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




            THE ADMINISTRATION'S PRESCRIPTION DRUG PROPOSAL

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 11, 2000

                               __________

                             Serial 106-104

                               __________

         Printed for the use of the Committee on Ways and Means

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
69-982                     WASHINGTON : 2001



_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402


                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Illinois            JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  KAREN L. THURMAN, Florida
JIM RAMSTAD, Minnesota
PHILIP S. ENGLISH, Pennsylvania


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
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current publication process and should diminish as the process is 
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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of May 4, 2000, announcing the hearing..................     2

                               WITNESSES

Health Care Financing Administration, Hon. Nancy-Ann Min DeParle, 
  Administrator..................................................     8
U.S. General Accounting Office, William J. Scanlon, Ph.D., 
  Director, Health Financing and Public Health Issues, Health, 
  Education, and Human Services Division.........................    26
Congressional Budget Office, Dan L. Crippen, Ph.D., Director; 
  accompanied by Steve Lieberman, Executive Associate Director...    35

                       SUBMISSIONS FOR THE RECORD

American College of Physicians-American Society of Internal 
  Medicine, statement and attachment.............................    68
National Alliance for the Mentally Ill, Arlington, VA, Jacqueline 
  Shannon, statement.............................................    71

 
            THE ADMINISTRATION'S PRESCRIPTION DRUG PROPOSAL

                              ----------                              


                         THURSDAY, MAY 11, 2000

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 9:31 a.m. in 
room 1100, Longworth House Office Building, Hon. William M. 
Thomas, (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

                                                Contact: (202) 225-3943
FOR IMMEDIATE RELEASE
May 4, 2000
No. HL-14

                      Thomas Announces Hearing on

              Administration's Prescription Drug Proposal

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on the Clinton Administration's prescription drug 
proposal.T2The hearing will take place on Thursday, May 11, 2000, in 
the main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 9:30 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include representatives from the Administration, the 
Congressional Budget Office, as well as other interested parties 
knowledgeable on the structure and financing of a Medicare prescription 
drug benefit. However, any individual or organization not scheduled for 
an oral appearance may submit a written statement for consideration by 
the Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Although Medicare currently offers a range of health care benefits, 
it differs significantly from other Federal health care programs and 
private sector health insurance in that it does not generally offer its 
enrollees coverage for outpatient prescription drugs. This is 
significant given that, on average, seniors currently spend in excess 
of $600 annually on prescription drugs. However, in the absence of 
Medicare prescription drug coverage, beneficiaries have come to rely 
upon several other sources of prescription drug benefits, such as 
employer-sponsored retiree health insurance, Medicaid or other State-
sponsored health programs, and managed care plans offered through the 
Medicare+Choice program. In total, recent data indicates that 
approximately two-thirds of beneficiaries have coverage through these 
alternate sources, thus leaving more that 10 million beneficiaries 
without coverage.
      
    In February, the Administration presented a proposal in its budget 
to provide for a Medicare prescription drug benefit. Seniors would pay 
a monthly premium to enroll in a new Part D program, in which 
beneficiaries and the Federal Government would split prescription drug 
costs up to a certain amount. This new program, administered by the 
Federal Government, would be accompanied by a proposed budgetary 
reserve fund for catastrophic drug expenses starting in 2006, allocated 
only after Congress and the Administration agree on a structure to 
provide for these costs.
      
    In announcing the hearing, Chairman Thomas stated: ``The purpose of 
this hearing is to examine the President's proposal for providing 
prescription drug coverage for Medicare beneficiaries. Now that the 
President's plan has been put into legislative form and analyzed by the 
Congressional Budget Office, the Subcommittee can better understand the 
probable implications of the President's approach to this vexing 
problem.''
      

FOCUS OF THE HEARING:

      
    The hearing will examine the Administration's proposal to provide 
access to prescription drugs for Medicare beneficiaries and how it will 
affect the financing of Medicare and its implications for beneficiary 
care.
      

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May 25, 2000 , to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
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    Note: All Committee advisories and news releases are available on 
the World Wide Web at `http://www.waysandmeans.house.gov''.
      

                                


    Chairman Thomas. The Subcommittee will come to order.
    Today the Subcommittee will continue its hearings on the 
important issue of expanding Medicare to provide coverage for 
outpatient prescription drugs for Medicare beneficiaries. Today 
we will examine the President's proposal for addressing this 
problem. Every Member of this Committee understands the 
importance of this issue to Medicare beneficiaries.
    Increasingly, in today's world medicines are the preferred 
method of treatment for a variety of ailments. This is 
particularly true for many chronic conditions that 
disproportionately impact the Medicare benefit community.
    Nevertheless, since its inception in 1965, the Medicare 
Program has generally excluded coverage of outpatient 
prescription drugs; however, as care givers turn increasingly 
to many of today's miracle drugs to manage chronic ailments and 
new and more-expensive biotech treatments come on the market, 
the financial pressures grow, caused by the Medicare Program's 
lack of a drug benefit, and that pressure will only continue to 
grow.
    We have had a number of anecdotal examples of beneficiaries 
spending down life savings, forced to make difficult choices, 
and without the kind of protection that we have been discussing 
on both sides of the aisle, they are more frequently exposed to 
catastrophic drug costs that can leave them destitute if they 
buy the drugs or create very difficult life choices, and, 
probably most insidious of all, practice one of the most 
negative aspects of current prescription drug medicine, and 
that is do it piecemeal--start a program and then determine 
their own regimen based upon finances rather than on medical 
efficacy.
    Seniors need a program of access to prescription drugs. 
Incidentally, the Medicare Program, as a whole, needs 
modernization so that we will be able to meet the needs of 
today's retirees, but also those retiring in the future. This 
is why, in part, republicans announced last month the outline 
of a plan to provide prescription drug benefit for Medicare 
beneficiaries and modernizations.
    We have pledged to Speaker Hastert that this Subcommittee 
will work closely to make sure that legislative language can be 
taken up by the House late this spring or early this summer.
    This, of course, brings us to today. The object of this 
particular hearing is to better understand and try to lean from 
the President's proposal.
    Recently, there have been important developments on this 
issue. First, the President's bill has been drafted into 
legislative language, and this is very helpful. It enables us 
to examine the details and better understand how the proposal 
would actually work.
    Second, the Congressional Budget Office has updated its 
score of the proposal, and I believe they actually announce 
some further refinements here today in testimony, and if that 
is not the case I certainly hope by making that statement we 
will try to get them to.
    It is really critical, because a lot of these decisions are 
tied intrinsically to financial implications of the policy, and 
changes made in the policy sometimes have significant financial 
implications.
    Third, the Congress has passed a budget resolution that set 
aside $40 billion over the next 5 years to finance reforms in 
Medicare and a prescription drug program. This is slightly more 
than the President's initial program would cost, based upon 
CBO's last estimate. This level of spending was supported by 
leaders in both parties, and they were both included in the 
republican and in the democrat budget resolutions.
    Finally, if you watched the video media last night and 
yesterday morning's paper, you know the that President and the 
Congressional democrats have already begun to rethink the 
President's initial proposal.
    Yesterday morning, at a press event at the White House, the 
democrats acknowledged one of the perceived flaws with the 
President's original plan and expanded on the President's offer 
of dealing with the catastrophic costs, or a real insurance 
benefit that protects seniors who encounter serious illness and 
the possibility of exorbitantly high drug bills through no 
fault of their own. This is good news. It means that 
republicans and democrats are moving toward each other on the 
issue.
    Yesterday, the President said he wants to work with the 
republican leadership in Congress to get a bill passed this 
year. This is also good news, for if we are going to pass 
legislation to help seniors and disabled beneficiaries with 
their drug costs this year, we have got to work together, and 
ultimately Congress and the President have to agree.
    Yesterday, Chairman Archer and I wrote the President a 
letter to tell him just how seriously we take this issue and 
how we are committed to working in good faith to get a 
prescription drug benefit signed into law before Congress 
adjourns. It is my hope that this hearing will be useful and 
hopefully instrumental in moving us down the path toward 
agreement.
    Yesterday the President showed he is willing to alter his 
plan to address legitimate criticisms. I, too, want to approach 
this process with an open mind.
    While those of us on this side of the aisle have agreed on 
some firm principles that will guide us as we write our bill, 
we want to learn from the President's effort and buildupon his 
proposal so that the Medicare beneficiaries can get the best 
Medicare Program possible--a modernized Medicare with 
prescription drugs.
    Chairman Thomas. With that, I would ask the gentleman from 
Wisconsin, who I understand is subbing for the gentleman from 
California, Mr. Stark, if he would have any opening remarks.
    Mr. Kleczka. Thank you, Mr. Chairman.
    As Chairman Thomas indicated, Congressman Stark was unable 
to be here this morning due to a meeting at the White House on 
the progress the Conference Committee is making on the managed 
care bill. I suspect that will be a very short meeting.
    I am pleased to offer opening remarks for this morning's 
hearing on one of the most critical issues in senior health 
care today, a prescription drug benefit.
    I thank the chairman for holding this hearing and join him 
in welcoming our new Mom, Administrator DeParle--Nancy, 
welcome--Mr. Scanlon and Mr. Crippen to this morning's hearing.
    Mr. Chairman, there is truly an urgent need to help 
Medicare beneficiaries with the cost of prescription drugs. 
Prescription drugs are used to prevent and treat virtually 
every major illness. They can accomplish what once could only 
be done through surgery, with far less pain and far less cost. 
They can provide treatment where none existed before, improving 
the quality and length of life for the patient.
    Prescription drugs are essential to quality health care, 
yet many seniors cannot afford the medical miracles made 
possible by pharmaceutical drugs.
    Some Medicare beneficiaries have employer-based retiree 
prescription coverage, others private supplemental coverage 
that exists in drug costs; however, many have no coverage at 
all.
    A study by the Commonwealth Fund found that in 1996 only 
half of all the Medicare beneficiaries had prescription drug 
coverage which lasted throughout the entire year. Even for 
those who do not have year-round coverage, there is no 
guarantee that this coverage will continue. Employer-sponsored 
health care has steadily declined over the last decade.
    While an estimated 65 percent of large employers offered 
retiree health care benefits in the eighties, less than 40 
percent do so today.
    As Pabst Brewery retirees in my district can attest, 
retiree benefits are not always a stable source of health care 
coverage. Pabst canceled their benefits in 1996.
    The 13 million plus seniors without any prescription drug 
coverage must pay high out-of-pocket costs for their drugs. To 
see how much seniors in my district without drug coverage were 
paying, I had a survey done of the five most frequently 
prescribed drugs for older Americans. The survey found that 
seniors were paying an average of 119 percent more for drugs 
than the drug companies' most favorite customers. In addition, 
the prices these seniors are paying are 75 percent higher than 
the prices that Canadian customers pay, and 73 percent higher 
than the prices that Mexican customers pay.
    These costs often exceed what fixed income seniors can 
afford. Far too many seniors are forced to choose between food 
and medicine. Adding a voluntary prescription drug benefit to 
Medicare is essential to ensure these seniors will have 
affordable access to prescription drugs.
    Despite the clear need for such coverage, the 
pharmaceutical companies are worried that having a drug benefit 
in Medicare will cut into their profits. To protect their 
profits, they are running a multi million dollar ad campaign 
featuring a woman named Flo. Flo is trying to convince seniors 
that a Medicare drug benefit will limited their drug choices or 
cause them to lose their current drug coverage, but those scare 
tactics are not backed up by the facts.
    Despite what Flo says, seniors in Medicare deserve the same 
quality of prescription drug coverage available in most other 
health plans. They should not be forced to accept second-class 
health care benefits.
    The President has proposed giving seniors without drug 
coverage affordable access to the medicines they need, while 
protecting quality drug coverage for those who already have it. 
The plan uses Medicare's purchasing power to obtain discounts 
for seniors.
    Starting in 2003, seniors who choose to participate would 
pay a monthly fee of $25 to participate in a Medicare drug 
benefit. In return, the program would pay half of their first 
$2,000 in drug costs, rising to one-half of $5,000 in 2009.
    In addition, starting in 2006, the President's plan would 
provide catastrophic coverage to limit the out-of-pocket 
expenses for seniors with the most exorbitant drug costs.
    Again, seniors who do not want or need this coverage do not 
have to participate in this strictly voluntary Medicare drug 
program. This plan is not perfect, but it is a good place to 
start.
    Just yesterday, the House democratic caucus unveiled a 
Medicare drug coverage proposal which builds on the White House 
plan. The democratic plan would provide drug coverage beginning 
in 2002 rather than 2003. The democratic plan would implement 
catastrophic coverage earlier than the President's plan--we 
would start it in year 2002--and commence to protect all 
seniors whose drug expenses exceed about $3,000 per year.
    The House budget resolution sets aside $40 billion, as the 
chairman indicated, over the next 5 years to create a Medicare 
prescription drug benefit.
    The adjustments to the budget baseline, which will be made 
this summer, will make more funds available to cover the 
additional cost of adding essential catastrophic coverage.
    In today's hearing we will begin the Committee's discussion 
on how to meet the prescription drug needs of our Nation's 
seniors. We have an obligation to bring Medicare into the 21st 
century by adding a prescription drug benefit.
    I am pleased to know that our republican colleagues share 
our commitment to add a prescription drug coverage to Medicare; 
however, I was disappointed yesterday, in listening to one of 
the news reports, where Senator Trent Lott was quoted 
indicating that he believes that a drug benefit is necessary 
but probably will not get done until next year.
    I would suggest to my colleague, Mr. Thomas and Chairman 
Archer, not only send a letter to the President urging his 
participation and negotiations, but maybe we would get Senator 
Trent Lott to agree to do something this year, also.
    The President's plan is an excellent starting point. I look 
forward to working together on a bipartisan basis to build on 
this proposal.
    Thank you, Mr. Chairman.
    Chairman Thomas. I thank you.
    [The opening statement of Mr. Ramstad follows:]

STATEMENT OF HON. JIM RAMSTAD, A REPRESENTATIVE IN CONGRESS FROM 
                   THE STATE OF MINNESOTA

    Mr. Chairman, thank you for calling this hearing today to 
review the Administration's prescription drug proposal.
    The health system in America is the best in the world. We 
have the most advanced pharmaceuticals, medical devices and 
care delivery systems in the world. In Minnesota, hundreds of 
people from foreigner countries flock to our state to visit the 
Mayo Clinic and the University of Minnesota/Fairview Hospital 
for specialized care.
    Sadly, however, Medicare has not kept pace with the 
incredible strides of American medical ingenuity. That's why I 
have authorized legislation, along with Rep. Thurman, to ensure 
seniors have access, through Medicare, to new technologies and 
look forward to similarly working on improving senior access to 
life-saving and life-enhancing prescription drugs.
    I commend the President for devising a plan to give seniors 
prescription drug coverage. However, as one who has worked 
tirelessly to improve the bureaucratic morass surrounding the 
coverage process for medical devices and procedures, I caution 
everyone to be careful in how we address prescription drug 
coverage.
    Any plan tha tis not transparent is doomed to implode 
within its own black-box of decision-making. Anything that is 
too bureaucratic is doomed to fail under its highly regulated, 
in-flexible system of red tape. Any plan that does not rely on 
competition is doomed to be far too expensive for the system to 
absorb.
    If Members are willing to put politics aside and work in a 
bipartisan, progmatic way, we can and will design an effective 
and efficient ways to use scarce Medicare and surplus dollars 
to help seniors. Hopefully, at the same time, we can modernize 
Medicare to reflect the advancements in our health care system, 
including a targeted prescription drug proposal to cover low-
income seniors without displacing the coverage and quality that 
a majority of enrollees already enjoy.
    Mr. Chairman, thanks again for holding this hearing. I look 
forward to learning more from today's witnesses or now we can 
best address this critical issue.

                                


    Chairman Thomas. I would ask the administrator, Nancy-Ann 
DeParle, to please come to the microphone.
    My understanding is that the business on the floor will 
probably begin with six votes at 10 a.m., and I had hoped to 
perhaps get the administrator's testimony and some questioning 
in prior to those votes. We are still going to try to do that, 
but, based upon the extended opening testimony on the part of 
the gentleman from Wisconsin, that may have consumed the 
minority's time in answering questions. I hope I can 
accommodate them to some degree.
    As usual, your written testimony will be made a part of the 
record, and you can address us in any way you see fit. Nice to 
have you back.

STATEMENT OF HON. NANCY-ANN MIN DEPARLE, ADMINISTRATOR, HEALTH 
                 CARE FINANCING ADMINISTRATION

    Ms. DeParle. Thank you. Mr. Chairman. I will try to be 
brief.
    I appreciate the opportunity to be here to talk about the 
need for a Medicare prescription drug benefit. This 
Subcommittee will be a focal point for the debate around this 
important subject. If it happens, it is going to have to happen 
in here. There is going to have to be a consensus in here. So 
it is a privilege to be before you today to provide the 
administration's perspective.
    When Medicare was founded 35 years ago, the great challenge 
before us was to provide access to the twentieth century 
miracles of modern hospitals for our seniors. Now we have to 
put in place a voluntary drug benefit that is affordable and 
available to all Medicare benefits.
    The good news is I am beginning to feel like I am preaching 
to the converted up here. I know that everyone up here is 
serious about this, and now we have to figure out how to do 
that.
    Drugs are as important to medicine today as hospital care 
was when Medicare was created; yet, as many seniors lack drug 
converge today as lacked hospital coverage back in 1963.
    We all agree that the drug benefit is needed. We don't 
necessarily agree on all the policy aspects of the design, so I 
think what we need to do is to begin having some serious 
discussions of this. There are many design parameters that we 
can discuss as we move forward to implement a drug benefit. Mr. 
Chairman, you noted some of them. So did Mr Kleczka.
    We look forward to working with you on the details. We are 
open to your ideas and we are flexible.
    There are certain key principals, I think, from the 
administration's perspective that we don't want to compromise. 
First, the benefit has to be voluntary and accessible for all 
beneficiaries.
    Second, it has to be affordable for all beneficiaries, as 
well as for the Medicare Program.
    Third, it must have efficient administration integrated 
into Medicare, but using the private sector to deliver it in a 
competitive way and give beneficiaries bargaining power in the 
marketplace. That is why we have suggested that private 
pharmacy benefit managers administer the new Medicare benefit, 
as they do right now for private sector health plans.
    Fourth, a Medicare prescription drug benefit must provide 
access to needed medications and provide high-quality care.
    Finally, Mr. Chairman--I know you agree with this--we 
should try to do this in the context of broader Medicare 
reform.
    As I said, we are open to your ideas and we are pleased 
that we share our policy goal to ensure that every beneficiary 
has access to voluntary, affordable drug coverage.
    Some ideas that have been suggested, though, don't seem to 
meet the principles that I outlined, and I want to just touch 
on some of those.
    As you said, Mr. Chairman, we have provided the legislative 
language for our bill to the Congress, and I appreciate your 
acknowledging the hard work that went into all those details. 
Now we need to see the details of some of the other proposals, 
but right now we are concerned that providing direct premium 
assistance or coverage only for the poor wouldn't meet our 
principle of ensuring that all beneficiaries who need coverage 
will be able to afford it.
    As you know, drug coverage is not just a problem for the 
poor, it is a middle class problem, too, and many beneficiaries 
now find that their drug coverage is not reliable, as former 
employers drop coverage and Medigap is not available to 
everyone.
    Second, we are concerned that providing a subsidy that is 
too small or providing no direct premium assistance to 
beneficiaries would not make the benefit affordable to everyone 
who needs it.
    The independent HCFA actuaries calculate that a subsidy of 
less than 50 percent for all beneficiaries would leave many 
unable to afford the coverage. That would mean that those who 
did choose the coverage would have higher costs, and that would 
increase premiums for everyone and leave even more people 
unable to be able to afford the coverage, so that is something 
that we need to work on.
    We are also concerned that a drug-only private insurance 
model would not meet our principles of providing a Medicare 
benefit that is accountable and affordable for all Medicare 
beneficiaries. Here, our concern is that there wouldn't be a 
guarantee that insurers would offer a comprehensive benefit, 
that it might be available only where insurers chose to offer 
it, and that it would have selection problems. Even with stop-
loss provisions or other adjustments, we are concerned that 
enrollment would be dominated by those with the highest costs 
and, again, that you would get into a spiral with unaffordable 
premiums.
    We need to see the details and we need to sit down and talk 
seriously about the details and the pros and cons of the 
various proposals, but I think we all agree that our challenge 
is something that we all accept, which is to help older 
Americans and the disabled have access to the 21st century 
miracles of modern medicine.
    I know how serious you are, Mr. Chairman, and the other 
Members of this Subcommittee, about moving forward on this 
issue, and I want to tell you that I am serious about it, too. 
We want to work with you to provide seniors with a voluntary 
benefit that is available and affordable for all, so let's work 
together to get it done.
    I thank you again for holding this hearing, and I am happy 
to try to answer your questions.
    [The prepared statement follows:]

STATEMENT OF NANCY-ANN MIN DEPARLE, ADMINISTRATOR, HEALTH 
             CARE FINANCING ADMINISTRATION

    Chairman Thomas, Congressman Stark, distinguished 
Subcommittee members, thank you for inviting me to discuss the 
need, and our proposal, to provide prescription drug coverage 
for Medicare beneficiaries. This Subcommittee will be a focal 
point of the debate around this important issue and it is a 
privilege to be before you today to provide the 
Administration's perspective.
    We must act now to ensure that all beneficiaries have an 
affordable prescription drug benefit option. Pharmaceuticals 
are as essential to modern medicine today as hospital care was 
when Medicare was created. And the President believes that we 
have an extraordinary opportunity to address this shortcoming 
in the context of additional necessary reforms to the program 
that make it more effective, modern, and adequately financed.
    Lack of prescription drug coverage among senior citizens 
today is similar to the lack of hospital coverage among senior 
citizens when Medicare was created. Three out of five 
beneficiaries lack dependable coverage. Only half of 
beneficiaries have year-round coverage, and one third has no 
drug coverage at all. They must pay for essential medicines 
fully out of their own pockets, and are forced to pay full 
retail prices because they do not get the generous discounts 
offered to insurers and other large purchasers. The result is 
that many go without the medicines they need to keep them 
healthy, out of the hospital, and living longer lives.
    Drug coverage is not just a problem for the poor. More than 
half of the beneficiaries who lack coverage have incomes above 
150 percent of the federal poverty level. Millions more have 
insurance that is expensive, insufficient, or highly 
unreliable.
    Even those with most types of coverage find it costs more 
and covers less. Copayments deductible,s and premiums are up. 
And coverage is often disappearing altogether as former 
employers drop retiree coverage, Medigap is becoming less 
available and more expensive, and managed care plans have 
severely limited their benefits. Clearly all beneficiaries need 
access to an affordable prescription drug coverage option.

[GRAPHIC] [TIFF OMITTED] T1387.001


KEY PRINCIPLES

    The President has identified key principles that a Medicare 
drug benefit must meet.
     It should be a voluntary benefit accessible to all 
beneficiaries. Medicare beneficiaries in both managed care and 
the traditional program should be assured of an affordable 
prescription drug option. Since access is a problem for 
beneficiaries of all incomes, ages, and areas, we must not 
limit a Medicare benefit to a targeted group. At the same time, 
those fortunate enough to have good retiree drug benefits 
should have the option to keep them.
     It should be affordable to beneficiaries and the 
program. We must ensure that the premiums for the voluntary 
drug benefit are affordable enough so that all beneficiaries 
participate. Otherwise, primarily those with high drug costs 
would enroll and the benefit would become unstable and 
unaffordable. And beneficiaries must have meaningful protection 
against excessive out-of-pocket costs.
     It should be competitive and have efficient 
administration. Medicare should adopt the best management 
approaches used by the private sector. Beneficiaries should 
have the benefit of market-oriented negotiations.
     It should ensure access to needed medications and 
encourage high-quality care. Beneficiaries should have a 
defined benefit that assures access to all medically necessary 
prescription drugs. They must have the assurance of minimum 
quality standards, including protections against medication 
errors.
     It should be done in the context of broader 
reform. The drug benefit should be a part of a larger plan to 
strengthen and modernize Medicare.
    The President's plan meets these principles. As part of a 
broader reform plan to strengthen and modernize Medicare, it 
adds a long-overdue voluntary prescription drug benefit to 
Medicare.
    Beneficiaries will have access to an optional drug benefit 
through either traditional Medicare of Medicare managed care 
plans. Those with retiree coverage can keep it and employers 
would be given new financial incentives to encourage the 
retention of these plans. Premiums will be affordable, 
beginning at $26 per month, with extra assistance for those 
with low-incomes. Medicare would cover half of the prescription 
drug costs up to $5,000 when fully phased in, and would provide 
protection against catastrophic sots. There will be no price 
controls or new bureaucracy; instead, the new benefit will be 
offered through private pharmacy benefit managers who can 
efficiently negotiate fair prices. All qualified pharmacies 
will be allowed to participate.
    Beneficiaries can get all medically necessary drugs 
prescribed by their physicians and will benefit from the 
qualify assurance programs used by private benefit managers. 
The President's budget includes the prescription drug benefit 
as part of a comprehensive plan to make Medicare more efficient 
and competitive and extend its solvency.
    We have broad consensus that we must act now to establish a 
Medicare drug benefit. We have an historic opportunity provided 
by the growing budget surplus. We have an obligation to keep 
our commitment to meet the medical needs of seniors and the 
disabled. And this can only be done by making a voluntary, 
affordable, accessible, competitive, efficient, quality drug 
benefit available to all beneficiaries in the context of 
Medicare reform.

