[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
EXPANDING COVERAGE OF PRESCRIPTION DRUGS IN MEDICARE
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
APRIL 9, 2003
__________
Serial No. 108-7
__________
Printed for the use of the Committee on Ways and Means
89-405 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
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
PHIL ENGLISH, Pennsylvania LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona EARL POMEROY, North Dakota
JERRY WELLER, Illinois MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisories announcing the hearing................................ 2
WITNESSES
Congressional Budget Office, Douglas Holtz-Eakin, Ph.D., Director 9
U.S. General Accounting Office, Hon. David M. Walker, Comptroller
General........................................................ 21
______
Pauly, Mark V., University of Pennsylvania....................... 82
Reinhardt, Uwe E., Princeton University.......................... 88
Stuart, Bruce, University of Maryland School of Pharmacy......... 78
SUBMISSIONS FOR THE RECORD
American Academy of Actuaries, Cori E. Uccello and John M.
Bertko, statement.............................................. 110
American Health Quality Association, David G. Shulke, statement.. 115
Long Term Care Pharmacy Alliance, John F. Jonas, letter.......... 118
National Association of Chain Drug Stores, Alexandria, VA,
statement...................................................... 119
EXPANDING COVERAGE OF PRESCRIPTION DRUGS IN MEDICARE
----------
WEDNESDAY, APRIL 9, 2003
U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 11:10 a.m., in
room 1100 Longworth House Office Building, Hon. Bill Thomas
(Chairman of the Committee) presiding.
[The advisory and revised advisory announcing the hearing
follow:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
April 2, 2003
No. FC-7
Thomas Announces Hearing on Expanding
Coverage of Prescription Drugs in Medicare
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold a hearing on
modernizing Medicare and integrating prescription drugs into the
program. The hearing will take place on Wednesday, April 9, 2003, in
the main Committee hearing room, 1100 Longworth House Office Building,
beginning at 10:30 a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. Invited
witnesses will include Dr. Douglas Holtz-Eakin, Director, Congressional
Budget Office, and academics with extensive knowledge of prescription
drugs and the Medicare program. Also, any individual or organization
not scheduled for an oral appearance may submit a written statement for
consideration by the Committee or for inclusion in the printed record
of the hearing.
BACKGROUND:
When Medicare was enacted in 1965, most health insurers did not
cover prescription drugs. Since that time, most private health plans
have fully integrated prescription drug coverage yet Medicare still
does not cover most outpatient prescription drugs. Prescription drugs
are now as important to health care as hospitals and physician services
were 38 years ago.
Seniors are more likely to be faced with high out-of-pocket
prescription drug costs than other individuals. While seniors comprise
approximately 12 percent of the population, they consume nearly 40
percent of all prescription drugs. Yet nearly one-third of Medicare
beneficiaries do not have some type of prescription drug coverage, and
those without coverage often pay the highest prices for their
medications. Further, many employers through their company retirement
benefit plans are paring back or dropping prescription drug coverage as
costs continue to dramatically escalate. Medigap plans with drug
coverage are becoming increasingly unaffordable. Prescription drug
costs are rising annually at double-digit rates. This causes seniors
without coverage to often forgo necessary prescriptions, while
jeopardizing current prescription drug coverage.
At the same time, Medicare's current costs are dramatically rising.
For example, according to the Center for Medicare and Medicaid
Services' Office of the Actuary, hospital costs were up by 10 percent
last year. Likewise, skilled nursing home expenditures rose by 9
percent, home health spending increased by 14 percent, durable medical
equipment spending increased by 20 percent, and hospice expenditures
rose by 24 percent. These increased expenditures are partially borne by
beneficiaries, whose Part B premiums are projected to rise by 12.4
percent next year.
Escalating Medicare spending in all areas means a new Medicare
prescription benefit must be carefully designed to be affordable to
both beneficiaries and taxpayers. In fact, all aspects of the program
must be examined to discern where inefficiencies exist and changes need
to be made.
In the last Congress, the House passed a Medicare prescription drug
bill (H.R. 4954), but the Senate failed to act on the legislation. The
President included $400 billion over 10 years in the fiscal year 2004
budget. The House and Senate passed resolutions to include the same
amount for prescription drugs, Medicare modernization, and appropriate
adjustments to provider payments.
In announcing the hearing, Chairman Thomas stated, ``The House
passed Medicare modernization and prescription drug legislation in the
106th and 107th Congresses. It is clear that this Congress must make
law.''
FOCUS OF THE HEARING:
This hearing will focus on issues related to an outpatient
prescription drug benefit for Medicare beneficiaries.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Due to the change in House mail policy, any person or
organization wishing to submit a written statement for the printed
record of the hearing should send it electronically to
[email protected], along with a fax copy to
(202) 225-2610, by the close of business, Wednesday, April 23, 2003.
Those filing written statements that wish to have their statements
distributed to the press and interested public at the hearing should
deliver their 200 copies to the full Committee in room 1102 Longworth
House Office Building, in an open and searchable package 48 hours
before the hearing. The U.S. Capitol Police will refuse sealed-packaged
deliveries to all House Office Buildings.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. Due to the change in House mail policy, all statements and any
accompanying exhibits for printing must be submitted electronically to
[email protected], along with a fax copy to
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a
total of 10 pages including attachments. Witnesses are advised that the
Committee will rely on electronic submissions for printing the official
hearing record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. Any statements must include a list of all clients, persons, or
organizations on whose behalf the witness appears. A supplemental sheet
must accompany each statement listing the name, company, address,
telephone and fax numbers of each witness.
Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.house.gov.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
* * * NOTICE--CHANGE IN TIME * * *
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
April 4, 2003
No. FC-7-REV
Change in Time for Hearing on Expanding
Coverage of Prescription Drugs in Medicare
Congressman Bill Thomas (R-CA), Chairman, Committee on Ways and
Means, today announced that the Committee hearing on modernizing
Medicare and integrating prescription drugs into the program scheduled
for Wednesday, April 9, 2003, at 10:30 a.m., in the main Committee
hearing room, 1100 Longworth House Office Building, will now be held at
11:00 a.m.
All other details for the hearing remain the same. (See full
Committee Advisory
No. FC-7 dated April 2, 2003.)
Chairman THOMAS. The Chair considers this one of the more
important hearings the full Committee will have as we consider
how to modernize Medicare and, obviously, the importance of
Medicare and the improvements it has made in millions of
seniors' lives, especially as we notice that seniors are living
longer and actually healthier lives than any generation in
history. Although one of the reasons we are holding the hearing
is because we think Medicare can do better. It really isn't
21st century-ready; it isn't even the last quarter of the 20th
century-ready, because it doesn't provide a meaningful
prescription drug coverage to seniors, who, coincidentally, are
the largest group of consumers of the pharmaceuticals. In
modern health care, prescription drugs are often the health
care solution of choice. They prevent, treat, or manage
diseases more effectively and less invasively than hospitals.
However, as we all know, Medicare provides extremely
limited coverage for what are today vital medicines. That means
the typical senior will spend about $1,450 out of pocket on
prescription drugs this year. Unfortunately, notwithstanding
that amount, seniors often pay the highest price because about
a third of the seniors have no prescription drug coverage.
However, as we all know, Medicare provides extremely limited
coverage for what are today vital medicines. That means the
typical senior will spend about $1,450 out of pocket on
prescription drugs this year. Unfortunately, notwithstanding
that amount, seniors often pay the highest price because about
a third of the seniors have no prescription drug coverage.
Clearly something has to be done. Change cannot occur in a
vacuum. You have to consider the context. This March, the
Medicare trustees issued their annual report, which said that
Medicare will start running deficits in about 10 years, and
will go broke in 2026. This is complicated by the Congressional
Budget Office's (CBO) projection that annual spending on
Medicare will more than double over the next 10 years, while
spending on prescription drugs will triple.
Analysis by the Centers for Medicare & Medicaid Services
(CMS) Actuary also shows that Medicare spending last year
spiked. Hospital spending was up 10 percent; home health up 14
percent; skilled nursing facilities up 9 percent; durable
medical equipment up 20 percent. All of these increases
occurred with the backdrop of inflation at about 2.4 percent.
Integrating a prescription drug benefit to Medicare will
clearly improve seniors' health and is long overdue. Hopefully,
it can also reduce what would otherwise be Medicare's cost over
time because we can substitute drugs as a more effective and
less expensive alternative than some other treatment options.
Also hopefully, we can integrate drugs around a disease
management program that would provide a more comprehensive
package for seniors when they are on multiple drugs, which is
becoming more the pattern than not.
Steps must be taken when crafting the prescription drug
benefit into other changes to ensure the sustainability of
Medicare over the long haul. To simply take current Medicare
and add prescription drugs is not the solution. The Medicare
Payment Advisory Commission (MEDPAC), the non-partisan panel of
experts that advise this Congress, has made a number of
recommendations which would slow the growth of Medicare and
which this Committee will examine very carefully.
History, and especially recent history, shows that we can
deliver. In the last two Congresses, this Committee has
produced, and the House has approved, legislation to modernize
Medicare. As we know, those bills did not become law. They did
not become law with a Democratic Senate and they did not become
law with a Republican Senate. This year, the President has
indicated he is willing to provide an additional $400 billion
over 10 years to improve Medicare. The House and the Senate has
passed a budget agreeing that that money would be utilized for
Medicare.
We should not squander this opportunity to deliver
prescription drugs for seniors while improving and
strengthening Medicare for future generations. Shortly we will
hear from the Director of the Congressional Budget Office, Dr.
Douglas Holtz-Eakin, who I believe is in his first appearance
in front of the Committee on Ways and Means, and David Walter,
the Comptroller General of the General Accounting Office, who
has been before us previously and who plays a significant role
both in producing documents that assist us in making decisions
and in making sure that those institutions which advise us are
professionally structured and maintained.
Prior to doing that, I will recognize the Ranking Member
from New York, Mr. Rangel, for any comments he would like to
make.
[The opening statement of Chairman Thomas follows:]
Opening Statement of The Honorable Bill Thomas, Chairman, and a
Representative in Congress from the State of California
As the Committee considers how to modernize Medicare, it's worth
noting that since its inception Medicare has improved the lives of
millions of our nation's seniors. Today, our seniors are living longer
and healthier lives than any generation in history.
But we can do better. Medicare is not 21st century-ready. It does
not provide prescription drug coverage to seniors--the largest
consumers of pharmaceuticals.
In modern health care, prescription drugs are often the health care
solution of choice. They prevent, treat or manage diseases more
effectively and less invasively than hospitals.
However, Medicare provides extremely limited coverage for what are
today vital medicines. That means the typical senior will spend about
$1,450 out of pocket on prescription drugs this year. And unfortunately
seniors often pay the highest prices because more than one-third of
seniors have no prescription drug coverage.
But change can't occur in a vacuum; we must first consider the
context. This March, the Medicare Trustees issued their annual report
which said that Medicare will start running deficits in about ten years
and will go broke in 2026. This is complicated by the Congressional
Budget Office's projection that annual spending on Medicare will more
than double over the next ten years, while spending on prescription
drugs will triple.
Analysis by the Centers for Medicare and Medicaid Services Actuary
also shows that Medicare spending last year spiked: hospital spending
was up ten percent, home health up 14 percent, skilled nursing
facilities up nine percent and durable medical equipment up 20 percent.
And all of these increases occurred with a backdrop of inflation around
2.4 percent.
Integrating a prescription drug benefit to Medicare will clearly
improve seniors' health and is long overdue. Hopefully it can also help
reduce Medicare's costs over time because we can substitute drugs as a
more effective and less expensive alternative to other treatment
options. Integrating prescription drugs around disease management is
important for seniors when they take multiple prescription drugs, which
is happening more and more.
Steps must be taken when crafting the prescription benefit and
other changes to ensure the sustainability of Medicare over the long
haul. To take the current Medicare system and simply add on
prescription drugs is not a solution. The Medicare Payment Advisory
Commission, the non-partisan panel of experts that advises Congress,
has made a number of recommendations to slow the growth of Medicare,
which this Committee will examine very carefully.
History shows we can deliver. In the last two Congresses, this
Committee has produced and the House has approved legislation to
modernize Medicare. As we know, those bills did not become law. This
year, the President recommended an additional $400 billion over ten
years to improve Medicare. The House and Senate have passed budget
resolutions providing for these resources. We should not squander this
opportunity to deliver prescription drugs for seniors while improving
and strengthening Medicare for future generations.
Mr. RANGEL. Thank you, Mr. Chairman, and thank you for
bringing the Committee together on this most important subject
matter. It has been almost a year since when we last visited
it. I agree with you that this serious national issue demands
and screams for some type of relief and solution, and everybody
who campaigned, campaigned that they would do that. I do hope
that you would agree, however, that this matter, there is no
Democrat or Republican or presidential solution, that we should
be working together. I understand that we have not been doing
that. We have no bill, we have no direction.
We welcome a hearing from the witnesses, and I would like
to yield to the Ranking Member on the Subcommittee on Health so
that he can share with us what progress has been made by the
Committee on this important subject. Mr. Stark.
Mr. STARK. Well, thank you, Mr. Rangel.
Mr. Chairman, thank you for holding this hearing. I notice
from the comments today in the Congress Daily, that this
hearing is to be the launch pad for getting started on a
Medicare prescription drug benefit, that your approach will be
comprehensive, dealing with Medicare as a whole and not just as
a prescription drug benefit. I am hopeful that this morning we
will hear more about what you really mean. The answer to that
question outlines, I think, the entire debate.
Are we going to move ahead to add a prescription drug
benefit in Medicare in order to improve the Medicare program
for seniors and people with disabilities, or will we use the
allure of a prescription drug benefit as a tool to achieve
fundamental restructuring--I would call it dismantling--of the
Medicare program? Will the addition of long-overdue drug
benefits come at the cost of ending Medicare as we know it, as
an entitlement program that guarantees all seniors and people
with disabilities access to the same set of benefits for the
same costs? These are the questions that need to be answered.
I note that this hearing has no witness from the
Administration. I would comment that the Energy and Commerce
hearing yesterday, another hearing today, and a Joint Economic
Committee hearing scheduled for tomorrow--no Administration
witnesses. Now, I don't know if that is because they have
refused to come, or they have not been invited. It leaves us
all wondering what direction you plan to go, Mr. Chairman, with
the Medicare prescription drug benefit. Are you going to
proceed with a plan that is similar to that passed last year in
the House, or will you take into account the policy the
President has put forth? I think the American public, and
especially America's seniors, would like to see that answered.
Certainly, we on our side of the aisle would be better able to
proceed in a bipartisan manner if we had some indication of
what you had in mind.
Finally, I hope this is not the only hearing that we have
prior to moving a Medicare bill through our Committee onto the
House floor. Having a bill completed, as I know you want to, by
the end of May is an ambitious agenda when the American public
has never seen or been able to have any input in what you may
plan to do. This is a program that covers 40 million lives and
will cover many more than that before long. Change to this
needs to be made in the open, and the seniors need to know what
your plan will really mean for them.
So, once your plan is announced, I hope we will have more
hearings that will allow representatives of the seniors
organizations and others affected by the changes to come before
our Committee and provide their counsel to this major change.
I look forward to hearing from the witnesses today and want
to especially welcome Professor Uwe Reinhardt, who has come to
share with us a bit of wisdom with regard to the Medicare
reform. I thank the Chair again.
Chairman THOMAS. Thank the gentlemen. The Ranking Member of
the Subcommittee on Health posed a number of questions, and to
make sure that people don't think they were rhetorical, the
Chair will respond briefly prior to recognizing the first
panel.
The Ranking Member from New York indicated that all Members
had taken a position on this issue during campaigns--therefore
setting a clear political tone--but then indicated there were
Democrat or Republican solutions. The Chair finds it
interesting, then, that the Ranking Member of the Subcommittee,
from California, indicated that before they could proceed in a
bipartisan manner, they needed the majority to commit to a
partisan position so they could therefore react in a bipartisan
way.
I tell the gentlemen that, just as in the last two
Congresses, the plan that passes this Committee and will pass
the House will be a Medicare plan under Medicare. The attempt
to characterize the plans that have been passed as not under
Medicare may in fact revert back to that campaign position that
the gentleman from New York referred to. No plan has been
offered and no plan has passed that does not come under
Medicare. It is not outside of Medicare, it isn't a
privatization; it is a Medicare program.
The reason we are holding a hearing is to try to ask basic
questions, not to flak for any particular plan on either side
of this dais. It is to inquire about the best estimate of cost
of proposals that have been presented in the past, as a guide
to helping us make decisions in the future. I think the panel
will provide us with some basic understandings, so that as we
begin to examine bills we have more of a common knowledge base
in which to address the options that might be presented to us.
The Chair believes that is the best way to pursue a program
that has the best chance of not bankrupting Medicare, but
providing prescription drugs for seniors.
With that, the Chair is once again pleased to recognize Dr.
Holtz-Eakin, who is the new head of Congressional Budget
Office, been in place for just a few months. I am sure that you
have already fully appreciated the stress and cross-purposes
for which that position was delightfully created. I am always
amazed that people with brilliant academic backgrounds and
successful work experience say yes to putting themselves in the
kind of position that the Director of the Congressional Budget
Office finds himself shortly after saying yes.
Also, to David Walker, who has a very difficult job in
which Members ask the General Accounting Office to produce any
number of documents, which are done in a timely fashion and in
a scholarly way. If they don't conform to preconceived notions
of what the report should have been, they aren't given the
credence they should be. I have been pleased to say that,
notwithstanding where the outcome of the research might fall,
that the research itself has been impeccable. For that, I do
want to compliment Mr. Walker. He, for this Committee, performs
another service, and that is tends to oversee, as the landlord,
the MEDPAC Commission, which is critical to assisting us in
evaluating what is going on in the medical world so that we can
make very difficult decisions across the broad spectrum of
providers.
With that----
Mr. RANGEL. Mr. Chairman, would you yield----
Chairman THOMAS. Certainly.
Mr. RANGEL. For purposes of allowing me to join in
welcoming our new Director. He brings a lot of credibility and
prestige to this most important job. We look forward to working
with you in a bipartisan way. Of course, I have always been a
great supporter of U.S. General Accounting Office (GAO) and the
great work that you do for the Congress and the country. We
look forward to working with you. Thank you, Mr. Chairman.
Chairman THOMAS. Thank the gentleman very much for his
comments.
Any written presentation you may have, gentlemen, will be
made a part of the record, and you can address us in any way
that you see fit in the time that you have available to you.
These microphones are fifties era. The Chair hopes we will
remodel this room soon. It has great ambiance, but we also need
decent acoustics. So, if you will address directly into the
mike, Members and the audience will have a chance to hear you.
Dr. Holtz-Eakin.
[The opening statement of Mr. Ramstad follows:]
Opening Statement of The Honorable Jim Ramstad, a Representative in
Congress from the State of Minnesota
Mr. Chairman, thank you for calling this important hearing on the
critical issue of providing America's seniors with prescription drug
coverage and Medicare's fiscal challenges.
As founder and co-chair of the House Medical Technology Caucus, I
appreciate the incredible advances that medical technology and
pharmaceuticals have made in recent years to treat and cure
debilitating conditions. These advances are truly breathtaking and will
become more and more prevalent as medical science continues to advance.
Unfortunately, the Medicare system penalizes seniors by
incorporating these advances too late, if at all.
Congress needs to comprehensively reform Medicare to modernize the
program and expand access to critical new technologies and drugs. By
acting this year, we can improve health, save lives and save the system
money.
The question is how to maintain the standard of care enjoyed by
America's seniors, improve the system and meet the incredible
demographic challenges facing us. This is not a simple task, and a
prescription drug benefit will place new pressure on Medicare as our
nation's senior population grows.
With the President and Congress committing to invest $400 billion
over the next ten years on Medicare reform and a prescription drug
benefit, the time to act is now. Our seniors have waited too long.
At the same time, we must ensure the long-term stability of the
Medicare system so that it is vibrant for both current and future
beneficiaries. To that end, we must examine the fiscal implications of
our actions, and examine ways to prevent wasteful spending while
ensuring the highest quality of care for our seniors.
Thank you again, Mr. Chairman, for holding this important hearing.
STATEMENT OF DOUGLAS HOLTZ-EAKIN, PH.D., DIRECTOR,
CONGRESSIONAL BUDGET OFFICE
Dr. HOLTZ-EAKIN. Well, thank you, Mr. Chairman, thank you,
Mr. Rangel, both, for the chance to be here and for the
gracious welcome. I really do appreciate it and look forward to
working with you.
You have my written testimony. Let me take my time and pull
out what I think are key facts that may be of some use to the
Committee in thinking about the issues that face us today.
One message that I hope comes through clearly is that the
entitlement programs of Medicare, Medicaid, and Social
Security, as currently structured, are on a trajectory to
overwhelm the Federal budget. Currently, these three programs
constitute 8 percent of gross domestic product (GDP). By the
year 2030, they will rise to 14 percent of GDP--a bit under the
size of the Federal budget at the moment; and by the year 2075,
they will rise to fully 21 percent of GDP, a share larger than
that of the Federal budget.
Medicare is the largest part of that rise. The chart that
we have pulled out of the testimony to display shows this rapid
rise in Medicare as a fraction of GDP from 2.4 percent today to
about 9.2 percent in 2075. As you can see on the chart, that
rise comes in two different components. The first is a
component that just is due to the aging-of-the-population
phenomenon, with which you are quite familiar. That is a
smaller component, about 30 percent of the overall increase.
The larger component comes from the rapid rise in health care
costs above the growth in GDP. That excess cost growth is not
unique to Medicare, but is at the source of the large run-up in
this entitlement program as a fraction of GDP.
Now, if we turn to cost growth in Medicare per se, CBO
projects that over the next 10 years in the budget window,
Medicare will continue to grow faster than GDP, at about 6.8
percent per year. As we detailed in the testimony, there are
limited direct tools at the Congress' disposal to control that
growth. It is a phenomenon that exists not only in Medicare,
but in the health care area as a whole.
Now, for the purpose of this hearing, an interesting piece
of information is the growth in prescription drug spending. On
that front, there is both good news and bad news. CBO's
baseline projections for prescription drug spending by the
Medicare population indicate that the good news is that
spending in the baseline is up by only 4 percent from last
year. Typically, one might expect a larger increase in baseline
spending. The 4-percent increase comes from the net effect of
dropping a relatively inexpensive year at the beginning of the
budget window and adding a relatively expensive year at the end
of the budget window--that is the typical story. This year, we
also learned, after looking into the research, that we had less
underreporting of prescription drug spending than had
previously been thought and slower growth in prescription drug
prices than had been anticipated.
The net effect of that is a modest increase in our baseline
estimates of prescription drug spending by this population,
making it easier to compare cost proposals. Although they won't
all be 4 percent higher--it depends on the details of the
proposals--it does make year-to-year comparisons a bit easier,
perhaps, than in the past.
Now, the bad news is that prescription drug spending
continues to rise faster even than overall Medicare spending
itself. We project that over the 10-year budget horizon, it
will rise by 9 percent per year, for a total of $1.8 trillion.
The final piece that I would like to pull out of the
testimony is the composition of some of that prescription drug
spending. For purposes of this hearing, we put together three
charts, the first of which shows who is covered by drug
coverage at the moment and who is not. If you look at the
chart, what the bars show you are the coverage for different
income levels, each measured as a fraction of the poverty
level, so the first bar is from 0 to 100 percent of the Federal
poverty level and the others rise to 400 percent of the poverty
level or more. Shown in the chart are lighter gray areas, which
are the fraction of beneficiaries in each income area who do
not have drug coverage, and darker gray shading, for those who
do have drug coverage. Roughly speaking, the population as a
whole has about a 25 percent share, in our estimate, that does
not have prescription drug coverage, and the share does not
vary much by income class--from 22 percent to 32 percent.
If we turn from who has coverage to how much individuals
are spending, we get roughly the same story. The second chart
looks at average prescription drug spending by Medicare
beneficiaries. The bottom lighter gray area shows how much is
paid out of pocket--about three-eighths is paid out of pocket--
and that share does not vary much by income. The top darker
gray part shows the share paid by third parties, including
other Federal programs. The average spending is about $1,500.
If you put those two pieces together, coverage and average
spending by individuals, we can show the total spending, in the
final chart, for the Medicare population. Here, again, we can
find total drug spending by income class, with the lighter gray
area showing the fraction that is actually paid out of pocket--
and that turns out to be roughly the three-eighths I mentioned
before--and the darker gray area, which has been covered by
third parties already. The basic message, again, in this chart
is that there is not much difference across income levels in
the degree to which these costs come from out of pocket.
So, I close with these pieces of information, which we
think will be useful in framing the important issues that this
Committee will face. I look forward to answering your
questions.
[The prepared statement of Dr. Holtz-Eakin follows:]
Statement of Douglas Holtz-Eakin, Ph.D., Director,
Congressional Budget Office
Chairman Thomas, Congressman Rangel, and Members of the Committee,
I am pleased to be here with you today. I understand that the focus of
this hearing is on expanding Medicare's coverage of prescription drugs,
and I am prepared to discuss that topic in some detail. But I would
first like to frame that discussion by looking at Medicare's overall
financial picture, both in the near term and the long run. As this
Committee well knows, Medicare is projected to consume an ever-larger
piece of our national income just in delivering its current set of
benefits. In determining whether and how to add prescription drug
coverage to its benefit package--and the desirability of adopting other
reforms to the program at the same time--lawmakers will face the
challenge of balancing the needs of beneficiaries against the resulting
pressures on the economy. To assist in that effort, I will describe the
Congressional Budget Office's (CBO's) latest projections of
prescription drug coverage and of drug spending for the Medicare
population. I will then conclude my testimony by outlining some of the
key issues that arise in designing a prescription drug benefit for
Medicare.
Factors Driving Medicare Spending
Under current law, Medicare spending--measured as a share of the
economy--is projected to nearly quadruple by 2075, growing to more than
9 percent of gross domestic product (GDP) from its current level of 2.5
percent. As a consequence, Medicare will necessarily compete with other
spending priorities for a much greater share of the Federal budget or
with private-sector spending for a bigger share of the national
economy--or with both. In thinking about how to address the substantial
challenges that the Medicare program faces, however, it is important to
recognize that they are not unique to Medicare; rather, they reflect
the broader forces of an aging society, the rising costs of health care
generally, and the looming long-range financial strains that will
affect the Federal Government and the economy as a whole.
Clearly, part of the challenge facing Medicare stems from the
demographic trends that are making the country as a whole older. From
1970 to 2010, the number of Americans ages 20 to 64 is projected to
increase by nearly 80 million; the elderly population by 2010 will have
grown by about 20 million, or roughly one-fourth as much. In contrast,
for the period 2010 to 2030--when the baby-boom generation will
retire--the number of working-age individuals is projected to grow by
about 10 million, whereas the population ages 65 and older will
increase by 30 million, or three times as much. The consequence of
those diverging patterns is that the ratio of the elderly population to
the population in its prime working years--which stood at 19 percent in
1970--is projected to grow from 21 percent today to 35 percent by 2030.
The ratio is then expected to continue to climb (albeit at a slower
rate) and could reach 42 percent in 2075. In other words, the shift to
an older society will accelerate as the baby-boom generation retires,
and it will persist afterwards, making the changes that the nation
faces--and their implications for the spectrum of Federal tax and
spending policies--more than just temporary.
Compounding those demographic pressures are the seemingly
inexorable increases in health costs per person--but that issue, too,
is not limited to Medicare. Nationally, health care expenditures as a
percentage of GDP have more than doubled over the past several decades,
growing from 7.0 percent in 1970 to 14.8 percent in 2002. On a per
capita basis, national spending for health care (in 2002 dollars)
increased from $1,321 in 1970 to $5,366 in 2002, or at an average rate
of about 4.5 percent per year--which is about 2.4 percentage points
faster than the growth of the underlying economy. The factors
contributing to the trend in real (inflation-adjusted) per capita
health care spending include expansions in insurance coverage, rising
income, medical price inflation in excess of general inflation, and the
aging of the population--but the major impetus has been the development
and diffusion of new medical technology. At the same time, it should be
noted that improvements in that technology--while costly--have
increased the health care system's potential to deliver high-quality
care. If the adoption of new technology is driven by the needs of
patients, the value of those improvements may well exceed their cost.
Over the 1970-2002 period, Medicare spending has risen even more
rapidly than national health expenditures, growing eightfold even after
adjusting for inflation. As a share of GDP, Medicare costs rose from
0.7 percent in 1970 to their current level of 2.5 percent. Although
cost growth on a per-enrollee basis has been volatile, it has also
tended to rise at a much faster pace than the economy has grown. Over
the period, real costs per enrollee grew more than twice as fast as the
economy--specifically, at the rate of per capita GDP plus 2.8
percentage points. One reason that total Medicare costs have grown more
quickly than overall health costs is that the number of beneficiaries
has grown more quickly than the U.S. population as a whole, owing both
to program expansions and to the increase in the share of Americans who
are elderly. In terms of costs per beneficiary, the growth of Medicare
spending is due in part to the same factors that have driven increases
in health care spending nationally, but it also reflects legislative
and administrative expansions of the program's benefit package.
In general, precisely determining each factor's effect on overall
program spending is difficult. As an illustration, however, consider
spending for services provided to fee-for-service program enrollees
during acute care hospital stays (which now account for about one-third
of Medicare's total costs). The program's total spending for those
services grew by 261 percent between 1972 and 1998, after adjusting for
general inflation (see Table 1). That growth in total spending is the
product of three factors: increases in the number of Medicare
beneficiaries; increases in the number of hospital admissions per
beneficiary; and--the most important factor--increases in the real cost
per admission. That cost nearly doubled over the period in real terms
and accounted for 57.4 percent of the overall growth. Over the same
period, the number of enrollees in the fee-for-service program
increased by about 50 percent, contributing 30.3 percent of the rise in
spending. The number of hospital admissions per beneficiary grew more
slowly and accounted for only 12.3 percent of the increase in total
costs.
Table 1.--Sources of Fee-for-Service Medicare Cost Growth for Acute Care Hospital Services
----------------------------------------------------------------------------------------------------------------
Percentage
Percentage Share of
1972 1998 Increase, Total
1972-1998 Increase
----------------------------------------------------------------------------------------------------------------
Total Costs (Millions of dollars) 21,744 78,522 261.1 100.0
----------------------------------------------------------------------------------------------------------------
Number of Beneficiaries (Millions) 21.1 32.0 51.3 30.3
----------------------------------------------------------------------------------------------------------------
Admissions per Beneficiary 0.302 0.365 20.9 12.3
----------------------------------------------------------------------------------------------------------------
Cost per Admission (Dollars) 3,408 6,724 97.3 57.4
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office based on Department of Health and Human Services, Health Care Financing
Administration, Health Care Financing Review: Medicare and Medicaid Statistical Supplement, 2000.
Note: The costs noted in the table (which are in 1998 dollars) reflect inpatient costs for fee-for-service
enrollees at acute care hospitals.
One valuable feature of such a breakdown is that it highlights the
factors driving Medicare spending that lawmakers can influence and
those that they cannot. In this case, costs per admission reflect the
mix of, and prices for, therapies or services provided in an average
admission. Today, policymakers can directly control only one of those
two components: the price paid for a given service, which is updated
annually as specified by statute. Thus, for example, lawmakers can seek
to change the increase in payments for procedures such as a coronary
artery bypass graft, but they do not control the share of total
admissions accounted for by each procedure--which results from
decisions made by doctors and their patients. The payment systems that
are established in law do influence how doctors and other health care
providers make treatment decisions. Similarly, features such as the
cost sharing for those services can affect what beneficiaries choose to
do. But the impact of changes in policy on those individual decisions
is complicated and far from direct.
CBO's Projections of Medicare Spending Under Current Law
With that historical view in mind, let me turn now to CBO's
projections of Medicare spending for the next 10 years, which were
updated in March. CBO projects that gross outlays for Medicare benefits
will total $271 billion in 2003 and $3.9 trillion over the 2004-2013
period (see Table 2). As a share of the economy, those Medicare outlays
are projected to rise from 2.5 percent in 2003 to 2.9 percent in 2013,
on average constituting 2.7 percent of GDP over the 2004-2013 period.
After deducting projected premium payments by beneficiaries--which
amount to $28 billion in 2003 and $461 billion over the 10-year
period--CBO estimates that net spending for Medicare benefits will
total $243 billion in 2003 and $3.4 trillion from 2004 through 2013.
All of CBO's projections reflect the assumption that current law
remains unchanged, thereby establishing the ``baseline'' for
legislative proposals.
Focusing on the program's growth rates, CBO projects that net
spending for Medicare benefits will increase by 5.9 percent in 2003 and
will grow at an average annual rate of 6.8 percent over the 2004-2013
period. In recent years, the annual rate of growth of Medicare spending
has varied considerably. Growth averaged 1.2 percent annually during
the 1997-2000 period but has averaged more than 8 percent since then.
Spending for benefits provided under Part B of Medicare (Supplementary
Medical Insurance) grew particularly rapidly in 2002, driven by a
significant rise in the volume and intensity of physician services and
by increases of about 20 percent in spending for durable medical
equipment and physician-administered pharmaceuticals. Costs for Part A
of Medicare (Hospital Insurance) also rose sharply, including a 10
percent increase in spending for inpatient hospital services.
Table 2.--Summary of CBO's March 2003 Baseline Projections of Medicare Benefit Outlays
(By fiscal year)
----------------------------------------------------------------------------------------------------------------
Billions of Dollars Average Annual
-------------------------------------- Rate of Growth,
2004-2013
2003 2004-2013 (Percent)
----------------------------------------------------------------------------------------------------------------
Gross Benefit Outlays 271 3,880 6.9
----------------------------------------------------------------------------------------------------------------
Premiums -28 -461 8.2
----------------------------------------------------------------------------------------------------------------
Net Benefit Outlays 243 3,419 6.8
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
a. Outlays exclude spending by Medicare for quality improvement organizations, health care fraud and abuse
control, and other administrative costs. Total spending on those activities is projected to be $5.4 billion in
2003. Of that amount, $3.8 billion is subject to appropriation.
The projected growth rates of Medicare's payments vary by service
type. Total payments to hospitals for inpatient services and payments
to physicians, which together account for two-thirds of the program's
outlays, are the slowest-growing components of spending for fee-for-
service enrollees, respectively averaging 6.4 percent and 5.9 percent
annually in CBO's baseline projections through 2013. By contrast, rates
of growth for the costs of other services--for example, those provided
by home health agencies and non-physician professionals--are projected
to average 10 percent to 13 percent annually (but will still constitute
a relatively small share of total Medicare spending).
Over the next decade, CBO expects several factors to play a major
role in the program's cost growth. Those factors include rising levels
of enrollment in Medicare and automatic increases in payment rates for
many services in the fee-for-service program (to adjust rates for
rising input costs). CBO also projects changes in the use of Medicare's
services, reflecting an increase in the number of services furnished
per enrollee as well as a shift in the mix of services toward those
that are higher priced and (often) more technologically advanced. In
part offsetting the effects of those spending components on total costs
will be small or negative updates (adjustments) to payment rates for
physician services and smaller updates (relative to cost increases in
the fee-for-service program) to the rates paid to Medicare+Choice
plans.
Specifically, increases in payment rates account for about 45
percent of the projected rise in Medicare spending over the next
decade; the other 55 percent is equally divided between increases in
enrollment and changes in the quantity and mix of services delivered
per beneficiary. As noted above, payment rates are the easiest factor
for policymakers to control. Rates for many services are automatically
adjusted for rising input costs. In the past, legislation has
frequently limited those increases to less than the full change
estimated for those costs. Since 1990, for example, updates to payment
rates for hospital admissions have averaged about 1 percentage point
less than the increase in the market-basket index used to measure
increases in the cost of hospital inputs. Under current law, however,
payment rates for services furnished by hospitals and many other
providers will automatically rise by the full amount of the increase in
estimated input costs, as a result of the expiration of many of the
provisions contained in the 1997 Balanced Budget Act.
Medicare's payment rates for physician services are subject to a
very different update formula. Most recently, the Balanced Budget Act
established an ongoing target for cumulative spending for physician
services (and services that accompany physician visits). By statute,
that target is automatically adjusted each year for changes in
physicians' input costs and in the program's enrollment--plus the
change in GDP per capita. (Future effects of enacted legislation and of
regulation are also taken into account.) In the absence of per capita
GDP growth, the real (inflation-adjusted) target for spending per
enrollee remains unchanged. Increases in GDP per capita thus act as an
allowance to cover increases in the number and average cost of services
being furnished per enrollee as technology and medical practices evolve
over time. If total spending for physicians deviates from that
allowance--in either direction--then the annual updates to payment
rates are adjusted over a period of several years to bring cumulative
spending back in line with the target.
By the time payment rates were set for 2002, expenditures for
physician services had exceeded the cumulative target, so rates for
those services were reduced by about 5 percent, and a further reduction
of 4.4 percent was originally scheduled for 2003. However, the
Department of Health and Human Services invoked a provision of the 2003
Consolidated Appropriations Resolution to increase the cumulative
target for 2002. As a result, payment rates for physician services in
2003 were increased by 1.6 percent.
Nevertheless, CBO projects that spending for physician services
will again exceed the target in 2003 and remain above it on a
cumulative basis through 2013. Therefore, in the absence of further
legislative action, payment rates for those services are likely to
decline (in absolute terms) for the next several years. (For example,
last month the Centers for Medicare and Medicaid Services released a
very preliminary estimate of the physician fee schedule update for
calendar year 2004 indicating that payment rates could be cut by 4.2
percent.) At the same time, the total volume of services provided will
continue to rise as the number of beneficiaries increases and the
number of services provided per beneficiary grows. As a result, CBO
projects that total Medicare spending for physician services--which is
the product of the prices paid and quantities used for the mix of
services provided--will rise each year through 2013, on both an
aggregate and a per capita basis. I should reiterate here that those
projections reflect CBO's best estimate of what will occur under the
assumption that no changes are made in current law; in the past,
lawmakers have often acted to modify those payments, whether to correct
discrepancies between payment rates and the costs providers incur or
for other purposes.
Medicare's Long-Term Financing Challenges
Although the 10-year budget window for Medicare now includes
enrollment of the first wave of the baby-boom generation--those
individuals born between 1946 and 1948, who will turn 65 by 2013--a
complete picture of the program's fiscal outlook requires an even
longer view. Toward that end, CBO projected the cost of Medicare as a
share of GDP out to 2075 to show how much of the country's production
of goods and services would be needed to pay for the program as it is
currently structured. Although we are continuing to refine our
projection models, CBO currently estimates that Medicare's costs as a
percentage of GDP will rise from 2.5 percent in 2003 to 9.2 percent in
2075. Approximately 30 percent of that growth is due to society's aging
and the resulting increase in the number of Medicare beneficiaries; the
remaining 70 percent is attributable to the growth of health care costs
per enrollee in excess of the rate of growth of GDP per capita (see
Figure 1).
For a sense of the magnitudes involved, if the Medicare program's
costs accounted for 9.2 percent of GDP today, they would equal half of
what is now spent by the entire Federal Government. If the program's
higher costs were simply added to current Federal spending, total
Federal receipts (which currently absorb about 18 percent of GDP) would
have to be one-third larger to balance the budget. And if those
increased costs were paid for entirely through a payroll-based tax, the
rate for Social Security and Medicare, now set at 15.3 percent on the
earnings of most workers, would have to more than double--a rise equal
to roughly $6,000 per worker (that is, $3,000 each for the worker and
his or her employer).
Figure 1.--Projected Long-Term Growth of Medicare Spending
(Percentage of GDP)
[GRAPHIC] [TIFF OMITTED] T9405A.001
Source: Congressional Budget Office.
Of course, the fiscal challenges facing Medicare will occur in
parallel with those for Social Security and Medicaid. Those three
programs now absorb 8 percent of GDP, but if CBO's projections hold,
that figure will rise to 14 percent by 2030. Beyond that point,
spending pressures will only intensify, with life expectancy continuing
to increase and health costs continuing to grow. CBO projects that by
2075, the cost of the three programs could climb to 21 percent of GDP,
the largest portion of which would be attributable to Medicare. To
accommodate the increase in spending, either taxes would need to be
raised dramatically or spending on other Federal programs would have to
be curtailed severely--or Federal borrowing would soar.
For Medicare, the most significant factor affecting those
projections is that annual growth of spending per beneficiary is
expected to increase faster than per capita GDP growth--but much less
quickly than in the past. CBO's current projection assumes that per
capita Medicare spending will eventually grow 1 percentage point faster
than per capita GDP, a rate that is substantially slower than the 2.8
percentage-point ``excess cost'' rate that the program has experienced
over the past 32 years (part of which has been due to program
expansions). CBO's assumption of an eventual deceleration in the
relative rise of health care costs is consistent with that of the
Medicare trustees (as well as others) and reflects the view that forces
within the health care sector will operate to slow the rate of growth
somewhat.
But that assumption might be too optimistic, and even seemingly
small deviations from it could have significant economic implications
when costs are projected over long periods. For example, if the growth
of per capita Medicare costs slowed only to the rate of per capita GDP
growth plus 1.5 percentage points, then program outlays would equal 5.4
percent of GDP in 2030 and 13.2 percent in 2075 (and if the health
sector as a whole grew at that rate, it would account for more than
half of the economy's output by 2075). Adding to the uncertainty is the
potential for program expansions, because enacting a new prescription
drug benefit or easing existing limits on payments to providers could
exacerbate the rising long-term spending trajectory.
Prescription Drug Coverage and Spending
I would now like to describe CBO's latest projections of
prescription drug coverage and spending for the Medicare population
under current law. I offer them not just because they serve as the
basis for our estimates of legislative proposals to add a drug benefit
to Medicare but also because they may provide useful insights for the
design of such proposals.
Most Medicare beneficiaries now have coverage for prescription
drugs at some point in the year, but the extent of that coverage varies
widely. CBO's analysis of the Medicare Current Beneficiary Survey
indicates that in 2000 (the most recent year for which data are
available), 75 percent of the Medicare population--or roughly 30
million individuals--had some form of insurance coverage for the costs
of prescription drugs for at least part of the year; 25 percent--or
roughly 10 million beneficiaries--had no drug coverage. Beneficiaries
who have coverage for their drug costs obtain it from a variety of
sources. For example, nearly 30 percent of Medicare beneficiaries
obtained coverage through employer-sponsored retiree benefits, and
another 16 percent had coverage through the Medicaid program. About 12
percent of beneficiaries are estimated to have had drug coverage
through individually purchased Medigap policies, while the remainder
obtained coverage through a Medicare+Choice plan or from another State
or Federal program.
CBO's estimates of the total number of Medicare beneficiaries
grouped by income and the share of them who lacked drug coverage
throughout 2000 appear in Figure 2. Although the fraction of
beneficiaries without coverage varied from 32 percent (for those with
income between 100 percent and 150 percent of the Federal poverty
level) to 22 percent (for those with income exceeding 400 percent of
poverty), CBO's main finding is that the differences across the income
spectrum are not dramatic. The varying degrees of coverage are likely
to reflect both difficulties in obtaining private drug coverage as well
as rational ``nonpurchase'' of such coverage by beneficiaries with low
levels of drug spending.
Clearly, the extent of the drug coverage that Medicare
beneficiaries have today--and whether and how that coverage should be
added to Medicare--is of central interest to policymakers, for two
reasons: the elderly and disabled as a group use substantial amounts of
prescription drugs, and their spending for such drugs has been rising
rapidly in recent years. CBO's analysis indicates that Medicare
beneficiaries bought about $1,500 worth of drugs, on average, in 2000
and that more than 90 percent of beneficiaries filled at least one
prescription that year. Overall, about three-eighths of those costs
were paid out of pocket, a figure that combines the payments of those
without coverage (who pay the full cost of their drugs) and those with
coverage (who incur copayments and deductibles). When average drug
spending and out-of-pocket costs for Medicare beneficiaries are broken
down by beneficiaries' level of income, again, the main finding is that
average spending--both total and out-of-pocket--is remarkably similar
for all income groups (see Figure 3).
Figure 2.--Medicare Beneficiaries in 2000, by Income Level and Drug
Coverage
(Millions of beneficiaries)
[GRAPHIC] [TIFF OMITTED] T9405A.002
Source: Congressional Budget Office.
As Figure 4 indicates (see page 12), an important consideration in
designing any Medicare drug benefit is how it will affect the out-of-
pocket costs of enrollees as well as the large amount of payments
currently made by third parties (including other Federal programs). For
example, in 2000, the 8.5 million Medicare beneficiaries with income
between 200 percent and 300 percent of the poverty level used about $13
billion worth of drugs. Beneficiaries paid about $5 billion of that
cost directly, and $8 billion was paid on their behalf. (Beneficiaries
ultimately pay part of those covered costs if they pay a premium for
their coverage.)
