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





             SENIORS' ACCESS TO PRESCRIPTION DRUG BENEFITS

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 15, 2000

                               __________

                             Serial 106-100

                               __________

         Printed for the use of the Committee on Ways and Means


                   U.S. GOVERNMENT PRINTING OFFICE
70-064                     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 
version. Because electronic submissions are used to prepare both 
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converting between various electronic formats may introduce 
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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 February 8, 2000, announcing the hearing.............     2

                               WITNESSES

U.S. General Accounting Office, Hon. David M. Walker, Comptroller 
  General........................................................     9

                                 ______

Alliance Pharmaceutical, and California Healthcare Insitute, 
  Theodore Roth..................................................    72
American Association of Retired Persons, Beatrice Braun, M.D.....    63
American Enterprise Institute, John E. Calfee....................    55
Sager, Alan, Boston University School of Public Health...........    76
Soumerai, Stephen B., Harvard Medical School, and Harvard Pilgrim 
  Health Care....................................................    52

                       SUBMISSION FOR THE RECORD

TREA Senior Citizens League, Alexandria, VA, Michael F. Ouellette    99

 
             SENIORS' ACCESS TO PRESCRIPTION DRUG BENEFITS

                              ----------                              


                       TUESDAY, FEBRUARY 15, 2000

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:10 p.m., in 
room 1100, Longworth House Office Building, Hon. Bill 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
February 8, 2000
No. HL-12

                      Thomas Announces Hearing on

             Seniors' Access to Prescription Drug Benefits

    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 to examine the implications of different proposals 
aimed at helping seniors gain more affordable access to prescription 
drugs. The hearing will take place on Tuesday, February 15, 2000, in 
the main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 1:00 p.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 experts in the financing of prescription drug 
benefits in both the public and private sectors, as well as 
representatives from the senior community and the pharmaceutical 
industry. 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:

      
    While nearly two-thirds of seniors have some insurance to help them 
pay for the costs of prescription medicines, an increasing number of 
vulnerable seniors lack access to affordable drug benefits. As a 
result, they are often either exposed to sizable financial risks or 
have their health and quality of life compromised. The origins of this 
problem are many. The Medicare fee-for-service program does not 
generally cover outpatient prescription drugs. In addition, many 
seniors lack access to, or find it difficult to afford, prescription 
drug benefits through either a Medicare+Choice or Medicare supplemental 
insurance (Medigap) plan. Finally, while millions of seniors now obtain 
drug coverage through a former employer (or a spouse's former 
employer), the rate at which employers are sponsoring retiree health 
insurance benefits is in decline. The rising cost of new drug therapies 
has contributed to this problem. It has also made it increasingly 
difficult for those without coverage to purchase the medicines they 
need on their own.
      
    Last March, Chairman Thomas joined a majority of the National 
Bipartisan Commission on the Future of Medicare in recommending 
systemic reforms to Medicare. The Commission proposal would have made a 
variety of drug coverage options available to all seniors through a 
competitive insurance model similar to the one that Members of Congress 
enjoy. The President responded last June by proposing to expand the 
current Medicare fee-for-service benefit package to include a 
standardized prescription drug benefit. The President resubmitted his 
proposal to Congress this week as part of his fiscal year 2001 budget. 
Other lawmakers have put forward proposals that would either subsidize 
the purchase of drugs for those most in need, or conversely, to impose 
in some form price restrictions on the companies who manufacture and 
sell prescription drug therapies.
      
    In announcing the hearing, Chairman Thomas stated: ``As modern 
medicine relies more and more on drug treatments to manage chronic 
disease, it is essential that Congress take steps to ensure that 
seniors have access to affordable prescription drugs. Last Spring, a 
majority of the Bipartisan Medicare Commission recommended a Medicare 
reform plan--a plan that expanded access to prescription drugs for 
seniors through market-based solutions such as group purchasing. These 
reforms are essential if Medicare is to remain a viable program for 
future generations. In working to address this growing problem this 
year, we will also evaluate other proposals, such as the one the 
President has put forward. This hearing will help us begin that 
process, and help us examine both the myths and realities surrounding 
this problem and the different solutions that have been proposed.''
      

FOCUS OF THE HEARING:

      
    The hearing will examine the current state of affairs with respect 
to seniors' access to prescription drug benefits and focus on the 
details of different drug proposals now before Congress. The 
Subcommittee will examine the implications that these proposals have 
for both the public and private financing of health care, their 
potential effects on health care choice and quality, and their 
relationship to the long-term needs of the Medicare program.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Tuesday, 
February 29, 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 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
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but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or 
MS Word format, typed in single space and may not exceed a total of 10 
pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://waysandmeans.house.gov.''
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                

    Chairman Thomas. If we could find our seats, please?
    Since the inception of Medicare in 1965, it is pretty 
obvious that the practice of medicine has changed dramatically 
and it seems as though the farther we get away from 1965 the 
more dramatically it changes. Unfortunately, since Medicare has 
a statutorily defined structure it simply has not kept pace 
with the changes that have occurred. We have tried at times to 
try to modify, upgrade, reform Medicare. We have had several 
successful efforts recently and unfortunately several failures.
    When the process began, drugs were a minor component of 
seniors' medical costs. Today they account for nearly 20 
percent of the average Medicare beneficiary's health care 
consumption and tomorrow they are going to be even a greater 
percentage. Now, this increase in prescription drug utilization 
hasn't been for not, pretty obviously. If you were a Medicare 
beneficiary in 1965 and suffered a heart attack, you really had 
very few treatment options available to guard against 
recurrences. In fact, the frightening part is that some of the 
suggested treatments may have, in fact, been counterproductive. 
Instead those with the history of congestive heart failure had 
to rely on the hope that timely intervention of acute care 
would save them if they had subsequent heart problems.
    However, today through the so-called miracle of modern 
medications, those with the history of heart problems can 
manage their disease by simply taking a pill every day. In 
fact, there are a number of things that you can do by taking a 
pill every day.
    One of the underlying concerns as we move forward in 
prescription drugs is the advertising of prescription drugs as 
we have all become more aware in the print media and on 
television. You might guess this is a ``People'' Magazine, 
February 14th issue. It is a picture of Cupid hugging a blue 
pill which says, ``Wishing you a Happy Valentine's Day'', 
Viagra, an official sponsor of Valentine's Day.
    [Laughter.]
    Chairman Thomas. Now, unfortunately, these pharmacological 
breakthroughs come at a price. They also come in varying 
categories; some primarily lifestyle, others life-saving. 
Prescription drugs are often expensive. The newer biotech ones 
are awfully expensive. Due to the years of research and intense 
commitments of capital necessary to find, develop and test 
these life-enhancing therapies. And given the fact that the 
traditional fee-for-service Medicare Program does not cover 
most outpatient prescription drugs, seniors without alternative 
drug coverage are forced to pay an ever-increasing share of 
their retirement incomes on medications.
    Now, this hearing is in part to examine one, that reality; 
and, two, alternatives. But, clearly, if Medicare is to remain 
the valued entitlement program that it is today, we have to 
change to incorporate coverage--incorporate coverage--of these 
increasingly important therapies. However, as I am quite sure 
the witnesses will tell us, notwithstanding all of the recent 
revenue flowing into the trust funds in the Treasury, the 
underlying, fundamental Medicare Program still faces dire 
financial straits.
    There is an inevitably about the current structure, the 
current benefit package, the number of retirees and the ongoing 
medical miracle of people living longer. If nothing is done to 
systematically overhaul the program before that baby boom 
generation begins to retire in real numbers, we either have 
Medicare crowding out all other fiscal discretionary spending 
or a significant and dramatic rollback of benefits or a 
significant increase in the payroll tax or a significant 
additional burden on the beneficiaries. Those are the options. 
The sooner we start the reform, the less necessary the 
intensity, the curve and the change needs to be.
    So, the real challenge now is to begin as soon as possible 
to begin to deal with the options, especially for those at the 
lowest end of the income levels who are literally choosing 
between food and medicine.
    If you listen to some of the direst critics, there is not a 
senior around receiving any kind of a Medicare and prescription 
drug benefit. In fact, even at the most difficult and hardest 
test it is still a majority. The number is usually 65 percent 
but clearly there is some slippage over the year, there is some 
in and some out. But I think you will find testimony today 
substantiates that it is still over 50 percent. Now, that is 
not bad but it is not good. Especially when you see who it is 
that does not have the coverage and especially when you realize 
that the products out there to provide that coverage are very 
rarely true insurance products with a stop-loss coverage. That 
is, those with the highest expenses, if they have coverage, 
almost always wind up paying for it out of their own pockets. 
So, our goal should be to expand coverage to those without good 
benefits, while not displacing private dollars with taxpayer 
dollars, and providing good coverage.
    Now, the Medicare Commission and others have put forward a 
number of suggestions. We have legislation introduced by 
Members of Congress. Some of them deal exclusively with 
providing prescription drugs; others try to integrate over a 
longer term reform structure to shore up Medicare for future 
generations.
    As Chairman of this Subcommittee, I am committed to 
bringing legislation before this Subcommittee before we 
adjourn. The goal will be to simultaneously advance those two 
goals: Reform and affordable prescription drug coverage. It is 
not going to be easy. I hope we can work together. I think a 
consensus can be found. I think we can make real progress. Even 
if we only make partial progress, I think it is important to 
begin.
    My hope is that this initial hearing will start us down a 
cooperative path of reform. Both the inclusion of prescription 
drugs--and as President Clinton has said--a more competitive 
and quality-rated Medicare, both in the fee-for-service and in 
the other options are essential; not just to provide seniors 
with needed services but to make sure that the very program, 
itself, continues to be available in a modern and usable form 
for those retirees yet to come.
    [The opening statement of Chairman Thomas follows:]

Opening Statement of Hon. William M. Thomas, a Representative in 
Congress from the State of California

    Since Medicare's inception in 1965, the practice of 
medicine has changed dramatically. In 1965, prescription drugs 
were a very minor component of seniors' medical costs. Today 
drug costs account for nearly 20% of the average Medicare 
beneficiaries health care consumption.
    By the same token however, a senior who suffered a heart 
attack in 1965 had few if any preventive treatment options 
available to them to guard against further heart traumas. 
Instead, those with a history of congestive heart failure 
largely lived in fear of a possible reoccurrence, and hoped 
that the timely intervention of acute care might save them if 
they had a second occurrence. Today, through the miracles of 
modern medications, those with a history of heart problems can 
manage the disease by simply taking pill each day. This is just 
one of many incredible advances in health care that the 
development of new medicines have fostered.
    Unfortunately, these kinds of pharmacological breakthroughs 
come at a price. As one of our panelists here today knows all 
to well, it takes years of research and intensive capital 
commitments to find, develop and prove these new therapies. And 
given the fact that the traditional fee-for-service Medicare 
program does not generally cover outpatient prescription drugs, 
seniors without alternative sources of insurance must often pay 
for these often expensive drugs with their own limited 
resources.
    While the growing reliance on outpatient medications as a 
treatment modality has vastly improved the quality and length 
of life for those suffering from chronic disease, Medicare's 
lack of coverage for drugs has also forced seniors to spend an 
ever increasing share of their retirement income on 
medications.
    Clearly, if Medicare is to remain the valued entitlement 
program that it is today, it must be changed to incorporate 
coverage for these increasingly important therapies. As the 
Medicare Commission recognized last year, a modern and reformed 
Medicare program must include affordable drug coverage.
    However, as this Committee knows all to well, the current 
Medicare program--which includes no outpatient drug benefit--
already faces dire financial straits in the years ahead. If 
nothing is done to systematically overhaul the program before 
the baby boom generation begins to retire at the end of this 
decade, the budget for Medicare alone will soon crowd out all 
other federal discretionary spending and ultimately collapse 
into financial insolvency.
    The challenge then is how do we balance the immediate needs 
of some seniors who are literally choosing between food and 
medicine, against the equally important, longer term needs of a 
program that is literally the lifeline of an entire segment of 
our population. Last year I worked very hard on the Medicare 
Commission to put craft a bipartisan proposal that was designed 
to meet both of these needs.
    This is a new year. While I remain equally committed to 
advancing systemic Medicare reforms, and to addressing the real 
needs of those seniors without access to affordable drug 
coverage, I am open to new ideas.
    Fortunately, the problem is not as grave as some would 
profess. Many seniors have access to good drug benefits--often 
through a former employer. Others have found cost-effective 
coverage through a Medicare+Choice plan. I feel strongly that 
we should build on these successes.
    Moreover, the Commission and others have put forward 
several good ideas that we can incorporate as we work to extend 
coverage for drugs while still working toward long-term reforms 
to shore up Medicare for future generations.
    I am committed to bringing legislation before the Committee 
later this year that will simultaneously advance these two 
competing goals. It won't be easy, but if we work together, I 
think a consensus can be found and real progress can be made. 
This hearing is intended to start us down that path.

                                


    Chairman Thomas. The gentleman from California.
    Mr. Stark. Thank you, Mr. Chairman, for holding this 
hearing on Medicare and prescription drugs. And I, too, hope it 
will lead to legislation. I hope that legislation will provide 
an affordable prescription drug benefit to all seniors. We are 
going to hear differing accounts on how many seniors have or do 
not have prescription drugs. We will hear questions about 
Medicare's trust fund going broke but it is important to keep 
in mind that a prescription drug benefit would have no effect 
on the part A trust fund.
    Whatever the number, we can agree that the percentage of 
people without prescription drug benefits is rapidly eroding 
and that most of the Medigap benefits now cost more for the 
benefit, like $1,800 for a Medigap drug benefit that pays for 
only $1,250 worth of drugs, so that really the seniors are 
poorly advised to even buy it.
    Recently I asked the CRS to analyze the tax treatment of 
the pharmaceutical industry. And the CRS found that tax credits 
contributed to lowering the average effective tax rate for drug 
companies so that their effective rate was nearly 40 percent 
lower than other major industries in the period from 1990 to 
1996. At the same time numerous studies find that Americans pay 
the highest prices for drugs.
    For these reasons, among others, I am introducing today the 
Prescription Price Equity Act of 2,000. Basically this bill 
would deny tax breaks to the pharmaceutical companies that sell 
their products at significantly higher prices in the United 
States compared to their sales in other developed countries. 
The purpose of this bill is to require drug companies to give 
U.S. consumers a fair deal in return for these significant 
taxpayer contributions to their industry. No drug company that 
charged fair prices would see any change in governmental 
support for research.
    I am sorry, Mr. Chairman, that PhRMA is not here today 
because I suppose there are some questions for them. I am 
concerned that the American drug industry, for all the multi-
billion subsidies we give them, does not do enough research and 
development to cure the plagues that haunt us. Today, PhRMA 
spends hundreds of millions of dollars telling us how much they 
spend on R&D and every one of those advertising and campaign 
contributions that amount to hundreds of millions of dollars is 
a dollar not spent on R&D. Those dollars spent by PhRMA 
disguise the fact that this pharmaceutical industry spends 
twice as much on sales and overhead as they spend on R&D. The 
profits to stockholders outstrip their R&D budgets and what is 
worse, the pharmaceutical industry has blocked us from knowing 
how much of their R&D is really research on ``me-too'' drugs 
that do nothing to advance human health.
    The attachment to my statement details billions of dollars 
the industry could and should be spending on R&D rather than 
trying to bribe--and bribe is the appropriate word here--
doctors to use a particular company's pills. I would like to 
explore with witnesses ways in which we could encourage them to 
do more in R&D that leads to breakthrough drugs that might 
prevent Alzheimer's, rheumatism, stroke, you name it.
    As we debate prescription drug coverage for Medicare 
beneficiaries, I hope we will ask ourselves this question. Do I 
have taxpayer-assisted prescription drug insurance in my own 
life, either because I am a Federal employee or because my 
employer gets a tax deduction for covering me? I suspect that 
99 percent of the people in this room would answer that they 
do. And I hope that this fact will give us the encouragement we 
need to be supportive now of drug coverage legislation that 
will help our fellow citizens who don't receive such tax 
subsidy.
    Thank you very much.
    [The opening statements of Mr. Stark and Mr. Ramstad 
follow:]

Opening Statement of Hon. Fortney Pete Stark, a Representative in 
Congress from the State of California

                MEDICARE PHARMACEUTICAL BENEFIT HEARING

    Mr. Chairman:
    Thank you for holding this hearing on Medicare and 
prescription drugs.
    There will be a lot of conflicting testimony today on how 
many seniors actually have prescription drug insurance 
coverage. As the AARP testimony says,
    ``although 65 percent of Medicare beneficiaries have some 
type of coverage for prescription drugs, this figure can be 
very misleading.''
    Whatever the number, I think we can all agree that the 
percentage is declining, as employers scale back retiree 
coverage. Medicare HMOs are dramatically reducing coverage, and 
we will see another round of major benefit reductions announced 
this summer. I think we can all agree that the three medi-gap 
policies that cover drugs are, frankly, a bad deal, and often 
cost more than the value of the drug benefit. As drug inflation 
soars, we can expect fewer and fewer seniors to have 
prescription insurance. So, whatever number we say are covered 
today, we know that the number will be significantly smaller a 
year from now.
    A Medicare benefit for all enrollees would also help with 
the war against medical errors. Any drug benefit should be 
designed to detect over and under-prescribing and contra-
indicated prescriptions, thus helping to reduce what we believe 
is a major area of medical mistakes. Establishing a well-run 
Medicare drug benefit may be the single best thing we can do to 
help improve the quality of care of our retirees and reduce the 
cost of medical errors.
    I am pleased that PharMA is here. I am concerned that the 
American drug industry, for all the multi-billion dollar 
subsidies that we give them, does not do nearly enough R&D to 
cure the illnesses that plague mankind.
    PharMA spends hundreds of millions of dollars telling us 
how much they spend on R&D-and every one of those advertising 
and campaign contribution dollars is a dollar NOT spent on R&D! 
Every one of those dollars disguises the fact that this 
industry spends twice as much on sales and overhead as they 
spend on R&D. Their profits are 50% more than their R&D budget. 
But what's worse, is that they have blocked us from knowing how 
much of their R&D is really research on `me-too' drugs that do 
nothing to advance human health. It is even reported that their 
R&D budgets may include R&D on how to market a drug, rather 
than inventing a new drug. The very nature of the industry is 
such that they waste billions and billions in over-lapping 
research, and a major reason we see these huge mergers is so 
that research overhead can be reduced.
    The attachment to my statement details the billions and 
billions of dollars this industry could and should be spending 
on R&D rather than trying to bribe-and that is the word-doctors 
to use a particular company's pill.
    I would like to explore with the witnesses ways we could 
encourage them to do much more R&D to prevent Alzheimer's, 
rheumatism, stroke, you name it.
    And I would like to ask the Comptroller General what he can 
do to help research
    --the true costs of developing a drug;
    --how much wasteful duplication there is,
    --how much is spent on `me toos,'
    --whether tax credits are being claimed for marketing,
    --how much of NIH's budget goes into subsidizing the basic 
research for the development of a breakthrough drug and whether 
the public shouldn't get some of that investment back when the 
companies profit from it, and so forth.
    Finally, as we debate this issue, I hope we will all ask 
ourselves the moral question: do I have taxpayer assisted 
prescription drug insurance in my own life, either because I am 
a Federal employee, or because my employer gets a tax deduction 
for covering me? I suspect that 99%-plus of the people in this 
room have such prescription drug coverage. I hope that fact 
will give us compassion to be supportive, NOW, of helping our 
fellow citizens who receive no such tax subsidy.

                                


Opening Statement of Hon. Jim Ramstad, a Representative in Congress 
from the State of Minnesota

        Hearing on Senior's Access to Prescription Drug Benefits

    Mr. Chairman, thank you for calling this hearing today to 
discuss access to prescription drug benefits for seniors.
    As founder and co-chair of the House Medical Technology 
Caucus, I am well aware of the incredible advances the medical 
technology industry has made in recent years to treat and cure 
many illnesses, diseases and conditions. Similar discoveries 
and innovations have been made in the area of pharmaceuticals.
    Sadly, however, Medicare has not kept pace with the 
incredible strides of American medical ingenuity. I've authored 
legislation 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 applaud the many proposals that have been issued, from 
the Medicare Commission, the President and Members of Congress 
in an attempt to address this important issue. Since anything 
worth doing is worth doing well, we must carefully review all 
proposals for their strengths and weaknesses, as well as 
intended and unintended consequences.
    We must look for methods that will expand access to drugs 
without reducing access to other Medicare benefits, stifling 
further innovation or further complicating Medicare's already 
shaky financial status. The National Center for Policy Analysis 
(NCPA) recently released a study which found that if current 
Medicare dollars were used more wisely, seniors could have 
prescription drug coverage without the infusion of any 
additional federal funds.
    That's why I believe we will ultimately--if Members are 
willing to put politics aside and work in a bipartisan, 
pragmatic way--design an effective and efficient ways to use 
scarce Medicare and surplus dollars to help seniors. Instead of 
cutting payments and raising taxes through fees to pay for new 
spending as the President's plan would do, Congress and the 
President should 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 on how we can 
best address this critical issue.

                                


    Chairman Thomas. I thank the gentleman. Our first panel 
will consist of one individual and I want to thank him for 
coming: The Honorable David M. Walker, Comptroller General of 
the United States, General Accounting Office. We have used you 
in the past. We will use you in the future. And your good 
offices and services are going to be invaluable in assisting us 
in making what are sometimes very difficult choices. I am 
hopeful that the choices that we make will be driven by policy 
and not by politics. And with that, Mr. Walker, any written 
testimony that you have will be made a part of the record and 
you can address us in any way you see fit in the time you have 
available.

 STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL, U.S. 
                   GENERAL ACCOUNTING OFFICE

    Mr. Walker. Thank you, Mr. Chairman, Members of the 
Committee, it is a pleasure to be back before you again to 
speak on the important issue of Medicare and prescription drug 
coverage. I would like to briefly summarize my full statement 
by addressing four key issues. First, the nature of current 
prescription drug coverage for seniors; second, the nature, 
extent and timing of Medicare's financing challenge; third, a 
view to the future of our long-range fiscal outlook; and 
fourth, the need for comprehensive Medicare reform and care in 
addressing any expansion of Medicare to include prescription 
drug coverage.
    First, current coverage statistics. Based upon 1996 data 
which, believe it or not, is the most recent available, 
approximately 31 percent of Medicare eligible beneficiaries had 
no prescription drug coverage. Of the 69 percent who have 
coverage, approximately 30 percent had coverage through 
employer plans, 10 percent through Medicaid, 9 percent through 
Medigap and 8 percent through Medicare-risk HMOs. Of those who 
were covered, the level of coverage and the related cost varied 
widely based upon their plan. In 1999, approximately 20 percent 
of Medicare beneficiaries incurred total drug costs of $1,500 
or more. Now, that is gross cost, not net cost, out-of-pocket.
    There appears to be a growing consensus that Medicare's 
benefit structure needs to be modernized in order to include 
prescription drug coverage. At the same time we must not forget 
that adding prescription drug coverage to Medicare could 
potentially exacerbate a serious financial imbalance that 
Medicare already faces. This financial imbalance will escalate 
dramatically when the known demographic tidal wave hits us 
around 2011.
    In that regard, Mr. Chairman--this chart represents Part A. 
I recognize that different reform proposals would have these 
costs in part B, and some would have it as a Part D. It varies. 
In the interest of full and fair disclosure, this represents 
Part A--the solid line represents the trust fund balance, which 
starts to plummet early in the middle part of this decade, and 
the solid bars below show how these annual deficits will 
escalate in the years ahead based upon the most recent 
trustees' projections.
    In addition, despite current and projected surpluses, our 
latest long-range budget simulation shows that we face serious 
long-range fiscal challenges in the United States in the future 
if we do not begin to reform entitlement programs. This chart 
demonstrates that the solid line that goes across is the 
percentage of the economy represented by taxes. Right now it is 
a little over 21 percent of gross domestic product represented 
by taxes. Obviously, taxes could be corporate taxes, individual 
taxes, payroll taxes, a variety of different forms. The bars 
represent the components of Federal spending.
    What this shows is that based upon the most recent 
assumptions of CBO, and the Medicare and Social Security 
trustees, that by the year 2030 if we spend the on-budget 
surplus and save the entire Social Security surplus, we will 
serve to significantly haircut discretionary spending by year 
2030. By 2050 it will be totally scalped and we wouldn't even 
be able to pay interest on the debt. The key point is this: We 
do face current surpluses and projected surpluses for a number 
of years, however, we are not out of the woods yet. We face 
serious long-range fiscal challenges due to known demographic 
trends which assures the sun rises in the morning, we are going 
to face absent meaningful reform.
    In addition, while Medicare's financial imbalance may only 
represent 1.4 percent of taxable payroll, the combined payroll 
tax imbalances of Social Security and Medicare are substantial. 
As we all know, payroll taxes are inherently very regressive. 
As you can see, based upon the trustees, Social Security and 
Medicare's latest projection, if you look at the combined 
potential pressure on Social Security and Medicare payroll 
taxes if the solution was to go on the revenue side alone, you 
can see escalating tax burdens of what is a very regressive tax 
and, in addition to that, history has shown that rightly or 
wrongly the American people have generally placed a limit as to 
how much they will allow themselves to be taxed in a democracy 
although the forms of tax, obviously, may vary.
    Given these long-range fiscal challenges, we should proceed 
with care in addressing the prescription drug issue and the 
possible expansion of Medicare. We should recognize the 
fundamental differences between wants, which are unlimited; 
needs, which vary based upon individual; and affordability, of 
which there are very real limits. We also should recognize and 
acknowledge the difference between access to prescription drugs 
at group rates, passing on any savings associated with bulk 
purchasing of prescription drugs versus financial support for 
individuals who may not be able to afford prescription drug 
coverage.
    Targeting is the key word in this regard, Mr. Chairman. 
After all, adding prescription drug coverage to Medicare will 
add costs to the Medicare Program and that program, according 
to the trustees for over 10 years, is already unsustainable in 
its present form. In addition, prescription drugs represent the 
fastest growing component of health care costs.
    As a result, we clearly need to look to the possible 
modernization of Medicare in light of changing times and in 
light of bona fide needs on behalf of certain populations; at 
the same point in time we also have to recognize that the 
biggest single challenge facing the Medicare Program is its 
long-range fiscal imbalance. In that regard, we must deal not 
just with solvency, we must deal with sustainability, and we 
must make sure that we can deliver on the promises that have 
already been made as well as being able to deliver on whatever 
new promises might be made.
    Thank you, Mr. Chairman. I would be happy to answer any 
questions that you or the other members may have.
    [The prepared statement follows:]

Statement of the Hon. David M. Walker, Comptroller General, U.S. 
General Accounting Office

    Mr. Chairman and Members of the Subcommittee:
    I am pleased to be here today as you discuss options for 
increasing Medicare beneficiaries' access to prescription 
drugs. There are growing concerns about gaps in the Medicare 
program, most notably the lack of outpatient prescription drug 
coverage, which may leave Medicare's most vulnerable 
beneficiaries with high out-of-pocket costs that they may not 
be able to afford. In 1996, almost a third of Medicare 
beneficiaries lacked prescription drug coverage. The remaining 
two-thirds had at least some drug coverage through other 
sources--most commonly employer-sponsored health plans. 
Although the proportion of beneficiaries who had drug coverage 
rose between 1995 and 1996, recent evidence indicates that this 
trend of expanding drug coverage is unlikely to continue. 
Moreover, the burden of prescription drug costs falls most 
heavily on the Medicare beneficiaries who lack drug coverage or 
those who have substantial health care needs. In 1999, an 
estimated 20 percent of Medicare beneficiaries had drug costs 
of $1,500 or more-a substantial sum for those lacking some form 
of insurance to subsidize the purchase.
    At the same time, however, long-term cost pressures facing 
the Medicare program are considerable. There appears to be an 
emerging consensus that substantive financing and programmatic 
reforms are necessary to put Medicare on a sustainable footing 
for the future. These fundamental program reforms are vital to 
reducing the program's growth, which threatens to absorb ever-
increasing shares of the nation's budgetary and economic 
resources. Thus, proposals to help seniors with the costs of 
prescription drugs should be carefully crafted to avoid further 
erosion of the projected financial condition of the Medicare 
program, which, according to its trustees, is already 
unsustainable in its present form.
    On the one hand, you must grapple with the hard choices 
involved in making the Medicare program sustainable for future 
generations. On the other, you are faced with the plight of 
many seniors who cannot afford the medical miracles that may be 
achieved through access to pharmaceutical advances. Expanding 
Medicare's benefit package could address the latter. However, a 
recent study suggests that such an expansion could add between 
7.2 and 10 percent annually to Medicare's costs.\1\ Increased 
spending of that magnitude would only exacerbate the tough 
choices that will be required to put Medicare on sustainable 
footing for the future.
---------------------------------------------------------------------------
    \1\ M.E. Gluck, National Academy of Social Insurance Medicare 
Brief: A Medicare Prescription Drug Benefit (April 1999); p. 8. http//
www.nasi.org/Medicare.medbr1.htm (4/22/99).
---------------------------------------------------------------------------
    You are considering these issues at a historic crossroad. 
After nearly 30 years of deficits, the combination of hard 
choices and remarkable economic growth has led to a budget 
surplus. We appear--at least for the near future--to have slain 
the deficit dragon. In its most recent projections, the 
Congressional Budget Office (CBO) shows both unified and on-
budget surpluses throughout the next 10 years. While this is 
good news and even superior to the projections made last year, 
it does not mean that hard choices are a thing of the past. 
First, it is important to recognize that by their very nature 
projections are uncertain. This is especially true today 
because, as CBO notes, it is too soon to tell whether recent 
boosts in revenue reflect a major structural change in the 
economy or a more temporary divergence from historical trends. 
Indeed, CBO points out that assuming a return to historical 
trends and slightly faster growth in Medicare would change the 
on-budget surplus to a growing deficit. This means we should 
treat surplus predictions with caution. Current projected 
surpluses could well prove to be fleeting, and thus appropriate 
caution should be exercised when creating new entitlements that 
establish permanent claims on future resources.
    Moreover, while the size of future surpluses could exceed 
or fall short of projections, we know that demographic and cost 
trends will, in the absence of meaningful reform, drive 
Medicare spending to levels that will prove unsustainable for 
future generations of taxpayers. Accordingly, we need to view 
this period of projected prosperity as an opportunity to 
address the structural imbalances in Medicare, Social Security, 
and other entitlement programs before the approaching 
demographic tidal wave makes the imbalances more dramatic and 
possible solutions more painful.
    As the foregoing suggests, the stakes associated with 
Medicare reform are high for the program itself and for the 
rest of the federal budget, both now and for future 
generations. Current policy decisions can help us prepare for 
the challenges of an aging society in several important ways: 
(1) reducing public debt to increase national savings and 
investment, (2) reforming entitlement programs to reduce future 
claims and free up resources for other competing priorities, 
and (3) establishing a more sustainable Medicare program that 
delivers effective and affordable health care to our seniors.
    My remarks today will focus on Medicare beneficiaries' 
access to prescription drugs and the environment in which you 
consider increasing that access. Two proposals before you, one 
offered in the President's budget and the other contained in 
the Breaux-Frist bill,\2\ would incorporate Medicare 
prescription drug coverage in the context of larger Medicare 
reform. Other proposals that focus only on increasing access to 
affordable prescription drugs are also being considered. These 
proposals would either subsidize prescription drug coverage or 
lower prices faced by beneficiaries without coverage. To put 
these proposals in context, I will discuss the factors 
contributing to the growth in prescription drug spending and 
efforts to control that growth. I will also discuss design and 
implementation issues to be considered regarding proposals to 
improve seniors' access to affordable prescription drugs. I 
then will repeat my message about the Medicare program's 
current financial condition and its long term sustainability.
---------------------------------------------------------------------------
    \2\ S. 1895, Medicare Preservation and Improvement Act of 1999.
---------------------------------------------------------------------------
    But before I turn to the specifics, let me reiterate that 
although people want unfettered access to health care, and some 
have needs that are not being met, health care costs compete 
with other legitimate priorities in the federal budget, and 
their projected growth threatens to crowd out future 
generations' flexibility to decide which of these competing 
priorities will be met. Thus, in making important fiscal 
decisions for our nation, policymakers need to consider the 
fundamental differences between wants, needs, and what both 
individuals and our nation can afford. This concept applies to 
all major aspects of government, from major weapons system 
acquisitions to issues affecting domestic programs. It also 
points to the fiduciary and stewardship responsibility that we 
all share to ensure the sustainability of Medicare for current 
and future generations within a broader context of also 
providing for other important national needs and economic 
growth. We have an opportunity to use our unprecedented 
economic wealth and fiscal good fortune to address today's 
needs but an obligation to do so in a way that improves the 
prospects for future generations. This generation has a 
responsibility to future generations to reduce the debt burden 
they will inherit, to provide a strong foundation for future 
economic growth, and to ensure that future commitments are both 
adequate and affordable. Prudence requires making the tough 
choices today while the economy is healthy and the workforce is 
relatively large.

RISING DRUG SPENDING ELEVATES BENEFICIARY ACCESS CONCERNS AND THE 
IMPORTANCE OF COST-CONTROL EFFORTS

    Extensive research and development over the past 10 years 
have led to new prescription drug therapies and improvements 
over existing therapies that, in some instances, have replaced 
other health care interventions. For example, new medications 
for the treatment of ulcers have virtually eliminated the need 
for some surgical treatments. As a result of these innovations, 
the importance of prescription drugs as part of health care has 
grown. However, the new drug therapies have also contributed to 
a significant increase in drug spending as a component of 
health care costs. The Medicare benefit package, largely 
designed in 1965, provides virtually no coverage. In 1996, 
almost one third of beneficiaries had employer-sponsored health 
coverage, as retirees, that included drug benefits. More than 
10 percent of beneficiaries received coverage through Medicaid 
or other public programs. To protect against drug costs, the 
remainder of Medicare beneficiaries can choose to enroll in a 
Medicare+Choice plan with drug coverage if one is available in 
their area or purchase a Medigap policy.\3\ The availability, 
breadth, and price of such coverage is changing as the costs of 
expanded prescription drug use drives employers, insurers, and 
managed care plans to adopt new approaches to control the 
expenditures for this benefit. These approaches, in turn, are 
reshaping the drug market.
---------------------------------------------------------------------------
    \3\ As an alternative to traditional Medicare fee-for-service, 
beneficiaries in Medicare+Choice plans (formerly Medicare risk health 
maintenance organizations) obtain all their services through a managed 
care organization and Medicare makes a monthly capitation payment to 
the plan on their behalf.

---------------------------------------------------------------------------
Rise in Prescription Drug Spending

    Over the past 5 years, prescription drug expenditures have 
grown substantially, both in total and as a share of all health 
care outlays. Prescription drug spending grew an average of 
12.4 percent per year from 1993 to 1998, compared with a 5 
percent average annual growth rate for health care expenditures 
overall. (See table 1.) As a result, prescription drugs account 
for a larger share of total health care spending--rising from 
5.6 percent to 7.9 percent in 1998.

Table 1: National Expenditures for Prescription Drugs, 1993-98


  Prescription drug expenditures (in billions) Annual growth in prescription drug expenditures (percent) Annual
                                growth in all health care expenditures (percent)
----------------------------------------------------------------------------------------------------------------
                                                                 Annual growth in         Annual growth in all
        Year          Prescription drug expenditures  (in       prescription drug       health care expenditures
                                    bilions)                  expendures  (percent)            (percent)
----------------------------------------------------------------------------------------------------------------
              1998                                 $90.6                        15.4                        5.6
              1997                                 $78.5                        14.0                        4.7
              1996                                 $68.9                        12.9                        4.6
              1995                                 $61.0                        10.6                        4.8
              1994                                 $55.2                         9.0                        5.5
              1993                                 $50.6                         8.7                        7.4
    Average annual   .....................................                      12.4                        5.0
     growth between
      1993 and 1998
----------------------------------------------------------------------------------------------------------------
 Source: Health Care Financing Administration (HCFA), Office of the Actuary.

    Total drug expenditures have been driven up by both greater 
utilization of drugs and the substitution of higher-priced new 
drugs for lower-priced existing drugs. Private insurance 
coverage for prescription drugs has likely contributed to the 
rise in spending, because insured consumers are shielded from 
the direct costs of prescription drugs. In the decade between 
1988 and 1998, the share of prescription drug expenditures paid 
by private health insurers rose from almost a third to more 
than half. (See fig. 1.) The development of new, more expensive 
drug therapies--including new drugs that replace old drugs and 
new drugs that treat disease more effectively--also contributed 
to the drug spending growth by boosting the volume of drugs 
used as well as the average price for drugs used. The average 
number of new drugs entering the market each year rose from 24 
at the beginning of the 1990s to 33 now. Similarly, 
biotechnology advances and a growing knowledge of the human 
immune system are significantly shaping the discovery, design, 
and production of drugs. Advertising pitched to consumers has 
also likely upped the use of prescription drugs. A recent study 
found that the 10 drugs most heavily advertised directly to 
consumers in 1998 accounted for about 22 percent of the total 
increase in drug spending between 1993 and 1998.\4\ Between 
March 1998 and March 1999, industry spending on advertising 
grew 16 percent to $1.5 billion. All of these factors suggest 
the need for effective cost control mechanisms to be in place 
under any option to increase access to prescription drugs.
---------------------------------------------------------------------------
    \4\ Barents Group LLC for the National Institute for Health Care 
Management Research and Educational Foundation, Factors Affecting the 
Growth of Prescription Drug Expenditures (July 9, 1999); p. iii.

Figure 1: Comparison of National Outpatient Drug Expenditures, 
---------------------------------------------------------------------------
1988 and 1998

[GRAPHIC] [TIFF OMITTED] T0064.001

    Note: Out-of-pocket expenditures include direct spending by 
consumers for prescription drugs, such as coinsurance, 
deductibles, and any amounts not covered by insurance. Out-of-
pocket premiums paid by individuals are not counted here.
    Source: HCFA, Office of the Actuary.