BACKGROUND

    Prescription drugs can prevent, treat, and cure more 
diseases than even before, both prolonging and improving the 
quality of life. Proper use of prescription drugs should 
minimize hospital and nursing home stays, and could, in some 
cases, substitute for more expensive care that is already 
covered by Medicare.
    Recognizing that prescription drugs are essential to modern 
medicine, the private sector now includes outpatient drug 
coverage as a standard benefit in almost all policies.
    Further, all plans in the Federal Employees Health Benefits 
Program offer a prescription drug benefit. No one would design 
Medicare today without including coverage for prescription 
drugs. Prescription drugs are particularly important for 
seniors and disabled Americans, who often take several drugs to 
treat multiple conditions. All across the country, Medicare 
beneficiaries are suffering physical and financial harm because 
they lack coverage.
    Current coverage for prescription drugs for Medicare 
beneficiaries is incomplete and unreliable. We project that 
this year more than half of Medicare beneficiaries will have 
prescription drug spending of $500 or more, and 38 percent will 
spend more than $1000 Each year, about 85 of Medicare 
beneficiaries fill at least one prescription. Yet one-third of 
beneficiaries have no coverage for drugs at all and, in 1996, 
half did not have drug coverage for the entire year.
    Almost half of beneficiaries without coverage have incomes 
above 150 percent of poverty ($12,525 for a single person, 
$16,875 for a couple), demonstrating that this not just a low-
income problem. All these beneficiaries end up paying more for 
needed prescriptions because they do not get the discounts 
commonly offered to insurers and other large purchasers.
    This situation is worse for the 10 million Medicare 
beneficiaries who live in rural areas. Nearly half of these 
beneficiaries have absolutely no drug coverage. They have less 
access to employer-quarters of rural beneficiaries do not have 
access to Medicare+Choice plans and the drug coverage that many 
of these plans provide.
    In 1996, about one-third of Medicare beneficiaries had 
private sector coverage offered by former employers to 
retirees. However, this coverage is eroding. The number of 
firms with 500 or more employees offering retiree health 
coverage dropped from 40 percent in 1994 to 30 percent in 1998, 
according to the employee benefits research firm Mercer/Foster 
Higgins (the numbers for small firms would be even lower).
    The true impact of this trend has not yet been realized, 
because some employers' decision to drop coverage apply to 
future retirees. Furthermore, a recent survey prepared for the 
Kaiser Family Foundation reported that 40 percent of large 
employers would consider cutting back on prescription drug 
coverage in the next three to five years. As today's workers 
retire, the population of Medicare beneficiaries with access to 
retiree coverage is likely to be well below the levels reported 
in our surveys.
    About one in six Medicare beneficiaries today are enrolled 
in Medicare+Choice plans, most of which include some drug 
coverage. Although Medicare--Choice plans are only required to 
provide the traditional Medicare benefit package, the majority 
of them also provide prescription drugs, which is one reason 
why they have been popular with Medicare beneficiaries.
    Nearly one-third of all beneficiaries, however, lack a 
Medicare+Choice option because they live in areas where there 
are no plans. And where available, plans have been raising 
premiums and copayments for drugs, while lowering caps on drug 
coverage. In 2000, three-quarters of plans cap benefit payments 
for brand-name drugs at or below $1000, and nearly on-third of 
plans cap this coverage at $500 or less, even though the 
majority of Medicare beneficiaries use prescription drugs 
costing $500 or more each year.
    About one in eight Medicare beneficiaries have drug 
coverage through Medicaid. Eligibility for Medicaid, however, 
is restricted to beneficiaries who typically have income below 
100 percent of poverty, and the majority of beneficiaries 
eligible for such coverage--60 percent--are most enrolled in 
the program. This enrollment problem persists despite 
increasing outreach efforts to enroll those who are eligible.
    Roughtly one in ten Medicare beneficiaries obtain drug 
coverage from a supplemental Medigap plan. Medigap coverage, 
however, is expensive, and its availability is not guaranteed 
except right after a beneficiary turns 65.
    Costs for these policies are rising rapidly, by 35 percent 
between 1994 and 1998, according to Consumer Reports, in part 
because those being covered this way are less healthy than the 
average beneficiary. The General Accounting Office (GAO) found 
that almost half of all Medigap insurers implemented 
substantial increases in 1996 and 1907, with AARP--one of the 
largest Medigap providers, and the only one offering a 
community-rated policy covering prescription drugs--increasing 
rates by 8.5 percent in 1997, 10.9 percent in 1998, and 9.4 
percent in 1999.
    The GAO also found that Medigap premiums for plans that 
include drug coverage vary widely, both within and across 
States. For example, premiums charged to 65-year-old 
beneficiary for the standardized ``I'' Medigap plan ranged from 
$991 to $5,943 per year in 1999. And the average premium for 
the standardized ``H'' Medigap plan ranges from $1,174 in 
Virginia to $2,577 in Georgia.
    Furthermore, Medigap premiums increase with age in most 
States. In some parts of the country, beneficiaries over age 75 
are paying more than $100 per month for a plan with drug 
coverage over and above the premium for a comparable plan 
without drug coverage. This occurs despite the fact that the 
maximum annual payment for drug costs in the ``H'' and ``I'' 
plans is only $1250 per year, barely over $100 a month.

THE PRESIDENT'S PLAN

    The President has proposed a comprehensive Medicare reform 
plan that includes a voluntary, affordable, accessible, 
competitive, efficient, quality drug benefit that will be 
available to all beneficiaries. The President's plan dedicates 
over half of the on-budget surplus to Medicare and extends the 
life of Medicare Trust Fund to at least 2030. It also improves 
access to preventive benefits, enhances and use of private 
sector purchasing tools, help the uninsured near retirement age 
buy into Medicare, and strengthens program management and 
accountability.
    The President's drug benefit proposal makes coverage 
available to all beneficiaries. The hallmark of the Medicare 
program since its inception has been its social insurance role.
    Everyone, regardless of income or health status, gets the 
same basic package of benefits. This is a significant factor in 
the unwavering support for the program from the American public 
and must be preserved. All workers pay taxes to support the 
Medicare program and therefore all beneficiaries should have 
access to a new drug benefit. A universal benefit also helps 
ensure that enrollment is not dominated by those with high drug 
cots (adverse selection), which would make the benefit 
unaffordable and unsustainable. And, as I described earlier, 
lack of drug coverage is not a low-income problem--
beneficiaries of all incomes face barriers.
    The benefit is completely voluntary. If beneficiaries have 
what they think is better coverage, they can keep it. And the 
President's plan includes assistance for employers offering 
retiree coverage that is at least as good as the Medicare 
benefit to encourage them to offer and maintain that coverage. 
This will help to minimize disruptions in parts of the market 
that are working effectively, and it is a good deal for 
beneficiaries, employers, and the Medicare program.
    We expect that most beneficiaries will choose this new drug 
option because of its attractiveness, affordability, and 
stability. For beneficiaries who choose to participate, 
Medicare will pay half of the monthly premiums, with 
beneficiaries paying an estimated $26 per month in 2003. The 
independent HCFA Actuary has concluded that premium assistance 
below 50 percent would result in adverse selection and thus an 
affordable and unsustainable benefit.
    Premiums will be collected like Medicare Part B premiums, 
as a deduction from Social Security checks for most 
beneficiaries who choose to participate. Low-income 
beneficiaries would receive special assistance. States may 
elect to place those who now receive drug coverage through 
Medicaid in the Medicare drug program instead, with Medicaid 
paying premiums and cost sharing as for other Medicare 
benefits.
    We would expand Medicaid eligibility so that all 
beneficiaries with incomes up to 135 percent of poverty would 
receive full assistance for their drug premiums and cost 
sharing.
    Beneficaries with incomes between 135 and 150 percent of 
poverty would pay reduced premiums on a sliding scale, based on 
their income. The Federal government will fully fund States' 
Medicaid costs for the beneficiaries between 100 and 150 
percent of poverty.
    Under the President's plan, Medicare will pay half of the 
cost of each prescription, with no deductible. The benefit will 
cover up to $2,000 of prescription drugs when coverage begins 
in 2003, in increase up to $5,000 by 209, with 50 percent 
beneficiary coinsurance. After that, the dollar amount of the 
benefit cap will increase each year to keep up with inflation.
    For beneficiaries with higher drug costs, they will 
continue to receive the discounted prices negotiated by the 
private benefit mangers after they exceed the coverage cap. 
And, to help beneficiaries with the highest drug costs, we are 
setting aside a reserve of $35 billion over the next 10 years, 
with funding beginning in 2006. In will be available so that 
Congress and the Administration can work in collaboration to 
design protections for those with the greatest need.
    Benefit managers, such as pharmacy benefit manager firms 
and other eligible companies, with administer the prescription 
drug benefit for beneficiaries in the traditional Medicare 
program. These entities will bid competitively for regional 
contracts to provide the service, and we will review and 
periodically re-compete those contracts to ensure that there is 
healthy competition. The drug benefit managers--not the 
government--will negotiate discounted rates with drug 
manufacturers, similar to standard practice in the private 
sector.
    We want to give beneficiaries a fair price that the market 
can provide without taking any steps toward a statutory fee 
schedule or price controls. The drug benefit managers will have 
to meet access and quality standards, such as implementing 
aggressive drug utilization review and patient counseling 
programs. And their contracts with the government will include 
incentives to kept costs and utilization low while assuring a 
fairly negotiated contractual relationship with participating 
pharmacists.
    Similar to the best private health plans in the nation, 
virtually all therapeutic classes of drugs will be covered. 
Each drug benefit manager will be allowed to establish a 
formulary, or list of covered drugs. They will have to cover 
off-formulary drugs when a physician certifies that the 
specific drug is medically necessary. Coverage for the handful 
of drugs that are now covered by Medicare Part B will continue 
under current rules, but they also may be covered under the new 
drug benefit once the Part B coverage is exhausted.
    The President's plan also strengthens a stabilize the 
Medicare+Choice program. Today, most Medicare+Choice plans 
offer prescription drug coverage using the excess from payments 
intended to cover basis Medicare benefits. Under the 
President's proposal, Medicare+Choice plans in all markets will 
be paid explicitly for providing a drug-benefit--in addition to 
the payment they receive for current Medicare benefits.
    Plans will no longer have to depend on what the rate is in 
a given area to determine whether they can offer a benefit or 
how generous it can be. This will eliminate the extreme 
regional variation in Medicare+Choice drug coverage, in which 
only 23 percent of rural beneficiaries will access to 
Medicare+Choice have access to prescription drug coverage, 
compared to 86 percent of urban beneficiaries.
    And beneficiaries will not lose their drug coverage if a 
plan withdraws from their areas, or if they choose to leave a 
plan, because they will also be able to get drug coverage in 
the traditional Medicare program. We estimate that plans will 
receive $54 billions over 10 years to pay for the costs of drug 
coverage.

Adminstrative Workload

    The administrative workload for the drug benefit proposed 
by the President would be handled largely by the pharmacy 
benefit mangers, who will be responsible for the vast majority 
of day-to-day functions. The capacity of these benefit managers 
to process claims instantly has expanded rapidly in recent 
years, and we have no doubt that this capacity could be readily 
expanded by 2003 to administer our proposed drug benefit.
    There would be no need for the type of coverage 
determination process in the traditional Medicare program 
because the pharmacy benefit manages would establish their own 
formularies, and be required to cover off-formulary drugs 
whenever determined to be medically necessary.
    The federal role primarily would be in conducting a 
competition for the pharmacy benefit manager contracts, 
overseeing the contracts, and ensuring a smooth interface with 
other Medicare programs and data systems.

MEETING BASIC PRINCIPLES

    As mentioned previously, a set of key principles guided the 
development of the President's plan. We are willing to support 
other proposals that meet these principles:
     Voluntary benefit accessible to all beneficiaries.
     Affordable to beneficiaries and the program.
     Competitive and efficient.
     Ensures access to needed medications and encourage 
high-quality care. Unfortunately, some of the proposals to 
establish a Medicare drug benefit fail to meet one or more of 
these criteria.
    Proposals that provide assistance only to low-income 
beneficiaries fail to help millions of beneficiaries with no or 
undependable coverage. Most lacking drug coverage have incomes 
about 150 percent of poverty, and it is increasingly difficult 
for them to afford the medicines they need as drug prices rise 
faster than inflation. It also is essential that we maintain 
the principle that all Medicare benefits are equally available 
to all beneficiaries. This is a pillar of strength for the 
program and is responsible for its overwhelming support among 
the American people.
    Proposals with high premiums due to inadequate government 
assistance would make the benefit unaffordable to many low and 
middle-income beneficiaries. As a result, the benefit would 
attract a disproportionate number of enrollees with high drug 
cots. That would drive up the price of premiums, which would 
further discourage those with lower incomes or lower drug costs 
from enrolling, and in the end result in an unsustainable 
program. As mentioned above, the independent HCFA Actuary has 
concluded that a subsidy of at least 50 percent is essential to 
attract a range of enrollees that is wide enough to maintain an 
adequate risk pool.
    Proposals that link a drug benefit to a high-option 
Medicare plan with additional benefits like a stop-loss for 
out-of-pocket costs for Medicare's basic benefits also are less 
affordable. Beneficiaries who elect the high option would have 
to pay not only for drug coverage but also for the other, 
typically unsubsidized costs of high option plan that many 
would not need, want, or be able to afford.
    Proposals that fail to establish private sector benefit 
managers everywhere, and instead merely allow private plans to 
offer coverage when and where they wish, fail to ensure access 
for all beneficiaries. The benefit would be available only in 
regions where Medigap and other private plans step forward to 
offer it. Medigap insurers have already said they would not 
find stand-along drug policies an attractive business 
proposition and are currently offering drug coverage less 
frequently. Medigap plans also have little experience 
negotiating with drug manufacturers and do not pool the 
purchasing power of seniors. That could well make the coverage 
unaffordable for many beneficiaries.
    And, finally, proposals that provide a guarantee to a 
dollar amount benefit rather than a defined benefit fail to 
meet the principles of affordability and competitiveness. They 
would allow insurers offering the coverage to ``cherry-pick'' 
by tailoring benefits in a way that would limit the value of 
the benefit to those with greater prescription drug needs. 
Additionally, most health policy experts agree that 
standardizing health benefits is essential to a competitive 
system, since it allows for ``apples to apples'' choices among 
beneficiaries.
    Finally, given the importance and costs of a Medicare drug 
benefit, both seniors and taxpayers should know what benefit 
they are buying.

CONCLUSION

    The need for a prescription drug benefit in Medicare is 
clear. There is consensus across the political spectrum that it 
should be added. The principles on which it should be based are 
strong. The opportunity is before us. The time to act is now. I 
look forward to working with all of you on this critical issue. 
I thank you for holding this hearing, and I am happy to answer 
your questions.

                                


    Chairman Thomas. Thank you very much.
    We do have it in bill form. Unfortunately, after this 
Subcommittee had announced the time for discussing the 
President's plan, there have been, I think everyone would 
agree, significant modifications to the President's plan, so 
you may not be able to answer these questions, although my 
assumption is that, in working out the additional details and 
working with the independent HCFA actuaries, that you scrubbed 
the additional proposals that the President and the democrats 
announced.
    My concern is that one of the principles that you advocated 
was the affordability, and the President's initial plan was 
really not an insurance plan, it was a pre-paid plan, and so 
you could work the numbers back from the amount of money that 
you would have. It is not a criticism. In fact, it is an 
admiration. It is easier to determine what your obligations are 
by building a plan that way.
    But yesterday the President announced that he was going to 
deal with a catastrophic--that is, a cost protection program 
for seniors--that would trigger--and I wasn't clear on the news 
reports--at $3,000 or $4,000. Do we know what the dollar amount 
is that it triggers at?
    Ms. DeParle. We haven't made that decision yet.
    Chairman Thomas. You haven't made that decision. If it 
would trigger at $3,000, that really would involve more than 20 
percent of the beneficiaries who are consuming more than 65 
percent of the costs, so my question would be: How is that 
catastrophic structure paid for? Is it a shared cost with the 
beneficiaries? Is it 100 percent assumed by the Federal 
Government? And if it is the former, how much would it be to 
the beneficiaries? And if it is the latter, how much more does 
the President's program cost than the one that we have examined 
that is in legislative form?
    Ms. DeParle. Well, if I could go back to the principle, 
again--and you articulated, as well--from our perspective, one 
of the principles here is that this benefit must be affordable, 
both for beneficiaries and for the program, and I know you 
agree with both of those sides of the formula there.
    When we initially put our proposal out a year or so ago, 
Mr. Chairman, we weren't sure that that financing would be 
sufficient to cover a catastrophic benefit. All of us, from a 
policy perspective, wanted to do that, but we weren't sure we 
had the funding to do it.
    In this year's budget, because of the good economy and 
because of the work that we have done together with Medicare 
and everything else in the Federal budget, we were able to set 
aside $35 billion, starting in 2006, I think, to introduce--
    Chairman Thomas. Yes, but it wasn't until 2006, and the 
legislation only had the dollar amount, so there was no--
    Ms. DeParle. That is right.
    Chairman Thomas.--structural aspect to it. And, of course, 
2006 is some time away. But the announcement yesterday was 
2003, so my assumption is you can explain to me the payment 
structure of the catastrophic portion of the President's plan.
    Ms. DeParle. No, sir, I cannot, because we still want to 
sit down with you and have serious discussions about the 
details of your proposal. You have an interesting catastrophic 
proposal. The democrats announced one yesterday that they would 
fund at a higher level. We want to sit down and talk with you.
    Now, on the policy issue----
    Chairman Thomas. You cannot say the democrats announced 
one. The President held the event at the White House, so it is 
the President's plan, as well. Or are you saying that this is 
the Congressional democrats' plan and not the President's? I am 
trying to understand the--
    Ms. DeParle. Well, in the end it will be everybody's plan, 
including, I hope yours, but the plan that was announced--
    Chairman Thomas. I am wondering about the beginning. We 
will work on the end, but right now--
    Ms. DeParle. There were, I believe--
    Chairman Thomas. Is this part of the President's plan, or 
is this something that the President held an event at the White 
House to help the Congressional democrats get exposure?
    Ms. DeParle. I wasn't there, but I can tell you this: the 
President is committed to providing catastrophic coverage for 
beneficiaries and--
    Chairman Thomas. Do you believe it is fair to say, then--
    Ms. DeParle.--he wants to work with the democrats and with 
you to do that.
    Chairman Thomas. OK. Do you believe it is fair to say, 
then, that the prices that have been announced, not just the 
cost--for example, $26, as has been cited as the premium cost, 
but then, of course, you go to the end of the program in 2009 
to say that it covers 5,000. Actually, it is 2,000 if the price 
is going to be $26. I don't think it is really fair marketing 
to take the cheapest price up front for the cost of the 
beneficiaries and then go to the end of the program and talk 
about what the benefits are going to be, and I would hope that 
you would agree with that, because if we are going to move 
forward in a bipartisan way we ought to deal with numbers that 
have a relationship to each other. So if the premium is $26, 
the benefit was going to be 2,000.
    Ms. DeParle. And it is $50 when it rises up to 5,000. Yes, 
sir.
    Chairman Thomas. I understand that. But you never see that 
in a discussion of the print. You take the cheapest and the 
best. And I understand the marketing aspect, but--
    Ms. DeParle. But you are asking me, and I am telling you of 
course you are right, the premium rises.
    Chairman Thomas. That is all I want to hear.
    Then the question is: Do you think it is reasonable to 
assume that you are now bringing in a catastrophic program in 
the year 2003 that we should then assume that the 
beneficiaries' premiums would be higher than was announced 
under the President's plan that is in legislative form? Would 
that be a reasonable assumption?
    Ms. DeParle. No, sir.
    Chairman Thomas. Therefore, the only other----
    Ms. DeParle. Let me explain why.
    Chairman Thomas.--assumption is government is going to pick 
up the entire cost of the catastrophic.
    Ms. DeParle. No. But you are making these as assumptions. 
There are policy options here. One option is for the government 
to pick up the entire cost, depending on how you--
    Chairman Thomas. And, therefore, the beneficiaries' 
premiums would be about what they are, because that would be 
that part----
    Ms. DeParle. Yes, sir.
    Chairman Thomas.--of the President's program--
    Ms. DeParle. Yes, sir.
    Chairman Thomas.--that would remain stable.
    Ms. DeParle. Yes, sir. And in our original plan in January 
in the President's budget we said we had allocated $35 billion. 
We didn't just pull that number out of the air. We had looked 
at a number of different ways of doing it. We want to--
    Chairman Thomas. But that didn't start until 2006.
    Ms. DeParle.--sit down with you. That is right, it didn't.
    Chairman Thomas. Now we have one that starts in 2003 that 
covers 65 percent of the beneficiaries' costs of prescription 
drugs. It is right around the corner.
    Ms. DeParle. But that plan, sir, was the Congressional 
democrats' plan. We are working with them, but I cannot give 
you the details of that.
    Chairman Thomas. That is fine. Then it is not--
    Ms. DeParle. All I am saying is--
    Chairman Thomas.--the President's plan, it is--
    Ms. DeParle.--you are right. There are two options here. 
There is a tension between providing a full catastrophic 
benefit with no additional cost to beneficiaries or providing 
one where the program's costs, the costs of the Medicare 
Program, are lower and beneficiaries pay more.
    Chairman Thomas. That is fine. But--
    Ms. DeParle. We will have to work together on that.
    Chairman Thomas. My concern is that, if we are reaching out 
across the aisle to try to build a bipartisan agreement, you 
probably should figure out how you are going to pay for the 
catastrophic and then be honest about the price to the 
beneficiaries if, in fact, they are going to share in that 
cost--since they are going to benefit, it might be reasonable 
to talk about having them share in it--or admit that the cost 
of the program is not the cost of the program that has been 
announced because it could very well double the cost of the 
program.
    Again, it is like saying it is the cheapest price for the 
premium at the beginning, but telling you the benefits are what 
it is at the end. That kind of a discussion makes it much more 
difficult to work in a positive, bipartisan atmosphere. It 
might almost appear that it is a partisan statement in an 
attempt to make the plan look better than it is.
    Ms. DeParle. Mr. Chairman--
    Chairman Thomas. So fundamental honesty is probably going 
to be one of the best environments for us to move forward, not 
of the President's plan as written, because that we can, I 
think, shed some light on.
    Ms. DeParle. If I could just respond, Mr. Chairman, I agree 
with you about honesty and making sure that we all know what 
kind of program we are adopting and that beneficiaries know it. 
If I didn't believe that, I wouldn't have had our staff work 
overtime at Christmas drafting the legislative details to get 
them up here. It would have been much easier for me to just 
talk on the talking points.
    Chairman Thomas. And I--
    Ms. DeParle. That is why the details are up here.
    Chairman Thomas. And I have complimented you on that.
    Ms. DeParle. And I am eager to see the other details.
    Chairman Thomas. I have indicated it is a great help, 
because all of us are wrestling with this new attempt to deal 
with an issue, and the President's plan adopts a model, to a 
certain extent, that tends to be prevalent in the private 
sector with pharmacy benefit managers.
    One of the criticisms you have made of other plans that 
may, in fact, be hypothetical criticisms just to let people 
know what you are concerned about, is the fact that you don't 
know if the program would be available in various regions if, 
for example, entities like PBMs wouldn't play in terms of 
structuring the program.
    What is there in the President's plan that guarantees that 
PBMs would play, would, in fact, agree to carry out the duties 
that you have assigned them in this plan? Is there any 
guarantee in the President's plan that PBMs would participate?
    Ms. DeParle. Well, we believe they would, sir. They--
    Chairman Thomas. No, is there anything--because you have 
criticized other plans saying you don't know if they would 
participate. My assumption is that criticism is based upon the 
fact that the President has, in his plan, a clear structural 
way in which PBMs would participate in the President's plan. Or 
are you saying that it is problematic for the President's plan, 
as well, as to whether PBMs would play?
    Ms. DeParle. No, I don't think it is, because we have 
talked to health plans who have administered this way. You have 
to realize, pharmacy benefit managers provide services, 
managing pharmacy benefits for over 200 million Americans 
today.
    Chairman Thomas. No, I understand that--
    Ms. DeParle. All the health plans--
    Chairman Thomas.--but they do it in a fundamentally 
different way, and I will have one question like that to--
    Ms. DeParle. I don't think they are doing it in a 
fundamentally different way.
    Chairman Thomas. OK. Then, when you read the GAO and the 
CBO testimony, they both indicate they have real concerns about 
the President's plan, in terms of the freedom of the PBMs to 
manage costs. And one of the things that the President's plan 
doesn't have is a shared risk aspect with the PBMs.
    But I am concerned about a more fundamental problem, 
pointed out primarily in the GAO testimony, which looks at the 
traditional structure of HCFA and the way in which it manages 
the Medicare Program, which is it pays after the fact.
    One of the real advantages of PBM is almost an 
instantaneous analysis of drug use and structuring.
    If, in fact, the President's plan says that it is a 50/50 
shared cost up to $2,000, and the assumption is it is going to 
follow the HCFA model in which bills will be paid, the product 
will be consumed, and at the end of the $2,000 50/50 it is 100 
percent or 100 cents on the dollar out of the pocket of the 
beneficiary.
    How would you propose to reconcile the problem of 
beneficiaries consuming more drugs than the 50/50 share would 
allow, but having, in fact, gotten the reduced price? Would 
beneficiaries be required to pay back after the fact any 
benefits that they received after that amount, or would the 
PBMs be responsible, because that is the entity through which 
the drug program flows? Or would HCFA just eat it because they 
cannot respond in a timely fashion to payment problems, as 
indicted by the GAO's testimony?
    Ms. DeParle. Well, I think I followed you. Let me see if I 
did. If I understood your question, the way our proposal is 
designed, beneficiaries would get the benefit of the lower 
prices that we believe that pharmacy benefit managers will be 
able to negotiate, even beyond their cap. And the pharmacy 
benefit managers have in place systems that are able to track 
the amount that beneficiaries have gotten. They will know when 
they hit their cap, and they will know that beyond that they 
can still get their drugs at the lower price, but they will be 
paying for it after that.
    They do that kind of thing now, and there is no reason to 
expect they couldn't do it with Medicare, as well.
    Chairman Thomas. So you are assuming that PBMs that 
currently operate out in the regular world would look very much 
like the PBMs that would be under the President's program?
    Ms. DeParle. Yes, sir. I do assume that.
    Chairman Thomas. I think you will find, if you read 
carefully the Congressional Budget Office testimony and the 
General Accounting Office testimony, both of them believe that 
the PBMs under the President's program would be severely 
hampered in their ability to function as they now function, to 
the point that they question whether or not you would even 
recognize them as the current entities.
    Of course, we will do some follow-up questions when that 
panel is available.
    Thank you very much. It is very helpful to have someone 
grapple with the real world relationship of these new entities, 
because we are going to have to do it, and your willingness to 
do it over the Christmas vacation ahead of us is a great help 
in us moving forward.
    The gentleman from Wisconsin?
    Mr. Kleczka. Let me again thank the chairman.
    Ms. DeParle, I think in your testimony you indicated that 
the President's plan is a starting point, you are open to 
suggestions, changes, negotiation, and I think we all admit 
that probably one of the knottiest problems we are going to 
have to face in this whole debate is how to provide the 
catastrophic coverage. And one of the main reasons is that will 
probably be one of the most expensive.
    Now, it has been cited that there are flaws in the 
President's plan; however, one of those flaws would be 
addressed in the democratic plan, and that is moving some of 
these dates up, which I am assuming the administration would 
agree to.
    I am trying to get a better understanding of the republican 
proposal, and it seems to me that the mainstay would be to 
provide a subsidy to health care plans that provide drug 
coverage to seniors, medigap type plans. Is that your 
understanding also?
    Ms. DeParle. Yes. It is more of an indirect subsidy through 
those plans, as I understand it.
    Mr. Kleczka. Versus a voluntary benefit to the Medicare 
Program?
    Ms. DeParle. Yes.
    Mr. Kleczka. OK.
    Ms. DeParle. And versus a direct subsidy, as in our plan 
and, I guess, the Breaux-Frist plan and some of the others.
    Mr. Kleczka. OK. Let me just ask a general question. We had 
a situation in my District where a whole bunch of seniors 
boarded a bus and took a trip to Canada and came back with the 
medicines they need for the next two to 3 months.
    In your research, why is it possible for individuals in 
Canada and Mexico to buy drugs that much cheaper in those 
countries versus our country? And is it the drug companies' 
contention that if, in fact, we would provide a drug benefit to 
Medicare or tamper with the pricing, that all research dollars 
for drug companies would dry up immediately?
    Could you respond to those two concerns?
    Ms. DeParle. Well, as I understand it, the reason why they 
are able to provide drugs more cheaply, one of the chief 
reasons is because of the purchasing power that they use on 
behalf of a number of beneficiaries pulling them together.
    We don't want to do price controls. We don't want to tamper 
with drug prices, either, but we believe that Medicare 
beneficiaries should get access to these miracles of modern 
medicine through prescription drugs and that we should do that 
by using the leverage of the Medicare Program, and that is what 
our proposal would do.
    Mr. Kleczka. How about the contention that if, in fact, we 
tamper with the way drugs are sold in this country, that all 
research dollars are lost forevermore and we will not have 
these modern miracles occurring any more?
    Ms. DeParle. Well, I don't believe that that would happen. 
As I said, we are not talking about imposing price controls or 
driving all of the research and development dollars out of 
this, first of all.
    Second, remember that the Congress and the American 
taxpayers fund a lot of the initial research through the 
National Institutes of Health and other research that this body 
funds, so I think that there is certainly support in the 
Congress. No one can have any doubt that this Congress supports 
research for new biomedical advances, and I don't think anyone 
up here is interested in something that is going to drive 
research and development out. I know the President isn't. That 
is why we tried to use a private sector model to do this.
    Mr. Kleczka. Fine. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Thomas. Thank you very much.
    The gentleman from Louisiana?
    Mr. McCrery. Thank you, Mr. Chairman.
    Well, since we had some testimony this morning from one of 
our colleagues on the House democrat plan, and the President 
seems to--while he has not endorsed it, he is wanting to talk 
with the House democrats about crafting something. I think it 
is important to note that the three plans that are out there--
the President's plan, the republican plan, and now the House 
democrats plan--have many similarities.
    Ms. DeParle. Yes.
    Mr. McCrery. For example, they are all voluntary. We don't 
force any senior to choose this new Medicare benefit. We think 
now that we are all agreed that there should be some stop loss 
provision to protect against financial ruin for seniors because 
of drug costs. We all agree that there should be some private 
sector administration of the program, whether it is a PBM or an 
insurance company. In our plan, it could be either.
    All of the plans provide some subsidy for everybody, all 
seniors, not just low-income seniors, all seniors. Our plan 
does. The President's plan does. And now the House democrats' 
plan does.
    We all provide greater subsidies for low-income seniors 
than we do for any other seniors.
    Those are commonalities among the plans. We are not that 
far apart. The democrats on the House side don't know yet how 
much theirs will cost, if they do a $3,000 stop loss. They say 
they may have to go to $4,000. We will see. Likewise, we don't 
yet know the level of stop loss that we can offer for the $40 
billion that we have been given by the budget over the next 5 
years.
    So, rather than see the media, the press take the bait and 
try to draw distinctions, say the republican plan is only going 
to help low-income seniors, I think it would be more 
constructive if, in our comments to the press, we would make it 
clear that there are quite a few things in common among all the 
plans, that we all have common goals, which are to help low-
income seniors with the cost of drugs, to help all seniors get 
a better deal for the cost of their drugs, and to subsidize, to 
some extent, the cost of drugs to all seniors, and, finally, to 
prevent financial ruin for seniors because they might have 
tremendously high drug costs.
    If those are our goals and we share those goals, there is 
no reason why we should not be able to come to an agreement on 
a proposal. The only thing that is missing, I would say, in the 
President's plan and the House democrats plan, is choice. In 
the republican plan, we at least envision there being greater 
choice for seniors, in terms of choosing a drug plan. The 
President's plan and the House democrats plan seemed to offer 
only one choice--voluntary, yes, but only one choice for 
seniors, because you are only going to have one PBM to service 
a region. That means only one plan. At least we envision, in 
the House republican proposal, to have multiple PBMs or 
insurance companies offering different kinds of drug plans that 
would have those common elements.
    So if we can bring you all along to our way on the choice 
element, I think we can get this done.
    Mr. Chairman, I appreciate your letting me talk a little 
bit about why we should all be pleased that we are as close as 
we are.
    Chairman Thomas. I thank the gentleman, because we often 
stress our differences, and, as the gentleman indicated, there 
are a lot of commonalities.
    Does the gentlewoman from Connecticut wish to inquire?
    Mrs. Johnson. Yes, thanks.
    As you realize, the bell is going off and we have a long 
series of votes, and, so that everyone will have a chance to 
get a little something on the record, instead of a dialog, 
Madam Administrator, I am just going to put on the record three 
very, very serious concerns that I have about the proposals 
that the President and the democrats have put on the table.
    First of all, I know, from our work on our proposal, that 
at least the executive branch has a pretty good understanding 
of the extraordinary cost of stop-loss benefits over 3,000, and 
I would just remind my democratic friends that the President's 
current proposal is funded by cutting Medicare 72 billion.
    Now, there may be cost savings from modernization, but, in 
your overview, you say some of that 25 billion in savings is 
going to come from competitive bidding and managed care choice 
plans. Managed care choice plans in my part of the country are 
going out of business because we have done such a poor job of 
reimbursing them fairly and paying in a timely fashion.
    Another source of your funding, 39 billion, comes from 
extending the BBA provisions. We reversed some of those 
provisions a little last year. We are going to have to reverse 
some of those provisions again. We cannot possibly have a home 
care industry if we cut the reimbursements 15 percent after we 
go to prospective payments.
    So, you know, my hospitals are absolutely in crisis, and I 
am going to fight with every breath in my body for at least 
what MedPac has proposed for hospitals. And then we are going 
to have to defer the 15 percent for home health care providers? 
Small nursing homes are having a terribly difficult time.
    I don't see how we can count on the savings that have been 
estimated by the executive branch to fund the prescription drug 
bill to begin with. That is a big problem. Where is the money 
going to come from and are we going to take it out of the hide 
of current Medicare providers, many of whom are already on the 
ropes? That is one issue.
    Second, in what was done at the White House yesterday--I 
will make these shorter--the democrats say that the government 
is going to negotiate discounted prices, but in another place 
they say the government will not be allowed to set prices. This 
is a contradiction of no small significance.
    Third, I do not see how, through this benefit 
administrative process, small pharmacies in the remote towns in 
my District will be able to participate.
    I am very concerned about access, small pharmacies, funding 
issues, and price setting, and I want that on the record.
    Thank you, Mr. Chairman.
    Chairman Thomas. If Members have some questions, I am quite 
sure that we can engage in the written exchange of questions 
and answers, as we have done in the past, because we are going 
to be limited on time.
    Does the gentlewoman from Florida wish to inquire?
    Mrs. Thurman. Mr. Chairman, thank you.
    Actually, I want to use my time to allow, since this was 
supposed to be a hearing to discuss with the administration 
exactly what the drug proposals were and the differences 
between them; I would like to give Ms. DeParle an opportunity 
to respond to Mr. McCrery on some of the issues that were 
outlined so that we have an idea of what actually are the 
differences and where we are similar.
    Ms. DeParle. Thank you. In fact, I was hoping I would have 
that chance.
    On the last point you raised, Mrs. Johnson, about how will 
pharmacies be allowed to participate, under our plan all 
qualified pharmacies will have to be allowed to play, and so 
people can go into your District into the small towns that I 
have been in with you, and all those pharmacies will be allowed 
to participate. I am sorry if that detail wasn't clear to you.
    Mrs. Johnson. If the gentlelady will yield, it is simply 
easier said than done when you have a regional administrator, 
but it is the details that we will eventually get into together 
that are going to answer this.
    Ms. DeParle. It is, but we spent a considerable amount of 
time working with plans that have used pharmacy benefit 
managers, and large plans as well as small plans, and I believe 
that aspect of it is not problematic.
    You also referred to the way that the plan is financed, and 
I want to talk about that for a minute.
    Our plan costs around $195 billion over 10 years. That 
includes the $35 billion that we set aside in the out years to 
design and work with the Congress on a catastrophic benefit.
    The funding for this is partly out of the surplus dollars--
$135 billion of it comes from that, and about $60 billion comes 
from savings from things like modernization.
    Under the President's plan, there is a model for using 
Medicare+Choice in a slightly different way than has so far 
been done to do competitive pricing and bidding to provide the 
Medicare benefit package.
    And yes, we do believe and our actuaries do believe there 
will be some savings from that, and that, under the new pricing 
methodology, which is different than the one that you 
criticized, that there will be more plans available.
    I also want to make a point. You raised the concerns that I 
know you have, and we have talked about them many times about 
the managed care plans up in Connecticut. I think that shows, 
as much as anything, that one of the things we have to do is 
start reimbursing for prescription drugs. You know, that is one 
of the pricing problems they have right now.
    What they get paid for is to provide the traditional 
Medicare benefit, which does not include prescription drugs, 
but they know they need to provide prescription drugs and they 
are trying to do it on the price that we are currently paying 
them, which doesn't include that cost.
    So if we can work together, both of our plans, as Mr. 
McCrery said, would cover these costs. In our plan, I think 
about $54 billion of the dollars I talked about, the 195, would 
go to managed care plans to cover the prescription drug 
benefit.
    Let's do this. Let's make it available in fee-for-service, 
too, so all of your constituents would have access to it. I 
think that is what we need to do.
    Mrs. Thurman. Ms. DeParle, let me ask you one question, 
though, because Mr. McCrery mentioned the issue of choice was 
part of our difference.
    I have to tell you, when I go home--and I probably have 
more seniors in my District than most people up here, about 
200,000 on Social Security and Medicare. That is not what they 
are telling me, because they are so aggravated with what has 
happened to them under HMO managed care, because they keep 
getting switched around. All of their prescription drug 
benefits are either being lowered or they are faced with higher 
premiums, higher deductibles, those kinds of things.
    Have you tested anything about what seniors want, what 
would be the best plan for them and the easiest for them to 
participate in?
    Ms. DeParle. We haven't. We haven't asked questions 
specifically about that. What we have done, though, is, in 
connection with our Medicare education program that this 
Committee has been a big supporter of, is, when we do focus 
groups about the education, the seniors often talk about other 
things, just as they do in the townhall meetings that all of 
you have, and they are continually saying, ``We really want 
prescription drug coverage,'' so we all know that.
    The other thing they do tell us, though, is, at least with 
respect to managed care, they care a lot more about having a 
choice of doctors and having their doctor covered than they do 
about having a choice among a bunch of different plans.
    I guess I would say to Mr. McCrery that was the one area 
where I slightly disagreed with him, as well. I agreed with 
most of what he said about the commonality, and I appreciate 
that he is focusing on that, but I do think there is a tension 
that we have to recognize between this notion of choice and 
having 300 different plans to choose from, or whatever the 
ideal would be, and the notion of stability and affordability 
and accessibility.
    The problem is, with insurance, as you all are expert on 
this and you know, when you have so many choices you introduce 
adverse selection, risk selection into it, which can drive up 
the cost both for the beneficiary and the program. There is 
really a tension there, and we have to recognize it.
    I think, you know, I like our plan better because it 
guarantees access, I believe. I know the chairman doesn't agree 
with me, but I believe it guarantees access to everyone to an 
affordable, accessible benefit. I hear Mr. McCrery saying that 
he values this choice. We need to sit down and talk about that, 
because I think we just have to recognize there are some 
differences there and there is a tension.
    Chairman Thomas. I thank the gentlewoman.
    We are going to have six votes in a row, the first one 
having commenced and now getting close to finishing, so the 
Chair apologizes, but there is no way we are going to keep the 
administrator to come back. I apologize to the Members if they 
had questions. You can certainly submit them in writing and she 
will respond, and I have a hunch this is not the last hearing 
that we are going to have.
    My guess is that we will reconvene at approximately 11:30 
a.m.
    In a brief response to the gentlewoman from Florida's 
statement and the administrator's response, I have read 
recently that there are some lobbyists inside the beltway who 
are complaining that Members of Congress are looking at issues 
in which the voters and the beneficiaries find most important 
and that we have not adopted the various lobbyists or 
organizational or associational representatives' priorities. I, 
frankly, am pleased over that, because I thought that was our 
job. It probably makes their job more difficult, since they 
cannot control the process, but, working with the 
administration, with elected representatives, our job should be 
to modify and change programs to meet the real needs and the 
felt needs of the people that we represent.
    I appreciate the administrator's willingness to come.
    As we add additional programs, I would hope that we move 
forward with legislative language. I am conscious of that 
commitment to our plan, as well, and I look forward to working 
with you again.
    The Subcommittee stands in recess until approximately 
11:30.
    [Recess.]
    Chairman Thomas. The Subcommittee will reconvene.
    I thank the principals for allowing us to carry out our 
Constitutional duty.
    We have before us now in this panel--and I thought it was 
appropriate, since we were dealing with the President's 
legislatively expounded plan, to look first to the 
administration, itself. I am sorry the time line was such that 
we could not accommodate all Members with a more-detailed cross 
question and answer process with the administrator. But, since 
it is a written plan and our job is to understand how the 
administration addressed certain concerns that may be more or 
less common to any plans that are attempting to introduce a 
prescription drug structure into Medicare, we have on the 
second panel Dr. Bill Scanlon from the General Accounting 
Office, who has been a long-time resource for us in 
understanding and analyzing Medicare-related information. We 
have Dr. Crippen, head of the Congressional Budget Office, and 
available if necessary, a lifeline, Mr. Lieberman, if the 
question becomes too technical. I don't know whether it is 
phone a friend or polling the audience, but it is a lifeline 
that will be available to us to get resources available.
    With that, I would indicate that any written testimony that 
you have is made a part of the record, and you can address us 
in any way you see fit, focused on the President's plan and the 
ramifications for this Subcommittee in looking at a 
prescription drug proposal along with modernizations to be 
added to the Medicare Program.
    I guess we will start with Dr. Scanlon and then go to Dr. 
Crippen.

   STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR, HEALTH 
FINANCING AND PUBLIC HEALTH ISSUES, HEALTH, EDUCATION AND HUMAN 
       SERVICES DIVISION, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Scanlon. Thank you very much, Mr. Chairman and Members 
of the Committee. I am very pleased to be here today to discuss 
the issues related to adding a prescription drug benefit to 
Medicare, and, in particular, the President's proposal.
    While there is growing consensus that the Medicare Program 
should incorporate such a benefit to address concerns that 
beneficiaries who lack access to prescription drug coverage 
will be able to receive such coverage, as I am sure you will 
hear from Dr. Crippen, such a benefit would involve 
considerable cost.
    Therefore, the imperative, as well as the challenge, would 
be to expand access to prescription drugs in the most efficient 
way possible to minimize the financial consequences for 
Medicare.
    It is particularly important to look to those that have 
experience with managing a drug benefit. Private insurers and 
HMOs have adopted a variety of techniques to manage their drug 
benefits which may be instructive for Medicare, though how to 
apply these techniques requires careful consideration.
    Many third party payers contract with pharmacy benefit 
managers, or PBMs, to develop and implement these cost control 
techniques and to perform other tasks related to managing a 
drug benefit.
    PBMs attempt to use the leverage of their large purchasing 
power to negotiate with drug manufacturers and pharmacies for 
discounts or rebates on their products and services. They have 
often used formularies to increase that leverage. With PBMs 
promising larger shares of the market for the drugs and the 
pharmacies they select, manufacturers and pharmacies may be 
likely to compete harder to contract with a PBM by offering 
more-favorable prices.
    Exactly how much of these techniques affect expenditures is 
uncertain. Data on the size of the rebates under the discounts 
are proprietary, and how much the techniques have altered 
utilization is unknown. Estimated savings reported to us and 
other researchers by insurers and PBMs range from 14 to 31 
percent. Several cautions, though, are appropriate.
    First, these estimates are self reports from the plans, not 
built upon data that we or others have analyzed.
    Second, they are several years old, and the dynamics and 
changes within the pharmaceutical market have been 
considerable.
    As you consider the methods to manage a potential Medicare 
benefit, these private sector techniques offer a useful 
starting point. At the same time, there are several issues that 
arise in considering how to adapt them to the unique 
characteristics of Medicare and its beneficiaries.
    Adoption of PBM techniques within traditional fee-for-
service Medicare on a nationwide basis could be difficult, 
given the program's size and the need for transparency in its 
actions.
    Determining whether a drug should be on a formulary 
typically involves clinical evaluations based on a drug's 
safety and effectiveness and a negotiated manufacturer's price. 
Plans and PBMs currently make those determinations privately, 
something that would not be tolerable for Medicare, which must 
have transparent policies that are determined openly.
    Given the stakes involved in a drug being selected for a 
Medicare formulary, one could imagine the intensive efforts to 
scrutinize and influence the selection process. In addition, 
once the formulary is in place, it may be difficult to steer 
utilization and limit use of non-formulary drugs, especially in 
the fee-for-service environment, where it may be hard to 
influence prescribing practices.
    Although contracting with multiple PBMs to manage segments 
of the drug market could potentially mitigate some of the 
likely difficulties that Medicare would face in adopting 
private sector strategies on a national basis, these area PBMs 
could potentially face some of the same difficulties.
    Furthermore, if each PBM had exclusive responsibility for a 
geographic area, beneficiaries who want certain drugs could be 
advantaged or disadvantaged merely by the fact that they live 
in a certain location.
    To reduce variation, Medicare could, like some private 
sector purchasers, specify core benefits or maintain clinical 
control over formulary decisions; however, without the ability 
to create and manage a formulary, the ability of a PBM to exact 
price discounts and control overall costs would be diminished.
    If multiple PBMs were to compete in a single area, issues 
would arise in terms of informing beneficiaries about the 
differences in their policies, monitoring their marketing and 
recruitment strategies, and accounting for differences in the 
health status of beneficiaries using each PBM.
    We have seen in our work on Medicare+Choice that trying to 
take advantage of cost containment strategies involving the 
benefits of competition also creates an obligation to 
adequately inform beneficiaries about the options available to 
them. Our work on Medicare+Choice has demonstrated that it is 
not an easy task to ensure that beneficiaries are adequately 
informed about their options.
    Regardless of the model that is chosen for managing a drug 
benefit, attention also needs to be paid to the nuts and bolts 
of administering the benefits--in other words, paying the 
claims.
    The efforts of PBMs to control expenditures involve a 
capacity also to scrutinize claims more effectively and quickly 
than is typical of Medicare today. PBMs provide online, real-
time drug utilization reviews to inform pharmacists about 
potential drug interactions, thereby avoiding some medical 
errors, as well as whether the prescribed drug is covered in 
the appropriate formulary and what copayments will apply.
    Currently, Medicare does not have such capability. To 
duplicate the type of capacity PBMs have will likely involve 
increasing the proportion of Medicare spending devoted to 
administrative costs. That share today is roughly 2 percent. It 
is not possible to estimate the administrative cost that will 
be needed to implement a drug benefit with any precision; 
however, the number of prescriptions for Medicare beneficiaries 
could easily approach the current number of claims for all 
other services combined, or $900 million annually, suggesting 
the total administrative cost would be substantial.
    I conclude by noting it is important to find the right 
balance in adapting these private sector techniques that I have 
discussed for Medicare. It is desirable to take advantage of 
these practices to provide a drug benefit as efficiently as 
possible, through the uniqueness of the Medicare Program, 
particularly its size, the need for transparency, and its 
importance to beneficiaries, suggests there will be real 
challenges in applying these techniques.
    Thank you very much, Mr. Chairman. I will be happy to 
answer any questions you or Members of the Subcommittee may 
have.
    Chairman Thomas. Thank you very much.
    The prepared statement follows:]

 STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR, HEALTH 
  FINANCING AND PUBLIC HEALTH ISSUES, HEALTH, EDUCATION, 
AND HUMAN SERVICES DIVISION, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Chairman and Members of the Subcommittee:
    I am pleased to be here as you discuss the President's 
proposal to extend prescription drug coverage to Medicare 
beneficiaries. In previous hearings before this and other 
committees, GAO has addressed considerations for adding a 
prescription drug benefit to Medicare, given the fiscal 
imbalance of the Medicare program and the need to implement 
major reforms to ensure the sustainability of the program. As 
you know, the President has proposed contracting with private 
entities to administer a new prescription drug benefit option 
under Medicare. This is to allow Medicare to benefit from 
techniques developed for private insurers to control spending 
and improve the use of prescription drugs. In this context, my 
remarks will focus first on the factors contributing to the 
rise in prescription drug spending and the impact of the rise 
in spending on Medicare beneficiaries, particularly those 
without coverage. Next, I will outline the methods private 
insurers, including those offering Medicare+Choice managed care 
products to Medicare beneficiaries, have developed to control 
these rising costs. Finally, I will discuss issues involved in 
adapting these methods for the Medicare program and its 
beneficiaries, should an outpatient prescription drug benefit 
be added to Medicare.
    In summary, private insurers, managed care plans, and 
employers have tried to manage the high and rising costs of 
prescription drugs by adopting cost and utilization control 
techniques. In many cases, insurers and managed care plans 
contract with a pharmacy benefit management company (PBM) to 
develop and implement these strategies. If a prescription drug 
benefit were added to the Medicare program, the federal 
government would face similar cost pressures and would need to 
employ methods to control spending. The experience gained in 
the private sector can provide useful insights into options for 
managing a possible Medicare benefit. However, the unique 
responsibilities and characteristics of the Medicare program 
raise a number of issues and introduce questions about applying 
private sector tools to the traditional Medicare fee-for-
service program and the appropriate roles of the Health Care 
Financing Administration (HCFA) and other entities, such as 
PBMs, in managing a drug benefit. In adapting these cost and 
utilization management techniques, it is important to keep in 
mind that: (1) the size of the Medicare program and the need 
for transparency in its actions may reduce the effectiveness of 
some cost control techniques; (2) using private-sector entities 
to implement a drug benefit introduces concerns related to 
beneficiary equity and concentrating market power; (3) private-
sector management tools require a capacity to process and 
scrutinize a large number of claims more quickly than is 
typical of the traditional Medicare program; and (4) strategies 
involving coverage restrictions impose an obligation to provide 
beneficiaries with adequate information about the benefit.

RISING DRUG SPENDING ELEVATES BENEFICIARY ACCESS CONCERNS AND 
THE IMPORTANCE OF COST CONTROLS

    Extensive research and development over the past 10 years 
has led to the introduction of new, more expensive drug 
therapies--including improvements upon existing drug therapies 
and drugs that treat diseases more effectively--which have 
contributed to the increase both in prescription drug use and 
drug spending. For example, new drug treatments for arthritis 
and depression have therapeutic advantages over older 
medications, but they are also more expensive than the drugs 
they replace. Biotechnological advances and a growing knowledge 
of the human immune system are significantly shaping the 
discovery, design, and production of drugs. As a result of 
these innovations, the importance of prescription drugs to 
health care delivery has grown.

Rise in Prescription Drug Spending Caused by Many Factors

    Prescription drug expenditures have grown significantly in 
the past 5 years, both in total and as a share of all health 
care expenditures. From 1993 to 1998, prescription drug 
spending rose an average of 12.4 percent a year, compared to a 
5 percent annual growth rate for overall health care 
expenditures. Consequently, drug spending comprised a larger 
share of total health care spending by 1998--rising from 5.6 
percent to 7.9 percent. Total drug expenditures have been 
driven up by both greater use of drugs and the substitution of 
higher-priced new drugs for lower-priced existing drugs.
    Several factors have contributed to rising expenditures--
more third-party coverage of drugs, the introduction of new 
drug therapies, and more aggressive marketing by manufacturers 
through direct-to-consumer advertising. The increase in 
prescription drug coverage provided by private insurance is a 
likely contributor to the rise in utilization because insured 
consumers are shielded from the direct costs of prescription 
drugs. In 1988, private health insurers paid almost a third of 
all prescription drug expenditures. By 1998, that share had 
risen to more than a half. The development of new, more 
expensive drug therapies--including new drugs that replace old 
drugs and new drugs that treat disease more effectively--also 
contributed to the drug spending growth by driving up the 
volume of drugs used as well as the average price of 
medications. Advertising pitched to consumers is also a likely 
contributor to the increased utilization of prescription drugs. 
Between March 1998 and March 1999, the pharmaceutical 
industry's spending on advertising grew 16 percent, to $1.5 
billion. A 1999 study found that the 10 drugs most heavily 
advertised to consumers in 1998 accounted for about 22 percent 
of the total increase in drug spending between 1993 and 
1998.\1\
---------------------------------------------------------------------------
    \1\ Barents Group LLC for the National Institute for Health Care 
Management Research and Educational Foundation, Factors Affecting the 
Growth of Prescription Drug Expenditures (July 9, 1999), p. iii.

---------------------------------------------------------------------------
Medicare Beneficiary Drug Coverage and Utilization

    Elderly individuals, with their greater prevalence of 
chronic conditions, represent a disproportionate share of drug 
spending. On average, in 1996, Medicare beneficiaries had 
estimated annual drug spending of about $674 per person,\2\ 
compared to an estimated $156 per person for the nonelderly 
population.\3\ A more recent estimate projected that 20 percent 
of Medicare beneficiaries would have drug costs of $1,500 or 
more in 1999, a substantial sum for those lacking some form of 
insurance to subsidize their drug purchases.\4\ In 1996, 
beneficiaries who had no drug coverage and were in poor health 
had estimated mean annual drug expenditures that were $591 
lower than beneficiaries with similar health status who had 
drug coverage.\5\ This indicates that the lack of prescription 
drug coverage may cause access problems, particularly for those 
in poor health.
---------------------------------------------------------------------------
    \2\ GAO calculation based on J.A. Poisal and G.S. Chulis, 
``Medicare Beneficiaries And Drug Coverage,'' Health Affairs (Mar./Apr. 
2000), p. 252.
    \3\ Agency for Health Care Policy and Research Center for Cost and 
Financing Studies, National Medical Expenditure Survey data, ``Trends 
in Personal Health Care Expenditures, Health Insurance, and Payment 
Sources, Community-Based Population, 1996-2005'' ``http://
www.meps.ahcpr.gov/nmes/papers/trends/96-05(c).pdf (Aug. 1998), p. 9 
(cited mar. 16, 2000).
    \4\ M.E. Gluck, ``National Academy of Social Insurance Medicare 
Brief: A Medicare Prescription Drug Benefit,'' ``http://www.nasi.org/
Medicare.medbr1.htm (Apr. 1999), p. 8 (cited Apr. 22, 1999).
    \5\ GAO calculation based on J.A. Poisal and G.S. Chulis, 
``Medicare Beneficiaries And Drug Coverage,'' Health Affairs (Mar./Apr. 
2000), p. 252.
---------------------------------------------------------------------------
    Although the Medicare benefit package, largely designed in 
1965, provides virtually no outpatient drug coverage, more than 
two-thirds of Medicare beneficiaries had at least some 
prescription drug coverage in 1996. Almost one-third of 
beneficiaries had employer-sponsored health coverage, as 
retirees, that included drug benefits. About 17 percent of 
Medicare beneficiaries had coverage because they chose to 
enroll in a Medicare+Choice plan or purchase a Medigap policy 
with such coverage. About 10 percent of beneficiaries received 
coverage through Medicaid.
    The rising cost of prescription drug benefits has driven 
employers, insurers, and managed care plans to adopt new 
approaches that limit total drug coverage or increase 
enrollees' out-of-pocket costs. Although employer-sponsored 
health plans provide drug coverage to the largest segment of 
the Medicare population with coverage, there are signs that 
this could be eroding. Fewer employers are offering health 
benefits to retirees eligible for Medicare and those that 
continue to offer coverage are asking retirees to pay a larger 
share of costs. In addition, the drug benefits offered by 
Medicare+Choice plans have become less generous. Many plans 
restructured their benefits in 2000, increasing enrollees' out-
of-pocket costs and limiting their total drug coverage.

