[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



   MEDICARE REFORM: PROVIDING PRESCRIPTION DRUG COVERAGE FOR SENIORS

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 15, 2001

                               __________

                            Serial No. 107-1

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                   U.S. GOVERNMENT PRINTING OFFICE
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                    ------------------------------  

                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
CHARLES F. BASS, New Hampshire

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

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

                                 ______

                         Subcommittee on Health

                  MICHAEL BILIRAKIS, Florida, Chairman

JOE BARTON, Texas                    SHERROD BROWN, Ohio
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     TED STRICKLAND, Ohio
NATHAN DEAL, Georgia                 THOMAS M. BARRETT, Wisconsin
RICHARD BURR, North Carolina         LOIS CAPPS, California
ED WHITFIELD, Kentucky               RALPH M. HALL, Texas
GREG GANSKE, Iowa                    EDOLPHUS TOWNS, New York
CHARLIE NORWOOD, Georgia             FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      PETER DEUTSCH, Florida
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES ``CHIP'' PICKERING,          ALBERT R. WYNN, Maryland
Mississippi                          GENE GREEN, Texas
ED BRYANT, Tennessee                 JOHN D. DINGELL, Michigan,
ROBERT L. EHRLICH, Jr., Maryland       (Ex Officio)
STEVE BUYER, Indiana
JOSEPH R. PITTS, Pennsylvania
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Buckley, Barbara E., Assemblywoman, State of Nevada..........    55
    Jones, John, Vice President, Legal and Regulatory Affairs, 
      Pacificare Health Systems..................................    22
    Kessler, Sylvia, on behalf of the National Committee to 
      Preserve Social Security and Medicare......................    20
    Moroni, Robert D., Assistant Director, Health Care Plans, 
      General Motors Corporation.................................    29
    Rowland, Diane, Kaiser Family Foundation.....................    32
    Smith, James F., Senior Vice President, Health Care Services, 
      CVS Corporation, on behalf of National Association of Chain 
      Drug Stores................................................    60
    Weller, William, Assistant Vice President and Chief Actuary, 
      Health Insurance Association of America....................    47
Material submitted for the record by:
    Jones, John, Vice President, Legal and Regulatory Affairs, 
      Pacificare Health Systems, letter dated March 23, 2001, 
      enclosing response for the record..........................    93
    Rowland, Diane, Kaiser Family Foundation, letter dated March 
      19, 2001, enclosing response for the record................    92

                                 (iii)

  

 
   MEDICARE REFORM: PROVIDING PRESCRIPTION DRUG COVERAGE FOR SENIORS

                              ----------                              


                      THURSDAY, FEBRUARY 15, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Upton, 
Greenwood, Burr, Ganske, Norwood, Shadegg, Pickering, Bryant, 
Buyer, Tauzin (ex officio), Brown, Waxman, Strickland, Barrett, 
Deutsch, Stupak, Engel, Wynn, Green, and Dingell (ex officio).
    Staff present: Anne Esposito, professional staff member; 
Tom Giles, majority counsel; Kristi Gillis, legislative clerk; 
Bridgett Taylor, minority professional staff member; and Amy 
Droskoski, minority professional staff member.
    Mr. Bilirakis. The committee will come to order.
    As per committee rules, the chairman and ranking member 
will have 5 minutes for an opening statement. Other members of 
the subcommittee will be limited to 3 minutes; a solid 3, I 
might add.
    I now call to order this first hearing of the Health 
Subcommittee in this, the 107th Congress. I would like to start 
by welcoming our witnesses and all of the subcommittee members, 
particularly our new members, none of whom are here, I believe. 
Mr. Buyer is here. I guess this is an appropriate time for me 
to say that since there are no votes on the House floor today, 
I thank my subcommittee colleagues for staying in town today to 
participate in this important hearing. Although when we take a 
look around, we don't see that too many have so far.
    I am pleased to be working again with my good friend 
Congressman Sherrod Brown as the ranking member, and he should 
hear that. I also want to take this opportunity to recognize 
the vice chairman of the subcommittee, Congressman Charlie 
Norwood, whose help and support I greatly appreciate.
    I am excited by the challenges before us in the current 
session. This subcommittee's jurisdiction includes a broad 
range of health concerns, as we know, including Medicare, 
Medicaid, health insurance, public health, food safety, and 
pharmaceuticals. Under the leadership of Chairman Tauzin, I am 
confident that the Energy and Commerce Committee and this 
subcommittee in particular will play a leading role in the 
health care debate. We have a busy year before us. By working 
together, and I emphasize that, we can significantly improve 
the quality of health care for all Americans.
    The topic of today's hearing is Medicare Reform: Providing 
Prescription Drug Coverage to Seniors. The title underscores a 
critical point; namely, that there is a clear and necessary 
connection between adding a prescription drug benefit to the 
Medicare program and broader reforms to protect and strengthen 
Medicare for the future.
    Before we expand Medicare to provide a costly new benefit, 
a necessary new benefit, in my opinion, we must ensure the 
program is standing on solid fiscal ground. A benefit promised 
but not delivered, of course, is no benefit at all. I am 
determined to protect the long-term solvency of this very vital 
program.
    In the last Congress, I proposed a State-based prescription 
drug plan to help seniors in greatest need. I remain determined 
that we help the poorest and sickest beneficiaries obtain the 
medicines they need, should broader reform efforts be delayed. 
But I am hopeful that there will not be delays, that the 
present Congress can reach agreement on a plan to reform 
Medicare and establish a voluntary prescription drug benefit 
for all Medicare beneficiaries. This hearing is the first in a 
series designed to lead us toward accomplishing that goal.
    This is meant to be an educational hearing for members of 
the subcommittee and the public. We have all heard the numbers. 
Roughly 65 percent of Medicare beneficiaries have access to 
some form of prescription drug coverage.Today we will hear more 
about the ways in which beneficiaries are currently obtaining 
prescription drugs outside of the Medicare program.
    Our panel will begin with Mrs. Sylvia Kessler, who has 
traveled from my home State of Florida to be here today. Thank 
you so much for joining us, Mrs. Kessler, and I wish we could 
welcome you and the others with better weather--although it is 
not as bad as it was yesterday. The panel will also include 
representatives from a Medicare+Choice plan, the Medigap plans, 
a chain drug store, an employer-sponsored plan, a State 
prescription drug assistance program, and the Kaiser Family 
Foundation. I would like to again offer a warm welcome to all 
of our panelists.
    I look forward to a productive hearing which can shed light 
on how various coverage programs are structured and how they 
operate. By reviewing ways in which current prescription drug 
delivery systems are modeled, we can learn from their successes 
and their difficulties. However, we are not focusing, and I 
want to emphasize that, we are not focusing today on specific 
legislative proposals.
    As Members know, this subcommittee has a strong record of 
working on a bipartisan basis to tackle difficult legislative 
issues, and I am hopeful that we can advance a bipartisan plan 
to improve prescription drug coverage for Medicare 
beneficiaries. By reaching agreement on an answer to this very 
difficult question, we can also help advance broader efforts to 
preserve and strengthen Medicare for the future.
    In closing, I want to again thank our witnesses for their 
time and effort in joining us today.
    I now recognize the ranking member Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. It is a pleasure to 
again serve with you as Chair in this 107th Congress. I am glad 
you are back as the chairman of the newly reconfigured Health 
Subcommittee. I would like to thank Diane Rowland and other 
distinguished witnesses for joining us today.
    Access to prescription drugs is fresh on my mind because I 
just received a letter from a Medicare beneficiary who needs 
medicine for his prostate cancer. His Medicare+Choice plan made 
two changes effective January 1 of this year. Premiums went up 
$350 per year, and brand name drugs are no longer covered, 
period. There is no generic version of the drug that my 
constituent needs.
    I received another letter from the frantic daughter of a 
woman whose Medicare+Choice plan dropped prescription drug 
coverage altogether. Her mother's prescriptions cost more than 
$300 per month. Neither mother nor daughter can afford that.
    I received a letter from a woman whose employer-sponsored 
retiree coverage dropped its prescription drug plan. My 
constituent didn't know she lost her drug coverage until she 
tried to fill the prescription. That prescription is still 
unfilled.
    I have heard from seniors who had to give up their Medigap 
coverage when premiums spiked upward, from seniors who joined 
the Plus Choice plan explicitly for the drug coverage, only to 
have that coverage ratcheted down or eliminated altogether; 
from seniors whose drug coverage is so skeletal they would be 
better served putting the associated premiums in a savings 
account.
    These stories, which resonate with my colleagues on both 
sides of the aisle, are not an indictment of Medigap or of Plus 
Choice plans or employers or any other source of drug coverage, 
but they are an indictment of partial solutions. The status quo 
is a mishmash of partial solutions. More than a third of 
Medicare beneficiaries, as all of us know, have no prescription 
drug coverage, and even more than that, of the two-thirds that 
have it, more than that have coverage that simply isn't 
dependable and is being oftentimes scaled back.
    The President's immediate Helping Hand proposal is another 
partial solution, and it would leave out nearly half of those 
who now lack prescription drug coverage.
    The stories our constituents share with us are an 
indictment of this Congress's, of our continued failure to add 
prescription drug coverage to the basic Medicare benefit. 
Medicare is reliable, Medicare is universal, Medicare is a 
large enough insurance pool to accommodate the risk and manage 
the costs associated with prescription drug coverage.
    Medicare came into being because half of all seniors in 
1965 were uninsured. Now, more than a third of all seniors are 
uninsured, and many more underinsured for prescription drugs. 
Medicare prescription drug coverage as opposed to State 
assistance programs or private coverage for prescription drugs 
means stable benefits over time and means coverage that does 
not leave any senior worse off than that senior's neighbor in a 
different county or a different State or a different income 
bracket or a different health status.
    Medicare prescription drug coverage has been demonized by 
many in this institution and others outside the institution as 
a one-size-fits-all program. This argument is spurious. The 
people that make this argument, that make this assertion know 
that it is spurious. The kind of choice that is important when 
it comes to prescription drug coverage is choice of pharmacy, 
choice of prescription drug, choice between brand name and 
generic drugs, access to the right drugs, even if it is not 
part of the standard formulary. That is the kind of choice a 
Medicare drug benefit can provide to every senior, not just 
those lucky enough to afford a Cadillac private insurance plan.
    I am confident, Mr. Chairman, that today's hearing will be 
informative and helpful. I am equally confident that what we 
hear today will reinforce the argument for a universally 
available Medicare drug benefit. Those of you who have observed 
this committee and know me probably are surprised that I 
haven't raised the issue of prescription drug prices or the 
related issues of direct-to-consumer advertising and patent 
extension, or tax cuts which put us in a straightjacket which 
makes it difficult to afford the kind of coverage that 
Americans deserve. In the interest of time, I will get to these 
issues when it is time to ask questions of the witnesses.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. And the Chair appreciates that.
    I now yield to Mr. Norwood, the vice chairman of the 
subcommittee.
    Mr. Norwood. Thank you very much, Mr. Chairman, and 
congratulations to you, as we are all pleased to follow your 
leadership on this very important subject. As a present to you 
today, I want you to know that I am here to listen and not 
talk, so I am going to be very brief. I know that is different, 
but I am grateful to all of you for coming so far, many of you, 
and I think that is exactly what we need to do. I want you to 
know we do listen to you, and what you say today will be 
carefully noted and help, as this is the--probably the opening 
salvo of the great Energy and Commerce Committee as we try to 
work out a prescription drug plan and help the President 
fulfill his campaign promises. I have great faith that this is 
the year we are going to get it done.
    So I thank all of you for being here and give it to us, 
because that is what we are here to do today.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Dingell for an opening statement.
    Mr. Dingell. Mr. Chairman, thank you, and I commend you and 
Chairman Tauzin for beginning this Congress looking at one of 
the most pressing problems facing the people of the country. 
Millions of our seniors and disabled who depend on Medicare for 
their health coverage lack affordable coverage for prescription 
medications. The situation facing Medicare beneficiaries with 
respect to prescription drugs today is not unlike the situation 
they faced with respect to insurance coverage in 1965. Indeed, 
this is the one crucial reform in the Medicare program which we 
need to pursue.
    Currently, there are a patchwork of stopgap measures 
available, from retiree coverage to Medigap to voluntary State 
assistance programs. But there is one thing clear about the 
whole business: None of them adequately fills the void, and our 
senior citizens confront a very serious and difficult problem 
as a result.
    What we need is a uniform Medicare benefit that seniors and 
the disabled can depend upon; no nonsense about how we are 
going to give money to States, who might or might not give it 
to HMOs, who then might or might not pass it through. This is a 
formula for wasted money and loss of opportunity to help people 
who are in desperate need.
    So the question we must examine today is how can we best do 
what must be done. I would like to suggest a few basic points 
to guide our thinking. First, the system must be reliable. 
Competition is a nice word, it is a buzzword, I use it, we all 
use it. Experience with Medicare+Choice, however, has shown 
that it certainly does not result in any dependable or stable 
product upon which seniors may rely. So unless we are willing 
to dump billions of dollars of overpayments into a system on an 
annual basis, that assuredly is not going to reach most of the 
people in need. This kind of idea must be rejected.
    Second, the benefit has to be defined. The Congress needs 
to know who is getting what, who is paying for it, and what the 
level of benefits might be. Seniors need to know exactly what 
they can count on. Employers and others who provide 
supplemental coverage need to know exactly what they are 
supplementing. I will point out to all that Medicare is an 
intricate, involved, and essential part today of industrial 
retirement plans and industrial retirement health plans. It is 
even a part of our Civil Service retirement. States and almost 
every unit of government that has a retirement system includes 
this as a part of a wraparound program in which benefits are 
provided, dependent in heavy part upon Medicare.
    We do not need to return to the old days of Medigap 
scandals when seniors were being sold a pig in a poke and when 
all kinds of scoundrels profited mightily at the expense of 
senior citizens and at the expense of the Federal Government, 
which was regarded as a generous giver who did not supervise.
    Third, the benefit must be affordable for seniors and the 
disabled. That has to include premiums and cost-sharing. A 
benefit that no one can afford is no benefit at all. I would 
note also a benefit that doesn't cover adequately is also no 
benefit at all.
    Mr. Moroni, who is assistant director of General Motors 
Health Plans, will tell us how GM works to ensure that a 
benefit is affordable to their members. Other companies in the 
auto industry and in the American industrial community are 
doing similar things, and they deserve commendations for their 
efforts in this matter, but they also need us to help them fill 
out a plan which will better not only those retirement plans, 
but the beneficiaries of those retirement plans.
    Finally, we need to remember why we are in this business. 
Congress is now discussing a Medicare prescription medication 
benefit because there is a pressing, urgent need amongst our 
elderly and disabled.
    It should be noted that today we regard ourselves as much 
more heavily dependent upon medication and prescription 
pharmaceuticals than we do upon medical treatment. That was 
unfortunately not the case in 1965 when we passed Medicare. The 
result was that we largely ignored that kind of benefit. In 
consequence, today our senior citizens miss what is a major and 
essential part of good health care for them.
    Any solution that this Nation devises and that this 
Congress designs must focus on the needs of seniors. We need to 
make good on the commitment that Congress made to seniors and 
the disabled in 1965 to provide their health care needs where 
the private market fell short. I am pleased that Mrs. Kessler 
has traveled all the way from Florida to share her experience 
with us as a Medicare beneficiary who lacks affordable 
prescription drug coverage, and we want to thank you for being 
here, Mrs. Kessler.
    I look forward to working with you, Mr. Chairman, and with 
Chairman Tauzin to expeditiously address these problems this 
year. I hope that we won't try to swallow any snake oil of the 
kind I see marketed about how we are going to trust the States 
or the HMOs to do this. We have trusted them overlong. They 
have been deficient in their responsibilities, and they are now 
trying to perpetrate the fraud.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. John D. Dingell follows:]