Figure 3.--Average Prescription Drug Spending in 2000 by and for
Medicare Beneficiaries
(Dollars)
[GRAPHIC] [TIFF OMITTED] T9405A.003
Source: Congressional Budget Office.
CBO's Projections of Future Drug Spending
As the above data illustrate, elderly and disabled Medicare
beneficiaries now consume substantial amounts of drugs. In addition,
their spending is projected to continue growing at a rapid pace (as is
drug spending for the country as a whole). For the period 2004 through
2013, CBO estimates that spending for prescription drugs by and on
behalf of the Medicare population will total roughly $1.8 trillion, or
nearly 50 percent of the projected $3.9 trillion in Medicare outlays
over that same period. Over that period, CBO expects Medicare
beneficiaries' average spending for prescription drugs to climb
quickly--at an average annual rate of about 9 percent--even in the
absence of a Medicare drug benefit.
CBO's current estimate of total drug spending is about 4 percent
higher than its projection last year for the 2003-2012 period.
Typically, shifting the projection period forward by one year adds a
relatively expensive year and drops a relatively inexpensive one,
leading to a larger increase. This year's estimate, however, reflects
two offsetting factors: new information about the degree to which drug
spending is underreported in current surveys (which slightly lowered
the starting point for the projections); and somewhat lower projections
of the rate of growth of drug spending (the result, in part, of slower-
than-expected economic growth in the near term).
Figure 4.--Total Prescription Drug Spending in 2000 by and for Medicare
Beneficiaries
(Billions of dollars)
[GRAPHIC] [TIFF OMITTED] T9405A.004
Source: Congressional Budget Office.
Issues in Designing a Drug Benefit
The financial challenges already facing the Medicare program and
the significant sums that projections indicate its beneficiaries will
spend on drugs combine to make designing a drug benefit for that
program a formidable task. In considering how to design such a benefit,
it is useful to begin with some key principles of insurance design
that--as an economist--help me think through the complex issues
involved and are related to some of the options with which the Congress
is now grappling.
The first and foremost issue to confront is the structure of the
benefit that is provided--that is, the deductible and cost sharing it
will require. In general, well-designed insurance should reduce the
risk of catastrophic financial losses yet leave individuals to cover
their routine, expected expenditures with their own resources. Such a
design would also reflect concern about the phenomenon known as ``moral
hazard''--in which further coverage would induce additional and perhaps
excessive demand for services.
Applying that principle would suggest that Medicare's drug benefit
should focus on protecting beneficiaries against very high drug costs.
If Medicare adopted some kind of catastrophic approach, most enrollees
would receive no payments in any given year, but they would nonetheless
benefit from being protected against the possibility of catastrophic
expenses. Several factors related to the nature of drug spending,
however, complicate the application of a ``pure insurance'' approach.
The two most important factors are the degree to which the distribution
of drug spending is skewed and the degree to which it is persistent.
Concentration and Persistence of Drug Spending
Although most Medicare enrollees use some prescription drugs, the
bulk of such spending is concentrated among a much smaller group. In
2000, about 26 percent of enrollees had expenditures of $2,000 or more,
and together they accounted for 65 percent of total drug spending by
the Medicare population. At the same time, 32 percent of beneficiaries
had expenditures of $500 or less, making up about 4 percent of total
spending.
Of course, skewed annual expenses by themselves are actually
typical of insurance markets, since insurance is usually purchased to
protect against a small but relatively random risk of a large loss.
What makes insurance for drug coverage difficult to provide is that
prescription drug costs persist over time for the same enrollees. In
particular, a large share of drug spending is associated with treatment
of chronic conditions--such as hypertension, cardiovascular disease,
and diabetes--which are often evident by the time individuals become
eligible for Medicare. The result is that potential enrollees have
important ``private information'' about their future drug costs. That
fact makes stand-alone drug coverage particularly susceptible to
adverse selection, in which enrollment is concentrated among those who
expect to receive the most in benefits.
Indeed, those same facts help explain why beneficiaries may find it
difficult today to purchase private coverage for prescription drugs--or
why catastrophic protection is virtually unavailable except through
subsidized retiree coverage or Medicaid. If beneficiaries were given a
choice about whether and when to purchase individual prescription drug
coverage, people with high drug costs would be most likely to
participate. That would drive premiums up, which in turn would reduce
enrollment as enrollees with below-average drug costs dropped out. In
the extreme, that spiral could lead to a market failure in which no
insurance was sold, even if most people would be willing to pay more
than the average cost of a policy that had broad enrollment. Those
theoretical pressures are well illustrated in practice by today's
market for new Medigap policies that include a drug benefit (which
cover as much as half of an enrollee's drug costs but cap the benefit
at $1,250 or $3,000 per year). Insurers that offer such policies often
charge a premium that represents a very large share of the maximum
potential drug benefit--to reflect the average cost of their enrollees.
Similarly, the drug coverage available through Medicare+Choice plans is
generally subject to caps.
Most proposals for a Medicare drug benefit have sought to correct
for such market failures by including coverage for catastrophic drug
costs but, accordingly, must also include measures designed to avoid an
adverse selection spiral. One potential approach would be to make
enrollment mandatory. A related option would integrate drug coverage
into the benefit package for Part B of Medicare (and charge a
correspondingly higher premium), so that beneficiaries could not
separate their choice of whether to obtain drug coverage from their
decision to purchase coverage for less predictable health costs.
But most of the drug benefit proposals developed in recent years
have sought to keep enrollment in the benefit as a separate option for
the elderly and disabled. To mitigate the potential for adverse
selection, they would use some or all of the following three methods:
Restrict Participation. Most proposals have either
given enrollees only one opportunity to choose the drug benefit--at the
time they first become eligible for it--or imposed a substantial
premium surcharge on those who delay enrollment. (Otherwise,
beneficiaries with low drug costs would simply wait until they needed
coverage to enroll.)
Provide Up-Front Coverage. Many proposals have sought
to make enrollment more attractive for beneficiaries with low drug
costs by providing some coverage for their initial drug expenditures--
for example, covering a substantial share of costs after beneficiaries
meet a deductible that can be as low as $100.
Offer High Premium Subsidy Rates. The extent of Federal
subsidization of premiums for a drug benefit is a key determinant of
total Federal costs for such a program both because of the direct costs
and because the availability of subsidies would lead employers and
State Medicaid programs to encourage or require full participation.
However, such subsidies would also serve to encourage other
beneficiaries with relatively low drug costs to enroll in the benefit.
Most recent proposals have contained relatively high subsidy rates--67
percent or higher--which mean that enrollees would pay one-third or
less of the average covered costs through their monthly premiums.
The Administration of a Medicare Drug Benefit
The way in which a drug benefit is administered also affects its
costs, and the options for administration involve many of the same
trade-offs between insurance and incentives that arise in designing the
benefit itself. Most recent proposals have envisioned adopting the
common private-sector approach of using pharmacy benefit managers
(PBMs) to process drug claims. Those proposals would also give
beneficiaries a range of drug plans from which to choose, either in
conjunction with their choice of medical coverage or as a stand-alone
benefit. The extent to which the organizations that administered a
Medicare drug benefit could effectively constrain its costs would
depend on the organizations' having both the authority and the
incentive to use the various cost-control mechanisms at their disposal.
Proposals have differed, however, in the nature and extent of the risk
that the entities responsible for administering the benefit would
assume, the kind of restrictions that would be placed on them in
managing drug costs, and the structure of the competition among those
entities to enroll and serve beneficiaries.
Private health plans use PBMs to process claims and negotiate price
discounts with drug manufacturers and dispensing pharmacies. PBMs also
try to encourage the use of certain drugs, such as generic, preferred-
formulary, or mail-order pharmaceuticals--in part so that they can
obtain lower prices for those preferred drugs that have competitors. In
addition, because of their centralized records for each enrollee's
prescriptions, they may help prevent adverse drug interactions and take
other steps to help beneficiaries manage their own drug use.
In the private sector, PBMs often have considerable leeway in the
tools they can use, but they do not assume any insurance risk for the
drug benefit (although they may be guided or selected by an employer or
insurer who does bear the residual risk). At most, they may be subject
to a bonus or a penalty added to their administrative fee, which is
based on how well they meet prespecified goals for their performance.
Some proposals have envisioned having PBMs or similar entities
administer a Medicare drug benefit in that way--accepting ``performance
risk'' but not ``insurance risk.'' In such models, all costs for
benefit claims would be paid by the Federal Government as they were
incurred.
Other proposals have adopted a different model, more akin to the
risk-based competitive model characteristic of Medicare+Choice plans.
Those proposals envision multiple risk-bearing entities (such as
partnerships between PBMs and insurers) that would compete to serve
enrollees. Enrollees would have some choice among providers, so that
beneficiaries who were willing to accept more-restrictive rules (such
as a closed formulary) in return for lower premium costs could do so,
whereas others could select a more expensive provider with fewer
restrictions. If the entities bore all of the insurance risk for the
drug benefit--that is, if they received a fixed per capita payment for
each enrollee--they would have strong incentives to use whatever cost-
control tools were permitted. However, such tools might be unattractive
to many beneficiaries, and the plans' administrators would also have
strong incentives to try to achieve favorable selection by avoiding
enrollees with the highest spending.
An additional concern about this model has been that entities might
be unwilling to participate if they had to assume the full insurance
risk for a stand-alone drug benefit. To mitigate that concern,
proposals have included federally provided reinsurance for high-cost
enrollees as well as so-called risk-adjustment mechanisms that would
vary the per capita payments on the basis of enrollees'
characteristics, such as their age or previous disease diagnoses.
(Reinsurance means that the Federal Government shares part or all of
the claims costs of high-cost enrollees.) Although reinsurance would
reduce the incentives to avoid the highest-cost enrollees that risk-
bearing plans face, it would also tend to weaken the plans' incentives
to control costs commensurately.
Complicating matters further, the incentives to control drug costs
faced by entities administering a Medicare drug benefit would not
depend solely on how they were paid; the financial incentives that
beneficiaries faced would also be a key consideration. Such incentives
might include lower beneficiary premiums for joining plans that could
deliver the required benefits for a lower overall cost, as well as
smaller out-of-pocket payments in plans that were able to negotiate
lower prices for the drugs they covered. If plans competed primarily on
the basis of the comprehensiveness of the coverage they provided,
however, Federal expenditures would probably be higher than if plans
competed on cost factors. Moreover, to devise a proposal that would
require plans to bear insurance risk but not allow beneficiaries'
premiums to vary with their choice of plan appears to be difficult.
Although much depends on a proposal's specific design and details,
a drug benefit could be structured so that entities bearing some
insurance risk would choose to provide it; further, such coverage would
probably be available across the country. That conclusion, which stands
in contrast to the experience of the Medicare+Choice program, is based
in part on the fact that the kind of competing pharmacy networks needed
to provide such a drug benefit are already well established nationwide.
At the same time, CBO concludes that plans bearing insurance risk would
incur additional costs that would not be borne by PBMs that are subject
only to performance risk. Whether and to what extent those added costs
might offset any reductions in Federal costs that accrued from having
plan administrators face insurance risk would also depend on the
specific provisions of the proposal.
Finally, recent discussions have included the notion of linking
drug coverage with reforms of the delivery mechanism for Medicare's
benefits. For example, the Bush Administration has put forward a set of
principles for Medicare reform that suggests an ``integrated'' approach
combining drug benefits and enrollment in private health plans. The
budgetary implications of such an approach are, however, unclear--the
Administration estimated that its initiative would cost a total of $400
billion through 2013 but did not submit sufficient details for CBO to
make its own estimate. CBO is preparing to estimate the effects of any
such proposals and looks forward to working with the Congress if and
when such initiatives are introduced as legislation.
Conclusion
In conclusion, I would be remiss if I did not emphasize the
important trade-offs involved in all of the policies now under
consideration. Even when considered in isolation, a Medicare drug
benefit might address a number of objectives--but objectives that might
be thought desirable in the abstract are often mutually incompatible,
necessitating difficult choices. For example, providing extensive drug
coverage to all Medicare beneficiaries at a low cost to all parties is
not possible; either enrollees' premiums or the government's subsidy
costs would be high. If most of the costs were paid through enrollees'
premiums to keep Federal spending low, some Medicare beneficiaries
would be unwilling or unable to participate in the program,
particularly if coverage was limited to catastrophic expenses. If,
instead, costs were limited by capping the annual benefits paid to each
enrollee, the program would fail to protect participants from the
impact of catastrophic drug costs. Proposals have taken various
approaches to balance those competing objectives.
Looking at the Medicare program as a whole, the choices may be even
more stark. If the program continues to operate as it is currently
structured, its costs will rise significantly--even in the absence of
program expansions such as a prescription drug benefit. In light of
that outlook, policymakers may wish to incorporate two features in
their approach to Medicare policy: a recognition of the larger economic
and budgetary trade-offs, and consideration of the program structure
that would best support Medicare's overall objective of providing
financing for high-quality medical care for the elderly and disabled.
With regard to economic and budgetary trade-offs, two issues stand
out. First, to the extent that the U.S. economy grows at a healthy
pace, it will be better able to meet the Medicare population's demands
for health care. Put differently, the overall level of national income
available in the future constitutes the reservoir from which the
resources for both private needs and public programs will be drawn, and
the nation must endeavor, in making public policy, to enlarge that
reservoir to the greatest degree possible. Second, the potential
pressures on the Federal budget from Medicare and other sources will
necessitate trade-offs with other spending priorities if Federal
programs are to remain close to their historical fraction of national
income.
Alternatively, public policy may steer a course toward devoting a
larger fraction of the Federal budget and the economy as a whole to
Medicare. Even if that occurs, it will be desirable to use those
Medicare funds as efficiently as possible--to purchase the highest-
value care with each dollar. Medicare beneficiaries (or their
families), together with their health care providers, are best
positioned to guide the use of additional dollars and to choose
services that meet therapeutic demands and match individual tastes.
Providing those parties with a broader range of choices and improved
information, and ensuring their sensitivity to the cost of those
services, should facilitate better decisionmaking. At the same time, an
appropriate balance must be struck between providing stronger financial
signals to beneficiaries about the cost of their care and providing
protection against greater financial exposure--in the program as a
whole and in any drug benefit that is added to it.
This concludes my testimony, and I look forward to answering any
questions that the Committee may have.
Chairman THOMAS. Thank you very much, Doctor. Mr. Walker?
STATEMENT OF THE HONORABLE DAVID M. WALKER, COMPTROLLER
GENERAL, U.S. GENERAL ACCOUNTING OFFICE
Mr. WALKER. Thank you, Mr. Chairman, Ranking Member Rangel.
It is a pleasure to be back before the full Committee on Ways
and Means to discuss Medicare's financial condition and
proposals to add an outpatient prescription drug benefit. I
will hit the highlights, if I can, Mr. Chairman.
There are growing concerns about gaps in the Medicare
program, most notably the lack of outpatient prescription drug
coverage, which can leave Medicare's most vulnerable
beneficiaries with high out-of-pocket costs. At the same time,
however, the recent publication of the 2003 trustees Annual
Report reminds us that Medicare, based on its current design,
with no prescription drug benefit, already faces a huge
projected financial imbalance and that has worsened
significantly in the past year.
Furthermore, as the Medicare trustees made clear over 10
years ago, the current Medicare program is not fiscally
sustainable in its present form. In fact, that was done in the
year that I was a trustee of Social Security and Medicare. In
10 years, Hospital Insurance (HI) Trust Fund outlays will begin
to exceed tax revenues, and by 2026, the HI Trust Fund will be
exhausted. However, trust fund insolvency does not mean that
the program will cease to exist. Program tax revenues will
cover a portion of projected annual expenditures thereafter.
In the face of these short-term and long-term cost
pressures, I continue to maintain that substantive financing
and programmatic reforms are necessary to put Medicare on a
sustainable footing for the future. The trustees' intermediate
projections in the 2003 report show that program outlays are
expected to begin to exceed program tax revenues in 2013. That
is when we go negative cash flow. Cash is key, not trust fund
solvency. In fact, trust fund solvency can be misleading and
give people a false sense of security as to not only the state
of this program, but also Social Security.
To finance these cash deficits, HI will have to draw on
special issue Treasury securities acquired during the years of
surpluses. To redeem those securities, the government will have
to obtain cash through a combination of increased taxes,
spending cuts, and/or increased borrowing from the public,
through publicly held debt. Neither the decline in the cash
surpluses nor the cash deficits will affect the payment of
benefits for a member of years. The negative cash flow will
place increased pressure on the Federal budget to raise
resources necessary to meet the program's ongoing costs. This
pressure will only increase when Social Security begins to
experience a negative cash flow just a few short years after
the Medicare program.
Importantly, the HI Trust Fund measure provides no
information on Supplemental Medical Insurance (SMI), or Part B,
SMI. The SMI's expenditures, which currently account for about
43 percent of total Medicare spending, are projected to grow
even faster than HI.
Ultimately, the critical question is not how much the trust
fund has in assets, but whether the government as a whole and
the economy at large can afford the promised benefits now and
in the future, and at what cost to other claims on available
resources. As shown in the next chart, Medicare, Medicaid, and
Social Security have already grown from 13 percent of Federal
spending in 1962--again, before Medicare and Medicaid were
enacted into law--to 42 percent of Federal spending in 2002.
These percentages are expected to continue to increase in
future years.
As the next chart shows, GAO prepares long-term budget
simulations twice a year, based upon CBO data and then going
out much further, that seek to illustrate the likely fiscal
consequences of the coming demographic tidal wave and rising
health care cost. These simulations continue to show that to
move into the future with no changes in Federal retirement and
health programs is to envision a very different role for the
Federal Government. In addition, while additional economic
growth would help to ease our burden, the projected fiscal gap
is too great for us to grow our way out of the problem.
At the same time, it is important to look beyond the
Federal budget to the economy as a whole. If we look at the
next chart, we will see that Medicare, Medicaid, and Social
Security are projected to represent an ever-increasing
percentage of the overall economy. Under the 2003 trustees'
intermediate estimates and the CBO's most recent long-term
Medicare estimates, spending for these entitlement programs
combined will grow to 14 percent of GDP in 2030 from today's
8.4 percent.
Despite a common awareness of Medicare's current and future
fiscal plight, pressure has been building to address recognized
gaps in Medicare's coverage, especially the lack of a
prescription drug benefit and protection against financially
devastating medical costs. Filling these gaps would add
expenses to an already fiscally overburdened program. Under the
trustees' 2003 intermediate assumptions, the present value of
HI's Part A's actuarial deficit in current dollars is $6.2
trillion. We would have to have $6.2 trillion today invested at
Treasury rates in order to fund the gap for Part A alone, a 20-
percent increase from last year.
As a result, it would be prudent for the Congress to
consider tackling the greatest needs first and for making any
benefit additions part of a larger structural reform effort. In
addition, Congress may want to adopt a Medicare Hippocratic
oath, namely, do not make Medicare's already huge financial
imbalance worse.
In closing, Medicare's financial challenge is very real and
growing. The 21st century has arrived, and our demographic
tidal wave is on the horizon. Frankly, we know that
incorporating a prescription drug benefit in the existing
Medicare program will add hundreds of billions of dollars to
the program spending just over 10 years.
Finally, in my view, Congress should consider the estimated
discounted present value of any major tax or spending actions
like this as an integral part of any related discussion and
debate and prior to enactment of any related legislation. This
information is critical in light of our long-range fiscal
challenge and the Congress' overall stewardship obligations to
the American people.
Thank you, Mr. Chairman. I am happy to answer any questions
you may have.
[The prepared statement of Mr. Walker follows:]
Statement of The Honorable David M. Walker, Comptroller General, U.S.
General Accounting Office
Mr. Chairman and Members of the Committee:
I am pleased to be here today as you discuss issues related to an
outpatient prescription drug benefit for Medicare beneficiaries. There
are growing concerns about gaps in the Medicare program, most notably
the lack of outpatient prescription drug coverage, which may leave
Medicare's most vulnerable beneficiaries with high out-of-pocket costs.
Recent estimates suggest that, at any point in time, about a third of
Medicare beneficiaries lack prescription drug coverage. The rest have
at least some drug coverage through various sources--most commonly
employer-sponsored health plans--although recent evidence indicates
that this coverage is beginning to erode.
At the same time, however, the recent publication of the 2003
Trustees' Annual Report reminds us that Medicare in its current
condition--with no prescription drug benefit--already faces a huge
projected financial imbalance that has worsened significantly in the
past year. Furthermore, as the Medicare trustees made clear over 10
years ago, the current Medicare program is not fiscally sustainable in
its present form.
In 10 years, Hospital Insurance (HI) Trust Fund outlays will begin
to exceed tax receipts, and by 2026 the HI Trust Fund will be
exhausted. However, trust fund insolvency does not mean the program
will cease to exist; program tax revenues will continue to cover a
portion of projected annual expenditures.\1\
---------------------------------------------------------------------------
\1\ Under the Trustees 2003 intermediate assumptions, revenues from
the HI payroll tax and the taxation of certain Social Security benefits
are initially projected to cover about three-fourths of projected
expenditures once the trust fund is exhausted. This ratio, however, is
projected to decline rapidly.
---------------------------------------------------------------------------
The huge fiscal pressures created by the retirement of the baby
boom generation and rising health care costs are on our 10-year budget
horizon. Between now and 2035, the number of people age 65 and older
will double. Federal health and retirement spending are expected to
surge as people live longer and spend more time in retirement. In
addition, advances in medical technology are likely to keep pushing up
the cost of providing health care. Moreover, the baby boomers will have
fewer workers to support them in retirement.
We must also remember that Medicare has grown substantially as a
percent of the Federal budget since its enactment in 1965. In addition,
it is expected to represent an increasing percentage of the Federal
budget in the years ahead. After a brief slowdown in the late 1990s,
Medicare spending growth has recently accelerated. In fiscal year 2001,
growth in program spending reached nearly 9 percent, with spending on
certain services increasing much more rapidly. For example, spending
for home health services grew about 30 percent and spending for skilled
nursing facility care grew slightly over 20 percent. For the first 5
months of fiscal year 2003, Medicare spending has been growing at 7.6
percent.\2\
---------------------------------------------------------------------------
\2\ Congressional Budget Office, Monthly Budget Review (Washington,
D.C.: Mar. 10, 2003).
---------------------------------------------------------------------------
A significant problem that hobbles Medicare's ability to achieve a
desirable degree of efficiency is that the program too often pays
overly generous rates for certain services and products. For example,
for certain services, our recent work has shown substantially higher
Medicare payments relative to providers' costs--as much as 35 percent
higher for home health care and 19 percent higher for skilled nursing
facility care.\3\ Similarly, Medicare has overpaid for various medical
products. In 2001, we reported that Medicare paid over $1 billion more
than other purchasers in 2000 for certain outpatient drugs that the
program covers. Excessive payments hurt not only the taxpayers but also
the program's beneficiaries or their supplemental insurers, as
beneficiaries are generally liable for copayments equal to 20 percent
of Medicare's approved fee. For certain outpatient drugs, Medicare's
payments to providers were so high that the beneficiaries' copayments
exceeded the price at which providers could buy the drugs. The Centers
for Medicare & Medicaid Services (CMS) has not acted on our
recommendation that Medicare establish payment levels for drugs more
closely related to actual market transaction costs, using information
available to other public programs that pay at lower rates.\4\
---------------------------------------------------------------------------
\3\ See U.S. General Accounting Office, Medicare Home Health Care:
Payments to Home Health Agencies Are Considerably Higher than Costs,
GAO-02-663 (Washington, D.C.: May 6, 2002) and Skilled Nursing
Facilities: Medicare Payments Exceed Costs for Most but Not All
Facilities, GAO-03-183 (Washington, D.C.: Dec. 31, 2002).
\4\ U.S. General Accounting Office, Medicare: Payments for Covered
Outpatient Drugs Exceed Providers' Costs, GAO-01-1118 (Washington,
D.C.: Sept. 21, 2001).
---------------------------------------------------------------------------
In the face of these short-term and long-term cost pressures, I
continue to maintain that substantive financing and programmatic
reforms are necessary to put Medicare on a sustainable footing for the
future. These fundamental reforms are vital to reducing the program's
growth, which threatens to absorb ever-increasing shares of the
nation's budgetary and economic resources. Thus, any proposals to help
seniors with the costs of prescription drugs would need to be carefully
crafted to avoid further erosion of the projected financial condition
of the Medicare program. Stated differently, it will be prudent to
adopt a modified Hippocratic oath for Medicare reform--namely, any such
reform proposals should ``do no further harm'' to Medicare's already
serious long-range financial imbalance.
As you deliberate on ways to modernize Medicare's benefit package
while striving for program sustainability, I would like to highlight
several key considerations:
The traditional measure of HI Trust Fund solvency is a
misleading gauge of Medicare's financial health. Long before the HI
Trust Fund is projected to be insolvent, pressures on the rest of the
Federal budget will grow as HI's projected cash flow turns negative and
the gap between program tax revenues and expenditures escalates.
Moreover, a focus on the financial status of HI ignores the increasing
burden Supplemental Medical Insurance (SMI)--Medicare Part B--will
place on taxpayers and beneficiaries.
GAO's most recent long-term budget simulations continue
to show that, absent meaningful entitlement reforms, demographic trends
and rising health care spending will drive escalating Federal deficits
and debt. To obtain budget balance, massive spending cuts, tax
increases, or some combination of the two would be necessary. Neither
slowing the growth of discretionary spending nor allowing the 2001 tax
reductions to sunset will eliminate the imbalance. In addition, while
additional economic growth will help ease our burden, the potential
fiscal gap is too great to grow our way out of the problem.
Under the huge budgetary pressures that we are sure to
face in the coming years, we must set priorities so that any benefit
expansions are in line with available resources. In this regard, the
application of basic health insurance principles to any proposed
benefit could help moderate the cost for both beneficiaries and
taxpayers. Under these principles, beneficiaries receive protections
against the risk of catastrophic medical expenses while remaining
conscious of the cost of care through their premium contributions and
cost-sharing arrangements. Given our already huge Medicare financial
imbalance, it is also important that benefit expansion proposals
include targeting mechanisms to ensure that Federal support is directed
at the beneficiaries with the greatest financial risk.
The private sector's use of entities called pharmacy
benefit managers for controlling drug expenditures may be instructive
for Medicare, but the program's unique role and nature may moderate how
these strategies will be used and the potential efficiency gains
afforded in attempting to transfer these strategies to Medicare.
Outlook Worsening for Medicare's Long-Term Sustainability
Today the Medicare program faces a long-range and fundamental
financing problem driven by known demographic trends and projected
escalation of health care spending beyond general inflation. The lack
of an immediate crisis in Medicare financing affects the nature of the
challenge, but it does not eliminate the need for change. Within the
next 10 years, the first baby boomers will begin to retire, putting
increasing pressure on the Federal budget. From the perspectives of the
program, the Federal budget, and the economy, Medicare in its present
form is not sustainable. Acting sooner rather than later would allow
changes to be phased in so that the individuals who are most likely to
be affected, namely younger and future workers, will have time to
adjust their retirement planning while helping to avoid related
``expectation gaps.'' Since there is considerable confusion about
Medicare's current financing arrangements, I would like to begin by
describing the nature, timing, and extent of the financing problem.
Demographic Trends and Expected Rise in Health Care Costs Drive
Medicare's Long-Term Financing Problem
As you know, Medicare consists of two parts--HI and SMI. HI, which
pays for inpatient hospital stays, skilled nursing care, hospice, and
certain home health services, is financed by a payroll tax. Like Social
Security, HI has always been largely a pay-as-you-go system. SMI, which
pays for physician and outpatient hospital services, diagnostic tests,
and certain other medical services, is financed by a combination of
general revenues and beneficiary premiums. Beneficiary premiums pay for
about one-fourth of SMI benefits, with the remainder financed by
general revenues. These complex financing arrangements mean that
current workers' taxes primarily pay for current retirees' benefits
except for those financed by SMI premiums.\5\
---------------------------------------------------------------------------
\5\ Another small source of funding derives from the tax treatment
of Social Security benefits. Under certain circumstances, up to 85
percent of an individual's or couple's Social Security benefits are
subject to income taxes. Under present law, the Old-Age and Survivors
Insurance (OASI) and Disability Insurance (DI) Trust Funds are credited
with the income taxes attributable to the taxation of the first 50
percent of OASDI benefit payments. The remainder of the income taxes
attributable to the taxation of up to 85 percent of OASDI benefit
payments is credited to the HI Trust Fund. Any other income taxes paid
by retirees would also help finance the general revenue contribution to
SMI.
---------------------------------------------------------------------------
As a result, the relative numbers of workers and beneficiaries have
a major impact on Medicare's financing. The ratio, however, is
changing. In the future, relatively fewer workers will be available to
shoulder Medicare's financial burden. In 2002 there were 4.9 working-
age persons (18 to 64 years) per elderly person, but by 2030, this
ratio is projected to decline to 2.8. For the HI portion of Medicare,
in 2002 there were nearly 4 covered workers per HI beneficiary. Under
their intermediate 2003 estimates, the Medicare trustees project that
by 2030 there will be only 2.4 covered workers per HI beneficiary. (See
fig. 1.)
Figure 1.--Ratio of HI-Covered Workers to Beneficiaries
[GRAPHIC] [TIFF OMITTED] T9405A.005
Source: CMS, Office of the Actuary.
Note: Projections based on the intermediate assumptions of The 2003
Annual Report of the Boards of Trustees of the Federal Hospital
Insurance and Federal Supplementary Medical Insurance Trust Funds.
The demographic challenge facing the system has several causes.
People are retiring early and living longer. As the baby boom
generation ages, the share of the population age 65 and over will
escalate rapidly. A falling fertility rate is the other principal
factor underlying the growth in the elderly's share of the population.
In the 1960s, the fertility rate was an average of 3 children per
woman. Today it is a little over 2, and by 2030 it is expected to fall
to 1.95--a rate that is below replacement. The combination of the aging
of the baby boom generation, increased longevity, and a lower fertility
rate will drive the elderly as a share of total population from today's
12 percent to almost 20 percent in 2030.
Taken together, these trends threaten both the financial solvency
and fiscal sustainability of this important program. Labor force growth
will continue to decline and by 2025 is expected to be less than a
third of what it is today. (See fig. 2.) Relatively fewer workers will
be available to produce the goods and services that all will consume.
Without a major increase in productivity, low labor force growth will
lead to slower growth in the economy and slower growth of Federal
revenues. This in turn will only accentuate the overall pressure on the
Federal budget. This slowing labor force growth is not always
recognized as part of the Medicare debate, but it is expected to affect
the ability of the Federal budget and the economy to sustain Medicare's
projected spending in the coming years.
Figure 2.--Labor Force Growth
[GRAPHIC] [TIFF OMITTED] T9405A.006
Source: Social Security Administration, Office of the Chief
Actuary, and GAO.
Note: GAO analysis based on the intermediate assumptions of The
2003 Annual Report of the Board of Trustees of the Federal Old-Age and
Survivors Insurance and the Federal Disability Insurance Trust Funds.
Percentage change is calculated as a centered 5-year moving average.
The demographic trends I have described will affect both Medicare
and Social Security, but Medicare presents a much greater, more
complex, and more urgent challenge. Unlike Social Security, Medicare
spending growth rates reflect not only a burgeoning beneficiary
population, but also the escalation of health care costs at rates well
exceeding general rates of inflation. The growth of medical technology
has contributed to increases in the number and quality of health care
services. Moreover, the actual costs of health care consumption are not
transparent. Third-party payers largely insulate covered consumers from
the cost of health care decisions. These factors and others contribute
to making Medicare a greater and more complex fiscal challenge than
Social Security.
LHI's Trust Fund Faces Cash Flow Problems Long Before the HI Trust Fund
Is Projected to Be Insolvent
Current projections of future HI income and outlays illustrate the
timing and severity of Medicare's fiscal challenge. Today, the HI Trust
Fund takes in more in taxes than it spends. Largely because of the
known demographic trends I have described, this situation will change.
Under the trustees' 2003 intermediate assumptions, program outlays are
expected to begin to exceed program tax revenues in 2013. (See fig. 3.)
To finance these cash deficits, HI will need to draw on the special-
issue Treasury securities acquired during the years of cash surpluses.
For HI to ``redeem'' its securities, the government will need to obtain
cash through some combination of increased taxes, spending cuts, and/or
increased borrowing from the public (or, if the unified budget is in
surplus, less debt reduction than would otherwise have been the case).
Neither the decline in the cash surpluses nor the cash deficits will
affect the payment of benefits, but the negative cash flow will place
increased pressure on the Federal budget to raise the resources
necessary to meet the program's ongoing costs. This pressure will only
increase when Social Security also experiences negative cash flow and
joins HI as a net claimant on the rest of the budget.\6\
---------------------------------------------------------------------------
\6\ Under the trustees' intermediate 2003 projections, this will
occur for Social Security (OASDI) in 2018.
---------------------------------------------------------------------------
Figure 3.--Medicare's HI Trust Fund Faces Cash Deficits as Baby Boomers
Retire
[GRAPHIC] [TIFF OMITTED] T9405A.007
Source: CMS, Office of the Actuary and GAO.
Note: GAO analysis based on the intermediate assumptions of The
2003 Annual Report of the Boards of Trustees of the Federal Hospital
Insurance and Federal Supplementary Medical Insurance Trust Funds.
The gap between HI income and costs shows the severity of HI's
financing problem over the longer term. This gap can also be expressed
relative to taxable payroll (the HI Trust Fund's funding base) over a
75-year period. This year, under the trustees' 2003 intermediate
estimates, the 75-year actuarial deficit is projected to be 2.40
percent of taxable payroll--a significant increase from last year's
projected deficit of 2.02 percent. This means that to bring the HI
Trust Fund into balance over the 75-year period, either program outlays
would have to be immediately reduced by 42 percent or program income
immediately increased by 71 percent, or some combination of the two.
These estimates of what it would take to achieve 75-year trust fund
solvency understate the extent of the problem because the program's
financial imbalance gets worse in the 76th and subsequent years. As
each year passes, we drop a positive year and add a much bigger deficit
year.
The projected exhaustion date of the HI Trust Fund is a commonly
used indicator of HI's financial condition. Under the trustees' 2003
intermediate estimates, the HI Trust Fund is projected to exhaust its
assets in 2026. This solvency indicator provides information about HI's
financial condition, but it is not an adequate measure of Medicare's
sustainability for several reasons. In fact, the solvency measure can
be misleading and can serve to give a false sense of security as to
Medicare's true financial condition. Specifically, HI Trust Fund
balances do not provide meaningful information on the government's
fiscal capacity to pay benefits when program cash inflows fall below
program outlays. As I have described, the government would need to come
up with cash from other sources to pay for benefits once outlays
exceeded program tax income.
In addition, the HI Trust Fund measure provides no information on
SMI. SMI's expenditures, which currently account for about 43 percent
of total Medicare spending, are projected to grow even faster than
those of HI in the near future. Moreover, Medicare's complex structure
and financing arrangements mean that a shift of expenditures from HI to
SMI can extend the solvency of the HI Trust Fund, creating the
appearance of an improvement in the program's financial condition. For
example, the Balanced Budget Act of 1997 modified the home health
benefit, which resulted in shifting a portion of home health spending
from the HI Trust Fund to SMI. Although this shift extended HI Trust
Fund solvency, it increased the draw on general revenues and
beneficiary SMI premiums while generating little net savings.
Ultimately, the critical question is not how much a trust fund has
in assets, but whether the government as a whole and the economy can
afford the promised benefits now and in the future and at what cost to
other claims on available resources. To better monitor and communicate
changes in future total program spending, new measures of Medicare's
sustainability are needed. As program changes are made, a continued
need will exist for measures of program sustainability that can signal
potential future fiscal imbalance. Such measures might include the
percentage of program funding provided by general revenues, the
percentage of total Federal revenues or gross domestic product (GDP)
devoted to Medicare, or program spending per enrollee. As such measures
are developed, questions would need to be asked about actions to be
taken if projections showed that program expenditures would exceed the
chosen level.
Absent Reform of Medicare and Other Entitlements for the Elderly,
Budgetary Flexibility Will Disappear
Taken together, Medicare's HI and SMI expenditures are expected to
increase dramatically, rising from about 12 percent of Federal revenues
in 2002 to more than one-quarter by midcentury. The budgetary challenge
posed by the growth in Medicare becomes even more significant in
combination with the expected growth in Medicaid and Social Security
spending. As shown in figure 4, Medicare, Medicaid, and Social Security
have already grown from 13 percent of Federal spending in 1962 before
Medicare and Medicaid were created to 42 percent in 2002.
Figure 4.--Composition of Federal Spending by Budget Function, 1962,
1982, and 2002
[GRAPHIC] [TIFF OMITTED] T9405A.008
Source: CMS, Office of the Actuary and GAO.
This growth in spending on Federal entitlements for retirees will
become increasingly unsustainable over the longer term, compounding an
ongoing decline in budgetary flexibility. Over the past few decades,
spending on mandatory programs has consumed an ever-increasing share of
the Federal budget.\7\ In 1962, prior to the creation of the Medicare
and Medicaid programs, spending for mandatory programs plus net
interest accounted for about 32 percent of total Federal spending. By
2002, this share had almost doubled to approximately 63 percent of the
budget. (See fig. 5.)
---------------------------------------------------------------------------
\7\ ``Mandatory spending'' refers to outlays for entitlement
programs such as food stamps, Medicare, and veterans' pensions; payment
of interest on the public debt; and outlays for certain nonentitlement
programs such as payments to States from Forest Service receipts. In
2002 Social Security, Medicare, and Medicaid accounted for over 71
percent of mandatory spending.
---------------------------------------------------------------------------
Figure 5.--Federal Spending for Mandatory and Discretionary Programs,
Fiscal Years 1962, 1982, and 2002
[GRAPHIC] [TIFF OMITTED] T9405A.009
In much of the past decade, reductions in defense spending helped
accommodate the growth in these entitlement programs. However, even
before the terrorist attacks of September 11, 2001, this ceased to be a
viable option. Indeed, spending on defense and homeland security will
grow as we seek to combat new threats to our nation's security.
GAO prepares long-term budget simulations that seek to illustrate
the likely fiscal consequences of the coming demographic tidal wave and
rising health care costs. These simulations continue to show that to
move into the future with no changes in Federal retirement and health
programs is to envision a very different role for the Federal
Government. Assuming, for example, that the tax reductions enacted in
2001 do not sunset and discretionary spending keeps pace with the
economy, by midcentury Federal revenues may not even be adequate to pay
Social Security and interest on the Federal debt. Spending for the
current Medicare program--without any additional new benefits--is
projected to account for more than one-quarter of all Federal revenues.
To obtain budget balance, massive spending cuts, tax increases, or some
combination of the two would be necessary. (See fig. 6.) Neither
slowing the growth of discretionary spending nor allowing the tax
reductions to sunset eliminates the imbalance. In addition, while
additional economic growth would help ease our burden, the projected
fiscal gap is too great for us to grow our way out of the problem.
Figure 6.--Composition of Spending as a Share of GDP Assuming
Discretionary Spending Grows With GDP After 2003 and the 2001 Tax Cuts
Do Not Sunset
[GRAPHIC] [TIFF OMITTED] T9405A.010
Source: GAO's March 2003 analysis.
Note: Assumes currently scheduled Social Security benefits are paid
in full throughout the simulation period. Social Security and Medicare
projections are based on the trustees' 2003 intermediate assumptions.
Indeed, long-term budgetary flexibility is about more than Social
Security and Medicare. While these programs dominate the long-term
outlook, they are not the only Federal programs or activities that bind
the future. The Federal Government undertakes a wide range of programs,
responsibilities, and activities that obligate it to future spending or
create an expectation for spending. A recent GAO report describes the
range and measurement of such fiscal exposures--from explicit
liabilities such as environmental cleanup requirements to the more
implicit obligations presented by life-cycle costs of capital
acquisition or disaster assistance.\8\ Making government fit the
challenges of the future will require not only dealing with the
drivers--such as entitlements for the elderly--but also looking at the
range of other Federal activities. A fundamental review of what the
Federal Government does and how it does it will be needed. This
involves looking at the base of all major spending and tax policies to
assess their appropriateness, priority, affordability, and
sustainability in the years ahead.
---------------------------------------------------------------------------
\8\ U.S. General Accounting Office, Fiscal Exposures: Improving the
Budgetary Focus on Long-Term Costs and Uncertainties, GAO-03-213
(Washington, D.C.: Jan. 24, 2003).
---------------------------------------------------------------------------
Medicare Is Projected to Absorb Ever-Increasing Shares of the Economy
At the same time, it is important to look beyond the Federal budget
to the economy as a whole. Figure 7 shows the total future draw on the
economy represented by Medicare, Medicaid, and Social Security. Under
the 2003 trustees' intermediate estimates and the Congressional Budget
Office's (CBO) most recent long-term Medicaid estimates, spending for
these entitlement programs combined will grow to 14 percent of GDP in
2030 from today's 8.4 percent. Taken together, Social Security,
Medicare, and Medicaid represent an unsustainable burden on future
generations.
Figure 7: Social Security, Medicare, and Medicaid Spending as a
Percentage of GDP
[GRAPHIC] [TIFF OMITTED] T9405A.011
Source: CMS, Office of the Actuary, SSA, Office of the Chief
Actuary, CBO, and GAO.
Note: Projections based on the intermediate assumptions of the 2003
trustees' Reports, CBO's March 2003 short-term Medicaid estimates, and
CBO's June 2002 Medicaid long-term projections under midrange
assumptions.
Although real incomes are projected to continue to rise, they are
expected to grow more slowly than has historically been the case. At
the same time, the demographic trends and projected rates of growth in
health care spending I have described will mean rapid growth in
entitlement spending. Taken together, these projections raise serious
questions about the capacity of the relatively smaller number of future
workers to absorb the rapidly escalating costs of these programs.
As HI Trust Fund assets are redeemed to pay Medicare benefits and
SMI expenditures continue to grow, the program will constitute a claim
on real resources in the future. As a result, taking action now to
increase the future pool of resources is important. To echo Federal
Reserve Chairman Alan Greenspan, the crucial issue of saving in our
economy relates to our ability to build an adequate capital stock to
produce enough goods and services in the future to accommodate both
retirees and workers in the future.\9\ The most direct way the Federal
Government can raise national saving is by increasing government
saving; that is, as the economy returns to a higher growth path, a
balanced fiscal policy that recognizes our long-term challenges can
help provide a strong foundation for economic growth and can enhance
our future budgetary flexibility. It is my hope that we will think
about the unprecedented challenge facing future generations in our
aging society. Putting Medicare on a sustainable path for the future
would help fulfill this generation's stewardship responsibility to
succeeding generations. It would also help to preserve some capacity
for future generations to make their own choices for what role they
want the Federal Government to play.
---------------------------------------------------------------------------
\9\ Testimony before the Senate Committee on Banking, Housing, and
Urban Affairs, July 24, 2001.
---------------------------------------------------------------------------
As with Social Security, both sustainability and solvency
considerations drive us to address Medicare's fiscal challenges sooner
rather than later. HI Trust Fund exhaustion may be more than 20 years
away, but the squeeze on the Federal budget will begin as the baby boom
generation begins to retire. This will begin as early as 2008, when the
leading edge of the baby boom generation becomes eligible for early
retirement.\10\ CBO's current 10-year budget and economic outlook
reflects this. CBO projects that economic growth will slow from an
average of 3.2 percent a year from 2005 through 2008 to 2.7 percent
from 2009 through 2013, reflecting slower labor force growth. At the
same time, annual rates of growth in entitlement spending will begin to
rise. Annual growth in Social Security outlays is projected to
accelerate from 5.2 percent in 2007 to 6.6 percent in 2013. Annual
growth in Medicare enrollees is expected to accelerate from 1.1 percent
today to 2.9 percent in 2013. Acting sooner rather than later is
essential to ease future fiscal pressures and also provide a more
reasonable planning horizon for future retirees. We are now at a
critical juncture. In less than a decade, the profound demographic
shift that is a certainty will have begun.
---------------------------------------------------------------------------
\10\ In 2008, the first baby boomers will reach age 62 and become
eligible for Social Security benefits; in 2011, they will reach age 65
and become eligible for Medicare benefits.
---------------------------------------------------------------------------
As Bleak Fiscal Future Looms, Efforts to Address Medicare Coverage
Gaps Are Being Considered
Despite a common awareness of Medicare's current and future fiscal
plight, pressure has been building to address recognized gaps in
Medicare coverage, especially the lack of a prescription drug benefit
and protection against financially devastating medical costs. Filling
these gaps could add significant expenses to an already fiscally
overburdened program. Under the trustees' 2003 intermediate
assumptions, the present value of HI's actuarial deficit is $6.2
trillion, a 20-percent increase from the prior year.\11\ This difficult
situation argues for tackling the greatest needs first and for making
any benefit additions part of a larger structural reform effort.
