[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
 PRESCRIPTION DRUGS: WHAT WE KNOW AND DON'T KNOW ABOUT SENIORS' ACCESS 
                              TO COVERAGE

=======================================================================

                                HEARINGS

                               before the

                            SUBCOMMITTEE ON
                         HEALTH AND ENVIRONMENT

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                    SEPTEMBER 28 and OCTOBER 4, 1999

                               __________

                           Serial No. 106-73

                               __________

            Printed for the use of the Committee on Commerce

                    ------------------------------  



                    U.S. GOVERNMENT PRINTING OFFICE
59-994 CC                   WASHINGTON : 1999




                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Health and Environment

                  MICHAEL BILIRAKIS, Florida, Chairman

FRED UPTON, Michigan                 SHERROD BROWN, Ohio
CLIFF STEARNS, Florida               HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 PETER DEUTSCH, Florida
RICHARD BURR, North Carolina         BART STUPAK, Michigan
BRIAN P. BILBRAY, California         GENE GREEN, Texas
ED WHITFIELD, Kentucky               TED STRICKLAND, Ohio
GREG GANSKE, Iowa                    DIANA DeGETTE, Colorado
CHARLIE NORWOOD, Georgia             THOMAS M. BARRETT, Wisconsin
TOM A. COBURN, Oklahoma              LOIS CAPPS, California
  Vice Chairman                      RALPH M. HALL, Texas
RICK LAZIO, New York                 EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN B. SHADEGG, Arizona             JOHN D. DINGELL, Michigan,
CHARLES W. ``CHIP'' PICKERING,         (Ex Officio)
Mississippi
ED BRYANT, Tennessee
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Hearings held:
    September 28, 1999...........................................     1
    October 4, 1999..............................................    93
Testimony of:
    Allen, Hon. Tom, a Representative in Congress from the State 
      of Maine...................................................   110
    Berry, Hon. Marion, a Representative in Congress from the 
      State of Arkansas..........................................   115
    Dummit, Laura A., Associate Director, Health Financing and 
      Public Health Issues, Health, Education, and Human Services 
      Division, General Accounting Office........................    25
    Fletcher, Hon. Ernie, a Representative in Congress from the 
      State of Kentucky..........................................   107
    Gilman, Hon. Benjamin A., a Representative in Congress from 
      the State of New York......................................   117
    Goldberg, Robert M., Senior Research Fellow, Program on 
      Medical Science and Society, Ethics and Public Policy 
      Center.....................................................    65
    Hash, Michael, Deputy Administrator, Health Care Financing 
      Administration.............................................    20
    Michel, Bob, Action Team Member, Seniors Coalition...........    71
    Peterson, Hon. Collin C., a Representative in Congress from 
      the State of Minnesota.....................................   102
    Reischauer, Robert D., Senior Fellow, The Brookings 
      Institution................................................    58
    Seidman, Bert, on behalf of the National Council of Senior 
      Citizens...................................................    68
    Stark, Hon. Pete, a Representative in Congress from the State 
      of California..............................................   104
    Wilensky, Gail R., Senior Fellow, Project Hope...............    54
Material submitted for the record by:
    Hash, Michael, Deputy Administrator, Health Care Financing 
      Administration, responses to questions of Hon. Nathan Deal.    91
    Seidman, Bert, National Council of Senior Citizens, letter 
      dated September 29, 1999, to Hon. Michael Bilirakis........    92

                                 (iii)

  


 PRESCRIPTION DRUGS: WHAT WE KNOW AND DON'T KNOW ABOUT SENIORS' ACCESS 
                              TO COVERAGE

                              ----------                              


                      TUESDAY, SEPTEMBER 28, 1999

                  House of Representatives,
                             Committee on Commerce,
                    Subcommittee on Health and Environment,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman), presiding.
    Members present: Representatives Bilirakis, Upton, Deal, 
Burr, Whitfield, Norwood, Coburn, Lazio, Bryant, Brown, Waxman, 
Pallone, Stupak, Green, Strickland, Barrett, Capps, and Eshoo.
    Staff present: Patrick Morrisey, majority counsel; Kristi 
Gillis, legislative clerk; Carrie Gavora, professional staff 
member; Amy Droskoski, minority professional staff member; and 
Karen Folk, minority professional staff member.
    Mr. Bilirakis. The hearing is called to order. Good 
morning.
    The topic of today's hearing is Prescription Drugs: What We 
Know and Don't Know About Seniors' Access to Coverage.
    I believe the title is appropriate because there is clearly 
much we do not know about this complicated and politically 
charged issue. We have all heard the numbers, roughly 65 
percent of Medicare beneficiaries have access to some form of 
prescription drug coverage, but one-third have no drug coverage 
at all. Today, we will hear more about the coverage options 
available to Medicare beneficiaries as well as possible methods 
for expanding coverage to individuals who currently lack it.
    Our first panel includes representatives from the Health 
Care Financing Administration and the General Accounting 
Office.
    The second panel includes experts with a diverse range of 
experience in addressing these issues, and I look forward to a 
productive hearing on which we can shed some light on what we 
do know.
    The bipartisan Medicare Commission on which I served spent 
a significant amount of time wrestling with this problem. The 
Commission was unable to secure a supermajority vote largely 
because we could not coalesce on a solution to the prescription 
drug problem.
    As members know, this subcommittee has a strong record of 
working on a bipartisan basis to tackle difficult legislative 
issues, and I am hopeful that we can advance a bipartisan plan 
to improve prescription drug coverage for Medicare 
beneficiaries. By reaching agreement on an answer to this 
difficult question, we can also help advance broader efforts to 
preserve and strengthen Medicare for the future.
    Given the importance of prescription drugs to Medicare 
beneficiaries, a number of potential solutions have been 
advanced to help those individuals who currently lack coverage. 
Since this is not a legislative hearing, we will not focus on 
specific bills today. I will note for the record, however, my 
own concern about overly broad proposals that spread limited 
resources too thin and increase beneficiaries premiums or 
disrupt their current coverage. A plan which would cause some 
beneficiaries to lose their coverage, or that would increase 
their premiums, is worse in my opinion, than no plan at all.
    I also believe that it is critical that we act now to help 
individuals in greatest need, our Nation's poorest and sickest 
beneficiaries. Our Nation's most vulnerable beneficiaries 
should not have to wait for broader reform of the Medicare 
program in order to obtain the help that they so desperately 
need.
    In 1994, I joined then Congressman Roy Rowland, a family 
practitioner from Georgia and former member of this committee, 
in proposing a targeted bipartisan solution to reform our 
Nation's health care system. Our plan included critical 
provisions to help individuals with preexisting conditions 
obtain coverage and to allow workers to keep their health 
insurance when they changed jobs.
    Opponents, including the President, took an all or nothing 
approach to health care reform. Unfortunately, as a result of 
their stubborn intransigence, individuals in need of care were 
forced to wait an additional 2 years until these insurance 
reforms were enacted into law in 1996, with strong bipartisan 
support, I would add. In my mind, it is unconscionable to ask 
the neediest beneficiaries to wait for prescription drugs while 
we continue to debate the broader problems facing the Medicare 
program.
    Therefore, I recently introduced legislation along with 
Congressman Collin Peterson and Ernie Fletcher of Kentucky to 
help the poorest and sickest beneficiaries right now. Our bill, 
H.R. 2925, would provide Federal matching funds to States that 
establish or expand drug assistance programs serving low-income 
individuals. It would also protect beneficiaries who obtain up-
front coverage from high annual drug costs through a stop loss 
protection.
    I am hopeful that today's hearing will help clarify the 
need for prescription drug coverage and provide a foundation 
for further legislative action. I again want to thank our 
witnesses for the time and effort in joining us today and would 
thank them, by the way, for having submitted their testimony in 
enough time, with one exception, for us to have an opportunity 
to take a look at it.
    I would now yield to the gentleman from Ohio, Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman.
    I ask unanimous consent to enter the statement of Mr. Stark 
from California on this hearing and also any other members that 
have----
    Mr. Bilirakis. Without objection, Mr. Stark's statement and 
the written statement of any members will be included in the 
record.
    Mr. Brown. Mr. Chairman, I thank you for doing this hearing 
today.
    In response for a moment to your comment about one witness 
who submitted his testimony only at the last minute, I think 
that is unacceptable. I think it would help this side of the 
aisle and those witnesses who are testifying, in terms of being 
able to get travel arrangements and rearrange their schedules, 
that we have more than a week's notice in being able to prepare 
for this hearing. Sometimes witnesses need more time than that.
    Today's hearing is about prescription drug coverage for 
Medicare beneficiaries. That means today's hearing could be one 
of the most productive hearings that this subcommittee has had 
the entire year, or we could walk out of here after today and 
after Monday's hearing having accomplished nothing.
    Either way, the parent or grandparent of somebody in this 
room will be leaving their doctor's office today with a 
prescription--let's say it is Ticlid, which is prescribed to 
individuals at high risk of stroke--knowing that she cannot 
afford to fill that prescription and too mortified to tell her 
doctor or relatives that.
    We can spend the next several hours complaining that there 
is no current data on the number of seniors without coverage. 
We can argue endlessly, based on that same data, about the 
nature and the magnitude of the problem. We could frame the 
discussion in such a way that continued inaction seems the 
prudent thing to do.
    After all, all of our data goes back to 1995. We do have 
data indicating that between 30 and 40 percent of seniors, as 
the chairman said, lacked drug coverage in 1995; and many of 
those who reported having some coverage in fact had grossly 
inadequate coverage making that 30 to 40 percent number 
significantly larger. To me, that is a problem.
    We also know the situation is going to get worse. Hundreds 
of thousands of seniors will lose their prescription drug 
coverage next year with the continued flight of Medicare+Choice 
plans. Other plans are dropping or curtailing the prescription 
drug benefits.
    But let's pretend for a moment that the problem is not 
getting worse. Let's just say that 30 percent, say, of seniors 
lack prescription drug coverage at any given time. What if 30 
percent of seniors lacked coverage for hospitalizations at any 
given time? Would we simply be dismissive and declare the 
problem minimal and look for stopgap measures to plug the hole? 
I think not.
    Prescription drugs are as essential to health and well-
being to seniors as any health care service or supply covered 
under Medicare. The purpose of Medicare is to protect seniors 
and their families from catastrophic health care costs; and, 
without prescription drug benefits, Medicare is simply not 
fulfilling that purpose.
    In 1965, the U.S. decided it was in the Nation's best 
interest to create a universal health care coverage system for 
seniors. That program has lifted millions of seniors out of 
poverty and has helped them live longer and healthier lives. It 
is critically important to seniors and to their families; and 
yes, Flo, it is a government program. It is a government 
program because the private insurance industry didn't 
particularly want to cover seniors back in 1965, just like they 
don't particularly want to cover early retirees or less 
profitable Medicare managed care enrollees today.
    Medicare, to its credit, treats all seniors equally and 
serves all of us well. We could complete the benefit package.
    Obviously, not everyone in this room agrees that Medicare 
is the right vehicle for prescription drug coverage. We should 
discuss that.
    Among those of us who support Medicare prescription drug 
coverage, some favor catastrophic, others favor a cap benefit 
or a hybrid or a doughnut approach. We should discuss that.
    Some in this room believe that the government should pay 
drug companies their monopoly set price for prescription drugs 
because drug companies have told them if we don't, research and 
development will dry up. Others believe the threat of reduced 
research and development is just that, a self-serving and 
irresponsible threat, and we should discuss that.
    Finally, some see the prescription drug debate as an 
opportunity to promote Medicare privatization. We should 
definitely trace the logic behind that. It certainly eludes me.
    Mr. Chairman, we have a lot of work to do. It is late in 
the year. We can make up some of the time that we have lost by 
dispensing with the question of whether or not seniors need 
prescription drug coverage and instead focusing on how to get 
it done.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Coburn for an opening statement.
    Mr. Coburn. Thank you, Mr. Chairman.
    I am pleased that we are having this hearing. The example 
just used by my friend from Ohio as an example of the problem, 
he is right, there is a problem. But what he failed to mention 
in that is the lack of professional activity to solve that 
problem.
    Let's just carry his example, Ticlid, a little further.
    A senior comes into a doctor's office. A prescription for 
that drug is given, and the senior walks out knowing that they 
are not going to be able to afford it or not knowing and going 
to the pharmacist and getting a huge bill and saying I can't 
afford that.
    That is a failure not of prescription drugs, that is a 
failure of the basic standard of professional care by 
physicians in this country. We should not confuse the two. That 
physician should ask their patient, here is a drug. Here is 
what it is probably going to cost. Can you afford that? And if 
you can't, what can I do as a physician either to make that 
drug available to you, give a substitute that accomplishes 95 
percent of that, which is aspirin, or otherwise solve that 
patient's problem.
    One of the things that has disgusted me in the whole debate 
is that we are focusing on prescription drug benefit and not 
the failure of the profession to do its job, what it was 
trained to do, to inquire, to care for their patients.
    The other thing that has extremely concerned me is that we 
are rushing to provide a benefit on a bankrupt program without 
the President doing what he can do to make significant increase 
and improvements of drugs available to the seniors in this 
country.
    Let me give you five instances that the President can do.
    The first thing that the President can do is put pressure 
on the FDA to increase more generics. He has not done that.
    No. 2, he can push and the Justice Department can line up 
on the side of the independent drug pharmacists in this country 
in their lawsuit against the drug manufacturers because they 
won't sell to them as a buying group. They will sell to mail 
order drug houses, but if the pharmacists want to group buy, 
they won't do that. They have a suit going. The Justice 
Department ought to be siding with them. It is a monopolistic 
practice to not sell to group pharmacists who buy as a buying 
group that then can pass on savings.
    No. 3, he can still work harder on the FDA to lower the 
cost of drug approval.
    No. 4, he can talk to the doctors in this country about 
their obligation of doing the job that they were trained to do. 
That is to make sure that you don't just write a prescription, 
that you know whether or not--you ask your patient, are you 
taking your drugs? There is good studies, 20 percent of the 
seniors walk back into their doctor's office, and the doctor 
never asks the patient, are you taking your medicines?
    Finally, he can put forward what is done well by the drug 
companies in this country because there are over 30 of them 
that offer drugs free for seniors in this country if they have 
an income limitation, and I would like to introduce for the 
record the list of those companies that are providing that 
service now.
    And if physicians get off their can and inquire of their 
patients whether or not they can afford to buy a drug, whether 
or not they have an income problem, and utilize the services 
out there for indigent and low-income seniors by the drug 
companies to provide a benefit, we could markedly change the 
access and availability for prescription drugs for seniors in 
this country.
    But what we want to do is fix another government program 
that is going to disrupt the marketplace. And I happen to agree 
with Mr. Brown. There are monopolistic practices going on in 
the pharmaceutical industry, and they ought to be ashamed of 
some of the prices that they are charging for some of the 
drugs. But we ought to do the basic smart things first before 
we obligate our grandchildren and their children for another 
enlarged program.
    The last point I would make is that HCFA has a terrible 
record of ever estimating any costs right. The closest they 
have come is missing it by 800 percent. That is the best that 
they have ever done on anything. So we cannot use data coming 
from HCFA as to what things are going to cost. And we better 
well know what we do in terms of prescription drug benefit for 
seniors because the problems that we have with Medicare now 
will be minuscule if we don't do this right.
    Mr. Bilirakis. Without objection, that will be made a part 
of the record.
    Mr. Pallone for an opening statement.
    Mr. Pallone. I want to thank you for holding this hearing.
    In my view, the Medicare program cannot be modernized 
without adding a prescription drug benefit. Some of my 
colleagues on the other side of the aisle contend that two-
thirds of the Nation's seniors have adequate coverage, and we 
need only devise a plan to cover the other third. This 
contention, however, is a diversion. The Republican leadership 
in Congress is intent on downplaying the two most important 
aspects of the prescription drug debate, those being the 
exorbitant price discrimination seniors face when purchasing 
pharmaceuticals and the substandard nature of the coverage held 
by those lucky enough to have it.
    I am pleased that Mr. Coburn mentioned the price 
discrimination issue today, but the price discrimination 
seniors face when purchasing pharmaceuticals has been well 
documented by Democrats on the Government Reform and Oversight 
Committee. The committee's Democrats found that seniors pay 
almost twice as much for their prescription drugs than does the 
pharmaceutical industry's most favored customers.
    As a result of this price discrimination, increasing 
numbers of seniors are being forced to choose between food and 
medicine. Without a prescription drug benefit and against the 
recommendations of their doctors, seniors are splitting the 
pills into pieces and staggering the days on which they take 
their medications to make their prescriptions last longer.
    The record is clear on who is taking the lead in trying to 
fix this problem. Notwithstanding Chairman Bilirakis' bill, the 
Republican leadership in Congress has done nothing on this 
issue. Democrats have been on the House floor day after day all 
year long pushing for consideration of legislative solutions 
such as those which have been offered by Congressman Allen of 
Maine and Henry Waxman and Pete Stark. Both of these plans, as 
would the President's plan, would increase the negotiating 
power of those seeking to provide a Medicare drug benefit 
allowing pharmaceuticals to be purchased at cheaper prices and 
passing those savings on to seniors.
    I know of no Republican proposals that confront the issue 
of pharmaceutical price discrimination. As I said earlier, many 
of my Republican colleagues contend that two-thirds of seniors 
have adequate coverage. Consequently, they say we need a plan 
only to provide coverage for the one-third of seniors who lack 
coverage. This contention ignores reality. The quality of the 
coverage for those who do have it is not that good at all. We 
need to pass a plan that provides comprehensive coverage as the 
President has proposed. The case for comprehensive coverage is 
extremely compelling.
    In July, the White House released a report detailing the 
quality of the prescription drug benefits for those Medicare 
beneficiaries who do have them. With respect to the 
availability of prescription drug coverage in the 
Medicare+Choice program, the President's July report found some 
disturbing trends. About 17 percent of Medicare+Choice 
enrollees have prescription drug plans, but again that coverage 
is not that good and is getting worse.
    The President's July report found three-fifths of 
Medicare+Choice plans were reporting that they are going to cap 
prescription drug benefits below $1,000 in the year 2000. In 
addition, it found that the number of Medicare+Choice plans 
imposing a $500 or lower cap on prescription drugs will 
increase by over 50 percent between 1998 and 2000. And just 
last week the White House released another report announcing 
that, next year, all Medicare HMOs will charge copayments for 
prescription drugs.
    Mr. Chairman, over 50 percent of Medicare beneficiaries 
without drug coverage are middle-class seniors. As stated 
another way, over 50 percent of seniors without drug coverage 
have incomes over 150 percent of poverty level. Passing a plan 
that provides a benefit to only one-third of the seniors will 
not help them nor will it help the millions that have 
insufficient coverage that is getting worse.
    The President has it right. Medicare should be expanded to 
include a prescription drug benefit for every Medicare 
beneficiary who wants one. There are a lot of plans that have 
been introduced by many Democratic members, all of which have 
considerable merit; and I have a plan which would refurbish 
Medigap to provide more comprehensive and affordable coverage 
than currently exists. But I want to stress that I believe, and 
it is partisan, but I am stating my opinion, that the 
Republican leadership in Congress has to date failed to show an 
understanding of the depth of prescription drug problems that 
seniors are facing, and they need to be disabused of the notion 
that the problem affects only those with the lowest incomes. 
The problem affects a vast number of seniors, and the sooner 
they realize the huge scope of the problem the sooner we can 
expand Medicare to include a meaningful and comprehensive drug 
benefit.
    Thank you.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Burr for an opening statement.
    Mr. Burr. Thank you, Mr. Chairman.
    Let me encourage everybody who is in this room, don't 
listen to a word we say today because, clearly, we are not here 
with the intention of solving the problem that exists in health 
care. You can't solve a policy issue with partisan politics. It 
will not happen. We can blame those individuals who 35 years 
ago looked at drug coverage as a part of Medicare and we can 
point a finger at them. They used the facts that were available 
to them at the time, that drug treatment was not a huge factor 
in the treatment of sick people--at least seniors.
    I am not questioning their judgment at that time, but I 
wonder if in fact people complained about the Post Office 
before there was FedEx. I wonder if we really looked at it 
without a comparison of something that could happen better and 
cheaper and faster and were critical of it. I doubt we were.
    Now health care has changed. As I listen to those who have 
preceded me on opening statements, I feel shamed that I had a 
hand in passing the FDA Modernization Act, an act that I think 
brought new pharmaceuticals and devices to the marketplace 
faster because, in fact, the success of the FDA and the drug 
companies, the new applications, the number larger than the 
year before and the year before that, have contributed to this 
7 percent rise in drug costs. That is what it is this year. 
When we have got twice the number of new pharmaceuticals in the 
marketplace under their cost recovery period for research and 
development, the cost of the marketplace is higher. And when we 
double it this year, it should be significantly higher than it 
was last year.
    Please don't lose focus on what that means. That means that 
individuals, not just seniors across this country who have 
terminal and chronic illness, who have for the first time a 
drug that treats it. We in this committee have lost focus time 
and time again on who it is that we are here to talk about, and 
that is patients. It is the human face that each of us are 
touched by every time we go home. It is the individual who 
should be at the forefront of the debate when we talk about 
seniors.
    If there is a commitment that we ought to make, it is that 
no senior would lose everything that they have accumulated 
because of an illness. Until we have designed a health care 
delivery system that I think fits that bill, then we will 
continue and I will continue to try to refine what we, in fact, 
should do as this committee.
    I will assure you, Mr. Chairman, that I will stay here 
patiently all day. I won't be critical of the President's plan, 
as I have been in the past. I won't be critical of any of the 
other plans which have been introduced. But I would tell you 
that until we have restructured Medicare to be the best 
delivery system for health care for seniors, this committee has 
not completed its work.
    Once again, I think we are after a band-aid versus a cure. 
I am confident before it is over with we will find a cure.
    And I yield back the balance of my time.
    Mr. Bilirakis. Ms. Eshoo for an opening statement.
    Ms. Eshoo. Good morning, Mr. Chairman and everyone that is 
here.
    I want to thank you for holding this very important hearing 
and for the one that will follow on an issue that I think 
effects all of us. Whether one considers themselves part of the 
ranks of seniors or in caretaker roles, we are really tied to 
this issue and need to address it.
    We have spent a great deal of our time during this Congress 
so far talking about the need to shore up the Medicare program. 
We have also talked about how we can modernize it. We are also 
painfully aware of the frightening statistics and how those 
statistics impact the program that is in place now. With 
Americans living longer, the number of Medicare beneficiaries 
are growing faster than the workers paying into the system; and 
without reforming the trust fund, it will be insolvent by the 
year 2015, which is not too far from now, so we have a lot of 
work to do.
    But securing the system we know, I think that each one of 
us would acknowledge, it is not enough. We have to modernize 
it. And the key to ensuring the program covers the best that 
medical science has to offer is to provide the kind of benefits 
that are needed in the system today. They weren't when Medicare 
was founded in 1965, but things have changed.
    When Medicare was created in that year, seniors were more 
likely to undergo surgery than to use prescription drugs. 
Today, the prescription drugs are often the preferred and 
sometimes the only method of treatment for many diseases. 
Seventy-seven percent of all seniors take a prescription drug 
on a regular basis. Nearly 15 million beneficiaries have no 
insurance coverage for prescription drugs. Eighteen percent of 
them spend $100 a month on their prescriptions.
    The number of employers who sponsor retiree health 
insurance coverage has dropped by 20 percent between 1993 and 
1997. For some seniors, enrolling in Medicare managed care 
plans has provided them drug coverage. However, 11 million 
beneficiaries don't have access--now as a Californian, most of 
them do, but in other States and across the country, that is a 
huge number, that 11 million don't even have access to any 
managed care plans whatsoever.
    And many of those plans are dropping or severely limiting 
coverage. A recent Kaiser study found that current drug 
coverage in Medicare managed care plans varies greatly, and 
many of them may be in jeopardy altogether as plans face 
declining profits.
    I applaud the President and my colleagues here who have 
introduced plans to provide a Medicare drug prescription 
benefit. I think it is an important one to add, but I think we 
have to figure out how we are going to do it. That is where the 
debate is. If I have any regret, it is that we are just 
starting the hearings on this issue now. I think in many ways 
it is a march to folly for anyone to make up their mind and say 
we have the absolute perfect way to address this. We don't 
know. We haven't examined it thoroughly enough. Today is the 
beginning of that.
    I am hopeful that these fact-finding hearings will be 
followed by legislative hearings so that we can move to provide 
coverage for seniors, because I don't think that our Nation's 
elderly should have to choose between paying for their 
prescription drugs and their other necessities, food included.
    Let me add, when President Johnson signed the law that 
created Medicare, he said, ``The benefits of this law are as 
varied and broad as the marvels of modern medicine itself.'' I 
think we need to bring Medicare up to the current marvels of 
medicine.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Deal for an opening statement.
    Mr. Deal. Thank you, Mr. Chairman.
    I want to congratulate my colleague, Mr. Coburn, for his 
opening statement and some of the most insightful suggestions 
or practical problem-solving solutions to this issue. I find it 
regrettable, as this committee now explores the possibility of 
expanding pharmaceutical benefits for senior citizens, that 
some on this panel would inject the poison pill of partisan 
politics. Partisan politics never solved any problem, and if it 
is the focus of this hearing or any debates relating to this 
issue, I think we all know that it will not solve anything. It 
is truly hardened upon the ultimate poison pill that will keep 
this from going anywhere.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Barrett for an opening statement.
    Mr. Barrett. Thank you, Mr. Chairman.
    I want to thank you for holding this hearing. If there is 
one hearing that is an important hearing, this is it. This is 
an issue where real people are affected. When I am back in my 
district and I am at senior citizens meetings or fish fries, 
this is the issue that when I talk about it, the citizens' 
heads go up and down because this is a real problem.
    We hear the talk here in Washington that it only affects a 
third of the seniors. Well, that is 13 million people. And 
there is another third that I think is basically on the 
tightrope act right now. They are either in Medicare+Choice 
plans or they are in plans that are covered by employers that 
could go in the other direction.
    And, unfortunately, we have started seeing that with the 
Medicare+Choice plans both in my area and I think in other 
areas of the country where those who are enticed into these 
programs by the offer of prescription drug coverage are now 
facing the harsh reality that drug coverage is being dropped 
totally or they are going to have to pay a significantly higher 
amount for that drug coverage.
    Others have talked that this is a problem that can't be 
solved by Medicare. Well, if it can't be solved by Medicare, 
then we have to look for other ways to solve the problem. And I 
think the bill that has been introduced by Mr. Allen and others 
is a bill that this committee should take a very, very close 
look at it, and that is the bill that recognizes that there is 
a huge market disparity right now in this country. That Joe 
Jones and Judy Jones, when they go into their drugstore to buy 
drugs, have no market power, and they are forced to pay 100 to 
105 percent higher than an HMO, than the Federal Government, 
than anybody who is buying at a volume discount.
    What I think we have to do and can do is not create a huge 
government bureaucracy, address this market discrepancy by 
allowing seniors and pharmaceuticals to form cooperatives. We 
have to take steps that allow this huge market disparity to be 
eased in some way, and I think this committee should take a 
careful look at that. Those who hate government programs and 
who fear that Medicare cannot solve this problem should take a 
look at that market-oriented solution, but it is a solution 
that really does try to deal with the problem. Again, one of 
the hugest problems we have here is the unequal market forces 
that are at play.
    The second problem, of course, is that there are a number 
of individuals who through no fault of their own are faced with 
disastrous bills. The vast majority of seniors don't have to 
pay $5, $6, $7,000 a year for prescription drug coverage. If we 
have a greater market force for those paying the lower amounts, 
we can combine that with more of a disaster type relief policy 
for those hit hard.
    I am tickled pink, Mr. Chairman, that you are holding this 
hearing. I honestly thought that this was going to be an issue, 
without sounding partisan, that the majority party would simply 
ignore. So I want to compliment you for recognizing that this 
is a real world problem, because I think the first step in 
solving this problem is sitting down and saying, okay, let's 
talk about the problem and see what we can do.
    I yield back the balance of my time.
    Mr. Bilirakis. Mr. Whitfield for an opening statement.
    Mr. Whitfield. Mr. Chairman, thank you very much.
    I think, obviously, this is one of the most difficult, 
complex issues relating to Medicare, not only to keep Medicare 
from going bankrupt but also to provide adequate coverage for 
recipients of Medicare. And it is going to take the best minds 
not only in Congress but of health officials throughout this 
country to solve the serious problem facing Medicare. And, 
because of that, I must say that I am disappointed that, once 
again, the gentleman from New Jersey seems to want to take and 
blame the Republican party for all of the deficiencies in the 
Medicare program, and I would just remind him that his party 
controlled Congress for 40 years and never addressed this 
problem, as far as I know.
    But the important thing is we don't need to sit here 
pointing fingers at each other, but we need to work together 
and try to solve the problem. Because senior citizens 
throughout this country, many of them cannot afford to pay 
their medical bills and, therefore, do not take the drugs that 
they need.
    We can solve this problem, but in doing so not only must we 
look at how it effects senior citizens on the financial side, 
but we have to look at many young couples today who are paying 
higher and higher payroll taxes. Many of them do not have any 
health coverage for their children. So we need to approach this 
in a balanced way, but I am convinced that we can come up with 
a meaningful solution to this problem. And there is no question 
that a lot--many senior citizens need help with prescription 
drugs, and I think that is what this committee is committed to 
try to take care of.
    I yield back the balanced of my time.
    Mr. Bilirakis. I thank the gentleman.
    Ms. Capps.
    Mrs. Capps.  Thank you, Mr. Chairman.
    I, too, want to commend you for holding this extremely 
important hearing. Ensuring that seniors have access to 
prescription drugs is as important today as guaranteeing that 
they had access to hospitals and doctors back in the 1960's 
when Medicare was started.
    Modern pharmaceutical drugs keep seniors healthier and 
improve the quality of their lives. As a nurse I know that by 
reducing hospital stays and the need for invasive treatment, 
prescription drugs save money. In today's health care 
environment, they are virtually indispensable, and yet Medicare 
does not cover prescription drugs.
    This hearing is to look at the data that we have regarding 
seniors' access to prescription drugs. While I am glad that we 
are discussing this problem, I would prefer that we actually 
begin discussing the merits of particular proposals to address 
it. Getting more information is good, but easing seniors' 
suffering today is better.
    We already know that one-third of seniors don't have any 
drug coverage, another quarter have coverage from former 
employers, but employers who offer retiree benefits are 
becoming fewer and fewer. Medigap plans are unaffordable or 
inadequate. Medicare+Choice plans are capping benefits at a 
thousand dollars or less, and some 40 percent of seniors don't 
have a plan with a drug benefit available to them.
    In my district, this last point is ringing especially true. 
Last year, three of the five HMOs serving San Luis Obispo 
County in California pulled out, leaving thousands of seniors 
scrambling to get into another HMO because that is where they 
could get the most affordable drug coverage.
    This month, Blue Cross, the only HMO that served the entire 
county, announced that it would pull out as of January 1, 2000. 
It will leave 1,900 seniors of that county with no HMO 
coverage, in effect with no affordable drug coverage. 1,300 
other seniors in the county currently enrolled in Blue Cross 
will only have one HMO option, Pacific Care Secure Horizons. 
Premiums for Secure Horizons are going up some $50 a month, 
raising costs to those seniors if they choose that HMO as well 
as to the 6,400 seniors already in Secure Horizons. For me and 
for thousands of seniors in my district, this experience has 
only reinforced the necessity of making prescription drug 
coverage available to all of our seniors through Medicare.
    While I am happy that the subcommittee is holding this 
hearing, I am dismayed that it has taken so long to look into 
this issue. It is clear that we have a problem. Our Nation's 
health plan for seniors is a product that most of us wouldn't 
chose for ourselves. This is an outrage, and this must motivate 
us to act and to act now.
    A third of seniors don't have coverage and are sometimes 
choosing between food and rent. I know this personally in my 
district--or filling that prescription in this, the richest 
country in the world.
    I would hope that this subcommittee begin discussing some 
of the different proposals to meet this challenge. The 
President has put his proposal on the table some months ago. 
Senator Breaux and Representative Thomas have done so as well. 
Representatives Turner and Allen have a proposal; and your 
introduction, Mr. Bilirakis, of legislation last week is 
another productive addition to the debate. I respectfully urge 
you to expand upon today's hearing and use this subcommittee as 
a platform for providing prescription drug coverage to all of 
our seniors. They deserve nothing less, and so I look forward 
to working with you to achieve this goal.
    I yield back the balance of my time.
    Mr. Bilirakis. The gentlewoman's time has expired.
    Mr. Bryant for an opening statement.
    Mr. Bryant. I want to thank you for having this hearing; 
and let me say, first of all, that I don't think that there is 
anyone in this room or even in Congress that would not want 
seniors to have access to the prescription drugs that they 
need. I don't think anyone would argue that point.
    But as I sit here and listen to some of the comments that 
are being made, I really appreciate those well-thought-out, 
instructive comments that people like Dr. Coburn have made, Tom 
Barrett has made on the other side about how we can perhaps 
address this issue short of a national entitlement program.
    In listening to Ms. Capps speak about some of the HMOs in 
her district going out of business, it made me think back to 
the hearing that we had in here perhaps a month or 2 ago about 
just that problem, and I know sometimes the way I deal with 
issues up here is I isolate those issues and forget the big 
picture sometimes. Listening to her talk about that today, it 
reminded me that at one point we were looking at nationalized 
health insurance or health coverage, and that failed, as it 
should have failed.
    But lately we have heard about maybe one big gulp wasn't 
the way that you do it. Maybe you take it incrementally. As I 
think back to those HMO hearings we had, the witnesses were all 
saying we are having to drop out of that business because we 
can't afford to stay in business where we are not being paid 
fully or on time. There were all kinds of problems with that. 
And I had the thought then that, perhaps not a conspiracy, but 
if one were conspiracy minded, this is the way that it has been 
handled to force people out of that business because that would 
direct those people back to Medicare, the traditional form of 
Medicare and, ultimately, a government-based solution, a 
government-based entitlement.
    And here today I am hearing the same thing in terms of 
prescription drugs. Many of us would like to see that access to 
drugs by seniors to be under the current environment where they 
have insurance coverage or they are getting it at the lower end 
through government programs, but these folks that we are 
dealing with today, that 35 percent who don't have any 
coverage, that we be creative and use some of these suggestions 
that have been made today.
    But yet what I am hearing again is like the Medicare plus 
cost, where we are looking for a government-based solution, 
another entitlement. There again, another step toward 
government-provided insurance. And again I think sometimes--I 
know that I have and perhaps it would help if all of us looked 
at the bigger picture, rather than one isolated part at a time.
    Certainly the purpose of today's hearing is to help us as a 
Congress understand how we can best facilitate access to 
prescription drugs by seniors, and we are going to hear several 
opinions, and I would say, as I have said earlier, I have 
concern about a sweeping prescription drug entitlement coverage 
for all beneficiaries.
    Again, we know that something like 65 percent of the 
Medicare beneficiaries already have some form of coverage, and 
that has been discussed. And the degree, the form of coverage 
might be argued as good or bad, but certainly they have access 
to some drugs. And before we look at creating another 
government entitlement in Medicare, I think we ought to look at 
ways to create a targeted prescription drug benefit for seniors 
and using creative ways such as what Mr. Barrett and Dr. Coburn 
suggested.
    I think there are other options out there without placing 
the government in control. I think in a time, too, when 
Medicare is in trouble financially and we are facing the 
prospect of my generation, the baby boomer generation, coming 
ahead, that we must really be careful that we behave 
responsibly in this area toward working out a solution for this 
common goal.
    Thank you for having this hearing.
    I have a more complete statement that I would like to put 
in the record.
    Mr. Bilirakis. Without objection.
    Mr. Green for an opening statement.
    Mr. Green. Thank you, Mr. Chairman.
    Like my colleagues, I am real glad to be here today and 
congratulate the Chair on starting a dialog on the committee 
process on this important legislation.
    Frankly, I was surprised about the concern about the poison 
pill of partisan politics. I am shocked that we have that in 
this committee room on this floor of this House. After getting 
here 1 minute ago and hearing how terrible the President was, 
the poison pill of partisan politics shocks me.
    Again, I appreciate the opportunity to be here today. I 
think this is an important issue facing Congress, how to 
provide prescription drugs at affordable prices. Several bills 
have been introduced; and, Mr. Chairman, I know that you have 
introduced one; and I know that there is both the Allen bill 
and the Turner bill and the President's plan within the budget.
    Critics oftentimes rarely offer their own solution to this 
growing problem. In fact, our Nation's health care system has 
dramatically evolved over the last 10, 20 and 30 years to the 
point where prescription drugs are a major component of the 
health care system, but they can be critical to an individual's 
survival.
    Everyone agrees that we need to make prescription drugs 
more affordable to those who least can afford them. Seniors are 
being forced to choose between buying food or taking their 
prescriptions. They often delay taking their prescriptions. 
Instead of one a day, they take one every 2 days. Because 
Medicare does not cover prescription drugs, so many seniors do 
not have a prescription drug benefit. I have seen a percentage 
that 37 percent don't have, but I know that it is much higher 
in my district. And, again, even those who have something, I 
think it is such a limited benefit that it is almost 
nonexistent.
    Representatives of the pharmaceutical industry say they 
have to charge the high cost to cover their research and 
development. I agree. Part of the success in the last 30 years 
is that we have medications that keep you from having to go to 
your physician, and I am certain that the time and money 
invested by these companies and NIH is exceedingly high.
    Last year, Congress passed a 15 percent increase in the 
National Institutes of Health budget, and hopefully we will be 
looking at the same thing this year, to continue that trend 
where we can treat people outside of the hospital or outside of 
the doctor's office.
    These facts do not explain why HMOs and even foreign 
countries are able to purchase approved drugs at significantly 
reduced prices. Studies by the minority staff, the Government 
Reform Committee, show that seniors actually pay as much as 
double what may be charged to a most favored HMO or someone who 
can negotiate, such as the Veterans Administration, and so that 
is the issue of the Turner and the Allen bill. Because seniors 
do pay substantially more, and I know in my own district they 
do.
    The other problem that we have in districts like I have, we 
are 6 hours from Mexico, and I understand the same situation in 
Canada, that shows that consumers in Canada and Mexico can 
purchase the same drugs for significantly less, and in some 
cases half of what they are in the United States. So I have 
constituents who literally drive to Mexico for 6\1/2\ hours in 
order to get their 90 days supply of prescription medication. 
Often, it is the same pharmaceutical that they can buy at their 
local drugstore.
    I am sensitive to the need for drug manufacturers to make 
profits for their approved drugs, because the success for the 
last 30 years is because of that reinvestment. But discounts 
are already available to HMOs and U.S. Government and 
hospitals.
    Mr. Chairman, I hear the bell. I am glad that we are having 
the hearing today, and hopefully the pharmaceutical industry 
will come forward with some type of suggestion on how we can 
address this issue.
    Thank you.
    Mr. Bilirakis. Thank you, Mr. Green.
    Mr. Norwood.
    Mr. Norwood. I would like to submit my opening statement 
for the record.
    I can associate my remarks with those that have spoken 
before me. Dr. Coburn made some very good suggestions, Mr. 
Barrett, and I certainly agree with Mr. Whitfield and Mr. Deal.
    If you want to help seniors with their medications, don't 
turn this into a partisan battle. That is the way that you may 
get votes, but you won't solve this problem.
    Now there is time for partisan politics. I love to 
participate in it. But I don't like to participate in it when 
it comes to health care. I probably have a bias in that.
    But we can work this out, and it won't be worked out by 
just simply saying the President has this program that he wants 
to add and let HCFA run it and add it to the Medicare program. 
That is not going to be the solution.
    We all know that patients that cannot fill their 
prescriptions are having and receiving very bad health care. It 
is bad for their health. In addition to that, it is bad for 
business. It is bad for Medicare and bad for HCFA because, in 
the end, when you can't take your medications, the cost for 
treatment down the road is a great deal more expensive than the 
cost for medications for not having taken those treatments.
    I don't think that HCFA can do it. They don't do very much 
well, and we are most assuredly forgetting what we were just 
talking about 2 years ago. Two years ago, we were talking about 
a trust fund going bankrupt. It is still very dangerously low. 
It is still a large problem. And one of our solutions has been 
what we have been doing since 1965, when in doubt add more 
expense to it.
    I am reminded of Lyndon Johnson's time when he pushed 
Medicare through, and he called his lieutenants into the Oval 
Office and said, this is a great new program for the American 
citizens, and it was in 1965. You guys go out and give me some 
idea what this thing is going to cost 25 years from now. And 
his lieutenants did the work and pushed the pencil and came 
back and said, Mr. President, by 1990, it is not going to cost 
much more than $9 million. He said, great. This country can 
afford that.
    But the problem was in 1990 it was $120 billion. Somebody 
has got to concern themselves with how we do this in terms of 
what it costs, because there is a limited amount of dollars 
that young people can put into the program. It doesn't mean, 
Mr. Chairman, we can't solve this. I believe that we can.
    And I would like to ask Mr. Pallone, let's try to do this 
on the basis of how can we solve this problem for our senior 
citizens, not how can we get votes next November.
    With that, Mr. Chairman, I yield back the balance of my 
time.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Stupak, opening statement.
    Mr. Stupak. Mr. Chairman, I was at another hearing and 
missed a lot of the opening statements. I am going to pass 
right now.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Upton.
    Mr. Upton. Rarely a day goes by that I do not receive a 
letter or call from seniors very concerned about the increases 
in the cost of prescriptions which they need and are paying for 
out of their own pocket. I want to be sure that no senior in 
America is forced to choose between buying vital prescriptions 
and other basic necessities.
    There is also a fairness issue here. A good number of my 
beneficiaries are snowbirds. They travel to your district down 
in Florida, Mr. Chairman, and they learn from their friends 
that they meet down there that their friends receive 
prescription coverage through their own Medicare HMOs, and they 
wonder why that is because they pay the same premium in 
Michigan as their Florida friends. It is because Medicare's 
premium payments are too low in my district to attract any 
Medicare HMOs. And as we work to change this in the Balanced 
Budget Act of 1997 over the next several weeks, I hope that 
every member will give careful consideration to speeding up the 
current phase-in of more equitable AAPPC rates which will make 
it fair for all seniors across the country.
    I yield back the balance of my time.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Strickland.
    Mr. Strickland. Mr. Chairman, for us to sit here and 
pretend that this is not a political issue is unreal. It is a 
political issue. If you watch the TV ads and you listen to the 
comments made by the leadership of both parties, you know this 
is a political issue.
    I think seniors are asking, why do I pay more for my 
prescriptions than people who have insurance coverage? They are 
asking me, why do I pay more for my prescriptions than people 
who live in other countries? They know that there is a problem 
out there, and it is not a Republican or Democrat problem, but 
I think it is the kind of problem that is going to require us 
as Republicans and Democrats to stand and accept responsibility 
for what we do.
    I would like to share some comments from letters that I 
have received from real people.
    One woman from Marietta, Ohio, writes, ``My expenses last 
year were just under $4,500, and this year they will be much 
higher. Even in the month of May just passed, I had to ask the 
pharmacist for 15 pills of two different prescriptions because 
I didn't have the money to pay for the full prescription.''
    I am sure I am not alone when I say I lack many times for 
necessary foods to buy enough medicine to get me through until 
the third when the Social Security check arrives.''
    A couple from Proctorville, Ohio, wrote to me and included 
an itemized list of their prescriptions for this past year. 
Even with insurance, his co-payments totaled $1,046.34 and hers 
totaled $4,996.83.
    Another couple from Portsmouth, Ohio, wrote to share their 
story for paying for anti-rejection drugs. Their supplemental 
insurance costs $148 a month and pays $3,000 per year toward 
their medications. The cost of the drugs they use is 
approximately $1,100 a month, which leaves them to pay the vast 
amount of the cost themselves, even though they have limited 
drug coverage.
    I didn't have to dig very deep into the constituent file to 
come up with this sampling of stories and while they may fall 
under the category of anecdotes, I have heard enough of them to 
convince me that we have a serious problem and we have got a 
responsibility to deal with it. And I believe that data exists 
to back up these stories.
    I want to close with a final thought from an Ohioian: ``We 
have to decide if we get to eat right or buy our medicine. I 
wonder if anybody in Congress has ever had to make a decision 
like this. I am sure if you have, the rules would change''
    Thank you, Mr. Chairman. I yield back.
    Mr. Bilirakis. Mr. Lazio.
    Mr. Lazio. Thank you very much, Mr. Chairman. Let me begin 
by thanking you for your work on this prescription issue which 
I know has been a multiyear concern of yours, and I am going to 
forego my complete opening statement and just sort of summarize 
if I can do that because I think some of the points have 
already been made. One of the points I think we need to 
reaffirm is the fact that we have rightfully made extraordinary 
strides in the increase in public resources dedicated to NIH 
and the various institutes under the National Institute of 
Health. It is the right thing to do to press forward at a time 
when technology and biotechnology is exploding with 
possibilities, but I think it is fair to ask that as cures and 
therapies become increasingly real from a research end, what 
good does that do if people can't access them. We know that 
there are certain strategies that we can embrace that would 
allow us to make use of these research breakthroughs for 
seniors, and I am happy we're looking at ways to provide for 
more access and affordability today.
    New York as you know is a state that addressed this issue 
almost 15 years ago. The Elderly Pharmaceutical Insurance 
Coverage Program, which is known as EPIC, is a state sponsored 
program that helps eligible seniors pay for their prescription 
drugs. By meeting certain financial requirements, seniors pay 
an annual fee, an annual deductible to receive benefits. When 
they go to the pharmacy, they show their EPIC card and pay only 
a co-payment which ranges from about $5 for $23 based on the 
cost of the prescription. Currently, this program serves about 
107,000 seniors in New York.
    Since the program started, over 280,000 have been served. 
The program has allowed seniors to pay for about 31 million 
prescriptions and at the same time allowed them to save over 
$683 million at the pharmacy counter. Generally EPIC seniors in 
New York on average purchase 36 prescriptions costing about 
$1,678, but saved $1,207. Without this program many seniors 
with limited income would be unable to cover the high cost of 
prescriptions often needed to improve or maintain their health.
    Mr. Chairman, I am proud that New York has taken this step. 
I applaud other states that have taken similar steps. I wish 
all of them had done this but efforts on the state level does 
not preclude the Federal Government from being a good partner 
and from doing our share. I want to endorse your commitment to 
solving this problem and doing it in a cost effective way that 
does not undermine the obligation of many private sector 
employees that already are paying directly or indirectly for 
prescription privileges. I look forward to this hearing and 
discussing the different ways that we can combat this complex 
problem today. I yield back.
    Mr. Bilirakis. I thank the gentleman for yielding back. Mr. 
Waxman.
    Mr. Waxman. Thank you, Mr. Chairman, I am pleased to 
participate in this hearing on one of our country's most 
critical problems, the hardship senior citizens face in 
obtaining prescription drugs. Given the state of modern 
medicine, every senior citizen should have prescription drug 
coverage. In my view, the most effective and fairest way to do 
this is through the Medicare program providing drug coverage 
for all beneficiaries. Far too many seniors lack this coverage 
and are unable to afford the drugs they need.
    Now, I don't think that is a partisan statement because I 
think that Medicare ought to cover prescription drugs and I am 
astounded to hear the reaction by our Republican colleagues who 
say you are a partisan if you think Medicare ought to cover 
prescription drugs. You are partisan if President Clinton just 
proposed a solution to this problem by saying that in Medicare, 
not only would doctors and hospitals be covered but so would 
prescription drugs be covered. Just as anybody would think that 
when you are buying a health insurance package today, that 
health insurance package ought to cover needed medical 
services, including prescription drugs. And when I hear some of 
our colleagues talk about we don't want our government--big 
government passes another entitlement. That sounds like all the 
statements we heard when Republicans argued against ever having 
Medicare to start with.
    Medicare has been a successful program. It has been a 
Godsend to these seniors in our Nation and while some people 
still don't like it, the American people sure do appreciate 
that program.
    Many elderly Americans face the cruel choice between buying 
food for the table or buying the medicines they need. Many take 
only half the pills their doctors prescribe or skip medications 
regularly and many don't even fill the prescriptions they need 
because they can't afford the high cost of drugs. Each of us 
has met constituents who can tell us heartbreaking stories. 
Last year I asked my staff on the Government Reform Committee 
to begin an investigation of prescription drug prices and to 
look at what was happening to senior citizens who didn't have 
coverage. I think many people were shocked by what we found. 
Senior citizens are being victimized by pervasive price 
discrimination. We found that seniors paying for their own 
prescription drugs must pay on average over twice as much as 
what the drug companies charge their favorite customers. This 
was true not only in my district in Los Angeles but across the 
country from Portland, Maine, to Gainesville, Florida, and even 
Milwaukee, Wisconsin, to Houston, Texas.
    Today over 80 districts specific drug pricing studies have 
been completed. These studies show that the very people who are 
the most vulnerable and frail, our senior citizens, are being 
forced to pay the most for their prescription drugs. On average 
our seniors are paying 100 percent more for their prescription 
drugs than drug companies' preferred customers. In some cases 
seniors even pay more. This price gouging has devastating 
effects on older Americans. The result can be a loss of 
independence, use of expensive institutional services, and in 
some cases irreversible decline in health.
    Representative Tom Allen and 130 of our colleagues have 
introduced the Prescription Drug Fairness for Seniors Act, H.R. 
664, to begin to address these problems. This bill would 
eliminate price discrimination and help lower drug prices. This 
bill's premise is that the worst off shouldn't have to pay the 
most for their drugs, and I support and commend Representative 
Allen and the co-sponsors for their efforts. But I hope it will 
do even more. Our senior citizens deserve coverage of 
prescription drugs under Medicare. It is time for us in 
Congress to take action and pass meaningful prescription drug 
coverage, and I think we ought to stop talking about if 
somebody wants one solution or another they are partisan 
because they want to deal with the problem. Let's work together 
on a bipartisan basis to do something about this problem, not 
simply throw brick bats and say if somebody points out a 
problem and wants to do something about it they must be acting 
as partisans in doing it.
    I yield back the balance of my time.
    Mr. Bilirakis. I thank the gentleman. His time has expired.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress 
                       from the State of Wyoming
    Thank you Mr. Chairman. I think we can all agree that over the past 
35 years since Medicare was created we have seen some phenomenal 
progress in the discovery and development of new lifesaving drugs. It 
stands to reason that the cost of these drug innovations will somehow 
get passed along to the consumer. The challenge we face today is how 
can seniors get access to these drugs without going bankrupt in the 
process.
    I think the first step in this effort must be a careful study of 
the statistics. That is, where do we stand today, in 1999, in terms of 
prescription drug coverage for seniors? Our discussion here today 
focuses on analyzing data from 1995 and, while this is a good start, I 
believe that we will need to work with current data in order to move 
forward on any lasting prescription drug plan.
    I'd also be interested in hearing about drug coverage in urban 
versus rural areas. In Wyoming, where we rely exclusively on fee-for-
service, seniors will have less access to drug coverage than would 
seniors in California, for example, where there are so many Medicare 
HMOs.
    I also think it is important to note that health insurance, be it 
through Medicare or private plans, is not a guarantee that we won't 
have out-of-pocket expenses, but rather it acts as a financial safety 
net in the event of catastrophic illness.
    I look forward to hearing from our witnesses today and I thank you 
again, Mr. Chairman.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    I am pleased that we are having this hearing to begin to address 
the issue of prescription drugs in Medicare. But I am perplexed by the 
title, ``Prescription Drugs: What We Know and What We Don't Know About 
Seniors' Access to Coverage.'' The situation is quite clear. We know 
that Medicare does not cover outpatient prescription drugs, but these 
drugs are increasingly important in treating disease and injury. We 
also know that while some Medicare beneficiaries do have some coverage 
for their pharmaceutical expenses, that coverage is unstable, meager, 
and declining. Most beneficiaries are living off fixed incomes, and as 
costs continue to increase and drugs become more prevalent as 
treatment, the cost eats up more and more of their income. It is clear 
that Congress needs to act.
    I, along with a number of my colleagues in the House, have 
introduced a bill, H.R. 1495, which would provide a meaningful 
prescription drug benefit in Medicare. I am concerned, however, by 
recent proposals which would erode the universal nature of Medicare by 
providing money for states to give assistance only for certain 
beneficiaries.
    These proposals are troubling for three reasons. First, they 
undermine the universal nature of Medicare. The Medicare program has 
always been an entitlement for every senior and disabled individual who 
qualified. Each person is entitled to the same benefits and same 
protections as the others. However, proposals to turn Medicare over to 
the states would remove these important protections. Second. these 
proposals do not guarantee a real benefit. It would be up to the states 
whether or not to offer coverage. Third, these proposals contain none 
of the critical elements to protect beneficiaries. So, even for the 
low-income, access to affordable coverage would not be guaranteed.
    Proposals to provide tax credits are equally disturbing, as more 
than fifty percent of seniors have no tax liability. And, tax credit 
proposals do nothing to make insurance for prescription drugs more 
accessible or to reduce the prices of prescription drugs for Medicare 
beneficiaries.
    This is simply unacceptable. I was in Congress when Medicare was 
signed into law in 1965. Medicare is the most successful social program 
in the history of this Republic. It has alleviated poverty and improved 
the health of our elderly and disabled. We need to continue in that 
tradition and ensure that Medicare provides security for all 
beneficiaries.
    We should not accept any drug benefit that is merely an empty 
promise made for political gain. Any true drug benefit must provide 
meaningful assistance to both seniors and disabled. Medicare 
beneficiaries should not have to wonder whether or not a drug benefit 
will always be available to help them meet their health care needs.