PRIVATE-SECTOR TECHNIQUES FOR CONTROLLING DRUG EXPENDITURES

    During this recent period of rising prescription drug 
spending, insurers and HMOs have adopted a variety of 
techniques to control enrollee utilization and the prices they 
pay for drugs. Many insurers and HMOs contract with PBMs to 
develop and implement these cost control techniques and to 
perform other activities related to managing the drug benefit. 
Direct negotiations with drug manufacturers yield lower prices 
through manufacturer rebate agreements. Because rebates 
generally depend on the volume of the products purchased, 
employers or HMOs use techniques to concentrate their 
enrollees' drug purchases to be able to use market power to 
maximize rebates. This is accomplished through the use of a 
formulary. Cost-control techniques also extend to the drug 
distribution network, with emphasis on negotiating 
reimbursement rates and dispensing fees with pharmacies and 
encouraging the use of mail-order pharmacies to lower 
distribution costs. Insurers or PBMs also perform other 
functions to manage a drug benefit, control spending, and 
ensure quality of care such as monitoring drug use when the 
pharmacist is filling the prescription to enable the 
substitution of lower-priced products or to identify possible 
adverse drug reactions. They also use claims data to monitor 
patterns of patient use, physician prescribing practices, and 
pharmacy dispensing practices.
    PBMs originated as claims processors and mail-order or 
managed care pharmacies. Today, they provide a wide range of 
services--such as claims processing, formulary management, and 
pharmacy network development--to HMOs, insurance carriers, Blue 
Cross Blue Shield plans, plans that cover federal and state 
employees, and union members. According to the Pharmacy Care 
Management Association, the PBM industry's trade association, 
PBMs manage about 1.8 billion prescriptions annually, or about 
70 percent of all prescriptions dispensed to ambulatory care 
patients. According to a recent estimate, PBMs are responsible 
for managing the drug benefits for about 71 percent of the 194 
million people with third party pharmacy coverage.\6\ There are 
more than 140 PBMs, which range in size, scope, and services 
provided. Some administer prescription drug benefits 
nationwide; others focus on serving clients in particular 
regions of the country.
---------------------------------------------------------------------------
    \6\ Testimony of Jeff Sanders, Senior Vice President, Value 
Development, PCS Health Systems, Inc., before the Senate Committee on 
Finance, June 23, 1999. http://www.senate.gov/finance/6-23san1.htm
---------------------------------------------------------------------------
    PBMs and insurers negotiate rebates from drug manufacturers 
and thus lower the net prices they pay for drugs. According to 
a 1996 study, manufacturers' rebates averaged 5 to 6 percent of 
total drug costs.\7\ This average masks what may be 
considerable variation across products. The negotiated rebate 
is typically dependent on the purchasing power of the PBM or 
insurer, the availability of several brand-named drugs in a 
therapeutic class, and assurances of a particular level of 
utilization of the product.
---------------------------------------------------------------------------
    \7\ A. Cook, T. Kornfield, and M. Gold, Mathematica Policy 
Research, Inc. for The Henry J. Kaiser Family Foundation, The Role of 
PBMs in Managing Drug Costs: Implications for a Medicare Drug Benefit 
(January 2000), p. 20.
---------------------------------------------------------------------------
    Insurers or PBMs employ various strategies to channel drug 
utilization to products for which they have rebate agreements 
that are based on market share. Generally, this is done by 
using a formulary, a list of prescription drugs, grouped by 
therapeutic class, that a health plan or insurer prefers and 
may encourage physicians to prescribe and beneficiaries to use. 
A particular product may be included on the formulary because 
of its medical value or because of a favorable price negotiated 
with the manufacturer. The inclusion of a particular drug on a 
formulary can affect its utilization, which can increase the 
level of manufacturer discounts or rebates, and lower a drug's 
net cost.
    Formularies are structured and implemented to steer drug 
choice when therapeutically equivalent options are available. 
Closed formularies, which restrict insurance coverage to only 
selected drugs and require enrollees to pay the full cost of 
nonformulary drugs, may be the most effective in channeling 
utilization. However, closed formularies have faced resistance 
from beneficiaries and providers because they can lead to 
higher enrollee costs or restrict access to certain medicines. 
As a result, more insurers are moving to incentive-based 
formularies that offer enrollees lower copayments for the 
preferred product or generic drugs. The insurer continues to 
cover drugs that are not on the formulary, but the beneficiary 
faces a higher copayment. A third type, open formularies, is 
often referred to as ``voluntary'' because physicians and 
beneficiaries may be informed about preferred drugs, but 
beneficiaries pay no more for using nonformulary drugs. 
Formularies that provide the strongest financial incentives to 
beneficiaries to choose one product over another offer more 
cost control potential. They can be used to steer utilization 
to lower-priced products, including generics, and concentrate 
market share to elicit the best prices or largest rebates on 
particular products. In doing so, however, they may produce 
dissatisfaction among consumers, who have to pay more out-of-
pocket for nonformulary drugs, and physicians, who believe 
formularies restrict their prescribing practices.
    PBMs and private insurers have also targeted drug 
distribution costs as an area for cost savings. Similar to 
their negotiations with manufacturers, PBMs negotiate with 
retail pharmacies to obtain prices that are well below 
pharmacies' usual price for customers without drug coverage. 
PBMs attempt to enhance their leverage with retail pharmacies 
by limiting the size of the pharmacy network. Restricting the 
number of pharmacies in the network can benefit participating 
pharmacies by increasing each one's market share, and as a 
result, make them more willing to provide larger discounts on 
the prescriptions they fill. Potential savings from this cost-
control technique, however, must be balanced with the 
inconvenience of a limited pharmacy network. PBMs may also 
operate mail-order pharmacies that allow enrollees to obtain 
prescriptions by mail. This is a cost-effective way of 
dispensing drugs, particularly maintenance drugs for chronic 
health conditions, such as high blood pressure or asthma.
    The claims processing capabilities of PBMs enable them to 
engage in other activities that may help control overall health 
care expenditures or improve quality of care. For example, drug 
utilization review (DUR) programs analyze patterns of drug use 
on a real-time basis when a pharmacist is actually filling a 
prescription. These programs use databases and computer systems 
that include a patient's entire drug utilization history for 
all network and mail-order pharmacies. These systems identify 
instances in which a drug may be inappropriate for a particular 
patient given a person's medications or age. Most PBMs use 
system edits specifically tailored to particular types of 
beneficiaries, such as people who are 65 years of age or older 
who may have a difficult time tolerating certain medicines. 
Such interventions can both improve quality of care and prevent 
additional health care costs by reducing drug interactions or 
flagging evidence of inappropriate use, such as early refills. 
DUR can also be conducted retrospectively, usually on a monthly 
or quarterly basis, to profile physician prescribing practices, 
pharmacy dispensing practices, or patient utilization. The 
results of retrospective DUR programs are used to encourage 
physicians to prescribe less costly therapeutic alternatives or 
generics, encourage pharmacies to substitute generics or 
preferred formulary drugs for more expensive nonformulary 
drugs, and ensure that some patients are not overutilizing 
prescription medicines.

APPLYING PRIVATE-SECTOR TECHNIQUES TO A DRUG BENEFIT WITHIN 
MEDICARE

    Private-sector entities have attempted to control the 
growth of prescription drug expenditures while preserving or 
enhancing the value of drug coverage for their enrollees, often 
through contracts with PBMs. The President proposes to contract 
with entities, such as PBMs, to administer a new Medicare 
prescription drug benefit. This could allow Medicare to use the 
cost control and quality enhancing techniques developed for 
private insurers. Yet the unique characteristics of Medicare 
and its beneficiaries will require careful consideration as 
private-sector experience influences the design of methods to 
increase beneficiary access to prescription drug coverage. I 
would like to discuss four issues that should affect how any 
Medicare prescription drug program is designed.
     Adaptation of PBM techniques within the 
traditional fee-for-service Medicare program could be difficult 
given its size and the need for transparency in its actions.
     Contracting with private-sector entities to 
administer a drug benefit with cost and utilization controls 
would raise other challenges.
     The efforts of PBMs to control expenditures 
involve a capacity to scrutinize claims more effectively and 
quickly than is typical of Medicare today.
     In the competitive model for Medicare--such as 
exists today with Medicare+Choice or in the models envisioned 
in some reform proposals to expand drug coverage--cost 
containment strategies involving restrictions on coverage 
through formularies or pharmacy networks impose an obligation 
to adequately inform beneficiaries about plan policies.

Adding a Drug Benefit to the Traditional Medicare Program 
Raises Issues About the Feasibility of Applying PBM Techniques

    It may be difficult for the traditional fee-for-service 
Medicare program to design and implement a national drug 
benefit using private-sector management techniques such as 
formularies. Traditional Medicare has generally established 
administrative prices for services such as physician or 
hospital care and then processed and paid claims with few 
utilization controls. Adopting some of the techniques used by 
private plans and insurers to obtain better prices and affect 
utilization might have the potential for better cost-control. 
However, adapting those techniques to deal with the unique 
characteristics and size of the Medicare program raises many 
questions. Because the traditional Medicare program may be 
unable to operate with the flexibility that PBMs have in the 
private sector, it may rely on other pricing strategies to try 
to exact lower prices from manufacturers.
    Having a formulary would enhance Medicare's ability to 
control costs by enabling it to negotiate significantly 
discounted prices with manufacturers by promising to deliver a 
larger market share for a manufacturer's product. Yet, 
implementing a formulary and other utilization controls could 
prove difficult for Medicare. Determining whether a drug should 
be on the formulary and which drugs should be preferred, 
typically involves clinical evaluations based on a drug's 
safety and effectiveness, and decisions on whether several 
drugs are therapeutically equivalent. A pharmacy and 
therapeutics committee within the health plan or a PBM may make 
these decisions. Plans and PBMs currently make formulary 
determinations privately--something that would not be tolerable 
for Medicare, which must have transparent policies that are 
determined openly. Given the stakes involved in a drug being 
selected as preferred on a Medicare formulary, one can imagine 
the intensive efforts to offer input to and scrutinize the 
selection process. In addition, once the formulary is in place 
it may be difficult to steer utilization or withstand pressure 
to allow access to non-formulary drugs, especially in the fee-
for-service environment, where it may be hard to influence 
prescribing practices.
    If Medicare covered all drugs in a therapeutic class on the 
same terms, beneficiaries may not be influenced toward 
particular drugs and thus manufacturers would have no incentive 
to offer deep discounts. Without a promised share of the 
Medicare market, manufacturers may determine they could reap 
greater returns from charging higher prices and concentrating 
marketing efforts on physicians and consumers to influence 
prescribing patterns.
    If Medicare cannot effectively operate a formulary, it may 
have to rely instead on administratively determined prices. 
These could be similar to the manufacturer rebates received by 
the Medicaid program, which is currently the largest government 
payer for outpatient prescription drugs, comprising about 17 
percent of national expenditures on outpatient drugs. Since the 
enactment of the Omnibus Budget Reconciliation Act of 1990 
(OBRA), drug manufacturers are required to provide rebates to 
state Medicaid programs on outpatient drugs based on the 
``lowest'' or ``best'' prices they charged other purchasers. In 
return for the rebates, state Medicaid programs maintain open 
formularies that permit reimbursement for all drugs. Although 
states have received billions of dollars in rebates from drug 
manufacturers since OBRA's enactment, state Medicaid directors 
have expressed concerns about the rebate program. The principal 
concern involves OBRA's requirement for open formularies, which 
limits the utilization controls Medicaid programs can use at a 
time when prescription drug expenditures are increasing 
rapidly.

Contracting with PBMs to Implement Cost Control Strategies 
Presents Other Challenges for Medicare

    Using PBMs or other similar entities to administer a 
Medicare drug benefit in geographic areas could potentially 
mitigate some of the likely difficulties that the program would 
face in attempting to apply private sector strategies on a 
national basis. But such an arrangement raises additional 
questions about how private sector techniques could be applied 
within Medicare. PBMs could potentially face some of the same 
difficulties mentioned previously--namely, their usual cost and 
utilization management tools may be blunted in the Medicare 
context due to the scrutiny their policies may face. Moreover, 
the decision to use a single or multiple PBMs for the entire 
country or one or multiple PBMs per region has the potential to 
affect the ability of the PBM or PBMs to control the cost of a 
Medicare drug benefit and to alter the value of the benefit 
available to different beneficiaries.
    A single PBM contractor administering a Medicare drug 
benefit would likely be subject to the same level of scrutiny 
as a government entity. Such scrutiny may compromise the 
flexibility PBMs typically have used to generate savings. An 
alternative would be to grant flexibility to multiple PBMs that 
are responsible only for a share of the market. Contracting 
with multiple PBMs, though, raises other issues. If each PBM 
had exclusive responsibility for a geographic area, 
beneficiaries who want certain drugs could be advantaged or 
disadvantaged merely because they live in a particular area. 
This kind of geographic variability may be difficult for 
Medicare to sustain. While it is true that such variability 
exists in the Medicare+Choice program, individuals enrolled in 
a Medicare+Choice plan have chosen to enroll and accept the 
terms of the benefit. For beneficiaries in traditional 
Medicare, their regional PBM may be their only drug coverage 
option. To reduce variation, Medicare could, like some private-
sector purchasers, specify core benefit characteristics or 
maintain clinical control over formulary decisions instead of 
delegating those decisions to the PBMs. However, without the 
ability to create and manage a formulary, PBMs would have less 
flexibility to use techniques that have been integral to their 
efforts to maximize price discounts and control overall costs.
    If multiple PBMs operate in each area, beneficiaries would 
choose one to administer their drug benefit. PBMs would compete 
for consumers directly, unlike the private-sector where they 
normally compete for contracts with insurers or other 
purchasers. With multiple PBMs, issues would arise regarding 
informing beneficiaries about the differences in each PBM's 
policies, monitoring PBMs marketing and recruitment strategies, 
and accounting for differences in health status of 
beneficiaries using each PBM. Having more than one PBM in an 
area may also dilute the market power of each PBM, because they 
would individually control fewer beneficiaries and need to be 
concerned about retaining beneficiaries. Having PBMs compete 
for beneficiaries may create an incentive for the PBM to have 
less stringent formularies, if all beneficiaries are subject to 
the same cost-sharing requirements regardless of the PBM they 
use.
    The competitiveness of a bidding process for contracts to 
administer a Medicare drug benefit would depend, in part, on 
the size of the region for which PBMs compete. One recent study 
showed that the PBM industry is competitive, but that it is 
dominated by a few large companies.\8\ If a contract were 
awarded for the entire country or a few large regions, these 
large companies may have an advantage. Large regional contracts 
would concentrate Medicare's market power in these few firms, 
giving them more leverage to negotiate with manufacturers. If 
PBMs competed for smaller areas, more regional PBMs may bid to 
provide services in their region. Awarding more contracts that 
cover fewer beneficiaries may encourage participation by a 
greater number of PBMs, but may also dilute the overall market 
power associated with providing a drug benefit to Medicare 
beneficiaries. It may also be more burdensome to administer 
more PBM contracts.
---------------------------------------------------------------------------
    \8\ A. Cook, T. Kornfield, and M. Gold, Mathematica Policy 
Research, Inc., for The Henry J. Kaiser Family Foundation, The Role of 
PBMs in Managing Drug Costs: Implications for a Medicare Drug Benefit 
(January 2000), p. 41.

Drug Benefit Administrative Functions are Unlike Traditional 
---------------------------------------------------------------------------
Medicare Activities

    PBMs' ability to administer formulary policy and impose 
other utilization controls involves a capacity to process and 
scrutinize claims that is very different from traditional 
Medicare's handling of claims for other services. For example, 
PBMs have the ability to provide on-line, real-time drug 
utilization reviews. These serve a quality-and cost-control 
function by supplying information to pharmacists regarding such 
things as whether a drug is appropriate for a person based on 
his or her age, medical conditions, and other medications, as 
well as whether the drug is covered on the formulary, and what 
copayments will apply. Currently, Medicare does not typically 
manage utilization of services in this fashion. It does not 
have the capacity to conduct real-time review of most services. 
Instead, Medicare pays claims after services have been 
delivered. In the current Medicare program, analysis of 
utilization patterns for individual services or providers is 
only possible after all claims have been submitted and 
assembled. Nevertheless, Medicare's administrative costs 
historically have been extremely low, averaging about 2 percent 
of the cost of the services themselves.\9\
---------------------------------------------------------------------------
    \9\ Medicare: HCFA Faces Challenges to Control Improper Payments, 
(GAO/T-HEHS-00-74, Mar. 9, 2000).
---------------------------------------------------------------------------
    Duplicating the type of controls PBMs have exercised over 
private-sector drug benefits will likely involve devoting a 
larger share of total expenditures to administration than is 
currently expended in the traditional Medicare program. The 
magnitude of the increase is difficult to estimate. Much 
depends on what services PBMs are asked to provide and how much 
of the Medicare drug benefit each PBM will administer. Even if 
the dimensions of the PBM's or contractor's role are specified, 
estimating the likely costs remains problematic. A Medicare 
drug benefit will be a large-scale endeavor. The number of 
prescriptions for Medicare beneficiaries could easily approach 
the current number of claims for all other services combined or 
about 900 million annually. It is unclear how much PBMs or 
others would have to increase current capacity or instead use 
more of the capacity already built into their information and 
claims processing systems--a consideration that could 
significantly affect the administrative costs that may be 
incurred.

Informed Beneficiary Choices Require Adequate, Comparable 
Information

    Any Medicare benefit that requires beneficiaries to choose 
among options for prescription drug coverage, for example 
between competing PBMs or health plans, would require a 
mechanism to ensure that they had adequate information to 
select the option that best meets their needs. Yet our previous 
work on the Medicare+Choice program indicates that it is 
difficult to provide that kind of information in a timely 
manner, in a format that is readily comparable. We identified a 
number of factors that make it difficult for beneficiaries to 
make an informed choice among Medicare+Choice options. In some 
cases, detailed information about plans' benefits and out-of-
pocket fees is provided only after a beneficiary enrolls in a 
plan. In other cases, detailed information may be available 
before enrollment from plan sales agents and member literature, 
but beneficiaries may find it difficult to compare available 
options because plans present the information in different 
formats and use different terms to describe covered benefits. 
The lack of comparative information can be particularly 
problematic when evaluating plans' drug benefits, because many 
design characteristics determine the true value of the drug 
coverage.
    Comparing alternative prescription drug coverage options 
can be difficult because formulary types and management 
techniques differ considerably, affecting the benefit. A 
beneficiary may not be aware of formulary changes until they 
are at the pharmacy counter. Aggressive formulary management 
may control spending, but beneficiaries need to be aware of how 
it may affect their access to a particular medicine and the 
prescribing practices of their physicians. Such issues present 
even greater challenges in the management of a drug benefit for 
the entire Medicare population.

CONCLUDING OBSERVATIONS

    There is growing consensus that Medicare needs to change 
its benefit structure to include outpatient prescription drug 
coverage. Yet such an undertaking has substantial consequences 
for the cost of the program. In fact, one recent study suggests 
that such an expansion would add between 7.2 and 10 percent 
annually to Medicare outlays.\10\ The structure of such a new 
benefit--whom it would cover and the extent of its coverage--is 
an important determinant of the added cost. This is why, in 
previous hearings, the GAO has emphasized the need to make 
prescription drugs more affordable to beneficiaries who lack 
coverage by expanding access to group rates, extending 
discounts associated with group purchasing, and targeting 
government subsidies for those most in need. To the extent that 
this is accomplished through expanding Medicare's benefit 
package, cost-control methods need to be incorporated into the 
management of the benefit. The private sector has developed and 
refined techniques, which have been implemented in some 
Medicare+Choice plans and private health plans, to control 
prescription drug costs. Applying these techniques to the 
larger Medicare population will require adaptations that may 
diminish their effectiveness.
---------------------------------------------------------------------------
    \10\ Gluck, p. 8.
---------------------------------------------------------------------------
    The challenge in adding prescription drug coverage to the 
Medicare program will be in designing and implementing drug 
coverage to minimize the financial implications for Medicare 
while maximizing the positive effect of such coverage on 
Medicare beneficiaries. Most importantly, this benefit 
expansion must be consistent with efforts to ensure the long-
run sustainability of Medicare so that the program does not 
consume an unreasonable share of our productive resources and 
does not encroach on other public programs or private sector 
activities. Private sector tools for controlling drug 
expenditures provide options for controlling drug expenditures. 
However, how to apply these tools effectively to a Medicare 
drug benefit presents a number of challenges and requires 
careful consideration of the nature and magnitude of the 
Medicare program.

-----

    Mr. Chairman, this concludes my prepared statement. I will 
be happy to answer any questions you or other members of the 
Subcommittee may have.

GAO CONTACTS AND ACKNOWLEDGEMENTS

    For future contacts regarding this testimony, please call 
William J. Scanlon or Laura A. Dummit at (202) 512-7114. Other 
individuals who made key contributions to this statement 
include John C. Hansen, Kathryn Linehan and Myrna Perez.

                                


    Chairman Thomas. Dr. Crippen?

  STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET 
 OFFICE; ACCOMPANIED BY, STEVE LIEBERMAN, EXECUTIVE ASSOCIATE 
             DIRECTOR, CONGRESSIONAL BUDGET OFFICE

    Mr. Crippen. Mr. Chairman, Mr. Stark, with your tolerance, 
I want to spend just a couple of minutes talking about the 
current state of the debate, if you will, and then the context 
in which the President's proposal was made.
    I recently listened to a debate in the other body that 
produced, not surprisingly, a flood of endorsements of 
pharmaceutical benefits for the elderly, accompanied by the 
virtually universal arguments that the practice of medicine has 
changed since 1965, that drugs have become a more important and 
expensive component of health care, and that therefore we need 
to modernize Medicare--all of which is not unlike the statement 
made by the administrator this morning.
    I did not hear anyone mention, however, the other aspects 
of medicine that have also changed. For example, both the 
frequency and duration of hospitalization have decreased 
dramatically, and as a result, over 50 percent of hospital beds 
in this country go unused every day. Despite that fact, there 
are even more in-patient rooms under construction, notably 
right here in Washington. We may want to address, as we 
``modernize'' Medicare, how our current system underwrites that 
potentially excess capacity.
    Nor did I hear in that debate about how the number of 
retirees and workers and their demographic profiles have 
changed since 1965 and how they will change in the next 30 
years. Between now and 2030, the number of retirees will grow 
by some 85 percent, while the number of workers will grow by 
only 15 percent. And those retirees will live, of course, much 
longer than they did in 1965.
    At the same time, there are claims being made about the 
current Medicare program--indeed, that the Congress cut it too 
much in 1997. Those providers who are more politically savvy, 
of course, say that the Congressional Budget Office (CBO) 
underestimated the effects of the Balanced Budget Act (BBA) and 
led you astray. Although we did underestimate future Medicare 
payments, with the exception of the interim payment system for 
home health care, we continue to believe the estimates are 
reasonable.
    It is useful to remember what was happening before 
enactment of the BBA-20 percent annual increases in home health 
care spending, for example--and to mention the effects of the 
government's efforts to reduce abusive and fraudulent payments. 
CBO's larger error was in failing to recognize the magnitude of 
those effects. To argue for restoration of the BBA cuts is, at 
least in part, to argue to restore the aggressive, if not 
abusive, billing practices that were frequently found among 
providers before Columbia/HCA's practices became headline news.
    There are other aspects of the debate thus far that I find 
curious and interesting. We are told, for example, that the 
private insurance market will not offer coverage for 
prescription drugs, that at if it did, most it would only be a 
system of reimbursement and not true insurance. That seems to 
me to invite the question, just what are the medigap policies 
that these same insurers offer if not first-dollar coverage at 
considerable expense to the taxpayers today?
    We estimate, for example, that on the one hand, medigap 
coverage costs the taxpayers hundreds of dollars per person per 
year because of the increased utilization it induces. Medigap 
reform, on the other hand, could save billions of dollars a 
year. As this Committee well knows, the design of those 
policies is a matter of government regulation.
    Mr. Chairman, my musings are perhaps just that, but one 
thing I am certain of: we need to analyze the impact of 
Medicare and any changes to it, not just in today's economic 
and fiscal climate but also in that of the future, and not just 
in the context of today's retirees and their health care but in 
the context of the nation's collective needs.
    For example, we currently expect that federal programs for 
the elderly will increase from 7 percent of gross domestic 
product (GDP) to 15 percent, as my generation retires. In terms 
of today's budget, Mr. Chairman, that would mean that about 
$600 billion--an amount equal to total discretionary spending 
today--would have to be cut, raised through new taxes, or 
borrowed. A drug benefit of any kind will obviously exacerbate 
that result, pushing spending for retirees near the level of 
the entire current federal budget.
    In the end, it does not matter if these programs have 
balances in trust funds or dedicated revenue sources. What 
matters is how much of what our kids produce will we demand 
that they give us. Let me repeat that, Mr. Chairman, because if 
there were only one point I might leave you with today, it 
would surely be that one. What matters is how much the elderly 
of the future--namely, my generation--will use of the nation's 
future income, produced by our children, and not the solvency 
or even the existence of some federal trust fund.
    Turning to the President's proposal, Mr. Chairman, our 
analysis has raised a variety of issues regarding the design of 
such a benefit--issues that will, of course, apply to many of 
the other Medicare pharmaceutical proposals as well. The 
specific features of the proposal determine the cost of the 
program to federal and state governments and the policy's 
effectiveness in providing affordable access to prescription 
drugs for Medicare beneficiaries.
    Some of the more important design issues, which are 
discussed in my submitted testimony, are things like the nature 
and initial value of the benefit; the effectiveness of pharmacy 
benefit managers (PBMs) and other forms of potential 
competition, as my colleague has just testified; program 
participation; and effects on Medicaid costs.
    Ultimately, future costs will depend on how much demand 
increases--that is, after all, the point of this policy--and 
how much the price of drugs is increased as well. Offering a 
new benefit to 39 million people, over 10 million of whom 
currently have no coverage, will have unforeseen effects of 
possibly large magnitudes. And even without that new coverage, 
drugs spending for by the elderly has been increasing at 
double-digit rates, well in excess of the rate of growth of 
spending for the Medicare Program, as a whole.
    In general, the President would create a voluntary 
prescription drug benefit, Part D of Medicare, that would begin 
in 2003 and be fully phased in by 2009. It would pay half of 
the cost of beneficiaries prescription drugs, up to a specified 
cap. The insured half of the benefit would be financed equally 
by premium payments and by general tax revenues.
    After taking the cost of premiums into account, enrollees 
would pay 75 percent of the cost of the benefit, and the 
government would pay 25 percent, up to the benefit's maximum.
    Although the President's budget suggests earmarking $35 
billion from 2006 through 2010 for a possible catastrophic 
benefit, no policy is specified. Like you, we have seen only 
press reports of the initiative announced yesterday, and we 
have no further details. For the moment, our estimate includes 
neither the earmarked $35 billion nor the effects of 
yesterday's proposal.
    Having said that, CBO estimates that the provisions of the 
President's proposal, excluding catastrophic coverage, would 
add a total of $160 billion to federal costs through 2010. That 
estimate is identical to the one the administration gave you 
this morning.
    On a bit of a personal note, Mr. Chairman, the 
administration's estimate last year for a virtually identical 
policy was two-thirds that figure, a difference that, at the 
time, caused the President to publicly disparage our estimates 
and some of your colleagues to question our motives.
    As you can see on the next chart, which is table 3 in my 
written statement, CBO's total of $160 billion represents $134 
billion in outlays for Medicare and $26 billion for Medicaid. 
States would also face an additional Medicaid cost.
    CBO estimates that the monthly premium for Part D would 
start at $24 in 2003 and rise at to about $50 in 2010--again, 
very much in line with the administration's own estimates.
    Let me conclude, Mr. Chairman, by stating what is perhaps 
obvious by now: providing prescription drug coverage to 
Medicare beneficiaries is a complex policy challenge. The role 
and cost of prescription drugs have grown dramatically since 
the inception of Medicare, as drugs have become a more critical 
component of modern health care. More than two out of every 
three Medicare beneficiaries have arranged some form of third-
party coverage, leaving 31 percent currently without any drug 
coverage for prescription drugs.
    The enormous variation in comprehensiveness, cost, and 
financing of existing drug coverage tremendously complicates 
the challenge of reforming insurance for prescription drugs. 
Under the President's proposal, for example, 33 percent of 
participants in the new drug benefit would have expenses for 
drugs that exceeded the cap in 2003. Even so, the proposed drug 
benefit would add significantly to federal costs.
    The specific details of a proposal matter enormously--the 
level of coinsurance, existence of a stop-loss provision, 
splitting how financing is split between beneficiaries and 
taxpayers, and the nature and degree of subsidies for low-
income prople and employers.
    Mr. Chairman, suffice it to say that Medicare does not 
exist for the preservation of medical institutions and the 
well-being of providers but rather to finance health care for 
our retirees. Nor does it exist in a world of unlimited 
resources. We have to look at the outcomes and at the effects 
of the program and the health of the beneficiaries in the 
context of what we and, ultimately, our children can afford.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

     STATEMENT OF DAN L. CRIPPEN, PH.D., DIRECTOR, 
               CONGRESSIONAL BUDGET OFFICE

    Mr. Chairman and Members of the Committee, I am pleased to 
be here today to discuss the President's proposal for a 
prescription drug benefit for the Medicare program. That 
proposal recognizes the public's concern that rising drug costs 
may be placing a large and growing financial burden on Medicare 
beneficiaries. About 30 percent of those beneficiaries do not 
have insurance coverage for prescription drugs, and others have 
only limited coverage. The President's proposal would provide 
some benefit for most Medicare beneficiaries but, as currently 
specified, would provide little financial protection for those 
who face extremely high spending for prescription drugs.
    The proposed prescription drug benefit is part of a broader 
set of policies for Medicare recommended in the President's 
budget for 2001. Those policies would expand Medicare 
eligibility to new populations, reduce payments for certain 
covered services, introduce innovations from the private sector 
to fee-for-service Medicare, and convert Medicare+Choice into a 
competitive defined benefit program.
    My testimony today will focus on the prescription drug 
proposal. As background to that analysis, I will briefly 
discuss spending by Medicare beneficiaries on prescription 
drugs and the extent of the insurance coverage for that 
spending. I will then describe the President's proposal and the 
Congressional Budget Office's (CBO's) most recent analysis of 
that plan, including a newly revised estimate of the plan's 
costs. The new estimate is about $11 billion higher than the 
one we reported in April in our analysis of the President's 
budgetary proposals. My statement will conclude with some 
observations on several design features that affect the cost 
and effectiveness of a Medicare prescription drug benefit.