Current Medicare Beneficiary Drug Coverage

    Prescription drugs are an important component of medical 
care for the elderly because of the prevalence of chronic and 
other health conditions associated with aging. In 1995, 
Medicare beneficiaries had an average of more than 18 
prescriptions filled.\5\ This varies substantially across 
beneficiaries, however, reflecting the range of their needs and 
also financial considerations such as third-party prescription 
drug coverage. In 1995, an elderly person's total average 
annual drug costs were $600 \6\ compared with a little more 
than $140 for a non-elderly persons.\7\ For some, prescription 
drug spending was considerably higher-6 percent of Medicare 
beneficiaries spent $2,000 or more.\8\ A recent report had 
projected that by 1999 an estimated 20 percent of Medicare 
beneficiaries would have total drug costs of $1,500 or more--a 
substantial sum for people lacking some form of insurance to 
subsidize their purchases or for those facing coverage 
limits.\9\
---------------------------------------------------------------------------
    \5\ M. Davis and others, ``Prescription Drug Coverage, Utilization, 
and Spending Among Medicare Beneficiaries,'' Health Affairs, Vol. 18, 
No. 1 (Jan./Feb. 1999); p. 237.
    \6\ M. Davis, p. 239.
    \7\ Agency for Health Care Policy and Research Center for Cost and 
Financing Studies, National Medical Expenditure Survey data, Trends in 
Personal Health Care Expenditures, Health Insurance, and Payment 
Sources, Community-Based Population, 1987-1995, (March 1997); p. 10. 
http://www.meps.ahcpr.gov/nmes/papers/trends/intnet4d.pdf (6/10/99).
    \8\ J.A. Poisal and others, ``Prescription Drug Coverage and 
Spending for Medicare Beneficiaries,'' Health Care Financing Review, 
Vol. 20, No. 3 (Spring 1999); p. 20.
    \9\ M.E. Gluck, p. 2.
---------------------------------------------------------------------------
    In 1996, almost a third of Medicare beneficiaries lacked 
drug coverage altogether. (See fig. 2.) The remaining two-
thirds had at least some drug coverage--most commonly through 
employer-sponsored health plans. The proportion of 
beneficiaries who had drug coverage rose between 1995 and 1996, 
owing to increases in those with Medicare HMOs, individually 
purchased supplemental coverage, and employer-sponsored 
coverage. However, recent evidence indicates that this trend of 
expanding drug coverage is unlikely to continue.

Figure 2: Sources of Drug Coverage for Medicare Beneficiaries, 
1996

[GRAPHIC] [TIFF OMITTED] T0064.002

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

    Although employer-sponsored health plans provide drug 
coverage to the 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. The proportion of 
employers offering health coverage to retirees eligible for 
Medicare declined from 40 percent in 1993 to 28 percent in 
1999. This decline is at least in part due to the rise in the 
cost of providing this coverage, which grew about 21 percent 
from 1993 to 1999. At the same time, the proportion of 
employers asking retirees to pay the full cost of their health 
coverage increased from 36 percent to 40 percent.
    In 1999, 13 percent of Medicare beneficiaries obtained 
prescription drug coverage through a Medicare+Choice plan, up 
from 8 percent in 1996. Medicare+Choice plans have found drug 
coverage to be an attractive benefit that beneficiaries seek 
out when choosing to enroll in managed care organizations. 
However, owing to rising drug expenditures and their effect on 
plan costs, the drug benefits the plans offer are becoming less 
generous. Many plans restructured drug benefits in 2000, 
increasing enrollees' out-of-pocket costs and limiting their 
total drug coverage.
    Beneficiaries may purchase Medigap policies that provide 
drug coverage, although this tends to be expensive, involves 
significant cost-sharing, and includes annual limits. Standard 
Medigap drug policies include a $250 deductible, a 50 percent 
coinsurance requirement, and a $1,250 or $3,000 annual limit. 
Furthermore, Medigap premiums have been increasing in recent 
years. In 1999, the annual premium for one type of Medigap 
policy with a $1,250 annual limit on drug coverage, ranged from 
approximately $1,000 to $6,000.
    All beneficiaries who have full Medicaid benefits \10\ 
receive drug coverage that is subject to few limits and low 
cost-sharing requirements. For beneficiaries whose incomes are 
slightly higher than Medicaid standards, 14 states currently 
offer pharmacy assistance programs that provided drug coverage 
to approximately 750,000 beneficiaries in 1997. The three 
largest state programs accounted for 77 percent of all state 
pharmacy assistance program beneficiaries.\11\ Most state 
pharmacy assistance programs, like Medicaid, have few coverage 
limitations.
---------------------------------------------------------------------------
    \10\ Certain low-income Medicare beneficiaries are dually eligible 
for Medicare and Medicaid.
    \11\ These programs are operated in New Jersey, New York, and 
Pennsylvania.
---------------------------------------------------------------------------
    The burden of prescription drug costs falls most heavily on 
the Medicare beneficiaries who lack drug coverage or who have 
substantial health care needs. Drug coverage is less prevalent 
among beneficiaries with lower incomes. In 1995, 38 percent of 
beneficiaries with income below $20,000 were without drug 
coverage, compared to 30 percent of beneficiaries with higher 
incomes. Additionally, the 1995 data show that drug coverage is 
slightly higher among those with poorer self-reported health 
status. At the same time, however, beneficiaries without drug 
coverage and in poor health had drug expenditures that were 
$400 lower than the expenditures of beneficiaries with drug 
coverage and in poor health. This might indicate access 
problems for this segment of the population.
    Even for beneficiaries who have drug coverage, the extent 
of the protection it affords varies. The value of a 
beneficiary's drug benefit is affected by the benefit design, 
including cost-sharing requirements and benefit limitations. 
Evidence suggests that premiums are on the rise for employer-
sponsored benefits, Medigap policies, and most recently, 
Medicare+Choice plans. Although reasonable cost sharing serves 
to make the consumer a more prudent purchaser, copayments, 
deductibles, and annual coverage limits can reduce the value of 
drug coverage to the beneficiary. Harder to measure is the 
effect on beneficiaries of drug benefit restrictions brought 
about through formularies designed to limit or influence the 
choice of drugs.

Cost-Control Approaches Are Reshaping the Pharmaceutical Market

    During this period of rising prescription drug 
expenditures, third-party payers have pursued various 
approaches to control spending. These efforts have initiated a 
transformation of the pharmaceutical market. Whereas insured 
individuals formerly purchased drugs at retail prices at 
pharmacies and then sought reimbursement, now third-party 
payers influence which drug is purchased, how much is paid for 
it, and where it is purchased.
    A common technique to manage pharmacy care and control 
costs is to use a formulary. A formulary is a list of 
prescription drugs, grouped by therapeutic class, that a health 
plan or insurer prefers and may encourage doctors to prescribe. 
Decisions about which drugs to include in a formulary are based 
on the drugs' medical value and price. The inclusion of a drug 
in a formulary and its cost can affect how frequently it is 
prescribed and purchased and, therefore, can affect its market 
share.
    Formularies can be open, incentive-based, or closed. Open 
formularies are often referred to as ``voluntary'' because 
enrollees are not penalized if their physicians prescribe 
nonformulary drugs. Incentive-based formularies generally offer 
enrollees lower copayments for the preferred formulary or 
generic drugs. Incentive-based or managed formularies are 
becoming more popular because they combine flexibility and 
greater cost-control features than open formularies. A closed 
formulary limits insurance coverage to the formulary drugs and 
requires enrollees to pay the full cost of nonformulary drugs 
prescribed by their physicians.
    Another way in which the market has been transformed is 
through the use of pharmacy benefit managers (PBM) by health 
plans and insurers to administer and manage prescription drug 
benefits. PBMs offer a range of services, including 
prescription claims processing, mail-service pharmacy, 
formulary development and management, pharmacy network 
development, generic substitution incentives, and drug 
utilization review. PBMs also negotiate discounts and rebates 
on prescription drugs with manufacturers.

EXPANDING ACCESS TO PRESCRIPTION DRUGS INVOLVES DIFFICULT 
DESIGN DECISIONS

    Expanding access to more affordable prescription drugs 
could involve either subsidizing prescription drug coverage or 
allowing beneficiaries access to discounted pharmaceutical 
prices. The design of a drug coverage option, that is, the 
scope of the benefit, the covered population, and the 
mechanisms used to contain costs, as well as its implementation 
will determine the effect of the option on beneficiaries, 
Medicare or federal spending, and the pharmaceutical market. A 
new benefit would need to be crafted to balance competing 
concerns about the sustainability of Medicare, federal 
obligations, and the hardship faced by some beneficiaries. 
Similarly, the effect of granting some beneficiaries access to 
discounted prices will hinge on details such as the price of 
the drugs after the discount, how discounts are determined and 
secured, and which beneficiaries are eligible.
    The relative merits of any approach should be carefully 
assessed. We suggest that the following five criteria be 
considered in evaluating any option. (1) Affordability: an 
option should be evaluated in terms of its effect on public 
outlays for the long term. (2) Equity: an option should provide 
equitable access across groups of beneficiaries and be fair to 
affected providers. (3) Adequacy: an option should provide 
appropriate beneficiary incentives for prudent utilization, 
support standard treatment options for beneficiaries, and not 
impede effective and clinically meaningful innovations. (4) 
Feasibility: an option should incorporate such administrative 
essentials as implementation and cost and quality monitoring 
techniques. (5) Acceptance: an option should account for the 
need to educate the beneficiary and provider communities about 
its costs and the realities of trade-offs required by 
significant policy changes.

Adding a Medicare Benefit

    Expanding Medicare coverage to include prescription drugs 
would entail numerous benefit design decisions that would 
affect the cost of this expansion as well as its acceptability. 
A basic design decision concerns whether financial assistance 
provided for the benefit would be targeted to those with the 
greatest need--owing to a lack of existing drug coverage, high 
drug expenditures, or poverty--or whether the public financial 
subsidies would be available to all beneficiaries. The 
President's proposal extends coverage to all beneficiaries, 
with greater government subsidies for the poor. The Breaux-
Frist Medicare reform proposal incorporates optional drug 
coverage, which is subsidized fully for the poor and partially 
for others. The generosity of the benefit--the extent of 
beneficiary copayments, coverage limits, and catastrophic 
protections--will also be a major factor in assessing the 
impact of this benefit on the Medicare program. The President's 
benefit design incorporates 50 percent beneficiary copayments; 
an annual benefit limit; and a cap on catastrophic drug costs, 
which is yet to be designed. Under the Breaux-Frist approach, 
competing health plans could design their own copayment 
structure, with requirements on the benefit's actuarial value 
but no provision to limit beneficiary catastrophic drug costs.
    Benefit cost-control provisions for the traditional 
Medicare program may present some of the thorniest drug benefit 
design decisions. Recent experience provides two general 
approaches. One would involve the Medicare program obtaining 
price discounts from manufacturers. Such an arrangement could 
be modeled after Medicaid's drug rebate program. While the 
discounts in aggregate would likely be substantial, this 
approach lacks the flexibility to achieve the greatest control 
over spending. It could not effectively influence or steer 
utilization because it does not include incentives that would 
encourage beneficiaries to make cost-conscious decisions. The 
second approach would draw from private sector experience in 
negotiating price discounts from manufacturers in exchange for 
shifting market share. Some plans and insurers employ PBMs to 
manage their drug benefits, including claims processing, 
negotiating with manufacturers, establishing lists of drug 
products that are preferred because of efficacy or price, and 
developing beneficiary incentive approaches to control spending 
and use. Applying these techniques to the entire Medicare 
program, however, would be difficult because of its size, the 
need for transparency in its actions, and the imperative for 
equity for its beneficiaries.

Medicaid Programs Rely on Rebates and Have Limited Utilization 
Controls

    As the largest government payer for prescription drugs, 
Medicaid drug expenditures account for about 17 percent of the 
domestic pharmaceutical market. Before the enactment of the 
Medicaid drug rebate program under the Omnibus Budget 
Reconciliation Act of 1990 (OBRA), state Medicaid programs paid 
close to retail prices for outpatient drugs. Other large 
purchasers, such as HMOs and hospitals, negotiated discounts 
with manufacturers and paid considerably less.
    The rebate program required drug manufacturers to rebate to 
state Medicaid programs a percentage off of the average price 
wholesalers pay manufacturers. The rebates were based on a 
percentage reduction that reflects the lowest or ``best'' 
prices the manufacturer charged other purchasers and the volume 
of purchases by Medicaid recipients. In return for the rebates, 
state Medicaid programs must cover all drugs manufactured by 
pharmaceutical companies that entered into rebate agreements 
with HCFA.\12\
---------------------------------------------------------------------------
    \12\ OBRA 1990 allowed the states to exclude certain classes of 
drugs.
---------------------------------------------------------------------------
    After the rebate program's enactment, a number of market 
changes affected other purchasers of prescription drugs and the 
amount of the rebates that Medicaid programs received. Drug 
manufacturers substantially reduced the price discounts they 
offered to many large private purchasers, such as HMOs. 
Therefore, the market quickly adjusted by increasing drug 
prices to compensate for rebates obtained by the Medicaid 
program.
    Although the states have received billions of dollars in 
rebates from drug manufacturers since OBRA's enactment, state 
Medicaid directors have expressed concerns about the rebate 
program. The principal concern involves OBRA's requirement to 
provide access to all the drugs of every manufacturer that 
offers rebates, which limits the utilization controls Medicaid 
programs can use at a time when prescription drug expenditures 
are rapidly increasing. Although the programs can require 
recipients to obtain prior authorization for particular drugs 
and can impose monthly limits on the number of covered 
prescriptions, they cannot take advantage of other techniques, 
such as incentive-based formularies, to steer recipients to 
less expensive drugs. The few cost-control strategies available 
to state Medicaid programs can add to the administrative burden 
on state Medicaid programs.

Other Payers Employ Various Techniques to Control Expenditures

    Other payers, such as private and federal employer health 
plans and Medicare+Choice plans, have taken a different 
approach to managing their prescription drug benefits. They 
typically use beneficiary copayments to control prescription 
drug use, and they use formularies to both control use and 
obtain better prices by concentrating purchases on selected 
drugs. In many cases, these plans and insurers retain a PBM's 
services to manage their pharmacy benefit and control spending.
    Beneficiary cost-sharing plays a central role in attempting 
to influence drug utilization. Copayments are frequently 
structured to influence both the choice of drugs and the 
purchasing arrangements. While formulary restrictions can 
channel purchases to preferred drugs, closed formularies, which 
provide reimbursement only for preferred drugs, have generated 
substantial dissatisfaction among consumers. As a result, many 
plans link their cost-sharing requirements and formulary lists. 
The fastest growing trend today is the use of a formulary that 
covers all drugs but that includes beneficiary cost-sharing 
that varies for different drugs--typically a smaller copayment 
for generic drugs, a larger one for preferred drugs, and an 
even larger one for all other drugs. Reduced copayments have 
also been used to encourage enrollees using maintenance drugs 
for chronic conditions to obtain them from particular 
suppliers, like a mail-order pharmacy.
    Plans and insurers have turned to PBMs for assistance in 
establishing formularies, negotiating prices with manufacturers 
and pharmacies, processing beneficiaries' claims, and reviewing 
drug utilization. Because PBMs manage drug benefits for 
multiple purchasers, they often may have more leverage than 
individual plans in negotiating prices through their greater 
purchasing power.
    Traditional fee-for-service Medicare has generally 
established reimbursement rates for services like those 
provided by physicians and hospitals and then processed and 
paid claims with few utilization controls. Adopting some of the 
techniques used by private plans and insurers might help better 
control costs. However, how to adapt those techniques to the 
characteristics and size of the Medicare program raises 
questions.
    Negotiated or competitively determined prices would be 
superior to administered prices only if Medicare could employ 
some of the utilization controls that come from having a 
formulary and differential beneficiary cost-sharing. In this 
manner, Medicare would be able to negotiate significantly 
discounted prices by promising to deliver a larger market share 
for a manufacturer's product. Manufacturers would have no 
incentive to offer a deep discount if all drugs in a 
therapeutic class were covered on the same terms. Without a 
promised share of the Medicare market, these manufacturers 
might reap greater returns from charging higher prices and by 
concentrating marketing efforts on physicians and consumers to 
influence prescribing patterns.
    Implementing a formulary and other utilization controls 
could prove difficult for Medicare. Developing a formulary 
involves determining which drugs are therapeutically equivalent 
so that several from each class can be included. Plans and PBMs 
currently make those determinations privately--something that 
would not be possible for Medicare, which must have transparent 
policies that are determined openly. Given the stakes involved 
in selecting drugs, one can imagine the intensive efforts to 
offer input to and scrutinize the selection process.
    Medicare may also find it impossible to delegate this task 
to one or multiple PBMs. A single PBM contractor would likely 
be subject to the same level of scrutiny as the program. Such 
scrutiny could compromise the flexibility PBMs have used to 
generate savings. An alternative would be to grant flexibility 
to multiple PBMs that are each responsible only for a share of 
the market. Contracting with multiple PBMs, though, raises 
other issues. If each PBM has exclusive responsibility for a 
geographic area, beneficiaries who need certain drugs could be 
advantaged or disadvantaged merely because of where they live. 
If multiple PBMs operated in each area, beneficiaries could 
choose one to administer their drug benefit. This raises 
questions about how to inform beneficiaries of the differences 
in each PBM's policies and whether and how to risk-adjust 
payments to PBMs for differences in the health status of the 
beneficiaries using them.

Extending Federal Price Discounts to Beneficiaries

    Another option before the Congress would allow Medicare 
beneficiaries to purchase prescription drugs at the lowest 
price paid by the federal government. Because of their large 
purchasing power, federal agencies, such as, the Departments of 
Veterans Affairs (VA) and Defense (DOD), have access to 
prescription drug prices that often are considerably lower than 
retail prices. Extending these discounts to Medicare 
beneficiaries, or some groups of beneficiaries, could have a 
measurable effect on lowering their out-of-pocket spending, 
although whether this would adequately increase access or raise 
prices paid by other purchasers that negotiate drug discounts 
is unknown.
    Typically, federal agencies obtain prescription drugs at 
prices listed in the federal supply schedule (FSS) for 
pharmaceuticals.\13\ FSS prices represent a significant 
discount off the prices drug manufacturers charge 
wholesalers.\14\ Under the Veterans Health Care Act of 1992, 
drug manufacturers must make their brand-named drugs available 
to federal agencies at the FSS price in order to participate in 
the Medicaid program.\15\ The act requires that the FSS price 
for VA, DOD, the Public Health Service, and the Coast Guard be 
at least 24 percent below the price that the manufacturers 
charge wholesalers.\16\
---------------------------------------------------------------------------
    \13\ The FSS for pharmaceuticals is a price catalog currently 
containing over 17,000 pharmaceutical products available to federal 
agencies.
    \14\ FSS prices are set through negotiations between VA, on behalf 
of the government, and drug manufacturers and are based on the prices 
that manufacturers offer their most favored nonfederal customers.
    \15\ The act covers single-source drugs, innovator multiple-source 
drugs, insulin, and biological products such as vaccines and 
antitoxins. The act does not cover noninnovator multiple-source or 
generic drugs.
    \16\ The act requires that manufacturers sell drugs covered by the 
act at no more that 76 percent of the nonfederal average manufacturer's 
price, a level referred to as the federal ceiling price. The nonfederal 
average manufacturer's price is the weighted average price of each 
single form and dosage unit of a drug that is paid by wholesalers in 
the United States to a manufacturer, taking into account any cash 
discounts or similar price reductiions. Prices paid by the fereral 
government are excluded from this calculation.
---------------------------------------------------------------------------
    Although most federal prescription drug purchases are made 
at FSS prices, in some cases, federal agencies are able to 
purchase drugs at even lower prices. For example, VA has used 
national contracts awarded on a competitive basis for specific 
drugs considered therapeutically interchangeable. These 
contracts enable VA to obtain larger discounts from 
manufacturers by channeling greater volume to certain 
pharmaceutical products.
    Providing Medicare beneficiaries access to the lowest 
federal prices could result in important out-of-pocket savings 
to those without coverage who are paying close to retail 
prices. However, concerns exist that extending federal 
discounts to Medicare beneficiaries could lead to price 
increases to federal agencies and other purchasers since the 
discount is based on prices determined by manufacturers. 
Federal efforts to lower Medicaid drug prices demonstrate the 
potential for this to occur. While it is not possible to 
predict how federal drug prices would change if Medicare 
beneficiaries are given access to them, the larger the market 
that seeks to take advantage of these prices, the greater the 
economic incentive would be for drug manufacturers to raise 
federal prices to limit the impact of giving lower prices to 
more purchasers.
EXPANDING BENEFITS NEEDS TO BE CONSIDERED IN LIGHT OF LARGER 
MEDICARE FISCAL CONCERNS

    The current Medicare program, without improvements, is ill 
suited to serve future generations of seniors and eligible 
disabled Americans. On the one hand, the program is fiscally 
unsustainable in its present form, as the disparity between 
program expenditures and program revenues is expected to widen 
dramatically in the coming years. On the other hand, Medicare's 
benefit package contains gaps in desired coverage, most notably 
the lack of outpatient prescription drug coverage, compared 
with private employer coverage. Any option to modernize the 
benefits runs the risk of exacerbating the fiscal imbalance of 
the programs. That is why we believe that expansions should be 
made in the context of overall program reforms that are 
designed to make the program more sustainable over the long 
term. Any discussions about expanding beneficiary access to 
prescription drugs should carefully consider targeting 
financial help to those most in need and minimizing the 
substitution of public funds for private funds. Employers that 
offer drug coverage through a retiree health plan may choose to 
adapt their health coverage if a Medicare drug benefit is 
available. A key characteristic of America's voluntary, 
employer-based system of health insurance is an employer's 
freedom to modify the conditions of coverage or to terminate 
benefits.

Medicare's Financial Condition

    Unlike private trust funds that can set aside money for the 
future by investing in financial assets, the Medicare Hospital 
Insurance (HI) Trust Fund--which pays for inpatient hospital 
stays, skilled nursing care, hospice, and certain home health 
services--is essentially an accounting device. It allows the 
government to track the extent to which earmarked payroll taxes 
cover Medicare's HI outlays. In serving the tracking purpose, 
the 1999 Trustees' annual report showed that Medicare's HI 
component has been, on a cash basis, in the red since 1992, and 
in fiscal year 1998, earmarked payroll taxes covered only 89 
percent of HI spending. In the Trustees' report, issued in 
March 1999, projected continued cash deficits for the HI trust 
fund. (See fig. 3.)

Figure 3: Financial Outlook of the Hospital Insurance Trust 
Fund, 1990 to 2025

[GRAPHIC] [TIFF OMITTED] T0064.003

    Source: 1999 Annual Report, Board of Trustees of the 
Federal Hospital Insurance Trust Fund.

    When the program has a cash deficit, as it did from 1992 
through 1998, Medicare is a net claimant on the Treasury--a 
threshold that Social Security is not currently expected to 
reach until 2014. To finance these cash deficits, Medicare drew 
on its special issue Treasury securities acquired during the 
years when the program generates a cash surplus. In essence, 
for Medicare to ``redeem'' its securities, the government must 
raise taxes, cut spending for other programs, or reduce the 
projected surplus. Outlays for Medicare services covered under 
Supplementary Medical Insurance (SMI)--physician and outpatient 
hospital services, diagnostic tests, and certain other medical 
services and supplies--are already funded largely through 
general revenues.
    Although the Office of Management and Budget (OMB) has 
recently reported a $12 billion cash surplus for the HI program 
in fiscal year 1999 due to lower than expected program outlays, 
the long-term financial outlook for Medicare is expected to 
deteriorate. Medicare's rolls are expanding and are projected 
to increase rapidly with the retirement of the baby boomers. 
Today's elderly make up about 13 percent of the total 
population; by 2030, they will comprise 20 percent as the baby 
boom generation ages and the ratio of workers to retirees 
declines from 3.4 to 1 today to roughly 2 to 1.
    Without meaningful reform, the long-term financial outlook 
for Medicare is bleak. Together, Medicare's HI and SMI 
expenditures are expected to increase dramatically, rising from 
about 12 percent in 1999 to about a quarter of all federal 
revenues by mid-century. Over the same time frame, Medicare's 
expenditures are expected to double as a share of the economy, 
from 2.5 to 5.3 percent, as shown in figure 4.

Figure 4: Medicare Spending as a Percentage of Gross Domestic 
Product (GDP)1999 to 2073

[GRAPHIC] [TIFF OMITTED] T0064.004

    Source: 1999 Annual Report, Board of Trustees of the 
Federal Hospital Insurance Trust Fund and 1999 Annual Report, 
Federal Supplementary Insurance Trust Fund.

    The progressive absorption of a greater share of the 
nation's resources for health care, like Social Security, is in 
part a reflection of the rising share of elderly population, 
but Medicare growth rates also reflect the escalation of health 
care costs at rates well exceeding general rates of inflation. 
Increases in the number and quality of health care services 
have been fueled by the explosive growth of medical technology. 
Moreover, the actual costs of health care consumption are not 
transparent. Third-party payers generally insulate consumers 
from the cost of health care decisions. In traditional 
Medicare, for example, the impact of the cost-sharing 
provisions designed to curb the use of services is muted 
because about 80 percent of beneficiaries have some form of 
supplemental health care coverage (such as Medigap insurance) 
that pays these costs. For these reasons, among others, 
Medicare represents a much greater and more complex fiscal 
challenge than even Social Security over the longer term.
    When viewed from the perspective of the entire budget and 
the economy, the growth in Medicare spending will become 
progressively unsustainable over the longer term. Our updated 
budget simulations show that to move into the future without 
making changes in the Social Security, Medicare, and Medicaid 
programs is to envision a very different role for the federal 
government. Assuming, for example, that the Congress and the 
President adhere to the often-stated goal of saving the Social 
Security surpluses, our long-term model shows a world by 2030 
in which Social Security, Medicare, and Medicaid increasingly 
absorb available revenues within the federal budget. Under this 
scenario, these programs would absorb more than three-quarters 
of total federal revenue. (See fig. 5.) Budgetary flexibility 
would be drastically constrained and little room would be left 
for programs for national defense, the young, infrastructure, 
and law enforcement.

Figure 5: Composition of Spending as a Share of GDP Under 
``Eliminate Non-Social Security Surpluses'' Simulation

[GRAPHIC] [TIFF OMITTED] T0064.005

    *The ``Eliminate non-Social Security surpluses'' simulation 
can only be run through 2066 due to the elimination of the 
capital stock.

Notes:

    1. Revenue as a share of GDP during the simulation period 
is lower than the 1999 level due to unspecified permanent 
policy actions that reduce revenue and increase spending to 
eliminate the non-Social Security surpluses.
    2. Medicare expenditure projections follow the Trustees' 
1999 intermediate assumptions. The projections reflect the 
current benefit and financing structure.
    Source: GAO's January 2000 analysis.

    When viewed together with Social Security, the financial 
burden of Medicare on future taxpayers becomes unsustainable, 
absent reform. As figure 6 shows, the cost of these two 
programs combined would nearly double as a share of the payroll 
tax base over the long term. Assuming no other changes, these 
programs would constitute an unimaginable drain on the earnings 
of our future workers.

Figure 6: Social Security and Medicare HI as a Percentage of 
Taxable Payroll, 1999 to 2074

[GRAPHIC] [TIFF OMITTED] T0064.006

    Source: 1999 Annual Report, Board of Trustees of the 
Federal Hospital Insurance Trust Fund, and 1999 Annual Report, 
Board of Trustees of the Federal Old Age and Survivors 
Disability Insurance Trust Funds.
    While the problems facing the Social Security program are 
significant, Medicare's challenges are even more daunting. To 
close Social Security's deficit today would require a 17 
percent increase in the payroll tax, whereas the HI payroll tax 
would have to be raised 50 percent to restore actuarial balance 
to the HI trust fund. This analysis, moreover, does not 
incorporate the financing challenges associated with the SMI 
and Medicaid programs.
    Early action to address the structural imbalances in 
Medicare is critical. First, ample time is required to phase in 
the reforms needed to put this program on a more sustainable 
footing before the baby boomers retire. Second, timely action 
to bring costs down pays large fiscal dividends for the program 
and the budget. The high projected growth of Medicare in the 
coming years means that the earlier the reform begins, the 
greater the savings will be as a result of the effects of 
compounding.
    The actions necessary to bring about a more sustainable 
program will no doubt call for some hard choices. Some suggest 
that the size of the imbalances between Medicare's outlays and 
payroll tax revenues for the HI program may well justify the 
need for additional resources. One possible source could be 
general revenues. Although this may eventually prove necessary, 
such additional financing should be considered as part of a 
broader initiative to ensure the program's long-range financial 
integrity and sustainability.
    What concerns us most is that devoting general funds to the 
HI trust fund may be used to extend HI's solvency without 
addressing the hard choices needed to make the whole Medicare 
program more sustainable in economic or budgetary terms. 
Increasing the HI trust fund balance alone, without underlying 
program reform, does nothing to make the Medicare program more 
sustainable--that is, it does not reduce the program's 
projected share of GDP or the federal budget. From a 
macroeconomic perspective, the critical question is not how 
much a trust fund has in assets but whether the government as a 
whole has the economic capacity to finance all Medicare's 
promised benefits--both now and in the future. We must keep in 
mind the unprecedented challenge facing future generations in 
our aging society. Relieving them of some of the financial 
burden of today's commitments would help preserve some 
budgetary flexibility for future generations to make their own 
choices.
    If more fundamental program reforms are not made, we fear 
that general fund infusions would interfere with the vital 
signaling function that trust fund mechanisms can have for 
policymakers about underlying fiscal imbalances in covered 
programs. The greatest risk is that dedicating general funds to 
the HI program will reduce the sense of urgency that impending 
trust fund bankruptcy provides to policymakers by artificially 
extending the solvency of the HI program. Furthermore, 
increasing the trust fund's paper solvency does not address 
cost growth in the SMI portion of Medicare, which is projected 
to grow even faster than HI in coming decades, assuming no 
additional SMI benefits.
    The issue of the extent to which general funds are an 
appropriate financing mechanism for the Medicare program would 
remain important under financing arrangements that differed 
from those in place in the current HI and SMI structures. For 
example, under approaches that would combine the two trust 
funds, a continued need would exist for measures of program 
sustainability that would signal potential future fiscal 
imbalance. Such measures might include the percentage of 
program funding provided by general revenues, the percentage of 
total federal revenues or gross domestic product devoted to 
Medicare, or program spending per enrollee. As such measures 
were developed, questions would need to be asked about the 
appropriate level of general revenue funding. Regardless of the 
measure chosen, the real question would be what actions should 
be taken when and if the chosen cap is reached.

Long-Term Fiscal Policy Choices

    Beyond reforming the Medicare program itself, maintaining 
an overall sustainable fiscal policy and strong economy is 
vital to enhancing our nation's future capacity to afford 
paying benefits in the face of an aging society. Decisions on 
how we use today's surpluses can have wide-ranging impacts on 
our ability to afford tomorrow's commitments.
    As we know, there have been a variety of proposals to use 
the surpluses for purposes other than debt reduction. Although 
these proposals have various pros and cons, we need to be 
mindful of the risk associated with using projected surpluses 
to finance permanent future claims on the budget, whether they 
are on the spending or the tax side. Commitments often prove to 
be permanent, while projected surpluses can be fleeting. For 
instance, current projections assume full compliance with tight 
discretionary spending caps. Moreover, relatively small changes 
in economic assumptions can lead to very large changes in the 
fiscal outlook, especially when carried out over a decade. In 
its January 2000 report,\17\ CBO compared the actual deficits 
or surpluses for 1986 through 1999 with the first projection it 
had produced 5 years before the start of each fiscal year. 
Excluding the estimated impact of legislation, CBO stated that 
its errors in projecting the federal surplus or deficit 
averaged about 2.4 percent of GDP in the fifth year beyond the 
current year. For example, such a shift in 2005 would mean a 
potential swing of about $285 billion in the projected surplus 
for that year.
---------------------------------------------------------------------------
    \17\ The Economic and Budget Outlook: Fiscal Years 2001-2010 (CBO, 
Jan. 2000).
---------------------------------------------------------------------------
    Although most would not argue for devoting 100 percent of 
the surplus to debt reduction over the next 10 years, saving a 
good portion of our surpluses would yield fiscal and economic 
dividends as the nation faces the challenges of financing an 
aging society. Our work on the long-term budget outlook 
illustrates the benefits of maintaining surpluses for debt 
reduction. Reducing the publicly held debt reduces interest 
costs, freeing up budgetary resources for other programmatic 
priorities. For the economy, running surpluses and reducing 
debt increase national saving and free up resources for private 
investment. These results, in turn, lead to stronger economic 
growth and higher incomes over the long term.
    Over the last several years, our simulations illustrate the 
long-term economic consequences flowing from different fiscal 
policy paths.\18\ Our models consistently show that saving all 
or a major share of projected budget surpluses ultimately leads 
to demonstrable gains in GDP per capita. Over a 50-year period, 
GDP per capita is estimated to more than double from present 
levels by saving all or most of projected surpluses, while 
incomes would eventually fall if we failed to sustain any of 
the surplus. Although rising productivity and living standards 
are always important, they are especially critical for the 21st 
century, for they will increase the economic capacity of the 
projected smaller workforce to finance future government 
programs along with the obligations and commitments for the 
baby boomers' retirement.
---------------------------------------------------------------------------
    \18\ See Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-
98-83, Feb. 25, 1998) and Budget Issues: Analysis of Long-Term Fiscal 
Outlook (GAO/AIMD/OCE-98-19, Oct. 22, 1997).

---------------------------------------------------------------------------
CONCLUDING OBSERVATIONS

    Updating the Medicare benefit package may be a necessary 
part of any realistic reform program to address the legitimate 
expectations of an aging society for health care, both now and 
in the future. Expanding access to prescription drugs could 
ease the significant financial burden some Medicare 
beneficiaries face because of outpatient drug costs. Such 
changes, however, need to be considered as part of a broader 
initiative to address Medicare's current fiscal imbalance and 
promote the program's longer-term sustainability. Balancing 
these competing concerns may require the best from government-
run programs and private sector efforts to modernize Medicare 
for the future. Further, the Congress should consider adequate 
fiscal incentives to control costs and a targeting strategy in 
connection with any proposal to provide new benefits such as 
prescription drugs.
    The Congress and the President may ultimately decide to 
include some form of prescription drug coverage as part of 
Medicare. Given this expectation and the future projected 
growth of the program, some additional revenue sources may in 
fact be a necessary component of Medicare reform. However, it 
is essential that we not take our eye off the ball. The most 
critical issue facing Medicare is the need to ensure the 
program's long range financial integrity and sustainability. 
The 1999 annual reports of the Medicare Trustees project that 
program costs will continue to grow faster than the rest of the 
economy. Care must be taken to ensure that any potential 
expansion of the program be balanced with other programmatic 
reforms so that we do not worsen Medicare's existing financial 
imbalances.
    Current budget surpluses represent both an opportunity and 
an obligation. We have an opportunity to use our unprecedented 
economic wealth and fiscal good fortune to address today's 
needs but an obligation to do so in a way that improves the 
prospects for future generations. This generation has a 
stewardship responsibility to future generations to reduce the 
debt burden they will inherit, to provide a strong foundation 
for future economic growth, and to ensure that future 
commitments are both adequate and affordable. Prudence requires 
making the tough choices today while the economy is healthy and 
the workforce is relatively large. National saving pays future 
dividends over the long term, but only if meaningful reform 
begins soon. Entitlement reform is best done with considerable 
lead-time to phase in changes and before the changes that are 
needed become dramatic and disruptive. The prudent use of the 
nation's current and projected budget surpluses combined with 
meaningful Medicare and Social Security program reforms can 
help achieve both of these goals.

                                --------

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

GAO CONTACTS AND ACKNOWLEDGMENTS

    For future contacts regarding this testimony, please call 
Paul L. Posner, Director, Budget Issues, at (202) 512-9573 or 
William J. Scanlon, Director, Health Financing and Public 
Health Issues at (202) 512-7114. Other individuals who made key 
contributions include Linda F. Baker, Laura A. Dummit, John C. 
Hansen, Tricia A. Spellman, and James R. McTigue.

