this hearing will be useful and
hopefully instrumental in moving us down the path toward
agreement.
Yesterday the President showed he is willing to alter his
plan to address legitimate criticisms. I, too, want to approach
this process with an open mind.
While those of us on this side of the aisle have agreed on
some firm principles that will guide us as we write our bill,
we want to learn from the President's effort and buildupon his
proposal so that the Medicare beneficiaries can get the best
Medicare Program possible--a modernized Medicare with
prescription drugs.
Chairman Thomas. With that, I would ask the gentleman from
Wisconsin, who I understand is subbing for the gentleman from
California, Mr. Stark, if he would have any opening remarks.
Mr. Kleczka. Thank you, Mr. Chairman.
As Chairman Thomas indicated, Congressman Stark was unable
to be here this morning due to a meeting at the White House on
the progress the Conference Committee is making on the managed
care bill. I suspect that will be a very short meeting.
I am pleased to offer opening remarks for this morning's
hearing on one of the most critical issues in senior health
care today, a prescription drug benefit.
I thank the chairman for holding this hearing and join him
in welcoming our new Mom, Administrator DeParle--Nancy,
welcome--Mr. Scanlon and Mr. Crippen to this morning's hearing.
Mr. Chairman, there is truly an urgent need to help
Medicare beneficiaries with the cost of prescription drugs.
Prescription drugs are used to prevent and treat virtually
every major illness. They can accomplish what once could only
be done through surgery, with far less pain and far less cost.
They can provide treatment where none existed before, improving
the quality and length of life for the patient.
Prescription drugs are essential to quality health care,
yet many seniors cannot afford the medical miracles made
possible by pharmaceutical drugs.
Some Medicare beneficiaries have employer-based retiree
prescription coverage, others private supplemental coverage
that exists in drug costs; however, many have no coverage at
all.
A study by the Commonwealth Fund found that in 1996 only
half of all the Medicare beneficiaries had prescription drug
coverage which lasted throughout the entire year. Even for
those who do not have year-round coverage, there is no
guarantee that this coverage will continue. Employer-sponsored
health care has steadily declined over the last decade.
While an estimated 65 percent of large employers offered
retiree health care benefits in the eighties, less than 40
percent do so today.
As Pabst Brewery retirees in my district can attest,
retiree benefits are not always a stable source of health care
coverage. Pabst canceled their benefits in 1996.
The 13 million plus seniors without any prescription drug
coverage must pay high out-of-pocket costs for their drugs. To
see how much seniors in my district without drug coverage were
paying, I had a survey done of the five most frequently
prescribed drugs for older Americans. The survey found that
seniors were paying an average of 119 percent more for drugs
than the drug companies' most favorite customers. In addition,
the prices these seniors are paying are 75 percent higher than
the prices that Canadian customers pay, and 73 percent higher
than the prices that Mexican customers pay.
These costs often exceed what fixed income seniors can
afford. Far too many seniors are forced to choose between food
and medicine. Adding a voluntary prescription drug benefit to
Medicare is essential to ensure these seniors will have
affordable access to prescription drugs.
Despite the clear need for such coverage, the
pharmaceutical companies are worried that having a drug benefit
in Medicare will cut into their profits. To protect their
profits, they are running a multi million dollar ad campaign
featuring a woman named Flo. Flo is trying to convince seniors
that a Medicare drug benefit will limited their drug choices or
cause them to lose their current drug coverage, but those scare
tactics are not backed up by the facts.
Despite what Flo says, seniors in Medicare deserve the same
quality of prescription drug coverage available in most other
health plans. They should not be forced to accept second-class
health care benefits.
The President has proposed giving seniors without drug
coverage affordable access to the medicines they need, while
protecting quality drug coverage for those who already have it.
The plan uses Medicare's purchasing power to obtain discounts
for seniors.
Starting in 2003, seniors who choose to participate would
pay a monthly fee of $25 to participate in a Medicare drug
benefit. In return, the program would pay half of their first
$2,000 in drug costs, rising to one-half of $5,000 in 2009.
In addition, starting in 2006, the President's plan would
provide catastrophic coverage to limit the out-of-pocket
expenses for seniors with the most exorbitant drug costs.
Again, seniors who do not want or need this coverage do not
have to participate in this strictly voluntary Medicare drug
program. This plan is not perfect, but it is a good place to
start.
Just yesterday, the House democratic caucus unveiled a
Medicare drug coverage proposal which builds on the White House
plan. The democratic plan would provide drug coverage beginning
in 2002 rather than 2003. The democratic plan would implement
catastrophic coverage earlier than the President's plan--we
would start it in year 2002--and commence to protect all
seniors whose drug expenses exceed about $3,000 per year.
The House budget resolution sets aside $40 billion, as the
chairman indicated, over the next 5 years to create a Medicare
prescription drug benefit.
The adjustments to the budget baseline, which will be made
this summer, will make more funds available to cover the
additional cost of adding essential catastrophic coverage.
In today's hearing we will begin the Committee's discussion
on how to meet the prescription drug needs of our Nation's
seniors. We have an obligation to bring Medicare into the 21st
century by adding a prescription drug benefit.
I am pleased to know that our republican colleagues share
our commitment to add a prescription drug coverage to Medicare;
however, I was disappointed yesterday, in listening to one of
the news reports, where Senator Trent Lott was quoted
indicating that he believes that a drug benefit is necessary
but probably will not get done until next year.
I would suggest to my colleague, Mr. Thomas and Chairman
Archer, not only send a letter to the President urging his
participation and negotiations, but maybe we would get Senator
Trent Lott to agree to do something this year, also.
The President's plan is an excellent starting point. I look
forward to working together on a bipartisan basis to build on
this proposal.
Thank you, Mr. Chairman.
Chairman Thomas. I thank you.
[The opening statement of Mr. Ramstad follows:]
STATEMENT OF HON. JIM RAMSTAD, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF MINNESOTA
Mr. Chairman, thank you for calling this hearing today to
review the Administration's prescription drug proposal.
The health system in America is the best in the world. We
have the most advanced pharmaceuticals, medical devices and
care delivery systems in the world. In Minnesota, hundreds of
people from foreigner countries flock to our state to visit the
Mayo Clinic and the University of Minnesota/Fairview Hospital
for specialized care.
Sadly, however, Medicare has not kept pace with the
incredible strides of American medical ingenuity. That's why I
have authorized legislation, along with Rep. Thurman, to ensure
seniors have access, through Medicare, to new technologies and
look forward to similarly working on improving senior access to
life-saving and life-enhancing prescription drugs.
I commend the President for devising a plan to give seniors
prescription drug coverage. However, as one who has worked
tirelessly to improve the bureaucratic morass surrounding the
coverage process for medical devices and procedures, I caution
everyone to be careful in how we address prescription drug
coverage.
Any plan tha tis not transparent is doomed to implode
within its own black-box of decision-making. Anything that is
too bureaucratic is doomed to fail under its highly regulated,
in-flexible system of red tape. Any plan that does not rely on
competition is doomed to be far too expensive for the system to
absorb.
If Members are willing to put politics aside and work in a
bipartisan, progmatic way, we can and will design an effective
and efficient ways to use scarce Medicare and surplus dollars
to help seniors. Hopefully, at the same time, we can modernize
Medicare to reflect the advancements in our health care system,
including a targeted prescription drug proposal to cover low-
income seniors without displacing the coverage and quality that
a majority of enrollees already enjoy.
Mr. Chairman, thanks again for holding this hearing. I look
forward to learning more from today's witnesses or now we can
best address this critical issue.
Chairman Thomas. I would ask the administrator, Nancy-Ann
DeParle, to please come to the microphone.
My understanding is that the business on the floor will
probably begin with six votes at 10 a.m., and I had hoped to
perhaps get the administrator's testimony and some questioning
in prior to those votes. We are still going to try to do that,
but, based upon the extended opening testimony on the part of
the gentleman from Wisconsin, that may have consumed the
minority's time in answering questions. I hope I can
accommodate them to some degree.
As usual, your written testimony will be made a part of the
record, and you can address us in any way you see fit. Nice to
have you back.
STATEMENT OF HON. NANCY-ANN MIN DEPARLE, ADMINISTRATOR, HEALTH
CARE FINANCING ADMINISTRATION
Ms. DeParle. Thank you. Mr. Chairman. I will try to be
brief.
I appreciate the opportunity to be here to talk about the
need for a Medicare prescription drug benefit. This
Subcommittee will be a focal point for the debate around this
important subject. If it happens, it is going to have to happen
in here. There is going to have to be a consensus in here. So
it is a privilege to be before you today to provide the
administration's perspective.
When Medicare was founded 35 years ago, the great challenge
before us was to provide access to the twentieth century
miracles of modern hospitals for our seniors. Now we have to
put in place a voluntary drug benefit that is affordable and
available to all Medicare benefits.
The good news is I am beginning to feel like I am preaching
to the converted up here. I know that everyone up here is
serious about this, and now we have to figure out how to do
that.
Drugs are as important to medicine today as hospital care
was when Medicare was created; yet, as many seniors lack drug
converge today as lacked hospital coverage back in 1963.
We all agree that the drug benefit is needed. We don't
necessarily agree on all the policy aspects of the design, so I
think what we need to do is to begin having some serious
discussions of this. There are many design parameters that we
can discuss as we move forward to implement a drug benefit. Mr.
Chairman, you noted some of them. So did Mr Kleczka.
We look forward to working with you on the details. We are
open to your ideas and we are flexible.
There are certain key principals, I think, from the
administration's perspective that we don't want to compromise.
First, the benefit has to be voluntary and accessible for all
beneficiaries.
Second, it has to be affordable for all beneficiaries, as
well as for the Medicare Program.
Third, it must have efficient administration integrated
into Medicare, but using the private sector to deliver it in a
competitive way and give beneficiaries bargaining power in the
marketplace. That is why we have suggested that private
pharmacy benefit managers administer the new Medicare benefit,
as they do right now for private sector health plans.
Fourth, a Medicare prescription drug benefit must provide
access to needed medications and provide high-quality care.
Finally, Mr. Chairman--I know you agree with this--we
should try to do this in the context of broader Medicare
reform.
As I said, we are open to your ideas and we are pleased
that we share our policy goal to ensure that every beneficiary
has access to voluntary, affordable drug coverage.
Some ideas that have been suggested, though, don't seem to
meet the principles that I outlined, and I want to just touch
on some of those.
As you said, Mr. Chairman, we have provided the legislative
language for our bill to the Congress, and I appreciate your
acknowledging the hard work that went into all those details.
Now we need to see the details of some of the other proposals,
but right now we are concerned that providing direct premium
assistance or coverage only for the poor wouldn't meet our
principle of ensuring that all beneficiaries who need coverage
will be able to afford it.
As you know, drug coverage is not just a problem for the
poor, it is a middle class problem, too, and many beneficiaries
now find that their drug coverage is not reliable, as former
employers drop coverage and Medigap is not available to
everyone.
Second, we are concerned that providing a subsidy that is
too small or providing no direct premium assistance to
beneficiaries would not make the benefit affordable to everyone
who needs it.
The independent HCFA actuaries calculate that a subsidy of
less than 50 percent for all beneficiaries would leave many
unable to afford the coverage. That would mean that those who
did choose the coverage would have higher costs, and that would
increase premiums for everyone and leave even more people
unable to be able to afford the coverage, so that is something
that we need to work on.
We are also concerned that a drug-only private insurance
model would not meet our principles of providing a Medicare
benefit that is accountable and affordable for all Medicare
beneficiaries. Here, our concern is that there wouldn't be a
guarantee that insurers would offer a comprehensive benefit,
that it might be available only where insurers chose to offer
it, and that it would have selection problems. Even with stop-
loss provisions or other adjustments, we are concerned that
enrollment would be dominated by those with the highest costs
and, again, that you would get into a spiral with unaffordable
premiums.
We need to see the details and we need to sit down and talk
seriously about the details and the pros and cons of the
various proposals, but I think we all agree that our challenge
is something that we all accept, which is to help older
Americans and the disabled have access to the 21st century
miracles of modern medicine.
I know how serious you are, Mr. Chairman, and the other
Members of this Subcommittee, about moving forward on this
issue, and I want to tell you that I am serious about it, too.
We want to work with you to provide seniors with a voluntary
benefit that is available and affordable for all, so let's work
together to get it done.
I thank you again for holding this hearing, and I am happy
to try to answer your questions.
[The prepared statement follows:]
STATEMENT OF NANCY-ANN MIN DEPARLE, ADMINISTRATOR, HEALTH
CARE FINANCING ADMINISTRATION
Chairman Thomas, Congressman Stark, distinguished
Subcommittee members, thank you for inviting me to discuss the
need, and our proposal, to provide prescription drug coverage
for Medicare beneficiaries. This Subcommittee will be a focal
point of the debate around this important issue and it is a
privilege to be before you today to provide the
Administration's perspective.
We must act now to ensure that all beneficiaries have an
affordable prescription drug benefit option. Pharmaceuticals
are as essential to modern medicine today as hospital care was
when Medicare was created. And the President believes that we
have an extraordinary opportunity to address this shortcoming
in the context of additional necessary reforms to the program
that make it more effective, modern, and adequately financed.
Lack of prescription drug coverage among senior citizens
today is similar to the lack of hospital coverage among senior
citizens when Medicare was created. Three out of five
beneficiaries lack dependable coverage. Only half of
beneficiaries have year-round coverage, and one third has no
drug coverage at all. They must pay for essential medicines
fully out of their own pockets, and are forced to pay full
retail prices because they do not get the generous discounts
offered to insurers and other large purchasers. The result is
that many go without the medicines they need to keep them
healthy, out of the hospital, and living longer lives.
Drug coverage is not just a problem for the poor. More than
half of the beneficiaries who lack coverage have incomes above
150 percent of the federal poverty level. Millions more have
insurance that is expensive, insufficient, or highly
unreliable.
Even those with most types of coverage find it costs more
and covers less. Copayments deductible,s and premiums are up.
And coverage is often disappearing altogether as former
employers drop retiree coverage, Medigap is becoming less
available and more expensive, and managed care plans have
severely limited their benefits. Clearly all beneficiaries need
access to an affordable prescription drug coverage option.
[GRAPHIC] [TIFF OMITTED] T1387.001
KEY PRINCIPLES
The President has identified key principles that a Medicare
drug benefit must meet.
It should be a voluntary benefit accessible to all
beneficiaries. Medicare beneficiaries in both managed care and
the traditional program should be assured of an affordable
prescription drug option. Since access is a problem for
beneficiaries of all incomes, ages, and areas, we must not
limit a Medicare benefit to a targeted group. At the same time,
those fortunate enough to have good retiree drug benefits
should have the option to keep them.
It should be affordable to beneficiaries and the
program. We must ensure that the premiums for the voluntary
drug benefit are affordable enough so that all beneficiaries
participate. Otherwise, primarily those with high drug costs
would enroll and the benefit would become unstable and
unaffordable. And beneficiaries must have meaningful protection
against excessive out-of-pocket costs.
It should be competitive and have efficient
administration. Medicare should adopt the best management
approaches used by the private sector. Beneficiaries should
have the benefit of market-oriented negotiations.
It should ensure access to needed medications and
encourage high-quality care. Beneficiaries should have a
defined benefit that assures access to all medically necessary
prescription drugs. They must have the assurance of minimum
quality standards, including protections against medication
errors.
It should be done in the context of broader
reform. The drug benefit should be a part of a larger plan to
strengthen and modernize Medicare.
The President's plan meets these principles. As part of a
broader reform plan to strengthen and modernize Medicare, it
adds a long-overdue voluntary prescription drug benefit to
Medicare.
Beneficiaries will have access to an optional drug benefit
through either traditional Medicare of Medicare managed care
plans. Those with retiree coverage can keep it and employers
would be given new financial incentives to encourage the
retention of these plans. Premiums will be affordable,
beginning at $26 per month, with extra assistance for those
with low-incomes. Medicare would cover half of the prescription
drug costs up to $5,000 when fully phased in, and would provide
protection against catastrophic sots. There will be no price
controls or new bureaucracy; instead, the new benefit will be
offered through private pharmacy benefit managers who can
efficiently negotiate fair prices. All qualified pharmacies
will be allowed to participate.
Beneficiaries can get all medically necessary drugs
prescribed by their physicians and will benefit from the
qualify assurance programs used by private benefit managers.
The President's budget includes the prescription drug benefit
as part of a comprehensive plan to make Medicare more efficient
and competitive and extend its solvency.
We have broad consensus that we must act now to establish a
Medicare drug benefit. We have an historic opportunity provided
by the growing budget surplus. We have an obligation to keep
our commitment to meet the medical needs of seniors and the
disabled. And this can only be done by making a voluntary,
affordable, accessible, competitive, efficient, quality drug
benefit available to all beneficiaries in the context of
Medicare reform.
BACKGROUND
Prescription drugs can prevent, treat, and cure more
diseases than even before, both prolonging and improving the
quality of life. Proper use of prescription drugs should
minimize hospital and nursing home stays, and could, in some
cases, substitute for more expensive care that is already
covered by Medicare.
Recognizing that prescription drugs are essential to modern
medicine, the private sector now includes outpatient drug
coverage as a standard benefit in almost all policies.
Further, all plans in the Federal Employees Health Benefits
Program offer a prescription drug benefit. No one would design
Medicare today without including coverage for prescription
drugs. Prescription drugs are particularly important for
seniors and disabled Americans, who often take several drugs to
treat multiple conditions. All across the country, Medicare
beneficiaries are suffering physical and financial harm because
they lack coverage.
Current coverage for prescription drugs for Medicare
beneficiaries is incomplete and unreliable. We project that
this year more than half of Medicare beneficiaries will have
prescription drug spending of $500 or more, and 38 percent will
spend more than $1000 Each year, about 85 of Medicare
beneficiaries fill at least one prescription. Yet one-third of
beneficiaries have no coverage for drugs at all and, in 1996,
half did not have drug coverage for the entire year.
Almost half of beneficiaries without coverage have incomes
above 150 percent of poverty ($12,525 for a single person,
$16,875 for a couple), demonstrating that this not just a low-
income problem. All these beneficiaries end up paying more for
needed prescriptions because they do not get the discounts
commonly offered to insurers and other large purchasers.
This situation is worse for the 10 million Medicare
beneficiaries who live in rural areas. Nearly half of these
beneficiaries have absolutely no drug coverage. They have less
access to employer-quarters of rural beneficiaries do not have
access to Medicare+Choice plans and the drug coverage that many
of these plans provide.
In 1996, about one-third of Medicare beneficiaries had
private sector coverage offered by former employers to
retirees. However, this coverage is eroding. The number of
firms with 500 or more employees offering retiree health
coverage dropped from 40 percent in 1994 to 30 percent in 1998,
according to the employee benefits research firm Mercer/Foster
Higgins (the numbers for small firms would be even lower).
The true impact of this trend has not yet been realized,
because some employers' decision to drop coverage apply to
future retirees. Furthermore, a recent survey prepared for the
Kaiser Family Foundation reported that 40 percent of large
employers would consider cutting back on prescription drug
coverage in the next three to five years. As today's workers
retire, the population of Medicare beneficiaries with access to
retiree coverage is likely to be well below the levels reported
in our surveys.
About one in six Medicare beneficiaries today are enrolled
in Medicare+Choice plans, most of which include some drug
coverage. Although Medicare--Choice plans are only required to
provide the traditional Medicare benefit package, the majority
of them also provide prescription drugs, which is one reason
why they have been popular with Medicare beneficiaries.
Nearly one-third of all beneficiaries, however, lack a
Medicare+Choice option because they live in areas where there
are no plans. And where available, plans have been raising
premiums and copayments for drugs, while lowering caps on drug
coverage. In 2000, three-quarters of plans cap benefit payments
for brand-name drugs at or below $1000, and nearly on-third of
plans cap this coverage at $500 or less, even though the
majority of Medicare beneficiaries use prescription drugs
costing $500 or more each year.
About one in eight Medicare beneficiaries have drug
coverage through Medicaid. Eligibility for Medicaid, however,
is restricted to beneficiaries who typically have income below
100 percent of poverty, and the majority of beneficiaries
eligible for such coverage--60 percent--are most enrolled in
the program. This enrollment problem persists despite
increasing outreach efforts to enroll those who are eligible.
Roughtly one in ten Medicare beneficiaries obtain drug
coverage from a supplemental Medigap plan. Medigap coverage,
however, is expensive, and its availability is not guaranteed
except right after a beneficiary turns 65.
Costs for these policies are rising rapidly, by 35 percent
between 1994 and 1998, according to Consumer Reports, in part
because those being covered this way are less healthy than the
average beneficiary. The General Accounting Office (GAO) found
that almost half of all Medigap insurers implemented
substantial increases in 1996 and 1907, with AARP--one of the
largest Medigap providers, and the only one offering a
community-rated policy covering prescription drugs--increasing
rates by 8.5 percent in 1997, 10.9 percent in 1998, and 9.4
percent in 1999.
The GAO also found that Medigap premiums for plans that
include drug coverage vary widely, both within and across
States. For example, premiums charged to 65-year-old
beneficiary for the standardized ``I'' Medigap plan ranged from
$991 to $5,943 per year in 1999. And the average premium for
the standardized ``H'' Medigap plan ranges from $1,174 in
Virginia to $2,577 in Georgia.
Furthermore, Medigap premiums increase with age in most
States. In some parts of the country, beneficiaries over age 75
are paying more than $100 per month for a plan with drug
coverage over and above the premium for a comparable plan
without drug coverage. This occurs despite the fact that the
maximum annual payment for drug costs in the ``H'' and ``I''
plans is only $1250 per year, barely over $100 a month.
THE PRESIDENT'S PLAN
The President has proposed a comprehensive Medicare reform
plan that includes a voluntary, affordable, accessible,
competitive, efficient, quality drug benefit that will be
available to all beneficiaries. The President's plan dedicates
over half of the on-budget surplus to Medicare and extends the
life of Medicare Trust Fund to at least 2030. It also improves
access to preventive benefits, enhances and use of private
sector purchasing tools, help the uninsured near retirement age
buy into Medicare, and strengthens program management and
accountability.
The President's drug benefit proposal makes coverage
available to all beneficiaries. The hallmark of the Medicare
program since its inception has been its social insurance role.
Everyone, regardless of income or health status, gets the
same basic package of benefits. This is a significant factor in
the unwavering support for the program from the American public
and must be preserved. All workers pay taxes to support the
Medicare program and therefore all beneficiaries should have
access to a new drug benefit. A universal benefit also helps
ensure that enrollment is not dominated by those with high drug
cots (adverse selection), which would make the benefit
unaffordable and unsustainable. And, as I described earlier,
lack of drug coverage is not a low-income problem--
beneficiaries of all incomes face barriers.
The benefit is completely voluntary. If beneficiaries have
what they think is better coverage, they can keep it. And the
President's plan includes assistance for employers offering
retiree coverage that is at least as good as the Medicare
benefit to encourage them to offer and maintain that coverage.
This will help to minimize disruptions in parts of the market
that are working effectively, and it is a good deal for
beneficiaries, employers, and the Medicare program.
We expect that most beneficiaries will choose this new drug
option because of its attractiveness, affordability, and
stability. For beneficiaries who choose to participate,
Medicare will pay half of the monthly premiums, with
beneficiaries paying an estimated $26 per month in 2003. The
independent HCFA Actuary has concluded that premium assistance
below 50 percent would result in adverse selection and thus an
affordable and unsustainable benefit.
Premiums will be collected like Medicare Part B premiums,
as a deduction from Social Security checks for most
beneficiaries who choose to participate. Low-income
beneficiaries would receive special assistance. States may
elect to place those who now receive drug coverage through
Medicaid in the Medicare drug program instead, with Medicaid
paying premiums and cost sharing as for other Medicare
benefits.
We would expand Medicaid eligibility so that all
beneficiaries with incomes up to 135 percent of poverty would
receive full assistance for their drug premiums and cost
sharing.
Beneficaries with incomes between 135 and 150 percent of
poverty would pay reduced premiums on a sliding scale, based on
their income. The Federal government will fully fund States'
Medicaid costs for the beneficiaries between 100 and 150
percent of poverty.
Under the President's plan, Medicare will pay half of the
cost of each prescription, with no deductible. The benefit will
cover up to $2,000 of prescription drugs when coverage begins
in 2003, in increase up to $5,000 by 209, with 50 percent
beneficiary coinsurance. After that, the dollar amount of the
benefit cap will increase each year to keep up with inflation.
For beneficiaries with higher drug costs, they will
continue to receive the discounted prices negotiated by the
private benefit mangers after they exceed the coverage cap.
And, to help beneficiaries with the highest drug costs, we are
setting aside a reserve of $35 billion over the next 10 years,
with funding beginning in 2006. In will be available so that
Congress and the Administration can work in collaboration to
design protections for those with the greatest need.