         Spending and Insurance Coverage for Prescription Drugs

    The majority of Medicare beneficiaries spend some money on 
prescription drugs in a year, and a significant fraction of 
those beneficiaries have very high expenses. In 1996, for 
example, the Health Care Financing Administration (HCFA) 
estimates that, in total, the average Medicare beneficiary 
spent more than $670 for prescription drugs. (That includes 
both out-of-pocket expenses and any insurance reimbursement.) 
About 87 percent of beneficiaries had some drug spending; about 
7 percent had expenditures of $2,000 or more (see Figure 1).
    Several statistics suggest the significance of prescription 
drug spending by the Medicare population. Because Medicare 
beneficiaries are elderly or disabled, they use more 
prescription drugs than the average person. Medicare 
beneficiaries constituted about 14 percent of the U.S. 
population in 1996 but accounted for about 40 percent of the 
$62 billion spent in the United States on prescription drugs in 
that year.
    In addition, drug spending by Medicare beneficiaries has 
grown at a more rapid rate than spending on other health 
services. Between 1995 and 1996, for example, total drug 
spending by an average Medicare beneficiary grew by 12.2 
percent, whereas federal spending for Medicare benefits (on a 
per-beneficiary basis) grew by 7.2 percent (see Table 1). Those 
rates compare with 4.6 percent growth in gross domestic product 
per capita over the same period.
    The Medicare program does not cover most prescription drugs 
that beneficiaries take on an outpatient basis, and to obtain 
such coverage, many beneficiaries turn to supplemental 
coverage.\1\ In 1996, according to HCFA data, more than two-
thirds of beneficiaries had supplemental insurance that 
provided some drug benefits (see Table 2). The sources of the 
coverage vary (see Figure 2). Many Medicare+Choice plans offer 
drug coverage as a supplement to their overall benefit package. 
Other sources are employer-sponsored and medigap (individually 
purchased) plans that include drug coverage. In addition, some 
beneficiaries are eligible for prescription drug coverage under 
Medicaid or through other public programs.
---------------------------------------------------------------------------
    \1\ Under Part B, Medicare now pays for a limited list of 
outpatient drugs, such as intravenous chemotherapy drugs that must be 
administered under the direction of a physician.
---------------------------------------------------------------------------
    Many Medicare beneficiaries have the option of enrolling in 
Medicare+Choice plans that offer prescription drug coverage. In 
1996, nearly 95 percent of Medicare+Choice enrollees were in 
such plans--typically, the coverage included a cap on the 
maximum benefit, cost-sharing requirements, and a drug 
formulary. (A formulary is a list of drugs preferred by the 
plan's sponsor, in part because of their lower prices.) Faced 
with tightening financial circumstances in the past two years, 
however, an unusually large number of health maintenance 
organizations (HMOs) have dropped out of the Medicare+Choice 
program, and many of the plans offering prescription drug 
coverage have pared benefits significantly. One analysis 
suggests that only about three-quarters of beneficiaries 
enrolled in Medicare+Choice plans had drug coverage in 1998.
    Employer-sponsored insurance is by far the largest source 
of prescription drug coverage for Medicare beneficiaries. In 
1996, more than 11 million Medicare beneficiaries had drug 
coverage through employer-sponsored plans. But employers often 
``carve out'' drug benefits from their main benefit package, 
typically subjecting them to more restrictions than are placed 
on other benefits. Employers and health plans have also turned 
to pharmacy benefit managers (PBMs), which use formularies, 
utilization review, selective contracting with pharmacy 
networks, and other tools to control the use of prescription 
drugs.
    Medicare beneficiaries may also purchase supplemental drug 
coverage through medigap plans. Such coverage is limited, 
however: it requires beneficiaries to pay half the cost of 
their prescription drugs after meeting a $250 deductible. 
Benefits are capped at either $1,250 or $3,000 annually. 
Premiums for medigap plans offering drug coverage are generally 
higher than for other medigap plans. The higher premiums are 
partly due to adverse selection (more people with greater need 
for health care--and thus greater costs--enroll in those 
plans).
    Certain low-income Medicare beneficiaries have access to 
drug coverage through state Medicaid programs. Such 
beneficiaries include those who have income lower than 100 
percent of the poverty level or medical expenses large enough 
to meet the program's spend-down requirements. (Individuals may 
be eligible for Medicaid under a state's spend-down requirement 
if their monthly income less medical expenses is below some 
maximum.) The assets that those beneficiaries may own are also 
limited. Medicare beneficiaries who meet those criteria are 
generally eligible for full Medicaid benefits, including 
prescription drug coverage. Other low-income people--those 
designated as qualified Medicare beneficiaries (QMBs) and 
specified low-income Medicare beneficiaries (SLMBs)--are 
eligible for subsidies for some Medicare expenses but are not 
eligible for full Medicaid services or Medicaid drug coverage. 
In 1996, about 3.9 million Medicare beneficiaries had 
supplemental drug coverage through Medicaid.
    Coverage for prescription drugs is also available through 
other sources. Several states have instituted special programs 
to provide drug coverage for the low-income elderly or people 
with disabilities. And some Medicare beneficiaries are eligible 
for drug coverage and other benefits through the Department of 
Veterans Affairs or the Department of Defense.
    People who have supplemental drug coverage consume more 
prescription drugs than those without such coverage but spend 
less out of pocket. In 1996, for example, Medicare 
beneficiaries with coverage spent an average of $769 compared 
with $463 for those without coverage, according to HCFA's 
estimates. Conversely, those with drug coverage spent less out 
of pocket: in 1996, beneficiaries with coverage averaged $253 
in out-of-pocket spending on prescription drugs (excluding 
premiums paid to private insurers or HMOs).

          The President's Medicare Prescription Drug Proposal

    The President proposes to create a voluntary, outpatient 
prescription drug benefit under a new Part D of Medicare. That 
program would begin in 2003 and be fully phased in by 2009. It 
would pay half of the cost of prescription drugs, up to a 
specified cap. The insured half of the benefit would be 
financed equally by premium payments from enrollees and by 
general tax revenues. After taking cost sharing and premiums 
into account, enrollees would pay 75 percent of the cost of 
covered drugs and the govern-ment would pay 25 percent, up to 
the cap.
    The proposed benefit would be administered by a private-
sector pharmacy benefit manager in each region of the country, 
selected through competitive bidding. The PBMs that administer 
Part D would negotiate lower drug prices, on average, than are 
currently paid by Medicare beneficiaries. Beneficiaries who 
enrolled in Part D would receive the benefit of those 
discounted prices on their prescription drug purchases, 
including drugs they bought after exceeding the benefit cap.
    Although the President's budget suggests earmarking $35 
billion from 2006 through 2010 for a possible catastrophic 
benefit, no policy is specified. Consequently, CBO's analysis 
does not focus on a catastrophic benefit, and our estimate does 
not include the $35 billion earmark.

How the Benefit Would Work

    In 2003, all Medicare beneficiaries would have a one-time 
chance to sign up for the new benefit. In later years, 
beneficiaries would be permitted to choose the Part D option 
only when they first became eligible for Medicare. The only 
exception involves beneficiaries with certain other 
prescription drug coverage who lose that coverage involuntarily 
(for example, when a former employer drops drug coverage for 
all retirees in its health plan).
    The new benefit would have no deductible and would 
generally pay 50 percent of an enrollee's prescription drug 
costs, up to a maximum benefit of $1,000 in 2003. That benefit 
cap would gradually rise to $2,500 in 2009. Thus, in 2009, a 
beneficiary who spent $5,000 or more on prescription drugs 
would receive the maximum reim-bursement of $2,500. That 
beneficiary would also pay $575 in Part D premiums that year. 
After 2009, the cap would be indexed to annual changes in the 
consumer price index (CPI). Assuming that the cost of 
prescription drugs continued to rise more rapidly than the CPI, 
the real value of the cap would shrink, thus eroding the 
benefit.
    Certain low-income beneficiaries would receive help with 
drug-related costs through the Medicaid program. Medicaid would 
pay both the premiums and the cost-sharing expenses under the 
Medicare drug benefit for participants who were also fully 
eligible for Medicaid. For these so-called dual-eligibles, 
Medicaid would pay all drug costs not paid by Medicare, 
including expenses above the cap. Medicaid would also pay the 
premiums and cost-sharing requirements for people who had 
limited assets and income below the poverty line. In both 
cases, the federal government would reimburse states for those 
costs at the usual federal/state matching rate, which averages 
57 percent.
    Another group of low-income enrollees would also receive 
assistance with their prescription drug costs. The federal 
government would pay all of the premiums and coinsurance for 
Part D enrollees with limited assets and income between 100 
percent and 135 percent of the poverty line, and part of the 
premiums for Part D enrollees with limited assets and income 
between 135 percent and 150 percent of the poverty line. 
Eligibility for those subsidies would be determined by state 
Medicaid agencies, but unlike the assistance provided to dual-
eligibles, the federal government would pay 100 percent of 
these costs. Neither the federal nor state governments would be 
liable for covering any drug expenses above the Part D cap for 
low-income beneficiaries who were not fully eligible for 
Medicaid.
    The President's proposal also includes an incentive that is 
intended to retain employer-sponsored drug coverage for 
retirees. Medicare would pay employers 67 percent of the 
premium-subsidy costs it would have incurred if the employers' 
retirees had enrolled in Part D instead. In addition, enrollees 
in Medicare's managed care plans would receive their 
prescription drug coverage through those plans, which for the 
first time would be paid directly for providing such coverage.

CBO's Cost Estimate

    The new Part D provisions would add a total of $160 billion 
to federal costs through 2010, CBO estimates. Of that total, 
$134 billion represents outlays for Medicare (net of premium 
receipts), and $26 billion represents federal outlays for 
Medicaid (see Table 3). States would also face additional 
Medicaid costs. CBO estimates that the premium for Part D would 
start at about $24 a month in 2003 and rise to about $50 a 
month in 2010.
    CBO's cost estimate assumes that most people who are 
enrolled in Part B of Medicare would also enroll in Part D. But 
the estimate takes into account the fact that some 
beneficiaries who have employer-sponsored drug coverage for 
retirees would rather keep that coverage than opt for the new 
benefit. In addition, CBO assumes that people who are eligible 
for benefits under Part B but do not actually enroll would also 
not enroll in Part D. Under those assumptions, nearly 36 
million people would sign up for Part D in 2003, representing 
approximately 88 percent of total Medicare enrollment.
    CBO's estimate is about $11 billion higher than the 
estimate in our April report, An Analysis of the President's 
Budgetary Proposals for Fiscal Year 2001. Two significant 
revisions have been made. First, we adjusted the data on 
spending for prescription drugs to recognize the discount that 
beneficiaries insured by employer-sponsored plans receive 
through their PBMs.\2\ Second, we increased our estimate of the 
cost of the new subsidies for low-income people.
---------------------------------------------------------------------------
    \2\ HCFA will make such a revision in the Medicare Current 
Beneficiary Survey for 1997. Previously, the survey assumed that 
beneficiaries in employer-sponsored plans paid the full retail price 
for prescription drugs.
---------------------------------------------------------------------------

          Considerations in Designing a Medicare Drug Benefit

    The President's prescription drug proposal has raised a 
variety of issues regarding the design of such a benefit. The 
specific features of a drug proposal determine the cost of the 
program to federal and state governments and the effectiveness 
of the policy in providing affordable access to pharmaceuticals 
for Medicare beneficiaries. Some of the important design issues 
that might be considered in assessing a Medicare drug benefit 
include:
     The Nature and Value of the Benefit. The proposed 
benefit is limited and does not include stop-loss coverage, 
which protects beneficiaries against catastrophically high 
spending on drugs.
     The Effectiveness of PBMs. It is uncertain whether 
PBMs would aggressively use formularies, coinsurance policies, 
and other methods to limit Medicare costs.
     Program Participation. Employers, who have been 
buffeted by rising drug costs, are likely to reduce their 
retiree coverage under a Medicare drug benefit instead of 
accepting a subsidy to retain their programs. Medigap insurers 
are also likely to restructure their plans to take advantage of 
the benefit. In addition, a drug benefit would reduce the 
incentive that Medicare beneficiaries now have to enroll in 
managed care plans rather than traditional fee-for-service 
Medicare.
     Effects on Medicaid Costs. The subsidy for low-
income Medicare beneficiaries is superimposed on the existing 
Medicaid structure, which necessarily complicates the new 
benefit's design and affects the cost of the program to both 
federal and state governments.

The Nature and Value of the Benefit

    Part D is designed to ensure that most enrollees would 
receive some benefit. However, because of the annual cap, it 
would not protect enrollees who have chronic conditions and are 
dependent on prescription drugs from very large out-of-pocket 
expenses. In 2003, for example, about

    Thirty-three percent of participants would have drug 
expenses that exceeded the $1,000 cap on Part D benefits. By 
2010, about 22 percent of participants would have expenditures 
exceeding the benefit cap of about $2,560. If drug costs 
continued to rise faster than the CPI, an increasing proportion 
of beneficiaries would have drug costs in excess of the maximum 
benefit cap after 2010.
    Because the benefit cap would limit Medicare's exposure to 
increases in prescription drug spending, it would also limit 
the value of the benefit to people who have the highest drug 
costs. A program that did not provide first-dollar coverage but 
limited an enrollee's out-of-pocket costs to some annual 
maximum (or stop-loss amount) would better protect 
beneficiaries with the highest drug spending. Such a program 
would make larger payments to fewer people than would a program 
that capped benefits.
    However, a redesigned benefit that protected beneficiaries 
more fully from catastrophic costs could raise prices for some 
drugs because enrollees whose expenses exceeded the stop-loss 
amount would be less price-sensitive. The patent system assigns 
exclusive marketing rights to the makers of most new drugs for 
some period after their introduction. Drugs with patent 
protection must compete with other products offering similar 
therapeutic effects. But manufacturers of particular drugs that 
primarily benefit the elderly would have greater flexibility in 
pricing their products under a Medicare drug benefit with stop-
loss protection than they have now. Such a pricing effect is 
likely to be greater for plans that have more generous 
catastrophic coverage or lower cost-sharing requirements.
    A Medicare prescription drug proposal that led to higher 
drug prices could impose additional costs on other federal 
programs that purchase drugs (including Medicaid, the 
Department of Veterans Affairs, and the Department of Defense). 
Higher drug prices could also increase the costs of private 
health insurance, leading to higher premiums. In that case, CBO 
would estimate somewhat lower federal revenues from income and 
payroll taxes as a larger portion of employee compensation was 
paid through nontaxed health benefits rather than through 
taxable wages.

The Effectiveness of PBMs

    As noted earlier, the President proposes to administer the 
prescription drug benefit through private-sector pharmacy 
benefit management companies, which private health plans use to 
negotiate price discounts and control utilization. A single 
PBM, selected through competitive bidding, would administer the 
benefit in each region. CBO's cost estimate assumes that those 
PBMs would reduce costs by about 12.5 percent from the level 
that an uninsured retail purchaser would pay--smaller savings 
than PBMs now generate for large, tightly managed health plans. 
The savings are net of the administrative costs incurred by a 
PBM in processing prescription claims.
    PBMs save money for private-sector health plans in four 
main ways. First, they negotiate discounts with pharmacies that 
agree to participate in their networks. Second, they obtain 
rebates from manufacturers of brand-name drugs in exchange for 
preferred status on the health plan's formulary. Third, PBMs 
use mail-order pharmacies, which are often better able than 
retail pharmacies to save money. Mail-order pharmacies are 
likely to have lower average operating costs, and they may be 
more likely to substitute generic or other lower-cost drugs for 
the ones prescribed. Finally, PBMs establish differential 
copayment requirements that encourage beneficiaries to select 
lower-priced options such as generic, preferred formulary, or 
mail-order drugs. Some PBMs also use management techniques such 
as on-line utilization review and prior approval to evaluate 
care and encourage the most cost-effective treatment practices. 
A PBM can generally negotiate larger rebates if it can shift 
more prescription purchases from one product to a competing 
product in the same therapeutic class.
    The President's proposal would constrain the ability of 
PBMs to use their cost-saving techniques. For example, the 
proposal calls for dispensing fees to be high enough to ensure 
broad participation by retail pharmacies. That requirement 
could limit the discounts that PBMs could negotiate from 
pharmacies.
    Other provisions could hamper the PBMs' ability to 
negotiate rebates from drug manufacturers. The proposal 
specifies that beneficiaries would be guaranteed access to off-
formulary drugs when medically necessary and coinsurance 
requirements could not exceed 50 percent. Some private drug 
plans require enrollees to pay the full difference between the 
cost of a brand-name drug and its generic equivalent (if one 
exists) unless the prescribing physician specifically states 
that the brand-name drug is medically necessary. Such an 
approach would apparently not be permitted in the Part D 
program proposed by the Administration.
    The President's proposal envisions competitive bidding to 
select the PBM for each geographic area, but it is unclear what 
financial risks, if any, the winning PBM would bear. In the 
absence of financial risk, PBMs might not have a strong 
incentive to generate savings under the program. Yet, if they 
were placed at financial risk, PBMs would have to charge higher 
premiums.
    Another issue that needs clarification is how savings would 
be measured under a Medicare drug benefit. Actual savings could 
disappear, even though nominal discount and rebate rates were 
unchanged, if the prices from which discounts and rebates were 
calculated rose as a result of the new benefit.
    Under the President's proposal, a single PBM would 
administer the benefit in an area. As an alternative, multiple 
PBMs in the same area could compete for shares of the Medicare 
market. Such competition might lead to more aggressive cost 
management, but that outcome is by no means certain. One 
potential drawback to a multiple-PBM system is that PBMs might 
keep their prices low by seeking out healthier enrollees with 
lower drug costs instead of focusing on cost management. In 
that case, the possible savings to the federal government would 
be dissipated.

Program Participation

    If a Medicare drug benefit was enacted, private insurers 
would alter the type of drug coverage they offered. CBO's 
estimate assumes that most people who participate in Part B of 
Medicare would also participate in Part D. Thus, employer-
sponsored plans and medigap insurance would generally offer 
their enrollees new options for supplemental coverage. 
Moreover, with a fee-for-service drug benefit in place, managed 
care plans in the Medicare+Choice program could become less 
attractive to beneficiaries.
    Employers would probably face lower costs for their retiree 
coverage under the President's proposal. Firms that offered 
prescription drug coverage with benefits comparable to those 
under the Part D program would be eligible to receive federal 
payments equal to 67 percent of the Part D premium subsidy for 
eligible retirees. That subsidy payment--together with the tax 
exclusion of their health plan costs--would induce some 
employers to keep full drug coverage in their retiree health 
plans rather than eliminating it or wrapping their plans' 
benefits around the new Part D package. (Under a wraparound 
plan, Medicare would be the primary payer for prescription 
drugs; the employer's plan would serve as a supplement.) Few 
employers would be likely to maintain full drug coverage, 
however. CBO assumes that about three-quarters of Medicare 
enrollees who now have drug coverage through a retiree health 
plan would enroll in Part D.
    Part D would offer a more generous drug benefit than 
standard medigap plans do, and at a lower premium. As a result, 
the three medigap plans that now offer drug coverage would no 
longer be competitive. For its estimate, CBO assumed that those 
plans would be replaced by one that supplemented the coverage 
offered under Part D by filling in the 50 percent coinsurance 
``gap.''
    Another possible effect of a Medicare prescription drug 
benefit is to reduce the attractiveness of managed care plans, 
which typically offer prescription drug coverage to their 
enrollees. That benefit is often cited as an important factor 
in beneficiaries' choosing managed care over traditional fee-
for-service Medicare. Although managed care plans might become 
somewhat less competitive with enactment of a Medicare drug 
benefit, the President has proposed other policies that would 
create new incentives to compete on the basis of price as well 
as quality through a competitive defined benefit program. 
However, CBO assumes that offering a drug benefit in the fee-
for-service sector would dramatically slow the growth of 
enrollment in Medicare+Choice. In 2010, for example, CBO 
projects that enrollment in Medicare+Choice plans would reach 
14.1 million under current law but only 11.6 million under the 
President's proposal.

Effects on Medicaid Costs

    The President's proposal would increase Medicaid's costs 
for drugs and other benefits--substantially in the case of 
federal costs and less sharply in the case of state costs. 
Although Medicaid would no longer have to pay all drug costs 
for Medicare beneficiaries who now receive full Medicaid 
benefits, those savings would be more than offset by additional 
Medicaid spending on behalf of other Medicare beneficiaries.
    Part D would pay for a portion of the drug costs that 
Medicaid now pays for Medicare enrollees who are fully eligible 
for both programs. That expansion of Medicare's role would 
lower both federal and state Medicaid costs by shifting them to 
Medicare. But the savings would be partly offset by the Part D 
premiums that Medicaid would have to pay for those dual-
eligibles.
    Certain low-income Medicare beneficiaries who are not 
eligible for full Medicaid benefits would also become eligible 
for assistance to pay for their Part D premiums and cost 
sharing. To receive that assistance, however, eligible Medicare 
beneficiaries would have to enroll at a state welfare office, 
and not all of them would choose to do so.
    The President's proposal would increase Medicaid spending 
for services not related to the new drug benefit. The 
availability of a free drug benefit, made possible by 
enrollment in Medicaid, would attract more Medicare 
beneficiaries into the Medicaid program. In turn, that 
increased enrollment would boost spending for other benefits 
that Medicaid pays for as well as the prescription drug 
benefit.

                               Conclusion

    The President's prescription drug proposal has both pluses 
and minuses that must be weighed in assessing its effects. The 
proposed coverage would provide some assistance to most 
Medicare enrollees. Because the benefit is capped, however, the 
proposal would offer little financial protection to 
beneficiaries with a high level of drug spending. In 2003, for 
example, about a third of enrollees in the new Part D drug 
benefit would spend more than the benefit cap for prescription 
drugs. And the cost of the proposal would be significant. 
Spending on prescription drugs is the fastest-growing component 
of health care costs. Even with a capped benefit, the proposal 
would increase federal outlays substantially.
    The specific details of a prescription drug proposal 
greatly affect the program's costs and value to beneficiaries. 
The level of coinsurance, the existence of a benefit maximum 
versus a stop-loss provision, the split in financing between 
beneficiary premiums and taxpayer subsidies, and the nature and 
degree of subsidies for low-income beneficiaries and employers 
all drive the value of the benefit and its costs. The role of 
the PBMs is equally critical. In attempting to create a 
competitive environment, the President's drug proposal 
establishes geographically exclusive PBMs but limits the scope 
of their activities. As a result, their effectiveness in 
managing costs is uncertain.
    Developing a prescription drug benefit in the Medicare 
program raises numerous difficult issues. Since the inception 
of Medicare in 1965, the cost of prescription drugs and their 
clinical importance have grown dramatically. As drugs became a 
critical component of modern health care, more than two out of 
every three Medicare beneficiaries turned to some form of 
supplemental coverage for their drug expenses. Those 
arrangements have led to very large variations across 
beneficiaries in the comprehensiveness, cost, and financing of 
their prescription drug spending. That variety complicates the 
task of rationalizing prescription drug coverage and makes 
developing such a benefit for Medicare a complex policy 
challenge.