---------------------------------------------------------------------------
\11\ This estimate represents the present value of HI's future
expenditures less future tax income, taking into account the amount of
HI Trust Fund assets at hand at the beginning of the projection period
and adjusting for the ending target trust fund balance. Excluding the
ending target trust fund balance, HI's unfunded obligation is estimated
to be $5.9 trillion over the 75-year period under the trustees' 2003
intermediate assumptions.
---------------------------------------------------------------------------
The Medicare benefit package, largely designed in 1965, provides
virtually no outpatient drug coverage. Beneficiaries may fill this
coverage gap in various ways. According to the Medicare Current
Beneficiary Survey, nearly two-thirds of Medicare beneficiaries had
some form of drug coverage from a supplemental insurance policy, health
plan, or public program at some point during 1999. All beneficiaries
have the option to purchase supplemental policies--Medigap--when they
first become eligible for Medicare at age 65. Those policies that
include drug coverage tend to be expensive and provide only limited
benefits. Some beneficiaries have access to coverage through employer-
sponsored policies or private health plans that contract to serve
Medicare beneficiaries. In recent years, coverage through these sources
has become more expensive and less widely available. Beneficiaries
whose incomes fall below certain thresholds may qualify for Medicaid or
other public programs. More than one-third may lack drug coverage
altogether.
In recent years, prescription drug expenditures have grown
substantially, both in total and as a share of all heath care outlays.
Prescription drug spending grew an average of 15.9 percent per year
from 1996 to 2001, more than double the 6.5 percent average growth rate
for health care expenditures overall. (See table 1.) As a result,
prescription drugs account for a growing share of health care spending,
rising from 6.5 percent in 1996 to 9.9 percent in 2001. By 2012,
prescription drug expenditures are expected to account for almost 15
percent of total health expenditures.
Table 1.--National Expenditures for Prescription Drugs and Health Care, 1996 to 2001
----------------------------------------------------------------------------------------------------------------
Annual Growth In Annual Growth In
Prescription Drug Prescription Drug Health Care
Year Expenditures (in Expenditures From Expenditures From
billions) Previous Year Previous Year
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
2001 $140.6 15.4 8.7
----------------------------------------------------------------------------------------------------------------
2000 121.8 17.3 6.9
----------------------------------------------------------------------------------------------------------------
1999 103.9 19.2 5.7
----------------------------------------------------------------------------------------------------------------
1998 87.2 15.1 5.4
----------------------------------------------------------------------------------------------------------------
1997 75.7 12.8 4.9
----------------------------------------------------------------------------------------------------------------
1996 67.2 10.5 5.0
----------------------------------------------------------------------------------------------------------------
Average annual growth from
1996 through 2001 15.9 6.5
----------------------------------------------------------------------------------------------------------------
Source: CMS, Office of the Actuary.
In 2002, CBO projected that the average Medicare beneficiary would
use $2,440 worth of prescription drugs in 2003. This is a substantial
amount considering that some beneficiaries lack any drug coverage and
others may have less coverage than in previous years. Moreover,
significant numbers of beneficiaries have drug expenses much higher
than those of the average beneficiary. CBO also estimated that, in
2005, 12 percent of Medicare beneficiaries would have expenditures
above $6,000.
In focusing on the need for prescription drug coverage, we should
not forget that Medicare does not provide complete protection from
catastrophic losses. Under Medicare, beneficiaries have no limit on
their out-of-pocket costs attributable to cost sharing. The average
beneficiary who obtained services had a total liability for Medicare-
covered services of $1,700, consisting of $1,154 in Medicare copayments
and deductibles in addition to the $546 in annual Part B premiums in
1999, the most recent year for which data are available on the
distribution of these costs. For beneficiaries with extensive health
care needs, the burden can be much higher. In 1999, about 1 million
beneficiaries were liable for more than $5,000, and about 260,000 were
liable for more than $10,000 for covered services. In contrast,
employer-sponsored health plans for active workers typically limited
maximum annual out-of-pocket costs for covered services to less than
$2,000 per year for single coverage.\12\
---------------------------------------------------------------------------
\12\ The Kaiser Family Foundation and Health Research and Education
Trust, Employer Health Benefits: 2000 Annual Survey (Menlo Park, Calif.
and Chicago: 2000).
---------------------------------------------------------------------------
Recently, several proposals have been made to add a prescription
drug benefit to the Medicare program. While different in scope and
detail, the proposals have certain features in common--including use of
a third-party entity to administer the new drug benefit. The remainder
of my remarks will focus on the lessons learned from our work regarding
the private sector's use of such an entity to manage the drug benefits
of insurers' policyholders and health plans' enrollees.
Private Sector Strategies for Controlling Drug Expenditures May Be
Instructive for Medicare
Some proposals to add a Medicare outpatient prescription drug
benefit look to private sector strategies as a means to administer a
drug benefit and control costs. Most employer-sponsored health plans
contract with private entities, known as pharmacy benefit managers
(PBM), to administer their prescription drug benefits, and those that
do not contract with PBMs may have units in their organizations that
serve the same administrative purpose. Typically, on behalf of the
health plans, PBMs negotiate drug prices with pharmacies, negotiate
rebates with drug manufacturers, process drug claims, operate mail-
order pharmacies, and employ various cost-control techniques, such as
formulary management and drug utilization reviews. In 2001, nearly 200
million Americans had their prescription drug benefits administered
through PBMs. This year, we reported on the use of PBMs by health plans
in the Federal Employees' Health Benefits Program (FEHBP).\13\ In
considering the application of these findings to Medicare, we are
reminded that Medicare's unique role and nature may temper how the
strategies and potential efficiency gains afforded by private sector
PBMs may be transferred to benefit the program.
---------------------------------------------------------------------------
\13\ U.S. General Accounting Office, Federal Employees' Health
Benefits: Effects of Using Pharmacy Benefit Managers on Health Plans,
Enrollees, and Pharmacies, GAO-03-196 (Washington, D.C.: Jan. 10,
2003). FEHBP covered about 8.3 million Federal employees, retirees, and
their dependents as of July 2002, and the three FEHBP plans we reviewed
accounted for about 55 percent of FEHBP enrollment. The FEHBP plans and
PBMs we reviewed were Blue Cross and Blue Shield, which contracted with
AdvancePCS for retail pharmacy services and Medco Health Solutions for
mail-order services; Government Employees Hospital Association, which
contracted with Medco Health Solutions; and PacifiCare of California,
which contracted with Prescription Solutions, another subsidiary of
PacifiCare Health Systems.
---------------------------------------------------------------------------
Private Sector Uses PBMs to Leverage Price Negotiations through Volume
Purchasing
PBMs use purchasing volume to leverage their negotiations with
pharmacies and drug manufacturers in seeking favorable prices in the
form of discounts, rebates, or other advantages. Through negotiations,
PBMs create networks of participating retail pharmacies, promising the
pharmacies a greater volume of customers in exchange for discounted
prices. PBMs may be able to secure larger discounts by limiting the
number of network pharmacies. However, smaller networks provide
beneficiaries fewer choices of retailers, thereby limiting convenient
access. These are trade-offs health plans must consider in deciding how
extensive a pharmacy network they want their PBMs to offer
beneficiaries. The health plans we reviewed in our FEHBP study
generally provided broad retail pharmacy networks. The average
discounted prices PBMs obtained for drugs from retail pharmacies were
about 18 percent below the average prices cash-paying customers without
drug coverage would have paid for 14 selected widely used brand-name
drugs. For 4 selected generic drugs, the PBM-negotiated retail pharmacy
prices were 47 percent below the price paid by cash-paying customers.
PBMs also use their leverage to negotiate with drug manufacturers
for rebates. Rebates generally depend on the volume of a manufacturer's
products purchased. Health plans and PBMs can add to that volume by
concentrating beneficiaries' purchases for particular types of drugs
with certain manufacturers. Health plans can steer their beneficiaries'
purchases to specific drugs through the use of a formulary--that is, a
list of prescription drugs that health plans encourage physicians to
prescribe and beneficiaries to use. Determining whether a drug should
be on the formulary involves clinical evaluations based on a drug's
safety and effectiveness, and decisions on whether several drugs are
therapeutically equivalent.\14\ Restricting the formulary to fewer
drugs within a therapeutic class can provide the PBMs with greater
leverage in negotiating higher rebates because they can help increase
the manufacturer's market share for certain drugs. However, a
restricted formulary provides beneficiaries with fewer preferred drug
alternatives and makes the policies governing coverage of nonformulary
drugs or the cost sharing for them critical to beneficiaries.\15\
---------------------------------------------------------------------------
\14\ A pharmacy and therapeutics committee within the health plan
or a PBM typically makes decisions about whether to include particular
brand-name or generic drugs on the plan's formulary.
\15\ Plans generally encourage the use of formulary drugs by having
lower cost sharing or requiring special approval of a nonformulary
drug. For example, health plans have increasingly adopted three-tiered
cost-sharing strategies whereby enrollees incur the lowest out-of-
pocket costs for using generic drugs, higher costs for brand-name drugs
on the formulary, and the highest costs for brand-name drugs not
included on the formulary.
---------------------------------------------------------------------------
The FEHBP plans and PBMs we reviewed provided enrollees with
generally nonrestrictive drug formularies across a broad range of drugs
and therapeutic categories.\16\ The manufacturer rebates that the PBMs
passed through to the FEHBP plans effectively reduced plans' annual
spending on prescription drugs by a range of 3 percent to 9 percent.
The share of rebates PBMs passed through to the FEHBP plans varied
subject to contractual agreements negotiated between the plans and the
PBMs.
---------------------------------------------------------------------------
\16\ Our report compared the FEHBP plans' formularies to the
Department of Veterans Affairs (VA) National Formulary, considered by
the Institute of Medicine to be not overly restrictive. Each FEHBP plan
we reviewed included over 90 percent of the drugs listed on the VA
formulary or therapeutically equivalent alternatives, and included at
least one drug in 93 percent to 98 percent of the therapeutic classes
covered by VA.
---------------------------------------------------------------------------
PBMs also assisted the FEHBP plans by providing a less expensive
mail-order drug option. Mail-order prices for the FEHBP plans we
reviewed averaged about 27 percent lower than cash-paying customers
would pay for the same quantity at retail pharmacies for 14 brand-name
drugs and 53 percent lower for 4 generic drugs. The FEHBP plans
generally had lower cost-sharing requirements for drugs purchased
through mail order, particularly for more expensive brand-name drugs or
maintenance medications for chronic conditions.
The claims and information processing capabilities PBMs offered
also helped the FEHBP plans to manage drug costs and monitor quality of
care. PBMs maintain a centralized database on each enrollee's drug
history that can be used to review for potential adverse drug
interactions or potentially less expensive alternative medications.
They also use claims data to monitor patterns of patient use, physician
prescribing practices, and pharmacy dispensing practices. Their systems
provide ``real-time'' claims adjudication capabilities that allow a
customer's claim for a drug purchase to be approved or denied at the
time the pharmacist begins the process of filling a prescription. Two
plans in our FEHBP study reported savings ranging from 6 to 9 percent
of the plan's annual drug spending; the savings were associated
primarily with real-time claims denials preventing early drug refills
and safety advisories cautioning pharmacists about potential adverse
interactions or therapy duplications.
Use of Private-Sector Strategies in Medicare Would Represent Departure
from Traditional Policies and Practices
While Medicare's sheer size would provide it with significant
leverage in negotiating with pharmacies and drug manufacturers, doing
so would represent a departure from traditional Medicare. Medicare
beneficiaries represent less than 15 percent of the population but a
disproportionately higher share--about 40 percent--of prescription drug
spending. However, because of Medicare's design and obligations as a
public program, its current purchasing strategies vary considerably
from those of the private sector.
Any willing provider. In contrast with private payers'
reliance on selective contracting with providers and suppliers, the
traditional Medicare program has generally allowed any hospital,
physician, or other provider willing to accept Medicare's
reimbursements and requirements to participate in the program. With
respect to drug purchasing in particular, private plans determine the
extent of their enrollees' access by the choices they make about the
size of their participating pharmacy network and breadth of their drug
formulary. Allowing any pharmacy willing to meet Medicare's terms to
participate or allowing all therapeutically equivalent drugs equal
coverage on a formulary would restrict the program's ability to secure
advantageous prices. Moreover, health plans and PBMs currently make
formulary determinations privately. In contrast, Medicare's policies
have historically been open to public comment.
Administrative rate-setting. Whereas private health
plans typically rely on price negotiations to establish payment rates,
Medicare generally establishes payment rates administratively. As
discussed earlier, Medicare's rates often exceed market prices and this
is the case for some of the few outpatient prescription drugs covered
by Medicare.\17\ The program's method of paying for these drugs is
prescribed in statute: In essence, Medicare pays 95 percent of a drug's
``average wholesale price'' (AWP). Despite its name, however, AWP is
not necessarily a price that wholesalers charge and is not based on the
price of any actual sale of drugs by a manufacturer. AWPs are published
by manufacturers in drug price compendia, and Medicare bases providers'
payments on these published AWPs. Other public and private purchasers
typically use the leverage of volume and competition to secure better
prices. By statute, Medicaid, the nation's health insurance program for
certain low-income Americans, is guaranteed manufacturers' rebates
based on prices charged other purchasers.\18\ Certain other public
payers can pay at rates set in the Federal supply schedule, which uses
verifiable confidential information on the prices drug manufacturers
charge their ``most favored'' private customers. Manufacturers agree to
these prices, in part, in exchange for the right to sell drugs to the
more than 40 million Medicaid beneficiaries.
---------------------------------------------------------------------------
\17\ GAO-01-1118.
\18\ Since the enactment of the Omnibus Budget Reconciliation Act
of 1990, 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 or a minimum of 15.1
percent of the average manufacturers' price (AMP) for brand-name drugs.
Rebates must be at least 11 percent of AMP for generic drugs.
---------------------------------------------------------------------------
Low-budget program administration. Duplicating the type
of controls PBMs have exercised over private-sector drug benefits would
likely involve devoting a larger share of total expenditures to
administration than is spent by Medicare currently. Medicare's
administrative costs historically have been extremely low, averaging
about 2 percent of the cost of the services themselves.\19\ This level
of expenditure may not be consistent with the level needed to review
the volumes of claims data associated with prescription drugs for the
elderly or acquire and maintain the on-line systems and databases PBMs
use to employ such utilization controls as real-time claims
adjudication. The number of prescriptions for Medicare beneficiaries
could easily exceed the current number of claims for all other services
combined, or over 1 billion annually.
---------------------------------------------------------------------------
\19\ U.S. General Accounting Office, Medicare: HCFA Faces
Challenges to Control Improper Payments, GAO/T-HEHS-00-74, (Washington,
D.C.: Mar. 9, 2000).
---------------------------------------------------------------------------
Decisions about the Extent of Latitude and Competition Allowed Are
Critical to Administering a Medicare Drug Benefit
Medicare would undoubtedly need assistance from external entities
to administer a drug benefit, just as it has used insurers to process
claims in the traditional program and Medicare+Choice plans to go
further by also managing services and assuming risk. Decisions about
the roles assigned an entity or entities and the latitude allowed them
in carrying out those roles would be critical. These decisions would
undoubtedly affect the benefit's value to beneficiaries and the
efficiencies and savings secured for both beneficiaries and taxpayers.
Some of these decisions parallel those made by FEHBP plans that I
discussed--trade-offs about beneficiaries' interests in broad pharmacy
networks and formularies versus potential savings. Others stem from the
uniqueness of Medicare, its likely disproportionate share of the drug
market, and its position as a public program requiring transparency and
fairness.
Insurers and PBMs have been successful in securing some savings on
drug purchases by leveraging their volume to move market share from one
product to another. Medicare's leverage, given that purchases by the
elderly constitute about 40 percent of the drug market, could be
considerable. Yet the large market share may also be likely to attract
considerable attention. The administration of a Medicare drug benefit
could then be subject to the same intensity of external pressures from
interested parties regarding program prices and rules that can often
inhibit the program from operating efficiently today. The potential for
micromanagement could compromise trying to use the very flexibility
PBMs have employed in negotiating prices and selecting preferred
providers in order to generate savings. An alternative would be to
sacrifice some of the program's leverage and grant flexibility to
multiple PBMs or similar entities so that any one entity would be
responsible for administering only a share of the market.
Contracting with multiple PBMs or similar entities, however, would
pose other challenges. If each had exclusive responsibility for a
geographic area, beneficiaries who wanted certain drugs could be
advantaged or disadvantaged merely because they lived in a particular
area. To minimize inequities, Medicare could, like some private sector
purchasers, specify core benefit characteristics or maintain clinical
control over formulary decisions instead of delegating those decisions
to its contractors.
If multiple PBMs or similar entities operated in a designated area,
beneficiaries could choose among them to administer their drug
benefits. These organizations would compete for consumers directly on
the basis of differences in their drug benefit offerings and
administration. This contrasts with the private sector where drug
benefits are typically part of an overall insurance plan, and PBMs
typically compete for contracts with insurers or other purchasers.
Competition could be favorable to beneficiaries if they were adequately
informed about differences among competing entities offering drug
benefits and shared in the savings. However, adequate oversight would
need to be in place to ensure that fair and effective competition was
maintained. For example, a means to ensure that beneficiaries received
comprehensive user-friendly information about policy and benefit
differences among competing entities would be necessary. Monitoring
marketing and customer recruitment strategies and holding entities
accountable for complying with Federal requirements would require
adequate investment. The contracting entities could need protections as
well. Some mechanism would be needed to risk adjust payments for
differences in beneficiaries' health status so that those entities
enrolling a disproportionate share of high-use beneficiaries would not
be disadvantaged.
Concluding Observations
Medicare's financial challenge is very real and growing. The 21st
century has arrived and our demographic tidal wave is on the horizon.
Within 5 years, individuals in the vanguard of the baby boom generation
will be eligible for Social Security and 3 years after that they will
be eligible for Medicare. The future costs of serving the baby boomers
are already becoming a factor in CBO's short-term cost projections.
Frankly, we know that incorporating a prescription drug benefit
into the existing Medicare program will add hundreds of billions of
dollars to program spending over just the next 10 years. For this
reason, I cannot overstate the importance of adopting meaningful
reforms to ensure that Medicare remains viable for future generations.
Adding a drug benefit to Medicare requires serious consideration of how
that benefit will affect overall program spending. If competing private
entities are to be used to administer a drug benefit, it is important
to understand how these entities can be used in the Medicare context to
provide a benefit that balances beneficiary needs and cost containment.
Medicare reform would be done best with considerable lead time to
phase in changes and before the changes that are needed become dramatic
and disruptive. Given the size of Medicare's financial challenge, it is
only realistic to expect that reforms intended to bring down future
costs will have to proceed incrementally. We should begin this now,
when retirees are still a far smaller proportion of the population than
they will be in the future. The sooner we get started, the less
difficult the task will be.
We must also be mindful that health care costs compete with other
legitimate priorities in the Federal budget, and their projected growth
threatens to crowd out future generations' flexibility to decide which
competing priorities will be met. In making important fiscal decisions
for our nation, policymakers need to consider the fundamental
differences among wants, needs, and what both individuals and our
nation can afford. This concept applies to all major aspects of
government, from major weapons system acquisitions to issues affecting
domestic programs. It also points to the fiduciary and stewardship
responsibility that we all share to ensure the sustainability of
Medicare for current and future generations within a broader context of
providing for other important national needs and economic growth.
The public sector can play an important role in educating the
nation about the limits of public support. Currently, there is a wide
gap between what patients and providers expect and what public programs
are able to deliver. Moreover, there is insufficient understanding
about the terms and conditions under which health care coverage is
actually provided by the nation's public and private payers. In this
regard, GAO is preparing a health care framework that includes a set of
principles to help policymakers in their efforts to assess various
health financing reform options. This framework will examine health
care issues systemwide and identify the interconnections between public
programs that finance health care and the private insurance market. The
framework can serve as a tool for defining policy goals and ensuring
the use of consistent criteria for evaluating changes. By facilitating
debate, the framework can encourage acceptance of changes necessary to
put us on a path to fiscal sustainability. I fear that if we do not
make such changes and adopt meaningful reforms, future generations will
enjoy little flexibility to fund discretionary programs or make other
valuable policy choices.
Mr. Chairman, this concludes my prepared statement. I will be happy
to answer any questions you or other Committee Members may have.
Contacts and Acknowledgments
For future contacts regarding this testimony, please call William
J. Scanlon, Director, Health Care Issues, at (202) 512-7114. Other
individuals who made key contributions include Rashmi Agarwal, Linda
Baker, John Dicken, Hannah Fein, Kathryn Linehan, James McTigue,
Jennifer Rellick, and Melissa Wolf.
Chairman THOMAS. I thank both of you very much.
It has sometimes been said, notwithstanding the charts,
that the solvency of Medicare is probably greater than in
previous periods and that we really shouldn't worry all that
much about it because when the pressure increases on us,
historically we have always done something. One of the concerns
that the Chair has is that some of the easy choices were taken
early.
For example, when this Committee engages--and it will--in
discussion of Social Security and the solvency of that trust
fund, we are all mindful that currently the payroll tax is
capped at a particular dollar amount. The HI Trust Fund already
does not have the cap that could be removed.
So, notwithstanding that 2013 and 2016 still seems like
some time away, do you believe we have luxury of arguing that
since we probably have as great a front-loaded number of years
of solvency as we have had at any time in the past, that that
is a comfort that we should wait awhile over?
Mr. WALKER. We should not focus on the trust fund balance,
for reasons that I articulated. I think we have three basic
sustainability problems: At the lowest level, Medicare; at the
next level, our health care system; and at the top level, our
overall fiscal imbalance.
Chairman THOMAS. Well, I tell you that I feel a little bit
about Medicare as I probably feel even more about the health
care system, because frankly when you compare us with other
countries--and sometimes you can't do it on an absolute base,
you have to look at other humans in the human condition and
what they do--it isn't so much how much we spend for health
care in this country, and underscored as well for some of the
government support programs like Medicare, it is how we spend
it. One of the reasons we have been so concerned about wanting
to try to make some fundamental modernizations or changes to
Medicare is because without those, Medicare as a support
structure isn't fashioned in the best way to receive a major
prescription drug addition--something as simple as the
historical creation of the A and the so-called B, one from a
dedicated trust fund, the other one from the general fund; and
the fact that it doesn't look much like an insurance policy or
any provisions that would give us comfort that some of the
things that we have seen work in other systems simply won't
work here by virtue of the way it was created and the failure
to keep it up to date.
Throwing on a prescription drug benefit doesn't solve the
underlying concerns over Medicare. Is that a fair statement?
Mr. WALKER. I think it is fair to say that if the
conditions that exist today had existed in 1965, you probably
would have included a prescription drug benefit in Medicare to
begin with. On the other hand, you probably also would have
included a number of other cost-containment mechanisms that you
do not have today. So, on one hand you are talking about adding
a prescription drug benefit, which most employers have added
since 1965, but they have also changed their health insurance
coverage in many other ways, with targeting, deductibles,
copays, and things of that nature, and Medicare has not.
Chairman THOMAS. Let me just briefly, then, ask you some
questions about the Medicare Payment Advisory Commission. They
perform a very important role. We attempted to create a
commission made up of professionals who have a broad background
in health care touching any number of areas, along with some
consumer advocates--who examine current conditions and make
recommendations on assistance to various providers and other
decisions that we need to make.
One of the major changes that was made recently was to
require MEDPAC, as we call it, to vote--because they have a
chance to influence public policy, we thought it might be
useful to require public votes so that people could see how the
interests that may represent particular areas of health care
voted on particular issues. I know MEDPAC recently made 17
recommendations to the House and specifically this Committee.
What I found most striking about those recommendations, that
where the 17 members--I believe it was 19 recommendations--
where the 17 members made 19 recommendations, if you added up
all the individual votes, and of course certain things happen
in the House if it is a voice vote versus a recorded vote
versus how many people are in opposition, we handle issues
differently based upon the votes. When you add up all the votes
of MEDPAC on those 19 recommendations, there were collectively
300 ayes for the position taken, and 2 nays.
Given the depth and breadth of the professionalism and
history of experience of MEDPAC, should this Committee be
impressed by, ignore--how should we deal with recommendations
that are presented to us by that body with a vote of 300 to 2?
Mr. WALKER. Mr. Chairman, I have tried very hard to work
with this Committee and others as Comptroller General of the
United States to appoint MEDPAC members. I believe that we have
significantly upgraded MEDPAC in the last several years. I
believe that you need to give serious consideration to the
recommendations that you receive from MEDPAC. They are hampered
with a problem that this Committee, GAO, and many others have
in that they don't have an adequate amount of timely, accurate
and useful health care information. Their basic recommendations
are consistent with the work that GAO has done, and I think
that you need to seriously consider their recommendations.
I also think it was appropriate to increase the
transparency and accountability of the votes associated with
MEDPAC members. I think that was appropriate, given their
substantial responsibilities and the sums involved.
Chairman THOMAS. Have you had any feedback from the MEDPAC
members themselves about their willingness and comfortableness
with the transparency in the recorded votes, as a process, as
opposed to what they used to do?
Mr. WALKER. Well, initially there was some apprehension. I
have not heard any concerns. I think there generally is an
understanding that it was the right thing to do.
Chairman THOMAS. I thank the gentlemen. Dr. Holtz-Eakin, it
is always difficult to ask a new director of CBO about
estimates that have been made in the past, although I assume
you have a moral obligation to accept all of the product of
previous CBOs and directors. Sometimes when people focus on the
debate on the floor of the House example, with amendments or
substitutes to bills, the discussion is couched in ways in
which people can't fairly judge or discriminate between
approaches taken by various bills. One of the things I hope to
do with this hearing is to at least begin the record with a
clear understanding that there are consequences to choices that
are made in the way you structure bills. I know this may be
uncomfortable for some folk, but I don't really know any other
way to begin a process of talking about building a bill without
asking some fairly direct questions, and asking you if you have
the ability to compare particular structures.
For example, included in the bill that passed the House
last year was a provision that we called the best price policy,
which would have required a degree of negotiation on discounts
from pharmaceutical manufacturers without regard to an
artificial so-called best price structure that is located in
Medicare. I am always fearful when someone tells me they are
going to give me the best price, especially if it is a
structured best price.
In looking at last year's bill--and it is true, as was
commented, there is no bill for the majority in yet. We are
looking at these issues and want to make some decisions. In
comparison, the gentleman from California, for example, Mr.
Stark, does have a bill in this year--I believe it is H.R.
1199. Have you been able to score that bill yet, Doctor?
Dr. HOLTZ-EAKIN. We do not yet have a score on the bill
this year. We did, in fact, do work in previous years on these
issues.
Chairman THOMAS. Okay. So, we might be comparing last
year's bills rather than the current edition.
Did the idea of negotiating discounts save money over a
best price--first part of the question. Second part, for
example, a tool that was utilized, I believe, in the previous
bill, where you allow physicians to override formularies and
provide an any-willing-provider structure for pharmacies. Those
are two ways to deal with pricing. Can you comment on each in a
comparison between them?
Dr. HOLTZ-EAKIN. With the caveat that I am new to the job
and may have to get back to you with particular details, I can
say a couple of things on those issues. The first is that in
looking at incentives and outcomes on cost containment, one
really wants to look at incentives and the opportunity to
undertake cost containment. So, with regard to the best-price
provision, that leads to a greater incentive to try to
negotiate a lower price from a manufacturer, and as a result,
CBO did in fact, score that in previous legislation as saving
about $18 billion. We would undertake to update that estimate
this year. I am not sure exactly what the precise number would
be.
With regard to physician override, that clearly limits the
ability to control costs and to undertake the control of the
lowest possible source of a pharmaceutical. As a result, it
would lead to higher costs, other things being equal.
Chairman THOMAS. One of the debates, and I am sure it will
ensue again this year, over models that might be constructed is
the idea of creating a catastrophic or so-called stop-loss
structure, where there is some exposure which most people
believe that if you have copayments or other arrangements in
which beneficiaries share in the costs, that there might be
some savings over the long run by decisions that are made in
part because of out-of-pocket costs in which the beneficiary is
not insulated from all costs associated with the cost of
pharmaceuticals.
We provided a structure in the last bill which created a
stop-loss arrangement. My understanding is, again comparing two
specific solutions to in essence the same problem, that H.R.
1199 has a very low stop-loss structure, which might deal with
so-called--price induction, is the phrase that is used--if you
are dealing with, say, a $2,000 catastrophic as opposed to the
structure that we had offered.
What is your analysis of those different approaches to the
question of exposure of beneficiaries to costs in an overall
attempt to reduce the exposure to the Medicare trust fund?
Dr. HOLTZ-EAKIN. Well, I again go back to the rules of
thumb, which are incentive and opportunity. To the extent that
beneficiaries have an incentive to control costs, you will get
greater cost savings. Regarding larger subsidies, other things
being equal, if you subsidize 90 percent of any insurance
product versus, say, 70 percent, the larger subsidy will lead
to a lower incentive to control costs and will lead to higher
prices and higher spending.
Chairman THOMAS. So, the idea of an assistance to
individuals to shield them to any cost exposure ironically
would wind up with an overall higher price because the so-
called incentive that was there is no incentive at all?
Dr. HOLTZ-EAKIN. The key thing is to look comprehensively.
To get total costs, you want to look comprehensively. So, you
would want to look at incentives and opportunities for
individuals as well as for providers. Focusing on the
individual's part, having limited incentives to control costs
will lead to higher costs and higher prices.
Chairman THOMAS. Then the bottom line of all of this
questioning is that last year the bill that passed the House,
along with the modernization of prescription drug and provider
portions, cost somewhere in the vicinity of $350 billion, I
believe, and the bill that was purported to meet essentially
the same argument from the minority's perspective cost what in
last year's dollars?
Dr. HOLTZ-EAKIN. The CBO score last year was roughly $970
billion.
Chairman THOMAS. So, $350 billion to $970 billion. Of
course that is the direct result of having a catastrophic,
which in fact does not induce the appropriate behavior and
therefore costs more and does not have competition, such as we
indicated in not accepting some formulaic best price but rather
requiring actually a negotiated process to produce best price.
These are the kinds of questions that I think are important
to understand why bills contain certain provisions. When you
add up all the particulars, it does produce a product that
either brings about particular results at a cost that is
afforded under a budget proposal, or you get something that is
up to three times as expensive and, ironically in terms of the
way it is built, produces cost increases rather than cost
savings.
With that, I want to thank both of you for what you have
done and, obviously as we move into a more formal discussion of
solutions, what you are going to do for us. Does the gentleman
from New York wish to inquire?
Mr. RANGEL. Thank you, Mr. Chairman. Let me thank both of
you for pointing out expertly the degree and the serious nature
of the problem. Am I to assume that both of you studied the
House-passed bill in preparation for your testimony today?
Dr. HOLTZ-EAKIN. I am familiar with the House-passed bill.
I would not say that I am intimately familiar with all the
details.
Mr. WALKER. I am somewhat familiar with it, but I did not
study it before today.
Mr. RANGEL. Well, have you been privy to any draft of a
bill that the majority intends to offer for our consideration
at some point in time in the future?
Dr. HOLTZ-EAKIN. We have to date not scored any particular
bills at CBO. We have talked at the staff level in discussions
about ideas, and no more.
Mr. WALKER. I have not seen any proposed bill or framework
for a bill.
Mr. RANGEL. Do you think that professionally you could be
of better assistance to this Committee if you had before you a
bill as to the direction that we were going?
Dr. HOLTZ-EAKIN. It will in the end be the Committee's
judgement whether I am of assistance or not. I will tell you
that, in our experience at CBO, the details of proposals do in
fact matter a great deal, and the greater specificity of an
actual bill allows us to give a more precise answer, without
question.
Mr. WALKER. Obviously if you have a specific proposal, you
can make more targeted comments as to what the likely pros and
cons of that proposal are.
Mr. RANGEL. That makes a lot of sense to me. I get the
impression from the past conduct of this Committee that we are
seeing both of you for the last time on this subject matter.
[Laughter.]
Mr. RANGEL. Not having the slightest clue as to which
direction the majority is going to take us, we may ask you, in
an impartial way, to meet with--if we don't have a formal
meeting, to share your opinions of whatever comes from the
majority, wherever it comes from, so that we might be able to
again visit with you and have a better understanding of the
impact of the decisions that we will be making. I do hope that
before we vote on this bill, assuming the bill comes back to
this Committee and not go straight to the suspension calendar,
that we would have an opportunity to discuss this further.
Let me thank you for this meeting, Mr. Chairman.
Chairman THOMAS. Thank the gentleman. I think you will find
that oftentimes the most useful examination of an issue is in
comparison with alternatives rather than examining it in some
absolute environment, because then you have the opportunity to
weigh real choices between real alternatives. The Chair hopes
that as a plan is presented from the majority side that we will
have an opportunity to examine one from the minority side as
well.
Does the gentleman from Illinois wish to inquire?
Mr. CRANE. Thank you, Mr. Chairman.
Now, Mr. Walker, I have in front of me the GAO Medicare
Hospital Insurance Trust Fund projected deficit between 2010,
starting roughly 2010 going on into 2040. Is that projection
based on constant dollar value?
Mr. WALKER. Yes, 2003 dollars. So, it is adjusted for
inflation. It is the HI program alone. It does not include SMI.
Mr. CRANE. The reason I ask that is I came to Congress in
1969 and the dollar is worth about 10 cents today of what it
was when I came here. You have a 30-year period here, and that
30-year period would result in a $300 billion deficit. Is that
a $300 billion probable deficit or a $3 trillion deficit?
Mr. WALKER. No, it is a $300 billion, based upon 2003
dollars. So, in other words----
Mr. CRANE. I know, constant dollars.
Mr. WALKER. That is correct.
Mr. CRANE. Would you honestly expect that to happen?
Mr. WALKER. Well----
Mr. CRANE. How would you expect that to happen based on our
performance here for the last 35 years?
Mr. WALKER. We rely upon the trustees' assumptions as to
what they expect inflation is going to be when we end up coming
up with the discount factors. I think if you look in the past
at how the trustees have done in projecting what cost will be,
if anything, their intermediate assumptions have been low, not
high. So, I think it is a realistic picture, and I think the
bottom line is it shows you have a serious problem.
Mr. CRANE. Well, I remember when we worried about billions
and now we are talking trillions, and it will be quadrillions
in another 30 years at the rate we are going. Governments
always have a way of resolving those problems by just
escalating the quantity of money out there. That is something
that has me troubled about any of these kinds of projections,
based upon our performance over the past generation.
Mr. WALKER. What I would suggest, Mr. Crane, if you also
looked at it as a percentage of the budget or as a percentage
of the GDP, which we also presented information on, that may be
a more useful way for you to look at it. Either way, it is a
problem.
Mr. CRANE. Oh, yeah. Oh, no question about it, it is a
problem.
I would like to also ask you, Mr. Walker, in your testimony
you say GAO's long-term budget simulations show that absent
meaningful entitlement reforms, demographic trends and rising
health care spending will drive escalating Federal deficits and
debt. Neither slowing the growth of discretionary spending nor
allowing the 2001 tax reductions to sunset will eliminate the
imbalance. Given these estimates, it seems that it will be
difficult to modernize Medicare that includes prescription
drugs. If a modest drug benefit program that costs $400 billion
is going to be hard to create due to budget constraints,
wouldn't a $1 trillion plan be next to impossible without
massive tax increases, slashing other valuable Federal
programs, cutting provider payments, and forcing seniors to pay
large premiums and deductibles?
Mr. WALKER. I think it is important, whether you are
dealing on the spending side or the tax side, that you look at
not just the 10-year costs but also the long-range
implications, including discounted present value amounts.
Obviously, to the extent that you are talking about adding a
benefit that costs a lot more money, that is going to worsen
the long-range imbalance. We look at the bottom line, what is
the bottom line.
Mr. CRANE. One final question I would like to put to you,
either one or both of you, and that has to do with the
recognizing Medicare's current benefit costs are escalating and
to obtain ideas from CBO to slow that cost growth. The CBO
projects that, absent any change in the law, annual spending on
Medicare will more than double in 10 years to nearly $460
billion. An analysis by the Centers for Medicare and Medicaid
Services Office of the Actuary demonstrates that Medicare
spending last year spiked dramatically. What recommendations
have you regarding controlling costs of the current program,
and have you examined the recent MEDPAC recommendations and
what do you think of those?
Dr. HOLTZ-EAKIN. Congressman, it is not CBO's role to make
specific recommendations on how to control Medicare costs. I
would be happy to discuss with you the implications of adopting
any of the MEDPAC recommendations. We look forward to working
with you on that.
Mr. CRANE. Very good. Thank you. I yield back the balance
of my time.
Mr. MCCRERY. [Presiding.] Mr. Stark.
Mr. STARK. Thank you, Mr. Chairman. I want to thank the
witnesses. Mr. Walker, I wonder if you could comment on the
effect on Medicare if the tax cuts were not extended and,
instead of repealing the estate tax, we had merely gone with a
fairly large exemption, say $3 or $4 million, as was suggested
in an alternative plan; and that the taxes would rise as a
share of the GDP. What kind of doomsday scenario--how would
that change it, in effect?
Mr. WALKER. We have done an overall budget simulation under
several sets of assumptions. One set is the tax cut does not
sunset; the other assumption is that it does sunset. Obviously,
if it does sunset, then that makes the gap less in the outer
years. At the same point in time, it does not come close to
closing the gap. There is still a long-range problem
irrespective of what the Congress decides to do there.
Mr. STARK. Is the difference in those 2 scenarios about 25
years till implosion or explosion, is that correct?
Mr. WALKER. It makes a bigger difference when you are
starting to deal with the 2030 to 2050 period. You know, either
way, you have really escalating deficits, but the timing in
which you start seeing those deficits, obviously, is different.
Mr. STARK. Did you do any studies on the change needed in
the--if you assumed that we did not extend the 2001 tax cut or
the inheritance tax demise, what kind of a payroll tax increase
would be needed to----
Mr. WALKER. We didn't do that. We looked at the larger
fiscal picture, which is what the long-range budget simulation
is intended to be. Mr. Stark, the trustees' latest report for
2003 would show that if you wanted to solve the problem merely
through increasing the tax rate for HI, you would have to
increase the HI tax rate by 83 percent today in order to solve
it just through that. That would only solve it for the next 75
years. Every year we have a big deficit beyond the 75 year
horizon that has to be dealt with.
Mr. STARK. Well, I might ask the same question, Dr. Holtz-
Eakin. It is my understanding that we could pass the 75 year
solvency test--which we have never achieved, I might add--if we
increase the payroll tax by about 1.2 percent on both sides. Is
that a number with which you gentlemen would concur?
Mr. WALKER. Yes, 2.4 percent of taxable payroll. You are
correct, 1.2 percent on each side, which would be an 83-percent
increase.
Mr. STARK. In a sense, that would pretty much solve, given
what we know now about the increased spending on health care,
that would solve this problem financially speaking for all
time.
Mr. WALKER. No, it does not.
Mr. STARK. Seventy-five years.
Mr. WALKER. That solves Part A, HI, for 75 years; it
doesn't do anything about SMI, it doesn't do anything about the
broader health care challenge or the long-range fiscal problem.
Mr. STARK. Okay, so that is on the HI and the Part A side.
The worst-case scenario for 75 years, which is about as far
ahead as we care to plan. That is fair. Now, how much would it
take in--have you then to solve the Part B side to provide
enough additional general revenues to cover the 75 percent that
we fund now. If this were done, how much more than not
extending the 2001 tax cut and not eliminating the inheritance
tax, how much more revenue would that--My understanding, that
this total tax cut, including the interest cost, is about a $2
trillion loser.
Mr. WALKER. Well, first, I think it is important----
Mr. STARK. Is that correct?
Mr. WALKER. I don't have the number. I can provide it for
the record. I can tell you that--in fact CBO would probably be
the right place to get that number, since they are the ones
that are supposed to be doing the projections. I----
Mr. STARK. Give it to CBO.
Mr. WALKER. I would say for the record, though, Mr. Stark,
that the 2.4 percent is not worst-case. That is based on the
intermediate assumptions. The trustees have low-cost, high-
cost, and intermediate cost estimates. So, it is not worst-
case, and again, it only deals with HI, not SMI.
Mr. MCCRERY. Before----
Mr. STARK. Could I--Mr. Chairman, I just the indulgence to
hear Dr. Holtz----
Mr. MCCRERY. If Dr. Holtz-Eakin would like to answer, that
is fine.
Dr. HOLTZ-EAKIN. Briefly, I am not privy to the simulations
that Mr. Walker has discussed. In the chart that I showed you,
what we displayed was a rise in Medicare costs from about 2.5
percent of GDP to in excess of 9 percent of GDP over the 75
year horizon you are discussing. Those costs will have to be
financed somehow. Spending is ultimately a burden on the
economy. I would also point out to you that these are
projections made under the assumption that health care costs
rise 1 percentage point faster than GDP. Historically, Medicare
costs have risen 2.8 percentage points faster than GDP. So,
these projections actually contain the assumption that there
will be steps taken to bring cost growth down. To the extent
that that does not happen, these numbers would be, in fact,
dramatically larger than the estimates that are in my written
testimony. The particulars of the financing which you have been
discussing, I would argue, are secondary to the ultimate
observation that the outlays will rise as a fraction of the
economic resources in this economy that are available to
finance those programs and any others.
Mr. MCCRERY. Dr. Holtz-Eakin, do these numbers include the
addition of a prescription drug benefit?
Dr. HOLTZ-EAKIN. No, they do not.
Mr. MCCRERY. How much difference would it make if we were
to add a $400 billion or trillion----
Dr. HOLTZ-EAKIN. We would have to do a careful set of
estimates. I would be happy to work with you on that. Four
hundred billion dollars is roughly $50 billion a year over the
8 years of the budget window in which a drug benefit would be
in effect. That is a number that is well under 1 percent of
GDP. However, as I pointed out in my remarks, prescription drug
spending has been growing more rapidly than Medicare spending
as a whole, and so the long-term outlook would certainly be
worse, other things being equal. The precise numbers--we could
work with you to develop an estimate.
Mr. MCCRERY. Mr. Walker.
Mr. WALKER. I would hope that there would be an effort to
come up with what would be the discounted present value of what
the cost of the program would be, not just looking at the 10-
year numbers, because they can be very misleading. I think it
is important to look beyond that, because we don't really start
to hit the major part of the demographic tidal wave until
beyond the 10 year point. Therefore, you can get a false sense
of security if you just looked at 10-year numbers. They can
explode beyond that.
Mr. MCCRERY. Mr. Shaw.
Mr. SHAW. Mr. Walker, I want to go back to a point that you
covered in your testimony. This goes back to the first graph
that you had up there, in which you talk about Medicare going
into a cash deficit in the year 2013. In that regard, of
course, we have Treasury bills that are in there, and they
won't be exhausted until what year?
Mr. WALKER. The year 2026 is when the special issue
Treasury securities will exhaust.
Mr. SHAW. Does the fact that we are going through the
process of cashing in Treasury bills, do they have any real
economic value to the program?
Mr. WALKER. I am not a Ph.D. economist, but I would say no,
they don't have an economic value. They have a legal
significance, they have a moral significance, they represent a
priority claim on future general revenues, but they do not have
an economic value.
Mr. SHAW. You may not be an economist, but you are
certainly a well-versed certified public accountant (CPA). As
such, you certainly know the difference between a real economic
asset and one that is not. I certainly accept your explanation.
So, what you are talking about and what you are telling this
Committee is that 2013 is the year in which, really, the system
is going to have to--we are going to have to find other ways to
pay benefits if we are going to keep taxes at their present
level and not cut benefits. Is that correct?
Mr. WALKER. Correct. You are either going to have to raise
taxes, cut spending, or go into more public debt financing in
order to convert these bonds into cash.
Mr. SHAW. Now, the same thing applies to Social Security,
doesn't it? What year is that?
Mr. WALKER. I believe it is 2018, Mr. Shaw.
Mr. SHAW. It just changed recently, and I believe you are
right. It was 2016. I think it has been changed. So, the same
thing applies in Social Security, where there are not real--
those Treasury bills are no real economic assets. It is simply
evidence of a moral obligation that a future Congress is going
to have to figure out how they are going to pay the benefits
and how they are going to pay off those Treasury bills. Is that
not correct?
Mr. WALKER. That is true, and personally I think that
Congress has a stewardship obligation. You need to look beyond
just today. You need to look to future generations and what
type of burdens are being passed on to them.
Mr. SHAW. So, I guess regardless of what particular road
the Congress may decide to go on eventually, we are going to
have to, if we want to do something, we are going to have to
start building up in some way real economic assets that the
Social Security Administration as well as Medicare will have
some type of a call on, unless we drastically restructure the
system. Is that not correct?