Benefit managers, such as pharmacy benefit manager firms
and other eligible companies, with administer the prescription
drug benefit for beneficiaries in the traditional Medicare
program. These entities will bid competitively for regional
contracts to provide the service, and we will review and
periodically re-compete those contracts to ensure that there is
healthy competition. The drug benefit managers--not the
government--will negotiate discounted rates with drug
manufacturers, similar to standard practice in the private
sector.
We want to give beneficiaries a fair price that the market
can provide without taking any steps toward a statutory fee
schedule or price controls. The drug benefit managers will have
to meet access and quality standards, such as implementing
aggressive drug utilization review and patient counseling
programs. And their contracts with the government will include
incentives to kept costs and utilization low while assuring a
fairly negotiated contractual relationship with participating
pharmacists.
Similar to the best private health plans in the nation,
virtually all therapeutic classes of drugs will be covered.
Each drug benefit manager will be allowed to establish a
formulary, or list of covered drugs. They will have to cover
off-formulary drugs when a physician certifies that the
specific drug is medically necessary. Coverage for the handful
of drugs that are now covered by Medicare Part B will continue
under current rules, but they also may be covered under the new
drug benefit once the Part B coverage is exhausted.
The President's plan also strengthens a stabilize the
Medicare+Choice program. Today, most Medicare+Choice plans
offer prescription drug coverage using the excess from payments
intended to cover basis Medicare benefits. Under the
President's proposal, Medicare+Choice plans in all markets will
be paid explicitly for providing a drug-benefit--in addition to
the payment they receive for current Medicare benefits.
Plans will no longer have to depend on what the rate is in
a given area to determine whether they can offer a benefit or
how generous it can be. This will eliminate the extreme
regional variation in Medicare+Choice drug coverage, in which
only 23 percent of rural beneficiaries will access to
Medicare+Choice have access to prescription drug coverage,
compared to 86 percent of urban beneficiaries.
And beneficiaries will not lose their drug coverage if a
plan withdraws from their areas, or if they choose to leave a
plan, because they will also be able to get drug coverage in
the traditional Medicare program. We estimate that plans will
receive $54 billions over 10 years to pay for the costs of drug
coverage.
Adminstrative Workload
The administrative workload for the drug benefit proposed
by the President would be handled largely by the pharmacy
benefit mangers, who will be responsible for the vast majority
of day-to-day functions. The capacity of these benefit managers
to process claims instantly has expanded rapidly in recent
years, and we have no doubt that this capacity could be readily
expanded by 2003 to administer our proposed drug benefit.
There would be no need for the type of coverage
determination process in the traditional Medicare program
because the pharmacy benefit manages would establish their own
formularies, and be required to cover off-formulary drugs
whenever determined to be medically necessary.
The federal role primarily would be in conducting a
competition for the pharmacy benefit manager contracts,
overseeing the contracts, and ensuring a smooth interface with
other Medicare programs and data systems.
MEETING BASIC PRINCIPLES
As mentioned previously, a set of key principles guided the
development of the President's plan. We are willing to support
other proposals that meet these principles:
Voluntary benefit accessible to all beneficiaries.
Affordable to beneficiaries and the program.
Competitive and efficient.
Ensures access to needed medications and encourage
high-quality care. Unfortunately, some of the proposals to
establish a Medicare drug benefit fail to meet one or more of
these criteria.
Proposals that provide assistance only to low-income
beneficiaries fail to help millions of beneficiaries with no or
undependable coverage. Most lacking drug coverage have incomes
about 150 percent of poverty, and it is increasingly difficult
for them to afford the medicines they need as drug prices rise
faster than inflation. It also is essential that we maintain
the principle that all Medicare benefits are equally available
to all beneficiaries. This is a pillar of strength for the
program and is responsible for its overwhelming support among
the American people.
Proposals with high premiums due to inadequate government
assistance would make the benefit unaffordable to many low and
middle-income beneficiaries. As a result, the benefit would
attract a disproportionate number of enrollees with high drug
cots. That would drive up the price of premiums, which would
further discourage those with lower incomes or lower drug costs
from enrolling, and in the end result in an unsustainable
program. As mentioned above, the independent HCFA Actuary has
concluded that a subsidy of at least 50 percent is essential to
attract a range of enrollees that is wide enough to maintain an
adequate risk pool.
Proposals that link a drug benefit to a high-option
Medicare plan with additional benefits like a stop-loss for
out-of-pocket costs for Medicare's basic benefits also are less
affordable. Beneficiaries who elect the high option would have
to pay not only for drug coverage but also for the other,
typically unsubsidized costs of high option plan that many
would not need, want, or be able to afford.
Proposals that fail to establish private sector benefit
managers everywhere, and instead merely allow private plans to
offer coverage when and where they wish, fail to ensure access
for all beneficiaries. The benefit would be available only in
regions where Medigap and other private plans step forward to
offer it. Medigap insurers have already said they would not
find stand-along drug policies an attractive business
proposition and are currently offering drug coverage less
frequently. Medigap plans also have little experience
negotiating with drug manufacturers and do not pool the
purchasing power of seniors. That could well make the coverage
unaffordable for many beneficiaries.
And, finally, proposals that provide a guarantee to a
dollar amount benefit rather than a defined benefit fail to
meet the principles of affordability and competitiveness. They
would allow insurers offering the coverage to ``cherry-pick''
by tailoring benefits in a way that would limit the value of
the benefit to those with greater prescription drug needs.
Additionally, most health policy experts agree that
standardizing health benefits is essential to a competitive
system, since it allows for ``apples to apples'' choices among
beneficiaries.
Finally, given the importance and costs of a Medicare drug
benefit, both seniors and taxpayers should know what benefit
they are buying.
CONCLUSION
The need for a prescription drug benefit in Medicare is
clear. There is consensus across the political spectrum that it
should be added. The principles on which it should be based are
strong. The opportunity is before us. The time to act is now. I
look forward to working with all of you on this critical issue.
I thank you for holding this hearing, and I am happy to answer
your questions.
Chairman Thomas. Thank you very much.
We do have it in bill form. Unfortunately, after this
Subcommittee had announced the time for discussing the
President's plan, there have been, I think everyone would
agree, significant modifications to the President's plan, so
you may not be able to answer these questions, although my
assumption is that, in working out the additional details and
working with the independent HCFA actuaries, that you scrubbed
the additional proposals that the President and the democrats
announced.
My concern is that one of the principles that you advocated
was the affordability, and the President's initial plan was
really not an insurance plan, it was a pre-paid plan, and so
you could work the numbers back from the amount of money that
you would have. It is not a criticism. In fact, it is an
admiration. It is easier to determine what your obligations are
by building a plan that way.
But yesterday the President announced that he was going to
deal with a catastrophic--that is, a cost protection program
for seniors--that would trigger--and I wasn't clear on the news
reports--at $3,000 or $4,000. Do we know what the dollar amount
is that it triggers at?
Ms. DeParle. We haven't made that decision yet.
Chairman Thomas. You haven't made that decision. If it
would trigger at $3,000, that really would involve more than 20
percent of the beneficiaries who are consuming more than 65
percent of the costs, so my question would be: How is that
catastrophic structure paid for? Is it a shared cost with the
beneficiaries? Is it 100 percent assumed by the Federal
Government? And if it is the former, how much would it be to
the beneficiaries? And if it is the latter, how much more does
the President's program cost than the one that we have examined
that is in legislative form?
Ms. DeParle. Well, if I could go back to the principle,
again--and you articulated, as well--from our perspective, one
of the principles here is that this benefit must be affordable,
both for beneficiaries and for the program, and I know you
agree with both of those sides of the formula there.
When we initially put our proposal out a year or so ago,
Mr. Chairman, we weren't sure that that financing would be
sufficient to cover a catastrophic benefit. All of us, from a
policy perspective, wanted to do that, but we weren't sure we
had the funding to do it.
In this year's budget, because of the good economy and
because of the work that we have done together with Medicare
and everything else in the Federal budget, we were able to set
aside $35 billion, starting in 2006, I think, to introduce--
Chairman Thomas. Yes, but it wasn't until 2006, and the
legislation only had the dollar amount, so there was no--
Ms. DeParle. That is right.
Chairman Thomas.--structural aspect to it. And, of course,
2006 is some time away. But the announcement yesterday was
2003, so my assumption is you can explain to me the payment
structure of the catastrophic portion of the President's plan.
Ms. DeParle. No, sir, I cannot, because we still want to
sit down with you and have serious discussions about the
details of your proposal. You have an interesting catastrophic
proposal. The democrats announced one yesterday that they would
fund at a higher level. We want to sit down and talk with you.
Now, on the policy issue----
Chairman Thomas. You cannot say the democrats announced
one. The President held the event at the White House, so it is
the President's plan, as well. Or are you saying that this is
the Congressional democrats' plan and not the President's? I am
trying to understand the--
Ms. DeParle. Well, in the end it will be everybody's plan,
including, I hope yours, but the plan that was announced--
Chairman Thomas. I am wondering about the beginning. We
will work on the end, but right now--
Ms. DeParle. There were, I believe--
Chairman Thomas. Is this part of the President's plan, or
is this something that the President held an event at the White
House to help the Congressional democrats get exposure?
Ms. DeParle. I wasn't there, but I can tell you this: the
President is committed to providing catastrophic coverage for
beneficiaries and--
Chairman Thomas. Do you believe it is fair to say, then--
Ms. DeParle.--he wants to work with the democrats and with
you to do that.
Chairman Thomas. OK. Do you believe it is fair to say,
then, that the prices that have been announced, not just the
cost--for example, $26, as has been cited as the premium cost,
but then, of course, you go to the end of the program in 2009
to say that it covers 5,000. Actually, it is 2,000 if the price
is going to be $26. I don't think it is really fair marketing
to take the cheapest price up front for the cost of the
beneficiaries and then go to the end of the program and talk
about what the benefits are going to be, and I would hope that
you would agree with that, because if we are going to move
forward in a bipartisan way we ought to deal with numbers that
have a relationship to each other. So if the premium is $26,
the benefit was going to be 2,000.
Ms. DeParle. And it is $50 when it rises up to 5,000. Yes,
sir.
Chairman Thomas. I understand that. But you never see that
in a discussion of the print. You take the cheapest and the
best. And I understand the marketing aspect, but--
Ms. DeParle. But you are asking me, and I am telling you of
course you are right, the premium rises.
Chairman Thomas. That is all I want to hear.
Then the question is: Do you think it is reasonable to
assume that you are now bringing in a catastrophic program in
the year 2003 that we should then assume that the
beneficiaries' premiums would be higher than was announced
under the President's plan that is in legislative form? Would
that be a reasonable assumption?
Ms. DeParle. No, sir.
Chairman Thomas. Therefore, the only other----
Ms. DeParle. Let me explain why.
Chairman Thomas.--assumption is government is going to pick
up the entire cost of the catastrophic.
Ms. DeParle. No. But you are making these as assumptions.
There are policy options here. One option is for the government
to pick up the entire cost, depending on how you--
Chairman Thomas. And, therefore, the beneficiaries'
premiums would be about what they are, because that would be
that part----
Ms. DeParle. Yes, sir.
Chairman Thomas.--of the President's program--
Ms. DeParle. Yes, sir.
Chairman Thomas.--that would remain stable.
Ms. DeParle. Yes, sir. And in our original plan in January
in the President's budget we said we had allocated $35 billion.
We didn't just pull that number out of the air. We had looked
at a number of different ways of doing it. We want to--
Chairman Thomas. But that didn't start until 2006.
Ms. DeParle.--sit down with you. That is right, it didn't.
Chairman Thomas. Now we have one that starts in 2003 that
covers 65 percent of the beneficiaries' costs of prescription
drugs. It is right around the corner.
Ms. DeParle. But that plan, sir, was the Congressional
democrats' plan. We are working with them, but I cannot give
you the details of that.
Chairman Thomas. That is fine. Then it is not--
Ms. DeParle. All I am saying is--
Chairman Thomas.--the President's plan, it is--
Ms. DeParle.--you are right. There are two options here.
There is a tension between providing a full catastrophic
benefit with no additional cost to beneficiaries or providing
one where the program's costs, the costs of the Medicare
Program, are lower and beneficiaries pay more.
Chairman Thomas. That is fine. But--
Ms. DeParle. We will have to work together on that.
Chairman Thomas. My concern is that, if we are reaching out
across the aisle to try to build a bipartisan agreement, you
probably should figure out how you are going to pay for the
catastrophic and then be honest about the price to the
beneficiaries if, in fact, they are going to share in that
cost--since they are going to benefit, it might be reasonable
to talk about having them share in it--or admit that the cost
of the program is not the cost of the program that has been
announced because it could very well double the cost of the
program.
Again, it is like saying it is the cheapest price for the
premium at the beginning, but telling you the benefits are what
it is at the end. That kind of a discussion makes it much more
difficult to work in a positive, bipartisan atmosphere. It
might almost appear that it is a partisan statement in an
attempt to make the plan look better than it is.
Ms. DeParle. Mr. Chairman--
Chairman Thomas. So fundamental honesty is probably going
to be one of the best environments for us to move forward, not
of the President's plan as written, because that we can, I
think, shed some light on.
Ms. DeParle. If I could just respond, Mr. Chairman, I agree
with you about honesty and making sure that we all know what
kind of program we are adopting and that beneficiaries know it.
If I didn't believe that, I wouldn't have had our staff work
overtime at Christmas drafting the legislative details to get
them up here. It would have been much easier for me to just
talk on the talking points.
Chairman Thomas. And I--
Ms. DeParle. That is why the details are up here.
Chairman Thomas. And I have complimented you on that.
Ms. DeParle. And I am eager to see the other details.
Chairman Thomas. I have indicated it is a great help,
because all of us are wrestling with this new attempt to deal
with an issue, and the President's plan adopts a model, to a
certain extent, that tends to be prevalent in the private
sector with pharmacy benefit managers.
One of the criticisms you have made of other plans that
may, in fact, be hypothetical criticisms just to let people
know what you are concerned about, is the fact that you don't
know if the program would be available in various regions if,
for example, entities like PBMs wouldn't play in terms of
structuring the program.
What is there in the President's plan that guarantees that
PBMs would play, would, in fact, agree to carry out the duties
that you have assigned them in this plan? Is there any
guarantee in the President's plan that PBMs would participate?
Ms. DeParle. Well, we believe they would, sir. They--
Chairman Thomas. No, is there anything--because you have
criticized other plans saying you don't know if they would
participate. My assumption is that criticism is based upon the
fact that the President has, in his plan, a clear structural
way in which PBMs would participate in the President's plan. Or
are you saying that it is problematic for the President's plan,
as well, as to whether PBMs would play?
Ms. DeParle. No, I don't think it is, because we have
talked to health plans who have administered this way. You have
to realize, pharmacy benefit managers provide services,
managing pharmacy benefits for over 200 million Americans
today.
Chairman Thomas. No, I understand that--
Ms. DeParle. All the health plans--
Chairman Thomas.--but they do it in a fundamentally
different way, and I will have one question like that to--
Ms. DeParle. I don't think they are doing it in a
fundamentally different way.
Chairman Thomas. OK. Then, when you read the GAO and the
CBO testimony, they both indicate they have real concerns about
the President's plan, in terms of the freedom of the PBMs to
manage costs. And one of the things that the President's plan
doesn't have is a shared risk aspect with the PBMs.
But I am concerned about a more fundamental problem,
pointed out primarily in the GAO testimony, which looks at the
traditional structure of HCFA and the way in which it manages
the Medicare Program, which is it pays after the fact.
One of the real advantages of PBM is almost an
instantaneous analysis of drug use and structuring.
If, in fact, the President's plan says that it is a 50/50
shared cost up to $2,000, and the assumption is it is going to
follow the HCFA model in which bills will be paid, the product
will be consumed, and at the end of the $2,000 50/50 it is 100
percent or 100 cents on the dollar out of the pocket of the
beneficiary.
How would you propose to reconcile the problem of
beneficiaries consuming more drugs than the 50/50 share would
allow, but having, in fact, gotten the reduced price? Would
beneficiaries be required to pay back after the fact any
benefits that they received after that amount, or would the
PBMs be responsible, because that is the entity through which
the drug program flows? Or would HCFA just eat it because they
cannot respond in a timely fashion to payment problems, as
indicted by the GAO's testimony?
Ms. DeParle. Well, I think I followed you. Let me see if I
did. If I understood your question, the way our proposal is
designed, beneficiaries would get the benefit of the lower
prices that we believe that pharmacy benefit managers will be
able to negotiate, even beyond their cap. And the pharmacy
benefit managers have in place systems that are able to track
the amount that beneficiaries have gotten. They will know when
they hit their cap, and they will know that beyond that they
can still get their drugs at the lower price, but they will be
paying for it after that.
They do that kind of thing now, and there is no reason to
expect they couldn't do it with Medicare, as well.
Chairman Thomas. So you are assuming that PBMs that
currently operate out in the regular world would look very much
like the PBMs that would be under the President's program?
Ms. DeParle. Yes, sir. I do assume that.
Chairman Thomas. I think you will find, if you read
carefully the Congressional Budget Office testimony and the
General Accounting Office testimony, both of them believe that
the PBMs under the President's program would be severely
hampered in their ability to function as they now function, to
the point that they question whether or not you would even
recognize them as the current entities.
Of course, we will do some follow-up questions when that
panel is available.
Thank you very much. It is very helpful to have someone
grapple with the real world relationship of these new entities,
because we are going to have to do it, and your willingness to
do it over the Christmas vacation ahead of us is a great help
in us moving forward.
The gentleman from Wisconsin?
Mr. Kleczka. Let me again thank the chairman.
Ms. DeParle, I think in your testimony you indicated that
the President's plan is a starting point, you are open to
suggestions, changes, negotiation, and I think we all admit
that probably one of the knottiest problems we are going to
have to face in this whole debate is how to provide the
catastrophic coverage. And one of the main reasons is that will
probably be one of the most expensive.
Now, it has been cited that there are flaws in the
President's plan; however, one of those flaws would be
addressed in the democratic plan, and that is moving some of
these dates up, which I am assuming the administration would
agree to.
I am trying to get a better understanding of the republican
proposal, and it seems to me that the mainstay would be to
provide a subsidy to health care plans that provide drug
coverage to seniors, medigap type plans. Is that your
understanding also?
Ms. DeParle. Yes. It is more of an indirect subsidy through
those plans, as I understand it.
Mr. Kleczka. Versus a voluntary benefit to the Medicare
Program?
Ms. DeParle. Yes.
Mr. Kleczka. OK.
Ms. DeParle. And versus a direct subsidy, as in our plan
and, I guess, the Breaux-Frist plan and some of the others.
Mr. Kleczka. OK. Let me just ask a general question. We had
a situation in my District where a whole bunch of seniors
boarded a bus and took a trip to Canada and came back with the
medicines they need for the next two to 3 months.
In your research, why is it possible for individuals in
Canada and Mexico to buy drugs that much cheaper in those
countries versus our country? And is it the drug companies'
contention that if, in fact, we would provide a drug benefit to
Medicare or tamper with the pricing, that all research dollars
for drug companies would dry up immediately?
Could you respond to those two concerns?
Ms. DeParle. Well, as I understand it, the reason why they
are able to provide drugs more cheaply, one of the chief
reasons is because of the purchasing power that they use on
behalf of a number of beneficiaries pulling them together.
We don't want to do price controls. We don't want to tamper
with drug prices, either, but we believe that Medicare
beneficiaries should get access to these miracles of modern
medicine through prescription drugs and that we should do that
by using the leverage of the Medicare Program, and that is what
our proposal would do.
Mr. Kleczka. How about the contention that if, in fact, we
tamper with the way drugs are sold in this country, that all
research dollars are lost forevermore and we will not have
these modern miracles occurring any more?
Ms. DeParle. Well, I don't believe that that would happen.
As I said, we are not talking about imposing price controls or
driving all of the research and development dollars out of
this, first of all.
Second, remember that the Congress and the American
taxpayers fund a lot of the initial research through the
National Institutes of Health and other research that this body
funds, so I think that there is certainly support in the
Congress. No one can have any doubt that this Congress supports
research for new biomedical advances, and I don't think anyone
up here is interested in something that is going to drive
research and development out. I know the President isn't. That
is why we tried to use a private sector model to do this.
Mr. Kleczka. Fine. Thank you very much.
Thank you, Mr. Chairman.
Chairman Thomas. Thank you very much.
The gentleman from Louisiana?
Mr. McCrery. Thank you, Mr. Chairman.
Well, since we had some testimony this morning from one of
our colleagues on the House democrat plan, and the President
seems to--while he has not endorsed it, he is wanting to talk
with the House democrats about crafting something. I think it
is important to note that the three plans that are out there--
the President's plan, the republican plan, and now the House
democrats plan--have many similarities.
Ms. DeParle. Yes.
Mr. McCrery. For example, they are all voluntary. We don't
force any senior to choose this new Medicare benefit. We think
now that we are all agreed that there should be some stop loss
provision to protect against financial ruin for seniors because
of drug costs. We all agree that there should be some private
sector administration of the program, whether it is a PBM or an
insurance company. In our plan, it could be either.
All of the plans provide some subsidy for everybody, all
seniors, not just low-income seniors, all seniors. Our plan
does. The President's plan does. And now the House democrats'
plan does.
We all provide greater subsidies for low-income seniors
than we do for any other seniors.
Those are commonalities among the plans. We are not that
far apart. The democrats on the House side don't know yet how
much theirs will cost, if they do a $3,000 stop loss. They say
they may have to go to $4,000. We will see. Likewise, we don't
yet know the level of stop loss that we can offer for the $40
billion that we have been given by the budget over the next 5
years.
So, rather than see the media, the press take the bait and
try to draw distinctions, say the republican plan is only going
to help low-income seniors, I think it would be more
constructive if, in our comments to the press, we would make it
clear that there are quite a few things in common among all the
plans, that we all have common goals, which are to help low-
income seniors with the cost of drugs, to help all seniors get
a better deal for the cost of their drugs, and to subsidize, to
some extent, the cost of drugs to all seniors, and, finally, to
prevent financial ruin for seniors because they might have
tremendously high drug costs.
If those are our goals and we share those goals, there is
no reason why we should not be able to come to an agreement on
a proposal. The only thing that is missing, I would say, in the
President's plan and the House democrats plan, is choice. In
the republican plan, we at least envision there being greater
choice for seniors, in terms of choosing a drug plan. The
President's plan and the House democrats plan seemed to offer
only one choice--voluntary, yes, but only one choice for
seniors, because you are only going to have one PBM to service
a region. That means only one plan. At least we envision, in
the House republican proposal, to have multiple PBMs or
insurance companies offering different kinds of drug plans that
would have those common elements.
So if we can bring you all along to our way on the choice
element, I think we can get this done.
Mr. Chairman, I appreciate your letting me talk a little
bit about why we should all be pleased that we are as close as
we are.
Chairman Thomas. I thank the gentleman, because we often
stress our differences, and, as the gentleman indicated, there
are a lot of commonalities.
Does the gentlewoman from Connecticut wish to inquire?
Mrs. Johnson. Yes, thanks.
As you realize, the bell is going off and we have a long
series of votes, and, so that everyone will have a chance to
get a little something on the record, instead of a dialog,
Madam Administrator, I am just going to put on the record three
very, very serious concerns that I have about the proposals
that the President and the democrats have put on the table.
First of all, I know, from our work on our proposal, that
at least the executive branch has a pretty good understanding
of the extraordinary cost of stop-loss benefits over 3,000, and
I would just remind my democratic friends that the President's
current proposal is funded by cutting Medicare 72 billion.
Now, there may be cost savings from modernization, but, in
your overview, you say some of that 25 billion in savings is
going to come from competitive bidding and managed care choice
plans. Managed care choice plans in my part of the country are
going out of business because we have done such a poor job of
reimbursing them fairly and paying in a timely fashion.
Another source of your funding, 39 billion, comes from
extending the BBA provisions. We reversed some of those
provisions a little last year. We are going to have to reverse
some of those provisions again. We cannot possibly have a home
care industry if we cut the reimbursements 15 percent after we
go to prospective payments.
So, you know, my hospitals are absolutely in crisis, and I
am going to fight with every breath in my body for at least
what MedPac has proposed for hospitals. And then we are going
to have to defer the 15 percent for home health care providers?
Small nursing homes are having a terribly difficult time.
I don't see how we can count on the savings that have been
estimated by the executive branch to fund the prescription drug
bill to begin with. That is a big problem. Where is the money
going to come from and are we going to take it out of the hide
of current Medicare providers, many of whom are already on the
ropes? That is one issue.
Second, in what was done at the White House yesterday--I
will make these shorter--the democrats say that the government
is going to negotiate discounted prices, but in another place
they say the government will not be allowed to set prices. This
is a contradiction of no small significance.