    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan

    I am pleased to see that Chairmen Tauzin and Bilirakis are 
beginning this Congress looking at one of the most pressing problems 
facing this country. Millions of seniors and disabled who depend on 
Medicare for their health coverage lack affordable coverage for 
prescription medications. The situation facing Medicare beneficiaries 
with respect to prescription drugs today is not unlike the situation 
they faced with respect to insurance coverage in 1965. In my mind, this 
is the one critical ``reform'' in the program that we need to pursue.
    Currently, there is a patchwork of stopgap measures available, from 
retiree coverage to Medigap to voluntary state assistance plans. But 
none of them adequately fills the void. What we need is a uniform 
Medicare benefit that seniors and the disabled can depend on. The 
question we will examine today is how best to do it.
    I suggest a few basic points to guide our thinking. First, the 
system has to be reliable. While ``competition'' might be a good buzz 
word these days, experience with the Medicare+Choice program has shown 
that it certainly does not result in a stable and dependable product 
that seniors can rely on, unless we are willing to dump billions of 
overpayments into the system on an annual basis.
    Second, the benefit must be defined. Seniors need to know exactly 
what they can count on. Employers and others who provide supplemental 
coverage need to know what they are supplementing. We do not need to 
return to the days of the Medigap scandals where seniors were being 
sold a ``pig in a poke.''
    Third, the benefit itself must be affordable for seniors and the 
disabled, including premiums and cost-sharing. A benefit that no one 
can afford is no benefit at all. Mr. Moroni, Assistant Director of 
General Motors health care plans, will tell us about how GM works to 
ensure that a benefit is affordable for their members.
    Finally, we need to remember why we are in this business. Congress 
is discussing a Medicare prescription medication benefit because there 
is a pressing, urgent need among our elderly and disabled. Any solution 
that we design should focus on them. We need to make good on the 
commitment Congress made to seniors and the disabled in 1965 to provide 
for their health care needs where the private market fell short. I am 
pleased that Mrs. Kessler has traveled all the way from Florida to 
share her experience as a Medicare beneficiary who lacks affordable 
prescription drug coverage.
    We look forward to working with Chairmen Tauzin and Bilirakis to 
move forward expeditiously and address this problem this year.