Mr. WALKER. Well, we are going to have to do something.
There are different ways to reform Social Security and
Medicare. The fact is, the Medicare problem is multiple times
worse than the Social Security problem.
Mr. CRANE. Will the gentleman yield?
Mr. SHAW. I yield.
Mr. CRANE. Is not one alternative solution also to increase
the money supply?
Dr. HOLTZ-EAKIN. No, sir. Over the long term, what will
serve as resources to pay these obligations of the Federal
Government and finance the private sector as a whole will be
the real (inflation-adjusted) economic resources. Those will
develop independently of movements of the money supply in the
short term.
Mr. CRANE. Well, no, my point is that is what we have been
doing for the last 30 years, is just increasing the money
supply. We have a steady erosion of the integrity of our
dollar, and we have had it going on for 30, 35 years.
Dr. HOLTZ-EAKIN. The evolution of inflation in the United
States is certainly one that we can discuss at length. I would
point out that in both the presentations we have adjusted for
that. We have taken out the inflation components and have
isolated just the part that has to do with real economic
growth.
Mr. CRANE. Oh, I know you have in your projections, but
what I'm saying is that is one of the alternatives that, sad to
say, government can fall back on.
Mr. SHAW. Let me reclaim my time, as it is about to expire.
Again, as Mr. McCrery asked, on the previous chart that was up
there, you have not built in any prescription drugs into your
prediction?
Mr. WALKER. No, this is the current program. It does not
include any potential prescription drug benefit.
Mr. SHAW. I thank you both for your testimony. I wish you
could have brought us better news, but you have to tell us what
you think and there is no sense in going after the messenger
because the real problem lies with us right here. Thank you.
Yield back.
Mr. MCCRERY. Mr. Shaw makes an excellent point about the
savings that we have in the trust fund. To make it crystal
clear, it is kind of like me telling myself I am going to save
for my son's college education, and I am going to save 3
percent of my income. I write a check for 3 percent of my
income, but instead of putting it in savings, I spend it on a
car or a house or whatever and I write myself an IOU and put it
in the drawer. So, that when my son gets to college age, I take
those IOUs out and spend them on his college education. Well,
clearly, I have to come up with the money somewhere to pay
those IOUs.
Mr. SHAW. Or he doesn't go to college.
Mr. MCCRERY. Or he doesn't go to college. So, it is an
excellent point that Mr. Shaw makes. It is not the trust fund
that we need to worry about so much as it is the cash flow.
Mr. Levin.
Mr. LEVIN. Welcome. I was going to ask you about deficits,
but I have decided not to do so. It is interesting that people
shift in terms of their attitudes toward deficits. When it
comes to tax cuts, we have been hearing deficits don't matter.
Then some of the same people who said that, when it comes to
their desire to restructure Medicare, deficits are supremely
important. It seems to me there needs to be some consistency in
position. Some of us who have thought deficits have mattered
and acted that way for the last 20 years have tried to be
consistent.
It is also interesting, when it comes to estimates, there
is also kind of the same pragmatic approach, to put it
charitably. When people want to accomplish a certain purpose--
in this case Medicare and restructuring it--they talk about
these estimates as if they are divinely decreed. Then, if they
are defending a so-called growth package, they say what Mitch
Daniels said just a month ago or 2 months ago, that these
estimates, 10-year estimates are not just flawed but wildly
misleading, to quote him exactly.
So, I think I won't pursue these issues here, but just talk
about a few other things. By the way, in terms of projection in
Medicare spending--maybe this isn't fair to the new Director,
but I think CBO's estimates on Medicare spending the last 6 or
7 years, as I see the data, those estimates have not been very
accurate, have they? They have overestimated actual spending in
their projections. Or maybe you don't have that data.
Dr. HOLTZ-EAKIN. I don't have the history in front of me. I
will be happy to provide the history, if you would like that. I
will point out that in doing its projections, CBO is
constrained to project current law. In those circumstances, if
after the projection is made the Congress chooses to alter
physician payments or other attributes of the Medicare program,
we will of necessity have our numbers be wrong after the fact.
It is the nature of the projection process. We can happily go
back and examine the history and find those situations where we
might be able to improve it, given that we are constrained to
project current law.
Mr. LEVIN. Okay, if you would do that and provide us the
information. I don't mean to minimize the problem for 1 minute.
I just think there needs to be a consistency and we should not
be using these figures to suit our particular purpose and then
the next week take the opportunity position.
Let me ask Mr. Walker about your statements on page 2 about
Medicare's overly generous rates. I just saw some material from
southeast Michigan hospitals that talked about $40 million
losses. Would it be possible--I am not sure this is within your
authority--for you to come to Southeast Michigan and sit down
with the hospitals and determine what the true picture is? Is
that something consistent with your----
Mr. WALKER. Well, Mr. Levin, I don't know that it is
consistent. I would be happy to talk to you about what may or
may not be appropriate for us to do. The reimbursement rates
can vary based upon the type of provider involved, the locality
involved, and a variety of factors. So, we have to be careful
when we talk about averages because there can be significant
variances from averages.
Mr. LEVIN. Okay, let us do that. By the way, when you talk
about overly generous rates for certain services and products,
has that applied in some instances, some substantial instances
to reimbursements or payments to Health Maintenance
Organizations (HMOs), to managed care organizations?
Mr. WALKER. We have reported on that, we have reported on
skilled nursing, and a variety of things----
Mr. LEVIN. You have reported on overly generous payments to
HMOs?
Mr. WALKER. We have done some work on that and I would be
happy to provide it to you.
Mr. LEVIN. Thank you.
Mr. WALKER. Again, one has to be careful, because there can
be big variances from the average.
Mr. LEVIN. That applies to HMOs, to various payment
structures, right?
Mr. WALKER. Correct.
Mr. LEVIN. Thank you.
Mr. MCCRERY. Mrs. Johnson.
Mrs. JOHNSON OF CONNECTICUT. Thank you, Mr. Chairman, and
thanks to both of you for laying out very clearly and quite
starkly the problem that confronts us with the entitlements. It
is absolutely clear that we have to add prescription drugs to
Medicare with that information in mind. It would be very
helpful, because Members on both sides of the aisle, whether
they are on this Committee or the Committee on Commerce, in
this body or the other body, whether on the major Committees or
off the major Committees, are trying to think this through. I
think it would be helpful if you took the charts that you did
for us today, the primary ones having to do with out-year
growth, and accommodated them for the assumption of $400
billion spent on increase in Medicare spending for the drug
bill, 500, 600, 700, 800, 900, and a trillion. There was a
trillion-dollar proposal last year that had some significant
Members behind it, and all Members on both sides of the aisle
need to see what the out-year impact of those different breaks
would be.
Then you both testified in one way or another to the
minimum tools that Medicare has to control spending. So, it
would be very useful if you could kind of do an analysis for us
of the major plans, taking primarily the other body's
Democratic plan--because I think it is fair to say it was the
best developed. Now, that may not be true, and I would
certainly allow my Democrat House colleagues to determine what
plan you should take. For instance, our plan last year had a
lot of tools in it. Some of them were very controversial. We
need to see what impact those tools would have on spending
growth.
For example, we allowed negotiating below the best price.
The CBO gave us $18 billion credit for that. We required people
to actually spend their own money to reach the catastrophic
threshold--not they're employer's money, not their insurance
company's money, their own money. That actually, I think, saved
us, as I recall, $40 billion.
So, Members on both sides need to see what are some of the
tools that are employed in the major bills that are out there
to control spending, and what has been the consequence. For
example, if you write the premium in law, then you no longer
have the ability for efficient plans that negotiate a better
drug benefit for lower cost, to be able to charge less. You
know, what are the implications of that?
So, I think we need to get a better grasp, I think all
Members need to have at their disposal a better grasp of what
you can do. What happens if you change Medigap law so that
Medigap is not allowed to cover the deductible and copayaments
in Medicare? My understanding is that one tool that has worked
is first dollar responsibility.
So, I would like you to comment on particularly tools that
we don't have in Medicare that you think it would be advisable
for us to consider having because of their impact on cost
growth. As you comment on that, I would remind you, Dr. Holtz-
Eakin, that we sent you a letter about prescription drugs and
specific drugs that if people take they stay out of the
hospital, they don't get in an emergency room, they don't even
see the doctor as much. Where are we in the science--and you
might want to comment on this, too, Mr. Walker--the science of
being able to determine what portion of the prescription drug
effort will actually reduce hospital and other costs, and how
could we structure our bills to focus on those drugs in those
diseases that are most likely to have the effect on the rest of
the plan of reducing costs. Are any of you doing any analysis
on the small percentage of seniors that have five chronic
illnesses and are eating up the majority of the money, and how
would--so that you can begin helping us think through, how do
we focus on that? If we focus on the people with chronic
illnesses, with five chronic illnesses, we should be able to
reduce costs and at the same time improve quality of care.
So, I have just laid out some tools here. We will be
sending you--in fact, I delivered today to you, Dr. Holtz-
Eakin, a binder on the issue of chronic disease management and
if we are able to feed in the seniors that meet that criteria,
do we have a potential, and what is that potential in dollar
amounts, to constrain cost growth and at the same time improve
the quality of care.
So, what ideas would you commend to us, what tools would
you urge us to give Medicare to bend this cost curve?
Dr. HOLTZ-EAKIN. Well, Congresswoman, if I could take those
in reverse order. First of all, thank you for the information
you provided to CBO. We will add it to the wealth of studies
that we are examining.
With regard to the ability to identify high-cost patients
in Medicare, we are looking at the degree to which those high-
cost patients are high-cost patients not just for 1 year, but
for many years thereafter, and also, the degree to which they
are identified with particular diagnoses and chronic illnesses.
These are areas of active study at CBO. We look forward to
working with you. We have not yet reached firm conclusions on
the ability to move forward with a specific program to identify
individuals and estimate cost savings from those kinds of
approaches, but it is certainly under study.
On the question before that, the degree to which
prescription drugs will lower costs elsewhere, we have
investigated this at some length. To date, while there are
cases of specific diagnoses--particularly heart disease--where
one can identify a tradeoff between prescription drugs and
traditional therapies, on balance, the peer-reviewed literature
and the research community has not yet reached any kind of an
indication that we get an overall saving from providing
prescription drugs. It is an area in which CBO has a lot of
interest, and we will continue to study it.
On your first question regarding tools for cost
containment, I would point you to the broad mantra of
incentives and opportunity. To the extent that a prescription
drug provider has incentives to control costs by being at risk
for the insurance risk in a program and has tools available--
opportunities to control costs by negotiating with
manufacturers, by picking a single drug out of a class of
drugs, and a variety of mechanisms of that type--one will get
better cost containment from providers. The same lesson would
apply on the beneficiary side as well. I would be happy to work
with you on the particulars of those lists.
Mr. WALKER. Mrs. Johnson, we have already done a fair
amount of work on this and we have other work under way. We
look forward to working with you and others on it.
I think you make a good point. The Congress may well decide
that it wants to update Medicare to include a prescription drug
benefit because, had you designed Medicare today, you would
undoubtedly have included a prescription drug benefit. However,
it is also important to learn the lessons from what has
happened since 1965 in the design of insurance, of health
insurance. You need to learn those lessons and try to design
this benefit in a way that provides incentives to control cost.
I think you also, frankly, in time are going to have to do the
same thing for the whole Medicare program. I think you are
going to have to fundamentally reassess the entire Medicare
program because as it is presently designed it is
unsustainable. We don't have the right type of incentives,
transparency and accountability mechanisms in place, and you
are ultimately going to have to do it for the whole program.
Mrs. JOHNSON OF CONNECTICUT. Thank you.
Mr. MCCRERY. Dr. McDermott.
Mr. MCDERMOTT. Mr. Chairman, I think we ought to have some
truth in advertising here. This says this is going to be a
Committee hearing on expanding coverage on prescription drugs.
We don't have any plan before us, neither one of the witnesses
are talking about a plan that anybody is putting forward. So, I
think what we are talking about is how to get rid of Medicare.
So, I want to talk a little bit about Medicare.
Mr. MCCRERY. You may proceed.
Mr. MCDERMOTT. Dr. Reinhardt in his testimony suggests that
there is data from the Dartmouth Study that in Texas they spend
$9,000 per patient, or in Miami, $7,800 per patient, and in
Oregon they spend $3,600 per patient. Now, there is a recent
study that came out of the group up at Dartmouth that suggests
there is no advantage, health-wise or satisfaction-wise, from
either a double or a triple expenditure in Miami. Where are you
with a proposal? Now, I say that I look at what happens with
doctors' fees, where we have set a global budget, and we said
we were going to control how much money and therefore we figure
out through the scheme how much we are going to pay. The thing
we didn't control was utilization. Utilization is out of
control.
The same is true in the South, or in many parts of the
country. I wouldn't just say the South, because it is not only
in Baton Rouge and in Miami that you get these big
expenditures, but it is other places. What you find is, it is
longer hospital stays and it is more specialists seeing
patients.
I come from a place where if we were running a health care
system like the State of Washington or Oregon or Minnesota,
there would be no Medicare problem here. I wonder what you guys
have as suggestions of how we fix the present system. What
answer do you have to the utilization problem? We get as good
results in Washington State as they get in Miami and Baton
Rouge, for less than half the amount of money.
Now, what is the solution? You are both supposed to have
some ideas here for us, how we are supposed to fix the Medicare
plan.
Dr. HOLTZ-EAKIN. You are first.
Mr. WALKER. Well, first let me say there are probably four
things primarily driving the overall cost. There's the number
of persons involved; inflation--both overall inflation, and
then health care costs in excess of that; there is utilization,
which you properly point out; and there is intensity, the
intensity of care. All these factors end up increasing the top
line on health care costs.
I would respectfully suggest, for any system to work,
whether it be health care, whatever system it is, you have to
have incentives for people to do the right thing, including
controlling cost, reasonable transparency to make sure
somebody's looking; and appropriate accountability mechanisms
if somebody tries to abuse the system. I would respectfully
suggest our Medicare system does not meet any of those
criteria. I would be more than happy to provide some
information for consideration by the Congress.
Mr. MCDERMOTT. I realize you have made a diagnosis, but
what is the cure? Tell me the economic--see, I am not an
economist like you guys are. I don't understand dollars and
cents. So, I am looking to you to tell me what mechanism you
put in place for this incentive program.
Mr. WALKER. Well, for one thing, I think that ultimately
the Congress is going to need to reconsider fundamentally what
is the promise. What is the promise in Medicare? Let me give
you an example.
If you look at health care, there are several important
elements. One is guaranteed access at group rates. The second
is the affordability of that. The third is protection against
financial ruin due to catastrophic illness. There is room in-
between. You can have guaranteed access to insurance at group
rates. You could end up providing significant protection
against financial ruin. You could end up having more cost-
sharing, which is where you need more cost-sharing. Where you
don't have enough incentives to control cost. I also don't
think that we have adequate, timely, and useful information to
analyze what is going on out there. The data that we have for
health care is often 2 and 3 years old. Health care is a huge
percentage of our economy. A lot of the data that MEDPAC and
you have to rely upon to make decisions is old data and it is
provided by providers, who have a fundamental conflict of
interest.
So, I would be happy to be able to provide some information
for you to consider. It would be a fundamental review and
assessment of the current system. You need a comprehensive
review but will probably need to act incrementally.
Mr. MCDERMOTT. Do you think the 52 percent that
beneficiaries already pay is not enough incentive to control
cost? Do you think that they are the ones--is that who? It
sounds like they are the ones that you think ought to be
controlling the costs, not the professionals.
Mr. WALKER. No, I think there is clearly room, both on
behalf of those who are being paid as well as the
beneficiaries. So, I don't think it is one side or the other. I
think there are issues both ways. I would be happy to have a
conversation with you about it. It is a large subject.
Mr. MCCRERY. Mr. Ramstad.
Mr. RAMSTAD. Thank you, Mr. Chairman. Thank you, gentlemen.
Dr. Holtz-Eakin, I just want to try to get my arms around
Medicare spending, putting it in a contextual basis, if you
will. You stated that your projections show at CBO that overall
Medicare spending is expected to quadruple by the year 2075 to
more than 9 percent of GDP. I believe that the assumption was
that we make no major changes to Medicare. Today the size of
our GDP is roughly at $10 trillion. What does CBO estimate the
GDP to be in 2075? If it is $10 trillion today, what is it
going to be in 2075?
Dr. HOLTZ-EAKIN. That is a number we could get for you. It
is going to grow over the long term at an average annual rate
of somewhere between 3 percent and 3\1/4\ percent, and over
long periods that will add tremendously to the overall size of
the economy. I can get back to you with the precise number.
Mr. RAMSTAD. Yeah, because I would like to know if we don't
make changes to Medicare, then according to your statement one
can deduce that Medicare spending in 2075 would be 9 percent
of----
Dr. HOLTZ-EAKIN. A very large number.
Mr. RAMSTAD. A very large number.
Dr. HOLTZ-EAKIN. We can get both large numbers for you, if
you would like.
Mr. RAMSTAD. Okay. I think that context is important,
certainly. Then to follow up your colloquy with Mrs. Johnson,
did I understand you to say that a prescription drug benefit
for Medicare seniors should not be enacted without overall
Medicare reform?
Dr. HOLTZ-EAKIN. In the end, the Congress will decide the
best path to go forward. My discussion with Mrs. Johnson was
about the extent to which prescription drugs--the introduction
of prescription drugs into a therapy--would provide cost saving
elsewhere in the medical system. The evidence thus far does not
indicate automatic cost saving so that you get an offset from
traditional therapies when you introduce prescription drugs.
Mr. WALKER. I said that I believed that it would be prudent
to address both at the same time.
Mr. RAMSTAD. That is right, it was your colloquy with Mrs.
Johnson. Excuse me.
Mr. WALKER. That is correct, that it would be prudent to
engage in reforms of the program, not just to add on a
prescription drug benefit. Congress ultimately can do whatever
it wants, whether it is prudent or not.
Mr. RAMSTAD. Again, Mr. Walker, asking you the question, is
it a fair assessment of your statement that a prescription drug
benefit for Medicare seniors should not be enacted without
comprehensive Medicare reform?
Mr. WALKER. My statement says, first, that I think it is
evident that you are going to do something on prescription
drugs, and it is arguably needed at this point in time. You
should be careful about how you design that program, and you
should also couple it with more comprehensive reforms--not just
make the long-term situation worse.
Mr. RAMSTAD. That certainly is responsive to the question.
I very much appreciate that answer. I think that is what most
of us believe, at least on this Committee, that to do it
without the context, not within the context of overall Medicare
reform is making a serious mistake, for the reasons you cited
and alluded to.
I just want to ask in my remaining couple of minutes, Dr.
Holtz-Eakin, let me also say that I think Congress is fortunate
to have an economist of your caliber at the helm. You do not
have an easy job, either one of you gentlemen, and we
appreciate your good work.
Most of us, I think, who support a prescription drug
benefit for seniors do see a cost saving to Medicare. Won't
there be a cost savings if seniors have greater access to
prescription drug therapies rather than the more--what is
documented is more costly and intrusive inpatient and
outpatient treatments that are currently covered by Medicare?
Dr. HOLTZ-EAKIN. While I applaud your intuition, in the
end, when we do the cost estimates, we rely on the evidence
that is available in the research community as a whole. While
we have found specific instances in which there are cost
savings, as a broad statement for the health care system as a
whole, there is not evidence yet that that is taking place. So,
I cannot offer that hope to you.
Mr. RAMSTAD. Well, you are right. My intuition is based
more on anecdotal experience than empirical data. I would like
to see the study you allude to.
Dr. HOLTZ-EAKIN. We will be happy to work with you on that
and would look forward to any information you might be able to
provide to CBO.
Mr. RAMSTAD. It just seems counter-intuitive to me, but
again, I defer to your empirical data. I would like to see
those studies, if I could.
Mr. WALKER. If I can, the evidence is that is not the case.
The evidence is, is that but for a few exceptions where there
may be a savings, that he has referred to, that in the
aggregate there is not a savings.
Mr. RAMSTAD. Again, to me that seems counter-intuitive, but
I would like to explore that further. I thank you very much for
being here today and your responsiveness to my questions.
Mr. MCCRERY. On the next panel we have some health care
economists, so maybe they can explore that with us at greater
length. Generally, I think the response given by the two
witnesses before us comports with what we have been told by
health care economists before. Maybe part of the reason for
that is that most of the medical expense for seniors occurs in
the last 6 months of their lives. Regardless of the fact that
we give them preventive care or medications or whatever,
eventually they are going to get sick and die, and that means
they are going to have the last 6 months of life which is going
to be expensive. So, quality of life is one thing, but saving
money is another. I am not sure the evidence, unfortunately,
points to significant, if any, savings because of preventive
care or a health care regimen.
Mr. Kleczka.
Mr. KLECZKA. Thank you, Mr. Chairman. I have a few
concerns. Let me start with Mr. Walker. Could we put that chart
back up on the trust fund deficit?
My question, Mr. Walker, is if I were preparing a net worth
statement for myself, I would naturally list the cash, right?
If I had a promissory note due me, would that be listed as my
asset?
Mr. WALKER. If it was a good promissory note, yes.
Mr. KLECZKA. No, don't--good, bad, indifferent. It is a
promise we made. We will make the judgment, not you. If it is a
promissory note, that would be part of my asset base and end up
in my net worth, would it not?
Mr. WALKER. Yes, it would be considered.
Mr. KLECZKA. Okay, that is why I think this chart is very
disingenuous, to say the least, because you might contend that
cash is king, but nevertheless it is not a true picture of the
entire net worth of the HI Fund. The fact that we have
promissory notes in the fund is Congress' doing. At the time
the cash, King Cash, is running out, this Congress or whatever
Congress is going to have to make the judgment whether or not
to make it whole. By presenting this chart, and your comments,
you indicate, well, the money is gone, folks, and let us not
kid each other, Congress is not going to raise taxes to replace
it. You know, that is a decision we will make, not the
comptroller general or the GAO.
In 2013, if I were to include the trust fund balance, the
money that is in treasuries, what would be the actual fiscal
portrayal? In 2013. Right now you have it at almost zero.
Mr. WALKER. No, at 2013, what happens is you have--the
annual income that you get from payroll taxes and other
revenues is not adequate to pay current benefits.
Mr. KLECZKA. I am fully aware of that. Now, we have been
amassing a balance over the years because we saw this day
coming years ago.
Mr. WALKER. That is correct.
Mr. KLECZKA. There is in fact a surplus. You chose not to
reflect it because you are only doing a cash portrayal here.
Mr. WALKER. No, I have reflected it. If you want to use
real accounting here, Mr. Kleczka, real accounting, it is a
$6.2 trillion deficit. That is real accounting.
Mr. KLECZKA. Okay, now--no, no, no, no. Is there not a
balance in a trust fund that is not cash, that is promissory
notes?
Mr. WALKER. That has value--it has legal significance.
Mr. KLECZKA. What is that amount?
Mr. WALKER. The amounts in the HI Trust Fund, let me see.
Mr. KLECZKA. No, I am looking for a comparison in 2013.
Mr. WALKER. Two hundred and eight billion dollars----
Mr. KLECZKA. Two hundred and eight billion dollars?
Mr. WALKER. In the HI Trust Fund----
Mr. KLECZKA. For what year?
Mr. WALKER. At the end of 2001, so at the end of 2002,
$234.8 billion.
Mr. KLECZKA. All right, so that blue line would be much
higher, and by the time you got to the red line, if you did an
accurate accounting, that red would occur further out and would
not be as dramatic if you did a true accounting using the
entire trust fund balance that is in promissory notes.
Mr. WALKER. Oh, we have that information. I have provided
that before.
Mr. KLECZKA. Could you possibly provide it again, maybe in
an updated form?
Mr. WALKER. I would be happy to.
[The information follows:]
Medicare's Hospital Insurance Trust Fund Balances 2002-25
Below are the Medicare trustees' 2003 intermediate estimates for
all years in which the HI Trust Fund is shown to have a positive
balance.
Estimates are provided in nominal and real (2003) dollars as of the
end of calendar years.
----------------------------------------------------------------------------------------------------------------
HI Trust Fund (EOY) HI Trust Fund (EOY) (millions
CY (millions) 2003$)
----------------------------------------------------------------------------------------------------------------
2002 $234,831 $240,467
----------------------------------------------------------------------------------------------------------------
2003 $258,537 $258,537
----------------------------------------------------------------------------------------------------------------
2004 $282,587 $275,991
----------------------------------------------------------------------------------------------------------------
2005 $310,944 $295,714
----------------------------------------------------------------------------------------------------------------
2006 $341,790 $315,828
----------------------------------------------------------------------------------------------------------------
2007 $375,185 $336,580
----------------------------------------------------------------------------------------------------------------
2008 $410,486 $357,535
----------------------------------------------------------------------------------------------------------------
2009 $446,563 $377,612
----------------------------------------------------------------------------------------------------------------
2010 $482,284 $395,964
----------------------------------------------------------------------------------------------------------------
2011 $517,390 $412,427
----------------------------------------------------------------------------------------------------------------
2012 $551,710 $426,954
----------------------------------------------------------------------------------------------------------------
2013 $583,578 $438,451
----------------------------------------------------------------------------------------------------------------
2014 $611,621 $446,146
----------------------------------------------------------------------------------------------------------------
2015 $634,426 $449,310
----------------------------------------------------------------------------------------------------------------
2016 $649,966 $446,897
----------------------------------------------------------------------------------------------------------------
2017 $656,658 $438,356
----------------------------------------------------------------------------------------------------------------
2018 $652,578 $422,928
----------------------------------------------------------------------------------------------------------------
2019 $635,688 $399,980
----------------------------------------------------------------------------------------------------------------
2020 $603,483 $368,674
----------------------------------------------------------------------------------------------------------------
2021 $553,018 $328,006
----------------------------------------------------------------------------------------------------------------
2022 $480,545 $276,716
----------------------------------------------------------------------------------------------------------------
2023 $382,258 $213,707
----------------------------------------------------------------------------------------------------------------
2024 $254,600 $138,189
----------------------------------------------------------------------------------------------------------------
2025 $93,987 $49,527
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis and data from the Office of the Actuary, Centers for Medicare & Medicaid Services.
Mr. KLECZKA. So, at least we can honestly portray this. No
one is talking cash-only, even though you might contend cash is
king. I think you have to look at the total picture. If you are
right, in year 2013 Congress shies away from making whole the
trust fund and we don't want to cut spending or whatever to
make the money whole, we will put up with a riot from those who
put money into the fund, but nevertheless that is a
congressional not a GAO decision.
Let me ask Dr. Holtz-Eakin a question about his chart. This
is the one that is entitled Medicare Beneficiaries by Income
Level and Drug Coverage.
Now, as I look at this chart, at all income levels, the
blue line is pretty hefty, indicating that seniors have drug
coverage. Did you do an analysis of what type of coverage we
are talking about? Is this a moderate policy, is it a Cadillac
plan, is this a couple of generics, is it a Medicare Choice-
type thing--which naturally they are dropping the drug
coverage. Is there an analysis of what the blue means? Is that
decent coverage?
Dr. HOLTZ-EAKIN. Underneath those numbers are a wide
variety of plans, in fact--some programs, which are employer--
--
Mr. KLECZKA. Medicare is in there also?
Dr. HOLTZ-EAKIN. This is coverage of any type. So, it is
also employer-provided plans and Medigap policies. To the
extent that they have coverage from any source, it is reflected
in this----
Mr. KLECZKA. So, it goes from low to high. So, it is not
really an indicator for the Committee or for the Congress that
there is adequate coverage out there, or sufficient, or a
decent benefit being provided to seniors? It is just who has
anything?
Dr. HOLTZ-EAKIN. To the extent that we were trying to
capture that, it is in the other graphs that show the degree to
which beneficiaries would face out-of-pocket expenses versus
covered expenses.
Mr. KLECZKA. Have either or both of you gentlemen looked at
the President's drug plan that he submitted to the Congress?
Mr. WALKER. I have not analyzed the President's plan.
Dr. HOLTZ-EAKIN. The President provided insufficient
evidence for CBO to do any real analysis of it, as we discussed
in our analysis of the President's budget that we put out in
March.
Mr. STARK. Would the gentleman yield?
Mr. MCCRERY. The gentleman's time has expired.
Ms. Dunn.
Mr. STARK. I guess not.
Ms. DUNN. Thank you very much, Mr. Chairman. Thank you for
being here gentlemen. Mr. Walker, I want to go to a point that
Mr. McDermott touched on briefly. In your testimony you stated
that Medicare pays overly generous rates. That is not, we feel
in my State of Washington, necessarily close to the truth. You
also mentioned that Medicare's payments are based on averages.
I am very concerned about the variation in payments from one
region to another. I am wondering if you come to us with any
recommendations to create more equity in these payments. For
example, do you have recommendations on the formula that is
used to determine these payments?
Mr. WALKER. Not today, Ms. Dunn. Let me say that what is in
my testimony talks about the fact that GAO has done work that
in some cases there are over-generous payments, not in all
cases. We have also done work to show that there can be
significant differences in what reimbursement rates are in
different regions of the country, and also the reasonableness
of what those reimbursements are between different types of
providers. So, it is not a one-size-fits-all. I would be more
than happy to follow up with you after the hearing, if you
want.
Ms. DUNN. Yeah, I would appreciate that. It is a continuing
problem in our State, where we believe we produce the best
medical care available in the country, and yet we are having a
hard time holding onto our doctors and keeping our hospital
doors open because the reimbursements aren't there at the same
rate that they are in many other States whose quality of care
is not any better than ours.
Mr. Walker, let me ask you, too, about a GAO report that
was released in January. It was on the role of the
pharmaceutical benefits managers (PBM) in the Federal Employee
Health Benefits program. I am wondering if you can summarize
your findings in that report. Did beneficiaries, for example,
have sufficient access, do you think, to retail pharmacies?
Mr. WALKER. I think the bottom line in that report is that
PBMs are a tool that had been used, including by the Federal
Employees Health Benefit Plan. It is a mechanism that the
Congress may well want to consider in conjunction with
providing a prescription drug benefit under Medicare. There
are, however, some differences between how Medicare
historically has been arranged--any willing provider, and so
forth. There is an opportunity for cost savings here with
regard to PBMs, but there are some adjustments that are going
to need to be made if you're thinking about doing it under
Medicare.
Ms. DUNN. Your comment on access to retail pharmacies?
Mr. WALKER. Most have a broad network. It can vary, but
yes, there are access to retail pharmacies in some
circumstances, yes.
Ms. DUNN. Thank you. Thank you, Mr. Chairman.
Mr. MCCRERY. Mr. Portman.
Mr. PORTMAN. Thank you, Mr. Chairman. Let me start off, if
I could, by following up on Ms. Dunn's question. Your GAO
report with regard to pharmacy benefit managers, it seems to
me, gave us some good information with regard to the so-called
brick-and-mortar or retail pharmacies. Many of them were quite
concerned with the bill that was enacted--not enacted, but
passed by this Committee and by the House of Representatives
last year. Despite the fact that we did not allow direct-mail
pharmacies to have a dominant position, still they were
concerned that they might not be accessed by the Medicare
prescription drug plan we put forward. So, I think to the
extent you can provide us this new information in relation to
this new legislation we are hoping to put together this year,
it would be very helpful.
What I took from it was that in the experience of the
Federal Employee Health Plan, that in fact there was access to
retail pharmacies. Perhaps that is a good example for us to use
and to try to allay some of those concerns, because all of us
have them, particularly those of us who represent small towns
where you have pharmacies that really provide more than just
the prescription drug, but also more health maintenance and
preventive health for beneficiaries.
I would like to go back, though, if I could, to some of
your earlier testimony. I apologize that you have to sit here
and be told by some of our Committee Members that you are
coming here to tell us how to get rid of Medicare. I feel just
the opportunity about it. I think that is offensive to you, two
professionals who, in the case of Mr. Walker, I know has spent
a lot of time on this issue, and to our newest CBO Director.
I appreciate the fact that you are giving us what I view as
straight talk. This is a very politically charged issue, as you
have seen here this morning. Again, Mr. Walker knows that from
working on it in the past. We need good data. I thought you
were responsible in terms of how you presented the solvency
issue because it is true that the lines do cross at 2013. It is
true that then Congress has choices to make. You laid out those
choices very specifically, including borrowing, including tax
increases, including reducing benefits. These are tough choices
that, in my view, Congress will have a very tough time making
in 10 short years.
So, I thank you for bringing focus on that. We constantly
hear that the year is 2027 or, now, 2026. So, I think, if
anything, we need to bring more focus on the fact that we have
a fiscal crisis that is more imminent. So, I appreciate that. I
also appreciate the fact, again, you laid out what the options
are at that point. So, I thank you for that.
I guess my question for you, Mr. Walker, would be, when you
talk about ``true accounting,'' you said in fact there would be
a deficit--I believe you indicated that in response to Mr.
Kleczka's question--at 2013. What did you mean by that?
Mr. WALKER. Well, what I meant by that was, if you were
actually preparing a net worth statement and you were using
accrual concepts, where you were trying to estimate what the
discounted present value of what your future promises are and
you look at what is the discounted present value of the revenue
stream that you have to meet those promises, what is the gap,
there is a $6.2 trillion gap for HI. I am just trying to
provide the facts. Congress is elected, Congress has to make
the judgments on what to do with the facts. Sometimes people
don't like the facts, but they are nonetheless the facts.
Second, as you properly point out, and I appreciate it, I
was a trustee in Medicare for 5 years. I care very deeply about
Social Security and Medicare. I was a trustee of Social
Security as well. We have to start dealing with the facts.
Mr. PORTMAN. Well, I appreciate that and I think, again, I
view it just the opportunity. We are not talking about how to
get rid of Medicare, we are talking about how to save Medicare.
When you look at the demographic challenge we face with people
living longer and with more and more baby boomers retiring--and
I appreciate also the fact that your charts today indicate
that, how much of it is due to the Medicare health care cost
increases and that inflation is still, in my view, way too high
to be sustained, but also just the aging population. My 98 year
old grandmother, who is right now back in Cincinnati--if C-SPAN
was on, she would probably be watching this, still very sharp--
God bless her, but there are more and more people in that
situation. Eighty-year-olds are our fastest growing group. So,
it is important that you lay that out, too. It is not just the
fact that health care costs are increasing at unsustainable
levels; it is this aging population.
Quickly to CBO: Your challenge is to help us determine
whether some of these competition models really save money. I
know that you have looked at some of these proposals. You
indicated you hadn't looked at the President's proposal. My
understanding is you have done some preliminary analysis of
some of the proposals that they have for competition, and you
have indicated they do not have significant savings. Is that
not accurate?
Dr. HOLTZ-EAKIN. To date, we have had staff-level
discussions on a variety of prototypes and thoughts. It is an
overstatement to say that CBO has scored any specific proposal,
the President's or otherwise.
Mr. PORTMAN. Well, we appreciate your focusing on that over
the next several months, because it is going to be critical to
us to figure out how to keep high quality of care and deal with
this huge challenge. I know you will look at it creatively,
because some of the existing models, I think, are inadequate.
Maybe the Federal Employee Health Benefits Plan that GAO looked
at is one model. Any models out there with regard to
competition--choice, which is something that our seniors want--
we certainly look forward to, because the existing model is not
one that can be sustained. Therefore it is a failed model.
Thank you, Mr. Chairman.
Mr. MCCRERY. Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman. I would like to begin
by yielding such time as he may consume, but I hope it is not
much, to Mr. Stark.
Mr. STARK. I just want to go back, Dr. Holtz-Eakin. You
said that there wasn't adequate information on the President's
plan for you to estimate it. Did I hear that in response to a
question back one or two?
Dr. HOLTZ-EAKIN. In March, CBO conducted its traditional
analysis of the President's budgetary proposals. The
information we had at that time was that there was to be a
Medicare prescription drug proposal that would cost $400
billion over 10 years. That was the extent of the information.
Mr. STARK. I did want to, and I heard Mr. Portman allude to
this, too, that there was, according to the Wall Street
Journal's weekly gossip sheet here, a very high-ranking
government official who recently told some Members of the other
body that the Medicare overhaul plan could add hundreds of
billions of dollars in costs and that the Administration's
cost-savings claims for its plan were disputed by the early
data of a demonstration project. Small savings from encouraging
seniors to opt for private plans would be offset by high
administrative costs. I presume that--of course, that was just
a shot in the dark by somebody who obviously didn't have
adequate information on the President's plan.
Mr. MCCRERY. In court we would call that hearsay.
Mr. Pomeroy.
Mr. POMEROY. Thank you. First of all, I want to salute each
of you for your work. In particular, David Walker and I have
had a chance to work together for years. I think we really have
a winner with the comptroller general, a top-flight account,
manager, and a health policy guru besides. So, you can
certainly make a very important contribution going forward. I
look forward to working with you in that regard.
I think your testimony on page 14 is very interesting.
Well, your testimony is interesting throughout, Mr. Walker, but
I really like on page 14, you talk about basically, making
government fit the challenges of the future will require not
only dealing with the drivers, such as entitlements for the
elderly, but looking at the range of other government
activities. Fundamental review of what the Federal Government
does and how well it does it will be needed. This involves--and
this is the most important part in my opinion, relative to what
faces this Congress at this day: This involves looking at the
base of all major spending and tax policies to assess their
appropriateness, priority, affordability, and sustainability in
the years ahead.
So, we had some discussion today about addressing
prescription drugs in the context of an overall Medicare
package, but it seems to me we ought to talk about Medicare
much more in the context of the overall budget, especially the
tax cuts that are the centerpiece of the Administration's, the
House-passed plan.
Clearly a diminished revenue picture in light of the tax
cuts proposed--first the growth package and follow along making
the tax cuts permanent--will have what effect, Mr. Walker, on
the ability of the Federal Government to meet these Medicare
payments on a cash-flow basis as they come in in the next
decade?
Mr. WALKER. It will reduce the revenues available. I try to
be an equal opportunity fact-provider. That is generally to be
consistent and to be transparent. We have done a simulation
that shows what the effect would be if Congress decided not to
extend the tax cuts. It would have an effect, but it is not
enough of an effect to solve the problem. We are still going to
need to do what you read in my testimony. The difference may be
less, but there is still a significant gap in----
Mr. POMEROY. Absolutely. I am certainly not suggesting it
is simply a matter of just not doing tax cuts, everything is
rosy. I think we also have to come to grips with the fact that
we are making a difficult situation a great deal worse, are
quite possibly putting us in a framework where we really can't
prudently commit the long-term commitment of a Medicare reform,
including prescription drugs, if we would so significantly
reduce the Federal revenue base.
Mr. WALKER. I think you need to consider it in the broader
context. I think there are three levels--the overall fiscal
challenge, health care, and Medicare. I believe you need to
look at all of those.
Mr. POMEROY. Mr. Walker, because we operate in a 10-year
budget window, but that really misses just around the corner
what happens when the baby boomers retire and the costs hit, is
there some analysis that you could do, or CBO could do, that
would somehow help us as we look at revenue issues now what
that means in terms of impact next decade relative to meeting
these existing commitments, the Social Security and Medicare?
Mr. WALKER. Well, I think one of the graphics that I showed
was the long-range budget simulation gives you a feel for that.
One of the things I believe Congress needs to consider before
it enacts legislation is that you need to consider the
discounted present value cost of both spending and tax sides
before you make the decisions. You need to consider what the
bottom-line impact is. I believe that is very important, and
should be consistent on both sides.
I should also say one last thing. I think this Committee,
Ways and Means, also needs to look very hard at existing tax
incentives for health care. I would respectfully suggest that
they are making many consumers less aware of the cost of health
care and maybe fueling health care cost increases.
Mr. MCCRERY. Thank the gentleman for that astute comment.
Mr. Hulshof.
Mr. HULSHOF. Thanks, Mr. Chairman. Those that will examine
this record will examine the entire record, I feel compelled to
respond to some of those who commented earlier, specifically to
the Ranking Member and the gentleman from Washington State. It
seems interesting, Mr. Chairman, that when the full Committee
meets to consider a Chairman's mark, we hear protestations
about the fact we have not held hearings. Today we are holding
hearings, and the objection from the other side, the lament, is
that we don't have a bill to consider. Which reminds me of an
old law school axiom: When the facts are against you, you argue
the law; when the law is against you, you argue the facts; and
when the facts and the law are against you, you pound the
podium.
I would also say to the gentleman from North by-gosh
Dakota, my friend--and even to Mr. Levin of Michigan earlier--
who were talking about 10-year projection numbers. Mr. Levin
specifically decried ``the use of figures for particular
political interests.'' I think I jotted his comment down
adequately. As recently as 1997, when this full Committee
considered the Balanced Budget Act, there was never a hint or
argument about a 10-year projection. There were 5-year numbers,
because the House operates under 5-year numbers. It is only
since then that not only do we talk about 10-year implications,
but now 15 and 20 and 30 year implications about tax cuts and
the like. So, I think I just wanted to insert that editorial
comment of my own and then get to a question.
Dr. Holtz-Eakin, I am also privileged to serve on the
Committee on the Budget along with this Committee. As we
debated the Medicare proposal, prescription drug and
modernization--and I do include those worlds equally, I would
say that I think the CBO estimate alone may not fully inform us
of the consequences of various prescription drug proposals. Let
me ask your comments on that.
We could have a $400 billion proposal that might lead to
lower costs for purchasing prescription drugs, it could lead to
more marketplace competition, it could lead to more innovative
drugs being introduced into the marketplace. Or we could have a
$400 billion proposal that could lead to no additional
innovation, no price stabilization. So, really, what we choose
to do--we can have this $400 billion new proposal, and yet
depending on which direction we go, and each of you talked
about innovations and incentives and consequences of those
incentives, how critical is it from an economist's perspective
that any Medicare modernization bill or prescription drug bill
encourage competition among private firms, increase access by
new firms and encourage innovation for new drugs and
technologies?
Dr. HOLTZ-EAKIN. Speaking as an economist, it may be the
case that, consistent with the charts we showed you, this
Nation chooses to spend an increasing fraction of its wealth on
medical care broadly defined. However, for those dollars to be
used wisely, one must give participants the incentives and
opportunity to channel those dollars to those particular drugs
or therapies that are the ones that they value the most highly,
and that is the traditional economic route to getting high
value per dollar.
Mr. HULSHOF. To go even--and to look at our current
Medicare program, the current fee-for-service program is an any
willing provider program. If we perpetuate that structure in a
prescription drug program and we put aside the use of
formularies or select contracting with pharmacies, what impact
would that have on our ability to control costs? Maybe another
way to ask you the question is, what incentives are there to
control costs if the government holds 100 percent of the risk?
Dr. HOLTZ-EAKIN. I think a concrete way to answer the
question is to look back at previous CBO analyses of
prescription drug proposals in previous Congresses and look at
those situations in which there were perceived to be cost-
containment incentives and opportunities on the part of
providers--whether they were at risk for the insurance losses,
whether they had tools available to choose low-priced drugs,
whether there were price signals sent to beneficiaries to
choose among providers on the basis of costs. All of those
things figured into CBO's cost estimates.
Mr. HULSHOF. I appreciate both of you gentlemen, especially
with the charts, which I think are quite telling. I have back
in Missouri a fairly substantial town meeting coming up, and
would ask the opportunity to use these charts that you have
shown to us today to help explain some of the challenges that
we have because I think they are quite telling.
Mr. MCCRERY. Mr. English.
Mr. ENGLISH. Mr. Chairman, will yield my time to Mr.
Portman.
Mr. PORTMAN. Well, thank you, Mr. English. I didn't know I
would have this opportunity, but let me go back to some of the
earlier questions and some of the legitimate concerns that were
raised on proposals that might be before this Committee and
just make what is maybe an obvious point.
Medicare and Social Security, as well as some other major
controversial and, as I said earlier, politically controversial
issues should be handled on a bipartisan basis, really have to
be to be successful. I think it was President Jefferson who
said a big issue should be more of a point of consensus rather
than a bare minority or a bare majority.
One of my concerns is that, as we criticize the various
proposals, we are not hearing alternatives from the other side
of the aisle as to what they would do with regard to these I
think now well-defined solvency issues.
So, I would just urge my colleagues on the other side give
us your best ideas. We could always come up with a Medicare
prescription drug coverage plan that costs $1 trillion a year
or $1 trillion over the 10-year period, and Mrs. Johnson talked
about that, that would be politically popular in certain
circles. It would not be the responsible thing to do.
We, instead, are trying to both provide this needed
coverage which, in the modern day, must be there, but also
modernize the program itself so that it can be sustained over
time. So, I would just make the obvious point that, while it is
easy to criticize and to poke holes in the various proposals
that are going to come up, the responsible thing would be to
offer alternative proposals.