    Mr. Bilirakis. The Chair now calls the first panel forward. 
Mr. Michael Hash, Deputy Administrator, Health Care Financing 
Administration. Welcome, Michael. Always good to see you. Ms. 
Laura Dummit, Associate Director, Health Financing and Public 
Health Issues, Health, Education, and Human Services Division 
of the General Accounting Office. Welcome, Ms. Dummit. As per 
usual, your written statement is made a part of the record. We 
will set the clock to anywhere between 5 and 10 minutes. 
Obviously I don't want to cut you off if you are on a salient 
point. We will kick it off with you, Mr. Hash. Please proceed.

  STATEMENT OF MICHAEL HASH, DEPUTY ADMINISTRATOR, HEALTH CARE 
   FINANCING ADMINISTRATION; AND LAURA A. DUMMIT, ASSOCIATE 
 DIRECTOR, HEALTH FINANCING AND PUBLIC HEALTH ISSUES, HEALTH, 
  EDUCATION, AND HUMAN SERVICES DIVISION, GENERAL ACCOUNTING 
                             OFFICE

    Mr. Hash. Thank you, Mr. Chairman. Chairman Bilirakis, 
Congressman Brown and other distinguished members of the 
subcommittee, I want to thank you for inviting us to come today 
to talk about this critically important issue of prescription 
drug coverage for Medicare beneficiaries.
    Currently about one-third of Medicare beneficiaries have no 
drug coverage whatsoever. They must pay for essential medicines 
out of their own pockets. They are forced to pay full retail 
prices because they do not get the deep discounts that are 
afforded to insurers and other large purchasers. The situation 
is worse in rural areas where nearly half of all Medicare 
beneficiaries have no access to drug coverage. The lack of 
prescription drug coverage is not just a problem for the poor. 
More than half of beneficiaries without any drug coverage today 
have incomes above 150 percent of the poverty level, the 
Federal poverty level. That is about $12,000 for an individual 
or $17,000 in income for an elderly couple.
    For those who do have drug coverage, it is becoming 
increasingly expensive and inadequate. Beneficiaries, as we 
have heard this morning, are paying higher co-payments, higher 
deductibles and premiums. And for some, coverage is 
disappearing altogether as former employers drop coverage for 
retirees and as Medigap, the private supplemental insurance 
market for beneficiaries, becomes increasingly more expensive 
and in many cases simply not available to individual 
beneficiaries who have preexisting health conditions. Yet while 
coverage is declining, the need is growing. The majority of 
Medicare beneficiaries use prescription drugs every year and 
the majority of them use as much as $500 per person or more 
each year. Thirty-eight percent consume more than $1,000 in 
drug expenses on an annual basis. Each year 87 percent of the 
39 million Medicare beneficiaries, or about 31 million 
beneficiaries, fill at least one prescription.
    I don't think anyone here disagrees that pharmaceuticals 
are essential to modern medicine today and just as essential as 
hospital and physician services were when Medicare was enacted 
in 1965. Modernizing Medicare by adding an adequate and 
dependable prescription drug benefit is not an option. It is an 
obligation. The private sector includes outpatient drug 
coverage as a standard benefit in almost every employer-based 
health insurance policy and many individual policies. This is 
also true of all plans in the Federal Employees Health Benefit 
Program. No one would design Medicare today without including 
coverage for prescription drugs.
    The President's comprehensive Medicare reform plan provides 
all beneficiaries with access to a voluntary and affordable 
outpatient drug benefit. The President's proposal is built upon 
current practices in the private sector and the benefit design 
and the way it is administered mirrors the way in which most 
Americans are covered for prescription drugs. It is kept 
affordable through private sector competition and expressly, 
and I emphasize this, it expressly includes no price control 
authority.
    The drug benefit under the President's plan is also 
completely voluntary. Individuals can keep other prescription 
drug coverage that they have if they prefer to. It includes 
incentives, important incentives, to provide such coverage 
through employment by employers to their retirees by providing 
an $11 billion subsidy to ensure that employer plans continue 
to offer drug coverage to their retirees. And importantly under 
the President's proposal, the drug benefit is available to all 
beneficiaries regardless of their income.
    The hallmark of the Medicare program for the last 35 years 
has been since its inception its broad social insurance role. 
Every one regardless of income is entitled to the same basic 
package of benefits. This has been, I believe, a very 
significant factor in the outstanding and overwhelming support 
for the Medicare program from the American public and it should 
be preserved.
    All workers pay taxes to support the Medicare program and 
therefore all beneficiaries should have access to any new drug 
benefit. A universal benefit also helps to ensure a 
representative risk pool and lessens the potential for adverse 
selection. For those who choose a benefit under the President's 
plan, the Medicare program will pay half of the premium and 50 
percent of the cost of prescription drugs up to a $5,000 a year 
limit when the benefit is fully phased in and it will include 
coverage for all therapeutic classes of pharmaceuticals. We 
expect that most beneficiaries will choose this new drug option 
because of its attractiveness, its affordability, and its 
dependability.
    Because seniors and people with disabilities rely so 
importantly on prescription drugs, we believe that about 31 
million, as I said a moment ago, 31 million Medicare 
beneficiaries will actually receive a benefit in the year 
because they will have at least one prescription drug that 
needs to be filled.
    Chairman Bilirakis, I know you have been and are deeply 
interested in ensuring beneficiaries, particularly those with 
low incomes and high drug costs, have access to adequate drug 
coverage. So are we. But access to affordable and meaningful 
prescription drug coverage is a growing problem for Medicare 
beneficiaries at all income levels. Prescription drugs are a 
fundamental component of modern medical treatment and all 
beneficiaries need coverage for this essential benefit. We have 
an obligation to ensure that comprehensive drug coverage is 
among Medicare's core benefits. We have an obligation to ensure 
that this coverage is available to all of them. And we have 
both an opportunity and the responsibility to make this 
essential change now as part of a comprehensive and fiscally 
responsible Medicare reform package as the President has 
proposed.
    Mr. Chairman, I look forward to working with you and other 
members of this subcommittee toward that end, and I thank you 
again for holding this hearing and am happy to respond to your 
questions and those of other members of the subcommittee.
    [The prepared statement of Michael Hash follows:]
 Prepared Statement of Michael Hash, Deputy Administrator, Health Care 
                        Financing Administration
    Chairman Bilirakis, Congressman Brown, distinguished Subcommittee 
members, thank you for inviting us to discuss prescription drug 
coverage for Medicare beneficiaries. In his comprehensive Medicare 
reform plan, the President has recognized the overwhelming need to 
ensure that all beneficiaries have access to a voluntary, affordable, 
and accessible prescription drug benefit. I believe all experts, and 
the public, agree that pharmaceuticals are as essential to modern 
medicine today as hospital care was when Medicare was created. 
Modernizing Medicare by adding a meaningful drug benefit is not an 
option--it is an obligation.
    Currently, about one third of beneficiaries have no drug coverage. 
They not only must pay for essential medicines out of their own 
pockets, but they also are forced to pay full retail prices because 
they do not get deep discounts offered to insurers and other large 
purchasers. Far too many must choose between buying groceries or 
filling prescriptions. But the lack of prescription drug coverage is 
not just a problem for the poor. More than half of beneficiaries 
without drug coverage have incomes above 150 percent of the federal 
poverty level (above $17,000 for an elderly couple).
    For those who do have drug coverage, it is growing increasingly 
expensive and inadequate, and eroding with higher copayments, 
deductibles and premiums, or disappearing completely as former 
employers drop coverage for retirees and Medigap coverage becomes 
scarce.
    The President's comprehensive Medicare reform plan provides all 
beneficiaries with access to a voluntary and affordable, meaningful 
outpatient prescription drug benefit. The President's proposal is built 
upon current practices in the private sector.
    It is kept affordable through private sector competition and 
expressly does not include government price controls. Making it an 
optional Medicare benefit for all beneficiaries helps ensure an 
insurance product with a healthier risk pool and less adverse 
selection, which also is essential for maintaining affordability.
    The drug benefit under the President's plan also is completely 
voluntary, so individuals can keep other prescription drug coverage if 
they prefer. And it includes incentives for employers to continue 
providing such coverage to their retirees.
Importance of Prescription Drugs
    Prescription drugs can prevent, treat, and cure more diseases than 
ever before, both prolonging and improving the quality of life. They 
can minimize hospital and nursing home stays. And in some cases they 
can help decrease the total cost of care.
    The private sector, recognizing that prescription drugs are 
essential to modern medicine, now includes outpatient drug coverage as 
a standard benefit in almost all coverage policies. This is also true 
of all plans in the Federal Employees Health Benefits Program. No one 
would design Medicare today without including coverage for prescription 
drugs.
    Prescription drugs are particularly important for seniors and 
disabled Americans, who often take several drugs to treat multiple 
conditions. All across the country there are Medicare beneficiaries 
suffering physical and financial harm because of the lack of coverage.
    For example, there is the case of a 70-year-old Durham, North 
Carolina widow with emphysema, high blood pressure, and arthritis whose 
monthly bills for Prilosec, Norvase, two inhalers, and nitroglycerin 
patches forced her daughter to take out a second mortgage on her home.
    There is the case of an 80-year-old Sauk Rapids, Minnesota breast 
cancer survivor who pays $384 every three months for a Medigap policy 
that does not cover the $89 she must spend each month for tamoxifen, 
$139 for Prilosec to control acid reflux, $43 for eye drops to treat 
glaucoma, and $20 for drugs to control high blood pressure.
    And there is the case of a New York City man who stopped taking the 
Lisinopril that controlled his hypertension because he could not afford 
its $30 monthly cost, and then suffered a stroke that left him without 
speech or the use of his right arm, and left Medicare with a $10,000 
hospital bill.
Current Coverage
    Data on prescription drug coverage and spending are gathered each 
year in the Medicare Current Beneficiary Survey. These data from 1995, 
analyzed for the Department of Health and Human Services by the 
Actuarial Research Corporation and projected forward to 2000, show 
several disturbing trends in Medicare beneficiary drug coverage.
    The majority of Medicare beneficiaries (56 percent) use 
prescription drugs costing $500 or more each year, with 38 percent 
requiring drugs costing $1000 or more. Each year 87 percent of Medicare 
beneficiaries need to fill at least one prescription.
    One in three Medicare beneficiaries (34 percent) overall has no 
prescription drug coverage. About half of these beneficiaries have 
incomes above 150 percent of poverty, showing that this is not just a 
low-income problem. These beneficiaries are forced to pay excessively 
high costs because they do not get the deep discounts offered only to 
insurers and other large purchasers.
    The situation is worse in rural areas, where nearly half of all 
Medicare beneficiaries have no drug coverage. They have less access to 
employer-based retiree health insurance because of the job structure in 
rural areas. And three-quarters of rural beneficiaries do not have 
access to Medicare+Choice plans and the drug coverage they provide.
    Only one in four Medicare beneficiaries (24 percent) has private 
sector coverage provided by former employers to retirees. This 
coverage, however, is eroding. The number of firms offering retiree 
health coverage dropped by 25 percent from 1994 to 1998, from 40 
percent in 1994 to 30 percent in 1998, according to the employee 
benefits research firm Foster-Higgins. The true impact of this trend 
has not yet been felt; as current workers retire, the population of 
Medicare beneficiaries with retiree coverage will drop even more.
    About one in six Medicare beneficiaries (17 percent) has drug 
coverage from a Medicare+Choice plan, (mostly HMOs). However, nearly 
one third of beneficiaries live in areas where there are no 
Medicare+Choice offerings. And where plans do exist, they are raising 
premiums and copayments, and lowering caps on coverage. In 2000, nearly 
one third of plans will cap coverage at $500, even though the majority 
of Medicare beneficiaries use prescription drugs costing $500 or more 
each year.
    About one in eight Medicare beneficiaries (12 percent) has drug 
coverage through Medicaid. However, eligibility for Medicaid is 
restricted to the poor, and the majority of beneficiaries eligible for 
such coverage--60 percent--are not enrolled in the program. This 
persists despite increasing outreach efforts to enroll those who are 
eligible, and may be due to the stigma associated with a program 
historically linked to welfare.
    Less than one in ten Medicare beneficiaries (8 percent) has drug 
coverage from a supplemental Medigap plan. Costs for these policies are 
rising rapidly, by 35 percent between 1994 and 1998, according to 
Consumer Reports, in part because of sicker risk pools. The General 
Accounting Office (GAO) found that almost half of all Medigap insurers 
implemented substantial increases in 1996 and 1997, with AARP--one of 
the largest Medigap providers--increasing rates by 8.5 percent in 1997, 
10.9 percent in 1998, and 9.4 percent in 1999.
    The GAO also found that Medigap premiums vary widely, both within 
and across States. For example, premiums charged to a 65-year-old 
beneficiary for the standardized ``I'' Medigap plan range from $991 to 
$5,943 around the country. And the average premium for the standardized 
``H'' Medigap plan ranges from $1,174 in Virginia to $2,577 in Georgia. 
Furthermore, premiums for Medigap coverage can increase with age in 
most States. In some parts of the country, beneficiaries over age 75 
are paying more than $100 per month for drug coverage, over and above 
the portion of the premiums they are paying for other Medigap benefits.
President's Plan
    A voluntary affordable drug benefit available to all beneficiaries 
is a key feature of the President's comprehensive Medicare reform plan. 
The President's plan also extends the life of the Medicare Trust Fund 
by dedicating part of the on-budget surplus to the program, improves 
preventive benefits, increases competition and use of private sector 
purchasing tools, helps the growing number of uninsured near retirement 
age buy into Medicare, and strengthens program management and 
accountability through increased flexibility and a private advisory 
committee.
    Under the President's proposal, the drug benefit is available to 
all beneficiaries, regardless of their incomes. The hallmark of the 
Medicare program since its inception has been its social insurance 
role--everyone, regardless of income, is entitled to the same basic 
package of benefits. This is a significant factor in the unwavering 
support for the program from the American public and should be 
preserved. All workers pay taxes to support the Medicare program and 
therefore all beneficiaries should have access to a new drug benefit. A 
universal benefit also helps ensure an insurance product with an 
adequate risk pool and less adverse selection.
    The benefit also is completely voluntary. If beneficiaries have 
what they think is better coverage, they can keep it. And the 
President's plan includes a subsidy for employers offering retiree 
coverage that is at least as good as the Medicare benefit to encourage 
them to offer and maintain that coverage. This will help to minimize 
disruptions in parts of the market that are working effectively, and it 
is a good deal for employers, beneficiaries, and the Medicare program.
    Still, we expect that most beneficiaries will choose this new drug 
option because of its attractiveness, affordability, and stability. 
Because Medicare beneficiaries rely so heavily on drugs, we project 
that about 31 million beneficiaries will benefit from this coverage 
each year.
    For beneficiaries who choose to participate, Medicare will pay half 
of the monthly premium, which is estimated to be $24 in 2002 and $44 in 
2008. Medicare also will pay half the cost of each prescription they 
fill, with no deductible. The benefit will cover up to $2,000 of 
prescription drugs when coverage begins in 2002, and increase to $5,000 
by 2008, with a 50 percent beneficiary coinsurance. After that, the 
dollar amount of the benefit cap will increase each year by the 
increase in the Consumer Price Index.
    The prescription drug benefit for beneficiaries in the traditional 
Medicare program will be administered by benefit managers, such as 
pharmacy benefit manager firms and other eligible companies.
    These entities will bid competitively for regional contracts to 
provide the service, and we will review those contracts to ensure that 
there is healthy competition. The drug benefit managers--not the 
government--will negotiate discounted rates with drug manufacturers, as 
they do now in the private sector. There will be no Medicare fee 
schedule or price controls.
    And, importantly, the small percentage of beneficiaries whose 
prescription needs exceed the benefit cap will continue to receive the 
discounted rates negotiated by their drug benefit manager even after 
they surpass the cap.
    The drug benefit managers will have to meet access and quality 
standards, such as implementing aggressive drug utilization review 
programs, as well as conducting beneficiary education. And their 
contracts with the government will include incentives to keep costs and 
utilization low.
    In general, all therapeutic classes of drugs will be covered. Each 
drug benefit manager will be allowed to establish a formulary, or list 
of covered drugs. They will have to cover off-formulary drugs when a 
physician has reason to request the dispensing of a specific drug that 
is not on the formulary. Coverage for the handful of drugs that are now 
covered by Medicare will continue under current rules and will not be 
included as part of the new drug benefit package.
    Beneficiaries enrolled in Medicare+Choice plans will receive this 
optional coverage through those plans, and the plans will use their 
existing management to negotiate prices and formularies. In addition to 
offering the new Medicare drug benefit, Medicare+Choice plans will be 
allowed to offer additional supplemental drug coverage not subsidized 
by Medicare, as well.
    It is important to stress that Medicare+Choice plans will be 
explicitly paid for providing a drug benefit under the President's 
plan, so they would no longer have to depend on what the rate is in a 
given area to determine whether they can offer to do so. We will no 
longer see the extreme regional variation in whether Medicare+Choice 
plans provide drug coverage. Today, only 23 percent of rural 
beneficiaries with access to Medicare+Choice have access to 
prescription drugs, compared to 86 percent of urban beneficiaries. 
Under the President's plan, both rural and urban beneficiaries will 
have drug coverage available from all Medicare+Choice plans in their 
area. And beneficiaries will not lose their drug coverage if a plan 
withdraws from their area or if they choose to leave a private managed 
care plan.
    Financing will be handled through a combination of beneficiary 
premiums and general revenue dollars. Premiums will be collected the 
same way Medicare Part B premiums are collected, as a deduction from 
Social Security checks for most beneficiaries who choose to 
participate.
    Beneficiaries can sign up for this benefit in the first year the 
benefit is offered, the first year in which a beneficiary is eligible 
for Medicare, the first year after retirement if a beneficiary had 
continued working and kept employer-sponsored coverage after becoming a 
Medicare beneficiary, in the first year after an employer-sponsored 
plan drops drug coverage for all retirees, and certain other specific 
circumstances that would not create potential for adverse selection.
    For poor beneficiaries, State Medicaid programs will pay premiums 
and cost sharing as they do for other Medicare benefits. Beneficiaries 
with incomes between 100 and 135 percent of poverty would receive full 
assistance for their drug premiums and cost sharing. Beneficiaries with 
incomes between 135 and 150 percent of poverty would pay a partial, 
sliding-scale premium based on their income. The Medicaid costs for 
both of these groups would be matched by the Federal government at 100 
percent.
    The drug benefit's cost to Medicare is paid for primarily through 
program savings resulting from increased competition and efficiency, 
and other provisions in the President's plan. Additional funding comes 
from a small portion of the budget surplus devoted to Medicare by the 
President.
Conclusion
    Chairman Bilirakis, I know you are particularly interested in 
ensuring that beneficiaries with low incomes and high drug costs have 
drug coverage. So are we. But access to affordable and meaningful 
prescription drug coverage is a growing problem for Medicare 
beneficiaries across the income spectrum. Prescription drugs are a 
fundamental component of modern medical treatment, and all 
beneficiaries need coverage for this essential benefit.
    Medicare's overwhelming success and popularity are premised on the 
fact that all Americans pay in their fair share and that all Americans 
have equal access to all the program's benefits. Given the essential 
nature of prescription drugs in modern medicine, we have an obligation 
to ensure that comprehensive drug coverage is among the program's 
benefits. We have an obligation to ensure that this coverage is 
available to all beneficiaries. And we have both the opportunity and 
the responsibility to make this essential change as part of a 
comprehensive and fiscally responsible Medicare reform package, as has 
been proposed by the President.
    I look forward to working with you on this. I thank you for holding 
this hearing, and I am happy to answer your questions.

    Mr. Bilirakis. Thank you very much, Mr. Hash. Ms. Dummit, 
please proceed.

                  STATEMENT OF LAURA A. DUMMIT

    Ms. Dummit. Mr. Chairman and members of the subcommittee, I 
am pleased to be here today as you consider the prescription 
drug coverage options available to Medicare beneficiaries. In 
the ongoing discussions by this subcommittee and others on 
Medicare reform and modernization, one of the most significant 
issues to emerge has been outpatient prescription drug coverage 
for Medicare beneficiaries. Outpatient drug expenditures have 
been outpacing other components of health care spending in 
recent years due to a variety of factors. These include the 
introduction of new drug therapies and improved drugs, more 
individuals with third-party drug coverage, and aggressive 
marketing of drugs directly to consumers.
    A much higher incidence of chronic conditions and the role 
drugs play in managing conditions among the elderly means they 
are particularly affected by these rising costs. Almost one-
third of Medicare beneficiaries do not have outpatient drug 
coverage and face the cost of drugs on their own. Evidence 
indicates that the lack of coverage may raise access barriers. 
Beneficiaries with no drug coverage who report their health 
status as poor have drug costs about 35 percent below the 
average costs of insured beneficiaries in poor health. Medicare 
beneficiaries lack coverage either because they are not 
eligible for employer sponsored benefits or Medicaid, they 
cannot or do not choose to enroll in a Medicare+Choice plan or 
cannot afford or do not purchase a Medigap policy with this 
protection.
    In 1996 employer sponsored insurance and Medicare+Choice 
plans provided drug protection to almost 40 percent of 
beneficiaries and the contribution of Medicare+Choice plans has 
gone up since then. The trend of rising drug coverage through 
these sources, however, may not continue. Employer efforts to 
scale back their retiree health benefits and Medicare+Choice 
plan withdrawals may result in more beneficiaries without this 
valuable benefit.
    Medigap policies are available to all beneficiaries in most 
areas during an open enrollment period. The largest barrier to 
obtaining drug coverage through this option, however, is 
probably the cost of these policies. Premiums for the three 
plan types with drug coverage average between $1600 and $2300 a 
year. Medicaid and state pharmacy assistance programs are 
available to help beneficiaries with lower incomes. The state 
assistance programs, however, are only available in 14 states 
with enrollment concentrated in only three.
    Even for beneficiaries with a prescription drug benefit, 
however, the coverage may be limited and there are indications 
that benefits may become less generous. Preliminary evidence 
shows that for next year many Medicare+Choice plans are raising 
cost sharing, imposing premiums or tightening their 
formularies. Employee sponsored health plans are doing the 
same. As pharmaceutical spending continues to outstrip other 
health spending, payers will continue to try to control the 
price they pay for each product, to contain utilization or to 
shift some of the cost to beneficiaries. This changing picture 
of who has coverage and the breadth of that coverage is 
critical to the Medicare debate. Assessments of a possible 
Medicare drug benefit will include many factors, especially who 
the benefit would cover and how it would be financed. The 
Congress will also likely examine a number of approaches to 
control the costs of prescription drug coverage. I would like 
to briefly discuss two that may be considered.
    One approach would be to model a Medicare drug benefit 
after the Medicaid rebate program. Drug manufacturers would be 
required to give rebates for outpatient drugs based on the 
lowest or best prices they charge other purchasers. Such an 
approach could substantially affect the pharmaceutical market. 
Given the large share of drug utilization accounted for by 
Medicare beneficiaries, a rebate could be substantial but it 
may cause manufacturers' prices to go up. Also, such an 
approach does not exert any control over utilization, which 
unchecked can contribute significantly to spending. Another 
approach would be to adopt formularies and cost sharing like 
other payers to control and channel drug utilization. These 
mechanisms also allow payers to concentrate purchases on 
selected drugs and thereby obtain significant discounts from 
manufacturers. Such techniques might help Medicare control its 
costs but they would also raise many concerns. The financial 
implications to drug manufacturers could be large.
    Other plans or insurers make formulary and cost sharing 
decisions privately but for Medicare they would have to be 
public decisions based on sufficient, valid, and defensible 
information. Delegating benefit administration to a pharmacy 
benefit manager may also prove difficult and raises issues 
about informing beneficiaries and risk adjusting payments for 
differences in enrollee health status.
    In conclusion, the challenge in addressing outpatient 
prescription drug coverage for Medicare beneficiaries will be 
in seeking a balance between its cost to the program and its 
value to many Medicare beneficiaries.
    Mr. Chairman, I would be glad to answer any questions you 
or other members of the subcommittee have.
    [The prepared statement of Laura A. Dummit follows:]
  Prepared Statement of Laura A. Dummitt, Associate Director, Health 
   Financing and Public Health Issues, Health, Education, and Human 
                         Services Division, GAO
    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today as you discuss Medicare beneficiaries' access to 
prescription drug coverage. Over the past several months, the Congress 
has focused its attention on Medicare reform issues to determine the 
nature and extent of changes needed to modernize the program and 
control its effect on the federal budget. This discussion comes at an 
important juncture in the program's history. The Congress passed 
landmark legislation in the Balanced Budget Act of 1997 (BBA) that has 
improved the financial underpinnings of the program, yet more work 
remains to ensure Medicare's continued financial viability. Budget 
projections show health care consuming ever larger shares of the 
federal dollar, threatening to crowd out funding for other valued 
government programs and activities. At the same time, many believe that 
Medicare's benefit structure should be updated to include a 
prescription drug benefit.
    Broadening Medicare's coverage to include prescription drugs could 
ease the significant financial burden some Medicare beneficiaries face 
because of outpatient drug costs. However, a recent study suggests that 
such an expansion could add between 7.2 and 10 percent annually to 
Medicare's costs.1 At the same time, Medicare's rolls are 
growing and are projected to increase rapidly with the aging of the 
baby boom generation. Major technological advances in medicine and 
biotechnology may continue to boost the importance of prescription 
drugs. The policy dilemma before you today is that, on the one hand, 
Medicare's lack of a prescription drug benefit may impede access to 
certain treatment advances for beneficiaries who have no access to 
other coverage. On the other hand, the cost implications of including a 
prescription drug benefit will be substantial. Additional costs could 
further erode the projected financial condition of the Medicare 
program, which, according to its trustees, is already unsustainable in 
its present form.
---------------------------------------------------------------------------
    \1\ Gluck M.E., ``National Academy of Social Insurance Medicare 
Brief: A Medicare Prescription Drug Benefit,'' (April 1999); p. 8. 
http//www.nasi.org/Medicare.medbr1.htm (4/22/99).
---------------------------------------------------------------------------
    My remarks today will focus on how growth in prescription drug 
spending for both the general population and Medicare beneficiaries has 
made coverage such an important policy issue. I will also address the 
sources and extent of Medicare beneficiary drug coverage. I will 
conclude with a discussion of benefit design and implementation issues 
to be considered in deliberations about adding a new prescription drug 
benefit. My comments are based on analyses of recent data and our body 
of completed work on prescription drugs.
    In summary, proposals to add prescription drug coverage to 
Medicare's benefits come during a period of rapid growth in national 
spending for pharmaceuticals and transformations in the prescription 
drug market. Coverage of drugs by health plans and insurers, advances 
in drug treatments, and aggressive marketing have spurred the growth in 
the use of pharmaceuticals. Insurers have attempted to manage the cost 
of the benefit through the use of formularies, pharmacy benefit 
managers, and generic substitutions--cost control approaches that have 
dramatically changed the nature of the market in which prescription 
drugs are purchased.
    What remains unchanged since the inception of the Medicare program, 
however, is the absence of coverage for outpatient prescription drugs 
by traditional Medicare. High drug use among Medicare's beneficiaries 
translates into a potentially daunting financial burden, particularly 
for the third who have no drug coverage. For those who obtain coverage 
through employer-sponsored plans, Medicare+Choice plans, Medigap 
policies, or Medicaid programs, the rise in spending can have an impact 
as well. As these payers attempt to control their outlays, coverage may 
be scaled back, priced out of the reach of the average beneficiary, or 
dropped altogether. Shifts in the availability of coverage, its costs, 
and its adequacy are likely to continue.
    The implications of adding prescription drug coverage to Medicare's 
benefit package depend on details such as its scope and financing. Its 
design and implementation will also shape the effect of this benefit on 
beneficiaries, Medicare spending, and the pharmaceutical market. Recent 
experience provides at least two approaches for implementing a drug 
benefit. One would involve the Medicare program obtaining price 
discounts from manufacturers. Such an arrangement could be modeled 
after Medicaid's drug rebate program. While the discounts in aggregate 
would likely be substantial, this approach lacks the flexibility to 
achieve the greatest control over spending. It could not effectively 
influence or steer utilization because it does not include incentives 
that would encourage beneficiaries to make cost-conscious decisions. 
The second approach would draw from private sector experience in 
negotiating price discounts from manufacturers in exchange for shifting 
market share. Some plans and insurers employ pharmacy benefit managers 
(PBM) to manage their drug benefits, including claims processing, 
negotiating with manufacturers, establishing lists of drug products 
that are preferred because of price or efficacy, and developing 
beneficiary incentive approaches to control spending and use. Applying 
these techniques to the entire Medicare program, however, would be 
difficult because of its size, the need for transparency in its 
actions, and the imperative for equity for its beneficiaries.
rising drug spending elevates the importance of coverage and efforts to 
                          control expenditures
    Extensive research and development over the past 10 years have led 
to new prescription drug therapies and improvements over existing 
therapies that, in some instances, have replaced other health care 
interventions. As a result, the importance of prescription drugs as 
part of health care has grown, as has drug spending as a component of 
health care costs. To protect against these costs, Medicare 
beneficiaries can choose to enroll in a Medicare+Choice plan with drug 
coverage if one is available in their area or purchase a Medigap 
policy. 2 Many beneficiaries have employer-sponsored health 
coverage as retirees. Others may receive coverage if they are eligible 
for Medicaid or other public programs. The availability and breadth of 
such coverage are changing as the costs of expanded prescription drug 
use drives payers to adopt new approaches to control these expenditures 
or cut back on coverage. These approaches, in turn, are reshaping the 
drug market.
---------------------------------------------------------------------------
    \2\ As an alternative to traditional Medicare fee-for-service, 
beneficiaries in Medicare+Choice plans (formerly Medicare risk health 
maintenance organizations) obtain all their services through a managed 
care organization and Medicare makes a monthly capitation payment to 
the plan on their behalf.
---------------------------------------------------------------------------
Rise in Prescription Drug Spending
    Over the past 5 years, prescription drug expenditures have grown 
substantially, both in total and as a share of all health expenditures. 
Prescription drug spending grew an average of 11.1 percent per year 
from 1992 to 1997, compared with a 5.5 percent average annual growth 
rate for health expenditures overall. (See table 1.) As a result, 
prescription drugs account for a larger share of total health care 
spending--rising from 5.6 percent to 7.2 percent.

                          Table 1: National Expenditures on Prescription Drugs, 1992-97
----------------------------------------------------------------------------------------------------------------
                                                                                 Annual growth    Annual growth
                                                                 Prescription   in prescription   in all health
                             Year                                    drug             drug             care
                                                                 expenditures     expenditures     expenditures
                                                                (in millions)      (percent)        (percent)
----------------------------------------------------------------------------------------------------------------
1997.........................................................         $78,888             14.1              4.8
1996.........................................................         $69,111             13.2              4.9
1995.........................................................         $61,060             10.6              4.9
1994.........................................................         $55,189              9.0              5.5
1993.........................................................         $50,632              8.7              7.4
1992.........................................................         $46,598             10.6              9.1
Average annual growth between 1992 and 1997..................  ...............            11.1              5.5
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration (HCFA), Office of the Actuary.

    Total drug expenditures have been driven up by both higher 
utilization of drugs and the substitution of higher-priced new drugs 
for lower-priced existing drugs. Several factors have contributed to 
rising expenditures: more third-party payment for drugs, the 
introduction of new drug therapies, and more aggressive marketing by 
manufacturers through direct-to-consumer advertising.
    Private insurance coverage for prescription drugs is likely to have 
contributed to the rise in spending because insured consumers are 
shielded from the direct costs of prescription drugs. In the decade 
between 1987 and 1997, the share of prescription drug expenditures paid 
by private health insurers rose from almost a third to more than half. 
(See fig. 1.) The development of new, more expensive drug therapies--
including new drugs that replace old drugs and new drugs that treat 
disease more effectively--also contributed to the drug spending growth 
by driving up the volume of drugs used as well as the average price for 
drugs used. The average number of new drugs entering the market each 
year rose from 24 at the beginning of the 1990s to 33 now. Similarly, 
biotechnology advances and a growing knowledge of the human immune 
system are significantly shaping the discovery, design, and production 
of drugs. Advertising pitched to consumers has also likely upped their 
use of prescription drugs. A recent study found that the ten drugs most 
heavily advertised directly to consumers in 1998 accounted for about 22 
percent of the total increase in drug spending between 1993 and 
1998.3 Between March 1998 and March 1999, industry spending 
on advertising grew 16 percent to $1.5 billion.
---------------------------------------------------------------------------
    \3\ Barents Group LLC for the National Institute for Health Care 
Management Research and Educational Foundation,--Factors Affecting the 
Growth of Prescription Drug Expenditures,'' (July 9, 1999); p. iii.
---------------------------------------------------------------------------
Figure 1: Comparison of National Outpatient Drug Expenditures, 1987 and 
                                  1997
[GRAPHIC] [TIFF OMITTED] T9994.001

[GRAPHIC] [TIFF OMITTED] T9994.002

    Note: Out-of-pocket expenditures include direct spending by 
consumers for prescription drugs, such as coinsurance, deductibles, and 
any amounts not covered by insurance. Out-of-pocket premiums paid by 
individuals are not counted here.
    Source: HCFA, Office of the Actuary.
Current Medicare Beneficiary Drug Coverage
    Prescription drugs are an important component of medical care for 
the elderly because of the prevalence of chronic and other health 
conditions associated with aging. In 1995, Medicare beneficiaries had 
on average more than 18 prescriptions filled.4 This varies 
substantially across beneficiaries, however, reflecting the range of 
their needs and also financial considerations such as third-party 
prescription drug coverage. In 1995, total average annual drug costs 
were $600 for elderly persons 5, compared with a little more 
than $140 for non-elderly persons.6 For some, prescription 
drug spending was considerably higher--6 percent of Medicare 
beneficiaries spent $2,000 or more.7 A recent report had 
projected that by 1999 an estimated 20 percent of Medicare 
beneficiaries would have total drug costs of $1,500 or more--a 
substantial sum for persons lacking some form of insurance to subsidize 
their purchases or for those facing coverage limits. 8
---------------------------------------------------------------------------
    \4\ Davis M. and others, ``Prescription Drug Coverage, Utilization, 
And Spending Among Medicare Beneficiaries,'' Health Affairs, Vol. 18, 
No. 1 (January/February 1999); p. 237.
    \5\ Davis M., p. 239.
    \6\ Agency for Health Care Policy and Research Center for Cost and 
Financing Studies, National Medical Expenditure Survey data, ``Trends 
in Personal Health Care Expenditures, Health Insurance, and Payment 
Sources, Community-Based Population, 1987-1995,'' (March 1997); p. 10. 
http://www.meps.ahcpr.gov/nmes/papers/trends/intnet4d.pdf (6/10/99).
    \7\ Poisal J.A. and others, ``Prescription Drug Coverage and 
Spending for Medicare Beneficiaries,'' Health Care Financing Review, 
Vol. 20, No. 3 (Spring 1999); p. 20.
    \8\ Gluck M.E., p. 2.
---------------------------------------------------------------------------
    In 1996, almost a third of Medicare beneficiaries lacked drug 
coverage altogether. (See fig. 2.) The remaining two-thirds had at 
least some drug coverage through other sources--most commonly employer-
sponsored health plans. The proportion of beneficiaries who had drug 
coverage rose between 1995 and 1996, owing to increases in those with 
Medicare health maintenance organization (HMO), individually purchased 
supplemental, and employer-sponsored coverage. However, recent evidence 
indicates that this trend of expanding drug coverage is unlikely to 
continue.
  Figure 2: Sources of Drug Coverage for Medicare Beneficiaries, 1996
[GRAPHIC] [TIFF OMITTED] T9994.003

    Note: ``All Other'' includes non-risk HMOs, state-based plans, the 
Department of Defense, and the Department of Veteran's Affairs.
    Source: HCFA, based on the 1996 Medicare Current Beneficiary Survey

    Although employer-sponsored health plans provide drug coverage to 
the broadest segment of the Medicare population, there are signs that 
this could be eroding. Fewer employers are offering health benefits to 
retirees eligible for Medicare and those that continue are asking 
retirees to pay a larger share of costs. The proportion of employers 
offering health coverage to retirees eligible for Medicare declined 
from 40 percent in 1993 to 30 percent in 1998. Of the employers 
offering health coverage in 1998, 72 percent included prescription drug 
coverage. However, 90 percent of employers with 10,000 or more 
employees offered prescription drug coverage to their retirees in 1998.
    In 1999, 13 percent of Medicare beneficiaries obtained prescription 
drug coverage through a Medicare+Choice plan, up from 8 percent in 
1996. Medicare+Choice plans have found drug coverage to be an 
attractive benefit that beneficiaries seek out when choosing to enroll 
in managed care organizations. However, owing to rising drug 
expenditures and their effect on plan costs, the drug benefits the 
plans offer are becoming less generous. According to a recent HCFA 
report, many plans will restructure drug benefits in 2000, increasing 
enrollees'' out-of-pocket costs and limiting their drug coverage.
    Beneficiaries may purchase Medigap policies that provide drug 
coverage, although this tends to be expensive, involves significant 
cost sharing, and includes annual limits. Standard Medigap drug 
policies include $250 deductibles, 50 percent coinsurance requirements, 
and $1,250 or $3,000 annual limits. In 1999, the annual premium for one 
type of Medigap policy with drug coverage ranged from approximately 
$1,000 to $6,000. Furthermore, premiums have been increasing in recent 
years.
    All beneficiaries who have full Medicaid benefits receive drug 
coverage that is subject to few limits and low cost-sharing 
requirements. For beneficiaries whose incomes are slightly higher than 
Medicaid standards, 14 states currently offer pharmacy assistance 
programs that provided drug coverage to approximately 750,000 
beneficiaries in 1997. The three largest state programs accounted for 
77 percent of all state pharmacy assistance program beneficiaries. 
9 Most pharmacy assistance programs, like Medicaid, have few 
coverage limitations.
---------------------------------------------------------------------------
    \9\ These programs are operated in New Jersey, New York, and 
Pennsylvania.
---------------------------------------------------------------------------
    The burden of prescription drug costs falls most heavily on the 
Medicare beneficiaries who lack drug coverage or those who have 
substantial health care needs.
Drug coverage is slightly less prevalent among beneficiaries with lower 
income. An analysis of 1995 data shows that drug coverage is slightly 
higher among those with poorer self-reported health status. At the same 
time, however, beneficiaries without drug coverage and in poor health 
had drug expenditures that were $400 lower than beneficiaries with drug 
coverage and in poor health. This might indicate access problems for 
this segment of the population.
    Even for beneficiaries who have drug coverage, the extent of 
protection it affords varies. The value of a beneficiary's drug benefit 
is affected by the benefit design, including cost-sharing requirements 
and benefit limitations. Evidence suggests that premiums are on the 
rise for employer-sponsored benefits, Medigap policies, and most 
recently, Medicare+Choice plans. Copayments, deductibles, and annual 
coverage limits can reduce the value of drug coverage to the 
beneficiary. Harder to measure is the effects on beneficiaries of drug 
benefit restrictions brought about through formularies designed to 
limit or influence the choice of drugs.
Cost Control Approaches are Reshaping the Pharmaceutical Market
    During this period of rising prescription drug expenditures, third 
party payers have pursued various approaches to control spending. These 
efforts have initiated a transformation of the pharmaceutical market. 
Whereas insured individuals formerly purchased drugs at retail 
pharmacies at retail prices and then sought reimbursement, now third-
party payers influence which drug is purchased, how much is paid for 
it, and where it is purchased.
    A common technique to manage pharmacy care and control costs is to 
use a formulary. A formulary is a list of prescription drugs, grouped 
by therapeutic class, that a health plan or insurer prefers and may 
encourage doctors to prescribe. Decisions about which drugs to include 
in a formulary are based on their medical value and their price. Both 
the inclusion of a drug in a formulary and its cost can affect how 
frequently it is prescribed and purchased and, therefore, can affect 
its market share.
    Formularies can be open, incentive-based, or closed. Open 
formularies are often referred to as ``voluntary'' because enrollees 
are not penalized if their physicians prescribe nonformulary drugs. 
Incentive-based formularies generally offer enrollees lower copayments 
for the preferred formulary or generic drugs. Incentive-based or 
managed formularies are becoming more popular because they combine 
flexibility and greater cost-control features than open formularies. A 
closed formulary limits insurance coverage to the formulary drugs and 
requires enrollees to pay the full cost of nonformulary drugs 
prescribed by their physicians.
    Another way in which the market has been transformed is the use of 
PBMs by health plans and insurers to administer and manage prescription 
drug benefits. PBMs offer a range of services, including prescription 
claims processing, mail-service pharmacy, formulary development and 
management, pharmacy network development, generic substitution 
incentives, and drug utilization review. PBMs also negotiate discounts 
and rebates on prescription drugs with manufacturers.
        issues to consider in benefit design and administration
    Policymakers considering proposals for including a prescription 
drug benefit in the Medicare program are facing myriad options. 
Assessing the merits of whether and how to implement a drug benefit 
will depend, in large measure, on whom the benefit covers and how it is 
financed. In any such assessment, five criteria should be considered. 
(1) Affordability: a benefit should be evaluated in terms of its effect 
on the sustainability of program expenditures for the long term. (2) 
Equity: a benefit should be fair across groups of beneficiaries and 
providers. (3) Adequacy: a benefit should foster cost-effective and 
clinically meaningful innovations, furthering Medicare's tradition of 
supporting technology development. (4) Feasibility: a benefit should 
incorporate such administrative essentials as implementation and 
monitoring techniques. (5) Acceptance: a benefit should account for the 
need to educate the beneficiary and provider communities about its 
costs and the realities of trade-offs required by significant policy 
changes.
    Although the Congress will likely examine a number of alternative 
benefit designs and administrative options, I would like to briefly 
discuss two approaches that may be considered. One would be similar to 
how drug benefits are provided in state Medicaid programs, which rely 
on federal authority to lower drug prices through rebates paid by drug 
manufacturers to control spending. The other would be modeled after 
approaches adopted by private sector health plans in which PBMs are 
used to administer various techniques to control pharmacy benefit 
costs. Each approach has some advantages and disadvantages.
    Medicaid Programs Rely on Discounts and Have Limited Utilization 
Controls As the largest government payer for prescription drugs, 
Medicaid drug expenditures ac-

count for about 13 percent of the domestic pharmaceutical market. 
Before the enactment of the Medicaid drug rebate program under the 
Omnibus Budget Reconciliation Act of 1990 (OBRA), state Medicaid 
programs paid close to retail prices for outpatient drugs. Other large 
purchasers, such as HMOs and hospitals, negotiated discounts with 
manufacturers and paid considerably less.
    The rebate program required drug manufacturers to give state 
Medicaid programs rebates for outpatient drugs. The rebates were based 
on the lowest or ``best'' prices they charged other purchasers. In 
return for the rebates, state Medicaid programs must reimburse for all 
drugs manufactured by pharmaceutical companies that entered into rebate 
agreements with HCFA.10
---------------------------------------------------------------------------
    \10\ OBRA 1990 allowed the states to exclude certain classes of 
drugs.
---------------------------------------------------------------------------
    After the rebate program's enactment, a number of market changes 
affected other purchasers of prescription drugs and the amount of the 
rebates that Medicaid programs received. For example, the prices many 
large private purchasers, such as HMOs, paid for outpatient drugs 
increased substantially. Moreover, the lowest prices in the market 
increased faster than the drugs'' average prices as drug manufacturers 
significantly reduced the price discounts they offered private 
purchasers. As a result, within 2 years the rebates paid to state 
Medicaid programs fell to the minimum percentage required by OBRA.
    Although the states have received billions of dollars in rebates 
from drug manufacturers since OBRA's enactment, state Medicaid 
directors have expressed concerns about the rebate program. The 
principal concern involves OBRA's requirement to provide access to all 
the drugs of manufacturers that offer rebates, which limits the 
utilization controls Medicaid programs can use at a time when 
prescription drug expenditures are rapidly increasing. Although the 
programs can require recipients to obtain prior authorization for 
particular drugs and can impose monthly limits on the number of covered 
prescriptions, they cannot take advantage of other techniques to steer 
recipients to less expensive drugs. The few cost-control strategies 
available to state Medicaid programs can add to the administrative 
burden on state Medicaid programs.
Other Payers Employ Various Techniques to Control Expenditures
    Other payers such as private and federal employer health plans and 
Medicare+Choice plans have taken a different approach to managing their 
prescription drug benefits. They typically use closed or incentive-
based formularies and copayments to control prescription drug use and 
obtain better prices by concentrating purchases on selected drugs. In 
many cases, these plans and insurers retain PBMs'' services to manage 
their pharmacy benefit and control spending.
    Beneficiary cost sharing has had a central role in attempting to 
influence drug utilization. Copayments are frequently structured to 
influence both the choice of drugs and purchasing arrangements. While 
formulary restrictions can channel purchases to preferred drugs, closed 
formularies, which provide reimbursement only for preferred drugs, have 
generated substantial dissatisfaction among consumers. As a result, 
many plans link their cost sharing requirements and formulary lists. 
The fastest growing trend today is to use a formulary in which all 
drugs are covered but beneficiary cost-sharing varies for different 
drugs--typically a smaller copayment for generic drugs, a larger one 
for preferred drugs, and an even larger one for all other drugs. 
Reducing copayments has also been used to encourage enrollees using 
maintenance drugs for chronic conditions to use particular suppliers, 
like a mail order pharmacy.
    Plans and insurers have turned to PBMs for assistance in 
establishing formularies, negotiating prices with manufacturers and 
pharmacies, processing beneficiaries'' claims, and reviewing drug 
utilization. Because PBMs manage drug benefits for multiple purchasers, 
they often may have more leverage than individual plans in negotiating 
prices as they combine the purchasing power of multiple purchasers.
    Traditional fee-for-service Medicare has generally established 
reimbursement rates for services like those provided by physicians and 
hospitals and then processed and paid claims with few utilization 
controls. Adopting some of the techniques used by private plans and 
insurers might have the potential for better control of costs. However, 
how to adapt those techniques to the characteristics and size of the 
Medicare program raises questions.
    Negotiated or competitively determined prices would be superior to 
administered prices only if Medicare could employ some of the 
utilization controls that come from having a formulary and differential 
beneficiary cost sharing. In this manner, Medicare would be able to 
negotiate significantly discounted prices by promising to deliver a 
larger market share for a manufacturer's product. Manufacturers would 
have no incentive to offer a deep discount if all drugs in a 
therapeutic class were covered on the same terms. Without a promised 
share of the Medicare market, these manufacturers might reap greater 
returns from higher prices and concentrating marketing efforts on 
physicians and consumers to influence prescribing patterns.
    Implementing a formulary and other utilization controls could prove 
difficult for Medicare. Developing a formulary involves determining 
which drugs are therapeutically equivalent so that several from each 
class can be included. Plans and PBMs currently make those 
determinations privately--something that would not be possible for 
Medicare, which must have transparent policies that are determined 
openly. Given the stakes involved in selecting drugs, one can imagine 
the intensive efforts to offer input to and scrutinize the selection 
process.
    Medicare may also find it impossible to delegate this task to a PBM 
or multiple PBMs. A single PBM contractor would likely be subject to 
the same level of scrutiny as the program. Such scrutiny could 
compromise the flexibility PBMs have used to generate savings. An 
alternative would be to grant flexibility to multiple PBMs that are 
responsible only for a share of the market. Contracting with multiple 
PBMs, though, raises other issues. If each PBM has exclusive 
responsibility for a geographic area, beneficiaries who need certain 
drugs could be advantaged or disadvantaged merely because of where they 
live. If multiple PBMs operated in each area, beneficiaries would 
choose one to administer their drug benefit. This raises questions of 
how to inform beneficiaries of the differences in each PBM's policies 
and whether and how to risk adjust payments to PBMs for differences in 
the health status of beneficiaries using them.
                        concluding observations
    As the Congress continues its deliberations on Medicare 
prescription drug coverage, it will need to consider the needs of 
beneficiaries and the fiscal health of the program. The lack of 
prescription drug coverage for some Medicare beneficiaries may cause 
hardship. Yet, ensuring the sustainability of the Medicare program is 
paramount. Balancing these competing concerns may require the best from 
government-run programs and private sector efforts to modernize 
Medicare for the future.
    Mr. Chairman, this concludes my prepared statement. I will be happy 
to answer any questions you or other Members of the Subcommittee may 
have.
                   gao contacts and acknowledgements
    For future contacts regarding this testimony, please call Laura A. 
Dummit at (202) 512-7119 or John Hansen at (202) 512-7105. Other 
individuals who made key contributions include Tricia Spellman, Kathryn 
Linehan, and Lara Carreon.