Third, I do not see how, through this benefit
administrative process, small pharmacies in the remote towns in
my District will be able to participate.
I am very concerned about access, small pharmacies, funding
issues, and price setting, and I want that on the record.
Thank you, Mr. Chairman.
Chairman Thomas. If Members have some questions, I am quite
sure that we can engage in the written exchange of questions
and answers, as we have done in the past, because we are going
to be limited on time.
Does the gentlewoman from Florida wish to inquire?
Mrs. Thurman. Mr. Chairman, thank you.
Actually, I want to use my time to allow, since this was
supposed to be a hearing to discuss with the administration
exactly what the drug proposals were and the differences
between them; I would like to give Ms. DeParle an opportunity
to respond to Mr. McCrery on some of the issues that were
outlined so that we have an idea of what actually are the
differences and where we are similar.
Ms. DeParle. Thank you. In fact, I was hoping I would have
that chance.
On the last point you raised, Mrs. Johnson, about how will
pharmacies be allowed to participate, under our plan all
qualified pharmacies will have to be allowed to play, and so
people can go into your District into the small towns that I
have been in with you, and all those pharmacies will be allowed
to participate. I am sorry if that detail wasn't clear to you.
Mrs. Johnson. If the gentlelady will yield, it is simply
easier said than done when you have a regional administrator,
but it is the details that we will eventually get into together
that are going to answer this.
Ms. DeParle. It is, but we spent a considerable amount of
time working with plans that have used pharmacy benefit
managers, and large plans as well as small plans, and I believe
that aspect of it is not problematic.
You also referred to the way that the plan is financed, and
I want to talk about that for a minute.
Our plan costs around $195 billion over 10 years. That
includes the $35 billion that we set aside in the out years to
design and work with the Congress on a catastrophic benefit.
The funding for this is partly out of the surplus dollars--
$135 billion of it comes from that, and about $60 billion comes
from savings from things like modernization.
Under the President's plan, there is a model for using
Medicare+Choice in a slightly different way than has so far
been done to do competitive pricing and bidding to provide the
Medicare benefit package.
And yes, we do believe and our actuaries do believe there
will be some savings from that, and that, under the new pricing
methodology, which is different than the one that you
criticized, that there will be more plans available.
I also want to make a point. You raised the concerns that I
know you have, and we have talked about them many times about
the managed care plans up in Connecticut. I think that shows,
as much as anything, that one of the things we have to do is
start reimbursing for prescription drugs. You know, that is one
of the pricing problems they have right now.
What they get paid for is to provide the traditional
Medicare benefit, which does not include prescription drugs,
but they know they need to provide prescription drugs and they
are trying to do it on the price that we are currently paying
them, which doesn't include that cost.
So if we can work together, both of our plans, as Mr.
McCrery said, would cover these costs. In our plan, I think
about $54 billion of the dollars I talked about, the 195, would
go to managed care plans to cover the prescription drug
benefit.
Let's do this. Let's make it available in fee-for-service,
too, so all of your constituents would have access to it. I
think that is what we need to do.
Mrs. Thurman. Ms. DeParle, let me ask you one question,
though, because Mr. McCrery mentioned the issue of choice was
part of our difference.
I have to tell you, when I go home--and I probably have
more seniors in my District than most people up here, about
200,000 on Social Security and Medicare. That is not what they
are telling me, because they are so aggravated with what has
happened to them under HMO managed care, because they keep
getting switched around. All of their prescription drug
benefits are either being lowered or they are faced with higher
premiums, higher deductibles, those kinds of things.
Have you tested anything about what seniors want, what
would be the best plan for them and the easiest for them to
participate in?
Ms. DeParle. We haven't. We haven't asked questions
specifically about that. What we have done, though, is, in
connection with our Medicare education program that this
Committee has been a big supporter of, is, when we do focus
groups about the education, the seniors often talk about other
things, just as they do in the townhall meetings that all of
you have, and they are continually saying, ``We really want
prescription drug coverage,'' so we all know that.
The other thing they do tell us, though, is, at least with
respect to managed care, they care a lot more about having a
choice of doctors and having their doctor covered than they do
about having a choice among a bunch of different plans.
I guess I would say to Mr. McCrery that was the one area
where I slightly disagreed with him, as well. I agreed with
most of what he said about the commonality, and I appreciate
that he is focusing on that, but I do think there is a tension
that we have to recognize between this notion of choice and
having 300 different plans to choose from, or whatever the
ideal would be, and the notion of stability and affordability
and accessibility.
The problem is, with insurance, as you all are expert on
this and you know, when you have so many choices you introduce
adverse selection, risk selection into it, which can drive up
the cost both for the beneficiary and the program. There is
really a tension there, and we have to recognize it.
I think, you know, I like our plan better because it
guarantees access, I believe. I know the chairman doesn't agree
with me, but I believe it guarantees access to everyone to an
affordable, accessible benefit. I hear Mr. McCrery saying that
he values this choice. We need to sit down and talk about that,
because I think we just have to recognize there are some
differences there and there is a tension.
Chairman Thomas. I thank the gentlewoman.
We are going to have six votes in a row, the first one
having commenced and now getting close to finishing, so the
Chair apologizes, but there is no way we are going to keep the
administrator to come back. I apologize to the Members if they
had questions. You can certainly submit them in writing and she
will respond, and I have a hunch this is not the last hearing
that we are going to have.
My guess is that we will reconvene at approximately 11:30
a.m.
In a brief response to the gentlewoman from Florida's
statement and the administrator's response, I have read
recently that there are some lobbyists inside the beltway who
are complaining that Members of Congress are looking at issues
in which the voters and the beneficiaries find most important
and that we have not adopted the various lobbyists or
organizational or associational representatives' priorities. I,
frankly, am pleased over that, because I thought that was our
job. It probably makes their job more difficult, since they
cannot control the process, but, working with the
administration, with elected representatives, our job should be
to modify and change programs to meet the real needs and the
felt needs of the people that we represent.
I appreciate the administrator's willingness to come.
As we add additional programs, I would hope that we move
forward with legislative language. I am conscious of that
commitment to our plan, as well, and I look forward to working
with you again.
The Subcommittee stands in recess until approximately
11:30.
[Recess.]
Chairman Thomas. The Subcommittee will reconvene.
I thank the principals for allowing us to carry out our
Constitutional duty.
We have before us now in this panel--and I thought it was
appropriate, since we were dealing with the President's
legislatively expounded plan, to look first to the
administration, itself. I am sorry the time line was such that
we could not accommodate all Members with a more-detailed cross
question and answer process with the administrator. But, since
it is a written plan and our job is to understand how the
administration addressed certain concerns that may be more or
less common to any plans that are attempting to introduce a
prescription drug structure into Medicare, we have on the
second panel Dr. Bill Scanlon from the General Accounting
Office, who has been a long-time resource for us in
understanding and analyzing Medicare-related information. We
have Dr. Crippen, head of the Congressional Budget Office, and
available if necessary, a lifeline, Mr. Lieberman, if the
question becomes too technical. I don't know whether it is
phone a friend or polling the audience, but it is a lifeline
that will be available to us to get resources available.
With that, I would indicate that any written testimony that
you have is made a part of the record, and you can address us
in any way you see fit, focused on the President's plan and the
ramifications for this Subcommittee in looking at a
prescription drug proposal along with modernizations to be
added to the Medicare Program.
I guess we will start with Dr. Scanlon and then go to Dr.
Crippen.
STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR, HEALTH
FINANCING AND PUBLIC HEALTH ISSUES, HEALTH, EDUCATION AND HUMAN
SERVICES DIVISION, U.S. GENERAL ACCOUNTING OFFICE
Mr. Scanlon. Thank you very much, Mr. Chairman and Members
of the Committee. I am very pleased to be here today to discuss
the issues related to adding a prescription drug benefit to
Medicare, and, in particular, the President's proposal.
While there is growing consensus that the Medicare Program
should incorporate such a benefit to address concerns that
beneficiaries who lack access to prescription drug coverage
will be able to receive such coverage, as I am sure you will
hear from Dr. Crippen, such a benefit would involve
considerable cost.
Therefore, the imperative, as well as the challenge, would
be to expand access to prescription drugs in the most efficient
way possible to minimize the financial consequences for
Medicare.
It is particularly important to look to those that have
experience with managing a drug benefit. Private insurers and
HMOs have adopted a variety of techniques to manage their drug
benefits which may be instructive for Medicare, though how to
apply these techniques requires careful consideration.
Many third party payers contract with pharmacy benefit
managers, or PBMs, to develop and implement these cost control
techniques and to perform other tasks related to managing a
drug benefit.
PBMs attempt to use the leverage of their large purchasing
power to negotiate with drug manufacturers and pharmacies for
discounts or rebates on their products and services. They have
often used formularies to increase that leverage. With PBMs
promising larger shares of the market for the drugs and the
pharmacies they select, manufacturers and pharmacies may be
likely to compete harder to contract with a PBM by offering
more-favorable prices.
Exactly how much of these techniques affect expenditures is
uncertain. Data on the size of the rebates under the discounts
are proprietary, and how much the techniques have altered
utilization is unknown. Estimated savings reported to us and
other researchers by insurers and PBMs range from 14 to 31
percent. Several cautions, though, are appropriate.
First, these estimates are self reports from the plans, not
built upon data that we or others have analyzed.
Second, they are several years old, and the dynamics and
changes within the pharmaceutical market have been
considerable.
As you consider the methods to manage a potential Medicare
benefit, these private sector techniques offer a useful
starting point. At the same time, there are several issues that
arise in considering how to adapt them to the unique
characteristics of Medicare and its beneficiaries.
Adoption of PBM techniques within traditional fee-for-
service Medicare on a nationwide basis could be difficult,
given the program's size and the need for transparency in its
actions.
Determining whether a drug should be on a formulary
typically involves clinical evaluations based on a drug's
safety and effectiveness and a negotiated manufacturer's price.
Plans and PBMs currently make those determinations privately,
something that would not be tolerable for Medicare, which must
have transparent policies that are determined openly.
Given the stakes involved in a drug being selected for a
Medicare formulary, one could imagine the intensive efforts to
scrutinize and influence the selection process. In addition,
once the formulary is in place, it may be difficult to steer
utilization and limit use of non-formulary drugs, especially in
the fee-for-service environment, where it may be hard to
influence prescribing practices.
Although contracting with multiple PBMs to manage segments
of the drug market could potentially mitigate some of the
likely difficulties that Medicare would face in adopting
private sector strategies on a national basis, these area PBMs
could potentially face some of the same difficulties.
Furthermore, if each PBM had exclusive responsibility for a
geographic area, beneficiaries who want certain drugs could be
advantaged or disadvantaged merely by the fact that they live
in a certain location.
To reduce variation, Medicare could, like some private
sector purchasers, specify core benefits or maintain clinical
control over formulary decisions; however, without the ability
to create and manage a formulary, the ability of a PBM to exact
price discounts and control overall costs would be diminished.
If multiple PBMs were to compete in a single area, issues
would arise in terms of informing beneficiaries about the
differences in their policies, monitoring their marketing and
recruitment strategies, and accounting for differences in the
health status of beneficiaries using each PBM.
We have seen in our work on Medicare+Choice that trying to
take advantage of cost containment strategies involving the
benefits of competition also creates an obligation to
adequately inform beneficiaries about the options available to
them. Our work on Medicare+Choice has demonstrated that it is
not an easy task to ensure that beneficiaries are adequately
informed about their options.
Regardless of the model that is chosen for managing a drug
benefit, attention also needs to be paid to the nuts and bolts
of administering the benefits--in other words, paying the
claims.
The efforts of PBMs to control expenditures involve a
capacity also to scrutinize claims more effectively and quickly
than is typical of Medicare today. PBMs provide online, real-
time drug utilization reviews to inform pharmacists about
potential drug interactions, thereby avoiding some medical
errors, as well as whether the prescribed drug is covered in
the appropriate formulary and what copayments will apply.
Currently, Medicare does not have such capability. To
duplicate the type of capacity PBMs have will likely involve
increasing the proportion of Medicare spending devoted to
administrative costs. That share today is roughly 2 percent. It
is not possible to estimate the administrative cost that will
be needed to implement a drug benefit with any precision;
however, the number of prescriptions for Medicare beneficiaries
could easily approach the current number of claims for all
other services combined, or $900 million annually, suggesting
the total administrative cost would be substantial.
I conclude by noting it is important to find the right
balance in adapting these private sector techniques that I have
discussed for Medicare. It is desirable to take advantage of
these practices to provide a drug benefit as efficiently as
possible, through the uniqueness of the Medicare Program,
particularly its size, the need for transparency, and its
importance to beneficiaries, suggests there will be real
challenges in applying these techniques.
Thank you very much, Mr. Chairman. I will be happy to
answer any questions you or Members of the Subcommittee may
have.
Chairman Thomas. Thank you very much.
The prepared statement follows:]
STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR, HEALTH
FINANCING AND PUBLIC HEALTH ISSUES, HEALTH, EDUCATION,
AND HUMAN SERVICES DIVISION, U.S. GENERAL ACCOUNTING OFFICE
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here as you discuss the President's
proposal to extend prescription drug coverage to Medicare
beneficiaries. In previous hearings before this and other
committees, GAO has addressed considerations for adding a
prescription drug benefit to Medicare, given the fiscal
imbalance of the Medicare program and the need to implement
major reforms to ensure the sustainability of the program. As
you know, the President has proposed contracting with private
entities to administer a new prescription drug benefit option
under Medicare. This is to allow Medicare to benefit from
techniques developed for private insurers to control spending
and improve the use of prescription drugs. In this context, my
remarks will focus first on the factors contributing to the
rise in prescription drug spending and the impact of the rise
in spending on Medicare beneficiaries, particularly those
without coverage. Next, I will outline the methods private
insurers, including those offering Medicare+Choice managed care
products to Medicare beneficiaries, have developed to control
these rising costs. Finally, I will discuss issues involved in
adapting these methods for the Medicare program and its
beneficiaries, should an outpatient prescription drug benefit
be added to Medicare.
In summary, private insurers, managed care plans, and
employers have tried to manage the high and rising costs of
prescription drugs by adopting cost and utilization control
techniques. In many cases, insurers and managed care plans
contract with a pharmacy benefit management company (PBM) to
develop and implement these strategies. If a prescription drug
benefit were added to the Medicare program, the federal
government would face similar cost pressures and would need to
employ methods to control spending. The experience gained in
the private sector can provide useful insights into options for
managing a possible Medicare benefit. However, the unique
responsibilities and characteristics of the Medicare program
raise a number of issues and introduce questions about applying
private sector tools to the traditional Medicare fee-for-
service program and the appropriate roles of the Health Care
Financing Administration (HCFA) and other entities, such as
PBMs, in managing a drug benefit. In adapting these cost and
utilization management techniques, it is important to keep in
mind that: (1) the size of the Medicare program and the need
for transparency in its actions may reduce the effectiveness of
some cost control techniques; (2) using private-sector entities
to implement a drug benefit introduces concerns related to
beneficiary equity and concentrating market power; (3) private-
sector management tools require a capacity to process and
scrutinize a large number of claims more quickly than is
typical of the traditional Medicare program; and (4) strategies
involving coverage restrictions impose an obligation to provide
beneficiaries with adequate information about the benefit.
RISING DRUG SPENDING ELEVATES BENEFICIARY ACCESS CONCERNS AND
THE IMPORTANCE OF COST CONTROLS
Extensive research and development over the past 10 years
has led to the introduction of new, more expensive drug
therapies--including improvements upon existing drug therapies
and drugs that treat diseases more effectively--which have
contributed to the increase both in prescription drug use and
drug spending. For example, new drug treatments for arthritis
and depression have therapeutic advantages over older
medications, but they are also more expensive than the drugs
they replace. Biotechnological advances and a growing knowledge
of the human immune system are significantly shaping the
discovery, design, and production of drugs. As a result of
these innovations, the importance of prescription drugs to
health care delivery has grown.
Rise in Prescription Drug Spending Caused by Many Factors
Prescription drug expenditures have grown significantly in
the past 5 years, both in total and as a share of all health
care expenditures. From 1993 to 1998, prescription drug
spending rose an average of 12.4 percent a year, compared to a
5 percent annual growth rate for overall health care
expenditures. Consequently, drug spending comprised a larger
share of total health care spending by 1998--rising from 5.6
percent to 7.9 percent. Total drug expenditures have been
driven up by both greater use of drugs and the substitution of
higher-priced new drugs for lower-priced existing drugs.
Several factors have contributed to rising expenditures--
more third-party coverage of drugs, the introduction of new
drug therapies, and more aggressive marketing by manufacturers
through direct-to-consumer advertising. The increase in
prescription drug coverage provided by private insurance is a
likely contributor to the rise in utilization because insured
consumers are shielded from the direct costs of prescription
drugs. In 1988, private health insurers paid almost a third of
all prescription drug expenditures. By 1998, that share had
risen to more than a half. The development of new, more
expensive drug therapies--including new drugs that replace old
drugs and new drugs that treat disease more effectively--also
contributed to the drug spending growth by driving up the
volume of drugs used as well as the average price of
medications. Advertising pitched to consumers is also a likely
contributor to the increased utilization of prescription drugs.
Between March 1998 and March 1999, the pharmaceutical
industry's spending on advertising grew 16 percent, to $1.5
billion. A 1999 study found that the 10 drugs most heavily
advertised to consumers in 1998 accounted for about 22 percent
of the total increase in drug spending between 1993 and
1998.\1\
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\1\ Barents Group LLC for the National Institute for Health Care
Management Research and Educational Foundation, Factors Affecting the
Growth of Prescription Drug Expenditures (July 9, 1999), p. iii.
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Medicare Beneficiary Drug Coverage and Utilization
Elderly individuals, with their greater prevalence of
chronic conditions, represent a disproportionate share of drug
spending. On average, in 1996, Medicare beneficiaries had
estimated annual drug spending of about $674 per person,\2\
compared to an estimated $156 per person for the nonelderly
population.\3\ A more recent estimate projected that 20 percent
of Medicare beneficiaries would have drug costs of $1,500 or
more in 1999, a substantial sum for those lacking some form of
insurance to subsidize their drug purchases.\4\ In 1996,
beneficiaries who had no drug coverage and were in poor health
had estimated mean annual drug expenditures that were $591
lower than beneficiaries with similar health status who had
drug coverage.\5\ This indicates that the lack of prescription
drug coverage may cause access problems, particularly for those
in poor health.
---------------------------------------------------------------------------
\2\ GAO calculation based on J.A. Poisal and G.S. Chulis,
``Medicare Beneficiaries And Drug Coverage,'' Health Affairs (Mar./Apr.
2000), p. 252.
\3\ Agency for Health Care Policy and Research Center for Cost and
Financing Studies, National Medical Expenditure Survey data, ``Trends
in Personal Health Care Expenditures, Health Insurance, and Payment
Sources, Community-Based Population, 1996-2005'' ``http://
www.meps.ahcpr.gov/nmes/papers/trends/96-05(c).pdf (Aug. 1998), p. 9
(cited mar. 16, 2000).
\4\ M.E. Gluck, ``National Academy of Social Insurance Medicare
Brief: A Medicare Prescription Drug Benefit,'' ``http://www.nasi.org/
Medicare.medbr1.htm (Apr. 1999), p. 8 (cited Apr. 22, 1999).
\5\ GAO calculation based on J.A. Poisal and G.S. Chulis,
``Medicare Beneficiaries And Drug Coverage,'' Health Affairs (Mar./Apr.
2000), p. 252.
---------------------------------------------------------------------------
Although the Medicare benefit package, largely designed in
1965, provides virtually no outpatient drug coverage, more than
two-thirds of Medicare beneficiaries had at least some
prescription drug coverage in 1996. Almost one-third of
beneficiaries had employer-sponsored health coverage, as
retirees, that included drug benefits. About 17 percent of
Medicare beneficiaries had coverage because they chose to
enroll in a Medicare+Choice plan or purchase a Medigap policy
with such coverage. About 10 percent of beneficiaries received
coverage through Medicaid.
The rising cost of prescription drug benefits has driven
employers, insurers, and managed care plans to adopt new
approaches that limit total drug coverage or increase
enrollees' out-of-pocket costs. Although employer-sponsored
health plans provide drug coverage to the largest segment of
the Medicare population with coverage, there are signs that
this could be eroding. Fewer employers are offering health
benefits to retirees eligible for Medicare and those that
continue to offer coverage are asking retirees to pay a larger
share of costs. In addition, the drug benefits offered by
Medicare+Choice plans have become less generous. Many plans
restructured their benefits in 2000, increasing enrollees' out-
of-pocket costs and limiting their total drug coverage.
PRIVATE-SECTOR TECHNIQUES FOR CONTROLLING DRUG EXPENDITURES
During this recent period of rising prescription drug
spending, insurers and HMOs have adopted a variety of
techniques to control enrollee utilization and the prices they
pay for drugs. Many insurers and HMOs contract with PBMs to
develop and implement these cost control techniques and to
perform other activities related to managing the drug benefit.
Direct negotiations with drug manufacturers yield lower prices
through manufacturer rebate agreements. Because rebates
generally depend on the volume of the products purchased,
employers or HMOs use techniques to concentrate their
enrollees' drug purchases to be able to use market power to
maximize rebates. This is accomplished through the use of a
formulary. Cost-control techniques also extend to the drug
distribution network, with emphasis on negotiating
reimbursement rates and dispensing fees with pharmacies and
encouraging the use of mail-order pharmacies to lower
distribution costs. Insurers or PBMs also perform other
functions to manage a drug benefit, control spending, and
ensure quality of care such as monitoring drug use when the
pharmacist is filling the prescription to enable the
substitution of lower-priced products or to identify possible
adverse drug reactions. They also use claims data to monitor
patterns of patient use, physician prescribing practices, and
pharmacy dispensing practices.
PBMs originated as claims processors and mail-order or
managed care pharmacies. Today, they provide a wide range of
services--such as claims processing, formulary management, and
pharmacy network development--to HMOs, insurance carriers, Blue
Cross Blue Shield plans, plans that cover federal and state
employees, and union members. According to the Pharmacy Care
Management Association, the PBM industry's trade association,
PBMs manage about 1.8 billion prescriptions annually, or about
70 percent of all prescriptions dispensed to ambulatory care
patients. According to a recent estimate, PBMs are responsible
for managing the drug benefits for about 71 percent of the 194
million people with third party pharmacy coverage.\6\ There are
more than 140 PBMs, which range in size, scope, and services
provided. Some administer prescription drug benefits
nationwide; others focus on serving clients in particular
regions of the country.
---------------------------------------------------------------------------
\6\ Testimony of Jeff Sanders, Senior Vice President, Value
Development, PCS Health Systems, Inc., before the Senate Committee on
Finance, June 23, 1999. http://www.senate.gov/finance/6-23san1.htm
---------------------------------------------------------------------------
PBMs and insurers negotiate rebates from drug manufacturers
and thus lower the net prices they pay for drugs. According to
a 1996 study, manufacturers' rebates averaged 5 to 6 percent of
total drug costs.\7\ This average masks what may be
considerable variation across products. The negotiated rebate
is typically dependent on the purchasing power of the PBM or
insurer, the availability of several brand-named drugs in a
therapeutic class, and assurances of a particular level of
utilization of the product.
---------------------------------------------------------------------------
\7\ A. Cook, T. Kornfield, and M. Gold, Mathematica Policy
Research, Inc. for The Henry J. Kaiser Family Foundation, The Role of
PBMs in Managing Drug Costs: Implications for a Medicare Drug Benefit
(January 2000), p. 20.
---------------------------------------------------------------------------
Insurers or PBMs employ various strategies to channel drug
utilization to products for which they have rebate agreements
that are based on market share. Generally, this is done by
using a formulary, a list of prescription drugs, grouped by
therapeutic class, that a health plan or insurer prefers and
may encourage physicians to prescribe and beneficiaries to use.
A particular product may be included on the formulary because
of its medical value or because of a favorable price negotiated
with the manufacturer. The inclusion of a particular drug on a
formulary can affect its utilization, which can increase the
level of manufacturer discounts or rebates, and lower a drug's
net cost.
Formularies are structured and implemented to steer drug
choice when therapeutically equivalent options are available.
Closed formularies, which restrict insurance coverage to only
selected drugs and require enrollees to pay the full cost of
nonformulary drugs, may be the most effective in channeling
utilization. However, closed formularies have faced resistance
from beneficiaries and providers because they can lead to
higher enrollee costs or restrict access to certain medicines.
As a result, more insurers are moving to incentive-based
formularies that offer enrollees lower copayments for the
preferred product or generic drugs. The insurer continues to
cover drugs that are not on the formulary, but the beneficiary
faces a higher copayment. A third type, open formularies, is
often referred to as ``voluntary'' because physicians and
beneficiaries may be informed about preferred drugs, but
beneficiaries pay no more for using nonformulary drugs.