In the area of Social Security, we have the 75 year
solvency standard criteria. I would suggest here the criteria
might be some of the challenges you have faced us with today,
including the crossing of the line, as I said earlier, between
the revenue coming in, and the benefits being paid out in 2013
or even pushing it back to 2026, coming up with some way to
fund that interim period, but we need to have some standards,
and I wonder if the two of you could perhaps comment on that,
putting you on the spot here of, maybe Dr. Holtz-Eakin, you
could go first. What should the standards be for Medicare
modernization and prescription drug proposals that we could
compare, instead of apples to oranges, apples to apples? What
would you say would be the appropriate criteria?
Dr. HOLTZ-EAKIN. In that area, I guess I would offer two
thoughts. The first is that we presented our analysis of the
long-run trajectory for Medicare looking at the current program
relative to the size of the economy, and I think that is a
useful baseline to use because it makes the point that in the
end, the economy is the ultimate source of all of the resources
to be devoted to health care and other needs. The second point
is that the financing mechanisms that the Congress might choose
to meet those needs are at their disposal. It could be debt
financing; it could be tax financing or we could choose to
lower the trajectory for Medicare outlays.
So, I think that the right standard is to compare programs
relative to the economy--especially over the long term--when
making decisions in the present that have long-term
consequences.
With respect to comparing proposals on an apples-to-apples
basis, the traditional way to do so is to attempt to make sure
that proposals have the same value per dollar, and I can offer
you only small comfort in that regard because whether a
proposal is ``worth it'' in the eyes of the Congress will
ultimately be your decision. We can provide you with the
dollars and allow you to compare the dollars on an equal basis.
Whether their proposals are worth it or not is a larger
question.
Mr. PORTMAN. Mr. Walker.
Mr. WALKER. Mr. Portman, the GAO did some work in
conjunction with Social Security, where we came up with a list
of questions that we recommended that the Congress consider in
deliberating any Social Security reform proposal. We are in the
process of doing the same thing for health care, and I expect
that that will be done within the next month. I would
respectfully suggest that this Committee and the Congress as a
whole may want to consider these questions in analyzing various
proposals. We can be helpful in that regard, but in the final
analysis, you are the elected officials. You have to make the
judgments as to what is appropriate to do.
I will agree with Doug to say that I think looking at
things as a percentage of the economy, a percentage of the
budget in different ways, moving beyond trust funds, which are
really not trust funds in Webster's Dictionary. They are
accounting devices. That is what they are, nothing more,
nothing less.
Mr. PORTMAN. I think you have made that point clearly today
early in your testimony, and I would just respectfully say that
if you look at, as a percentage of our economy or as a
percentage of our budget, what mandatory spending is, in
general, of course, we have seen dramatic increases, and the
projections are for even greater increases, I am not sure that
that criteria is one that we would adhere to as Members.
So, anything you can give us, in terms of those questions
or even in terms of just establishing some criteria to be able
to compare the various proposals on a fiscal basis would be
very helpful.
Mr. WALKER. Ours cover much more than cost. They cover
access administration, quality and other issues.
Mr. PORTMAN. Right, quality issues.
Mr. WALKER. It is a much more balanced approach. It is not
just focused on cost because in the end you need to consider
more than just cost.
Mr. PORTMAN. Right. Thank you, Mr. Chairman.
Mr. MCCRERY. Mr. Becerra.
Mr. BECERRA. Thank you, Mr. Chairman, and thank you to the
two of you for your testimony and your time.
I would like to, if I can actually for 1 second, refer back
to the GAO chart. I want to make sure I am clear on something.
In terms of the out-years, in 2050, the largest component that
you identified there is net interest, and I am assuming that
means the interest we pay on the national debt.
Mr. WALKER. That is correct.
Mr. BECERRA. It seems that it is not much smaller than the
combined costs of Medicare, Medicaid and Social Security come
2050. I know that the Congressman from North Dakota was asking
some questions with regards to this, and I would like to follow
up on what Mr. Pomeroy was asking.
If we believe that the size of the debt, which will require
interest payments larger than any other of these other programs
and almost as large as three of our greatest programs combined,
would it not seem that we would want to be making decisions
today that help us decrease the size of the national debt, and
therefore decrease not just for this year, but in the out-years
the amount of interest payments we will be making on that debt?
Mr. WALKER. I think a different way of saying it is
deficits do matter. It is important. Obviously, the amount of
the deficit, the nature of the deficit, the timing of the
deficit--is it a time of war or recession--should be
considered, but ultimately you need to get back into balance
over the long term.
Mr. BECERRA. If I am correct, the President's budget
proposal would have us with a deficit for each of the 10 years,
in the succeeding 10 years of his plan, and thereby increasing
the size of the national debt. If we were to eliminate his
proposals to, one, permanently extend the 2001 tax cut, which
is factored into this chart, but also eliminate the other
proposed tax cut that he has of some $700 billion over 10
years, principally with regards to dividend repeal, tax repeal,
would we see that very dark blue and large box under the year
2050 that represents net interest also come down?
Mr. WALKER. That is correct. We have done that. It would
come down, and it would come down significantly. It would still
be significantly higher than it is today, and you would still
have a significant long-range problem to deal with.
Mr. BECERRA. So, even if we were to cut all of the
President's tax cuts, we still have a lot of work to do because
there is a lot more that goes into making the national debt and
the annual deficits that we are facing than just the tax cut. I
think most folks understand that, but we have got to, at some
point as you said, start to bring this budget back into
balance.
Certainly, if we are going to see a net interest payment
that large, representing that high a percentage of our GDP, it
would seem that we would want to start now to move toward that
road of fiscal responsibility.
Let me ask another question. Dr. Holtz-Eakin, I think you
mentioned this in earlier testimony that about 70 percent of
Medicare's growth is due to excess health care cost growth
which, as I think you have mentioned in the past, is not unique
to Medicare. The private sector has faced this as well.
If the private sector isn't doing much better or any
better, and some people would say it is doing worse, but if it
is not doing any better than Medicare at controlling the growth
and its costs, and in fact I think most people would agree that
Medicare has done a better job than the private insurers in
curtailing costs, how do we expect a program that would turn
over, as the President proposes in his plan, Medicare or
prescription drug benefits to private plans, in essence,
privatizing senior's health care, at least for prescription
drugs, how would that help us reduce costs under Medicare?
Dr. HOLTZ-EAKIN. There are really two answers to your
questions. The first is that if one looks historically, if one
goes back and looks at growth of costs for private-sector
payers and growth of costs under Medicare, while on a year-to-
year basis Medicare may be above or below the private sector,
but on balance, they tend to end up in roughly the same place.
Mr. BECERRA. Pretty close.
Dr. HOLTZ-EAKIN. So, I wouldn't characterize one as being
faster or slower than the other in any sustained way.
Then with respect to any proposals on prescription drugs
and their cost-containment features, I would refer back to the
things that I have mentioned already in my testimony.
The degree to which there will be cost containment depends
on--in many, many detailed ways--on the particulars of the
proposal and the degree to which there are features such as
providers who are at risk and have incentives to control their
costs, beneficiaries who are responsive to price signals and
face some incentive to minimize costs, and a wide variety of
other features of the proposal. As a blanket statement, it is
impossible to characterize how that comes out.
Mr. BECERRA. Mr. Chairman, I know my time has expired, if I
could ask one last quick question. Do either of you believe
that we could try to maintain the cost in a private-sector
plan, when it comes to administrative costs at least, or those
costs that are ancillary to the actual provision of health
care. So, in the case of Medicare, we are talking about
administrative costs, and in the case of a private plan, the
administrative costs would probably be complemented with
marketing costs and profit that would have to be added for the
private plan.
Is there any way that we could try to corral those costs
for any private plan so that they are about what Medicare
currently pays in administrative costs, which I understand is
about 3 percent?
Dr. HOLTZ-EAKIN. The evidence is, thus far, for existing
private plans versus Medicare, is that administrative costs are
higher for HMOs and Preferred Provider Organizations (PPOs)
that we see. Going forward, how that would play out remains to
be seen.
Mr. MCCRERY. Mr. Cardin.
Mr. CARDIN. Thank you, Mr. Chairman, and let me thank both
of our witnesses. I am not sure we are asking the right
question. So, let me see if I can at least get your view on
this. We are looking at this to try to save the Federal
Government money in the Medicare system, which I understand are
the growth of the cost to the Federal taxpayer, but it seems to
me that we are talking about health care costs increasing. To
the extent that we put in these so-called reforms or deal with
the changes as to what the Federal Government will pay, we may
very well be adding to the burden of the individual and not
really dealing with reducing health care costs or the growth of
health care costs in the country.
I am looking at MEDPAC's study, which indicates today that
for all beneficiaries, including institutionalized, and those
in Medicare+Choice (M+C), Medicare covers 52 percent of the
total cost. So, a large part is already being paid for by the
beneficiaries directly and not by the Federal taxpayer.
Then according to MEDPAC analysis of Medicare Current
Beneficiary Survey (MCBS), growth in out-of-pocket costs for
fee-for-service beneficiaries living in the community has
outpaced growth and their income. The largest source of out-of-
pocket growth has been for non-covered services.
I could also go into those that are in some form of a
managed care plan. The coverage for non-covered service has
been shrinking. So, it seems to me that when you put that all
together, we run a real danger of putting a lot of pressure
here to reduce the Federal taxpayer share, but in fact will be
placing more burdens on the individual. I would just appreciate
your comments. Are we looking at this the wrong way?
Mr. WALKER. Well, first, I think you have to keep in mind
that that 52 percent number, as I understand it, just talks
about Medicare, that you have Medigap paying costs----
Mr. CARDIN. That, in many cases, is 100 percent of the
costs----
Mr. WALKER. No, it is not 100 percent, but you have got to
consider that Medigap is paying costs, and employers are paying
costs with regard to retiree health care.
Mr. CARDIN. On every one of those cases, the individual
beneficiary is paying for that. It may be paying for it in
salary compensation, may be paying for it in full cost of the
Medigap premiums. They might have some help through their prior
employment arrangement----
Mr. WALKER. Right.
Mr. CARDIN. Low-income people of course get some help. As
far as the Medicare system, it is not paying it.
Mr. WALKER. I understand, but the other thing you have to
keep in mind with those numbers is that they also include
nursing home costs, and one could debate whether that is solely
a health care cost. I don't believe that is solely a health
care cost. Some of the services that are provided are not
health-care related services when you are in a nursing home;
housing or basic food, subsistence----
Mr. CARDIN. I think that is a good point on the 52 percent,
but it still points out that if we are just shifting who is
paying the cost here, the seniors, as a class, are already
burdened in their out-of-pocket costs as it affects their
standard of living that they have to pay for health care.
Mr. WALKER. Mr. Cardin, you might not have been here when I
mentioned that GAO is preparing a briefing report that I think
would be helpful to this Committee and the Congress on what has
happened in health care in the last number of years. I think
you will be surprised to see that in the aggregate, the
individual's portion of health care costs has gone down
dramatically in the last 40 years, the percentage being paid by
individuals, in the aggregate, of overall health care costs,
but that varies by----
Mr. CARDIN. Does that include seniors? Are you saying
seniors' costs have gone down?
Mr. WALKER. It varies by age group, but in the aggregate,
if you look at who was paying health care costs back years
ago----
Mr. CARDIN. Well, I would be curious to see how that breaks
down by seniors.
Mr. WALKER. Sure.
Mr. CARDIN. That is what we are talking about today.
Mr. WALKER. I understand that. No, I understand that.
Mrs. JOHNSON OF CONNECTICUT. Will the gentleman yield a
minute?
Mr. CARDIN. I would be glad to.
Mrs. JOHNSON OF CONNECTICUT. I think the point of your
question was does people taking first-dollar coverage have an
impact on utilization or is it just shifting who pays?
Mr. CARDIN. Well, I am not sure about that because the
utilization issue is a separate issue, and there has been no
demonstration that we will get, there are over-utilizations
adding to the cost here.
Let me ask one more question, if I might, because my time
is running short. The Chairman mentioned in the beginning $400
billion is in the budget for a Medicare prescription drug plan.
Can you tell us just very quickly is that anywhere near enough
money, in the ballpark, to cover a prescription drug plan which
is typical for those under 65 that they have in commercial
insurance, such as what Members of Congress would have in the
Federal Employees Health Benefit plans? Would $400 billion come
close to covering those types of costs? Just so we have some
yardstick here as to the moneys that are being put on the
table.
Dr. HOLTZ-EAKIN. Mr. Congressman, I guess if I could ask a
little clarification. When you say ``those costs,'' which costs
do you refer to? Our baseline has about----
Mr. CARDIN. If we were going to provide the benefits of a
typical plan provided those under 65, such as the Federal
Employees Health Benefit Plan prescription drug coverage, how
much money would it cost over 10 years?
Dr. HOLTZ-EAKIN. The reason I asked is that if you go back
to the charts we pointed out, out of a baseline of, say, $1.8
trillion, roughly three-eighths, or about $600 billion is
currently out-of-pocket. If those costs are what you are trying
to cover, then $400 billion is two-thirds of that.
If you are trying to construct a prescription benefit plan
that would replace current sources of insurance coverage for
prescription drugs, then the number would be much larger. So,
it really depends upon the objective that you have in mind.
Mr. CARDIN. In any case, it would be much larger than $400
billion. If we had no deductibles and 25 percent co-pays, I am
just looking at the Blue Cross Standard Option Plan, which has
a 25 percent co-insurance, no gaps in coverage, stop loss for
all medical benefits, that would cost well in excess of $400
billion, I take it.
Dr. HOLTZ-EAKIN. Clearly.
Mr. CARDIN. Thank you, Mr. Chairman.
Mr. MCCRERY. Mr. Stark, you have a quick follow-up?
Mr. STARK. I just wanted to comment on Dr. Holtz-Eakin's
statement previously that the difference in increasing costs
between Medicare and private plans. I am not sure that that is
quite correct.
Dr. Moon's study recently indicated that over the previous
30 years, health care cost increases for private insurance was
41 percent higher than Medicare. Now, for the first 15 years,
approximately, they were almost identical, but that was prior
to our putting any real cost controls into Medicare, and since
we have put cost controls into Medicare, the rate of increase
of the private insurers has been far higher in the last part of
that 30-year period in every year and to a significant degree,
and I would not want the record to suggest that private plans
come anywhere close to the Medicare system insofar as
controlling increase in costs.
Dr. HOLTZ-EAKIN. I am not familiar with the details of that
study. We would appreciate getting a copy.
Mr. STARK. Yes, you certainly should be.
Dr. HOLTZ-EAKIN. I would caution that, in making these
comparisons, making sure that you compare apples with apples is
usually the hard part.
Mr. STARK. She adjusted this to age and, indeed, this was
adjusted to compare exactly because there are two different
populations, and this was thus adjusted.
Mr. MCCRERY. Well, I appreciate the gentleman bringing that
to our attention. I wonder if she included, though, things like
compliance costs that the Medicare program imposes on the
private sector that they have to comply with, and that is
probably not accounted for in her numbers or certainly not in
the 3-percent figure that we hear all the time, as far as the
administrative costs of the Medicare system. I wonder if our
witnesses would like to comment on whether the Medicare
compliance costs are figured in when we talk about
administrative costs.
Dr. HOLTZ-EAKIN. With regard to the comparisons that are on
the table, the compliance costs I can get back to--I do not
know the details there. The CBO looked at the study, and we
have a different interpretation of the historical data. In
particular, the apples-to-apples comparison requires comparable
benefits. I would be happy to work with the Congressman in
making that comparison as clean as possible.
Mr. MCCRERY. One question to Dr. Holtz-Eakin. On the
question of whether we should write into law the premium dollar
amount for the pharmaceutical plans, do you believe that a
prescription drug plan, which does a very good job at
negotiating with pharmaceutical manufacturers and others in the
distribution chain, should have the same premium as a plan that
doesn't do a great job in those negotiations?
Dr. HOLTZ-EAKIN. In looking at and evaluating such a plan,
the degree to which plans can offer different prices sends a
clear signal to beneficiaries to pursue lower-cost plans if
those plans also meet the other parts of their desires. To the
extent that mechanism is available, we will facilitate cost
containment. On the other hand, it also presents the
possibility that different beneficiaries will face different
prices if they reside in different regions. Those are the
elements that we considered in looking at those plans.
Mr. MCCRERY. If we put the dollar amount in law, the
incentive for a plan to do a better job would go away, wouldn't
it?
Dr. HOLTZ-EAKIN. That is true.
Mr. MCCRERY. Thank you. Thank you, gentlemen, very much for
your testimony and your responses to our questions. I call the
next panel.
Ms. TUBBS JONES. Mr. Chairman----
Mr. MCCRERY. If you wish, you may inquire, although you
missed the entire hearing, you may----
Ms. TUBBS JONES. Mr. Chairman, for the record, I did not
miss the entire hearing. I had been here before, but I had to
leave for another meeting.
Mr. MCCRERY. Okay, you may inquire.
Ms. TUBBS JONES. Just so the record is clear. I don't want
to make a big deal, but I did hear their testimony.
Mr. MCCRERY. You did?
Ms. TUBBS JONES. I did hear their testimony.
Mr. MCCRERY. According to your staff, not here at the
beginning.
Ms. TUBBS JONES. Well, take my word, not my staff, okay?
Mr. MCCRERY. You may inquire.
Ms. TUBBS JONES. Thank you, Mr. Chairman. Mr. Walker,
earlier in your testimony today, you were talking about
percentages with regard to GDP. Do you recall that testimony?
Mr. WALKER. Yes, I do.
Ms. TUBBS JONES. My question goes to, and your
responsibility as the U.S. Comptroller General, you are looking
at all costs in the government, not just particularly in the
health care, as we are talking about today.
Mr. WALKER. That is correct, among other things.
Ms. TUBBS JONES. Among other things, yes.
What percentage of the GDP are the dollars that we have
expended so far in the deployment of the military, the expenses
in terms of machinery, and so forth, and the war in Iraq? What
percentage of the GDP is that?
Mr. WALKER. Well, just back of the envelope, the current
request is I think $80 billion, if I am not mistaken.
Ms. TUBBS JONES. Correct.
Mr. WALKER. Sixty-billion dollars for the U.S. Department
of Defense (DOD), but I think----
Ms. TUBBS JONES. It is $80 billion, the pack. The
supplemental was $80----
Mr. WALKER. The DOD was $60----
Ms. TUBBS JONES. Right.
Mr. WALKER. So, you take $60 billion, and the overall
economy is, about $11 trillion. So, less than 1 percent.
Ms. TUBBS JONES. Less than 1 percent. What percent of the
GDP would the proposed--there is a proposal by the Democrats to
fund a prescription drug benefit for senior citizens in
conjunction with the existing Medicare program. Do you have any
idea what percentage of the GDP that proposal is?
Mr. WALKER. I am not familiar with any proposal that is on
the table right now for a prescription drug benefit, but if you
mean last year's, last year's was what, $900 billion, roughly,
over 10 years?
I don't recall how much it is per year, but if you assume
that it was about the same per year----
Ms. TUBBS JONES. Assume $900 billion.
Mr. WALKER. Ninety-billion dollars, it would be less than 1
percent of GDP.
Mr. STARK. Would the gentle-lady yield for just a moment?
Ms. TUBBS JONES. Absolutely.
Mr. STARK. The $80 billion for the Defense was 6 months,
and ours was for 12 months--our drug benefit--so I would
suspect that you would have to----
Mr. WALKER. We don't know what the cost is going to be.
Frankly, I have got a son who is a company commander with the
Marine Corps in Iraq right now. So, we don't know how long they
are going to be there, and we don't know what the cost is going
to be.
Ms. TUBBS JONES. You know what, my heart goes out to you
having a son over there. I have lost two of my constituents,
and the point is not to argue our patriotism. What I wanted to
bring to the attention of the Committee and to those who are
listening is the fact that previously Secretary Snow said it
doesn't matter what the cost of the war, it is minor in terms
of the GDP.
If you assume his statement is correct, and you assume that
the 1 percent of GDP is what you are suggesting the Democratic
plan, though you are not familiar with it, would cost, that is
minor, compared to the GDP, to pay for the cost of a
prescription drug benefit for all seniors. Would you agree with
that, sir?
Mr. WALKER. I think you are comparing apples and oranges,
though, with all due respects.
Ms. TUBBS JONES. What are the apples from your perspective?
Mr. WALKER. Let me tell you why I say that. You may or may
not agree.
Ms. TUBBS JONES. We have a short amount of time, just so
you know that.
Mr. WALKER. I understand that. The cost of the war is not
going to be forever. We are not going to be in Iraq forever.
However, the cost of a prescription drug benefit, unless
Congress decides to rescind that benefit, after it passes, will
be forever.
Ms. TUBBS JONES. I understand the forever language, but the
people that would be covered by the prescription drug benefit
for as long as they live. They have been forever, most of them
paying into our--are paying taxes, and they are forever our
people. They are our mothers, our fathers, our sisters and
brothers, and we are going to be forever grateful to them for
the work that they have done to allow us to be sitting where
they are sitting today. Fair?
Mr. WALKER. I would agree with that.
Ms. TUBBS JONES. Thank you. Dr. Holtz-Eakin, I am sorry. I
would have asked you a question, but I can't. I have run out of
time. I am on yellow. At another juncture, I hope to be able to
engage with you and ask you a few questions, and I yield back
my time, Mr. Chairman, and I thank you for the opportunity to
ask questions.
Mr. MCCRERY. You are quite welcome. Thank you very much,
gentlemen, for your testimony and your responses, and now I
would like to call up our next panel; three Ph.D.'s, Dr.
Stuart, Dr. Pauly and Dr. Reinhardt.
We have testifying on our next panel--I am going to let Mr.
Cardin introduce his constituent. Before I do that, I will say
the other two witnesses are Dr. Uwe Reinhardt, who is a
professor of Economics and Public Affairs, the Department of
Economics and Woodrow Wilson School of Public and International
Affairs at Princeton University; Dr. Mark Pauly, professor,
Health Care Systems, the Wharton School, University of
Pennsylvania.
Mr. Cardin, if you would honor us with your----
Mr. CARDIN. We are very pleased to have Dr. Bruce Stuart
with us today from the University of Maryland School of
Pharmacy, the Peter Lamy Center on Drug Therapy and Aging. Dr.
Stuart has been a tremendous help for us locally, as well as
nationally, on these issues and it is a pleasure to have him
here for the Committee on Ways and Means.
Mr. MCCRERY. Thank you, Mr. Cardin, and thank all of you,
gentlemen, for appearing today. Your written testimony will be
submitted for the record. If you could, in about 5 minutes,
summarize your testimony, we would appreciate it. Dr. Stuart,
we will start with you.
[Questions submitted to Mr. Walker from Mr. Houghton, and
his responses follow:]
Question: I understand that historically when Congress has added a
new benefit or when CMS makes a national coverage determination, all
other insurance becomes secondary to Medicare regardless of whether it
is offered through supplemental insurance, a private plan, or Medicaid.
Is this correct? Is this coordinated sufficiently under current law and
regulations so that all people, regardless of their coverage,
understand the rules?
Response: Whether Medicare would be the primary or secondary payer
depends on the type of other coverage the beneficiary has. In general,
Medicare is the primary payer for covered services when a Medicare
beneficiary has any of the following sources of supplemental coverage:
a. Medigap insurance, which is designed to supplement Medicare
by paying certain cost-sharing requirements or non-covered services (42
U.S.C. Sec. 1395ss),
b. Medicaid, which statutorily is always the insurer of last
resort (42 U.S.C. Sec. 1902(a)(25)), or
c. employer-sponsored health coverage when the beneficiary and
spouse are no longer employed.
In general, Medicare is the secondary payer for covered services
when a Medicare beneficiary is:
a. working and has employer-sponsored group health coverage (42
U.S.C. Sec. 1395y(b)),
b. not working but is covered by a working spouse's employer
group health plan,
c. treated for a condition or an injury where a third party may
be liable for medical services provided, or
d. afflicted with end-stage renal disease during the 30-month
coordination period.
The liability for Medicare or other payers to pay for these
services depends on coverage determinations by CMS and the plans. One
would have to look to the terms of the other plan's coverage to
determine how that plan's coverage will be affected by a Medicare
decision. For example, if Medicare began covering a health care service
for which it would be the primary payer, a beneficiary's other plan
would either provide secondary coverage or no coverage depending on the
terms of that plan. Alternatively, if an employer's group health
insurance is the primary payer but does not pay in full for certain
Medicare-covered services, Medicare may provide secondary coverage;
however, if the group plan denies payment for these services, Medicare
may pay as primary payer.
Accurately determining whether Medicare is the primary or the
secondary payer and effectively coordinating these benefits requires
that the CMS have timely information on any other sources of health
coverage that a beneficiary may have both at the time of initial
eligibility for Medicare and when any changes occur. CMS provides
information to beneficiaries and providers about coordination of
benefits, the need to provide accurate insurance information, and
Medicare's role as primary or secondary payer on its Web site (http://
www.cms.hhs.gov/medicare/cob/) and through other means.
There is no question that this issue is complex and making it
understandable to everyone is challenging. Fortunately, the number of
instances where confusion will arise is small relative to the numbers
of Medicare beneficiaries and services. Medicare covers a broad variety
of services, including inpatient hospital care, skilled nursing
facility care, certain home health and hospice care, physician and
outpatient services, diagnostic services, outpatient physical and
occupational therapy, ambulance services, and other medical services
and supplies. Coverage policies impose some limitations, but such
policies are important as they seek to assure that Medicare only pays
for necessary valued services.
Question: If we were to enact a drug benefit that allows employers
the option to continue retiree coverage and tap into the Medicare drug
subsidy, do you think it will be confusing for Medicare beneficiaries,
especially if the ``Medicare plan(s)'' differs from the employer-
sponsored plan? For example, a beneficiary may not know who pays each
time they go to the pharmacy (whether it is the Federal Government,
private insurer or paid out of pocket). Obviously we need a structure
that retirees understand, can you make recommendations on how to avoid
confusion in layering a Medicare benefit with employer sponsored
coverage?
Response: I agree that it will be very important to provide
Medicare beneficiaries with clear and comprehensive information about
any choices they would have under a proposed Medicare drug benefit. As
I stressed in my statement, if multiple private entities were selected
to administer drug benefits, a means to ensure that beneficiaries
receive comprehensive user-friendly information about policy and
benefit differences among competing entities would be necessary.
Similarly, such comprehensive information will be necessary to help
beneficiaries determine how any new Medicare covered drugs would
coordinate with existing sources of drug coverage, such as employer-
sponsored group health plans and Medigap, as well as the effect on
beneficiaries out-of-pocket payments. Beneficiaries will need such
information to make informed decisions regarding whether to maintain or
opt out of current supplemental coverage--an especially important
decision as the availability of employer-sponsored retiree health
benefits has generally declined over the last decade and many employer-
sponsored group health plans have increased cost-sharing requirements.
One option that you may consider to reduce confusion for Medicare
beneficiaries maintaining employer coverage is to provide a subsidy for
premiums of a private plan offering a drug benefit rather than having
dual coverage through both a private plan and Medicare. Then each
beneficiary with drug coverage would only be affected by one set of
coverage and copayment rules. This would also avoid the situation we
have now where supplementary insurance, like Medigap, ends up making
beneficiaries less sensitive to the costs of services and contributes
to the fiscal challenges the Medicare program faces today.
[Questions submitted from Mr. Levin, Mrs. Johnson, and Mr.
Ramstad to Mr. Holtz-Eakin and his responses follow:]
Levin Question: Please provide a historical series of CBO's
projections for Medicare spending over the last six or seven years.
Response: Table 1 shows the Congressional Budget Office's (CBO's)
projections of Medicare spending and actual Medicare spending for the
years 1995 to 2002 (with projections extending into future years as
applicable). The projections of ``baseline'' spending shown there for
each 10-year period-which were made in January or March of the previous
year-reflect current law governing Medicare at that time. Actual
spending will differ from projections for a variety of reasons,
including subsequent changes in legislation or in the underlying
economy. For example, the projections of Medicare spending made prior
to the passage of the Balanced Budget Act of 1997 were substantially
higher than the projections made after that point.
Johnson Question: As a supplement to the chart on long-term
Medicare spending included in your testimony, please show the effect of
adding prescription drug benefits at varying levels (with 10-year costs
of $500 billion to $1 trillion).
Response: Table 2 shows how Medicare spending as a share of gross
domestic product (GDP) would vary depending on the size of the10-year
drug benefit that was enacted. As the table indicates, Medicare
spending in 2075 could range from 9.2 percent of GDP under current law
to 12.5 percent if a drug benefit costing $1 trillion over 10 years was
enacted today. The estimates incorporate the assumption that drug
spending outside of the 10-year budget window will grow with the rest
of Medicare (as a share of GDP). That assumption is preliminary and
subject to review, and considerable uncertainty surrounds any
projection made over such a long period.
Ramstad Question: Please provide estimates of GDP and Medicare
spending in 2075 in nominal dollars.
Response: Nominal GDP in 2075 will be $293 trillion, and Medicare
transfers will total $27 trillion, according to CBO's preliminary
projections. Because such figures are difficult to compare with current
levels of spending and economic output, the estimated share of GDP
devoted to Medicare spending-in 2075, 9.2 percent-can be a more useful
metric.
Table 1.--Medicare Baseline Actuals and Projections, 1995 to 2013 (Actuals shown in bold)
----------------------------------------------------------------------------------------------------------------
Fiscal Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
March 1996
----------------------------------------------------------------------------------------------------------------
Benefits 176.9 195.8 215.3 236.2 257.2 279.3 303.1 328.4 356.9 388.9
----------------------------------------------------------------------------------------------------------------
Premiums 20.2 20.0 20.6 22.6 24.0 25.1 26.2 27.4 28.6 30.0
----------------------------------------------------------------------------------------------------------------
Net Benefits 156.7 175.8 194.7 213.6 233.2 254.2 276.8 301.0 328.3 358.9
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Jan 1997
----------------------------------------------------------------------------------------------------------------
Benefits 191.0 207.9 226.0 247.1 271.8 284.4 312.4 337.9 366.8
----------------------------------------------------------------------------------------------------------------
Premiums 20.0 20.2 21.4 22.4 23.4 24.5 25.6 26.7 28.0
----------------------------------------------------------------------------------------------------------------
Net Benefits 171.0 187.7 204.6 224.6 248.3 259.9 286.8 311.2 338.8
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Jan 1998
----------------------------------------------------------------------------------------------------------------
Benefits 207.0 216.6 229.6 242.2 266.0 275.5 304.1 328.9
----------------------------------------------------------------------------------------------------------------
Premiums 20.4 20.9 22.8 25.2 28.0 31.1 34.6 38.5
----------------------------------------------------------------------------------------------------------------
Net Benefits 186.6 195.8 206.8 217.0 238.1 244.5 269.5 290.5
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
March 1999
----------------------------------------------------------------------------------------------------------------
Benefits 210.1 212.1 227.6 243.1 253.2 277.1 298.5
----------------------------------------------------------------------------------------------------------------
Premiums 20.8 21.5 23.2 25.4 27.7 30.6 34.1
----------------------------------------------------------------------------------------------------------------
Net Benefits 189.4 190.6 204.4 217.7 225.5 246.5 264.4
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
March 2000
----------------------------------------------------------------------------------------------------------------
Benefits 208.3 216.9 234.8 242.4 262.9 282.1
----------------------------------------------------------------------------------------------------------------
Premiums 21.6 21.8 23.3 25.4 28.1 31.1
----------------------------------------------------------------------------------------------------------------
Net Benefits 186.7 195.1 211.5 217.0 234.8 251.0
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
March 2001
----------------------------------------------------------------------------------------------------------------
Benefits 214.9 237.0 251.4 268.5 288.0
----------------------------------------------------------------------------------------------------------------
Premiums 21.9 23.6 26.9 30.0 33.3
----------------------------------------------------------------------------------------------------------------
Net Benefits 193.0 213.4 224.5 238.5 254.7
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
March 2002
----------------------------------------------------------------------------------------------------------------
Benefits 236.5 246.9 259.4 272.7
----------------------------------------------------------------------------------------------------------------
Premiums 23.7 25.9 27.8 29.7
----------------------------------------------------------------------------------------------------------------
Net Benefits 212.7 221.0 231.6 243.1
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
March 2003
----------------------------------------------------------------------------------------------------------------
Benefits 252.2 271.3 285.7
----------------------------------------------------------------------------------------------------------------
Premiums 26.0 28.3 31.6
----------------------------------------------------------------------------------------------------------------
Net Benefits 226.2 243.1 254.1
----------------------------------------------------------------------------------------------------------------
Table 1.--Medicare Baseline Actuals and Projections, 1995 to 2013 (Continued)
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2005 2006 2007 2008 2009 2010 2011 2012 2013
----------------------------------------------------------------------------------------------------------------
March 1996
----------------------------------------------------------------------------------------------------------------
Benefits 424.0 463.0
----------------------------------------------------------------------------------------------------------------
Premiums 31.1 32.1
----------------------------------------------------------------------------------------------------------------
Net Benefits 393.0 430.9
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Jan 1997
----------------------------------------------------------------------------------------------------------------
Benefits 408.4 436.2 462.6
----------------------------------------------------------------------------------------------------------------
Premiums 29.3 30.7 32.3
----------------------------------------------------------------------------------------------------------------
Net Benefits 379.1 405.5 430.4
----------------------------------------------------------------------------------------------------------------
Jan 1998
----------------------------------------------------------------------------------------------------------------
Benefits 365.6 375.3 415.4 447.0
----------------------------------------------------------------------------------------------------------------
Premiums 42.4 46.4 50.6 55.1
----------------------------------------------------------------------------------------------------------------
Net Benefits 323.3 329.0 364.7 391.9
----------------------------------------------------------------------------------------------------------------
March 1999
----------------------------------------------------------------------------------------------------------------
Benefits 328.4 343.0 377.8 409.5 442.9
----------------------------------------------------------------------------------------------------------------
Premiums 37.6 40.4 44.4 48.7 53.1
----------------------------------------------------------------------------------------------------------------
Net Benefits 290.8 302.5 333.4 360.8 389.8
----------------------------------------------------------------------------------------------------------------
March 2000
----------------------------------------------------------------------------------------------------------------
Benefits 308.4 318.7 347.8 373.4 401.7 432.5
----------------------------------------------------------------------------------------------------------------
Premiums 34.2 37.2 40.3 43.6 47.2 51.0
----------------------------------------------------------------------------------------------------------------
Net Benefits 274.2 281.5 307.5 329.8 354.5 381.5
----------------------------------------------------------------------------------------------------------------
March 2001
----------------------------------------------------------------------------------------------------------------
Benefits 313.7 331.7 360.6 389.1 420.3 454.2 499.3
----------------------------------------------------------------------------------------------------------------
Premiums 36.8 39.6 43.4 47.1 50.9 55.3 60.4
----------------------------------------------------------------------------------------------------------------
Net Benefits 276.9 292.1 317.2 342.0 369.4 398.9 438.9
----------------------------------------------------------------------------------------------------------------
March 2002
----------------------------------------------------------------------------------------------------------------
Benefits 293.1 308.5 335.0 361.2 389.0 418.9 454.1 482.7
----------------------------------------------------------------------------------------------------------------
Premiums 32.1 35.0 38.6 42.1 45.8 49.6 53.8 58.2
----------------------------------------------------------------------------------------------------------------
Net Premiums 261.0 273.5 296.4 319.1 343.2 369.3 400.3 424.5
----------------------------------------------------------------------------------------------------------------
March 2003
----------------------------------------------------------------------------------------------------------------
Benefits 305.0 317.6 341.2 364.6 390.9 419.4 453.6 480.2 522.0
----------------------------------------------------------------------------------------------------------------
Premiums 34.4 37.1 40.0 43.1 46.5 50.4 54.6 59.1 64.4
----------------------------------------------------------------------------------------------------------------
Net Benefits 270.6 280.5 301.2 321.5 344.4 369.0 399.0 421.1 457.7
----------------------------------------------------------------------------------------------------------------
Table 2.--Medicare Transfers as a Percentage of GDP Under Current Law and Various Scaled Drug Benefit Packages
(Reflecting CBO's Spring 2003 Baseline)
----------------------------------------------------------------------------------------------------------------
Spending Under a Drug Benefit with Costs over the 2006-2013 Period
of:
Calendar Year Spending Under ---------------------------------------------------------------------
Current Law $400 $500 $600 $700 $800 $900 $1
Billion Billion Billion Billion Billion Billion Trillion
----------------------------------------------------------------------------------------------------------------
2005 2.4 2.5 2.5 2.5 2.5 2.5 2.5 2.5
----------------------------------------------------------------------------------------------------------------
2010 2.6 2.9 3.0 3.1 3.2 3.2 3.3 3.4
----------------------------------------------------------------------------------------------------------------
2015 3.0 3.4 3.5 3.6 3.7 3.8 3.9 4.0
----------------------------------------------------------------------------------------------------------------
2020 3.4 3.9 4.0 4.1 4.3 4.4 4.5 4.6
----------------------------------------------------------------------------------------------------------------
2025 4.0 4.6 4.7 4.9 5.0 5.1 5.3 5.4
----------------------------------------------------------------------------------------------------------------
2030 4.7 5.4 5.5 5.7 5.8 6.0 6.2 6.3
----------------------------------------------------------------------------------------------------------------
2035 5.3 6.1 6.2 6.4 6.6 6.8 6.9 7.1
----------------------------------------------------------------------------------------------------------------
2040 5.8 6.6 6.8 7.0 7.2 7.4 7.6 7.8
----------------------------------------------------------------------------------------------------------------
2045 6.1 7.0 7.2 7.4 7.6 7.8 8.0 8.3
----------------------------------------------------------------------------------------------------------------
2050 6.5 7.4 7.6 7.8 8.1 8.3 8.5 8.7
----------------------------------------------------------------------------------------------------------------
2055 6.9 7.9 8.1 8.3 8.6 8.8 9.1 9.3
----------------------------------------------------------------------------------------------------------------
2060 7.4 8.5 8.7 8.9 9.2 9.5 9.7 10.0
----------------------------------------------------------------------------------------------------------------
2065 7.9 9.1 9.4 9.6 9.9 10.2 10.5 10.8
----------------------------------------------------------------------------------------------------------------
2070 8.6 9.9 10.1 10.4 10.7 11.0 11.3 11.6
----------------------------------------------------------------------------------------------------------------
2075 9.2 10.6 10.9 11.2 11.5 11.8 12.1 12.5
----------------------------------------------------------------------------------------------------------
STATEMENT OF BRUCE STUART, PH.D., PROFESSOR AND DIRECTOR, PETER
LAMY CENTER ON DRUG THERAPY AND AGING, UNIVERSITY OF MARYLAND
SCHOOL OF PHARMACY, BALTIMORE, MARYLAND
Dr. STUART. Thank you, Mr. Chairman, and Members of the
Committee. I would like to use my brief remarks to address what
I think is the most important question underlying the debate
over a Medicare drug benefit, which is what will happen to
beneficiaries if Congress fails to act. I hope to show you that
recent trends in coverage put future beneficiaries at risk of
having significantly reduced options for meaningful
prescription benefits if legislative action is not taken soon.
Although a higher proportion of beneficiaries had some form
of prescription coverage in 2000 than ever before, the growth
is unsustainable. It is due to two phenomena, a rise in
Medicare HMO enrollments and a rapidly growing segment of
beneficiaries with ill-defined and overlapping benefits.
In fact, since 1995, there has been a slight decline in
rates of drug coverage among beneficiaries who rely on a single
prescription plan from an employer, a Medigap policy, Medicaid
or other public program. By examining changes in these sources
of coverage, we can develop a reasonably accurate forecast of
what beneficiaries will face in the near future.
Retiree health benefits offered by employers and unions
represent the most generous private source of prescription
coverage available to Medicare beneficiaries. Data from the
MCBS show that the number of beneficiaries with prescription
coverage from employer plans has remained steady at 34 percent
from 1996 through the latest data release for 2000.
This is actually a very surprising statistic, in light of
the pull-back in retiree health benefits reported by employers.
According to annual Mercer/Foster Higgins surveys, the number
of large employers offering employer coverage has dropped from
57 percent in 1987 to just 23 percent in 2001.
Why haven't we seen a comparable decline in the MCBS data?
Preliminary results from a study my colleagues and I are
conducting for the Commonwealth Fund suggests that the answer
lies in beneficiary demographics. We find that the proportion
of younger beneficiaries with employee-sponsored health
benefits dropped dramatically between 1996 and 2000, while
there was a small increase in coverage for beneficiaries 70 and
older. This pattern does not auger well for future retirees.
The advent of Medicare+Choice in 1997 was followed by a
major expansion in HMO enrollments. At the program's peak in
1999, more than 7.5 million beneficiaries had enrolled, yet 22
percent of them left their plans that year, presumably for
better coverage elsewhere.
The HMO enrollees represent a large fraction of the
beneficiary population with shifting sources of prescription
benefits and gaps in coverage. Today, M+C enrollment has
declined by a quarter and the drug coverage offered by the
remaining plans is less generous than it was 4 years ago.
Beyond M+C and employer coverage, the only other private
source of prescription benefits available to beneficiaries is
self-purchased coverage through a Medigap plan. In most States
private carriers are permitted to offer three standardized
plans with very limited benefit provisions that have not been
updated in over a decade. Even this limited coverage may appeal
to older people who have no other options.
The catch is that many carriers do not sell these policies
and those that do generally charge high premiums. In some
cases, the premiums exceed the maximum value of the
prescription coverage itself. In other words the market for
Medigap plans is ill-equipped to provide meaningful coverage to
Medicare beneficiaries who lose benefits because of pull-backs
in HMOs and employer plans.
The poorest elderly typically do not qualify for employer-
sponsored health insurance and cannot afford the premiums for
individual Medigap policies. Medicaid is available to those who
meet stringent Federal and State means tests for income and
assets. Some States have responded to the needs of those too
poor to afford adequate medications, but not poor enough to
qualify for traditional Medicaid by extending full Medicaid
coverage to beneficiaries enrolled in the Federal Qualified
Medicare Beneficiaries and Specified Low-Income Medicare
Beneficiary programs.
Thirty other States have enacted pharmaceutical assistance
programs that subside prescription drug expenses for selected
low-income populations. The latest development is the CMS
Pharmacy Plus waiver program that encourages States to develop
drug-assistance plans paid for through savings in traditional
Medicaid. Five States have approved Pharmacy Plus Programs and
10 others are in the process of developing waiver applications.
This flurry of activity at the State level might lead one
to conclude that the needs of low-income Medicare beneficiaries
are being adequately addressed. That would be a mistake.
According to the MCBS, less than half of beneficiaries below
the Federal poverty level are enrolled in Medicaid or another
public program offering drug benefits during 2000. Only 1 in 5
beneficiaries, between 100 and 150 percent of the poverty line,
was enrolled in a public plan.
The current patchwork of State programs is extremely
fragile. Four of the 30 States that enacted pharmaceutical
assistance programs have put them on indefinite hold because of
budgetary problems. Massachusetts has frozen enrollments in its
assistance plan. Some of the larger plans, including the
Pennsylvania Program of All-Inclusive Care for the Elderly
program are seriously underfunded.
Let me rephrase the central question I posed at the
beginning of my remarks. What should Congress learn from these
recent trends as it prepares to enact a meaningful drug
benefit? The first lesson is that strong action must be taken
to avoid further erosion in retiree health benefits.
Subsidizing prescription coverage will reduce the burden on
employers, but additional steps will be necessary to assure
that firms maintain or, better yet, improve upon current
coverage.
Second, while managed care plans have clearly failed to
provide meaningful drug benefits in the absence of government
payment, it is just possible that covering drug costs in plan
capitation rates may actually save the M+C program.
Finally, as important as State programs can be in filling
the gaps in prescription coverage, present circumstances call
for a unified national program of prescription benefits
available to all Medicare beneficiaries.
Thank you very much.
[The prepared statement of Dr. Stuart follows:]
Statement of Bruce Stuart, Ph.D., Professor and Director, Peter Lamy
Center on Drug Therapy and Aging, University of Maryland, Baltimore,
Maryland
Mr. Chairman and distinguished Members of the House Ways and Means
Committee. My name is Bruce Stuart. I am a Professor at the University
of Maryland School of Pharmacy. I also direct the Peter Lamy Center on
Drug Therapy and Aging which conducts research on Medicare
beneficiaries' drug coverage, utilization, and outcomes. I am pleased
to be here this morning to address what I believe should be the core
question underlying the debate over a Medicare drug benefit; namely,
what will happen to beneficiaries if Congress fails to act? I will show
that recent trends in coverage put future beneficiaries at risk of
having significantly reduced options for meaningful prescription
benefits if legislative action is not taken soon.