[GRAPHIC] [TIFF OMITTED] T9982.002


        Table 1.--Growth of Drug Spending and Medicare Benefits Per Beneficiary, Calendar Years 1995-1996
----------------------------------------------------------------------------------------------------------------
                                              Average Spending per  Beneficiary
                                                          (Dollars)                 Percentage Change from 1995
                                          ----------------------------------------            to 1996
                                                  1995                1996
----------------------------------------------------------------------------------------------------------------
                        Drug Spending                 600                 673                            12.2
                    Medicare Benefits               4,953               5,312                             7.2
Memorandum:
    Gross Domestic Product per Capita              28,130              29,430                             4.6
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office based on the Health Care Financing Administration's unpublished tabulations
  of the Medicare Current Beneficiary Survey Cost and Use File, 1995 and 1996.

  [GRAPHIC] [TIFF OMITTED] T9982.001
  

Table 2.--Medicare Beneficiaries, by Type of Supplemental Insurance and Drug-Coverage Status, Calendar Year 1996
----------------------------------------------------------------------------------------------------------------
                                                                            Number of
                                                      Number of        Beneficiaries with       Percentage of
        Type of Supplemental Insurance              Beneficiaries         Drug Coverage      Beneficiaries with
                                                     (Millions)            (Millions)           Drug Coverage
----------------------------------------------------------------------------------------------------------------
                    Medicare Risk-Based HMO                   3.2                   3.1                    95
                                 Medicaid a                   4.4                   3.9                    89
              Employer-Sponsored Coverage b                  12.9                  11.4                    89
       Individually Purchased Coverage Only                   9.8                   3.9                    40
          All Other Supplemental Coverage c                   0.7                   0.6                    81
                   No Supplemental Coverage                   2.9                     0                     0
        Switched Coverage During the Year d                   3.3                   2.7                    83
                 All Medicare Beneficiaries                  37.2                  25.6                   69
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office based on John A. Poisal and George S. Chulis, ``Medicare Beneficiaries and
  Drug Coverage,'' Health Affairs, vol. 19, no. 2 (March/April 2000), p. 251.
Note: HMO = health maintenance organization.
a Includes Medicare beneficiaries receiving full Medicaid benefits as well as qualified Medicare beneficiaries
  and specified low-income Medicare beneficiaries.
b Includes Medicare beneficiaries with both employer-sponsored and individually purchased supplemental
  insurance.
c Includes other public programs such as Department of Veterans Affairs, Department of Defense, and state
  pharmaceutical assistance programs for low-income elderly people, as well as non-risk-based HMOs (cost and
  health care prepayment plans).
d Includes Medicare beneficiaries who did not spend 100 percent of their Medicare-eligible months in one
  insurance category.


  Table 3.--CBO'S Estimate of the Cost of the President's Proposal for a Prescription Drug Benefit in Medicare
                                    (By fiscal year, in billions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                                         Total
                             2003      2004      2005      2006     2007     2008     2009     2010   2003- 2010
----------------------------------------------------------------------------------------------------------------
Medicare
              Spending a        15        21        26       30       35       38       44       48         257
 Part D premium receipts        -8       -11       -13      -15      -17      -19      -22      -24        -129
 Subsidy to health plans         *         1         1        1        1        1        1        1           6
            for retirees
       Medicaid Spending         1         2         3        3        4        4        4        5          26
           Net Effect on         8        13        17       19       22       24       27       30         160
        Federal Spending
Memorandum:
          Monthly Part D     24.00     24.80     32.10    33.30    39.90    41.50    47.90    50.70       n.a.
       Premium (Dollars)
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
Notes: Numbers may not add up exactly to totals because of rounding.
* = less than $0.5 billion; n.a. = not applicable.
a Includes administrative costs of $0.4 billion in 2002.

      

                                