Formularies that provide the strongest financial incentives to
beneficiaries to choose one product over another offer more
cost control potential. They can be used to steer utilization
to lower-priced products, including generics, and concentrate
market share to elicit the best prices or largest rebates on
particular products. In doing so, however, they may produce
dissatisfaction among consumers, who have to pay more out-of-
pocket for nonformulary drugs, and physicians, who believe
formularies restrict their prescribing practices.
PBMs and private insurers have also targeted drug
distribution costs as an area for cost savings. Similar to
their negotiations with manufacturers, PBMs negotiate with
retail pharmacies to obtain prices that are well below
pharmacies' usual price for customers without drug coverage.
PBMs attempt to enhance their leverage with retail pharmacies
by limiting the size of the pharmacy network. Restricting the
number of pharmacies in the network can benefit participating
pharmacies by increasing each one's market share, and as a
result, make them more willing to provide larger discounts on
the prescriptions they fill. Potential savings from this cost-
control technique, however, must be balanced with the
inconvenience of a limited pharmacy network. PBMs may also
operate mail-order pharmacies that allow enrollees to obtain
prescriptions by mail. This is a cost-effective way of
dispensing drugs, particularly maintenance drugs for chronic
health conditions, such as high blood pressure or asthma.
The claims processing capabilities of PBMs enable them to
engage in other activities that may help control overall health
care expenditures or improve quality of care. For example, drug
utilization review (DUR) programs analyze patterns of drug use
on a real-time basis when a pharmacist is actually filling a
prescription. These programs use databases and computer systems
that include a patient's entire drug utilization history for
all network and mail-order pharmacies. These systems identify
instances in which a drug may be inappropriate for a particular
patient given a person's medications or age. Most PBMs use
system edits specifically tailored to particular types of
beneficiaries, such as people who are 65 years of age or older
who may have a difficult time tolerating certain medicines.
Such interventions can both improve quality of care and prevent
additional health care costs by reducing drug interactions or
flagging evidence of inappropriate use, such as early refills.
DUR can also be conducted retrospectively, usually on a monthly
or quarterly basis, to profile physician prescribing practices,
pharmacy dispensing practices, or patient utilization. The
results of retrospective DUR programs are used to encourage
physicians to prescribe less costly therapeutic alternatives or
generics, encourage pharmacies to substitute generics or
preferred formulary drugs for more expensive nonformulary
drugs, and ensure that some patients are not overutilizing
prescription medicines.
APPLYING PRIVATE-SECTOR TECHNIQUES TO A DRUG BENEFIT WITHIN
MEDICARE
Private-sector entities have attempted to control the
growth of prescription drug expenditures while preserving or
enhancing the value of drug coverage for their enrollees, often
through contracts with PBMs. The President proposes to contract
with entities, such as PBMs, to administer a new Medicare
prescription drug benefit. This could allow Medicare to use the
cost control and quality enhancing techniques developed for
private insurers. Yet the unique characteristics of Medicare
and its beneficiaries will require careful consideration as
private-sector experience influences the design of methods to
increase beneficiary access to prescription drug coverage. I
would like to discuss four issues that should affect how any
Medicare prescription drug program is designed.
Adaptation of PBM techniques within the
traditional fee-for-service Medicare program could be difficult
given its size and the need for transparency in its actions.
Contracting with private-sector entities to
administer a drug benefit with cost and utilization controls
would raise other challenges.
The efforts of PBMs to control expenditures
involve a capacity to scrutinize claims more effectively and
quickly than is typical of Medicare today.
In the competitive model for Medicare--such as
exists today with Medicare+Choice or in the models envisioned
in some reform proposals to expand drug coverage--cost
containment strategies involving restrictions on coverage
through formularies or pharmacy networks impose an obligation
to adequately inform beneficiaries about plan policies.
Adding a Drug Benefit to the Traditional Medicare Program
Raises Issues About the Feasibility of Applying PBM Techniques
It may be difficult for the traditional fee-for-service
Medicare program to design and implement a national drug
benefit using private-sector management techniques such as
formularies. Traditional Medicare has generally established
administrative prices for services such as physician or
hospital care and then processed and paid claims with few
utilization controls. Adopting some of the techniques used by
private plans and insurers to obtain better prices and affect
utilization might have the potential for better cost-control.
However, adapting those techniques to deal with the unique
characteristics and size of the Medicare program raises many
questions. Because the traditional Medicare program may be
unable to operate with the flexibility that PBMs have in the
private sector, it may rely on other pricing strategies to try
to exact lower prices from manufacturers.
Having a formulary would enhance Medicare's ability to
control costs by enabling it to negotiate significantly
discounted prices with manufacturers by promising to deliver a
larger market share for a manufacturer's product. Yet,
implementing a formulary and other utilization controls could
prove difficult for Medicare. Determining whether a drug should
be on the formulary and which drugs should be preferred,
typically involves clinical evaluations based on a drug's
safety and effectiveness, and decisions on whether several
drugs are therapeutically equivalent. A pharmacy and
therapeutics committee within the health plan or a PBM may make
these decisions. Plans and PBMs currently make formulary
determinations privately--something that would not be tolerable
for Medicare, which must have transparent policies that are
determined openly. Given the stakes involved in a drug being
selected as preferred on a Medicare formulary, one can imagine
the intensive efforts to offer input to and scrutinize the
selection process. In addition, once the formulary is in place
it may be difficult to steer utilization or withstand pressure
to allow access to non-formulary drugs, especially in the fee-
for-service environment, where it may be hard to influence
prescribing practices.
If Medicare covered all drugs in a therapeutic class on the
same terms, beneficiaries may not be influenced toward
particular drugs and thus manufacturers would have no incentive
to offer deep discounts. Without a promised share of the
Medicare market, manufacturers may determine they could reap
greater returns from charging higher prices and concentrating
marketing efforts on physicians and consumers to influence
prescribing patterns.
If Medicare cannot effectively operate a formulary, it may
have to rely instead on administratively determined prices.
These could be similar to the manufacturer rebates received by
the Medicaid program, which is currently the largest government
payer for outpatient prescription drugs, comprising about 17
percent of national expenditures on outpatient drugs. Since the
enactment of the Omnibus Budget Reconciliation Act of 1990
(OBRA), drug manufacturers are required to provide rebates to
state Medicaid programs on outpatient drugs based on the
``lowest'' or ``best'' prices they charged other purchasers. In
return for the rebates, state Medicaid programs maintain open
formularies that permit reimbursement for all drugs. Although
states have received billions of dollars in rebates from drug
manufacturers since OBRA's enactment, state Medicaid directors
have expressed concerns about the rebate program. The principal
concern involves OBRA's requirement for open formularies, which
limits the utilization controls Medicaid programs can use at a
time when prescription drug expenditures are increasing
rapidly.
Contracting with PBMs to Implement Cost Control Strategies
Presents Other Challenges for Medicare
Using PBMs or other similar entities to administer a
Medicare drug benefit in geographic areas could potentially
mitigate some of the likely difficulties that the program would
face in attempting to apply private sector strategies on a
national basis. But such an arrangement raises additional
questions about how private sector techniques could be applied
within Medicare. PBMs could potentially face some of the same
difficulties mentioned previously--namely, their usual cost and
utilization management tools may be blunted in the Medicare
context due to the scrutiny their policies may face. Moreover,
the decision to use a single or multiple PBMs for the entire
country or one or multiple PBMs per region has the potential to
affect the ability of the PBM or PBMs to control the cost of a
Medicare drug benefit and to alter the value of the benefit
available to different beneficiaries.
A single PBM contractor administering a Medicare drug
benefit would likely be subject to the same level of scrutiny
as a government entity. Such scrutiny may compromise the
flexibility PBMs typically have used to generate savings. An
alternative would be to grant flexibility to multiple PBMs that
are responsible only for a share of the market. Contracting
with multiple PBMs, though, raises other issues. If each PBM
had exclusive responsibility for a geographic area,
beneficiaries who want certain drugs could be advantaged or
disadvantaged merely because they live in a particular area.
This kind of geographic variability may be difficult for
Medicare to sustain. While it is true that such variability
exists in the Medicare+Choice program, individuals enrolled in
a Medicare+Choice plan have chosen to enroll and accept the
terms of the benefit. For beneficiaries in traditional
Medicare, their regional PBM may be their only drug coverage
option. To reduce variation, Medicare could, like some private-
sector purchasers, specify core benefit characteristics or
maintain clinical control over formulary decisions instead of
delegating those decisions to the PBMs. However, without the
ability to create and manage a formulary, PBMs would have less
flexibility to use techniques that have been integral to their
efforts to maximize price discounts and control overall costs.
If multiple PBMs operate in each area, beneficiaries would
choose one to administer their drug benefit. PBMs would compete
for consumers directly, unlike the private-sector where they
normally compete for contracts with insurers or other
purchasers. With multiple PBMs, issues would arise regarding
informing beneficiaries about the differences in each PBM's
policies, monitoring PBMs marketing and recruitment strategies,
and accounting for differences in health status of
beneficiaries using each PBM. Having more than one PBM in an
area may also dilute the market power of each PBM, because they
would individually control fewer beneficiaries and need to be
concerned about retaining beneficiaries. Having PBMs compete
for beneficiaries may create an incentive for the PBM to have
less stringent formularies, if all beneficiaries are subject to
the same cost-sharing requirements regardless of the PBM they
use.
The competitiveness of a bidding process for contracts to
administer a Medicare drug benefit would depend, in part, on
the size of the region for which PBMs compete. One recent study
showed that the PBM industry is competitive, but that it is
dominated by a few large companies.\8\ If a contract were
awarded for the entire country or a few large regions, these
large companies may have an advantage. Large regional contracts
would concentrate Medicare's market power in these few firms,
giving them more leverage to negotiate with manufacturers. If
PBMs competed for smaller areas, more regional PBMs may bid to
provide services in their region. Awarding more contracts that
cover fewer beneficiaries may encourage participation by a
greater number of PBMs, but may also dilute the overall market
power associated with providing a drug benefit to Medicare
beneficiaries. It may also be more burdensome to administer
more PBM contracts.
---------------------------------------------------------------------------
\8\ A. Cook, T. Kornfield, and M. Gold, Mathematica Policy
Research, Inc., for The Henry J. Kaiser Family Foundation, The Role of
PBMs in Managing Drug Costs: Implications for a Medicare Drug Benefit
(January 2000), p. 41.
Drug Benefit Administrative Functions are Unlike Traditional
---------------------------------------------------------------------------
Medicare Activities
PBMs' ability to administer formulary policy and impose
other utilization controls involves a capacity to process and
scrutinize claims that is very different from traditional
Medicare's handling of claims for other services. For example,
PBMs have the ability to provide on-line, real-time drug
utilization reviews. These serve a quality-and cost-control
function by supplying information to pharmacists regarding such
things as whether a drug is appropriate for a person based on
his or her age, medical conditions, and other medications, as
well as whether the drug is covered on the formulary, and what
copayments will apply. Currently, Medicare does not typically
manage utilization of services in this fashion. It does not
have the capacity to conduct real-time review of most services.
Instead, Medicare pays claims after services have been
delivered. In the current Medicare program, analysis of
utilization patterns for individual services or providers is
only possible after all claims have been submitted and
assembled. Nevertheless, Medicare's administrative costs
historically have been extremely low, averaging about 2 percent
of the cost of the services themselves.\9\
---------------------------------------------------------------------------
\9\ Medicare: HCFA Faces Challenges to Control Improper Payments,
(GAO/T-HEHS-00-74, Mar. 9, 2000).
---------------------------------------------------------------------------
Duplicating the type of controls PBMs have exercised over
private-sector drug benefits will likely involve devoting a
larger share of total expenditures to administration than is
currently expended in the traditional Medicare program. The
magnitude of the increase is difficult to estimate. Much
depends on what services PBMs are asked to provide and how much
of the Medicare drug benefit each PBM will administer. Even if
the dimensions of the PBM's or contractor's role are specified,
estimating the likely costs remains problematic. A Medicare
drug benefit will be a large-scale endeavor. The number of
prescriptions for Medicare beneficiaries could easily approach
the current number of claims for all other services combined or
about 900 million annually. It is unclear how much PBMs or
others would have to increase current capacity or instead use
more of the capacity already built into their information and
claims processing systems--a consideration that could
significantly affect the administrative costs that may be
incurred.
Informed Beneficiary Choices Require Adequate, Comparable
Information
Any Medicare benefit that requires beneficiaries to choose
among options for prescription drug coverage, for example
between competing PBMs or health plans, would require a
mechanism to ensure that they had adequate information to
select the option that best meets their needs. Yet our previous
work on the Medicare+Choice program indicates that it is
difficult to provide that kind of information in a timely
manner, in a format that is readily comparable. We identified a
number of factors that make it difficult for beneficiaries to
make an informed choice among Medicare+Choice options. In some
cases, detailed information about plans' benefits and out-of-
pocket fees is provided only after a beneficiary enrolls in a
plan. In other cases, detailed information may be available
before enrollment from plan sales agents and member literature,
but beneficiaries may find it difficult to compare available
options because plans present the information in different
formats and use different terms to describe covered benefits.
The lack of comparative information can be particularly
problematic when evaluating plans' drug benefits, because many
design characteristics determine the true value of the drug
coverage.
Comparing alternative prescription drug coverage options
can be difficult because formulary types and management
techniques differ considerably, affecting the benefit. A
beneficiary may not be aware of formulary changes until they
are at the pharmacy counter. Aggressive formulary management
may control spending, but beneficiaries need to be aware of how
it may affect their access to a particular medicine and the
prescribing practices of their physicians. Such issues present
even greater challenges in the management of a drug benefit for
the entire Medicare population.
CONCLUDING OBSERVATIONS
There is growing consensus that Medicare needs to change
its benefit structure to include outpatient prescription drug
coverage. Yet such an undertaking has substantial consequences
for the cost of the program. In fact, one recent study suggests
that such an expansion would add between 7.2 and 10 percent
annually to Medicare outlays.\10\ The structure of such a new
benefit--whom it would cover and the extent of its coverage--is
an important determinant of the added cost. This is why, in
previous hearings, the GAO has emphasized the need to make
prescription drugs more affordable to beneficiaries who lack
coverage by expanding access to group rates, extending
discounts associated with group purchasing, and targeting
government subsidies for those most in need. To the extent that
this is accomplished through expanding Medicare's benefit
package, cost-control methods need to be incorporated into the
management of the benefit. The private sector has developed and
refined techniques, which have been implemented in some
Medicare+Choice plans and private health plans, to control
prescription drug costs. Applying these techniques to the
larger Medicare population will require adaptations that may
diminish their effectiveness.
---------------------------------------------------------------------------
\10\ Gluck, p. 8.
---------------------------------------------------------------------------
The challenge in adding prescription drug coverage to the
Medicare program will be in designing and implementing drug
coverage to minimize the financial implications for Medicare
while maximizing the positive effect of such coverage on
Medicare beneficiaries. Most importantly, this benefit
expansion must be consistent with efforts to ensure the long-
run sustainability of Medicare so that the program does not
consume an unreasonable share of our productive resources and
does not encroach on other public programs or private sector
activities. Private sector tools for controlling drug
expenditures provide options for controlling drug expenditures.
However, how to apply these tools effectively to a Medicare
drug benefit presents a number of challenges and requires
careful consideration of the nature and magnitude of the
Medicare program.
-----
Mr. Chairman, this concludes my prepared statement. I will
be happy to answer any questions you or other members of the
Subcommittee may have.
GAO CONTACTS AND ACKNOWLEDGEMENTS
For future contacts regarding this testimony, please call
William J. Scanlon or Laura A. Dummit at (202) 512-7114. Other
individuals who made key contributions to this statement
include John C. Hansen, Kathryn Linehan and Myrna Perez.
Chairman Thomas. Dr. Crippen?
STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE; ACCOMPANIED BY, STEVE LIEBERMAN, EXECUTIVE ASSOCIATE
DIRECTOR, CONGRESSIONAL BUDGET OFFICE
Mr. Crippen. Mr. Chairman, Mr. Stark, with your tolerance,
I want to spend just a couple of minutes talking about the
current state of the debate, if you will, and then the context
in which the President's proposal was made.
I recently listened to a debate in the other body that
produced, not surprisingly, a flood of endorsements of
pharmaceutical benefits for the elderly, accompanied by the
virtually universal arguments that the practice of medicine has
changed since 1965, that drugs have become a more important and
expensive component of health care, and that therefore we need
to modernize Medicare--all of which is not unlike the statement
made by the administrator this morning.
I did not hear anyone mention, however, the other aspects
of medicine that have also changed. For example, both the
frequency and duration of hospitalization have decreased
dramatically, and as a result, over 50 percent of hospital beds
in this country go unused every day. Despite that fact, there
are even more in-patient rooms under construction, notably
right here in Washington. We may want to address, as we
``modernize'' Medicare, how our current system underwrites that
potentially excess capacity.
Nor did I hear in that debate about how the number of
retirees and workers and their demographic profiles have
changed since 1965 and how they will change in the next 30
years. Between now and 2030, the number of retirees will grow
by some 85 percent, while the number of workers will grow by
only 15 percent. And those retirees will live, of course, much
longer than they did in 1965.
At the same time, there are claims being made about the
current Medicare program--indeed, that the Congress cut it too
much in 1997. Those providers who are more politically savvy,
of course, say that the Congressional Budget Office (CBO)
underestimated the effects of the Balanced Budget Act (BBA) and
led you astray. Although we did underestimate future Medicare
payments, with the exception of the interim payment system for
home health care, we continue to believe the estimates are
reasonable.
It is useful to remember what was happening before
enactment of the BBA-20 percent annual increases in home health
care spending, for example--and to mention the effects of the
government's efforts to reduce abusive and fraudulent payments.
CBO's larger error was in failing to recognize the magnitude of
those effects. To argue for restoration of the BBA cuts is, at
least in part, to argue to restore the aggressive, if not
abusive, billing practices that were frequently found among
providers before Columbia/HCA's practices became headline news.
There are other aspects of the debate thus far that I find
curious and interesting. We are told, for example, that the
private insurance market will not offer coverage for
prescription drugs, that at if it did, most it would only be a
system of reimbursement and not true insurance. That seems to
me to invite the question, just what are the medigap policies
that these same insurers offer if not first-dollar coverage at
considerable expense to the taxpayers today?
We estimate, for example, that on the one hand, medigap
coverage costs the taxpayers hundreds of dollars per person per
year because of the increased utilization it induces. Medigap
reform, on the other hand, could save billions of dollars a
year. As this Committee well knows, the design of those
policies is a matter of government regulation.
Mr. Chairman, my musings are perhaps just that, but one
thing I am certain of: we need to analyze the impact of
Medicare and any changes to it, not just in today's economic
and fiscal climate but also in that of the future, and not just
in the context of today's retirees and their health care but in
the context of the nation's collective needs.
For example, we currently expect that federal programs for
the elderly will increase from 7 percent of gross domestic
product (GDP) to 15 percent, as my generation retires. In terms
of today's budget, Mr. Chairman, that would mean that about
$600 billion--an amount equal to total discretionary spending
today--would have to be cut, raised through new taxes, or
borrowed. A drug benefit of any kind will obviously exacerbate
that result, pushing spending for retirees near the level of
the entire current federal budget.
In the end, it does not matter if these programs have
balances in trust funds or dedicated revenue sources. What
matters is how much of what our kids produce will we demand
that they give us. Let me repeat that, Mr. Chairman, because if
there were only one point I might leave you with today, it
would surely be that one. What matters is how much the elderly
of the future--namely, my generation--will use of the nation's
future income, produced by our children, and not the solvency
or even the existence of some federal trust fund.
Turning to the President's proposal, Mr. Chairman, our
analysis has raised a variety of issues regarding the design of
such a benefit--issues that will, of course, apply to many of
the other Medicare pharmaceutical proposals as well. The
specific features of the proposal determine the cost of the
program to federal and state governments and the policy's
effectiveness in providing affordable access to prescription
drugs for Medicare beneficiaries.
Some of the more important design issues, which are
discussed in my submitted testimony, are things like the nature
and initial value of the benefit; the effectiveness of pharmacy
benefit managers (PBMs) and other forms of potential
competition, as my colleague has just testified; program
participation; and effects on Medicaid costs.
Ultimately, future costs will depend on how much demand
increases--that is, after all, the point of this policy--and
how much the price of drugs is increased as well. Offering a
new benefit to 39 million people, over 10 million of whom
currently have no coverage, will have unforeseen effects of
possibly large magnitudes. And even without that new coverage,
drugs spending for by the elderly has been increasing at
double-digit rates, well in excess of the rate of growth of
spending for the Medicare Program, as a whole.
In general, the President would create a voluntary
prescription drug benefit, Part D of Medicare, that would begin
in 2003 and be fully phased in by 2009. It would pay half of
the cost of beneficiaries prescription drugs, up to a specified
cap. The insured half of the benefit would be financed equally
by premium payments and by general tax revenues.
After taking the cost of premiums into account, enrollees
would pay 75 percent of the cost of the benefit, and the
government would pay 25 percent, up to the benefit's maximum.
Although the President's budget suggests earmarking $35
billion from 2006 through 2010 for a possible catastrophic
benefit, no policy is specified. Like you, we have seen only
press reports of the initiative announced yesterday, and we
have no further details. For the moment, our estimate includes
neither the earmarked $35 billion nor the effects of
yesterday's proposal.
Having said that, CBO estimates that the provisions of the
President's proposal, excluding catastrophic coverage, would
add a total of $160 billion to federal costs through 2010. That
estimate is identical to the one the administration gave you
this morning.
On a bit of a personal note, Mr. Chairman, the
administration's estimate last year for a virtually identical
policy was two-thirds that figure, a difference that, at the
time, caused the President to publicly disparage our estimates
and some of your colleagues to question our motives.
As you can see on the next chart, which is table 3 in my
written statement, CBO's total of $160 billion represents $134
billion in outlays for Medicare and $26 billion for Medicaid.
States would also face an additional Medicaid cost.
CBO estimates that the monthly premium for Part D would
start at $24 in 2003 and rise at to about $50 in 2010--again,
very much in line with the administration's own estimates.
Let me conclude, Mr. Chairman, by stating what is perhaps
obvious by now: providing prescription drug coverage to
Medicare beneficiaries is a complex policy challenge. The role
and cost of prescription drugs have grown dramatically since
the inception of Medicare, as drugs have become a more critical
component of modern health care. More than two out of every
three Medicare beneficiaries have arranged some form of third-
party coverage, leaving 31 percent currently without any drug
coverage for prescription drugs.
The enormous variation in comprehensiveness, cost, and
financing of existing drug coverage tremendously complicates
the challenge of reforming insurance for prescription drugs.
Under the President's proposal, for example, 33 percent of
participants in the new drug benefit would have expenses for
drugs that exceeded the cap in 2003. Even so, the proposed drug
benefit would add significantly to federal costs.
The specific details of a proposal matter enormously--the
level of coinsurance, existence of a stop-loss provision,
splitting how financing is split between beneficiaries and
taxpayers, and the nature and degree of subsidies for low-
income prople and employers.
Mr. Chairman, suffice it to say that Medicare does not
exist for the preservation of medical institutions and the
well-being of providers but rather to finance health care for
our retirees. Nor does it exist in a world of unlimited
resources. We have to look at the outcomes and at the effects
of the program and the health of the beneficiaries in the
context of what we and, ultimately, our children can afford.
Thank you, Mr. Chairman.
[The prepared statement follows:]
STATEMENT OF DAN L. CRIPPEN, PH.D., DIRECTOR,
CONGRESSIONAL BUDGET OFFICE
Mr. Chairman and Members of the Committee, I am pleased to
be here today to discuss the President's proposal for a
prescription drug benefit for the Medicare program. That
proposal recognizes the public's concern that rising drug costs
may be placing a large and growing financial burden on Medicare
beneficiaries. About 30 percent of those beneficiaries do not
have insurance coverage for prescription drugs, and others have
only limited coverage. The President's proposal would provide
some benefit for most Medicare beneficiaries but, as currently
specified, would provide little financial protection for those
who face extremely high spending for prescription drugs.
The proposed prescription drug benefit is part of a broader
set of policies for Medicare recommended in the President's
budget for 2001. Those policies would expand Medicare
eligibility to new populations, reduce payments for certain
covered services, introduce innovations from the private sector
to fee-for-service Medicare, and convert Medicare+Choice into a
competitive defined benefit program.
My testimony today will focus on the prescription drug
proposal. As background to that analysis, I will briefly
discuss spending by Medicare beneficiaries on prescription
drugs and the extent of the insurance coverage for that
spending. I will then describe the President's proposal and the
Congressional Budget Office's (CBO's) most recent analysis of
that plan, including a newly revised estimate of the plan's
costs. The new estimate is about $11 billion higher than the
one we reported in April in our analysis of the President's
budgetary proposals. My statement will conclude with some
observations on several design features that affect the cost
and effectiveness of a Medicare prescription drug benefit.