First, the good news. The latest data from the Medicare Current
Beneficiary Survey (MCBS) show that a higher proportion of
beneficiaries had some form of prescription coverage in 2000 than ever
before, reaching almost 79% of the beneficiary population with Medicare
entitlement for the entire year. That is up from 69% in 1995. Moreover,
a higher percentage of those with drug benefits in 2000 maintained them
throughout the year than in any previous year for which we have data.
However, aggregate statistics can be misleading. The growth in
prescription coverage between 1995 and 2000 is explained by two
phenomena, a rise in Medicare HMO enrollment and a rapidly growing
segment of beneficiaries with ill-defined and overlapping benefits.
There was a slight decline in rates of prescription coverage among
beneficiaries who relied on a single prescription plan from an
employer, a Medigap policy, Medicaid, or other public program. By
examining changes in these sources of prescription coverage, we can
develop a reasonably accurate forecast of what beneficiaries will face
in the near future.
Supplemental health benefits offered by employers and unions
represent the most generous private source of prescription coverage
available to Medicare beneficiaries. No one knows exactly how many
beneficiaries are entitled to employer-sponsored coverage. Not all
retirees given the opportunity of health insurance choose to take it
either because of cost or alternative coverage. Data from the MCBS show
that the number of beneficiaries with employer-sponsored health plans
peaked in 1997 at 41% of the population and fell slightly to 39% in
2000. The proportion of beneficiaries with prescription coverage under
employer plans has remained a steady 34% from 1995 through the latest
data release for 2000. These are actually very surprising statistics in
light of the pull-back in retiree health benefits reported by
employers. According to annual Mercer/Foster Higgins surveys, the
number of large employers offering health coverage to Medicare-eligible
retirees declined from 57 percent in 1987 to 23 percent in 2001. Why
haven't we seen a comparable decline in the MCBS data? Preliminary
results from a study my colleagues and I are conducting for The
Commonwealth Fund suggest that the answer lies in beneficiary
demographics. Younger beneficiaries aged 65 to 69 are more likely to be
affected by changing employer policies on retirement benefits than
beneficiaries aged 70 and older. Based on MCBS data, we found that the
proportion of beneficiaries with employer-sponsored health benefits in
the younger age band dropped dramatically between 1995 and 2000, while
there was a small increase in coverage for the older group. This
pattern does not auger well for future retirees.
The advent of Medicare+Choice in 1997 was followed by a major
expansion in HMO enrollments. At the program's peak in 1999, more than
seven and a half million beneficiaries had enrolled. Yet 22 percent of
them left their plans that year, presumably to get better coverage
elsewhere. HMO enrollees represent a large fraction of the beneficiary
population with shifting sources of prescription benefits and gaps in
coverage. For example, 50% of those who disenrolled from an M+C plan in
1999 were left without prescription coverage. But even among those who
stayed, only 65% were able to rely on M+C prescription coverage alone;
20% supplemented HMO drug benefits with other coverage, 7% had outside
drug coverage and no M+C prescription benefits, and 9% had no
prescription benefits from any source. Today, M+C enrollment has
declined by a quarter, and the drug coverage offered by the remaining
plans is far less generous than four years ago. Federal lock-in rules
now scheduled for 2005 will presumably reduce the rate of M+C turnover,
but that will not address the underlying reasons why beneficiaries move
from plan to plan. Indeed, limiting beneficiaries' ability to leave
plans that no longer meet their needs will make them worse off, and may
well lead to further erosion in M+C enrollments. Plan withdrawals and
rising premiums will have a similar effect.
Beyond M+C and employer coverage, the only other private source of
prescription benefits available to Medicare beneficiaries is self-
purchased coverage through a Medigap plan. In most States, private
carriers are permitted to offer three standardized plans (H, I, and J)
with maximum prescription coverage of $1,250 or $3,000 per year. All
three plans contain a $250 deductible and 50% coinsurance. These
benefit provisions were created by Federal law over a decade ago, and
have not been updated. But even this limited coverage may appeal to
older people who have no other options. The catch is that many carriers
do not sell the policies that cover drugs, and those that do generally
charge high premiums that in some cases actually exceed the maximum
value of the coverage itself. According to MCBS data, the proportion of
non-institutionalized beneficiaries relying only on these policies
hovered around 9% between 1995 through 2000 (another percent or two
mixed self-purchased plans with other coverage). The real number may be
only half that high. Most experts believe that beneficiary reports of
self-purchased drug coverage are inflated with the inclusion of
discount cards and other plans that do not provide true insurance.
Whatever the real number, the market for Medigap plans is ill equipped
to provide meaningful coverage to Medicare beneficiaries who lose
benefits because of pull-backs in HMOs and employer plans.
The poorest elderly typically do not qualify for employer-sponsored
health insurance and can't afford premiums for individual Medigap
policies. Medicaid is available to those who meet Federal and State
means tests for income and assets. Dual enrollment in Medicare and
Medicaid dropped slowly throughout the nineteen-nineties as a result of
rising beneficiary incomes and static income-eligibility criteria. A
slight up tick in 2000 may signal a reversal in this trend, but
traditional Medicaid is still available only to the poorest poor. Some
states have responded to the needs of those too poor to afford adequate
medications but not poor enough to qualify for traditional Medicaid by
extending full Medicaid benefits, including prescription coverage, to
Medicare beneficiaries enrolled in the Federal QMB and SLMB programs.
Other States (30 as of this writing) have enacted pharmaceutical
assistance programs that subsidize drug expenses for selected low-
income populations. An additional eight States have drug discount card
programs for Medicare beneficiaries. The latest development is the CMS
``Pharmacy Plus'' waiver program that encourages States to develop drug
assistance plans paid for through savings in traditional Medicaid. Five
States (Illinois, Wisconsin, South Carolina, Florida, and Maryland)
have approved Pharmacy Plus programs. Ten others are in the process of
developing waiver applications.
This flurry of activity at the State level might lead one to
conclude that low-income Medicare beneficiaries' needs for drug
coverage are being adequately addressed. That would be a mistake.
According to the MCBS, 48% of beneficiaries below the Federal poverty
line were enrolled in Medicaid or another public program offering drug
benefits during 2000. Only 20% of beneficiaries in the band between
100% and 150% of the poverty line were enrolled in a public plan. These
proportions are not significantly higher than in 1995 when 46% and 18%,
respectively, received such benefits. When data become available for
2001 and 2002, we may find that matters have improved. But even if that
proves true, the current patchwork of State programs is extremely
fragile. Four of the 30 States that have enacted pharmaceutical
assistance programs have put them on indefinite hold because of
budgetary problems. Massachusetts has frozen enrollment in its
assistance program. Some of the largest plans, including the
Pennsylvania PACE program are seriously under funded. The initial
excitement surrounding the Pharmacy Plus program has turned to concern
as States try to figure out how to pay for their new obligations
without gutting traditional Medicaid. Unlike the Federal Government,
State prohibitions against running budget deficits mean that assistance
programs are most vulnerable to cuts at precisely the time they are
most needed.
Let me rephrase the central question I posed at the beginning: What
should Congress learn from these recent trends as it prepares to enact
a meaningful Medicare drug benefit? My optimism is based on the belief
that our government will simply not permit the gains in drug coverage
won by Medicare beneficiaries during the nineteen-nineties to be
needlessly lost. The first lesson is that strong action must be taken
to avoid further erosion in retiree health benefits. Subsidizing
prescription coverage will reduce the burden on employers, but
additional steps will be necessary to assure that firms maintain--or
better yet--improve upon current coverage. Second, while managed care
plans have clearly failed to provide meaningful drug benefits in the
absence of government payment, it is just possible that including drug
costs in plan capitation rates may actually save the M+C program.
Finally, as important as State programs can be in filling gaps in
prescription coverage, present circumstances call for a unified
national program of prescription benefits available to all Medicare
beneficiaries.
Thank you.
Mr. MCCRERY. Dr. Pauly?
STATEMENT OF MARK V. PAULY, PH.D., PROFESSOR, HEALTH CARE
SYSTEMS, WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA,
PHILADELPHIA, PENNSYLVANIA
Dr. PAULY. Thank you, Mr. Chairman and Members of the
Committee. I have directed my prepared remarks at the issue of
prescription drug coverage, but I would be happy to comment on
the general issue of Medicare reform.
The absence of outpatient prescription drug coverage for
the quarter to a third of Medicare beneficiaries who don't get
such coverage poses for them a serious risk of both high out-
of-pocket payments and the risk that they will fail to use
drugs that are effective for their health and so be of concern
to their fellow citizens. Are there ways to improve the
situation?
I believe that there are and that the best design for
improvement that pays attention to the budget constraints for
Medicare as a whole is one that builds on two important
principles of public policy. First, that protection against
financial risk should be based on a correct theory of insurance
and, second, that coverage of concern for public policy should
help people with low incomes pay for drugs they might otherwise
forego, but that concern need not extend to beneficiaries with
lower levels of spending and higher incomes who are able to pay
for their drugs.
I, first, consider the design of insurance coverage to
maximize value. That is what we are trying to do here. This
design is based on the common-sense principle that underlies
all insurance. The purpose of insurance is to provide benefits
when they are most needed.
For the financial protection dimension of insurance, it is
obvious that benefits are most needed when losses are greatest,
since in such cases the threat to wealth and future standard of
living is greatest. In contrast, insurance coverage is of low
value, if it pays for low or below-average levels of expense.
Since insurance itself always carries an administrative cost,
such budgetable expenses usually should not be insured at the
real cost of using resources to review claims and write checks.
Insurance is supposed to pay for the rare high-cost event
that spells financial disaster and not for the modest expense
most people could reasonably expect year-after-year and could
afford if it did occur. Insurance which did pay for small,
predictable expenses would be insurance in name only. For the
Medicare population, it would be roughly equivalent to an
increase in Social Security payments, but made in a less
transparent and less-efficient way.
What about people who, because of the absence of insurance,
failed to use beneficial care? We know for certain that the
volume of drug use and drug spending is increased when
insurance coverage is greater. This phenomenon of moral hazard
mentioned earlier occurs for people at all income levels. In
effect, insurance makes expensive drugs look cheap and
inexpensive drugs look dirt cheap.
This lower price appears to have an amazingly strong effect
on everyone's behavior. For example, our research indicated
that lowering the copayment for prescription from $10 to $2
could produce up to a 65-percent increase in drug expenditure
for people under age 65 who are middle class, privately
insured, and the same order of magnitude is probably true for
seniors.
The evaluation, of course, of the increase in spending is
uncertain. Some portion of it represents increase in spending
that would receive social approbation. Other portions though,
may represent the use of products which, even if of positive
value, were not really worth what they cost.
These two principles can be made highly consistent if we
assume that lower income is associated with a lower use of
drugs, other things equal, and that such low use is a matter of
social concern. Then, the socially optimal coverage policy in a
budget constraint world would provide virtually complete
financial protection for those beneficiaries with incomes just
above the Medicaid limit.
In contrast, for the elderly middle class, who are about
half of the elderly, the insurance of concern to government
should cover expenses more generously as expenses rise, but
should provide no coverage for small expenses, with the point
of which coverage begins to take effect related to household
income and wealth. A very simple version of such a scheme would
involve insurance that provides full coverage of a deductible,
with the deductible stated as a percentage of household income.
There are two objections to this simple, but powerful
model:
First, because drug expenditures are not evenly spread over
the population, some people criticize this model because most
people will not collect from their insurance, but will either
have to pay something or, even if the insurance is fully paid
by taxes, will be miffed at not getting an equal slice of
government largesse.
As suggested earlier, if those unlucky people who have low
drug expenses in a given time period need to receive a
political payoff, providing low deductible or first-dollar
coverage is an inefficient and inequitable (to those with zero
expenses) way to do so; just increase Social Security with a
cost of living adjustment that includes drug spending as a
component.
Of course, whether low risks are in or out, a somewhat more
respectable argument is one that views front-end coverage as a
way of dealing with adverse selection. The main problem with
the argument here is that adverse selection only helps the high
risks if the low risks can be induced to pay more than the
value of their benefits, but because the benefits for low risk
are so small and so predictable, there is very little
willingness to pay extra.
I will also make just a few comments on how to pay for
drugs. I have talked about the form of insurance coverage. The
general principle of insurance here is pretty straightforward.
The idea would be to pay an indemnity benefit that would cover
products that are sold in competitive markets, and that might
be a reasonable principle for generic drugs, although the
Federal Trade Commission should continue to be vigilant about
pricing of those products.
The most serious problem arises, however, for products
protected by patents. Society offers patents in order to induce
drug firms to invest in research & development for new
products. Once products are invented and fixed costs have been
incurred, however, it is desirable to get final selling prices
down. So, our choice, actually, is between cheap products now
and good products later, but not between cheap, good products
now and cheap, good products later.
Thus, the part of the government that wants to contain
medical costs is at war with the part that wants to foster
medical progress. It is certain that if research & development
is undertaken by rational profit-maximizing firms, lower
prospective prices and payments will mean fewer good, new
products. The key, obviously, is what are the nature of the
good products that would be foregone. They would probably
include orphan drugs and some things of substantial value.
In the face of such uncertainty about what public policy
might affirmatively do, in my judgment, the best policy is to
try again to replicate as much as possible markets with patents
that are otherwise competitive. This situation would be best
accomplished if individuals could choose from a large number of
different health plans, with the plans having different
policies as to which drugs they pay for, what prices they pay
and what advice and assistive services they provide.
When there is a choice of plans, those plans must be
allowed to differ in both coverage policies and premiums paid
by the insured for choice to be meaningful. It does not help if
there are multiple contractors administering exactly the same
coverage at the same beneficiary premium.
Competition between different plans cannot be guaranteed to
yield lowest possible price, I think it is important to
emphasize, but it probably will lead to the best price and the
best tradeoff between price and quality that reflects the
tradeoffs beneficiaries are willing to make between the
different types of cost containment that provides incentives to
squeeze out any insurer profit and that best deals with
government-granted patent monopolies.
My final comment, and in some ways saving the worst for
last or, in some ways, the best for last, we know that the
primary reason why health care costs rise in this country is
because of the addition of beneficial, but costly, new
technology. I think there are serious doubts about our ability
to afford, certainly for public programs, and perhaps even
privately, the rate of growth of beneficial, but new,
technology that we have become used to over time. We live and
will live in a world of limited resources, some technology
should not be made available to all who will benefit from it,
but we have found no institutional structure for saying,
``No.'' There is no institutional structure for making such
cost-benefit tradeoffs and especially not for government-funded
coverage like Medicare.
So, three policy questions remain:
First, how low a deductible at any given income level
represents the appropriate combination of financial protection
for seniors, appropriate incentives to use, but not overuse,
drugs, and tax burdens on present and future taxpayers?
Second, what tradeoffs should we make between inexpensive
drugs today and better drugs for the future?
Third, and most importantly, what rate of increase in
spending for higher quality, but more costly, products we think
is appropriate for the growing number of elders in our country?
Thank you very much.
[The prepared statement of Dr. Pauly follows:]
Statement of Mark V. Pauly, Ph.D., Professor, Health Care Systems,
Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania
The absence of outpatient prescription drug coverage for those non-
poor Medicare beneficiaries who did not have a job at a firm that
offered drug coverage as a retirement benefit leaves a serious gap.
This gap exposes a quarter to a third of beneficiaries to the risk of
high out of pocket payments for drugs or to the risk that they will
underuse drugs that are effective for their health, and so be a concern
to their fellow citizens. Unsubsidized Medigap markets, required to
undertake some community rating, are plagued with adverse selection
because high prescription drug expenses are usually associated with
chronic conditions with highly predictable drug expenses and consequent
severe adverse selection. Are there ways to improve this situation?
I believe that there are, and that the best design for improvement
is one that is built on what (in my view) ought to be two important
principles of public policy: (1) protection against financial risk
should be based on a correct theory of insurance, and (2) coverage of
concern for public policy should help people with low incomes pay for
drugs they might otherwise forego, but that concern need not extend to
beneficiaries with lower levels of spending who are able to pay for
their drugs. I will elaborate on the implications of these two
principles, and then suggest what they imply for practical benefits
design and realistic public policy. Throughout, I will be sensitive to
a third important aspect of public policy: even current levels of
Medicare benefit are threatened, once the baby boom generation reaches
retirement age, by high Medicare costs relative to levels of support at
current tax rates; the feasibility of substantial increases in the
distortive taxes paid for Medicare (largely by younger workers) is
limited and therefore any new benefit should add as little as possible
to the tax burden. Drug benefits for some parts of the Medicare
population in some circumstances are of sufficient value to justify
some increase in payment and taxes, but these increases should be kept
as modest as possible.
I first consider the design of insurance coverage to maximize
value. This design is based on the common sense principle which
underlies all insurance. The purpose of insurance is to provide
benefits when they are most needed. For the financial protection
dimension of insurance, it is obvious that benefits are most needed
when losses are greatest, since in such cases the threat to wealth and
future standards of living is greatest. In contrast, insurance coverage
is of low value if it pays for low (below-average) levels of expenses;
since insurance itself always carries an administrative cost, such
budgetable expenses usually should not be insured at the real cost of
using resources to review claims and write checks. Insurance is
supposed to pay for the rare high cost event that spells financial
disaster, and not for the modest expense most people could reasonably
expect year after year, and could afford if it did occur. Insurance
which did pay for such smaller predictable expenses would be insurance
in name only; it would really be an income transfer (largely
equivalent, for this population, to an increase in Social Security
payments), but done in a less transparent and less efficient way. Put
more explicitly, the rational and valuable insurance is coverage
against financial catastrophes, and only such coverage is warranted on
the basis of financial protection.
What about the role of insurance as assistance to people who
otherwise would not choose to obtain beneficial care? We know for
certain that the volume of drug use and drug spending is increased when
coverage is greater; this phenomenon occurs for people at all income
levels. In effect, insurance makes expensive drugs look less expensive,
and inexpensive drugs look dirt cheap; this lower price appears to have
an amazingly strong impact on everyone's behavior. For example,
research indicates that lowering the copayment per prescription from
$10 to $2 can produce a 65 percent increase in drug expenditure for
privately insured middle class non-elderly, and the same is probably
true for seniors.
While the increase in use with coverage is certain, the social
evaluation of this increase is uncertain. It may represent the use of
highly beneficial drugs that reduce illness, frailty, and poor
functional status about which there is substantial concern by others in
the community. On the other hand, especially for beneficiaries who are
not poor and not suffering from serious chronic conditions, this
increased use may represent spending of low value (even if it is
positive) relative to its cost. Since that cost must be paid by some
other taxpayers if not paid by the beneficiary, those taxpayers may
correctly judge this increase to be inefficient and unfair.
These two principles are highly consistent if we assume that lower
income is associated with lower use of drugs, other things equal, and
that such low use is a matter of social concern. Then the socially
optimal coverage policy would provide virtually complete financial
protection for those beneficiaries with incomes just above the Medicaid
limit. In contrast, for the middle class households that predominate
among the elderly, the insurance of concern to the government should
cover expenses more generously as expenses rise, but should provide no
coverage for small expenses, with the point at which coverage begins to
take effect related to household income and wealth. A very simple
version of such a scheme (though one that can be fine tuned if need be)
would involve insurance that provides full coverage above a deductible,
with the deductible stated as a percentage of household income.
Refinements of this approach might make the required deductible a
smaller percentage of income for lower income households (``progressive
deductible''), and might provide a corridor of coverage with percentage
coinsurance before full coverage kicks in.
Spreading the Gains and Adverse Selection
There are two objections to this simple but powerful model. First,
because drug expenditures (like all losses for which insurance is
rational) are unevenly distributed over households, within any time
period some households (those with low or zero expenses) will get no
insurance benefits, while a few households with very large expenses
will get large benefits under catastrophic insurance. This is the way
insurance is supposed to work, redistributing benefits from lucky
people who are not ill and have low expenses to the few most
unfortunate who have the greatest need for help. There is a cynical
political view that American voters are unable to support an insurance
plan which is based on catastrophic insurance principles, because
``most people will not collect anything from the insurance,'' but will
either have to pay something or, even if the insurance is fully paid by
taxes, will be miffed at not getting an equal slice of government
largesse.
That argument has no support in any view of the political process
as one that makes rational decisions to maximize the general well being
of society or of a targeted population like senior citizens. In my
view, Congress should play an educational and leadership role in
explaining to citizens (who really and truly do understand it) that it
is not in the long run desirable that most people ``make money'' from
insurance; instead, insurance is supposed to help out the most unlucky.
As suggested earlier, if those ``unlucky'' people who have low drug
expenses in a given time period need to receive a political payoff,
providing low deductible or first dollar coverage is an inefficient and
inequitable (to those with zero expenses) way to do so; just increase
Social Security benefits to keep with a ``cost of living'' that
includes drug spending as a component. If some upfront health-related
benefit must be offered to lower income people, it should be as
flexible as possible (for example, usable for out of pocket payments or
supplemental insurance to buy down the deductible), and not be pre-
specified to be a particular percentage coinsurance.
A somewhat more respectable argument is one that views ``front-
loaded'' benefits as a possible response to adverse selection. Adverse
selection is such a complicated and poorly understood phenomenon in
health insurance that it can be used to justify almost anything. The
notion here is that, if people can estimate in advance whether they
will have high or low drug expenses in a given year, and if there is a
positive uniform premium for voluntary catastrophic coverage, such
coverage will not appeal to those with low expected expenses. They will
not enter the risk pool, thus raising the average benefit per person in
the pool. Of course, whether lower risks are in or out has no impact
whatsoever on the actual expenses by or benefits to the higher risks,
but the cosmetic effect of having a lower average benefit cost is
thought to be desirable. More substantively, it is felt that if the
lower risks are not ``contributing,'' that somehow means that the
subsidy to the higher risks will need to be greater.
Such a phenomenon is unlikely. But having the lower risks in the
pool helps out the higher risks only if the amount of premium charged
to the lower risks is in excess of their average claims, so that they
cross subsidize the higher risks. But, especially in prescription drug
insurance with high predictability of expenses in the short run, the
lower risks will be unwilling to pay much above their expected claims.
The claims are small and so pose little risk, and the claims are highly
predictable. I take a medicine for a chronic condition that costs $30
per month but am otherwise healthy. I will not be willing to pay much
more than $360 per year for drug insurance; I cannot be induced to
cross subsidize voluntarily. Unless lower risks are terribly risk
averse, there is no financial benefit from keeping them in the pool.
How to Pay for Drugs
The general principle of insurance reimbursement is simple. The
price or loss should be determined in competitive markets, and then
insurance should indemnify insureds against some portion of that loss.
The insurance should pay an indemnity whose value depends only on what
the person's illness is and the competitive expense for treating that
illness. The price paid should be the market price, and should ideally
be unaffected by and independent of the presence or absence of
insurance.
The principle of leaving price setting to the competitive market
might work for drugs sold in competitive markets, such as generic
drugs, although even here FTC oversight will be important. However, for
drugs protected by patents, the situation is more complex. Patents are
a government-granted monopoly for a limited period of time in order to
provide incentives for research on and development of new products. The
dilemma for citizens and for government agencies is this: once products
are ``invented'' and fixed costs have been incurred, it is desirable to
get final selling prices down. But such a strategy offers low priced
existing products only at the cost of less development of new products.
Thus the part of government that wants to contain medical costs is at
war with the part that wants to foster medical progress. It is certain
that, if research and development is undertaken by rational profit
maximizing firms, lower prospective prices and profits will mean fewer
new products. The key question here obviously is that of the value of
products foregone relative to the benefits from lower prices, but no
researcher or policymaker knows the answer to that question. For the
present, we must plan policy in ignorance.
In the face of such uncertainty about what public policy might
affirmatively do, probably the best policy is again to try to replicate
(as much as possible) markets with patents that are otherwise
competitive, especially on the buyer or insurance side. Buyers should
be free to walk away from products whose price is higher than what
buyers think they are worth, but no set of buyers should be permitted
to collude or combine to force prices down. This situation would best
be accomplished if individuals could choose from a large number of
different health plans, with the plans having different policies as to
which drugs they pay for, what prices they pay, and what assistive
services they provide. One would expect plans to impose some copayments
that signal to insureds when covered drugs are sold at especially high
prices relative to other alternatives; ``triple tier'' copayment or
simple proportional coinsurance will accomplish this goal. I believe
there is also merit in trying to approximate an indemnity payment
conditional on the need for some drug in a given therapeutic class; the
German health system model of reference pricing, in which a fixed
amount adequate to buy one product in a class is paid but patients are
free to buy more expensive products with their own money. More
elaborate versions in which some fraction of the incremental cost is
covered are also possible.
When there is a choice of plans, these plans must be allowed to
differ in both coverage policies and premiums paid by the insured for
choice to be meaningful; it does not help if there are multiple
contractors administering exactly the same coverage at the same
beneficiary premium. ``Competition'' between different plans cannot be
guaranteed to lead to the lowest possible price, but it probably will
lead to the best price, the price that best reflects the tradeoffs
beneficiaries are willing to make between different types of cost
containment, that squeezes out any insurer profit, and that best deals
with government granted patent monopolies.
Final Comments
Although the case for catastrophic insurance coverage for seniors
that extends to prescription drugs is overwhelming, the addition of
that coverage makes Medicare's long run future even more difficult to
plan. The reason is that rising medical care and health insurance
expenses are almost always driven by the addition of beneficial but
costly new technology, and because pharmaceuticals have been the
leading source of that new technology. Because we live (and will live)
in a world of limited resources, some technologies should not be made
available to all who would benefit from them. However, we have no
institutional structure for making such cost-benefit tradeoffs,
especially not for government-funded coverage like Medicare. The model
of a panel of wise and dispassionate scientists determining coverage
for all, tried in some other countries, has some serious problems; to
let Congress decide on (and be lobbied about) coverage is even worse.
My own suggestion would be to make a social decision about what level
of contribution for Medicare is financially sustainable; make that
amount of funding available to beneficiaries, and let them use it for a
variety of loosely limited competing plans. See how this works, and
only add to the budget if serious problems of access to highly
beneficial products emerge. Such a strategy may be the best one for a
constrained and uncertain future.
Three essentially political questions remain: (1) How low a
deductible at any given income level represents the appropriate
combination of financial protection for seniors, appropriate incentives
to use (but not overuse) drugs, and tax burdens on present and future
taxpayers? (2) What tradeoffs should we make between inexpensive drugs
today and better drugs for the future? And (3), most importantly, what
rate of increase in spending for higher quality but more costly
products do we think is appropriate for the growing numbers of elderly
in our country?
Mr. MCCRERY. On that sobering note, we will go to Dr.
Reinhardt.
STATEMENT OF UWE E. REINHARDT, PH.D., PROFESSOR, ECONOMICS AND
PUBLIC AFFAIRS, DEPARTMENT OF ECONOMICS AND THE WOODROW WILSON
SCHOOL OF PUBLIC AND INTERNATIONAL AFFAIRS, PRINCETON
UNIVERSITY, PRINCETON, NEW JERSEY
Dr. REINHARDT. Thank you, Mr. Chairman, and Members of this
Committee for inviting me to share my views on Medicare reform.
I will concentrate mainly on Medicare reform and not on the
prescription drug coverage. I am working on a paper on it. I
haven't totally through. Once I have, I will be happy to share
on that.
Now, my testimony grew out of a primer I had written for
journalists who always kept asking the same questions and to be
efficient, I just wrote this up and said call me back if it is
not clear.
The questions I was asked: What are the deficiencies of the
traditional program and who is responsible for those
deficiencies?
The second question: What form should the competition
between traditional Medicare and private insurance plans take?
The third one was what are actually the goals of Medicare
reform and are these achievable?
Finally, what are some of the technical and political
obstacles?
Now, with respect to the shortcomings, the interesting
thing is Medicare is a highly popular program. Survey after
survey shows that if you array public and private insurance
products, Medicare usually is among the top or the winner. So,
you are trying to reform a program that is highly popular among
not only the old, but also the young. It has shortcomings, and
we have heard these. It has a strange insurance structure. It
has no stop-loss protection, no catastrophic protection,
doesn't cover prescription drugs.
I am asked who is responsible for it? The culture and
language is bureaucracy. The word ``bureaucracy'' in America is
a little bit like the word ``French'' is these days. It is
always not good.
I analyzed it, and I would defy anyone to prove me
different. All of the shortcomings of the traditional Medicare
program are the Congress' responsibility. Think of Medicare as
an insurance company. The management is the Health Care
Financing Administration (HCFA) and now CMS. You are the board
of directors. Then look down what good governance would
require, and you would find the fault lies in the board of
directors.
If Medicare doesn't have prescription drugs, that is
Congress' fault. If there has never been successful competitive
bidding, that is Congress' fault.
I noticed Mr. Walker said that Medicare overpays for
prescription drugs for oncologists, but straight shooter that
he is, he points out on page 20, that it is in the statute.
There is nothing CMS can really do about it. So, that is the
first thing. There is no reason why this body, the board of
directors, could not fix the deficiencies that are in Medicare,
and there are many proposals around on the shelf to do this.
This is not rocket science.
The next question that gets asked is: What should be the
nature of the competition? I think the reasons why some people
feel that the proposals now before the Congress are actually
out to destroy the existing Medicare is the idea to put $400
billion of taxpayer money and give that only to the private
health plans as a come-on and not to put a drug benefit also in
the traditional Medicare.
That would, of course, be a policy quite consciously
designed to destroy the old Medicare. Maybe that should be
done, but it should be openly discussed as such. I think
camouflaging that with pretty language does seem to me to be
not proper in a democracy.
The next question comes: What are actually the objectives
of this reform? Here I have the most difficult problems with
journalists. I, myself, I have heard again many times this
morning that we need to reform Medicare. What are we really
talking about?
I list on page 7 of my testimony several goals, but let me
pick on just two. If the idea is that Medicare reform will
lower total health spending per elderly from all sources, I
would almost assure you that will not be achieved. I have a
chart on page 8 where I say, ``Where could those savings come
from?''
Would you believe that private health plans can get lower
fees than the traditional Medicare? I don't think so.
Would you believe that you can reduce volume more than the
traditional Medicare? Well, we have the managed care backlash.
We have just been through it, and the Supreme Court now
completely killed HMOs by having this ``any willing provider''
provision.
So, the idea that you think you can reduce volume with
private health plans in Dade County, Miami, and not trigger a
backlash among the elderly, I doubt it. I think you will find
there isn't that much volume, unless Congress really gets
control, unless you get into it.
When it comes to SG&A, savings and administration, Medicare
now spends less than 2 percent of the total expenditure on
administration. I will put to you the proposition there is no
insurance company in America that could run an insurance
program this complex and spend only 2 percent on
administration. In addition, they would have to market
individually to the elderly, which Medicare does not, and they
would have to give profits to shareholders, which Medicare does
not.
So, I believe there is no source of saving in SG&A. I think
in chart A, I can ask my colleague here to audit it, I don't
think I have left anything out. This is, again, not rocket
science. I put it all out there, and anyone who would argue
that you can save total spending would have to tell me where in
this map would you do it.
Now if, on the other hand, the idea is to let total
spending go where it may, but to limit just the taxpayers'
exposure, that of course you could do. The idea there would be
to lighten the burden on the working population who pays
payroll taxes and shift it to the elderly themselves. I think
that could be debated, but I would think, in a democracy, that
should be put honestly on the table for all the young and the
elderly to see, so that one could have a forthright, democratic
debate on this--democrat ``small''--rather than hiding that
under some other goal.
There are some obstacles that I see. The CMS--or HCFA
formerly--has never succeeded to experiment with competitive
bidding, yet competitive bidding is a core of this reform. So,
ask yourself how would the health plans ever play along? They
like administered prices because they can manipulate them. I
don't think they would like competitive bids.
We don't have a good risk-adjustment mechanism. The Dutch
don't, we don't, the Germans don't, and yet having a good risk
adjuster is the sine qua non of a competitive insurance
structure. We heard about the Winberg variations this morning.
Finally, I do ask Medicare can't ever really compete fairly
with private plans because, say, Humana can pull out of Iowa if
they don't like it, but Medicare has to stay as the insurer of
last resort. So, it will be very difficult ever to have a
really level playing field in this field.
Those are my remarks. Thank you.
[The prepared statement of Dr. Reinhardt follows:]
Statement of Uwe Reinhardt, Ph.D., Professor, Economics and Public
Affairs, Department of Economics, and Woodrow Wilson School of Public
and International Affairs, Princeton University, Princeton, New Jersey
My name is Uwe E. Reinhardt. I am Professor of Economics and Public
Affairs at Princeton University's Department of Economics and the
Woodrow Wilson School of Public and International Affairs. At this
hearing, I represent only my own views as a health economist and health
policy analyst, and not those of any other person or institution.
I would like to thank you, Mr. Chairman and your colleagues on this
Committee for the opportunity to share with you my observations on
proposals to extend coverage for prescription drugs to Medicare
beneficiaries as part of a reform of the entire Medicare program.
My statement before you, submitted for the hearing record, draws on
a longer Primer for Journalists on Medicare Reform Proposals, which I
have submitted to your Committee as well. It can be accessed at website
http://www.wws.Princeton. EDU/~chw/memberf.html (Click on ``Uwe
Reinhardt'' and then on ``Medicare Reform'').
The Primer was written in response to several inquiries by
journalists on the Medicare reform proposal released by President Bush
in early March. In the Primer, I have sought to comment on four
questions frequently posed by journalists:
A. What are the deficiencies of the traditional Medicare
program, and who is responsible for them?
B. What form should the competition between traditional Medicare
and private insurance plans take?
C. What are the goals posited for the proposed Medicare reform
proposals, and are these goals achievable with the proposed reform?
D. What might be the technical and political obstacles to such a
reform?
In what follows, I shall respond to each of these questions. I
assume throughout that the reform in question is the one sketched out
in general terms by President Bush on March 3rd, 2003, although that
proposal is so sketchy that one could easily, and quite inadvertently,
do it injustice. But similar proposals had been proposed earlier by
Senators John Breaux and Bill Frist, and by the Bipartisan Commission
of the Future of Medicare in the mid 1990s. The general idea of these
proposals is to have Medicare delegate the tasks of managing the cost
of health care benefits and their quality to private health plans that
would bid competitively for the Medicare business. All such plans,
however, would allow Medicare beneficiaries to stay with the
traditional Medicare program, in its current form.
The purpose of my testimony--and of my Primer for Journalists on
Medicare Reform--is not been to advocate a particular reform plan or to
oppose one. The intent has merely to raise a series of questions that
have either not been raised before or have never been satisfactorily
answered, if they have cropped up before. The testimony, Mr. Chairman,
is submitted to your Committee in that spirit.
A. THE POPULARITY AND SHORTCOMINGS OF TRADITIONAL MEDICARE
The Abiding Popularity of the Program: In their recent paper
``Medicare Versus Private Insurance: Rhetoric and Reality'' (available
on the Health Affairs Web Exclusive, October 9, 2002), health services
researchers Karen Davis, Cathy Schoen, Michelle Doty and Katie Tenney
report on a national survey of some 3,500 adults, and conducted in mid
2001, according to which ``Medicare beneficiaries are more satisfied
with their health care under traditional Medicare than are persons
under age sixty-five who are covered by private insurance.''
This finding corroborates an earlier survey in 1998 by the Henry J.
Kaiser Family Foundation entitled ``National Medicare Policy Options
Survey'' (available on website http://kff.org), which similarly found
that the traditional Medicare program earns very high marks among
public and private health insurance products among Americans, both
young and old.
The Program's Shortcomings: The popularity of traditional Medicare
is all the more remarkable, because that program does have serious
deficiencies, to wit:
1. It does not cover prescription drugs or long-term care other
than that associated with an acute-care episode.
2. It does not provide adequate catastrophic stop loss protection.
3. It calls for considerable cost-sharing by patients at point of
service--for example, $840 for the first day in a hospital episode,
$210 per day for hospital stays in excess of 60 days, $420 per day for
stays exceeding 60 days, and all costs for stays exceeding 150 days.
Indeed, because of its spotty benefit package, Medicare currently
pays for only about 52% of the total health spending for Medicare
beneficiaries (from all sources). Medicaid pays for another 12% and
private insurers (so-called Medigap coverage provided by former
employers or purchased directly by beneficiaries) another 12%. The
beneficiaries themselves pay for 19% of their total spending out of
pocket at point of service. For low-income beneficiaries, their out-of-
pocket costs for health care tends to be around 30% of their meager
incomes.
The abiding popularity of the traditional Medicare program--in
spite of its deficiencies--probably reflects three factors.
First, unlike virtually all other private or public insurance
products in this nation, which tend to be ephemeral, Medicare coverage
is permanent. It does provide its beneficiaries with the genuine sense
of security not enjoyed by most other insured Americans, which is a
decided plus, especially for elderly people.
Second, Medicare traditionally has offered beneficiaries completely
free choice of providers and completely free choice of therapy for
covered services. Usually, private insurance products have a variety of
restrictions in this regard.
Finally, most Medicare beneficiaries have plugged the gaps in
coverage left by traditional Medicare with Medigap policies, or
Medicaid comes to their rescue.
Responsibility for the Medicare's Current Shortcomings: It is
customary among critics of traditional Medicare to blame its
shortcomings on its ``unwieldy bureaucracy,'' the Department of Health
and Human Services Centers for Medicare and Medicaid Services (CMS),
formerly the Health Care Financing Administration (HCFA). Among people
with distaste for government, that theory has great currency.
A major point I make to journalists is that this accusation is a
bum rap. Responsibility for Medicare's shortcomings rests almost wholly
with the program's Board of Directors--the Congress of the United
States. For example:
If the traditional Medicare program does not cover
prescription drugs, it is so because the collective will of the
Congress of the United States has willed it so.
If the traditional Medicare program does not work as a prudent
purchaser with selective centers of excellence or with other preferred
providers known to give cost-effective care, it is so because Congress
has expressly forbidden that kind of contracting and prudent
purchasing.
If the traditional Medicare program does not engage in
``disease management'' or ``managed care'' of any type, it is so
because Congress has not permitted Medicare to pursue these avenues.
If the traditional Medicare program has hardly ever had the
benefit of being able to solicit competitive bids for the products and
services it purchases on behalf of beneficiaries, it is so because the
Congress has willed it so.
Until the early 1990s, private health insurers typically did not
cover prescription drugs either. Virtually none of them employed any
utilization or cost controls, and most of them paid providers whatever
they were billed by the providers of health care, rather than
negotiating fees. Consequently, throughout most of the 1980s, Medicare
spending per beneficiary rose much less rapidly than did the (per
capita) premiums charged by private health insurers. As is well known,
that differential in favor of Medicare is observed today as well.
To be explained, then, is why Congress decided to sit on its hands
during the 1990s, as private insurers began to modernize their approach
to health insurance and cost containment. It is a question not properly
posed to CMS. It is a question properly addressed to the Congress
itself, which failed to expand Medicare's benefit package in step with
modern clinical developments, and which incessantly micro-managed
Medicare's bureaucracy, preventing the very innovations whose absence
are now being deplored, sometimes by Members of Congress themselves.
To illustrate, how can the Congress justify to the American people
that it has budgeted for Medicare an administrative overhead allowance
of less than 2%. No private health insurer could possibly manage so
large and complex a program at so low an expense ratio? Congress'
posture on this budget item seems almost designed to prevent Medicare
from managing its affairs effectively. Why is this so?
Similarly, how can the Congress justify to the American people that
the budget for operations research it appropriates for the CMS (about
$15 million a year) is only about 0.0038% of total spending by the CMS?
Consider, if you would, the graph on the next page. For decades
Congress has been apprised by health services researcher John H.
Wennberg, M.D. and his associates at Dartmouth University that, even
after adjustment for inter-county differences in the age-gender
composition of the elderly population, of case-mix severity and of
practice costs, Medicare spending per statistically equivalent
beneficiary varies by a factor of three across the nation (see the
graph below). Remarkably, Congress has never shown any interest in
funding research that might uncover what difference such spending
differentials might have on the quality of the beneficiaries' lives. It
is all the more remarkable as the Congress expresses concern over the
economic implications of the retiring Baby Boom. After all, if
physicians in many of the Sunbelt States were to adopt the more
conservative practice style of, say, the Mayo Clinic in Rochester,
Minnesota, the retiring Baby Boom really would not be a major economic
problem for this relatively young nation.
Finally, how can the Congress justify to the American people that,
during the 1990s, it has consistently intervened with the bureaucracy
on behalf of the health insurance industry, preventing experiments with
competitive bidding for the Medicare business by private health plans?
To quote in this regard from an analysis of this remarkable record by
Bryan Dowd, Robert Coulam and Roger Feldman:
Most Medicare reform proposals would replace the current
payment system with some for competitive pricing [of insurance
products]. However, efforts over the past five years to demonstrate
competitive pricing for M+C plans have been blocked repeatedly by
Congress, even when the demonstrations were directly responsive to a
congressional mandate. In the absence of political support, a
demonstration of competitive pricing may be infeasible, and Congress
could be forced to take the risky step of implementing broad Medicare
reforms with very little information about their effects.'' \1\
---------------------------------------------------------------------------
\1\ Bryan Dowd, Robert Coulam, and Roger Feldman, ``A Tale of Four
Cities: Medicare Reform and Competitive Pricing,'' Health Affairs,
September/October, 2002; pp. 9-27. This volume of Health Affairs
contains several other papers and commentaries on the issue of
competitive bidding.
[GRAPHIC] [TIFF OMITTED] T9405A.012
Source: John E. Wennberg et al., Dartmouth Atlas of Health Care
---------------------------------------------------------------------------
1999, AHA Press, 1999: Chapter One Table, pp. 33-40.
Viewed in their entirety, Congress' policies on traditional
Medicare convey the impression that Congress has deliberately stunted
the evolution of Medicare in step with modern clinical and
organizational developments. It is fair to inquire why that is so.
B. WHAT FORM SHOULD COMPETITION BETWEEN TRADITIONAL MEDICARE AND
PRIVATE HEALTH PLANS TAKE?
As a general rule, it is always a good idea to subject publicly
administered programs to competition from private-sector entities
capable of delivering the same benefits, where that is feasible. For
that reason, one should welcome any reform that sets up a fair and
intellectually manageable competition between the traditional Medicare
program and equivalent private-sector health insurance products, if
only to offer citizens a wider choice--the ability to exit a
relationship with the public program.
The Virtue of Choice: We take it for granted that ``more choice''
always is to be preferred to ``less choice'' in the design of social
programs, even though modern behavioral economists would warn us that
there can be such a thing as too much choice. It happens when choices
set before individuals are not accompanied by adequate information on
these choices. It also happens when the sheer complexity of the choice
menu overwhelms the individual's capacity to make rational choices.
If the Administration and the Congress wish to confront Medicare
beneficiaries--especially the frail elderly--with ever more complex
choices in health insurance, it is incumbent upon government to
accompany these choices with clear information about them and to
structure them so as to make rational choice manageable by ordinary
human beings. In this regard, one is not at all assured by the recent
headline that ``Medicare Officials Order End to Instructive Services''
(The New York Times, January 25, 2003, p. A12). The article opens with
the statement:
``Running short of money, Medicare officials have ordered
immediate cuts in a wide range of services that provide information,
advice and assistance to Medicare beneficiaries.''
Once again, the temptation here is to blame the ``Medicare
bureaucracy'' for this budget reallocation. As I have noted above, the
fault really lies with Congress' insufficient appropriation for
Medicare's administrative expense.
Be that as it may, if this is an augury to come for Medicare
reform, then ``more choice'' may well end up as ``more confusion''
among beneficiaries and ``more regret'' and disillusionment ex post. If
Congress really seeks to reform Medicare along the lines proposed by
the President, then Congress must show better faith in regards to the
information infrastructure the reform presupposes.
The Fairness of Competition: The next question is what form the
competition among alternative insurance products in Medicare should
take. Two distinct visions of this competition are now put before the
American people.
One arrangement would be to style the choice and competition among
health insurance products as one between (a) a modernized, government-
run Medicare program that includes prescription drugs, preventive care
and catastrophic coverage, and that is allowed by Congress to use
techniques of modern ``managed care'' and (b) equivalent private-sector
insurance products managed by private health plans. The arrangement
would attempt to create a level playing field between a government-
administered Medicare and private-sector competitors.
An alternative arrangement--one deliberately designed to erode the
popularity of the traditional Medicare program--is to style the choice
and competition in Medicare as one between (a) the traditional,
unreformed, government-run Medicare program, whose development has been
and will continue to be deliberately stunted by the Congress and (b)
more modern private-sector insurance products offered by private health
plans. It appears to be the style of competition preferred by the
President, who would endow the traditional Medicare program with only a
skimpy drug benefit \2\ and subsidize drug benefits through private
plans more heavily, and who would otherwise not alter Medicare's
benefit package.