    Mr. Bilirakis. I thank the gentleman.
    Mr. Buyer for an opening statement.
    Mr. Buyer. Thank you, Mr. Chairman.
    I am pleased to be a member of this subcommittee and to 
work with you and Mr. Brown. I come to the committee as a 
strong believer in the private system, but we really don't have 
that in this country. It is sort of a quasisystem. You and I 
have worked together during the last 8 years with regard to the 
VA and its health system. I have worked for 8 years with the 
military health delivery system, as I chaired that Personnel 
Subcommittee panel, and with pride, saying I am the only Member 
of Congress to author and pass a prescription drug benefit that 
was done in the last Congress. The reason that occurred and 
that it received the support of the pharmaceutical 
manufacturers was that I insured that there was a retail out-
of-network pharmacy benefit.
    So I will also share a word from Mr. Dingell. I will also 
be very careful and I will beware of the snake oil of those who 
will try to operate or create systems that will take us on a 
path to universal health care. I don't agree with universal 
health care run by the government.
    So what we have here, and what I recognize in Congress, are 
individuals of both parties who want to bring a benefit to 
people and help the disabled and the needy, most needy in our 
country, but we do have two distinct, different paths to get us 
there. One is make sure that we make improvements in our quasi 
health delivery system we have for our country and, at the same 
time, continue to press the bounds of the frontier of medicine 
and science and health. The other is that path toward 
incremental steps toward universal health care run by the 
government. So I will also be as watchful for the snake oil.
    I yield back my time .
    Mr. Bilirakis. Mr. Deutsch for an opening statement.
    Mr. Deutsch.  Thank you, Mr. Chairman. I want to add my 
words of thanks to the chairman for having this hearing and 
also the honor and the really pleasure as well of working with 
him during the last 6 years, and I look forward to this 
Congress. I know his commitment toward this issue is absolutely 
genuine, and hopefully this is a year we will see something 
happen.
    As opposed to my colleague who just spoke, I would say that 
I would like to see America have universal health care. I think 
it is the wealthiest society in the history of the world, and 
we have citizens without health care, and we have a system 
which has incentives--disincentives for employees to have 
insurance. That is a goal that we should be talking about.
    I think really the focus of where we are going is really 
about the universality of the prescription drug coverage. I 
think the benefits have to be universal. Attempts to address 
only low-income seniors and ignore middle-class elderly who are 
having a difficult time purchasing prescription drugs--and I 
think Mrs. Kessler will be able to directly bear witness to 
that case.
    In Florida, there are 2.5 million seniors who rely upon 
Medicare. That number will increase to 5.5 million by the year 
2025. Over 50 percent of the seniors in Florida are middle 
income who would not qualify for the low-income assistance 
program suggested by some of my colleagues on the other side of 
the aisle. That is the real issue that we are addressing here. 
Hopefully others and a majority of the Congress, a majority of 
this committee, will see it along the same lines.
    I want to add quickly one other point that I know the 
chairman and I are both concerned about, and it is relevant to 
this issue that we are here today about, and that is on 
oncology drugs and oncologists. Currently some of the drugs are 
being perhaps overreimbursed while the oncologists themselves 
are being underreimbursed, and I know the GAO is conducting a 
study under his direction, and I look forward to the results of 
that.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Greenwood for an opening statement.
    Mr. Greenwood. Thank you, Mr. Chairman.
    It obviously goes without saying that every member of this 
committee wants to make sure that every elderly person in the 
country, every disabled person has access to an affordable 
prescription drug plan. I think it should be the No. 1 priority 
for this Congress. It is a subject of enormous frustration to 
me that we did pass legislation in the House last session and 
the Senate did not. Contrary to speakers on the other side of 
the aisle, it was not a plan that only provided a plan for 
prescriptions for low-income people, but made it affordable for 
everyone, every Medicare recipient in the country.
    What is even more problematic is we are going in the wrong 
direction; that we have had this fall-away from the 
Medicare+Choice plans because of our failure, HCFA's failure, 
the previous President's failure to adequately fund the 
Medicare+Choice plans that we had, and 934,000 Medicare 
beneficiaries will lose access to health care benefits and 
choices next year as a result of these underpayments and 
burdensome HCFA regulations.
    In my district we have--I have seniors and the disabled who 
were able to get into a Medicare+Choice plan, became somewhat 
dependent upon the availability of prescription drugs, and then 
for the reasons I have just cited, the premiums went up so 
steeply in order to get those plans that many of my 
constituents can no longer afford them and are in desperate, 
desperate straits as we speak.
    I have a fellow in my district who is 45 years old, a 
computer guy, hit by a drunk driver, disabled, totally reliant 
on a painkiller, is suicidal without the painkiller, and lost 
access to that drug as of the first of the year. We have been 
desperately trying to help him ever since, and that is just one 
instance that repeats itself all over the country.
    So I am looking forward to working with this committee and 
other committees, and hopefully we can get this job done and 
get it done soon.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Green for an opening statement.
    Mr. Green. Thank you, Mr. Chairman.
    Like all of my colleagues, I am glad you led off our first 
committee hearing this year with the prescription drug event 
public hearing. I believe addressing the need for Medicare 
coverage and prescription drugs is one of the most important 
issues that Congress will face.
    Just last weekend I finished a series of town hall meetings 
in my own district in Houston, and in every town hall meeting 
over the last month, seniors asked me to do something to help 
them pay for their prescription drugs. Seniors who had lost 
their HMO coverage for lots of reasons, and to my colleague 
from Pennsylvania Mr. Greenwood, BBA 97 passed this House by 
such an overwhelming bipartisan vote in efforts to correct it, 
although I am concerned that we do need to correct it, but 
there is lots of things that we could do with Medicare 
reimbursements.
    When Medicare was created 35 years ago, most of the 
prescription medications that save and improve lives weren't 
even invented. Medicare, like most private insurance plans at 
that time, didn't cover outpatient prescription medications. 
Well, we know now that things have changed, and over the last 
20 years there has been a surge in new drugs, more than 600 in 
all. Thanks to these innovations, leading causes of death have 
been eliminated, and life expectancy and quality of life and 
health has been dramatically improved. But that innovation and 
progress comes at a high price tag. The cost of these drugs 
often leaves our most vulnerable citizens, our seniors and 
those with disabilities, struggling to make ends meet. While 
some seniors have access to prescription drug coverage through 
private insurance, Medigap, Medicare, HMOs, or other sources, 
coverage is insufficient, capped, and oftentimes expensive. 
Fully one-third of our Medicare beneficiaries, more than 14 
million seniors, have no prescription drug coverage at all.
    To make matters worse, study after study has found that 
American seniors who live on the most limited incomes and who 
depend most heavily on prescription drugs are paying the 
highest prices for the medication that keep them in good 
health. Because seniors tend to have more long-term chronic 
conditions such as diabetes, arthritis, high blood pressure and 
heart disease, they are more reliant on prescription drugs. 
This is evidenced by the fact that more than 86 percent of 
Medicare's 40 million beneficiaries use prescription drugs, 86 
percent. The average older American uses 18.5 prescriptions 
annually.
    While seniors make up only 12 percent of the U.S. 
population, they use one-third of the prescription drugs, and 
this isn't just a problem for low-income seniors. Of those with 
incomes below 250 percent of poverty, almost 40 percent lack 
prescription drug coverage. An initial 5.4 million seniors who 
have incomes over 250 percent of the poverty level are without 
coverage. Hard-working seniors who worked all of their lives, 
who have saved for their retirement, have moderate incomes, in 
other words much more than Medicaid, find themselves excluded 
from State programs like Medicaid or other discount programs 
because they earn just a little too much. Many of our seniors, 
like Mrs. Sylvia Kessler, are forced to work so that they can 
afford to buy their prescriptions. Last Congress when we 
removed the----
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Green. Thank you, Mr. Chairman. I will finish up.
    Again, I appreciate this being the first hearing, and I 
look forward to continuing hearings. Thank you.
    Mr. Bilirakis. As evidence of his interest in this subject, 
Chairman Tauzin has joined us today, and the Chair now 
recognizes him for an opening statement.
    Chairman Tauzin. I thank the chairman.
    Let me particularly thank Chairman Bilirakis for his 
agreement again to serve as subcommittee chairman of this 
critical work of the Energy and Commerce Committee. If there 
has been any doubt about whether or not the new reenergized 
Energy and Commerce Committee would be an active player in all 
of the health care issues that face this Congress and the 
country, let there be no more doubt about it.
    This first hearing on prescription drugs is just a first. 
Recently Mr. Bilirakis led a tour of Members to HCFA 
headquarters in Baltimore. We had a chance to see the 
operations there, and we will begin very soon very extensive 
hearings, along with Jim Greenwood, our O&I chairman, on HCFA 
and how we might reorganize that organization to better serve 
the needs of Americans in this country with their health care 
problems.
    Let me also congratulate Mr. Bilirakis on his and my good 
friend the ranking minority member Mr. Dingell's membership on 
the National Bipartisan Commission on Medicare Reform.
    The talent on this committee, both of its Members on both 
sides of the aisle and of the staffs have been accumulating a 
wealth of knowledge and experience for years, is going to be 
brought to bear on basic Medicare reform this year, and I want 
to thank them for their commitment to that effort.
    Let me also finally say that this is not about us providing 
some kind of new services or better services for seniors out 
there. This is about us take taking care of our own families. I 
want to disabuse folks of a notion. When we declare national 
Mother's Day, it is not a Democratic mother's day or a 
Republican Mother's Day, it is Mother's Day. We, too, have 
mothers and fathers and grandparents whom we love. We, too, 
have children we care about. And when this Nation discusses 
health care issues and health care concerns, we think about 
mothers like my own, who is a 3-time cancer survivor, who, 
without the health care coverage of Medicare and without the 
miracle of new drugs, would not be alive today. This amazing 
82-year-old woman, who still wins gold and silver medals in the 
Senior Olympics, get this, in discus and javelin, has survived 
breast cancer in 1960, lung cancer in 1980, and recently 
uterine cancer, and she apologized to me because she wouldn't 
be able to give me that little brother I always wanted. This 
amazing woman is just one example of the millions of Americans 
who depend upon this committee to get it right.
    Mr. Bilirakis, I want to thank you for giving us this 
first, most important hearing. We are going to hear from people 
who are in the business of organizing and managing drug 
prescription plans, and we are going to learn how we might 
organize this country's efforts to make sure we get it right 
when we provide a drug prescription benefit for all of our 
mothers and fathers and grandparents under this new benefit 
program. It is not a question of whether we are going to do it. 
The issue is how to do it and how to do it right, and you will 
help us learn how to do it right today, and we thank you for 
that.
    Mr. Bilirakis, bon voyage. You are on it, and your 
committee is on it, and I wish you well, and I will be with you 
every step of the way. This committee is going to help this 
Nation solve these problems this Congress.
    Mr. Bilirakis, good luck to you and all of the committee 
members. You have my full support, sir.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
follows:]

 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce

    Mr. Chairman, thank you for holding a hearing on this topic of 
utmost importance--not just to the seniors in our country, but to all 
Americans.
    The Medicare Program affects all of us. Whether we are eligible for 
the program today, or have family members who are eligible, all of us 
have a strong interest in ensuring that the Program will meet the 
health care needs of a growing senior population.
    Over the past few years, it has become increasingly clear that 
Congress needs to modernize Medicare and bring the Program into the 
21st Century. Since the Program's inception in 1965, much in health 
care has changed. Yet many of the Program's features, as well as the 
design of Medicare's basic benefit package, are stuck in a 1960's style 
approach to practicing medicine. Prescription drug coverage is still 
not included in Medicare's basic benefit package and there are no caps 
placed on seniors' out of pocket medical expenses. No one in this room 
today would model a new system after Medicare's current benefit 
package.
    This Committee is committed to addressing the issue of Medicare 
reform this session. Today's topic focuses on prescription drugs and 
the entities that currently provide a prescription drug benefit to 
seniors. We hope to learn how these entities administer a prescription 
drug benefit to seniors, as we in Congress wrestle with how best to 
administer such a benefit at the Federal level.
    We can all agree that the question is not whether to enact a 
prescription drug benefit, but how. As we will hear from our witnesses, 
about two-thirds of our seniors have some form of prescription drug 
coverage, but another one-third do not. It is critical that we 
determine how best to improve access for all Medicare beneficiaries yet 
focus our efforts on those who are sickest and neediest. Additionally, 
when crafting a new benefit, we must be careful not to disrupt existing 
coverage. Our witnesses today will share with us how they provide a 
prescription drug benefit to Medicare beneficiaries in a cost-effective 
way.
    Providing an affordable prescription drug benefit to Medicare 
beneficiaries is Just one aspect of Medicare Reform this Committee will 
be exploring this year. We will also be examining the role of the 
Health Care Financing Administration in the management of Federal 
health care programs. Just two days ago, Members of this Subcommittee 
visited HCFA's central office in Baltimore to see their operations 
first hand. The Energy and Commerce Committee, through both the Health 
Subcommittee and the Oversight and Investigation Subcommittee, intends 
to hold a series of hearings on HCFA's operations and their policies. 
We look forward to working with HCFA to remove any impediments it may 
face in administering health care to tens of millions Americans. More 
importantly, we look forward to improving the quality of health care 
delivered to patients through HCFA's federally administered programs.
    This is an exciting time to be involved in health care and Medicare 
reform in particular. Our new President has expressed a strong interest 
in reforming Medicare. Many in the Senate have expressed a desire to 
move a reform package. Here on this Committee, we are honored to have 
two Members of the National Bipartisan Commission on Medicare Reform: 
Chairman Bilirakis, and my ranking counterpart on the Committee, Mr. 
Dingell. With our wealth of talent on health care issues, our Committee 
will be a strong leader in the Medicare reform debate.
    Mr. Chairman, I thank you again for holding this important hearing. 
I look forward to listening to the testimony of our witnesses and 
beginning the hard work of developing a solution to this complex issue.

    Mr. Bilirakis. Thank you very much, Mr. Chairman.
    Mr. Wynn is recognized for a 3-minute opening statement.
    Mr. Wynn. Thank you very much, Mr. Chairman.
    I certainly appreciate the fact that you have gotten the 
subcommittee off to a fair start dealing with this very 
important issue. I don't know how much bipartisanship exists in 
this Congress, but I think there is consensus on the issue of 
Medicare reform, and prescription drugs does have considerable 
consensus.
    As a new member of the committee, I don't have any 
extensive comments. I am looking forward to working with you 
and our ranking member Mr. Brown and learning about these 
issues.
    I would like to take a moment, though, to make an 
observation, I guess. One of our colleagues mentioned in his 
opening statement that he was opposed to universal health care. 
Now, I don't subscribe to a Socialist model, but I actually do 
believe that we ought to be pursuing a goal of universal health 
care, or certainly universal access, and the fact that we have 
failed to accomplish that should cause us some concern. I don't 
think we could be content to say, well, we have failed to 
implement this, but at least we failed using a market-driven 
approach. I think we need to be receptive to all approaches 
that would help us achieve this objective, which is to make 
sure that people don't die needlessly, don't suffer needlessly, 
or don't have to endure economic hardship, making decisions 
about their lot, because we as a governmental entity have 
failed to implement a universal system or a universal access 
system.
    So I am very excited about the committee's work, and I look 
forward to hearing the witnesses who are before us today. Thank 
you.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Upton for an opening statement.
    Mr. Upton. Thank you, Mr. Chairman. I am going to ask 
unanimous consent to put a lengthy opening statement into the 
record.
    Mr. Bilirakis. Without objection, the opening statement of 
all members of the subcommittee may be made a part of the 
record. The gentleman may continue.
    Mr. Upton. I would just like to summarize it by saying 
this: Our Nation leads the world in the development of new 
drugs that enable us to effectively treat diseases and 
conditions, but if our folks can't afford to buy those drugs, 
they are useless.
    I am known as an optimist, as I still root for the Chicago 
Cubs, and I had a gentleman at one of my town meetings last 
year who said, Upton, I know you are an optimist, and he came 
with his little white prescription bag, and he said, I like the 
idea that you are talking about dealing with a prescription 
drug bill. Can you get it done before I have to refill this 
prescription? I said, I am an optimist, but I am not that 
optimistic.
    This is the Congress, this is the year that we do need to 
work on legislation. I commend the chairman for having this 
hearing, and I look forward to watching legislation move 
through the House, as well as the Senate, and get on the 
President's desk. This is a job that we need to get done, and I 
congratulate the chairman for holding this hearing, and I yield 
back the balance of my time.
    [The prepared statement of Hon. Fred Upton follows:]

  Prepared Statement of Hon. Fred Upton, a Representative in Congress 
                       from the State of Michigan

    Mr. Chairman, thank you for holding today's hearing on how many 
seniors currently obtain prescription drug coverage. It will give us 
important background information that will be useful as we again set 
out to craft a federal benefit within the Medicare program.
    It was my pleasure to serve with you on the House Leadership's 
Prescription Drug Task Force in the last Congress and to see the plan 
we crafted approved by the House of Representatives. I sought to serve 
on this task force because I strongly believe that no senior citizen 
should be forced to forego needed medication, take less than the 
prescribed dose, or go without other necessities in order to afford 
life-saving medications. Our nation leads the world in the development 
of new drugs that enable us to effectively treat diseases and 
conditions. But if people cannot afford to buy these drugs, their 
benefits are lost to many in our population.
    Let me just quote from a letter I received last year that is all 
too typical of many I receive every week and of many stories that I 
hear at my town meetings:
    ``I am among those who skip my meds every other day to make it 
through the month. I am taking nine pills a day plus I'm a diabetic. My 
husband has glaucoma and high blood pressure and eye drops are very 
expensive. We have no prescription drug coverage, so it is a very 
trying ordeal for us.''
    Mr. Chairman, I am looking forward to working with you and my 
colleagues on both sides of the aisle and with the new Administration 
to craft a plan that can win the bipartisan support necessary to move 
quickly through Congress and be signed into law by President Bush. I 
see today's hearing as an important first step toward ensuring that my 
constituent and the many seniors like her no longer have to skip their 
meds or stretch their limited incomes to the breaking point paying for 
basic necessities and the prescriptions they need. We cannot allow 
another Congress go by without providing relief to the millions of 
seniors without prescription drug coverage.