    Chairman Thomas. I thank both of you.
    One of the concerns that I have that we need to get a 
handle on, if we are going to have an honest and open 
bipartisan discussion of where we need to go, is some data that 
I assume to be fairly reliable comparing--again, not trying to 
argue that one group is under-utilizing health care services or 
the other group is over-utilizing health care services, but I 
found it rather interesting, in examining those individuals who 
did not have medigap, beneficiaries who had an employer's 
program wrap-around, and those who bought medigap, that there 
was a clear consumption difference in a hierarchical order of 
those three categories, and that if someone who doesn't have 
the augment insurance with the first dollar being required to 
buy down the deductibles and the copays, it would be obvious 
that you would get a greater consumption of goods and services 
if you had an ability to buy down the cost of making those 
goods and services available.
    So maybe the employer's position would be a middle ground, 
and if that is the case then it might be that below that it 
would be somewhat under-utilization and above that it might be 
over-utilization.
    My concern is that if we are not moving into a prescription 
drug program, hopefully having learned from the past, that one 
of the clear phenomenons will be an increase in utilization of 
prescription drugs, which I guess is a positive. But what can 
we do to make sure that that increased utilization is based 
upon need and not a structural defect that produces, in 
essence, an over-utilization because we have built in stimuli 
for over-utilization by virtue of the program that we have put 
in place?
    For example, in the private sector, PBMs have a lot of 
flexibility to control price--volume sales, formularies, tiered 
pricing. Is it normal in the private sector for PBMs to share 
in those savings, or is it built into the managerial structure 
of the PBMs? My understanding is, according to the 
administrator, the administration's PBMs will not be at risk. 
Is it normal for PBMs in the private sector to share some of 
the risk, which would encourage them to keep costs down because 
it would otherwise be out of pocket, or is the President's 
proposal, which involves PBMs with no risk at all, because my 
understanding is they get their revenue from the transactions. 
If there is no risk, more transactions, the more money they 
get, which I think would be a clear indicator that it might 
move toward over-utilization.
    Mr. Scanlon. Mr. Chairman, In the private sector PBMs do 
not commonly accept risk for the cost of the drugs. However, 
their contracts with different third-party payers contain 
provisions that provide incentives for performance--performance 
either in terms of obtaining a price discount or performance in 
terms of controlling utilization.
    Those are the devices by which the incentives are there to 
try and control utilization and offset what might be the reward 
for the per-payment or the per-prescription kind of payment 
within the system.
    I also would comment on the data that you talked about 
initially in terms of the relative expenditures of different 
parties.
    In part, I think it also reflects the real concern we 
should have about the issue of adverse selection--that people 
who, in the current market, end up with insurance sometimes 
will be people that know they are going to be needing some sort 
of coverage, and that in proposals to consider a Medicare 
benefit we need to think very much about how we can control 
adverse selection.
    In the President's plan, there is a provision that you have 
a one-time option to enroll, and I think that is important for 
any plan to consider, because we do not want to create a 
situation where we have favorable selection.
    Chairman Thomas. And you would agree that the easiest way 
to deal with that is to make it mandatory?
    Mr. Scanlon. Or to subsidize it so it is attractive. part B 
is not--
    Chairman Thomas. Or make it so attractive that no one would 
turn it down, like part B at 97 percent voluntary program.
    Mr. Scanlon. Right.
    Chairman Thomas. That was supposed to be a 50/50 funded 
program. It is now a 25/75. So if we would simply give it to 
them, I guess you could make it voluntary, and if you give it 
to them it is the same as mandatory.
    The point I wanted to make was that there are alternatives 
dealing with adverse risk selection, but I think, since all the 
plans are voluntary, those have been dismissed, so we have to 
pay even more attention to the internal structure of the plan.
    Mr. Crippen. Frankly, Mr. Chairman, what I know about the 
President's bill on this issue I learned from Mr. Scanlon. 
Clearly, the current structure of PBMs is not one that, in 
general, requires them to assume financial risk. A couple of 
companies are now positioning themselves perhaps to be able to 
do that within the next few months, but there are none at the 
moment.
    Chairman Thomas. Finally--and I know the President's plan 
only came out yesterday, but would there be significant cost 
differences if the catastrophic proposal--which I guess the 
administration has not completely addressed yet but indicated 
they had an interest in working on--of a $3,000 level, 
depending upon how you pay for that, either sharing it with the 
beneficiaries, which would increase the cost to the 
beneficiaries, or assuming it on government, is that a 
relatively low level to kick in full-blown protection of dollar 
amount? And do you have any back-of-the-envelope estimate of 
what might happen to the cost of the program if you went to the 
President's current legislatively defined program of a shared 
cost up to 2,000 and what I would think would be a relatively 
narrow window of $1,000 of out-of-pocket, until you have 
finally wound up with a 100 percent protection of any and all 
costs above that, which, according to current data I think is 
about 65 percent of the cost of seniors' drugs today? Any 
numbers at all, or any inkling or feeling as to what might 
happen?
    I think you would be comfortable with saying it will cost 
more. I am looking for a little more precision than that.
    Mr. Crippen. I think there are too many moving parts at 
this point. One issue, of course, is what you include in the 
$3,000. Do you count all expenses or just out-of-pocket 
expenses that are not covered by a third party? What you 
include makes a lot of difference to when the government's 
coverage would kick in. More important, does the proposal 
include premium contributions for the benefit? If so, what is 
the percentage split between Medicare and the beneficiaries? 
And are the copays covered?
    The President's proposal for catastrophic coverage would 
probably be quite expensive, but that is just looking at data 
on current drug spending by the elderly. It would be very easy 
to construct a benefit with a $3,000 stop-loss amount that 
could literally double the cost of the underlying program. The 
details are critical, but just on its face, the benefit would 
be quite expensive.
    Chairman Thomas. So, in other words, once we have priced 
the President's program, we have a comfort level--again, 
because it is not an insurance program, it is a pre-paid 
benefit program, and you control all of the points, you can 
control the cost. It probably then would require not a grain of 
salt but a block of salt to accept any numbers that are 
currently discussed about a program which takes the President's 
and adds on to that catastrophic.
    I think it is critically important that you people try to 
get us a number. I know it depends upon all of the points that 
you indicated, but you are going to have to give us some kind 
of a range, because I don't think we can move forward in any 
real fashion if, in fact, your ruminations prove anywhere near 
close, and that is that this new proposal doubles the cost, 
which means, instead of roughly $40 billion over 5 years it is 
now $80 billion over five, especially if it has built into it 
structures that might, in fact, promote utilization beyond the 
normal utilization increase that would occur, because, from 
what I have seen of data, the increase of cost of drugs, yes, 
are tied in part to the increased cost of the drugs, 
themselves, but the overall cost is the utilization involved 
and more and more people using the slightly higher-cost drugs.
    That can create a snowball effect in which, over a 5-year 
period, given the incremental cost, could mean also your 
doubling could be off by 50 percent, and that is what begins to 
get frightening as we go forward in talking about working out a 
plan.
    The information you provide us will be absolutely critical.
    Mr. Crippen. Mr. Chairman, if I might just add to what you 
have said, the price effect for a catastrophic benefit could be 
even greater than what has been mentioned here because of what 
happens once you cross the threshold level. Say you are dealing 
with a regimen of drugs to treat a chronic illness. If the 
beneficiary's costs for the drugs are above the catastrophic 
threshold, the beneficiary has no incentive to change unless 
there is a big copayment and the drug company has no incentive 
to keep the cost of the drugs down, particularly if they are 
drugs whose use is unique to the elderly. So there may be an 
even stronger price effect with a catastrophic benefit.
    Mr. Scanlon. And you set up a structure in which government 
holds the bag not only on a 50/50 deal through the process, 
with no one else concerned about keeping costs down, and then a 
structure which conceivably could be the government holding 100 
percent of the bag on the catastrophic. At some point, those 
bags get pretty heavy.
    The gentleman from California?
    Mr. Stark. Thank you.
    Dr. Scanlon, you point out a lot of the difficulties in 
implementing or controlling costs. Let me ask you this: We have 
got, my guess is, 200 million people in America using these 
pharmaceutical benefit managers, PBMs. Do you think that we 
should use them if we have a prescription drug benefit in 
Medicare? And, if we do use them, should we be writing the 
rules, these lists of items of how they should bid, or should 
we leave that to the administration?
    While they may create some problems, it seems to me that 
we, those of us who have a Federal benefit--most of us would 
have some kind of prescription drug benefit manager. I don't 
know quite how it works. I know I get a copay, and I don't know 
how the hell they figure it out, but I know we are using PBMs 
and General Motors uses them.
    So would you advise us to use a prescription drug benefit 
manager? And how much detail would you say we should prescribe 
in legislation?
    Can you get a handle on that?
    Mr. Scanlon. Mr. Stark, I think that, in terms of laying 
out the cautions in our testimony, they are cautions to not 
have unrealistic expectations about what PBMs can accomplish in 
terms of administering a Medicare drug benefit. They 
principally focus on this issue of control of cost. I think 
that, given I have seen Dr. Crippen's testimony today, there is 
agreement between the two of us, in terms of this necessary 
caution regarding what PBMs can accomplish from a cost 
perspective. That caution is already built into the numbers 
that CBO is providing you.
    The second part of our testimony deals with the fact that 
PBMs would provide a valuable service in terms of administering 
a Medicare drug benefit. It is very important to be able to pay 
claims on a much more realtime basis than we currently do in 
Medicare, particularly if we are going to have a structure in 
which an individual's cost-sharing obligation is going to 
shift, depending upon the amount of drugs that they have used 
during the course of the year.
    The other thing, from the quality perspective, is the role 
that PBMs potentially play in detecting interactions, which 
today are a serious problem for elderly individuals. PBMs can 
potentially point out other medical factors that should be 
taken into account, through the type of technology and networks 
that they have.
    Now, the issue, in terms of how prescriptive you are to the 
Secretary, in terms of a PBM contract, that is one area which 
is laid out now in very general terms. I am not sure that we 
could help, in terms of being much more specific. But, during 
the course of this debate some more specifics may come out. It 
would be useful to instruct the Secretary along those lines.
    At the same time, it is also probably important for you to 
have expectations that the Secretary is going to have to 
iterate to the best solution here--that, in terms of trying to 
negotiate with PBMs, nobody has gone out to the PBMs, 
themselves, and said, ``Are you willing to play in this game 
and under what terms?''
    I think, once this process starts, we may find that the 
Secretary will come back to you and say, ``We need to modify 
something,'' and I think you should feel open to that in the 
sense that we don't have experience here so it is hard to lay 
out the path from the outset.
    Mr. Stark. OK. Let me try two things on both of you. These 
are perceptions that I have, and I wonder how you both would 
react.
    Dan, you brought up the question of Medigap perhaps 
fostering over-utilization. At least Kaiser in California has 
done some studies, and I think others have, and I don't have a 
congenital objection to copays, but they found that a minimum, 
almost de minimis amount, like $5, was enough to deter over-
utilization without keeping people from actually getting needed 
care, so that you didn't have to get up to 10 percent, just a 
couple of bucks to make people stop and think.
    I wonder if both of you have either a perception that that 
is a correct understanding of what we could do, in which case 
it wouldn't trouble me to use that.
    And then my second perception is that--and this is pretty 
loose, but that the catastrophic benefit would only cover, if 
we talk about 3,000 out of pocket--that is assuming a 50 
percent copay. We are talking about 6,000 in total purchase--
that would only clock in for about 2 percent of the 
beneficiaries.
    Now, at that rate, my understanding is we would perhaps be 
talking about $5 billion a year, or, in round figures $25 
billion over five.
    Now, there have been a variety of numbers suggested, and I 
am just picking the 3,000--with a 50 percent copay--because it 
is a perception that I have that that might put us in the ball 
park of about $5 billion a year.
    Is that close enough for government work, or am I way off?
    Mr. Crippen. Yes and no. Or, no and yes.
    I think we can be a little more precise here. The 
information I brought with me has a break at $5,000 and at 
$10,000 but not at $6,000.
    Mr. Stark. OK.
    Mr. Crippen. Under a catastrophic Medicare benefit in 2000, 
beneficiaries who spent more than $5,000 annually on 
prescription drugs would spend, on average, $7,800; 
beneficiaries with drug spending over $10,000 annually would 
average $14,000. So I would suggest the answer is closer to $10 
than$ 5 billion.
    Mr. Stark. OK.
    Mr. McCrery. Will the gentleman yield a minute?
    Mr. Stark. Yes. What about the idea that that would affect 
about 2 percent of the beneficiaries? There's a very flat curve 
until you get out in the 90th percentiles, and then it jumps 
way up above $1,000 or so.
    Mr. Crippen. That is probably pretty close.
    Mr. Stark. Big percentage of the cost, but a very small--
    Mr. Crippen. Is it 40 percent of $60 billion?
    Mr. Stark. Really catastrophic.
    Mr. Crippen. Okay. Let's return to the percentage of people 
covered.
    Mr. Stark. Yes.
    Mr. Crippen. Among Medicare beneficiaries, 5.3 percent 
spend more than $5,000 annually on prescription drugs; 0.9 
percent spend more than $10,000. You said 2 percent spend more 
than $6,000; that is clearly in the ballpark.
    Mr. Stark. But they probably use up a big chunk of the 
total cost of the drugs purchased. OK.
    Mr. Crippen. My colleague, Steve Lieberman, points out that 
the number I gave you is probably a little bit low on the 
amount of total spending. It looks more like $12 billion to $15 
billion.
    Chairman Thomas. Will the gentleman yield?
    Mr. Stark. Sure.
    Chairman Thomas. On his explanation of the catastrophic, 
which is the first details I have heard, the plan that you 
outline then is that you take the President's program, which 
would be a 50 percent match, to produce $2,000 50/50 coverage, 
thousand each. Let's leave the premium aside for now. But then 
at $2,000 the President's program stops. He proposes in 2006 
some catastrophic that would kick in with no details.
    Are you indicating that the democrats' plan that they 
outlined yesterday would then have a catastrophic that would 
begin picking up once again a 50/50 payment at the 3,000 to 
get--
    Mr. Stark. My understanding, Mr. Chairman--and I will have 
my staff pull on my coattails here if I am off--is, regardless 
of what the copay and the--I think the cost sharing is 50/50, 
and I don't know where that caps out, but the idea was that, 
after a beneficiary had spent $3,000 out of pocket, whether 
that was copay or full pay, that we would pick up from there on 
all expenses.
    Now, I assume that if there was a 50 percent copay up to 
$3,000 or $6,000 in drugs, that is how it would--in other 
words, if it were a continuous benefit and in the first $6,000 
of purchases you paid 50 percent, you would be 3,000 out of 
pocket. You can say it one way or the other. And then over that 
the government would pick up all the balance.
    Now, it could be that if you are talking a max of 2,000 in 
the primary benefit, then there is a chunk of money where the 
beneficiary would be paying the full price of the drugs without 
any copay, but, in any event, the numbers that I have heard 
bandied about would be about 3,000 out-of-pocket, I believe, 
the copay thing aside, and then we pick up the balance.
    It depends on how you estimate the underlying--
    Chairman Thomas. Yes. That is significantly different than 
has been reported, and I can understand that the reporters 
would not be able to get that accurate, given the information 
they had, because I thought we had just invented a new category 
of catastrophic in which the beneficiary pays 50 percent of the 
catastrophic cost--
    Mr. Stark. No. I didn't mean to imply that.
    Chairman Thomas.--which is not--yes, which is a new and 
novel idea.
    Mr. McCrery. If I might jump in?
    Chairman Thomas. Yes.
    Mr. Stark. Thank you both.
    Mr. McCrery. Mr. Stark, if I might jump in, if, in fact, 
your basic benefit stops at $2,000, as proposed by the 
President, then, as I figure it, your catastrophic plan would 
kick in after $5,000 of total spending on drugs. Would that be 
right?
    Mr. Stark. Excuse me--first of all, let me just back up a 
minute, if the gentleman would yield.
    Mr. McCrery. Sure.
    Mr. Stark. We are proposing that it would be 50 percent 
equal to $2,000 the first 2 years, then it would go to 3,000, 
then 4,000, and then 5,000.
    Chairman Thomas. Those are out-of-pocket expenses?
    Mr. Stark. No. Those are 50 percent of annual limits. So at 
the max we would be paying 50 percent of $5,000, which is 
$2,500. Then, in effect, the beneficiary would have to pay the 
next $500, or 100 percent of the prescription, and after that 
the $3,000 catastrophic would clock in.
    Now, you could drop it to $2,500 to make it seamless, but 
the cost goes up. You could move that catastrophic up to 
4,000--and all I have ever tried to do is keep it easy to 
explain, both to my colleagues and to my constituents--and make 
it as seamless as possible.
    I am on a bill that says you have got to pay that first 
couple of hundred out of pocket. We are going to end up, if 
there is a benefit, trying to make the most convenient benefit 
out of the dollars we have to spend, and so I think I have 
explained to you as accurately as I know what the benefit is.
    Basically, it pretty much is a 50 percent copay, and then, 
after you run a couple or three thousand bucks out of pocket, 
it pays 100 percent.
    Mr. McCrery. OK. I appreciate the gentleman going to that 
length to explain. I know you don't have your proposal in 
concrete, as we don't, and so I appreciate the gentleman 
letting us know that it is probably not the design of the plan. 
It is probably not as the press advertised it to be in the 
initial coverage of the announcement by the democrats that you 
would have a catastrophic benefit kicking in at $3,000 of total 
drug expenditures. That is--
    Mr. Stark. No. It does.
    Mr. McCrery. No.
    Mr. Stark. Yes.
    Mr. McCrery. It is $3,000 out of pocket.
    Mr. Stark. OK. Out of pocket, $3,000--
    Mr. McCrery. Which would be about $5,000--
    Mr. Stark. Yes.
    Mr. McCrery.--of drug expenditures before the catastrophic 
plan would kick in, and that is a big difference.
    Mr. Stark. That is always the way I have explained it.
    Mr. McCrery. OK. And I appreciate very much the gentleman 
explaining that.
    Chairman Thomas. And the Chair is also pleased, because, 
given the new math approach, I am quite sure that the proposal 
that we have been working on and the proposal that you just 
announced, if you would use the traditional insurance language 
of how you begin to pay for and the catastrophic plan kicks in, 
we are amazingly closer than I thought we were.
    Mr. Stark. Mr. Chairman, I will accept no math that I 
cannot do with my shoes and socks on, so it has to be simple.
    Chairman Thomas. I would say that one of the simpler ways 
to communicate with others is to use the math that everybody 
else uses, whether you have your shoes on or not. Once we work 
that out, I think it is amazing because my assumption is that 
Dr. Crippen's estimate of doubling the cost was based upon the 
catastrophic that went into effect at 3,000. Is that correct? 
So you were somewhat confused.
    Let the record show he was nodding his head in a vertical 
fashion.
    Mr. Stark. Yes.
    Chairman Thomas. That was our assumption because that is 
what everybody told us, so actually that is a positive, and I 
appreciate that.
    Does the gentleman from Louisiana wish to inquire?
    Mr. McCrery. Thank you, Mr. Chairman.
    I will ask this of either of you or both of you, and either 
can answer.
    Both of you have talked about the use of pharmacy benefit 
managers, PBMs. As we have talked about here today, I think all 
of us anticipate some usage somehow of these private sector 
entities to help us with our plans.
    In either your written testimony or your explanations 
orally here today, you have talked about a single PBM 
administering a Medicare drug benefit would likely be subject 
to the same level of scrutiny as a government entity, and that 
such scrutiny may compromise the flexibility that PBMs 
typically have used in the private sector to generate savings.
    Could you elaborate on some of these constraints that could 
be anticipated and how those would diminish savings that are 
normally enjoyed by private sector PBMs?
    Mr. Scanlon. I think it largely goes to the issue of 
transparency and the market size or the market leverage that a 
PBM, either a national one--I wouldn't necessarily envision on 
the national basis the single PBM, but I would envision that 
there would be very detailed specification of what the benefit 
was going to be by the Secretary. That would effectively 
preclude negotiation on the part of private entities that were 
going to be contracting or severely limit sort of the 
negotiation that private entities are going to engage in that 
had the actual job of administering the plan.
    But even if we went down to geographic areas and you 
consider that all elderly individuals who are the major 
consumers of drugs are now being bargained for by a single 
entity, that is incredible power with respect to the 
pharmacies, it is incredible power with respect to the 
manufacturers.
    Our sense is that the political process, in part, would say 
this has to be an open negotiation, to a degree, and we need to 
know what's going on, because anybody that is left out, any 
pharmacy or any drug that is left out is going to be severely 
affected.
    That, I think, is not going to be conducive to negotiating 
the same level of discounts that PBMs have been able to do when 
they do it, in a sense, on a proprietary basis behind closed 
doors.
    Mr. McCrery. So if we went from the use of a single PBM to 
allowing multiple PBMs to compete, would that solve some of 
those problems?
    Mr. Scanlon. I think it solves or ameliorates some of those 
problems and introduces new ones, because, I think, as you 
introduce multiple PBMs in a single area, just as we have the 
model for having multiple Medicare+Choice plans in an area, we 
need to start to worry about the information that is provided 
beneficiaries so that they know what they are choosing when 
they choose a particular PBM. We also need to be concerned 
about whether or not a PBM has structured a benefit or 
structured its policies so that it attracts a more favorable 
group of beneficiaries in terms of better health status.
    We need to think about whether and how we would have to 
risk adjust the payments to PBMs if we have multiple PBMs in an 
area.
    So it is an issue, in terms of both options, that we have 
challenges that we need to think about how we are going to 
overcome.
    Mr. McCrery. And I agree, but if we go with a single PBM it 
seems to me that the challenges are more clear-cut and that we 
are less able to overcome those challenges than we are with a 
multiple PBM arrangement.
    One example, in the private sector, in current practice, 
PBMs negotiate lower prices from pharmaceutical manufacturers 
by giving preference for a particular drug in a particular 
therapeutic class on what is called a ``formulary.'' That means 
that one drug in that therapeutic class would be favored, would 
be covered, and a competing drug would not be covered, or the 
formulary drug would be a lower price to the consumer than a 
non-formulary drug.
    But the President's plan, for example, explicitly prohibits 
formularies. That is an example, I think, of how you talked 
about, if you have only a single PBM, it would be easier for 
the government to impose restrictions on it, making it more 
like a government entity, really, than a private sector entity.
    And if you, in fact, prohibit formularies, for example, and 
you require a 50 percent flat copay, how would pharmaceutical 
benefit managers negotiate lower prices from pharmaceutical 
manufacturers?
    Mr. Scanlon. Mr. McCrery, I don't think the President's 
plan precludes a formulary. The President's plan requires that 
every medically necessary drug be covered. But it also has an 
option for the entities that are administering the benefit in a 
particular area to propose a cost sharing mechanism other than 
the 50/50 cost sharing mechanism, as long as it is budget 
neutral.
    So one could think of the cost-sharing mechanism somewhat 
akin to the tiered copayments that we are seeing in the private 
sector today, where a certain group of drugs have a lower cost 
sharing for beneficiaries associated with them and other drugs 
are going to have a higher cost sharing associated with them, 
and generics and ones that are on the formulary would be the 
ones that would have the lower copays.
    Mr. McCrery. OK. So the President's plan then could 
accommodate some different treatment for different drugs, as 
long as it was a budget-neutral arrangement?
    Mr. Scanlon. Yes, it could.
    Mr. McCrery. That is interesting. But, even if that were 
the case, though, if you only had one PBM, it would seem to me 
to be a less-effective tool than if you had multiple PBMs 
competing with different drug manufacturers.
    Mr. Scanlon. Well, I think if the PBM was unrestrained it 
actually would have a lot of leverage, in terms of negotiating 
prices.
    Mr. McCrery. Sure.
    Mr. Scanlon. But I don't think we would allow--
    Mr. McCrery. That is the very reason we would have to 
impose restrictions.
    Mr. Scanlon. Right. One of the concerns about the size of 
the Medicare Program is how it can potentially disrupt the 
market.
    Mr. McCrery. Right.
    Mr. Scanlon. Therefore, you wisely have, on many occasions, 
put limits on in terms of how Medicare is going to behave in 
the market.
    Mr. McCrery. Right. OK.
    Mr. Stark. Would the gentleman yield at that point?
    Mr. McCrery. Sure.
    Mr. Stark. This question of the number of PBMs, how many 
did you envision?
    Mr. McCrery. More than one.
    Mr. Stark. Well, here's an issue that came up--and more 
than one doesn't trouble me--but if we have 10 million people 
eligible for this benefit--is that ball park? Dan's nodding his 
head.
    Mr. Crippen. That is the number who are currently 
uninsured.
    Mr. Stark. Yes. And we would pick up more. But if we had 
50, you would cut the bargaining power, because, Kaiser, alone, 
has almost six million people it could bid for.
    Would the gentleman feel comfortable that, while we want 
more than one PBM, we ought to not have so many as to dilute 
their bargaining power?
    Mr. McCrery. I think that would--I think the market would 
take care of that, but I understand the gentleman's point.
    Mr. Stark. Yes. You have got to give them enough business--
    Mr. McCrery. Sure.
    Mr. Stark.--to have the bargaining power.
    Mr. McCrery. Yes.
    Chairman Thomas. And, just coincidentally, I am going to 
yield to the gentlewoman from Florida. I assume she was aware 
of the President's program in which, in essence, in a budget-
neutral way, certain diseases would be privileged over others 
based upon a formulary that was required to be budget neutral, 
but in which certain drugs could be purchased at a relatively 
cheaper price than other drugs.
    Is that a correct assessment of what you said about the 
mechanism--
    Mr. Scanlon. Well, I--
    Chairman Thomas.--for formularies under the President's 
plan?
    Mr. Scanlon. That would be an issue that would have to be 
addressed by the Secretary in terms of accepting a formulary 
proposal. If a formulary were not to include drugs from every 
therapeutic class, then in the private sector today most third 
party payers and most employers would reject it. So the issue 
would be, would the Secretary also reject a formulary that 
didn't have a drug in every therapeutic class.
    Chairman Thomas. You could have a drug in every therapeutic 
group, but you said that the President's plan would allow an 
adjustment in a budget neutral way of buying down the cost of 
particular drugs within that structure.
    Mr. Scanlon. But I don't think it would--
    Chairman Thomas. Which means, based on the particular drugs 
that are cheaper, particular diseases would be privileged over 
others on the cost of the drugs to treat them.
    Mr. Scanlon. It would be a question of whether there were 
drugs within the therapeutic class that were only for certain 
diseases and others for other diseases, because I think that 
you could structure it in a way that no disease was favored, 
but there would be an effort to try to steer drug utilization 
to favored drugs.
    Chairman Thomas. I think what it fundamentally does is 
underscore the fact that there is no single best path; that 
there are a number of choices that are going to have to be made 
where there are virtually tradeoffs on every option. 
Unfortunately, that is too much like the real world, and we are 
going to have to engage in that as we make decisions.
    You might get a bargaining price between PBMs in a 
negotiated way, and you also could get a bargain price in a 
negotiated way with a single PBM, except the role of the 
government would be a bit more significant in that latter, or 
the President's proposal, which means that the ability to 
influence through the governmental structure might be greater 
in the latter structure rather than the former.
    People who were able to get that manipulation would see it 
as a positive. Those who didn't would see it as a negative.
    The gentlewoman from Florida?
    Mrs. Thurman. Dr. Crippen, in all of this let me ask you a 
question, then. Which would you score as getting the most 
savings? Multiple? One?
    Mr. Crippen. It depends on the restrictions that go with 
them, as my colleague, Mr. Scanlon, said in his testimony. You 
can think of PBMs as a surrogate for competition and what that 
can do. Currently, PBMs perform two of three potential roles. 
One is price discounting. On the one hand, if there are 
restrictions on their purchasing power or what they have to bid 
on, for example, their ability to achieve price discounts my be 
limited. On the other hand, PBMs might be able to achieve large 
discounts because of the number of people who would participate 
in a Medicare drug program. So it is not clear what the PBMs 
overall effect on price discounting would be.
    The PBMs' second role involves utilization. PBMs do not 
control utilization, but they do monitor it. They will 
encourage you to use generic instead of name brand drugs, for 
example, but they will also monitor the drugs you take to 
prevent harmful drug interactions.
    A third potential role that PBMs do not often play but that 
may have the best chance of providing both savings and, more 
important, better outcomes for patients case or disease 
management. That would be most effective in cases in which we 
know that a certain protocol works best for a specific disease. 
Generally, drug protocols for people with chronic diseases have 
high total costs, or they can have, and those costs will 
probably increase as more new drugs enter the market. So the 
potential case management for PBMs to do is there, but it has 
not yet been realized.
    Whether it would be better to have one or five PBMs in a 
region is not clear. That really depends on the limitations 
placed on their activities, as Mr. Scanlon said. If you had a 
dozen PBMs, for example, but said, effectively, ``You cannot 
have formularies, you cannot negotiate discounted prices, you 
cannot do these other things,'' the larger number would not 
matter.
    Mrs. Thurman. OK. You need to help me through this a little 
bit then, because in your testimony you talked about Medicare 
beneficiaries with coverage spend an average of $769. Now, 
those beneficiaries generally would be under the plan you have 
just described that would give them the best disease 
management, correct?
    Mr. Crippen. Not necessarily.
    Mrs. Thurman. Isn't that what's happening today? I mean, 
that is, most of our seniors are under a managed care plan of 
some sort that goes out and supposedly is doing disease risk 
management and those kinds of things, correct?
    Mr. Crippen. There is some of that being done for Medicare 
beneficiaries who are in the Medicare+Choice plans, Also, the 
number of those plans is dropping. Although it depends on the 
kind of plan they are in.
    Mrs. Thurman. Right.
    Mr. Crippen. PBMs is shorthand for having a pharmaceutical 
manager and most of those arrangements are not in managed care. 
Most PBMs operate in the private sector, serving the non-
Medicare population. But in theory, the managed care setting 
would be the most likely to provide a case management or 
disease management approach, which should include 
pharmaceuticals.
    Mrs. Thurman. In any of yours, Dr. Crippen--and I know that 
we don't score this, but, even in the usage part of 
prescription drugs, can you look at all as to--because, I mean, 
risk disease, all of the kinds of things you just said--is 
there any savings to Medicare in the long term of having a 
prescription drug benefit for seniors?
    Mr. Crippen. The evidence, Mrs. Thurman, is mixed. For some 
specific conditions--after heart attacks, for example--the 
appropriate use of drugs could save you money, but we know of 
only a few such conditions and there is evidence on both sides 
of the question. Some of it says you can save money, a lot of 
it says you cannot. So for the purpose of estimating costs, we 
do not assume that there are any savings, per se, for expanding 
prescription drug--
    Mrs. Thurman. But yet, if you talk to medical folks who say 
that the senior out there that cannot afford the prescribed 
drug comes in more often than the person who can continue their 
drug coverage or their prescription drugs as they were 
prescribed, so it would seem to me that there would be some 
savings, if not a lot of savings, in at least the hospital side 
of it.
    Mr. Scanlon. I think you might want to insert the word 
``net'' in front of ``savings'' here, because I think the issue 
is that there are savings from particular drugs, substituting 
for both surgical procedures and hospitalizations, but there 
are also additional drug expenditures to deal with conditions 
that wouldn't have been managed well before, and those that 
overwhelm those savings.
    Mrs. Thurman. Let me ask a couple more questions here 
quickly.
    I, quite frankly, don't know that the private sector has 
done a very good job in negotiating discounted prices with drug 
companies. I don't know with PBMs or whomever. I mean, we have 
seen a raise in drug prices 18, 20, 30 percent.
    Are we seeing those same increases in say, for example, the 
Federal health employees increases, or are we getting a better 
savings through what we do already the Federal health plan?
    Mr. Crippen. Do we know? I would assume it is about the 
same.
    Mrs. Thurman. Evidently, GAO did a study that said we were 
getting about a 20 to 27 percent savings, I think, back in 1999 
on FEHBP, as versus what is happening today in the private of 
about--we are actually going up about 18.3 percent.
    Mr. Scanlon. Mrs. Thurman, actually that study is a little 
older than 1999.
    Mrs. Thurman. OK.
    Mr. Scanlon. We may have used the information again. There 
is an important caveat to the information that I mentioned in 
my oral statement: The information is self-reported by PBMs and 
the plans, and it is not something that we were able to verify. 
But, this is the range of savings that they have reported.
    The issue is, though, that, while they may have 
accomplished those savings, they may not have influenced 
strongly the rate of growth, so that once you get the 14 
percent out or the 20 percent out, that the rate of growth 
continues the same for these plans as it does for other sectors 
of the pharmacy market.
    I think FEHBP is very much like other private insurance, in 
the sense that we are contracting with insurance companies and 
they are turning around and contracting with PBMs, who may be 
serving General Motors, who may be serving Xerox, or any other 
private sector organization, and negotiating with the same 
manufacturers and the same pharmacies for the discounts.
    So I think they are not necessarily doing any better. There 
are no techniques that I know of that they have that nobody 
else uses.
    Mrs. Thurman. Would you say that is the same thing as with 
the VA?
    Mr. Scanlon. Well, the VA, I think, is in a different 
situation, in part because, one, it has some sort of 
legislative clout, in terms of being able to gain a certain 
level of prices, and, second, it is a major bulk purchaser, and 
it is its own dispenser.
    Mrs. Thurman. Would Medicare be that same--
    Mr. Scanlon. Medicare is going to have to operate in the 
retail market, to a great extent. We are going to have to 
anticipate that beneficiaries are going to be able to go to 
local pharmacies and get their drugs, as opposed to how the VA 
dispenses, so I think that is a distinction that the VA has 
that Medicare may not have.
    Medicare is also so much bigger. It is also going to 
influence how it behaves and how we are going to tolerate it, 
how it behaves sort of in the pharmacy market.
    Chairman Thomas. I thank the gentlewoman for her line of 
questioning, because it is exactly these kinds of questions 
that we have to explore.
    One of that confusing points, I think, that we have to 
begin to show a bit more discipline on as we discuss this is 
the price of drugs versus the expenditure to pay for the drugs, 
because we continually talk about the price of drugs going up. 
As a matter of fact, between now and 2005 we are going to see a 
significant number of brand names kick over into the generic 
category, and the price of the drugs will go down, but the 
expenditures for drugs are going to go up because of the 
increased utilization, especially if we put in a program. So, 
as we go through this discussion, that is one line of reasoning 
that we have to keep straight.
    The other one--and her question about the number of PBMs is 
a good one, but I want to underscore the answer that she 
received, and that is, if you are really going to talk about 
cost containment or competition, which is another way of saying 
cost containment, the key to that is the freedom of the PBM to 
do what it thinks it needs to do, rather than the number of 
PBMs.
    If you have one PBM and you say you are only going to have 
one, but you let them do whatever they want to do to control 
the cost, that can be very effective. If you limited them 
significantly as to what they could do, you could have 50 of 
them in competition with each other but you are not going to 
get a significant reduction because they are not able to do the 
very aggressive cost containment procedures that the private 
sector is currently engaged in. In fact, we have seen recent 
reports where some employers, because of their willingness to 
allow the aggressive cost containment of PBMs, are, in fact, 
not having to increase their cost to the consumer because of 
the internal savings.
    Now, that is not an ongoing ability. You get some time line 
control on that.
    Is that a fair way to assess what was said: That it is not 
the number of PBMs; it is the degree of freedom to allow for 
aggressive cost containment that would be the key to saving 
some money in that particular aspect of the program?
    Mr. Crippen. And the incentives you give the PBMs to 
achieve savings.
    Chairman Thomas. The other side of the coin.
    Mr. Crippen. Yes.
    Chairman Thomas. Any response to that?
    [No response.]
    Chairman Thomas. But, see, the problem then goes back to 
Dr. Scanlon's concerns, because in the private sector, of 
course, you have the ability to do that, and there are a lot of 
things that go on which produce a cheaper price, like tough 
negotiating on volume or a tradeoff on one drug versus another 
for increased utilization for a particular drug versus another 
in the marketplace. It would be very difficult for Medicare 
PBMs, no matter how much the arm length would be, because those 
kinds of transactions are probably going to have to be a bit 
more transparent.
    So I go back to my original point. There are going to be a 
ton of tradeoffs here that don't allow us to use a direct 
analogy to the private sector, but, to a certain extent, we are 
going to have to talk about the traditional way in which the 
Health Care Financing Administration has dealt with medical 
pricing, payment, and oversight, versus if we really want to 
try to get an effective prescription drug program, the 
traditional HCFA management techniques are probably least 
useful in this particular area of any that they have moved 
into, and we are going to have to examine that aspect fairly 
closely.
    Mrs. Thurman. Mr. Chairman, it would seem to me, when you 
have like we have with 39 million people, or however many 
people are out there, you are still in the best position as a 
negotiator because you have that many people to share this risk 
over, with one benefit.
    Chairman Thomas. But you don't, and that is where--unless 
you are going to drive out the single--see that pie chart up 
there? The single-largest segment of seniors who are Medicare 
beneficiaries are currently getting their drug coverage from 
their employer's insurance, and some of it is much richer.
    One of the interesting parts about the President's plan was 
that it didn't have a whole lot of impact because most people 
who have employer plans shrugged their shoulders and said the 
President cannot compete.
    To the degree we make it attractive, those employers are 
not mandatorily required to offer the program. That is why, in 
the President's program, you incentivize people by paying them 
to stay in the program, so it really isn't 39 million lives.
    Now, there are some things that we could do, for example, 
on sharing the high-risk portion of beneficiaries that would 
keep employers in, if we created a pool that covered all 
Medicare beneficiaries, whether they got the insurance from 
employers or not. That would utilize the larger number.
    But, again, we are going to have to look at subsets of that 
as we deal with people ho have no benefit whatsoever today, 
people who would be moving from Medicaid, which might have a 
variety of programs available in States, coming to a more-
uniform Federal program, as the President envisions a shift 
over, with some degree of cost maintenance as we move through--
people getting off of medigap because they are paying $2,100 
for an H program and not getting much prescriptions, and they 
got into it because that was one of the only ways they could 
get prescriptions in the first place, and now they are getting 
a much better program.
    We talk about this as though it is purely additive and 
moving into a whole new area. There are a lot of high points on 
the topography that, when we flood the plain, are still going 
to be there, and we are going to have to deal with them.
    Mrs. Thurman. That is true, but we are already starting to 
see Medicare choices and those people drop out of areas and 
drop out of plans because of the high increase in cost of--
    Chairman Thomas. But remember--
    Mrs. Thurman. Wait a minute. Can I finish?
    Chairman Thomas. OK.
    Mrs. Thurman. And so you are also going to start seeing 
that hit that 31 percent at some point.
    I will just tell you what happened yesterday. I had my 
insurance agents in to talk to me. They told me that they do a 
group policy insurance right now for a small company. They are 
going to increase the cost, alone, to that company for their 
premiums by $100,000, and the only thing that is driving that 
is prescription drugs. But, just as importantly, as they are 
doing that, they are dropping benefits off of their insurance 
because they cannot continue to pay for everything.
    So maybe this is the issue: Whether it is in this debate or 
whatever debate we have on prescription drugs, at some point we 
are going to have to get a handle on what is happening in this 
country, as compared to what is happening in other parts of the 
world.
    You know, I look at Mrs. Johnson over there, who is hitting 
up against Canada. You go to Texas, and you have got Mexico. 
You have got Maine passing legislation. You have got Florida 
passing legislation.
    Mrs. Johnson. I am sorry.
    Mrs. Thurman. We have got problems.
    Chairman Thomas. She has a time limit.
    One quick response. Medicare+Choice is currently paying for 
drugs out of what would otherwise be the profit amount returned 
to HCFA. It is not a benefit, as we are defining, so that you 
will not get the cost squeeze on the prescription drug portion 
of the Medicare+Choice program. It would be a dollar additive 
program to the basic benefits package, an entirely different 
universe of price support and structure, so any analogy to 
current practice of Medicare+Choice without a prescription drug 
benefit versus what would happen if you added it simply is not 
relevant to the discussion of how, in fact, people will react 
and prices will be structured.
    The gentlewoman from Connecticut.
    Mrs. Johnson. I would just like to say, I think if we think 
that negotiation is going to solve the Medicare prescription 
drug cost problem, we are kidding ourselves. The hospitals are 
part of a nationwide buying group, and their drug costs went 
up--my local hospital's drug cost went up 40 percent in a 
single year.
    Now, they are getting rock bottom prices. I don't know that 
we can do better. That is one of the things I want to look at 
with you, although not at this moment, but I want us to look at 
what makes us think that government would get any lower prices 
than some of the very big purchasers, nationwide purchasing 
groups out there.
    But that is only one aspect. The big problem is the 
explosion of the number of drugs and the complexity of their 
structure.
    But what I want to ask you is--and, Dr. Crippen, you got on 
this, because I am very afraid that we will legislate to the 
past in this bill. We have to legislate for the future.
    You mentioned disease management. One of my concerns about 
this whole approach of a beneficiaries manager is that I 
don't--one of the problems we have had with pharmaceutical 
managers is that they manage the pharmaceuticals. They are not 
managing the health.
    There has developed in my District, and there are now 
across the country the embryonic kinds of companies that 
manage, under the doctor's direction, health. And so, if you 
want to lower drug cost, you have to stick to the regiment. You 
have to exercise and you have to lose weight, if that is what 
your doctor has prescribed as your heart regiment.
    I don't think that any benefit manager is going to be able 
to keep up on this industry that is developing, because it is 
holistic. It is much more complicated. You have to do it with 
the doctor involved.
    I think one regional benefit manager is going to keep us 
focused on price negotiations. That is not enough. That is not 
the future.
    So even multiple benefit managers--one of the reason I am 
interested in multiple insurers is because insurers, because of 
their broader experience in workman's company and disability 
law and a lot of areas where they are looking more holistically 
at managing health care for long-term recovery or managing 
chronic illness, they are more likely to be able to pair with 
this kind of disease management entity that is developing in 
our society.
    But if we lock in benefit managers--which, frankly, we have 
had a lot of trouble with, in my experience--we are legislating 
to the past using the tools of the past, and the real savings 
is going to be how do we hook high-cost drugs with other health 
initiatives to improve health at an affordable cost.
    So would you comment on that, on how we keep that in the 
mix and whether competing insurers might not be a more powerful 
tool than competing benefit managers.
    Mr. Crippen. Let me say two things. First as Mrs. Thurman 
noted, the Medicare+Choice plans provide the closest thing we 
may currently have to a disease management application. In 
contrast, the fee-for-service sector has no incentives and no 
design that would give you the holistic approach you are 
talking about.
    But perhaps the ideal world--in the case of pharmaceutical 
management, at least--would be one in which the pharmaceutical 
managers were at risk or were paired with an insurance company 
to create some incentive to manage the entire disease in a 
protocol. And so, if a PBM was put at risk or tied to an 
insurance company--
    Mrs. Johnson. So an insurance company in a competitive 
environment could use this issue of disease management and, you 
know, you would get a lower premium if you agree that, if you 
had a chronic disease, you would enter this kind of program, 
and, working with benefit managers and chronic disease 
management companies, the insurer could offer than a variety of 
packages. Some people only want fee-for-service. They don't 
want to have anything to do with anyone telling them when, 
what, or anything about the rest of their lives, so they pay a 
higher premium.
    The last thing I just want to put on the record is I am 
very concerned, Mr. Crippen, that in your estimates you have 
assumed that 75 percent of those who now get coverage through 
their employers will move to this plan, because people who are 
getting benefit coverage through their employers--GM, some of 
the big guys--are getting better coverage.
    Why did you make the assumption that they would move to the 
public program, which is going to be fraught with difficulty, 
if the past is any indicator?
    Mr. Crippen. We assumed they would move because the general 
subsidy to the program from the taxpayers would give them an 
incentive to move. That does not mean, however--
    Mrs. Johnson. Will that incentivize their employers to 
incentivize them to move?
    Mr. Crippen. Sure. But we are assuming at the moment--
although I am not sure it is a valid assumption--that all of 
these insurers would have continued their current level of 
benefits through wraparound provisions. So they would take the 
basic.
    Mrs. Johnson. I see.
    Mr. Crippen.--program--the President's proposal, for 
example--but would then add to it with wraparound provisions.
    Mrs. Johnson. That makes sense. Thank you very much.
    I am sorry. I have to leave.
    Chairman Thomas. One second, if you can, this business of 
insurance companies, we are talking about risk. We are talking 
about a national program. And there are entities which re-
insure. It seems to me that there is a dollar amount that you 
can place on the assumption of risk and that you don't need 
insurance companies, as we know them, in terms of management of 
the program if PBMs, disease management structures, or a new 
entity that evolves in offering the prescription drug 
management program, not matter how complete it might be on the 
regiment involved, would be willing to play a role that we 
invented with the National Association of Insurance 
Commissioners with the provider-sponsored organizations in 
which you can assess risk. Risk would have a price that would 
be passed through to the re-insurance and the government would 
pay the price for that shared risk.
    And so you can utilize this management structure on a risk 
assumption basis, as well, which is simply identifying the cost 
of passing it through.
    So if an insurance company said, ``We aren't going to play 
in this business,'' that doesn't mean that we couldn't create 
entities at the Federal level that would serve us very usefully 
in helping to produce a more-aggressive managed program.
    Is that a fair statement?
    Mr. Crippen. I think so. What I was trying to imply, in 
response to Mrs. Johnson, was that PBMs currently do not assume 
any risk and probably do not have a capital structure that 
would support them in doing that directly, whereas insurance 
companies--
    Chairman Thomas. Of course.
    Mr. Crippen.--historically have done exactly that and have 
the necessary capital. There may well be other entities that 
would evolve or could be formed, but again, to be optimal, they 
would have to assume risk and have a capital basis to back up 
that assumption.
    Mrs. Johnson. But could the PBMs perform the role that is 
envisioned for them in the democrat's proposal without assuming 
risk?
    Mr. Crippen. Yes, they could entirely.
    Mrs. Johnson. What would be their motivation to control 
cost?
    Mr. Crippen. Whatever incentives the Secretary specifies, 
as I understand it.
    Mr. Scanlon. As it is currently structured, the PBMs would 
not be at risk and the incentives are not specified, but the 
Secretary has the discretion to create incentives for the PBMs 
to control cost.
    Mrs. Johnson. It would be very helpful if--and maybe your 
testimony does this. I didn't get through all of it--but to 
have some better understanding of what incentives might create 
what economic effect, because, particularly if there is one 
entity, the likelihood that we will allow them the right to 
provide the incentives that would be most cost effective is, 
frankly, very small, in my estimation, one of the reasons why 
Medicare is in such deep there.
    Thank you very much for your thoughts. I look forward to 
working with you as we try to work through these problems. I 
appreciate the quality of your work and of your testimony.
    Chairman Thomas. Thank you.
    Through no fault of his own, the gentleman from Maryland is 
no longer a Member of this Subcommittee; however, we are 
pleased to have him with us. But, before I recognize him, I 
just want to make one more point.
    Coming from a single-payer State, he might better 
understand this phenomenon of the fact that, in using hospitals 
as an example of tough negotiators, you do have to keep in mind 
that that negotiation occurs under a reimbursement structure in 
which there may not be as much incentive as you might think for 
very tough negotiations under an administered price structure, 
and that, when you talk about the price of drugs, comparing two 
aggressive negotiators probably isn't the most meaningful 
comparison; it is looking at those seniors, who are the last 
bastion of retail payers of drugs, and what the cost would be 
through a negotiated arrangement, allowing them to get the 
benefits of group purchasing.
    A recent study by Lewin said that perhaps those costs could 
be reduced by 30 to 39 percent, which is fairly comparable to 
the Canadian price, if you had aggressive, privately managed 
group purchasing structures.
    So ultimately we have to look the what the current price of 
drugs are to seniors, versus what the price would be if we 
brought many of these benefits.
    Once again, turn that facet a slightly different way and 
looking at it from a different perspective.
    The gentleman from Maryland.
    Mr. Cardin. Thank you, Mr. Chairman.
    Just one observation about Maryland. Maryland, of course, 
has negotiated rates for our hospitals by government. It is a 
government entity that negotiates the rates. We think that we 
are going to do even better than the Federal Government is 
doing, so, therefore, we have built an incentive now in our 
rate structure to give our hospitals a little bit more money, 
assuming that we are going to outdo the Federal Government on 
how you achieve cost savings within the hospitals.
    What I am interested in finding out is, in doing any of 
your estimates, have you assumed that the prescription drug 
proposal that the President has recommended would have, in and 
of itself, any impact on the number of Medicare beneficiaries 
that choose to go into Medicare+Choice HMO?
    Mr. Crippen. Under the President's proposal, we assume that 
fewer people would go into HMOs.
    Mr. Cardin. I assume that reduction would be based upon the 
assumption that people are going into HMOs or prescription drug 
coverage, and now they can get prescription drug coverage 
through a new part of Medicare, they no longer need to go into 
an HMO.
    Mr. Crippen. Right.
    Mr. Cardin. I assume that is the basis of that assumption.
    Let me challenge that for a moment, if I might. And no one 
can really crystal ball, with any degree of certainty, what is 
going to happen, but one of the things that we have found, 
since we changed the reimbursement structure for 
Medicare+Choice, is that HMOs are having to charge significant 
premiums for seniors to join. They impose caps on their 
prescription drug benefits. They have done all these things in 
an effort to have a cost-effective program, because they are 
not reimbursed within their government payment for a 
prescription drug benefit.
    But if the President's plan were to become law--and one of 
the major differences--and Mr. McCrery did not point this out 
when he was questioning the administrator, but one of the major 
differences between the President's proposal and the republican 
proposal is that, because the President puts it into the core 
plan, all private health care plans must include at least the 
benefit that is in the President's proposal, so that tomorrow, 
if this were law, the HMO would have to offer at least this 
benefit, but they would be reimbursed for it under their 
contract.
    Chairman Thomas. I tell the gentleman that there is no 
difference in our plan in requiring that, as well.
    Mr. Cardin. In other words, all the HMOs would also have to 
provide--
    Chairman Thomas. Yes.
    Mr. Cardin. I didn't know that. I appreciate that 
clarification. I thought that it was--so you have built it in 
also that all HMOs would have to cover the benefit.
    Chairman Thomas. Yes. We are currently grappling with the 
fact that Medicare+Choice--we do not allow certain disease-
identified folk to go into the Medicare+Choice, but you 
certainly wouldn't want to create an option on a basic addition 
to the program like prescription drugs, and we are trying to 
deal with both of those problems at the same time.
    You would have a full spectrum of choice to all folks who 
are covered by Medicare.
    Mr. Cardin. So the republican proposal then does put the 
prescription drug benefit within the core benefit of Medicare, 
but the only way that a senior can get it is either by joining 
a Medicare+Choice or participating in a private prescription 
drug plan? Is that--
    Chairman Thomas. Yes. And one of the reasons we wanted to 
do that was because, from the Medicare Commission experience, 
everyone told us that the best way to deliver a new 
prescription drug program would be in an integrated medical 
setting, and the closest thing we have to an integrated medical 
setting today is the Medicare+Choice program, so we would want 
to incentivize that.
    Mr. Cardin. Well then I think we are getting closer, Mr. 
Chairman. I really do think we are getting closer. I didn't 
realize that you had included in your core benefits the 
Medicare. If it is included in the core benefit of Medicare--
the point I was going to raise, and the reason why I disagree, 
I think it would be an intuitive conclusion that you don't have 
to go into an HMO to get the prescription drugs, you could go 
in--there would be less people going into an HMO--is that now 
the HMOs are protected in the reimbursement structure, and they 
can now offer an HMO plan that doesn't charge separate premium, 
that doesn't have the risk factors associated with a 
prescription drug benefit because it is already covered, in 
part, on the reimbursements they are receiving, and in our 
experience we have seen a reduction of HMO interest in the 
senior market.
    It would seem to me if we put it in the core benefit we are 
going to have an increased interest of private HMOs into the 
senior market because of the reimbursement structure.
    So what has happened in my own State of Maryland, where we 
have gone from eight HMO carriers under Medicare+Choice, to now 
four, which will become three next year--at least no more than 
three next year--with none now that will not be charging a 
supplemental premium, and 14 counties that don't offer any 
coverage at all, it seems to me we have a much better chance, 
under the President's proposal, to be able to have more private 
interest in an HMO than we would otherwise.
    I just invite your observations to those thoughts.
    Mr. Crippen. Certainly. If reimbursement to Medicare+Choice 
plans increased through this additional prescription benefit 
proposal, that would allow the plans to charge lower premiums 
or provide better benefits. That could encourage more 
beneficiaries to choose the HMO option. However, on balance, 
CBO estimates that Medicare+Choice enrollment would decline 
under the President's full Medicare reform proposal, which 
includes other payment reductions and changes in addition to a 
drug benefit.
    But, part of the story is also that we are looking now at 
flat or declining growth, just as you suggested. It is 
certainly happening in Maryland. And so that might help reduce 
those trends, but it may not necessarily reverse them.
    Mr. Cardin. And let me just make one more observation, if I 
might, and that is, on the private, employer-based prescription 
drug benefits that are currently out there, mostly as wrap-
around to what Medicare is providing, it seems to me a similar 
argument was probably made on Medicare part B, that, since the 
government provided Medicare part B, there would be no need for 
supplemental, employer-sponsored insurance to cover other 
benefits.
    I think a similar argument would occur with prescription 
drugs. Yes, we are now covering, under the basic benefit of 
prescription drug plan, but it gives private insurance, 
employer-sponsored, an opportunity to have a more fiscally 
viable wrap-around plan that may provide a much more generous 
prescription drug plan than they current provide, because, 
again, the government is now covering a significant part of the 
cost through subsidy.
    Mr. Crippen. Sure. Again, if you give the employers more 
money, there is at least some prospect that they will split it 
with their employees, which would mean better benefits.
    Mr. Cardin. So the final observation that I would have is 
that, by providing within the core benefit of Medicare a 
prescription drug benefit, it seems to me that every one of 
those Medicare beneficiaries, whether it is a person who has no 
benefits today, a person who has an employer-sponsored plan 
versus an HMO, a person in medigap, a person with other, all 
are going to benefit by Medicare having prescription drug 
within their core benefit, as recommended by the President.
    Mr. Crippen. That is a possibility. Again, we have made no 
assumption at this point about what employers are going to do, 
other than that we are quite certain that many of them will 
take advantage of the program. Some observers argue that one of 
the reasons employers have provided insurance coverage to their 
retirees is to give them a drug benefit that is not provided by 
Medicare. If the Congress enacted a Medicare drug benefit, 
employers might drop their supplemental coverage, altogether.
    Mr. Cardin. But they would run into political problems. If 
their supplemental protection was stronger than what is in the 
basic core program, they would run into a political problem 
trying to reduce below what they currently are providing.
    Mr. Crippen. Possibly.
    Mr. Cardin. It is possible they will not increase it and 
take advantage of the savings, themselves. I doubt if they 
would--if they were going to reduce it, they would reduce it 
now.
    Thank you, Mr. Chairman, for your patience.
    Chairman Thomas. Any additional final bites of the apple?
    [No response.]
    Chairman Thomas. I want to thank you very much. Obviously, 
we are looking forward to your continued, over time, analysis 
of additional permutations.
    My goal will be, in a cooperative way, to try to pulse the 
material to you so that we can do it in a timely fashion and 
have hearings in which the data has been available so that we 
will deal with less conjecture and more certainty in beginning 
to ferret out the choices that might be in front of us.
    Thank you very much. Once again, both of you and your 
support structures have performed an invaluable service for the 
House, and I thank you for that.
    The Subcommittee stands adjourned.
    [Whereupon, at 12:59 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