                                


    Chairman Thomas. Thank you very much, Mr. Walker.
    One of the concerns that I would like to deal with right 
off the top is oftentimes Medicare is compared to Social 
Security and they are the two basic safety net entitlements for 
seniors.
    But is it not true that the Social Security trust fund 
relies only on the payroll tax?
    Mr. Walker. The payroll tax, as well as some income taxes 
on earnings, but primarily on the--payroll tax.
    Chairman Thomas. Very small amount and that a solvency test 
based upon how much is coming in and how much is going out is a 
legitimate test of how many years you can get out of the Social 
Security trust fund.
    Mr. Walker. It is a signal.
    Chairman Thomas. And with Medicare: Part A being a trust 
fund similar to Social Security, part B being a general fund 
draw, that the solvency argument for part A is not really 
analogous to Social Security; is that a fair thing to say?
    Mr. Walker. That is fair because by definition part B is a 
term insurance program. It is intended to have enough reserves 
at the end of the year to pay claims incurred but not reported, 
claims reported but not paid, and you recalculate the premium 
and financing for general revenues every year.
    Chairman Thomas. In fact, one of the concerns that led to 
the Balanced Budget Act of 1997 was the then-threatened 
insolvency of the part A plan by 2003, 2004, which sounded 
farther away in 1999 but now that it is 2000 it sounds a lot 
closer than it used to. And that one of the component parts of 
the Balanced Budget Act was to take a program that had been 
funded under part A and move it to the general fund, thereby 
relieving the costs in the part A fund, but it still got paid 
for because it was over in part B. Could you do that without 
statutory change of a significant nature with the Social 
Security trust fund?
    Mr. Walker. In what regard, Mr. Chairman?
    Chairman Thomas. Well, what you just did was take general 
fund money and increase that load on the overall Medicare 
payment structure between part A and Part B.
    Mr. Walker. Well, there have been, as you pointed out, 
circumstances in the past where different types of benefits 
have been moved----
    Chairman Thomas. And it was home health care that was 
shifted from part A to Part B.
    Mr. Walker. That is correct.
    Chairman Thomas. Doesn't the President's budget this year 
contemplate moving that somewhat phony solvency test on part A, 
as though it is supposed to have some fundamental significance, 
from the current roughly 20/15, because the economy has the 
improved and the Medicare payments have been slightly less than 
we had anticipated, by simply taking general fund money and 
proposing it surplus, general fund money, moving it over to 
Part A?
    So, that really if we wanted to play the game of Medicare 
being adequately funded using a part A solvency test, all we 
have to do is just periodically shift programs from part A to 
part B and/or create an open channel of moving general fund 
money over to part A so that it never, ever reaches the point 
of what a solvency test is supposed to judge: The inflow and 
outflow of the payroll taxes in Part A.
    So, of what use is a quote/unquote solvency test on part A 
as a real judge of how many resources are being utilized in 
this area and what is the appropriate balance between a 
dedicated trust fund payroll tax that people pay into and the 
general fund which some folks may have never paid into?
    Mr. Walker. Mr. Chairman, solvency is simply not enough. 
Sustainability is equally or more important than solvency; 
solvency is nothing more than a signal. The chart that we had 
up before that demonstrated the burdens on the economy that are 
going to be associated with health care in general and 
entitlement programs in particular directly bears on the point 
of sustainability. Will we be able to deliver on our promises?
    Chairman Thomas. Excuse me. Couldn't you sustain the 
Medicare Trust Fund? I mean, for example, the President 
proposes transferring $700 billion from general revenues. 
Couldn't you sustain this fund by transferring $700 billion 
than a trillion, than a trillion and a half?
    The fund could be sustained. The only limit would be the 
general fund's ability to put those moneys into so-called part 
A trust fund.
    Mr. Walker. That is the fundamental difference, Mr. 
Chairman. In the vernacular that I use you could end up putting 
more securities into the trust fund and that would extend 
solvency, and it would give the trust fund, the HI Trust Fund, 
for example, a first claim on future general revenues up and to 
the extent of those securities. On the other hand, it doesn't 
deal with the economic sustainability issue which is what 
percentage of the Federal budget, what percentage of the 
economy is represented by these programs and can we sustain 
that. Can we deliver on that promise? That is important and 
that is what this chart demonstrates.
    Chairman Thomas. So, really partly our effort here is not 
about the solvency of the part A trust fund. It also, in part, 
is not totally about adding one more benefit to a basic program 
but that at some point the society has to ask itself to what 
extent do we want to take scarce, relatively or less so, 
resources and, without a clear programmatic understanding of 
where we are going, simply transfer.
    One of the concerns the Medicare Commission had was exactly 
that point and I do have to say that the Senator from Nebraska, 
Senator Kerrey, was very instrumental in creating what, for 
want of a better term, we called programmatic solvency, which 
was to examine a percentage of the general fund that would be 
transferred. That, I think, is kind of a crude measure of what 
you are talking about; is it not?
    Mr. Walker. It is but even under that measure, for example, 
which the Breaux-Frist bill has, which I believe you are 
talking about the 40 percent----
    Chairman Thomas. Yes. That was originally a Commission idea 
and Kerrey was----
    Mr. Stark. Even under that, you are going to hit that cap. 
And the question is, what will end up happening when you hit 
that cap? Really that is similar to what the solvency test is 
for the trust funds. And we need to deal with the 
sustainability issue, which is----
    Chairman Thomas. And we understood that at some time you 
would hit that cap but then it would at least trigger a public 
discussion of more put in by the beneficiaries, more put in by 
the beneficiaries to the payroll tax, a reexamination of the 
benefits, a reexamination of the fundamental program and the 
way it works or a reexamination of that 40 percent. At least it 
would be an event that would trigger a discussion.
    And what we are trying to do is trigger that very 
discussion, I think, without any kind of a dramatic example of 
why we need to carry out that discussion. And the problem is 
that we hear, well, we can make it solvent to 2025, all you 
have to do is this. Don't worry about it. Seniors deserve 
everything they get and more. And that it is very difficult to 
create a meaningful debate over what we are really talking 
about which is to create a sustainable program for today's 
seniors--enhanced, no question, by prescription drugs which are 
an essential part of medical practice today--but sustainable 
for seniors to come.
    And it is susceptible to the political siren of let us just 
answer the question of prescription drugs and worry about that 
fundamental structure later. If you don't do it over 
prescription drugs, what is going to be the next big event that 
will force us to address reform and when is it going to occur?
    I believe we share that concern.
    Mr. Walker. There are two key issues here, I think, at 
least, Mr. Chairman. First is the issue of sustainability which 
we have talked about. But the other issue is flexibility. How 
much choice are we going to provide Generation Xers and future 
generations of Americans to be able to make their own choices 
about how the resources of tomorrow are going to be allocated. 
To what extent are we going to make choices for them today that 
will increase their burdens and reduce their flexibility to 
make some of their own decisions?
    Chairman Thomas. I want to underscore that point because 
when you talk about choices, you are not necessarily talking 
about them as seniors having a multitude of choices among plans 
all of which cost far more than the society is able to sustain. 
It is, in fact, taking that dollar, which ultimately is the 
total package available, and what portion of those resources 
will have been committed by our failure to make the changes 
today to that program which limits their ability to make 
decisions in the future. Isn't that the choice question you are 
talking about?
    Mr. Walker. That is correct, as well as choices on 
discretionary spending.
    Chairman Thomas. Exactly.
    Mr. Walker. Because there are a number of important 
programs in discretionary spending. National defense. The 
judicial system. The infrastructure of the nation. Children's 
programs. A number of things that are in there that are going 
to be crowded out if we don't get on with more fundamental 
reforms.
    Chairman Thomas. Well, there are some individuals in some 
groups that believe seniors have the first call and almost 
total call on that discretionary dollar. And there has to be a 
system in which there is an open public debate about 
priorities. That has not occurred and it needs to.
    Thank you very much for your testimony.
    Mr. Walker. Thank you.
    Chairman Thomas. Does the gentleman from California wish to 
inquire?
    Mr. Stark. Thank you, Mr. Chairman.
    I guess the other side of the coin, Mr. Walker, is that my 
understanding--and I don't know how close I am but I will be 
close enough for government work here--is that if we increase 
the Medicare tax by about three-quarters of a percent on both 
sides, the employer and the employee, that we would take care 
of the solvency, with everybody's estimate, for another 50 or 
60 years. Is that a fair----
    Mr. Walker. For part A, 1.46 percent----
    Mr. Stark. Would do it. Now, that is a tax increase, I 
understand, but I am trying to characterize it here just so 
that is the other extreme. That is as far as you would have to 
go to get A solvent.
    Now, on the part B side, the Republicans suggested that we 
have an $800 billion tax cut which also comes out of general 
revenues; does it not? It has the same effect as part B calling 
on general revenues.
    Mr. Walker. That is correct.
    Mr. Stark. Okay. How much can you estimate, to the closest 
$100 billion, how much we would have to put in to set aside to 
make a trust fund for Part B? That 10-year estimate was $700-
and-some-odd billion. That would have solved part B for a long 
time; would it not?
    Mr. Walker. I don't have the exact numbers. But I think 
that is why you have to look at the total projected cost. 
Because, as you know, Mr. Stark, part B is funded 25 percent by 
premiums and 75 percent by general revenues.
    Mr. Stark. Well, I know that. Okay. Well, I just wanted to 
suggest that there were options.
    Now, you do, in your written testimony, mention that for a 
variety of factors we need an effective cost control mechanism 
under any option to increase access to prescription drugs. Is 
that your feeling?
    Mr. Walker. I think we have to be concerned with effective 
incentives to control utilization and I think we have to 
recognize the difference between, does somebody have access to 
prescription drugs versus can they afford it. For those that 
may not be able to afford it may be possible to target 
financial assistance to those that are truly in need.
    The other thing I think we have to recognize, Mr. Stark, is 
having been Assistant Secretary of Labor for Pensions and 
Health for a number or years and being very familiar with the 
private sector side, employers are looking for a lot of reasons 
to get out of the business of providing prescription drug 
coverage for seniors and we have to be aware of that. Care has 
to be taken to make sure that something is not done to 
facilitate that shift such that the government would then start 
picking up costs that otherwise employers might be picking up.
    Mr. Stark. Are you suggesting that probably it is not such 
a good idea to rely on the generosity of employers to solve the 
problems of the uninsured or to provide pharmaceutical benefits 
for their retirees?
    Mr. Walker. I don't think that you can count on employers 
to voluntarily step it up to the plate to add a lot of burdens 
here.
    Mr. Stark. OK.
    Thank you very much.
    Chairman Thomas. Does the gentlewoman from Connecticut wish 
to inquire?
    Mrs. Johnson. Thank you.
    Mr. Walker, I just wondered whether the GAO has figured out 
what percentage of the gross national product is currently 
being spent on people over 65 and what will be spent on that 
group in 10 years and 20 years if there are no changes in 
current law?
    Mr. Walker. I don't have those percentages off the top of 
my head. I would be more than happy to go back and look and see 
if we have that.
    [The information follows:]
                             U.S. General Accounting Office
                                       Washington, DC 20548
                                                       May 11, 2000

The Honorable Nancy L. Johnson
House of Representatives

Subject: Federal Mandatory Spending on the Elderly

    Dear Mrs. Johnson:
    I am writing to respond to a question you asked the Comptroller 
General at his testimony before the Subcommittee on Health, Committee 
on Ways and Means on Tuesday, February 15, 2000. You asked whether we 
had data on the percentage of the economy currently being spent on 
people aged 65 or over and what the percentage spent on that group 
would be in 10 years and 20 years if there were no changes to current 
law.
    Since the data needed to fully answer this question are not readily 
available, providing a definitive answer would require extensive 
research. To develop information on current and future federal spending 
for the elderly, we contacted various federal agencies and compiled 
data they had available on the largest federal mandatory spending 
programs that provide income transfers and health benefits to the 
elderly. These programs are listed in the enclosure. From these data we 
constructed estimates of federal mandatory outlays for the elderly 
(that is, those aged 65 or over) for fiscal years 2000, 2010, and 2020. 
these estimates reflect current law assumptions and are generally based 
on spending projections obtained from the actuaries' offices at the 
responsible federal agencies. Programs for which we provide estimates 
encompass the major portion of federal spending for the elderly, but 
not all federal spending for the elderly.\1\ Our estimates and the data 
sources we used are provided in the enclosure to this letter.
---------------------------------------------------------------------------
    \1\ A recent report by the Senate Special Committee on Aging 
summarizes and analysis the many federal policies and programs that are 
of the most continuing importance for older persons and their families. 
See Special Committee on Aging, Developments in Aging: 1997 and 1998 (2 
vols.).
---------------------------------------------------------------------------
    We estimate that federal mandatory spending on the elderly for the 
applicable programs as a share of gross domestic product (GDP) will 
grow from 6 percent in 2000 to 6.5 percent in 2010. In the following 
decade, as the baby boom generation begins to retire, this pending will 
accelerate, reaching 8.4 percent of GDP in 2020. This represents a 
growth of about 30 percent in federal mandatory spending on the elderly 
as a share of GDP between 2010 and 2020. Not surprisingly, Social 
Security and Medicare comprise the largest share of federal spending on 
the elderly. Medicaid's spending on the elderly as a share of GDP is 
projected to grow the fastest, doubling over the next 20 years. On the 
other hand, our estimate show that federal spending on civilian and 
military retirees is projected to remain relatively constant as a share 
of the economy.
    Future claims of the elderly in the economy are likely to be larger 
than indicated by our estimates. For example, our estimates do not 
include federal tax expenditures targeted to the elderly, such as the 
extra standard deduction for those elderly taxpayers who do not itemize 
deductions; Veterans Administration expenditures for the elderly; other 
federal programs targeted to or used by the elderly, including those 
for housing and food assistance; or spending by state and local 
governments. In addition, our estimates also do not include private 
spending on the elderly, such as pensions, prescription drugs, or long-
term care including out-of-pocket costs and hours of work foregone by 
those caring for elderly parents.
    If you have any questions regarding the estimates provided here, 
please call me at (202) 512-9573.
            Sincerely yours,
                                            Paul L. Posner,
                                    Director, Budget Issues

                             Estimates of Federal Mandatory Spending for the Elderly
----------------------------------------------------------------------------------------------------------------
                                                                        Federal year
             Percentage of GDP             ---------------------------------------------------------------------
                                                     2000                    2010                   2020
----------------------------------------------------------------------------------------------------------------
     Old-Age and Survivors Insurance a                     3.1                    3.2                    4.2
                            Medicare a                     2.0                    2.3                    3.0
        Supplemental Security Income a                     0.1                    0.1                    0.1
                            Medicaid b                     0.3                    0.4                    0.6
Military retirement and retiree health c                   0.2                    0.2                    0.1
Federal civilian retirement and retiree                    0.4                    0.4                    0.4
                               health c
            Other federal retirement d                     0.1                      e                      e
Estimated federal mandatory spending on                    6.0                    6.5                    8.4
               the elderly and retirees
----------------------------------------------------------------------------------------------------------------
 Notes:
 1. ``Elderly'' is defined as those aged 65 or over.
 2. Spending projections reflect the largest federal mandatory spending programs that provide income transfers
  and health benefits to the elderly. Spending projections do not include Veterans Administration expenditures
  for the elderly or other federal programs targeted to or used by the elderly.
 3. Column totals may not add due to rounding.
a Estimates for elderly share only.
b Estimates reflect the estimated federal share for beneficiaries who originally qualified for Medicaid at age
  65 or older. Spending for beneficiaries who originally qualified for Medicaid on other grounds (e.g.,
  disability) but are aged 65 or over in the projection year is not reflected.
c Estimates for federal civilian retirement reflect Civil Service Retirement System and Federal Employee
  Retirement System defined benefits only. Estimates for federal civilian retiree health reflect spending due to
  annuitants aged 65 and over who remain in the Federal Employee Health Benefits program and their
  dependents,including nonelderly dependents. Estimates for military retiree health reflect all spending for
  retirees and survivors aged 65 and over and their dependents, including nonelderly dependents.
d ``Other federal retirement'' is largely railroad retirement.
e Estimated to be less than 0.1% of GDP.

    Sources:

Old-Age and Survivors Insurance:

    Estimates are based on our analysis of long-term spending 
projections obtained from the Social Security Administration, 
Office of the Chief Actuary. These projections reflect the 
intermediate assumptions of the 2000 Annual Report of the Board 
of Trustees of the Federal Old-Age and Survivors Insurance and 
Disability Insurance Trust Funds.

Medicare Hospital Insurance and Supplementary Medical 
Insurance:

    Estimates are based on GAO analysis of long-term spending 
projections obtained from the Health Care Financing 
Administration, Office of the Actuary. These projections 
reflect the intermediate assumptions of the Annual Report of 
the Board of Trustees of the Federal Hospital Insurance Trust 
Fund, April 2000, and the Annual Report of the Board of 
Trustees of the Supplementary Medical Insurance Trust Fund, 
March 2000.

Supplemental Security Income:

    Estimates are based on our analysis of spending projections 
published in the Annual Report of the Supplemental Security 
Income Program, Social Security Administration, May 1999.

Medicaid:

    For 2000 and 2010, estimates are based on our analysis of 
projections obtained from the Health Care Financing 
Administration. For 2020, estimates are based on our analysis 
of unpublished long-term spending projections obtained from the 
Congressional Budget Office.

Military retirement and health:

    Estimates are based on our analysis of long-term spending 
projections obtained from the Office of the Actuary, Department 
of Defense (DOD).

Federal civilian retirement:

    Estimates are based on our analysis of long-term spending 
projections obtained from the Office of Personnel Management, 
Office of the Actuary.

Federal civilian retiree health:

    Estimates are based on analysis of unpublished projections 
obtained from the Office of Personnel Management, Budget and 
Program Information Division, and the Office of Actuaries.

Other federal retirement:

    Other federal retirement military includes railroad 
retirement. The estimate for railroad retirement is based on 
projections published in The Budget and Economic Outlook: 
Fiscal Years 2001-2010, Congressional Budget Office, January 
2000.

                                


    Mrs. Johnson. I would like you to provide them to the 
Committee. From another but credible source a year ago, was my 
understanding, that currently it is somewhere in about the mid-
or-high thirties and that in 10 years it is going to be in the 
mid-or-high forties. I think all of us have the responsibility 
to ask ourselves what percentage of the gross economic activity 
we can afford to dedicate to any group, population group.
    And if we are going to be getting up toward 50 percent 
without prescription drugs we at least need to know it because 
that is part of your comments that prescription drugs should be 
added as part of a holistic reform. Now, personally, I have 
been for a long time a very strong advocate of Medicare 
including prescription drug coverage access because, frankly, 
health care without medications simply is not health care any 
more. When Medicare was founded, you could say that.
    Now, I want to get to sort of the nuts and bolts in just 
the short time that I have. In your testimony you say that the 
VA negotiates the discounted prices that are listed in the 
Federal supply schedule. Now, it is my understanding that this 
Federal supply schedule of prices is simply a formula and that 
formula is that the government is going to pay 24 percent less 
than that company sells the drug to everybody else.
    Now, first of all, that keeps the company from dropping the 
drug price to the rest of us but a 24 percent drop is not 
exactly what I would call negotiations. And it is my 
understanding, although just superficially, that this is not 
the kind of process that the Federal employees' health benefit 
plan uses in its effort to provide drug benefits to public 
employees. Could you discuss those differences?
    Mr. Walker. My understanding is that the VA does an overall 
negotiation on behalf of itself and other federal purchasers, 
whereas the Federal health benefit plans, as you know, each of 
the plans end up negotiating their own deal as to what is going 
to be covered.
    And part of this has to do with what is the effect of the 
discount? One of the great debates is to the extent that you 
end up basing the discount say, for example, on retail or 
wholesale prices, then there are certain consequences of that. 
The consequences of who is going to end up bearing those 
additional costs? And, so, there is a difference between VA and 
FEHBP in part because VA covers federal purchasers and the 
others negotiate on their own behalf.
    Mrs. Johnson. And could you comment on the scope of drugs 
covered by the VA and the scope covered by most benefit plans 
serving Federal employees?
    Mr. Walker. As far as the benefit levels?
    Mrs. Johnson. In other words, is the formulary more 
restricted? Does the VA offer drugs but only a narrower 
spectrum of drugs than most Federal employees health benefit 
plans?
    Mr. Walker. As you know, Mrs. Johnson, that since by 
definition there are numerous FEHBP plans, benefit plans vary 
as to what they offer under prescription drug coverage as 
compared to what VA would be.
    Mrs. Johnson. That is the point really I wanted to bring 
out was that in choosing a health plan as a Federal employee--
and I get exactly the same choices as the receptionist in my 
office, my caseworkers, everyone else who works for me, and 
exactly the same choices as the people who work in the Social 
Security offices, the air traffic controllers, all the other 
Federal employees, I don't get a different set of choices--but 
I can choose a plan that offers me access to a whole range of 
drugs. I can also choose a plan that offers me very big access 
but to a limited number of drugs. And it is my understanding 
that the VA offers you access to the drugs that they have on 
formulary.
    And I think one of the really big problems we have in 
talking in this area is understanding the implications of 
formularies. And if you would just talk a little bit about that 
problem of health care quality and formularies. You do mention 
it in your testimony.
    Mr. Walker. Yes. Part of the difference is, is whether you 
have an open formulary or a closed formulary from the 
standpoint as to whether or not there is a restriction placed 
on which drugs you can actually get. In many cases there can be 
a situation where you have an incentive to select a drug from a 
restrictive list where the provider pays a larger share of the 
cost, if you pick from that preferred list.
    On the other hand, you can select a drug from outside of 
that list if you want to but you may have to incur more costs 
if, in fact, you do that. So, there are differences in design.
    FEHBP provides an array of choices and it empowers the 
individual to make the determination as to how much coverage 
they want and what they are willing to pay.
    Mrs. Johnson. I would just like to put on the record that I 
am getting more and more complaints from my constituents about 
formularies, whether they are people who work for employers and 
get their health insurance that way or whether they are seniors 
using Medigap coverage or a Medicare managed care choice plan, 
but formularies sound good on paper. If what you need is not in 
that formulary, it can be a very big problem. And I think in 
planning this, we have to understand that formularies are a 
common way of controlling costs and they are very destructive 
to health care quality for seniors.
    Thanks, Mr. Chairman, I have other questions but I will 
wait until there is another round.
    Chairman Thomas. Does the gentleman from Louisiana wish to 
inquire?
    Mr. McCrery. Yes. Thank you, Mr. Chairman.
    Mr. Walker, on your chart on the pedestal right now, you 
have one category for Medicare and Medicaid, so, we can't 
really tell the Medicare.
    Mr. Walker. Right.
    Mr. McCrery. Do you know whether Medicare increases at a 
greater rate than Medicaid does during that period of time?
    Mr. Walker. Yes, it does. And the bulk of that is the 
combined Medicare Program.
    Mr. McCrery. Right. OK. And we see that by 2050 Social 
Security and Medicare/Medicaid take up almost the entire stream 
of revenue if it is still 20.7 percent of GDP or there-abouts?
    Mr. Walker. That is correct and, in fact, you don't have 
enough to even pay interest on the national debt.
    Mr. McCrery. Right.
    So, if we make no changes in Medicare, Medicaid or Social 
Security, we have a big problem; don't we?
    Mr. Walker. That is correct.
    Mr. McCrery. Unless we want to take a much bigger bite out 
of national income in the form of revenues to the Federal 
Government?
    Mr. Walker. That is correct.
    Mr. McCrery. Now, can you tell me if your figures, that are 
illustrated on the board, include a drug benefit?
    Mr. Walker. No. They do not.
    Mr. McCrery. So, those figures showing a tremendous 
increase in Medicare, Medicaid expenditures do not include 
adding a prescription drug benefit. And can you tell us what 
the estimate is for Medicare costs to increase if we added a 
prescription drug benefit to the current program
    Mr. Walker. Two footnotes. First, they don't explicitly 
include adding a prescription drug benefit. The cost obviously 
would vary depending upon how that program would be structured, 
who would be covered, how much subsidy there would be, and so 
forth. But an important footnote here, under these projections 
it assumes that the Social Security surplus will be saved and 
that the on-budget surplus will be spent either through tax 
cuts or spending increases. Therefore, one could say that one 
of the things that could happen with that on-budget surplus is 
to dedicate part of those revenues to prescription drug 
benefits or for a variety of things.
    So, no, it does not expressly consider that.
    Mr. McCrery. Right.
    Mr. Walker. On the other hand----
    Mr. McCrery. Well, the fact remains though if you added 
more spending to Medicare, whether you do it from general funds 
or from a new tax, that shaded area is going to go up and 
probably rise above the revenue line that is on your chart.
    Mr. Walker. That is correct.
    Mr. McCrery. And I believe in your testimony you estimate 
that by adding a prescription drug benefit to current Medicare, 
current Medicare costs would increase from about 7 to 10 
percent per year.
    Mr. Walker. That is what the estimate is on average.
    Mr. McCrery. Last week you testified before the Senate 
Aging Committee and there you said, ``Ideally the unfunded 
promises associated with today's program should be addressed 
before or concurrent with proposals to make new ones such as 
adding prescription drug coverage. To do otherwise might be 
politically attractive but not fiscally prudent.''
    Mr. Walker. I think it is important that we make progress 
in closing the gap associated with unfunded promises based on 
current benefits. At a minimum, I would hope that if the 
Congress was going to increase prescription drug coverage it 
would at least not exacerbate the financial imbalance and 
hopefully would be coupled with reforms that would at least 
make a down-payment on closing the gap between promised and 
funded benefits for the current program.
    Mr. McCrery. So to put it simply or try to put it simply, 
to paraphrase what you just said, if we add a prescription drug 
benefit to Medicare we ought to do it in the context of overall 
reform of the program?
    Mr. Walker. Comprehensive reform clearly is called for.
    Mr. McCrery. And, finally, let me ask you about the 
suggestion by some that we extend the Federal supply schedule, 
the FSS, to Medicare. It seems to me that at some point if you 
keep extending that--I mean there is already I think a move to 
extend it to one of the programs under the FEHBP or one of the 
plans under FEHBP and now you are talking about including 
Medicare beneficiaries--at some point don't you raise the cost 
of drugs to those who are currently getting the discount? And 
if you don't do that then you certainly will reduce the number 
or the amount of money that drug companies have for research 
and development?
    Mr. Walker. Something has got to give. Either profits will 
give, R&D will give or prices will somehow go up and prices 
will be redistributed. But I think that is one of the debates 
that has to be had. What is the most important thing? Is access 
the most important? Do you want to assure access? After you 
have assured access then what about affordability? And then how 
do you want to end up allocating any financial support, whether 
it be tax incentives or spending or whatever else, based upon 
need, based upon who can't afford to pay for it?
    And, so, yes, something has got to give. And there will 
likely be a ripple effect on others.
    Mr. McCrery. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. Thank you. Does the gentleman from 
Wisconsin wish to inquire?
    Mr. Kleczka. Thank you, Mr. Chairman.
    Mr. Walker, on that exact same point, isn't the reverse 
true? If I and my company are not on that formulary, I am 
paying a higher price to subsidize those who are. That is 
unfair on its face.
    Mr. Walker. Unless you are a good negotiator and negotiated 
your own rate generally that is the case, yes.
    Mr. Kleczka. So, you have unfairness on both ends and we 
are going to have to strike a balance.
    In your testimony you indicate that one-third of seniors 
have no drug benefit coverage and two-thirds do have some type 
of drug coverage. Some of my colleagues have said ``that isn't 
bad. I mean two-thirds are being covered; I don't see a 
critical problem.''
    But you have indicated that the coverage for those two-
thirds is very unstable. We are going to hear later this 
afternoon from the AARP and they indicate that while an 
estimated 60 to 70 percent of large employers offered retiree 
health coverage during the eighties, fewer than 40 percent of 
large employers do so today. Of those employers who offer 
retiree benefits, 28 percent do not offer drug coverage to the 
Medicare eligible retirees.
    Again, you indicated that the coverage held by two-thirds 
of Medicare beneficiaries is unstable. Do you want to expound 
on that? Because I think this is the crisis and this crisis is 
going to grow. I think that it is incumbent upon Congress to 
start addressing the situation this year, this session, 
starting with this hearing. Could you expand on the 
unstableness of the current retiree coverage?
    Mr. Walker. The single largest source of retiree coverage 
is from employer-sponsored plans. It is about 30 percent. Of 
the employer-sponsored plans they are not subject to the same 
protections in the Employee Retirement Income Security Act. In 
other words, you don't vest in a benefit since it is not a 
pension benefit. Therefore, it is a matter of contract law.
    In many cases employers have flexibility to change the 
nature and extent of their promises. And, quite frankly, they 
would like to have an opportunity to do so. And, so, yes, it is 
very tenuous. Yes, they can end up modifying those promises a 
lot easier than they can their pension promises. But I think we 
also have to be careful not to allow them to modify in the way 
where they are passing their obligations off on the taxpayers, 
which is one of the cares that has to be taken here.
    Mr. Kleczka. And how and why would that occur? If we 
mandate a benefit in Medicare, I think, would be one. Do you 
have any others?
    Mr. Walker. For example, if prescription drug benefits was 
provided to everybody under Medicare and subsidized and paid 
for under Medicare, and employers didn't have a contract law 
obligation in order to continue to provide that prescription 
drug coverage, then I can assure you that they would in all 
likelihood terminate that coverage and say you now can be 
covered under the government's plan. They may or may not 
provide any assistance if there is a premium associated with 
it.
    So, there are some very real ripple effects of whatever 
happens in this area.
    Mr. Kleczka. Okay. But, would not the employer do the same 
even with a voluntary benefit? Employers might think, ``under 
contract law I don't have to do it. There is another option for 
my retirees. Let them get their drugs through Medicare. The 
company can save money, we can keep the additional profit.''
    Mr. Walker. Under contract law in most cases it is deemed 
to be a status benefit. In most courts the way that has worked 
is that once you are in retirement and once you are receiving 
the benefit, most courts have held that that is when you are 
entitled to the benefit.
    So, the real key is that what are they going to do for 
people that haven't met that status benefit yet.
    Mr. Kleczka. I have to take serious exception to that last 
statement, Mr. Walker. As I look at the various decisions 
relative to retiree health benefits, the courts in recent years 
have been ruling more and more with the employer. I cite for 
you the case in Milwaukee, Wisconsin, of the Pabst Brewing Co. 
wherein for years they provided decent health care benefits for 
the retirees. And one day, willy nilly, they woke up and just 
canceled those benefits. The employees took them to court but 
they didn't have a leg to stand on.
    So, I think in a real world the reverse is happening today.
    Mr. Walker. It really depends upon the language in the 
applicable documents. I mean this is an area that you really 
can't generalize on. But I will agree with you on this: It is a 
tenuous promise. I will agree with you on that.
    Mr. Kleczka. Thank you very much.
    Chairman Thomas. And before I call on the gentleman from 
Michigan, I would like to underscore the point that was made 
while we were talking about employers and whether or not they 
have a heart, whether or not they have an interest in their 
employees and I believe you did say that that is the single 
greatest source of pharmaceutical coverage for seniors today.
    Mr. Walker. That is correct.
    Chairman Thomas. Okay. And are they required to offer it?
    Mr. Walker. They are not required to offer unless they 
negotiate it through union contracts or bargaining or another 
way.
    Chairman Thomas. Now, clearly, we want a better world but 
that is the current world as we discuss various people's 
motives.
    Does the gentleman from Michigan wish to inquire?
    Mr. Camp. I do. Thank you, Mr. Chairman.
    Mr. Walker, you make quite a case in your written and oral 
testimony here and at several points you say that without 
reforms Medicare spending will increase to a point that is just 
unsustainable by future generations. You also mention that 
Medicare without improvements is currently ill-suited to serve 
future generations. And at another point you say without reform 
the future of Medicare is bleak. That is pretty strong 
language.
    You have also stated that adding a prescription drug 
benefit would increase Medicare annual costs, and you estimate, 
between 7 and 10 percent. Do you believe it is wise for 
Congress to take action on prescription drugs this year if 
there are not some significant steps toward systemic reform?
    Mr. Walker. We are on the record as saying that we believe 
that if Congress takes action on prescription drugs it should 
be coupled with enough reforms that at least it will not make 
the financial condition worse. And that ideally we should start 
making some progress on closing the unfunded gap in connection 
with existing promises.
    Stated differently, adding a prescription drug benefit 
without doing anything else is going to compound our problems. 
It is going to take us in the wrong direction.
    Mr. Camp. And I think even a point in your testimony you go 
further and say, with some updated budget simulations that you 
would even suggest reforms to Social Security and Medicaid and 
Medicare because of the financial pressures.
    Mr. Walker. Realistically we can't do everything at once. 
But I will say this, the financial imbalance in Medicare is 
much, much greater than Social Security and it may well require 
some revenue infusion of some form as part of the solution but 
it clearly is going to require fundamental program reform as 
well.
    Mr. Camp. Given the limited resources that we have and that 
you have testified to and we have an extremely significant 
long-term financial problem looming, do you believe that we 
should expand access to prescription drugs in a way that does 
not displace the private sector, a private sector that is 
helping seniors with access to drugs?
    Mr. Walker. If anything, I think you would want to 
encourage the private sector to help and not displace private 
spending for public spending in this area.
    Mr. Camp. All right. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. Does the gentleman from Minnesota wish to 
inquire?
    Mr. Ramstad. Thank you, Mr. Chairman.
    General, good to see you. Just to follow-up the previous 
line of questioning. In your testimony you stated that or in 
the questioning that adding a prescription drug benefit, as Mr. 
Camp reiterated, would increase Medicare spending 7 percent. 
How does that square with the study recently released by the 
National Center for Policy Analysis that concluded if current 
Medicare dollars were used more wisely seniors could have a 
prescription drug coverage without the infusion of any 
additional Federal funds. Is that why you conclude that we need 
to do it within the context of overall Medicare reform, and do 
you agree with that conclusion?
    Mr. Walker. I am not familiar with that particular study. I 
will say that there is no question that there are opportunities 
to improve the economy and the efficiency of HCFA and the 
Medicare Program but even if we pursue all of those, we still 
have a major long-range challenge and even if we pursue all of 
those, adding prescription drugs is going to add to the cost 
and it is going to add to the pressure posed by those bars.
    Mr. Ramstad. Well, and, of course, how we do it is the key 
question. I think everyone or most people on this panel agree, 
as the Chairman said so well, that we need prescription drug 
coverage for seniors who can't afford prescription drugs for 
Medicare beneficiaries. Seniors in my district are saying, give 
us a targeted prescription drug coverage to cover low-income 
seniors without displacing the coverage and quality that those 
who aren't low-income currently are benefiting from, that they 
currently enjoy.
    And it seems to me, to go back to your testimony, that we 
have two options, Congress has two options in addressing the 
drug issue. One, we can either devise a system to help seniors 
insure against the cost of drugs or intervene to make the cost 
of products of medicines less for seniors.
    And it seems to me, given your studies and your 
observations of the private drug market, General, and the 
expanding role of so-called PBMs, the pharmacy benefit 
managers, in monitoring drug utilization, isn't it fair to say 
that the insurance approach would be better certainly in terms 
of driving health care quality?
    Mr. Walker. Well, I think it is difficult to say that there 
is a particular approach that would be better. I think frankly 
that the fundamental issue is severalfold. First, access. Most 
people believe that it is important that everybody have access 
to prescription drug coverage. So, therefore, we need to 
examine what can be done in order to assure universal access to 
prescription drug coverage.
    Secondly, the issue of the extent to which the Federal 
Government might be able to leverage purchasing power to get a 
better deal on prescription drug prices, and to what extent 
might the benefit of those prices be passed on to seniors in a 
cost-neutral fashion to the Federal taxpayer.
    The third issue is to the extent that you have got some 
seniors that can't afford the coverage then how do you target 
dollars? I think it is either through the tax system, through 
Medicare or otherwise, how do you target dollars to help those 
that need help?
    Mr. Ramstad. But don't you agree that we should target them 
to low-income seniors, the prescription drug proposal should be 
targeted to low-income seniors?
    Mr. Walker. I think we are on record as saying that 
targeting would clearly appear to be the prudent course of 
action here especially in light of the financial imbalances 
this program already faces.
    Mr. Ramstad. But you are not willing to recommend to the 
Congress an insurance approach with some form of a stop-loss 
coverage to protect seniors in terms of costs?
    Mr. Walker. I have always found that it is prudent for me 
to be able to provide the facts, lay out the options, talk 
about the pros and cons, but not recommend any particular 
solution, Mr. Ramstad.
    Mr. Ramstad. So, your analysis doesn't--you haven't 
analyzed that vis-a-vis a discounted pricing scheme; the 
insurance approach versus a discounted pricing scheme?
    Mr. Walker. There are different effects. On a discounted 
pricing scheme what would theoretically happen is that you 
would end up potentially redistributing the cost among 
different purchasers. If, for example, you said, we want to be 
able to buy at 25 percent less than average wholesale prices, 
then that is not saying what the price is because wholesale 
prices could go up. But what that would result in is a 
redistribution of price among different purchasers, if you 
will.
    In addition, there are even different insurance approaches 
as we have heard already based upon how different Federal 
health plans approach this issue versus others. So, I don't 
think there is a universal way.
    Mr. Ramstad. Well, in my remaining seconds I just hope that 
we can design an effective and efficient way to use scarce 
Medicare dollars in targeting a prescription drug benefit to 
low-income seniors. If we do nothing else this session, we need 
to do that in the context of Medicare reform.
    Thank you very much, General, it has been very helpful 
testimony.
    Thank you, Mr. Chairman.
    Chairman Thomas. Thank the gentleman.
    Does the gentleman from Washington wish to inquire?
    Mr. McDermott. Thank you, Mr. Chairman.
    Mr. Walker, I am not an economist so I always like to know 
the assumptions of a graph. And I like that graph you have got 
up there. But I have trouble figuring out one thing about it. 
Where does all that net interest problem come in 2050 if we pay 
off the deficit. Now, where in the world are you coming up with 
all that net interest?
    Mr. Walker. Where it comes, Mr. McDermott, is first, the 
assumption in this chart is that all of the Social Security 
surplus will be saved----
    Mr. McDermott. Like the President has suggested.
    Mr. Walker. That is correct. I think that there appears to 
be bipartisan, bicameral consensus on that, to save the Social 
Security surplus.
    Mr. McDermott. On that part.
    Mr. Walker. There does not, however, appear to be any 
bipartisan or bicameral consensus on anything more than that. 
In fact, there is pent-up demand to somehow deal with the on-
budget surplus, either through additional spending and/or tax 
cuts. So, what this assumes is that Social Security surplus 
will be saved and that the on-budget surplus will be spent one 
way or the other, either through tax cuts, spending increases 
or a combination.
    Mr. McDermott. Well, this reflects the Republicans' plan to 
give a $1 billion tax cut in this country.
    Mr. Walker. No, no, absolutely it doesn't reflect anybody's 
plan. It reflects an assumption that whatever the on-budget 
surplus is that there are pent-up demands through either 
prescription drug pricing increases or education spending 
increases or tax cuts or a variety of different things. 
Moreover, if you assume that and if you assume that the 
taxation of the American public remains roughly at the current 
level of the economy, then that is where you start getting the 
haircut or the scalp.
    As a result we will have deficits reemerge. I mean, for 
example, Social Security, itself, is going to start turning a 
negative cash flow in 2014 or 2015. Thus, we know that we face 
longer range deficits.
    The other thing is that even though publicly held debt is 
going down, total debt is going up.
    Mr. McDermott. What do we care about that? That is not our 
problem.
    Mr. Walker. Well, the only thing that I think that we would 
care about it--as an economist and I am not a Ph.D., economist 
but----
    Mr. McDermott. I am not an economist.
    Mr. Walker. Oh, I apologize. I thought you were.
    Mr. McDermott. Yes. I am not an economist. Let me get that 
straight.
    Mr. Walker. I apologize.
    Mr. McDermott. I want to know why----
    Chairman Thomas. Let us clear this up, he is not an 
economist, he is a psychiatrist.
    [Laughter.]
    Mr. Walker. You know, the fact is that clearly there is a 
difference between debt held by the public and intra-government 
debt that the government owes itself. At the same point in 
time, debt that the government owes itself, in effect, I mean 
the debt that is in these trust funds at some point in time has 
got to get paid off. And it is going to get paid off based upon 
future general revenues and it represents burdens that future 
taxpayers are going to have to bear.
    Mr. McDermott. Is it fair then to characterize your 
testimony that it is impossible for us to do a drug benefit, 
given that graph----
    Mr. Walker. I do not think that it is----
    Mr. McDermott. Without putting us in more fiscal difficulty 
than we are in today?
    Mr. Walker. I do not think it is impossible for you to do a 
prescription drug benefit. What I am saying is, I think that it 
is important that in whatever the Congress pursues in this area 
that it keeps in mind the long-range financial imbalance that 
we face in Medicare as well as the overall budget, and that 
whatever is done at least does not make things worse. That, by 
definition, would mean that somehow it would be coupled with 
some type of reforms that would at least break even on what 
incremental costs the government might have associated----
    Mr. McDermott. The prescription drug benefit is held 
hostage to Medicare reform as one possibility. I mean we can 
shift enough costs off of Medicare off the government and onto 
individuals than we would have a little bit of money to put 
into a prescription drug benefit; is that what you are saying, 
that one scenario might work?
    Mr. Walker. I mean there a lot of ways.
    Mr. McDermott. But is that one that might work?
    Mr. Walker. Potentially. I am not recommending that. I mean 
ultimately all that I am trying to say is this, Mr. McDermott, 
is that I think there appears to be a broad-based consensus 
that something needs to be done about prescription drugs in 
order to modernize the program. So, how can whatever is done be 
targeted to minimize the cost, to maximize the positive effect 
that you are designed to try to achieve without making the 
long-range problem on Medicare worse. That is all I am trying 
to say. Because right now we have got these short-term 
surpluses but they are exactly that. We have got very real 
long-range problems that sooner or later we have got to get on 
to dealing with and that is all I am trying to say.
    Mr. McDermott. It seems like extrapolating from that you 
could say that making a tax cut doesn't make any sense now; 
doesn't it?
    I mean if we have got only short-term surpluses and we 
spend them where--and we wind up exacerbating the problem in 
2050?
    Mr. Walker. We are on the record saying that the most 
prudent fiscal course is to pay down the debt.
    Mr. McDermott. That is all I wanted out of you.
    Thank you.
    Mr. Walker. Thank you, Mr. McDermott.
    Chairman Thomas. That assumes then that the more than $300 
billion of proposed tax cuts in the President's budget falls 
under that same argument.
    Mr. McDermott. I would go with that.
    Chairman Thomas. You would go with it in denying needy 
seniors prescription drugs based on your logic.
    Mr. McDermott. No. The President proposed a tax and a 
proposal for prescription drugs.
    Chairman Thomas. Correct. He also proposed $70 billion in 
cuts in Medicare.
    Mr. McDermott. Ah, well, you think your proposal was less?
    Chairman Thomas. No. I am just anxious to see how AARP 
reacts to that.
    I thank the gentleman; his time has expired.
    [Laughter.]
    Chairman Thomas. I sometimes like to get the full benefit 
of being chair.
    Does the gentleman from Pennsylvania wish to inquire?
    Mr. English. Thank you, Mr. Chairman, I do wish to inquire.
    General Walker, I appreciate your taking the time to 
participate today and I found your testimony so far very well 
informed and stimulating. I think you are speaking to one of 
the largest problems currently facing older Americans and one 
that to address up here, and I firmly believe we need to 
address this issue as soon as possible, we need to get it 
right.
    I am a little concerned. I think the GAO performs an 
important role up here. Sometimes in an institution that 
sometimes doesn't think beyond the next election, 2 years down 
the road, you provide a certain institutional memory. And I 
wonder could you give us an insight? This prescription drug 
benefit would amount, even though it is an aggregation on the 
existing Medicare Program, it would amount to a new 
entitlement. Can you give us a sense of how, over time, the 
projections of the cost of new entitlements when they are 
enacted, how accurate have those projections proven to be? Or 
is there a case to be made that new entitlements tend to be 
fantastically more expensive in the long-run than initially 
projected?
    Mr. Walker. Without having the exact numbers in front of 
me, I can tell you that because of the inherent uncertainty in 
projecting the cost of entitlements the Social Security and 
Medicare trustees every year come up with three projections of 
the estimated cost: A high cost, a best estimate cost, and a 
low cost.
    Historically over a number of years, the estimated costs 
have been closer to the best estimate cost but more toward the 
higher rather than the lower. So, in other words, people have 
tended to be more optimistic that costs weren't going to go up 
than, in fact, history showed.
    Another point that I think is important here is that when 
John Kennedy was President 70 percent of the Federal budget was 
discretionary spending. We are now down to 30 percent roughly. 
We flipped it totally. And it is going to get a lot worse if we 
don't do something about it. And that is part of what this 
chart demonstrates.
    Mr. English. So, when you write, as you do in your 
testimony, that we believe that expansions should be made in 
the context of overall program reforms that are designed to 
make the program more sustainable over the long-term, what you 
are saying is, because of the unpredictability of the 
additional costs we have to be exceptionally careful as we add 
this benefit to the Medicare Program so that the entire program 
is going to be sustainable in the long haul?
    Mr. Walker. That is correct. I think we also have to 
recognize the inherent uncertainty of projections. Take CBO's 
latest budget projections. They now have adopted several 
potential alternative assumptions. Under one of their 
assumptions, if you go back to historical spending patterns and 
a 1 percent higher average annual inflation rate for health 
care over what they assumed, surpluses turn into deficits.
    So, I think we need to proceed prudently and with caution.
    Mr. English. You also say in your summary comments that 
expanding beneficiary access to prescription drugs should 
carefully consider targeting financial help to those most in 
need and minimizing the substitution of public funds for 
private funds.
    On those two critical points, how do you assess the 
President's proposal?
    Mr. Walker. I have not fully assessed the President's 
proposal. I do have a hearing scheduled for the 24th, I 
believe, of this month where I am going to be doing that. So, I 
would hesitate to say much until I have fully analyzed it.
    Mr. English. Very good. And I look forward then to your 
analysis. You had something else to say?
    Mr. Walker. I will say one thing. Solvency is not enough. 
Sustainability is not adequately addressed by the proposal. I 
have said that before and I expect that I will say that again 
on the 24th.
    Mr. English. Also, you talk about in your testimony, 
Federal price discounts as a potential model for price 
discounts through the Medicare Program. And you say that 
whether this would adequately increase access or raise prices 
paid by other purchasers that negotiate drug discounts is 
unknown.
    Is it fair to say that there is a legitimate danger that by 
including Medicare drug purchases under this kind of a discount 
it would have a deleterious effect on the existing discounts 
provided to the Departments of Veterans Affairs and Defense, 
for example?
    Mr. Walker. It could have a deleterious effect and it also 
could have a ripple effect on what overall prices people pay 
for prescription drugs. But that is----
    Mr. English. You mean cost shifting?
    Mr. Walker. Correct. But, believe me, cost shifting is 
already happening in many forms in health care and one of the 
greatest challenges we face is how can we make the cost of 
health care more transparent and what can we do to provide 
meaningful incentives for individuals to control utilization 
and intensity where they need to be controlled?
    We have some real challenges here, including the fact that 
our largest tax preference in the Code before too long is going 
to be for health care which may actually be fueling 
consumption.
    Mr. English. Thank you.
    And with that pro-tax reform note, I will yield back to the 
chair.
    Chairman Thomas. I thank the gentleman.
    Does the gentlewoman from Florida wish to inquire?
    Mrs. Thurman. I do. Thank you, Mr. Chairman.
    General, let me ask you a question, philosophical question, 
maybe. Do you consider Medicare to be an insurance program?
    Mr. Walker. It was intended to be an insurance program. It 
isn't financed the same way----
    Mrs. Thurman. But basically it is an insurance program for 
people over 65.
    Mr. Walker. It was intended to be one, yes.
    Mrs. Thurman. So, if we look at a prescription drug benefit 
in all of our other private sector insurance companies that 
have a prescription drug benefit, do they go out and negotiate 
with these pharmaceutical companies for the best price to 
deliver to their customer?
    Mr. Walker. In many cases they do. Yes. They try to 
leverage purchasing power.
    Mrs. Thurman. So, why would it not be--say we don't have 
any money, forget the charts about what we might do to Medicare 
bouncing this up, doing that--why would it not just make sense 
for no other reason, just like we do with VA, just like the 
states do, just like you do with the Federal employees, at 
least leverage the people that we have in Medicare today or the 
fact that we have a Medicare Program which is an insurance 
program to negotiate the best customer price?
    Mr. Walker. Clearly, one of the questions to address on 
this issue is whether you want to leverage purchasing power to 
be able to get a better deal for everybody covered under the 
Medicare Program. On the other hand, there is going to be a 
ripple effect that could be----
    Mrs. Thurman. OK. However, let us talk about that ripple 
effect a little bit. First of all, we have two Federal programs 
to help low-income seniors. You may want to talk about those: 
SLMBs and QMBs, I believe are the two synonyms for those 
programs; both to help low-income seniors have access; one pays 
for a premium for some other kind of an insurance, another pays 
deductibles correct?
    Mr. Walker. Yes, that is correct.
    Mrs. Thurman. So, we do, in fact, have in place now a 
prescription drug benefit for low-income seniors.
    Mr. Walker. On a targeted base, right, low-income.
    Mrs. Thurman. OK. Then the second question is, do we not 
have a prescription drug benefit for those people----
    Chairman Thomas. I would just tell you as you go down that 
track and you make an absolute statement, let's make sure that 
when we make them that we don't mischaracterize the current 
structure because, frankly, there is a crazy quilt of 
prescription drug benefits currently available to designated 
seniors because Medicaid is a combined Federal/State program.
    Mrs. Thurman. Correct.
    Chairman Thomas. In some States, like Pennsylvania, they 
will go up to $18,000 and in other States they have virtually 
none or very little. Some Medicare HMOs have requirements you 
have got to try one of the formulary drugs and show they fail 
before you get a non-formulary drug.
    So, when we say we have an insurance program for low-income 
seniors, I wouldn't want to just say, Okay, so, we have a low-
income----
    Mrs. Thurman. Okay.
    Mr. Walker. The range of programs vary in many States.
    Mrs. Thurman. But in reclaiming my time, part of it is that 
we also don't mandate that. We just sign them up if they are in 
those categories of being low-income.
    Chairman Thomas. And I will tell the gentlewoman that is 
one of the things I am wrestling with. Why with seniors, who 
are low-income, do we classify them as low-income first--i.e. 
involved in the Medicaid Program--and seniors second? Why don't 
we just pull that whole program up to the Federal level and 
treat all seniors fairly and equally in all States?
    Mrs. Thurman. And, Mr. Chairman, do we not pay for it 
anyway or at least a good portion of it?
    Chairman Thomas. No. Because the prescription drugs are 
beyond the payment structure to a certain extent. That is one 
of the discussions that I hope we can get into but the 
gentlewoman can have the full time that this intervention 
caused. But as we characterize low-income I don't want anyone 
to think that they have got a comprehensive, uniform 
prescription drug package because they are low-income. In fact, 
because they are low-income, they are not treated equally 
because they are assumed to be low-income first and seniors 
second.
    Mrs. Thurman. General, I would be glad to hear your part of 
this conversation.
    Mr. Walker. Clearly there is assistance provided to low-
income through the Medicaid Program. And I would have two basic 
comments on that. One, that exhibits targeting. It is targeting 
to lower income where there is a need which is an important 
principle I think we have to keep in mind.
    Mrs. Thurman. Which is one that you, in fact, testified 
about.
    Mr. Walker. Correct. And second, I don't know that I would 
view the Medicaid Program as an insurance program.
    Mrs. Thurman. OK.
    Mr. Walker. Both as to intent and to design and to 
financing and, so, but you are right, there is some coverage 
there. In fact, I think on our chart on page six it is 10 
percent of the 65-and-over population.
    Mrs. Thurman. OK.
    So, I still have a little time here, Mr. Chairman.
    OK. So, let me go on to another program, one that we are 
all very familiar with that also provides a prescription drug 
benefit, and that is the Medicare choice program, correct?
    Mr. Walker. Correct, that is 8 percent.
    Mrs. Thurman. I am sorry?
    Mr. Walker. In 1995, eight percent of the 65-and-over 
population obtained it through Medicare Risk HMO.
    Mrs. Thurman. And has that number come down over the last 
couple of years because of the droppage?
    Mr. Walker. It has. I am not sure how much.
    Chairman Thomas. Actually I don't believe those are correct 
figures. You might want to check with Dr. Scanlon. I believe 
that it is more like 13, slowly moving toward 15.
    Mr. Walker. Pardon me. Dr. Scanlon, as you know, is head of 
our health issue areas, says that the number of enrollees are 
up but the relative level of coverage is down.
    Mrs. Thurman. On prescription drugs?
    Mr. Walker. Through that program. Through the program we 
were just talking about.
    Mrs. Thurman. Okay.
    Mr. Walker. Medicare plus Choice.
    Mrs. Thurman. So, part of our problem in all of this 
discussion is what is happening to the drug prices? I think 
that part of the droppage in coverage through the Medicare plus 
Choice is due to the cost of drugs. I will just give you some 
examples. I had Sears in last week sometime and they told me--
now they are a private insurance--they said that, their drug 
prices alone have gone up by 34 percent. The Florida Hospitals 
told me that their drug costs have risen as much as 16 percent 
just in the last year.
    So, part of what we are seeing happening out there is that 
we are not getting drug coverage in insurances any more because 
of the fact that the drug prices are going up. What can you say 
because I noticed you mentioned in some of your papers about 
some of the cost containment, looking at what we might be doing 
to ensure that we get a real figure about what the cost of 
these drugs are and what they are being sold to our customers, 
those being our Medicare customers.
    Mr. Walker. The single fastest growing component of the 
health care costs is prescription drugs. Last year they went up 
about 15 percent on average. If you look at CalPRS, which is 
the largest State with prescription drug coverage for its 
employees, it is the fastest growing part of their health care 
costs. I think part of it to control these costs is increasing 
the visibility of these costs, having appropriate cost sharing 
provisions to sensitize individuals to this cost to help them 
to be able to differentiate between what they might want which 
is unlimited and what they truly might need, and to target 
subsidies from a Federal standpoint and assistance to true 
need, financial ability to pay.
    I mean I think those are some of the key principles that 
have to be considered by the Congress. But ultimately you are 
the elected representatives and you are the ones that need to 
make a choice.
    Mrs. Thurman. And I am sure we all have more questions but, 
thank you, Mr. Chairman.
    Chairman Thomas. Does anyone have an additional question?
    The gentlewoman from Connecticut?
    Mrs. Johnson. Thank you, Mr. Chairman.
    Mr. Walker, you know, there are a lot of us that are 
thinking about this issue of volume discounts. You do want to 
leverage your buying power in the market to provide the lowest 
prices. I mean one of the things that happened with fee-for-
service medicine is that prices just had no relationship to 
volume.
    On the other hand, one of the most frustrating and painful 
aspects of managed care's operation in our society is the way 
that a big managed care company would come in and not negotiate 
with your local hospital, tell your local hospital what they 
were going to pay. And if what they were telling your local 
hospital was well below that local hospital's costs, the local 
hospital had the choice: They could either check off a whole 
group of patients, sometimes 25 or 50 percent of their 
clientele, or they could accept the price the HMO was offering.
    Now, I raise this concern about HMOs because the Federal 
supply price is a 24 percent drop, period. The negotiations for 
volume go on underneath that. Now, a lot of us are supporters 
of the prevailing wage concept, and the prevailing wage concept 
in labor law is that the government, as a big buyer of labor, 
when it comes in to do a big project, should not pay a wage 
below the prevailing wage because it would pull all the wages 
down.
    Now, we have seen this in operation in the private sector 
with big HMOs and we are beginning to counter that and the 
providers are beginning to counter that. But I think the 
concept of the Federal Government coming into the national 
market, dropping prices 24 percent plus, you know, would have a 
ripple effect that would have great significance.
    Now, I want to put that out there. And then what would we 
do about the situations in which the government price doesn't 
cover the cost of delivering the drug? The VA price for cancer 
pharmaceuticals is very low. But we appropriate money to the VA 
so that they can do the infusion therapy that goes along with 
the delivery of these drugs. The Medicare price is considerably 
higher because it covers the cost of the drug and the delivery 
of that drug.
    So, not only am I afraid of the government being a 
thousand-pound gorilla in this situation and, therefore, 
actually tamping down research into new drugs and, Heaven 
knows, the people who need the new drugs the most are the 
seniors because they are the ones with the long-term 
Alzheimer's, they are the ones with the most serious long-term 
consequences of diabetes and the other chronic diseases.
    So, you know, I would like to hear you talk. If we can't 
leverage a volume benefit by using the Federal supply price, 
which is this 24 percent plus, then what are other ways of 
recognizing in any Medicare drug benefit our volume position in 
the market? I mean what are the other ways you could do this?
    Mr. Walker. Well, first, I think you touched on the fact 
that it is possible to leverage purchasing power, but there are 
consequences to leveraging purchasing power. For example, if 
you take the 24 percent discount approach, then if the Federal 
Government is going to come in and say, we want that same 
discount for this whole new population and we want to pass that 
on, then we can probably get it or get a substantial discount 
because of the volume that we are going to do. But then the 
question is going to be: What is the consequence of that going 
to be?
    In all likelihood, what the consequence is going to be is 
one of several things: One, the average price that others will 
pay may go up, the average price that employers pay or 
individuals pay through other circumstances will go up, or the 
amount of profit or R&D expenditure for the pharmaceutical 
industry will go down. But unlike many other circumstances 
where the Federal Government has come in and mandated a stated 
price--there is so much profit in pharmaceuticals, at least in 
the United States. The same potential consequences of paying 
people below cost is not clearly as evident here as it might 
be, for example, for a hospital, if you will. And part of that 
problem, frankly, is because we have excess capacity in many 
parts of the country, and so what is a reasonable cost?
    Mrs. Johnson. That is true. Because we have excess 
capacity, the drop in price eliminated beds.
    Mr. Walker. That is correct.
    Mrs. Johnson. And so if you get too big a drop in price, 
you will eliminate availability of others in the formulary. The 
formulary will diminish in size. That is one possibility, that 
the number of drugs that would be accessible through this price 
structure would diminished and then, of course, research into 
others.
    But if you had a competitive system that was insurance 
based, you would still get a volume discount because every 
insurer would be able to say we will have a large chunk of 
Medicare people. But then the insurer who paid the more 
reasonable price would offer probably the greatest spectrum of 
drugs. And you would have some fail-safe against the 800-pound 
gorilla pressing the price so low that the market actually 
diminished for seniors as well as impacted the rest of us.
    Thank you.
    Chairman Thomas. Does the gentlewoman from Florida wish to 
have a follow-up question?
    Mrs. Thurman. You have talked a little bit about the 
research and development part of this, and I know that Mr. 
Stark had talked about a piece of legislation that he might 
introduce.
    You know, over the last several years, we have watched 
probably one of the only agency budgets in true dollars go up--
that of the NIH. How much of our NIH budget do you know goes to 
the pharmaceutical companies for research and development?
    Mr. Walker. I don't know off the top of my head.
    Mrs. Thurman. Or how much money do university systems 
actually expend in research?
    Mr. Walker. I don't have that off the top of my head, Mrs. 
Thurman. I would be happy to try to get what we do have and 
provide it to you.
    [The information follows:]