    Mr. Bilirakis. I thank the gentleman.
    Mr. Stupak for an opening statement.
    Mr. Stupak. Thank you, Mr. Chairman.
    Let me just summarize. I look forward to working with you 
again in this Congress, and thanks for holding this hearing. 
Last Congress we had three main plans out there. The Democrats 
had their plan which made prescription drugs part of Medicare; 
we had the Republican plan, if you will, the insurance one 
where you buy a voucher and try to buy some drugs; the Allen 
bill was out there with the Federal Supply Service. None of 
them went very far. I hope this year we can do something 
different.
    As you know, Mr. Chairman, because you have heard me speak 
of this before, back in 1998 we did a study up in my district 
from Marquette to Hancock to Gladstone, and seniors pay 91 
percent more in northern Michigan for their drugs than large 
HMO and insurance plans.
    I don't support price controls or unfairly limiting the 
pharmaceutical companies on what they can charge for their 
important lifesaving drugs, but I do believe that Medicare 
beneficiaries should be allowed to participate in the market 
the same way GM employees or any other class of employees come 
together jointly to purchase a product. So hopefully this year 
we can move forward and really put forward a true, true 
prescription drug plan that will help out all people; not just 
seniors, but all people.
    Someone mentioned Medicare Choice, or Medicare+Choice. We 
don't have that in northern Michigan. We don't have much in the 
way of HMOs. So the small rural districts really do need some 
help. This is a really pressing problem. When I do my town hall 
meetings next week back in my district during the work break, 
that is going to be the No. 1 issue from the seniors and others 
who show up at the town hall meetings, not just prescription 
drugs, but health care reform in general.
    So I look forward to working with you, Mr. Chairman. I am 
going on my 7th year on this committee, and I enjoy this 
committee, and that is why I grandfather in every year, and I 
look forward to working with you on health care issues. Thank 
you.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Pickering for an opening statement.
    Mr. Pickering. Thank you, Mr. Chairman. Let me acknowledge 
and commend you for the willingness and the commitment that you 
have made to address this issue and move this legislation. I do 
believe we have a great opportunity working with the new 
administration for this Congress, and this committee, to get 
something done.
    Let me say, as we approach it, there are several 
fundamental principles that I hope will be part of the 
equation. First, I support a plan that provides full coverage 
for seniors facing serious illnesses and catastrophic out-of-
pocket drug costs. Second, I favor an approach that gives 
seniors choices and flexibility in choosing a plan that fits 
their individual needs. And third, I would like to see a plan 
that offers prescription drug protection for rural areas, 
including guaranteeing the availability of at least two drug 
plans and allowing seniors to have the convenience of assessing 
medicine through a main street pharmacy, the Internet, or mail 
order.
    Again, I believe that this is the year that we can get it 
done. I look forward to working with all of the members of the 
committee, and I look forward to hearing the testimony of the 
panel today.
    [The prepared statement of Hon. Chip Pickering follows:]

Prepared Statement of Hon. Chip Pickering, a Representative in Congress 
                     from the State of Mississippi

    Mr. Chairman, thank you for holding this hearing today about one of 
the most important issues facing many people in our country, 
particularly seniors. As Congress begins a new year, we are in the 
process of shaping and focusing on our priorities. That is why today's 
hearing on prescription drug coverage for seniors is timely and 
necessary as we move forward on this issue.
    Medicare is an essential health care component for America's 
seniors. While it is true that Medicare needs to be strengthened and 
modernized, there is also room under the Medicare umbrella for a 
prescription drug benefit for seniors who need help covering the costs 
of their medicines. While we will need to fund additional resources to 
Medicare to make it work, the fact remains that seniors should have 
access to affordable, voluntary prescription drug coverage that 
provides protection against high out-of-pocket costs.
    Last year, Congress passed a bipartisan bill ensuring that 
prescription drug coverage is affordable, available and voluntary for 
all senior citizens and disabled Americans, regardless of income. 
Unfortunately, this legislation was not signed into law by President 
Clinton so we must begin again to craft legislation to address this 
issue. I supported this legislation last year that allowed seniors, 
including approximately 408,000 in my state of Mississippi, to choose 
from at least two competing drug plans so each person could get the 
plan that worked best for them, or to keep their existing coverage. The 
price of premiums were adjusted to reflect the income of seniors and 
the type of coverage each person chose to receive. The plan was 
designed to protects seniors from high out-of-pocket drug costs, 
without government price controls which would hurt research and 
development of new drugs and cures.
    Last year, President Clinton proposed a plan that would have forced 
seniors into a ``one size fits all'' government run program with no 
flexibility or choice. They would pay a set monthly premium regardless 
of their prescription drug needs. I opposed President Clinton's 
proposal because it would have given the federal government too heavy a 
hand in controlling drug benefits, denying some seniors the right to 
select the coverage that best fits their needs.
    This year, as we work on legislation to bring about a common sense 
plan to provide prescription drug coverage to seniors who need help, 
there are several fundamental principles I hope will be part of the 
equation. First, I support a plan that provides full coverage for 
seniors facing serious illnesses and catastrophic out-of-pocket drug 
costs. Second, I favor an approach that gives seniors choices and 
flexibility in choosing a plan that fits their individual needs. Third, 
I would like to see a plan that offers prescription drug protection for 
rural areas, including guaranteeing the availability of at least two 
drug plans and allowing seniors to have the convenience of accessing 
medicine through a main street pharmacy, the Internet, or mail order.
    I am confident that working together with President Bush, Congress 
can develop legislation to help seniors with the costs of prescription 
drugs through a voluntary, affordable plan that brings lower costs and 
more peace of mind. I look forward to working on this important issue 
with all of the members of the Health Subcommittee and the entire 
Energy and Commerce Committee. Thank you.

    Mr. Bilirakis. I thank the gentleman.I think we are all 
pleased with the fact that we have had such a good turnout 
considering that it is a day that we have no votes at all or 
the balance of the week.
    Mr. Engel is recognized for an opening statement.
    Mr. Engel. Thank you, Mr. Chairman.
    When I was first elected to Congress more than 12 years 
ago, I spoke with my mother, who, by the way, Mrs. Kessler, is 
a resident of Tamarac, Florida, for the past 24 years, and said 
to her, Mom, what is the one thing we can do to help seniors in 
the country? And she said, prescription drugs, prescription 
drugs, prescription drugs. And that hasn't changed. We haven't 
moved very fast, but that still hasn't changed. When she tells 
me stories about her friends, people cutting down on their 
pills because they can't afford to take the required 
medication, cutting pills in half and things like that, we know 
that this is certainly something whose time has come.
    I commend the chairman, and I am glad we are finally on the 
right track. This is the Congress, this is the year that we 
have to move with prescription drugs. The American people don't 
want partisan bickering or fighting, they want production, they 
want us to produce. We have an obligation to produce for them. 
Whether it is the senior citizens in my district in New York, 
or whether it is people in Florida, California, all across the 
country, senior citizens need the help now. We have to make 
sure that we cover all seniors; the poorest elderly, of course, 
but there are many, many Medicare beneficiaries without drug 
coverage, and more than half of them have an income of only 
$15,000 to $17,000 a year, and they don't qualify for Medicaid 
or State-run drug plans as we have in New York. So clearly 
today's living standards render these seniors incapable of 
bearing the full burden of their prescription drug needs.
    I have made this a priority of mine, and I have offered 
legislation to establish a Medicare prescription drug benefit, 
and as I mentioned, we cannot wait any longer. We have to do it 
now.
    Senior citizens are becoming more and more dependent on 
medication to maintain their health and quality of life. And 
just the way the chairman spoke about his mother and how 
medication kept her alive, the same thing with my mother, who 
has had two heart surgeries. So it is not a matter of luxury. 
Seniors need help with prescription drugs. As they are living 
longer, they need more and more help.
    So I am very delighted to be part of this subcommittee and 
very delighted that we are finally tackling the issue so that 
we can help seniors like Mrs. Kessler and my mother and 
millions of other people across the country who are really 
looking to Congress for leadership.
    I thank you, Mr. Chairman. I will submit my full statement 
for the Record.
    [The prepared statement of Hon. Eliot L. Engel follows:]

Prepared Statement of Hon. Eliot L. Engel, a Representative in Congress 
                       from the State of New York

    Mr. Chairman, I want to thank you for having this hearing today. 
Providing seniors with affordable access to prescription drugs has been 
a priority of mine for several years, and I am pleased we are moving 
forward. I have authored legislation to establish a Medicare 
prescription drug benefit and feel that we cannot wait any longer to 
provide relief to seniors who today cannot purchase the medicine they 
need.
    The evidence is clear. The elderly are becoming more and more 
dependent on medication to maintain their health and quality of life. 
Medication has taken the place of hospital stays and surgery in many 
instances, and also provides a means of treatment that did not exist in 
the past. In essence, advancements in medical and drug technology have 
changed how health care is delivered. Medicare has not kept pace. We in 
Congress must act now to give seniors access to these new medical 
benefits.
    We have all heard stories about seniors sitting at their kitchen 
table cutting pills in half to extend the life of a prescription or 
taking their medicine every other day to cut costs. We cannot let 
seniors continue to suffer financially or medically because they cannot 
afford the medicine they need. In many instances, not taking the proper 
amount of medication results in little or no benefit, leaving many in 
an even more precarious situation and costing Medicare more in hospital 
stays and acute care expenses. We must assist seniors in obtaining 
affordable drugs that allow them to receive the full benefit of today's 
medicinal technology. However, the question remains, what form should 
this drug benefit take?
    Designing a prescription drug benefit in the context of Medicare 
reform is no small undertaking. There are infinite considerations and 
many different visions of the size and scope of the benefit. Many feel 
that providing the poorest elderly with a benefit is as far as we 
should go or that catastrophic coverage is sufficient. On the contrary, 
while we must provide for our poorest and most catastrophic cases, 
average, middle-income seniors are suffering as well and in dire need 
of assistance. In fact, more than half of Medicare beneficiaries 
without drug coverage have an average income of $15,000 to $17,000 a 
year. Thus, they do not qualify for Medicaid or state-run drug plans. 
Clearly, today's living standards render these seniors incapable of 
bearing the full burden of their prescription drug needs.
    A question many are asking is whether or not to move forward with a 
Medicare prescription drug benefit now or wait to completely overhaul 
the Medicare program. I believe that we must act now to help our 
seniors. Medicare reform is certainly needed, but it is likely several 
years down the road. Any benefit designed today will give us invaluable 
experience and expertise in any reform model. I am pleased we are here 
today, and I await the testimony from the panel in hopes that it will 
set the stage to move ahead with a Medicare prescription drug benefit 
that will assist our seniors in meeting their health care needs.