    Mr. Bilirakis. Thank you. Thank you very much, Ms. Dummit. 
CBO reports that competition causes manufacturers to offer 
discounts while price controls and mandatory rebates will 
actually halt drug discounting and can cause drug prices to 
increase for all purchasers. CBO refers to voluntary discounts 
as--I am quoting them now--an important mechanism for aiding 
pricing competition in the pharmaceutical market, end quotes. 
Comments?
    Mr. Hash. Mr. Chairman, that is, I think, precisely why the 
President's proposal is based upon a model that involves 
competition in providing the beneficiaries access to prices 
that reflect the benefits of large group purchasing through a 
pharmacy benefit manager. Our actuaries estimate that the 
impact on prices that would be paid under the President's 
proposal would be some 13 percent on average below current 
retail prices.
    Mr. Bilirakis. Ms. Dummit?
    Ms. Dummit. Work we have done in looking at the Medicaid 
rebate program showed that indeed in response to that program 
manufacturer prices did go up so that the rebate offered to 
Medicaid programs ended up being the minimum rebate allowed 
under the law. That, however, is a broad-based program, the 
kinds of discounts that smaller programs could achieve through 
voluntary discounts, we don't know to the extent which they 
could achieve those kinds of discounts.
    Mr. Bilirakis. So you don't necessarily disagree then with 
the CBO conclusion?
    Ms. Dummit. That is correct.
    Mr. Bilirakis. You don't agree either?
    Mr. Hash. I believe that competition through a managed 
benefit would in fact achieve economies in the prices that 
would be paid for prescription drugs.
    Mr. Bilirakis. Ms. Dummit, you touched on the state 
assistance programs. 14 states have those in place. But you 
indicated only three are really emphasizing it. What were your 
words in that regard?
    Ms. Dummit. The majority of the enrollees are concentrated 
in three state programs. I believe these programs are in 
Pennsylvania New Jersey, and New York.
    Mr. Bilirakis. Is that because those states are doing a 
better job in terms of getting programs to go into effect the 
way they intended?
    Ms. Dummit. I don't know the reason for the disparity.
    Mr. Bilirakis. Do you have an opinion? These are programs 
that are financed completely with state dollars. Do you have an 
opinion as to the effect enhanced Federal grants, the enhanced 
formulas, could have on these programs. I realize that you 
haven't been asked to study this and come back with an opinion. 
However, maybe you have formed one in your own mind. How 
enhanced Federal dollars may impact the existing 14 States 
programs and also how that could affect others coming aboard?
    Ms. Dummit. Certainly I wouldn't venture a guess to predict 
what Federal funding would do to the growth of those types of 
programs but I would note that since the programs are 
relatively small in 11 of those 14 states and not existent in 
others, that there would be a learning curve for other states 
to gear up to a larger program.
    Mr. Bilirakis. Mr. Hash, you of course are a proponent of 
the President's program. I would like to think, knowing you for 
many, many years even though it is your job, that you are open 
minded in terms of other ideas. Do you have any opinion 
regarding this assistance program concept?
    Mr. Hash. Mr. Chairman, we have been looking at the 
proposal that you have put forward and recognize that it is a 
good faith effort to address this problem. I guess our concern 
in short would be the lack of certainty and dependability about 
exactly what the benefit would be. For the existing 13 States, 
when you look across their programs, they vary quite 
considerably. Some have initial deductibles in their assistance 
programs up to approximately $640 per person per year. So I 
think the lack of specificity about what the benefit would be 
and in fact whether states would have any obligation to take up 
this program is another concern that we would have.
    Mr. Bilirakis. Of course they wouldn't have any obligation 
to take it up but in terms of the specificity of it all, we 
tried to cover that to some degree and obviously are open to 
other ideas.
    The Chair yields to Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. Mr. Hash, you are aware 
I am sure of the Flo advertisements sponsored by.
    The--its name is Citizens for a Better Medicare. These ads 
feature a senior citizen named Flo who expresses vehement 
opposition to the President's Medicare drug plan, declaring I 
don't want big government in my medicine cabinet. Flo goes on 
to cite several things wrong with the President's proposal. I 
would like to go through each of those claims and ask whether 
you think the President's plan does in fact do these things. It 
makes me wonder if Medicare 1965 would ever have become law if 
Flo had been around in those days.
    First, Flo states the President's proposal is not a 
comprehensive reform that improves Medicare for all seniors. Is 
that statement true?
    Mr. Hash. That is just not true, Mr. Brown. As I know you 
know, the President's proposal is a comprehensive plan, the 
prescription drug benefit being one part of it, but other key 
parts are modernizing the program, continuing to moderate the 
growth and expenditures and dedicating a significant portion of 
the surplus to extend the life of the trust fund from 2015 to 
2027.
    Mr. Brown. Flo then states that the President's drug plan 
displaces seniors' existing coverage with a large government 
run plan. Is that true?
    Mr. Hash. That is not true, Mr. Brown. The President's 
proposal explicitly recognizes the importance of employer based 
coverage by providing up to $11 billion in subsidy for those 
programs. Our actuaries and the CBO have both testified to the 
effect that roughly three-quarters of the employer-based 
coverage would remain in place and that would be what 
beneficiaries would elect in lieu of the Medicare program.
    Mr. Brown. Flo also claims in this very, very expensive ad 
that this group Citizens for a Better Medicare did the 
President's plan shows promising research with bureaucracy and 
price controls. Is that true?
    Mr. Hash. No, Mr. Brown, I do not believe it is true. I 
believe the people who designed the ads failed to read the 
President's plan because it is quite clear that the approach is 
the approach that is existing in the private sector for the 
most part and, that is, competitive contracts with pharmacy 
benefit managers utilizing the techniques that they have used 
successfully across the country and offering beneficiaries 
particular protection in the coordination and monitoring of 
their drug benefits.
    Mr. Brown. Finally, Flo claims that the President's drug 
plan would let government bureaucrats interfere with doctor-
patient relationships and decisions. Is that true?
    Mr. Hash. Absolutely not. This plan is clearly one in which 
while pharmacy benefit managers would be able to use the 
techniques of formularies, they would be required to offer 
coverage for every therapeutic class of pharmaceuticals and 
they would be required to offer coverage for drugs that were 
found to be reasonable and necessary by their own physician. So 
there is absolutely no interference with the decisions that a 
practitioner might make with respect to medically appropriate 
and reasonable, necessary coverage both inside and outside of a 
formulary.
    Mr. Brown. Mr. Chairman, I think it is important to point 
out that--not that we don't really know this, but important to 
point out that Flo is an actress paid for by the drug 
companies, paid by the drug companies. The ads are paid for by 
the drug companies. It kind of puts a new twist on the term 
Mediscare.
    Thank you.
    Mr. Brown. Mr. Burr.
    Mr. Burr. Thank you, Mr. Chairman. Mr. Hash, is it true 
under the President's plan, and I am trying to understand it 
better, there will be regional drug purchasing contracts?
    Mr. Hash. That is correct.
    Mr. Burr. How many contracts in each region?
    Mr. Hash. We have not actually specified that yet, but 
obviously that needs to be incorporated into the legislation. 
But we would like to work with members and others to ascertain 
what that would be. Clearly we would want it to be geographical 
areas that are of a sufficient size that in fact the strength 
of the purchasing volume discounting activity would be 
sufficient to ensure beneficiaries got the best price possible.
    Mr. Burr. Doesn't the plan call for one contract per 
geographical region?
    Mr. Hash. It calls for competition among PBMs who could 
serve a particular region.
    Mr. Burr. Given that you have one contract that is awarded 
per region, tell me where we work the word ``competition'' into 
that. That they would bid for it and then after that we would 
allow it to operate as a monopoly?
    Mr. Hash. No, sir, the way the President's plan is designed 
is that there would of course, as you allude to, be competition 
between pharmacy benefit companies who wanted to achieve the 
business but in addition, once a winner had been selected, the 
contracts would be for approximately 2 years. They would be 
reopened on the basis of offerings and competition that would 
be specified in the contract offering. So it wouldn't be a 
franchise, if you will in perpetuity, but be revisited on an 
every 2-year basis.
    Mr. Burr. It would be the first program in the Federal 
Government that we have ever done that where it didn't become a 
permanent fixture for one. Let me ask you and I am not 
suggesting that the President does create price controls, but 
if any plan created price controls, what would that do for 
research and development in the pharmaceutical industry?
    Mr. Hash. Well, I think the real issue here, Mr. Burr, is 
of course ensuring that market forces are really at the root of 
determining the price for pharmaceuticals. That is what has 
been so beneficial to people with private coverage who are 
enjoying the benefits of discounts related to the give and take 
of bargaining in the marketplace. That is clearly the superior 
way to arrive at appropriate prices for these items.
    Mr. Burr. Is that an endorsement of a private sector based 
plan because it works--is that what we are trying to replicate?
    Mr. Hash. We are trying to replicate----
    Mr. Burr. Why don't we just let them do it? Why don't we 
find a way to work it through them versus work it through us?
    Mr. Hash. Medicare is a program that is universal in its 
scope and coverage to age 65. We want to be clear that the core 
benefit package in Medicare includes coverage for prescription 
drugs either through this contract with private pharmacy 
benefit managers or through purchase or coverage by employer-
based retiree coverage.
    Mr. Burr. We are all after that objective. The President's 
plan calls for low income beneficiaries between 100 percent and 
135 percent of poverty to be covered under this plan. Tell me 
what happens to the individuals who are below 100 percent but 
not covered by state Medicaid.
    Mr. Hash. Under this program, under the President's 
program, all individuals under 135 percent would be covered for 
the premiums and cost sharing. For those under 100 percent of 
poverty, they would be covered through the state Medicaid 
program.
    Mr. Burr. But there are only 11 states that currently cover 
above 75 percent of poverty. How does this plan address them?
    Mr. Hash. This plan would in effect be the same model we 
have in place for the QMB program now where individuals who are 
up to 100 percent of poverty regardless of whether they are in 
the basic Medicaid program are covered for cost sharing and 
premiums under the Medicare program. That is how this coverage 
would be extended to those low income individuals.
    Mr. Burr. So the individuals that are not covered----
    Mr. Hash. By Medicaid.
    Mr. Burr. [continuing] by Medicaid. So what do you say to 
the 11 states that cover them today? If I understand you are 
going to ask them to continue to cover it but you are going to 
pay for the 25 percent in the other states?
    Mr. Hash. Since Medicare would be the primary payer to any 
Medicaid coverage, the advent of this new coverage would 
relieve states of that burden to the extent that they were 
carrying more than the premium and cost sharing associated with 
the Medicare benefit.
    Mr. Burr. Would you consider this to be a Medicaid 
expansion?
    Mr. Hash. I would consider it to be an important protection 
for low income beneficiaries.
    Mr. Burr. One last question if I could, Mr. Chairman, for 
clarification. Mr. Waxman referred to a report--I haven't had 
an opportunity to see it but I will try to read it--that 
suggested that the differential between prices for drugs was as 
much as 106 percent of the ten drugs that they charted. You 
said if we accomplish this we would see a 13 percent drop. 
Where is the difference between your projections on what we can 
achieve in savings on drug prices and Mr. Waxman's projections 
that currently seniors pay 106 percent higher than the average?
    Mr. Hash. The 13 percent figure I used, Mr. Burr, was from 
our actuary looking across the entire spectrum of 
pharmaceuticals and making an estimate based on putting into 
place the program that I have been describing here and that on 
average pharmaceutical prices would decline at the point of 
sale by an average of 13 percent. That average would obviously 
cover a distribution in local markets that could be much higher 
or could be lower, as all averages are. I believe Mr. Waxman's 
figures are the result of local market studies that have been 
conducted by the Government Reform staff and that they relate 
to individual market sites, but my figure relates to a national 
estimated average.
    Mr. Burr. So those are not indicative----
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Burr. I thank the Chair.
    Mr. Bilirakis. Ms. Eshoo.
    Ms. Eshoo. Thank you, Mr. Chairman. Good morning. Nice to 
see you here. Mr. Coburn provided the subcommittee with a list 
of pharmaceutical companies that have patient assistance 
programs for the poor. Can you characterize for us or elaborate 
on how much--what this list represents in terms of what they do 
in picking up the cost of prescriptions for seniors in the 
country? Can HCFA do that?
    Mr. Hash. We would certainly be happy to. I don't have the 
details. I am aware that a number of pharmaceutical companies 
offer low income access, low income individuals access to 
pharmaceuticals. I don't know the details of their policies and 
what requirements or eligibility criteria they use, but I am 
aware there is some of this among pharmaceutical companies.
    Ms. Eshoo. Is there any way you can do an analysis so you 
can get that information back to the committee? I say this with 
all sincerity. I mean, I think that we should know what kind of 
an impact--it is a long list. I think I handed it to my staff. 
You will get it, but I think it would be--at least to me, it 
would be helpful to know what this actually represents.
    Mr. Hash. We would certainly be happy to inquire and ask 
and see what we can get. Perhaps our colleagues at the General 
Accounting Office also might be able to help us with such an 
inquiry if that would be appropriate.
    Ms. Eshoo. As we look at the senior population in the 
country, very often it has been divided into thirds. One-third 
having absolutely no coverage whatsoever for prescription 
drugs, a third--approximately a third that have coverage as 
retirees from their employer health plan, and a third that have 
some kind of coverage through managed care. So if, say, two-
thirds already have drug coverage, does it mean that the 
problem is really a minor one and that we just need to target 
that third?
    Mr. Hash. By no means I think. One needs to look underneath 
those data to sort of look at the stability and affordability 
of the coverage in each of those areas. For example, 
regrettably, employer retiree coverage is declining. It has 
declined by over 25 percent in the last 4 years, and that is a 
trend that started well before today's discussions. It is also 
clear that as you look at Medigap coverage, the private 
supplemental plans, there are about 8 percent of the 
beneficiaries who actually purchased one of the supplemental 
policies that covers prescription drugs. The problem with that 
is, as was noted in the GAO testimony, the premiums for those 
policies are very, very high and growing rapidly and, most 
importantly, those are the very policies that are underwritten 
and are simply not available to individuals who have 
preexisting health conditions, the very people who need 
prescription drug coverage in most cases.
    In the case of Medicare+Choice plans, as we noted in a 
report that was released a couple of weeks ago, nearly three-
fifths of the Medicare+Choice plans have in fact imposed $1,000 
a year or less cap on their coverage of prescription drug 
benefits for 2000. As many people know, there is now a cost, 
co-pay or co-insurance amount, for all drug coverage that is 
offered by Medicare+Choice plans, so the adequacy and stability 
of benefits covered that way is clearly changing very 
dramatically. What we are looking for is a dependable, 
affordable, accessible prescription drug benefit that is part 
of the basic Medicare package.
    Ms. Eshoo. How much would the plan as the President has 
submitted, what would his plan cost once the baby boomers come 
into the system?
    Mr. Hash. What we have, Ms. Eshoo, on the cost is our 
actuaries have estimated that over the next 10 years between 
now and 2009, the cost of the President's program would be $118 
billion over those 10 years. We don't--I don't have available 
estimates beyond that period of time, but that is the current 
available estimate.
    Ms. Eshoo. Thank you.
    Mr. Bilirakis. Mr. Deal to inquire.
    Mr. Deal. I pass right now, Mr. Chairman.
    Mr. Bilirakis. Mr. Barrett?
    Mr. Barrett. Thank you, Mr. Chairman. I thought that Mr. 
Brown did a very good job talking about Flo in this commercial. 
I don't think she is here today. It is unfortunate. I would 
like to hear her and ask her some questions. I thought maybe--I 
think she got a new job. She is in another play or performance. 
I was surprised because I frankly didn't know. Maybe I am 
showing my naivete as to who paid for those commercials. Do you 
know who paid for those commercials?
    Mr. Hash. It is my understanding its an organization that 
is financed largely by pharmaceutical companies.
    Mr. Barrett. The pharmaceutical companies themselves have 
financed this ad campaign?
    Mr. Hash. It is my understanding.
    Mr. Barrett. Against a proposal to provide prescription 
drug coverage for seniors. I think it is important people 
understand who is paying for that campaign against providing 
prescription drug coverage for seniors. Why do you think they 
are doing that?
    Mr. Hash. I am--I assume that they believe that the 
movement of such a plan through the Congress and enactment of 
such a plan would be deleterious to their interest, their 
business interest of one kind or another. I think it is 
unfortunate, of course, that they are allowing a kind of 
deception campaign to characterize their attack on this 
proposal instead of dealing with it on the merits. But as to 
the full scope of what their motivations may be, I am certainly 
not in a good position to speak on their behalf or to indicate 
why they may be doing this.
    Mr. Barrett. I assume you have seen the commercials?
    Mr. Hash. I have.
    Mr. Barrett. Maybe you can just tell me as you watched them 
what got your blood pressure up the highest.
    Mr. Hash. I think as Mr. Brown indicated, each of the 
critical message points that are included in these ads are 
distortions, they are misrepresentations of the facts of the 
proposal as put forward by the President. It is very 
disheartening that people, including pharmaceutical interests, 
do not want to engage this subject on the merits in the spirit 
of constructive dialog----
    Mr. Barrett. Can you be more specific. As you were watching 
it there must have been something where you said no way. I am 
curious as someone who is obviously involved in the problem, 
what rankled you the most?
    Mr. Hash. The most recent occasion on which my blood 
pressure went above acceptable norms was the most recent ad 
which indicates that 9 million Medicare beneficiaries will be 
losing the employer retiree coverage they have as a result of 
the President's proposal.
    Mr. Barrett. That is just patently false.
    Mr. Hash. It is patently false.
    Mr. Barrett. How do you think they came up with that 
figure?
    Mr. Hash. I cannot speak for how they came up with it, but 
I do know there is no basis in fact for that allegation.
    Mr. Barrett. I would like to shift gears now just for a 
minute. There was a discussion a little earlier about how the 
contracting would occur, that bids would go out. Explain to me 
a little bit how that segment of the program will work.
    Mr. Hash. Let me just say that a lot of the very specific 
details would be subject to further discussion and development 
as legislation would be considered. So I want to be 
straightforward in saying that every detail about how this will 
work has not yet been put in place. But in general, the 
approach in the President's plan is to take advantage of the 
use of pharmacy benefit managing organizations to actually 
contract with the Medicare program on a competitive bid basis, 
giving them the responsibility for geographic administration of 
this benefit and, importantly, bringing to bear the techniques 
that PBMs are using under private coverage arrangements where 
they negotiate for economical prices on behalf of the lives 
that they are covering and, second, the way in which they 
monitor and track the provision of drugs, the utilization 
monitoring, the contraindication monitoring, all of which helps 
to ensure that beneficiaries are properly assisted in using 
pharmaceuticals appropriately and staying on their compliance 
regimen.
    Mr. Barrett. Let's bring it down to a lower level here. So 
I represent Milwaukee, Wisconsin. So you would have a number of 
companies that would bid?
    Mr. Hash. Right.
    Mr. Barrett. What service then specifically for my mother 
would they provide?
    Mr. Hash. They would actually be the organization that 
receives the claims for pharmaceutical benefits that were 
covered. They would process those claims and they would pay the 
vendor of the pharmaceutical item just as a PBM does in a 
private health insurance plan.
    Mr. Bilirakis. The gentleman's time has expired. We have 
got a long hearing here. Forgive me.
    Mr. Barrett. I understand.
    Mr. Bilirakis. Mr. Whitfield.
    Mr. Whitfield. Thank you, Mr. Chairman. Mr. Hash, you have 
been Acting Administrator over at HCFA for how long?
    Mr. Hash. Since about the first of August. I am actually 
still the Deputy Administrator because our Administrator has 
not really left. She is on maternity leave.
    Mr. Whitfield. Many of us on this committee do not have 
detailed knowledge of all the ins and outs of Medicare because 
it is a very complex system and you are quite knowledgeable. 
Looking at the President's proposal if you were going to point 
out strengths and weaknesses of the proposal, what would you 
say would be the weakest part of his proposal?
    Mr. Hash. It is a good question. I actually think the 
President's proposal is an excellent approach to a long-
standing problem in terms of access to prescription drugs and 
while obviously one would want to do more in the sense of the 
scope of its coverage and in the protection that it provides to 
beneficiaries. What the President I think has done is tried, in 
a prudent and fiscally responsible manner, to design a program 
in the context of a comprehensive reform plan that is 
affordable and prudent given the important limitations on 
Medicare funding.
    Mr. Whitfield. Part B, I guess the average Medicare 
beneficiary pays something like $46 a month.
    Mr. Hash. $45.50.
    Mr. Whitfield. So I was 50 cents off. The President's 
proposal is going to establish a part C of Medicare for the 
prescription drug part. Now the premium on that is going to be 
$24 a month and goes up ultimately to $48 a month. I am 
assuming that people that would participate in it--I know it is 
voluntary so you don't have to but those who would participate, 
would most of them drop their Medigap coverage or at least 
those that maybe--there has been some testimony about some 
Medigap policies are particularly expensive because of the drug 
benefit. So would it be logical that this proposal would save 
senior citizens that money in that they drop that policy?
    Mr. Hash. It would in the sense that the proposal is 
predicated on the notion that the legislation would have to 
provide for changes in the Federal standards that now apply to 
the Medigap market. As you may know, there is Federal law that 
actually defines each of the 10 products that can be sold to 
Medicare beneficiaries as supplemental insurance. Three of 
those include some drug benefit. Those would have to be 
modified to take into account the presence of this core 
prescription drug benefit under the President's proposal.
    Mr. Whitfield. So the standards on Medigap would all have 
to be changed.
    Mr. Hash. In those policies that deal with prescription 
drug coverage.
    Mr. Whitfield. Refresh my memory. I haven't read it in a 
while. Under the President's proposal, the first few years it 
would pay one-half of up to $2,000 a year?
    Mr. Hash. That is correct. That is the beginning. Then 
there is a transition over a 6-year period, I believe, up to an 
out of pocket limit of $2,500 or $5,000 in annual drug 
expenditures.
    Mr. Whitfield. Now, how many Federal laws are there that 
require the drug companies provide rebates? It is my 
understanding they have to provide rebates to the VA, 
Department of Defense. What other areas are there?
    Mr. Hash. I am not sure I know this as well as I should, 
but the two areas I know about are under what is called the 
Federal Supply Schedule. The Veterans Administration and 
certain other Federal health programs do have access to a 
negotiated price under that Federal purchasing schedule and 
then of course there is the statutory provision in Medicaid 
that provides for rebates to the Medicaid program for covered 
pharmaceuticals.
    Mr. Bilirakis. I know that the gentleman is trying to make 
a point here but we really should continue on. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and following up, I 
think what we have talked about and I guess the next panel will 
talk about, we need the private sector to develop a plan and, 
Mr. Chairman, I don't know why the private sector couldn't 
develop a plan now that would address the problems. And to 
follow that up, the GAO in their study said that Medicare 
beneficiaries have an average of 18 prescriptions filled on an 
annual basis?
    Ms. Dummit. Yes, sir.
    Mr. Green. That is amazing that on a yearly basis a given 
senior citizen would have 18 prescriptions. No wonder we have a 
hearing today. I didn't realize it was that high. I was 
thinking half a dozen maybe.
    Ms. Dummit. That is not necessarily 18 different drugs. It 
is 18 prescriptions over an entire year.
    Mr. Green. They may limit you to 30 pills a month but you 
could have 12. Okay. You explained that. Mr. Hash, back years 
ago Congress passed a Medicare Catastrophic Coverage Act. Very 
few of us on this panel were here then, thank goodness, and for 
whatever reason, part of that act turned out to be truly 
catastrophic. I think some of us remember our former chairman 
of the Ways and Means Committee being attacked in Chicago. The 
industry opposed it. The prescription drug benefit was repealed 
and in later testimony today, there will be some comparisons 
between the President's drug benefit to the Medicare 
catastrophic benefit plan that was passed in 1988. Is the 
President's plan going to put us in that same box again?
    Mr. Hash. I don't believe so, Mr. Green. This plan is very 
different from the 1988 proposal in the catastrophic 
legislation. This plan is voluntary. This plan has subsidized 
premiums, subsidized 50 percent, which is unlike the prior 
proposal. I think clearly it also does not have any deductible. 
That was another issue so that in this--under this proposal, 
Medicare beneficiaries would receive a benefit from the very 
first time in a year they needed to have a prescription filled.
    Mr. Green. In your testimony, you talk about an 80-year-old 
in Minnesota who is a breast cancer survivor and pays $384 for 
a 3-month Medigap policy and then you list the prescriptions 
that this lady spends money on which comes to about $290 a 
month. And so on a 12-month basis, she is spending $3,482. 
Could you tell me under the President's plan what would she see 
to benefit if she decided to join that plan.
    Mr. Hash. What she would see is from the very first 
prescription, that 50 percent of its cost would be covered by 
this program. No deductible. It would be covered right away and 
it would be covered in the first year up to a maximum of $2,000 
and then under the phase-in in the President's proposal it 
would cover those expenditures up to $5,000 a year on a 50 
percent co-pay basis.
    Mr. Green. She would be paying $40 a month?
    Mr. Hash. In the beginning it would be $24 a month and then 
over time by the time it was fully phased in, it would rise to 
$44 per month.
    Mr. Green. She would be paying $24 per month and now she 
has no prescription benefit plan. I have had lots of town hall 
meetings. I guess since 1994, 1995, this issue comes up every 
time. I have seniors who bring in their prescriptions and list 
it in every geographic part of my district, very diverse 
racially and ethnically and even income and it affects 
particularly lower income seniors who may not be qualified for 
Medicaid, but I have also found that even for seniors who plan 
for their retirement, Social Security plus some type of 
retirement in savings, oftentimes one of the seniors has as 
much as $400 a month and that's just one of them. The fear they 
have told me is that if the one passes away and they lose that 
Social Security benefit and the one who passes away is not the 
one who has all the prescriptions they just can't make it. That 
is why it is so important.
    Mr. Chairman, again thank you for having this hearing today 
and addressing this issue.
    Mr. Bilirakis. Thank you, Mr. Green. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. Good morning. I have 
one question for each one of you, if I might begin with Ms. 
Dummit. Did I pronounce your name correctly?
    Ms. Dummit. Yes.
    Mr. Bryant. Thank you. GAO's Comptroller General David 
Walker testified in a Senate Finance Committee hearing this 
past summer on this subject and he was quoted as saying a 
primary means of allocating limited resources is to target them 
on the greatest needs. With the exception of greater Federal 
subsidies for certain Medicare beneficiaries, the proposed 
coverage--that is President Clinton's proposal--is not targeted 
to the need. And they go on to say or he goes on to say ``it 
would be prudent to target the benefit to those most in need 
and include additional safety valves to check excessive program 
costs growth.'' Can you comment today on why GAO has come to 
that conclusion and does your presentation here today 
complement or contradict that conclusion?
    Ms. Dummit. GAO has come to that conclusion because it 
believes the sustainability of the Medicare program over the 
long term should be the paramount concern. Clearly prescription 
drug spending, as everyone has noted, is very expensive and 
those costs are expected to rise over time and that is why the 
Comptroller General urges caution in implementing a broad based 
new benefit under the Medicare program because of those costs 
now and into the future. That message is very complimentary to 
the one I present as well.
    Mr. Bryant. Thank you. Mr. Hash, I have a question for you. 
You are up here about as often as we are. I congratulate you 
for the good job that you always do.
    Mr. Hash. Thank you, Mr. Bryant.
    Mr. Bryant. In this issue of private coverage, I am 
concerned about the effect it would have and I am reading here 
where both GAO and CBO has said the administration's plan has 
the potential of displacing employee provided retiree benefits, 
and then I see a Price Waterhouse Cooper study that projects 6 
to 9 million Medicare beneficiaries with employer sponsored 
retirement coverage would lose their benefits because employers 
would have incentives to enroll their retirees in that.
    Mr. Bryant. Now, you have mentioned today that the 
President's plan has $11 billion. Is that over 10 years to 
incentivize business not to do that?
    Mr. Hash. Yes, sir.
    Mr. Bryant. Again, Price Waterhouse projects that it is 
going to represent some $3 billion to $5 billion per year in 
current spending by employers, and that certainly does not 
sound like enough to disincentivize that. CBO estimates the 
cost of employer subsidy alone ought to be $19.2 billion rather 
than the $11 billion. Do you have any comment on that?
    Mr. Hash. Well, my understanding is based on conversations 
with our actuary, that our estimates are that approximately 5 
million of the 8 million beneficiaries who now have employment-
based retiree coverage, that is about three-quarters of them 
would elect to stay in that coverage that they are in, and that 
is also, as I understand it, the position--the estimate that 
the CBO has made as well.
    So I think at least we differ pretty substantially with the 
conclusion in the Price Waterhouse study which was, as I 
understand it, done on behalf of the pharmaceutical 
industry.Our independent and the CBO independent analysis has 
come to a very different conclusion about that.
    Mr. Bryant. I am not going to question PriceWaterhouse- 
Coopers' role in this. I know that they are certainly a 
recognized company that would feel that they are doing the 
right thing regardless of who sponsored their study. Does GAO 
have a position on this issue?
    Ms. Dummit. No, sir, we have not independently looked at 
those estimates nor have made any estimates on that.
    Mr. Bryant. Again, Mr. Hash, my concern is that when you 
provide a government entitlement that over--if not immediately 
over a period of time, why pay if the government will pay it 
for you? Thank you.
    Mr. Bilirakis. Mr. Strickland.
    Mr. Strickland. Thank you, Mr. Chairman.
    Mr. Chairman, I keep going back in my own mind to this 
question about politics versus policy. And I have appreciated 
many of the thoughtful questions that panel members have posed 
today, but I have this gnawing fear in me that, ultimately, 
this decision regarding what we do with prescription drug 
coverage will be decided by politics. It bothers me that Flo 
lies, and I think this is an example of a special interest 
being willing to invest millions of dollars to get their way so 
that they can save perhaps billions of dollars. And it is cost-
effective on their part, but it is wrong.
    Now, I don't want to be trite, but some of us in this 
Congress have said that we ought to post the Ten Commandments 
in our schools so that are kids will know it is wrong to kill 
and steal and bear false witness and perhaps their behavior 
would be changed as a result. After hearing about Flo's lies, I 
guess I would encourage more members of pharmaceutical 
companies to post the Ten Commandments in their board rooms. 
Because one of those commandments is that thou shall not bear 
false witnesses, and we heard that the pharmaceutical companies 
are purposely bearing false witness in order to protect 
themselves, and that is just plain wrong.
    Now, I have a question regarding a practical proposal that 
I think is a part of the Republican tax bill. One approach to 
helping seniors with prescription drug coverage is to provide 
tax subsidies for seniors to purchase this coverage; and the 
Republican bill, as I understand it, includes a provision to 
allow premiums for Medigap plans that offer drug coverage to 
count toward the medical deduction under current law.
    It seems that one big drawback to this proposal is that a 
lot of seniors don't pay taxes, so a tax deduction wouldn't 
help them much. Would you care to comment on that?
    Mr. Hash. That is correct. I think if you don't have a tax 
liability, the opportunity to deduct against that liability is 
meaningless; and it doesn't do anything to address the 
affordability of drug coverage before you get to the question 
of the deductibility.
    Mr. Strickland. The follow-up question, if I may, wouldn't 
such a tax cut proposal perhaps be more trouble than it is 
worth? How would it be administered? Would seniors be forced to 
turn their pharmacy receipts into the IRS to get credit? 
Furthermore, I think Flo may be upset because now we have the 
IRS in her medicine cabinet.
    Mr. Hash. I think you have identified the administrative 
issues that would surround an expansion of the deductibility of 
health expenses for tax purposes. It would require that kind of 
documentation and recordkeeping, at least as I understand how 
the medical expense deduction works today. So, therefore, it 
would impose that burden on individuals who in fact--and it 
would also, as we said, have to have the tax liability against 
which to apply the deductions.
    Mr. Strickland. Thank you.
    Mr. Waxman. Would the gentleman yield?
    Mr. Strickland. Yes.
    Mr. Waxman. If you are looking at trying to target the 
health to people who need it the most, it strikes me that tax 
break would help those who need it the least. They can take a 
medical deduction off income, and seniors who are making--
living on Social Security alone and struggling with these bills 
will not get any help from this Republican proposal; is that a 
fair statement?
    Mr. Hash. To qualify for the medical expense deduction is 
very difficult. I think very few Americans have the percentage 
that allows them to qualify for a medical expense deduction. 
Seven percent of income has to be identified for that purpose. 
I think it would be out of the reach except for the most well--
highest income beneficiaries.
    Mr. Waxman. I thank the gentleman from Ohio for raising 
this point, because we ought to recognize who wins and who 
loses. The people who need the help the most are not going to 
win.
    Mr. Bilirakis. Dr. Norwood.
    Mr. Norwood. Thank you, Mr. Chairman.
    Mr. Hash, did I understand you to say that the President's 
proposal would cost $118 billion over 10 years?
    Mr. Hash. Yes, sir.
    Mr. Norwood. Would you very carefully explain to me if you 
have a $100 prescription who pays what for that $100?
    Mr. Hash. Under the President's plan, the beneficiary would 
pay $50 and the individual would pay $50. The program would 
pay----
    Mr. Norwood. The taxpayer would pay $50 and the recipient 
of the medication would pay $50?
    Mr. Hash. The 50 percent coinsurance.
    Mr. Norwood. Is that $118 billion the 50 percent that the 
taxpayer would pay?
    Mr. Hash. Yes, sir.
    Mr. Norwood. I just want to tell you that my sons don't 
care to pay half of Ross Perot's prescription. They can't 
afford to do that. I want you to tell me where that $118 
billion comes from. Where do we get it?
    Mr. Hash. Dr. Norwood, that is why the President's proposal 
is put in the context of the comprehensive reform package. It 
is fully financed by a series of steps to modernize the 
Medicare program and to extend the reduction in the growth of--
--
    Mr. Norwood. What are we cutting in Medicare to afford 
this?
    Mr. Hash. As we leave the BBA period which ends 2002, the 
President's proposal extends in a more modest way some of the 
provisions of the BBA which have been important in moderating 
the growth in Medicare expenditures.
    Mr. Norwood. So we are guessing that we can pay for it 5 
years from now?
    Mr. Hash. We are basing it on estimates of what the effect 
of those policies would be--what the effect of policies would 
be to give the program more flexibility in managing in a fee-
for-service environment, things like PPOs and Centers of 
Excellence and other approaches to the traditional Medicare 
program which would also achieve savings and economy for 
Medicare. The combination of that with the BBA provisions that 
would extend out after 2002 represent a package of savings that 
would be financing most of the cost----
    Mr. Norwood. So you are suggesting that this is not new 
spending? This doesn't threaten the trust fund? You have clever 
new ways to pay for this 5 years from now if your actuaries are 
right?
    Mr. Hash. There is some portion of that $118 billion that 
is a portion of the surplus of the Medicare trust fund that has 
been identified in the actuary's estimate.
    Mr. Norwood. Again, we are guessing. Do you believe your 
actuaries?
    Mr. Hash. Yes, sir. I believe the Medicare actuaries time 
and time again have been the most conservative and accurate in 
their projections, and I would be happy to provide for the 
record evidence of what they have been able to achieve. They 
are an independent office.
    Mr. Norwood. Is that why the trust fund was going bankrupt 
in 2000?
    Mr. Hash. The trust fund was going bankrupt because the 
expenditures were exceeding the income from the payroll tax.
    Mr. Norwood. Oh. So what that means is we were actually 
spending more than the actuaries planned, because surely they 
didn't plan on us going bankrupt because otherwise they would 
have called you and said we have a problem here?
    Mr. Hash. The expenditures have been rising more rapidly 
than projected.
    Mr. Norwood. That is because people have been guessing 
wrong. Dr. Coburn said that the closest you have been was 800 
percent off.
    Mr. Hash. With all due respect to Dr. Coburn, I think I can 
show him some examples where we have been much closer to the 
mark than that.
    Mr. Norwood. But when you are off, you are off big time, 
and it affects the other portions of health care. Part of this 
that I want to be concerned about is the bigger picture and the 
other values in Medicare that our senior citizens need.
    I want you to know, I don't believe your actuaries. I don't 
think that they are right at all, and they are guessing, and 
they are guessing on some very dangerous grounds.
    I haven't seen this ad that was referred to earlier, and I 
don't know for sure what all it says, but I am absolutely 
positive that the employers of this country will drop their 
prescription coverage for their employees in order to pass it 
on to the taxpayers. You can absolutely bet on that. That is 
going to happen.
    Does that mean that people are going to have to turn to the 
taxpayer to pay it rather than in a benefit package that their 
employers are offering? Yes, that is exactly what it is going 
to mean, and that is going to grow this number. And I 
personally don't believe that this number is anywhere near 
correct. And if you go back and look in 1988 when we were 
talking about the catastrophic legislation and the mess that 
got into, the problem was that nobody could predict what the 
cost was, and people agreed they couldn't predict what the cost 
was.
    This hearing is not about whether seniors should take and 
receive and be able to get their medication. I don't think 
anybody here would disagree with that. It is about how to go 
about doing that without ruining a Medicare system that I want 
to be on in just a few years.
    I yield back the balance of my time.
    Mr. Bilirakis. Mr. Waxman.
    Mr. Waxman. Thank you, Mr. Chairman.
    The issue that we are discussing is a serious one for 
millions of Americans who can't afford to pay for their drugs, 
and we have large numbers of people who don't have any coverage 
at all for prescription drugs because they can't afford it, 
because their employers didn't provide it, they are not in an 
HMO that covers it or their HMO is dropping that coverage.
    If we do nothing, if we just paralyze ourselves and do 
nothing again, what is the trend? Are we going to see more 
employers dropping coverage because it is just too expensive 
anyway?
    Mr. Hash. The data that I have seen, Mr. Waxman, the trend 
of employer-based coverage for retirees has been going down. It 
has declined by 25 percent in the last 4 years.
    Mr. Waxman. We know that HMOs are starting to drop coverage 
for prescription drugs as well. Just as we see more and more 
people completely uninsured in this country because employers 
are not choosing to cover it and government is not stepping up 
to the plate, we are going to find more and more seniors 
uncovered.
    Let's look at the consequences. Seniors who pay for drugs 
and who pay the most often have the least ability to pay, and I 
argue that they are being charged the most by the drug 
companies for prescription drugs.
    I mentioned earlier my staff have conducted a study that 
indicated that uninsured seniors have to pay higher prices for 
prescription drugs than if they are a favorite customer of the 
pharmaceutical companies, if they are in an HMO or they have 
the Federal Government paying for them because they are a 
poverty case.
    I would like to ask you about this problem. In its 1998 
study on prescription drug pricing, CBO found different buyers 
pay different prices for brand name prescription drugs; and in 
today's market for outpatient prescription drugs, purchasers 
who have no insurance coverage for drugs pay the highest prices 
for brand name drugs. Is that--that is the GAO's report, isn't 
it, Ms. Dummit?
    Ms. Dummit. There is evidence to indicate that certainly 
individual buyers going to their retail pharmacies do pay 
higher prices than, say, managed care organizations or 
hospitals that can negotiate with----
    Mr. Waxman. There is more than just evidence. We have done 
studies that everywhere in this country seniors who don't have 
any coverage end up paying twice as much, so those with 
bargaining power get some break on the price. But if you are a 
frail, elderly, 80-year-old woman and you buy your drugs, you 
pay twice as much. Is that what our society has come to, that 
we say that is reasonable, that the free market system is 
working effectively?
    We have also looked at international prices. Americans pay 
more for drugs than Canadians or Mexicans or Europeans. Isn't 
that an accurate statement, Ms. Dummit?
    Ms. Dummit. Yes.
    Mr. Waxman. So in order for the same pharmaceutical company 
to sell their brand name drug in Canada or England and then 
sell it at a lower price for somebody who has prescription drug 
coverage in the United States, the costs are shifted to make 
those who can least afford it pay the most. That seems to me 
unconscionable. As a society, we should be protecting our 
seniors. Instead, the drug companies are essentially gouging 
them, forcing them to pay far more for drugs than other 
purchasers in the United States or abroad.
    Maybe that is why the pharmaceutical companies are paying 
this actress to present herself as Flo to argue against this 
program to cover seniors so they can continue to gouge the 
seniors to make them pay the higher prices.
    Now let's look at some solutions. This, obviously, makes no 
sense to have a tax deductibility for these costs of 
prescription drugs or for the coverage of prescription drugs. I 
don't want to pay for a tax deduction that some very wealthy 
people are going to take and the lowest income people are not 
going to benefit.
    Some are suggesting that we have State-based programs. Some 
States already have some assistance. You have indicated that 
there is a great deal of disparity between what one State and 
another has, but hasn't our experience whenever we have a 
State-based program meant that people don't want to go to 
another bureaucracy to get a benefit when they are on Medicare 
and, therefore, even though we provide help to pay for the 
Medicare premium through States' efforts that most people don't 
take advantage of it? But if it is a Federal program like 
Medicare, 100 percent of the seniors take advantage of it?
    Mr. Hash. That is correct, Mr. Waxman. The benefit of the 
Medicare program is that there is a one-time enrollment. It is 
good for the lifetime of the individual. They have the 
entitlement.
    The Medicaid and State programs require annual 
redetermination, and it creates a kind of administrative 
situation which is not attractive in terms of appealing to 
people to come in and go through elaborate application and 
redetermination processes. That is why we would like to build 
it into the basic core benefit in the Medicare package.
    Mr. Bilirakis. Mr. Lazio to inquire.
    Mr. Lazio. Thank you, Mr. Chairman.
    I read the panelists' testimony, and it is interesting to 
note that when it came to the CHIP program that extended health 
care benefits to children, that we did not have a particular 
problem in a bipartisan way with the concept of allowing the 
States the creativity to develop those programs which have been 
largely a success.
    And I want to, if I can, just speak to some of the issues 
that were raised by Dr. Norwood about projections, because it 
is an extraordinarily important issue in terms of the solvency 
of the program and giving people the peace of mind so they know 
that their basic hospital coverage will be there.
    Mr. Hash, the administration estimated the drug benefit 
proposal would cost about $118 billion over 10, and the savings 
from the fee-for-service program would save about $64 billion?
    Mr. Hash. That is correct.
    Mr. Lazio. CBO estimated the cost of the program at $168 
billion, about $50 billion more, and the savings from changes 
to traditional Medicare at about $40 billion, which is $16 
billion less than your estimate. I understand that one of the 
reasons for the difference with CBO, which is an 
extraordinarily large difference of opinion in terms of overall 
projection of cost, is that they believe that the 
administration underestimates the interaction with Medicaid and 
that there is a resulting increase in Medicaid costs, and I am 
wondering if you could respond to that and Ms. Dummit could 
also respond to that.
    Mr. Hash. Yes, sir. What I believe is the source of some of 
the major differences between the two estimates is, in fact, 
assumptions about participation rates in Medicaid as a result 
of the improvements in the Medicare program. Obviously, those 
assumptions are very sensitive in terms of the impact on the 
budget.
    The notion is because, among seniors who are eligible for 
Medicaid and not enrolled, there is about a 40 percent 
difference there. That is to say, 40 percent of the individuals 
who would be eligible for Medicaid as an elderly individual are 
not currently enrolled in Medicaid. And the issue is, what do 
you assume about the numbers of them who will come in?
    The second issue that I think accounts for the major 
differences has to do with more recent data on the cost of 
prescription drugs and projections to the future about the 
growth in those.
    And with respect to the differences in estimating the 
President's savings package, I think, as the CBO indicated in 
their testimony recently in the Senate, the major difference 
was the CBO believed that the Congress would not allow the 
Medicare program to actually implement the reforms associated 
with more modern management through PPOs and Centers of 
Excellence even if they were authorized in the law, and that 
was the source of the major difference, the effect of those 
changes on savings to be realized by Medicare.
    Ms. Dummit. Mr. Lazio, we do not do any work regarding 
estimates of future programs.
    Mr. Lazio. Thank you.
    I want to briefly ask you about utilization, increase of 
spending by pharmaceuticals, which has to do with the 
development of more complex, more costly pharmaceuticals which 
is consistent with the explosion of research which has occurred 
in the last 10 years. So designing strategies for harnessing 
the costs of that are going to be extraordinarily difficult, it 
seems to me.
    Now, if you have folks that are not now or that would not 
otherwise be in this program that are seniors but are private 
pay, it seems to me that they could very well be a victim of 
some fairly significant cost shifting, and I am just positing 
the premise that we have to be very mindful of the fact that, 
while we are trying to serve a segment of the population, one-
third of seniors right now that have no coverage, the last 
thing that we want to do is exacerbate the cost problem for 
seniors that are private pay, either through an increase of 
premiums, HMO or other insurance, or purely fee-for-service 
private pay.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Deal.
    Mr. Deal. Thank you, Mr. Chairman.
    Mr. Hash, in your statistics when you talk about the cost 
to the average person for pharmaceuticals, for example 56 
percent have drug cost of $500 or more every year, that is the 
total cost of drugs, that is not counting any offset for 
insurance premiums or anything, is it correct?
    Mr. Hash. It is the total cost.
    Mr. Deal. The current Part B, as I understand, since it is 
voluntary, the participation rate of eligible people is 
somewhere around 97, 98 percent, is that right?
    Mr. Hash. I believe that is right.
    Mr. Deal. What is your participation rate under Part C?
    Mr. Hash. Because of the premium amount, the actuaries 
estimate that the participation rate would be very high, in the 
90--well above 95 percent participation.
    Mr. Deal. Let me use some of your figures and see if you 
can explain to me why someone would want to participate in it. 
Let's take the $24 per month premium that you are talking 
about, and my figures show that is $288 a year in premiums. 
Let's take that cutoff of $1,000 per year of pharmaceutical 
cost. An individual that has $1,000 of pharmaceutical cost--and 
that is less than half of the people in this country? Only 38 
percent?
    Mr. Hash. Thirty-eight percent have more than $1,000 a 
year.
    Mr. Deal. And you would agree that less than half have 
$1,000?
    Mr. Hash. Yes, sir.
    Mr. Deal. Let's use that figure, $1,000. I am going to have 
to pay $500 of that thousand dollars as my part of co-pay, is 
that correct?
    Mr. Hash. Yes, sir.
    Mr. Deal. And the government would pay the other $500. So 
if I am paying $288 in premium and $500 out of pocket, I have 
paid $788. The ratio of the Part C premium is based on the same 
25/75 ratio; is that correct.
    Mr. Hash. No, it is 50/50.
    Mr. Deal. So then the government then is paying----
    Mr. Hash. They are paying $24, and the beneficiary is 
paying $24 a month.
    Mr. Deal. So the government then is paying another $288?
    Mr. Hash. That is correct.
    Mr. Deal. On top of the $500. We come out significantly 
more than $1,000 in total cost. Why if that is the average or 
more than the average, why would anyone want to participate in 
a program that is costing more than what they are getting?
    Mr. Hash. I think there is for the individual who has no 
coverage and who would be covered under this program, they 
would receive a benefit. Because instead of paying $1,000 out 
of their own income, they would actually pay less than that in 
order to get this coverage. I think that is the reason why it 
would be attractive.
    Mr. Deal. But it would seem to me since 44 percent of the 
people in this country have less than a $500 prescription bill 
for the whole year, they would be paying about $414 to get $125 
worth of benefit? I don't see how your auditors say that people 
will participate in a program in that regard.
    Mr. Hash. The thing to keep in mind is that this is an 
insurance program, and an insurance program by definition is 
one in which you create a pool of money where you spread the 
risk as far as possible in the anticipation of the unexpected 
event, such as a large medical expense and having the 
protection there for you. It doesn't mean that each and every 
dollar one pays in premium one gets returned to them in 
benefit.
    Mr. Deal. In reality, isn't there another dynamic here and 
that is increased utilization? Isn't that one of those 
unexpected but certainly not unanticipated things that will 
happen? The average cost of pharmaceuticals will no longer be 
less than half having $1,000 a year, but it will be 
substantially more than that?
    Mr. Hash. Yes, sir. I think it could be.
    When we look at surveys that show how much was actually 
spent by beneficiaries for pharmaceuticals, that is how much 
they spent. That is not how much they needed.
    You have lots of evidence that says that people are 
foregoing prescriptions that they otherwise would want to fill 
but don't have the money to fill. So when we say that less than 
half have $500 or less, that is how much they could afford. If 
they had coverage and their medical needs were appropriately 
met, presumably in many cases they would be getting more.
    Mr. Deal. Have your projections of cost been based on the 
actual amount or that escalated anticipated further use?
    Mr. Hash. The $118 billion is based on the actuary's 
assessment of use and cost over time of prescription drugs.
    Mr. Brown. I enjoyed the exchange. I think each of you 
neglected to point out that the way that prescription drugs are 
purchased that there will be additional cost savings for the 
beneficiaries.
    Mr. Hash. That is correct. On average, 13 percent.
    Mr. Burr. I would ask unanimous consent for two additional 
questions for myself.
    Mr. Bilirakis. We are running into problems here, but I 
certainly will not object. Brief questions and brief answers.
    Mr. Burr. Mr. Hash, you referred to this as an insurance 
proposal. Tell me, in year 2002 when a beneficiary reaches a 
cost for pharmaceuticals of $2,000, who pays for the cost of 
the pharmaceuticals above that $2,000 threshold?
    Mr. Deal. The individual is responsible, but, fortunately, 
they can continue enjoying the discounted prices through their 
PBM.
    Mr. Burr. So a hundred percent is assumed by the 
beneficiary?
    Mr. Hash. That is correct.
    Mr. Burr. Clearly this is the first insurance policy where 
we have seen where a catastrophic situation is borne by the 
patient.
    You also referred to the PriceWaterhouse report. I have had 
an opportunity while everybody was asking questions to go back 
to it, and let me suggest that PriceWaterhouse's conclusion is 
based upon the employers that choose to no longer provide 
coverage to their retirees. And I want to ask you about one 
specific area of the President's plan and that is the period 
that you have to opt in or opt out. Why, in fact, do you have a 
limited time where, in fact, employees may look at this new 
Medicare Part D not knowing what their employers will do in the 
future and opt in because of a fear that their employers might 
drop it in the future or have to make a decision during that 
period? What effect do you think that has on it?
    Mr. Hash. The reason that we have an initial open 
enrollment into the Part D that is proposed here is to make 
sure that we manage the selection issue as effectively as 
possible because if, as with the usual example of fire 
insurance, you allow people to sign up for fire insurance as 
the fire engines are arriving at their property, it becomes an 
uninsurable risk. If you have people in a large pool where you 
are spreading that risk as broadly as possible, then it is 
capable of being an insured risk, and that is what this benefit 
needs to be.
    Mr. Burr. Clearly, the American people are, for the most 
part, intelligent. And I think Mr. Deal has raised the best 
question that I hope members on both sides of this committee 
will look at, and that is, in quite a few of the instances, 40 
some percent, 40 plus seniors will in fact pay more to 
participate in this plan because of the 50 percent coinsurance 
and the deductible than equates to their annual prescription 
cost today. Clearly, if they don't participate, your actuaries 
don't hit their numbers, do they? I think we ought to put that 
into the methodology that we have gone through.
    I thank the gentleman for his generous time.
    Mr. Bilirakis. We will discharge the panel. As per usual, 
we will probably have some written questions for you.
    Mr. Hash, we look forward to seeing you on Friday.
    Thank you very much.
    The second panel consists of Dr. Gail Wilensky, Senior 
Fellow, Project HOPE; Mr. Robert Reischauer, Senior Fellow, 
Brookings Institution; Mr. Bob Goldberg, Senior Research 
Fellow; Mr. Bert Seidman on behalf of the National Council of 
Senior Citizens; and Mr. Bob Michel, Action Team Member, 
Seniors Coalition.
    Welcome. Your written statements are made a part of the 
record. I will turn the clock on 5 minutes, but, obviously, I 
will not cut you off if you go over it a little bit.
    Dr. Wilensky, please proceed.