    The NIH appropriation for FY 1999 was $15.6 billion. More 
than 80 percent, or about $13 billion, supported scientists in 
more than 2,000 institutions--universities, medical schools, 
hospitals, small businesses, and research institutions 
throughout the country. NIH was unable to give us information 
on the level of resources that may have informed pharmaceutical 
companies in research and development of new therapies.

GAO CONTACTS AND ACKNOWLEDGMENTS

    For future contacts regarding this testimony, please call 
Paul L. Posner, Director, Budget Issues, at (202) 512-9573 or 
William J. Scanlon, Director, Health Financing and Public 
Health Issues at (202) 512-7114. Other individuals who made key 
contributions include Linda F. Baker, Laura A. Dummit, John C. 
Hansen, Tricia A. Spellman, and James R. McTigue.

    Mrs. Thurman. Well, I think that would be very important. 
And then I think if you are going to provide that, I would also 
like whatever tax incentives they have, and maybe Mr. Stark has 
that, because I think part of the problem with the cost here is 
the fact that they keep using that, and, quite frankly, I think 
it is a little bit of a red herring. First of all because based 
on what was the Fortune 500 list on April 26th of 1999, for 
return on revenues--number one pharmaceuticals; return on 
assets--number one pharmaceuticals; return on equity--number 
one pharmaceuticals. Pharmaceuticals on return on revenues was 
18.5, next was commercial banks at 13.2, and telecommunications 
11.9. And it is that way all the way through the list.
    But what was really interesting is there is a report that 
was done called ``Debunking the Myth of Drug Makers,'' I am not 
even sure who put this out. But just look at what some of the 
corporate executives were making in and across this country.
    Now, you know, Mr. Chairman, you said we get the big bucks 
for making these decisions. I should only wish that I got some 
of these big bucks. I mean, you have people in here making $56 
million a year. They say the average compensation for the top-
paid executives from each company is $27 million. Coca-Cola 
realized their top direct compensation was 57, and then you go 
down, Bristol-Myers was $56 million, Colgate $52 million, 
Abbott Labs $45 million. And then the next company closest to 
it is Texaco, and he or she is making $6 million, AT&T $3 
million, Delta Airlines $2 million.
    I guess what I am really trying to get the question is, if 
we start leveraging as a Federal Government like we do with VA 
and others, do we really hurt these folks and their research 
and development? You talked about advertising. You talked about 
all of these things. It doesn't matter what kind of research we 
do in the future if our seniors can't afford the medicine. What 
good does it do them if it costs $11,000, $12,000, $13,000 a 
year? They will never have access to those drugs.
    And then you just add all of these things, I just think 
there is a lot more to this issue that we need to be looking at 
as to why these prices are so high. Then on top of that, look 
at what other countries are paying for the same medicine, in 
Canada, in Mexico, in Britain. I mean, we can go on and on and 
on about the differences. And these are life-sustaining drugs.
    I want you to look right back here. These are all letters 
from my constituents on this issue with their pharmaceutical 
bills--I could go through and show you life-sustaining 
medicines, breast cancer medicines that have jumped from $130 
to $166 in one year. I mean, there is something going on here 
that we have got to start paying attention to because we are 
going to outprice life-sustaining drugs to these very people.
    Mr. Walker. Several comments. First, executive 
compensation. Having been responsible for that, among other 
things, when I was with Arthur Andersen, the ratio of chief 
executive officer comp to average worker pay in this country is 
way higher than anywhere else in the world. We can have a long 
debate about whether that is appropriate or not. It is reality.
    Second, there is also the issue of targeting with regard to 
tax incentives and support. Is it a new drug or is it a ``me 
too'' drug?
    Third, you have the issue of the global ripple effect. We 
live in a global economy. There are many countries out there 
that already place price controls on what they will pay for 
these drugs. And, therefore, there is a ripple effect.
    This is a very complicated issue, and I think this is an 
area where we have done some work, and, in fact, I think we are 
going to be asked to do some more work because it is important 
that the Congress get the facts, understand the options, 
understand the pros and cons. It is very complex. All the more 
reason to proceed with caution in dealing in this area.
    Mrs. Thurman. Thank you, Mr. Chairman.
    Chairman Thomas. Thank you very much, Mr. Walker.
    I just want to underscore the point that although we have 
been talking about Medicare and then Medicaid as the low-income 
aspect of Medicare--and as I think was correctly stated, 
Medicaid is not an insurance program--that is one of the 
reasons I think all of us believe that at the very least there 
needs to be a humanitarian, compassionate component, and we 
will get testimony in the next panel, as soon as we get to the 
next panel, about the health profile of the low-income. But 
just because we have focused on that doesn't mean that we 
aren't trying to figure out a way to get that group purchasing 
power into the hands of seniors, who are the last major group.
    The concern, I think, that needs to be focused on is 
whether government does it in a displacing, rippling effect or 
whether we, to the best of our ability, like the FEHBP, utilize 
some structure of market regulation.
    Now, Mr. Walker, you indicated you indicated you would be 
looking at the President's program, and I hope that you look at 
it in its entirety, especially since we discussed here today 
about the displacement of the private dollars already being 
spent, with the understanding that there is no requirement for 
employers to provide prescription drugs for their retirees, 
but, in fact, they are the single largest group. I think the 
President was sensitive to that because he has an inducement to 
try to keep the employers in up to two-thirds of the amount 
that they are currently paying. And I am trying to figure out 
why that isn't a displacement or a replacement or a 
substitution of private dollars for public dollars with the 
appearance of keeping the private dollars out there.
    I mean, I do think we have to be as honest as we can be on 
this displacement/replacement/substitution issue. And if I were 
to provide 100 percent bribe for the employers to stay in, to 
say, see, you still got the employer market, it is where the 
money comes from that is the critical question.
    So as you analyze it, I hope you analyze it from: One, 
obviously, will it work? And, two, to what extent was most of 
the time spent on trying to create an adequate policy to deal 
with this problem of prescription drugs for seniors? And 
perhaps to what extent was time spent on creating a political 
package which, on its appearance, addresses some of the 
fundamental concerns that you have? But whether it is a public 
dollar spent up front, a public dollar spent to subsidize 
employers, it is the same public dollar. That is my concern is 
not driving out the private dollar. But you also mentioned the 
Tax Code and a number of other areas that we can deal with.
    Do you want to get in?
    Mr. McDermott. Well, Mr. Chairman, I just had a question of 
you because I am trying to understand something you said, and 
that is, you said that Medicaid is not an insurance plan. It is 
not a health insurance plan for poor people. I don't know what 
you would call it and how--I mean, I would agree that it is a 
bad insurance plan because we have allowed the States to have 
50 different variations on it. But----
    Chairman Thomas. I think as we get into semantics, the next 
panel will also assist us in that, because I think while there 
is also a myth around the Social Security, there is maybe even 
a greater myth around Medicare.
    The argument is that all I want out of Social Security is 
what I paid in with interest. Well, most retirees get that in 
60 months, and most of them live many years after that. And it 
is, in fact, then someone else's money that is supplying the 
wherewithal.
    In Medicare, it is even greater than that because the part 
B original agreement between Medicare beneficiaries and the 
government was that it was to be a 50-cent-on-the-dollar split. 
It has now slipped to 25 cents on the dollar, and, in fact, the 
President's plan, and others, talk about even beyond that 
massive transfers of general taxpayers' money to support a 
program.
    That is not to say it isn't meritorious, but I do think we 
kid ourselves a bit if we talk about it, as I think most people 
think of insurance, as insurance. This is----
    Mr. McDermott. You are talking about individual insurance 
that I buy on my card----
    Chairman Thomas. Or group insurance that you buy through 
the employer. What we are really looking at is the single 
largest shift of resources between generations in the history 
of the world. And the question is: Do we continue it and, in 
fact, accelerate it? Or do we begin to make adjustments in 
which all of us have to participate, the younger people coming 
along, the policymakers, the recipients of the money, and most 
importantly, the beneficiaries who get that final product? It 
is a problem for all of us. But to continue to argue it is an 
insurance program I think creates a veneer which makes it more 
difficult to get at the fundamental problems of the public 
policy that we have to deal with, basically who gets what, 
when, and how.
    Mr. McDermott. Is it fair, then, to say that you don't 
think of Medicare as a social insurance policy? The whole 
country insures the health of senior citizens in the country?
    Chairman Thomas. Well, I think semantically we can turn it 
any way we want to, and if it creates more comfort in isolating 
you from the fundamental problem, and that is, there are more 
benefits going out because Congress gets re-elected by saying 
yes instead of no, and that we have completely distorted 
whatever insurance structure was there in the first place about 
an adequate inflow to an adequate outflow, whatever gives you a 
comfort in terms of the pitches that you make I say is fine, as 
long as we understand that the basic problem is we are spending 
more money than the current structure provides with an 
inadequate medical structure for seniors, and we have to 
address it: One, the inadequate structure; and, two, the 
financing.
    Mr. Walker, you wanted to get in on----
    Mr. Walker. Mr. McDermott, the reason that I responded in 
the way that I did with regard to Medicaid was because 
generally when you consider an insurance program, you have an 
transfer of risk in exchange for a premium. In the case of 
Medicaid, there is no premium. At the same point in time----
    Mr. McDermott. I understand. You are describing or defining 
individual insurance for me. Is that correct?
    Mr. Walker. In the context of the way I articulated it.
    Mr. McDermott. And my question to the chairman was: Is this 
another entity which we would call a social insurance policy 
for the entire society rather than every individual buying 
their own insurance policy? I understand that Franklin Delano 
Roosevelt sold Social Security as your individual retirement 
program by giving you that number and that you thought there 
was a drawer somewhere--I mean, people thought that. But, in 
fact, it was a social insurance policy by which we in the 
country decided old people should have a guaranteed benefit.
    Mr. Walker. Two comments on that. One, clearly, it is not 
traditional insurance and so, therefore, social insurance is 
what generally people refer to the Social Security and Medicare 
Programs, as social insurance. However, no matter what you call 
it, we still have that problem. We can call it whatever we want 
to call it. We still have these long-range fiscal pressures 
that we need to ultimately deal with.
    Chairman Thomas. Because in insurance you deal with risk 
adjustment mechanisms. The risk adjustment mechanism here is 
that Social Security worked fine as long as there were more 
workers than there were retirees and that their life expectancy 
was less than getting the payment, which was the case in 1938 
when it started. We have not adjusted for the continued 
longevity, which is a modern miracle that we want to continue, 
but we also have fewer number of people paying into the program 
and something has got to give.
    With that, Mr. Walker, the clock is giving us the need to 
move on, but thank you very much for outlining in a very broad-
based way the problem that faces us.
    Now I would ask the next panel to come forward, which will 
begin to look at details of a plan that they might want to 
articulate or at least alert us to some subsets of concerns as 
we try to put together a package.
    First on the panel is Dr. Soumerai, Professor of Ambulatory 
Care and Prevention at Harvard Medical School. Dr. John Calfee 
is a Resident Scholar, American Enterprise Institute. Dr. 
Beatrice Braun, who has been with us before, nice to have you 
back again, Board of Directors, American Association of Retired 
Persons. Theodore Roth, President and Chief Operating Officer, 
Alliance Pharmaceutical Corp., on behalf of the California 
Healthcare Institute. And Professor Sager of Boston University 
School of Public Health.
    Thank you all. The written testimony that you have provided 
us will be made a part of the record, and you can address us in 
any way you see fit with the time you have available. Let's 
start with Dr. Soumerai and move across the panel.

STATEMENT OF STEPHEN B. SOUMERAI, SC.D., PROFESSOR, AMBULATORY 
    CARE AND PREVENTION, AND DIRECTOR, DRUG POLICY RESEARCH 
  PROGRAM, HARVARD MEDICAL SCHOOL AND HARVARD PILGRIM HEALTH 
                  CARE, BOSTON, MASSACHUSETTS

    Dr. Soumerai. Mr. Chairman and Members of the Committee, I 
am indeed very pleased to be here to talk about one of my 
favorite issues and a very important health issue--emphasis on 
health. I wish to provide strong scientific support for 
legislation to at least provide urgent, unlimited drug coverage 
for elderly and disabled people with incomes up to 200 percent 
of the Federal poverty threshold and catastrophic coverage to 
protect against high drug expenses for all Medicare enrollees.
    Our research group has been studying the health effects of 
changes in drug coverage for over 15 years, and Medicare 
populations have been a part of those studies.
    In an article published last year in the New England 
Journal of Medicine--this is one of the attachments that you 
have--my colleague Dr. Ross-Degnan and I reviewed the problem 
of inadequate drug coverage for Medicare enrollees and proposed 
as a first step a Federal-State insurance program that provides 
unlimited drug coverage to Medicare enrollees with low incomes. 
Since then, additional data have convinced us of the need for a 
catastrophic coverage program for higher-income enrollees. The 
evidence also indicates that high cost-sharing or capped 
benefits, which are part of some of the plans that are being 
considered, are ineffective policies for low-income chronically 
ill individuals because they reduce access to essential drugs 
among the sickest patients and increase use of expensive 
institutional services.
    We estimated that Medicare enrollees with incomes below 
$10,000 and without drug coverage consume less than half of the 
medications taken by higher-income individuals with employer 
drug coverage, despite the fact that the lower income 
beneficiaries are twice as likely to report poor health.
    I am going to focus on several relevant studies on the 
impacts of two successive policy changes affecting low-income 
patients enrolled in the New Hampshire Medicaid Program: First, 
a change from unlimited coverage to a three-prescription-per-
month coverage limit or cap; second, replacement of this cap 
with unlimited drug coverage. You can think of this also as 
taking away catastrophic coverage, and then returning it.
    This natural experiment allowed us to study the impacts of 
both reducing and increasing drug coverage in low-income 
populations, and these large controlled studies were published 
as three consecutive reports in the New England Journal of 
Medicine.
    The first report, Attachment 2, showed that limited 
coverage caused use of essential life-saving drugs, like 
insulin for diabetes, to decline substantially. See the figures 
in these reports, even if you don't have time to read them in 
their entirety, because they really are striking in terms of 
the effects. After drug coverage was restored, use of these 
drugs rebounded to baseline levels.
    In the second study, we focused on chronically ill elderly 
and found that the limited drug coverage resulted in a 35-
percent decline in use of essential drugs such as insulin and 
cardiac meds; a twofold increase in institutionalization in 
nursing homes that was usually permanent and increase hospital 
admissions; increased government costs for institutional care, 
which was about 20 times the drugs savings in this population; 
and a cessation of these adverse outcomes after restoration of 
drug benefits.
    Based on these data, we have estimated that a low-income 
coverage program would save State and Federal insurers at least 
one-third of the cost of drugs provided.
    In our third report, on patients with disabling mental 
health problems, which is Attachment 4, limited coverage caused 
a 15 to 49-percent decline in use of essential psychoactive 
drugs such as antidepressant agents and lithium; a 50-percent 
increase in mental health visits; large increases in symptoms, 
emergency mental health services, and day hospitalizations; and 
government costs for treating destabilized patients that were 
at least 17 times higher than the drug savings.
    In a new study led by Dr. Alyce Adams in our research 
group, we examined the effects of different types of drug 
coverage on drug consumption in 1995 for 3,000 Medicare 
patients with hypertension. We found that drug coverage was 
indeed significantly associated with consumption of potentially 
life-saving drugs for high blood pressure. Enrollment in a 
state program for low-income seniors was associated with a 36-
percent increase in use of these agents; employer coverage, 
with a 20-percent increase; and Medigap coverage, with only an 
11-percent increase in use of these blood pressure drugs. The 
small effect of Medigap coverage that was alluded to earlier is 
consistent with the high levels of cost sharing, limited 
benefits, and barriers to enrollment in these plans.
    In conclusion, Mr. Chairman, these data argue for a set of 
core principles for action.
    First, we believe that all beneficiaries should have access 
to prescription drugs, but available solutions are 
controversial and compromise may take time.
    Second, poor, near-poor, and low-income elderly have an 
urgent clinical need for an immediate benefit. We have heard 
similar stories all around the country.
    And third, no one should become impoverished by their 
medical need for essential drugs. From the standpoints of 
public health and equity, a stop-loss protection provision 
should be the second highest priority for action by the 
Congress.
    Thank you.
    [The prepared statement follows:]

Statement of Stephen B. Soumerai, Sc.D., Professor, Ambulatory Care and 
Prevention, and Director, Drug Policy Research Program, Harvard Medical 
School and Harvard Pilgrim Health Care, Boston, Massachusetts

    Mr. Chairman and Members of the Committee:
    I am very pleased to have been invited to speak here about 
this important public health issue. I offer strong support--on 
scientific, clinical, and economic grounds--for legislation to 
provide urgent prescription drug coverage for elderly and 
disabled individuals with incomes up to 200% of the federal 
poverty threshold, and catastrophic coverage to protect against 
high drug expenses for all Medicare beneficiaries. Currently, I 
direct the Drug Policy Research Program at Harvard Medical 
School and Harvard Pilgrim Health Care and have been studying 
the health effects of changes in drug coverage among Medicare 
patients for over 15 years.
    In an article published last year in The New England 
Journal of Medicine (Attachment 1, selected pages from: 
Soumerai SB, Ross-Degnan D. Inadequate drug coverage in 
Medicare: A call to action. N Engl J Med 1999; 340: 722-8.), my 
colleague, Dr. Ross-Degnan, and I reviewed the problem of 
inadequate drug coverage for Medicare enrollees and proposed, 
as a first step, a federal-state insurance program that 
provides unlimited drug coverage to Medicare enrollees with low 
incomes. Since then, additional data have convinced us of the 
need for catastrophic coverage for higher-income enrollees. The 
evidence also indicates that high cost-sharing or capped 
benefits are ineffective policies for low-income chronically-
ill, because they reduce access to essential drugs among the 
sickest patients and increase use of expensive institutional 
services.
    Almost half of all Medicare enrollees do not have adequate 
access to essential drugs. We estimated that Medicare enrollees 
with incomes below $10,000 and without prescription drug 
coverage consume less than half of the medications taken by 
higher-income individuals with employer drug coverage -despite 
the fact that the lower-income beneficiaries are twice as 
likely to report poor health. In 1998, 10% of elderly low-
income participants in the New Jersey Pharmacy Assistance 
Program consumed an average of $4900 for generally essential 
medications--clearly out of reach of low-income seniors in 
other states.
    I will focus on several relevant studies on the impacts of 
two successive policy changes affecting low income patients 
enrolled in the New Hampshire Medicaid Program--first, a change 
from unlimited coverage to a three-prescription per month 
coverage limit (cap); second, replacement of the cap with 
unlimited drug coverage again. This natural experiment allowed 
us to study the impacts of both reducing and increasing drug 
coverage in low-income patients. These large, controlled 
studies were published as three consecutive reports in The New 
England Journal of Medicine (NEJM).
    The first report (Attachment 2, Abstract of: Soumerai SB, 
Avorn J, Ross-Degnan D, Gortmaker S. Payment restrictions for 
prescription drugs in Medicaid: Effects on therapy, cost, and 
equity. N Engl J Med 1987; 317:550-6.) showed that limited drug 
coverage caused use of essential life-saving drugs like insulin 
for diabetes, furosemide for congestive heart failure, 
bronchodilators for asthma, and lithium for bipolar illness, to 
decline substantially. (See figures in NEJM report). A key 
finding is that immediately after drug coverage was restored, 
use of these drugs rebounded to baseline levels.
    In the second study, reported in the NEJM (Attachment 3, 
Abstract of: Soumerai SB, Ross-Degnan D, Avorn J, McLaughlin 
TJ, Choodnovskiy I. Effects of Medicaid drug-payment limits on 
admission to hospitals and nursing homes. N Engl J Med 1991; 
325(15):1072-1077.), we focused on chronically-ill elderly, and 
found that the limited drug coverage resulted in:
     a 35% decline in use of essential drugs, such as 
insulin, and cardiac medications;
     a twofold increase in institutionalization in 
nursing homes, that was usually permanent, and increased 
hospital admissions;
     increased government costs for institutional care 
of $311,000, which was about 20 times the drug savings in this 
population;
     a cessation of these adverse outcomes after 
restoration of drug benefits.
     based on these data, we have estimated that a low-
income coverage program would save state and federal insurers 
at least one-third of the cost of drugs provided.
    In our third NEJM report on patients with disabling mental 
health problems (Attachment 4, Abstract of: Soumerai SB, 
McLaughlin TJ, Ross-Degnan D, Casteris C, Bollini P. Effects of 
limiting Medicaid drug-reimbursement benefits on the use of 
psychotropic agents and acute mental health services by 
patients with schizophrenia. N Engl J Med 1994; 331:650-655.). 
Limiting coverage caused several important adverse effects 
which also began to disappear when drug coverage was restored. 
These included:
     15 to 49% decline in use of essential psychoactive 
drugs, such as antidepressant agents and lithium
     a 50% increase in mental health visits
     large increases in symptoms, use of emergency 
mental health services and day hospitalizations.
     an additional 1.3 treatment episodes per patient 
each month.
     government costs for treating destabilized 
patients were at least 17 times higher than the drug savings.
    These estimates of increased government costs are 
conservative, because they do not consider unquantified costs 
of pain and suffering and risks of suicide.
    In a new study (see Attachment 5) led by Dr. Alyce Adams in 
our research group, we examined the effects of different types 
of drug coverage on drug consumption in 1995 for 3,000 Medicare 
beneficiaries with hypertension. Controlling for differences in 
health and socio demographic characteristics, we found that 
drug coverage was significantly associated with consumption of 
potentially life saving antihypertensive medications. State 
drug coverage for low income seniors was associated with a 36% 
increase in use of antihypertensives; employer coverage, with a 
20% increase; and Medigap coverage with only a 11% increase in 
use of these blood pressure drugs. The small effect of Medigap 
coverage is consistent with the high levels of cost sharing, 
limited benefits, and barriers to enrollment in these plans.
    What are the implications of this research for national 
pharmaceutical policy? First, we have found that even 
relatively small changes in drug coverage can have substantial 
effects on the quality and costs of care, especially for low-
income, chronically ill patients.
     Our data indicate that coverage of medications in 
these groups can:
      prevent major acute illness;
      control chronic illnesses;
      and maintain independence of frail elderly and 
disabled people in the community.
      Medications are inadequately covered for many 
low-income and chronically-ill elderly in the majority of 
states who may not be able to afford treatments that are, from 
a societal perspective, clearly cost-effective.
    In conclusion, these data argue for a set of core 
principles for action:
      All beneficiaries should have access to 
prescription drugs but available solutions are controversial 
and compromise may take time.
      Poor, near-poor, and low-income elderly have an 
urgent, clinical need for an immediate benefit.
      No one should become impoverished by their 
medical need for essential drugs. From the standpoint of public 
health, a stop-loss protection provision should be the second 
highest priority for action by the congress.
    [Attachments are being retained in the Committee files.]