    Mr. Bilirakis. I appreciate that.
    The longtime chairman of this subcommittee, a very active 
chairman in those days, Mr. Waxman for an opening statement.
    Mr. Waxman. Thank you very much, Mr. Chairman. I plan to be 
active these days as well.
    I am pleased that the very first hearing that you have 
called of this subcommittee is on the question of the need for 
prescription drug coverage. I think the large majority of this 
committee and indeed of this Congress recognize that we cannot 
fail to enact legislation that will provide seniors and 
disabled persons with the coverage they desperately need. We 
are going to hear some interesting testimony today.
    We will hear again that seniors as a group are most 
dependent on prescription drugs because they are older and 
sicker than the population as a whole. We are going to hear 
again that many seniors lack coverage, and even those who are 
covered are finding that their coverage is eroding, whether it 
is retiree coverage provided by their employers, Medigap 
coverage which is increasingly unaffordable, or coverage 
through Medicare Choice plans. We will hear again that seniors 
without coverage end up paying the highest prices for their 
drugs, simply because they do not have the advantage of group 
purchasing power. But even buying at discounted rates continues 
to be costly and beyond the means of many seniors.
    Finally, we will hear again that although Medicaid makes a 
significant contribution in terms of drug coverage for the 
poor, and supplementary State-run programs to provide drugs 
have been tried to extend that coverage to higher-income 
seniors, generally those programs geared just to lower-income 
people have had only very limited success in even reaching 
their target population. We will hear again what we all know: 
All seniors and disabled beneficiaries need a drug benefit, and 
they need it to be an assured benefit, a defined benefit, and 
an accessible and affordable benefit.
    This isn't only a problem for low income, it isn't just a 
problem for people in some areas of the country, it isn't a 
problem that will solve itself if we do not take action. Every 
day we delay makes the problem worse. This is the reform of 
Medicare that we all know we must make, and we need to do it 
now.
    I want to congratulate you, Mr. Chairman, for holding this 
hearing, the very first of our subcommittee, in putting this 
issue right there on our agenda.
    I yield back the balance of my time.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Barrett for an opening statement.
    Mr. Barrett. Thank you, Mr. Chairman.
    I want to join with my colleagues on this side of the aisle 
to thank you for holding this hearing. I think you are showing 
real leadership on this issue, and I appreciate that very much. 
I think leadership is something that is desperately needed on 
this issue, because I believe that President Bush's plan falls 
woefully short of what is needed for seniors in this country.
    To suggest that seniors who make over $12,000 or couples 
over $15,000 are too well off to receive any type of assistance 
I think really is an insult to the millions of senior Americans 
who are struggling to get by, primarily on their Social 
Security checks, and are seeing double-digit inflation as they 
pay for the products that they need most desperately in their 
lives.
    I also think, as I think probably every member of this 
panel recognizes, that this is a real world issue. I have held 
many, many town hall meetings on this issue, and this is the 
one issue where people truly are affected and really are crying 
out for action at the Federal level. I think it is our 
obligation to respond.
    I am concerned, and I have to voice my concerns, although I 
am strongly in favor of adding a Medicare benefit for pharmacy 
products, I think we still have to deal with the market 
distortions, because I believe with the marketing structure and 
the pricing structure here in the United States, we are, in 
effect, subsidizing seniors throughout the world and others who 
use pharmaceutical products throughout the world because of the 
pricing structures that take place in other countries.
    So if we were merely to transfer the cost of prescription 
drugs from seniors to taxpayers, we would not be dealing with 
that market problem, and taxpayers don't want us to be taken 
for a ride either. So I think, again, we have to, as Mr. Stupak 
was saying, be more aggressive in finding market ways to deal 
with this problem.
    Finally, one of the problems that I have encountered in my 
town hall meetings throughout my neck of the woods in 
Wisconsin, there are currently programs that the pharmaceutical 
companies offer that will allow individuals with very low 
incomes to get some sort of pricing relief. The problem is that 
the companies for whatever reason have not come together to 
develop a common procedure to get this type of relief. In other 
words, if you have a senior who goes into a physician and needs 
three or four different products, and those products come from 
different manufacturers, there is paperwork, and sometimes 
significant paperwork, that will go along with getting that 
free or discounted rate from each of those pharmaceutical 
companies. I think if there are antitrust problems developing, 
as we have been told, I think that this committee should at a 
minimum do something quite quickly to come up with a common 
forum so that seniors who need these products right now can get 
them without having to spend hours filling out paperwork.
    Mr. Bilirakis. The gentleman's time has expired. Please 
finish up, Tom.
    Mr. Barrett. That's it.
    Again, thank you for holding the hearing.
    Mr. Bilirakis. Thank you, sir.
    Mr. Strickland, to close the opening statements, I trust.
    Mr. Strickland. Thank you, Mr. Chairman. I think all of us 
appreciate your personal concern about this important issue.
    As many of you know, I represent a rural area. The great 
majority of my Medicare beneficiaries have never had an 
opportunity to get drug coverage through a Medicare+Choice HMO, 
because my area is terribly unattractive to HMOs. A small 
minority of my constituents did sign up for an HMO that served 
the most populous section of my district, but many of them have 
been dropped by that HMO during the last 2 years.
    Precious few of my constituents have incomes high enough to 
afford coverage through a Medigap policy. A slightly greater 
percentage depend on a retiree health plan. Based on my 
countless conversations with seniors in my district, I know 
that there are very large numbers of seniors who lack any drug 
coverage at all, and the lack of an affordable and meaningful 
prescription drug benefit is the most serious issue facing 
seniors in my district.
    Every day that we delay action on this issue, we deny 
lifesaving medications to our constituents. For us it is very 
difficult to imagine the pain of having to choose between 
taking the medicine we need and paying our rent or buying 
groceries, and I doubt that any of us on this panel have ever 
had to make such a decision. However, that is what some of our 
constituents are doing every day, and while we wait, they face 
these circumstances.
    I believe this circumstance is intolerable. Seniors are 
most likely to have chronic illnesses. They are most likely to 
need multiple prescriptions. They are among the group least 
likely to have adequate prescription drug coverage. They are 
the group most likely to be on fixed incomes, and they are the 
group that is paying the highest price for prescription drugs 
in this country. This is a moral issue. It will define whether 
or not we are a moral people.
    I am encouraged to read in The New York Times comments by 
Senator Grassley, and this gives me courage, because it appears 
that if they do the right thing on the Senate side and we do 
the right thing on this side, something good can happen. 
Senator Grassley is quoted as saying, I plan to work with 
Finance Committee members on both sides of the aisle and with 
our President to get something done before August. And then, 
drug benefits should be part of Medicare, not a freestanding 
supplement, and should be available and affordable to every 
older American, and I would hope that Senator Grassley's advice 
would be taken to heart by all of us as we proceed to deal with 
this difficult issue.
    Thank you, Mr. Chairman, and I yield back my time.
    Mr. Bilirakis. I thank the gentleman.
    [Additional statement submitted for the record follows:]

  Prepared Statement of Hon. Lois Capps, a Representative in Congress 
                      from the State of California

    Mr. Chairman, I would like to thank you for holding this hearing on 
one of the most pressing healthcare issues facing our country today, 
prescription drug coverage.
    When Medicare was created in 1965, seniors were more likely to 
undergo surgery for major health problems than to use prescription 
drugs. Today, prescription drugs are often the preferred, and sometimes 
the only, method of treatment for many illnesses and diseases.
    In fact, 77% of all seniors take a prescription drug on a regular 
basis. And yet, nearly 15 million Medicare beneficiaries have no 
insurance coverage for prescription drugs whatsoever.
    Most of us here today would agree that Medicare's most glaring 
problem is the lack of drug coverage.
    Clearly, no one would design a health insurance program for seniors 
today that doesn't include a drug benefit. I don't think anyone here 
would voluntarily choose a plan for their family that doesn't provide 
such coverage. And Medigap policies designed to fill this need are 
often expensive and inadequate.
    We hear again and again about seniors on modest, fixed incomes 
choosing between food on the table and life saving medication. At this 
time of prosperity and strength, we really can and should do better 
than that for older Americans.
    And this problem is getting worse. According to Families USA, the 
price of prescription drugs most often used by seniors has risen at 
DOUBLE the rate of inflation for six years in a row.
    I have been working on this issue for more than two years, and I 
have been frustrated by the lack of progress. As we fall to develop 
effective solutions the problem continues. Congress can no longer stand 
idly by.
    As Congress considers different plans to tackle this problem, I 
believe that any worthy proposal would provide certain key components.
    A strong plan should be universal, voluntary, affordable, 
accessible to all, and based on competition. It must also address the 
issue of catastrophic coverage.
    In the last Congress, many worthy legislative proposals were 
raised. There was the Allen bill, the Stark/Dingell bill, and the 
Pallone bill. Among others, I myself cosponsored H.R. 4607, the 
Medicare Prescription Drug Act of 2000 introduced by my colleague and 
good friend Representative Anna Eshoo.
    The Eshoo bill creates a new voluntary ``Part D'' prescription drug 
benefit in Medicare that is optional and available to all 
beneficiaries, regardless of income.
    It included a defined stop-loss benefit to prevent any individual 
beneficiary from being bankrupted by a single catastrophic event that 
causes unusually high drug costs. And it used proven market-based 
approaches to promote competition and drive down prices. OPM (Office of 
Personnel Management) would administer the plan in coordination with 
HCFA. I hope she will introduce this bill again in this Congress.
    Mr. Chairman, Democrats have offered many different approaches to 
this problem, but have not seen a legitimate proposal from the other 
side. It would be my hope that we could work together, in a bipartisan 
fashion as we craft the best benefit possible for older Americans.
    As I think about the countless seniors on the Central Coast of 
California that have shared their personal stories with me about 
crushingly high drug prices, I know in my heart that prescription drug 
coverage is not a political issue. It is simply the right thing to do, 
as we seek to honor our seniors and care for them as they move into the 
later phases of life.
    I thank the Chairman for holding this hearing. I hope we can move 
legislation as soon as possible on this most pressing issue for our 
country.

    Mr. Bilirakis. Let us go right into the panel now. I would 
like to introduce the panel.
    Mrs. Sylvia Kessler from Tamarac, Florida, is here on 
behalf of the National Committee to Preserve Social Security 
and Medicare; Mr. John Jones, the Vice President of Legal and 
Regulatory Affairs of PacifiCare Health Systems; Mr. Robert 
Moroni, Assistant Director, Health Care Plans, General Motors 
Corporation; Diane Rowland, Kaiser Family Foundation; Bill 
Weller, Assistant Vice President and Chief Actuary, Health 
Insurance Association of America; Barbara Buckley, 
Assemblywoman from the State of Nevada; and James F. Smith, 
Senior Vice President of Health Care Services, CVS Corporation, 
and he is here on behalf of the National Association of Chain 
Drug Stores.
    Ladies and gentlemen, I will turn the clock on for 5 
minutes. If you are certainly in the middle of something, I am 
not going to stop you, but hopefully you would try to stay 
within that. Your written statements are a part of the record, 
as you may know, so hopefully you will complement or supplement 
those written statements.
    We will kick it off with Mrs. Kessler. Welcome, ma'am.