 STATEMENTS OF GAIL R. WILENSKY, SENIOR FELLOW, PROJECT HOPE; 
ROBERT D. REISCHAUER, SENIOR FELLOW, THE BROOKINGS INSTITUTION; 
ROBERT M. GOLDBERG, SENIOR RESEARCH FELLOW, PROGRAM ON MEDICAL 
  SCIENCE AND SOCIETY, ETHICS AND PUBLIC POLICY CENTER; BERT 
SEIDMAN, ON BEHALF OF THE NATIONAL COUNCIL OF SENIOR CITIZENS; 
     AND BOB MICHEL, ACTION TEAM MEMBER, SENIORS COALITION

    Ms. Wilensky. Thank you, Mr. Chairman and members of the 
subcommittee. I am pleased to be here.
    As you indicated, I am Senior Fellow at Project HOPE. I am 
also the Chair of the Medicare Payment Advisory Commission. I 
am here today as an economist and health policy analyst and not 
in any official capacity.
    I would like to make several points to you during my oral 
presentation.
    The first is to remind you, although I know that you have 
heard this many times before and have spoken about it yourself, 
there is a continuing need to reform Medicare. A lot of the 
talk is financial. We have heard about the deficits that we 
anticipate. We have also heard that with the Balanced Budget 
Act producing greater savings than anticipated, it may be that 
we have several more years on the trust fund before it goes 
into bankruptcy. I would like to remind the members that this 
is based on razor-thin surpluses in each of the 5 years. 
Anything that would increase spending or reduce income could 
take us back to 2010.
    But it is not just the financial issues that require us to 
reform Medicare. The fact is that there are benefit problems, 
inadequacies, particularly outpatient prescription drugs, 
catastrophic, as was mentioned during the last panel. There is 
concern or should be concern about inequities. There are cross-
subsidies between people who live in low-cost States with 
conservative practice styles to people who live in high-cost 
States with aggressive practice styles. So there is more than 
ample need to reform Medicare.
    The difficulty in taking on prescription drug coverage 
first before significant other Medicare reform has to do with 
adding what will clearly be significant new expenditures to a 
program that is already in a fiscally fragile state.
    So the point for me is not whether or not prescription drug 
coverage and catastrophic coverage should be a part of a reform 
Medicare program. I believe both of these elements should be 
and will be in whatever Medicare for the 21st century for the 
baby boomers is produced by the Congress. But the question is, 
are you ready to do that now?
    As I observe the discussions going on in Congress, it 
appears that you are not ready to take on major Medicare reform 
right now. There are a lot of issues that have not been 
resolved, very legitimate issues. What should the structure 
look like of a major Medicare reform package? What should the 
design look like? How about the cost-sharing arrangements for 
government payments? Whether or not income relating is 
appropriate? What is the appropriate age of eligibility? And, 
ultimately, how should Medicare for the 21st century be 
financed?
    As you know, our history of estimating costs of new 
benefits is not very good. We had the experience that many of 
you were involved with in the catastrophic plan. There was both 
disputes between the administration and the CBO; and the fact 
is, by the time the program was repealed in 1989, it was about 
2 and a half times greater in its estimated cost than when CBO 
first estimated the cost projection. And, of course, it was 
never actually implemented. We don't know what would have 
happened.
    It is also true that exactly how to structure the benefit 
design is not clear. There has been some discussion about PBMs, 
the Pharmacy Benefit Management activities that are used in the 
private sector. I think they offer some promise to try to 
moderate spending and to have people be able to purchase at 
lower prices, but there are a lot of difficult questions that 
have not been resolved in the President's plan or other 
discussions. Should they be able to take financial risk? Should 
they be able to have discretion with regard to putting together 
drug classes and formularies? Will seniors be able to spend 
more to get outside of the formularies? How do we try to 
construct competition between the PBMs? Very serious issues 
that we will need to have thought out before such a program is 
actually put into place.
    So it leads me to say not whether or not prescription drug 
coverage is an appropriate part of a reform Medicare package, 
but I think the answer is yes.
    What can we do now? I would suggest that you think about 
the issues raised before. Either a program like the CHIPs 
program, grants to States where States can either extend their 
own assistance programs or come up with a new program or make 
use of Medicaid or to use the existing special categories, the 
QMBs and SLMBs that are already on the books where we have 
special benefits for individuals who are above the Medicare 
line but not well enough off to take care of some of the 
responsibilities under Medicare and to set up such a special 
program. To me, I actually think the CHIPs model is better 
because it might teach us more about how to design such a 
program.
    [The prepared statement of Gail R. Wilensky follows:]
Prepared Statement of Gail R. Wilensky, Senior Fellow, Project HOPE and 
               John M. Olin, Senior Fellow, Project HOPE
    Mr. Chairman and members of the subcommittee, thank you for 
inviting me to appear before you. My name is Gail Wilensky. I am the 
John M. Olin Senior Fellow at Project HOPE, an international health 
education foundation and I chair the Medicare Payment Advisory 
Commission. I am also a former Administrator of the Health Care 
Financing Administration. I am here today, however, to discuss my views 
on Medicare reform and prescription drug coverage based on my 
experiences as an economist and a health care policy analyst. I am not 
here in an official capacity, and my remarks should not be interpreted 
as representing the views of either Project HOPE or MedPAC.
The Need for Medicare Reform
    As the Subcommittee has heard in many previous hearings, Medicare 
is a program in need of reform. Some of the motivation for reform has 
been financial but issues have also been raised about the benefit 
structure, the incentives, and the geographic cross subsidies 
associated with the traditional program. The focus of this hearing, 
outpatient prescription drug coverage, is a frequently used example of 
the inadequacies of the current benefit structure.
    The Committee is familiar with the financial problems of Medicare. 
Medicare, as it is currently structured, is partially dependent on a 
Part A trust fund that is projected to be depleted of funds just as the 
pressure of the baby boomers' retirement starts to be felt. Although 
the April 1999 report of the Social Security Trustees moved the date of 
depletion from 2010 to 2015, the new estimate is extremely fragile. The 
additional five years of Part A solvency are based on razor-thin 
surpluses over several years that could easily disappear if Part A 
expenditures increase slightly faster than anticipated or wage tax 
revenue grows slightly slower than expected. In addition, the pressure 
on general revenues from Part B growth will continue although this is 
less observable since Part B is not funded by a stand-alone trust fund.
    Medicare's other problems are also familiar. Traditional Medicare 
is modeled after the indemnity insurance plans that dominated the way 
health care was organized and delivered in the 1960's. The benefit 
package also reflects the 1960's, not covering outpatient prescription 
drugs or providing protection against very large medical bills.
    Because of the limited nature of the benefit package, most seniors 
have supplemented traditional Medicare, although some have opted-out of 
traditional Medicare by choosing a Medicare risk plan. The use of this 
two-tiered insurance strategy has had important consequences for both 
seniors and for the Medicare program.
    For seniors, supplemental coverage has meant substantial additional 
costs, with annual premiums varying between $1000 and $3000 or more. 
The supplemental plans have also meant additional costs for Medicare. 
By filling in the cost-sharing requirements of Medicare, the plans make 
seniors and the providers that care for them less sensitive to the 
costs of care, resulting in greater use of Medicare-covered services 
and thus increased Medicare costs.
    There are also serious inequities associated with the current 
Medicare program. The amount Medicare spends on behalf of seniors 
varies substantially across the country, far more than can be accounted 
for by differences in the cost of living or differences in health 
status among seniors. Seniors and others pay into the program on the 
basis of income or wages and pay the same premium for Part B services. 
These large variations in spending means there are substantial cross-
subsidies from people living in low medical cost states and states with 
conservative practice styles to people living in higher medical cost 
states and states with aggressive practice styles.
A Reformed Medicare Program
    A reformed Medicare program should, in my opinion, include coverage 
for outpatient prescription drugs as well as provide protection against 
catastrophic expenses. How to structure new benefits so that they do 
not represent a costly change to the program is among the many issues 
that will need to be resolved. Should seniors continue to pay the 
average premium they now pay for Medigap or should there be a higher 
set of deductibles and coinsurance payments?
    The benefit package is not the only issue that needs to be resolved 
in reforming Medicare. There are also issues of the design and 
structure of a reformed Medicare program, the structure and cost 
sharing arrangement of government payments, questions of income-
relating government payments, the appropriate age of eligibility and 
the adequacy of the financing arrangements.
    I personally support a program modeled after the Federal Employees 
Health Benefits Program or what is generically referred to as a 
premium-support program. I believe this type of structure for Medicare 
would produce a more financially stable and viable program. Such a 
program would provide better incentives for seniors to choose efficient 
plans and/or providers and better incentives for physicians and other 
health care providers to produce high-quality, low cost care. This type 
of program would allow seniors to choose among competing plans, 
including a modernized fee-for-service Medicare program, for the plan 
that best suits their needs.
    I also recognize that not all Members of Congress agree that a 
premium support model would represent an improvement over the current 
program. Nor does there appear to be strong support for a competing 
reform model.
Why Not Change the Benefit Structure Now?
    Given my agreement that a reformed Medicare package would include 
outpatient prescription drug coverage, the question is whether that is 
the place to start the reform process. I think the answer is ``no'' on 
several counts, although I do think there are some changes to the 
benefit structure that could be introduced on an interim basis.
    The most obvious reason not to proceed with the benefit changes 
first is that there are a series of reforms that need to occur to make 
Medicare viable for the 21st Century and to accommodate the retirement 
of the baby boomers. These include the issues raised earlier such as 
the design and structure of Medicare, the design and structure of 
government payments for services and plans, age and any other 
eligibility issues and a stable financing structure for Medicare. To 
introduce a change that would substantially increase the spending needs 
of a program that is already financially fragile without addressing 
these other issues of reform is a bad idea.
    There are other reasons to proceed with some caution when it comes 
to introducing a new outpatient prescription drug benefit for Medicare. 
The difficulty of correctly estimating the cost of such a program is 
clearly an important other reason. Our past history in this area is not 
encouraging.
    Many of you were involved in the passage and subsequent repeal of 
the Medicare Catastrophic Coverage Act. From the time the legislation 
was first introduced until the time it was repealed, the cost estimates 
of the prescription drug benefit provided by the Congressional Budget 
Office (CBO) increased by a factor of two and a half. This very 
substantial change occurred before the program was ever actually 
implemented.
    The experience of the Catastrophic Act also makes it very clear 
that seniors are not only interested in the benefits they will receive 
but also in any additional costs that they will be expected to bear. As 
became apparent, many seniors then felt they would be better off 
without the new program and were quite vociferous in expressing that 
belief.
    Disagreement over the cost of the new drug benefit plan recently 
proposed by the President has already occurred. The Administration 
estimated the proposed drug benefit would cost $118 billion over 10 
years and that savings from changes to the fee-for-service program 
would save $64 billion. CBO estimated the cost of the program at $168 
billion ($50 billion more), and the savings from changes to traditional 
Medicare at $48 billion ($16 billion less).
    In addition to cost and estimating concerns, important questions 
remain about how best to structure the benefit. Most recent proposals 
have made use of pharmacy benefit managers or PBM's as a way to 
moderate spending without explicitly using price controls. These 
strategies, when used by managed care, showed some promise for a few 
years although more recently they have seemed less effective. But most 
PBM's have relied heavily on discounted fees and formularies and only 
recently have begun using more innovative strategies.
    If Medicare is going to make use of PBM's, decisions will need to 
be made about whether and how much financial risk PBM's can take, the 
financial incentives they can use, how formularies will be defined and 
how best to structure competition among the PBM's. All of these issues 
remain outstanding.
    Finally, it is important that we understand the reasons we are now 
experiencing rapid increases in pharmaceutical spending and the 
challenges these reasons present. Medical inflation or price increases 
for the same product represents only a small amount of the increase in 
spending.
    Part of the increase in spending has come from increased 
utilization, but most of the increase has come from the substitution of 
newer, presumably better, more expensive pharmaceuticals for older, 
presumably less effective, cheaper ones. Designing strategies that 
allow for appropriate use of newer therapies as well as appropriate use 
of existing therapeutics is much more challenging than designing 
strategies to only moderate medical inflation.
What Can We Do Now?
    Although the Congress does not appear ready to take on the broader 
issues of Medicare reform during this current session, there are 
changes that could be made on an interim basis. The most important as 
it relates to pharmaceutical benefit coverage would be to introduce a 
program that targeted coverage to low income seniors.
    One way to do a targeted program would be to introduce a grant 
program to the states that allowed states to extend existing 
pharmaceutical assistance programs, expand Medicaid coverage or 
introduce new programs, following in the model of the Children's Health 
Insurance Program (CHIP). Another strategy would be to provide 
pharmaceutical benefit coverage to those populations who already get 
special treatment under Medicare, that is, the qualified Medicare 
beneficiaries (QMB's) and the specified low-income beneficiaries 
(SLMB's). With the latter strategy, all of the decisions about if and 
how to use PBM's would still have to be resolved.
    A targeted program to the low income population in no way lessens 
the need for more fundamental reform of the Medicare program. It does, 
however, provide an important interim opportunity.

    Mr. Bilirakis. Thank you.
    Mr. Reischauer.

                STATEMENT OF ROBERT D. REISCHAUER

    Mr. Reischauer. Thank you, Mr. Chairman. And let me start 
by apologizing for not providing the subcommittee with my 
testimony in a timely fashion. To be beaten up by Gail Wilensky 
is probably a record that not many people----
    Mr. Bilirakis. Yes, you are very busy people and you take 
the time to come here when we invite you and ask you to come, 
and yes, ideally if we give you more notice, fine. But, quite 
often, we can't do that. We do need the time to look at the 
testimony, but I appreciate your making that comment.
    Mr. Reischauer. I appreciate that.
    My testimony deals with three questions.
    First, why have serious legislative proposals to provide 
Medicare participants with some form of protection against high 
prescription drug cost surfaced now, a decade after we repealed 
the Medicare catastrophic act?
    Second, which of the various broad approaches to achieving 
this objective makes the most sense in the current context?
    And, third, how should the new prescription drug benefit be 
structured?
    In my judgment, the renewed interest that we are seeing in 
providing prescription drug coverage is explained by three 
developments, all of them quite obvious.
    First, prescription drugs are becoming an ever more 
important and increasingly costly component of modern medical 
care.
    Second, the mechanisms that elderly and disabled have been 
using to obtain such protections are becoming increasingly 
inadequate, and they are beginning to crumble.
    Third, successful restructuring of the Medicare program for 
the 21st century is going to involve adopting a more adequate 
benefit package, one that includes coverage of prescription 
drugs.
    Let me just say a word about the second of these 
developments, namely the erosion of the current system of 
providing some kind of coverage.
    As Mike Hash indicated, there has been a substantial 
reduction in the fraction of employers that are providing 
retiree health benefits that cover drugs. This is related to 
the FASB 106 ruling. It is likely to continue in the future. We 
haven't seen the full effects of it because, for the most part, 
they apply to future retirees, not existing retirees; but this 
is going to be a growing problem.
    Because of the Medicare--the Balanced Budget Act changes 
that you adopted in 1997 and market forces, we have seen a 
sharp reduction in the generosity of drug benefits offered by 
Medicare+Choice plans. Thirty-two percent of them will have 
caps of $500 or less in the year 2000. None of you have ever 
had such a chintzy drug benefit in any plan that you have been 
covered by. This is not insurance, it is a token form of 
assistance. Medigap policies which provide prescription drug 
coverage are very expensive, and their premiums are rising very 
rapidly, and it is possible that they will price themselves out 
of the market for many Americans. So we have a real problem 
here.
    A lot of approaches have been put forward as ways to deal 
with this problem, and they cover such things as tax 
deductibility for prescription drug expenditures, tax credits, 
grants to States to support pharmacy benefit programs, stand-
alone prescription drug programs offered through FEHB-type 
structure, mandated manufacturer discounts to retail pharmacies 
for drugs sold to Medicare participants who lack coverage, 
mandates on Medigap policies to have all of them cover 
prescription drugs so you don't have adverse selection problems 
that you now have, or encompassing prescription drugs in the 
basic Medicare benefit package.
    While all of these approaches would offer some help to some 
Medicare participants, only the last of those, including 
prescription drugs and the basic benefit package, would be more 
than a partial and temporary solution to the underlying 
problem. And so I would urge you to not deal with stop-gap 
solutions but to begin in a very gradual and measured way to 
move down the road that inevitably we will have to follow if 
this problem is going to be resolved.
    When you design Medicare prescription drug coverage 
policies, you are going to have to deal with a number of very 
difficult questions, questions for which there really are no 
right or wrong answers. Policy, budgetary, administrative and 
philosophical considerations will come into play when you 
answer them.
    Let me touch on a couple of these. Should the benefit be 
insurance or assistance? Ideally, it should be insurance. It 
should protect you from large expenditures. Most people can 
bear some of the expenditures themselves. As we learned in the 
Medicare catastrophic act and as we have learned from looking 
at the way employers structure their health benefits, most 
Americans want some assistance. They want a plan that gives 
lots of people a little bit.
    I don't think you should use that fact as an excuse to not 
provide real top dollar insurance coverage. Medigap policies 
don't provide real insurance now. Medicare+Choice policies on 
the whole don't provide it. The President's plan didn't provide 
real insurance, and that was brought out by some of the 
questions. What we really have to do is protect those with high 
expenditures.
    Let me just say a word about the last of these questions, 
which is should it be a mandatory or voluntary program.
    It probably should be mandatory, if we were designing this 
in the Kennedy School seminar, but the fact of the matter is 
that it has to be voluntary. And to get people to join a 
voluntary program to avoid the adverse selection problems, it 
will require considerable subsidization, as the President has 
done, and probably inducements for enrollment such as the one-
time opt in that the President has provided.
    My testimony goes through several other questions that I 
think are relevant in design, and I will be glad to answer 
questions on them.
    [The prepared statement of Robert D. Reischauer follows:]
        Prepared Statement of Robert D. Reischauer 1
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    \1\ Senior Fellow, The Brookings Institution [(202)-797-6056, 
[email protected]]. The views expressed in this statement should 
not be attributed to the staff, officers, or trustees of the Brookings 
Institution.
---------------------------------------------------------------------------
    Mr. Chairman and Members of the Subcommittee, I appreciate this 
opportunity to discuss with you some of the issues raised by proposals 
to provide Medicare participants with greater protection from large 
out-of-pocket prescription drug expenditures. My statement addresses 
three questions:

 Why have serious legislative proposals to provide Medicare 
        participants with some type of prescription drug coverage 
        surfaced now, one decade after Congress voted overwhelmingly to 
        repeal the modest drug protection provided by the Medicare 
        Catastrophic Coverage Act of 1988?
 Which of the various broad approaches to providing the elderly 
        and disabled prescription drug coverage makes the most sense in 
        the current context? and
 How should a new prescription drug benefit be structured?
Why now?
    Three considerations have stimulated renewed interest in providing 
prescription drug coverage to Medicare participants:

 First, with each passing year, prescription drugs are becoming 
        an ever more important and costly component of medical care.
 Second, the mechanisms the elderly and disabled have been 
        using to obtain protection against the high costs of outpatient 
        prescription drugs are becoming increasingly inadequate and 
        threaten to crumble altogether.
 Third, successful restructuring of Medicare for the 21st 
        century will almost certainly require adoption of a more 
        adequate benefit package--one that, at a minimum, provides some 
        out-patient prescription drug coverage, protection against 
        catastrophic costs, and a rational schedule of copayments.
    Before World War II, few prescription drugs were available and 
their therapeutic contribution to health care was limited. The 
development of new and more powerful antibiotics and antidepressants in 
the late 1940s and 1950s laid the groundwork for a pharmaceutical 
revolution. When Medicare was enacted in 1965, this revolution had not 
yet come to fruition, and the role of pharmaceuticals in health care 
remained relatively limited. Since 1965, however, there has been an 
explosion of new drug therapies--more powerful drugs for bacterial 
infections, immunosuppressant drugs for organ transplants, 
antidepressants with fewer side effects, vaccines to protect against 
measles, mumps, rubella, diphtheria, hepatitis B and other diseases, 
chemotherapies to fight cancer, clot busting and blood thinning drugs, 
along with pharmaceutical interventions for such chronic conditions as 
high cholesterol, irregular heartbeats, elevated blood pressure, 
asthma, and arthritis. The past decades are likely to be just the 
overture to what lies ahead as new gene therapies and biotechnological 
applications move from the laboratory to the marketplace.
    As the ability of drug therapies to improve health has grown, so 
too have the total costs of such treatments. When Medicare was enacted, 
pharmaceutical expenditures constituted 10.6 percent ($3.7 billion) of 
personal health care expenditures.2 From the mid 1960s 
through the early 1980s, the contribution of drugs to the total health 
care bill fell fairly steadily, reaching a low of 5.3 percent ($15.0 
billion) of personal health care expenditures by 1982. This ratio then 
began to rise. When the Medicare Catastrophic Care Act was repealed, 
drug expenditures amounted to 6 percent ($32.9 billion) of personal 
health care expenditures. In 1999, a decade later, the fraction is 
expected to be 9.3 percent ($100.6 billion) and it is projected to grow 
to 12.6 percent ($243.4 billion) by 2008. Many believe these 
projections are conservative.
---------------------------------------------------------------------------
    \2\ Heath Care Financing Administration, National Health 
Expenditures.
---------------------------------------------------------------------------
    Employer-sponsored health insurance policies, as well as privately 
purchased individual policies, have recognized the increasing 
importance of drug therapies to overall health care and have expanded 
coverage and reduced coinsurance for out- patient pharmaceuticals over 
the past several decades. About 95 percent of employer-sponsored plans 
now provide some drug coverage and many individual policies offer such 
protection as well. However, Medicare, with a few exceptions, does not 
cover the costs of out-patient prescription drugs. This constitutes a 
serious inadequacy in the program, one that makes no more sense than 
offering a health insurance policy that does not cover diagnostic 
imaging such as X-ray, CT, MRI, sonogram, or PET scans.
    Most Medicare participants have managed to cope with the program's 
failure to provide broad coverage by obtaining some form of out-patient 
prescription drugs coverage through supplemental policies. The 12 
percent of participants who are dually eligible for Medicaid have the 
most extensive protection and face no, or very little, out-of-pocket 
exposure. Of the one-third of participants who are covered by a 
supplemental policy provided by their former employer, roughly nine in 
ten receive more or less adequate drug coverage through these 
policies--coverage that is similar to that which they enjoyed when they 
were active workers.3
---------------------------------------------------------------------------
    \3\ For breakdown of the distribution of Medicare participants in 
1995 by the type of supplemental policy they have and the drug coverage 
provided by these policies see, Michael E. Gluck, ``A Medicare 
Prescription Drug Benefit,'' Table 2, National Academy of Social 
Insurance, Medicare Brief No. 1, April 1999.
---------------------------------------------------------------------------
    Roughly one in four of those with Medigap policies--those who 
purchase one of the three standard Medigap policies that offers 
prescription drug coverage (policy types H, I, and J) or a nonstandard 
(pre-1992) policy with such coverage--receive drug benefits that are 
rather limited and which bear a fairly stiff price. The standard H and 
I Medigap policies pay 50 percent of prescription drug costs above a 
$250 deductible up to a maximum $1,250; the J policy has a maximum 
benefit of $3,000. In a 1998 survey of a sample of metropolitan areas, 
Consumer Reports found that the median annual premium faced by a 65 
year old for the standard Medigap I plan was $1,201 higher than that 
for the standard F plan--a pretty steep differential considering that 
the only additional benefit the I plan offers besides limited drug 
coverage is payment of the Part B deductible ($100). Such differentials 
reflect the fact that, in a voluntary system like Medigap, less healthy 
participants are attracted to plans that offer prescription drug 
coverage.
    The overwhelming majority of Medicare participants who are enrolled 
in a Medicare+Choice plan (M+C)--some 16 percent of all participants 
today--are provided with some prescription drug coverage, although this 
protection is often quite limited. Less than 3 percent of Medicare 
participants get help with their drug expenses through programs 
operated by the Departments of Defense and Veterans Affairs or one of 
the drug assistance programs 14 states have established for their low-
income elderly and disabled.
    Though this patchwork response to Medicare's inadequate benefit 
package has functioned tolerably well for many participants in the 
past, it is inequitable and is starting to erode. There is little or no 
relationship between access to prescription drug coverage and the need 
for such insurance or the ability of participants to pay out-of-pocket 
for their drugs. For those lacking employer-sponsored retiree coverage 
or Medicaid eligibility, costs and availability can vary significantly. 
In some areas of the country there are no M+C plans through which a 
participant can obtain drug coverage. In other regions, participants 
must pay steep supplemental premiums to obtain M+C drug coverage. In 
still others, prescription drug coverage is part of the M+C plans' 
basic or no-cost benefit packages. Similarly, premiums for Medigap 
policies that provide drug coverage vary more than five fold depending 
on the purchaser's place of residence.
    The consequences of this situation are not just financial. Those 
lacking coverage or having inadequate coverage are more likely to forgo 
filling prescriptions written by their physicians or to skimp on 
recommended dosages. Such behavior not only undermines the 
effectiveness of the medical care these patients receive but, in some 
cases, also result in complications that require more costly treatment 
later on.
    While estimates suggest that about 65 percent of participants had 
some form of drug coverage in 1995, the figure is almost certainly 
lower today and likely to fall further in the future.4 The 
coverage that remains is also likely to be less comprehensive and more 
expensive for beneficiaries. In response to rising costs and the 1992 
Financial Accounting Standards Board statement (No.106) which required 
that the unfunded liability of retiree health plans be reported on 
corporate balance sheets, fewer firms will adopt retiree health 
benefits in the future and more of those that already offer such 
benefits will drop their coverage, raise the premiums they impose on 
retirees, or scale back the generosity of their benefits. Between 1994 
and 1998, the fraction of employers offering health benefits to their 
Medicare-eligible retirees fell by one-quarter.5 The full 
effect of this retrenchment has yet to be felt because, for the most 
part, the cutbacks apply to workers who will retire in the future.
---------------------------------------------------------------------------
    \4\ Margaret Davis, John Poisal, et al., ``Prescription Drug 
Coverage, Utilization and Spending Among Medicare Beneficiaries,'' 
Health Affairs, January/February 1999.
    \5\ National Economic Council, Domestic Policy Council, Office of 
Domestic Policy, ``Disturbing Truths and Dangerous Trends: The Facts 
About Medicare Beneficiaries and Prescription Drug Coverage,'' July 22, 
1999. For similar estimates see, General Accounting Office, ``Retiree 
Health Insurance: Erosion in Retiree Health Benefits Offered By Large 
Firms,'' 1998 and KPMG Peat Marwick, ``Health Benefits in 1998,'' 1998.
---------------------------------------------------------------------------
    The restraints the Balanced Budget Act of 1997 (BBA97) imposed on 
payments to M+C plans and market pressures are causing these plans to 
scale back the generosity of their drug benefits. The fraction of M+C 
plans that provided drug coverage in their basic packages stabilized in 
1998 after rising rapidly from 32 percent of all plans in 1993 to 68 
percent in 1997.6 All indications are that the fraction has 
now begun to fall. In addition, more plans are imposing caps on drug 
coverage and these caps are becoming more restrictive. In 2000, some 32 
percent of plans will impose caps of $500 or less, up from 21 percent 
in 1999, and 82 percent of plans will set their maximum benefit at 
$2,000 or less. Copays will also rise--8 percent on average for generic 
drugs and 21 percent for brand-name pharmaceuticals. In short, while 
access to some drug coverage through M+C plans does not appear to be 
changing significantly, the generosity of the drug benefits offered by 
these plans is shrinking markedly and there is every reason to expect 
that this trend will continue.
---------------------------------------------------------------------------
    \6\ Health Care Financing Administration, ``Medicare+Choice: 
Changes for the Year 2000,'' September 1999.
---------------------------------------------------------------------------
    Furthermore, after a period of fairly modest growth, Medigap 
premiums have begun to grow again at a rate faster than that of the 
incomes of the retired population. The premiums charged by the three 
plan types that provide limited drug coverage, which average around 
$2,000 a year, are already high relative to the incomes of Medicare 
participants who lack employer-sponsored retiree coverage. A few more 
years of increases along the lines of those of the past three years--
increases in the 7 percent to 12 percent range--will make this source 
of limited drug coverage unaffordable to many.
    The increasing importance of drug therapies to modern medicine and 
the erosion of access to affordable drug coverage are not the only 
reasons why there is growing interest in establishing some new 
mechanism to provide drug coverage for Medicare participants. Such 
coverage is also an essential component of the leading approach for 
restructuring Medicare to meet the fiscal challenges that await it in 
the 21st Century. Premium support--or competitive defined benefit--
proposals would encourage competition both among M+C plans and between 
these plans and traditional fee-for-service Medicare. For such 
competition to function effectively, the standard benefit package that 
all M+C plans and the traditional Medicare offered would have to be 
sufficiently comprehensive so that few participants felt the need for 
supplemental policies. In other words, the benefit package would have 
to include some drug coverage. If this were not the case, dual 
insurance coverage, which is complex, confusing to participants and 
providers, inequitable, and costly, would persist. Adverse selection 
would continue to be a problem and the task of adjusting payments to 
plans for differential risk would be made more difficult.
The approaches
    A large number approaches have been suggested to help Medicare 
participants pay for prescription drugs. These include:

 allowing Medicare participants an above-the-line deduction 
        from taxable income for prescription drug expenditures that 
        exceed some threshold amount,
 providing income tax credits to offset large out-of-pocket 
        drug expenditures of Medicare participants 7
---------------------------------------------------------------------------
    \7\ One proposal would provide a $1,000 credit to individuals 
($1,500 for couples) with incomes above 200 percent of poverty (250 
percent of poverty for couples) for expenditures over $500 a year. See, 
HIAA, ``Proposed HIAA Policy Position on Outpatient Prescription Drugs 
for Medicare Beneficiaries to be presented at the HIAA Board of 
Directors on September 15, 1999.''
---------------------------------------------------------------------------
 giving states matching or block grants so that they can 
        establish or expand targeted drug assistance programs for low-
        income Medicare participants, 8
---------------------------------------------------------------------------
    \8\ Stephen B. Soumerai and Dennis Ross-Degnan, ``Inadequate 
Prescription-Drug Coverage for Medicare Enrollees--A Call to Action,'' 
The New England Journal of Medicine, March 4, 1999 Volume 340, No. 9. 
The HIAA proposal cited in footnote 6 would also provide a block grant 
with no matching requirements to states to help them pay for assistance 
to those ineligible for the tax credits.
---------------------------------------------------------------------------
 offering Medicare participants separate prescription drug 
        insurance policies through a FEHBP-like structure of competing 
        plans,
 establishing a stop-loss arrangement financed by government 
        and the private sector to fully cover the pharmaceutical costs 
        associated with chronic or devastating diseases that exceed a 
        threshold, 9
---------------------------------------------------------------------------
    \9\ Fred Hassan, ``Free-Market Medicare Reform,'' The Wall Street 
Journal, page A-18, August 11, 1999.
---------------------------------------------------------------------------
 mandating that manufacturers provide drugs at discounted price 
        to retail pharmacies for sale to Medicare participants who lack 
        prescription drug coverage, 10
---------------------------------------------------------------------------
    \10\ H.R. 696 and S. 731.
---------------------------------------------------------------------------
 requiring that all Medigap policies provide prescription drug 
        coverage, and
 adding prescription drug coverage to Medicare either as part 
        of the mandatory benefit package or as an optional 
        benefit.11
---------------------------------------------------------------------------
    \11\ Both the proposal of Senator Breaux and Representative Thomas 
and the President's plan call for Medicare to offer an optional drug 
benefit. See, National Bipartisan Commission on the Future of Medicare, 
``Building a Better Medicare for Today and Tomorrow'' March 16, 1999 
and National Economic Council, Domestic Policy Council, ``The 
President's Plan to Modernize and Strengthen Medicare for the 21st 
Century: Detailed Description'' July 2, 1999.
---------------------------------------------------------------------------
    While any of these approaches would reduce the burden that drug 
expenditures now impose on some Medicare participants and would begin 
to level the playing field between those who have and those who do not 
have prescription drug coverage, most would provide only a partial and 
temporary solution to the underlying problem. Moreover, most of these 
approaches would make the current system even more complex than it 
already is.
    Prescription drugs are an integral and important component of 
modern health care and, therefore, should be incorporated into the 
basic Medicare health insurance package. To adopt some other approach 
will serve only to delay the inevitable. If stopgap measures that rely 
on tax expenditures or state grant programs are adopted now because 
they seem to be more affordable, undesirable inequities will be 
perpetuated and the eventual integration of drug coverage into Medicare 
may be made more difficult.
The structure of a prescription drug benefit
    Policy makers wishing to design a workable system to assist 
Medicare participants with their prescription drug expenditures must 
address a such questions as:

 Should the benefit provide insurance or assistance?
 Should program eligibility be targeted, that is, limited to 
        those with low incomes?
 Should subsidies be provided only to those with low incomes or 
        to all participants?
 Should the benefit be mandatory or optional?
    There are no right or wrong answers to these questions. Policy, 
budgetary, administrative, and philosophical considerations must come 
into play when answering them.
    Insurance or assistance? From both the policy and budgetary 
perspectives, a prescription drug benefit should be designed to provide 
insurance protection--security against the possibility that needed 
pharmaceuticals will impose a financial burden that is large relative 
to the participant's resources. All but the poorest participants, many 
of whom are eligible for Medicaid, should have the financial capacity 
to budget for a moderate level of out-of-pocket prescription drug 
expenditures each year.
    Political considerations, however, seem to rule out designs that 
benefit only the minority of participants who incur catastrophic drug 
expenditures. The lack of popular appeal for catastrophic drug 
insurance was brought home most forcefully by the fate of the Medicare 
Catastrophic Care Act of 1988 (MCC). That legislation set a relatively 
high deductible--one that would be exceeded by only 16.8 percent of 
participants each year.12 When fully phased in, the benefit 
would have paid 80 percent of approved drug costs above the deductible. 
The MCC was ignominiously repealed only 17 months after enactment 
because both the drug and the other catastrophic protections were 
concentrated on a small number of beneficiaries while the financing was 
spread broadly across all participants, many of whom concluded that 
they would receive no benefits over and above those they were already 
receiving through their employer's retiree health plan.
---------------------------------------------------------------------------
    \12\ Had the MCC not been repealed, the drug deductible would have 
been around $2,000 in 1999.
---------------------------------------------------------------------------
    Most employer-sponsored plans impose either no deductibles or 
relatively modest ones for drugs and, therefore, provide some 
assistance to a majority of participants. It seems likely that any 
successful drug plan for Medicare will have to follow this practice. 
This political reality, however, should not be used as a reason for 
denying true catastrophic protection to the small fraction of 
participants who face extraordinary drug expenses. In other words, drug 
benefits should not be capped as they are in most M+C plans, in the H, 
I, and J Medigap policies, and in the president's drug proposal. Any 
new drug benefit should pick up all drug expenditures above some high 
level; ideally, one catastrophic cap should apply to the out-of-pocket 
expenditures for all covered services. Within any fixed budget, the 
resources needed to provide true catastrophic protection could be 
obtained by reducing the level of assistance to those faced with small 
and modest expenditures.13 Participants should accept a 
program whose assistance became more generous as the burden of drug 
expenditures rose.
---------------------------------------------------------------------------
    \13\ A system of graduated copayments could preserve the principle 
that a majority of participants receive some benefit while those with 
extraordinary expenditures are provided full protection. For example, 
the benefit could pay 20 percent of the first $1,500 of drug 
expenditures, 40 percent of the next $1,500, 50 percent of the next 
$1,000, 75 % of the next $2,000, and 100 percent of expenditures over 
$6,000.
---------------------------------------------------------------------------
    Targeted or universal eligibility? Given the reality of limited 
resources and the fact that most moderate- and upper-income 
participants have either prescription drug coverage or access to 
affordable coverage, some have advocated restricting any new drug 
benefit to those with low incomes. This could be accomplished by 
providing states with grants to establish or expand state pharmacy 
assistance programs or by creating a new drug benefit within Medicaid 
that serves QMB, SLMB, and QI-1 beneficiaries. Such an approach, 
however, would be inconsistent with the overarching philosophy of 
social insurance which holds that, while financing can be income 
related, eligibility for social benefits should not be. There is no 
more logic to means-testing drug benefits than to means-testing home 
health, laboratory, or physicians services. Moreover, as pharmaceutical 
costs rise and private coverage continues to erode, the need for 
assistance to help pay for large drug expenditures will creep up the 
income distribution, eventually encompassing many middle-income 
retirees. For these reasons, any program to provide prescription drug 
coverage to the aged and disabled should be universal.
    Broadly or narrowly based subsidies? Logically, subsidies in any 
universal prescription drug program should be restricted to those who 
do not have the resources to pay the full cost of this protection. The 
high option in the Breaux/Thomas restructuring proposal, which provided 
drug coverage as well as broader catastrophic protection, followed this 
precept. Unfortunately, it is not practical to target subsidies only to 
low-income beneficiaries as long as participation in a new program is 
voluntary. In such circumstances, those with middle and upper incomes 
who expect to incur high drug costs will find the program most 
attractive and the unsubsidized premiums will be driven up by adverse 
selection. A broad subsidy equal to the cost associated with adverse 
selection is probably the minimum needed to make a voluntary program 
workable.
    Mandatory or optional participation? If given the choice, any 
rational Medicare participant should want to have some modest level of 
prescription drug coverage if it were available at an actuarially fair 
price. Judging from the similarity in the drug coverage provided by 
different employer-sponsored plans, it is likely that the vast majority 
of Medicare participants would be comfortable with the same modest drug 
plan, especially if those who wanted more extensive coverage were free 
to purchase supplemental policies. Mandating participation in such a 
fair plan, therefore, would not constitute a significant infringement 
on personal freedom. Nevertheless, as the MCC experience proved, 
requiring participation in a drug plan that is not heavily subsidized 
is politically infeasible as long as many enjoy heavily subsidized 
coverage through a former employer's plan and others who are healthy 
and lack coverage are myopic and fail to perceive their long-run 
interests. Making participation voluntary, however, introduces the 
possibility of adverse risk selection. To overcome this hazard, 
policymakers can either provide broad subsidies that are sufficiently 
generous to make the coverage attractive even to healthy, non-risk 
adverse individuals or they can restrict enrollment in ways that 
encourage participation. For example, beneficiaries could be allowed to 
enroll only when they become initially eligible for Medicare benefits 
or when their employer-sponsored supplemental plan is no longer 
available to them. The president's proposal, quite wisely, relies on 
both the carrot and the stick to ensure the broad participation that is 
necessary to ensure stability.
Conclusion
    It will be no simple task to design and implement a workable and 
politically acceptable program to provide Medicare participants with 
adequate, affordable prescription drug coverage. Nevertheless, the need 
for such protection is great and will only grow in the future. 
Furthermore, adoption of a more up-to-date standard benefit package--
one that covers prescription drugs, provides an out-of-pocket 
expenditure cap, and rationalizes copayments--is a necessary first step 
along the road to making Medicare a more efficient and effective 
program and allowing it to cope with the demographic and cost pressures 
that it will face in the 21st Century.

    Mr. Bilirakis. Thank you, Mr. Reischauer.
    Mr. Goldberg.