                                


    Chairman Thomas. Thank you, Doctor.
    Dr. Calfee?

STATEMENT OF JOHN E. CALFEE, PH.D., RESIDENT SCHOLAR, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Calfee. Mr. Chairman, I would also like to thank you 
for inviting me. I am honored to be here. I have provided some 
written remarks, and I will provide a brief summary here.
    I think the starting point is the simple fact that the 
reason these hearings are being held in the first place is 
because pharmaceutical research has been so successful in the 
last 5 or 10 or 15 years and has provided benefits which are 
really quite impressive, and I think that you could summarize 
it by saying that the reason that people are so excited about 
pharmaceatical issues is precisely because both physicians and 
patients are finding new drugs to be so useful.
    Expenditures have been going up very rapidly, but what the 
research shows is that it is not price increases that are 
driving up the expenditures but, rather, the adoption of new 
drugs and the greater use of existing drugs. In this research 
enterprise, the central motivation has been the profit 
incentive. I think that when you think about what it takes to 
gather the kinds of intellectual resources and financial 
resources that are necessary to solve problems that, in fact, 
had defied solutions for decades or centuries, it is clear that 
it is the lure of profits that has brought together that 
constellation of resources and abilities.
    This suggests that in thinking about and in constructing a 
Medicare drug benefit, I would submit that the single most 
important principle is not to do anything that would interfere 
with continued success in pharmaceutical research. In other 
words, it would be a tragedy if a drug benefit were constructed 
that in some way impeded or retarded or curtailed the ongoing 
pharmaceutical revolution.
    With this background, we can think a little bit about what 
a drug benefit might entail. I would suggest that there are 
three points, at least from my perspective, that are essential. 
The first of these is the necessity of avoiding any form of 
control over pharmaceutical prices. There is no surer or more 
certain disincentive to research than price controls.
    Unfortunately, there are two reasons why a Medicare drug 
benefit would be particularly and unusually prone to price 
controls. One is the fact that pharmaceuticals themselves 
invite price controls. That is because the cost of 
manufacturing and distributing drugs is small compared to the 
cost of developing pharmaceuticals. Anyone who has control over 
prices--a government agency in particular--faces a strong 
temptation to push down prices, keeping them above the cost of 
manufacturing and distribution, but not necessarily above the 
cost of doing the research that is necessary to create those 
drugs.
    In addition, the Medicare system itself is susceptible to 
price controls. Medicare has traditionally been a fee-for-
service program, and I think it is fair to say that virtually 
every medical or health care product that has been covered by 
Medicare has eventually been enveloped in pervasive price 
controls. So there are reasons to think that a Medicare drug 
benefit would be prone to price controls, and this suggests 
that we should very much beware that possibility when putting 
together a Medicare drug benefit.
    A second principle, which is discussed rather infrequently 
but I think could be very important as we get into the details 
of a Medicare drug benefit, is that it is essential to maintain 
the freedom for the elderly to purchase whatever drugs they 
wish to purchase, even if those drugs are not covered by 
Medicare, even if they are beyond Medicare's limits, even if 
patients are paying a price that is greater than the price that 
Medicare has specified. We don't want a situation like we have 
in other parts of Medicare where the elderly are simply 
prohibited from purchasing services that Medicare does not 
cover.
    Finally, a Medicare drug benefit should respect the basic 
economic principles of insurance. We have had a lot of 
experience with insurance, especially health insurance. We know 
something about how health insurance programs work. This 
experience suggests that, first of all, there should be 
substantial deductibles for a drug benefit. It makes no sense 
to put all pharmaceutical purchases through an insurance 
program or through a government program. There should be 
substantial copayments because we need to maintain some kind of 
linkage between consumer willingness to pay and pharmaceutical 
research and development and pharmaceutical uses.
    We should maintain as far as possible private markets for 
pharmaceutical benefits, not only because private plans are 
more efficient but also because of the importance of 
maintaining a diversity of choices for the elderly. Not 
everyone is going to want the same kind of program.
    Finally, it would make sense to have some kind of stop-loss 
provision, and some form of means testing, so that the 
resources can be devoted to the most essential task of 
maintaining a safety net.
    Regarding specific Medicare proposals, I only have a few 
comments. There is a consensus among most of observers that it 
would be best to reform the Medicare system itself before 
adding a drug benefit. That may not be feasible. There is 
certainly no inherent reason why it is impossible to have a 
drug benefit without reforming Medicare, but as I mentioned 
before, extreme care would be necessary.
    The White House has announced a plan, which has been 
discussed earlier today. That plan is open to a number of very 
important criticisms. For example, It has no deductible. More 
important, the White House plan would essentially create 
purchasing monopolies for each region of the country. This 
would invite some forms of price controls. Even more important 
is the fact that under the Clinton plan, Medicare beneficiaries 
who have exceeded the benefit limits of the plan would still be 
able to buy drugs at the prices specified by the plan. 
Essentially, that would extend Medicare prices beyond Medicare 
itself to essentially encompass the entire pharmaceutical 
market for the elderly. That would be a de facto regime of 
price controls.
    The fact that the administration's budgeting for their plan 
entails--or predicts--expenditures that would be probably on 
the order of one-third less than the current trends in 
pharmaceutical expenditures for the elderly strongly suggests 
that the administration is, in fact, counting on price controls 
and expenditure controls to reduce drug costs.
    I will also mention that other proposals, specifically 
those coming out of the Breaux-Thomas commission and some of 
the other plans, such as the Snowe-Wyden plan, are quite 
different. They would not involve price controls, although the 
danger of price controls might well be there. And they would 
permit competing market-generating pharmaceutical benefits 
which, again, I think would be a good idea.
    That concludes my remarks. Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of John E. Calfee, Ph.D., Resident Scholar, American 
Enterprise Institute

    Mr. Chairman, I thank you for inviting me to testify today 
on seniors' access to prescription drug benefits. I am an 
economist who has devoted considerable attention to health care 
markets and the pharmaceutical industry. Most of what I wish to 
say today is drawn from my recently published book, Prices, 
Markets and the Pharmaceutical Revolution (AEI Press). That 
book is available from the publisher, AEI Press, and is also 
downloadable from the American Enterprise Institute website 
(www.aei.org).
Pharmaceutical Costs in Perspective

    Outpatient expenditures on prescription drugs (with 
inflation taken into account) almost doubled between 1990 and 
1998, and increased an additional 12.3 percent in 1998.\1\ The 
elderly have consistently accounted for about 30 percent of 
those expenditures (Medicare Current Beneficiary Survey, HCFA). 
Pharmaceuticals are also claiming an increasing share of the 
U.S. health care budget. This is a relatively recent 
phenomenon, however. Prescription costs as a proportion of 
health care expenditures actually declined for many years after 
1960, with the trend reversing in the early 1980s. Even today, 
the share of spending on pharmaceuticals is far below the 
levels of the early 1960s, despite climbing from 4.9 percent of 
health care costs in 1985 to 7.2 percent in 1997 (see Figure 
1).
---------------------------------------------------------------------------
    \1\ Barents Group 1999, p. i, citing data from the Health Care 
Financing Administration in the U.S. Department of Health and Human 
Services, and for 1998, from Scott-Levin Source Prescription Audit.
---------------------------------------------------------------------------

                               Figure 1:

      Prescription Drugs as a Percentage of U.S. National Health 
                        Expenditures, 1960-1997

[GRAPHIC] [TIFF OMITTED] T0064.007

                           Source: HCFA 1999

    Other advanced economies have also seen rapid increases in 
pharmaceuticals expenditures.\2\ In fact, the 7 percent of 
health care costs allocated to prescription drugs in the United 
States today is barely half the corresponding proportions in 
Canada (12.5%) or Germany (12.5%) and even further below the 
levels in France (16.7%), the United Kingdom (17.3%), and Japan 
(20.0%) (OECD Health Data 1998).

    \2\ IMS Health, Drug Monitor, December 1998, August 1999 and 
September 1999.

---------------------------------------------------------------------------
Why Pharmaceutical Expenditures Have Been Increasing

    Increased drug expenditures are partly offset by reduced 
expenditures on other forms of health care. The medical 
literature is full of studies documenting health cost savings 
from drug therapies for ulcers, schizophrenia, depression, 
congestive heart failure, asthma, strokes, migraine headaches, 
kidney disease, AIDS, and other illnesses and conditions.\3\ 
Nonetheless, expanded uses of pharmaceuticals tend to increase 
total health care expenditures for the simple reason that they 
lengthen lives and treat conditions that formerly were not 
treated at all.
---------------------------------------------------------------------------
    \3\ See the following sources. Ulcers: Vakil 1996. Schizophrenia: 
Hospital and Community Psychiatry, v. 41, n. 8, 1990, and Glennie 1997. 
Depression: Frank 1999. Congestive heart failure: Managed Healthcare, 
April 1998, and SOLVD Investigators 1991. Strokes: Fagan, et al. 1998, 
and NIH 1998. Migraine headaches: Legg, et al. 1997a and 1997b. Kidney 
disease: Showstack, et al. 1989.
---------------------------------------------------------------------------
    Price increases are not the main reason for increased 
pharmaceutical expenditures. Prescription drug prices between 
1993 and 1998 increased at less than 4 percent annually, only 
slightly above the general inflation rate and far below the 
rate at which prescription drug expenditures increased (see 
Figure 2).

                                Figure 2

Prescription Drug Price Increases versus Total Expenditures Growth
[GRAPHIC] [TIFF OMITTED] T0064.008


    Sources: Expenditures Increases from HCFA 1999; Price 
Increases from Bureau of Labor Statistics, CPI, All Urban 
Consumers, Prescription Drugs and Medical Supplies.

    Surveys have accordingly found that higher prices for 
existing drugs account for less than one-fourth of expenditure 
increases. The bulk of the increases come from increased volume 
and, especially, a shift toward more expensive drugs, which are 
usually newer on the market.\4\ Even this modest role for price 
increases is exaggerated because measurements of pharmaceutical 
price changes are upwardly biased, as pharmaceutical price 
indices fail to adjust for the higher quality of new drugs and 
the increased benefits from new uses for old drugs (see 
Triplett 1999, especially chapter 3 by Frank, Berndt and 
Busch).
---------------------------------------------------------------------------
    \4\ See Health Industry Association of America 1999, figures 1 and 
2, showing that drug prices have increased at less than four percent 
annually while drug expenditures have increased in double digits. Also 
see Pharmaceutical Research and Manufacturers of America 1999, p. 49, 
figure 4-11, which breaks down prescription drug expenditure increases 
into price versus volume, etc., showing that price increases accounted 
for about one-fifth of the expenditure increases in 1997 and 1998. 
These data are from IMS Health 1999, Retail and Provider Perspective, 
various issues.
---------------------------------------------------------------------------
    Physicians are prescribing more pharmaceuticals primarily 
because there are so many valuable new drug therapies. New 
drugs are treating conditions that formerly were undertreated 
or even underdiagnosed (see Calfee 2000a for citations and 
additional material). Such conditions include high blood 
pressure, elevated blood cholesterol, obesity, diabetes, 
depression and other mental illnesses, and osteoporosis. Many 
of the new treatments are especially important for the elderly. 
The dramatic reduction in mortality from heart disease in the 
past 30 years, for example, is almost certainly due primarily 
to improved medical treatments including ``clot-busters'' and 
other innovative drug therapies.\5\ We have also seen great 
progress in reducing pain and suffering, as a result of better 
pain relievers, drugs with fewer debilitating side-effects, 
pills that replace injections, and treatments for migraines and 
osteoporosis. Examples include the ``Cox-2 inhibitors'' for 
treating arthritis pain, and newer anti-depressants. So-called 
``lifestyle'' therapies such as those for mild obesity, mild 
depression, allergies, hair loss and impotence are also of 
enormous value to consumers. Finally, such remarkable 
developments as improved hypertension treatments and the statin 
class of cholesterol-reducing drugs are saving lives by 
preventing heart attacks.
---------------------------------------------------------------------------
    \5\ A recent summary of progress against heart disease is contained 
in Center for Disease Control, Aug. 6, 1999. On the impact of medical 
treatments, see Cutler, McClellan, and Newhouse 1999, especially their 
description of a forthcoming study by Heidenriech and McClelland.
---------------------------------------------------------------------------
    All this is flowing from what is widely regarded as a 
revolution in pharmaceutical research and development. This 
revolution is very much market-driven. Its power comes from 
combining scientific research and faster FDA regulation with 
burgeoning market institutions that include managed care with 
its disease management techniques and massive data sets, a 
revamped clinical trials industry, the computer revolution, 
venture capital for biotechnology, flexible labor markets, and 
innovations in advertising and marketing research.
    This research revolution is still in its early stages, as 
scientists rush to decode the human genome and open up new 
research areas. A crucial task in constructing a pharmaceutical 
benefit for Medicare is to permit this revolution to continue 
uninterrupted.
    The greatest threat to further progress would be controls 
over prices. The profit motive is what has brought us the new 
drugs that physicians and patients want to use. The expectation 
that the government will control the prices of new drugs--an 
HHS-dictated price for a breast cancer cure, for example--would 
force firms to constrain their research investments, causing 
many of our most talented scientists and entrepreneurs to turn 
to the many other areas in the U.S. economy that offer handsome 
returns for intelligence and hard work. Price controls would be 
a powerful disincentive for pursuing the expensive and risky 
explorations necessary to solve such stubbornly resistant 
problems as devising preventatives and cures for Alzheimers, 
diabetes, osteoporosis, arthritis, heart disease, and cancer 
(cf. Calfee 1999).
    Price controls would also introduce overwhelming complexity 
into health care, create vested interests for those parties 
that benefit from controls (there are always some who do), and 
inhibit the market adjustments necessary for a dynamic research 
enterprise. And once in place, price controls are extremely 
difficult to dismantle. Advanced nations with pervasive 
pharmaceutical price controls, such as Japan, have for decades 
denied innovative drugs to their citizens (Thomas 1994).

Potential Dangers in a Poorly Conceived Medicare Drug Benefit

    Medicare is predominantly a fee-for-service arrangement. 
History shows that Medicare's fee-for-service reimbursement 
mechanism leads to pervasive price controls--despite the fact 
that the original proponents of Medicare vociferously promised 
that the system would never lead to price controls for 
physicians, hospitals and other essential components of health 
care for the elderly (Hoff 1998). This history also 
demonstrates that an arrangement in which medical technology 
and services can be purchased only at Medicare prices leads to 
endless disputes, much gaming of the system, and highly 
arbitrary and unpredictable prices that are often dominated by 
political considerations.
    If a drug benefit is simply folded into an unreformed fee-
for-service Medicare system, price controls over 
pharmaceuticals would be inevitable. That is one reason why 
many informed parties have advocated reforming Medicare to 
bring it closer to a competitive private market before adding a 
drug benefit. A majority of the Breaux-Thomas Bipartisan 
Commission on Medicare Reform, for example, proposed to reform 
Medicare by bringing it more in line with the methods developed 
by private enterprise, and encouraging drug benefit plans 
similar to those in private health insurance rather being part 
of the obsolete fee-for-service arrangement now prevailing in 
Medicare (National Bipartisan Commission 1999).
    This does not mean that it is impossible to add a useful 
drug benefit to Medicare. But it is essential to avoid the 
error of constructing a benefit plan that would do more harm 
than good, by curtailing the very research enterprise that has 
made prescription drugs essential to health care for the 
elderly.

Essential Elements in a Well-Designed Medicare Drug Benefit 
Plan

    Two crucial questions immediately arise in any Medicare 
reform. The first, of course, is whether the plan would permit 
or encourage price controls on pharmaceuticals. The adverse 
consequences of price controls are so great that leaving 
pharmaceuticals out of Medicare altogether would be preferable 
to constructing a drug benefit that controlled prices. A 
Medicare drug plan would therefore have to be designed so as 
not to invite the progressive implementation of price controls, 
a fate that has met all other health care activities funded by 
Medicare. The Breaux-Thomas recommendations, which would 
provide defined contributions for health care plans but would 
not specify prices, presumably would not involve price 
controls. But what factors would enter the process for 
approving health care plans? The theoretical power to specify 
prices can easily evolve into a mechanism for price controls.
    A second, equally important question about any Medicare 
reform is whether the elderly would be free to purchase medical 
services, including pharmaceuticals, outside their plan's 
limits. If they could, market incentives would continue to 
yield pharmaceutical advances. But if Medicare patients could 
not purchase pharmaceuticals outside the system--just as they 
now cannot purchase nonreimbursed medical care except under 
onerous conditions--the effect would be to create de facto 
price controls (Hoff 1998).
    A Medicare drug benefit should also respect the basic 
economics of insurance. One of those principles is that 
insurance should not cover events that involve little or no 
financial risk. Here we must note the emerging role of 
pharmaceuticals for the elderly. Many people today can expect 
to lead relatively healthy and enjoyable lives through their 
eighties and perhaps into their nineties. In doing so, they 
will almost certainly make liberal use of pharmaceuticals, 
which are now attacking the most common illnesses and 
disabilities of old age and very old age. It makes sense for 
consumers to prepare for a lengthy retirement that includes 
pharmaceuticals along with recreation, travel, special living 
arrangements, good dining, and all the other products and 
services that are already finding huge new markets among the 
elderly. There is no individual or social benefit to selecting 
one component of these expected expenses--pharmaceuticals--and 
processing it through an insurance system, with its attendant 
administrative costs and debates over ``health'' compared with 
``lifestyle'' products.
    A related principle from the economics of insurance 
concerns financial limits. Deductibles should be substantial. 
Passing all pharmaceutical purchases through insurance, instead 
of only those exceeding, say, $500-1,000 per year, would create 
unnecessary administrative costs and would remove incentives 
for reasonably careful use of pharmaceuticals. Conversely, 
insurance should provide coverage for catastrophic costs, with 
limits on out-of-pocket expenses. Co-payments are essential to 
maintain a link (albeit an imperfect one) between what drugs 
cost and what they are worth to consumers. All of this can be 
means tested so as to provide a safety net for the impoverished 
elderly (Pauly 1999).
    Private insurance is invariably more efficient and less 
susceptible to political manipulation than is insurance 
provided by the government. It would also permit the 
introduction of competing plans at varied prices, which is 
essential to avoid forcing Medicare beneficiaries to pay for 
plans that offer either far less or far more than what 
beneficiaries are willing to pay for. A voucher system, which 
is essentially what the Breaux-Thomas Commission recommended, 
would therefore be far superior to an insurance plan run 
directly by Medicare. The special problems of bringing 
pharmaceuticals into the Medicare fold--along with the simple 
fact that doing so involves new legislation and a new 
administrative mechanism--suggest that something akin to 
Breaux-Thomas might be adopted for pharmaceuticals even if the 
rest of Medicare were left untouched. That action would, among 
other things, provide important new evidence to inform the 
larger debate over Medicare reform.
    Even such a modest system would be far from foolproof. It 
would be difficult to solve the problem of adverse selection 
(i.e., the tendency for those most in need of expensive 
treatments to choose the most generous insurance plan, thus 
driving up costs and causing the less-sick to choose leaner 
plans, which raises costs yet more). Adverse selection can 
cause premiums to climb so high that insurance plans for sicker 
participants provide little financial benefit. Also, a 
catastrophe benefit could raise difficult problems in deciding 
which new therapies (offered with the expectation of full 
government coverage) would be worth their cost. Nonetheless, a 
market-oriented Medicare reform could permit the pharmaceutical 
revolution to continue (cf. Calfee 2000b).

Problems with the Clinton Medicare Drug Benefit Proposal

    The President described in July 1999 a new Medicare drug 
benefit proposal, which was slightly altered in January 2000 
(see Office of the President 1999). Unfortunately, the 
President's plan would create many of the very problems that a 
Medicare drug benefit should avoid. The plan would pay for half 
of purchases up to an annual limit, starting at $2,000 in 2002 
and increasing to $5,000 in 2008. There would be no deductible. 
Annual premiums, set to provide a 50% subsidy, were estimated 
to start at $288 in 2002 and reach $528 by 2008. (The White 
House recently indicated that these numbers were being adjusted 
upward, but the essential features of the plan remain in 
place.) Prices would be negotiated by regional purchasing 
monopolies, administered by a single pharmaceutical benefit 
manager selected by HCFA. These prices would apply to purchases 
by Medicare beneficiaries even after the benefit limits had 
been exceeded, thus extending the HCFA-negotiated prices to 
non-Medicare reimbursed prescription drug purchases. This would 
amount to price controls.
    The White House estimated that total spending on 
prescription drugs for the elderly in its plan, including the 
patients' share, would start at $30 billion annually in year 
2002 and increase by 5 percent per year to roughly $31.5 
billion in 2003, $33 billion in 2003 and so on. But 
prescription drug expenses for the elderly are already running 
at about $33-35 billion, and are expected to increase to a 
minimum of $45 to $50 billion by year 2002, with further 
increases likely. The Clinton plan would therefore cut 
pharmaceutical expenditures for the elderly by over one-third 
in 2002, and even more in later years. This illustrates the 
central role that price and expenditure controls are expected 
to play in this plan.
    The President's plan would also create the inefficiencies 
that invariably arise when there is no deductible, as even the 
most routine prescription drug purchases would go through the 
Medicare bureaucracy. The plan would also prohibit competing 
formularies or other competitive tools. Such an enforced 
uniformity would work to the disadvantage of most Medicare 
beneficiaries.

Other Proposals

    I have not reviewed the details of other leading Medicare 
drug benefit proposals. I note, however, that the majority 
recommendations of the Breaux-Thomas Bipartisan Commission 
would avoid most of the problems with the White House plan. In 
particular, the Breaux-Thomas approach (the details of which 
would be set by a special board) would presumably involve 
deductibles, an avoidance of price controls, and competing 
plans with varied formularies. Much the same appears to be true 
of the Snowe-Wyden proposal (S. 1480).
    Such plans at least offer hope for a Medicare drug benefit 
that would permit the pharmaceutical research revolution to 
continue, bringing yet more life-saving and life-improving 
therapies whose nature we can now only imagine.

                               References

    Barents Group LLC (1999) ``Factors Affecting the Growth of 
Prescription Drug Expenditures,'' prepared for the National 
Institute for Health Care Management Research and Educational 
Foundation, July 9, 1999, Washington, D.C.
    Calfee, John E. (1999) ``Price Controls are a Prescription 
for Disaster,'' Wall Street Journal, July 22, 1999.
    Calfee, John E. (2000a) Prices, Markets, and the 
Pharmaceutical Revolution. American Enterprise Institute, 
Washington, D.C.
    Calfee, John E. (2000b) ``The Increasing Necessity for 
Market-Based Pharmaceutical Prices'' (2000), forthcoming in 
Pharmacoeconomics.
    Center for Disease Control's Morbidity and Mortality Weekly 
Report (MMWR), Aug. 6, 1999, v. 46, n. 30, ``Decline in Deaths 
from Heart Disease and Stroke--United States, 1900-1999.''
    David Cutler, Mark McClellan, Joseph Newhouse (1999) ``The 
Costs and Benefits of Intensive Treatment for Cardiovascular 
Disease,'' in Triplett, Jack, ed., Measuring the Prices of 
Medical Treatments, Brookings Institution.
    Fagan, S.C., L. B. Morgenstern, A. Petitta, R. E. Ward, B. 
C. Tilley, J. R. Marler, S. R. Levine, J. P. Broderick, T. G. 
Kwiatkowski, M. Frankel, T. G. Brott, M. D. Walker; The NINDS 
rt-PA Stroke Study Group (1998) ``Cost-effectiveness of Tissue 
Plasminogen Activator for Acute Ischemic Stroke, Neurology, v. 
50, p. 883-889 (April).
    Frank, Richard G., Ernst R. Berndt, and Susan H. Busch 
(1999) ``Price Indexes for the Treatment of Depression,'' in 
Triplett, Jack, ed., Measuring the Prices of Medical 
Treatments, Brookings Institution.
    Glennie, Judith L. (1997) ``Pharmacoeconomic Evaluations of 
Clozapine in Treatment-Resistant Schizophrenia and Risperidone 
in Chronic Schizophrenia,'' Technology Overview: 
Pharmaceuticals, Issue 7.0, July 1997, Canadian Coordinating 
Office for Health Technology Assessment, Ottawa, Canada.
    Health Industry Association of America (1999) 
``Prescription Drugs: Cost and Coverage Trends,'' September 
1999.
    Hoff, John (1998) Medicare Private Contracting: Paternalism 
or Autonomy (AEI Press).
    Legg, R.F., D.A. Sclar, N.L. Nemec, J. Tarnai, and J.I. 
Mackowiak (1997a) ``Cost-Effectiveness of Sumatriptan in a 
Managed Care Population,'' The Journal of Managed Care, v. 3, 
no. 1, p. 117-122 (January).
    Legg, R.F., D.A. Sclar, N.L. Nemec, J. Tarnai, and J.I. 
Mackowiak (1997b) ``Cost Benefit of Sumatriptan to an 
Employer,'' Journal of Occupational and Environmental Medicine, 
v. 39, no. 7, p. 652-657 (July).
    Managed Healthcare, April 1998, Vol. 8, No. 4, p. 42-44, 
``Provide Education about Congestive Heart Failure and Pump Up 
Your Savings.''
    National Bipartisan Commission on the Future of Medicare 
(1999) ``Final Breaux-Thomas Medicare Reform Proposal.'' 
Washington, D.C.
    National Institutes of Health, National Institute of 
Neurological Disorders and Stroke, ``New Stroke Treatment 
Likely to Decrease Health Care Costs and Increase Quality of 
Life,'' news release, April 28, 1998.
    Office of the President, National Economic Council, 
Domestic Policy Council (1999) ``Disturbing Truths and 
Dangerous Trends: the Facts about Medicare Beneficiaries and 
Prescription Drug Coverage,'' July 22, 1999.
    Organisation for Economic Co-operation and Development 
(1999) OECD Health Data 1999. Washington, D.C.
    Pauly, Mark (1999) ``Can Beneficiaries Help Save Medicare? 
Beneficiary Contributions and Medicare Reform,'' in Helms 
(1999).
    Pharmaceutical Research and Manufacturers of America 
(1999), Pharmaceutical Industry Profile 1999. Washington, D.C.
    Showstack, J., et al. (1989) ``The Effect of Cyclosporine 
on the Use of Hospital Resources for Kidney Transplantation,'' 
New England Journal of Medicine, Vol. 321, No. 16, 1989.
    ``The SOLVD Investigators,'' (1991) 325/5 New England 
Journal of Medicine pp. 293-302.
    Thomas, Lacy Glen (1994a) ``Pricing, Regulation, and 
Competitiveness--Lessons for the U.S. from the Japanese 
Pharmaceutical Industry,'' Pharmacoeconomics, V. 6, Supp. 1, 
67-70.
    Triplett, Jack, ed. (1999) Measuring the Prices of Medical 
Treatments, Brookings Institution.
    U.S. Department of Health & Human Services, Health Care 
Financing Administration (HCFA) (1999) ``National Health Care 
Expenditures by Type of Service and Source of Funds; Calendar 
Years 1960-1997.''
    Vakil, Nimish (1996) ``Guidelines for H. pylori-Induced 
Peptic Ulcer Disease Treatment,'' Drug Benefit Trends, v. 8(B), 
p. 21-24, 32.
      

                                


    Chairman Thomas. Thank you very much, Doctor.
    Dr. Braun, it would be my usual pleasure to welcome you 
once again, but I think since the last time you were here, we 
have had an addition to the Health Care Subcommittee, and so 
for a more direct and personal introduction, your 
Representative. The gentlewoman from Florida, your constituent.
    Mrs. Thurman. Dr. Braun, I just wanted to officially 
welcome you and let you know that all of us in Hernando County 
are very proud of the work that you have done in the past and 
the work that you are doing today. And I am just glad you are 
here.

STATEMENT OF BEATRICE BRAUN, M.D., MEMBER, BOARD OF DIRECTORS, 
            AMERICAN ASSOCIATION OF RETIRED PERSONS

    Dr. Braun. Thank you very much, Congresswoman. As you have 
heard, I am Bea Braun. I come from Springfield, Florida, and I 
am a member of the AARP's Board of Directors.
    Chairman Thomas. Dr. Braun, as usual, these microphones are 
very unidirectional, and you need to have it right in front of 
you and talk directly so we can all hear you.
    Dr. Braun. Thank you, Mr. Chairman.
    Since it was enacted, Medicare has provided access to 
affordable health care and kept many older people out of 
poverty. But there are a lot of challenges facing the program, 
as we have heard this morning. As a retired physician, I have 
seen the practice of medicine change dramatically, particularly 
in the area of prescription drugs. Simply stated, prescription 
drug coverage is smart medicine.
    Yet, while most employer plans include drug coverage, 
Medicare does not. We are pleased that Congress, the 
Administration, and the drug industry recognize that 
prescription drug coverage must be a part of a strengthened 
Medicare Program. The question is how to do it.
    AARP believes that a Medicare prescription drug benefit 
must be available to and affordable for all beneficiaries. The 
benefit should be voluntary, allowing people the option of 
keeping the coverage that they have, and the benefit must be 
affordable for all beneficiaries, not just for those with low 
incomes.
    The benefit needs to ensure that it helps middle-income 
beneficiaries handle mounting prescription costs. Equally 
important, it needs to ensure enough participation in the 
benefit to avoid risk selection.
    One of Medicare's greatest strengths has been its success 
in pooling the risk of nearly 40 million beneficiaries. This 
has let Medicare avoid the cherrypicking that exists in today's 
under-65 health insurance market. The broadest pool must be 
sustained in order to keep Medicare strong and affordable.
    While 65 percent of beneficiaries may have some type of 
coverage, as we have heard this morning, employer-based retiree 
coverage is declining rapidly, Medigap coverage is expensive 
and it is limited in what and who it covers, and managed care 
coverage has proven unstable, as the last 2 years of increased 
prices and pullouts have demonstrated.
    I am not attempting today to give a full review of the 
prescription drug proposals before Congress. That will take a 
lot more hearings. But as Congress undertakes this effort, I 
would like to raise the following fundamental questions that 
need to be answered about any drug proposal.
    First, will the proposed prescription drug coverage be 
affordable to beneficiaries and assure a viable risk pool for 
the program? These go hand in hand.
    Second, how would insurers be prevented from cherrypicking 
beneficiaries?
    Third, how would beneficiaries with very high costs for 
drugs be protected?
    Fourth, does the proposed benefit meet the needs of current 
and future beneficiaries?
    The AARP is reserving judgment on current proposals until 
these and other questions about their impact on beneficiaries 
and the program itself are answered.
    How to provide Medicare beneficiaries with affordable 
prescription drugs is a huge challenge. We urge the Congress, 
the drug industry, and consumers to engage in a serious debate 
on the merits of the full range of approaches. The success of 
any drug benefit proposal as well as broader changes in 
Medicare depend on a clear understanding on the part of public 
and policymakers alike of the changes being contemplated. This 
will require not only extensive dialog, but also a thorough 
analysis of how the proposal would affect current and future 
beneficiaries.
    In fact, if legislation is pushed through too quickly 
before the effect on beneficiaries and the program is known, 
AARP would be compelled to alert our members of the dangers in 
such legislation and why we could not support it.
    Mr. Chairman, thank you for your efforts to examine the 
high costs of prescription drugs for older Americans like 
myself. AARP is committed to working with the Members of 
Congress on a bipartisan basis to advance this debate over 
prescription drug coverage and to carefully explore the best 
options for securing all of Medicare's future.
    Thank you.
    [The prepared statement follows:]

Statement of Beatrice Braun, M.D., Member, Board of Directors, American 
Association of Retired Persons

    Mr. Chairman and members of the Committee, I am Beatrice 
Braun, a member of AARP's Board of Directors. I want to thank 
you for your interest in the issue of the high cost of 
prescription drugs and the difficulties older Americans have in 
paying for needed medications. AARP appreciates this 
opportunity to share our perspective on the need for a Medicare 
prescription drug benefit and some of the broader issues 
involved in reforming the Medicare program.
    For over thirty years Medicare has provided older and 
disabled beneficiaries with dependable, affordable, quality 
health insurance. I live in Florida, which has one of the 
largest beneficiary populations in the nation. As a retired 
physician, I have seen first hand how Medicare has made a 
difference in the lives of older Americans. Medicare has been 
instrumental in improving the health and life expectancy of 
beneficiaries in Florida and across the nation. It has also 
helped to reduce the number of older persons living in poverty.
    Medicare's promise of affordable health care extends beyond 
the current generation of retirees. Now, more than ever, 
Americans of all ages are looking to Medicare's guaranteed 
protections as part of the foundation of their retirement 
planning. AARP believes that in order for Medicare to remain 
strong and viable for today's beneficiaries, and for those who 
will depend on it in the future, we must confront the key 
challenges facing the program.
    Foremost among these challenges is ensuring that Medicare's 
benefits and its means of delivering care remain dependable 
even as they are updated to keep pace with the rapid advances 
in health care. The practice of medicine has changed 
dramatically since the Medicare program was created. We are now 
living in a time of amazing breakthroughs in medical 
technology. Among the most striking are the advances in the 
area of prescription drugs. Drug therapies that were not 
available when Medicare began are now commonly used to prevent 
and treat virtually every major illness. In many cases, new 
drugs substitute for or allow patients to avoid more expensive 
therapies such as hospitalization and surgery. In other cases, 
drugs facilitate treatment or provide treatment where none 
existed before, improving the quality and length of life for 
the patient. As a result, prudent reliance on prescription 
drugs now goes to the very core of good medical practice.
    Ironically, while older Americans typically need more 
medications than younger people, most employer plans include 
and rely on prescription drug coverage as an essential tool for 
medical management, but Medicare still does not. Consequently, 
high prescription drug prices impose significant financial 
hardship on the millions of Medicare beneficiaries who have 
inadequate or no insurance coverage for prescription drugs. It 
is important to remember that beneficiaries without coverage 
pay top dollar for their prescriptions because they do not 
benefit from discounts negotiated by third party payers as do 
most younger persons. AARP believes prescription drug coverage 
must be part of an improved Medicare program. Simply stated, 
prescription drug coverage is smart medicine.
    The second challenge facing Medicare is our nation's 
changing demographics. The retirement of the baby boom 
generation will nearly double the number of Medicare 
beneficiaries in the program. Medicare's financing and delivery 
systems must be capable of serving this enormous influx of 
beneficiaries whose health care circumstances, needs, and 
expectations will be similar in some respects to those of 
today's beneficiaries, but very different in others. Just as 
important, longer life spans are already causing rapid growth 
in the very old population. Medicare must be prepared to handle 
the unique health care needs of a growing number of older 
Americans who reach 85, or even 100.
    To meet these challenges, the program's long-term financial 
solvency must be secure. AARP supported the Balanced Budget Act 
of 1997 as a first step towards securing Medicare's long-term 
solvency. The strong economy we now enjoy, and the Medicare 
Trustees' projection of solvency to the year 2015 are good 
news. But, this does not mean we can afford to become 
complacent or that we can delay the debate over how best to 
strengthen Medicare.
    The deliberation over Medicare's future must be ongoing. It 
will take a sustained effort to update and improve Medicare. 
Changing a program that millions of Americans depend on for 
their health care is no small task. There must be a careful and 
thorough examination of the full range of issues--prescription 
drugs being only one issue among them--and a similarly careful 
effort to make sure that policy makers and the public alike 
understand the trade-offs that will be necessary.
    AARP believes that it would be a serious mistake for anyone 
to hinder debate on reform proposals. By the same token, it 
would be an error for the Congress to rush to judgment on any 
reform option before policy makers and the public understood 
the proposed changes and their anticipated effect on 
beneficiaries, providers, and on the Medicare program in 
general. As we all learned over the recent BBA revisions, 
earlier experiences with the Catastrophic Coverage Act in the 
late 1980s, and from the health care reform debate of the early 
1990s, unless the American public understands the trade-offs 
they are being asked to make and the changes that they will 
face, initial support can erode quickly.