     STATEMENT OF AMERICAN COLLEGE OF PHYSICIANS-AMERICAN 
               SOCIETY OF INTERNAL MEDICINE

    Summary
    The American College of Physicians-American Society of 
Internal Medicine (ACP-ASIM) is the largest medical specialty 
society in the country, representing over 115,000 physicians of 
internal medicine and medical students. ACP-ASIM's members 
provide the majority of medical care to adults in America, 
including Medicare beneficiaries, and are therefore in a unique 
position to evaluate the need for and the appropriate structure 
of any proposed Medicare prescription drug benefit.
    ACP-ASIM strongly supports enactment this session of 
legislation to provide a prescription drug benefit with 
sustainable financing, with the highest priority going to help 
low-income beneficiaries. Such legislation must include key 
consumer protections, particularly if the benefit is to be 
restricted by a formulary administered by pharmacy benefit 
managers (PBMs). Patients' access to beneficial drugs must not 
be hindered by restrictive formularies--or other managed care 
controls--that are imposed by PBMs solely to reduce costs, 
without regard to safety, effectiveness, or ease of 
administration. Physicians should have the option of 
prescribing drugs that are not on the formulary without 
cumbersome prior authorization requirements. Beneficiaries 
should be informed of the impact of the formulary on both co-
payments and access to prescription drugs. Also, they should be 
promptly notified of changes in the formulary. PBMs or others 
defining a formulary should be required to consult with 
physicians on the drugs that are included in the formulary.
    Background
    Prescription drugs are an essential tool for treating and 
preventing many acute and chronic conditions. In 1965, when 
Medicare was first established, pharmaceutical therapies were 
not as commonly available as they are now, and outpatient 
prescription drugs were not nearly as important a component of 
health care. Today, however, they are a primary form of medical 
care and often substitute for more costly therapies, such as 
hospitalization and surgery.
    Pharmaceuticals are the fastest-growing component of 
national health expenditures. In 2000, national drug spending 
increased by an estimated 11% compared with 7% for physician 
services and 6% for hospital care. Since 1990, national 
spending for prescription drugs has tripled. By 2008, that 
figure is expected to more than double from an estimated $112 
billion today to $243 billion. (Source: HCFA, Office of the 
Actuary).
    The growing importance and increased use of prescription 
drugs have had a disproportionate impact on the elderly, who 
use prescription drugs more extensively than the general 
population because of high rates of chronic illness. Although 
the elderly represent only about 12 percent of the population, 
they account for over a third of spending on prescription 
drugs. It is estimated that 80 percent of Medicare 
beneficiaries use pharmaceuticals on a regular basis. Having 
drug coverage is a significant factor affecting whether 
Medicare beneficiaries fill their prescriptions. Lack of or 
limited drug coverage can expose beneficiaries to high out-of-
pocket costs that may result in under-utilization of prescribed 
medications and adverse health outcomes.
    In response to the increase in utilization and costs of 
prescription drugs, managed care organizations have turned to 
cost-control techniques, such as the use of formularies and 
PBMs. In fact, PBMs currently manage an estimated 71% of the 
volume of prescription drugs dispensed through retail 
pharmacies that are covered by private third-party payers. 
Several bills pending in Congress, including the 
Administration's proposal, would use PBMs to administer a 
Medicare drug benefit and give PBMs the authority to determine 
which drugs would be available to patients under such a 
benefit. PBMs are private companies that contract with health 
plans to limit the costs of prescription drugs by managing drug 
utilization and obtaining discounts from retail pharmacies and 
manufacturers. Formularies--lists of approved drugs that 
physicians are permitted to prescribe--are typically used by 
PBMs to limit access to expensive drugs.
    ACP-ASIM Concerns with PBMs
    As physicians, the members of ACP-ASIM know that the lack 
of prescription drug coverage can significantly reduce patient 
compliance with prescribed drug therapies. However, our members 
also recognize that the cost of prescription drugs is 
escalating at a rate far greater than health care spending 
generally and that legislation must work to create and maintain 
a careful balance between the need for a prescription drug 
benefit and the cost of such a benefit. It is critical, 
however, that cost not be the primary factor in structuring any 
prescription drug benefit program.
    Physicians constantly are forced to strike a balance 
between ensuring that their patients receive medication that is 
medically necessary and minimizing their patient's out-of-
pocket costs. Formularies and/or PBMs that limit beneficiaries' 
coverage, either in terms of increased copayments or 
deductibles, or by restricting the availability of certain 
medications, increase the likelihood that patients will not be 
able to comply with their physicians' recommended regimens. 
Moreover, patients with serious illnesses requiring more costly 
medications may be particularly at risk if PBMs are allowed to 
restrict coverage to only the cheapest drugs. If drugs are 
prescribed that are not listed in the formulary, patients may 
be penalized with higher out-of-pocket costs (increased 
copayments or deductibles). PBMs also monitor the number and 
types of drugs that physicians prescribe to their patients. 
Physicians who prescribe more costly drugs may be pressured to 
give their patients less expensive--but potentially less 
effective--alternatives. All of these circumstances may result 
in adverse health outcomes.
    PBMs need to consult with physicians on the drugs that are 
included in a formulary. They need to educate patients about 
how their prescription drug benefit works, what the impact will 
be on their out-of-pocket costs if they need a drug that is not 
on the formulary, and how to obtain approval for a drug that is 
not on the formulary list. Physicians should be able to 
prescribe beneficial ``off-formulary'' drugs to their patients, 
when supported by clinical evidence on effectiveness, without 
cumbersome prior authorization requirements. Beneficiaries and 
their physicians need to be promptly notified when formularies 
are changed or discontinued.
    ACP-ASIM believes it is critical that any authorizing 
legislation on a Medicare prescription drug benefit includes 
sufficient oversight of how PBMs operate. As private companies, 
PBMs can exert a great deal of influence over which drugs will 
be available to Medicare beneficiaries, without any 
accountability to the public for their decisions. The PBM 
industry makes their pricing decisions without public scrutiny, 
oversight or regulation. The PBM industry is highly 
concentrated, with the top three PBMs--Merck-Medco Managed 
Care, PCS Health Systems, and Express Scripts--together 
managing approximately 45 percent of prescriptions dispensed 
through retail pharmacies that are covered by private third-
party payers. A Medicare drug benefit administered by PBMs 
needs to protect against potential conflicts of interest that 
can arise when a PBM is owned by a drug manufacturer, or has 
close ties to a drug manufacturer. ACP-ASIM supports the 
disclosure of any financial relationships between PBM 
companies, pharmacists and pharmaceutical manufacturers to 
patients and physicians.
    PBMs are coming under increasing scrutiny. The National 
Association of Insurance Commissioners is currently considering 
whether to recommend legislation to regulate the industry. 
Pending lawsuits contend that some pharmacy benefit managers 
have violated their duty to act in the best interest of 
patients. The U.S. Department of Justice is investigating 
possible illegal kickbacks at the two largest PBMs. ACP-ASIM 
believes that Congress should proceed cautiously in placing too 
much control of a Medicare prescription drug benefit program in 
the hands of pharmacy benefit managers. Cost-effective rather 
than cost-control practices recognize the patient's well-being 
as primary and promote quality patient care. Patients should 
have access to effective treatment rather than the least 
expensive therapy. A prescription drug benefit will be a hollow 
promise to beneficiaries if it allows PBMs to deny them access 
to beneficial drugs principally on the basis of cost.
    (A list of ACP-ASIM's recommended consumer protection 
principles is attached.)

American College of Physicians-American Society of Internal Medicine 
Consumer Protection Principles for Medicare Prescription Drug 
Legislation

    1. A method of pricing Medicare payments for prescription 
drugs should be included that will balance the need to restrain 
the cost of the benefit with the need to create financial 
incentives for manufacturers to continue to develop new 
products. Rigid price controls that will discourage innovation 
should be rejected.
    2. The use of formularies should not be mandated. If a 
formulary is instituted, by a PBM or otherwise, decisions on 
which drugs should be included and evaluation of physician 
prescribing patterns should be based on effectiveness, safety, 
and ease of administration, rather than just costs.
    3. Physicians should have the option of prescribing drugs 
that are not on the formulary (based on objective data to 
support a justifiable, medically indicated cause) without 
cumbersome prior authorization requirements.
    4. Beneficiaries should have access to comprehensive, 
accurate and understandable educational and informational 
material about their prescription drug benefits; such material 
should include information on how the formulary functions and 
the impact of the formulary on co-payments and/or deductible 
requirements, and access to prescription drugs.
    5. Beneficiaries and their physicians should be promptly 
notified (at least ninety days notice) when formularies are 
changed or discontinued.
    6. PBMs or others defining a formulary should be required 
to consult with physicians on the drugs that are included in 
the formulary. Formularies should be approved on a regional 
basis by a professionally qualified body that includes 
practicing physicians using that formulary.
    7. Any request by a benefit manager to alter medication 
regimes should occur only when such requests are based on 
objective data supported by peer-reviewed medical literature 
and which undergo review and approval of associated managed 
care organizations'/managed behavioral health organizations' 
pharmacy and therapeutic committees.
    8. Physicians should continue to be able to prescribe 
covered drugs for accepted off-label uses.
    9. The prescription drug benefit should not require an 
expansion of prescribing privileges for non-physician health 
professionals beyond what can be supported based on their level 
of training.
    10. Issues of generic and therapeutic substitution under 
the Medicare program should be addressed through the 
development of a national system that would allow physicians 
who permit generic substitution to: designate substitution by 
only ``A'' rated generic drugs; require any prescription 
medication crossing state lines, such as those as part of a 
prescription filled by an out-of-state pharmacy, to use only 
``A'' rated generic drugs if a brand name is not required by 
the prescribing physician; and require a national uniform 
policy regarding a phrase that can be used to denote the need 
for a brand name drug.
    11. PBMs should be required, with a patient's consent, to 
provide treating physicians with all available information 
about the patient's medication history.
    12. PBMs should be required to disclose to beneficiaries 
and their physicians any financial relationships among the 
benefit manager, pharmacists and pharmaceutical managers.

                                


         STATEMENT OF JACQUELINE SHANNON, PRESIDENT, 
                   NATIONAL ALLIANCE FOR THE 
                         MENTALLY ILL

    Chairman Thomas, Representative Stark and members of the 
Ways and Means Subcommittee on Health, I am Jacqueline Shannon 
of San Angelo, Texas, President of the National Alliance for 
the Mentally Ill (NAMI). I am pleased today to offer NAMI's 
views on proposals now before the Congress to expand the 
Medicare program to cover the costs of outpatient prescription 
drugs. In addition to serving as NAMI's President, I am also 
the mother of Greg Shannon. Greg was diagnosed with 
schizophrenia in 1985. For the past 15 years, Greg and our 
entire family have struggled with his illness. Like so many of 
NAMI 210,000 consumer and family members, I am grateful that 
the Finance Committee is now poised to fill what has been the 
most significant gap in the Medicare program since its 
inception 35 years ago--outpatient prescription drug coverage.
    NAMI is extremely pleased that this critical issue is 
gaining significant bipartisan attention in Congress this year. 
As President Clinton observed in his State of the Union address 
on January 27, no one doubts that if the Medicare program were 
enacted today outpatient prescription drug coverage would be 
included as part of the basic benefits package. As the 
Committee has heard from many witnesses on this issue, 
prescription medications played a relatively minor role in 
medical care back in 1965 when Congress passed, and President 
Johnson signed into law, Title XVIII of the Social Security 
Act. Today, advances in science and treatment have yielded new 
medications that have become our frontline of attack on major 
illnesses.
    This is certainly the case with serious brain disorders, 
probably more so than any other class of diseases. Back in 
1965, someone diagnosed with a serious brain disorder such as 
schizophrenia or bipolar disorder (manic-depression) was likely 
to end up spending much of their adult life in a public 
psychiatric hospital being treated with medications such as 
haldol and thorazine that were only marginally effective in 
treating symptoms and had serious, debilitating side effects. 
For many consumers, these side effects were as challenging as 
the symptoms of the illness itself and have been directly 
related to the problems many have faced in consistently 
adhering to treatment. Fortunately, advances in science in the 
last two decades, especially in the development of a new 
generation of atypical antipsychotic medications for 
schizophrenia and selective serotonin reuptake inhibitors 
(SSRIs) for depression, have made it possible for many 
consumers to achieve a level of recovery never dreamed of 
decades ago. It is NAMI's view that these new treatments--made 
possible in large part through the bipartisan effort in 
Congress to increase federal funding for brain research--are 
central to higher functioning and recovery.

TWWIIA and its Role in Recovery from Severe Mental Illness

    Mr. Chairman at the outset I would like to thank you and 
all members of the Subcommittee who came together on a 
bipartisan basis last year to pass the Ticket to Work and Work 
Incentives Improvement Act. This new law addresses head-on so 
many of the outdated and unfair eligibility rules in the SSDI, 
SSI, Medicare and Medicaid programs that forced beneficiaries 
to choose between a job and health care coverage. During debate 
over this legislation last year, and since its enactment, we 
heard from so many consumers and families who told of their 
frustrations at seeing genuine recovery from severe mental 
illness fall short because they were forced to quit a job or 
cut back their hours, notbecause of their illness, but because 
of fear of losing health coverage.
    While TWWIIA was a tremendous bipartisan accomplishment, it 
is a first step. Perhaps the most important next step that 
Congress can take to help people with mental illness, and all 
severe disabilities, go to work is to add an outpatient 
prescription drug benefit to Medicare. NAMI agrees that the 4.5 
years of added Medicare eligibility for SSDI beneficiaries 
included in TWWIIA will be critical in helping people to stay 
on the job longer. However, for too many people with severe 
disabilities on SSDI, this extended period of health care 
coverage comes with a benefit package that is inadequate. 
Moreover, the most overwhelming gap in the Medicare benefit 
package is coverage for outpatient prescription drugs.

The Interests of Non-Elderly SSDI Beneficiaries Must Be Part of 
This Debate

    NAMI recognizes that so many of the interests that come 
before this Subcommittee to offer their views on the issue of 
Medicare prescription drug coverage speak only to ``coverage 
for seniors.'' While this characterization of the issue may 
offer political simplicity, we believe that it excludes the 
population of Social Security recipients who need coverage for 
prescription drugs the most--non-elderly people with 
disabilities who are SSDI beneficiaries. Furthermore, NAMI 
would argue that it is non-elderly SSDI beneficiaries with 
severe mental illnesses who most need outpatient drug coverage. 
While some SSDI beneficiaries may need only coverage for acute 
care to achieve recovery and work, individuals with severe 
mental illnesses simply must have coverage for medications in 
order to even consider employment as an option.
    Currently, there are 1.3 million non-elderly disabled 
Americans on SSDI. Of this population, nearly 400,000 became 
eligible through a ``mental disorder'' under Social Security's 
medically determinable eligibility standards. While this figure 
is not nearly the size of the number of our nation's growing 
elderly population, it does represent an important population 
in the Medicare debate. First, people with severe mental 
illnesses come on to the cash benefit rolls earlier than any 
other disability category. The typical onset of an illness such 
as schizophrenia is late adolescence or early adulthood. Young 
adults with the most severe, disabling symptoms are likely to 
qualify for benefits within a year or so. Many depend on 
benefits for a large part of their adult life. By contrast, 
individuals who use SSDI as an early retirement program for 
injuries or chronic disabilities related to lifetime of manual 
labor stay on cash benefits for a brief period before moving 
into Social Security's main retirement program. Thus, the long-
term fiscal implications of SSDI beneficiaries with severe 
mental illness go beyond their numbers.
    Second, the lack of an outpatient prescription drug benefit 
in Medicare has important consequences for state Medicaid 
programs. While Title XIX is not under the jurisdiction of this 
Subcommittee, NAMI recognizes that any new Medicare 
prescription drug benefit is certain to have profound 
consequences on both beneficiaries and the States. Under the 
current system, many SSDI beneficiaries with severe mental 
illnesses are forced to spend down their assets and go into 
poverty to establish eligibility for Medicaid to get drug 
coverage. Once on Medicaid, these individuals must stay poor to 
keep their Medicaid coverage. Persons who are dual eligible for 
SSI and SSDI face similar concerns, as do so-called ``disabled 
adult children,'' who must move onto SSDI when their parents 
retire. This system also prevents many families from providing 
even the most modest forms of financial assistance to their 
sons, daughters and siblings with severe disabilities, out of 
fear of jeopardizing Medicaid eligibility. The TWWIIA will be a 
tremendous help to many consumers and families in this arena, 
but more needs to be done to ensure that people do not have to 
become poor, and stay poor for their entire adult life, just to 
access prescription drug coverage.

What Does NAMI Want to See in a Medicare Outpatient 
Prescription Drug Benefit?

    1. Congress should ensure that any prescription drug 
program offered as part of, or as a supplement to, Medicare be 
made available to non-elderly SSDI beneficiaries under the same 
terms and conditions as those for seniors. Although election-
year politics may make it tempting to focus on the nation's 
growing elderly population, we are adamantly opposed to any 
program that would discriminate against non-elderly people with 
disabilities who are eligible for Title II benefits by 
establishing a program that either limits their eligibility or 
establishes terms or conditions that do not apply to seniors. 
Managed care plans such as Medicare Plus Choice and 
``prescription drug only'' plans should be required to offer 
enrollment to non-elderly SSDI beneficiaries under the same 
rules and conditions as those for seniors.
    2. Prescription drug coverage under Medicare should be 
accompanied by the enactment of parity for mental illness 
benefits. Currently, the Medicare co-payment for Part B 
outpatient services is 20 percent. This co-payment does not 
apply to mental illness treatment, however, which is only 
covered at a rate of 50 percent. There is also currently a 190-
day lifetime limit for inpatient psychiatric hospital 
treatment. Furthermore, only office-based therapy and partial-
hospitalization mental health services are allowed under 
Medicare's current coverage--no assertive community treatment 
or psychiatric rehabilitation is covered. NAMI urges that 
Congress use this historic opportunity to address a 
prescription drug benefit that also addresses the 
discrimination in Medicare's existing mental illness benefits. 
Neither the proposals put forward by the Bipartisan Commission 
on the Future of Medicare nor the Clinton Administration 
addresses this basic unfairness within Medicare.
    3. To the maximum extent possible, NAMI believes that a 
Medicare outpatient prescription drug benefit should be a 
national program benefit that is standardized throughout the 
country. The depth and scope of coverage for medications should 
not be dependent on where you live. While NAMI is not opposed 
to a State role in any program, there should be national 
standards that ensure reasonable similarities in coverage 
across the nation.
    4. Coverage should be adequate to finance the most 
expensive drugs for the treatment of serious and persistent 
mental illness. NAMI is concerned that the President's Medicare 
prescription drug proposal, as well as several competing plans 
in Congress, has a principal objective of providing a tangible 
benefit to a large number of people, rather than helping a 
small number of Medicare beneficiaries with high drug expenses. 
For example, in the President's plan there is no limit on how 
much an individual would have to pay out-of-pocket for 
medications. Likewise, the benefit would begin immediately, 
regardless of an individual's expenses. While such limitations 
may serve to keep premiums low so that large numbers of healthy 
Medicare beneficiaries will sign up for a voluntary program, 
these restrictions are likely to impose significant burdens on 
people with chronic and severe illnesses who rely on 
medications as their principal form of treatment. An 
examination of the costs of several key psychiatric medications 
indicates that, while many Medicare beneficiaries might be 
helped in meeting the high costs associated with their drugs, 
substantial gaps in coverage would likely persist under 
proposals such as the President's. Average annual costs for 
major psychiatric medications include: Clozaril ($6,200), Paxil 
($711), Prozac ($808), Risperidone ($2,800), zoloft ($852), and 
Zyprexa ($3,000). It is important to note that most people 
living with severe mental illnesses such as schizophrenia and 
bipolar disorder are prescribed several medications (including 
drugs to treat side effects) rather than a single drug.
    5. Medicare prescription drug formulary policies should not 
interfere with access to the newest and most effective 
medications for serious brain disorders such as schizophrenia 
and bipolar disorder. Medications for mental illnesses differ 
from one another--either in their effectiveness in treating 
specific symptoms or disorders, or in their side effects. There 
is solid evidence that newer medications offer advantages over 
conventional medications in either effectiveness or side 
effects. For example, most treatment guidelines now recommend 
newer antipsychotic medications as the drugs of first choice 
because they can be more effective in treating symptoms in some 
individuals and because their side effects may cause fewer 
short-term and long-term problems--and in particular, fewer 
cases of tardive dyskinesia, an irreversible and potentially 
disabling movement disorder.
    However, some health plans (including many that now are a 
part of Medicare through the Medicare Plus Choice program) 
place restrictions on access to medications. Sometimes these 
policies may be appropriate to avoid the inappropriate use of 
drugs or to encourage the use of generic equivalents. But often 
the limitations are designed primarily to discourage the use of 
more expensive medications. Limitations may take the form of a 
restricted formulary, in which only certain medications are 
covered by the plan, or a ``fail-first'' policy, requiring 
failed treatment with older, less expensive medications before 
allowing treatment with newer medications. NAMI supports 
efforts to ensure that Medicare (and all health plans 
participating in the program such as Medicare Plus Choice) 
offer access to all effective and medically appropriate 
medications. If Medicare (or a participating health plan) uses 
a formulary, exceptions from the formulary limitation must be 
allowed when a non-formulary alternative is medically 
indicated. Moreover, procedures should be established whereby 
beneficiaries can appeal a decision to prescribe a specific 
medication. Finally, Medicare (and participating plans) should 
not be allowed to require beneficiaries to switch from 
medications that have been effective for them.

Conclusion

    On behalf of NAMI's consumer and family membership, thank 
you for the opportunity to offer our views on this critically 
important issue. NAMI looks forward to working with this 
Subcommittee and the entire Congress to ensure that the 
Medicare program is modernized and preserved for generations to 
come and that its meets the needs of one of America's most 
vulnerable populations, people with serious, persistent mental 
illnesses.

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