                 STATEMENT OF ROBERT M. GOLDBERG

    Mr. Goldberg. Thank you, Mr. Chairman and members of the 
committee.
    You have my full written testimony. I am going to be brief.
    I believe that Congress has breathing room to work on a 
full-scale reform of Medicare to incorporate the fact that 
pharmaceuticals are front-line therapy for most diseases and 
should begin to restructure and reorganize the program, I 
think, around the lines of what the Breaux-Thomas Commission 
was trying to do and in the interim take the step of dealing 
with the fact that many seniors, including poor seniors, need 
prescription drug coverage now, and I think there are several 
proposals in Congress that do that.
    I am just going to cite some specific statistics that 
haven't been discussed today to put--to show you that you do 
have some breathing room.
    There is a report that the Department of Health and Human 
Services published in 1997, it did a survey of seniors, that 
said only 2 percent didn't have access to medications when they 
were needed. The Census Bureau did a consumer expenditure 
survey that said, on average, that even seniors with the lowest 
income were more likely to spend more on other items than 
prescription drugs and Medicare. Its own beneficiaries' survey, 
which shows that 75 percent of all seniors spent less than $500 
out of pocket a year on medications.
    The immediate problem of drug costs is concentrated among 
the poor elderly and those with catastrophic out-of-pocket 
costs. About 1.2 million elderly poor don't have drug coverage. 
Of course, those averages often hide real hardship. A small 
percentage, as other people have said in this hearing, 
particularly those that are chronically ill, spend thousands a 
year on medications; and I don't have any magic bullet or 
formula for what to do. I think there are several proposals 
that--in Congress that would deal with that specific problem.
    I do have one simple suggestion. I did find in my research 
that 53 percent of seniors with incomes below the Federal 
poverty level do not receive Medicaid assistance even though 
they are eligible for it. Ten percent of Medicare recipients 
also on Medicaid today don't get prescription drug coverage. 
You can do some tinkering and deal with a big chunk of the 
problem right there. I think it is a better use of the money 
than subsidizing corporate drug benefit plans and paying for 
Ross Perot or George Steinbrenner's prescription drug benefits, 
as some proposals would suggest.
    I also think that dumping a new drug benefit on top of the 
existing program would make it harder in the long run for 
seniors to get the benefits in medical progress because I think 
evidence shows that stand-alone drug benefits that don't 
integrate the drug benefit as part of the entire health care 
package lead to restrictions inevitably. Any managed drug 
benefit with formularies and restrictions have been shown to 
hurt elderly more than other populations because of their 
specific medical needs.
    And I know that there is an erosion in the private sector 
because of the fact that drugs are becoming the front-line 
therapy. I think it shows if we try to keep drug costs down 
through rationing and price controls and stuff instead of 
trying to integrate it as part of a new 21st century approach 
to health care, we are going to be hurting ourselves and 
seniors.
    And while things are getting bad in the private sector they 
ain't getting much better in Medicare either. I have seen that 
Medicare is proposing in the year 2000 to pay flat rates for 
future cancer drugs in the outpatient setting, regardless of 
their actual cost or effectiveness. For example, they will pay 
less for Taxol and Herceptin, which is a superior treatment for 
breast cancer, than for an older form of therapy. And that the 
hospitals, as a result, will have a financial incentive to 
shift patients away from superior treatments and will be 
discouraged from using cutting-edge drugs and that drugs like 
Herceptin are not available under the VA's formulary and health 
system formulary. And I don't think that is the kind of drug 
benefit that I want my mother or father to get.
    And that under the proposed Medicare rule that the self-
administered drugs will not be eligible for payment. It is sort 
of like the old joke of the Catskills. The two women are 
sitting next to each other saying the food is terrible. Yeah, 
and the portions are so small.
    I am afraid if we create a new large drug benefit without 
fully taking into account what we need to do to reform the 
entire system, government will go further down the road of 
rationing, restriction and retrograde medicine. So we need to 
reform Medicare so that poor elderly and those with 
catastrophic costs are taken care of now and physicians and 
patients can choose the best medicines now and in the future.
    [The prepared statement of Robert M. Goldberg follows:]
   Prepared Statement of Robert M. Goldberg, Senior Research Fellow, 
Program on Medical Science and Society, Ethics and Public Policy Center
    Mr. Chairman, Honorable Members of the Committee, thank-you for the 
opportunity to testify before you today. I believe that Congress should 
develop a plan that allows poor seniors to obtain prescription drug 
coverage in the private sector and focus on reforming Medicare to 
reflect the fact that pharmaceuticals are the front-line therapy for 
most diseases. Simply dropping a large new entitlement on top of the 
existing Medicare program will further undermine its ability to offer 
seniors advances against stroke, cancer, Alzheimer's, Parkinson's, 
heart disease now and in the future.
    There is no policy or health reason to create a government program 
to cover prescription drug costs for all senior citizens. Some 
advocates of a universal entitlement claim that half the prescriptions 
written go unfilled because many elderly literally choose between drugs 
and food. There is no scientific data to support this oft-repeated 
claim. However, there are many surveys that suggest most seniors do not 
have a problem getting the drugs they need. In a report (Access to 
Healthcare) published in 1997, the Department of Health and Human 
Services reported that only 2 percent of people 65 and over did not 
have access to medications when they were needed. A consumer 
expenditure survey conducted by the Census Bureau also found that, on 
average even seniors with the lowest incomes were more likely to spend 
more on other items than on prescription drugs. Indeed, Medicare's own 
beneficiary survey shows that nearly 75 percent of all seniors spend 
less than $500 a year out-of-pocket on medications. That includes many 
seniors with incomes below $10,000 a year.
    There are two reasons that, on average the drug expenditures of 
seniors are relatively modest. First, we are aging healthier and living 
longer. A study on aging done by the McArthur Foundation found that we 
are more independent, have fewer infirmities and have a better outlook 
on life than previous generations of seniors. Second, prescription drug 
coverage, while not first dollar, does defray at least half of the cost 
of drugs for over 60 percent of seniors. Many seniors, particular those 
with higher incomes and low drug expenditures find it is cheaper to pay 
for drugs and go without drug coverage. For example, for seniors with 
incomes of $50,000 and over, who make up nearly 20 percent of all 
Medicare beneficiaries, out of pocket drug costs of are only one half 
of one percent of their income.
    The real problem of drug costs is concentrated among the poor 
elderly. About 1.2 million elderly poor don't have drug coverage. 
Seniors with incomes below $10000 a year spend, on average about $427 
out of pocket a year on drugs. Of course, averages often hide real 
hardship. A smaller percentage, those that are chronically ill, spend 
thousands a year on medications.
    To be honest, I don't have a specific proposal that targets, 
defines or cares for the truly needy. Frankly, I am struck by how many 
proposals there are to cover the cost of prescription drugs for 
seniors. The last thing you need is another suggestion dumped at your 
feet.
    Rather, I am suggesting that Congress focus on the poor and on 
easing the risk and burden of catastrophic drug costs instead of 
subsidizing corporate drug benefit plans and wealthy retirees as some 
proposals now do. One simple suggestion: 53 percent of seniors with 
incomes below the federal poverty level do not receive Medicaid 
assistance. Ten percent of that are on Medicare are not for 
prescription drug coverage. Enrolling the unenrolled and providing drug 
coverage to those Medicaid recipients would be a huge step towards 
meeting their needs.
    In response, supporters of a universal drug benefit argue that 
private sector coverage is eroding and that in the future the cost of 
new drugs will make more generous government drug coverage necessary 
for all regardless of the current need. Build the roof while the sun is 
shining is how some people put it.
    But dumping a new drug benefit on top of the existing Medicare 
program will make it harder for seniors to get access to benefits of 
medical progress for two reasons. First, the way most stand-alone drug 
benefits control their costs usually compromise the health of seniors. 
A study by Susan Horn shows seniors are much more likely to go to the 
hospital if they are faced with restrictions on their choice of drugs. 
In general, all the proposals before Congress would lead prescription 
drug coverage into a stand-alone ``managed'' drug benefit that would 
limit the ability of doctors and patients to choose the right type of 
medicines. It would give government, HMO and pharmacy benefit 
management bureaucrats control over what drugs people can and cannot 
have.
    Second, drug coverage is eroding in the public and private sector 
because both the government and insurance companies have not faced up 
to the fact that is it medicines, not hospitals or physicians that are 
the most dynamic and decisive form of health care today. Payment and 
reimbursement systems have not changed to reflect that new reality. 
Rather, payors are still trying to keep drug costs down through price 
controls, rationing, formularies and the like rather than fully capture 
the value of new medicines by reforming the way medicine is practiced. 
You can't say your goal is to check to see if all your doctors are 
giving beta-blockers on the one hand and then complain about rising 
drug costs on the other. You can't assert that drugs are cost-effective 
because they keep people out of the hospital and allow people to stay 
at home and at work and then limit their access to the very medicines 
that let them do just that. But that is the kind of schizophrenic 
policy these large entitlements tend to produce.
    Indeed, the government's track record on this score is not very 
encouraging. Supporters of a universal drug benefit point to eroding 
private sector coverage for retirees and the fact that HMOs are raising 
drug co-pays and limiting drug choices. But HMO prescription drug 
cutbacks seem downright altruistic and patient-centered compared to 
those steps Medicare is taking right now to rein in drug spending.
    In 2000, Medicare will pay flat rates for future cancer drugs in 
hospital outpatient departments regardless of their actual cost or 
effectiveness. Hospitals will make money on older generic cancer drugs 
and lose money when they treat with newer ``state of the art'' cancer 
therapies. Just as alarming is the fact that even though drugs used to 
treat the side effects of chemotherapy and radiation therapy are 
essential to prolonging life, new Medicare rules do not include payment 
for these supportive therapies.
    An old combination of drugs used to treat breast cancer (leucovorin 
and 5FU) would yield a hefty profit of $3300 per patient. What is 
considered the superior treatment for breast cancer (Taxol and 
Herceptin) loses $2500. New compounds such as Rituxan or Gemzar are 
cancer drugs designed to turn off specific genes or molecules that 
cause specific cancers. Medicare will only reimburse such drugs at 2-8 
percent of their cost according to a study done by the Lewin Group. 
Hospitals will have a financial incentive to shift patients away from 
superior treatments and will be discouraged from using cutting edge 
drugs. In the British Health Care system, doctors can't prescribe 
Taxol. In our own Veterans Administration and Indian Health System, 
Herceptin is not on the drug formulary. Is this the kind of drug 
benefit we want to offer all our senior citizens?
    And ladies and gentlemen, as you heard two weeks ago from Michael 
Hash, Medicare's administrator, the program will reportedly change 
current policy and deny Medicare coverage for any drug that can be 
self-administered--regardless of whether self-administration would be 
safe for affected patients. Elderly cancer patients will be forced to 
pay for life-saving medications under that rule. They will be forced to 
inject themselves at home--even if they are unable to perform this task 
safely and correctly, even if they are unable to watch for and attend 
to the adverse reactions that could seriously harm or kill them if not 
responded to immediately.
    If Congress creates a large new drug benefit--one that the data 
suggests we do not need--it will force the government further down the 
road of rationing, restriction and retrograde medicine. We must care 
for the poor elderly with large out of pocket drug costs now. And we 
need to reform Medicare so that physicians and patients can choose the 
best medicines available now and in the future.
    Thank you for your time and patience.

    Mr. Bilirakis. Thank you, Mr. Goldberg.
    Mr. Seidman.

                    STATEMENT OF BERT SEIDMAN

    Mr. Seidman. Thank you, Mr. Chairman and Representative 
brown and members of the committee, for the opportunity to 
speak on this important issue.
    Let me just say at the outset that I am a member of the 
General Policy Board of the National Council of Senior Citizens 
and speak on its behalf, but I am also a senior.
    Mr. Bilirakis. You are not alone, sir.
    Mr. Seidman. I know I am not. There are many of us, and we 
are increasing all the time.
    I also live in a large apartment complex, a retirement 
community composed entirely of seniors. And I know because I 
see them every day how seniors depend on prescription drugs and 
how important it is to them in order to continue to live in any 
decent way at all.
    The National Council of Senior Citizens is a leading 
advocate for a stronger Medicare program, and we have been 
strongly in favor of a pharmaceutical benefit in Medicare ever 
since its enactment.
    Right off the bat, let me say that the NCSC supports the 
efforts of the President, Senator Kennedy, Representative Stark 
and others to create a universal Medicare drug benefit and to 
use some of the on-budget surplus for such a benefit.
    At the same time, it is very important that Congress and 
the administration address the pharmaceutical cost issue in an 
effective manner because, if costs increase as they are, they 
could render a Medicare drug benefit absolutely too expensive.
    I would like to mention four reasons why a Medicare drug 
benefit is more important today than ever before.
    As you all know, when a patient is in the hospital, he or 
she is covered for pharmaceuticals. But when they get out of 
the hospital, they are no longer covered.
    You are also familiar with the so-called quicker and sicker 
phenomenon. That is people are being discharged from the 
hospital sooner than they were, and now it goes back to 10 
years ago that this began, but it is probably truer today than 
ever before. And that means that, in effect, seniors have lost 
the drug coverage that they had, and when they get out of the 
hospital, if they are getting home health care, instead of 
being in the hospital, they are not covered for 
pharmaceuticals.
    As has been said, private drug coverage is declining, 
employer managed care, Medigap, you name it. Beneficiaries are 
getting older, and the older they get the more dependent they 
are on prescription drugs, and they are paying for the most 
expensive prescription drugs because of the conditions that the 
oldest among us--and I am now among them because I have just 
turned 80--have.
    Finally, drug prices have been increasing far faster than 
beneficiary income, and particularly those who are dependent on 
the Social Security COLA.
    Mr. Chairman, in simple terms, access is largely determined 
by income and wealth. But, as others have said, it is not just 
the poor elderly who are suffering because they don't have 
adequate prescription drug coverage. Those who are in the 
middle ranks, many of them are also suffering because of that 
lack of coverage. And as far as people under Medicaid are 
concerned, the Kaiser Commission has shown that many of them 
are not getting the drug coverage that they are entitled to.
    Meanwhile, when companies are cutting back on retiree 
coverage, and the talk has been in this hearing on whether 
employers will cut back on their retiree coverage if there is a 
drug plan, well, they are cutting back on their drug coverage. 
It is a rout. It is not just a gradual cutback. It is a rout. 
The drug prices are going through the ceiling. There is no end 
in sight for that. Therefore, it becomes important, as 
suggested during this hearing, that seniors should not be 
gouged, that they should be in a position where they are paying 
no more than the large purchasers of drugs.
    So, finally, here are the recommendations of the NCSC to 
ensure adequate and affordable drug coverage for seniors:
    Take steps to stop the drug price spiral. Enact this year a 
Medicare drug benefit and a comprehensive Medicare drug benefit 
with a stop loss component of not more than $3,000.
    Take steps to, through tax incentives or through strong 
maintenance of effort provisions, to require or induce retiree 
health plans covering drugs to continue such benefits.
    Beneficiaries should pay a premium for drug coverage, but 
other sources of revenue should certainly be investigated.
    And we simply don't buy the idea, and others have said 
this, that the pharmaceutical industry needs to gouge seniors 
in order to carry on research.
    So we urge very strongly that this committee recommend a 
comprehensive drug benefit this year, and we look forward to 
doing anything that we can to support your efforts.
    Thank you, Mr. Chairman.
    [The prepared statement of Bert Seidman follows:]
    Prepared Statement of Bert Seidman, National Council for Senior 
                                Citizens
    Thank you, Mr. Chairman, and Representative Brown, for this 
opportunity to speak on this important issue. I am myself a senior, I 
live in a large apartment complex composed entirely of seniors, and my 
organization, the National Council of Senior Citizens, is a leading 
advocate for a stronger Medicare program, the enactment of a Medicare 
pharmaceutical benefit and action to moderate the price spiral of 
pharmaceuticals in this nation.
    And, right off the bat, let me say that NCSC supports the efforts 
of the President, Senator Kennedy, Representative Stark and others to 
create a universal Medicare drug benefit and to use some of the on-
budget surplus for such a benefit. At the same time, this Congress and 
the Administration must address the pharmaceutical cost issue in an 
effective manner because costs alone could render a Medicare drug 
benefit too expensive even with significant surplus financing.
    Mr. Chairman, in simple terms, access is largely determined by 
income and wealth. But, Mr. Chairman, that simple equation of wealth-
equals-access begins to break down in the dynamics of the real lives of 
seniors. According to HHS, more than half of Medicare beneficiaries 
without drug coverage have incomes greater than 150 percent of poverty. 
Another 24 percent are at poverty to 150 percent of poverty. The lack 
of coverage is spread all along the income spectrum although, again, 
the very wealthy are adequately covered and have full access.
    For the very poor, those eligible for Medicaid, the pattern is also 
uneven. The Kaiser Commission on Medicaid and the Uninsured earlier 
this year estimated that only 40 percent of Medicare beneficiaries who 
are also eligible for Medicaid are actually enrolled in Medicaid. This 
is a scandalous situation that cries out for solution because Medicaid 
has comprehensive and adequate drug coverage.
    For those with Medicare managed care drug coverage, coverage is 
rapidly deteriorating. In just three years, the number of plans with 
$500 or lower coverage will increase by almost fifty percent, from 19 
percent in 1998 to an estimated 28 percent in the year 2000. Fifty 
percent of all these plans will have caps of under $1,000 annually for 
benefits and the costs of these plans, including higher premiums, are 
increasing at rates exceeding 10 percent and 15 percent annually.
    Mr. Chairman, when Medigap insurance was the subject of reform and 
Federal regulation more than a decade ago, we had hopes of good 
coverage for prescriptions. But, the history of pricing Medigaps has 
dashed such hopes. Older persons, my juniors, 75 year olds, are paying 
over $4,000 in premiums in such places as Miami and Los Angeles for 
``I'' Medigap policies with $1,250 drug coverage with a $250 
deductible. Even with Medigap drug coverage, seniors are paying $650 in 
out-of-pocket annual spending for prescriptions.
    Meanwhile, companies are cutting back on retiree coverage, as has 
already been discussed here. The 30% of firms still offering coverage 
for retiree drug costs are a declining breed with a 25% drop in company 
coverage over the past four years.
    Mr. Chairman, the back drop to all of these cost and coverage 
issues is the income picture of seniors. Median household income is 
below $18,000 per year. More than fifty percent of elderly families 
have incomes below $24,000. Fewer and fewer active workers are covered 
by either defined benefit or defined contribution pensions. Fewer 
retirees are receiving retiree health benefits. Savings for late-middle 
aged workers are marginal. I would add to this some information on drug 
prices in the U.S. Although the drug industry has been the most durably 
profitable U.S. industry over the past 3 decades, it is also one of the 
least competitive. Our generous patent laws give protections to the 
companies beyond any other nation. Thousands of seniors visit Canada 
and Mexico weekly to buy drugs 30 percent to 50 percent cheaper. And 
U.S. seniors, with only about 12 percent of the population, consume 
over 36 percent of all prescriptions.
    Here are some recommendations of NCSC to the Congress to assure a 
just level of access for seniors to the prescriptions that they need.
    1. Take steps to stop the drug price spiral. We support the 
proposal of Representative Tom Allen, H.R. 664, to secure for seniors 
the same level of discounts enjoyed by HMOs, the Veterans 
Administration, State Medicaid programs and other favored customers. 
This bill responds to the competitive nature of discounting of drug 
prices among HMOs, large hospital chains and other large consumers. 
What we need is to give seniors the same bargaining power.
    2. Enact, this year, a Medicare drug benefit. In our view, such a 
benefit must be of a sufficient scope to provide a universal uniform 
benefit for all Medicare beneficiaries. It should have a stop-loss 
component of not more than $3,000. It should not have a deductible of 
more than $250 and a co-insurance of not more than 30 percent.
    3. Take steps either through tax incentives or through strong 
maintenance-of- effort provisions to require or induce retiree health 
plans covering drugs to continue such benefits. We should be careful 
not to weaken the resolve of employer retiree health benefit plans to 
continue drug coverage. Over time, the public benefit should reach a 
level of adequacy to make most supplementary plans unnecessary.
    4. Beneficaries should pay a premium for drug coverage, but this 
alone is not enough. In financing such a benefit, the on-budget surplus 
should be used and the Medicare payroll tax should be examined for 
possible increase. In addition, some taxation of unearned income should 
be examined.
    5. The National Institutes of Health finances extensive basic 
pharmaceutical research. The pharmaceutical industry is granted patents 
for these publicly developed drugs at bargain-basement prices. The 
Congress should review the NIH system of granting patents toward more 
competitive and realistic prices.
    Mr. Chairman, the issues that this hearing has raised are some of 
the most important public policy issues of the coming century. This 
Congress, the Administration, the scientific community, unions and 
business, seniors and all citizens should quickly unite on a plan to 
assure an adequate and just level of access to prescription drugs for 
not only seniors but for all citizens. The progress of pharmacological 
treatment, in the long run, may be at the heart of a more effective and 
more efficient health system for all citizens. But, what you do now, 
this year, for seniors and for a more responsive Medicare program, can 
be a jump start for the larger challenge of health reform for all 
Americans.
    Thank you.

    Mr. Bilirakis. Thank you, Mr. Seidman.
    Mr. Michel, who has retained the French pronunciation of 
his last name.

                     STATEMENT OF BOB MICHEL

    Mr. Michel. Thank you, Mr. Chairman. And on behalf of The 
Seniors Coalition of 3.5 million people, we are very delighted 
with the wonderful work you and your staff are doing here.
    You have my testimony, and so I am going to summarize some 
of the key points.
    I know twice it has been mentioned today the Medicare 
catastrophic coverage debacle back in 1989. If you recall, 
Congress passed the Medicare catastrophic act to reform the 
Medicare program to cover a more comprehensive benefit package, 
and one of the highlights was a prescription drug program. 
Initially, about 80 percent of the seniors supported the 
program benefit but only until the truth of its cost and who 
was going to pay for it were revealed. The CBO estimate of $5.7 
billion, when the bill was passed, turned out to be $11.8 
billion a year later, more than twice as much.
    For seniors, the premium that they were supposed to pay to 
get the drug benefit turned out to be a substantial income tax 
increase for people 65 and over. Seniors realized that the 
Medicare Catastrophic Coverage Act of 1988 would result in a 
sharp increase in their tax liability. Seniors knew then, as 
they know now, that the one-size-fits-all prescription drug 
benefit is not in their best interest; and with the President's 
recent outpatient prescription drug proposal, it looks like 
deja vu all over again.
    There are clear signs that the President's plan will open 
up the same can of worms as the Medicare Catastrophic Coverage 
Act did. Estimates of the cost of the program run between $20 
and $40 billion a year. That number has been kicked around this 
morning. The Heritage Foundation projects that it will likely 
cost twice as much as the administration is forecasting.
    Using simple economics, it is easy to see why that would be 
so costly. The National Center for Policy Analysis believes 
that creating a universal entitlement will foster what is 
called the problem of increased utilization. In other words, 
the more people are insulated from the cost of a good or 
service, the more likely they will use it.
    We have seen HCFA use a tactic throughout the Medicare 
program under the pretense of cost containment. In the case of 
an expensive drug plan, price controls will thwart the profit 
that pharmaceuticals companies use to research and develop new 
health-enhancing drugs. That means that innovative drugs are 
less likely to make it to the market and, in turn, to seniors.
    I am confused and we all are in the Coalition as to why the 
President would oppose a costly universal plan when nearly 65 
percent of seniors already have prescription drug coverage. The 
President's claim that seniors don't have enough access to 
prescription drugs is plain fiction. The facts clearly speak 
otherwise: 95 percent of Medicare HMOs provide their enrollees 
with a prescription drug benefit; 84 percent of seniors with 
employer-sponsored supplemental insurance have drug coverage. 
Granted some of that is fading away, but there is still plenty 
of it out there.
    There are several Medigap policies that offer prescription 
drug coverage. Congress should shun the President's one-size-
fits-all prescription drug proposal, if it wants to do what is 
best for seniors, and consider only proposals that would create 
a targeted program for seniors that actually need the financial 
assistance. Needy seniors are those with low incomes and/or 
high out-of-pocket costs.
    Congress should strengthen an existing program, such as 
Medicare+Choice, pay the bills, and Medigap, that already 
provides millions of seniors with high-quality, inexpensive 
prescription drug coverage.
    My mother-in-law, for example, was paying $400--$400 to 
$600--I forget what she told me--out of pocket for her 
prescription drugs. She joined an HMO, and she is now getting 
it all--all of her prescription drugs free with the HMO. It 
doesn't cost her anything out of pocket. That was $4,800 a 
year, almost $5,000 a year. That is a big savings for her.
    Will that HMO back away someday? I don't know. If we keep 
treating them the way we have been, they might. If we do 
something to clean up our act with the HMOs, maybe they will 
stick around, and we will see some more out there competing.
    Congress should also strengthen--I mentioned that, and I 
mentioned mom.
    Last, Congress should heed the lessons of history. Seniors 
can smell a rat. The administration as well as Congress will 
not be able to sneak a costly one-size-fits-all prescription 
drug program past America's seniors. The truth about the 
pitfalls of such a program will rear its ugly head, just as it 
did with Medicare catastrophic coverage.
    As a member of The Seniors Coalition, I thank you.
    [The prepared statement of Bob Michel follows:]
   Prepared Statement of Bob Michel, Action Team Member, The Seniors 
                               Coalition
    Good morning. My name is Bob Michel and I am a member and supporter 
of The Seniors Coalition.
    Let me start by saying thank you, Mr. Chairman, for the opportunity 
to testify today. The three million members and supporters of The 
Seniors Coalition are grateful to you for your excellent leadership of 
this subcommittee. We appreciate the diligent and thoughtful work of 
its members and staff on issues that impact the lives of seniors like 
myself.
    I'm sure many of you remember the Medicare catastrophic coverage 
debacle of 1989. If you don't, let me remind you. In 1988, Congress 
passed the Medicare Catastrophic Coverage Act to reform the Medicare 
program to cover a more comprehensive benefit package. One of the 
highlights of the new benefits package was coverage for prescription 
drugs.
    Initially, about 80 percent of seniors supported the prescription 
drug benefit, but only until the truth of its cost and who was going to 
pay for it were revealed. The CBO's estimate of the annual cost of the 
prescription drug benefit jumped from $5.7 billion when it was passed 
to $11.8 billion a year later--more than twice as much. For seniors, 
the premium that they were supposed to pay to get the drug benefit 
turned out to be a substantial income tax increase for those 65 and 
over. Seniors realized that the Medicare Catastrophic Coverage Act 
would result in a sharp increase in their average extra tax liability.
    On August 17, 1989, Congressman Dan Rostenkowski, a strong 
proponent of the Medicare catastrophic plan, was booed and chased down 
a Chicago street by a group of senior citizens after he refused to talk 
with them about the issue. Eventually, Rostenkowski cut through a gas 
station, broke into a sprint, and escaped into his car. But these 
seniors were so livid they refused to relent. They surrounded his car 
and rocked it back and forth. It was a classic case of political 
protest.
    Later that year, in 1989, the firestorm against the Medicare 
Catastrophic Coverage Act reached a feverish pitch and, fortunately, 
the law was repealed. Not surprisingly, it was out of this firestorm 
that The Seniors Coalition was formed.
    Seniors knew then, as they know now, that a one-size-fits-all 
prescription drug benefit is not in their best interests. And with the 
president's recent outpatient prescription drug proposal, it's deja vu 
all over again. There are clear signs that the president's plan will 
open up the same can of worms that the Medicare Catastrophic Coverage 
Act did.
    Just like the drug plan in the Medicare Catastrophic Coverage Act, 
the president's plan will be a very costly program. Estimates run 
between $20 and $40 billion a year. The Heritage Foundation has found 
that it will likely cost twice as much as the Administration is 
forecasting. Using simple economics, it's easy to see why it will be so 
costly. The National Center for Policy Analysis believes that creating 
a universal entitlement will foster what is called the ``problem of 
increased utilization.'' In other words, the more people are insulated 
from the cost of a good or service, the more they will use.
    We all know that the government despises increased costs, as it 
should. But the government's favorite weapon against the skyrocketing 
costs of its programs is price controls. We've seen HCFA use that 
tactic, under the pretense of ``cost containment,'' throughout the 
Medicare program. In the case of an expensive prescription drug plan, 
price controls will thwart the profits that pharmaceutical companies 
use to research and develop new health-enhancing and life-saving drugs. 
That means that innovative drugs are less likely to make it to the 
market, and, in turn, to seniors.
    The government is adept at employing even more tactics to ``contain 
costs'' when its programs become more costly than anticipated. When the 
cost of a prescription drug plan explodes, the government, in addition 
to price controls, will be forced to cut benefits and/or raise 
premiums. We of course cannot rule out tax increases. Actually, we can 
probably count on them--the payroll tax for Medicare has been increased 
36 times since Medicare's inception in 1965.
    I am confused as to why the president would propose a costly 
universal plan when nearly 65 percent of seniors already have 
prescription drug coverage. The president's claim that seniors don't 
have enough access to prescription drugs is plain fiction. The facts 
clearly speak otherwise. Ninety-five percent of Medicare HMOs provide 
their enrollees with a prescription drug benefit. Eighty-four percent 
of seniors with employer-sponsored supplemental insurance have drug 
coverage. There are several Medigap policies that offer prescription 
drug coverage. As for me, I have excellent prescription drug coverage 
through my veteran's health insurance.
    Congress should shun the president's one-size-fits-all prescription 
drug proposal if it wants to do what is best for seniors. Congress 
should consider only proposals that would create a targeted program for 
seniors that actually need financial assistance to gain access to 
prescription drugs. Needy seniors are those with low incomes or high 
out-of-pocket costs.
    Congress should also strengthen existing programs, such as 
Medicare+Choice and Medigap, that already provide millions of seniors 
with high quality, inexpensive prescription drug coverage. My mother-
in-law, before Congress created the Medicare+Choice program in 1997, 
was paying more than $600 per month for her prescription drugs. Ever 
since she enrolled with a Medicare HMO, however, she has been covered 
by a free prescription drug benefit. Congress needs to restore 
reimbursement rates to Medicare HMOs. This will encourage Medicare HMOs 
not to leave the Medicare+Choice program, and it will likely encourage 
new plans to enter. If this happens, seniors will surely have more 
access to prescription drugs.
    Lastly, Congress should heed the lessons of history. Seniors can 
smell a rat. The Administration, as well as Congress, will not be able 
to sneak a costly one-size-fits-all prescription drug program past 
America's seniors. The truth about the pitfalls of such a program will 
rear its ugly head just as it did with the Medicare Catastrophic 
Coverage Act.
    As a senior citizen, and a member of The Seniors Coalition, I thank 
you once again fors inviting me to give my testimony on this very 
important issue.

    Mr. Bilirakis. Thank you very much, Mr. Michel.
    I just want to make it clear there aren't many of our 
colleagues here.
    Mr. Seidman is here. I want to make it clear to you, sir, 
and to all the seniors out there and other Members of Congress, 
I served on the Medicare Commission. In spite of the fact we 
were pledged, if you will, charged with the responsibility of 
saving the current program and with the concern that adding 
anything to it would make our job that much tougher, still 
every member of that Commission, every Republican appointed and 
every Democratic appointed felt that prescription drugs should 
be part of the Medicare program. Anybody who says anything to 
the contrary is just out and out lying to you.
    Today on a 1- or 2-day a week basis, a task force, a 
bipartisan task force sits together in one of the Ways and 
Means rooms over in the Capitol and is working on Medicare--
some sort of Medicare reform which will include prescription 
drugs as part of the program.
    Now, Ms. Wilensky, Mr. Reischauer, others have talked about 
how very complex Medicare reform is and the time it is going to 
take and that sort of thing. I have confidence that in this 
Congress, if politics next year does not really rear its ugly 
head as much as we might anticipate it is going to, then we are 
going to do something with Medicare reform to save it for ever 
and ever and ever.
    Obviously, every current beneficiary and everybody who is 
about to become a beneficiary is not going to have any Medicare 
coverage problems. It is just the future--the Mr. Goldbergs, if 
you will, and others that are younger that we are really 
concerned with.
    So, that having been said, some of us are concerned. I, in 
my opening remarks refer to the work with former Congressman 
Roy Rowland. A bipartisan group, sat 3 or 4 nights a week for 
months and crafted a plan that would go into effect now to do 
many of the things that we now have accomplished through 
Kassebaum-Kennedy.
    In any case, the feeling was we have got to have 
comprehensive reform; and, therefore, we can't do it on an 
incremental basis. Therefore, our plan was not allowed to come 
on the floor of the House; and we didn't control the floor at 
that time. Consequently, an awful lot of people could have been 
helped and started to be helped from that point in time, but a 
lot of time was wasted, and they weren't helped.
    Dr. Wilensky, you have mentioned the S-CHIP program, as we 
fondly call it, the Children's Health Insurance Program, which 
is a program that States have. Using that as a model, we 
created a plan that would help people now outside of the scope 
of the Medicare program, and it could blend in with a Medicare 
reform program.
    We want it to blend in with a Medicare reform program, Mr. 
Seidman, but the fact of the matter is, why not help the people 
now? Why not help our elderly now who are poorest and who are 
sickest? And so this is exactly what we are trying to do.
    Now, that is just one version. This is not to belittle all 
of the others. Mr. Brown has his and what not; and we are going 
to hear some of these versions next week. But this is the idea 
behind it all to help people now, not to keep it from being a 
part of the Medicare, of an overall comprehensive Medicare 
program, but to help people now who are sicker and who are 
poor.
    So Dr. Wilensky, I don't know how much time I have left of 
my 5 minutes, but I guess I am asking why do you believe a 
State approach mirrored on that Children's Health Insurance 
Program is a preferred approach to this program.
    Ms. Wilensky. I would like to see something happen now, 
this session of Congress if possible. I think it is something 
you can do now. I believe it will be a better program if it is 
integrated in the long-term pharmaceutical benefits, should be 
integrated into the rest of Medicare, but I don't believe 
Congress is ready to make Medicare for the 21st century viable 
right now. This is something you can do, and you would learn 
some things.
    There are a number of issues about how to actually 
administer this type of benefit. If you want to use PBMs or 
States want to explore other options, that could help in 
designing the structure of this benefit. It is not enough to 
say you just give it to the private sector. The carriers and 
fiscal intermediaries technically do that for Medicare now, but 
they clearly don't run the program.
    So I agree that catastrophic and prescription drug coverage 
should be a part of reform Medicare program. I am eager to do 
something for seniors now who need the most help, which is low 
income.
    Mr. Bilirakis. Mr. Seidman, you used the stop-loss level of 
$3,000. The piece of legislation I am referring to has a stop 
loss of $1,500, not $3,000, $1,500 stop loss.
    My time is really up. Do you have a brief comment?
    Mr. Seidman. I just want to say we have a program which it 
seems to me is the kind of thing that happens when you target 
exclusively the poorest people.
    Mr. Bilirakis. And the sickest because of the stop loss.
    Mr. Seidman. Somebody would have to determine who are the 
sickest, but most people know when they are sick and when they 
are not.
    But the point I was going to make was that we have the 
spenddown program in Medicaid for people in nursing homes. At 
least in the National Council of Senior Citizens, we don't want 
to see another spenddown program. It seems to me that is what 
we would be risking if we focused exclusively on the poorest. 
Now, I am not saying that we should not do the maximum that we 
can for the poorest, and that means making the Medicaid program 
much more effective than it has been up until now in reaching 
the poorest elderly and disabled, but that isn't all that 
should be done.
    Mr. Bilirakis. And I think I have made it clear that I 
agree that it is not all that should be done. But we are 
talking about helping people now, and with enhanced Federal 
dollars it would certainly encourage the States to do an awful 
lot of the good things that are being done in S-CHIP, which 
does not appear to be working as well as we had intended. We 
have got to have a hearing to get an overview of what is 
happening with S-CHIP.
    Mr. Brown.
    Mr. Brown. Thank you.
    Mr. Michel, I congratulate you on your excellent coverage. 
You are more fortunate than most. Interesting in your 
testimony, however, that you deplore government involvement. 
You deplore anything resembling price controls. Yet, as you 
know, the VA, through a government agency, last time I checked, 
gets--always a 25 percent, often as much as a 50 percent 
discount on all kinds of prescription drugs through the Federal 
supply schedule that way. What is it? You enjoy this benefit. 
These cost-containment mechanisms work for you, but you don't 
want any government involvement in these programs and 
prescription drugs for the rest of the population?
    Mr. Michel. Let me clarify that. It was written in my 
script. It was presented in a little wrong circumstance. I am 
retired military. As long as I am near a base, I just go into a 
pharmacy and pick up what my doctor prescribes.
    Mr. Brown. Most people can't do that, right?
    Mr. Michel. All retired can. That is a few million people. 
That is not a small group. Of course, a lot of them are now 
reaching senior age. I also think--answering directly, sir, 
your question, the Medicare+Choice program, which covers an 
awful lot of seniors in this country, is good. And I wouldn't 
want anything to happen to thwart any future expansion of the 
private enterprise doing the same thing with the government 
paying private enterprise to do that out of the Medicare fund.
    I guess what we are opposed to is a Federal Government run, 
operated program, because that brings with it a lot of added 
costs that has been traditional. It is going to jack the cost 
of it up quite a bit, and someone has to pay for it. The people 
that don't have anything right now, certainly as this gentleman 
said, we have got to address that. We have got to do something.
    Mr. Brown. Let me shift to Mr. Goldberg.
    Mr. Goldberg, if I can understand your testimony, you 
generally believe that prescription drug prices are where they 
ought to be in this society in terms of market forces; is that 
correct? Prices are set--prices are evolved through market 
forces, and you don't quarrel with that.
    Mr. Goldberg. I didn't address prescription drug prices in 
my testimony, but if you are asking me a question, yes, 
generally they are where they should be based upon what the 
market says. Are you asking if I think that when I go to the 
prescription--to CVS and I pick up a prescription for my 
daughter and I look at the price and I go, jeez, this is 
expensive, I have the same reaction as everyone else.
    Mr. Brown. Interestingly, with prescription drugs, because 
the NIH funds about 50--NIH and other non-industry sources fund 
close to 50 percent of prescription drug research and 
development--research and development of new drugs. 
Additionally, the government gives major tax breaks for the 
dollars that they do spend on prescription drugs.
    Then because of market forces, because prescription drugs 
prices are set in a monopolistic sort of way in some sense 
because there is no government regulation, there is no ability 
for people to shop somewhere else unless there is a generic 
when their physician prescribes a drug to them. Yet those same 
companies turn around and charge Americans who get the honor, 
as taxpayers paying for NIH and as taxpayers paying for tax 
breaks for these companies, get the honor of paying two and 
three and four times more than the Canadians and the Brits and 
the Germans and the French and the Japanese and others. Isn't 
that a little bit of an artificial market force setting this? 
Should we just allow the status quo to continue this way?
    Mr. Goldberg. I think the larger question, Congressman--
over the past decade, for example, prescription drugs as a 
total of our health care expenditures, it has been about 7 
percent. It has been about the same relative to other 
countries. Now we are entering an era we have all these new 
discoveries displacing hospitals and physicians and stuff as 
sort of the front-line therapies. I think what you are pointing 
out, quite rightly, is that we have come to a point in society 
where we can no longer sort of deal with this at a retail level 
kind of business, and we have to start dealing with it in 
different ways. I guess where you and I would have a difference 
of opinion is I think we need to reform the way in which we 
finance health care as opposed to using sort of price control 
and rationing kinds of mechanisms.
    Mr. Brown. I think we differ probably on a lot of issues.
    Mr. Goldberg. I am a Yankee fan.
    Mr. Brown. That is another thing. You mentioned 
Steinbrenner. I don't like Steinbrenner for two reasons. One, 
he owns the Yankees; the second, he moved to shut down the 
shipyard in my district. So you missed on that one, too.
    Mr. Goldberg. I am really in deep doodoo here.
    Mr. Brown. Let me ask one other question. I would really 
want to pursue this if we had more time. I don't know what--the 
Ethics and Public Policy Center. Do you get any pharmaceutical 
drug funding ?
    Mr. Goldberg. The Ethics and Public Policy Center, we get 
money from different foundations. And we in the past have 
gotten some money from pharmaceutical firms, like every other 
thing tank in Washington, D.C., but I don't get any funding 
directly from them, no.
    Mr. Brown. Thank you.
    Mr. Bryant [presiding]. Dr. Wilensky, I missed part of your 
testimony. I had a phone call. I had to step out briefly, but I 
think those who are here now have been here diligently 
throughout the hearing. I was just wondering if you had any 
comments in terms of some of the questions I asked about some 
of the estimates that Mr. Hash referred to as well as the GAO 
representative on the first panel and some of the outside 
groups who have done studies, PriceWaterhouse being one of 
those. Do you think the universal plan that the administration 
has proposed is financially not accurate in terms of their 
estimated cost or is it higher or lower?
    Ms. Wilensky. Well, the history of trying to estimate the 
cost of a new program without actually looking at anybody's 
numbers is that we will be low in estimating the cost of a new 
program. That has traditionally been the case with regard to 
Medicare and one that has a universal coverage and also one--it 
is unclear how the program will be administered, and it is 
unclear exactly what the power of the PBMs--so-called PBMs--
will be. But I think it is likely to say--it is a likelier 
occurrence that the fact is that the spending will be higher 
than is anticipated, because that has been our experience, 
particularly because of the broad coverage of individuals who 
are involved.
    I think the real concern is to say if we want to do 
something to help the people who are most in need of help right 
now is this a way to go do it, and it seems on two grounds this 
doesn't really make it. The first is that it doesn't provide 
any kind of catastrophic back-end coverage. Mr. Burr had 
mentioned this is a funny kind of insurance program. It is 
unfortunately true for much of Medicare, but it is a funny kind 
of insurance program.
    So I think the real question is, if you have a limited 
amount of dollars to start now, how can you best do it? I don't 
think this is the direction.
    I want to be very clear. A reform Medicare program would do 
better to have prescription drugs as part of the package so you 
can make use of what therapeutics can do to get you out of the 
hospital, but I don't see this as the right approach. I think 
there is a better interim approach. I would be very surprised, 
if it were to be adopted, that we don't spend substantially 
more than is estimated.
    Mr. Bryant. Mr. Reischauer, also the question on the cost 
of the high and low and do you favor and if you do favor a more 
targeted response to this problem.
    Mr. Reischauer. With respect to the cost estimates having 
scar tissue from the Medicare Catastrophic Coverage Act repeal 
when I was running the Congressional Budget Office, I can try 
and speak to this in an objective way, but you might question 
my ability to do that.
    Making estimates on new programs like this, as Gail has 
pointed out, is a very, very difficult job. The data we use is 
incomplete and usually quite old, and that explains one of the 
huge differences between the HCFA and the CBO estimate of a 
likely cost of the drug proposal. The details of the proposal 
are never really specified as they have to be when the 
administration puts forward a plan. There is lots of little 
bits and pieces that will affect cost in important ways.
    And, third, you have to use professional judgment on the 
responses of various actors to the new program. What will 
consumers do? How much will their demand for prescriptions 
increase? We can guess, but we really don't know. How will 
businesses react? Will they drop their retiree coverage big 
time, as PriceWaterhouse has suggested, or rather modestly, as 
CBO and the administration have proposed. How will 
pharmaceutical companies respond to negotiations with the PBMs 
that will be purchasing these prescriptions for seniors? There 
is lots of uncertainty.
    I think both HCFA and CBO try to do the best job they can. 
They don't try to spin this in any particular way. As Gail has 
suggested, almost always the things we can't see and can't 
predict turn out to be cost increasing; and so if you are going 
to put your money down on one square, that is the square to put 
it down on.
    With respect to targeting versus universality, I am not a 
big fan of targeting. This is a program, Medicare, which is 
social insurance. We can vary the financing by income, by 
ability to pay, but I think it would be a huge mistake to vary 
entitlement to specific benefits by ability to pay.
    What we have to realize is that pharmaceuticals are an 
integral part of medical care and should be an integral part of 
the Medicare package, and to treat it separately I think is 
going down a very mistaken road and one that will make the 
eventual solution to this problem much more complex and 
difficult politically to achieve.
    Mr. Bryant. Thank you.
    I think my time is up. I think, Mr. Green, you were next.
    Mr. Green. Thank you, Mr. Chairman.
    Let me first start off with some concerns I guess, and I 
guess this is the best panel.
    One, my concern for a lot of the bills, either the 
President's plan or the Turner-Allen bill, was that the private 
sector has not come up with a plan until now similar to the 
CHIPs program that has both the good and bad side. My 
statements to pharmaceuticals for a number of months is saying, 
well, come into us and tell us what you suggest. And the only 
response I see is the number of TV commercials that cost 
millions of dollars and actually, as I see them, are 
distortions. As Teddy Roosevelt said, get into the pit and we 
will talk about it and see what we can do. And if you don't 
like, obviously, the Turner-Allen bill or the President's plan, 
then let's see what we can do.
    Mr. Goldberg, let me ask you some questions, because I 
wasn't familiar with your organization. One of the suggestions 
today by Dr. Wilensky is that we create something like the 
CHIP, children's Health Insurance Program. In the past, have 
you given testimony opposing that program?
    Mr. Goldberg. I opposed the creation of the specific CHIP 
program, yes.
    Mr. Green. So you would not disagree then with what Dr. 
Wilensky said to create even some type of program patterned 
after CHIP where the States would buy into it, so to speak?
    Mr. Goldberg. No. The reason I opposed the CHIP program is 
because I felt it created a large entitlement again that was 
not targeted to the specific needs at the time. I think that--
--
    I am trying to think if I even testified. I think I wrote 
about it, but I didn't testify before the committee.
    I felt that the estimate of 10 million children or 24 
million children without adequate insurance was overestimated, 
and I had concerns about the crowd-out effect, about the 
creation of a new entitlement, about people dropping coverage 
and going out to Medicaid, which has happened in some States 
under the CHIP program.
    Mr. Green. Wait a minute now. People are dropping coverage?
    Mr. Goldberg. There was a concern that the expansion of the 
kid care program would lead to people in the private sector 
dropping private sector coverage and enrolling into a publicly 
taxpayer subsidized program, which, of course, is the same 
concern that the President's plan for the drug parity program 
is trying to address with the $11 billion subsidy.
    Mr. Green. I only have 5 minutes. I don't like the answers 
to take longer than my questions.
    Mr. Goldberg. I am sorry.
    Mr. Green. I don't share that concern, because I know the 
Medicaid program--I can't imagine somebody dropping their 
private sector coverage. Because most of the folks who qualify 
for CHIP, at least in Texas--and our legislature just bought 
into the plan this year--those folks typically don't have 
private sector offered to them at all. So I was just saying, in 
the past, you have disagreed with the children's health care 
program--insurance program, so that is the only other 
suggestion--I know the day is new--other than the President's 
plan and the Turner-Allen bill.
    Mr. Green. By the way, I am an Astros fan. I have heard 
this before. Anybody who plays the Yankees, I am supporting 
them, even though we are in a different league. You can tell 
where I come from, also.
    Dr. Reischauer, let me ask you a question about the--in Mr. 
Goldberg's assessment of the effects of the drug benefit, Dr. 
Goldberg notes in his testimony, if Congress creates a new drug 
benefit, one of the data suggests we don't need it. It would 
force the government further down the road of rationing and 
restriction and retrograde medicine. And, also, the 2 percent 
in his testimony, that is the only request.
    Mr. Reischauer, would you like to comment on that statement 
in light of the current situation that seniors and the disabled 
are facing? Aren't they already exposed to rationing and 
restriction because many can't afford the coverage and many 
have inadequate coverage?
    And, also, I would like to hear your comment on Dr. 
Goldberg's statement in light of the fact that we are one of 
the few industrialized nations that do not provide drug 
coverage for its elderly.
    Mr. Reischauer. I guess the bell means I should have a very 
short answer. My short answer would be I disagree with almost 
every element of his statement.
    Mr. Green. That is about the best answer I guess I could 
ask for.
    Mr. Reischauer. And I am a Red Sox fan.
    Mr. Green. Mr. Chairman, just one comment, no question.
    I appreciate Mr. Michel being here. Houston, Texas, my 
retired military has to go 200 miles to get prescription 
medication in San Antonio, Texas. Even for our retired military 
who are not qualified for VA it is tough to get that. They go 
to Mexico often.
    Mr. Michel. There is a mail order--there is a mail thing 
right now.
    Mr. Burr [presiding]. That will teach you to be an Astros 
fan.
    Mr. Green. I will know after they beat the Reds two games 
tonight and tomorrow night.
    Mr. Burr. The Chair would ask unanimous consent to enter 
the written statements into the record of the American Academy 
of Actuaries and the United Seniors Association. Without 
objection, so ordered.
    [The statements follow:]
        Prepared Statement of the American Academy of Actuaries
    The American Academy of Actuaries appreciates the opportunity to 
comment on an important issue for seniors in this country--the 
availability and affordability of coverage for prescription drugs. The 
American Academy of Actuaries is the public policy organization for 
actuaries practicing in all specialties within the United States. A 
major purpose of the Academy is to act as the public information 
organization for the profession. The Academy is non-partisan and 
assists the public policy process through the presentation of clear 
actuarial analysis. The Academy regularly prepares testimony for 
Congress, provides information to federal elected officials, comments 
on proposed federal regulations, and works closely with state officials 
on issues related to insurance. The Academy also develops and upholds 
actuarial standards of conduct, qualification and practice, and the 
Code of Professional Conduct for all actuaries practicing in the United 
States.
    The cost of prescription drugs is a major component of the overall 
health care expenses paid by Americans. According to the Health Care 
Financing Administration, prescription drug costs accounted for 7.1 
percent of the total national health care costs in 1997.\1\ 
Prescription drug prices are rising faster than cost increases for 
consumer goods or for medical services. The consumer price index (CPI), 
which measurer the cost of consumer goods and services such as food, 
housing, clothing and medical services, increased 2.3 percent from 
August, 1989 to August, 1999 while the CPI for medical services alone 
rose 3.4 percent.\2\ In comparison, the CPI for prescription drugs and 
medical supplies increased 5.9 percent during the same period.\3\ Costs 
for prescription drugs are also increasing if measured on a per capita 
basis. Employers questioned in a recent poll by a benefits consulting 
firm indicated that prescription drug costs for retirees covered under 
employer health plans were expected to increase by 15.7 percent over 
the next year.\4\ Clearly the cost of prescription drugs can have a 
significant impact on seniors, many of whom are on fixed incomes.
---------------------------------------------------------------------------
    \1\ Health Care Financing Administration, Office of the Actuary, 
National Health Statistics Group.
    \2\ Bureau of Labor Statistics, Consumer Price Index, All Urban 
Consumers, U.S. City Average (Not Seasonally Adjusted).
    \3\ Bureau of Labor Statistics, Consumer Price Index, All Urban 
Consumers, U.S. City Average (Not Seasonally Adjusted).
    \4\ Wall Street Journal, July 13, 1999
---------------------------------------------------------------------------
    Congress is considering a wide range of proposals to help seniors 
with prescription drug costs. In considering how to best address this 
issue, policymakers should keep the following factors in mind.
How Do Seniors Pay For Medical Care?
    Almost 98 percent of the population age 65 years or older in this 
country are covered by Medicare.\5\ For those Medicare beneficiaries, 
62.3 percent of their health care costs were paid by traditional 
Medicare, 15.2 percent came from out-of-pocket spending, 11.5 percent 
was paid by supplemental insurance, 4.8 percent was paid through 
managed care, 2.5 percent was paid by Medicaid and 3.7 percent was 
covered by other sources such as the Veterans Administration.\6\
---------------------------------------------------------------------------
    \5\ Medicare Payment Advisory Commission, Report To The Congress--
Selected Medicare Issues, June 1999.
    \6\ Medicare Payment Advisory Commission, Report To The Congress--
Selected Medicare Issues, June 1999.
---------------------------------------------------------------------------
    Proposals to increase the availability and affordability of 
prescription drugs for seniors must be viewed in terms on their impact 
on these various sources of funding. For example, any expansion of 
Medicare coverage will ultimately impact the private health insurance 
market (Medicare Supplement insurance, long-term care insurance and 
employer health plans for retirees).
What Health Care Needs Do Seniors Have?
    Seniors have their own specific health needs and patterns of 
utilization of medical services that are different from the general 
population. While it is helpful to look at data regarding the cost and 
usage of prescription drugs from other sources, such as information 
showing the cost of medical services provided in the employer group 
health insurance market, care should be taken when applying this data 
to seniors. It is important to consider data showing what types of 
prescription drugs are used by seniors, the cost of those drugs and the 
extent to which drug therapies may or may not help control related 
medical costs.
Who Benefits From Proposals To Extend Prescription Drug Coverage?
    It should be expected that most seniors who lack prescription drug 
coverage through some source, such as a Medicare+Choice plan, Medicare 
supplement insurance or employer sponsored health plan, would opt for 
such a benefit if offered through either Medicare or an expansion of 
Medicaid. For a given population, people who do not have to spend their 
own money on services will have a tendency to use more of those 
services. Seniors will choose the drug coverage option that will 
provide them with the most ``bang for the buck.''
How Will Plans Currently Offering Drug Coverage For Seniors React?
    Undoubtedly some individual and employer sponsored plans will drop 
prescription drug benefit for those seniors who are able to obtain 
coverage through a government funded plan such as Medicare or Medicaid. 
If the drug benefit in those private plans was more generous than that 
offered by a government plan, the affected individuals will be worse 
off. This is also true if the level of the benefit subsidy for 
prescription drug coverage is lower in the government plan than the 
private coverage. To the extent that private plans drop prescription 
drug benefits for seniors, this represents cost shifting from premium 
payers to the general taxpayer.
Who Pays For Prescription Drug Coverage For Seniors?
    If a new prescription drug benefit for seniors is offered through 
Medicare or an expansion of Medicaid, taxpayers will pick up a 
significant portion of the cost. Unlike funding for Social Security, 
which relies on employer and employee financing, general revenues 
provided by taxpayers have always been a significant part of Medicare 
and Medicaid financing. It should be noted, for example, that when Part 
B of Medicare was originally enacted, it was intended that 
participants' premiums would pay 50 percent of the cost, and general 
revenues 50 percent.
    Those ratios are now 25 percent and 75 percent respectively.
What Is The Total Cost Of A Prescription Drug Benefit?
    The ultimate cost for a prescription drug benefit is highly 
speculative in light of the many uncertainties about how individuals 
and health plans will react to the choices they must make. The 
resulting uncertainties concerning cost create a risk that should be 
born in mind. For example, the administration's estimate for the cost 
of its Medicare prescription drug benefit for the first ten years 
(2000-2009) is $118 billion. The Congressional Budget Office estimate 
for the proposal is $168 billion, which is not a small difference. One 
factor to consider is the extent that a government sponsored program 
would be able to negotiate price discounts with prescription drug 
manufacturers.
Conclusion
    In summary, public policymakers evaluating proposals to provide 
prescription drug coverage for seniors, have the difficult task of 
deciding whether such proposals will result in the improvement of the 
health care outcomes of older Americans at an acceptable cost borne by 
the appropriate people. Key issues to consider are:

 Who ultimately benefits from such coverage?
 Is the benefit design optimal?
 Will existing plans drop coverage for the elderly?
 What is the total cost and who pays?
                                 ______
                                 
          Prepared Statement of The United Seniors Association
    The United Seniors Association (USA), a nationwide seniors advocacy 
organization of over 685,000 members, appreciates the opportunity to 
submit this written testimony for consideration by the Subcommittee on 
Health and the Environment. We respectfully request that it be included 
as part of the official record.
    USA applauds the Subcommittee for focusing on this important issue. 
Ensuring that America's senior citizens have access to affordable 
pharmaceutical drugs is a priority of our organization. Seniors should 
not be forced to choose between purchasing prescription drugs or paying 
their rent. We are pleased that the topic has received significant 
attention in recent months. Yet, at the same time, we are concerned 
that some proposals intended to expand access to drugs for seniors 
could have the unintended consequence of disrupting the coverage 
arrangements already enjoyed by the majority of senior citizens.
    We believe that a prescription drug benefit for Medicare 
beneficiaries should be considered in the context of more encompassing 
Medicare restructuring. Such restructuring should be modeled after the 
highly successful Federal Employee Health Benefit Program (FEHBP), 
which covers over 9 million federal employees including Members of 
Congress. Under this arrangement, beneficiaries would be given the 
opportunity to choose from a wide range of health care plans. Choice 
and competition would ensure quality.
    However, if it is the will of this Congress to move a Medicare 
prescription drug benefit separate from broader reform, then that 
benefit must be narrow and targeted to those beneficiaries most in 
need. Exceedingly broad proposals which are not focused on those in 
need spread limited resources too thin and threaten the fiscal 
stability of Medicare.
The Administration's Proposal
    USA is concerned that the prescription drug proposal outlined by 
President Clinton on June 26, 1999 could substantially harm Medicare 
beneficiaries. Under this plan, starting in 2002 seniors would pay an 
additional premium of $24 per month for the proposed drug coverage. 
However, the plan would only pay 50 percent of the first $2,000 per 
year in drug expenses. When the plan is fully phased in by 2008, 
seniors would pay a premium of $44 per month for the drug coverage and 
the plan would pay 50 percent of the first $5,000 in drug costs. 
Nothing above $5,000 per year would be covered, even though some of the 
latest, most advanced drug therapies could exceed this coverage limit.
    According to the National Academy of Social Insurance, currently 72 
percent of all seniors spend less than $500 per year on prescription 
drugs. More than half spend less than $200 per year. Only 14 percent 
spend more than $1,000 per year, and only 4 percent spend more than 
$2,000 per year.
Better Alternatives
    Fortunately, there are better alternatives to the administration's 
proposal. The National Bipartisan Commission on the Future of Medicare, 
chaired by Senator John Breaux, proposed a plan modeled after the 
Federal Employee Health Benefit Program that addresses the long term 
Medicare financing crisis and contains superior prescription drug 
coverage at a reasonable cost for every senior. Such coverage would 
include a maximum cap on direct, out of pocket costs for seniors with 
the insurer covering all costs above that limit. The government would 
pay entirely for seniors with incomes up to 135 percent of the poverty 
level. USA endorses this model.
    While USA remains committed to wholesale restructuring of Medicare 
along a FEHBP model, we understand that there are a limited number of 
seniors who need immediate relief from the rising costs of prescription 
drugs. Therefore, we encourage the committee to consider the bipartisan 
``Medicare Beneficiary Prescription Drug Assistance and Stop-Loss 
Protection Act'' a bill introduced by Congressman Michael Bilirakis and 
Congressman Collin Peterson. This legislation targets those most in 
need by providing federal matching funds to states to create or expand 
programs to serve Medicare beneficiaries up to a certain percentage of 
the federal poverty level. Equally important, the proposal contains a 
stop-loss provision to limit beneficiaries' exposure to high annual 
drug costs, with no increase in their Medicare premiums.
    There are other more limited reforms that would address the problem 
better than the administration's plan. For example, Congress should 
change regulations that force Medigap insurers to include many 
expensive benefits in their prescription drug policies. Then insurers 
could offer low cost plans providing drug coverage only, enabling many 
more seniors to buy such coverage.
Conclusion
    Reforming and strengthening Medicare is one of the greatest 
challenges facing America today. As we move into the new century, it 
will become increasingly clear that the tax burden necessary to sustain 
the system as currently structured is unreasonable. The Concord 
Coalition estimates that by 2030 Medicare spending will account for one 
quarter of all federal revenues. We can not allow this to happen. 
Accordingly, we urge Congress to consider legislation that restructures 
Medicare along the model of the FEHBP. Absent such reform, USA believes 
it is important to target a prescription drug benefit to those most in 
immediate need of relief without upsetting the plans already enjoyed by 
many seniors.
    United Seniors Association appreciates the opportunity to express 
our thoughts on improving the accessibility and affordability of 
prescription drugs for senior citizens. We look forward to working with 
this committee and with Congress to find a mutually agreeable solution 
to both expand drug coverage for seniors and strengthen the system for 
tomorrow's retirees.