The Need for a Medicare Prescription Drug Benefit

    AARP is pleased that the Subcommittee has begun to examine 
ways to make prescription drugs more accessible and affordable 
for older Americans. It is our hope that today's hearing will 
help focus attention on the need for an affordable Medicare 
prescription drug benefit for all beneficiaries, as well as on 
other Medicare reform issues.
    As new prescription drugs are becoming available to treat 
and even prevent more and more serious conditions and life-
threatening illnesses, reliance on these drugs has become 
especially significant for older Americans. Eighty percent of 
retirees use a prescription drug every day. While older 
Americans comprise only 12 percent of the U.S. population, they 
account for one-third of prescription drug spending. In fact, 
after premium payments, prescription drugs account for the 
single largest component of health care out-of-pocket spending, 
for non-institutionalized Medicare beneficiaries age 65 and 
older. On average, these beneficiaries spend as much out-of-
pocket for prescription drugs (17 percent of total out-of-
pocket health care spending) as for physician care, vision 
services, and medical supplies combined. By contrast, inpatient 
and outpatient hospital care each accounts for about 3 percent 
of older beneficiaries' total out-of-pocket health spending.
    High use, high drug prices, and inadequate insurance 
coverage pose serious problems for today's Medicare 
beneficiaries. A chronic health problem necessitating some of 
the newest, most expensive prescription drugs can deplete a 
retiree's financial resources. Some beneficiaries are forced to 
choose between food and their medications. Others do not refill 
their prescriptions or take the proper dosage in order to make 
their prescriptions last longer. A new international health 
care survey of the elderly by the Commonwealth Fund reports 7% 
of adults age 65 and over did not even fill a prescription due 
to cost.
    Because of Medicare's current lack of prescription drug 
coverage, many beneficiaries must pay for prescription drugs 
completely out-of-pocket. While some beneficiaries may have 
employer-based retiree coverage, or be able to purchase private 
supplemental coverage that assists with costs, or join a 
Medicare HMO that offers a prescription drug benefit, these 
coverage options are inadequate, limited, expensive, and 
unstable. For instance, a new study by the Commonwealth Fund, 
reports that many Medicare beneficiaries do not have continuous 
prescription drug coverage. In 1996, just 53 percent of 
beneficiaries had prescription drug coverage throughout
    Although 65 percent of Medicare beneficiaries have some 
type of coverage for prescription drugs, this figure can be 
very misleading. In fact, the majority of Medicare 
beneficiaries--not just those with low incomes--need drug 
coverage in Medicare. Why?
    First, Medicare beneficiaries' current prescription drug 
coverage does not protect them from high out-of-pocket 
expenses. AARP estimates that 25 percent of Medicare 
beneficiaries spent over $500 out-of-pocket on prescription 
drugs in 1999, and over half of these beneficiaries had some 
type of coverage. Forty-two percent of beneficiaries who spent 
$1,000 or more on their prescription drugs (excluding insurance 
premiums) had some type of drug coverage. For example, some 
beneficiaries buy Medigap policies that provide a drug benefit. 
Two of the three Medigap policies that cover prescription drugs 
have an annual cap of $1,250 on drug coverage; the third policy 
has a $3,000 cap. All three Medigap policies that have a 
prescription drug benefit require the beneficiary to pay 50 
percent coinsurance. It is interesting to note that while 
Medigap prescription drug coverage is quite limited, the 
premiums on these policies exceed $1,000. Other beneficiaries 
choose to enroll in Medicare HMOs that offer some prescription 
drug coverage. Yet, this year 32 percent of Medicare HMOs 
offering drug coverage have a $500 cap that applies to brand or 
to brand and generic drugs, and average copays in these plans 
have increased dramatically from last year--an estimated 21 
percent for brands and 8 percent for generics.
    Second, current prescription drug coverage available to 
Medicare beneficiaries is limited. Private Medigap policies may 
be the only option for obtaining drug coverage for 
beneficiaries who do not have access to employer coverage or 
Medicare+Choice plans. Yet, because almost all Medigap policies 
with drug coverage exclude beneficiaries based on pre-existing 
conditions once they have passed the first six months of their 
Medicare eligibility, and because not all three Medigap 
policies that include prescription drugs are not offered 
everywhere, many Medicare beneficiaries desiring such coverage 
cannot obtain it. Additionally, although Medicare HMOs are 
prohibited by law from underwriting the coverage they offer, 
such plans are not available in all parts of the country.
    Third, current drug coverage options are not stable. For 
example, beneficiaries who obtain prescription drug coverage 
from their former employer are finding that coverage to be 
unstable. Retiree health benefits that include prescription 
drug coverage are becoming more scarce. While an estimated 60 
to 70 percent of large employers offered retiree health 
coverage during the 1980s, fewer than 40 percent do so today. 
Of those employers who offer retiree benefits, 28 percent do 
not offer drug coverage to Medicare eligible retirees.
    Further, beneficiaries who have drug coverage through 
Medicare HMOs cannot depend on having this coverage from year 
to year as plans can change benefits on an annual basis or even 
terminate participation in Medicare. For example, this year 
many beneficiaries in Medicare+Choice plans are living through 
abrupt changes in their prescription drug coverage that they 
did not foresee when they enrolled. Some of the most visible of 
these changes include:
     Increasing premiums--Over the past few years, more 
and more Medicare+Choice plans are charging premiums for their 
coverage, and those premiums are climbing. This year 207,000 
beneficiaries must pay over $80 per month to enroll in a 
Medicare HMO. This compares to 1999 when only 50,000 Medicare 
beneficiaries enrolled in Medicare HMOs had a premium above $80 
per month.
     Higher cost-sharing--For the first time this year, 
all Medicare HMOs that provide prescription drug coverage are 
charging copays for those prescription drugs, and the average 
beneficiary copay has increased significantly.
     Decreasing benefit--The annual cap on the typical 
Medicare+Choice drug benefit has decreased. While in 1999 only 
21 percent of Medicare HMOs had an annual cap of $500 or less 
on their drug benefit, this year 32 percent of plans will have 
a $500 cap.
     Loss of benefit--This year some Medicare+Choice 
plans dropped their prescription drug benefit entirely. 
Although Medicare+Choice has provided beneficiaries with an 
opportunity for drug coverage, the volatility of the 
Medicare+Choice market has made that coverage unpredictable and 
unstable from year to year.

Issues Surrounding Adding Prescription Drugs to Medicare

    AARP is committed to the creation of a voluntary, 
affordable Medicare prescription drug benefit that would be 
available to all beneficiaries, so that they may benefit from 
longer, healthier lives, fewer invasive medical procedures, and 
reduced health care costs. We appreciate the Subcommittee's 
interest in this issue and look forward to working with the 
Congress and the Administration to assure that a prescription 
drug benefit that is available and affordable to all Medicare 
beneficiaries becomes part of Medicare's defined benefit 
package. To that end, we have identified principles that we 
believe are fundamental to the design of a Medicare 
prescription drug benefit:
     A Medicare prescription drug benefit must be 
availableto all Medicare beneficiaries. First, the benefit 
should be voluntary so that beneficiaries are able to keep the 
coverage that they currently have, if they choose to do so. A 
Medicare prescription drug benefit should not be an incentive 
for employers to drop or cut back on retiree health coverage. 
Second, the benefit needs to be affordable to assure enough 
participation and thereby avoid the dangers of risk selection. 
To this end, the government contribution will need to be 
sufficient to yield a beneficiary premium that is affordable, 
and a benefit design that is attractive to beneficiaries. In 
other words, this is not simply a matter of beneficiary 
affordability, but equally important, the fiscal viability of 
the risk pool. Medicare Part B is a model in this regard. The 
Part B benefit is voluntary on its face, but Medicare's 
contribution toward the cost of the benefit elicits virtually 
universal participation.
     Prescription drugs should be part of a defined 
benefit package. It is critical that beneficiaries understand 
what is included in their benefit and that they have dependable 
and stable prescription drug coverage. In addition, defining 
the drug benefit would reduce the opportunity for risk 
selection.
     The benefit must assure beneficiaries have access 
to medically appropriate and needed drug therapies.
     The benefit must include quality improvement 
components to reduce medical errors and mismedication and to 
help reduce overall health care costs.
     The benefit must include meaningful cost-
containment mechanisms for both beneficiaries and Medicare. 
This should include drug-purchasing strategies that enable 
Medicare beneficiaries and the program to take advantage of the 
aggregate purchasing power of large numbers of beneficiaries.
     The benefit must provide additional subsidies for 
low-income beneficiaries to protect them from unaffordable 
costs and assure that they have access to the benefit.
     The benefit must be financed in a fiscally 
responsible manner that is both adequate and stable. AARP 
believes that an appropriate amount of the Federal budget 
surplus should be used to help finance a prescription drug 
benefit.
     A new prescription drug benefit should be part of 
a strong and more effective Medicare program. Prescription drug 
coverage must be integrated into the program in a manner that 
strengthens Medicare by improving the program's ability to 
support modern disease management and prevention strategies. 
Many of these strategies hold promise to both improve health 
outcomes and lower program costs.

Prescription Drug Proposals Before the Congress

    The need to modernize the Medicare program to address the 
lack of prescription drug coverage has become a major issue for 
the 106th Congress. Several types of policy approaches for 
easing the financial burden that high prescription drug prices 
can impose on older Americans have been introduced. At this 
time, AARP has not taken a position on any of the proposals 
before Congress. As these plans continue to be refined, we have 
reserved judgment until further questions can be answered. We 
have not attempted in this testimony to undertake an extensive 
review of all of the prescription drug proposals introduced and 
the full range of questions that they raise. That essential 
step will require many more hearings, close review by a range 
of experts, and careful assessment of the impact of the 
proposed changes on beneficiaries, plans, providers, and the 
program itself. However, we have tried to summarize the major 
types of policy approaches before the Congress and the 
fundamental questions that must be answered about each.

President Clinton's Proposal

    The approach put forward by President Clinton requires 
Medicare to pay for 50 percent of beneficiaries' prescription 
drug costs. This Medicare benefit would be available to all 
beneficiaries, but would be voluntary. Benefit management would 
be contracted out to private entities, such as pharmacy benefit 
managers (PBMs). This approach would allow market forces to 
reduce drug prices for beneficiaries because the contracted 
third parties could negotiate the same types of discounts from 
manufacturers and pharmacies for Medicare as they currently 
negotiate for health plans and HMOs. The government would be 
distanced from the role of determining prices under this 
approach. Additional financial assistance would be provided to 
low-income beneficiaries and financial incentives would be 
offered to employers to ensure that they retain current retiree 
health benefits. The Administration has now also suggested a 
new catastrophic benefit, although the details have not been 
spelled out. While AARP is pleased that the President's 
proposal includes prescription drug coverage for all 
beneficiaries, details of his plan are forthcoming and there 
are still unanswered questions about how a Medicare-based 
proposal would work. For instance:
     Will this prescription drug coverage be affordable 
to beneficiaries?
     Are the proposed benefit package and subsidy 
sufficient to attract a large number of beneficiaries?
     How would the President's new additional benefit 
to protect those beneficiaries with extremely high drug costs 
work?
    The Kennedy-Stark-Dingell bill takes a similar Medicare-
based approach as the President's, but would provide a 
different and more generous benefit structure. Although the 
bill's proposed benefit would include a deductible of $200, the 
beneficiary's coinsurance would be 20 percent rather than 50 
percent, as proposed by the President. In addition, the 
Kennedy-Stark-Dingell bill would include a cap on the benefit 
of $1700 and stop-loss protection after the beneficiary has 
$3000 in out-of-pocket prescription drug expenses. This 
proposal raises the following questions:
     What happens to beneficiaries after they have 
exceeded the benefit cap but before they are eligible for stop-
loss protection?
     Would beneficiaries support this type of benefit 
structure?
     Does this type of benefit meet the need of most 
current and future beneficiaries?

The Breaux-Frist Proposal

    The approach introduced by Senators Breaux (D-LA) and Frist 
(R-TN) provides some subsidy to all beneficiaries interested in 
purchasing prescription drug coverage. Unlike the President's 
plan, this approach would not create a defined prescription 
drug benefit; rather, it allows entities, such as insurance 
companies or health plans, to offer any type of benefit so long 
as the benefit is equal to a certain actuarial value. Plans 
would compete by varying their drug benefit design. AARP is 
pleased that the Breaux-Frist bill improves upon earlier 
versions of the proposal in that it would include some form of 
subsidy for all beneficiaries who choose to purchase a ``high 
option'' plan. However, we have several questions that relate 
to our belief that the benefit must be affordable and avoid 
risk selection. These questions include:
     Is the prescription drug benefit affordable? Is a 
25 percent premium subsidy enough to create a viable risk pool 
and make the benefit affordable for most beneficiaries?
     How would insurers be prevented from ``cherry 
picking'' beneficiaries since the drug benefit would be pegged 
to an actuarial cost and not to a particular benefit design?
     What will be the effect on quality of care and on 
beneficiaries or program cost of having a prescription drug 
that is administered separately rather than as part of the rest 
of Medicare? Will this lack of integration lead to cost-
shifting or poorer quality care?
     Will prescription drug insurance that is offered 
through private entities be more expensive for beneficiaries 
and for the Medicare program than a benefit administered by 
Medicare because Medicare does not have to make a profit and 
has lower administrative overhead costs?
     Will stop-loss protection extend to the 
prescription drug benefit? How would beneficiaries with very 
high drug costs be protected?

The Bilirakis Proposal

    Another approach, illustrated by Representative Bilirakis' 
(R-FL) bill, is to create a state-based approach for low-income 
beneficiaries, while expanding Medicare's benefits to include 
stop-loss protection so that the program would cover 
prescription drug costs once a beneficiary's annual out-of-
pocket expenses reached a specified threshold. This approach 
would rely on the states to develop mechanisms for reducing 
prescription drug costs for low-income beneficiaries. While 
AARP opposes a Medicare prescription drug benefit for low-
income beneficiaries only, the approach of providing low-income 
drug assistance outside of the Medicare program deserves 
further review. However, a state-based approach with 
accompanying Medicare stop-loss protection raises the following 
types of questions:
     How would the state low-income drug assistance 
program work? Would all states offer a low-income program?
     What processes would be established for enrollment 
and outreach in the state-based low-income prescription drug 
programs?
     Will there be any incentives for Medicare+Choice 
plans to keep offering a drug benefit or to offer wrap-around 
coverage?
     Would receipt of Medicare stop-loss protection be 
conditioned on the purchase of private sector insurance?

The Allen Proposal

    Another approach, reflected in Representative Allen's (D-
ME) bill, attempts to lower prescription drug prices by 
limiting the prices that manufacturers could charge 
beneficiaries. This approach does not involve the creation of a 
Medicare prescription drug benefit, but rather would lower drug 
prices by legislatively tying the prices paid by retail 
pharmacies for drugs sold to Medicare beneficiaries to the best 
prices paid by the government. Although it does not provide a 
Medicare benefit, the Allen approach has helped focus attention 
on the inequity of prescription drug pricing and merits review. 
However, a prescription drug discount approach raises the 
following types of questions:
     Will manufacturer discounts be passed on to 
Medicare beneficiaries?
     Will manufacturers engage in cost-shifting?
     Will--as the industry has threatened--a lower 
return on pharmaceuticals taken by beneficiaries discourage 
manufacturers from further research and development of drugs 
mainly used by older Americans?
Options for Medicare Reform

    The above policy approaches for dealing with the high cost 
of prescription drugs illustrate one challenge we face in 
modernizing Medicare. The President's Medicare reform proposal, 
the plan introduced in the Senate by Senators Breaux and Frist, 
and proposals that will likely emerge from the House, provide 
opportunities for furthering debate about Medicare's future. We 
urge the Congress to carefully examine the different reform 
options and begin to answer some of the most critical issues 
surrounding broad changes to Medicare, including:
     How, and to what extent, would Medicare's long-
term solvency be improved?
     Would all beneficiaries--regardless of the area of 
the country in which they live--have access to the same set of 
defined Medicare benefits?
     Would fee-for-service Medicare remain an 
affordable option for beneficiaries of all incomes?
     Would a prescription drug benefit be affordable 
and available to all beneficiaries?
     Would the level of the government's contribution 
continue to assure adequate choice for beneficiaries over time, 
without regard to where they live?
     How would beneficiaries be protected from high 
out-of-pocket costs?
     Would the entity responsible for administering 
Medicare be accountable to Congress and to beneficiaries?
     How would Medicare reforms be financed?

Key Principles That Should Guide Broader Medicare Reform

    As this Committee also examines the broader issue of 
reforming Medicare, AARP urges you to consider the fundamental 
principles that, since Medicare's inception, have helped to 
shape it into such a successful program. We believe strongly 
that these principles must be the basis of any viable reform 
option.

Defined Benefits Including Prescription Drugs

    All Medicare beneficiaries are now guaranteed a defined set 
of health care benefits upon which they depend. A specified 
benefit package that is set in statute is important for a 
number of reasons. First, it assures that Medicare remains a 
dependable source of health coverage over time. Second, a 
defined benefit package serves as an important benchmark upon 
which the adequacy of the government's contribution toward the 
cost of care can be measured. Without this kind of benchmark, 
the government's contribution could diminish over time, thereby 
eroding Medicare's protection. Third, a benefit package set in 
statute reduces the potential for adverse selection by 
providing an appropriate basis for competition among the health 
plans participating in Medicare. And finally, a defined benefit 
package provides an element of certainty around which 
individuals, employers, and state Medicaid programs may plan.
    As was laid out earlier in this statement, because 
prescription drugs are central to the delivery of high quality 
health care, Medicare should be like most other health 
insurance plans and include prescription drugs as part of 
Medicare's defined benefit package offered by all participating 
plans--including traditional fee-for-service.

Adequate Government Contribution Toward the Cost of the Benefit 
Package

    It is essential that the government's contribution or 
payment for the Medicare benefit package keep pace over time 
with the cost of the benefits. Currently, payment for 
traditional Medicare is roughly tied to the cost of the benefit 
package. If the government's contribution were tied to an 
artificial budget target and not connected to the actual cost 
of the benefit package, there would be a serious risk of both 
the benefits and government payment diminishing over time. The 
effect of a flat government payment--regardless of the plan 
cost--could be sharp year-to-year premium and cost-sharing 
increases for beneficiaries. It could also mean significant 
differences in what beneficiaries would have to pay for 
different Medicare plans.

Out-of-Pocket Protection

    Changes in Medicare financing and benefits should protect 
all beneficiaries from burdensome out-of-pocket costs. Medicare 
beneficiaries age 65 and over, spent on average, about $2,430--
nearly 20 percent of their income--out-of-pocket for health 
care expenses in 1999, excluding the costs of home care and 
long-term nursing care. In addition to items and services not 
covered by Medicare, beneficiaries have significant Medicare 
cost-sharing obligations: a $100 annual Part B deductible, a 
$776 Part A hospital deductible, 20 percent coinsurance for 
most Part B services, a substantially higher coinsurance for 
hospital outpatient services and mental health care, and 
significant coinsurance for skilled nursing facility care and 
very long hospital stays. Currently, there is no coinsurance 
for Medicare home health care.
    AARP believes that Medicare beneficiaries should continue 
to pay their fair share of the cost of Medicare. However, if 
cost-sharing were too high or varied across plans, Medicare's 
protection would not be affordable, and many beneficiaries 
would be left with coverage options they might consider 
inadequate or unsatisfactory.

Viable Fee-for-Service

    Medicare beneficiaries must continue to have access to a 
strong and viable fee-for-service option. Managed care is not 
yet established as a fully satisfactory choice for many 
beneficiaries. In addition, many beneficiaries live in areas of 
the country where managed care plans are not available or 
likely to become available. Without an affordable fee-for-
service option, these beneficiaries could end up paying as much 
or more out-of-pocket for health care coverage that does not 
meet their needs.

Protecting the Availability and Affordability of Medicare 
Coverage

    Medicare should continue to be available to all older and 
disabled Americans regardless of their health status or income. 
Our nation's commitment to a system in which Americans 
contribute to the program through payroll taxes during their 
working years and then are entitled to receive the benefits 
they have earned is the linchpin of public support for 
Medicare. Denying Medicare coverage to individuals based on 
income threatens this principle. Similarly, raising the age of 
Medicare eligibility would have the likely affect of leaving 
more Americans uninsured. Thus, in the absence of changes that 
would protect access to affordable coverage, AARP would oppose 
efforts to raise the eligibility age for Medicare. Analogies to 
Social Security's increasing age of eligibility simply do not 
apply. Social Security's early retirement benefits--though 
actuarially reduced--start at age 62, and most retirees today 
begin to collect benefits at age 62 not at age 65.

Quality of Care

    Medicare beneficiaries have come to depend upon quality 
care in Medicare. Quality standards have been a hallmark of the 
program and have often served as a model for the private 
sector. Systematic data collection and analysis, careful 
quality monitoring, as well as new techniques for promoting 
quality outcomes, must remain a part of any reformed Medicare 
system.

Administration of Medicare

    Effective administration of the program remains essential. 
The agency or organization that oversees Medicare must be 
accountable to Congress and beneficiaries for assuring access, 
affordability, adequacy of coverage, quality of care, and 
choice. It must have the tools and the flexibility it needs to 
improve the program--such as the ability to try new options 
like competitive bidding or expanding centers of excellence. It 
must ensure that a level playing field exists across all 
options; modernize original Medicare fee-for-service so that it 
remains a viable option for beneficiaries; ensure that all 
health plans meet rigorous standards; and continue to reduce 
waste, fraud and abuse in the program.

Financing

    Medicare must have a stable source of financing that keeps 
pace with enrollment and the costs of the program. Ultimately, 
financing sources will need to be both broadly based and 
progressive. Additionally, because health care costs are rising 
faster than productivity, AARP supports using an appropriate 
portion of the on-budget surplus to secure Medicare's financial 
health.

Conclusion

    The Medicare program needs to be ready to meet the unique 
challenges it faces now and in the future. Foremost among the 
challenges is ensuring that, even as the program adjusts to 
ensure its future financial soundness, it must also adjust to 
keep pace with the rapid advances in medicine. Therefore, AARP 
believes that an affordable Medicare prescription drug benefit 
that is part of Medicare's defined benefit package and 
available to all Medicare beneficiaries is essential to any 
Medicare reforms.
    How to provide Medicare beneficiaries with affordable 
prescription drugs is a huge challenge before us. AARP urges 
all stakeholders--government, industry, and consumers--to 
engage in a serious debate on the merits of the full range of 
approaches. The success of any drug benefit proposal as well as 
broader changes to Medicare depend on a clear understanding--on 
the part of the public and policy makers alike--of the changes 
that are being contemplated. This will require not only 
extensive dialogue, but also a thorough distributional analysis 
of how the proposed changes would affect the full range of 
current and future beneficiaries.
    If legislation is pushed through too quickly, before there 
has been a thorough examination of the effect on beneficiaries 
and the program, and before there is an emerging ``public 
judgment'' about the changes, this would be a very serious 
mistake. In such a circumstance, we would be compelled to alert 
our members to the dangers in such legislation and why we could 
not support it.
    We thank you for your efforts to examine the high costs of 
prescription drugs for older Americans. AARP looks forward to 
continuing to work with members of this Subcommittee and the 
Congress to advance the debate over prescription drug coverage, 
and to carefully explore the best options for securing 
Medicare's future.

                                


    Chairman Thomas. Thank you, Doctor. Cost and availability.
    Mr. Roth?

   STATEMENT OF THEODORE ROTH, PRESIDENT AND CHIEF OPERATING 
  OFFICER, ALLIANCE PHARMACEUTICAL, SAN DIEGO, CALIFORNIA, ON 
         BEHALF OF THE CALIFORNIA HEALTHCARE INSTITUTE

    Mr. Roth. Mr. Chairman and members of the subcommittee, 
thank you for giving me the opportunity to testify today on the 
important issue of Medicare and prescription drugs for seniors. 
I would also like to commend you for demonstrating commitment 
to this issue and the broader topic health care policy. How we 
deal with this subject has great implications for the physical 
and emotional health of our Nation's older citizens and the 
financial health of America's biomedical research and 
development enterprise.
    My name is Ted Roth. I am president and chief operating 
officer of Alliance Pharmaceutical, a biopharmaceutical company 
based in San Diego. We employ about 300 people engaged in 
developing unique therapeutic and diagnostic products that are 
based on the company's expertise with perfluorochemicals, 
surfactants, and pharmaceutical manufacturing processes. Our 
drugs and medical devices are intended mainly for use in 
critical and acute care situations, including surgical, 
cardiology, and respiratory indications.
    Today I am testifying on behalf of the California 
Healthcare Institute, representing approximately 200 companies 
and academic institutions. During the past generation, 
California has become the world headquarters for biotechnology 
and medical innovation. Altogether this statewide enterprise 
employees well over 200,000 California who are pursuing 
hundreds of research and development projects to cure and 
prevent disease. It is no exaggeration to say that such that 
such research represents our only hope of conquering the 
terrible diseases that predominantly affect our older citizens: 
Alzheimer's and stroke, as well as cancer, heart disease, and 
depression.
    With respect to the Medicare population, the central 
challenge we face is twofold: How can we make sure that 
biomedical research companies continue to produce the new 
medicines that patients so desperately need and, at the same 
time, ensure that these medicines are available to all our 
senior citizens who need them?
    Ironically, we confront this question to a great degree 
because pharmaceuticals have been so effective. A century ago, 
Americans' average age at death was 47 years. Most of the 
diseases that accompany older age today were rare. And at the 
dawn of the new millennium, thanks in large measure to vaccines 
and other pharmaceuticals, the average life expectancy in the 
U.S. is 76 and rising. In fact, today more than 1.4 million 
Americans are in their 90s.
    To a large extend, the costs associated with prescription 
drugs and biioltyechnology products are an indications of just 
how much innovative science has transformed health care. 
Increasingly, drugs and biologic are saving the lives of people 
who would have died without them and are displacing less 
desirable surgical procedures and treatments. In other words, 
breakthrough medicine has changed the nature of health care, 
and in doing do, they inevitably represent a growing share of 
medical costs. Patients and physicians generally view this as a 
positive trend. For instance, curing ulcers with a drug is 
vastly preferable to surgery, and rating depression on an 
outpatient basis with a compound that regulates the brain's 
neurotransmittes is immeasurably better than confining a 
severely depressed patient in a psychiatric hospital.
    A recently study of nearly 2,000 members in a managed care 
program for congestive heart failure showed that pharmacy costs 
increases by 60 percent, or $250,000, but hospital costs, in 
fact, decreased by 78 percent, and the total savings exceeded 
$9 million.
    The free market economy of medicine in America has produced 
the most technologically advanced drugs and biologics in the 
world. Nationally, there are about 30 biotechnology products in 
Phase Ii or Phase III clinical trials, a high percentage of 
which will be approved for patient use within the next few 
years, and much of this innovative has taken place in small, 
entrepreneurial; biomedical companies, as Exhibit 1 to my 
prepared remarks indicate, the California biomedical companies 
and the products that they are working on:
    To meet the high standards of safety and efficacy demanded 
by the Food and Drug Administration for commercialization, the 
average new drug requires an investment of nearly $500 million 
over a period of 12 years. The biotechnology revolution we are 
experiencing is only possible because an unprecedented amount 
of private capital has flowed into small startup companies 
during the past 20 years, enabling them to fund the long and 
arduous process of transforming an invention into a product for 
patients. In 1998 along, biotechnology companies invested 
almost $10 billion in R&D. Since most of these companies have 
yet to generate commercial sales, let along profits, their net 
operating loss of 1998 amounted to $5.1 billion.
    At Alliance Pharmaceutical, which is a typical company in 
this regard, we have exploited every available avenue for 
financing--venture capital, public equity, corporate 
partnerships, and so forth--to support our key development 
programs.
    Naturally, investors are concerned about whether or not 
they can earn a return on invested capital that is commensurate 
with the risk involved with developing a new drug. Bear in mind 
that the entire research and development work, including 
obtaining FDA approval, must be completed before realizing the 
first dollar of sales from each product. By and large, 
investors are comfortable with assessing the inherent risks of 
science and the marketplace. What makes them uncomfortable is 
the prospect of Government intervention in the form of price 
controls, direct or indirect. If Congress imposes price control 
mechanisms in changing Medicare, the most serious unintended 
consequence will be to reduce the rate of private investment in 
biomedical research and, as a result, the research itself.
    I would just like to present four areas that we think 
should be incorporated into any legislation for prescription 
drugs: number one, help the neediest first; two, rely on market 
mechanisms, not price controls; three, focus on the total 
health care costs, not individual components; and, finally, 
incorporate pharmaceuticals into broader Medicare reform.
    Thank you for this opportunity to present to you.

Statement of Theodore Roth, President and Chief Operating Officer, 
Alliance Pharmaceutical, San Diego, California, on behalf of the 
California Healthcare Institute

    Mr. Chairman, Members of the Subcommittee, thank you for 
giving me the opportunity to testify today on the important 
issue of Medicare and prescription drugs for seniors. I'd also 
like to commend you for demonstrating commitment to this issue, 
and the broader topic of health care policy. How we deal with 
this subject has great implications for the physical and 
emotional health of our nation's older citizens and the 
financial health of America's biomedical research and 
development enterprise.
    My name is Ted Roth and I am president and chief operating 
officer of Alliance Pharmaceutical, a biopharmaceutical company 
based in San Diego, California. We employ about 300 people 
engaged in developing unique therapeutic and diagnostic 
products that are based on the Company's expertise with 
perfluorochemicals, surfactants, and pharmaceutical 
manufacturing processes. Our drugs and medical devices are 
intended mainly for use in critical and acute care situations, 
including surgical, cardiology and respiratory indications.
    Today I am testifying on behalf of the California 
Healthcare Institute (CHI), representing approximately 200 
companies and academic institutions. During the past 
generation, California has become the world headquarters for 
biotechnology and medical innovation. Altogether this statewide 
enterprise employs well over 200,000 Californians who are 
pursuing hundreds of research and development projects to cure 
and prevent disease. It is no exaggeration to say that such 
research represents our only hope of conquering the terrible 
diseases that predominantly affect our older citizens: 
Alzheimer's, stroke, as well as cancer, heart disease and 
depression.
    With respect to the Medicare population, the central 
challenge we face is twofold: How can we make sure that 
biomedical research companies continue to produce the new 
medicines that patients so desperately need and, at the same 
time, ensure that these medicines are available to all our 
senior citizens who need them?
    Ironically, we confront this question to a great degree 
because pharmaceuticals have been so effective. A century ago, 
Americans' average age at death was 47 years. Most of the 
diseases that accompany older age today were rare. At the dawn 
of the new millennium, thanks in large measure to vaccines and 
other pharmaceuticals, the average life expectancy in the U.S. 
is 76 and rising. This is truly remarkable--in a 100-year 
period, we have added 30 years to the average length of life. 
In addition, the quality and productivity of those years has 
been greatly improved. Every five years since 1965, medicines 
have helped add one year to average life expectancy. Today more 
than 1.4 million Americans are in their nineties.
    To a large extent, the costs associated with prescription 
drugs and biotechnology products are an indication of just how 
much innovative science has transformed healthcare. 
Increasingly, drugs and biologics are saving the lives of 
people who would have died without them and are displacing less 
desirable surgical procedures and treatments. In other words, 
breakthrough medicines change the nature of healthcare, and in 
doing so they inevitably represent a growing share of medical 
costs. Patients and physicians generally view this as a 
positive trend. For instance, curing ulcers with a drug is 
vastly preferable to surgery. Treating depression on an 
outpatient basis with a compound that regulates the brain's 
neurotransmitters is immeasurably better than confining a 
severely depressed patient in a psychiatric hospital. A recent 
year-long study of nearly 2,000 members in a managed care 
program for congestive heart failure showed that pharmacy costs 
increased by 60%, or $250,000, but hospital costs decreased by 
78% and total savings exceeded $9 million.
    The free-market economy of medicine in America has produced 
the most technologically advanced drugs and biologics in the 
world. Nationally, there are about 300 biotechnology products 
in Phase II or Phase III clinical trials, a high percentage of 
which will be approved for patient use within the next few 
years. And much of this innovation has taken place in small, 
entrepreneurial biomedical companies. As exhibit I shows, 
California's biomedical companies are working 
disproportionately on the maladies that afflict senior 
citizens. Significantly, most of these products in development 
have yet to reach the market.
    To meet the high standards of safety and efficacy demanded 
by the Food and Drug Administration for commercialization, the 
average new drug requires an investment of nearly $500 million 
over a period of 12 years. The biotechnology revolution we are 
experiencing is only possible because an unprecedented amount 
of private capital has flowed into small startup companies 
during the past twenty years, enabling them to fund the long 
and arduous process of transforming an invention into a product 
for patients. In 1998 alone, biotechnology companies invested 
almost $10 billion in R&D. Since most of these companies have 
yet to generate commercial sales, let alone profits, their net 
operating loss for 1998 amounted to $5.1 billion. At Alliance 
Pharmaceutical, which is a typical company in this regard, we 
have exploited every available avenue for financing--venture 
capital, public equity, corporate partnerships, and so forth--
to support our key development programs.
    Naturally, investors are concerned about whether or not 
they can earn a return on invested capital that is commensurate 
with the risk involved with developing a new drug. Bear in mind 
that the entire research and development work, including 
obtaining FDA approval must be completed before realizing the 
first dollar of sales from each product. By and large investors 
are comfortable with assessing the inherent risks of science 
and the marketplace. What makes them uncomfortable is the 
prospect of government intervention in the form of price 
controls, direct or indirect. If Congress imposes price control 
mechanisms in changing Medicare, the most serious unintended 
consequence will be to reduce the rate of private investment in 
biomedical research, and, as a result, the research itself. 
This outcome would be particularly tragic in view of our 
industry's promise and the increasing rate of public sector 
investment in basic life sciences research through the National 
Institutes of Health and other federal agencies. Government 
investment in academic science remains inert unless private 
investors are willing to capitalize the development of that 
research into commercially viable products. In fact, the 
development phase (after characterization of the 
biopharmaceutical product) represents by far the greatest 
amount of time and money to bring these products to patients. 
Government agencies are not prepared to conduct this work--the 
private sector has demonstrated that it can most effectively 
perform this function.
    Still, we must face the question of how to ensure seniors' 
access to affordable medicines, once they are developed. Here I 
would like to focus on a few principles that, no matter the 
details of any particular approach, are essential to balancing 
the goals of expanding access and continuing innovation.
     Help the neediest first. Cost is the reason we do 
not have a Medicare prescription drug benefit today. One in 
three seniors have already arranged coverage for drugs in the 
private insurance market. Any plan that simply adds an 
expensive new benefit onto a program already beset by cost 
problems is unwise. We should begin with providing benefits to 
lower-income seniors and disabled citizens.
     Rely on market mechanisms, not price controls. The 
private market has demonstrated a robust ability to contain 
healthcare costs, including the cost of drugs. By exploiting 
private sector cost-containment and healthcare management 
systems already in place, and encouraging competition, Medicare 
has the best chance of controlling its budget without imposing 
government price controls.
     Focus on total healthcare costs, not individual 
components. In many instances, pharmaceuticals are replacing 
more expensive clinical alternatives such as surgery or 
hospitalization. Beyond improving patients' quality of life, 
prescription drugs often produce substantial cost savings.
     Incorporate pharmaceuticals into broader Medicare 
reform. The National Bipartisan Medicare Commission identified 
a direction for Medicare in the future, with seniors selecting 
from various competing private sector plans those options that 
best met their needs. A drug benefit should be integral to a 
modernized Medicare program, not an afterthought merely added 
to a faulty structure.
    Mr. Chairman, as you consider the best way to improve drug 
access for Medicare beneficiaries, we urge you and your 
colleagues to remember the crucial role that smaller 
biotechnology companies play in meeting the unmet medical needs 
of seniors and, ultimately, of everyone. The reason California 
leads the world in biomedical progress is that we have enjoyed 
a free market that rewards risk-taking and successful 
innovation. This free market is the envy of the world. It must 
not be constrained by the visible hand of government 
intervention. We share your goals of making the fruits of 
innovation available to all, and we look forward to working 
with you to achieve the best solution.