---------------------------------------------------------------------------
\2\ Medicare beneficiary choosing to stay in the traditional
Medicare program would receive free of charge a drug-discount card--
presumably administered by a pharmaceutical benefit management company
or a private insurance carrier--to benefit from bulk purchasing. They
would also have catastrophic coverage for drug spending exceeding an
annual threshold, which is left unspecified. Low income beneficiaries
would, in addition, receive a $600 annual subsidy toward their drug
purchases.
---------------------------------------------------------------------------
No one, probably not even its proponents, would call the second
style of competition fair. It is the analogue of a parent offering a
high school graduate, as a graduation gift, a choice between (A) a Ford
Taurus and (B) a similar Chevrolet, on the condition that the parents
will pay for a CD player in the Ford Taurus and pick up the annual
maintenance costs on it, but that they will not cover these items for
the Chevrolet. It can be doubted that either GM or the kid would call
this a fair choice.
What rationale one might offer for styling the competition between
Medicare and substitute private health plans in this unfair way.
First, it might be argued that, under our system of political
governance and campaign financing, it will always be impossible for
Congress to modernize Medicare in step with changes in modern medicine.
The argument would be that Congress and successive Administrations have
managed Medicare as poorly as they have because, by its very nature and
its method of campaign financing, American government manages
everything it does poorly. It is a troublesome thought.
Second, it may be argued that government-run health insurance
programs are inherently cumbersome, because they must strive to be
horizontally fair to all parties, while market mechanisms usually are
not subject to that constraint, unless government imposes on them. To
illustrate, Medicare must observe scrupulously horizontal equity in its
dealings with hospitals and physicians. (Horizontal equity means two
physicians or hospitals would always be treated the same way). There
are public hearings on proposed changes, notices in the Federal
Register, comment periods, and such. By contrast, private health plans
need not be so fair. They can treat different physicians differently,
if they can cut different deals with them, and they can change rules or
contracts with providers and patients overnight, without much notice,
and subject only to the tort system and contract law. Therein lies
greater flexibility.
A third argument for the proposed, unfair competition might be
that, by their respective natures, private health insurance plans will
always be more efficient than government-run insurance plans in
anything they do. In principle, that hypothesis is amenable to
empirical verification, after one has defined carefully what is meant
by ``efficient.'' If there is a body of empirical research that
convincingly supports this hypothesis (which there might be) I am not
aware of it. In any event, if private health plans really are more
efficient than is traditional Medicare, why then would they need the
boost of a special public subsidy available only to them (and not the
traditional Medicare) to be competitive with traditional Medicare?
C. WHAT IS THE GOAL OF MEDICARE REFORM?
It has never been clear to me just what the goal posited for
Medicare reform might be, because usually the authors of such proposals
remain silent on the subject. I can think of several distinct goals, to
wit:
Reduction in total health spending per Medicare
beneficiary, from all sources, however it may be split between
taxpayers and Medicare beneficiaries.
Reduction only in the taxpayer's exposure to Medicare
spending, even if it increased total health spending per Medicare
beneficiary.
Obtaining better value for the health care dollar,
whatever the source, and whatever Medicare reform does to total health
spending per Medicare beneficiary, from whatever source.
Rescuing the private health insurance from a slow death
march caused by the ever-finer risk segmentation that occurs under mass
customization of private health insurance.
In what follows I shall briefly explore each goal in turn,
referring readers to my Primer for a lengthier exploration.
Goal 1--Reduction in Total Health Spending: If the goal of the
proposed Medicare reform were to reduce total health spending per
Medicare beneficiary--from all sources, including the beneficiaries
themselves--then I doubt that this goal will be achieved with the
proposed reform. I come to this conclusion by ruminating on the sketch
on the next page.
Given the awesome power traditional Medicare has to set
administered prices for Medicare, it can be doubted that private health
plans can buy benefits for the beneficiaries at lower prices, or even
at the prices Medicare now pays. It may be argued, of course, that
these prices are too low, and that private health plans would set more
appropriate, higher prices. Whatever the merits of that idea, however,
it would drive up total health spending per Medicare beneficiary, not
lower it, other things being equal.
[GRAPHIC] [TIFF OMITTED] T9405A.013
It may be argued, next, that private health plans would lower total
health spending per beneficiary by ``managing'' health care utilization
(volume) more efficiently than does traditional Medicare, perhaps
through disease management. At the abstract level, this argument has a
certain appeal, especially in view of the previously cited Wennberg
variations. But there are practical obstacles to this strategy.
First, if attempts by private health plans to ``manage'' the
utilization of health care by employees triggered a ``managed care''
backlash in the younger generations, one can only imagine what backlash
that attempt would trigger among Medicare beneficiaries and their
physicians, if these much maligned (though theoretically defensible)
managed-care techniques were applied to the elderly population.
Second, there is scant empirical evidence that the private health
plans so far have performed much disease management. One would have
thought that these plans should have been able to earn a fortune by
managing health care properly in counties where their premiums were
based on 95% of a very high Average Actuarial Per Capita Cost (AAPCC)--
e.g., Dade County Miami, Baton Rouge, Louisiana, and so on. Yet when
Congress capped the premiums paid the plans for the high cost countries
under the Balance Budget Acts of 1997 (BBA 97) at an annual growth of
2%, the plans professed not to be able to manage with those premiums.
Evidently, there are narrow limits to the plans ability to reduce
utilization even in high-utilization areas.
Third, the concept of Enhanced Medicare proposed by the President
envisages health insurance products otherwise known as Preferred
Provider organizations (PPOs), which resemble nothing so much as open-
ended, unmanaged indemnity products. Such open-ended plans are unlikely
to control volume significantly better (if at all) than traditional
Medicare does now.
Finally, it is doubtful that the total fraction of the premium that
plans need for marketing, administration and profits (SG&A plus
profits) under a privatized Medicare program will be lower than the sum
of the administrative cost of traditional Medicare (less than 2% of
expenditures, see graph below) plus those of Medigap policies.
[GRAPHIC] [TIFF OMITTED] T9405A.014
Source: CMS, http://cms.hhs.gov/charts/default.asp, CMS Facts &
Figures, II. CM Program Operations, June 2002 Edition, Slide II.6.
In sum, if, relative to traditional Medicare, private health plans
would be unlikely to achieve (1) lower prices, (2) significantly lower
volume or (3) lower SG&A costs, whence then would come any cost savings
from privatizing Medicare?
Goal 2--Limiting the Taxpayer's Exposure to Medicare: If the goal
of Medicare reform were merely to limit the taxpayer's contribution to
the health-care cost of Medicare beneficiaries (even if that drove up
total health spending on them from all sources) that goal could be
achieved with such a reform, at least theoretically.
In effect, the reform would be designed to convert the Medicare
program from its traditional structure of a defined benefit program
(which saddles taxpayers with the risk of health care cost inflation)
to a defined contribution program (which would shift the risk of future
health-care cost inflation substantially onto the shoulders of Medicare
beneficiaries). It would, in effect, represent a reallocation of an
essentially uncontrollable fiscal burden from the young to the old.
In view of the burden of the retiring Baby Boom and the inexorable
decline in the number of workers per elderly in the decades ahead, such
a strategy certainly deserves careful consideration. If that be the
goal of Medicare reform, however, one would hope that those positing it
would do so straightforwardly, for open debate in our democracy.
Goal 3--Obtaining Better Value for the Dollar: It may be argued
that private health plans can obtain better value for the Medicare
dollar (regardless what total health spending on Medicare beneficiaries
may be), because these plans know how to manage health care better than
does traditional Medicare.
Although that proposition has appeal, there is the caveat that any
such attempt at ``managed care'' might trigger the backlash alluded to
above. Indeed, the President's proposed Enhanced Medicare is explicitly
designed to spare Medicare beneficiaries these ``managed care''
techniques.
Furthermore, there is no reason why traditional Medicare could not
be allowed to purchase health care more prudently than it is now
allowed to do and to engage in modern disease management. Government-
run or -controlled health insurance programs abroad--e.g. in Germany--
certainly are now experimenting with this approach. If Congress wished
to attain better value for the health care dollar under traditional
Medicare, it could certainly achieve that goal.
If, on the other hand, Congress as a matter of fiat steadfastly
refuses ever to allow traditional Medicare to manage itself and the
care it procures more efficiently, then almost by definition and by
deliberate design private health plans will have a comparative
advantage in this regard. In that case, however, it would seem
reasonable to ask Congress for an explicit justification of such a
policy.
Goal 4--Rescuing the Private Insurance Industry from Self-Afflicted
Demise: In my Primer for journalists, I explore at greater length the
effect that the ever-finer risk segmentation within the private health
insurance sector will have on the fraction of the health care dollar
that the private sector will control in the future.
Although the sector currently covers two thirds of the American
population, it accounts for only about one third of total national
health spending. It is so, because fiscal responsibility for the more
costly citizens--the blind and disabled and the elderly--has been left
to the public sector.
If the private insurance industry continues to segment risks as it
has in recent years--through ever more sophisticated ``mass
customization'' of its policies--then more and more chronically ill
Americans will be flushed out of its book of business and onto the
mercy of government. Thus, a decade hence the private sector might
control only 25% of total health spending.
One could think of the proposed Medicare reform as a strategy
designed mainly to rescue the private insurance industry from this
self-inflicted wound. It would be a purely political decision, of
course, that one would be hard put to justify on economic grounds.
D. OBSTACLES TO MEDICARE REFORM
Among the potential obstacles facing the proposed reform of the
Medicare program, and listed in my Primer for journalists, are the
following:
1. Competitive Bidding: Competitively bid premiums are the central
core of most proposals to privatize Medicare, the President's included.
Competitively bid premiums are thought to be the main engine for
quality and cost control. Yet, as noted earlier, previous attempts by
Medicare to experiment with competitive bidding by private health plans
has met with stiff resistance from the health plans. They have
invariably been killed, courtesy of the good offices of the Congress.
What assurance do the proponents of Medicare reform have that the plans
would embrace the competitive bidding envisaged by the proposal?
2. Risk Adjustments: Any system of competitive enrollment of
diverse people by price-competitive private health insurance plans
requires that the premiums paid the plans be adjusted for the actuarial
risk of the enrollees choosing the plans. Unfortunately, no one in the
world has yet developed a satisfactory risk-adjustment instrument for
this purpose. The risk adjuster currently used by Medicare for its
Medicare+Choice program, although fairly sophisticated by international
standards, has been vehemently criticized by the health plans.
Concretely, then, what ideas for risk adjustment do the advocates of
the proposed reforms have?
3. Wennberg Variations: There is the question how a reformed
Medicare would cope with the previously cited Wennberg variations in
Medicare spending. These variations have hitherto been politically
acceptable, because they are known only to the cognoscenti. The
proposed reform might flush them out to greater visibility and trigger
political controversy.
4. Insurer of Last Resort: Finally, there is the question how any
competition between traditional Medicare and private health plans can
ever be on a fully level playing field, if the private health plans are
permitted to withdraw from certain regions of the country in which they
cannot thrive, while traditional Medicare must stay as insurer of last
resort. That facet of the proposed reform required further thought than
it has hitherto been given.
Mr. MCCRERY. Thank you, Dr. Reinhardt, and thank all of you
for your testimony. I am going to turn, first, to the Chairman
of the Subcommittee on Health, Mrs. Johnson.
Mrs. JOHNSON OF CONNECTICUT. Thank you all for your
thoughts and your very thoughtful testimony.
Dr. Reinhardt, under program shortcomings, you mentioned
prescription drugs, no stop loss and cost-sharing issues, but
you don't mention almost total lack of preventive, coverage of
preventive benefits under Medicare, and more importantly,
Medicare has no capability to provide management of chronic
illness. Structurally, it doesn't have that capability, and yet
about 32 percent of the seniors that have 5 or more chronic
illnesses are using 78 percent of the resources.
So, when you say what could plans offer us, the private
sector is far more advanced than is the public sector in
managing care, not managing care in the old HMO model; managing
care in the integrated disease protocols models.
When you look at the number of people retiring and the
length of time they are living, and the number of multiple
diseases they are living with, do you think that there is no
opportunity to save money in Medicare by better managing
chronic disease?
Dr. REINHARDT. Oh, no, I do believe--that is on page 10, my
goal 3. I said it could be that we assume we get better value
for the dollar, in particular, disease management, which is
also I mentioned in the----
Mrs. JOHNSON OF CONNECTICUT. It is very much of an aside,
and, to me, if 32 percent are using 78 percent of your
resources, and that type of patient is going to grow, this is
not an aside.
If we want to bend long-term spending in Medicare, we can
do exactly what has happened in other sectors of our economy.
Through more integrated teamwork, through better use of
technology, we have reduced costs and improved quality, and
that is really what disease management does. It improves the
quality of care for the individual patient, but it reduces the
overall cost by reducing hospitalizations, emergency room
visits, and in many instances even physician visits.
If this were aggressively pursued in the near term, with
CMS identifying these patients and giving them incentives to
join such plans, the issue really isn't would this save money,
in my mind; the issue is how do you do it? How do you let both
private-sector plans that have demonstrated that they are doing
this well do this for our seniors, and how do you provide
access to coordination of care, management of diabetes,
management of heart disease, these kinds of things in rural
areas where there is no plan?
There almost invariably is some small hospital or medical
practice that, with the resources, particularly the technology,
could do this. This is springing up from the medical community,
and it is better quality and lower cost.
So, your analysis is interesting, but it is too focused on
where we are now and the way we have always viewed care. If we
are going to view care more holistically and more proactively,
we will get higher-quality care, and we will be able to, in the
long run, keep people out of dialysis. That will save us money.
Dr. REINHARDT. Yes, Congresswoman Johnson, I agree there is
some experiment or some initial experiments with disease
management, but I think it would not be accurate to say that
disease management is now widely practiced in the private
sector. They, too, are only just beginning, and usually the
mechanism they use is to contract/subcontract with specialized
niche companies who do that.
There is no reason the traditional Medicare couldn't do
that, too. It could deal with Centers of Excellence, it could
do selective contracting. It could do almost all of it that a
health plan can do. The real issue is it needs the authority
from the Congress to do it.
I think you might want to invite people like Marilyn Moon,
who have thought much about this, who would tell you, you don't
necessarily have to join a private health plan to get disease
management.
Mrs. JOHNSON OF CONNECTICUT. My time is about to expire,
and I want to see if anyone else has a comment. I agree with
that, but I don't think you want to exclude those systems that
have more advanced capability than we do. I think you need to
do both.
Dr. REINHARDT. Not at all. In fact, I say I welcome always
competition. Every public program, where feasible, should have
competition from the private sector, whether it is Federal
Express and the U.S. Post Office or health plans and Medicare.
I totally agree with you on that.
Mrs. JOHNSON OF CONNECTICUT. Dr. Pauly and Dr. Stuart. Do
you have any comment?
Dr. STUART. I am sorry?
Mrs. JOHNSON OF CONNECTICUT. Do either of you have any
comment on this aspect of cost control and Medicare?
Dr. STUART. I was going to say that I have trouble hearing,
and so if I ask you to repeat your question. I also might note
that Medicare does not cover hearing aids.
[Laughter.]
Dr. STUART. Let me make a point about disease management.
Disease management, actually, as it is practiced by these niche
companies, typically plays a heavy role in terms of
prescription drug therapy. So, it would be very, very difficult
for Medicare, as it is currently constructed, to encourage
disease management, because one of the central elements of
disease management in the private sector is simply not
available to Medicare. So, I think that simply making
prescription drugs available would actually make it feasible to
develop disease management approaches.
Dr. PAULY. Well, I am both more and less optimistic than
Professor Reinhardt. I think if we judge from the competition
between managed care and fee-for-service in the private sector,
although we don't have any definitive estimates, my entry in
the office pool is that managed care saved about 15 percent.
Now, that was a one-time saving, but it was what resulted in
very low rates of growth for private sector spending from about
1994 to 2000. You might be able to see that same sort of saving
within Medicare, but it would require what managed care
required in the private sector, which is limitation, greater
limitations on patients and providers, and that would fly in
the face of what people love about today's Medicare. I will say
though I am, in 4 years, contemplating being eligible for
Medicare, and one of the things I worry about is a point that
Chairman Thomas made this morning. I worry about the relevant
comparator, you need to have the relevant comparator. My
judgment is today's Medicare is not sustainable. I am not sure
whether it is sustainable for the next 4 years, but is
certainly not for as long as I hope to be around and a burden
on my children. So, I think the affection that people feel for
a very generous program, of whose cost they pay less than 10
percent, is not something that we can continue to hold out for
future generations of elderly people, so we need to think about
how to change that.
The good news is that some private sector plans may be able
to save money, although they will probably require some
restrictions that Medicare beneficiaries are not used to. The
bad news is that potentially the savings that private sector
plans can achieve, which in part result from obtaining lower
prices and discounts to providers, Medicare may have already
achieved. So, at least the part about better negotiation with
providers, at least to judge from the complaints of hospitals
and physicians these days, Medicare may have already made those
cuts, so there may not be as much of a gain.
In keeping with the tradition of economists as professional
wet blankets, I guess what I see as the main advantage of
competition in Medicare is that when the inevitable
restrictions come, I would rather have a choice of how to have
those restrictions imposed on me, rather than have them decided
unilaterally and in a monopolistic way.
Mrs. JOHNSON OF CONNECTICUT. Thank you.
Dr. PAULY. It is a kind of name your poison phenomenon.
Mrs. JOHNSON OF CONNECTICUT. Thank you. My time has well
expired. Sorry.
Mr. MCCRERY. Mr. Stark.
Mr. STARK. Thank you, Mr. Chairman. I am confused about
what it is we are trying to hear today. I wanted to ask Dr.
Reinhardt some questions, but I would ask Dr. Pauly, if he
would be so good--he mentions the research about lowering the
copayment produces a 65-percent increase, and if you could at
some point after the hearing or subsequently just give me a
reference to that, I would be interested in looking into that
further.
I wanted to get to why we are talking about Medicare
reform, as in quotation marks, and that is, what are we trying
to do? I am going to ask Dr. Reinhardt to give me what my
choices are, and also to comment on this often stated theory
that competition and free enterprise are what is missing in
controlling the delivery of health care, medical care, to
particularly seniors. For one thing, I am confused when people
talk about choice in prescriptions. I don't know if anybody in
this room, including some of the physicians, could tell me what
half the prescription drugs that are advertised in People
Magazine do for you or to you. I am sure that none of us are
apt to go off and buy some just for the hell of it if we don't
know what is going to drop off or quit working if we take this
stuff. I don't know any of us that know the cost of any of
these tests. I have often stated that if I offered witnesses a
half-price proctological examination at George Washington this
afternoon, would you run up and take it? No, you wouldn't. Only
if your doctor told you to you might.
So, what is this market based on? I went to a school where
they taught marketing, and they had some economists there and
they talked about having to have a knowledge of the market and
how do consumers decide if they don't know what the hell they
are buying?
So, I wonder, Dr. Reinhardt, if you could elaborate for us
a little bit about what--accepting your challenge that we have
to fix it, what in broad terms are our options in fixing it,
which is to provide a proper amount of medical care to all
Americans, and what factors would help us most, free market,
complete competitive bidding? Go ahead.
Dr. REINHARDT. Well, starting with the latter, the
competitive bidding, California Public Employees Retirement
System, which is the biggest purchaser of health care in
California, your State, last year had 25-percent premium
increase. These were highly competitive plans, and the question
of course you have to ask yourself in Congress, is that the
kind of cost control that we can afford; is that sustainable,
or how do you make this sustainable? I think your only option
is to roll that responsibility over on the elderly, which maybe
should be done, but I think that should be openly discussed to
what extent that is the goal of Medicare reform.
I think whenever you hear people say the people should have
more ``skin in the game,'' as the language is, fiscal skin in
the game, what is actually really being talked about though--
and again, maybe that should be done--you want to ration health
care by price and ability to pay, and it is the lower half of
the income distribution who should carry the burden because
think of someone in the top first or second percentile of the
income distribution, someone making more than $200,000. What
does it actually mean for them? I'm in that position. Cost
sharing doesn't mean a thing to me. Whatever it is, I'll pay
it. So, it has zero effect on people like me, but if you were a
gas station attendant, cost sharing has a major effect. So, we
are saying like food is rationed and like housing and clothes,
we would like to ration health care. That way the burden would
mainly be borne by the lower half of the income distribution.
There is no reason why a nation might not choose that as
long as you are honest about it, that is what markets--or cost
sharing, that is what it really achieves. I am not--I think I
am more inclined, as Mark says, to have some choice as always,
because most airlines are the same, lousy food, lousy planes,
but it does give you some pleasure to be able to tell one
airline to go to hell. I have often done it, just the last
minute I have rebooked, and I think that is sort of what Mark--
pick your own poison, so to speak. There is some virtue in
that, and that is why some competition is obviously very good.
When the President talks about enhancement Medicare, which is
essentially PPOs, which is essentially warmed-over fee-for-
service, unmanaged. I cannot imagine where the savings would
come from, other than this ability, Mark says, to have some
choice is always a good thing.
Again, I want to emphasize I am not at all against it; I am
for it. I would worry about having a popular program such as
Medicare--which is not more expensive, as Marilyn Moon's
research shows--abolished simply because some people don't like
the esthetics of it.
Mr. STARK. Thank you.
Mrs. JOHNSON OF CONNECTICUT. [Presiding.] Mr. McDermott.
Mr. MCDERMOTT. Dr. Reinhardt, knowing the injunction about
not casting pearls before swine--there are very few of us
left--but I would like to give you a Blue Book question. If a
country can for 120 years provide a guaranteed set of benefits,
including prescription drugs, as Germany has done, what is it
that is wrong with Medicare that--or what do we need to change
in Medicare to make the same thing possible for the elderly in
this country?
Dr. REINHARDT. Well, you would need to modernize the
benefit package. It is sometimes overlooked that until 1990,
Medicare was the more innovative program that kept step.
Medicare covered renal dialysis when it was technically
feasible. Medicare introduced diagnosis related groups.
Medicare introduced the fee schedule. It was only after 1990,
when the private plans introduced prescription drugs, that
Medicare fell behind. Those plans also didn't cover preventive
care until about 1992. So, when you talk about modernizing,
mainly it is that you have to have a modern benefit package.
What makes Germany cheap are two things. One, simplicity.
It is a very simple program. It has very low administration.
There was a McKinsey Global Institute study that showed in 1990
Americans actually got $390 less health care--doctor visits,
pills, and so forth. So, we were clinically more efficient,
they said, because we spent less. Ninety percent of that was
spent on administration.
I am on the board of the Duke University health system. We
consolidated our billing, and I was told we have 900 people in
the billing department. I got kind of angry, and I said, well,
is that Medicare--Medicare compliance? The answer, no. For the
most part it is because we have 60 different plans, each with
their own rules, they don't pay. Medicare pays within 20 days,
it is electronic. Private is still all paper.
So, Germans save a lot of money on administration by having
standard billing forms, standard fee schedules, and those kind
of things; where here there are no fee schedules. We have a
market without prices. I defy anyone to give me the website in
Washington, DC where I could find out what different physicians
cost. Each fee schedule has 9,000 items in it. How would you
technically even do this? You need somebody to negotiate these
things for you. I think that is, of course, Medicare's
advantage. It is a simple program. Prices could be negotiated,
too. You set them, but they could be negotiated, the way
Germans do it, and make the program a lot simpler.
There is no question, Germany's population today is as old
as ours will be only in the year 2020. Yet Germany's spending
per capita is about 57 percent of ours. There is no discernable
difference in health status.
Mr. MCDERMOTT. What is their mechanism by which they
control the pharmaceutical industry? The pharmaceutical
industry is as big in Germany as it is in this country, I
think, on some relative scale. How did they deal with the cost
of pharmaceuticals?
Dr. REINHARDT. They use what I think both Professor Pauly
and I would call a market approach called reference pricing,
where they classify groups into therapeutically equivalent
classes of drugs, reimburse fully--not the cheapest, but sort
of the third way up drug--and then tell the patient if you want
a more expensive drug, you have to pay the whole difference
between that benchmark, the reference price, and that brand-
name price, out of pocket. That has really worked,
substantially, in Germany.
In addition, though, they also put a budget on top of drug
spending. Reference pricing is very much hated by the
pharmaceutical industry, because in Germany the prices of brand
names tended to collapse to the reference price. The
pharmaceutical industry then fears that there won't be enough
of a margin for innovation. That has been the argument.
Mr. MCDERMOTT. Do you agree to that, that if we put
reference pricing in our system, suddenly there would be not
enough money in the system for innovation?
Dr. REINHARDT. I think what you need to do to build those
groups is to have absolutely first-rate science to make sure
that really better drugs actually don't get penalized, that it
is only the me-too drugs that you push down. That is where
there might be some controversy.
I think as a general rule, if you take money away from the
pharmaceutical industry, every item in their income will
probably go down. They are spending 13 percent of revenue goes
for research and development (R&D). If you took a buck away,
there might be maybe 13 cents of R&D might disappear. Marketing
would disappear, too, and other things as well. When you take a
dollar away from a drug company, I don't think Mark and I would
say you lose a dollar R&D. That is not true.
Mr. MCDERMOTT. Thank you.
Mrs. JOHNSON OF CONNECTICUT. Mr. Becerra.
Mr. BECERRA. Thank you, Madam Chair. Thank you to the three
of you for your testimony. If I can, I would like to just
follow up on a couple of things that Dr. Reinhardt mentioned
earlier.
First, Dr. Reinhardt, you mentioned that Congress as the
board of directors, as you said, could, if it chose, address
some of the concerns that we have with the current system of
Medicare. Let me ask you this--and I would pose this to the
three of you. Should we, if we end up with a privatized system
of health care for our seniors, whether it is for prescription
drugs or general for Medicare, should we require attributes all
providers, private insurers, in the case of a private plan, be
required to offer a plan in all geographic parts of the
country? Which is something that, I think, Dr. Reinhardt, you
mentioned that Medicare doesn't have a choice in Iowa or
anywhere else, it has to offer to that senior. Should we impose
that as a requirement on any private insurer if we go toward a
privatized system of Medicare?
Dr. PAULY. No, I don't think so. I think some insurers, the
Blue Cross insurers, although it is changing, wouldn't be
capable of offering something country-wide. I think it would do
a lot of violence to the current structure of insurance
markets.
Mr. BECERRA. Who would then cover----
Dr. PAULY. Let me say what I think, what----
Mr. BECERRA. Dr. Pauly, if I could ask you, who would then
cover, if it wouldn't be Blue Cross or any other private
insurer----
Dr. PAULY. Well, it doesn't have to be every insurer in
every location. If--and this is the next point I wanted to
make--if insurers are not willing to enter Iowa or wherever, or
Ohio, where I came from, or Pennsylvania, where I am now, that
is a sign that the current payment rates are inadequate. The
solution to that is not to force them to enter areas where they
are sure to lose money. Even if you are able to be effective,
they will de-market their services and provide very poor
service. The solution is to adjust the payment rates so that it
is equally profitable, at least as much as you can approximate
it, for insurers to enter in all parts of the country. That
will surely mean, as we heard some discussion this morning,
paying more in some areas than others because in rural areas
you can't have the same kind of economies of scale as you can
have in urban areas, but on the other hand, you are not paying
big-city prices, either.
Mr. BECERRA. That doesn't seem to reduce the cost overall
of Medicare if we are having to increase the costs that we pay
in certain parts of the country to encourage the private sector
to go into those areas that Medicare currently services.
Dr. PAULY. No, I think this would be an attempt to be more
equitable and even-handed in providing access.
Mr. BECERRA. It would increase costs?
Dr. PAULY. I am not sure it would increase costs. That
depends----
Mr. BECERRA. Well, if it doesn't increase costs, why can't
we keep the level of reimbursement as it is, what Medicare
currently is receiving, or what we are providing it to offer
these services?
Dr. PAULY. You would lower it in some places and raise it
in others if you thought access was currently unequal.
Mr. BECERRA. I see. I see. I don't know, Dr. Stuart, if you
wish to add anything to that?
Dr. STUART. No.
Mr. BECERRA. A question with regard to what Dr. Reinhardt
said in terms of the total health care spending and how you
come up with that calculation, the fees times the volume plus
your costs. Do any of the other panelists disagree with what
Dr. Reinhardt has identified as the variables, the factors that
we would take into consideration, that formula for determining
overall costs? Dr. Stuart or Dr. Pauly? Any disagreement? I
don't want you to go into it, just to--I wonder if you agree or
disagree.
Dr. STUART. Well, I think it is an accounting framework,
and the elements of the accounts are there. So, one might
disagree in terms of where savings might be obtained in one of
the elements as opposed to another element. I think, certainly,
the model itself is complete.
Mr. BECERRA. Can anyone identify for me a private insurer
which today administrative costs that are lower than what
Medicare spends? There, Medicare doesn't market, so it doesn't
have marketing expenses. It also doesn't seek to secure a
profit. So, if we could factor in marketing and profit into
that cost of administration, can anyone name for me a private
insurer that right now offers a health plan and benefits for a
lower administrative cost as I have defined it than does
Medicare?
Dr. PAULY. Well, the literature says--actually, it doesn't
identify private insurers by name, but the traditional
estimates in the literature on group insurance are that large
group insurance, say the General Motors-type firm, would have
administrative costs of around 5 percent.
Mr. BECERRA. That is still higher than Medicare.
Dr. PAULY. It is still higher than Medicare, but the
difference, as you mentioned is that Medicare raises its money
via compulsory taxes and private insurers don't have that
luxury or that privilege. To my understanding, the pure cost of
claims processing is not terribly different between Medicare
and private insurers. The primary difference, the thing that
explains why Medicare is at 3 percent and private insurance on
average is at around 13 percent, are those selling costs. You
have to talk people into private insurance. You don't have to
talk them into Medicare because it is 10 percent subsidized--
only paying 10 percent of the price, and also billing costs.
When people buy private insurance, somebody has to remind them
to pay their bill every year.
So, there are a lot of good things to say about Medicare,
but I actually think the administrative cost saving is somewhat
of a red herring. If you compared kind of equivalent costs for
doing equivalent things, the people up on Security Boulevard
are wonderful people, but I don't think they are any better or
worse than the private sector.
Mr. BECERRA. I think that is a very good point in terms of
the marketing, that as a mandated program you don't have
marketing costs, you don't have to try to go out there and
solicit business. Dr. Stuart, did you want----
Dr. STUART. I think there are a couple of other elements
here on, actually, both sides of the argument. One of the
arguments behind the difference in measuring administrative
costs in a public program and a private program is that
although what you count as an administrative cost in a private
program might show up in terms of higher prices or in terms of
inefficiencies in the public program. So, you have to be
careful when you are just looking at that stratum that goes to
administration on the balance sheet, or on the income
statement.
The other thing that I might note is that the
administrative costs under Medicare are managed. Those costs
are determined by budgets. You determine how much Medicare
spends on administration by how much you are willing to give
CMS to carry out its mandate.
Mr. BECERRA. My time has expired. I would just like to make
sure that--I didn't hear anybody mention a particular private
plan in place that offers its services for a lower
administrative cost than does Medicare. I think the point is
well taken, though, in terms of marketing. There may be some
value in having a mandated system which doesn't require
marketing nor the profit element in terms of costs that
ultimately seniors have to absorb in order to be provided with
a health care benefit.
I thank you very much, and thank you, Madam Chairman.
Mrs. JOHNSON OF CONNECTICUT. Thank you. Before I recognize
the next speaker, I would like to point out that Medicare's
administrative costs do not include Treasury's costs of
collecting the Medicare tax nor the inspector general's cost of
their portion of overseeing Medicare with the fraud and abuse
function, which the private sector covers.
In addition, I don't know, and I will ask the experts, has
anyone ever done any study of the combined administrative costs
by the government and the administrative costs that the payor
pays on the provider? For instance, Medicare imposes much
heavier costs on home care providers than private sector
providers impose on home care providers. That is one of the
reasons why I am trying to eliminate the Outcomes Assessment
Information System form for private-care patients. So, has
there been any combined look at administrative costs of both
the government and those on its providers that it has imposed,
versus the private sector's administrative costs and the
administrative costs that they impose on providers?
Dr. REINHARDT. I think that is a good point and worth a
study. There are compliance costs with Medicare, particularly
when you have a corporate integrity agreement, which is one of
those letters that oblige you to be audited and so on. What
struck me in the Duke example--and I have asked in the other
company on whose board I am, too--the unbelievable back-and-
forth to get a claim paid, that goes back several times.
Mrs. JOHNSON OF CONNECTICUT. In Medicare, you mean?
Dr. REINHARDT. In the private plan, where your payment days
outstanding may be 90 or 100 days. So, if you take Duke, for
example, we have a float of $250 million a year that has to be
financed. I asked, well, why aren't we getting paid? They told
me, well, Medicare is not the problem; we get paid in 20 days.
Mrs. JOHNSON OF CONNECTICUT. Dr. Reinhardt, if I may
interrupt you, if you have ever been to a doctor trying to get
paid for comprehensive physical versus a detailed physical with
very different payment rates, you can see exactly this long
paper trail. I have one hospital that has an intensivist
overseeing their intensive care unit. It is saving Medicare
money. We have a code for this and never, ever have they been
able to get paid under the Code. They just provide more and
more documentation.
So, frankly, I am loaded with examples of that kind of
problem going on over months or years. At one point, Medicare
stopped paying for all partial hospitalizations in my State and
it took us 9 months to straighten it out. So, I would have to
have a study show me that there were more serious payment
controversies in the private sector than those in the public
sector.
Dr. REINHARDT. Well, as I said, it really would be worth
studying.
Mrs. JOHNSON OF CONNECTICUT. It would be worth it.
Dr. REINHARDT. I would include an administrative cost on
the private side; also, of course, the claims processing. I
don't do it. I just refuse. My wife does it. She tells me that
her claims processing is worse than doing the income tax. She
does the income tax, too. So, we have a good apple-to-apple.
She says dealing with the insurance is a lot worse.
Mrs. JOHNSON OF CONNECTICUT. On the other hand, having just
broken my ankle about a year ago and being a Medicare
recipient, I can tell you the number of mailings that I
received for a simple broken ankle was scandalous, from
Medicare, scandalous. So, I do think we should try to find
that, and any of you--and let me let the others comment and
then we will let the other two Members question before we have
to go. So, briefly.
Dr. PAULY. Just two comments. First, there are estimates of
the administrative cost at hospitals for third-party payment
and they run around 20 percent. So, they are certainly not
trivial. I haven't ever seen any Medicare versus private
sector. Of course, if it is hopeless to try to get money out of
Medicare, there is no point in a doctor wasting administrative
costs.
Mrs. JOHNSON OF CONNECTICUT. We do have only 13 minutes
left, and I have two questioners----
Dr. PAULY. Some physicians feel that way. The other point I
wanted to make, though, I think an important, often neglected
to mention, administrative cost to the Medicare system is,
well, the slogan is one-size-fits-all. I don't much like that
sloganeering, but people buy Medigap coverage to tailor
Medicare to their own desires. So, really, the administrative
costs of Medigap plans ought to be attributed to Medicare. If
you did that, you would end up with a lot more than 3 percent.
Mrs. JOHNSON OF CONNECTICUT. A very valid point. I am
sorry, Dr. Stuart, since we only have 15----
Dr. STUART. Let me just take 1 minute to suggest an area in
which administrative costs are going to be a major concern for
Congress as it considers the Medicare drug benefit, and that is
the administrative costs that are imposed on the private sector
by private plans developing wildly different formularies. I can
tell you that this is very costly to medical practices, because
the physicians can't figure out which patients are covered
under which plan and which drugs they should get. It is
particularly costly on pharmacies because the patient comes in
and the drug is not covered under the formulary----
Mrs. JOHNSON OF CONNECTICUT. That is a very important
consideration. We may get back to you on that. Mr. Pomeroy.
Mr. POMEROY. My time is very brief, but I want to ensure my
colleague, Ms. Tubbs Jones, also has time. So, I think that I
will pull back out of the weeds a little bit of how we
restructure Medicare. I will note consensus across the panel
that some work is needed here, even though there may be
substantial difference in terms of how we proceed.
The thing that I am wondering about is regardless of what
we have by way of exact delivery of benefit mechanism under the
name of Medicare, how we pay for it in the next decade if we
don't do some preparatory work this decade to strengthen the
financial position of our country to prepare for the
entitlement hit of baby boomers. It would seem to me
specifically that paying down the debt this decade would make
more sense than adding to it significantly, because I believe
borrowing in the next decade will absolutely be essential to
cash flow the requirements that we see in the Medicare trust
fund.
If we could run across the panel and give us your counsel
on that one. Would it be better to increase the debt or
decrease the debt for purposes of preparing to meet the
entitlement challenge of baby boomers, or is it your position
that we should simply back off of those entitlement
commitments. Dr. Reinhardt?
Dr. REINHARDT. Well, I would have been in favor of not
increasing the deficit, actually try as much as possible to
have a surplus and buy back the debt. That is really supply
side economics. How would that work? You could imagine the
Medicare trust fund just buying through the Treasury, buying
back bonds. Those bonds would be owned by pension funds. They
would have to recycle that money into the private sector. That
is the clearest way to get 100 percent of that money into
investment. If you instead give it in tax cuts to individuals,
like myself, who benefits from these tax cuts, I might buy a
new Mercedes--in fact, I have--with the money and it might not
yield productivity.
So, I believe going the route of having less of a deficit.
Once the day will come when Europeans may not wish to hold
dollars or other nations, they may wish to hold euros. That
seems already to be happening. It could be happening throughout
the Middle East. You will see interest rates skyrocket in the
United States.
So, I think the fiscal policy we are now on, to my mind is
not the right path.
Dr. PAULY. Well, I would risk controversy by saying I
prefer a smaller debt to a larger debt. I don't think that is
the most important thing that will determine the future
viability of the Medicare and other entitlement programs. I
think it is the overall economic health of the economy, so that
the rate of growth of gross national product (GNP) and the
level of real GNP is a lot more important than the level of
debt. Other things equal, lower debt is better than larger
debt, but if the economy can be made to operate better, that is
going to be much more important. That is the first thing I
would do to save Medicare.
Mr. POMEROY. Significantly higher debt could even
interfere, perhaps, with some of the economic----
Dr. PAULY. Well, it is the ratio of debt to GNP that you
ought to pay attention to, not the absolute level of debt. I
would rather work on the GNP side than----
Mr. POMEROY. I accept that, but for the known fiscal hit we
all know about--lives in being with existing entitlement
commitments--that it seems to me should also be factored in,
unless we are straight-up talking about diminishing those
entitlement commitments.
Dr. PAULY. Well, I personally think we ought to start
talking about diminishing those entitlement commitments
because, given the demographics, I don't see any way to avoid
that. I guess that is the other solution--this is only my own
personal solution--have more grandchildren. That would help a
lot.
Mr. POMEROY. Thank you. Thank you very much, Dr. Pauly.
Dr. STUART. Well, I will make it three in terms of reducing
the debt. I happen to believe that the absolute level of the
debt is important as well as the relative level of the debt,
and I am concerned to see the debt rising as fast as it is.
I do think, however, that when one makes decisions about
Medicare, it is going to be very difficult, if not impossible,
to make a decision about the entire program. I really believe
that is true. So, what that means is that you are going to have
to deal with incremental changes within that program. So, when
we, each of us received the invitation to talk today about
modernization in Medicare with a prescription drug benefit, I
think the prescription drug benefit should be treated on its
own merits. What you really need to do is you need to say is
this something a modern Medicare program should have--and I
believe you will say yes--and then the question is how best to
do it.
Mrs. JOHNSON OF CONNECTICUT. All but 8 seconds of the
gentleman's time has expired, so if we may move on to Ms. Tubbs
Jones. We have 5 minutes before the vote.
Ms. TUBBS JONES. Five minutes?
Mrs. JOHNSON OF CONNECTICUT. Five minutes. You can take 4
minutes.
Ms. TUBBS JONES. I won't take that long, probably. Dr.
Pauly, you say you are from Ohio. Where?
Dr. PAULY. Cincinnati.
Ms. TUBBS JONES. Cincinnati, oh, the other end of the
State. They say it is like Cleveland and Cincinnati are in two
different States. All joking aside, one of the biggest problems
we have had with health care in Ohio is the fact that the
private insurers have not been required to contract, that they
could just give notice and say ``I'm gone'' and in 30 days the
people having health care under the HMOs in Ohio have just run
away. So, then we end up with people with no health care
coverage. That is why I have a real dilemma with pushing
Medicare into the HMOs, based on the experience that my
Medicaid constituents have had with the HMOs.
Real short: How do I resolve that problem? If I agree I
want to go with private insurers, how do I resolve the running
away from my constituents?
Dr. PAULY. Well, you have to pay them enough to make it
worth their while to stay.
Ms. TUBBS JONES. Except when they enter into the contract,
they know what I am going to pay them.
Dr. PAULY. Presumably, they run away when the contract is
expired, not before.
Ms. TUBBS JONES. Well, we have had it as terrible as 30
days. I am not going to argue that. That is my dilemma with the
private insurers.
Dr. PAULY. Then I would say write more iron-clad contracts.
The fundamental aspect of private firms is that they need to be
able to cover their costs in order to remain in business.
Ms. TUBBS JONES. Dr. Reinhardt, how do I resolve this issue
as we reform Medicare?
Dr. REINHARDT. Well, one is to pay more. Then Congress, of
course, loses any sense of budgetary control, have even less
than they have now. Or the alternative is to make sure the old
Medicare is always there as a fallback position, which would be
my--my favoring that program is because it is a fallback
position.
Ms. TUBBS JONES. Why do we always have to worry about
deficit spending when it comes to programs such as Medicare and
Medicaid, and we don't ever worry about deficit spending when
it comes to things like military spending and the other issues?
I voted for the Supplemental, and I support the military. I am
just wondering why that number always comes up. Dr. Pauly?
Dr. PAULY. Well, I don't worry about deficit spending for
Medicaid, at least the part of it that pays for children,
because I view you are making an investment in children and
that is as good as an investment in national security. I think
for senior citizens, in a way, it is more difficult because it
is less easy to make the argument that the spending will yield
returns.
Ms. TUBBS JONES. If I was sitting at the table and I had to
decide whether you got services, and you would live or not
live, you would want me to let you live, wouldn't you? Or give
you the treatment that was necessary for you to hang around for
a little while?
Dr. PAULY. Well, certainly, but those are presumably not
the services that we are talking about rationing or not
rationing.
Ms. TUBBS JONES. In your prior testimony, you alluded to
it. I am going to end my time, Madam Chairman. Thank you,
gentlemen, for giving us this opportunity.
Mrs. JOHNSON OF CONNECTICUT. Thank you very much for being
here. I appreciate it very much. I do hope we will get a chance
to pursue this conversation later on as the bill develops.
Thank you.
[Whereupon, at 2:41 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of Cori E. Uccello, and John M. Bertko, American Academy of
Actuaries
The American Academy of Actuaries appreciates the opportunity to
provide comments on issues related to expanding coverage of
prescription drugs in Medicare. The Academy is the non-partisan public
policy organization for actuaries of all specialties in the United
States.
This statement focuses on three areas that Congress needs to
address as it designs a Medicare prescription drug benefit:
First, if enrollment in the drug program is voluntary,
the program must be designed to minimize adverse selection. That is,
actual program enrollment needs to be nearly universal, broad enough to
include healthy participants as well as those who would be expected to
be high utilizers of the program. Otherwise, per-enrollee costs could
become too high, potentially leading to the need for increased
beneficiary premium contributions and cost sharing, and discouraging
the participation of private entities that administer and/or deliver
the benefit.
Second, the plan must include components that will help
minimize per script costs, contain drug utilization, and keep total
spending to an affordable level. Otherwise, drug spending under the
program will grow much faster than projected, further endangering the
solvency of the overall Medicare program.
Finally, policymakers may want to add risk-sharing
provisions during the first few years after implementation to private
sector organizations administering or delivering the benefit. Risk-
sharing provisions are especially important in the early years of the
program, until pent-up demand levels off and utilization data for
previously uninsured beneficiaries becomes available.
These issues are discussed in more detail below, along with options
for addressing them.
Adverse Selection
Adverse selection can be a problem in any voluntary health
insurance program. Because people in poor health are more likely to
purchase coverage, and to purchase more generous coverage in
particular, premiums will increase significantly to cover the impact of
this selection. Indeed, in typical private insurance programs in which
premiums are paid entirely by participants, the average cost for those
who enroll will be well above the average of all potential applicants.
As premiums are set higher to reflect the higher costs of enrollees,
even fewer applicants are willing to pay them, further increasing
selection effects and the average per enrollee cost.