    Mr. Burr. Mr. Strickland, are you ready?
    The Chair will delay recognizing himself and will recognize 
the gentleman from Ohio.
    Mr. Strickland. Thank you, Mr. Chair.
    Mr. Michel, I am going to read a couple of sentences from 
your testimony. You say, ``The President's claim that seniors 
don't have enough access to prescription drugs is plain 
fiction. The facts clearly speak otherwise. Ninety-five percent 
of Medicare HMOs provide their enrollees with a prescription 
drug benefit.'' I don't know if you ever met people like my 
constituents who write me about these problems or not, but I 
just have problems with your conclusion that seniors aren't 
having these problems. I just meet too many seniors who have 
these problems.
    Mr. Michel. Some seniors are. There is no question about 
that. But to make it sound like all seniors are in the tough 
situation of not having any prescription drug service is wrong. 
That is the way it is presented, a lot of times, to the people.
    Mr. Strickland. Then you say, ``As for me, I have excellent 
prescription drug coverage through my veteran's health 
insurance.'' and I would say to you, I am glad for you. I think 
we ought to take care of our veterans, even better than we are, 
certainly. But there are many older citizens who don't have 
such coverage, and we ought to be concerned about them.
    Mr. Michel. We are, sir. I didn't say anything in my 
testimony that said we weren't. But what I said, we have States 
doing things now for people. We have HMOs. We have 
Medicare+Choice. We have things like the VA. We have things 
like retired military. There are some people that don't fit in 
that.
    Mr. Strickland. You said, ``The President's claim that 
seniors don't have enough access to prescription drugs is plain 
fiction.'' that is what I was taking issue with.
    Mr. Goldberg, I have been looking forward to meeting you. I 
never met you, but are you familiar with the Chillicothe 
Gazette, which is located in Chillicothe, Ohio?
    Mr. Goldberg. The Chillicothe Gazette, no.
    Mr. Strickland. Well, I am surprised, because you wrote 
them a letter.
    Mr. Goldberg. I have sent letters out regarding the 
Prescription Drug Fairness for Seniors Act.
    Mr. Strickland. I would like to read you something that you 
said: The sad truth is that many in Congress are looking for 
votes, not solutions to the very real problems many seniors 
face. I would like to ask you, sir, do you think we are looking 
for votes rather than to try to solve problems of seniors?
    Mr. Goldberg. I don't know if that applies to you, sir. But 
I think to the extent that the Prescription Drug Fairness for 
Seniors Act is being touted as the solution, I don't think it 
is the real answer.
    Mr. Strickland. Do you believe that those of us who support 
this act are looking for votes rather than trying to help 
seniors? I am asking for your personal opinion.
    Mr. Goldberg. My personal opinion is that I think there are 
better solutions that actually deliver coverage for seniors.
    Mr. Strickland. That is not an answer to my question, sir.
    Mr. Goldberg. Then I will be perfectly frank with you, 
Congressman. I think that the Prescription Drug Fairness for 
Seniors Act is based upon a misleading set of statistics and 
offers a discount that does not and cannot materialize for 
senior citizens, yes, sir.
    Mr. Strickland. I still don't think you answered my 
question, but we will move on.
    Mr. Goldberg, in an article you wrote, the geriatocracy 
won't swallow Clinton's drug plan.
    Mr. Goldberg. In the Wall Street Journal, yes, sir.
    Mr. Strickland. You say most seniors don't need, want or 
care about a government-run drug benefit. In fact, most seniors 
don't have a problem getting the drugs they need, and they 
don't spend a lot on medications.
    Mr. Goldberg. Right.
    Mr. Strickland. Then you say, seniors know that just the 
talk of price controls is driving down the price of the 
pharmaceutical stocks that make up a good chunk of their 
retirement portfolio.
    I don't know who you are talking with, but I would 
encourage you to come to my district--in fact, I would ask you 
here today to come to my district and let us talk about this 
issue publicly so that you can meet some of these individuals 
face to face.
    I talked to a woman in my district a few weeks ago who 
spent many years of her life as a Christian missionary in 
Mexico. She reared 36 children. I asked her if she had problems 
with prescription drugs; and she said, I am supposed to wear a 
heart patch, Congressman, but I haven't filled that 
prescription for over a year because I can't afford to do so.
    I just take issue with the fact that there is not a crisis 
and there are not many Americans who need this Congress to take 
decisive action on this issue.
    Mr. Goldberg. I agree with you, Congressman. Congress 
should take decisive action. I think the way to do it is to 
focus on providing care and direct assistance and coverage now, 
and I agree with you wholeheartedly in that respect.
    Mr. Burr. The gentleman's time has expired.
    The Chair would recognize himself for questions.
    Let me thank all of you for attending today. As you can 
tell, this is of high interest to many members; and earlier 
today we had a packed room ready to listen to members talk 
about solutions. And I think it is safe to say, in a bipartisan 
way, every member is interested in solving this problem. They 
are interested in seeing that prescription drugs are 
incorporated into the Medicare package that is offered to all 
Americans, both now and in the future. And, clearly, we have 
differences as to how to get there. Debate on differences is 
healthy to reach, in fact, the right end point.
    Let me go to you, Mr. Reischauer. I heard you say earlier, 
and I want to make sure I understood you correctly, that today 
companies have made decisions and have informed their employees 
that drug coverage or that health care--retiree health benefits 
will be phased out. We know that today. Do you believe that 
that has been taken into account in the actuary numbers that 
HCFA has gone through as it relates to the President's plan and 
the cost of it?
    Mr. Reischauer. Yes, to some extent. Whether they have, I 
don't know the specifics. But this is not a new trend, as Mike 
Hash pointed out. There has been a gradual decline in the 
prevalence of employee--employer-sponsored retiree policies 
since the late 1980's.
    Mr. Burr. It is accurate to say for every employer that 
decides not to extend coverage to retirees that we would then 
absorb that drug coverage that they are not going to have into 
this new plan that would be created, correct?
    Mr. Reischauer. That is correct.
    Mr. Burr. So if----
    Mr. Reischauer. But the President's plan, remember, 
provided assistance to those firms that kept retiree policies 
that was equal to two-thirds of the cost that would be imposed 
if the individual shifted into the government system. So it 
isn't like a nothing-something comparison. It is a two-thirds 
versus a hundred percent comparison in the cost estimate.
    Mr. Burr. But an employee has that opt-in, opt-out 
decision, look down the road, not know what their employer is 
going to do as far as the extension of their coverage, and they 
have got to make a gut decision, right?
    Mr. Reischauer. Yes.
    Mr. Burr. Let me ask you on another front. If any plan 
moved into price controls, what does that do to--and I know--
Mr. Seidman, I understand exactly what you said about future 
research and development. But if the price controls went into 
effect, what would that do to research and development? What 
would it do for the breakthroughs down the road for chronic and 
terminal illness?
    Mr. Reischauer. The answer to that question depends on the 
level at which the price controls are set. And we have had 
price controls in some government programs that have been, I 
would argue, above market prices.
    Mr. Burr. If they adopted the VA contract, what would it 
do?
    Mr. Reischauer. It undoubtedly would slow down to some 
extent the pace of technological innovation. But do we know 
that the optimal amount of technical innovation is what we are 
having right now or is it a little more or is it a little less? 
And what are the tradeoffs we have to give up to get something 
that we want?
    If you could tell me that we could design a health system 
in America that would provide coverage to everyone so we didn't 
have 34 million people uninsured but the price of that would be 
that we would, in 1999, have to live with 1997 medicine, I 
would say, fine, as long as the 1997 medicine continued each 
year. We would be making a tradeoff between one objective which 
is good, which is universal coverage, and another, which is 
more rapid increase in new discoveries and health 
breakthroughs.
    That is what we hire you to do. Too much of this discussion 
makes it sound like any amount of technological advance is good 
and we should go for it at all costs. And the issue is that you 
are giving up something when you accelerate technology, and 
something you give up might be good.
    Mr. Burr. We have many panels of patients, children, 
seniors, that we look at and hope the technology is advanced to 
the degree that next year when they come back they are actually 
on a drug that might have extended their life. Many times we 
are wrong; and, unfortunately, they don't make that repeat 
visit.
    Yes, sir, Mr. Seidman.
    Mr. Seidman. May I just say there are many seniors who, 
because the drug companies are putting their money into 
technology, if it is necessary for them to raise their prices 
because of that, and I don't think it is, but they deprive 
other seniors of the opportunity to obtain the drugs that are 
available today, not just the drugs that may be available in 
the future, and they lose their lives.
    Mr. Burr. Clearly, we have conveyed that Congress does have 
the ability, along with the administration, to extend drug 
coverage, and that is what we are here to debate. Clearly, we 
have differences on how that should be structured. Is there a 
way to keep drug development, device development at the levels 
that technology allows it to go and extend drug coverage as an 
option? I think the answer is yes. It is to find an agreement.
    Mr. Goldberg?
    Mr. Goldberg. I just wanted to go back to what Medicare is 
proposing to do with cancer drugs now, which is to dump all 
future new cancer drugs into the lowest reimbursement 
categories as a way of saving money on an outpatient basis. And 
what that would do to cancer research and quality of cancer 
care and if that is evidence of how a drug benefit would be 
administered to all senior citizens on an outpatient level, 
then I think we should really seriously examine how we should 
go about restructuring it. Because from the people that I have 
spoken to running the freestanding cancer centers and cancer 
patients, it would be devastating. People would be given 30-
year-old cancer therapies because HCFA has developed rules that 
would give it a financial incentive to use 30-year-old cancer 
therapies instead of cutting-edge cancer therapies in an effort 
to save money at an outpatient level. That is exactly the same 
kind of HMO penny wise, pound foolish things that we are 
decrying in today's hearing.
    So before we start running to the government to protect us 
from the vagaries of the marketplace, I think that your 
committee ought to take a close look at how HCFA, who would 
administer a drug benefit, is treating the use of drugs in 
Medicare today.
    Mr. Burr. We try to continually look at the ways that the 
agencies are interpreting.
    Dr. Wilensky?
    Ms. Wilensky. I just want to make sure the members 
understand that you don't have to rely on price controls as a 
way to try to moderate spending. In fact, one of the actually 
more positive issues that has come out of the discussion is 
that most of the bills do not do that, that HCFA in general has 
relied on administered pricing, as you well know, but there are 
better and smarter ways.
    I am nervous about VA supply prices because you are not 
having a major distribution center. And I think the whole 
economic rationale as to why you have a supply price is not 
relevant in Medicare, but you could have competitive PBMs that 
are able to purchase at a cheaper price that allow people, if 
they don't want to accept the drug in the category at the 
price, to buy a different drug if their physician is 
prescribing it but pay the difference. There are smarter ways 
than we have traditionally used in Medicare to try to restrain 
spending and not get involved in all the problems of price 
controls. So I would encourage you to remember that.
    There is a lot of reasons I think why price controls in the 
pharmaceutical area would produce some bad outcomes, but we 
ought to be able to moderate spending in smarter ways, and I 
think it is encouraging that the President and some of the 
other bills actually have raised that as an issue.
    Mr. Burr. Very good.
    The Chair would recognize Mr. Lazio for questions.
    Mr. Lazio. Thank you very much, Mr. Chairman.
    I apologize for having been out of the room for a good deal 
of the testimony, but I wanted to focus, if I could, and maybe 
perhaps target this question particularly to Dr. Wilensky, 
whose testimony I have read.
    Earlier in my introductory comments, I was referencing the 
New York State program. I don't know if you were in the room. 
It is the elderly pharmaceutical insurance coverage program. It 
has got 107,000 seniors that are enrolled. New York is probably 
one of the most progressive in terms of extending 
pharmaceutical coverage to folks, to seniors, low-income 
seniors, and the co-payment ranges from about $5 to $23.
    I just want to ask you, what is wrong with building on that 
kind of success? Is anything fundamentally wrong with taking a 
State model that has been used successfully, at least in 
certain States? Fourteen States have some form of prescription 
drug coverage. Three or four have a very significant presence 
in terms of the extension of benefits. What is wrong with 
building on that model and how do you think--and I guess I 
would open this up to the panel, Dr. Reischauer also--what do 
you think the reaction would be of the States if they were 
given flexibility and they were given the resources to 
administer a program?
    I can't help but also reference the CHIP program, health 
care program for children, that really started almost from 
ground zero, but many States also had some experimentation with 
the program. Now it is a very successful program administered 
at the State level extending health care benefits for low-
income children. Why can't we do the same thing for seniors if 
we can do it for children?
    Ms. Wilensky. I think it is exactly what you should do now.
    Ultimately, when Medicare is reformed for the baby boomers, 
I think it would be better to have a more integrated 
prescription drug coverage, catastrophic coverage, but there 
are a lot of decisions that Congress will have to make before 
they get there. So I think it is precisely what we ought to do 
now and use the models Pennsylvania and New York have, very 
long-standing programs. So I would strongly advocate that 
strategy.
    Mr. Reischauer. While I applaud the New York program, which 
is a very good program, I think it would be a mistake to move 
in that direction for several reasons.
    First, while the 14 States that have programs now could 
expand their programs rather easily with additional Federal 
grants, the other States would take 2 or 3 years to establish 
themselves.
    And I am more of an optimist about long-term Medicare 
reform than Gail is. I see that there is a consensus developing 
around premium support, and I would hope sometime in the next 3 
years or so we really can restructure the benefit and introduce 
more competition into Medicare and reform it for the next 
century.
    But, more importantly, these are programs that help folks 
with low incomes, and you have to come in and sign up. They are 
means tested.
    Some people don't like to participate in means-tested 
programs, even those with low incomes, but it is impossible to 
do what the chairman suggested is possible, which is protect 
not only low-income people but people with high expenditures 
relative to their incomes. And the reason for that is that you 
have to keep track of how much people have spent out of pocket 
on drugs. And unless you are in the program, which a $25,000 a 
year couple wouldn't be in the plan until they had already 
spent the $3,000 out of pocket associated with some 
catastrophic event, and so it isn't--administratively and 
technically it just isn't possible to cover both of the groups 
of people one would want to help, low income and those who in 
the course of a year end up having very high expenditures 
relative to their incomes, because they couldn't 
retrospectively go back and find out how much they spent.
    Mr. Lazio. Aren't there certainly judgments we need to make 
in term of resource allocation so that we don't--the public 
sector is efficiently reaching the most, if not all--the most 
people that we can that are struggling with the problem. The 
most efficient way is really by dealing with poverty level and 
their ability to--it is the same exact model we used with the 
CHIP program, isn't it, by saying low-income families with 
children, that these people would have to qualify for the 
program in order for them to get the benefit and that we gave 
the States the flexibility to model programs that maybe could 
be piggybacked with other programs used in a more collaborative 
way, as opposed to forcing a whole separate program on folks. 
There is a point in which you could extend it to everybody.
    That argument that you make is also an argument for picking 
up the costs, in part, of current employer-paid health care 
benefits, aren't they?
    Mr. Reischauer. Why are we treating prescription drugs 
differently from physician visits, from hospital care, from 
home health, from all the other important elements of a 
complete medical package? The answer is, by historical accident 
that it was left out and if we had to rethink Medicare again, 
design it again, we certainly would include it in the package. 
For us to all say, well, it cost an awful lot to do that, if I 
said to you----
    Mr. Lazio. The projections would have been significantly 
higher. We would have been forced to make the reforms that 
maybe you were calling for many years ago if we would have had 
that in place; isn't that right?
    Mr. Reischauer. But I would rather have a Medicare program 
that was less generous on the things we cover now that covers 
prescription drugs than a Medicare program that is very 
generous for home health and very generous for laboratory 
expenditures and doesn't cover outpatient prescription drugs at 
all. It makes absolutely no sense.
    Mr. Burr. The gentleman's time has expired.
    I know all members would like additional time. The Chair 
would recognize Mr. Strickland for a very quick question, if he 
has it.
    Mr. Strickland. I am going to go back to Mr. Goldberg. 
Friendly exchange, Mr. Goldberg. I detect that you kind of have 
a tendency to look at the motives and make determinations about 
the motives of people who disagree with you.
    In the letter to the editor to my district, you said, we 
are looking for votes, not solutions; and then in a Wall Street 
Journal article regarding the children's program, you said, 
there is no children's health care crisis. This crisis has been 
concocted out of myths and misstatements from interest groups 
more interested in expanding the welfare state than in the 
children's well-being.
    Those are pretty harsh judgments which you have leveled 
against some of us, and I am going to try to give you the 
benefit of the doubt and think that you truly believe those 
things or you wouldn't be just saying them for purposes of God 
only knows. The question I have, though----
    Mr. Goldberg. I think I would have rewritten the lead to my 
Wall Street Journal's article.
    Mr. Strickland. Thank you.
    One very quick question, Mr. Reischauer. This multilevel 
approach for prescription benefits, I think Mr. Lazio and you 
discussed this, but there are various ways of trying to get 
prescription coverage to seniors. Some States have programs, 
HMOs, Medigap policies, and the like. In your judgment, 
wouldn't it be better to have that effort centralized into the 
Medicare program?
    Mr. Reischauer. I think it is essential to do that. To do 
otherwise, the solution will be temporary, and there will be a 
stopgap. And I think the chairman and I think Gail and other 
people have recognized that eventually this should be part of 
the package. And so what we are really doing is talking about 
tactics. How long is it going to take Congress to get around 
fundamental Medicare reform? And if that is a long period of 
time, shouldn't we have something in the meantime to address 
this growing problem? It is a judgment.
    Mr. Burr. Exercising the authority of the Chair, I am going 
to suggest to the gentleman that his time is up.
    I am going to ask all of our witnesses, following up on the 
question and the answer that was just given, to supply for the 
committee answers to this question: If we do something 
incrementally, in other words, if we give away the carrot, what 
does that effect have on our ability to reach true Medicare 
restructuring reform, however you envision Medicare in the 21st 
century, to look as a cost-effective quality of care delivery 
system for all seniors?
    And again, I don't think that the debate that we are 
currently having is whether we extend drug coverage to seniors. 
I think we all agree that we should, that if we had it to do 
over again, it would be there. The question that we have before 
us is, how do we do it? And if we do it incrementally, does 
that affect our responsibility long term transforming this 
health care system?
    Once again, let me thank these witnesses. Let me thank the 
members. I am sure this won't be the last hearing we have on 
this subject.
    This hearing is adjourned.
    [Whereupon, at 1:52 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
Responses of Michael Hash, Deputy Administrator, HCFA, to Questions of 
                            Hon. Nathan Deal
    Question 1: In your testimony you state that the prescription drug 
benefit is completely voluntary, and yet you project that 31 million 
beneficiaries will be covered by the benefit. Is that correct?
    Answer 1: Because the program is voluntary, we used a conservative 
estimate based on data prepared for the White House by the Actuarial 
Research Corporation. This estimate represents the 87 percent of the 39 
million Medicate beneficiaries that fill at least one prescription 
annually. However, we expect that most, if not all, of the 
approximately 39 million beneficiaries will choose this new drug option 
because of its attractiveness, affordability, and stability.
    Question 2: If only 31 million of the 39-40 million Medicare 
beneficiaries will be covered by Part D, will the remainder, the 8-9 
million not covered by the benefit have any prescription drug coverage, 
and if so from what sources?
    Answer 2: We expect that most, if not all, of the approximately 39 
million beneficiaries will benefit from the President's prescription 
because all beneficiaries will have access to a prescription drug 
benefit plan. While some beneficiaries may opt out of the voluntary 
program, we believe that most will choose to participate.
    Question 3: Would you tell the Subcommittee, please, by source of 
coverage preenactment of the President's plan, what you believe will be 
the source of coverage post-enactment? In other words, for those 
preenactment covered by Medicaid, what will be their sources of 
coverage post enactment? Please provide the committee with a table that 
presents this information clearly.
    Answer 3: The table below shows which payers will cover the 
prescription drug benefits, premiums, and coinsurance by Medicaid 
eligibility status.

----------------------------------------------------------------------------------------------------------------
                                                                         Payer
         Medicaid Eligibility         --------------------------------------------------------------------------
                                         Medicare Rx Benefit      Medicare Rx Premium         Rx Coinsurance
----------------------------------------------------------------------------------------------------------------
Dual.................................  Medicare...............  State Medicaid           State Medicaid
                                                                  (with Federal            (with Federal
                                                                 Matching).               Matching)
Qualified Medicare Beneficiary (QMB).  Medicare...............  State Medicaid           State Medicaid
                                                                  (with Federal            (with Federal
                                                                 Matching).               Matching)
Specified Low-Income Beneficiary       Medicare...............  Federal Government.....  Federal Government
 (SLMB).
----------------------------------------------------------------------------------------------------------------

    Question 4: Of the beneficiaries covered by private-sector sources 
preenactment, what percentage would you project will be covered by the 
government-sponsored Medicare program post-enactment? What percentage 
covered by government-sponsored programs preenactment will be covered 
by private sector program post enactment?
    Answer 4:

------------------------------------------------------------------------
            Current Rx Coverage                Coverage Under Proposal
------------------------------------------------------------------------
Medicare secondary payer (Medigap)........  Medicare secondary payer
Employer sponsored retiree plan...........  We project that about \3/4\
                                             of beneficiaries in
                                             employer sponsored retiree
                                             plans will continue to be
                                             enrolled in employer plans
                                             which would be subsidized
                                             by Medicare under the
                                             employer subsidy provision.
                                             The remaining beneficiaries
                                             will enroll in Medicare
                                             Part D with or without
                                             supplementation from the
                                             employers.
Privately purchased plans.................  All beneficiaries with
                                             privately purchased plans
                                             will enroll in Medicare
                                             Part D. Some of these
                                             beneficiaries may purchase
                                             new supplemental policies.
Medicaid..................................  Medicaid
Veterans Administration...................  Veterans Administration
------------------------------------------------------------------------

                                 ______
                                 
                National Council of Senior Citizens
                               Silver Spring, MD 20910-3314
                                                 September 29, 1999
The Honorable Michael Bilirakis
Chairman, Subcommittee on Health and Environment
House Commerce Committee
2125 Rayburn House Office Building
Washington, D.C. 20515
    Dear Sir: At the close of the September 28th hearing on 
prescription drug coverage under Medicare, Representative Richard Burr, 
then presiding, asked each member of Panel B--of which I was a member--
to respond in writing to a question he posed. I understood his question 
to be something like:
    Should prescription drug coverage under Medicare be achieved 
incrementally?
    My answer to the question is ``No.'' I do not believe that the 
serious problems that beneficiaries of all income groups, except the 
most wealthy, face can be met soon enough, if ever, by an incremental 
approach. The National Council of Senior Citizens strongly believes 
that enactment of comprehensive, affordable Medicare coverage by this 
session of Congress is imperative and would be widely supported, not 
just by seniors but Americans of all ages.
    The alternative, as I understand it, would be a program 
``targeted'' only to the poorest beneficiaries. Experience has 
demonstrated over and over again, including the drug coverage under 
Medicaid, that programs for which only the poor are eligible in the 
face of a situation in which many non-poor beneficiaries are deprived 
of desperately needed pharmaceuticals by non-coverage and excessive 
costs of drugs would be far from the kind of program that would be 
enacted.
    On behalf of the National Council of Senior Citizens and millions 
of elderly and disabled Americans, I urge your Subcommittee to 
recommend prompt enactment of comprehensive, affordable prescription 
drug coverage for all Medicare beneficiaries.
            Sincerely yours,
                                               Bert Seidman
                                  Member, NCSC General Policy Board


 PRESCRIPTION DRUGS: WHAT WE KNOW AND DON'T KNOW ABOUT SENIORS' ACCESS 
                              TO COVERAGE

                              ----------                              


                        MONDAY, OCTOBER 4, 1999

                  House of Representatives,
                             Committee on Commerce,
                    Subcommittee on Health and Environment,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 4:30 p.m., in 
room 2123, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Stearns, 
Greenwood, Lazio, Bryant, Brown, Green, Strickland, and Capps.
    Staff present: John Manthei, majority counsel; Patrick 
Morrisey, majority counsel; Carrie Gavora, professional staff; 
Kristi Gillis, legislative clerk; and John Ford, minority 
counsel.
    Mr. Bilirakis. We will call the hearing to order.
    I want to first apologize to the members of the 
subcommittee and to the members testifying for moving this from 
3 o'clock to this time. I went to the airport to catch a 10:30 
flight, and it was delayed, so I switched over to another 
airline. That will probably be happening even more in the 
winter.
    But I do want to thank all of the members for taking time 
to be here.
    This is a continuation of the hearing we held last Tuesday 
on Prescription Drugs: What We Know and Don't Know About 
Seniors' Access to Coverage. Today we will hear from several of 
our colleagues on this issue. Although this is not a 
legislative hearing, the members testifying will share their 
views on specific measures to improve prescription drug 
coverage for Medicare beneficiaries.
    In considering this complicated issue, I have been guided 
for a long time by a simple principle, and that is no 
beneficiary should have to choose between buying groceries and 
filling a prescription.
    Two of our colleagues, Mr. Peterson and Mr. Fletcher, 
recently joined me in introducing bipartisan legislation that 
is targeted to help our Nation's neediest beneficiaries, the 
poorest and sickest, right now. Not later, but now.
    Our bill, H.R. 2925, will provide prescription drug 
assistance outside of the Medicare program to beneficiaries who 
are low income or have high annual drug costs. Specifically, 
H.R. 2925 provides Federal matching funds to States that 
establish or expand drug assistance programs serving low-income 
individuals. It also establishes a Federal stop-loss protection 
to limit the out-of-pocket prescription drug costs of 
beneficiaries who obtain up-front coverage.
    H.R. 2925 would not raise beneficiaries' Medicare premiums, 
it would not increase Medicare spending or jeopardize the 
fiscal solvency of this vital program. What it would do is help 
the neediest beneficiaries today, while we continue working on 
broader reform to protect and strengthen Medicare for the 
future. As I have repeatedly emphasized, an overly broad 
approach will spread limited resources too thin--without 
helping those most in need of assistance.
    By contrast, H.R. 2925 is a responsible plan to help the 
poorest and sickest beneficiaries obtain prescription drugs. 
Certainly there are a variety of approaches to this complex 
problem, and I do not profess to have identified the only 
solution.
    I will welcome the ideas and input of my colleagues on both 
sides of the aisle. I am committed to working on a bipartisan 
basis as any legislation moves forward, and I hope that we will 
use this forum to learn from each other. We have invited you 
here so we can learn from you and consider all of your ideas in 
the process of moving forward.
    I want to be absolutely clear about one point. I believe it 
is unconscionable to ignore the plight of our poorest and 
sickest beneficiaries as some might have us do. An all-or-
nothing attitude is a recipe for failure for today, just as it 
was during the health reform debate of 1994. That approach to 
health reform forced individuals who lacked coverage due to 
preexisting conditions to wait 2 years longer for targeted 
health care reform, which was finally enacted with strong 
bipartisan support. It would have been enacted 2 years before 
were we allowed to bring it to the floor.
    We should not waste the opportunity to act now on a 
bipartisan basis to help individuals in need. Our Nation's most 
vulnerable beneficiaries should not have to wait any longer for 
drug assistance. I would like to thank the members who have 
joined us today. I look forward to their testimony and now 
recognize Mr. Brown for his opening statement.
    Mr. Brown. Thank you, Mr. Chairman. I appreciate your 
responsiveness to our request on this side of the aisle for a 
second hearing on Medicare prescription drugs. Should we as a 
Nation see to it that our seniors have access to prescription 
drugs? Let's look at the status quo. As much as opponents to 
any drug plan try to disguise it, gloss over it, ignore it or 
lie about it, the status quo means health care rationing. 
Seniors who have money or were fortunate enough to work for an 
employer that offered generous retirement benefits have access 
to prescription drugs that can lengthen and enhance the quality 
of their lives. For the rest, tough luck. That is the status 
quo.
    I have been thinking about Mr. Coburn's comments during 
last week's hearing. He and I both cited the drug Ticlid as an 
example of a medicine that serves a critically important 
purpose, reducing the probability of stroke for high-risk 
individuals, but it is undoubtedly unaffordable for many 
seniors. Mr. Coburn admonished physicians for failing to take 
their patients' financial status into account when prescribing 
drugs like Ticlid. He said that in the case of Ticlid, a doctor 
can instead prescribe aspirin which he said is 95 percent as 
effective.
    Here is my question: Should doctors be in the business of 
rationing drugs to patients based on the patient's financial 
status? If my mother is rich and your mother is poor, should my 
mother receive medicine more likely to prolong her life and 
your mother get aspirin? Doctors should be in the business of 
preserving and restoring health, not in the business of 
rationing prescription drugs.
    I have another question about the Ticlid scenario. In my 
district in Ohio, Ticlid costs $1.91 per pill. Aspirin costs 6 
cents per pill when it is not on sale. That means that Ticlid 
is at least 30 times the price of aspirin and 5 percent more 
effective. Are we getting our money's worth?
    The truth is physicians are not likely to ration drugs. It 
is not in their job description and it shouldn't be in their 
job description. In the United States, doctors don't ration 
drugs, drug companies ration drugs. Drug companies know that 
they can mark their prices up dramatically and still sell 
enough to earn enormous profit. It is called price 
inelasticity. The desire for a product is so great that its 
purchasers are insensitive to the price. Or at least those 
purchasers who can afford to be are. When you sell one of a 
kind or an essential product, you can overprice it dramatically 
and still sell plenty of it.
    Lots of high-end products are priced this way: penthouses, 
Cadillacs, personal jets. Only the rich can afford them. 
Prescription drugs are not a luxury. Once they become 
available, they become a necessity. Rationing luxury items is 
capitalism. Rationing prescription drugs is inhumane.
    That is not to say there are no other examples of rationing 
health care in the United States. Census Bureau figures 
released today say that 44.3 million Americans lack health 
insurance. Uninsured individuals receive far less health care 
than those with insurance. Our fragmented gap-ridden insurance 
system for working-age individuals is a crisis that we have yet 
to face up to. But in 1965 this Nation decided to deliver 
seniors from the uncertainty and the unfairness of that system.
    We created a system designed to treat all seniors equally 
when it comes to basic health care needs. We made a decision to 
establish Medicare because seniors generally live on fixed 
income and cannot absorb catastrophic health care costs, 
because the private insurance market abandoned at least half of 
them, because financial crises affecting seniors echo 
throughout the entire family and, most importantly, because our 
values as a Nation led us in that direction.
    Now that prescription drugs have become as essential as 
hospital and medical care, we are allowing the drug industry 
bullying and our own apathy to undercut the commitment that we 
as a Nation and this Congress made in 1965. We have legitimate 
concerns about the cost of the prescription drug program. 
According to the National Institute of Health Care Management, 
two-thirds of the recent explosion in prescription drug 
spending is attributable to price inflation.
    Drug companies are doing what they need to do to maximize 
profits. Unlike other industrialized nations the U.S. does not 
regulate drug prices, so drug companies charge us the highest 
price of any nation, by multiples of 2, 3 and even 4 times what 
other countries pay. Within the United States, drug companies 
are charging the highest prices to those with the least 
bargaining power, seniors and others without health insurance 
or drug insurance. Drug companies are diverting huge sums of 
money, money that comes from inflated drug prices, into 
advertising and marketing. They are in a campaign to convince 
Americans that life would be meaningless without Viagra, that 
happiness hinges on Propecia. From a market perspective, 
though, drug companies are doing everything right. You can't 
blame drug companies for maximizing profit. That is their job. 
But you can't blame the Federal Government for taking steps to 
protect seniors and address policy ramifications to what drug 
companies do. That is our job.
    I have introduced drug legislation, H.R. 2927, that would 
bring prices down without taking away the industry's incentive 
to act like an industry. That is, to maximize profits and 
develop new products. H.R. 2927 does not use price controls or 
regulation to bring down drug prices. What my bill does is 
reduce drug industry power and increase consumer power by 
subjecting the drug industry to the same competitive forces 
that almost every other industry bears. It is a means of 
moderating prices that are too high without inadvertently 
setting prices that are too low.
    Drawing from intellectual property laws already in place in 
the U.S. for other products where access is an issue, pollution 
control devices are one example, the legislation would 
establish product licensing for essential prescription drugs. 
If based on criteria established by the Department of Commerce, 
a drug price is so outrageously high it bears no resemblance to 
pricing norms for other industries, the Federal Government 
could require drug manufacturers to license their patent to 
generic drug companies. The generic companies could then sell 
competing products before the brand name patent expired, paying 
the holder royalties for that right. The patent holder would 
still be rewarded for being the first on the market, and 
Americans would benefit from competitively driven prices.
    Alternatively, a drug company could limit its prices which 
would preclude the Federal Government from finding cause for 
product licensing.
    The bill would also require drug companies to provide 
audited detailed information on drug company expenses. Given 
that these companies, the drug companies, are asking us to 
accept a status quo that has bankrupted seniors and ignited 
health care inflation, they have kept us guessing about their 
true costs for far too long.
    We can continue to protect drug companies from good, old-
fashioned American competition. We continue to buy into drug 
company threats that research and development will dry up 
unless we continue to shelter them from competition even though 
that argument falls apart when you look at how research and 
development is funded today. It is mostly funded by American 
taxpayers. Drug companies pay only 50 percent of the costs of 
their prescription drug research and development. Taxpayers pay 
most of the rest. Taxpayers give generous tax subsidies and tax 
breaks to those drug companies on the research dollars that 
they do spend, and then taxpayers are privileged to pay 2, 3, 
and 4 times what drug consumers in other countries pay.
    We can do nothing, Mr. Chairman, or we can get the guts to 
challenge the drug industry on behalf of seniors and on behalf 
of every health care consumer in this country. We can take a 
serious look at the Allen bill, the Berry-Sanders bill and the 
Brown bill. If we have questions about drug utilization, we 
should confront them,not use them as an excuse for inaction. 
Mr. Chairman, there is no excuse for inaction. Our inaction 
perpetuates suffering. There is no excuse for that.
    Mr. Bilirakis. Thank you. The gentleman's time has expired.
    Mr. Stearns for an opening statement.
    Mr. Stearns. I thank the chairman. Let me compliment him 
for having this hearing and, of course, the ranking member, Mr. 
Brown, for his recommendation, and welcome my colleagues for 
being here to testify.
    Many of us have looked at this and agree that it is a 
problem, and we are also concerned. I want to also give 
commendation to the chairman for drawing up his bill on this. 
Mr. Chairman, in an age when the nightly news is full of new 
and exciting medical discoveries for therapies we could not 
conceive of in the past, it is an important goal to focus on 
how the patients who may need these medicines the most will be 
assured better access. I am also concerned about ensuring that 
any steps that we take in these areas do not come at the cost 
of endangering the current benefits that seniors and other 
patients already enjoy. I say this, Mr. Chairman, because as 
the chairman of the Veterans Subcommittee on Health, there is 
concern with limited money in the budget for veterans. The 
impact this will have and how it will affect veterans.
    Our subject today is what we know and don't know about 
seniors' access to coverage. I think it is timely that we talk 
about it, and some of the key issues that you are having on 
this panel is identifying the cost of drug coverage, both 
premium and out of pocket for seniors today. I think that is 
important in reviewing the existing options for coverage in the 
prior Medicare supplemental market, and what level of coverage 
seniors currently receive through supplemental insurance.
    But, of course, the concerns we have today and the 
testimony we will hear from our colleagues is not new. This is 
a problem that has existed for at least 10 years and so we are 
all sensitive at this point because Medicare has so many 
problems in its funding. Those of us who have looked at this 
issue recognize that we have to tackle this, but it has been 
something that has been on the radar screen for some time. We 
have to look at what we can do in terms of policy and not 
politics.
    I have listened on the House floor to some of my colleagues 
talk about this issue, and every time they do this I try to put 
it in perspective and try to understand the impact and what it 
would cost.
    The only bill I am familiar with is H.R. 664 which is Mr. 
Allen's bill. I know Mr. Allen has been on the floor recently 
talking about his bill, and I think he mentioned that--and you 
and Mr. Allen might want to talk about this, that his 
legislation involves almost virtually no expense to the Federal 
Government. I could be wrong in my interpretation, but I think 
that is what you said.
    Mr. Allen. That is correct.
    Mr. Stearns. I have to view that as Chairman of the 
Veterans Subcommittee on Health. I had asked Dr. Garthwaite, 
who is the Department of Veterans Affairs' Acting Under 
Secretary for Health to review your bill. Perhaps you got a 
copy of his letter. I thought I would put, Mr. Chairman, with 
unanimous consent, the letter from Dr. Garthwaite which is 
dated August 11, 1999, in which he was kind enough to review 
H.R. 664 relative to the VA.
    In his letter he said that H.R. 664 would cost the 
Department of Veterans Affairs between $500 million and $600 
million annually. This Department has had experience with 
several attempts to take their favorable pricing and extend it 
to other purchasers and their conclusions have been the same: 
It costs them hundreds of millions of dollars.
    And I think, Mr. Chairman, you realize the effect that 
would have on veterans. So, I am interested in the hearing and 
I am concerned about veterans. I think we may need to realize 
the impact of this legislation, and how it affects veterans. I 
appreciate Dr. Garthwaite's letter, and I hope that----
    Mr. Bilirakis. Without objection that letter is made a part 
of the record.
    [The letter follows:]

                     Department of Veterans Affairs
                             Veterans Health Administration
                                                    August 11, 1999
The Honorable Cliff Stearns
Chairman, Subcommittee on Health
Committee on Veterans' Affairs
U.S. House of Representatives
Washington, DC 20515
    Dear Mr. Chairman:
    This is in response to your letter on the impact on the Department 
of Veterans Affairs (VA) of H.R. 664, which would extend favorable 
government prices for pharmaceuticals to the Medicare population.
    We are very concerned that this proposed legislation would have an 
indirect, negative impact on VA pharmaceutical budgets. Section 3(c) of 
the bill would force covered outpatient drug manufacturers to sell to 
Medicare-affiliated pharmacies at the lower of the Medicaid reported 
best price or the ``lowest price paid for [the drug] by any agency or 
department of the United States''. The latter benchmark would include 
not only low Federal Supply Schedule (FSS) and FSS Blanket Purchase 
Agreement (BPA) prices negotiated by VA for the Government, but also 
large volume committed use national contract prices obtained by VA and/
or Department of Defense (DOD) in head-to-head competitive 
procurements. Perhaps most importantly, the ``lowest price paid'' 
benchmark would include many Federal ceiling prices (FCPs) already 
imposed on manufacturers by the Veterans Healthcare Act of 1992, 
Section 603 (Public Law 102-585; 38 U.S.C. 8126).
    By way of further information, through many recent inquiries by 
drug manufacturers regarding this bill, we have been informally 
informed that manufacturers may no longer offer lower-than-FCP prices 
to VA and DOD in BPA and national contract negotiations. They may also 
invoke 30-day cancellation clauses in FSS contracts and BPAs, to the 
extent allowed by Public Law 102-585, which would force Government 
healthcare agencies to buy drugs in the open market at much higher 
retail prices or AWPs (average wholesale prices).
    In summary, we believe enactment of H.R. 664 would increase VA's 
annual pharmaceutical costs by $500-600 million. We. would be pleased 
to discuss this matter further with you. If you have additional 
questions, please contact me or Mr. John Ogden, Chief Consultant for 
Pharmacy Benefits Management, at 202.273.8429/8426.
            Sincerely,
                                 Thomas L. Garthwaite, M.D.
                                  Acting Under Secretary for Health

    Mr. Bilirakis. Mr. Green for an opening statement.
    Mr. Green. Thank you, Mr. Chairman. I want to thank the 
chairman for scheduling this second hearing. It is one that we 
started last week on prescription drug medication, and today I 
look forward to hearing our colleagues who have thoughts on how 
they got to this issue.
    Several members that we have here today have done extensive 
research on providing better and more affordable access to 
prescription medication. The finding can be translated into 
legislative language and hopefully our committee can move 
forward. This will give the members of our subcommittee a 
second hearing and the opportunity to look at the wide range of 
options that we can consider.
    Whatever model, I hope our primary responsibility is one 
for now that Congress has recognized the high cost of 
prescription drugs. The Commerce Subcommittee on Health, this 
is our second hearing, and although in Washington sometimes you 
think that it is a win just by having a committee hearing, I 
would hope that we would carry it much further than that and 
actually start addressing some of the issues of prescription 
medication.
    In my part of the country from doing town hall meetings, it 
is very seldom that I have one that prescription medication 
does not come up, with seniors bringing in receipts to show me 
that they are spending $200 to $300 a month on medication.
    Being 6 hours from Mexico, if a senior is well enough, they 
will drive or somehow get to Mexico to be able to save half and 
sometimes more on their cost. The studies in our district show 
that seniors on the average pay more than double what maybe in 
Mexico or maybe the most favorable providers, HMO or VA, for a 
certain number of prescription medications, and I know that 
happens on the Canadian border, too. Not all of our seniors 
have that opportunity.
    The study that I read and we talked about last week at the 
hearing shows that 65 percent of seniors have some type of 
coverage. I don't think that is true in the district that I 
represent. Maybe there is a lot of them who have partial 
coverage or some high deductible that they can't get to, but 
that study seems, at least with the information that I am 
getting from average constituents, I wish it were 65 percent. 
We probably wouldn't have as much contact as we do.
    I share my colleague's concern. We heard it last week on 
politics, but our system of government, to get to policy 
changes, we have to engage in politics. Whether it is me 
sitting here today or standing on the floor of the House or 
someone else saying we have identified the problem, the high 
cost of prescription for seniors. We know that the Veterans 
Administration and HMOs can negotiate for smaller amounts and 
lower costs, why shouldn't we try and build on that?
    With that, Mr. Chairman, I would hope Mr. Stearns would 
provide a copy of that letter because I would like to take it 
further and find out--$500 million is a large cost to be trying 
to negotiate for prescription medication. That will be part of 
the committee record, and I hope that it will be shared.
    Mr. Bilirakis. I thank the gentleman. Yes, that letter is 
made a part of the record and certainly it is available at any 
time.
    Mr. Lazio.
    Mr. Lazio. Thank you for scheduling this hearing and your 
personal commitment to the issue of prescription benefits, and 
I know that we have a fine panel of my colleagues here, 
including the dean of my home State delegation, Congressman 
Gilman, who is the people's advocate on so many different 
fronts.
    This is a difficult issue in terms of trying to balance 
competing interests. On the one hand, we are seeking a program 
that will be true to cost containment in the Medicare system, 
ensuring that we don't undermine the solvency of a program that 
is already under siege.
    We are trying to develop a program with a second 
consideration, which is not to undermine the tremendous 
innovation that has occurred in the pharmaceutical industry, 
partly because of the huge investment of the public sector 
through NIH. And I want to say I am very proud of the current 
majority for its huge increases in the budget for the National 
Institutes of Health and the various other institutes which 
does leverage both basic science and the type of science that 
evolves to pharmaceutical development, the great breakthroughs 
that have been occurring. We have to keep that in mind. We 
cannot undermine creativity for cutting-edge pharmaceuticals.
    And third of all, we need to make sure that what we do is 
accessible, easy for seniors to opt into and does not 
substitute for current coverage. Right now as the chairman has 
said, about one-third of our seniors have Medicare+Choice or 
the equivalent with prescription benefits. About one-third have 
employer-sponsored health benefits that include prescription 
coverage, and we are really targeting it to the one-third of 
seniors that do not have prescription benefits.
    I know how important it is to have those kinds of benefits. 
I have been lucky in my family. My dad was a stroke victim and 
suffered for many years as a result of a stroke. We were lucky 
to have coverage that included prescription benefits. I know 
many other seniors throughout America are not so lucky, and so 
I know that we need to redouble our efforts to balance these 
very important competing demands for access, for ensuring cost 
containment, making sure that we don't cost shift, undermine 
the ability of pharmaceutical companies to innovate, and bring 
the very best of pharmaceutical creativity and promise and 
affordable rates to our seniors.
    I want to applaud our colleagues for coming forward here. I 
don't agree with every approach that has been taken by those 
that are going to be testifying, but I want to say that I 
applaud their commitment to try to find a solution to this very 
difficult problem. Once again I want to applaud you, Mr. 
Chairman, for your personal commitment to this important issue. 
I yield back the balance of my time.
    Mr. Bilirakis. I thank the gentleman.
    Ms. Capps for an opening statement.
    Ms. Capps. Thank you for continuing the hearing that we 
began on Thursday. My opening statement was made on Thursday, 
and I didn't know whether I would be here in time today, but I 
would like to thank my colleagues who have put in extraordinary 
amounts of time and energy on this topic. I really appreciate 
that this is now an important part of our discussion in the 
House of Representatives. That is significant.
    I represent a district where Medicare HMOs have been 
pulling out, and Saturday morning the front page news in our 
paper was that our largest hospital is probably going to 
eliminate HMO service and this will affect our Medicare 
population. Seniors tell me every day I am in my district how 
difficult it is for them to have no options for their 
prescription drug coverage.
    So, clearly it is something that we need to address, and I 
know that although we may have differing ideas about how we 
should go about doing that, all of us understand that this is a 
need or an issue that is important in our country today. Thank 
you for holding the hearing, Mr. Chairman.
    Mr. Bilirakis. I thank the gentlewoman for her comments. 
Any written statements that the subcommittee members wish to 
make a part of the record, without objection, that will be the 
case.
    [Additional statement submitted for the record follows:]
Prepared Statement of Hon. Ralph M. Hall, a Representative in Congress 
                        from the State of Texas
    Mr. Chairman, I am pleased that the Subcommittee has decided that 
its time would be well spent in thoughtful consideration of an issue 
that is of paramount importance to so many of our constituents--how to 
provide prescription drug insurance coverage for Medicare 
beneficiaries. It is not going to be simple to accomplish this goal, 
and time spent understanding discussing all the components of the issue 
is time well spent.
    One of the things that I believe to be most critical to a good 
outcome for this debate is that we clearly define the issue--what it 
is, and what it is not. The reason that many Medicare beneficiaries do 
not have adequate access to prescription drugs is that they do not have 
prescription drug coverage under their health insurance. The problem we 
need to discuss, therefore, is drug coverage. How can drug coverage be 
expanded so that it is accessible to all Medicare beneficiaries?
    Our task as the Subcommittee looks into Medicare drug coverage is 
not, nor should it be, to engage a battle about the price of 
prescription drugs. That fight is unproductive and off point. 
Furthermore, it is a valid concern that meddling in the marketplace, 
including establishing price controls, can and will have a detrimental 
effect. We are witnessing this now, as a result of certain Medicare 
payment controls imposed under the Balanced Budget Act. The BBA made 
well-intentioned changes, based on the best information available at 
the time. But some of those changes, especially where they resulted in 
substantial reductions in payments for Medicare services--in essence, 
controlling the prices of these services--have not turned out as we 
expected and planned. In fact, some of the changes may have compromised 
the services Medicare beneficiaries are receiving.
    We cannot afford to make a critical error that will result in the 
enactment of a Medicare prescription drug program that won't work over 
the long term, or that will cause perturbations in the market that 
inevitably will result in reduced availability of new drugs resulting 
from reduced investment in pharmaceutical research. With the aging of 
the population will come an increase in chronic diseases for which we 
do not have good treatments; we will hurt our Medicare beneficiaries if 
we slow or jeopardize the possibility of their getting new and better 
treatments for the diseases that primarily affect the aging--such as 
arthritis, Parkinson's disease, and Alzheimer disease.
    So let us maintain our focus, Mr. Chairman, as we move forward on 
this issue. Our focus should be on drug coverage. If we stay focused, 
and determine to solve problems carefully as this Committee and 
Subcommittee historically have done, our chance of success is much 
improved.