                                


    Chairman Thomas. Thank you, Mr. Roth.
    Dr. Sager?

 STATEMENT OF ALAN SAGER, PH.D., PROFESSOR, BOSTON UNIVERSITY 
         SCHOOL OF PUBLIC HEALTH, BOSTON, MASSACHUSETTS

    Mr. Sager. Thank you, Mr. Chairman, and thank you for 
inviting me.
    We can make all needed medications affordable for all 
Americans and build a durable financial foundation under drug 
research.
    Over 70 million of us lack insurance for drugs today. Some 
17 percent of Americans and 42 percent of uninsured Americans 
report not filling prescriptions for financial reasons. What 
good is drug research if people can't afford the product?
    Yet our drug spending per person is the world's highest, 
and total prescription drug spending will be over $120 billion 
this year, or 10 percent of health care costs.
    We face three choices: Many of us could suffer and die for 
lack of needed drugs, but that is intolerable; we could spend 
more on drugs, but that is both unaffordable and unnecessary; 
or we could secure more drugs from manufacturers for what we 
already spend.
    Why are medications unaffordable for many?
    First, because of high U.S. drug prices;
    Second, our Government does not fight for lower prices for 
all citizens. Americans pay some $20 to $50 billion extra for 
the drugs we buy. That is because other wealthy nations don't 
pay their fair shares of drug makers' costs. This amounts to 
badly targeted, private, and invisible foreign aid to rich 
nations; and
    Third, the drug makers paralyze government action by 
claiming that high U.S. prices and profits are needed to 
finance research, and that prices and profits are products of a 
free market. False.
    During the nineties, the nation's big drug makers' returns 
on equity were over double that of all industries for the 
entire decade. High profits, decade after decade, mean that 
drug makers' risk is much less than they claim. Drug makers 
claim, falsely, that they set prices to cover research costs. 
They do set prices to try to maximize profits as stakeholders 
expect and demand.
    Profits don't finance research. Profit is what is left over 
after paying for research and other costs. Drug profits were 
over 50 percent greater than research in 1998. Drug makers 
won't identify a ceiling on profits above which no more 
research money is needed, and they won't identify a level below 
which research would suffer. They just want more.
    In a free market, that would make sense. Sadly, there is 
little of a free market here. Lacking either a free market or 
effective government action, we have anarchy. Anarchy allows 
the strong to earn unwarranted profits. PhRMA spreads a fog of 
fear to try to paralyze public action and to preserve profits 
by threatening collapse of research if Government protects 
patients.
    Drug makers themselves are the real threat to research. 
Their unnaturally high prices and profits, while patients 
suffer, could lead an angry future Congress to legislate harsh 
controls. Moderate action today will protect both patients and 
research tomorrow.
    But what solutions are possible? Bills to lower drug prices 
for seniors and offer Medicare drug benefits have been filed. 
We should weave these approaches together because helping 
people will be very costly without restraints on spending.
    Private restraints, such as formularies and higher copays, 
will fail in costly, bureaucratic, and irritating ways. 
Instead, we should build on the blessings of at least four rich 
opportunities:
    First, we already spend enough to buy all needed drugs;
    Second, we generate some one-quarter to one-third of the 
world's drug revenues;
    Third, once research is performed and factories are built, 
the added or marginal cost of making more pills is very low. We 
estimate it at 5 cents on the retail dollar. That means that 
manufacturers can make drugs worth $20 billion to Americans, at 
retail, at an added cost to themselves of about $1 billion; and
    Fourth, lower prices may not hurt drug makers. Merrill 
Lynch says that a 40 percent price cut for Medicare patients 
would result, at worse, in a 6-percent loss of revenue, or even 
in a slight revenue gain.
    How to seize these four opportunities? Internationally, by 
negotiating a drug price treaty. All wealthy nations should pay 
the same fair prices for prescription drugs and to subsidize 
poor nations.
    Domestically, either we could fight for years over drug 
prices, profits, and coverage--with substantial name calling. 
Anger would grow. Stock prices would wobble.
    Or we could make a package deal for patients, payers, and 
drug makers that could include at least three elements:
    First, payers and drug makers negotiate returns on equity 
adequate to finance research and retain capital, but with big 
rewards for breakthrough drugs;
    In exchange, drug makers produce and distribute enough 
medications to meet all the need. Low marginal costs make this 
very inexpensive;
    Finally, to make the deal real, set lower drug prices in 
the private market, use public money to buy drugs for people 
unable to afford the lower discounted prices, and assure that 
drug makers obtain enough private plus public revenue to reach 
negotiated profit and total revenue targets.
    Thank you for the chance to present these views.
    [The prepared statement follows:]

Statement of Alan Sager, Ph.D., Professor, Boston University School of 
Public Health, Boston, Massachusetts

    Mr. Chairman and members of the Subcommittee on Health--
    Good afternoon.
    My name is Alan Sager and I am a professor at the Boston 
University School of Public Health. I am honored by your 
invitation to appear before you today.
    Together, we face two challenges.
     making all needed medications affordable for all 
Americans, while
     building a durable financial foundation under drug 
research and delivery in the U.S.
    I am convinced we can do both of these. One reason is that 
we already spend enough money to do so. But not if we continue 
business as usual.

What is the nature of the problem?

    Many Americans can't afford needed prescription drugs 
because they lack insurance, suffer low incomes, and can't 
afford high American prices.
    Today, 70 million Americans of all ages have no insurance 
for prescription drugs. Additional millions have skimpy 
coverage. Yet American prescription drug spending per person 
this year will be the world's highest. And total prescription 
drug spending will be over $120 billion this year, or about ten 
percent of overall U.S. health spending.
    Worse, people without insurance typically pay the world's 
highest prices for prescription drugs. That's because average 
American prices are highest in the world, and uninsured 
Americans pay prices above the average.
    So it is not surprising that 17 percent of all Americans--
and 42 percent of uninsured Americans--reported not filling 
prescriptions for financial reasons.\1\
---------------------------------------------------------------------------
    \1\ Karen Donelan, Robert J. Blendon, Cathy Schoen, Karen Davis, 
and Katherine Binns, ``The Cost of Health Care System Change: Public 
Discontent in Five Nations,'' Health Affairs, Vol. 18, No. 3 (May-June 
1999), pp. 206-216, exhibit 6.
---------------------------------------------------------------------------
    And these are the economy's fat years, to paraphrase what 
Joseph told Pharaoh.
    The drug cost problem will probably worsen. Drug spending 
in the U.S. has been rising about three times as fast as 
overall health care spending.
    Perhaps 1,000 new drugs are in the overall pharmaceutical 
pipeline.\2\
---------------------------------------------------------------------------
    \2\ Neil Munro, ``Technology: Frontier Ethics,'' National Journal, 
4 June 99.
---------------------------------------------------------------------------
    If too few of these medications work, we will have a lot of 
disappointed investors.
    But what if a great number of them do work?
    Then, many more patients will have to choose between their 
money and their lives. And still other patients will not even 
have this choice, because they will lack the money.
    Will medical miracles be affordable for all or merely 
profitable for some?
    If we fail to make vital drugs available to all who need 
them, how great will be the public fear and anger? Reasonable 
action today will prevent over-reaction tomorrow.
    Together, we face three choices:
     Many of us could suffer and die for lack of needed 
medications, but that is intolerable.
     We could spend more public or private money--or 
both--to buy needed drugs, but that is both unaffordable and 
unnecessary.
     We could secure more drugs from manufacturers for 
the amount we already spend.

What are the causes of the problem of unaffordable medications?

    To make sense these problems and to devise solutions to 
protect the biotechnology industry specifically, we must 
examine the prescription drug industry generally.
    1. High U.S. drug prices make drug insurance unaffordable 
for many.
    2. U.S. prices are high mainly because, alone in the world, 
our government does not protect us from the world's drug 
makers. This year, Americans will pay between $20 and $50 
billion extra for drugs. This is an invisible subsidy to other 
rich nations that don't pay their fair shares of the drug 
makers' costs. It constitutes the world's least-well-targeted 
foreign aid.
    3. The drug makers paralyze government action by claiming
     that today's prices and profits are legitimate 
products of a free market;
     that high U.S. prices and profits are needed to 
finance vital research; and
     that even moderate restraint on prices or profits 
will collapse the drug makers' fragile financial house of 
cards.
    These three claims are false. The drug makers' prices and 
profits can't be sustained at current or hoped-for levels.
    During the 1990s, the nation's big drug makers' returns on 
equity were two and one-quarter times the average for all U.S. 
industries. It is unrealistic to expect that American patients 
can or will continue to pay prices high enough to sustain these 
profits.
    The United States government emphatically rejects PhRMA's 
claims by taking a 40 percent (or so) price discount for 
medications for the V.A. and military, and by taking an 18 
percent (or so) price cut for the Medicaid program. This is the 
sort of thing foreign governments have long done for all their 
citizens.
    But unlike governments elsewhere, our government has 
protected only itself alone. In so doing, it leaves the drug 
makers free to raise prices on the rest of us in order to reach 
their revenue targets.
    The drug makers claim they set prices to cover research 
costs. That is not true. They set the prices that they believe 
will maximize profits, and that's what their stockholders 
expect. In 1998, the drug makers' profits averaged more than 
one and one-half times their research costs.
    And the drug makers are unwilling to identify any ceiling 
whatsoever on their profits--the level of profit beyond which 
no more money is needed to finance vital research. Similarly, 
the drug makers are unwilling to identify any floor on their 
profits--the level of profit below which vital research would 
suffer. Their position is simple: more is better. That would 
make sense only if the drug makers operated in a competitive 
free market.
    The drug makers' returns are unnaturally high and are not 
justified by legitimate market forces. Sadly, few signs of a 
living free market can be detected in the drug industry--
outside the retail pharmacy sector. (The evidence for this 
position is detailed in the July 1999 report to the U.S. House 
of Representatives Prescription Drug Task Force that I co-
authored with my colleague, Deborah Socolar.) Without either 
functioning free markets or effective government action, we 
have only one thing--anarchy. And anarchy allows the strong to 
earn unwarranted profits.
    That is why PhRMA, the drug makers' trade association, 
spreads a fog of fear--PhRMA's Fog of Fear--to try to paralyze 
public action and to preserve anarchy.
    But the drug makers themselves sometimes pay a price for 
this anarchy. Some individuals connected with the biotech and 
prescription drug industries have worried aloud about the 
instability of biotech stock prices in 1993-1994 and again in 
recent months. They have condemned legislative efforts to 
contain prices or improve coverage, claiming that these efforts 
would impede the flow of capital to the industry. But their 
position amounts to condemning a symptom. As long as many 
Americans cannot afford needed medications, we will see 
repeated attempts to lower prices and improve coverage. The 
industry cannot wish away this simple reality. Unless all 
patients win equitable and affordable access to medications, 
investors will be denied relaxed enjoyment of drug profits. The 
challenge is to win both.
    Drug makers claim that sky's-the-limit prices and profits 
are needed to finance drug research. But excessive prices and 
profits are more likely to damage the very research the drug 
makers profess to care about.
    Insisting on unnaturally high drug prices and profits--in a 
nation where growing numbers of patients suffer for lack of 
needed medications--could lead an angry future Congress to 
legislate harsh price and profit controls. And that is the real 
threat to sustained research funding. Moderate action and 
compromise today will protect both Americans and our vital drug 
research community tomorrow.

What solutions are possible--to win affordable medications for all 
Americans?

    Some drug makers' magical solution is to promise that new 
drugs will reduce costs of hospital and doctor care. That's 
easy to promise but hard to deliver, on average. Some short-run 
savings may be possible in some instances. While preventing or 
treating one disease is a blessing, doing so will inevitably 
expose patients to other diseases. This means that any dollar 
savings are one-time only.
    Prudence demands that we plan against the contingency that 
drug breakthroughs will fuel higher spending.
    Legislation to mandate lower drug prices for seniors has 
been introduced, as has legislation to offer prescription drug 
benefits under Medicare. We need to weave these two approaches 
together because helping vulnerable people will be very costly 
unless it is coupled with restraints on spending. And no market 
will restrain spending safely or adequately. Recall the 
experience that an unrestrained Medicare program had with 
hospital and physician spending in the late 1960s and early 
1970s.
    We can protect all people without spending more money, and 
in ways that provide fair and adequate financing for research 
to develop new and effective drugs.
    We can do so because we are blessed with at least four rich 
opportunities.
    First, U.S. drug prices and drug spending per person are 
the highest in the world. This means that all of us together 
already spend enough to buy the medications all Americans need.
    Second, Americans together generate between one-quarter and 
one-third of the world's drug makers' revenues.
    Third, once the research is performed and the factories are 
built, the marginal cost of manufacturing additional volumes of 
medications--more capsules, pills, and suspensions--is very 
low. We estimate it at 5 cents on the retail dollar. That means 
that manufacturers can make drugs worth $20 billion to 
Americans (at retail) at a cost to them of only $1 billion.
    Fourth, the price elasticity of demand for medications may 
be very substantial. For example, researchers at Merrill-Lynch 
estimated last year that even a 40 percent price cut for 
Medicare patients would result in only a 6 percent loss of 
revenue--or even a slight revenue gain.\3\
---------------------------------------------------------------------------
    \3\ Merrill Lynch, Pharmaceuticals: A Medicare Drug Benefit: May 
Not Be So Bad, 23 June 1999.
---------------------------------------------------------------------------
    Several specific approaches could be used to meet these 
capitalize on these opportunities. Here are a few:
    I. Internationally, negotiate a drug price peace treaty. 
All wealthy nations would agree to pay the same fair prices for 
prescription drugs, and to subsidize sick people in poor 
nations. Our government would have to take the lead. This is 
probably worth doing no matter what domestic approaches are 
taken.
    II. Domestically, I see only two alternatives. Either:
    A. We could engage in years or decades of increasingly 
mean-spirited and fragmented fights over drug prices, profits, 
and coverage. Anger and threats would be the highlights. So 
would corporate stock price instability.
    OR
    B. We could sit down to negotiate a comprehensive package 
deal. By focusing on the two real bottom line issues--
affordable medications for all plus fair returns on invested 
equity and adequate financing for research, this approach could 
short-circuit angry trench warfare fights about the details. 
The package could include these eight elements:
    1. Private and public payors and drug makers negotiate fair 
returns on drug makers' equity. This would be the rate adequate 
to finance needed research and retain needed capital. Adequate 
overall profits would be combined with generous rewards to 
those who develop valuable medications.
    2. In exchange, drug makers produce and distribute enough 
medications to fill all prescriptions written by physicians for 
Americans. Drug makers would find it inexpensive, on average, 
to provide the increased volumes (higher than today's 
production levels) required to protect all Americans. That is 
because drug makers face high fixed costs but very low marginal 
or incremental costs to make additional amounts of most 
medications.
    3. To make the deal real:
     Drug prices would be lowered in the private 
market.
     Public money could be used to buy medications for 
people unable to afford even the discounted prices.
     The drug makers would win enough total revenue to 
achieve negotiated profit and total revenue targets.
     The targeted total spending on prescription drugs 
this year would be pegged at about the expected $120 billion-
plus.
    4. To make medications more affordable, drug makers would 
be encouraged to cut wasteful marketing and advertising costs.
    5. Physicians need better evidence on each drug's benefits 
and costs. Studies to obtain this information should be 
financed, compiled, and disseminated by objective parties, not 
by industry.
    6. To encourage better use of medications, patients deserve 
improved information about proper drug use.
    7. To protect patients, pharmacists need to be assured of 
payments adequate to cover the time of both patient counseling 
and accurate dispensing.
    8. It may also be desirable to target scarce public and 
private research dollars down paths that are more likely to 
develop medications that are both effective and affordable for 
all.
    Evidence supporting the findings and conclusions presented 
in this testimony is found in Alan Sager and Deborah Socolar, 
Affordable Medications for Americans: Problems, Causes, and 
Solutions, presented to the Prescription Drug Task Force, 
United States House of Representatives, 27 July 1999. It is 
available from www.house.gov/berry/prescriptiondrugs/. Refer to 
``studies of interest.''
    (A summary of that report is incorporated into this 
testimony; it appears on the following pages.) [
    Thank you for the opportunity to present these views. I 
will be happy to respond to your questions, either today or 
subsequently.
    [The summary is being retained in the committee files.]

                                