Spending and Insurance Coverage for Prescription Drugs
The majority of Medicare beneficiaries spend some money on
prescription drugs in a year, and a significant fraction of
those beneficiaries have very high expenses. In 1996, for
example, the Health Care Financing Administration (HCFA)
estimates that, in total, the average Medicare beneficiary
spent more than $670 for prescription drugs. (That includes
both out-of-pocket expenses and any insurance reimbursement.)
About 87 percent of beneficiaries had some drug spending; about
7 percent had expenditures of $2,000 or more (see Figure 1).
Several statistics suggest the significance of prescription
drug spending by the Medicare population. Because Medicare
beneficiaries are elderly or disabled, they use more
prescription drugs than the average person. Medicare
beneficiaries constituted about 14 percent of the U.S.
population in 1996 but accounted for about 40 percent of the
$62 billion spent in the United States on prescription drugs in
that year.
In addition, drug spending by Medicare beneficiaries has
grown at a more rapid rate than spending on other health
services. Between 1995 and 1996, for example, total drug
spending by an average Medicare beneficiary grew by 12.2
percent, whereas federal spending for Medicare benefits (on a
per-beneficiary basis) grew by 7.2 percent (see Table 1). Those
rates compare with 4.6 percent growth in gross domestic product
per capita over the same period.
The Medicare program does not cover most prescription drugs
that beneficiaries take on an outpatient basis, and to obtain
such coverage, many beneficiaries turn to supplemental
coverage.\1\ In 1996, according to HCFA data, more than two-
thirds of beneficiaries had supplemental insurance that
provided some drug benefits (see Table 2). The sources of the
coverage vary (see Figure 2). Many Medicare+Choice plans offer
drug coverage as a supplement to their overall benefit package.
Other sources are employer-sponsored and medigap (individually
purchased) plans that include drug coverage. In addition, some
beneficiaries are eligible for prescription drug coverage under
Medicaid or through other public programs.
---------------------------------------------------------------------------
\1\ Under Part B, Medicare now pays for a limited list of
outpatient drugs, such as intravenous chemotherapy drugs that must be
administered under the direction of a physician.
---------------------------------------------------------------------------
Many Medicare beneficiaries have the option of enrolling in
Medicare+Choice plans that offer prescription drug coverage. In
1996, nearly 95 percent of Medicare+Choice enrollees were in
such plans--typically, the coverage included a cap on the
maximum benefit, cost-sharing requirements, and a drug
formulary. (A formulary is a list of drugs preferred by the
plan's sponsor, in part because of their lower prices.) Faced
with tightening financial circumstances in the past two years,
however, an unusually large number of health maintenance
organizations (HMOs) have dropped out of the Medicare+Choice
program, and many of the plans offering prescription drug
coverage have pared benefits significantly. One analysis
suggests that only about three-quarters of beneficiaries
enrolled in Medicare+Choice plans had drug coverage in 1998.
Employer-sponsored insurance is by far the largest source
of prescription drug coverage for Medicare beneficiaries. In
1996, more than 11 million Medicare beneficiaries had drug
coverage through employer-sponsored plans. But employers often
``carve out'' drug benefits from their main benefit package,
typically subjecting them to more restrictions than are placed
on other benefits. Employers and health plans have also turned
to pharmacy benefit managers (PBMs), which use formularies,
utilization review, selective contracting with pharmacy
networks, and other tools to control the use of prescription
drugs.
Medicare beneficiaries may also purchase supplemental drug
coverage through medigap plans. Such coverage is limited,
however: it requires beneficiaries to pay half the cost of
their prescription drugs after meeting a $250 deductible.
Benefits are capped at either $1,250 or $3,000 annually.
Premiums for medigap plans offering drug coverage are generally
higher than for other medigap plans. The higher premiums are
partly due to adverse selection (more people with greater need
for health care--and thus greater costs--enroll in those
plans).
Certain low-income Medicare beneficiaries have access to
drug coverage through state Medicaid programs. Such
beneficiaries include those who have income lower than 100
percent of the poverty level or medical expenses large enough
to meet the program's spend-down requirements. (Individuals may
be eligible for Medicaid under a state's spend-down requirement
if their monthly income less medical expenses is below some
maximum.) The assets that those beneficiaries may own are also
limited. Medicare beneficiaries who meet those criteria are
generally eligible for full Medicaid benefits, including
prescription drug coverage. Other low-income people--those
designated as qualified Medicare beneficiaries (QMBs) and
specified low-income Medicare beneficiaries (SLMBs)--are
eligible for subsidies for some Medicare expenses but are not
eligible for full Medicaid services or Medicaid drug coverage.
In 1996, about 3.9 million Medicare beneficiaries had
supplemental drug coverage through Medicaid.
Coverage for prescription drugs is also available through
other sources. Several states have instituted special programs
to provide drug coverage for the low-income elderly or people
with disabilities. And some Medicare beneficiaries are eligible
for drug coverage and other benefits through the Department of
Veterans Affairs or the Department of Defense.
People who have supplemental drug coverage consume more
prescription drugs than those without such coverage but spend
less out of pocket. In 1996, for example, Medicare
beneficiaries with coverage spent an average of $769 compared
with $463 for those without coverage, according to HCFA's
estimates. Conversely, those with drug coverage spent less out
of pocket: in 1996, beneficiaries with coverage averaged $253
in out-of-pocket spending on prescription drugs (excluding
premiums paid to private insurers or HMOs).
The President's Medicare Prescription Drug Proposal
The President proposes to create a voluntary, outpatient
prescription drug benefit under a new Part D of Medicare. That
program would begin in 2003 and be fully phased in by 2009. It
would pay half of the cost of prescription drugs, up to a
specified cap. The insured half of the benefit would be
financed equally by premium payments from enrollees and by
general tax revenues. After taking cost sharing and premiums
into account, enrollees would pay 75 percent of the cost of
covered drugs and the govern-ment would pay 25 percent, up to
the cap.
The proposed benefit would be administered by a private-
sector pharmacy benefit manager in each region of the country,
selected through competitive bidding. The PBMs that administer
Part D would negotiate lower drug prices, on average, than are
currently paid by Medicare beneficiaries. Beneficiaries who
enrolled in Part D would receive the benefit of those
discounted prices on their prescription drug purchases,
including drugs they bought after exceeding the benefit cap.
Although the President's budget suggests earmarking $35
billion from 2006 through 2010 for a possible catastrophic
benefit, no policy is specified. Consequently, CBO's analysis
does not focus on a catastrophic benefit, and our estimate does
not include the $35 billion earmark.
How the Benefit Would Work
In 2003, all Medicare beneficiaries would have a one-time
chance to sign up for the new benefit. In later years,
beneficiaries would be permitted to choose the Part D option
only when they first became eligible for Medicare. The only
exception involves beneficiaries with certain other
prescription drug coverage who lose that coverage involuntarily
(for example, when a former employer drops drug coverage for
all retirees in its health plan).
The new benefit would have no deductible and would
generally pay 50 percent of an enrollee's prescription drug
costs, up to a maximum benefit of $1,000 in 2003. That benefit
cap would gradually rise to $2,500 in 2009. Thus, in 2009, a
beneficiary who spent $5,000 or more on prescription drugs
would receive the maximum reim-bursement of $2,500. That
beneficiary would also pay $575 in Part D premiums that year.
After 2009, the cap would be indexed to annual changes in the
consumer price index (CPI). Assuming that the cost of
prescription drugs continued to rise more rapidly than the CPI,
the real value of the cap would shrink, thus eroding the
benefit.
Certain low-income beneficiaries would receive help with
drug-related costs through the Medicaid program. Medicaid would
pay both the premiums and the cost-sharing expenses under the
Medicare drug benefit for participants who were also fully
eligible for Medicaid. For these so-called dual-eligibles,
Medicaid would pay all drug costs not paid by Medicare,
including expenses above the cap. Medicaid would also pay the
premiums and cost-sharing requirements for people who had
limited assets and income below the poverty line. In both
cases, the federal government would reimburse states for those
costs at the usual federal/state matching rate, which averages
57 percent.
Another group of low-income enrollees would also receive
assistance with their prescription drug costs. The federal
government would pay all of the premiums and coinsurance for
Part D enrollees with limited assets and income between 100
percent and 135 percent of the poverty line, and part of the
premiums for Part D enrollees with limited assets and income
between 135 percent and 150 percent of the poverty line.
Eligibility for those subsidies would be determined by state
Medicaid agencies, but unlike the assistance provided to dual-
eligibles, the federal government would pay 100 percent of
these costs. Neither the federal nor state governments would be
liable for covering any drug expenses above the Part D cap for
low-income beneficiaries who were not fully eligible for
Medicaid.
The President's proposal also includes an incentive that is
intended to retain employer-sponsored drug coverage for
retirees. Medicare would pay employers 67 percent of the
premium-subsidy costs it would have incurred if the employers'
retirees had enrolled in Part D instead. In addition, enrollees
in Medicare's managed care plans would receive their
prescription drug coverage through those plans, which for the
first time would be paid directly for providing such coverage.
CBO's Cost Estimate
The new Part D provisions would add a total of $160 billion
to federal costs through 2010, CBO estimates. Of that total,
$134 billion represents outlays for Medicare (net of premium
receipts), and $26 billion represents federal outlays for
Medicaid (see Table 3). States would also face additional
Medicaid costs. CBO estimates that the premium for Part D would
start at about $24 a month in 2003 and rise to about $50 a
month in 2010.
CBO's cost estimate assumes that most people who are
enrolled in Part B of Medicare would also enroll in Part D. But
the estimate takes into account the fact that some
beneficiaries who have employer-sponsored drug coverage for
retirees would rather keep that coverage than opt for the new
benefit. In addition, CBO assumes that people who are eligible
for benefits under Part B but do not actually enroll would also
not enroll in Part D. Under those assumptions, nearly 36
million people would sign up for Part D in 2003, representing
approximately 88 percent of total Medicare enrollment.
CBO's estimate is about $11 billion higher than the
estimate in our April report, An Analysis of the President's
Budgetary Proposals for Fiscal Year 2001. Two significant
revisions have been made. First, we adjusted the data on
spending for prescription drugs to recognize the discount that
beneficiaries insured by employer-sponsored plans receive
through their PBMs.\2\ Second, we increased our estimate of the
cost of the new subsidies for low-income people.
---------------------------------------------------------------------------
\2\ HCFA will make such a revision in the Medicare Current
Beneficiary Survey for 1997. Previously, the survey assumed that
beneficiaries in employer-sponsored plans paid the full retail price
for prescription drugs.
---------------------------------------------------------------------------
Considerations in Designing a Medicare Drug Benefit
The President's prescription drug proposal has raised a
variety of issues regarding the design of such a benefit. The
specific features of a drug proposal determine the cost of the
program to federal and state governments and the effectiveness
of the policy in providing affordable access to pharmaceuticals
for Medicare beneficiaries. Some of the important design issues
that might be considered in assessing a Medicare drug benefit
include:
The Nature and Value of the Benefit. The proposed
benefit is limited and does not include stop-loss coverage,
which protects beneficiaries against catastrophically high
spending on drugs.
The Effectiveness of PBMs. It is uncertain whether
PBMs would aggressively use formularies, coinsurance policies,
and other methods to limit Medicare costs.
Program Participation. Employers, who have been
buffeted by rising drug costs, are likely to reduce their
retiree coverage under a Medicare drug benefit instead of
accepting a subsidy to retain their programs. Medigap insurers
are also likely to restructure their plans to take advantage of
the benefit. In addition, a drug benefit would reduce the
incentive that Medicare beneficiaries now have to enroll in
managed care plans rather than traditional fee-for-service
Medicare.
Effects on Medicaid Costs. The subsidy for low-
income Medicare beneficiaries is superimposed on the existing
Medicaid structure, which necessarily complicates the new
benefit's design and affects the cost of the program to both
federal and state governments.
The Nature and Value of the Benefit
Part D is designed to ensure that most enrollees would
receive some benefit. However, because of the annual cap, it
would not protect enrollees who have chronic conditions and are
dependent on prescription drugs from very large out-of-pocket
expenses. In 2003, for example, about
Thirty-three percent of participants would have drug
expenses that exceeded the $1,000 cap on Part D benefits. By
2010, about 22 percent of participants would have expenditures
exceeding the benefit cap of about $2,560. If drug costs
continued to rise faster than the CPI, an increasing proportion
of beneficiaries would have drug costs in excess of the maximum
benefit cap after 2010.
Because the benefit cap would limit Medicare's exposure to
increases in prescription drug spending, it would also limit
the value of the benefit to people who have the highest drug
costs. A program that did not provide first-dollar coverage but
limited an enrollee's out-of-pocket costs to some annual
maximum (or stop-loss amount) would better protect
beneficiaries with the highest drug spending. Such a program
would make larger payments to fewer people than would a program
that capped benefits.
However, a redesigned benefit that protected beneficiaries
more fully from catastrophic costs could raise prices for some
drugs because enrollees whose expenses exceeded the stop-loss
amount would be less price-sensitive. The patent system assigns
exclusive marketing rights to the makers of most new drugs for
some period after their introduction. Drugs with patent
protection must compete with other products offering similar
therapeutic effects. But manufacturers of particular drugs that
primarily benefit the elderly would have greater flexibility in
pricing their products under a Medicare drug benefit with stop-
loss protection than they have now. Such a pricing effect is
likely to be greater for plans that have more generous
catastrophic coverage or lower cost-sharing requirements.
A Medicare prescription drug proposal that led to higher
drug prices could impose additional costs on other federal
programs that purchase drugs (including Medicaid, the
Department of Veterans Affairs, and the Department of Defense).
Higher drug prices could also increase the costs of private
health insurance, leading to higher premiums. In that case, CBO
would estimate somewhat lower federal revenues from income and
payroll taxes as a larger portion of employee compensation was
paid through nontaxed health benefits rather than through
taxable wages.
The Effectiveness of PBMs
As noted earlier, the President proposes to administer the
prescription drug benefit through private-sector pharmacy
benefit management companies, which private health plans use to
negotiate price discounts and control utilization. A single
PBM, selected through competitive bidding, would administer the
benefit in each region. CBO's cost estimate assumes that those
PBMs would reduce costs by about 12.5 percent from the level
that an uninsured retail purchaser would pay--smaller savings
than PBMs now generate for large, tightly managed health plans.
The savings are net of the administrative costs incurred by a
PBM in processing prescription claims.
PBMs save money for private-sector health plans in four
main ways. First, they negotiate discounts with pharmacies that
agree to participate in their networks. Second, they obtain
rebates from manufacturers of brand-name drugs in exchange for
preferred status on the health plan's formulary. Third, PBMs
use mail-order pharmacies, which are often better able than
retail pharmacies to save money. Mail-order pharmacies are
likely to have lower average operating costs, and they may be
more likely to substitute generic or other lower-cost drugs for
the ones prescribed. Finally, PBMs establish differential
copayment requirements that encourage beneficiaries to select
lower-priced options such as generic, preferred formulary, or
mail-order drugs. Some PBMs also use management techniques such
as on-line utilization review and prior approval to evaluate
care and encourage the most cost-effective treatment practices.
A PBM can generally negotiate larger rebates if it can shift
more prescription purchases from one product to a competing
product in the same therapeutic class.
The President's proposal would constrain the ability of
PBMs to use their cost-saving techniques. For example, the
proposal calls for dispensing fees to be high enough to ensure
broad participation by retail pharmacies. That requirement
could limit the discounts that PBMs could negotiate from
pharmacies.
Other provisions could hamper the PBMs' ability to
negotiate rebates from drug manufacturers. The proposal
specifies that beneficiaries would be guaranteed access to off-
formulary drugs when medically necessary and coinsurance
requirements could not exceed 50 percent. Some private drug
plans require enrollees to pay the full difference between the
cost of a brand-name drug and its generic equivalent (if one
exists) unless the prescribing physician specifically states
that the brand-name drug is medically necessary. Such an
approach would apparently not be permitted in the Part D
program proposed by the Administration.
The President's proposal envisions competitive bidding to
select the PBM for each geographic area, but it is unclear what
financial risks, if any, the winning PBM would bear. In the
absence of financial risk, PBMs might not have a strong
incentive to generate savings under the program. Yet, if they
were placed at financial risk, PBMs would have to charge higher
premiums.
Another issue that needs clarification is how savings would
be measured under a Medicare drug benefit. Actual savings could
disappear, even though nominal discount and rebate rates were
unchanged, if the prices from which discounts and rebates were
calculated rose as a result of the new benefit.
Under the President's proposal, a single PBM would
administer the benefit in an area. As an alternative, multiple
PBMs in the same area could compete for shares of the Medicare
market. Such competition might lead to more aggressive cost
management, but that outcome is by no means certain. One
potential drawback to a multiple-PBM system is that PBMs might
keep their prices low by seeking out healthier enrollees with
lower drug costs instead of focusing on cost management. In
that case, the possible savings to the federal government would
be dissipated.
Program Participation
If a Medicare drug benefit was enacted, private insurers
would alter the type of drug coverage they offered. CBO's
estimate assumes that most people who participate in Part B of
Medicare would also participate in Part D. Thus, employer-
sponsored plans and medigap insurance would generally offer
their enrollees new options for supplemental coverage.
Moreover, with a fee-for-service drug benefit in place, managed
care plans in the Medicare+Choice program could become less
attractive to beneficiaries.
Employers would probably face lower costs for their retiree
coverage under the President's proposal. Firms that offered
prescription drug coverage with benefits comparable to those
under the Part D program would be eligible to receive federal
payments equal to 67 percent of the Part D premium subsidy for
eligible retirees. That subsidy payment--together with the tax
exclusion of their health plan costs--would induce some
employers to keep full drug coverage in their retiree health
plans rather than eliminating it or wrapping their plans'
benefits around the new Part D package. (Under a wraparound
plan, Medicare would be the primary payer for prescription
drugs; the employer's plan would serve as a supplement.) Few
employers would be likely to maintain full drug coverage,
however. CBO assumes that about three-quarters of Medicare
enrollees who now have drug coverage through a retiree health
plan would enroll in Part D.
Part D would offer a more generous drug benefit than
standard medigap plans do, and at a lower premium. As a result,
the three medigap plans that now offer drug coverage would no
longer be competitive. For its estimate, CBO assumed that those
plans would be replaced by one that supplemented the coverage
offered under Part D by filling in the 50 percent coinsurance
``gap.''
Another possible effect of a Medicare prescription drug
benefit is to reduce the attractiveness of managed care plans,
which typically offer prescription drug coverage to their
enrollees. That benefit is often cited as an important factor
in beneficiaries' choosing managed care over traditional fee-
for-service Medicare. Although managed care plans might become
somewhat less competitive with enactment of a Medicare drug
benefit, the President has proposed other policies that would
create new incentives to compete on the basis of price as well
as quality through a competitive defined benefit program.
However, CBO assumes that offering a drug benefit in the fee-
for-service sector would dramatically slow the growth of
enrollment in Medicare+Choice. In 2010, for example, CBO
projects that enrollment in Medicare+Choice plans would reach
14.1 million under current law but only 11.6 million under the
President's proposal.
Effects on Medicaid Costs
The President's proposal would increase Medicaid's costs
for drugs and other benefits--substantially in the case of
federal costs and less sharply in the case of state costs.
Although Medicaid would no longer have to pay all drug costs
for Medicare beneficiaries who now receive full Medicaid
benefits, those savings would be more than offset by additional
Medicaid spending on behalf of other Medicare beneficiaries.
Part D would pay for a portion of the drug costs that
Medicaid now pays for Medicare enrollees who are fully eligible
for both programs. That expansion of Medicare's role would
lower both federal and state Medicaid costs by shifting them to
Medicare. But the savings would be partly offset by the Part D
premiums that Medicaid would have to pay for those dual-
eligibles.
Certain low-income Medicare beneficiaries who are not
eligible for full Medicaid benefits would also become eligible
for assistance to pay for their Part D premiums and cost
sharing. To receive that assistance, however, eligible Medicare
beneficiaries would have to enroll at a state welfare office,
and not all of them would choose to do so.
The President's proposal would increase Medicaid spending
for services not related to the new drug benefit. The
availability of a free drug benefit, made possible by
enrollment in Medicaid, would attract more Medicare
beneficiaries into the Medicaid program. In turn, that
increased enrollment would boost spending for other benefits
that Medicaid pays for as well as the prescription drug
benefit.
Conclusion
The President's prescription drug proposal has both pluses
and minuses that must be weighed in assessing its effects. The
proposed coverage would provide some assistance to most
Medicare enrollees. Because the benefit is capped, however, the
proposal would offer little financial protection to
beneficiaries with a high level of drug spending. In 2003, for
example, about a third of enrollees in the new Part D drug
benefit would spend more than the benefit cap for prescription
drugs. And the cost of the proposal would be significant.
Spending on prescription drugs is the fastest-growing component
of health care costs. Even with a capped benefit, the proposal
would increase federal outlays substantially.
The specific details of a prescription drug proposal
greatly affect the program's costs and value to beneficiaries.
The level of coinsurance, the existence of a benefit maximum
versus a stop-loss provision, the split in financing between
beneficiary premiums and taxpayer subsidies, and the nature and
degree of subsidies for low-income beneficiaries and employers
all drive the value of the benefit and its costs. The role of
the PBMs is equally critical. In attempting to create a
competitive environment, the President's drug proposal
establishes geographically exclusive PBMs but limits the scope
of their activities. As a result, their effectiveness in
managing costs is uncertain.
Developing a prescription drug benefit in the Medicare
program raises numerous difficult issues. Since the inception
of Medicare in 1965, the cost of prescription drugs and their
clinical importance have grown dramatically. As drugs became a
critical component of modern health care, more than two out of
every three Medicare beneficiaries turned to some form of
supplemental coverage for their drug expenses. Those
arrangements have led to very large variations across
beneficiaries in the comprehensiveness, cost, and financing of
their prescription drug spending. That variety complicates the
task of rationalizing prescription drug coverage and makes
developing such a benefit for Medicare a complex policy
challenge.
[GRAPHIC] [TIFF OMITTED] T9982.002
Table 1.--Growth of Drug Spending and Medicare Benefits Per Beneficiary, Calendar Years 1995-1996
----------------------------------------------------------------------------------------------------------------
Average Spending per Beneficiary
(Dollars) Percentage Change from 1995
---------------------------------------- to 1996
1995 1996
----------------------------------------------------------------------------------------------------------------
Drug Spending 600 673 12.2
Medicare Benefits 4,953 5,312 7.2
Memorandum:
Gross Domestic Product per Capita 28,130 29,430 4.6
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office based on the Health Care Financing Administration's unpublished tabulations
of the Medicare Current Beneficiary Survey Cost and Use File, 1995 and 1996.
[GRAPHIC] [TIFF OMITTED] T9982.001
Table 2.--Medicare Beneficiaries, by Type of Supplemental Insurance and Drug-Coverage Status, Calendar Year 1996
----------------------------------------------------------------------------------------------------------------
Number of
Number of Beneficiaries with Percentage of
Type of Supplemental Insurance Beneficiaries Drug Coverage Beneficiaries with
(Millions) (Millions) Drug Coverage
----------------------------------------------------------------------------------------------------------------
Medicare Risk-Based HMO 3.2 3.1 95
Medicaid a 4.4 3.9 89
Employer-Sponsored Coverage b 12.9 11.4 89
Individually Purchased Coverage Only 9.8 3.9 40
All Other Supplemental Coverage c 0.7 0.6 81
No Supplemental Coverage 2.9 0 0
Switched Coverage During the Year d 3.3 2.7 83
All Medicare Beneficiaries 37.2 25.6 69
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office based on John A. Poisal and George S. Chulis, ``Medicare Beneficiaries and
Drug Coverage,'' Health Affairs, vol. 19, no. 2 (March/April 2000), p. 251.
Note: HMO = health maintenance organization.
a Includes Medicare beneficiaries receiving full Medicaid benefits as well as qualified Medicare beneficiaries
and specified low-income Medicare beneficiaries.
b Includes Medicare beneficiaries with both employer-sponsored and individually purchased supplemental
insurance.
c Includes other public programs such as Department of Veterans Affairs, Department of Defense, and state
pharmaceutical assistance programs for low-income elderly people, as well as non-risk-based HMOs (cost and
health care prepayment plans).
d Includes Medicare beneficiaries who did not spend 100 percent of their Medicare-eligible months in one
insurance category.