    Mr. Bilirakis. Gentlemen, thank you for taking time away 
from your busy schedules and all of the time that you have put 
into this subject.
    We will kick off with Mr. Peterson. Collin, you have 5 
minutes. Your written statement is made a part of the record. 
Please proceed.

   STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MINNESOTA

    Mr. Peterson. Thank you, Mr. Chairman and members of the 
committee. I appreciate being able to be with you today. My 
interest is in trying to get something done with this 
prescription drug issue. Medicare has been a good program. It 
has delivered health care for over 30 years, but I think 
everyone agrees that we are going to have to make some changes 
and finally within the context of that we will get some kind of 
prescription benefit.
    But having sat through a lot of meetings this year, I think 
this issue has become highly politicized to the point that I am 
not sure that we are going to get something accomplished in the 
short term.
    I am interested in getting some help for people that need 
it. I was glad to work with the chairman and introduce 
legislation, along with Dr. Fletcher, to provide targeted 
prescription drug assistance to the neediest Medicare 
beneficiaries, individuals who have low incomes or who have 
high drug costs. This bill would help Medicare beneficiaries 
now. They would not have to worry about getting through the 
whole process. It is a positive first step while Congress works 
on the other broader Medicare reforms.
    Approximately two-thirds of Medicare beneficiaries have 
some form of prescription drug coverage now. The one-third that 
do not have are largely women and individuals on fixed income. 
The high cost of prescription drugs coupled with individual's 
low incomes forces beneficiaries to make decisions that no 
American should have to make. I am speaking of Medicare 
beneficiaries who have to choose between paying bills and 
buying groceries or purchasing prescription drugs that they 
need. Some have to cut costs by rationing their medicine in 
efforts to prolong their prescription.
    With the best health care system in the world, these are 
decisions that should never have to be made. There are many 
policy issues to be addressed while Congress considers Medicare 
reform. But as I have stated, the one issue that should and can 
be addressed immediately is prescription drug coverage for the 
most vulnerable beneficiaries in our society. As Mr. Bilirakis 
stated, our bill would provide drug coverage outside of the 
Medicare program and it would not raise beneficiaries' Medicare 
premiums, increase Medicare spending, or jeopardize the 
program's solvency.
    This bipartisan legislation is consistent with my 
philosophy of a middle-of-the-road solution to important policy 
questions. I believe it is truly a common sense approach. It is 
not an overly broad proposal resulting in benefits being spread 
too thin and not providing substantive help. Instead it is 
targeted and really helps those beneficiaries in the greatest 
need. Additionally, it avoids excessive regulation and 
sometimes ineffective government price controls and unnecessary 
bureaucracy.
    As a member of the Veterans' Affairs Committee along with 
Mr. Stearns, and I have a copy of this letter from the VA, and 
I sat through the situation where we were told in the 
independent budget we needed $3 billion and we only ended up 
with $1.7 billion in the House, and in the Senate $1.1 billion, 
I would be concerned if we put another $6 billion cost on top 
of that. I think there would be negative ramifications for the 
VA. I would hope that this committee would look into that.
    Providing prescription drugs for Medicare's most vulnerable 
beneficiaries is simply good medicine. As I mentioned, the lack 
of drug coverage leads to inappropriate use of medications 
which can result in increased costs and unnecessary 
hospitalization.
    My home State of Minnesota is one of 15 States that has 
created a drug assistance program for low-income seniors. The 
program offers relief to seniors who have too much income and 
assets to qualify for Medicaid but can't afford private 
insurance. During community forums around the State last year, 
State officials frequently heard seniors say they often can't 
afford their prescribed medication or ration their dosages to 
make ends meet. Minnesota being a progressive State, in spite 
of some of our politicians making interviews, is often ahead of 
the curve on important policy decisions. Their targeted 
assistance program offers real help to people who need it the 
most. Congress should look at the success that States like 
Minnesota are experiencing when considering this issue.
    Currently I am working with a bipartisan group of my 
colleagues on a broader Medicare reform. I hope Congress will 
send the President a Medicare reform measure that preserves, 
strengthens, and modernizes the program for current and future 
generations. However, until we reach that point, we should act 
now to help the neediest Medicare beneficiaries. We should not 
make them wait longer for assistance. I hope that Congress will 
take this opportunity to help seniors and individuals with 
disabilities before it slips by. Thank you very much.
    [The prepared statement of Hon. Collin C. Peterson 
follows:]
  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                  Congress from the State of Minnesota
    Good afternoon. I am Collin Peterson and I represent the 7th 
district of Minnesota. I'd like to thank Chairman Bilirakis and the 
committee for inviting me to testify today.
    Medicare has delivered quality health care for over 30 years, but 
everyone can agree that it needs reformed for the future. As Congress 
considers Medicare reform measures, the debate has evolved into a 
highly politicized issue. I'm concerned that it has become so 
politicized that Congress will fail to produce a proposal that has a 
real chance to become law. Unfortunately, the real losers in this 
political battle are the people that need help the most.
    To address this concern, I introduced legislation with Chairman 
Bilirakis and Congressman Ernie Fletcher to provide targeted 
prescription drug assistance to the neediest Medicare beneficiaries--
individuals who are low-income or have high drug costs.
    This bill would help Medicare beneficiaries now. It is a positive 
first step while Congress works on broader Medicare reform.
    Approximately two-thirds of Medicare beneficiaries have some form 
of prescription drug coverage. The one-third that do not are largely 
women and individuals on fixed-incomes. The high cost of prescription 
drugs coupled with individual's low-incomes forces beneficiaries to 
make decisions that no American should have to make. I'm speaking of 
Medicare beneficiaries who have to choose between paying bills and 
buying groceries, or purchasing prescription drugs. Some have to cut 
costs by rationing their medicine in efforts to prolong their 
prescription.
    With the best health care system in the world, these are decisions 
that should never have to be made.
    There are many policy issues to be addressed while Congress 
considers Medicare reform. But as I have stated, the one issue that 
should, and can, be addressed immediately is prescription drug coverage 
for the most vulnerable beneficiaries.
    As Mr. Bilirakis stated, our bill would provide drug coverage 
outside of the Medicare program, and it would not raise beneficiaries' 
Medicare premiums, increase Medicare spending, or jeopardize the 
program's solvency.
    This bipartisan legislation is consistent with my philosophy of 
middle of the road solutions to important policy questions. I believe 
it is truly a common sense approach. It is not an overly broad 
proposal, resulting in benefits being spread too thin, and not 
providing substantive help. Instead, it is targeted, and really helps 
those beneficiaries in the greatest need.
    Additionally, it avoids excessive regulation, ineffective 
government price controls and unnecessary bureaucracy. As a member of 
the Veteran Affairs Committee, I am particularly concerned about 
proposals that could inadvertently impact the Department of Veterans' 
Affairs pharmaceutical budget, and put veteran's access to health care 
at risk.
    Providing prescription drugs to Medicare's most vulnerable 
beneficiaries is simply good medicine. As I have mentioned, the lack of 
drug coverage leads to inappropriate use of medications, which can 
result in increased costs and unnecessary hospitalization.
    My home state of Minnesota is one of 15 states that has created a 
drug assistance program for low-income seniors.
    The program offers relief to seniors who have too much income and 
assets to qualify for Medicaid, but can't afford private insurance. 
During community forums around the state last year, state officials 
frequently heard seniors say they often can't afford their prescribed 
medication, or ration their dosages to make ends meet.
    Minnesota is a very progressive state and is often ahead of the 
curve on important policy decisions. Their targeted assistance program 
offers real help to people that need it most. Congress should look at 
the success states like Minnesota are experiencing when considering 
this issue.
    Currently, I'm working with a bipartisan group of my colleagues on 
broader Medicare reform. And I hope Congress will send the president a 
Medicare reform measure that preserves, strengthens, and modernizes the 
program for current and future generations.
    However, until that point, we should act now to help the neediest 
Medicare beneficiaries. We should not make them wait any longer for 
assistance.
    Congress should not let this opportunity to help seniors and 
individuals with disabilities slip by.
    Thank you very much.

    Mr. Bilirakis. Thank you. I would remind the gentleman that 
I am not only a member of the Veterans' Committee, but also 
that particular subcommittee that you referred to.
    Mr. Fortney Stark, fondly referred to as Pete Stark, as we 
all know, has been very involved in health care issues for 
many, many years. Please proceed.

   STATEMENT OF HON. PETE STARK, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF CALIFORNIA

    Mr. Stark. Mr. Chairman, thank you for having these 
hearings. They are timely and important. I quite frankly would 
be happy to see any of the bills before you passed. As you are 
aware and many of you here are aware, I am on a bill with 
Congressman Dingell and Senators Kennedy and Rockefeller, and 
we are trying to expand the Medicare drug benefit which we did 
a decade ago, only to have the pharmaceutical industry rally 
around and defeat it the following year.
    I would like to make some observations and you or my 
colleagues at the table may challenge this, but first of all, I 
think that it is unrealistic to think for a moment that we are 
going to enact in any forum a pharmaceutical benefit which we 
would spend any Federal money on and not eventually have to 
control the price of pharmaceutical drugs. That is what sends 
the pharmaceutical industry into orbit and which has got them 
committed to spend a couple of hundred million dollars to 
defeat any pharmaceutical benefit. We do it with hospitals, we 
do it with doctors.
    We formed the Medicare program in 1965 because there wasn't 
medical care for people over 65. Nobody was writing the 
insurance, and most people over 65 couldn't afford the 
insurance. So unless we are willing to face up to the fact that 
we have a responsibility to get a good deal for the taxpayers, 
to get a good deal for whatever kind of program that we are 
going to enact, unless we think for some reason that the 
pharmaceutical fairy is going to come along and put these 
prescriptions under people's pillows at night, which I don't 
think, I have always had the Stark triology, and it is as close 
to religion as I get, Mr. Chairman; that is, that as a matter 
of right, and it applied to Medicare, and now it applies to 
pharmaceuticals because without pharmaceuticals you are not 
getting medical care today, every citizen as a matter of right 
ought to have pharmaceutical drugs mailed. One small group of 
citizens constitutionally has a right to that. A nickel to 
anybody who can tell me who it is. Come on.
    Prisoners, gentlemen. Cruel and inhumane punishments. I 
have always said that what is good enough for Haldeman, 
Ehrlichman, and Rostenkowski is good enough for me. If you have 
a constituent who doesn't have medical care and can't get his 
prescription drugs, have him hit a cop, particularly in Los 
Angeles; he will get more medical care free at the cost to the 
Los Angeles County Government than he ever thought possible. 
Seriously, we ought to as a matter of right provide this.
    Second, every provider as a matter of right should have 
reasonable, not necessarily desired, but reasonable 
compensation for their services. We have learned to negotiate 
that for better or worse over the years, and I suspect that we 
would have to do that spending taxpayer's money.
    The third part of this is we all to have pay for this right 
according to our ability to pay. For Medicare we do. If you 
make $1 million a year, you are going to pay $10,000 out of 
your pocket in premium. If you make $20,000 a year, you are 
going to pay about $200 in premium. That sounds to me about 
right.
    I do not know why if everybody is going to pay for this 
drug benefit, we want to take it out of their hides when they 
are old and sick. That is the worse time to pay your copayer 
premiums, when you are sick, can't work even if you wanted to. 
Why not do it when you are young and healthy like my kids and 
grandkids? Let's start, as we do with Medicare and Social 
Security, and pay a little in when you are young, more if we 
need it. I don't see how we can end up with any program that 
doesn't touch on all of these items. I would say one thing, and 
this is a matter of choice, but I heard--I think Mr. Lazio said 
he didn't like the idea.
    We can do one of two things.If we want to save some money, 
give everybody a bottle of aspirin and include everybody and 
gradually ratchet up the number of drugs that we don't cover. 
Or you can pay for all drugs for 1,000 people and then just add 
the number of people as we go or some combination.
    But all of our bills, mine and everybody at this table, 
have got the darndest convoluted system for figuring who is in 
and who is out. That is not how you get sick and that is not 
how you need drugs. As we have done in Medicare, I believe the 
best thing would be to include everybody so we don't get into 
the fights of income levels, what we do with the disabled, 
include everybody, phase it in as we can, pay for it as much as 
politically we can increase the payroll taxes, sales tax if you 
choose to do it that way, a consumption tax, I would support 
that.
    And third, be prepared to have to do battle with the 
pharmaceutical industry who will oppose any prescription drug 
because they know--and I don't say this as a moral issue, I 
just see it as a practical matter--they know that they won't 
get all of these fat profits if we have to control the prices.
    I think that is what is before us and I hope that in this 
Congress we can take one small step. Let's design a camel's 
head and get it in the tent. I want to thank you, Mr. Chairman, 
for taking the first step. Let's talk about it. Thank you for 
letting me participate.
    [The prepared statement of Hon. Pete Stark follows:]
  Prepared Statement of Hon. Pete Stark, a Representative in Congress 
                      from the State of California
    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today with Reps. Tom Allen (D-Maine), Marion Berry (D-Arkansas), 
Ernie Fletcher (R-Ky), Benjamin Gilman (R-N.Y.) and Collin Peterson (D-
Minn.). I testify in strong support of providing America's seniors with 
a Medicare prescription drug benefit.
    When it comes to pharmaceutical coverage, seniors in America are 
getting a bad deal. Unlike the majority of Americans under the age of 
65 who have health insurance, Medicare beneficiaries have to buy their 
drug coverage separately. Many can't afford to--an estimated 15.5 
million, and rising.
    This means seniors can't count on being able to afford the 
prescriptions their doctors order. Yet it's a well-known fact that 
older Americans need prescription drugs far more than younger people 
do, both to stay healthy and to stabilize chronic health conditions.
    I take a cholesterol-lowering medication every day. For me, it's 
the difference between being at high risk for a heart attack and costly 
hospitalization . . . and being here this afternoon to talk about 
Medicare's future.
    We tried a decade ago to enact catastrophic drug coverage, only to 
see it turned back by an intensive campaign funded by pharmaceutical 
companies. Much has changed in the private health care marketplace 
since then, and almost all of it is for the worse. Retiree health 
coverage has become skimpier, and for millions it has evaporated--
despite our economic prosperity. Supplemental drug-Medigap policies 
have become nearly worthless--with payouts that are lower than the 
premiums paid.
    So now that we know the private sector won't do it, we're back to 
discussing how Medicare can be improved to give ALL seniors access to 
affordable pharmaceutical coverage that they can count on. And from the 
various proposals that have been introduced so far, it's clear there's 
a lot of interest.
    It's my hope that this interest can be translated into legislative 
action.
    I hope we will resist proposals calling for incremental coverage, 
which, by their very nature, would help some seniors, while hurting 
others. Medicare is not a program that provides benefits to only some 
beneficiaries but denies others. Rather, it is an entitlement to a 
uniform set of benefits for all those 65 and older, and the disabled. 
Congress shouldn't unravel Medicare by enacting legislation that would 
begin to carve up the program into haves and have-nots.
    In April, I introduced the ``Access to Affordable Prescription 
Medications in Medicare Act of 1999'' with Reps. Brown, Waxman, 
Dingell, and Senators Kennedy and Rockefeller. It proposes to add an 
outpatient drug benefit to Medicare Part B, covering 80% of costs up to 
$1,700 per year after a $200 annual deductible. The bill also has a 
stop-loss benefit under which Medicare would pay all prescription drug 
expenses after a senior incurs $3,000 in out-of-pocket expenses. 
Administration of the benefit is by private-sector entities under 
contract with HHS, which would competitively bid for Medicare's 
business and meet a range of federal quality standards--including those 
governing formularies--to ensure that the benefit is equitable for 
seniors across the country.
    More recently, President Clinton has proposed a similar Medicare 
drug plan that is sound and well thought-out. That makes it a target 
for the pharmaceutical industry, which has mounted an all-out campaign 
to kill drug coverage for seniors.
    But PhRMA's ``Flo'' cannot defeat the needs of millions of seniors. 
Like HMO reform, we'll be talking about a Medicare drug benefit until 
the day we enact it. The reason for this is simple. Public pressure for 
affordable drug coverage is being fueled by the aging of our population 
and its growing health needs--even as genetic engineering is beginning 
to provide remedies and cures for diseases that we thought were 
unbeatable.
    It's my hope that this hearing, along with subsequent discussions 
and good-faith negotiations, will provide the momentum to do what we 
all know is the right thing to do. Let's prove the pundits wrong, and 
enact a Medicare drug benefit this Congress.
    Thank you.

    Mr. Bilirakis. Thank you.
    Dr. Ernie Fletcher.

 STATEMENT OF HON. ERNIE FLETCHER, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF KENTUCKY

    Mr. Fletcher. Thank you, Mr. Chairman and distinguished 
members of the committee, it is certainly a privilege to 
testify before you.
    As we look at this issue, I think everybody recognizes that 
it is important to focus on the change that has occurred in 
medicine over the last 30 years. Length of stays as far as 
inpatients have decreased. Much of the treatment is done as 
outpatient. We have had a tremendous number of new medications 
with market effectiveness in preventing disease, decreasing 
morbidity and mortality. Obviously, we have had an accompanying 
increase in cost with those medications and with our outpatient 
prescription drug costs that we have seen.
    We also have seen insurance companies offering more 
prescription drug benefits. As we look at the demographics, we 
need to recognize about 64 percent of our Medicare patients do 
have some sort of prescription drug coverage. It has been 
addressed, alluded to, that that may be eroding as the cost 
increases, but over the last year, the estimates have increased 
that have some prescriptive coverage.
    The average out-of-pocket cost for beneficiaries of 
Medicare is about $200 to $400 per year per person. About 14 
percent incur no prescriptive drug cost; 4 percent or over, 
$2,000 a year; and if you round off the total cost, that is 
probably about 10 percent, may spend about $3,000 a year on 
prescription drugs. Thirty-six percent of our Medicare 
beneficiaries have no prescription drug cost, and it is 
estimated that 40 to 44 percent are below the poverty level.
    So I think when we look at the demographics there, it is 
important as we address the issue that we focus on the folks 
that are the neediest and the sickest.
    I am reminded of a story of practicing medicine not too 
long ago. The most affected individuals, of not being able to 
afford the prescription drugs, are single women, often widows 
that are living on Social Security alone; $600 to $700 a month. 
They are trying to live on and buy prescription drugs. I had a 
patient come in and I wrote a prescription because of her high 
blood pressure. Continued to follow up, and her blood pressure 
was out of control. Finally, this very proud lady who worked 
very hard all of her life said, I could not afford the 
medication.
    So I think it is very important that we do address the 
needs of these low-income seniors who have worked hard, that we 
provide them the kind of medication that will actually improve 
their life and prolong their life.
    I have some concerns about the President's plan. I 
certainly appreciate the focus that he has brought in the arena 
and really beginning the dialog. The estimates of cost, are 
$168 billion over 10 years. I am very concerned about how that 
will threaten Medicare, which is already having financial 
problems. Also, we see it may displace 50 to 75 percent of the 
employer-sponsored plans. That means $3 to $5 billion paid by 
employers, that cost will now go to the taxpayer; so that is $3 
to $5 billion more that taxpayers will have to pay. I am also 
concerned what it will do with price control, what it will do 
at the cost of VA or veterans, other Federal and Medicaid drug 
plans, and how it is going to affect those.
    Additionally, let me share a little story. My son had a 
chronic illness, a disease very severe, and we found a 
medication that might work. It was being tested and researched 
at the University of Kentucky for anti-tissue necrosis factor. 
There was a study, and so we got him into the study and he 
responded tremendously, and the study was over. I even 
requested with Dr. Kessler to get some compassionate use and 
that was not available at the time. But I am very concerned 
when we see the new things that are available and the 
tremendous response that we make against diseases that have 
tremendous effect on morbidity and patient's livelihood, that 
we affect that by price controls.
    Folks talk about maybe some compulsory licensing, that has 
been a Third World practice. I think we are above the Third 
World. I think we can come up with more innovative ways to 
control costs and provide prescription drugs for our patients.
    As we look at the plan that the chairman and Mr. Peterson 
and I have offered, it does have bipartisan support. It helps 
the poorest and neediest, those that are below the poverty 
level and those that incur those extraordinary outpatient costs 
that keep them from having to go into the hospital or keep them 
from other costs. It really does not discourage investment from 
the private industry.
    Let me say as we look at this plan, it is certainly not 
perfect and I think there are many plans, and I am glad the 
dialog has begun. I hope that we do something. That is the 
right thing to do. Certainly as we conclude this I will be glad 
to answer any questions and thank you very much, Mr. Chairman.
    [The prepared statement of Hon. Ernie Fletcher follows:]
Prepared Statement of Hon. Ernie Fletcher, a Representative in Congress 
                       from the State of Kentucky
    Mr. Chairman and members of the subcommittee, thank you for 
inviting me to testify before you this afternoon. I appreciate the 
opportunity to be a part of this very important and timely discussion 
on Medicare prescription drug benefits.
    We are blessed in America with advances in medicine that make 
dramatic differences in our lives, particularly benefiting the elderly 
who consume a large portion of prescription drugs. Innovations in 
pharmaceutical and biotechnology research are transforming health care 
from traditional and costly inpatient hospital treatment to outpatient 
treatment based largely on prescription drugs. Prescription drugs allow 
our seniors to stay out of the hospital, avoid surgery, improve their 
health, and even prolong life. Unfortunately, as the importance of 
these new technologies increase, so does the cost of these medications.
    Overall, spending on prescription drugs has been rising faster than 
any other component of health care. From 1990 to 1997, prescription 
drug expenditures almost doubled from $37.7 billion to $78.9 billion. 
In just one year, from 1996 to 1997, spending on prescription drugs 
increased 14.1%, while overall spending on health care increased only 
4.8%. In 1995, the average Medicare beneficiary used 18 prescription 
drugs, and 86% of Medicare beneficiaries used at least 1 prescription 
drug. On average, beneficiaries spend $600 per year on prescription 
drugs with roughly half paid by insurers and half paid out-of-pocket. 
The distribution of these costs, however, is very unequal. The vast 
majority of Medicare beneficiaries spend a relatively modest amount on 
prescription drugs, and 14% have no drug expenditures at all. Only 4% 
of Medicare beneficiaries have expenditures that exceed $2,000 every 
year.
    I think we can all agree that the time has come for Medicare to 
include a pharmaceutical drug benefit. Too many seniors must choose 
between taking the medications that will improve their lives or buying 
everyday necessities. As a family physician, I have encountered many 
seniors who cannot afford their prescriptions, either not filling them 
at all or taking only half of the prescribed amount. I am reminded of 
one of my elderly patients who came in for elevated blood pressure. I 
prescribed the medicine she needed to correct her problem, however, on 
the follow up visit her pressure was not better. After several changes 
in her prescription, she finally overcame her pride to confide to me 
that she couldn't afford to buy the medication. Experiences such as 
this have made a lasting impression, and guide me as I work with my 
colleagues to modernize Medicare.
    Over the past several months Congress and the nation have focused 
their attention on Medicare reform issues. How do we as a nation update 
the program while controlling costs in the federal budget? We all know 
the problems facing Medicare. We also know that the Medicare Part A 
trust fund is projected to be depleted in 2015, just as the pressure of 
the baby boomers' retirement begins to be felt. As the debate continues 
on how to best restructure Medicare for the 21st century, I think it is 
imperative that Congress makes changes on an interim basis to guarantee 
that seniors have access to lifesaving prescriptions.
    Recently, President Clinton introduced a plan that would provide 
universal prescription drug coverage for Medicare beneficiaries at a 
cost of $168 billion over ten years, according to the Congressional 
Budget Office. This proposal would bankrupt Medicare instead of 
targeting assistance to those who need it most--the poor, and the small 
fraction of beneficiaries who have extremely high drug costs. The 
President's one-size fits all plan will result in many beneficiaries 
paying more for fewer benefits. CBO estimated that the average enrollee 
would pay about 75 percent of the cost of covered drugs up to the cap.
    To justify his tremendous expansion of the Medicare program, the 
President claims that seniors do not have enough access to prescription 
drugs. This simply is not the case. About 64 percent of our nation's 
seniors have prescription drug coverage through employer sponsored 
plans, Medicare+Choice, Medigap, and Medicaid. Eighty-six percent of 
Medicare beneficiaries who receive supplemental benefits through 
employer sponsored insurance have prescription drug coverage. Ninety-
five percent of Medicare+Choice beneficiaries have prescription drug 
coverage and 90 percent of those who are enrolled in Medicaid have 
coverage. In addition, the Medigap H, I, and J plans cover prescription 
drugs.
    What's more, the President's plan could displace the existing 
sources of coverage that Medicare beneficiaries already have. According 
to research by PriceWaterhouseCoopers employers would have an economic 
incentive to encourage Part D enrollment. This would displace employer-
sponsored retiree drug coverage from 50 percent to 75 percent, 
affecting between 6 million and 9 million beneficiaries. This 
represents $3 billion to $5 billion annually in employer spending being 
transferred to American taxpayers.
    I believe that we should work to help those who do not have any 
coverage without displacing sources of private coverage. There are 
three core principles to follow in providing our seniors a prescription 
drug benefit. First, a proposal must be targeted to help those 
beneficiaries in need. Second, the benefit must be enacted IMMEDIATELY. 
Third, any proposal must be fiscally sound so that it does not 
jeopardize the Medicare program. I have recently joined Chairman 
Bilirakis, and Representative Collin Peterson in introducing a 
prescription drug benefit that meets these guidelines.
    The first part of our proposal would be targeted towards the 36% of 
beneficiaries who do not have coverage. The proposal would help states 
in developing or expanding a State Drug Assistance Program to aid low-
income Medicare beneficiaries in obtaining prescription drugs. It gives 
each state the flexibility to design a program that will fit the unique 
needs of their residents. Federal matching funds will help states serve 
Medicare beneficiaries up to a certain percent of poverty. States would 
receive enhanced FMAP funds for coverage up to 150 percent of poverty, 
and regular matching funds for coverage up to 200 percent of poverty.
    States must follow certain guidelines when establishing their 
programs. First, states can not use federal funds to provide low-income 
drug assistance through their Medicaid program. Second, states must 
offer drug coverage that meets the coverage provided under the states' 
Medicaid programs, the Federal Employees Health Benefit Plan, coverage 
available to state employees, or coverage available to consumers of the 
state's largest HMO. Third, states would subsidize the portion of the 
premium that is attributable to drug coverage and for individuals who 
choose to receive drug coverage through Medicare+Choice or employer-
sponsored health plans. Fourth, participants must meet income 
eligibility levels and meet state residency requirements to participate 
in the program. The neediest individuals would not be required to pay 
coinsurance; however, the states could impose up to a $5 or 20% 
coinsurance for individuals above 120% of poverty.
    The second part of the proposal would limit a beneficiary's out-of-
pocket expense through a federal stop loss protection. The federal 
government would protect beneficiaries who obtain qualifying up-front 
coverage from paying more than a set amount annually in out-of-pocket 
costs for prescription drugs. The out-of-pocket expenses would 
initially be set at $1500 per year. This protection would be available 
to beneficiaries whose up-front coverage meets minimum financial 
requirements--no more than a $500 deductible and no more than 50% cost-
sharing. In addition plans would not be allowed to cap their 
expenditures below the level at which the stop-loss protection takes 
effect.
    This plan will help those who need help the most--low-income 
beneficiaries and beneficiaries who have high annual prescription drug 
costs. Congress must concentrate on the 36 percent of beneficiaries 
that do not have any drug coverage. If fully implemented, this plan can 
cover 44 percent of beneficiaries who currently lack coverage. This 
amounts to over 6 million beneficiaries who will be eligible to receive 
assistance through State Drug Assistance Programs. Congress must also 
concentrate its resources on beneficiaries who have high annual drug 
expenditures. This proposal will provide stop-loss-coverage to 31 
million Medicare beneficiaries. Our seniors should feel assured that 
they will never have to sell their possessions to afford their 
prescription drugs. This proposal provides true insurance for Medicare 
beneficiaries.
    I believe this proposal is a good start. Is it perfect? No. I will 
work with my colleagues to expand upon certain aspects of the proposal 
to ensure a smooth running program. I am also open to suggestions. For 
instance, I believe that we should set up a board or corporation 
outside of the Health Care Financing Administration to operate the 
stop-loss program. The Board would be able to establish eligibility 
criteria within a specified framework that each private plan must meet. 
I also believe it is important that plans focus coverage on those drugs 
that have been proven to decrease morbidity and mortality.
    The need for a targeted prescription drug benefit is great, and 
will only continue to grow. Congress cannot wait to provide assistance 
to those in need while we debate fundamental reforms to the Medicare 
program. We must take this opportunity and provide relief to those 
beneficiaries struggling to pay for prescriptions--low-income 
beneficiaries or beneficiaries with catastrophic yearly expenditures--
that will prevent or treat illnesses. A fiscally responsible approach 
to drug coverage is the only lasting prescription for real reform.

    Mr. Bilirakis. Thank you.
    Mr. Allen, please proceed.

 STATEMENT OF HON. TOM ALLEN, A REPRESENTATIVE IN CONGRESS FROM 
                       THE STATE OF MAINE

    Mr. Allen. Thank you, Mr. Chairman, Congressman Brown, 
distinguished members of the committee, I am pleased to be here 
today to testify about one of the most pressing issues for 
America's seniors, the availability of prescription drugs. 
Prescription drugs can improve and extend the lives of seniors 
and others, and they are doing that. But the explosion in 
prices for prescription drugs, together with the widespread and 
growing lack of prescription drug insurance coverage, has left 
millions of Americans unable to afford the drugs that their 
doctors tell them they have to take.
    Seniors today are 12 percent of the population, but they 
use 33 percent of all prescription drugs. Over one-third of all 
Medicare beneficiaries have no drug coverage at all and must 
pay for their drugs out of pocket. About 8 percent of seniors 
have Medigap drug coverage, but those plans are too expensive 
and inadequate for most beneficiaries. About 17 percent of 
Medicare beneficiaries have coverage through Medicare managed 
care. These plans are very unstable. Some right now are 
increasing premiums and reducing benefits. Some are dropping 
prescription drug coverage. Some are dropping out of Medicare 
entirely. About 21 percent of those plans last year limited 
drug coverage to $500 or less, and 1 year later the percentage 
is 32 percent that have that limit.
    Look at the retiree plans. About one-quarter of Medicare 
beneficiaries have meaningful coverage provided by a retirement 
plan, but there again look what is happening. The proportion of 
firms offering retiree health coverage has declined by 25 
percent in just the last 4 years and a principal reason is the 
high cost of prescription drugs. The result is that seniors are 
making choices that no one should have to make. I have had 
women write me and say, I don't want my husband to know but I 
am not taking my prescription medication because he is sicker 
than I am and we can't both afford to both take our 
medications.
    Under the leadership of Henry Waxman, a member of this 
committee, there have been studies done by the Democratic staff 
of this committee in over 80 districts around the country, and 
they show a shocking pattern of price discrimination. The 
studies have found, on average, older Americans pay almost 
twice as much as the drug companies's favored customers such as 
large insurance companies and HMOs for the medications with the 
highest dollar sales to seniors.
    In my district of Maine the price differential was 96 
percent. In other districts the differential is significantly 
higher. Not only are seniors paying the highest prices in the 
country, but in this country we are paying the highest prices 
in the world. Another study showed that in my district American 
seniors are paying 72 percent more than consumers in Canada and 
102 percent more than consumers in Mexico. Older Americans pay 
the highest prices in the world for their prescription drugs. 
Contrast the plight of these seniors with the profits of the 
industry. The pharmaceutical industry earns more in profits, 
$26.2 billion in 1998, than it spends on research, $24 billion.
    This is the Nation's most profitable industry, No. 1 in 
return on revenues, return on assets and return on equity. In 
short, the most profitable industry in the country is charging 
the highest prices in the world to those who can least afford 
it: senior citizens without prescription drug coverage. The 
Prescription Drug Fairness for Seniors Act which I introduced, 
H.R. 664, has over 130 cosponsors. It has been introduced in 
the Senate. It is a simple bill. It costs no significant amount 
to the Federal Government. It creates no new bureaucracy. It 
simply allows pharmacies to buy drugs for Medicare 
beneficiaries at the best price given to the Federal 
Government, which today is the Medicaid price or the VA price.
    I designed this bill to attract bipartisan support. As I 
say, no significant increase in Federal spending, no new 
bureaucracy, but it would reduce prices for seniors by up to 40 
percent. It doesn't impose price controls. It simply ends price 
discrimination. It won't restrict research and development. The 
industry is competitive. The pharmaceutical industry must 
invest in research and development heavily or they won't stay 
ahead of the generic industry. Their profits come from their 
patents. Their patents run out. They have to do the research, 
and they will do it whether or not this legislation or others 
pass as well.
    Medicare beneficiaries need more than the kind of discount 
that is set out in my bill. They need a Medicare prescription 
drug benefit as well. The President has proposed the benefit 
and Representatives Stark, Dingell and Waxman have proposed the 
benefit. I support these initiatives. They are moving in the 
right direction.
    Mr. Chairman, I thank you again for convening this hearing 
and I hope that we can work together to find a good answer for 
America's seniors for this particular problem.
    [The prepared statement of Hon. Tom Allen follows:]
    Prepared Statement of Hon. Thomas H. Allen, a Representative in 
                    Congress from the State of Maine
    Chairman Bilirakis, Congressman Brown, distinguished Subcommittee 
members, thank you for this opportunity to join you today to discuss 
one of the most pressing health care needs of seniors today, the 
availability of prescription drugs.
    Prescription drugs can improve, and often extend the lives of 
people with serious illnesses and chronic disabilities. Recent 
pharmaceutical breakthroughs offer hope and relief to patients 
suffering from Alzheimer's, AIDS and other deadly disorders. But the 
explosion in prices for prescription drugs, coupled with widespread and 
growing lack of prescription drug insurance coverage, has left millions 
of Americans unable to afford the drugs their doctors tell them they 
have to take.
The Need for Affordable Prescription Drugs for Seniors
    Prescription drugs, no matter how innovative and effective, provide 
no benefit to people who cannot afford to take them. Who are the people 
left behind? Disproportionately, they are many of our nation's seniors.
    Congress did not include an outpatient drug benefit when Medicare 
was created 35 years ago because pharmaceuticals played a much smaller 
role in health care and were not a significant cost to consumers. But 
today, seniors, who comprise 12 percent of the population, use one-
third of all prescription drugs.
    It is estimated that at least one-third of Medicare beneficiaries 
have no drug coverage at all and must incur these expenditures out-of-
pocket. Medicaid is available only to the poor, often driven into 
poverty by rising medical bills. About 8 percent have Medigap drug 
coverage. But these plans are too expensive and inadequate for most 
beneficiaries.
    About 17 percent of Medicare beneficiaries have coverage through 
Medicare managed care. These plans are very unstable. Some are dropping 
prescription drug coverage. Some are dropping out of Medicare entirely. 
In 1999 almost 400,000 people have been dropped form Medicare managed 
care plans. According to a recent report all Medicare HMOs will begin 
charging copayments for drugs next year. Already 21 percent of Medicare 
plans limit drug coverage to $500 or less. By next year 32 percent of 
Medicare managed care plans are expected to have such limits. Seniors 
deserve more predictability, continuity, stability, and equity than is 
offered by medicare managed care.
    The National Economic Council and Domestic Policy Council report 
only about one quarter of Medicare beneficiaries have meaningful 
coverage provided by a retirement plan. Even these plans are even 
threatened by the high prices of prescription drugs. The proportion of 
firms offering retiree health coverage has declined by 25 percent in 
the last four years. Among the largest employers, over one-third have 
dropped coverage. A principal reason for dropping coverage is that 
employers cannot afford to pay for prescription drugs.
    What does this lack of adequate coverage mean? The General 
Accounting Office has estimated that the misuse of prescription drugs 
costs Medicare an estimated $20 billion per year in hospital and 
physician expenses. The National Economic Council reports that 
inappropriate use and underutilization of prescription drugs has been 
found to double the likelihood of low-income beneficiaries entering 
nursing homes. They report that drug-related hospitalizations accounted 
for 6.4 percent of all admissions of the over 65 population and that 
over three-fourths of these admissions could have been avoided with 
proper use of medications.
    Perhaps most importantly, this lack of adequate coverage means that 
seniors are left to make choices that no one should have to make. Do 
they pay the rent or take their high blood pressure medication? Do they 
buy groceries this week or fill their prescription for an osteoporosis 
drug? We can do better by our nation's seniors.
Seniors are Paying the Highest Prices
    As prescription drugs have become an increasingly important 
component of health care, the pricing practices of drug manufacturers 
have become increasingly discriminatory toward those least able to 
afford their products, especially seniors without prescription drug 
coverage.
    Under the leadership of Representative Henry Waxman, who sits on 
this Subcommittee, the House Government Reform Committee minority staff 
have spent much of the past year and a half examining the drug prices 
charged to senior citizens and others who pay for their own drugs. They 
have conducted studies in over 80 Congressional Districts across the 
nation. The resulting studies confirmed a shocking pattern of price 
discrimination.
    These studies examined the five to ten drugs that are most commonly 
prescribed to seniors. The studies found that older Americans pay, on 
average, almost twice as much as the drug companies' favored customers, 
such as large insurance companies and HMOs, for the medications with 
the highest dollar sales to seniors. For the top five drugs (Zocor, 
Prilosec, Norvasc, Procardia XL and Zoloft) the price differential in 
my district was 96 percent. This is a price differential four times 
greater than the average price differential for other consumer goods. 
In other districts the differential is significantly higher.
    For some specific drugs the findings are even more dramatic. 
Synthroid', a commonly prescribed hormone treatment manufactured by 
Knoll Pharmaceuticals, costs favored customers $1.75 per dose. The 
study in my congressional district found that an uninsured Maine senior 
pays $29.80 for the same dose--a price differential of 1,600 percent.
    The National Economic Council reports that by the year 2000, the 
average total drug costs for Medicare beneficiaries will be more than 
$1,100 per year. But averages are misleading. Many seniors already pay 
thousands of dollars every year. A Harvard Medical School study of 
patients with five patterns of disease common among the elderly found 
that the cost of prescription drugs ranges from $2,400 to $26,500 per 
year.
    Not only are seniors in this country paying high prices for their 
drugs, they are paying more than consumers in other countries. The 
Government Reform Committee conducted a cost survey of medications 
commonly used by seniors in the U.S., Canada and Mexico for the same 
drugs in the same amounts from the same manufacturer. In my district 
American seniors pay 72 percent more than consumers in Canada, and 102 
percent more than consumers in Mexico. Older Americans pay the highest 
prices in the world for their prescription drugs.
The Industry
    The pharmaceutical industry earns more in profits ($26.2 billion in 
1998) than it spends on research ($24 billion). Fortune magazine rates 
pharmaceuticals as the nation's most profitable industry: No. 1 in 
return on revenues (18.5 percent), assets (16.6 percent) and equity 
(39.4 percent). The profits of other industries that rely heavily on 
research pale in comparison: telecommunications, 11.5 percent; computer 
and data services, 5 percent; and electronics, 3.6 percent.
    In short, the most profitable industry in the nation is charging 
the highest prices in the world to those who can least afford it, 
senior citizens without prescription drug coverage.
The Prescription Drug Fairness for Seniors Act
    To protect America's seniors from this drug price discrimination, 
over 130 other members of Congress have joined me to support H.R. 664, 
The Prescription Drug Fairness for Seniors Act. Senators Edward Kennedy 
and Tim Johnson introduced a companion bill, S. 731. Our legislation 
gives Medicare beneficiaries the same advantages that large HMOs and 
other bulk purchasers like the federal government receive. Currently, 
virtually all federal health care programs, including the Veterans 
Health Administration, the Public Health Service and the Indian Health 
Service, obtain prescription drugs for their beneficiaries at low 
prices. Our legislation takes the same common sense approach, which is 
to buy in bulk and save money.
    H.R. 664 would allow pharmacies to buy prescription drugs for 
Medicare beneficiaries at the ``best price'' given by the manufacturers 
to the federal government. The best price to the government typically 
the Medicaid or Veteran's Administration price and, according to GAO, 
is close to the best price given by the manufacturers to private sector 
customers. In practice, the federal government would negotiate lower 
prices for beneficiaries who are already on a federal health care plan 
called Medicare.
    I designed this bill to attract bipartisan support. This bill would 
not significantly increase federal spending. It creates no new federal 
bureaucracy. Yet it provides a price discount to seniors of up to 40 
percent. While other plans for a prescription drug benefit under 
Medicare involve substantial expense, my plan involves no significant 
cost to the federal government or the taxpayers. I believe that H.R. 
664 is a fiscally responsible approach relying on free market 
negotiation to ensure that Medicare beneficiaries get the prescription 
drugs they need.
    The Prescription Drug Fairness for Seniors Act does not impose 
price controls on the pharmaceutical industry, it ends price 
discrimination. The bill enables senior citizens to purchase 
prescription drugs at the same prices the drug manufacturers offer to 
their favored customers. Rather than imposing a top-down, arbitrary 
price, the bill leverages the market power of the federal government. 
Companies can set their best price at whatever level they want and the 
market will bear. Given our government's social contract with seniors, 
it is fair and appropriate to use this buying power for the benefit of 
Medicare recipients, just as we do for other government-sponsored 
health care beneficiaries.
    I understand the need for ongoing research and development in the 
drug industry. That is why I have supported efforts to extend the 
research and development tax credit as well as to increase funding for 
the National Institutes of Health. I am confident that if enacted, H.R. 
664 will not force the pharmaceutical industry to reduce research 
expenditures. Competition within the pharmaceutical industry would 
assure continued investment.
    The historical evidence assures us of continued research and 
development in this industry. The 1984 Waxman-Hatch Act increased the 
availability of generic drugs and provided more competition for brand 
name drugs. Despite the dire predictions of the pharmaceutical 
industry, the legislation did not stifle or even reduce innovation in 
the pharmaceutical industry. In fact, pharmaceutical companies more 
than doubled their investment in research and development, from $4.1 
billion to $8.4 billion over the five years following enactment of 
Waxman-Hatch. Similarly, 1990 legislation that created a drug rebate, 
requiring drug companies to reduce their prices for drugs sold to the 
Medicaid program, did not reduce innovation in the pharmaceutical 
industry. Since 1990, pharmaceutical companies have almost tripled 
their spending on research and development, from $8.4 billion in 1990 
to $24 billion in 1998.
    While H.R. 664 is designed to assist all Medicare beneficiaries, it 
will not solve the problem. Medicare beneficiaries don't just need 
lower prices for their medications, they need coverage. The President 
has proposed a benefit, and Representatives Stark, Dingell and Waxman 
have proposed a benefit. I strongly support these initiatives and 
believe that it is time to update the Medicare program for the 21st 
Century and include a prescription drug benefit.
    That said, I believe that the Prescription Drug Fairness for 
Seniors Act complements a prescription drug benefit. We must work to 
ensure that drug prices are lowered, even in the context of a benefit. 
With questions about the future viability of our nation's health care 
program for seniors, this approach will assist seniors without 
increased burdens on taxpayers.
Conclusion
    Chairman Bilirakis, I again want to thank you for holding this 
hearing today. I realize that you, several of my colleagues on this 
panel, as well as many members of this subcommittee have proposals 
aimed at providing seniors with assistance in affording their 
prescription drugs. I look forward to working together toward a 
solution that makes prescription drugs affordable for all citizens in 
this country.

    Mr. Bilirakis. Thank you, Mr. Allen. I feel sure that if we 
don't evidence a prior ownership, if you will, there is always 
hope that we will find a solution to this problem.
    Mr. Berry.