    Chairman Thomas. I thank all of you.
    Dr. Sager, do you have a timeframe in which that plan would 
run? Would it be like a 5-year plan?
    Mr. Sager. I think that--
    Chairman Thomas. Or a 10-year plan?
    Mr. Sager. I think it should be incremental and American, 
sir.
    Chairman Thomas. No, but I mean the number of years. So 
once you put it in place, it has to be monitored constantly in 
terms of the dollar flows, so it wouldn't be for a set number 
of years.
    Mr. Sager. I think we would have to see as we got into it.
    Chairman Thomas. All of us are concerned that we need to do 
what we need to, accessibility and affordability. The concern 
is that we might do some of the things that you don't want us 
to do. So quickly, on a list of do's and don'ts, I think I 
heard clearly that the program ought not to be capped in some 
way. How does that reflect over to formularies? There are 
choices and sometimes providing restricted choices gives you 
ultimately more than open-ended choices. Any reaction to that?
    Dr. Soumerai. Yes, in terms of caps, caps really hurt the 
people with multiple chronic illnesses. The data clearly point 
that way.
    There are a lot of private systems and public systems that 
make formularies, if they are good formularies, work. And I 
could give you some papers that we and others have written that 
show examples of good policies that have said, for example, 
that all non-steroidal anti-inflammatory agents are about 
equally effective. And the expensive ones are discouraged.
    Chairman Thomas. Well, part of the problem is the 
incremental benefit from an incredible increasing cost in some 
of the newer drugs, and someone needs to deal with the tradeoff 
in that area.
    I assume New Hampshire put the caps on to, quote-unquote, 
save money?
    Dr. Soumerai. Yes, as well as about a dozen other States.
    Chairman Thomas. One of the things that this Committee did, 
to its credit, was to destroy the myth that a 5-year budget 
plan reflects reality and that in the area of preventive care, 
you can invest money and that over the long haul, not even just 
measuring the quality of life, but actually produce savings. So 
is it fair to say that if we were not going to do the things 
that are, quote-unquote, cost savers, like caps and the rest, 
that it also would be reasonable that as benefits are given, 
there might be some reasonable reduction of choice? Now, maybe, 
Dr. Calfee, that is to you, because if you look at, for 
example, some of the AARP requirements, it means you cannot 
build a plan because you have to maximize choice, you have to 
provide full coverage, you have to have reasonable costs, 
meaning virtually no increase in anything, and at some point 
you have got to deal with the realities of the situation.
    Is it a reasonable tradeoff to require formularies but 
restrict choice? Or is it better to maximize choice and then 
let people pay out of pocket? Which gets to the next level: 
Deductibles, good or bad? I know it depends on how high they 
are. But as a concept, should we include deductibles if they 
are reasonable?
    See, the President's plan has no deductibles whatsoever. 
Now, let's----
    Dr. Braun. I think that is something that we need to talk 
more about. We certainly have evidence of what beneficiaries 
would like, they would like first-dollar coverage. And, of 
course, one of the advantages of that is that you are more apt 
to have more people buy into it if it is a voluntary situation 
and you want to get your risk pool as big as you can.
    Chairman Thomas. Well, you have to give it away free. You 
have first-dollar coverage, you are going to get more people 
participating. But then you have got an enormous cost on your 
hand.
    Dr. Braun. But you want some of the people who have low 
cost----
    Chairman Thomas. I understand that.
    Dr. Braun [continuing]. To come into the risk pool; 
otherwise, you are going to have nothing except high ones, and 
then you can't afford the premium.
    Chairman Thomas. I understand that, but at some point maybe 
we need to talk about government as the insurer of last resort 
or a reinsurance concept, given how few those high-costers are 
which skew the entire risk pool.
    Dr. Braun. That is right.
    Chairman Thomas. Rather than create an open-ended, front-
loaded, everybody gets in to guarantee a larger risk pool. 
Managing that risk pool might be a responsible role.
    Dr. Braun. I think that stop-loss idea, whether it is 
reinsurance or whatever, is very----
    Chairman Thomas. Well, stop-loss is very critical for some. 
But, Dr. Braun, just to give you an example of the difficulty 
with the way in which the testimony once again has been 
presented by AARP, although it certainly is far-ranging, when I 
try to distill it down in terms of getting any direction or 
assistance or guidance, I find that you have pointed to a 
number of things, but have not taken a position on anything.
    Dr. Braun. No, Mr. Chairman. We realize that there needs to 
be more discussion and there have to be some tradeoffs in this, 
and speaking of the first-dollar situation, you know, maybe 
deductibles are going to work out better. I don't think we have 
made any decision on that situation.
    Chairman Thomas. OK. At the bottom of page 17, it says, 
``AARP urges all stakeholders--Government, industry and 
consumers--to engage in a serious debate.''
    Dr. Braun. Yes.
    Chairman Thomas. You say slightly above that, under 
financing, that AARP supports using an appropriate portion of 
the on-budget surplus. How much is appropriate?
    Dr. Braun. I don't think we have determined how much is 
appropriate. I think that is another thing that needs to be 
discussed as the plan is developed to see what is going to be 
necessary.
    Chairman Thomas. OK. On page 16, you say that Medicare 
should continue to be available to all older and disabled 
Americans, regardless of their health status or income. That 
means you don't want any income test at all, no means test for 
any of the benefits, right?
    Dr. Braun. No, not means testing for benefits, no.
    Chairman Thomas. OK.
    Dr. Braun. But there may be some income-relating or some 
differences in premium or there certainly needs to be subsidies 
for the low-income group, and that is going to depend----
    Chairman Thomas. Well, I am thinking more about the high-
income, not the low-income. I think you heard general agreement 
here that we ought to take care of the low-income.
    You say that our Nation's commitment to a system in which 
Americans contribute to the program through payroll taxes 
during their working years and then are entitled to receive the 
benefits they have earned is the linchpin of public support for 
Medicare.
    Are they entitled to the benefits greater than what they 
earned or just what they earned? What does that mean? I don't 
think anyone here argues that they should not get what they put 
in plus interest. The concern is that if you say that they 
deserve benefits they have earned----
    Dr. Braun. Well, first of all, you need--you would 
certainly have to look at it in terms of what the money was 
worth in the time, plus, as you say----
    Chairman Thomas. Certainly buying power, no question we 
would give----
    Dr. Braun. But I think it has been very difficult in the 
past to foresee what kind of payroll tax was going to be 
necessary to take care of the population that we have now. I 
think you need to face the fact that it is probably true for 
the future. Are people paying in now going to be able to pay 
for what is going to be available when they come----
    Chairman Thomas. So it really isn't that they are entitled 
to what they earned. It is entitled to what it costs to provide 
them with the reasonable health care----
    Dr. Braun. A good health care benefit----
    Chairman Thomas [continuing]. Far beyond what they paid in, 
which is the current situation.
    Dr. Braun. Not for everybody. Some people do die young.
    Chairman Thomas. If that were the solution, we wouldn't be 
here today.
    Dr. Braun. No. That is right.
    Chairman Thomas. Because that is changing as well.
    Finally, on page 15, you say, ``AARP believes that Medicare 
beneficiaries should continue to pay their fair share of the 
cost of Medicare.'' Is that the original 50 cents on the dollar 
of the part B premium, or is 25 cents on the dollar, which is 
what we currently pay, a fair share? You don't want to go back 
to the original statute of 50/50.
    Dr. Braun. I think that is another thing that needs to be 
discussed, that whole area of Medicare financing and what is 
the fair share. We simply want to say that the beneficiaries 
need to do their share in reforming Medicare and not expect 
everybody else to do it.
    Chairman Thomas. Does AARP have a position on the 
President's 20 percent copay for clinical labs in his budget? 
Is that a fair-share payment by a beneficiary?
    Dr. Braun. AARP hasn't taken any position on any of the 
proposals as yet. We still want some more information. We have 
got questions about each of them.
    Chairman Thomas. What about the President's proposal to 
index deductions on the part B premium, which has never been 
changed since it was put in effect? Obviously, everything has 
gone up, as you indicated, but the deduction hasn't gone up at 
all. So would indexing of things be a reasonable approach, as 
the President offered?
    Dr. Braun. I think we have to look at that as part of the 
whole picture, but I think we have an indexing problem all over 
the place.
    Chairman Thomas. See, this is part of my problem as I go 
through. You have got testimony once again in which on the one 
hand and on the other, but what I get out of this is although 
people are supposed to engage in a serious debate over this, 
you folks don't take a position, you don't offer assistance, 
and you are the single largest group that would create a 
positive factor for change.
    If you would step forward and say we are willing to assume 
x percentage of the load, we are willing to say that if we get 
value, we are willing to trade choice, but what you want is 
value and choice and more. And it is exceedingly difficult to 
try to deal with an organization as large as you are when you 
give us a set of principles which, if we honored all of them, 
the only way you could honor them is to contradict others. You 
can't do everything that you said you wanted as a principle and 
produce a real-world product. That is the difficulty with this 
kind of testimony, Dr. Braun.
    Now, I know that you are a representative of AARP, but at 
some point, I would hope that we could engage some of the 
principals in AARP so that as we begin to make difficult 
choices, we would at least have the opinion of the single 
largest group that represents or purports to represent seniors.
    For example, AARP is one of the largest Medigap insurers. 
Do you believe that seniors who buy the AARP Medigap insurance 
are getting value for a dollar when the first dollar goes to 
buy down deductibles and copays instead of going, for example, 
for prescription drugs, which you say is the highest cost for 
seniors other than premiums? Would that be a good change in the 
law, to let people write Medigap that had first-dollar coverage 
for prescription drugs instead of deductibles and copays?
    Dr. Braun. Medigap needs some changes. I don't think there 
is any question but that it needs changes. And it may need more 
changes as we get into Medicare reform. I think it would be 
nice if we didn't need Medigap, if we simply had an insurance 
which would obviate----
    Chairman Thomas. Well, I would love to engage the 
organization in that conversation as well. But at least if 
there are some areas for change or fundamental reform which 
would preclude the need for Medigap, but at some point I would 
love to have you folks engage us in a conversation in which you 
simply do more than tell us we have to engage in serious 
dialog, that you actually provide some--
    Dr. Braun. I hope, Mr. Chairman, that they are frequently 
talking with you, and we want to continue to talk with you 
because--
    Chairman Thomas. I guess my frustration is that what they 
say behind closed doors is exactly what you are delivering in 
your testimony, and at some point we need to engage. And I 
appreciate your appearance once again.
    Dr. Braun. That is fair enough, and I understand your 
frustration, Mr. Chairman.
    Chairman Thomas. Well, it is difficult. We need to go to a 
vote. I apologize. But I do believe the other members would 
very much like to ask the panel some questions. Would you be 
willing to remain so that we can come back after the vote? Is 
that possible for the panel members?
    We will be back no later than 10 of 4 . The Subcommittee 
stands in recess.
    [Recess.]
    Mrs. Johnson [presiding]. The hearing will come to order. 
The chairman is unable to return, so we will proceed.
    I would like to just pose a question to Mr. Roth and Dr. 
Sager, and there are others on the panel who may not have been 
able to stay who might want to comment on the same question.
    It is unusual for us to have panelists who directly 
contradict one another. And you are saying diametrically 
opposed things about what the impact would be of the government 
setting prices on the pharmaceutical industry.
    So are you talking about different segments of the market? 
Have we had any experience that we can look at in the past as 
to what has happened to pharmaceutical investments and research 
when there have been government discussions of price setting?
    Mr. Roth, if you would like to comment, or, Dr. Sager, if 
you would like to comment? And then some of the others of you 
may want to comment as well.
    Mr. Roth. Well, I think that in the 1993-94 timeframe we 
saw an example where proposed legislation that would have 
included price controls, particularly on innovative drugs, had 
a profound impact on our ability to raise capital at that time. 
The Wall Street investment essentially shut down because of the 
fear that the health care plan that was proposed at that time 
would result in the inability of the firms that were taking 
this risk of them getting an eventual return on their 
investment at such time as the products were commercialized.
    Mrs. Johnson. Dr. Sager?
    Mr. Sager. I think as long as prices are so high in this 
country, so much higher than they are elsewhere, and as long as 
so many Americans are unable to afford the medications we 
require, there will be pressures to make medications more 
affordable for more people, and that will make the industry 
nervous.
    The industry is blaming the symptom. government is not the 
cause of their problem. The cause of their problem is 
unaffordable medications. The symptom is government trying to 
respond in some way by proposing measures to make medications 
more affordable for all us.
    Until, like every other wealthy nation in the world, we 
devise a method of making medications affordable for all of us, 
the stock markets will be made nervous every few years and 
investors will be frightened every few years.
    Mrs. Johnson. So you believe that government would set a 
price that would assure a level of profitability that would 
allow the kinds of companies that Mr. Roth has been associated 
with to recoup their investment and make a reasonable profit? 
You believe that?
    Mr. Sager. If they produce medications that benefit us. 
Obviously, the taxpayers can't throw money down a black hole to 
finance research that doesn't work.
    Mrs. Johnson. Well, of course, that is a given, and that 
happens in today's market. The question is what would happen in 
tomorrow's market, and you are saying you believe the 
government would set a reasonable price.
    Mr. Sager. Well, I think it needs to be negotiated. One of 
the questions that the drug makers and their representatives 
consistently refuse to answer is what profit level is required 
to finance needed research. Is it the 39.4 percent on equity 
that they earned in 1998? Is it 20 percent on equity? Is it 80 
percent?
    Mrs. Johnson. See, the problem with your figures, Dr. 
Sager, if I may interrupt, is that they are across the board. 
The companies Mr. Roth is talking about have no profit. I don't 
know what percentage of the research on new drugs is being done 
by startups and what percentage is being done by the Pfizers of 
the world. And I don't know whether the Pfizers of the world 
are satisfactory in terms of our future needs in terms of 
research, but certainly there isn't any way Mr. Roth's group 
could survive under your regimen, in my estimation. And if you 
look at what happened just last year--look at what happened to 
the equity markets for nursing homes because we sent levels of 
nursing home reimbursement that made it very clear that they 
couldn't possibly repay their mortgage.
    Now, you look at Medicaid. And what is happening in 
Medicaid? I mean, I had an elderly physician say to me just a 
few weeks ago, when Medicaid paid usual and customer fees, it 
was a great program. It pays now whatever the government 
negotiates, and what the government negotiates depends a lot on 
what they want their tax policy to look like. And I have sat on 
both the tax Committees and the reimbursement Committees, and 
it is not as if we set prices according to costs and 
probability and all these great things that you think. We don't 
set prices for that reason. We set prices, and then we say but 
if the volume goes up too much--it doesn't matter whether the 
volume goes up because people need health care, whether seniors 
need to see the doctors. If the volume goes up too much, we cut 
your price again.
    And Medicare just last year, over the last 3 years, 
withheld $3 million from physicians for reimbursements just 
because they didn't bother to adjust a reimbursement for them--
they had the power to readjust--because they didn't want the 
additional money to go out. So I think you are naive in 
thinking that we can set this price accurately.
    But I do want to go on to one other issue, and that is this 
business of the lower prices for American drugs in foreign 
markets. I think the fastest thing we could do to really help 
here is to repeal the law that prohibits the importation of 
pharmaceuticals from other countries. Would you support that?
    Mr. Sager. Do you mean there the reimportation of--
    Mrs. Johnson. Yes, the reimportation.
    Mr. Sager. Well, I think that is a very useful partial 
solution, and I also agree with you that the profit margins 
would need to take into account the size of the firm and the 
extent of risk that it runs. Greater risk entitles a firm to 
greater reward.
    We may not know how precisely to do that sitting here this 
afternoon, but we are not stupid, either, and we can think this 
one through.
    Mrs. Johnson. Well, I certainly would agree that repealing 
the law that prohibits the importation of pharmaceuticals from 
abroad would be a partial solution, but at least it would be 
immediate. At least we would certainly have American 
entrepreneurs who would rush down to Mexico and get the same 
drug for the same amount--for the cheap amount and bring it 
back in.
    So I think that is the kind of thing that we can do 
immediately. I would have to say that there has been very 
strong opposition to that approach in the Congress from the 
other side of the aisle, and that is the kind of thing that we 
would have to talk about and get together on. But at least it 
is something that we could do promptly.
    I am not as optimistic as you are that we could set 
different prices for different companies. What we have done in 
Medicare for people, senior citizens going to see physicians, 
to prevent the government from paying for a short visit the 
same way we pay for a long visit, is to have five levels of 
office visit, each one with a different documentation in the 
record. Nobody is really talking about the intrusion into 
privacy that this represents. We just don't talk about it 
because there is no other way to do this. But you talk to any 
internist, and you talk to them about what happens toward the 
end of the year, and the government codes down all his visits 
so he gets less than plumber in my district for a long visit 
that he is supposed to get three times that amount for.
    So there are problems with the government setting the 
price, and then there are problems with the government paying 
the price.
    So I want to leverage. I want to do something about price 
and volume. But I think the idea of looking at the experience 
that we have had in the private sector of competitive pricing 
by plans has a lot more to offer. And then if we back it up 
with the right to import low-cost drugs from abroad and things 
like that that we might have--we need a variety of things that 
will enable us through the market to lower prices.
    Mr. Sager. Well, I think the main concern there would be 
that the mechanisms themselves wouldn't add up to enough to 
substantially lower prices for Americans.
    Mrs. Johnson. Well, see, then in that case, what you are 
advocating is the kind of mechanism in the Federal supply 
system. That is a 24 percent cutoff right off the top, and 
negotiations thereafter. I would not want to guess that any 
company that Mr. Roth has worked with can survive that.
    Mr. Sager. I think what we have to do, ma'am, is to start 
with the objective of making sure that all Americans can afford 
their medications, and doing that in a way that doesn't throw 
money recklessly at industries that earn extravagant profits.
    One of the very useful things about your point on 
mentioning the reimportation of medications from foreign 
countries is that this has finally smoked out the drug 
industry's mistaken argument that the drug prices in the United 
States are not extraordinarily high. For years, they have 
denied that American prices were extraordinarily high. And I 
think if we look point by point through the things they say--
medications cost $500 million each to develop and the rest--we 
really need supporting evidence. And I think that supporting 
evidence is largely lacking.
    The drug makers say they expend more than $20 billion a 
year on research. Where is the evidence? Where is the standard 
accounting and financial reporting to back that up? How much of 
that is market research? How much of it is ``Me, too'' drug 
research? The drug industry----
    Mrs. Johnson. I am hopeful----,
    Mr. Sager [continuing]. Has for years purveyed information 
without substantiation.
    Mrs. Johnson. I certainly am hopeful that through the 
discussion in the next few months we can get better information 
on the table. But I would have to say that I consider the 
concrete evidence that the government can and will set fair 
values to be lacking.
    Before I conclude, let me just ask particularly Dr. Braun: 
My colleague, Pete Stark, a dear colleague, he is urging us all 
to sign on to a discharge petition that would bring his bill 
and the Allen-Turner bill to the floor immediately.
    Now, in your testimony you say that we shouldn't push 
legislation too quickly. Do you think it is a good thing to 
sign that discharge petition, or is it premature?
    Dr. Braun. I think we stand by what we say, that we don't 
think that things should be pushed too quickly until there has 
been sufficient time for discussion.
    Mrs. Johnson. Thank you. I would interpret your testimony 
to say that as well.
    Mr. Stark?
    Mr. Stark. I thank the gentle lady. I believe our discharge 
petition is just to open the rule so we could debate any bill, 
which is fine with me.
    Also, I think the Chair stated that the Democrats opposed 
importing pharmaceuticals from Europe, and that is hardly the 
case. Congressman Berry has a bill, H.R. 1885. If you want 
unanimous consent to allow us to import from Europe, Canada, or 
Mexico, we can do it right now. I will ask unanimous consent 
that we approve the bill and report it out.
    We have long been for taking any restrictions or harassment 
away from folks who import the same drugs that the 
manufacturers ship out of the country and we can't ship them 
back at the same price. That hardly seems fair.
    But I would just like to suggest that all these people here 
on the panel understand free enterprise. I presume--well, 
certainly Mr. Roth has made a lot of money in the free 
enterprise system, and probably Dr. Calfee has, too. But Lehman 
Brothers and Merrill Lynch indicated recently that they think 
that these bills wouldn't hurt. It is the old saying, I guess, 
about an increase in volume, and you say, gee, yes, but you cut 
the margin, you can't make any money. Lehman and Merrill Lynch 
disagree. They suggest that the benefits of increased volume of 
sales would offset any suspected cut in price through any kind 
of regulation.
    Further, in 1988, not many people remember that marvelous 
catastrophic bill, which, if the PhRMA group had not 
surreptitiously moved to get it repealed, we would have a drug 
benefit today and we would not have to worry about Medigap. 
But, according to the Lehman report, after the passage of the 
act, ``the drug sector outperformed the S&P significantly 
because investors anticipated additional volume gains as a 
result of the legislation''--that is a quote--and that R&D 
increased 16.2 percent in 1988, well above the average for the 
nineties. So it is not necessarily a universal agreement among 
the freest of the free enterprisers that some kind of a 
pharmaceutical benefit would be bad. Even if a drug benefit, in 
fact, lowered prices, the lowering of the prices would have an 
effect of increasing volume. That maybe works, maybe it 
doesn't.
    But, Mr. Roth, you don't want any price controls, and 
however you feel about what it might do to the world, those of 
us who spend the taxpayers' money, directly or indirectly, some 
of us, feel we have a responsibility to spend it wisely. And 
there are some cases--now, you could probably tell me many 
more, such as Amgen and Epo. We are the sole purchasers of Epo, 
for all practical purposes. It goes to people with dialysis, 
and it might be life-threatening for them not to have it. And 
right now we have to pay whatever Amgen decides to charge.
    The same thing is true, I think, of Beta Seron. It is 
marketed as--if I can find the quote here--it has some other 
brand name. But it costs about $11,000, the protocol, say 
$1,000 a month for somebody with MS. And it received $4.6 
million in government aid to develop this drug, but basically 
is uncontrolled. And, you know, $1,000 a month for somebody to 
lay out for a drug is pretty rough.
    How is the free market going to keep those charges in 
control where you have a sole source for preventing a life-
threatening occurrence? What is to prevent the manufacturer 
from charging what, let's assume, reasonable people would say 
is an outrageous amount because they have basically had the 
sick person over a barrel? How do we deal with that? How does 
the free market set that price?
    Mr. Roth. May I respond to your comments first?
    Mr. Stark. Sure, please.
    Mr. Roth. The Lehman and Merrill Lynch reports that you 
refer to, I am not familiar exactly with them, but I believe 
that what they said was that they feel that prescription drug 
coverage for seniors is important and it will happen. And I 
think that is what we are saying, but it is the method that it 
happens. Is it going to be done in a way that allows 
competition, or is it going to be government mandated? I 
believe----
    Mr. Stark. I just want to know how competition, Mr. Roth, 
works for Epo. How about----
    Mr. Roth. OK. I will get to that, sir.
    Mr. Stark. Yes, that is the key. How does competition work 
there?
    Mr. Roth. Amgen has been probably the biggest reason that 
our industry has been able to exist. It has shown that one can 
take an idea, develop a product around that, and deliver it to 
people in a way that allows them to live more productive lives. 
And what we are seeing is that there are more companies that 
have followed, and they are trying to develop additional 
products that will compete with epo, and that is where you will 
see--
    Mr. Stark. Only because Uncle Sam picks up the cost. Now, 
take the Beta Seron. How do you anticipate that the free 
market--let's say that Uncle Sam stopped paying for Epo--how do 
you suppose the free market is going to set a price that would 
make that drug reasonably available to dialysis patients, most 
of whom are getting Social Security disability?
    Mr. Roth. The free market, there will be additional 
products that will come that will compete with that if you 
allow the system to work.
    Mr. Stark. But if there aren't--and there are many cases, 
Mr. Roth, where there aren't other products--there is no 
replacement for Epo. I don't know if there is one for Beta 
Seron or not.
    Mr. Roth. There are at least three products that are being 
developed for treatment of multiple sclerosis.
    Mr. Stark. And what do you do while you wait for them to be 
developed? Croak? What do you do if you can't get Epo? Turn 
yellow and die?
    Mr. Roth. That is part--you know, if what you are saying is 
that it is taking too long to develop drugs, we would agree 
with that. We are doing all that we can--
    Mr. Stark. How does the free market limit what the 
taxpayers would be responsible for--I mean, you haven't told 
me. How does the free market work here? It is not working now. 
There is no control. Patents work effectively to deny any other 
entry.
    Mr. Roth. You know, Mr. Stark, I would disagree with you, 
respectfully--
    Mr. Stark. Okay.
    Mr. Roth--and say that the free market is working. We have 
value. We are delivering value to people in the United States 
better than any other country. And, you know, I sit here and 
listen to people talk about----
    Mr. Stark. You are selling in Canada for a third less and 
in Mexico for half. Why is Canada getting a better deal than I 
am?
    Mr. Roth. If you feel that other countries are taking our 
products and imposing improper price controls, then it is 
incumbent upon our government to see that those types of trade 
barriers are not allowed to exist.
    Mr. Stark. This is not a trade barrier. It is your industry 
that is selling it for less in these countries.
    Mr. Roth. Mr. Stark, what I am saying is that we are 
providing value to the American citizens through our industry. 
It is an industry that there has been a lot of discussion today 
where people have talked about exorbitant profits. I am proud 
to be a member of this industry. I am proud to be working in 
something that is helping mankind, that is investing money, 
that--yes, there is going to be a return, but that is what--
there is nothing wrong with profits in our economy.
    Mr. Stark. Nobody is suggesting that there is anything 
wrong with profits. All I am suggesting is that the government, 
which is spending your money, whether you like it or not, tends 
to bid. We go buy automobiles for the FBI to drive around in. 
We just don't go down to the local Chevy dealer and pay list 
price. You know, we don't pay sticker price. We get some bids. 
The automobile dealers aren't complaining that we are not 
letting the free market work. It is only the drug manufacturers 
who say we don't want the government doing any of this.
    Now, we buy guns to arm our soldiers. We buy paper, we buy 
computers, we buy all of those things. I don't hear Microsoft 
complaining because I get the Federal GSA rate for my Windows. 
They are happy to sell it to the government at a government-
negotiated rate.
    What is so--I mean, why should the pharmaceutical industry 
not behave like every other high-tech industry that deals with 
the government? What is wrong with that?
    Mr. Roth. I don't think anyone has said that there is 
anything wrong with it.
    Mr. Stark. Okay.
    Mr. Roth. We are saying that it should be done in a 
competitive manner.
    Mr. Stark. So you would be willing to let the government 
accept bids, then, for pharmaceuticals to use for its 
constituents?
    Mr. Roth. I am saying that if the prescription drug benefit 
is put in place in a competitive manner that that is something 
that our industry would support.
    Mr. Stark. Just say that one more time. Let's say there is 
a drug benefit for Medicare beneficiaries, you would have no 
objection to the Federal Government running a bidding process 
to let the free market bid on how much they would sell it to 
the beneficiaries for. Is that correct?
    Mr. Roth. Yes, and if you will see my testimony, which I 
would refer you to, we also feel that it should be part of 
overall structural Medicare reform and not done in a piecemeal 
fashion.
    Mr. Stark. OK. Mr. Calfee, do you buy that?
    Mr. Calfee. Well, there are great dangers of the Federal 
Government as the sole purchaser of a product as important as 
drugs that are used by the elderly.
    There are a couple things that came up in the previous 
exchange that I think--
    Mr. Stark. Nobody is suggesting it would be the sole 
purchaser. I am just saying for this particular benefit, which 
we assume, like part B, would be voluntary. So if people don't 
want it, they don't have to sign up for it.
    All I am suggesting is where there is a Federal benefit, 
would you object to some kind of a bidding structure so that we 
can assure that people, where there is a competitive drug, 
could get the best price?
    Mr. Calfee. A lot depends on how it would be done. My fear 
is that if we have a program in which HCFA simply purchases 
pharmaceuticals for the elderly directly, they would have such 
extraordinary power over pricing that what they would be 
tempted to do and what experience shows they almost certainly 
would do, I would be to push those prices down, leaving them 
above the marginal cost of producing the drug, but less than 
what is necessary to induce research and development. Just as 
other nations have----
    Mr. Stark. Doctor, we currently spend over $1 billion a 
year on epo, one drug, and we have never even raised the issue. 
What evidence do you have--
    Mr. Calfee. Actually----
    Mr. Stark --Where we buy drugs----
    Mr. Calfee. Actually, in my reading about the relationships 
between Amgen and Medicare over the EPO drug, there have been 
long and tortured negotiations between Amgen and Medicare, and 
there has been a lot of--I am not sure it has ever reached the 
point of litigation, but certainly there have been a lot of 
discussions about the pricing of that drug----
    Mr. Stark. As well there should be.
    Mr. Calfee [continuing]. Because the government is the sole 
purchaser. But the reason it is sole purchaser is because the 
government undertook to become the sole purchaser of that drug.
    But I would also remind you that it was the free market 
that produced that drug in the first place.
    Mr. Stark. Look, I have got no quarrel--as I said earlier--
I would like the free market to do more research and less 
advertising and less money with PhRMA, and we would all be 
better off. But, you know, they spent $11 billion last year on 
spiffs to doctors. They gave free merchandise and trips and all 
kinds of junk to physicians to con them into using one drug or 
another--$11 billion. Now, that is money that could have gone 
into research, and I bet Mr. Roth could use that kind of dough 
in his company and not have to go to these guys--a pretty nice 
chunk of money, wouldn't it be? For venture capital, it costs 
you a lot.
    So why should we give that to doctors in terms of 
commissions and free golf bags and stuff like that to use a 
product? I mean, this free market has some warts on it, my 
friend, as well as it may or may not do. You know, there are as 
many members of the free market in Federal penitentiaries as 
there are Congressmen. So this cuts both ways, and don't think 
that anybody is exempt from having their scalawags.
    I am just trying to find out how the free market could 
contain--it wasn't able in Medicare to contain hospitals or 
physicians. We are forced into time--Madam Chair, Mr. Thomas 
inquired for 20 minutes, and you did for 10, and out of order, 
I might add.
    Mrs. Johnson. And you have for 12, and the reason I went 
ahead and inquired was that it was my understanding that I was 
next. We do have two other members, and there are people here 
who have to make a 5 o'clock plane. So I would like----
    Mr. Stark. Thank you. Thanks for your usual fairness, Madam 
Chair.
    Mrs. Johnson. Mr. English of Pennsylvania.
    Mr. English. Thank you, Madam Chair, and my inquiry will be 
shorter than the State of the Union address. Thank you.
    Mr. Roth, I want to follow through and maybe get you to 
summarize some of the things you have suggested. In your 
testimony, you mentioned that in 1998 the biotechnology 
industry invested almost $10 billion in R&D on 300 
biotechnology products currently in development, and most of 
the companies have yet to generate commercial sales. So the 
industry experienced in that loss, as I understand it, of $5 
billion in 1998.
    To put this into context, a few other 1998 statistics 
regarding R&D. Research-based pharmaceutical companies spent 20 
percent of sales on R&D, electrical and electronic industry 
spent 7.6 percent on R&D, telecommunications spent 5.1 percent 
on R&D, aerospace and defense spent 3.7 percent on R&D. So, 
clearly, pharmaceuticals firms like yours are very much R&D-
intensive.
    I wonder what would be the effect on your industry's 
ability to raise venture capital for R&D to produce cures for 
tomorrow if price control legislation such as the Waxman-Allen 
bill would become law? And beyond that, what would be the 
impact of a monopolistic government structure with 85 percent 
of the seniors' market dictating formularies and prices with 
biotechnology and pharmaceutical companies?
    Mr. Roth. I think we would see access to the capital 
markets close drastically and most likely permanently.
    Mr. English. Dr. Sager called you a threat to research. Is 
that fair?
    Mr. Roth. Called me what?
    Mr. English. Called your industry a threat to research in 
his testimony; is that fair?
    Mr. Roth. No, that is not fair.
    Mr. English. Okay. Dr. Soumerai, you have been quiet. Let 
me ask you, you recommend providing comprehensive prescription 
drug coverage for individuals up to 200 percent of poverty and 
protection against high drug expenditures for everyone. Under 
the President's proposal, comprehensive prescription drug 
coverage phases out at 150 percent of poverty and at that point 
individuals have to pay 50 percent cost-sharing on a capped 
benefit. Therefore, an individual with an income of $12,360 
would have to pay 50 percent of their drugs, a $24 monthly 
premium and 100 cents on the dollar for drug costs above $2,000 
when first implemented.
    Do you think this is a good benefit structure and a wise 
use of scarce taxpayer dollars?
    Dr. Soumerai. Our concern is exactly for those vulnerable 
populations at low-income and----
    Mr. English. Like the people in my district.
    Dr. Soumerai. Well, I have to agree with the tenor of your 
question that for those people between 150 and 200 percent of 
poverty they can't pay those kinds of bills. We know from our 
research, for example, that in the lowest income populations 
close to the poverty level that even a $1 co-pay inhibits 
compliance with the doctor's prescription regimen. It may be a 
10 or 12-percent reduction for a $1 copayment. So, that kind of 
excessive cost-sharing is unacceptable.
    And, actually, I would say that it would inhibit 
appropriate use of effective medications. Many of the proposals 
out there do not protect that for the low-income populations.
    Mr. English. Dr. Calfee, I represent a district up on the 
Canadian border so, obviously, we have a great sensitivity to 
the differential prices between those in our local drugstore 
versus how much pharmaceuticals cost in Canada, right over the 
border.
    I wonder what is your explanation for that difference? And 
beyond that, assuming that the Canadians have put in place a 
way of leveraging through lower prices, what impact does that 
have on the U.S. consumer in terms of potentially having to 
absorb higher prices? For example, the Comptroller General made 
the point that when you squeeze at one end the costs tend to go 
up some place else. Are American consumers being hung out to 
dry? And would that problem be addressed by allowing re-
importation legislation to go through?
    Dr. Calfee. Several questions there. Let me take a shot at 
it. The reason it happens, of course, why we have the disparity 
in the first place, is that they have price controls in Canada. 
I think everyone understands that.
    I think that the idea that if drugs could be freely 
imported from Canada to the U.S. that that would simply reduce 
U.S. prices to the Canadian prices, I think that idea is on the 
whole a mirage. I think that what would happen is that a 
pharmaceutical firm, if they are selling to the Canadian market 
and if they know that everything they sell to the Canadian 
market can move right across the border, not just to your 
district but also places like Detroit and other, you know, 
large metropolitan areas immediately across the border, if they 
know that is what is going to happen with their drugs they are 
going to take that into account as part of their pricing 
policy. They will say to the Canadian authorities we are not 
just selling to you, we are selling to all of the Northern 
United States and we are going to price accordingly. And either 
the Canadian authorities would have to adjust their prices 
drastically or they would no longer be able to purchase drugs 
as they have in the past.
    In fact, I would predict that if the Allen legislation 
becomes law and it becomes very easy to re-import drugs from 
Canada, I would predict that the first thing that will happen 
is that the Canadian authorities would undertake measures to 
try to keep those drugs from being re-imported back to the U.S. 
because they would quickly realize they would lose their 
capability of extorting the prices that they are now getting.
    So, I don't think the Allen bill is really going to provide 
the solution that a lot of people think that it will.
    As far as the burden on American consumers, there may be a 
small burden from Canadian prices but the main consequence of 
that is a long-run burden. That is that the Canadians are 
contributing relatively little to the research enterprise and 
this is slowing down the research enterprise to some extent. 
And we would all benefit from faster drug research if the 
market, if a freely competitive market were larger than the one 
there is right now.
    I hope that answers some of your questions.
    Mr. English. It does and I will yield back the balance of 
my time.
    Mrs. Johnson. The gentlelady from Florida.
    Mrs. Thurman. Thank you, Madam Chairman.
    Dr. Calfee, in your testimony and I sometimes think we are 
up here doing a Breaux-Thomas rah-rah session right now because 
everybody keeps talking about reform of Medicare. However, I am 
going to point to something that you said. For example, 
proposals to reform Medicare by bringing it more in line with 
the methods developed by private enterprise and encouraging the 
inclusion of drug benefit plans similar to those in private 
health insurance rather than being part of the obsolete fee-
for-service.
    We do that under the Allen bill. That is exactly the 
proposal; to allow us to negotiate a fair price for a drug just 
like you do in any private insurance or at least that is the 
intention of it. So, that we could go out there and, in fact, 
negotiate just like anybody else does.
    So, in fact, from your testimony we could say that you want 
Medicare to be more like private insurance because private 
insurance does, in fact, go out and negotiate a price; is that 
correct?
    Dr. Calfee. I don't know the details of the Allen bill, 
that is for sure.
    Mrs. Thurman. But don't private insurances negotiate the 
best price for their customer?
    Dr. Calfee. Competing private insurance firms negotiate the 
prices and in doing that they have to negotiate over various 
elements including the nature of their formularies and other 
things. So, that if one firm, for example, were to pay 
extremely low prices for drugs and, therefore, would have to 
have a very restrictive formulary because they couldn't buy a 
lot of drugs, they would have to compete against other firms 
that charge higher prices but have better formularies and they 
might well lose out. It is the competition that is essential.
    Mrs. Thurman. But we would be in a competitive market at 
that point because we would have been negotiating as well for 
the best price available.
    Dr. Calfee. Again, I don't know what the Allen bill does. 
By, we, do you mean the entire Medicare system as just one 
buyer?
    Mrs. Thurman. Yes. Because you would be negotiating.
    Dr. Calfee. Yes.
    Mrs. Johnson. Would the gentlelady yield?
    I thought the Allen bill simply required that drug 
companies make drugs available in America at the same price 
that they make them available in other countries.
    Mrs. Thurman. No. It would be based on the VA system where 
we negotiate a fair price for veterans in our VA system. So, I 
believe what it does is to allow us to go out and negotiate the 
best price just like we do for Medicaid or like we do for like 
the Veterans Administration. It is a very similar situation to 
the health benefits we have.
    Mrs. Johnson. The way it is described in your ``Dear 
Colleague'' is that it says simply that the drug companies--
they would have to make their products available to seniors at 
the same low prices that companies give the Federal Government 
and other of their favored customers.
    Mrs. Thurman. Correct. And, so, that would also allow Blue 
Cross/Blue Shield to negotiate for their services.
    Mrs. Johnson. So, they would have to make the Medicare 
available to Medicare recipients at the same price as their 
lowest customer. So, if there was a Federal plan that had lower 
prices than the VA it would be the lowest.
    Mrs. Thurman. Correct. Because we are assuming that, as I 
assume and believe, Medicare is a government insurance program. 
I mean we are the administrators of that program. So, I think 
that----
    Mrs. Johnson. I think the difference between you and Dr. 
Calfee is this issue of whether there would continue to be 
multiple negotiations and multiple producers in the market. If 
one person gets that big a market, would there be other 
companies there the next time you want to negotiate?
    When we did this in the defense area, we ended up having to 
support two producers because otherwise we would have only one 
producer and then we would have nobody to competitively bid 
with and that is a big problem in this area.
    Mrs. Thurman. But I would think that we would not want to 
take the competition out because that would be the way we would 
get our lowest price is to make sure that we have----
    Mrs. Johnson. But see then you don't actually do it to the 
lowest prices; you do it to several of the lower priced. And, 
so, those are the kinds of issues. I think that is what Pete 
was trying to get at and what you were struggling with.
    He was attempting to say do you mind the bidding processes? 
And I think the question is how do you structure it so you 
always have multiple actors in the bidding process and that is 
the difficulty here.
    Mrs. Thurman. But I think that is something that we can get 
around if we can provide a benefit under Medicare and cut the 
cost for prescription drugs, which could be as much as 40 
percent.
    And Dr. Sager, let us go back to your testimony because 
obviously you and I think a lot alike on this issue so I 
appreciate everything that you said and particularly regarding 
the Merrill Lynch study. I found that really very interesting 
compared to all of the other testimony and conversations that 
have been going on about this issue.
    And where they say--and they, in fact, use the Drug 
Fairness Act which is the Allen bill which is one that I think 
is the toughest proposal on the table--that would reduce drug 
industry sales revenue by about just 3.3 percent because of 
volume increases. And that is important. I am going to say 
something to Dr. Braun here, but I would like you to talk about 
that a little bit because obviously you have done some research 
in that area. That is an amazing number compared to what we are 
hearing.
    Mr. Sager. There is a range of numbers out there and that 
is at the optimistic end, but it is a product of one serious 
effort. At some time we may have to take, ``yes'' for an 
answer. We are torturing ourselves. A $120 billion really is 
enough to buy all the medications we need. We can't afford to 
throw money recklessly at any industry, however deserving it 
might think it is. We can't afford to throw the money. We have 
to protect people. And the drug makers can, indeed--owing to 
this price elasticity of demand, as use goes up because prices 
go down, through a combination of that and their astonishing 
low marginal cost of making more pills produce all the 
medications Americans require for the $120 billion we already 
spend.
    Mrs. Thurman. Dr. Braun, I hope I am going to characterize 
this right. Is it safe to say that the seniors that you 
represent are basically saying to us, look, we have got to get 
this under control? We want something. We don't want to engage 
in the bipartisan debates, we don't want to take a stand 
because what we really want is a benefit?
    Dr. Braun. We need prescription drug coverage for seniors. 
That is what our AARP members and all seniors really want and 
that is what we need and that is what we need to keep focused 
on. We need coverage available for all Medicare beneficiaries 
just as it is available for most of the rest of you in the 
room.
    Mrs. Thurman. And I think you said something that really 
was also substantiated by Dr. Soumerai in the idea which you 
called smart medicine.
    Dr. Braun. Right.
    Mrs. Thurman. Why did you use that terminology?
    Dr. Braun. Because I think it doesn't make any sense if you 
spend your money for the doctor to examine you and tell you 
what you need, and write you a prescription, and then you don't 
have any money to pay for the prescription so you don't get the 
prescription. So, next week he has to put you in the hospital 
because you didn't get better. I think that is why it is smart 
medicine.
    Mrs. Thurman. So, we use up a lot of our Medicare dollars 
where this same person could go into the hospital and get the 
medicine and it is charged to Medicare but when they walk out 
there after they have been stabilized they can't afford it.
    Dr. Braun. That is right. And they can't continue their 
medicine so in another month or two they are back in again.
    Dr. Soumerai. An interesting corollary to that is that we 
pay through Medicare for physician and hospital care. We don't 
pay for the most ubiquitous and effective treatment in medicine 
which is pharmaceuticals for chronic illnesses suffered by the 
elderly. It is just such an incredible thing when you think 
about that.
    Mrs. Thurman. Mr. Roth, and I have to tell you I am very 
pleased with the research that gets done in this country. I 
probably have a husband who is alive because of research and a 
mother who is alive because of research that is done in this 
country. And none of us want to see that taken away and I know 
you may not believe that based on some of the statements that 
we have made today. I mean that is absolutely not true. And we 
also believe it is good for our economy.
    We understand that we need to keep this economy moving and 
one of the ways we do is through innovation. But I have to tell 
you, I don't know how to explain this to people. We have talked 
about Canada and Mexico, we have had a little bit of discussion 
about that. But what do I say to constituents of mine--and if 
you want to look at some of those letters and answer them for 
me, I would be happy for you to do that. But, you know, to 
somebody who comes to me and tells me that on 5-28-99 they 
could get breast cancer medicine--for $130.22. Okay? Then on 
12-20, they get that same medicine for $166.59. How do I answer 
that question as to why this has gone up?
    I mean it is the market. It is producing revenue back. And 
it is doing, you know, all the things that we think when we put 
something out there that has been researched and developed but 
the price keeps just going up which is just the exact opposite 
of what we see in other parts of our economy. Computers were 
very high when we got them out there. Now, people are buying 
them and the price has come down.
    I don't know how to answer this question.
    Dr. Roth. I am not able to answer specifics either other 
than to say that, you know, the research that will continue to 
be done is going to develop new and innovative products that 
will hopefully allow other treatments for those diseases which, 
will in turn, bring the cost to the consumer, to the patient 
down from what it is.
    Mrs. Thurman. But it takes a long time for that to happen. 
I mean not just the research and the development but once it 
hits the market. I have been going through this immuno-
suppressant issue that costs $15,000 a year for a patient to 
take it. They can't afford it. I mean it is about $1,100 a 
month. They can't afford it. We are trying to make sure that it 
gets covered under Medicare because we think that is smart 
medicine, to keep people off dialysis, keep them out of the 
hospital, all the kinds of things that we think are smart 
medicine.
    And that is the problem. I can't answer that question. So, 
the question that then comes back to me is, well, why can't you 
negotiate a price for us? Why can't you give us the same 
benefit that somebody under a preferred customer rate would 
get?
    I mean we are part of an insurance. And seniors are seeing 
their costs much higher than a preferred customer sometimes 
being 189 percent more, all the way up to a 1,500 percent 
difference.
    And I don't know how to explain this, especially when they 
come to me and tell me it is a life-sustaining drug. It breaks 
my heart. I mean these people have heart problems and they 
write me these letters and tell me: I have got to cut my 
medicine in half.
    I have a letter from, a daughter that said her father is 
saying that he is going to quit taking his medicine so that his 
wife can have the medicine. I have people who told me similar 
stories. I mean these are real issue for these folks and they 
are life-sustaining issues.
    My seniors probably pay, on average, $2,400 a year for the 
cost of medicine. This is what seniors are concerned about this 
month. Another couple wrote to me that they both have to go to 
the doctor. They both have to pay their deductibles this month, 
because it is the first time they are going to be back to the 
doctor since after the first of the year.
    All of a sudden their Medicare deductible has become a 
burden. I mean they have to pay it. So, they are going to go in 
and they are both going to pay, you know, $50 or $100 and they 
can't pay it--and that is going to go back to the problem of 
them buying drugs or turning down their heat or not being able 
to go to the grocery store to buy food. These are the kinds of 
stories that I am hearing at home.
    Now, I have to tell you my district is about 188,000 
Medicare, Social Security recipients. It is also the second 
highest senior district in the State of Florida. These are the 
people that I represent. Their stories are very compelling and 
I don't have a good answer for them other than that I am trying 
to find a way to fix this.
    And I wish you could give me an answer.
    Mrs. Johnson. Yes. I thank the gentlelady from Florida. 
They are difficult questions that are hard to answer to our 
constituents. It is also true and I represent an old 
manufacturing area in which there are a lot of people getting 
by on just Social Security. But many of them also are in drug 
coverage plans that they don't want disturbed. Many of our 
employers did provide good retirement coverage and they don't 
believe that if we provide it, it will be as good. And I cannot 
assure them looking at Medicaid that what we do will be as good 
for them as what they are currently in.
    So, we are getting a lot of contradictory input from our 
seniors just as AARP is. And this is a difficult area. We thank 
you very much for your input.
    As you leave, I just want to bring up one thing that is 
very dear to my heart. We have a new Institute of Medicine 
study on the value of nutrition, nutritional counseling, 
nutritional considerations. And not only do I have a bill to 
have Medicare cover nutritional counseling but I think to open 
up a prescription drug medication benefit without better 
integrating it with nutritional education would be the loss of 
a tremendous opportunity because more and more we are realizing 
that there are things we are medicating for that actually if we 
help people change their diet, their lifestyle that they 
actually wouldn't need the medicine and they would be much 
wholer and healthier.
    So, any thoughts you have about how we could link 
nutritional education with any prescription program I would be 
very interested in.
    I know some of you have to leave so I do feel compelled to 
close this hearing down but thank you for your input. If there 
is one thing that came out loud and clear it is that it is 
important for us all to think through very carefully--I mean 
Dr. Sager has a nice little list of what to do but other people 
also have real concerns of what might be the consequence and 
experience gives us the clear information that the unintended 
consequences are going to be far greater than the intended 
consequences. And if we can't even define the intended 
consequences we do have to gain more input and more 
understanding before we can move with any confidence.
    But it is my hope and I know it is the chairman's hope that 
we will pass a prescription drug bill this session and my goal 
is, at the very least, target it to those who need it most and 
stop loss for those so that everyone will, no one will be 
subject to bankruptcy as a result of medication needs.
    Thank you very much for your input. We invite your follow 
on thoughts and I particularly invite your thoughts on how 
nutritional counseling could be integrated with any 
prescription benefit.
    Thank you very much.
    [Whereupon, at 4:48 p.m., the hearing adjourned.]
    [A submission for the record follows:]

Statement of Michael F. Ovellette, TREA Senior Citizens League, 
Alexandria, VA

    Mr. Chairman, The TREA Senior Citizens League (TSCL) 
appreciates the opportunity to submit testimony to your 
committee concerning ways to make prescription drugs more 
affordable for senior citizens and to offer proposals to 
establish a prescription drug benefit program for senior 
citizens. In this regard, TSCL appreciates and will take the 
opportunity to offer a number of insights and several proposals 
for consideration. Finally TSCL will make specific 
recommendations for general application to any Medicare 
Prescription Drug Benefit eventually passed by Congress that 
would be both beneficial to and accessible by the League's 
membership.
    TSCL is a non profit, issues advocacy organization 
representing over 1.5 million members and supporters and is 
dedicated to serving its members by defending and protecting 
their earned retirement benefits. The League is registered to 
conduct grassroots fundraising, public education and lobbying 
activities in nearly every state, and does not solicit nor 
accept any money from the federal government. As a matter of 
information, over 39,006 of our members are constituents of 
members of this subcommittee and are looking for your bi-
partisan help in assuring that a Medicare Prescription Drug 
Benefit or some alternative to high-cost medications are 
finalized this year.
    Although TSCL has formally supported the Administration's 
Medicare Reform proposal we also support S. 1895 by Senators 
John Breaux (LA) and Bill Frist (TN). We applaud their efforts 
at being the first in the Senate to present a logical and well 
though-out piece of legislation. TSCL is equally grateful to 
Representative Pete Stark (CA) for his introduction of H.R. 
1495 and to Representative Tom Allen (ME) for his introduction 
of H.R. 664, The Prescription Drug Fairness for Seniors Act. 
TSCL also wants to thank the members of this subcommittee for 
the decision to hold a hearing on this critically important 
issue this early in the legislative year.
    Mr. Chairman, the hardships for seniors caused by the 
increasing cost of prescription drugs has spurred the Congress 
to include the issue among the highest legislative goals and 
objectives to be considered during the 2nd Session of the 106th 
Congress. Prices for the 50 prescription drugs most often used 
by seniors rose 6.6 percent in 1998--four times faster than the 
year's 1.6 percent overall inflation rate, according to a 
recent study. These rising costs are putting medicine out of 
reach of a growing number of older Americans, particularly the 
35 percent of Medicare recipients without prescription drug 
insurance. Government figures released in July 1999 projected 
that senior spending on prescription drugs would grow about 
11.2 percent annually during 1999 and 2000. Yet industry 
figures released in September 1999 showed that prescription 
spending increases for 1999 already exceeded that amount, up 12 
percent with four months remaining in 1999. Additionally, many 
Medicare recipients that belong to Health Maintenance 
Organization (HMO's) will have to pay three times as much in 
monthly premiums in 2000 and will find HMO's far less willing 
to pay for Doctor-prescribed medicines. In sharp reversal of 
recent trends, no HMO that accepts Medicare patients next year 
will cover the full cost of a patient's medicine. Sadly, many 
HMO's across the nation are dropping seniors, who depended on 
this protection, from coverage at an alarming rate. 
Particularly hit hard are those seniors residing in rural 
areas. Faced with the situation just described, many seniors 
are being forced to travel to Canada or Mexico to purchase 
prescription medicines at not always affordable rates, but far 
less cost than if purchased in the United States. Sadly, when 
forced to choose between paying for medication or food, older 
Americans have no choice other than to explore any avenue that 
provides financial relief because they must have both to 
survive.

THE ADMINISTRATION'S MEDICARE REFORM PROPOSAL

    In June 1999, President Clinton introduced a plan that 
would offer a voluntary prescription drug benefit to all 
Medicare beneficiaries. There would be no deductible and a 50 
percent co-payment. Premiums would start at $24 per month in 
2002, rising gradually to $44 per month by 2008. The plan would 
match a beneficiary's drug costs up to $1,000 in 2002, rising 
to $2,500 by 2008. It would also exclude premiums and co-
payments for individuals earning less than $11,000, or couple 
earning less than $15,000. The Administration estimated this 
proposed drug benefit would cost $118 billion over ten years. 
The non-partisan Congressional Budget Office (CBO), however, 
estimated the cost of the program at $168 billion ($50 billion 
more).
    TSCL has supported this proposal because it was the first 
solid effort to address the prescription drug problem being 
faced by its members and supporters. TSCL does not believe that 
the proposal offers older Americans who have earned a 
government sponsored benefit, the kind of comprehensive and 
affordable protection plan that one would reasonably expect 
would be offered to the older Americans whose efforts during 
their lifetimes have brought this Country to where it is today.

THE PRESCRIPTION DRUG FAIRNESS FOR SENIORS ACT (H.R. 664)

    Another proposal that TSCL supports and which drew a 
substantial amount of support last year is H.R. 664, introduced 
by Representative Tom Allen (ME). This legislation has a 
companion bill in the Senate (S.731). The bill would assure 
that Medicare beneficiaries receive the same reduced drug 
prices that drug manufacturers currently give their favored 
customers, such as the federal government and large HMOs. 
Estimates are that the more favored prices would cut drug costs 
by as much as 40 percent. A senior citizen spending $150 a 
month on prescription drugs could save over $700 annually under 
the legislation. The appeal of this legislation is the offer of 
some protection to Medicare prescription drug consumers without 
huge costs to finance the program. The downside of this 
proposal is the fear professed by powerful drug lobbies that it 
creates ``price controls'' on the industry and would mean less 
money for research and development, weakening the industry's 
ability to create new drugs and improve existing ones. Again, 
TSCL supports this legislation because if passed would be of 
benefit to senior citizens. Ultimately though, TSCL believes 
that the prescription drug costs situation being faced by older 
Americans should be solved by the government and not referred 
to the pharmaceutical industry for resolution.

ACCESS TO PRESCRIPTION MEDICATIONS IN MEDICARE ACT OF 1999 
(H.R. 1495)

    While TSCL has not to date supported H.R.1495, we wish to 
extend our appreciation to Representative Pete Stark (CA) and 
the other members of the House of Representatives who are 
responsible for its introduction. TSCL is encouraged by their 
pro-active efforts to act in an expeditious manner by 
presenting legislation to significantly reduce the burdens of 
older Americans and to seek wide public debate on Medicare 
reform. In keeping with our commitment to support any 
legislative efforts to improve the lives of older Americans, 
TSCL should be eager to support H.R. 11495, but has not done so 
yet. This can be attributed directly to the overall confusion 
produced by all of the recently introduced pieces of 
legislation. With the understanding that it appears the bill 
has been crafted by experts, it simply is not readily 
understandable and is virtually impossible to clearly and 
succinctly define the bill to our members and supporters so 
they will be able to understand the impact on their 
``pocketbooks.'' At first glance, the Administration's proposal 
is understandable as is H.R. 664. However, H.R. 1495 is no less 
difficult to understand that the Senate's primary prescription 
drug proposal, S. 1895. This subcommittee is urged to consider 
action to direct the re-crafting of H.R. 1495 in understandable 
language so that older Americans, many who have never had 
access to a prescription drug benefit of any kind, will be able 
to understand the bill in order to allow them to make an 
educated decision.

TSCL'S VISION OF A PRESCRIPTION DRUG BENEFIT

    Very simply, TSCL will lend its full support and urge the 
grassroots efforts of its members and supporters to a proposed 
Medicare prescription drug benefit with the following 
characteristics:

Universal:

    Any benefit that becomes law would be the same for all 
Medicare-eligible beneficiaries to include an age 62-65 and age 
55-62 Medicare buy-in options.

Targeted:

    Provides additional assistance for low-income 
beneficiaries.

Voluntary

    Older Americans participation in a government-sponsored 
plan would be voluntary and give them the choice of remaining 
with any current supplemental plan that they currently possess 
and maintain confidence. Such a condition would generate a need 
to field a government-sponsored plan that encourages 
participation by the vast majority of Medicare-beneficiaries.

Affordable:

    Would require reasonable monthly premiums, cost-sharing or 
co-pays with an annual likewise reasonable benefit maximum 
intended to reduce catastrophic out-of-pocket expenses for the 
most seriously ill beneficiaries.

Responsible:

    Would discourage irresponsible or over-utilization of the 
benefit.

Modernizes Medicare

    Like other modern insurers, Medicare would use a benefit 
manager to negotiate lower drug prices.

Partners with the Private Sector

    Would provide incentives to employers to develop and retain 
retiree drug coverage by possibly paying the entire or portion 
of the retirees' monthly premium.
Understandable

    Any plan considered must be clearly understandable by those 
who make an enrollment decision.
    TSCL believes the Administration's proposal meets the 
majority of the aforementioned preferred characteristics and is 
one where support is justifiable. However, the League contends 
that there are very attractive portions of virtually all 
Medicare prescription drug benefit legislation introduced to 
date. The complexity of H.R.1495 appears to be a major 
shortfall that needs significant improvement.
    TSCL is of the opinion that the 50 percent cost-sharing 
requirement of the Clinton proposal and the 20 percent cost-
sharing requirement of H.R. 1495 should be changed to a $10 co-
pay per prescription even if other provisions of the plan were 
increased. A flat-dollar co-pay requirement would make the plan 
much more understandable and therefore much easier for older 
Americans to be able to establish or adjust their monthly 
prescription drug out-of-pocket costs. Therefore, TSCL 
recommends to this committee that if H.R. 1495 were to be re-
crafted to incorporate a recommended $10 per prescription co-
pay, we could support H.R. 1495 assuming the required monthly 
premium was affordable. TSCL also encourages this committee to 
debate this issue in a totally bipartisan manner, understanding 
that that the important question to be answered is not whether 
older American need a prescription drug benefit, but rather how 
soon it can be made available. For far too long our parents, 
friends and neighbors have needed some kind of Medicare Drug 
Benefit. Now is the time to put aside partisan politics and 
make the lives of these deserving Older Americans more 
comfortable and dignified.
    As an additional comment, TSCL believes that in the absence 
of a comprehensive prescription drug program under Medicare, 
one other alternative would be to pass legislation that would 
make generic equivalent drugs more readily available to older 
Americans and prevent the extensions of patents on name-brand 
medications. This would be one way that Congress could increase 
the affordability of prescription drugs to seniors with no 
insurance protection.

                                             Senior Citizens League
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                                TSCL Members                                             In District
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                       Representative William M. Thomas, Chairman                                 3,467
                     Representative Fortney Stark, Ranking Member                                 2,571
                                            Representative Nancy L. Johnson                       2,571
                                       Representative Jim McCrery                                 1,713
                                   Representative Philip M. Crane                                 2,537
                                       Representative Sam Johnson                                 1,842
                                         Representative Dave Camp                                 4,537
                                       Representative Jim Ramstad                                 2,822
                                 Representative Philip S. English                                 3,894
                                     Representative Jerry Kleczka                                 3,753
                                             Representative John Lewis                            1,415
                                     Representative Jim McDermott                                 2,867
                                     Representative Karen Thurman                                 7,949
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            Thank you