Table 3.--CBO'S Estimate of the Cost of the President's Proposal for a Prescription Drug Benefit in Medicare
(By fiscal year, in billions of dollars)
----------------------------------------------------------------------------------------------------------------
Total
2003 2004 2005 2006 2007 2008 2009 2010 2003- 2010
----------------------------------------------------------------------------------------------------------------
Medicare
Spending a 15 21 26 30 35 38 44 48 257
Part D premium receipts -8 -11 -13 -15 -17 -19 -22 -24 -129
Subsidy to health plans * 1 1 1 1 1 1 1 6
for retirees
Medicaid Spending 1 2 3 3 4 4 4 5 26
Net Effect on 8 13 17 19 22 24 27 30 160
Federal Spending
Memorandum:
Monthly Part D 24.00 24.80 32.10 33.30 39.90 41.50 47.90 50.70 n.a.
Premium (Dollars)
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
Notes: Numbers may not add up exactly to totals because of rounding.
* = less than $0.5 billion; n.a. = not applicable.
a Includes administrative costs of $0.4 billion in 2002.
Chairman Thomas. I thank both of you.
One of the concerns that I have that we need to get a
handle on, if we are going to have an honest and open
bipartisan discussion of where we need to go, is some data that
I assume to be fairly reliable comparing--again, not trying to
argue that one group is under-utilizing health care services or
the other group is over-utilizing health care services, but I
found it rather interesting, in examining those individuals who
did not have medigap, beneficiaries who had an employer's
program wrap-around, and those who bought medigap, that there
was a clear consumption difference in a hierarchical order of
those three categories, and that if someone who doesn't have
the augment insurance with the first dollar being required to
buy down the deductibles and the copays, it would be obvious
that you would get a greater consumption of goods and services
if you had an ability to buy down the cost of making those
goods and services available.
So maybe the employer's position would be a middle ground,
and if that is the case then it might be that below that it
would be somewhat under-utilization and above that it might be
over-utilization.
My concern is that if we are not moving into a prescription
drug program, hopefully having learned from the past, that one
of the clear phenomenons will be an increase in utilization of
prescription drugs, which I guess is a positive. But what can
we do to make sure that that increased utilization is based
upon need and not a structural defect that produces, in
essence, an over-utilization because we have built in stimuli
for over-utilization by virtue of the program that we have put
in place?
For example, in the private sector, PBMs have a lot of
flexibility to control price--volume sales, formularies, tiered
pricing. Is it normal in the private sector for PBMs to share
in those savings, or is it built into the managerial structure
of the PBMs? My understanding is, according to the
administrator, the administration's PBMs will not be at risk.
Is it normal for PBMs in the private sector to share some of
the risk, which would encourage them to keep costs down because
it would otherwise be out of pocket, or is the President's
proposal, which involves PBMs with no risk at all, because my
understanding is they get their revenue from the transactions.
If there is no risk, more transactions, the more money they
get, which I think would be a clear indicator that it might
move toward over-utilization.
Mr. Scanlon. Mr. Chairman, In the private sector PBMs do
not commonly accept risk for the cost of the drugs. However,
their contracts with different third-party payers contain
provisions that provide incentives for performance--performance
either in terms of obtaining a price discount or performance in
terms of controlling utilization.
Those are the devices by which the incentives are there to
try and control utilization and offset what might be the reward
for the per-payment or the per-prescription kind of payment
within the system.
I also would comment on the data that you talked about
initially in terms of the relative expenditures of different
parties.
In part, I think it also reflects the real concern we
should have about the issue of adverse selection--that people
who, in the current market, end up with insurance sometimes
will be people that know they are going to be needing some sort
of coverage, and that in proposals to consider a Medicare
benefit we need to think very much about how we can control
adverse selection.
In the President's plan, there is a provision that you have
a one-time option to enroll, and I think that is important for
any plan to consider, because we do not want to create a
situation where we have favorable selection.
Chairman Thomas. And you would agree that the easiest way
to deal with that is to make it mandatory?
Mr. Scanlon. Or to subsidize it so it is attractive. part B
is not--
Chairman Thomas. Or make it so attractive that no one would
turn it down, like part B at 97 percent voluntary program.
Mr. Scanlon. Right.
Chairman Thomas. That was supposed to be a 50/50 funded
program. It is now a 25/75. So if we would simply give it to
them, I guess you could make it voluntary, and if you give it
to them it is the same as mandatory.
The point I wanted to make was that there are alternatives
dealing with adverse risk selection, but I think, since all the
plans are voluntary, those have been dismissed, so we have to
pay even more attention to the internal structure of the plan.
Mr. Crippen. Frankly, Mr. Chairman, what I know about the
President's bill on this issue I learned from Mr. Scanlon.
Clearly, the current structure of PBMs is not one that, in
general, requires them to assume financial risk. A couple of
companies are now positioning themselves perhaps to be able to
do that within the next few months, but there are none at the
moment.
Chairman Thomas. Finally--and I know the President's plan
only came out yesterday, but would there be significant cost
differences if the catastrophic proposal--which I guess the
administration has not completely addressed yet but indicated
they had an interest in working on--of a $3,000 level,
depending upon how you pay for that, either sharing it with the
beneficiaries, which would increase the cost to the
beneficiaries, or assuming it on government, is that a
relatively low level to kick in full-blown protection of dollar
amount? And do you have any back-of-the-envelope estimate of
what might happen to the cost of the program if you went to the
President's current legislatively defined program of a shared
cost up to 2,000 and what I would think would be a relatively
narrow window of $1,000 of out-of-pocket, until you have
finally wound up with a 100 percent protection of any and all
costs above that, which, according to current data I think is
about 65 percent of the cost of seniors' drugs today? Any
numbers at all, or any inkling or feeling as to what might
happen?
I think you would be comfortable with saying it will cost
more. I am looking for a little more precision than that.
Mr. Crippen. I think there are too many moving parts at
this point. One issue, of course, is what you include in the
$3,000. Do you count all expenses or just out-of-pocket
expenses that are not covered by a third party? What you
include makes a lot of difference to when the government's
coverage would kick in. More important, does the proposal
include premium contributions for the benefit? If so, what is
the percentage split between Medicare and the beneficiaries?
And are the copays covered?
The President's proposal for catastrophic coverage would
probably be quite expensive, but that is just looking at data
on current drug spending by the elderly. It would be very easy
to construct a benefit with a $3,000 stop-loss amount that
could literally double the cost of the underlying program. The
details are critical, but just on its face, the benefit would
be quite expensive.
Chairman Thomas. So, in other words, once we have priced
the President's program, we have a comfort level--again,
because it is not an insurance program, it is a pre-paid
benefit program, and you control all of the points, you can
control the cost. It probably then would require not a grain of
salt but a block of salt to accept any numbers that are
currently discussed about a program which takes the President's
and adds on to that catastrophic.
I think it is critically important that you people try to
get us a number. I know it depends upon all of the points that
you indicated, but you are going to have to give us some kind
of a range, because I don't think we can move forward in any
real fashion if, in fact, your ruminations prove anywhere near
close, and that is that this new proposal doubles the cost,
which means, instead of roughly $40 billion over 5 years it is
now $80 billion over five, especially if it has built into it
structures that might, in fact, promote utilization beyond the
normal utilization increase that would occur, because, from
what I have seen of data, the increase of cost of drugs, yes,
are tied in part to the increased cost of the drugs,
themselves, but the overall cost is the utilization involved
and more and more people using the slightly higher-cost drugs.
That can create a snowball effect in which, over a 5-year
period, given the incremental cost, could mean also your
doubling could be off by 50 percent, and that is what begins to
get frightening as we go forward in talking about working out a
plan.
The information you provide us will be absolutely critical.
Mr. Crippen. Mr. Chairman, if I might just add to what you
have said, the price effect for a catastrophic benefit could be
even greater than what has been mentioned here because of what
happens once you cross the threshold level. Say you are dealing
with a regimen of drugs to treat a chronic illness. If the
beneficiary's costs for the drugs are above the catastrophic
threshold, the beneficiary has no incentive to change unless
there is a big copayment and the drug company has no incentive
to keep the cost of the drugs down, particularly if they are
drugs whose use is unique to the elderly. So there may be an
even stronger price effect with a catastrophic benefit.
Mr. Scanlon. And you set up a structure in which government
holds the bag not only on a 50/50 deal through the process,
with no one else concerned about keeping costs down, and then a
structure which conceivably could be the government holding 100
percent of the bag on the catastrophic. At some point, those
bags get pretty heavy.
The gentleman from California?
Mr. Stark. Thank you.
Dr. Scanlon, you point out a lot of the difficulties in
implementing or controlling costs. Let me ask you this: We have
got, my guess is, 200 million people in America using these
pharmaceutical benefit managers, PBMs. Do you think that we
should use them if we have a prescription drug benefit in
Medicare? And, if we do use them, should we be writing the
rules, these lists of items of how they should bid, or should
we leave that to the administration?
While they may create some problems, it seems to me that
we, those of us who have a Federal benefit--most of us would
have some kind of prescription drug benefit manager. I don't
know quite how it works. I know I get a copay, and I don't know
how the hell they figure it out, but I know we are using PBMs
and General Motors uses them.
So would you advise us to use a prescription drug benefit
manager? And how much detail would you say we should prescribe
in legislation?
Can you get a handle on that?
Mr. Scanlon. Mr. Stark, I think that, in terms of laying
out the cautions in our testimony, they are cautions to not
have unrealistic expectations about what PBMs can accomplish in
terms of administering a Medicare drug benefit. They
principally focus on this issue of control of cost. I think
that, given I have seen Dr. Crippen's testimony today, there is
agreement between the two of us, in terms of this necessary
caution regarding what PBMs can accomplish from a cost
perspective. That caution is already built into the numbers
that CBO is providing you.
The second part of our testimony deals with the fact that
PBMs would provide a valuable service in terms of administering
a Medicare drug benefit. It is very important to be able to pay
claims on a much more realtime basis than we currently do in
Medicare, particularly if we are going to have a structure in
which an individual's cost-sharing obligation is going to
shift, depending upon the amount of drugs that they have used
during the course of the year.
The other thing, from the quality perspective, is the role
that PBMs potentially play in detecting interactions, which
today are a serious problem for elderly individuals. PBMs can
potentially point out other medical factors that should be
taken into account, through the type of technology and networks
that they have.
Now, the issue, in terms of how prescriptive you are to the
Secretary, in terms of a PBM contract, that is one area which
is laid out now in very general terms. I am not sure that we
could help, in terms of being much more specific. But, during
the course of this debate some more specifics may come out. It
would be useful to instruct the Secretary along those lines.
At the same time, it is also probably important for you to
have expectations that the Secretary is going to have to
iterate to the best solution here--that, in terms of trying to
negotiate with PBMs, nobody has gone out to the PBMs,
themselves, and said, ``Are you willing to play in this game
and under what terms?''
I think, once this process starts, we may find that the
Secretary will come back to you and say, ``We need to modify
something,'' and I think you should feel open to that in the
sense that we don't have experience here so it is hard to lay
out the path from the outset.
Mr. Stark. OK. Let me try two things on both of you. These
are perceptions that I have, and I wonder how you both would
react.
Dan, you brought up the question of Medigap perhaps
fostering over-utilization. At least Kaiser in California has
done some studies, and I think others have, and I don't have a
congenital objection to copays, but they found that a minimum,
almost de minimis amount, like $5, was enough to deter over-
utilization without keeping people from actually getting needed
care, so that you didn't have to get up to 10 percent, just a
couple of bucks to make people stop and think.
I wonder if both of you have either a perception that that
is a correct understanding of what we could do, in which case
it wouldn't trouble me to use that.
And then my second perception is that--and this is pretty
loose, but that the catastrophic benefit would only cover, if
we talk about 3,000 out of pocket--that is assuming a 50
percent copay. We are talking about 6,000 in total purchase--
that would only clock in for about 2 percent of the
beneficiaries.
Now, at that rate, my understanding is we would perhaps be
talking about $5 billion a year, or, in round figures $25
billion over five.
Now, there have been a variety of numbers suggested, and I
am just picking the 3,000--with a 50 percent copay--because it
is a perception that I have that that might put us in the ball
park of about $5 billion a year.
Is that close enough for government work, or am I way off?
Mr. Crippen. Yes and no. Or, no and yes.
I think we can be a little more precise here. The
information I brought with me has a break at $5,000 and at
$10,000 but not at $6,000.
Mr. Stark. OK.
Mr. Crippen. Under a catastrophic Medicare benefit in 2000,
beneficiaries who spent more than $5,000 annually on
prescription drugs would spend, on average, $7,800;
beneficiaries with drug spending over $10,000 annually would
average $14,000. So I would suggest the answer is closer to $10
than$ 5 billion.
Mr. Stark. OK.
Mr. McCrery. Will the gentleman yield a minute?
Mr. Stark. Yes. What about the idea that that would affect
about 2 percent of the beneficiaries? There's a very flat curve
until you get out in the 90th percentiles, and then it jumps
way up above $1,000 or so.
Mr. Crippen. That is probably pretty close.
Mr. Stark. Big percentage of the cost, but a very small--
Mr. Crippen. Is it 40 percent of $60 billion?
Mr. Stark. Really catastrophic.
Mr. Crippen. Okay. Let's return to the percentage of people
covered.
Mr. Stark. Yes.
Mr. Crippen. Among Medicare beneficiaries, 5.3 percent
spend more than $5,000 annually on prescription drugs; 0.9
percent spend more than $10,000. You said 2 percent spend more
than $6,000; that is clearly in the ballpark.
Mr. Stark. But they probably use up a big chunk of the
total cost of the drugs purchased. OK.
Mr. Crippen. My colleague, Steve Lieberman, points out that
the number I gave you is probably a little bit low on the
amount of total spending. It looks more like $12 billion to $15
billion.
Chairman Thomas. Will the gentleman yield?
Mr. Stark. Sure.
Chairman Thomas. On his explanation of the catastrophic,
which is the first details I have heard, the plan that you
outline then is that you take the President's program, which
would be a 50 percent match, to produce $2,000 50/50 coverage,
thousand each. Let's leave the premium aside for now. But then
at $2,000 the President's program stops. He proposes in 2006
some catastrophic that would kick in with no details.
Are you indicating that the democrats' plan that they
outlined yesterday would then have a catastrophic that would
begin picking up once again a 50/50 payment at the 3,000 to
get--
Mr. Stark. My understanding, Mr. Chairman--and I will have
my staff pull on my coattails here if I am off--is, regardless
of what the copay and the--I think the cost sharing is 50/50,
and I don't know where that caps out, but the idea was that,
after a beneficiary had spent $3,000 out of pocket, whether
that was copay or full pay, that we would pick up from there on
all expenses.
Now, I assume that if there was a 50 percent copay up to
$3,000 or $6,000 in drugs, that is how it would--in other
words, if it were a continuous benefit and in the first $6,000
of purchases you paid 50 percent, you would be 3,000 out of
pocket. You can say it one way or the other. And then over that
the government would pick up all the balance.
Now, it could be that if you are talking a max of 2,000 in
the primary benefit, then there is a chunk of money where the
beneficiary would be paying the full price of the drugs without
any copay, but, in any event, the numbers that I have heard
bandied about would be about 3,000 out-of-pocket, I believe,
the copay thing aside, and then we pick up the balance.
It depends on how you estimate the underlying--
Chairman Thomas. Yes. That is significantly different than
has been reported, and I can understand that the reporters
would not be able to get that accurate, given the information
they had, because I thought we had just invented a new category
of catastrophic in which the beneficiary pays 50 percent of the
catastrophic cost--
Mr. Stark. No. I didn't mean to imply that.
Chairman Thomas.--which is not--yes, which is a new and
novel idea.
Mr. McCrery. If I might jump in?
Chairman Thomas. Yes.
Mr. Stark. Thank you both.
Mr. McCrery. Mr. Stark, if I might jump in, if, in fact,
your basic benefit stops at $2,000, as proposed by the
President, then, as I figure it, your catastrophic plan would
kick in after $5,000 of total spending on drugs. Would that be
right?
Mr. Stark. Excuse me--first of all, let me just back up a
minute, if the gentleman would yield.
Mr. McCrery. Sure.
Mr. Stark. We are proposing that it would be 50 percent
equal to $2,000 the first 2 years, then it would go to 3,000,
then 4,000, and then 5,000.
Chairman Thomas. Those are out-of-pocket expenses?
Mr. Stark. No. Those are 50 percent of annual limits. So at
the max we would be paying 50 percent of $5,000, which is
$2,500. Then, in effect, the beneficiary would have to pay the
next $500, or 100 percent of the prescription, and after that
the $3,000 catastrophic would clock in.
Now, you could drop it to $2,500 to make it seamless, but
the cost goes up. You could move that catastrophic up to
4,000--and all I have ever tried to do is keep it easy to
explain, both to my colleagues and to my constituents--and make
it as seamless as possible.
I am on a bill that says you have got to pay that first
couple of hundred out of pocket. We are going to end up, if
there is a benefit, trying to make the most convenient benefit
out of the dollars we have to spend, and so I think I have
explained to you as accurately as I know what the benefit is.
Basically, it pretty much is a 50 percent copay, and then,
after you run a couple or three thousand bucks out of pocket,
it pays 100 percent.
Mr. McCrery. OK. I appreciate the gentleman going to that
length to explain. I know you don't have your proposal in
concrete, as we don't, and so I appreciate the gentleman
letting us know that it is probably not the design of the plan.
It is probably not as the press advertised it to be in the
initial coverage of the announcement by the democrats that you
would have a catastrophic benefit kicking in at $3,000 of total
drug expenditures. That is--
Mr. Stark. No. It does.
Mr. McCrery. No.
Mr. Stark. Yes.
Mr. McCrery. It is $3,000 out of pocket.
Mr. Stark. OK. Out of pocket, $3,000--
Mr. McCrery. Which would be about $5,000--
Mr. Stark. Yes.
Mr. McCrery.--of drug expenditures before the catastrophic
plan would kick in, and that is a big difference.
Mr. Stark. That is always the way I have explained it.
Mr. McCrery. OK. And I appreciate very much the gentleman
explaining that.
Chairman Thomas. And the Chair is also pleased, because,
given the new math approach, I am quite sure that the proposal
that we have been working on and the proposal that you just
announced, if you would use the traditional insurance language
of how you begin to pay for and the catastrophic plan kicks in,
we are amazingly closer than I thought we were.
Mr. Stark. Mr. Chairman, I will accept no math that I
cannot do with my shoes and socks on, so it has to be simple.
Chairman Thomas. I would say that one of the simpler ways
to communicate with others is to use the math that everybody
else uses, whether you have your shoes on or not. Once we work
that out, I think it is amazing because my assumption is that
Dr. Crippen's estimate of doubling the cost was based upon the
catastrophic that went into effect at 3,000. Is that correct?
So you were somewhat confused.
Let the record show he was nodding his head in a vertical
fashion.
Mr. Stark. Yes.
Chairman Thomas. That was our assumption because that is
what everybody told us, so actually that is a positive, and I
appreciate that.
Does the gentleman from Louisiana wish to inquire?
Mr. McCrery. Thank you, Mr. Chairman.
I will ask this of either of you or both of you, and either
can answer.
Both of you have talked about the use of pharmacy benefit
managers, PBMs. As we have talked about here today, I think all
of us anticipate some usage somehow of these private sector
entities to help us with our plans.
In either your written testimony or your explanations
orally here today, you have talked about a single PBM
administering a Medicare drug benefit would likely be subject
to the same level of scrutiny as a government entity, and that
such scrutiny may compromise the flexibility that PBMs
typically have used in the private sector to generate savings.
Could you elaborate on some of these constraints that could
be anticipated and how those would diminish savings that are
normally enjoyed by private sector PBMs?
Mr. Scanlon. I think it largely goes to the issue of
transparency and the market size or the market leverage that a
PBM, either a national one--I wouldn't necessarily envision on
the national basis the single PBM, but I would envision that
there would be very detailed specification of what the benefit
was going to be by the Secretary. That would effectively
preclude negotiation on the part of private entities that were
going to be contracting or severely limit sort of the
negotiation that private entities are going to engage in that
had the actual job of administering the plan.
But even if we went down to geographic areas and you
consider that all elderly individuals who are the major
consumers of drugs are now being bargained for by a single
entity, that is incredible power with respect to the
pharmacies, it is incredible power with respect to the
manufacturers.
Our sense is that the political process, in part, would say
this has to be an open negotiation, to a degree, and we need to
know what's going on, because anybody that is left out, any
pharmacy or any drug that is left out is going to be severely
affected.
That, I think, is not going to be conducive to negotiating
the same level of discounts that PBMs have been able to do when
they do it, in a sense, on a proprietary basis behind closed
doors.
Mr. McCrery. So if we went from the use of a single PBM to
allowing multiple PBMs to compete, would that solve some of
those problems?
Mr. Scanlon. I think it solves or ameliorates some of those
problems and introduces new ones, because, I think, as you
introduce multiple PBMs in a single area, just as we have the
model for having multiple Medicare+Choice plans in an area, we
need to start to worry about the information that is provided
beneficiaries so that they know what they are choosing when
they choose a particular PBM. We also need to be concerned
about whether or not a PBM has structured a benefit or
structured its policies so that it attracts a more favorable
group of beneficiaries in terms of better health status.
We need to think about whether and how we would have to
risk adjust the payments to PBMs if we have multiple PBMs in an
area.
So it is an issue, in terms of both options, that we have
challenges that we need to think about how we are going to
overcome.
Mr. McCrery. And I agree, but if we go with a single PBM it
seems to me that the challenges are more clear-cut and that we
are less able to overcome those challenges than we are with a
multiple PBM arrangement.
One example, in the private sector, in current practice,
PBMs negotiate lower prices from pharmaceutical manufacturers
by giving preference for a particular drug in a particular
therapeutic class on what is called a ``formulary.'' That means
that one drug in that therapeutic class would be favored, would
be covered, and a competing drug would not be covered, or the
formulary drug would be a lower price to the consumer than a
non-formulary drug.
But the President's plan, for example, explicitly prohibits
formularies. That is an example, I think, of how you talked
about, if you have only a single PBM, it would be easier for
the government to impose restrictions on it, making it more
like a government entity, really, than a private sector entity.
And if you, in fact, prohibit formularies, for example, and
you require a 50 percent flat copay, how would pharmaceutical
benefit managers negotiate lower prices from pharmaceutical
manufacturers?
Mr. Scanlon. Mr. McCrery, I don't think the President's
plan precludes a formulary. The President's plan requires that
every medically necessary drug be covered. But it also has an
option for the entities that are administering the benefit in a
particular area to propose a cost sharing mechanism other than
the 50/50 cost sharing mechanism, as long as it is budget
neutral.
So one could think of the cost-sharing mechanism somewhat
akin to the tiered copayments that we are seeing in the private
sector today, where a certain group of drugs have a lower cost
sharing for beneficiaries associated with them and other drugs
are going to have a higher cost sharing associated with them,
and generics and ones that are on the formulary would be the
ones that would have the lower copays.
Mr. McCrery. OK. So the President's plan then could
accommodate some different treatment for different drugs, as
long as it was a budget-neutral arrangement?
Mr. Scanlon. Yes, it could.
Mr. McCrery. That is interesting. But, even if that were
the case, though, if you only had one PBM, it would seem to me
to be a less-effective tool than if you had multiple PBMs
competing with different drug manufacturers.
Mr. Scanlon. Well, I think if the PBM was unrestrained it
actually would have a lot of leverage, in terms of negotiating
prices.
Mr. McCrery. Sure.
Mr. Scanlon. But I don't think we would allow--
Mr. McCrery. That is the very reason we would have to
impose restrictions.
Mr. Scanlon. Right. One of the concerns about the size of
the Medicare Program is how it can potentially disrupt the
market.
Mr. McCrery. Right.
Mr. Scanlon. Therefore, you wisely have, on many occasions,
put limits on in terms of how Medicare is going to behave in
the market.
Mr. McCrery. Right. OK.
Mr. Stark. Would the gentleman yield at that point?
Mr. McCrery. Sure.
Mr. Stark. This question of the number of PBMs, how many
did you envision?
Mr. McCrery. More than one.
Mr. Stark. Well, here's an issue that came up--and more
than one doesn't trouble me--but if we have 10 million people
eligible for this benefit--is that ball park? Dan's nodding his
head.
Mr. Crippen. That is the number who are currently
uninsured.
Mr. Stark. Yes. And we would pick up more. But if we had
50, you would cut the bargaining power, because, Kaiser, alone,
has almost six million people it could bid for.
Would the gentleman feel comfortable that, while we want
more than one PBM, we ought to not have so many as to dilute
their bargaining power?
Mr. McCrery. I think that would--I think the market would
take care of that, but I understand the gentleman's point.
Mr. Stark. Yes. You have got to give them enough business--
Mr. McCrery. Sure.
Mr. Stark.--to have the bargaining power.
Mr. McCrery. Yes.
Chairman Thomas. And, just coincidentally, I am going to
yield to the gentlewoman from Florida. I assume she was aware
of the President's program in which, in essence, in a budget-
neutral way, certain diseases would be privileged over others
based upon a formulary that was required to be budget neutral,
but in which certain drugs could be purchased at a relatively
cheaper price than other drugs.