The potential for adverse selection is even greater for a stand-
alone Medicare prescription drug program because seniors can better
predict their future drug costs than their other health care costs. The
key to minimizing adverse selection in a Medicare prescription drug
program is to increase participation rates, which can be accomplished
through various means, including:
Premium subsidies. When deciding whether to participate
in the program, many seniors will evaluate the perceived value of the
program and compare their expected out-of-pocket drug costs to the
plan's premiums. Those who expect to have covered drug costs that are
less than the premium required to participate will be less likely to
enroll. Premium subsidies reduce the direct cost of participation,
increasing the number of eligible individuals who will expect their
likely benefit from the program to exceed the premium cost, and thus
will increase enrollment.
``Default'' enrollment. Making enrollment in the drug
program the default option (i.e., seniors desiring not to be in the
program would have to take a step to opt out) would increase
enrollment.
Penalty for delay. Mandating that enrollment in the
drug plan be on a guaranteed-issue basis would ensure that all seniors
have access to the benefit, regardless of health status. However, these
enrollment features could encourage seniors to delay enrollment until
they expected to incur significant prescription drug expenses. Limiting
guaranteed issue to an initial open enrollment period, or providing
some other meaningful penalty for late enrollment, would encourage
individuals with low current drug expenditures to consider their future
needs and protect themselves by enrolling.
Risk Adjustment. In the absence of universal coverage,
some degree of adverse selection is inevitable. Risk adjustment and/or
other types of reinsurance arrangements can reduce the incentives an
insurer might have to avoid enrolling high-risk individuals. These
options are discussed in more detail below.
The combination of these elements would help to reduce adverse
selection, thereby increasing the program's long-term stability. In
addition, because private insurers would hesitate to offer plans if
they feared they would be selected against, reducing adverse selection
would also increase the likelihood that insurers or other organizations
would participate in the program.
Drug Utilization Management
The CBO estimates that prescription drug spending by the Medicare
population will total $95 billion this year and will nearly triple to
$284 billion by 2013. The introduction of a Medicare prescription drug
program would likely increase drug spending even further due to induced
or pent-up demand. In other words, because drug coverage would reduce
the out-of-pocket costs of prescription drugs to consumers, they would
be able to afford to use more drugs. One-third or more of seniors
currently lack prescription drug coverage. Prescription drug spending
by this population is very likely to increase dramatically if they
obtain comprehensive drug coverage. Utilization could increase even
among seniors with drug coverage (e.g., through a retiree health plan,
Medigap, Medicare+Choice plan) if the Medicare prescription drug plan
is more comprehensive than their current plan.
The long-term sustainability of a Medicare prescription drug plan
depends in part on the extent to which the plan can manage drug
utilization and spending. Many tools are available to help contain
utilization and costs, including patient cost sharing, limiting the
range of drugs covered, and drug utilization management mechanisms.
Patient cost sharing. Patient cost sharing through
deductibles, copayments, and/or coinsurance will reduce the overall
cost of the program in two ways. First, it directly reduces the share
of the costs borne by the insurance program. Second, and equally
important, cost sharing will also make patients more sensitive to
prescription drug costs, thereby reducing utilization to that which is
medically necessary and, ultimately, overall costs.
Deductibles are amounts that must be paid out-of-pocket before
drug coverage begins. Aside from lowering the cost of benefits paid,
low or modest deductibles help hold down administrative costs by
eliminating claims processing for small amounts. Large deductibles in
effect result in catastrophic coverage, which provides coverage for
those most in financial need of assistance at a relatively low cost.
With coinsurance, the patient is responsible for a percentage
of the drug cost. Copayments, on the other hand, are a fixed amount per
prescription and have the advantage of being more predictable to
patients. However, copayments might not make patients as sensitive to
the costs of drugs as does coinsurance. Also, whereas coinsurance
automatically adjusts for increases in drug costs, copayments (and
deductibles) need to be increased periodically as drug costs rise, or
overall program costs will increase faster than drug costs.
By making patients more sensitive to costs, cost sharing will
decrease prescription drug utilization. Although the goal of cost
sharing is to reduce unnecessary utilization, it will likely reduce
necessary utilization to some extent as well. Reducing the cost-sharing
requirements for lower-income seniors will help minimize the extent to
which cost sharing discourages needed care. However, some minimal level
of cost sharing should be present for even the lowest income levels to
deter unnecessary utilization.
Formularies. Formularies are lists of a plan's
preferred medications and are used to encourage the use of less costly
drugs. There are three types of formularies--open, closed, and
incentive. Under open formularies, all drugs are available with no
incentive to choose one over the other, although programs can be
designed to encourage use of preferred medications (e.g. therapeutic
interchange programs). In contrast, closed formularies limit the drugs
available under the plan to those listed in the formulary. Incentive-
based formularies contain cost-sharing differentials for preferred and
non-preferred brand name drugs, and generic drugs, thereby giving
patients a financial incentive to request preferred or generic
medications. Nevertheless a non-preferred drug may be the only drug
that is fully effective for a particular person, leaving the
beneficiary paying more unless exceptions are available.
Merck-Medco, a pharmacy benefit manager (PBM), has estimated
that the cost savings that derive from formularies can range from 2
percent to 3 percent for an open formulary with compliance
interventions to 5 percent to 9 percent for a three-tier incentive-
based formulary. It is important, however, that any formulary be broad
enough to include drugs in each therapeutic category and class of
covered outpatient drugs. In addition, the formulary must be
periodically reviewed and modified to reflect new drugs being
introduced and updated clinical information.
Drug Management Mechanisms. Insurers and/or pharmacy
benefit managers have several mechanisms they can use to help contain
drug costs:
Prior authorization requires physicians to receive
authorization that the drug is appropriate for the medical condition
and could save from 1 percent to 2 percent of drug spending. Because it
is expensive to administer, prior authorization is typically reserved
for expensive drugs that have potential for excessive use or misuse.
Maximum dispensing limits restrict the quantity of medication
a patient receives over time or per fill, and could also save about 1
percent to 2 percent of drug spending. This technique may be
appropriate for therapies in which the potential for excessive use
affects either cost or clinical outcomes.
Step therapies are used to check the medical appropriateness
of using a newer, more expensive medication (i.e. a second-line drug)
rather than a traditional medication (i.e. a first-line drug) for the
same condition. This technique encourages the use of traditional
therapies if they are more cost-effective than newer therapies and the
new therapies offer minimal to no additional clinical benefit. Step
therapies could save from 1 percent to 3 percent of drug spending.
Online drug utilization review can be performed electronically
at the point of sale to ensure that the patient is eligible for the
plan and that the prescription has not been refilled too soon. It can
also screen for any drug interactions and perform other systematic
checks. This concurrent review can save up to 4 percent of drug
spending.
Risk Sharing
Many of the recent Medicare prescription drug coverage proposals
suggest not only using private sector organizations to deliver the
benefits, but also having these organizations share in the financial
risk. Although private sector organizations have some experience with
the risks associated with providing prescription drug coverage, either
through employment-based, Medicare+Choice, or Medigap plans, these
organizations lack experience with the overall senior market and there
are increased risks associated with a new Medicare prescription drug
benefit. In addition to adverse selection risks related to the
program's overall participation rates, a Medicare prescription drug
plan is also subject to risks associated with the difficulty in pricing
the benefit adequately and plan-specific adverse selection. Each of
these risks is discussed below, along with potential methods of
addressing these risks.
Pricing Risk
It will likely be difficult for private sector organizations to
estimate the per capita costs of a stand-alone prescription drug
program for several reasons. First, the costs for seniors who are
currently without drug coverage are uncertain. About one-third of
current Medicare beneficiaries lack any prescription drug coverage.
Their future prescription drug consumption will likely increase under a
Medicare prescription drug benefit, but it is unclear how large that
increase will be. Understating these costs could result in large losses
to private sector entities. Overstating these costs could result in
overpayments by the government.
Moreover, the lack of comprehensive data on current prescription
drug usage by seniors makes it difficult to estimate costs under the
program, even for those seniors who currently have prescription drug
coverage. For instance, using cost estimates derived from Medigap plans
could be unreliable. On one hand, these estimates could overstate costs
due to the likely adverse selection from seniors who choose these
plans. On the other hand, using spending data for seniors with
relatively limited Medigap prescription drug coverage could understate
costs under a more comprehensive prescription drug program. Because of
the potentially enormous volume of senior drug spending, even a 10
percent misestimate in a single large State could cause a $100 million
loss (or unexpected gain).
Not only is it difficult to accurately estimate initial levels of
prescription drug spending, it is difficult to estimate the trends in
spending. Drug spending among the nonelderly with employment-based
coverage has grown recently, as much as 15 to 20 percent per year, due
to a combination of higher drug prices, increased utilization, and the
introduction of new and expensive drugs. On one hand, a Medicare
prescription drug program that provides near-full coverage may have
cost increases of that magnitude. On the other hand, drug utilization
may not increase as quickly among the senior population if they are
already using many drugs.
In order to mitigate the pricing risk issue, policymakers may wish
to consider shared risk arrangements that protect the government from
over-paying and provide protection for those organizations willing to
participate. Risk corridors provide a mechanism to limit an
organization's potential losses and gains to a more acceptable level.
Reinsurance could also limit an organization's potential losses. In
addition, using performance standards for administrative tasks in the
first several years of a new Medicare prescription drug program could
ease the transition to an insurance risk-based system. Each of these is
discussed in more detail below.
Risk corridors are contractual safeguards that can
limit both the downside risk and upside gain for an insurance
organization.\1\ In a typical arrangement, a best estimate of the
claims and administrative cost of a benefit would be made. Gains or
losses inside a risk corridor around that estimated level would be the
full responsibility of the private sector organization. Additional
gains or losses beyond the risk corridor would be shared with or borne
by the Federal Government. As a result, an at-risk organization such as
an insurance company would be able to offer coverage, but its risk
would be limited.
---------------------------------------------------------------------------
\1\ The Federal Government has large-scale experience with the use
of risk corridors through its TriCare contracts, which provide health
benefits to military personnel, their dependents, and military
retirees. In addition, there are other risk corridors now being used in
Medicare Private Fee For Service and PPO demonstrations.
---------------------------------------------------------------------------
The example below illustrates how risk corridors work:
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Best estimate of annual Medicare $1,000 per year per senior
prescription drug premium
----------------------------------------------------------------------------------------------------------------
First-year Medicare prescription drug 1 percent
risk corridor
(i.e., the corridor is 2 percent wide around the
best estimate)
----------------------------------------------------------------------------------------------------------------
Dollars at risk per senior in first year $10 per year per senior possible gain or loss
----------------------------------------------------------------------------------------------------------------
Federal Government responsibility Losses in excess of $1,010
Gains if costs are less than $990 per year per
senior
----------------------------------------------------------------------------------------------------------------
In this example, if the insurance company enrolled 1 million
seniors, its maximum loss would be $10 million (1 million seniors times
$10 maximum loss per senior), with the government covering any losses
over $10 million. Similarly, if cost estimates proved to be
conservative, then the Federal Government would recover any gains that
exceeded $10 million.
Risk corridors or other risk-sharing arrangements might be
essential during the first few years of a Medicare prescription drug
program. During the period in which risk corridors are in place, both
insurers and the Federal Government would be able to gather the drug
expenditure data needed to make more accurate cost estimates for future
years. As a result, this mechanism could be useful as a transition to
full-risk contracting. (In the past, the Federal Government has had the
time to conduct pilots or demonstrations on a small scale to gather the
necessary beneficiary data, before implementing a new program. That
time may not be available for a new Medicare prescription drug
program.)
For example, in the second year, the risk corridor could be
expanded from 1.0 percent (a corridor 2 percent wide) to
2.5 percent (a corridor 5 percent wide) to allow for
greater incentives for the private sector organization. Other
provisions could include some cost sharing (e.g., 10 percent) outside
the corridor. In other words, the insurer would be responsible for all
claims within the first 2.5 percent corridor, then 10 percent within an
additional 5 percent corridor.
Aggregate Reinsurance is another option to limit
insurers' downside risk. Under aggregate reinsurance, the Federal
Government would pay all or a percentage of claims once a private
plan's aggregate claims paid exceed a pre-determined threshold. This
threshold is typically expressed as a percentage of aggregate expected
claims (for example, a first-year aggregate limit might be 102 percent
of projected paid claims). Insurers would keep all gains if actual
claims are lower than expected. Government-provided aggregate
reinsurance protection is similar to a one-sided risk corridor. In
other words, the insurer would keep all gains, regardless of the size,
if actual spending is less than expected, but would bear the losses
only up to a certain point if spending is greater than expected.
However, aggregate reinsurance may be easier to administer than risk
corridors. Other mechanisms, like premium stabilization reserves,
funded by some level of underwriting gains, could be added to limit the
possibility of unintended funding windfalls.
Individual Reinsurance can protect a plan from
unexpected high claims from individual beneficiaries. Although there is
much less variation in prescription drug spending among Medicare
beneficiaries compared to other health spending, plans can still be at
risk for unusually high claims among individual enrollees. Under
individual reinsurance, the Federal Government would pay all or a
percentage of claims once an individual enrollee's claims exceed a pre-
determined threshold (typically expressed as a dollar amount, such as
$7,500). Individual reinsurance, however, would not provide much
protection for plans from higher than expected aggregate costs under
the threshold, which could occur especially in the first few years of
the program due to induced or pent-up demand.
Performance standards are another approach that can be
used to encourage cost containment. These measure plan administrators
against certain criteria and require them to put a certain amount of
administrative fees at risk for their performance. For example, a plan
could have a negotiated goal that a certain percentage of prescription
drug scripts be generic (e.g., 50 percent) in order to hold down costs.
If this goal is met, then the Federal Government would provide the
organization with its full administrative fee payment. Otherwise, a
portion of the administrative fee payment would be forfeited. Again,
such incentives might be particularly important during the first few
years of program operation. After two or more years in this pilot
state, the contract could be converted into a full-risk contract, in
which the organization would bear the insurance risk.
An important issue is the required duration of a risk corridor
or reinsurance stage. Although prescription drug claims are typically
paid much more quickly than other medical claims, sometimes within two
to four weeks of being incurred, it is likely that any bidding process
would require a pilot stage for the first two years. In year one, no
data would be available to determine the best estimate of claim costs.
Bidding for year two would begin almost immediately during the first
year, so, once again, very little data would be available. By the
second year of a contract, a full first year of data would be available
and bidding for the third program year could proceed on an at-risk
basis, or with a wider corridor.
Plan-Specific Adverse Selection
Even if adverse selection is minimized in the program as a whole, a
particular plan could end up with a disproportionate share of seniors
with high prescription drug expenditures. If payments to the plan do
not reflect this, then the plan could be at risk for large losses. Risk
adjustment could be used to adjust the payments to the plans to take
into account the health status of the beneficiaries who participate in
the program. Risk adjustment helps to make payments to competing plans
more equitable and can reduce the incentives for competing plans to
avoid beneficiaries with higher than average prescription drug needs.
Risk adjustment may also help stabilize experience among private plans,
causing less disruption for plan participants.
Several risk adjustment mechanisms for acute care services have
been developed using pharmacy data. Pharmacy-based models can also be
used as risk adjustment mechanisms for prescription drug utilization.
Although risk adjustment can help account for the differences in
participant health status across plans, no current risk adjustment
system is designed to compensate each competitor for the full financial
effects of adverse selection.
Conclusion
Proposals to add a prescription drug benefit to Medicare need to
address issues related to adverse selection, drug utilization
management, and risk sharing. Adverse selection will be minimized to
the extent that participation is nearly universal. This can be
accomplished through high premium subsidies, default enrollment, and
penalties for delayed enrollment.
The long-term sustainability of a Medicare prescription drug
program also depends on the extent to which the program manages drug
utilization and spending. Patient cost sharing, formularies, and other
drug management mechanisms can each help contain costs.
Finally, policymakers may want to provide provisions to minimize
the financial risk of private sector organizations administering or
delivering the benefit in the first few years of the program. Risk
corridors, reinsurance, and performance standards could be used in the
initial years of a prescription drug program while organizations
collect important data. Risk adjustment could provide additional
protection to private organizations, thereby increasing their
willingness to participate.
Statement of David G. Schulke, Executive Vice President, American
Health Quality Association
The American Health Quality Association represents independent
private organizations--known as Quality Improvement Organizations
(QIOs)--that work under contracts with the Centers for Medicare and
Medicaid Services (CMS) to improve the quality of care for Medicare
beneficiaries in all 50 States and every U.S. territory. Congress
created the QIOs to monitor and improve the quality of care delivered
to Medicare beneficiaries and supports the national work of the QIOs
with approximately $333 million annually from the Medicare Trust Fund,
or about $8 per beneficiary per year.
Past policy efforts to develop a Medicare prescription drug benefit
for the 21st century have focused almost exclusively on financing a
benefit. Very little attention was given to including initiatives in
the drug benefit to ensure a benefit is safe and continuously monitored
to maximize the quality of outpatient pharmacotherapy.
It is absolutely critical to create an integrated quality
improvement program. Otherwise, beneficiaries are likely to be ill-
served by a carved-out drug benefit that operates separately from the
Medicare hospital and outpatient benefits and data systems.
Building a Safe Drug Benefit.
A Medicare outpatient prescription drug benefit presents an
opportunity to improve the quality of life for our nation's seniors,
but also brings the real risk of increased morbidity and mortality
associated with an increase in the use of medications. It is reasonable
to predict that with an outpatient prescription drug benefit, more
seniors will receive more drugs. Expanding access to and availability
of drugs, without a complementary investment in quality improvement,
will exacerbate the unacceptable cost and incidence of hospital and
long-term care admissions associated with medication use. A recent
meta-analysis of 11 different studies reviewing drug use in the elderly
population found that ``[t]he reported prevalence of elderly patients
using at least one inappropriately prescribed drug ranged from a high
of 40% for a population of nursing home patients to 21.3% for
community-dwelling patients over age 65.'' [i]
---------------------------------------------------------------------------
\[i]\ Lui GG, Christensen, DB, ``The Continuing Challenge of
Inappropriate Prescribing in the Elderly: An Update of the Evidence.''
J Am Pharm Assoc, 42(6), p847-857, 2002.
---------------------------------------------------------------------------
Pharmacoeconomists at The University of Arizona have tracked the
costs associated with drug therapy since the early
1990s.[ii],[iii] In the spring of 2001 these researchers
published the following statement: ``Overall, the cost of drug-related
morbidity and mortality [in the ambulatory care environment] in the
United States exceeded $177.4 billion in 2000. Hospital admissions
accounted for nearly 70% ($121.5 billion) of total costs, followed by
long-term-care admissions, which accounted for 18% ($32.8 billion).''
[iv]
---------------------------------------------------------------------------
\[ii]\ Johnson JA, Bootman JL, ``Drug-related morbidity and
mortality. A cost-of-illness model.'' Arch Intern Med (United States),
155(18), p1949-56, 1995.
\[iii]\ Harrison DL, Bootman JL, Cox ER. ``Cost-effectiveness of
consultant pharmacists in managing drug-related morbidity and mortality
at nursing facilities.'' Am J Health Syst Pharm, 55(15), p1588-94,
1998.
\[iv]\ Ernst FR, Grizzle AJ, ``Drug-related morbidity and
mortality: updating the cost-of-illness model.'' J Am Pharm Assoc,
41(2), p191-199, 2001.
---------------------------------------------------------------------------
Integrating Medical and Pharmacy Data Systems through Medicare QIOs.
Historically, attempts to address the morbidity and mortality
associated with medication use have been stymied by the inability of
practitioners in various disciplines to access certain medical or
pharmacy records that would otherwise provide a comprehensive picture
of a patient's true medication use history. As this Committee discusses
building a Medicare prescription drug benefit for the 21st century, it
is essential that the new statutes and regulations include language
that provide the QIOs with access to pharmacy claims data. Regardless
of how a drug benefit is administered, the Secretary of HHS must have
unrestricted access to pharmacy claims data to use in directing the
activities of the QIOs. QIOs were created by Congress with the
necessary confidentiality protections and staff expertise to permit
them to combine medical and pharmacy data to guide health care systems
improvement.
Most congressional proposals forwarded to date rely on the pharmacy
benefit administrators to process pharmacy claims data and take certain
quality improvement steps at the point of service when the pharmacy
claims data suggests medication misadventures. The good work of the
pharmacy benefit administrators is limited by the information present
in the pharmacy claim. Without integration of the data present in the
medical record and pharmacy record, systematic failures leading to
inappropriate prescribing and dispensing will continue to happen
everyday.
Integration of Data Systems through QIOs Is Critical--A Study of
Outpatient Beta-Blocker Use in Heart Attack Victims.
QIOs use data to track progress and improve provider performance,
reducing errors by focusing on treatment processes, mostly
pharmacotherapy. Since 1996, QIOs have worked on local projects to
improve clinical indicators in care for diseases and conditions that
broadly afflict seniors. Among the diseases targeted for quality
improvement by the QIOs, treating heart attack victims with beta-
blockers offers an example of how the QIOs could further their current
inpatient efforts with appropriate access to data gathered with an
outpatient prescription drug benefit.
Medical practitioners have known for several decades that the
secondary prevention benefits of beta-blocker therapy after heart
attack include reduced hospital readmissions, reduced incidence of
further heart attacks, and decreased overall mortality.[v]
The evidence is so convincing that the American College of Cardiology
and the American Heart Association guidelines for the management of
heart attack recommend routine beta-blocker therapy for all patients
without a contraindication.[vi] Despite the evidence and
expert recommendations, the use of beta blockers after heart attacks
remains considerably suboptimal, with 20-30% of appropriate patients
lacking this essential therapy.[vii] The reason is unlikely
to be cost. Beta-blocker therapy in the outpatient setting is one of
the most affordable medications available to patients. A 90-day supply
of this life-saving medication usually costs less than $10.00.
---------------------------------------------------------------------------
\[v]\ Soumerai, SB, McLaughlin TJ, et al. ``Adverse outcomes of
underuse of beta-blockers in elderly survivors of acute myocardial
infarction.'' JAMA, 227, p115-121, 1997.
\[vi]\ Ryan TJ, et al. ``ACC/AHA guidelines for the management of
patient with acute myocardial infarction. A report of the ACC/AHA Task
Force on Practice Guidelines (Committee on Management of AMI).'' J Am
Coll Cardiol, 28, p328-348, 1996.
\[vii]\ Krumholz HM, et al. ``National use and effectiveness of
beta-blockers for the treatment of elderly patients after AMI: National
Cooperative Cardiovascular Project.'' JAMA, 280, p623-629, 1998.
---------------------------------------------------------------------------
QIOs work to ensure that patients discharged from the hospital
following a heart attack leave the hospital with a prescription for a
beta-blocker. In the November 2002 issue of the Journal of the American
College of Cardiology (JACC), researchers report that many patients
never fill prescriptions for their discharge medication, and many of
those that do discontinue the use of beta-blockers shortly after
filling the prescription. The study's authors conclude: ``Patients not
discharged on beta-blockers are unlikely to be started on them as
outpatients. For patients who are discharged on beta-blockers after
AMI, there is a significant decline in use after discharge. Quality
improvement efforts need to be focused on improving discharge planning
and to continue these efforts after discharge.'' [viii]
During the QIO's Sixth Scope of Work (1999-2002), QIOs were responsible
for improving the national rate of beta-blocker order at discharge by
7%.[ix]
---------------------------------------------------------------------------
\[viii]\ Butler J, et al. ``Outpatient adherence to beta-blocker
therapy after AMI.'' J Am Coll Cardiol, 40(9), 1589-1595, 2002.
\[ix]\ Jencks SJ, et al. ``Change in the Quality of Care Delivered
to Medicare Beneficiaries 1998-1999 to 2000-2001.'' JAMA, 289, p305-
312, 2003.
---------------------------------------------------------------------------
In his study published in JACC, Butler and colleagues found that
the first step to preventing heart attack recurrence is to make sure a
prescription is written and ordered at the time of the patient's
discharge from a heart attack hospitalization. If this is done, the
study shows there is a 10 TIMES greater likelihood of getting that
patient started on inexpensive, effective beta blocker drugs that 20-
30% of Medicare heart attack patients still do not receive, almost 40
years after the first marketing of propranolol, the first beta blocker.
The authors of the study utilized data for the dually enrolled
population of patients (those receiving Medicare and Medicaid benefits
simultaneously), as this is the only population of seniors for which
there is comprehensive drug therapy claims data. This same kind of
monitoring should be available for all beneficiaries. It is critical
for Medicare to have the drug claims/utilization data so QIOs can
identify heart attack patients who don't fill a prescription for beta
blockers post discharge, or who stop filling prescriptions (almost one
quarter do after 6 months, according to the study)--and give their
physicians assistance in getting the prescription started or changed
(the latter might be needed if the patient didn't like the particular
beta blocker initially prescribed and has consciously stopped taking it
due to unacceptable or intolerable side effects). QIOs are ideally
suited to identify patients at highest risk for hospital readmission or
death due to poor beta-blocker adherence (i.e., patients taking beta-
blockers post heart attack). We believe the QIOs unique ability to
integrate medical information with pharmacy claims/utilization data
complement pharmacy adherence programs that may be currently managed by
benefit administrators.
QIO Confidentiality Requirements.
The confidentiality of information collected or developed by a
Medicare QIO is assured by Section 1160 of the Social Security Act. It
was the intent of Congress in drafting this provision to provide
safeguards for information identifying a specific patient, practitioner
or reviewer. These safeguards foster an environment that is conducive
to quality improvement efforts.
Recommendations.
The American Health Quality Association has drafted the following
legislative specifications we ask the Committee to include in this
year's Medicare outpatient prescription drug benefit bill.
Legislative Specifications for the 108th Congress.
1) Give the QIOs responsibility for the outpatient drug benefit
analogous to the responsibility they have for all other Title 18
benefits:
Add new `Sec ____. Review Authority--. Section 1154(a)(1) is
amended by adding ` and section ____ after `1876'.
2) Instruct the QIOs to make assistance available to providers,
practitioners and benefit administrators to improve the quality of care
under the new drug benefit.
Prescription Drug Therapy Quality Improvement.--Section 1154(a) is
amended by adding a new paragraph 17:
``(17) With respect to items and services provided under Title
XVIII Part ____ the organization shall execute its responsibilities
under subsection (a)(1)(A) and (B) by making available to providers,
practitioners and benefit administrators assistance in establishing
quality improvement projects focused on prescription drug or drug-
related therapies. For the purposes of this part and title XVIII, the
functions described in this paragraph shall be treated as a review
function.''
3) Include legislative language instructing prescription drug
benefit administrators to provide patient specific pharmacy claims and
drug utilization data to the Secretary of HHS. Suggested wording:
``Requirements for Prescription Drug Plan Sponsors, Contracts,
Establishment of Standards.--Any agreement between the Secretary and a
benefit administrator for this purpose shall provide the Secretary with
all patient specific pharmacy claims and drug utilization data.''
4) Include legislative language providing appropriate availability
of prescription drug claims data to the QIOs for quality improvement
purposes. Suggested wording:
``Data Availability.--The Secretary shall provide the
utilization and quality control peer review organizations with the
patient specific pharmacy claims and drug utilization data to permit
the organizations to perform the functions described in 1154(a)(17).''
Long Term Care Pharmacy Alliance
Washington, DC 20037
April 8, 2003
The Honorable William M. Thomas
Chairman
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth H.O.B.
Washington, DC 20515
Dear Chairman Thomas:
On behalf of the Long Term Care Pharmacy Alliance, I am writing to
submit this statement for the record of your Committee's April 9, 2003
hearing on ``Expanding Coverage of Prescription Drugs in Medicare.''
We appreciate your leadership in considering issues related to the
creation of a new Medicare prescription drug benefit, and we would like
to take this opportunity to highlight the special pharmacy needs of the
nation's frail elderly residing in nursing facilities. We want to work
constructively with you to ensure the continued provision of quality
services to these particularly vulnerable seniors.
While most Medicare beneficiaries are able to walk into pharmacies
to pick up their prescriptions or to receive vials of pills through the
mail, a sizable percentage of beneficiaries cannot do so and need
special services that retail and mail order pharmacies do not provide.
Nursing home residents have specific diseases and multiple co-
morbidities that require specialized pharmacy care. Without such
treatment, we cannot expect positive therapeutic outcomes for these
patients. Failure to take into consideration the special pharmacy needs
of the frail and institutionalized elderly will lead to a marked
increase in medication errors and other adverse events.
Pharmacy benefit managers and insurance companies are not equipped
to administer a Medicare drug benefit to this vulnerable population,
because they lack the necessary experience, infrastructure and
expertise. By contrast, members of the Long Term Care Pharmacy Alliance
are the nation's major operators of pharmacies that serve the frail and
institutionalized elderly, and they specialize in serving the needs of
patients in long-term care settings.
TCPA members' patients are elderly, frail, chronically ill, and
can no longer care for themselves. They require a level of pharmacy
care that goes well beyond what the typical retail or mail order
pharmacy provides to its customers. To meet these needs, long-term
pharmacies provide specialized packaging, 24-hour delivery, intravenous
and infusion therapy services, geriatric-specific formularies, clinical
consultation and other services that are indispensable in the long-term
care environment.
Without ensuring that nursing-home residents and other patients
with special needs can receive these specialized pharmacy services, a
Medicare prescription drug benefit could actually endanger the health
of beneficiaries residing in nursing facilities. We look forward to
working with you on a specific proposal to ensure appropriate coverage
of pharmaceutical services for Medicare beneficiaries who reside in
nursing homes.
If you have any questions or would like additional information,
please feel free to contact me at (202) 457-6000. Thank you for your
consideration of our views.
Very sincerely yours,
John F. Jonas
cc: The Honorable Charles B. Rangel
The Honorable Nancy L. Johnson
The Honorable Fortney H. Stark
Statement of the National Association of Chain Drug Stores, Alexandria,
Virginia
Mr. Chairman and Members of the Subcommittee. The National
Association of Chain Drug Stores (NACDS) is pleased to submit this
statement for the hearing on Designing a Medicare Prescription Drug
Benefit for the 21st Century.
NACDS represents over 200 pharmacy companies that operate nearly
35,000 community-based retail pharmacies. NACDS members employ nearly
100,000 pharmacists and provide about 70 percent of all outpatient
prescriptions. The majority of our prescriptions are paid for by third
party insurance companies and pharmacy benefit managers--over 85
percent--so we have a significant amount of experience in operating in
the current pharmacy benefit marketplace. Our industry and the patients
that we serve will be significantly affected by the structure and
operation of any new Medicare pharmacy benefit. For that reason, we
need to be engaged and involved in the policy discussions regarding a
Medicare pharmacy benefit. We believe that we can provide a unique
perspective on what we feel will work best for Medicare program,
seniors, and the taxpayers.
Principles for a 21st Century Medicare Pharmacy Benefit
It is often said that no one would design a contemporary Medicare
program without a prescription drug benefit. We agree. Prescription
medications are the most widely used and cost-effective health care
interventions used by patients today. Modern prescription drugs have
extended and improved the lives of millions of Americans and saved
millions of dollars through shortened length of illnesses, increased
productivity, and reductions in hospitalization and medical procedures.
Community pharmacy is proud of its role in assuring the safe and
effective use of these therapies.
That is why we believe that any new program to expand prescription
drug coverage to seniors should be a pharmacy benefit, not just a
prescription drug benefit. Too often, we think of a prescription drug
benefit as only providing a ``drug product'' to seniors. We believe
that this is a serious mistake. Seniors take so many more prescription
medications than younger individuals. For that reason, seniors need
ready access to community-pharmacy-based education, counseling, and
medication therapy management, in addition to the drug product, so they
can take their medications appropriately to achieve the intended
medical outcomes.
NACDS, along with seven other national pharmacy and related
organizations, developed principles for and components of a quality,
cost-effective pharmacy benefit. Among other items, pharmacy believes
that the best way to develop the Medicare pharmacy benefit for the 21st
century would be to incorporate the following elements:
Create transparency and full pass through of any
rebates, discounts, or other price concessions received by
administrators of the pharmacy benefit so that Medicare and seniors
benefit from their purchasing power;
Include policies that promote the utilization of
generic drugs when appropriate;
Provide seniors with access to meaningful, community-
based medication therapy management services with appropriate
compensation for pharmacies;
Give seniors access to the community-based pharmacy
provider of their choice;
Break down any artificial barriers created by drug plan
administrators that impede competition and steer patients to higher-
cost brands or limit their choice of pharmacy provider;
Do not economically coerce seniors to use other
prescription delivery mechanisms, such as out-of-state mail order;
Assure that community pharmacies are adequately
compensated in providing services to meet the health care needs of our
nation's seniors.
Allow the intense competitive forces that exist among
pharmacies and manufacturers to work to reduce costs without the
interference of a self-interested middleman.
We believe that these are among the most important principles that
can be included in any future pharmacy benefit. We also want to
describe for the Subcommittee some observations about trends in the
marketplace that are important to consider as the Medicare pharmacy
benefit debate moves forward.
FEHBP and DOD Use Different Approaches to Prescription Drug Benefit
Design
The Federal Employees Health Benefits Program (FEHB) is often
pointed to as the model for Medicare reform. Frankly, we believe that a
more careful examination of the prescription drug benefit programs in
FEHBP will give policymakers ample evidence to re-evaluate some of the
major models being proposed that would rely primarily on pharmacy
benefit managers (PBMs) to provide a prescription drug benefit.
Anyone who is following the health policy, business, and financial
news would find that important public health and public policy
questions are being raised about the current practices of PBMs, and
whether they are holding down drug costs, or responsible, in part, for
their significant increases.
The experience of the government's own FEHBP should be instructive
to Members of Congress as they consider the true effectiveness and
competitiveness of this approach to providing a prescription drug
benefit for seniors. Our analysis indicates that escalating
prescription drug spending in the FEHBP program--which is administered
by some of the same PBMs that would be used for Medicare--has
contributed significantly in recent years to the sharp premium
increases seen in the program. In fact, these PBMs have a poor track
record in managing FEHBP drug program costs. For example, the Office of
Personnel Management's (OPM) own data indicate that drug cost increases
were responsible for 40 percent of the 10.5% premium increase in 2001,
37 percent of the 13.3% premium increase in 2002, and 30 percent of the
11.1% premium increase in 2003.
Keep in mind that the average age of the FEHBP population is about
47 years of age, while that of traditional older Medicare population is
about 70. Medicare beneficiaries have more chronic conditions,
requiring greater drug use, which results in higher per capita
expenditures than the much-younger, healthier FEHBP population. For
example, the average Medicare beneficiary uses four times more
prescriptions--about 21 prescriptions each year--than the average
individual under 65 years of age, who uses about 5. If the PBMs have
not been able to manage prescription drug spending in the FEHBP
program's younger, healthier population, why should we believe that
they would be any more effective in the higher-cost Medicare
population?
A recent General Accounting Office (GAO) report \1\ found that PBMs
would not disclose the amount of rebates and other price concessions
that they receive from drug manufacturers. These price concessions take
many forms and have many different names. The bottom line is that the
Medicare programs, seniors, and taxpayers should benefit from these
financial incentives, and the best way to assure that they are passed
along is to require transparency in their reporting by the PBMs. We
urge that such provisions be included in any final Medicare pharmacy
benefit program.
---------------------------------------------------------------------------
\1\ GAO Report on Federal Employees' Health Benefits: Effects of
Using Pharmacy Benefit Managers on Health Plans, Enrollees, and
Pharmacies, January 2003.
PBMs' Anti-Competitive Practices Not Aligned with Goals of Payors or
---------------------------------------------------------------------------
Medicare
Any Medicare pharmacy benefit for the 21st century should emphasize
choice and access. These goals can only be attained if the structure of
the pharmacy benefit breaks down many of the artificial, anti-
competitive barriers erected by the PBMs. Many public and private
payors are rethinking their PBM strategies because they recognize that
PBMs have overpromised and underdelivered. The goal of payors to reduce
prescription drug costs is not necessarily aligned with that of the
PBMs, which is to drive manufacturers rebates to gain higher operating
profits for the PBM. These rebates are generated by promoting the use
of higher-cost brand name drugs. What follows is an excellent example
of how rebates create perverse incentives and anti-competitive
practices in the marketplace:
Most PBM-administered prescription drug benefit plans have both
a community retail pharmacy network and a mail order pharmacy component
(i.e. Medco, Express, Advance PCS, Caremark). In most cases, these mail
order pharmacies are owned by the PBM, and the PBM uses the patient-
identifiable information that they obtain from processing a retail
pharmacy claim, to switch patients to their own mail-order facilities.
The PBMs have financial incentive to do this because they
receive significant rebates from brand name manufacturers for moving
(or increasing) a particular manufacturer's market share, so the more
product that is dispensed through mail, the more rebates the PBM
receives. This is not always cost-effective for the payor or the
patient, since it increases copays for the patient and overall costs
for the payor. Moreover, the retail pharmacy doesn't receive rebates
and has no incentive to provide higher-cost brand name drugs.
In fact, retail pharmacies use more lower-cost generics than
mail, so the net cost to the payor and the patient is actually lower
for drugs dispensed through retail. (Latest data found that mail order
uses 37% generics, while retail uses generics in 49% of the cases).
But, to force patients to obtain their brand name drugs through
mail, these PBMs artificially limit the quantity of brand name drugs
that a retail pharmacy can dispense.
That is, while PBMs may incorrectly contend that State pharmacy
practice laws prohibit retail pharmacies from dispensing a 90-day
supply of medications, this is not the case. Some States do have limits
on the amount of controlled substances that can be provided, but these
restrictions would occur for any pharmacy outlet that dispenses these
drugs. PBMs, however, will not allow pharmacies to provide any more
than a 30-day supply because they want to run those prescriptions
through their mail order facility so they can collect the manufacturer
rebates.
Mail order operations are direct competitors to community
pharmacies. PBMs should not be allowed to use information obtained
through a retail prescription claims transaction to switch patients to
mail order for their own financial gain. To avoid this anti-competitive
practice, PBMs should not be allowed to be both the community pharmacy
network contractor and mail order contractor within the same region,
since this creates a competitive conflict with community retail
pharmacies. In addition, pharmacies should be allowed to continue to
provide maintenance medications to patients (i.e. fill a 90-day supply
of maintenance medication). PBMs should not contractually prohibit
pharmacies from providing these medications. PBMs should not use any
coverage or cost sharing incentive that would create incentives for
seniors to use one method of pharmacy distribution over another.
Some of these anti-competitive issues can be addressed by including
strong ``transparency'' provisions in the Medicare pharmacy benefit.
Pricing transparency is necessary for the efficient operation of
markets, and also allows consumers and others to make the best
purchasing choices. Right now, the PBM industry is operating without
this necessary transparency.
The Medicare program and seniors should benefit directly from any
and all price concessions given to plan administrators and PBMs. These
price concessions take many forms--rebates, discounts, formulary
placement fees, market share movement fees, data collection and
analysis fees, and others.
If made transparent, and passed along, these incentives will
ultimately reduce the cost of the benefit to Medicare and to seniors.
It will also reduce the incentives that PBMs have to erect these anti-
competitive barriers that increase cost and can negatively impact
quality of care.
The PBM industry argues against transparency because they know it
will more fully expose that their business model centers almost
exclusively on deriving and retaining rebates from drug manufacturers
that are not passed along to plan sponsors. We urge policymakers to
make sure that transparency is a hallmark of any Medicare pharmacy
benefit.
Department of Defense (DOD) Recognizes PBM Influences
In contrast to the FEHBP program, which relies on private sector
PBMs, the DOD's Tricare program has developed prescription drug models
that are more cognizant of the negative influences of PBM rebates.
Their approach uses a pharmacy benefits administrator (PBA) type model,
which is the approach being taken by more and more public and private
sector payors.
The PBA model relies on a benefits administrator to adjudicate and
pay claims, determine eligibility, create networks, and perform other
operational functions to run the program. The PBA doesn't become
involved with direct rebate negotiations with manufacturers, and is
therefore not in a position to retain these rebates or develop policies
that would encourage the dispensing of drugs for which they are
receiving rebates.
For example, the Tricare National Mail Order Program (NMOP) program
passes along to DOD all the rebates that the DOD negotiates with
pharmaceutical companies. This program is administered by Express
Scripts, so even the traditional PBMs are able to participate in models
that use PBA-type approaches. Building on the success of the NMOP
program, DOD recently announced that its Tricare national retail
pharmacy contract would operate in a similar manner. The DOD has
recognized that PBMs retain a significant portion of manufacturer
rebates and want these rebates to accrue to the DOD and the military
eligibles and retirees. Thus, there are two major Federal Government
health care programs using different approaches--with very different
outcomes--to provide pharmacy benefits to two important populations.
NACDS and community pharmacy support approaches to delivering a
Medicare pharmacy benefit that take the perverse rebate incentives out
of the system, since it results in nothing more than limiting seniors'
access to needed medications and the pharmacy of their choice.
Medicare, seniors, and taxpayers would all benefit from a system
where any manufacturer or pharmacy price concessions are passed along
to the senior, and anti-competitive incentives to dispense larger
quantities of brand name medications or restrict the use of generics
are eliminated.
Marketplace Has Responded with Discounts for Low-Income Seniors
We believe that the market has changed significantly since the
Department of Health and Human Services (HHS) announced its original
Medicare-endorsed PBM-based discount card program in July 2001. For
example, manufacturers now offer prescription drug assistance through
participating retail pharmacies. These programs include ``Lilly
Answers,'' ``Pfizer's Living Share Program'' and the ``Together Rx
Program'' all of which assure that truly needy low-income seniors are
able to obtain meaningful savings on brand name prescription
medications at their participating local pharmacy.
These private-sector approaches obviate the need for government-
mandated programs on the private sector. Over 150 brand name
prescription drugs are available at discounts of up to 40 percent. In
fact, the best competition occurs in the market when manufacturers and
pharmacies compete without the interference of a middleman PBM that has
the government's sanction to create artificial barriers to competition
in the marketplace.
By HHS' own estimate, their Medicare-endorsed PBM-based discount
card program, such as those envisioned by CMS, would only generate
savings of 10 to 13 percent for seniors on the cost of their
prescriptions. Almost all of these savings would come from reduction in
the prices that pharmacies charge, not a reduction in the price that
the manufacturer charges the pharmacy for the drug. Moreover, these
discount card programs--which already exist in the market--overuse
higher-cost brand name drugs, rather than lower-cost generics. That is
because PBMs earn rebates from drug manufacturers by promoting the use
of their brand name drugs. These practices lead to higher prescription
drug bills for seniors, not lower ones.
Under a Medicare-endorsed discount card program, seniors' access to
needed prescription medications and their choice of pharmacy would be
restricted. Under these other newer programs, however, seniors do not
have to make choices between various discount programs, switch their
medication from a drug they may be taking to another drug just to get a
discount, and don't have to give up using their local pharmacy. In our
opinion, this is better health care for seniors.
We would ask that you reconsider your approach to legislating a
Medicare-endorsed discount card program that would be of little benefit
to seniors and would significantly harm community pharmacies. Instead,
we ask that you work with us to assure that private-sector approaches
continue to be developed, which will help seniors obtain their
prescription medications in the short term, while we work on a model
for longer term Medicare reform that incorporates these important
private-sector approaches.
Conclusion
NACDS believes that the Subcommittee is asking the right questions
regarding the best way to structure a Medicare prescription drug
benefit that will serve the needs of Medicare beneficiaries and
pharmacies in the 21st century. Contrary to popular opinion, today's
market for prescription drug benefits has structural flaws that are
being recognized by many public and private payors as impeding
competition and unnecessarily increasing costs. These payors are
responding by taking their benefit management functions in house, or by
using a pharmacy benefits administrator (PBA) model. We believe that
any pharmacy benefit should rely on the competitive market forces that
already exist among pharmaceutical manufacturers and retail pharmacies,
and that artificial barriers should not be erected to impede this
competition.
The Committee should also take note of the market shift that
appears to be occurring--both in private and public sector programs--
away from PBM models and toward PBA or in-house administration models.
These approaches help assure that the plan sponsors reap the benefits
of their purchasing power, rather than having it diluted by a
middleman.
In order to provide the most competitive pharmacy benefit possible,
policymakers should assure that the following components are
incorporated into the program: 1) transparency and pass through of all
PBM-derived rebates, concessions, and discounts; 2) assurances that
PBMs do not erect artificial barriers to seniors' access to the
pharmacy of their choice, such as through restrictive networks,
limitations on the quantity of medication that retail pharmacies can
provide, or differential cost sharing to provide seniors with
incentives to use mail order over retail pharmacies; 3) limits on the
activities performed by PBMs so that they function more as PBAs, and do
not become involved in patient care functions, which is the purview of
the health professionals; and, 4) restrictions on the ability of the
PBM to serve both as the retail network administrator and the mail
order provider in the same region, which is an inherent conflict of
interest since PBMs are direct competitors of retail pharmacies.
NACDS and its member companies look forward to working with the
Subcommittee and full Committee on developing this Medicare pharmacy
benefit. Thank you for an opportunity to submit this statement.