    STATEMENTS OF SYLVIA KESSLER, ON BEHALF OF THE NATIONAL 
COMMITTEE TO PRESERVE SOCIAL SECURITY AND MEDICARE; JOHN JONES, 
VICE PRESIDENT, LEGAL AND REGULATORY AFFAIRS, PACIFICARE HEALTH 
  SYSTEMS; ROBERT D. MORONI, ASSISTANT DIRECTOR, HEALTH CARE 
PLANS, GENERAL MOTORS CORPORATION; DIANE ROWLAND, KAISER FAMILY 
FOUNDATION; WILLIAM WELLER, ASSISTANT VICE PRESIDENT AND CHIEF 
 ACTUARY, HEALTH INSURANCE ASSOCIATION OF AMERICA; BARBARA E. 
 BUCKLEY, ASSEMBLYWOMAN, STATE OF NEVADA; AND JAMES F. SMITH, 
 SENIOR VICE PRESIDENT, HEALTH CARE SERVICES, CVS CORPORATION, 
     ON BEHALF OF NATIONAL ASSOCIATION OF CHAIN DRUG STORES

    Mrs. Kessler. Good morning, Mr. Chairman and the 
distinguished members of the committee. My name is Sylvia 
Kessler, and I am a resident of Tamarac, Florida, and a member 
of the National Committee to Preserve Social Security and 
Medicare. I am here today to share my personal story with you. 
My hope is that you will understand how important my daily 
prescription drugs are to my health, and what a prescription 
drug plan under Medicare would mean to someone like me.
    I am an 81-year-old grandmother. I have worked very hard 
for my entire life to make sure that I would not be a burden to 
my children as I get older. The reason that I am not a burden 
to them is because of the Medicare program, which is there to 
take care of me when I get sick or have emergencies. For 
example, I recently demolished my only car in a bad accident 
and suffered several bruises and minor injuries. Thank God, 
with all of the cost involved in the accident, Medicare paid 
for the emergency care that I needed. Without Medicare, there 
would have been real problems. There is no way that I could 
have afforded the costs of treatment on my own.
    I believe that a large part of my health is due to the 
prescription drugs that I take every day. I take nine pills 
every day for a variety of conditions, including heart disease 
and high cholesterol. These drugs have allowed me to remain 
active and to contribute to my community and share in the lives 
much my children and grandchildren.
    However, it has become more and more difficult each month 
to afford them. My prescription drugs cost almost $2,300 a 
year, which is over 10 percent of my annual income. The only 
way that I can make ends meet is to work two part-time jobs, 
one at a local flea market and the other for my local board of 
elections. Without these two part-time jobs and some financial 
help from my children, thank God, I would have to choose 
between food and my medications, and I don't think I could make 
it without either of them for very long. I worry about what 
will happen when I can no longer work.
    So now what are my options? Well, I have tried Medicare 
managed care for a while, but I could not get the specialty 
care that I needed. I now pay for a Medigap plan that pays for 
some of my medical expenses, but it does not cover my 
prescription drugs. Now, I know that some Medigap plans offer 
prescription drug coverage, but I can't afford that type of 
coverage.
    There just aren't a lot of options for people like me. My 
daughter, who is a nurse practitioner, she made me get off HMO 
and hopes to open up a clinic in the hills of Georgia and 
Tennessee for poor people who do not even know about Medicare 
and Medicaid prescriptions. They don't know anything about it.
    Please don't think that I am asking for a handout. I have 
been a hard-working American for my entire life, and now I am 
in need of a little help. I am asking you, Mr. Chairman, and 
everybody here today to please do everything that you can to 
make sure that seniors can have access to their prescription 
drugs so that they can have healthy lives and continue to work. 
I hope that you and all of our elected officials from both 
parties can work together to provide access to prescription 
drugs for all seniors. I know it is the right thing to do. 
Thank you for your time.
    Mr. Bilirakis. Thank you very much for your time, Mrs. 
Kessler.
    Mrs. Kessler. Thank you for having me.
    [The prepared statement of Sylvia Kessler follows:]

                  Prepared Statement of Sylvia Kessler

    Good Morning, Chairman Bilirakis and distinguished Members of the 
Committee.
    My name is Sylvia Kessler and I am a resident of Tamarac, Florida 
and a member of the National Committee to Preserve Social Security and 
Medicare. I'm here today to share my personal story with you. My hope 
is that you will understand how important my daily prescription drugs 
are to my health . . . and what a prescription drug plan under Medicare 
would mean to someone like me.
    I am an 81-year-old grandmother. I have worked very hard for my 
entire life to make sure that I would not be a burden to my children as 
I get older. The reason that I am not a burden to them is because of 
the Medicare program, which is there to take care of me when I get sick 
or have emergencies. For example, I recently demolished my only car in 
a bad accident and suffered several bruises and minor injuries. Thank 
God, with all of the cost involved in the accident, Medicare paid for 
the emergency care that I needed. Without Medicare, there is no way 
that I could have afforded the costs of treatment on my own.
    I believe that a large part of my health is due to the prescription 
drugs that I take every day. I take 9 pills every day for a variety of 
conditions, including heart disease and high cholesterol. These drugs 
have allowed me to remain active, contribute to my community, and share 
in the lives of my children and grandchildren.
    However, it has become more and more difficult each month to afford 
them. My prescription drugs cost almost $2,300 a year--which is over 10 
percent of my annual income. The only way that I can make ends meet is 
to work two part-time jobs--one in a local flea market and the other 
for my local Board of Elections. Without these two part-time jobs and 
some financial help from my children, I would have to choose between 
food and my medications. And I don't think I could make it without 
either of them for very long. And I worry about what will happen when I 
can no longer work.
    So what are my options? Well, I have tried Medicare managed care 
for a while, but I could not get the specialty care that I needed. I 
now pay for a Medigap plan that pays for some of my medical expenses, 
but it does not cover any prescription drugs. Now I know that some 
Medigap plans offer prescription drug coverage, but I can't afford that 
type of coverage. There just aren't a lot of options for people like 
me.
    Please don't think that I am asking for a handout. I have been a 
hard working American for my entire life and now I am in need of a 
little help. I am asking you, Mr. Chairman, and everybody here today to 
please do everything that you can to make sure that seniors can have 
access to their prescription drugs so that they can have healthy lives. 
I hope that you and all of our elected officials from both parties can 
work together to provide access to prescription drugs for all seniors. 
I know it is the right thing to do. Thank you for your time.

    Mr. Bilirakis. Mr. Jones.

                     STATEMENT OF JOHN JONES

    Mr. Jones. Mr. Chairman and members of the subcommittee, 
thank you very much for the opportunity to comment on issues 
related to providing prescription drug coverage for Medicare 
beneficiaries.
    I am John Jones, Vice President of Legal and Regulatory for 
Prescription Solutions. I am a pharmacist, and I have been in 
practice for 25 years.
    Prescription Solutions is a pharmacy benefit management 
company. It was founded in 1993 as a subsidiary of PacifiCare 
Health Care Systems. We serve more than 5 million individuals, 
including members of managed care organizations and union 
trusts, as well as retirees, third-party administrators, and 
employer groups. We fill over 2 million prescriptions per month 
for our Medicare beneficiaries. Our goal is to provide the 
highest quality drug coverage in a cost-effective manner.
    Our parent company, PacifiCare, is one of the Nation's 
largest health care services companies. Primary operations 
include managed products for employer groups and Medicare 
beneficiaries in eight States and Guam, serving approximately 4 
million members. One million of these members are in our 
Medicare health plan, Secure Horizons.
    Prescription coverage is one of the main reasons 
beneficiaries support the Medicare+Choice program. We believe 
that the success of a pharmacy benefit program rests on many 
methods to provide quality and safety, along with cost 
management.
    Now, let me tell you a few of the tools that we use. We 
employ a quality improvement program. This is an integrated 
approach to prevention or management of specific diseases that 
involves physicians, pharmacists and patients. These programs 
often encourage the use of medication and can increase the 
initial cost of care, but will decrease the cost of overall 
health care in the long term.
    Our beta blocker effort is an example of such a program. 
National guidelines identify the importance of beta blockers in 
reducing the risk of a second heart attack.
    Our program has succeeded in getting 85 to 90 percent of 
patients on beta blockers who need to be on them. The national 
average per use of beta blockers is only about 70 percent.
    We use a strong clinically based formulary. The drug 
formulary, of course, is a list of drugs that have been 
reviewed for safety and efficacy. The list is maintained by our 
pharmacy and therapeutics committee, which is comprised of 
physicians who use the formulary to treat their own patients. 
Nonformulary drugs may be prescribed and covered, but they do 
require preauthorization. However, preauthorizations represent 
only 1 percent of the total paid prescriptions for Prescription 
Solutions.
    Another tool is our on-line computer review. These reviews 
are made to identify inappropriate prescribing and dispensing 
of prescription drugs.
    Provider education is also important. We regularly educate 
physicians and pharmacists within the network to provide up-to-
date information on formulary changes and significant clinical 
developments in the pharmaceutical area. Keeping all providers 
well informed helps ensure positive outcomes for our members.
    Prescription Solutions achieves its most significant 
savings from effective contract negotiations with 
manufacturers. Aggressive contracting for classes of 
medications that have several me-too-type drugs results in 
substantial discounts to the health plan. Pharmaceutical 
manufacturers are willing to discount drugs if the drug benefit 
design and formulary management results in a larger market 
share and increased sales.
    Our mail service pharmacy is another key cost control and 
quality component. The fully automated pharmacy has highly 
trained pharmacists who oversee the system's multiple quality 
checks to identify and prevent errors. We employ a generic 
sampling program to encourage the use of generic drugs which 
offer exceptional value and are considered first-line therapy 
for a variety of diseases. With our program we supply the 
physician with samples of widely used and well-tested generic 
medications that effectively treat many diseases. The physician 
provides the patient with a prescription for the generic 
medication, along with the samples.
    Finally, our real-time audit program is connected to our 
claims system. We have developed proprietary software which 
incorporates filters to identify those claims that fall outside 
of normal pharmacy practice. These claims pop up on our audit 
team's computers for immediate action.Taking immediate action 
allows us to follow through on claims flagged as possible 
errors and stop payment on those that are indeed erroneous so 
we don't pay them at all.
    In conclusion, the tools I have described to you are just a 
few that are responsible for the success of our pharmacy 
benefit program. They are critical to making a quality Medicare 
drug benefit affordable.
    Thank you, and I would be happy to answer any questions.
    [The prepared statement of John Jones follows:]

        Prepared Statement of John Jones, Prescription Solutions

                              INTRODUCTION

    Mr. Chairman and members of the subcommittee, thank you very much 
for the opportunity to comment on issues related to providing 
prescription drug coverage for Medicare beneficiaries. I am John Jones, 
Vice President of Legal and Regulatory for Prescription Solutions, 
based in Costa Mesa, California.

                               BACKGROUND

    Prescription Solutions, a pharmacy benefits management (PBM) 
company, was founded in 1993 as a subsidiary of PacifiCare Health 
Systems, Inc. (PHS). As one of the leading managed care PBMs in the 
U.S., Prescription Solutions serves more than five million individuals, 
including members of managed care organizations and union trusts, as 
well as retirees, third-party administrators, and employer groups. Our 
goal is to provide the highest quality drug coverage in a cost-
effective manner. Access and affordability are the cornerstones of 
everything we do. Our company manages over $2 billion of prescription 
drugs annually. With the opening of our newest mail-service facility in 
Carlsbad, California, we anticipate our annual prescription fulfillment 
volume to increase from 17,000 to approximately 45,000 prescriptions a 
day.
    Our parent company, PHS, is one of the nation's largest health care 
services companies. Primary operations include managed products for 
employer groups and Medicare beneficiaries in eight states and Guam 
serving approximately 4 million members. One million of these members 
are in our Medicare health plan, Secure Horizons. PHS and Prescription 
Solutions strive to provide a high quality, cost-effective pharmacy 
benefit for our commercial members and Medicare beneficiaries. 
(Attachment A outlines the structure of our Medicare+Choice drug 
benefit in eleven of the markets we serve.)
    Prescription benefits have been documented as one of the main 
reasons Medicare+Choice is so positive for eligible beneficiaries. We 
believe that the success of a pharmacy benefit program rests on a 
multitude of business functions. Today, I would like to focus on areas 
that we believe are the most important factors in providing a pharmacy 
benefit: quality and safety, and cost management.