Is that a correct assessment of what you said about the
mechanism--
Mr. Scanlon. Well, I--
Chairman Thomas.--for formularies under the President's
plan?
Mr. Scanlon. That would be an issue that would have to be
addressed by the Secretary in terms of accepting a formulary
proposal. If a formulary were not to include drugs from every
therapeutic class, then in the private sector today most third
party payers and most employers would reject it. So the issue
would be, would the Secretary also reject a formulary that
didn't have a drug in every therapeutic class.
Chairman Thomas. You could have a drug in every therapeutic
group, but you said that the President's plan would allow an
adjustment in a budget neutral way of buying down the cost of
particular drugs within that structure.
Mr. Scanlon. But I don't think it would--
Chairman Thomas. Which means, based on the particular drugs
that are cheaper, particular diseases would be privileged over
others on the cost of the drugs to treat them.
Mr. Scanlon. It would be a question of whether there were
drugs within the therapeutic class that were only for certain
diseases and others for other diseases, because I think that
you could structure it in a way that no disease was favored,
but there would be an effort to try to steer drug utilization
to favored drugs.
Chairman Thomas. I think what it fundamentally does is
underscore the fact that there is no single best path; that
there are a number of choices that are going to have to be made
where there are virtually tradeoffs on every option.
Unfortunately, that is too much like the real world, and we are
going to have to engage in that as we make decisions.
You might get a bargaining price between PBMs in a
negotiated way, and you also could get a bargain price in a
negotiated way with a single PBM, except the role of the
government would be a bit more significant in that latter, or
the President's proposal, which means that the ability to
influence through the governmental structure might be greater
in the latter structure rather than the former.
People who were able to get that manipulation would see it
as a positive. Those who didn't would see it as a negative.
The gentlewoman from Florida?
Mrs. Thurman. Dr. Crippen, in all of this let me ask you a
question, then. Which would you score as getting the most
savings? Multiple? One?
Mr. Crippen. It depends on the restrictions that go with
them, as my colleague, Mr. Scanlon, said in his testimony. You
can think of PBMs as a surrogate for competition and what that
can do. Currently, PBMs perform two of three potential roles.
One is price discounting. On the one hand, if there are
restrictions on their purchasing power or what they have to bid
on, for example, their ability to achieve price discounts my be
limited. On the other hand, PBMs might be able to achieve large
discounts because of the number of people who would participate
in a Medicare drug program. So it is not clear what the PBMs
overall effect on price discounting would be.
The PBMs' second role involves utilization. PBMs do not
control utilization, but they do monitor it. They will
encourage you to use generic instead of name brand drugs, for
example, but they will also monitor the drugs you take to
prevent harmful drug interactions.
A third potential role that PBMs do not often play but that
may have the best chance of providing both savings and, more
important, better outcomes for patients case or disease
management. That would be most effective in cases in which we
know that a certain protocol works best for a specific disease.
Generally, drug protocols for people with chronic diseases have
high total costs, or they can have, and those costs will
probably increase as more new drugs enter the market. So the
potential case management for PBMs to do is there, but it has
not yet been realized.
Whether it would be better to have one or five PBMs in a
region is not clear. That really depends on the limitations
placed on their activities, as Mr. Scanlon said. If you had a
dozen PBMs, for example, but said, effectively, ``You cannot
have formularies, you cannot negotiate discounted prices, you
cannot do these other things,'' the larger number would not
matter.
Mrs. Thurman. OK. You need to help me through this a little
bit then, because in your testimony you talked about Medicare
beneficiaries with coverage spend an average of $769. Now,
those beneficiaries generally would be under the plan you have
just described that would give them the best disease
management, correct?
Mr. Crippen. Not necessarily.
Mrs. Thurman. Isn't that what's happening today? I mean,
that is, most of our seniors are under a managed care plan of
some sort that goes out and supposedly is doing disease risk
management and those kinds of things, correct?
Mr. Crippen. There is some of that being done for Medicare
beneficiaries who are in the Medicare+Choice plans, Also, the
number of those plans is dropping. Although it depends on the
kind of plan they are in.
Mrs. Thurman. Right.
Mr. Crippen. PBMs is shorthand for having a pharmaceutical
manager and most of those arrangements are not in managed care.
Most PBMs operate in the private sector, serving the non-
Medicare population. But in theory, the managed care setting
would be the most likely to provide a case management or
disease management approach, which should include
pharmaceuticals.
Mrs. Thurman. In any of yours, Dr. Crippen--and I know that
we don't score this, but, even in the usage part of
prescription drugs, can you look at all as to--because, I mean,
risk disease, all of the kinds of things you just said--is
there any savings to Medicare in the long term of having a
prescription drug benefit for seniors?
Mr. Crippen. The evidence, Mrs. Thurman, is mixed. For some
specific conditions--after heart attacks, for example--the
appropriate use of drugs could save you money, but we know of
only a few such conditions and there is evidence on both sides
of the question. Some of it says you can save money, a lot of
it says you cannot. So for the purpose of estimating costs, we
do not assume that there are any savings, per se, for expanding
prescription drug--
Mrs. Thurman. But yet, if you talk to medical folks who say
that the senior out there that cannot afford the prescribed
drug comes in more often than the person who can continue their
drug coverage or their prescription drugs as they were
prescribed, so it would seem to me that there would be some
savings, if not a lot of savings, in at least the hospital side
of it.
Mr. Scanlon. I think you might want to insert the word
``net'' in front of ``savings'' here, because I think the issue
is that there are savings from particular drugs, substituting
for both surgical procedures and hospitalizations, but there
are also additional drug expenditures to deal with conditions
that wouldn't have been managed well before, and those that
overwhelm those savings.
Mrs. Thurman. Let me ask a couple more questions here
quickly.
I, quite frankly, don't know that the private sector has
done a very good job in negotiating discounted prices with drug
companies. I don't know with PBMs or whomever. I mean, we have
seen a raise in drug prices 18, 20, 30 percent.
Are we seeing those same increases in say, for example, the
Federal health employees increases, or are we getting a better
savings through what we do already the Federal health plan?
Mr. Crippen. Do we know? I would assume it is about the
same.
Mrs. Thurman. Evidently, GAO did a study that said we were
getting about a 20 to 27 percent savings, I think, back in 1999
on FEHBP, as versus what is happening today in the private of
about--we are actually going up about 18.3 percent.
Mr. Scanlon. Mrs. Thurman, actually that study is a little
older than 1999.
Mrs. Thurman. OK.
Mr. Scanlon. We may have used the information again. There
is an important caveat to the information that I mentioned in
my oral statement: The information is self-reported by PBMs and
the plans, and it is not something that we were able to verify.
But, this is the range of savings that they have reported.
The issue is, though, that, while they may have
accomplished those savings, they may not have influenced
strongly the rate of growth, so that once you get the 14
percent out or the 20 percent out, that the rate of growth
continues the same for these plans as it does for other sectors
of the pharmacy market.
I think FEHBP is very much like other private insurance, in
the sense that we are contracting with insurance companies and
they are turning around and contracting with PBMs, who may be
serving General Motors, who may be serving Xerox, or any other
private sector organization, and negotiating with the same
manufacturers and the same pharmacies for the discounts.
So I think they are not necessarily doing any better. There
are no techniques that I know of that they have that nobody
else uses.
Mrs. Thurman. Would you say that is the same thing as with
the VA?
Mr. Scanlon. Well, the VA, I think, is in a different
situation, in part because, one, it has some sort of
legislative clout, in terms of being able to gain a certain
level of prices, and, second, it is a major bulk purchaser, and
it is its own dispenser.
Mrs. Thurman. Would Medicare be that same--
Mr. Scanlon. Medicare is going to have to operate in the
retail market, to a great extent. We are going to have to
anticipate that beneficiaries are going to be able to go to
local pharmacies and get their drugs, as opposed to how the VA
dispenses, so I think that is a distinction that the VA has
that Medicare may not have.
Medicare is also so much bigger. It is also going to
influence how it behaves and how we are going to tolerate it,
how it behaves sort of in the pharmacy market.
Chairman Thomas. I thank the gentlewoman for her line of
questioning, because it is exactly these kinds of questions
that we have to explore.
One of that confusing points, I think, that we have to
begin to show a bit more discipline on as we discuss this is
the price of drugs versus the expenditure to pay for the drugs,
because we continually talk about the price of drugs going up.
As a matter of fact, between now and 2005 we are going to see a
significant number of brand names kick over into the generic
category, and the price of the drugs will go down, but the
expenditures for drugs are going to go up because of the
increased utilization, especially if we put in a program. So,
as we go through this discussion, that is one line of reasoning
that we have to keep straight.
The other one--and her question about the number of PBMs is
a good one, but I want to underscore the answer that she
received, and that is, if you are really going to talk about
cost containment or competition, which is another way of saying
cost containment, the key to that is the freedom of the PBM to
do what it thinks it needs to do, rather than the number of
PBMs.
If you have one PBM and you say you are only going to have
one, but you let them do whatever they want to do to control
the cost, that can be very effective. If you limited them
significantly as to what they could do, you could have 50 of
them in competition with each other but you are not going to
get a significant reduction because they are not able to do the
very aggressive cost containment procedures that the private
sector is currently engaged in. In fact, we have seen recent
reports where some employers, because of their willingness to
allow the aggressive cost containment of PBMs, are, in fact,
not having to increase their cost to the consumer because of
the internal savings.
Now, that is not an ongoing ability. You get some time line
control on that.
Is that a fair way to assess what was said: That it is not
the number of PBMs; it is the degree of freedom to allow for
aggressive cost containment that would be the key to saving
some money in that particular aspect of the program?
Mr. Crippen. And the incentives you give the PBMs to
achieve savings.
Chairman Thomas. The other side of the coin.
Mr. Crippen. Yes.
Chairman Thomas. Any response to that?
[No response.]
Chairman Thomas. But, see, the problem then goes back to
Dr. Scanlon's concerns, because in the private sector, of
course, you have the ability to do that, and there are a lot of
things that go on which produce a cheaper price, like tough
negotiating on volume or a tradeoff on one drug versus another
for increased utilization for a particular drug versus another
in the marketplace. It would be very difficult for Medicare
PBMs, no matter how much the arm length would be, because those
kinds of transactions are probably going to have to be a bit
more transparent.
So I go back to my original point. There are going to be a
ton of tradeoffs here that don't allow us to use a direct
analogy to the private sector, but, to a certain extent, we are
going to have to talk about the traditional way in which the
Health Care Financing Administration has dealt with medical
pricing, payment, and oversight, versus if we really want to
try to get an effective prescription drug program, the
traditional HCFA management techniques are probably least
useful in this particular area of any that they have moved
into, and we are going to have to examine that aspect fairly
closely.
Mrs. Thurman. Mr. Chairman, it would seem to me, when you
have like we have with 39 million people, or however many
people are out there, you are still in the best position as a
negotiator because you have that many people to share this risk
over, with one benefit.
Chairman Thomas. But you don't, and that is where--unless
you are going to drive out the single--see that pie chart up
there? The single-largest segment of seniors who are Medicare
beneficiaries are currently getting their drug coverage from
their employer's insurance, and some of it is much richer.
One of the interesting parts about the President's plan was
that it didn't have a whole lot of impact because most people
who have employer plans shrugged their shoulders and said the
President cannot compete.
To the degree we make it attractive, those employers are
not mandatorily required to offer the program. That is why, in
the President's program, you incentivize people by paying them
to stay in the program, so it really isn't 39 million lives.
Now, there are some things that we could do, for example,
on sharing the high-risk portion of beneficiaries that would
keep employers in, if we created a pool that covered all
Medicare beneficiaries, whether they got the insurance from
employers or not. That would utilize the larger number.
But, again, we are going to have to look at subsets of that
as we deal with people ho have no benefit whatsoever today,
people who would be moving from Medicaid, which might have a
variety of programs available in States, coming to a more-
uniform Federal program, as the President envisions a shift
over, with some degree of cost maintenance as we move through--
people getting off of medigap because they are paying $2,100
for an H program and not getting much prescriptions, and they
got into it because that was one of the only ways they could
get prescriptions in the first place, and now they are getting
a much better program.
We talk about this as though it is purely additive and
moving into a whole new area. There are a lot of high points on
the topography that, when we flood the plain, are still going
to be there, and we are going to have to deal with them.
Mrs. Thurman. That is true, but we are already starting to
see Medicare choices and those people drop out of areas and
drop out of plans because of the high increase in cost of--
Chairman Thomas. But remember--
Mrs. Thurman. Wait a minute. Can I finish?
Chairman Thomas. OK.
Mrs. Thurman. And so you are also going to start seeing
that hit that 31 percent at some point.
I will just tell you what happened yesterday. I had my
insurance agents in to talk to me. They told me that they do a
group policy insurance right now for a small company. They are
going to increase the cost, alone, to that company for their
premiums by $100,000, and the only thing that is driving that
is prescription drugs. But, just as importantly, as they are
doing that, they are dropping benefits off of their insurance
because they cannot continue to pay for everything.
So maybe this is the issue: Whether it is in this debate or
whatever debate we have on prescription drugs, at some point we
are going to have to get a handle on what is happening in this
country, as compared to what is happening in other parts of the
world.
You know, I look at Mrs. Johnson over there, who is hitting
up against Canada. You go to Texas, and you have got Mexico.
You have got Maine passing legislation. You have got Florida
passing legislation.
Mrs. Johnson. I am sorry.
Mrs. Thurman. We have got problems.
Chairman Thomas. She has a time limit.
One quick response. Medicare+Choice is currently paying for
drugs out of what would otherwise be the profit amount returned
to HCFA. It is not a benefit, as we are defining, so that you
will not get the cost squeeze on the prescription drug portion
of the Medicare+Choice program. It would be a dollar additive
program to the basic benefits package, an entirely different
universe of price support and structure, so any analogy to
current practice of Medicare+Choice without a prescription drug
benefit versus what would happen if you added it simply is not
relevant to the discussion of how, in fact, people will react
and prices will be structured.
The gentlewoman from Connecticut.
Mrs. Johnson. I would just like to say, I think if we think
that negotiation is going to solve the Medicare prescription
drug cost problem, we are kidding ourselves. The hospitals are
part of a nationwide buying group, and their drug costs went
up--my local hospital's drug cost went up 40 percent in a
single year.
Now, they are getting rock bottom prices. I don't know that
we can do better. That is one of the things I want to look at
with you, although not at this moment, but I want us to look at
what makes us think that government would get any lower prices
than some of the very big purchasers, nationwide purchasing
groups out there.
But that is only one aspect. The big problem is the
explosion of the number of drugs and the complexity of their
structure.
But what I want to ask you is--and, Dr. Crippen, you got on
this, because I am very afraid that we will legislate to the
past in this bill. We have to legislate for the future.
You mentioned disease management. One of my concerns about
this whole approach of a beneficiaries manager is that I
don't--one of the problems we have had with pharmaceutical
managers is that they manage the pharmaceuticals. They are not
managing the health.
There has developed in my District, and there are now
across the country the embryonic kinds of companies that
manage, under the doctor's direction, health. And so, if you
want to lower drug cost, you have to stick to the regiment. You
have to exercise and you have to lose weight, if that is what
your doctor has prescribed as your heart regiment.
I don't think that any benefit manager is going to be able
to keep up on this industry that is developing, because it is
holistic. It is much more complicated. You have to do it with
the doctor involved.
I think one regional benefit manager is going to keep us
focused on price negotiations. That is not enough. That is not
the future.
So even multiple benefit managers--one of the reason I am
interested in multiple insurers is because insurers, because of
their broader experience in workman's company and disability
law and a lot of areas where they are looking more holistically
at managing health care for long-term recovery or managing
chronic illness, they are more likely to be able to pair with
this kind of disease management entity that is developing in
our society.
But if we lock in benefit managers--which, frankly, we have
had a lot of trouble with, in my experience--we are legislating
to the past using the tools of the past, and the real savings
is going to be how do we hook high-cost drugs with other health
initiatives to improve health at an affordable cost.
So would you comment on that, on how we keep that in the
mix and whether competing insurers might not be a more powerful
tool than competing benefit managers.
Mr. Crippen. Let me say two things. First as Mrs. Thurman
noted, the Medicare+Choice plans provide the closest thing we
may currently have to a disease management application. In
contrast, the fee-for-service sector has no incentives and no
design that would give you the holistic approach you are
talking about.
But perhaps the ideal world--in the case of pharmaceutical
management, at least--would be one in which the pharmaceutical
managers were at risk or were paired with an insurance company
to create some incentive to manage the entire disease in a
protocol. And so, if a PBM was put at risk or tied to an
insurance company--
Mrs. Johnson. So an insurance company in a competitive
environment could use this issue of disease management and, you
know, you would get a lower premium if you agree that, if you
had a chronic disease, you would enter this kind of program,
and, working with benefit managers and chronic disease
management companies, the insurer could offer than a variety of
packages. Some people only want fee-for-service. They don't
want to have anything to do with anyone telling them when,
what, or anything about the rest of their lives, so they pay a
higher premium.
The last thing I just want to put on the record is I am
very concerned, Mr. Crippen, that in your estimates you have
assumed that 75 percent of those who now get coverage through
their employers will move to this plan, because people who are
getting benefit coverage through their employers--GM, some of
the big guys--are getting better coverage.
Why did you make the assumption that they would move to the
public program, which is going to be fraught with difficulty,
if the past is any indicator?
Mr. Crippen. We assumed they would move because the general
subsidy to the program from the taxpayers would give them an
incentive to move. That does not mean, however--
Mrs. Johnson. Will that incentivize their employers to
incentivize them to move?
Mr. Crippen. Sure. But we are assuming at the moment--
although I am not sure it is a valid assumption--that all of
these insurers would have continued their current level of
benefits through wraparound provisions. So they would take the
basic.
Mrs. Johnson. I see.
Mr. Crippen.--program--the President's proposal, for
example--but would then add to it with wraparound provisions.
Mrs. Johnson. That makes sense. Thank you very much.
I am sorry. I have to leave.
Chairman Thomas. One second, if you can, this business of
insurance companies, we are talking about risk. We are talking
about a national program. And there are entities which re-
insure. It seems to me that there is a dollar amount that you
can place on the assumption of risk and that you don't need
insurance companies, as we know them, in terms of management of
the program if PBMs, disease management structures, or a new
entity that evolves in offering the prescription drug
management program, not matter how complete it might be on the
regiment involved, would be willing to play a role that we
invented with the National Association of Insurance
Commissioners with the provider-sponsored organizations in
which you can assess risk. Risk would have a price that would
be passed through to the re-insurance and the government would
pay the price for that shared risk.
And so you can utilize this management structure on a risk
assumption basis, as well, which is simply identifying the cost
of passing it through.
So if an insurance company said, ``We aren't going to play
in this business,'' that doesn't mean that we couldn't create
entities at the Federal level that would serve us very usefully
in helping to produce a more-aggressive managed program.
Is that a fair statement?
Mr. Crippen. I think so. What I was trying to imply, in
response to Mrs. Johnson, was that PBMs currently do not assume
any risk and probably do not have a capital structure that
would support them in doing that directly, whereas insurance
companies--
Chairman Thomas. Of course.
Mr. Crippen.--historically have done exactly that and have
the necessary capital. There may well be other entities that
would evolve or could be formed, but again, to be optimal, they
would have to assume risk and have a capital basis to back up
that assumption.
Mrs. Johnson. But could the PBMs perform the role that is
envisioned for them in the democrat's proposal without assuming
risk?
Mr. Crippen. Yes, they could entirely.
Mrs. Johnson. What would be their motivation to control
cost?
Mr. Crippen. Whatever incentives the Secretary specifies,
as I understand it.
Mr. Scanlon. As it is currently structured, the PBMs would
not be at risk and the incentives are not specified, but the
Secretary has the discretion to create incentives for the PBMs
to control cost.
Mrs. Johnson. It would be very helpful if--and maybe your
testimony does this. I didn't get through all of it--but to
have some better understanding of what incentives might create
what economic effect, because, particularly if there is one
entity, the likelihood that we will allow them the right to
provide the incentives that would be most cost effective is,
frankly, very small, in my estimation, one of the reasons why
Medicare is in such deep there.
Thank you very much for your thoughts. I look forward to
working with you as we try to work through these problems. I
appreciate the quality of your work and of your testimony.
Chairman Thomas. Thank you.
Through no fault of his own, the gentleman from Maryland is
no longer a Member of this Subcommittee; however, we are
pleased to have him with us. But, before I recognize him, I
just want to make one more point.
Coming from a single-payer State, he might better
understand this phenomenon of the fact that, in using hospitals
as an example of tough negotiators, you do have to keep in mind
that that negotiation occurs under a reimbursement structure in
which there may not be as much incentive as you might think for
very tough negotiations under an administered price structure,
and that, when you talk about the price of drugs, comparing two
aggressive negotiators probably isn't the most meaningful
comparison; it is looking at those seniors, who are the last
bastion of retail payers of drugs, and what the cost would be
through a negotiated arrangement, allowing them to get the
benefits of group purchasing.
A recent study by Lewin said that perhaps those costs could
be reduced by 30 to 39 percent, which is fairly comparable to
the Canadian price, if you had aggressive, privately managed
group purchasing structures.
So ultimately we have to look the what the current price of
drugs are to seniors, versus what the price would be if we
brought many of these benefits.
Once again, turn that facet a slightly different way and
looking at it from a different perspective.
The gentleman from Maryland.
Mr. Cardin. Thank you, Mr. Chairman.
Just one observation about Maryland. Maryland, of course,
has negotiated rates for our hospitals by government. It is a
government entity that negotiates the rates. We think that we
are going to do even better than the Federal Government is
doing, so, therefore, we have built an incentive now in our
rate structure to give our hospitals a little bit more money,
assuming that we are going to outdo the Federal Government on
how you achieve cost savings within the hospitals.
What I am interested in finding out is, in doing any of
your estimates, have you assumed that the prescription drug
proposal that the President has recommended would have, in and
of itself, any impact on the number of Medicare beneficiaries
that choose to go into Medicare+Choice HMO?
Mr. Crippen. Under the President's proposal, we assume that
fewer people would go into HMOs.
Mr. Cardin. I assume that reduction would be based upon the
assumption that people are going into HMOs or prescription drug
coverage, and now they can get prescription drug coverage
through a new part of Medicare, they no longer need to go into
an HMO.
Mr. Crippen. Right.
Mr. Cardin. I assume that is the basis of that assumption.
Let me challenge that for a moment, if I might. And no one
can really crystal ball, with any degree of certainty, what is
going to happen, but one of the things that we have found,
since we changed the reimbursement structure for
Medicare+Choice, is that HMOs are having to charge significant
premiums for seniors to join. They impose caps on their
prescription drug benefits. They have done all these things in
an effort to have a cost-effective program, because they are
not reimbursed within their government payment for a
prescription drug benefit.
But if the President's plan were to become law--and one of
the major differences--and Mr. McCrery did not point this out
when he was questioning the administrator, but one of the major
differences between the President's proposal and the republican
proposal is that, because the President puts it into the core
plan, all private health care plans must include at least the
benefit that is in the President's proposal, so that tomorrow,
if this were law, the HMO would have to offer at least this
benefit, but they would be reimbursed for it under their
contract.
Chairman Thomas. I tell the gentleman that there is no
difference in our plan in requiring that, as well.
Mr. Cardin. In other words, all the HMOs would also have to
provide--
Chairman Thomas. Yes.
Mr. Cardin. I didn't know that. I appreciate that
clarification. I thought that it was--so you have built it in
also that all HMOs would have to cover the benefit.
Chairman Thomas. Yes. We are currently grappling with the
fact that Medicare+Choice--we do not allow certain disease-
identified folk to go into the Medicare+Choice, but you
certainly wouldn't want to create an option on a basic addition
to the program like prescription drugs, and we are trying to
deal with both of those problems at the same time.
You would have a full spectrum of choice to all folks who
are covered by Medicare.
Mr. Cardin. So the republican proposal then does put the
prescription drug benefit within the core benefit of Medicare,
but the only way that a senior can get it is either by joining
a Medicare+Choice or participating in a private prescription
drug plan? Is that--
Chairman Thomas. Yes. And one of the reasons we wanted to
do that was because, from the Medicare Commission experience,
everyone told us that the best way to deliver a new
prescription drug program would be in an integrated medical
setting, and the closest thing we have to an integrated medical
setting today is the Medicare+Choice program, so we would want
to incentivize that.
Mr. Cardin. Well then I think we are getting closer, Mr.