  STATEMENT OF HON. MARION BERRY, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF ARKANSAS

    Mr. Berry. Thank you, Mr. Chairman. I want to thank Ranking 
Member Brown also for holding this hearing today and I think 
you have it absolutely right, Mr. Chairman, when you said that 
no senior citizen in this country, the greatest Nation in the 
history of the world, should have to make a choice between food 
and medicine.
    I believe providing seniors affordable access to 
prescription drugs is one of the most important health care 
issues pending in the Congress. I think it should be said that 
the pharmaceutical manufacturing companies are the only health 
care providers that have not contributed to holding down health 
care costs.
    Every senior and Medicare beneficiary needs to have some 
kind of prescription drug coverage. The prices that seniors and 
others must pay for prescription drugs has risen much faster 
than the ability of senior citizens to pay for them. 
Congressman Stark and Allen have done a good job of explaining 
why Medicare recipients need prescription drug coverage, and 
the need to address the pricing situation cash-paying seniors 
are paying.
    What I would like to talk about today is the need to level 
the playing field in the United States who are paying sometimes 
twice, and sometimes more than that, as much as seniors in 
other countries. As you may know, there are tens of thousands 
of American consumers who cross our borders just so they can 
get prescription drugs that they need at a cheaper price.
    This is because they cannot afford to pay the outrageous 
high prices charged by the drug companies.
    Seniors and other Americans go to Canada and Mexico because 
prescription drugs in those countries cost much less than in 
the U.S. recent studies that have been prepared for several 
Members of Congress have shown this.
    In the district that I represent in Arkansas, seniors pay 
72 percent more for the 10 prescription drugs they most 
commonly use than their elderly counterparts in Canada. 
Americans pay even more when compared to prices in Mexico. 
Seniors pay 103 percent more in Arkansas than they do in 
Mexico.
    Why are seniors leaving this country to get cheaper drugs? 
The General Accounting Office reported in 1991 that out of 121 
prescription drugs surveyed, 99 had higher prices in the United 
States than in Canada. In 21 of those cases, the price 
differential exceeded 100 percent.
    In a similar study conducted in 1994 looking at price 
differentials in prescription drugs between the U.S. and the 
United Kingdom, the GAO determined that 66 of the 77 drugs 
surveyed were priced higher in the United States. In fact, four 
of the five most commonly dispensed drugs in the United States 
cost anywhere from 58 to 278 percent more in the U.S. than in 
the UK. And 47 of the drugs evaluated had a markup of over 100 
percent.
    This is because drug companies are the only ones allowed to 
reimport drugs made in the United States back into this country 
under current Federal law. The drugs are made in our country, 
shipped to Canada, England or other countries, and sold by 
their pharmacists and distributors in those countries, but if 
an American pharmacist or distributor wants to purchase these 
American-made products at a much lower price in another country 
and pass the savings along to their customers, they are 
prohibited by law from doing so. Because the international 
marketplace is structured in this manner, manufacturers are 
able to charge a much higher price in the domestic marketplace.
    Acting in a safe manner to close this loophole will give 
Americans billions of dollars on their prescription drug bills. 
Drug companies are the only ones allowed to reimport drugs made 
in the United States back into this country under Federal law, 
as I have already said. I have introduced legislation with 
Congresswoman Emerson and Congressman Bernie Sanders, H.R. 
1885, the International Prescription Drugs Parity Act, that 
amends the Food, Drug and Cosmetic Act to allow American 
pharmacists to reimport prescription drugs into the United 
States as long as the drugs meet strict safety standards. This 
includes ensuring drugs are FDA-approved and made in FDA-
approved facilities and have been stored and handled in 
compliance with FDA guidelines.
    Our bill will remove nontariff barriers to trade that cause 
American citizens to pay significantly more for FDA-approved 
drugs than citizens of any other country in the world. Thus, 
American pharmacies and distributors benefit by purchasing 
their drugs at lower prices, which they can pass along to 
American consumers.
    When Americans are allowed to benefit from this competition 
in the international marketplace, the free market will 
eliminate the ability of manufacturers to overcharge Americans 
more for the exact same products, and the market forces will 
cause manufacturers to charge fairer prices for their products 
within our country.
    Our bill will give American citizens the same purchasing 
opportunities as citizens of other countries. This legislation 
is a fair, common-sense, free-market approach to lowering drug 
prices for our constituents while benefits small business. We 
need to put the American consumer on a level playing field with 
consumers in Canada, Mexico and other countries.
    Thank you, Mr. Chairman, for your time.
    [The prepared statement of Hon. Marion Berry follows:]
 Prepared Statement of Hon. Marion Berry, a Representative in Congress 
                       from the State of Arkansas
    Thank you Chairman Bilirakis and Ranking Member Brown for holding 
this hearing today.
    I believe providing seniors affordable access to prescription drugs 
is one of the most important health care issues pending in Congress. 
Every senior and Medicare beneficiary needs to have some kind of 
prescription drug coverage. The prices seniors and others must pay for 
prescription drugs has risen much faster than the ability of senior 
citizens to pay for them.
    Congressmen Pete Stark and Tom Allen have done an excellent job of 
bringing attention to why Medicare recipients need prescription drug 
coverage and also the need to address the pricing situation cash-paying 
seniors are facing.
    What I would like to talk about today is the need to level the 
playing field for seniors in the U.S., who are paying sometimes twice 
as much as seniors in other countries. As you may know, there are tens 
of thousands of American consumers who cross our borders just so they 
can get the prescription drugs they need at a cheaper price. This is 
because they cannot afford to pay the outrageously high prices charged 
by the drug companies.
    Seniors and other Americans go to Canada and Mexico because 
prescription drugs in these countries cost much less than in the U.S. 
Recent studies that have been prepared for several members of Congress 
have shown this. According to a Government Reform minority study 
prepared for my district, seniors pay 72% more than Canadians for the 
10 brand name prescription drugs with the highest dollar sales to the 
elderly in the United States. Americans pay even more when compared to 
prices Mexican seniors pay--103% more for Arkansans.
    GAO reported in 1991 that out of 121 prescription drugs surveyed, 
99 had higher prices in the United States than in Canada (in 21 cases, 
the price differentials exceeded 100%). In a similar study conducted in 
1994 looking at the price differentials in prescription drugs between 
the United States and the United Kingdom, GAO determined that 66 of the 
77 drugs surveyed were priced higher in the United States. In fact, 
four of the five most commonly dispensed drugs in the United States 
cost anywhere from 58-278% more in the United States than in the United 
Kingdom, and 47 of the drugs evaluated had a mark-up of over 100%.
    This is because the United States does not benefit from global 
price competition since drug companies are the only ones allowed to 
reimport drugs made in the United States back into this country under 
current federal law. The drugs are often made in our country, shipped 
to Canada, England or other countries, and sold by pharmacists and 
distributors in those countries. But if an American pharmacist or 
distributor wants to purchase these American-made drugs at the much-
lower price and pass the savings along to their customers, they are 
prohibited by law from doing so. Because the international marketplace 
is structured in this manner, manufacturers are able to charge a much 
higher price in the domestic marketplace.
    Acting in a safe manner to close this loophole will save Americans 
billions of dollars on their prescription drug bills. I have introduced 
the International Prescription Drug Parity Act, H.R. 1885, with Rep. 
Emerson and Rep. Bernie Sanders, which amends the Food, Drug, and 
Cosmetic Act to allow American distributors and pharmacists to reimport 
prescription drugs into the U.S. as long as the drugs meet strict 
safety standards, this includes ensuring the drugs are FDA approved, 
made in FDA approved facilities, and have been stored and handled in 
compliance with FDA guidelines.
    The International Prescription Drug Parity Act will remove this 
non-tariff barrier to trade which causes American citizens to pay 
significantly more for FDA approved drugs than citizens of any other 
country.
    American pharmacies and distributors could benefit by purchasing 
their drugs at lower prices, which they can then pass along to American 
consumers, and allowing this to happen would result in fairer pricing 
at the manufacturing level in the United States. When Americans are 
allowed to benefit from price competition in the international 
marketplace, the free market will eliminate these discriminatory 
pricing practices that harm Americans.
    H.R. 1885 will give Americans the same purchasing opportunities as 
citizens of other countries. This legislation is a fair, common-sense, 
free-market approach to lowering drug prices for our constituents while 
benefitting small businesses. We need to put the American consumer on 
level playing field with consumers in Canada and other developed 
countries.
    Thank you for allowing me to testify today.

    Mr. Bilirakis. Thank you, Mr. Berry.
    Mr. Gilman, the chairman of the International Relations 
Committee, a very busy man. We are pleased to have you.

   STATEMENT OF HON. BENJAMIN A. GILMAN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF NEW YORK

    Mr. Gilman. Thank you, Mr. Chairman, and I thank you and 
Mr. Brown and our colleagues on the committee for providing 
this opportunity for me and my colleagues to testify at this 
hearing examining the various alternatives to address this 
serious challenge posed by the high cost of prescription drugs 
for today's low- and middle-income seniors.
    Along with many of our colleagues, I have heard from so 
many of our seniors voicing their concerns about the ever-
increasing costs associated with their monthly prescription 
drug requirements. In response, I have introduced H.R. 2375, 
entitled the Senior Prescription Drug Assistance Expansion 
Demonstration Act of 1999. In doing so, I am offering 
legislation which can, Mr. Chairman, serve as a viable first 
step toward addressing the serious issue of the rising 
prescription drug costs.
    The purpose of my legislation is to provide assistance to 
those States which have already undertaken an important step in 
offering supplemental assistance for low-income seniors to help 
defray the rising costs of their prescription medications. This 
legislation will provide a demonstration project that will 
provide block grant funding to permit three States with an 
existing prescription assistance program for low-income seniors 
to raise their income eligibility by $5,000 for both single 
individuals and for married couples. Should this program prove 
to be successful, it can later be expanded to many other States 
that have created such prescription assistance programs.
    It would encourage States to undertake these programs. My 
bill, H.R. 2375 recognizes the States with existing 
prescription plans have widely varying requirements with 
regards to the administration of those plans. Consequently, 
this bill does not alter those requirements in any way except 
to qualify for Federal funding, each State must raise its 
income eligibility for both single and married couples.
    Mr. Chairman, the last 5 years have seen a rapid increase 
in the amount of revolutionary medications available on the 
market. At the same time, these new drugs come with an ever-
increasing price tag. The availability of these new drugs has 
been a wonderful result of annual advances in medical 
technology and knowledge. Regrettably, though, the price that 
accompanies these new medications has become increasingly 
burdensome for so many of our seniors.
    A number of our colleagues in the House as well as in the 
other body have offered a number of bills, as demonstrated 
today, designed to address the rising costs of prescription 
medications for seniors. And we commend you, Mr. Chairman, and 
the members of your committee for your bipartisan approach. 
These bills have tended to utilize either price controls or the 
extension of free or heavily subsidized prescriptions as a new 
Federal entitlement as a solution to this problem.
    Our Nation's experience, though, with price controls during 
prior administrations in the 1970's has demonstrated that price 
controls are not a viable tool. Moreover, while the new 
entitlement proposed by the current administration sounds 
appealing, the President has downplayed both the 50 percent 
copayment requirement in his plan as well as concerns that a 
universal prescription entitlement will displace existing 
company-based plans for retired employees.
    Furthermore, price controls for prescription drugs run the 
very real risk of stifling future development in medical 
advances, and while none of the major drug companies has any 
reason to plead poverty, there is concern that the 
implementation of a Federal system of mandatory price controls 
would serve as a major disincentive for future research and 
development of new prescription medications.
    In that sense, medical success does come with a price. On 
the other hand, prescription prices should not be so high that 
the target audience for which the drugs were developed cannot 
afford to purchase those drugs.
    Regrettably this has been increasingly the case over the 
past several years for our seniors who live on fixed incomes. 
The Federal Government has a vital role to play in fostering 
innovation in medicine so that today's seniors can receive the 
benefits of tomorrow's new medical technology. The last few 
years have seen wonderful advances in drugs to treat such 
problems as osteoporosis, arthritis, and Alzheimer's.
    At the same time, a new federally run bureaucracy is 
certainly not the answer to address the needs of our seniors 
being able to afford new medications as they become available. 
Such a bureaucracy would take medical decisions with regard to 
which drugs to prescribe away from the physicians, dampen the 
overall level of medical research on new drugs, and force our 
seniors to accept a one-size-fits-all Federal program.
    My legislation sets out to avoid those problems. It expands 
on the ideas that the States have shown do work in practice. 
The EPIC program in New York State has been a highly successful 
program. Both parties in Albany have consistently voted to 
expand that program each and every year. However, the State 
officials also recognize that New York State cannot afford on 
its own to cover every senior that it should. New York's EPIC 
program provides assistance to State residents aged 65 and 
over. Its budget, $68 million in this past year, comes out of 
the State's general fund. The eligible income levels top out at 
$18,000 for an individual and $23,700 for a married couple. 
Annual deductibility ranges from $468 to $638. The New York 
EPIC plan covers the bulk of prescription costs. Plan members 
are responsible, though, for a copayment of $3 to $23, based in 
large part upon the actual cost of the prescription.
    By partnering with New York State----
    Mr. Bilirakis. If you would summarize, Ben, I would 
appreciate it.
    Mr. Gilman. I am concluding, Mr. Chairman. I recognize that 
I have taken a great deal of time.
    By partnering with New York State and other States with 
prescription assistance programs, the Federal Government is 
going to be able to both provide aid to thousands of seniors on 
fixed incomes with their monthly prescription drug bills while 
leaving prescribing authority where it belongs, with the 
physicians. In essence, everyone would win.
    Mr. Chairman, I thank you for your patience and for 
permitting us this opportunity to testify.
    [The prepared statement of Hon. Benjamin A. Gilman 
follows:]
  Prepared Statement of Hon. Benjamin A. Gilman, a Representative in 
                  Congress from the State of New York
    Mr. Chairman, I want to thank you for permitting me to testify this 
afternoon, at your hearing examining the various alternatives to 
address the challenge posed by the high cost of prescription drugs for 
today's low and middle income seniors.
    Along with many of my colleagues, I have heard from many 
constituents voicing their concerns about the ever increasing cost 
associated with their monthly prescription drug requirements. In 
response, I introduced H.R. 2375, the Senior Prescription Drug 
Assistance Expansion Demonstration Act of 1999. In doing so, I am 
offering legislation which can serve as a viable first step towards 
addressing the serious issue of rising prescription drug costs.
    The purpose of my legislation is to provide assistance to those 
states which have taken an important step to offer supplemental 
assistance for low income seniors to help defray the rising cost of 
prescription medication.
    This legislation will create a demonstration project that will 
provide block grant funding to permit three states with an existing 
prescription assistance program for low income seniors to raise their 
income eligibility by $5,000 for both single individuals and married 
couples. Should the program prove to be successful, it can later be 
expanded to other states that have created such prescription assistance 
programs.
    H.R. 2375 recognizes that the states with existing prescription 
plans have widely varying requirements with regards to the 
administration of these plans. Consequently, it does not alter these 
requirements in any way, except that, to qualify for the federal funds, 
each state must raise its income eligibility for both single and 
married categories.
    Mr. Chairman, the last five years have seen a rapid increase in the 
amount of revolutionary medications available on the market. At the 
same time, these new drugs come with an ever increasing price tag. The 
availability of these new drugs has been a wonderful result of annual 
advances in medical technology and knowledge. Regrettably, the price 
that accompanies these new medications is increasingly burdensome for 
many senior citizens.
    A number of our colleagues in this House, as well as in the other 
body, have offered various bills designed to address the rising cost of 
prescription medications for seniors. These bills have tended to 
utilize either price controls, or the extension of free or heavily 
subsidized prescriptions as a new federal entitlement, as a solution to 
this problem.
    The Nation's experience with price controls during the Nixon 
Administration in the 1970s has demonstrated that they are not a viable 
tool. Moreover, while the new entitlement proposed by the current 
administration sounds appealing, the President, has downplayed both the 
50% copayment requirement in his plan, as well as concerns that a 
universal prescription entitlement will displace existing company based 
plans for retired employees.
    Furthermore, price controls for prescription drugs run the very 
real risk of stifling future development in medical advances. While 
none of the major drug companies has any reason to plead poverty, there 
is a concern that the implementation of a federal system of mandatory 
price controls would serve as a major disincentive on the future 
research and development of new prescription medications. In this 
sense, medical success does come with a price.
    On the other hand, prices should not be so high that the target 
audience for which the drugs were developed cannot afford to purchase 
those drugs. Regrettably, this has been increasingly the case over the 
past several years for seniors living on fixed incomes.
    The Federal Government has a vital role to play in fostering 
innovation in medicine, so that today's seniors can receive the 
benefits of tomorrow's new medical technology. The last few years have 
seen wonderful advances in drugs to treat osteoporosis, arthritis, and 
alzheimer's disease.
    At the same time, a new federally run bureaucracy is not the answer 
to address the needs of our seniors being able to afford these new 
drugs as they become available. Such a bureaucracy would take medical 
decisions with regard to which drugs to prescribe away from doctors, 
dampen the overall level of medical research on new drugs, and force 
seniors to accept a one-size-fits-all federal program.

    Mr. Bilirakis. Thank you very much, Ben. And thank you so 
much for your hard work.
    Before the Chair goes into his 5 minutes, without 
objection, I would like to ask unanimous consent that a letter 
from David Kessler to the Honorable John Dingell dated June 29, 
1999, be made a part of the record.
    [The letter follows:]

The Honorable John D. Dingell
2328 Rayburn House Office Building
United States House of Representatives
Washington, DC 20515
    Dear Representative Dingell: You may recall that there has been a 
continuing controversy about the re-importation into the United States 
of prescription drugs manufactured here and exported abroad (so-called 
``American Goods Returned''). As you know the Prescription Drug 
Marketing Act of 1987 (the PDMA), P.L. 100-293 (Apr. 22, 1988), of 
which you were the principal sponsor in the House prohibits such 
reimportation. As the former FDA Commissioner who oversaw the 
implementation of many of the provisions of the PDMA, I wanted you to 
know of my concerns about this issue.
    I believe the prohibition on re-importing exported drugs serves two 
critical public health purposes: (1) preventing the introduction into 
U.S. commerce of prescription drugs that may have been improperly 
stored, handled, and shipped overseas, and (2) reducing the 
opportunities for importation of counterfeit and unapproved 
prescription drugs. I know you will recall that the Energy and Commerce 
Committee described these purposes in its report accompanying the bill 
that became the PDMA.
    Specifically, the existence and method of operation of a wholesale 
submarket, herein referred to as the ``diversion market,'' prevents 
effective control over or even routine knowledge of the true sources of 
merchandise in a significant number of cases. As a result, 
pharmaceuticals which have been mislabeled, misbranded, improperly 
stored or shipped, have exceeded their expiration dates, or are bald 
counterfeits, are injected into the national distribution system for 
ultimate sale to consumers.
    A significant volume of pharmaceuticals is being reimported to the 
United States as American Goods Returned. These goods present a health 
and safety risk to American consumers because they may have become 
subpotent or adulterated during foreign handling and shipping. The 
ready market for reimports has also been a catalyst for the 
perpetration of a continuing series of frauds against American 
manufacturers, and has provided the cover for the importation of 
counterfeit pharmaceuticals in several cases. Moreover, the hazards 
associated with reimports have forced the Food and Drug Administration 
and U.S. Customs Service to spend inspectional and other resources that 
are sorely needed in other areas.
    H.R. Rep. No. 76, 100 Cong., 1st Sess. 6-7 (1987).
    In 1986, the Oversight and Investigations Subcommittee of the 
Energy and Commerce Committee, which you chaired, described the public 
health and safety concerns of allowing ``American Goods Returned'' as 
follows:
    [T]he clear and present danger to the public health from reimported 
pharmaceuticals is the threat that subpotent, superpotent, impotant or 
even toxic substances labeled as U.S.-produced legend drugs will enter 
the distribution system. The foremost danger comes from so-called 
``generic'' drugs produced in developing countries that do not provide 
product patent protection for pharmaceuticals.
    Uncertain Returns: The Multimillion Dollar Market in Reimported 
Pharmaceuticals, 99th Cong., 2nd Sess, 23 (Comm. Print 99-GG 1986). One 
well-publicized example involved importation of more than one million 
counterfeit birth control pills, complete with counterfeit packaging 
and labeling. Id. Dangerous Medicine: The Risk to American Consumers 
From Prescription Drug Diversion and Counterfeiting, 99th Cong., 2nd 
Sess, 22 (Comm. Print 99-Z 1986).
    In my view, the dangers of allowing re-importation of prescription 
drugs may be even greater today than they were in 1986. For example, 
with the rise of Internet pharmacies, the opportunities for illicit 
distribution of adulterated and counterfeit products have grown well 
beyond those available in prior years. Repealing the prohibition on re-
importation of drugs would remove one of the principal statutory tools 
for dealing with this growing issue.
    I know one argument now being made for allowing re-importation is 
that this would make lower priced prescription drugs available to U.S. 
consumers. But, your Committee effectively rebutted that argument in 
1986, in terms that seem to me to be equally applicable today.
    Pharmaceuticals re-imported by diverters displace full price sales 
in the wholesale market. Moreover, prices to ultimate consumers are 
generally not lowered as a result of diversion. Rather, the profits go 
to the various middlemen, here and abroad, while consumers bear the 
risk.
    Uncertain Returns, supra, at 32 (emphasis added). See also 
Dangerous Medicine, supra, at 25-26 (``there is little or no 
significant benefit to consumers from pharmaceutical reimportation, and 
there are obvious costs in terms of health and safety risks and 
utilization of scarce FDA resources'').
    I know of no changed circumstances that require either a shift in 
FDA policy or the passage of legislation to repeal PDMA's prohibition 
on re-importing drugs. Furthermore, I believe that such a repeal or 
change in policy would re-create the substantial public health risks 
PDMA was designed to eliminate. I would welcome your analysis and 
comments on this matter.
            Sincerely,
                                     David A. Kessler, M.D.

    Mr. Bilirakis. And additionally at the request of Chairman 
Bliley, there are a number of letters here from patient 
advocacy groups regarding their concerns about bills that would 
impose price controls on the pharmaceutical industry: A letter 
from WomenHeart, the national coalition for women with heart 
disease, dated October 4, 1999; a letter from the International 
Patient Advocacy Association, dated October 4, 1999. I ask 
unanimous consent that all of those letters be made a part of 
the record.
    [The letters follows:]

        The National Coalition for Women with Heart Disease
                                                    October 4, 1999
The Honorable Tom Bliley
Chairman
Committee on Commerce
U.S. House of Representatives
Washington, DC 20515
    Dear Mr. Chairman: The National Coalition for Women with Heart 
Disease was founded by young women heart attack survivors to respond to 
and advocate for the concerns of the 8,000,000 American women living 
with heart disease. One of our primary concerns is increasing the 
access of women to advanced medicines. We also want to encourage the 
development of new and better medicines for heart disease.
    The Coalition appreciates the concern expressed by this Committee 
and others in Congress about access to medicines, particularly among 
the Medicare population. We favor enhanced access to medicines, but we 
have concerns about some of the bills introduced that would use price 
control mechanisms to achieve this end.
    We believe that the real issue is pharmaceutical coverage, and we 
respectfully suggest that Congress concentrate its energies in 
expanding coverage under Medicare a comprehensive reform that will 
allow beneficiary choice and will encourage research and development.
            Sincerely,
                                               Nancy Loving
                                                          President
cc: Members of the Subcommittee on Health and Environment
                                 ______
                                 
                 International Patient Advocacy Association
                                                    October 4, 1999
The Honorable Tom Bliley
Chairman
Committee on Commerce
U.S. House of Representatives
Washington, DC 20515
    Dear Mr. Chairman: As a patient who was saved from death or 
crippling disability by an innovative medicine, I want everyone to have 
the benefits of modern medicines. Unfortunately, I do not believe that 
many of the bills recently introduced with the stated goal of 
increasing access to medicines would accomplish this goal. 
Specifically, I ask that you reject the legislation introduced by 
Representatives Allen, Sanders and Brown. All of these bills include 
price controls, in one form or another, and price controls would 
deprive patients of future cures.
    In 1986, at the age of 27, I learned that I had Gaucher disease--a 
rare disorder for which there was then no known treatment. After 
several years of suffering and narrow escapes from death, my life 
changed dramatically, because of a new drug called Ceredase, which 
supplies the enzyme people with Gaucher disease lack. Because of this 
drug, I am alive and well today. To help others with rare diseases, I 
founded the International Patient Advocacy Association. Like me, our 
members know the value of pharmaceutical research and the need to 
encourage it. For this reason, the International Patient Advocacy 
Association asks Congress to reject the aforementioned price control 
bills.
            Sincerely,
                                             Lenny Van Pelt
                                                 Executive Director
cc: Members of the Subcommittee on Health and Environment
                                 ______
                                 
                         National Kidney Cancer Association
                                                    October 4, 1999
The Honorable Tom Bliley
Chairman
Committee on Commerce
U.S. House of Representatives
Washington, DC 20515
    Dear Mr. Chairman: The Kidney Cancer Association acts as an 
advocate for patients with kidney cancer and their families. More than 
25,000 new cases of kidney cancer are diagnosed annually, and the 
disease takes the lives of more than 11,000 Americans each year. One of 
our primary goals is to encourage both public-sector and private-sector 
research on kidney cancer.
    Earlier this year, we went on record in opposition to The 
Prescription Drug Fairness for Seniors Act of 1999, because it would 
chill the incentives for research on cures for diseases, including 
kidney cancer. Price controls and innovation don't mix. Our members 
don't need price controls--they need their government to provide 
incentives for companies to develop new drugs.
    More recently, other bills that would have a similar chilling 
effect on research have been introduced, namely The International 
Prescription Drug Parity Act introduced by Rep. Sanders and the 
Compulsory Licensing bill introduced by Rep. Brown. Both of these bills 
would reduce the incentives to develop new medicines that patients with 
kidney cancer need.
    We believe that Congress should reject such approaches--which won't 
help and which will do a lot of harm--and, instead, craft a 
comprehensive Medicare reform that would enhance the access of 
beneficiaries to state-of-the-art medicines.
            Sincerely,
                                                 Carl Dixon
                                                          President
cc: Members of the Subcommittee on Health and Environment.

    Mr. Bilirakis. I think it is important that we not tear 
each other's ideas apart. It is critical because we all have 
good ideas. I am going to concentrate on Mr. Berry's comments. 
You make good points, and how could anyone quarrel with the 
fact that these things you mentioned do take place.
    Back in 1987, the Prescription Drug Marketing Act was 
approved by this committee, and that bill was intended to 
prohibit reimportation of prescription drugs. I am not sure 
whether you are aware of that, Mr. Berry. Then-Chairman John 
Dingell reasoned that reimported pharmaceuticals posed a 
serious health and safety threat to consumers. The letter that 
I have referred to from former FDA Commissioner David Kessler 
expressed his concerns--and I am just going to quote from that 
letter: ``In my view the dangers of allowing reimportation of 
prescription drugs may be even greater today then they were in 
1986. I know of no change of circumstances that require either 
a shift in FDA policy or the passage of legislation to repeal 
PDMA's prohibition on reimporting drugs. Furthermore, I believe 
that such a repeal or change in policy would recreate the 
substantial public health risks PDMA was designed to 
eliminate.''
    And I go into those, Mr. Berry, because it is an obstacle 
that you have to surmount, obviously, so I would ask you what 
is your assessment of these comments?
    Mr. Berry. Mr. Chairman, we already import $18 billion 
worth of pharmaceuticals into this country every year. We allow 
private citizens to go across the border any time and buy up to 
a 3-months' supply of these products and bring them back into 
this country, and we have not had any problem from that, and I 
think it is bogus. I think I would have to see some evidence 
here that--we are in the international marketplace.
    A member of my staff just a few weeks ago got on the 
Internet and ordered prescription medicine from New Zealand, 
got it within 3 or 4 days, and it came in anyway. And it was 
made in this country. It is a good product. There is nothing 
wrong with it. It costs one-third what it would have cost to go 
down to CVS to buy it.
    I just think that we have to recognize we are in a world 
marketplace. We import into this country every day food that 
sometimes we have a problem with. But what I am talking about 
is products that are made in FDA-approved facilities, and they 
are FDA-approved products. We are already doing this. All we 
are doing is protecting the manufacturers' market and 
protecting--giving them a monopoly situation as far as their 
ability to price their product. And if it is so necessary to 
have these protections, why do the other countries not have to 
have to do this?
    Mr. Bilirakis. Well, I guess----
    Mr. Berry. And why do we charge 2, 3, 4 times as much for 
the products in this country as they do in other countries?
    Mr. Bilirakis. I guess we could always ask why does it take 
FDA to be so concerned about the safety and quality of drugs as 
against the time of approvals in many other countries.
    Mr. Allen, your bill would require manufacturers to sell 
their products to pharmacies at a government-set price. I say 
that only from the standpoint that it would be basically the 
best available price or the lowest price paid by any government 
agency. That is what I mean. My question is, what guarantee is 
there that the pharmacies then will pass these savings on to 
the beneficiaries?
    Mr. Allen. If I could respond first, it is not a 
government-set price, in my opinion, at all. All we are saying 
is if the pharmaceutical industry, a pharmaceutical 
manufacturer, gives a discount to the Federal Government or to 
HMOs or to hospitals, but particularly to the Federal 
Government, then those who are on Medicare, beneficiaries under 
a Federal health care plan ought to get the same discount. It 
is very simple. The idea is simple. It is just buy in bulk and 
save money. And there is no reason why that, by itself, is a 
government-set price. I don't believe it is.
    Mr. Bilirakis. And I appreciate your explaining that it is 
either the lowest price paid by any government agency or the 
best price for the drug as the term is defined under Medicaid. 
Whether we say government-set price or not, I think it probably 
ultimately amounts to that. But how, again, can we be sure that 
the pharmacies will pass those discounts or discount prices or 
savings on to the beneficiaries?
    Mr. Allen. You can be sure because the retail pharmacy 
market is a competitive market. All of our studies, 80 studies 
around the country, have shown that the markup charged by 
retail pharmacies is by and large a single-digit markup, and 
with few occasions it may be a low double-digit markup, but 75 
to 80 percent of the price differentials or price 
discrimination that we found is as a result of pricing at the 
wholesale level. Wherever you go, if you talk to seniors, you 
find this as well. They are checking around among pharmacies in 
the area to find the lowest price. The pharmacies are trying 
to, you know, get something of a markup, but they are limited 
in how much they can mark up their prescription drugs by the 
competitive marketplace.
    If we had--if we had tried to set controls at the retail 
level, that would be price controls, and those people who are 
opposed to this bill because they claim it is price controls 
now would be even more upset by it. But the truth is that we 
felt as a competitive market, at the retail level we should 
leave it alone, and because there is a competitive market, a 
discount at the wholesale level will be passed on over time.
    Mr. Bilirakis. I thank you. My time has expired.
    Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman.
    One panelist mentioned product licensing is a Third World 
pricing mechanism. Actually, product licensing, far from being 
a Third World phenomenon, is used and has been used and is 
being used in England and France and Germany and Israel and 
Japan and a host of smaller countries, too. And according to a 
fact book put out by--and I use that term lightly--PhRMA, the 
trade association for the drug companies, half of all new 
medications are developed in the United States. And by quick 
reasoning, I figured out that, therefore, half of all new 
medications are not developed in the United States, and that 
means a significant number of those prescription drugs are 
developed in countries that use price controls. Some use 
product licensing. Some use parallel imports. All of those 
countries where half the new drugs are developed are in 
countries where they charge significantly lower prices than 
they do in this country for drugs.
    So the companies, I guess--inferring then, the companies 
don't seem to have any trouble, drug companies, developing 
new--with the research and development, developing new 
prescription drugs in those countries. So I guess for Mr. Allen 
and Mr. Berry, comment, if you will, based on that and based on 
other thoughts that you have had about this whole process. 
Comment, if you will, Mr. Berry, first, and then perhaps Mr. 
Allen, on this threat by PhRMA and by the drug industry and 
their using front groups like some of those letters that we see 
all the times, letters to the editors and letters circulating 
from groups we have never heard of. It is not the Kidney 
Foundation, the major group; it is some offshoot group that the 
drug companies are generally funding. Comment, if you would, on 
their threats that they will have--their research and 
development will dry up. Mr. Berry?
    Mr. Berry. The drug companies, when the bill was passed--
and I don't remember what year it was, but when we actually 
made generic drugs a viable thing in this country, the drug 
companies said the same thing. If we allow generic drugs, all 
the research will stop. The fact is that they have dramatically 
increased their research. The research and the new products 
that the drug companies produce are their life blood for 
profits, and they are not going to stop doing that. That is the 
way they make their money. And that is a good thing. We want 
them to make money.
    But the fact is they are not going to stop doing that, and 
that is just another bogus argument. It is interesting that the 
drug companies are willing to even ask for patent extensions on 
drugs at a time when they are already charging us three and 
four times for that product as they do people in Canada or 
Mexico or Europe or wherever you want to go. It is just a smoke 
screen to try to continue this overpricing system that they 
have for Americans.
    Mr. Brown. Mr. Allen?
    Mr. Allen. I actually have some numbers in front of me, and 
Congressman Berry is right. Just look at history. I mean, this 
is an industry which always comes in and says, if you try to 
contain our prices, we will cut back on research and 
development, but then they don't do it. In 1984, the Waxman-
Hatch Act was passed that increased the availability of generic 
drugs and provided more competition for brand-name drugs, and 
the industry had said, well, this will force us to cut back on 
research and development, but in the 5 years following 
enactment of that legislation, they increased their R&D from 
$4.1 billion to $8.4 billion.
    Then in 1990, legislation was passed that created the drug 
rebate requiring companies to reduce what they were charging 
for Medicaid, Medicaid program, and since 1990 pharmaceuticals 
have almost tripled their spending in R&D from $8.4 billion in 
1990 to $24 billion in 1998. The same thing will happen.
    The basic point is this: Their profits come from their 
patents. Their patents run out. The only way they can be 
successful is to develop new drugs. So they will always do 
research and development. For this particular industry, 
research and development is critical, and there is no way the 
Federal Government can stop them from doing that, and no way we 
want to stop them from doing that.
    Mr. Brown. Thank you.
    Mr. Stark, having known you for 7 years, and knowing that 
you probably don't watch a lot of television, but also knowing 
that you have an opinion on virtually everything, and 
particularly a good staff that you are known for sitting behind 
you, we hear this about bipartisanship. Let's do this together. 
Are those Flo ads adding anything to public understanding?
    Mr. Stark. No. They are good, though. The ranking member of 
the health committee when I chaired in the Ways and Means later 
sponsored the Larry and Louise ads and knocked our socks off 
when we tried to bring a health reform bill. And as a 
politician I have a deep respect for negative advertising when 
it is done well, I just don't like it when it is directed 
against me. So it is going to cause us some problems 
politically. You can scare people. That is how you sell 
Noxzema, because you are afraid you are going to get zits, and 
you scare people that nobody will like you with zits.
    Mr. Brown. Actually, that was for Clearasil, Mr. Stark, but 
you are obviously from a generation that doesn't remember that.
    Mr. Bilirakis. I guess we can bring up a lot of instances 
from both sides of the aisle regarding scaring people and ads 
and misleading ads.
    Mr. Stark. It is a political tactic, Mr. Chairman.
    Mr. Bilirakis. Well, it is a terrible political tactic.
    Mr. Stark. But it works.
    Mr. Bilirakis. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman, and let me join in the 
chorus of this panel in thanking you and Mr. Brown for this 
series of hearings on a very important issue. I doubt there is 
a Member in Congress who holds town meetings that doesn't deal 
with this issue of increasing drug cost and what do we do in 
terms of senior citizens, people on Medicare.
    And I just flew in from my district and missed, 
unfortunately, some of the statements, including Mr. Fletcher, 
and I wanted to ask, Ernie, if you would grab a microphone so I 
could ask you a couple of questions about what you are talking 
about in your statement. I hurriedly went through this, and I 
know that you referenced there--first of all, let me commend 
each one of the panelists, too, for stepping forward and 
offering proposed solutions to this problem. I think it is 
going to take maybe some combination of what some of you are 
saying to help me work through this process.
    But, Mr. Fletcher, in terms of your statement, you included 
reference to the President's bill. And in the first hearing 
last week, I had concerns about that because while you can 
quarrel with the quality and the nuances of the various bills, 
the various policies out there, I think the Medicare survey in 
1995 showed that some 65 percent of the Medicare recipients did 
have some sort of drug benefit, whether it was at the low end 
through Medicaid and those kinds of low-income supplements that 
helped poor people get prescription drugs, or perhaps at the 
other end for people who could afford to buy Medigap policies 
or who were on Medicare+Choice and where a drug prescription 
was a benefit of that policy.
    And so really what we are talking about are those people, 
if you subtract 65 percent from 100 percent, really it seems to 
me our first obligation, our first order of priority ought to 
be to reach that other 35 percent that do not have that 
benefit. And it may be later we can come back and look at the 
quality of some of that 65 percent's drugs coverage, but our 
first priority ought to be to reach out to the 35, 36 percent 
of people that don't have that drug benefit. And I think you 
suggest a couple of things in what you are doing that would set 
that same priority. Can you comment further on that?
    Mr. Fletcher. Yes, Mr. Bryant, I appreciate that. It is 
important as I think we look--there is really two different 
subjects here. One is, are pharmaceuticals overpricing? But 
right now when we are facing the immediate problems out there, 
we are facing a number of about 6 million people, a little more 
than that, that are in that income bracket where they fall 
through the cracks. They cannot afford the Medigap plans, and 
they do not qualify for Medicaid or some of the other programs 
that help low income.
    There are 13 States that have already started programs and 
they are very similar to the CHIPs program for our children 
where they provide low-income assistance on their Medicare 
prescription drugs. This will address the real need for the 
individuals there that are not able to afford their 
medications.
    I think if we begin to address where the real problems are, 
as you have identified, then I think we have start to address 
this problem in a way that not only can increase the 
competition among pharmaceuticals, but we can begin to have 
more competition, and I think we can address some of the other 
concerns with a great deal of dialog. But I think you have very 
aptly pointed out that we are talking about 44 percent of that 
35 percent, which amounts to about 6 million people that would 
benefit substantially from what we are trying to do.
    Mr. Bryant. The first part covers the States working 
basically, as you say, similar to a CHIPs program. Is there 
another component to this also?
    Mr. Fletcher. There is. There is one where we have enhanced 
Medicaid payments for those folks 150 percent below the poverty 
level, and then the standard Medicare reimbursment for States 
at 200 percent, but we also have some stop loss. It depends on 
what you look at. You have anywhere from 5 to 15 percent that 
end up having increased cost of medication, so they may not 
fall within that 200 percent below poverty level, but they are 
incurring a tremendously high cost of prescriptions.
    We just got a call from a retired State employee receiving 
health benefits through Kentucky retirement for persons 65 
years of age, and he has now become eligible for Medicare, but 
because the plan that he had was much better than Medicare, and 
by being forced into Medicare, he is going to lose prescription 
coverage, and he is at that income where he can't afford that 
and probably will not qualify for Medicaid. We have a plan that 
will help those people with high prescription drug cost be able 
to get into the plans that will be able to get the negotiated 
costs from the larger negotiated prices that are reduced so 
they will be able to afford those and get into it and would 
help those individuals in particular.
    Mr. Bryant. Mr. Chairman, I yield back the balance of my--I 
have no time.
    Mr. Bilirakis. You yield back the balance of time that you 
don't have; right?
    Mrs. Capps?
    Mrs. Capps. Thank you. And again, Mr. Chairman, it is clear 
to me that our distinguished panel of witnesses, a bipartisan 
panel, gives us the framework for what I believe should be a 
bipartisan discussion on the floor on this very topic because 
of its timeliness and because of its urgency all across the 
country.
    I will just comment on something that Congressman Berry 
said. I come from a border State, and you talked about people 
going across the border to buy their prescription drugs. I was 
just joined by two of my constituents from Santa Maria, 
California. We are 300 miles from the border, and so many 
people in my central coast area drive regularly to Tijuana, 
across the border, to buy their prescription drugs and have 
been doing so and will continue to do so. It is not that they 
want to drive down there; that is the only way they can afford 
their prescriptions.
    So you clearly--whether the studies indicate it, whether 
your bill passes or not, patients are doing it. And I believe 
that is a symptom of something that is not working right in our 
country.
    Congressman Allen, you know, I am a cosponsor of your bill 
and glad to be that because the study in my district indicated 
that the markup for seniors for the top 10 most commonly used 
medications is 113 percent. And yet the answer always comes 
back from the drug companies, that your bill is price controls. 
But I think about the fact that we have the veterans as a group 
who are negotiating a lower price and the HMOs as well. Explain 
for me again--you know, you deal with this every day--it is 
like the one argument that comes back to us about the reason we 
shouldn't be doing this.
    Mr. Allen. The argument about price controls?
    Mrs. Capps. Yes.
    Mr. Allen. Well, the fact is that when you think about this 
issue, the legislation I have introduced simply says pharmacies 
should be able to buy drugs for Medicare beneficiaries at the 
best price given to the Federal Government. The best price 
given to the Federal Government is going to be a matter of 
negotiation. It largely is now, either through the VA or 
through Medicaid. And one of the reasons, in one of those 
programs there is a statutory discount, but it is a statutory 
discount from what is called the average manufacturer's price. 
That is a market price.
    Basically, the pharmaceutical industry has chosen this 
price structure. The pharmaceutical industry has decided to 
charge seniors who don't have any coverage twice as much as 
HMOs, twice as much as big hospitals, twice as much as the 
Federal Government, and far more than citizens pay in Canada, 
Mexico and around the world.
    All we are saying is that the Federal Government should act 
as the negotiating agency on behalf of the 39 million Americans 
who are on Medicare. It is a Federal health care plan. The 
Federal Government sets reimbursement rates for doctors, 
nurses, home health care agencies and hospitals. All we are 
saying is that they should make sure that seniors get a break; 
get not a huge break, just the break that HMOs and hospitals 
and the Federal Government itself gets. And what would happen 
is the industry would be faced--and this is why they don't like 
it--with a very big buyer. It is not that the government is 
going to tell them they have to sell a drug at a particular 
price. It is that for once there would be real negotiating 
power on the other side of the table. That is what the industry 
doesn't like, but that is what our seniors need.
    Mrs. Capps. I appreciate that reinforcement of what you 
said before. I guess my final--I know we have things to do--
final appeal to you, Mr. Chairman, is something that 
Congressman Stark said. Any of these bills would be better than 
what we have today. And I would just urge--this is such an 
important topic, and I appreciate your urging us to keep the 
spirit of bipartisanship, which I believe here today we have 
evidenced, and I think we could do this on the floor as well. I 
think we should.
    Mr. Bilirakis. Thank you. And I appreciate Mr. Stark's 
comments. It is just important that we do something that will 
be better than what we have now. It may not be perfect, it may 
not be all that some people think it should be, but it will be 
better than we now have.
    Mr. Greenwood?
    And I would like very much if we can all cooperate here. I 
don't mean to shut anyone off, but it would be great if we 
could finish up so that these gentlemen don't have to come 
back.
    Mr. Greenwood. Thank you, Mr. Chairman. And I thank the 
members of the panel for your testimony.
    When I think of providing prescription drug benefits for 
seniors, I have about five bottom lines. The first is that in 
this day and age, and certainly in the future, if you don't 
have a prescription drug benefit, you simply don't have 
adequate health care. It is as simple as that, and that is 
particularly true of seniors, and it is going to be more and 
more true as we move forward in time.
    The second bottom line is that two-thirds of seniors have a 
drug benefit, and so as we go about the business of trying to 
figure out how to provide a benefit for the third that do not 
have it, we don't want to do anything to charge seniors for 
something that they already have. That is important. We have 
been down that road before in 1988.
    Third, bottom line is we don't want to do anything to 
reduce the incentives for the private sector employers who are 
already now providing much of this coverage for their retired 
employees. So we don't want to make that mistake and have the 
employers dump this responsibility on to the Federal 
Government.
    Fourth, one size does not fit all. Seniors have different 
health care needs, different pharmaceutical needs at different 
times in their lives, and that changes over their lives, and 
they need choices that they can adapt as their health care 
changes.
    And fifth, and this is equally important, we don't want to 
do anything to kill the biotech and the pharmaceutical industry 
that produces the research and development for these miracle 
cures and the new drugs that eventually cure cancer and AIDS 
and Alzheimer's, et cetera.
    Those are my bottom lines. A question to see if any of 
these plans are consistent with those important bottom lines. 
And let me turn to Mr. Stark for a starter.
    Sir, your proposal which would create a new Medicare 
benefit, I think we ought to do that; I think we ought to do it 
differently than you do. I think we ought to do it creating 
private sector options, and Mr. Thomas and a group of us are 
working in that direction. How can you--how would you respond 
to the concern that all of these employers who provide health 
care benefits for their retirees, and in many cases very good 
prescription drug benefits, would not simply look at the fact 
that Uncle Sam is doing it and say, gee, we can avoid that 
expense, let's not cover prescription drug benefits 
postretirement?
    Mr. Stark. If we had a reasonable prescription drug benefit 
for Medicare, I am sure they would. They are dropping away from 
providing Medigap. The plans are dropping not only retirees, 
but they are dropping people who retire early. So that is why 
the President has wanted to allow people to buy in.
    I don't think that we can depend on the responsibility of 
employers. Traditional employment in the workplace is changing. 
We are getting more leased employees, telecommuting employees. 
The traditional idea of going to work for a company and working 
for them for 45 years until you retire and then being taken 
care of, I think, is disappearing, so the benefits are already 
disappearing. Medigap is cutting, managed care plans are 
cutting back, and employers are cutting back whether or not we 
provide this benefit. And I don't think--I think that we would 
be replacing it to some extent, which means money they will 
save and hopefully could be used to contribute to pay for the 
overall plan.
    Mr. Greenwood. I think the gentleman's answer is 
straightforward and honest. It would shift most of this 
responsibility, probably eventually all of this responsibility, 
from the private sector to the public sector. I think there are 
ways to meet the needs of the one-third by subsidizing their 
opportunities on a means-tested ability to do that in a way 
that minimizes the cost shift from the private sector to the 
Federal sector, and I would like to work with you.
    For Mr. Allen--I am trying to go quickly because the 
chairman has requested it--you identified in your plan the 
Federal Government being the big buyer. But, in fact, when big 
purchasers get discounts, it is generally because they can 
create efficiencies. You can ship your product to a big central 
warehouse. You can avoid middlemen. There are all kinds of ways 
that you can justify selling the product for the reduced price 
because of the bulk consumption.
    The problem that we have in the pharmaceutical case, it 
seems to me, is that you don't get that when you simply say to 
the pharmaceutical companies, sell your product to these 
pharmacies so individuals can, one at a time, on a retail 
basis, buy it. I don't see any efficiency in there. So you have 
the current system where the pharmaceuticals sell at a price 
that they can to the pharmacies, and then your system overlies 
that, but there is no cost savings in the process. You don't do 
anything to reduce anybody's cost, you simply, in my view, 
artificially reduce the price.
    Mr. Bilirakis. A very brief comment. I apologize, but what 
you are going to do?
    Mr. Allen. Briefly this has nothing to do with costs. The 
pricing structure has nothing to do with costs. The 
pharmaceutical industry charges what the market will bear. That 
is why you have these huge disparities. So what is really 
important is the market power on the other side, not the cost 
of delivering pills. Both the cost of----
    Mr. Greenwood. That is not market power, it is coerced 
power.
    Mr. Allen. It is market power. The Federal Government buys 
toilet paper and tanks and fleets of automobiles, and it always 
tries to get a reduced price for the benefit of the taxpayer. 
We should do the same thing when it comes to providing health 
care for seniors. It is a market power even though because what 
the Federal Government is doing is simply acting as a bulk 
buyer.
    Mr. Bilirakis. Let's not get into a debate, though. We 
don't have time for it, although I think it would be 
interesting.
    Mr. Strickland.
    Mr. Strickland. Mr. Chairman, I will be very brief. This is 
what I have heard today: That Americans are paying much more 
for prescription drugs than are people who live in other 
countries; that individual senior citizens are paying much more 
for prescription drugs than are large HMOs or the Federal 
Government. I have heard numerous witnesses say that America's 
senior citizens in many cases are having to choose between 
buying prescription drugs and buying food.
    We have got to do something about this, and in my judgment, 
we cannot do it in a piecemeal, mediocre way. This calls for 
bold action, and I believe--I will say this to all of the 
witnesses--I believe this: If we do not do this, and we don't 
act boldly and courageously and provide justice and fairness to 
American senior citizens, that every one of us will pay a heavy 
price when the American people make a decision about us in the 
future. It is as simple as that.
    No issue in this country, in my judgment, is as powerful as 
is this issue because it affects every family in this country. 
And I thank you for your good work and for your information, 
and, Mr. Chairman, I thank you.
    Mr. Bilirakis. I thank the gentleman very much. Without 
objection, there is a CRS issue brief updated April 7, 1999, 
entitled Prescription Drugs Pricing Differences between Insured 
and Uninsured Consumers. Without objection, I would ask that be 
made a part of the record.
    And it has been commented a couple of times as to the 
percent of prescription drug research and development which is 
paid for by the Federal Government. That is a very significant 
point----
    Mr. Brown. Mr. Chairman, I have never done this, but I 
reserve the right to object to the CRS report because my 
understanding is that it has actually officially been 
withdrawn. I have not heard that that has happened before, but 
if it has, I would like to----
    Mr. Bilirakis. Why don't we withdraw my request until maybe 
that is clarified?
    Mr. Brown. Fine, fair enough.
    Mr. Bilirakis. If it has not been withdrawn, you have no 
objection?
    Mr. Brown. Exactly.
    Mr. Bilirakis. And the point that I was making is that we 
felt that it was a very significant point, and we contacted 
both CRS and NIH, and both organizations said it is not 
possible to determine how much of the funds dedicated to drug 
research and development were government dollars.
    And also Mr. Nader made a comment before Congress back in 
1993, regarding a certain percentage of Federal funding that is 
supporting drug research, but that was research and development 
on all health care, not just drugs. It wasn't broken out.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 6:15 p.m., the subcommittee was adjourned.]
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