                            QUALITY & SAFETY

    Our processes for quality and safety encompass several elements: an 
overarching quality assurance program, formulary development, and 
various other techniques such as on-line computer review, and provider 
education.
    Quality Initiative (QI) improvement programs are an integral part 
of an effective strategy for a PBM. The QI program is an integrated 
approach to prevention or management of specific diseases that involves 
physicians, pharmacists, and patients. We improve quality of care and 
quality of life, and at the same time reduce medical and pharmacy 
costs. These programs often encourage the use of medication and can 
sometimes increase the initial cost of care, but will decrease cost of 
overall health care over the long term. Two recent programs have shown 
that QI programs are making a difference. The use of beta-blockers 
after a first heart attack is strongly supported by research to prevent 
a second heart attack. National guidelines are in place that recognize 
the need for these medications. Our program has demonstrated an 85-90% 
compliance with this standard. The national average for the use of beta 
blockers is only about 70%. Another Prescription Solutions program 
designed to encourage the use of ACE inhibitors for patients with 
congestive heart failure has shown equal success. We are able to exceed 
the national compliance rate by identifying patients with these 
conditions and communicate with their personal physicians on the use of 
the most efficacious drugs.
    Prescription Solutions' commitment to quality also is evidenced by 
voluntary compliance with standards set forth by the National Committee 
on Quality Assurance (NCQA) and with Health Plan Employer Data and 
Information Set (HEDIS). Currently, PBM's are not required to comply 
with either NCQA or HEDIS standards. However, at Prescription 
Solutions, we adhere to the standards and criteria to measure quality.
    The use of formularies is one of our quality enhancement tools. By 
our definition, a drug formulary or preferred drug list is a 
compilation of drugs that have been reviewed for safety and efficacy. 
Contrary to the popular belief that formularies exist simply to control 
costs of an individual drug, there are many aspects to proper 
administration of a formulary that have more to do with quality and 
clinical effectiveness.
    For example, in a recent case, a request for a non-formulary 
antibiotic medication, Vancomycin oral, was received in the prior 
authorization department. The physician had prescribed this drug for a 
serious knee infection. Due to the way this oral medication works, it 
could not get into the blood stream in a high enough concentration to 
effectively treat the infection. Subsequently, our systems identified 
this as a care issue, and we contacted the doctor to change the 
medication to an intravenous form. Notwithstanding the fact that the 
intravenous drug was significantly more costly than the oral 
medication, the latter would have had no benefit and potentially could 
lead to a more serious problem, including the need for surgery.
    Often times, formularies are misunderstood. Requests for non-
formulary drugs only represent one percent of total claims. Even then, 
Prescription Solutions employs prior authorization to determine 
approvals. In fact, of the one percent of requests for non-formulary 
drugs, 75 percent are approved.
    With the recent advent of direct-to-consumer (DTC) advertising, 
demand for ``newer and better'' medications has dramatically increased 
the demand for drugs new to the market. In many cases, the physicians 
reviewing these products for our formulary have found that they are not 
always better than existing treatments.
    Physicians are often approached by patients with specific requests 
for medications they have seen on TV or in print media. The patient may 
indeed have a legitimate need for a medication to treat an illness, but 
it is often preferable to use drugs that have a proven track record 
with regard to safety and effectiveness. In order to keep a patient 
happy, many physicians have reported that they are likely to prescribe 
a requested drug, unless they believe that the drug may cause harm. In 
many cases, the new drug is not significantly better than existing 
products that can be purchased at a fraction of the cost. For example, 
Celebrex is widely promoted for arthritis at a retail price of about 
$75 per month vs. generic ibuprofen or naproxen at about $10 per month. 
In clinical studies, these drugs have shown equivalent response in the 
patients tested.
    Another quality control we use at Prescription Solutions is on-line 
computer review, known as ``edits,'' to identify inappropriate 
prescribing or dispensing of prescription drugs. In many cases, on-line 
edits identify potential inappropriate drug interactions or possible 
dosing discrepancies. For reasons that can vary, physicians sometimes 
prescribe medications in a manner that varies from prescribing 
guidelines. For example, there are many drugs that are manufactured to 
be taken only once a day. However, if a physician orders a twice-a-day 
dose, our edits will notify the pharmacy of the correct dosage.
    Frequent communication to physicians and pharmacists within the 
network provides up-to-date information on formulary changes and any 
significant clinical developments in the pharmaceutical arena. Warnings 
on new drugs, as well as drug recalls, are communicated on a regular 
basis. Keeping all providers well-informed helps ensure positive health 
outcomes for our members.

                   PRESCRIPTION DRUG COST MANAGEMENT

    The key elements to prescription drug cost management are: 
formularies, provider contracts, mail services, generic and over-the-
counter drug promotions, and audits.
    In addition to the quality controls referred to earlier, drug 
formularies are valuable tools to control costs. In today's 
environment, formularies have proven to be necessary to maintain 
affordable pharmacy benefits. On the cost management side, a formulary 
is designed to leverage the collective buying power of large member 
organizations. The list is maintained by the Pharmacy and Therapeutics 
(P&T) Committee, comprised mostly of practicing physicians, along with 
medical directors from the health plans. Decisions are made based upon 
the clinical expertise and experience of the physicians on the 
committee. This list is the basis for our pharmacy benefit and is made 
available to our members.
    Most formularies have 1000 to 2000 medications available. The P&T 
Committee meets every two months to decide to add or replace 
medications on the list. The majority of AIDS and cancer medications 
are automatically added without restriction of use. New drugs are 
reviewed as requested by network physicians. Unique, breakthrough drugs 
tend to get higher priority review.
    Prescription Solutions contracts with over 50,000 pharmacies 
nationwide. Although we provide fairly broad pharmacy access to our 
members, we command competitive discounts in each region where we have 
significant membership. However, we achieve the most significant 
savings from effective contract negotiating with manufacturers.
    Strategic purchasing has contributed to lower drug costs and a drug 
benefit that is affordable. Aggressive contracting for classes of 
medications that have several ``me-too'' type drugs results in 
substantial discounts to the health plan. Pharmaceutical manufacturers 
are willing to discount drugs if the drug benefit design and formulary 
management results in a larger market share and increased sales. Deep 
discounts by the manufacturers are available only to those PBMs that 
demonstrate a value to the manufacturers in achieving those goals.
    The Prescription Solutions mail service pharmacy is another key 
cost control component. The fully automated pharmacy is staffed with 
highly trained pharmacy personnel who oversee the systems' multiple 
checks to identify and prevent errors. Patients can order medications 
24 hours a day, either by phone or on-line. With mail-service, members 
have the convenience of pharmacy refills delivered to their door, 
eliminating trips to the pharmacy and waits for their prescriptions. 
Our members also save money when using mail-service by paying lower co-
payments. Additionally, where appropriate, our mail service pharmacists 
work with the patient's physician to determine if one of the plans' 
formulary drugs can be used if equivalent to the member's non-formulary 
drug. These services are especially important to our Medicare 
enrollees.
    Pharmacists and technical personnel provide personal, high quality 
services in a high tech/interactive environment. Automation allows for 
a high degree of accuracy and efficiency. However, automation is not 
successful in the absence of direct member communication. Patients are 
provided with detailed, personalized instruction about their 
medication, along with a toll-free number to a Prescriptions Solutions 
pharmacist for a personal consultation. This service provides members a 
convenient and easy way to refill their prescriptions. We field up to 
12,000 calls per day on our toll-free personal assistance line to help 
our members with their prescriptions.
    This toll-free service is used by 25 percent of our Secure Horizons 
(Medicare) members. Seventy-five percent of all prescriptions filled by 
our mail service are for our Medicare members. Members that use the 
mail service pharmacy have stated that they are pleased with the 
convenience and cost-savings. Members receive a 90-day supply of 
medications for the price of a 60-day supply. The average Medicare 
member uses on average two prescriptions per month; by using mail 
service, they will save about eight copays per year and depending upon 
the market, approximately $70-100.
    Generic drugs also offer exceptional benefits and are often 
considered first line therapy for a variety of diseases. Prescription 
Solutions employs a generic sampling program to encourage the use of 
these high value drugs as a balance to traditional sampling programs. 
Currently, pharmaceutical companies give providers free samples of new, 
branded drug products that the pharmaceutical companies are anxious to 
promote. In many cases, these drugs offer little or no advantage over 
current tried and true medications. When samples of new drugs are 
available, physicians are often tempted to grab a starter package for a 
patient to try, instead of writing a prescription for a generic 
medication. With our program, we will supply the physician with starter 
supplies of widely-used and well-tested generic medications that 
provide an appropriate starting point for many diseases.
    Other generic or over-the-counter programs, such as our migraine 
management program, encourage the use of non-prescription drugs for 
migraine. Studies have shown that some non-prescription products are 
just as effective as their expensive prescription counterparts for the 
majority of people who use them. Promotion of programs like these helps 
control the spiraling cost of pharmaceuticals without sacrificing 
quality of care.
    Fighting fraud is an ongoing battle. Each year, billions of dollars 
are wasted for fraudulent prescription claims. Roughly, three percent 
of all pharmacy claims are fraudulent. At Prescription Solutions, an 
organized effort to combat fraud began two years ago and recently 
resulted in the arrest of a pharmacist in California that may have been 
involved in over $1 million of fraudulent claims. In order to stop 
fraud, real time audits are necessary. Occasionally, incorrect claims 
are simply mistakes, but many times, these are deliberate attempts to 
defraud the system. Real time audits allow us to stop payment on 
erroneous claims.
    Our ``real time'' audit program is connected to our claims system. 
Prescription Solutions has developed proprietary software, which 
incorporates filters to identify those claims that fall outside of 
normal pharmacy practice. These claims pop up on our audit teams' 
screens for immediate action. This does not hold up the payment process 
for normal claims that pass through the system. Taking immediate action 
allows us to follow-through on claims flagged as possible errors and 
stop payment on those that are indeed erroneous.

                                SUMMARY

    In conclusion, our success at managing pharmacy costs is due to an 
integrated approach. (This approach is illustrated in Attachment B.) We 
target pharmaceutical companies, physicians, members, prescription plan 
design and retail pharmacies. We are able to effectively forecast the 
cost of providing pharmacy benefits based on our experience. When 
necessary, benefits are flexed in response to market issues. Our strong 
clinical foundation means we emphasize appropriate drug utilization, 
which drives cost-effective care. This unique combination of clinical 
expertise and health plan experience is what qualifies us to 
effectively influence pharmacy costs over the long-term. Our primary 
goal is to keep pharmacy benefits accessible and affordable for all 
Americans well into the 21st century. We look forward to working with 
Congress and the Administration in the design and implementation of a 
drug benefit for all Medicare beneficiaries.