Chairman. I really do think we are getting closer. I didn't
realize that you had included in your core benefits the
Medicare. If it is included in the core benefit of Medicare--
the point I was going to raise, and the reason why I disagree,
I think it would be an intuitive conclusion that you don't have
to go into an HMO to get the prescription drugs, you could go
in--there would be less people going into an HMO--is that now
the HMOs are protected in the reimbursement structure, and they
can now offer an HMO plan that doesn't charge separate premium,
that doesn't have the risk factors associated with a
prescription drug benefit because it is already covered, in
part, on the reimbursements they are receiving, and in our
experience we have seen a reduction of HMO interest in the
senior market.
It would seem to me if we put it in the core benefit we are
going to have an increased interest of private HMOs into the
senior market because of the reimbursement structure.
So what has happened in my own State of Maryland, where we
have gone from eight HMO carriers under Medicare+Choice, to now
four, which will become three next year--at least no more than
three next year--with none now that will not be charging a
supplemental premium, and 14 counties that don't offer any
coverage at all, it seems to me we have a much better chance,
under the President's proposal, to be able to have more private
interest in an HMO than we would otherwise.
I just invite your observations to those thoughts.
Mr. Crippen. Certainly. If reimbursement to Medicare+Choice
plans increased through this additional prescription benefit
proposal, that would allow the plans to charge lower premiums
or provide better benefits. That could encourage more
beneficiaries to choose the HMO option. However, on balance,
CBO estimates that Medicare+Choice enrollment would decline
under the President's full Medicare reform proposal, which
includes other payment reductions and changes in addition to a
drug benefit.
But, part of the story is also that we are looking now at
flat or declining growth, just as you suggested. It is
certainly happening in Maryland. And so that might help reduce
those trends, but it may not necessarily reverse them.
Mr. Cardin. And let me just make one more observation, if I
might, and that is, on the private, employer-based prescription
drug benefits that are currently out there, mostly as wrap-
around to what Medicare is providing, it seems to me a similar
argument was probably made on Medicare part B, that, since the
government provided Medicare part B, there would be no need for
supplemental, employer-sponsored insurance to cover other
benefits.
I think a similar argument would occur with prescription
drugs. Yes, we are now covering, under the basic benefit of
prescription drug plan, but it gives private insurance,
employer-sponsored, an opportunity to have a more fiscally
viable wrap-around plan that may provide a much more generous
prescription drug plan than they current provide, because,
again, the government is now covering a significant part of the
cost through subsidy.
Mr. Crippen. Sure. Again, if you give the employers more
money, there is at least some prospect that they will split it
with their employees, which would mean better benefits.
Mr. Cardin. So the final observation that I would have is
that, by providing within the core benefit of Medicare a
prescription drug benefit, it seems to me that every one of
those Medicare beneficiaries, whether it is a person who has no
benefits today, a person who has an employer-sponsored plan
versus an HMO, a person in medigap, a person with other, all
are going to benefit by Medicare having prescription drug
within their core benefit, as recommended by the President.
Mr. Crippen. That is a possibility. Again, we have made no
assumption at this point about what employers are going to do,
other than that we are quite certain that many of them will
take advantage of the program. Some observers argue that one of
the reasons employers have provided insurance coverage to their
retirees is to give them a drug benefit that is not provided by
Medicare. If the Congress enacted a Medicare drug benefit,
employers might drop their supplemental coverage, altogether.
Mr. Cardin. But they would run into political problems. If
their supplemental protection was stronger than what is in the
basic core program, they would run into a political problem
trying to reduce below what they currently are providing.
Mr. Crippen. Possibly.
Mr. Cardin. It is possible they will not increase it and
take advantage of the savings, themselves. I doubt if they
would--if they were going to reduce it, they would reduce it
now.
Thank you, Mr. Chairman, for your patience.
Chairman Thomas. Any additional final bites of the apple?
[No response.]
Chairman Thomas. I want to thank you very much. Obviously,
we are looking forward to your continued, over time, analysis
of additional permutations.
My goal will be, in a cooperative way, to try to pulse the
material to you so that we can do it in a timely fashion and
have hearings in which the data has been available so that we
will deal with less conjecture and more certainty in beginning
to ferret out the choices that might be in front of us.
Thank you very much. Once again, both of you and your
support structures have performed an invaluable service for the
House, and I thank you for that.
The Subcommittee stands adjourned.
[Whereupon, at 12:59 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
STATEMENT OF AMERICAN COLLEGE OF PHYSICIANS-AMERICAN
SOCIETY OF INTERNAL MEDICINE
Summary
The American College of Physicians-American Society of
Internal Medicine (ACP-ASIM) is the largest medical specialty
society in the country, representing over 115,000 physicians of
internal medicine and medical students. ACP-ASIM's members
provide the majority of medical care to adults in America,
including Medicare beneficiaries, and are therefore in a unique
position to evaluate the need for and the appropriate structure
of any proposed Medicare prescription drug benefit.
ACP-ASIM strongly supports enactment this session of
legislation to provide a prescription drug benefit with
sustainable financing, with the highest priority going to help
low-income beneficiaries. Such legislation must include key
consumer protections, particularly if the benefit is to be
restricted by a formulary administered by pharmacy benefit
managers (PBMs). Patients' access to beneficial drugs must not
be hindered by restrictive formularies--or other managed care
controls--that are imposed by PBMs solely to reduce costs,
without regard to safety, effectiveness, or ease of
administration. Physicians should have the option of
prescribing drugs that are not on the formulary without
cumbersome prior authorization requirements. Beneficiaries
should be informed of the impact of the formulary on both co-
payments and access to prescription drugs. Also, they should be
promptly notified of changes in the formulary. PBMs or others
defining a formulary should be required to consult with
physicians on the drugs that are included in the formulary.
Background
Prescription drugs are an essential tool for treating and
preventing many acute and chronic conditions. In 1965, when
Medicare was first established, pharmaceutical therapies were
not as commonly available as they are now, and outpatient
prescription drugs were not nearly as important a component of
health care. Today, however, they are a primary form of medical
care and often substitute for more costly therapies, such as
hospitalization and surgery.
Pharmaceuticals are the fastest-growing component of
national health expenditures. In 2000, national drug spending
increased by an estimated 11% compared with 7% for physician
services and 6% for hospital care. Since 1990, national
spending for prescription drugs has tripled. By 2008, that
figure is expected to more than double from an estimated $112
billion today to $243 billion. (Source: HCFA, Office of the
Actuary).
The growing importance and increased use of prescription
drugs have had a disproportionate impact on the elderly, who
use prescription drugs more extensively than the general
population because of high rates of chronic illness. Although
the elderly represent only about 12 percent of the population,
they account for over a third of spending on prescription
drugs. It is estimated that 80 percent of Medicare
beneficiaries use pharmaceuticals on a regular basis. Having
drug coverage is a significant factor affecting whether
Medicare beneficiaries fill their prescriptions. Lack of or
limited drug coverage can expose beneficiaries to high out-of-
pocket costs that may result in under-utilization of prescribed
medications and adverse health outcomes.
In response to the increase in utilization and costs of
prescription drugs, managed care organizations have turned to
cost-control techniques, such as the use of formularies and
PBMs. In fact, PBMs currently manage an estimated 71% of the
volume of prescription drugs dispensed through retail
pharmacies that are covered by private third-party payers.
Several bills pending in Congress, including the
Administration's proposal, would use PBMs to administer a
Medicare drug benefit and give PBMs the authority to determine
which drugs would be available to patients under such a
benefit. PBMs are private companies that contract with health
plans to limit the costs of prescription drugs by managing drug
utilization and obtaining discounts from retail pharmacies and
manufacturers. Formularies--lists of approved drugs that
physicians are permitted to prescribe--are typically used by
PBMs to limit access to expensive drugs.
ACP-ASIM Concerns with PBMs
As physicians, the members of ACP-ASIM know that the lack
of prescription drug coverage can significantly reduce patient
compliance with prescribed drug therapies. However, our members
also recognize that the cost of prescription drugs is
escalating at a rate far greater than health care spending
generally and that legislation must work to create and maintain
a careful balance between the need for a prescription drug
benefit and the cost of such a benefit. It is critical,
however, that cost not be the primary factor in structuring any
prescription drug benefit program.
Physicians constantly are forced to strike a balance
between ensuring that their patients receive medication that is
medically necessary and minimizing their patient's out-of-
pocket costs. Formularies and/or PBMs that limit beneficiaries'
coverage, either in terms of increased copayments or
deductibles, or by restricting the availability of certain
medications, increase the likelihood that patients will not be
able to comply with their physicians' recommended regimens.
Moreover, patients with serious illnesses requiring more costly
medications may be particularly at risk if PBMs are allowed to
restrict coverage to only the cheapest drugs. If drugs are
prescribed that are not listed in the formulary, patients may
be penalized with higher out-of-pocket costs (increased
copayments or deductibles). PBMs also monitor the number and
types of drugs that physicians prescribe to their patients.
Physicians who prescribe more costly drugs may be pressured to
give their patients less expensive--but potentially less
effective--alternatives. All of these circumstances may result
in adverse health outcomes.
PBMs need to consult with physicians on the drugs that are
included in a formulary. They need to educate patients about
how their prescription drug benefit works, what the impact will
be on their out-of-pocket costs if they need a drug that is not
on the formulary, and how to obtain approval for a drug that is
not on the formulary list. Physicians should be able to
prescribe beneficial ``off-formulary'' drugs to their patients,
when supported by clinical evidence on effectiveness, without
cumbersome prior authorization requirements. Beneficiaries and
their physicians need to be promptly notified when formularies
are changed or discontinued.
ACP-ASIM believes it is critical that any authorizing
legislation on a Medicare prescription drug benefit includes
sufficient oversight of how PBMs operate. As private companies,
PBMs can exert a great deal of influence over which drugs will
be available to Medicare beneficiaries, without any
accountability to the public for their decisions. The PBM
industry makes their pricing decisions without public scrutiny,
oversight or regulation. The PBM industry is highly
concentrated, with the top three PBMs--Merck-Medco Managed
Care, PCS Health Systems, and Express Scripts--together
managing approximately 45 percent of prescriptions dispensed
through retail pharmacies that are covered by private third-
party payers. A Medicare drug benefit administered by PBMs
needs to protect against potential conflicts of interest that
can arise when a PBM is owned by a drug manufacturer, or has
close ties to a drug manufacturer. ACP-ASIM supports the
disclosure of any financial relationships between PBM
companies, pharmacists and pharmaceutical manufacturers to
patients and physicians.
PBMs are coming under increasing scrutiny. The National
Association of Insurance Commissioners is currently considering
whether to recommend legislation to regulate the industry.
Pending lawsuits contend that some pharmacy benefit managers
have violated their duty to act in the best interest of
patients. The U.S. Department of Justice is investigating
possible illegal kickbacks at the two largest PBMs. ACP-ASIM
believes that Congress should proceed cautiously in placing too
much control of a Medicare prescription drug benefit program in
the hands of pharmacy benefit managers. Cost-effective rather
than cost-control practices recognize the patient's well-being
as primary and promote quality patient care. Patients should
have access to effective treatment rather than the least
expensive therapy. A prescription drug benefit will be a hollow
promise to beneficiaries if it allows PBMs to deny them access
to beneficial drugs principally on the basis of cost.
(A list of ACP-ASIM's recommended consumer protection
principles is attached.)
American College of Physicians-American Society of Internal Medicine
Consumer Protection Principles for Medicare Prescription Drug
Legislation
1. A method of pricing Medicare payments for prescription
drugs should be included that will balance the need to restrain
the cost of the benefit with the need to create financial
incentives for manufacturers to continue to develop new
products. Rigid price controls that will discourage innovation
should be rejected.
2. The use of formularies should not be mandated. If a
formulary is instituted, by a PBM or otherwise, decisions on
which drugs should be included and evaluation of physician
prescribing patterns should be based on effectiveness, safety,
and ease of administration, rather than just costs.
3. Physicians should have the option of prescribing drugs
that are not on the formulary (based on objective data to
support a justifiable, medically indicated cause) without
cumbersome prior authorization requirements.
4. Beneficiaries should have access to comprehensive,
accurate and understandable educational and informational
material about their prescription drug benefits; such material
should include information on how the formulary functions and
the impact of the formulary on co-payments and/or deductible
requirements, and access to prescription drugs.
5. Beneficiaries and their physicians should be promptly
notified (at least ninety days notice) when formularies are
changed or discontinued.
6. PBMs or others defining a formulary should be required
to consult with physicians on the drugs that are included in
the formulary. Formularies should be approved on a regional
basis by a professionally qualified body that includes
practicing physicians using that formulary.
7. Any request by a benefit manager to alter medication
regimes should occur only when such requests are based on
objective data supported by peer-reviewed medical literature
and which undergo review and approval of associated managed
care organizations'/managed behavioral health organizations'
pharmacy and therapeutic committees.
8. Physicians should continue to be able to prescribe
covered drugs for accepted off-label uses.
9. The prescription drug benefit should not require an
expansion of prescribing privileges for non-physician health
professionals beyond what can be supported based on their level
of training.
10. Issues of generic and therapeutic substitution under
the Medicare program should be addressed through the
development of a national system that would allow physicians
who permit generic substitution to: designate substitution by
only ``A'' rated generic drugs; require any prescription
medication crossing state lines, such as those as part of a
prescription filled by an out-of-state pharmacy, to use only
``A'' rated generic drugs if a brand name is not required by
the prescribing physician; and require a national uniform
policy regarding a phrase that can be used to denote the need
for a brand name drug.
11. PBMs should be required, with a patient's consent, to
provide treating physicians with all available information
about the patient's medication history.
12. PBMs should be required to disclose to beneficiaries
and their physicians any financial relationships among the
benefit manager, pharmacists and pharmaceutical managers.
STATEMENT OF JACQUELINE SHANNON, PRESIDENT,
NATIONAL ALLIANCE FOR THE
MENTALLY ILL
Chairman Thomas, Representative Stark and members of the
Ways and Means Subcommittee on Health, I am Jacqueline Shannon
of San Angelo, Texas, President of the National Alliance for
the Mentally Ill (NAMI). I am pleased today to offer NAMI's
views on proposals now before the Congress to expand the
Medicare program to cover the costs of outpatient prescription
drugs. In addition to serving as NAMI's President, I am also
the mother of Greg Shannon. Greg was diagnosed with
schizophrenia in 1985. For the past 15 years, Greg and our
entire family have struggled with his illness. Like so many of
NAMI 210,000 consumer and family members, I am grateful that
the Finance Committee is now poised to fill what has been the
most significant gap in the Medicare program since its
inception 35 years ago--outpatient prescription drug coverage.
NAMI is extremely pleased that this critical issue is
gaining significant bipartisan attention in Congress this year.
As President Clinton observed in his State of the Union address
on January 27, no one doubts that if the Medicare program were
enacted today outpatient prescription drug coverage would be
included as part of the basic benefits package. As the
Committee has heard from many witnesses on this issue,
prescription medications played a relatively minor role in
medical care back in 1965 when Congress passed, and President
Johnson signed into law, Title XVIII of the Social Security
Act. Today, advances in science and treatment have yielded new
medications that have become our frontline of attack on major
illnesses.
This is certainly the case with serious brain disorders,
probably more so than any other class of diseases. Back in
1965, someone diagnosed with a serious brain disorder such as
schizophrenia or bipolar disorder (manic-depression) was likely
to end up spending much of their adult life in a public
psychiatric hospital being treated with medications such as
haldol and thorazine that were only marginally effective in
treating symptoms and had serious, debilitating side effects.
For many consumers, these side effects were as challenging as
the symptoms of the illness itself and have been directly
related to the problems many have faced in consistently
adhering to treatment. Fortunately, advances in science in the
last two decades, especially in the development of a new
generation of atypical antipsychotic medications for
schizophrenia and selective serotonin reuptake inhibitors
(SSRIs) for depression, have made it possible for many
consumers to achieve a level of recovery never dreamed of
decades ago. It is NAMI's view that these new treatments--made
possible in large part through the bipartisan effort in
Congress to increase federal funding for brain research--are
central to higher functioning and recovery.
TWWIIA and its Role in Recovery from Severe Mental Illness
Mr. Chairman at the outset I would like to thank you and
all members of the Subcommittee who came together on a
bipartisan basis last year to pass the Ticket to Work and Work
Incentives Improvement Act. This new law addresses head-on so
many of the outdated and unfair eligibility rules in the SSDI,
SSI, Medicare and Medicaid programs that forced beneficiaries
to choose between a job and health care coverage. During debate
over this legislation last year, and since its enactment, we
heard from so many consumers and families who told of their
frustrations at seeing genuine recovery from severe mental
illness fall short because they were forced to quit a job or
cut back their hours, notbecause of their illness, but because
of fear of losing health coverage.
While TWWIIA was a tremendous bipartisan accomplishment, it
is a first step. Perhaps the most important next step that
Congress can take to help people with mental illness, and all
severe disabilities, go to work is to add an outpatient
prescription drug benefit to Medicare. NAMI agrees that the 4.5
years of added Medicare eligibility for SSDI beneficiaries
included in TWWIIA will be critical in helping people to stay
on the job longer. However, for too many people with severe
disabilities on SSDI, this extended period of health care
coverage comes with a benefit package that is inadequate.
Moreover, the most overwhelming gap in the Medicare benefit
package is coverage for outpatient prescription drugs.
The Interests of Non-Elderly SSDI Beneficiaries Must Be Part of
This Debate
NAMI recognizes that so many of the interests that come
before this Subcommittee to offer their views on the issue of
Medicare prescription drug coverage speak only to ``coverage
for seniors.'' While this characterization of the issue may
offer political simplicity, we believe that it excludes the
population of Social Security recipients who need coverage for
prescription drugs the most--non-elderly people with
disabilities who are SSDI beneficiaries. Furthermore, NAMI
would argue that it is non-elderly SSDI beneficiaries with
severe mental illnesses who most need outpatient drug coverage.
While some SSDI beneficiaries may need only coverage for acute
care to achieve recovery and work, individuals with severe
mental illnesses simply must have coverage for medications in
order to even consider employment as an option.
Currently, there are 1.3 million non-elderly disabled
Americans on SSDI. Of this population, nearly 400,000 became
eligible through a ``mental disorder'' under Social Security's
medically determinable eligibility standards. While this figure
is not nearly the size of the number of our nation's growing
elderly population, it does represent an important population
in the Medicare debate. First, people with severe mental
illnesses come on to the cash benefit rolls earlier than any
other disability category. The typical onset of an illness such
as schizophrenia is late adolescence or early adulthood. Young
adults with the most severe, disabling symptoms are likely to
qualify for benefits within a year or so. Many depend on
benefits for a large part of their adult life. By contrast,
individuals who use SSDI as an early retirement program for
injuries or chronic disabilities related to lifetime of manual
labor stay on cash benefits for a brief period before moving
into Social Security's main retirement program. Thus, the long-
term fiscal implications of SSDI beneficiaries with severe
mental illness go beyond their numbers.
Second, the lack of an outpatient prescription drug benefit
in Medicare has important consequences for state Medicaid
programs. While Title XIX is not under the jurisdiction of this
Subcommittee, NAMI recognizes that any new Medicare
prescription drug benefit is certain to have profound
consequences on both beneficiaries and the States. Under the
current system, many SSDI beneficiaries with severe mental
illnesses are forced to spend down their assets and go into
poverty to establish eligibility for Medicaid to get drug
coverage. Once on Medicaid, these individuals must stay poor to
keep their Medicaid coverage. Persons who are dual eligible for
SSI and SSDI face similar concerns, as do so-called ``disabled
adult children,'' who must move onto SSDI when their parents
retire. This system also prevents many families from providing
even the most modest forms of financial assistance to their
sons, daughters and siblings with severe disabilities, out of
fear of jeopardizing Medicaid eligibility. The TWWIIA will be a
tremendous help to many consumers and families in this arena,
but more needs to be done to ensure that people do not have to
become poor, and stay poor for their entire adult life, just to
access prescription drug coverage.
What Does NAMI Want to See in a Medicare Outpatient
Prescription Drug Benefit?
1. Congress should ensure that any prescription drug
program offered as part of, or as a supplement to, Medicare be
made available to non-elderly SSDI beneficiaries under the same
terms and conditions as those for seniors. Although election-
year politics may make it tempting to focus on the nation's
growing elderly population, we are adamantly opposed to any
program that would discriminate against non-elderly people with
disabilities who are eligible for Title II benefits by
establishing a program that either limits their eligibility or
establishes terms or conditions that do not apply to seniors.
Managed care plans such as Medicare Plus Choice and
``prescription drug only'' plans should be required to offer
enrollment to non-elderly SSDI beneficiaries under the same
rules and conditions as those for seniors.
2. Prescription drug coverage under Medicare should be
accompanied by the enactment of parity for mental illness
benefits. Currently, the Medicare co-payment for Part B
outpatient services is 20 percent. This co-payment does not
apply to mental illness treatment, however, which is only
covered at a rate of 50 percent. There is also currently a 190-
day lifetime limit for inpatient psychiatric hospital
treatment. Furthermore, only office-based therapy and partial-
hospitalization mental health services are allowed under
Medicare's current coverage--no assertive community treatment
or psychiatric rehabilitation is covered. NAMI urges that
Congress use this historic opportunity to address a
prescription drug benefit that also addresses the
discrimination in Medicare's existing mental illness benefits.
Neither the proposals put forward by the Bipartisan Commission
on the Future of Medicare nor the Clinton Administration
addresses this basic unfairness within Medicare.
3. To the maximum extent possible, NAMI believes that a
Medicare outpatient prescription drug benefit should be a
national program benefit that is standardized throughout the
country. The depth and scope of coverage for medications should
not be dependent on where you live. While NAMI is not opposed
to a State role in any program, there should be national
standards that ensure reasonable similarities in coverage
across the nation.
4. Coverage should be adequate to finance the most
expensive drugs for the treatment of serious and persistent
mental illness. NAMI is concerned that the President's Medicare
prescription drug proposal, as well as several competing plans
in Congress, has a principal objective of providing a tangible
benefit to a large number of people, rather than helping a
small number of Medicare beneficiaries with high drug expenses.
For example, in the President's plan there is no limit on how
much an individual would have to pay out-of-pocket for
medications. Likewise, the benefit would begin immediately,
regardless of an individual's expenses. While such limitations
may serve to keep premiums low so that large numbers of healthy
Medicare beneficiaries will sign up for a voluntary program,
these restrictions are likely to impose significant burdens on
people with chronic and severe illnesses who rely on
medications as their principal form of treatment. An
examination of the costs of several key psychiatric medications
indicates that, while many Medicare beneficiaries might be
helped in meeting the high costs associated with their drugs,
substantial gaps in coverage would likely persist under
proposals such as the President's. Average annual costs for
major psychiatric medications include: Clozaril ($6,200), Paxil
($711), Prozac ($808), Risperidone ($2,800), zoloft ($852), and
Zyprexa ($3,000). It is important to note that most people
living with severe mental illnesses such as schizophrenia and
bipolar disorder are prescribed several medications (including
drugs to treat side effects) rather than a single drug.
5. Medicare prescription drug formulary policies should not
interfere with access to the newest and most effective
medications for serious brain disorders such as schizophrenia
and bipolar disorder. Medications for mental illnesses differ
from one another--either in their effectiveness in treating
specific symptoms or disorders, or in their side effects. There
is solid evidence that newer medications offer advantages over
conventional medications in either effectiveness or side
effects. For example, most treatment guidelines now recommend
newer antipsychotic medications as the drugs of first choice
because they can be more effective in treating symptoms in some
individuals and because their side effects may cause fewer
short-term and long-term problems--and in particular, fewer
cases of tardive dyskinesia, an irreversible and potentially
disabling movement disorder.
However, some health plans (including many that now are a
part of Medicare through the Medicare Plus Choice program)
place restrictions on access to medications. Sometimes these
policies may be appropriate to avoid the inappropriate use of
drugs or to encourage the use of generic equivalents. But often
the limitations are designed primarily to discourage the use of
more expensive medications. Limitations may take the form of a
restricted formulary, in which only certain medications are
covered by the plan, or a ``fail-first'' policy, requiring
failed treatment with older, less expensive medications before
allowing treatment with newer medications. NAMI supports
efforts to ensure that Medicare (and all health plans
participating in the program such as Medicare Plus Choice)
offer access to all effective and medically appropriate
medications. If Medicare (or a participating health plan) uses
a formulary, exceptions from the formulary limitation must be
allowed when a non-formulary alternative is medically
indicated. Moreover, procedures should be established whereby
beneficiaries can appeal a decision to prescribe a specific
medication. Finally, Medicare (and participating plans) should
not be allowed to require beneficiaries to switch from
medications that have been effective for them.
Conclusion
On behalf of NAMI's consumer and family membership, thank
you for the opportunity to offer our views on this critically
important issue. NAMI looks forward to working with this
Subcommittee and the entire Congress to ensure that the
Medicare program is modernized and preserved for generations to
come and that its meets the needs of one of America's most
vulnerable populations, people with serious, persistent mental
illnesses.