                              Attachment A

                 Secure Horizons (Medicare+Choice Plan)
                       2001 Drug Benefit Examples
------------------------------------------------------------------------
                 Location                     Secure Horizons Coverage
------------------------------------------------------------------------
Dallas, Texas.............................  $5 copay per generic drug
                                             and $25 copay per brand
                                             name drug. Coverage of
                                             generic and brand name
                                             drugs is subject to a
                                             combined annual limit of
                                             $1000. Formulary applies.
                                             Mail order available for
                                             $15 generic and $50 brand.
                                             Annual limit applies.
Denver, Colorado..........................  $11 copay per generic drug,
                                             $30 per brand name drug,
                                             $60 per generic or brand
                                             non-formulary drug.
                                             Coverage of generic drugs
                                             is unlimited. Coverage of
                                             formulary brand and non-
                                             formulary/generic drugs is
                                             subject to an annual limit
                                             of $1300.
Houston, Texas............................  $5 copay per generic drug
                                             and $20 copay per brand
                                             name drug. Coverage of
                                             generic and brand name
                                             drugs is subject to a
                                             combined annual limit of
                                             $1200. Formulary applies.
                                             Mail order available for
                                             $15 generic and $50 brand.
                                             Annual limit applies.
King County, Washington...................  No supplemental drugs
                                             coverage.
Las Vegas, Nevada.........................  $7 copay per generic drug
                                             and $15 copay per brand
                                             name drug. Coverage of
                                             generic drugs is unlimited.
                                             Coverage of brand name
                                             drugs is subject to an
                                             annual limit of $1500.
                                             Formulary applies. Mail
                                             order available $14 generic
                                             and $30 brand. Annual limit
                                             applies.
Los Angeles, California...................  $7 copay per generic drug
                                             and $14 copay per brand
                                             name drug. Coverage of
                                             generic drugs is unlimited.
                                             Coverage of brand name
                                             drugs is subject to an
                                             annual limit of $2000 per
                                             year. Formulary applies.
                                             Mail order available for
                                             $14 generic and $30 brand.
                                             Annual limit applies.
Oklahoma City, Oklahoma...................  $10 per generic drug and $25
                                             copay per brand name drug.
                                             Coverage of generic and
                                             brand name drugs is subject
                                             to an annual limit of
                                             $1000. Formulary applies.
                                             Mail order available $20
                                             generic and $50 brand.
                                             Annual limit applies.
Orange County, California.................  $7 copay per generic drug
                                             and $14 copay per brand
                                             name drug. Coverage of
                                             generic and brand name
                                             drugs is subject to a
                                             combined annual limit of
                                             $2000 per year. Formulary
                                             applies. Mail order
                                             available for $20 generic
                                             and $40 brand. Annual limit
                                             applies.
Portland, Oregon..........................  No supplemental drugs
                                             coverage.
San Diego, California.....................  $7 copay per generic drug
                                             and $14 copay per brand
                                             name drug. Coverage of
                                             generic and brand name
                                             drugs is subject to a
                                             combined annual limit of
                                             $2000 per year. Formulary
                                             applies. Mail order
                                             available for $20 generic
                                             and $40 brand. Annual limit
                                             applies.
San Francisco, California.................  $8 copay per generic drug
                                             and $16 copay per brand
                                             name drug. Coverage of
                                             generic and brand name
                                             drugs is subject to a
                                             combined annual limit of
                                             $1200 per year. Formulary
                                             applies. Mail order
                                             available for $30 generic
                                             and $60 brand. Annual limit
                                             applies.
------------------------------------------------------------------------

                                             [GRAPHIC] [TIFF OMITTED] T1491.001
                                             
    Mr. Bilirakis. Thank you, Mr. Jones. And we will have those 
questions.
    Mr. Moroni, please proceed, sir.

                  STATEMENT OF ROBERT D. MORONI

    Mr. Moroni. Good morning. My name is Robert Moroni. I am 
the Assistant Director of Health Care Plans for General Motors.
    Mr. Bilirakis. Pull the mike closer, Mr. Moroni.
    Mr. Moroni. Is that better?
    General Motors is the largest private purchaser of health 
care in the United States, offering enrollees a variety of 
health plan options including self-insured traditional and PPO 
options and insured HMOs. General Motors' health plan covers 
1.2 million salaried and hourly employees, retirees, surviving 
spouses and their families. Of the total enrollment, 75 
percent, which equates to about 900,000 enrollees, are the 
self-insured traditional and PPO options for which General 
Motors pays the prescription drug directly.
    In 2000, GM spent nearly $4 billion to provide health care 
coverage to its total population. Of that amount nearly $900 
million was spent on just our self-insured prescription drug 
coverage. That was a 19 percent increase over our prescription 
drug expense for 1999.
    Approximately $700 million of the $900 million was for 
retirees' surviving spouses and their families. Under our 
current design, retirees' surviving spouses and their 
dependents pay the same copays as their employee counterparts 
even though they account for proportionately more of the 
expense.
    The current design of our prescription drug coverage is 
often referred to as a card program, with enrollees issued ID 
cards that they present to local pharmacies to obtain covered 
prescription drugs. The enrollee pays a copay at the time of 
dispensing, and the balance is billed to General Motors through 
our pharmacy benefit managers, also known as PBMs. GM uses two 
PBMs. We believe these PBMs provide some level of quality 
control and cost containment through a managed network of 
retail pharmacies and a mail order house. They have put a 
number of components in place to encourage medically 
appropriate, cost-effective prescribing and dispensing 
practices.
    Among the tools our PBMs use are programs that encourage 
prescribed drugs that are safe when taken by the elderly; 
encourage the use of formulary medications; profile physicians; 
detect in real time severe drug-to-drug interactions, which are 
not that uncommon when patients see more than one physician; 
provide disease management; optimize dosing; and deliver 
generic substitutions when appropriate.
    Although this is not an exhaustive list, it will give you a 
feel for some important components of a well-managed pharmacy 
program. But even with these comprehensive program components, 
we are extremely concerned about our continuing ability to 
provide our current level of prescription drug coverage. 
Prescription drugs are the most inflationary component of our 
health care costs. Year-to-year increases for the past 3 years 
have averaged more than 19 percent, and future costs are 
projected to increase at even more alarming rates.
    Prescription drugs do not operate according to the 
traditional free market model. Consumerism is limited. Patients 
are inundated by direct-to-consumer advertising, yet they lack 
the full information to make fully informed decisions about the 
risks, benefits and cost of a particular drug. We believe it is 
a challenge for providers, payers and consumers to ensure that 
prescription decisions are clinically appropriate and cost-
effective.
    Other concerns regarding escalating drug costs are--ongoing 
of market exclusivity--pharmaceutical manufacturers' pricing 
practices in the U.S. which produce higher prices than in 
Europe and Japan and other countries in North America.
    Breakthrough drug technology definitely offers the 
potential for increased longevity and functionality. However, 
new and replacement therapies for existing drugs often result 
in cost increases that are out of proportion with the benefits 
to the patient.
    High drug costs have a negative impact on international 
competitiveness of U.S. firms that provide prescription drug 
coverage. It should not come as a surprise that such firms 
would consider implementing increasingly stringent controls or 
discontinuing coverage altogether.
    General Motors supports the addition of a prescription drug 
component to Medicare. We regard this coverage as necessary not 
only for the treatment of illness and injury, but because in 
many cases prescription drugs are the most clinically 
appropriate and cost-effective treatment option. We believe 
Medicare prescription drug benefits should be universal and 
should employ quality control features to ensure that drugs 
being covered are necessary, appropriate and effective. The 
Medicare program should have effective mechanisms that can 
maintain spending at a manageable level. It should have broad-
based equitable financing. And a program with less than 
universal coverage would be unfair to enrollees and employers 
who have paid into Medicare for many years, and providing 
coverage only for those who have no coverage through employers 
would penalize responsible employers who have voluntarily 
provided prescription drug coverage in the past.
    Thank you.
    [The prepared statement of Robert D. Moroni follows:]

Prepared Statement of Robert D. Moroni, Assistant Director, Health Care 
                   Plans, General Motors Corporation

    Good morning. My name is Robert Moroni and I am the Assistant 
Director--Health Care Plans, for General Motors Corporation. In this 
capacity, I oversee the GM self-insured health care plans including 
coverage for prescription drugs. I have been employed by General Motors 
for almost twelve years, the last 6 of which have been in our Health 
Care Activity. My professional background is as a certified public 
accountant. I hold a Masters Degree in Health Services Administration 
from the University of Michigan's School of Public Health.
Background
    By way of background, under our health care programs we offer 
enrollees a variety of health plan options, including self-insured 
``Traditional'' and Preferred Provider Organization options and Health 
Maintenance Organizations (the latter being insured). General Motors' 
health plans cover over 1.2 million salaried and hourly employees, 
retirees, surviving spouses and their families. Of the total 
enrollment, 75% (almost 900,000 enrollees) are in the self-insured 
Traditional and PPO plans, for which GM pays prescription drug expenses 
directly. We require that the HMOs offered to our people provide 
prescription drug coverage, but it varies in detail from HMO to HMO. We 
estimate that our HMO premiums include $300 million in prescription 
drug costs. Since we offer over 130 HMOs nationwide, I think you can 
appreciate why my comments today will be limited to our self-insured 
coverage which, after all, addresses the bulk of our program enrollees.
    In calendar year 2000, GM spent approximately $3.9 billion to 
provide health care coverage for its total population. Of that amount, 
nearly $900 million was for our self-insured prescription drug 
coverage. That was a19% increase over our prescription drug expense for 
1999. Approximately $700 million (or $1,289 per enrollee) of the $900 
million was for retirees, surviving spouses and their families.
    General Motors has been providing prescription drug coverage for 
its retirees, surviving spouses and their families since 1971. As 
noted, this group accounts for the vast majority of our prescription 
drug expense. Under the current design, retirees, surviving spouses and 
their dependents pay the same co-pays as their employee counterparts, 
even though they account for proportionately more of the expense.
Coverage Design
    The current design of our prescription drug coverage is often 
referred to as a ``Card Program'', with enrollees issued ID cards that 
they present at local pharmacies to procure covered prescription drugs. 
The enrollee pays a co-pay at the time of dispensing and the balance is 
billed to GM through our carriers or pharmacy benefit manager (PBM). We 
pay the ingredient costs, dispensing fees and administrative fees. 
There are both retail and mail order options, the latter option being 
of particular benefit to those with long term ``maintenance drug'' 
needs and/or limited access to a local pharmacy.
    There are different co-pays for our hourly and salaried programs. 
Currently, hourly program ``Traditional'' and PPO option enrollees pay 
flat $5 or $3 retail co-pay and enrollees of both options pay a $2 mail 
order co-pay for each prescription or refill. The salaried program co-
pay is 25% of the prescription cost at retail with a $15 minimum and 
$25 maximum. If a generic drug is chosen the retail co-pay is $5. The 
salaried mail-order co-pay is $20 for brand-name drugs and $10 for 
generics. It should be noted that with mail order a 90-day supply is 
available, versus a 34-day supply at retail. We have what I refer to as 
a ``preferred formulary''--actually an open formulary where we do not 
restrict the choice of drug dispensed but we try to influence physician 
prescribing behavior and/or patient selection, as I will describe 
shortly.
    GM uses two PBMs, Merck-Medco and Blue Cross/Blue Shield of 
Michigan. We believe these PBMs provide some level of quality control 
and cost containment through a managed network of retail pharmacies and 
a mail order house. They have put a number of components in place to 
encourage medically-appropriate and cost-effective prescribing and 
dispensing practices. Many of these are ``transparent'' to the enrollee 
and/or voluntary, and operate on a pharmacist-to-physician interaction. 
Among the tools our PBMs use are:

 Partners for Healthy Aging--an enrollee/patient and physician 
        education effort which provides information on issues of 
        pharmaceutical safety and use among the elderly.
 Therapeutic Interchange--contacts with physicians to encourage 
        use of formulary medications
 Physician Profiling and Peer Rating--an expansion on the above 
        which provides feedback on quality and utilization performance.
 Severe Drug-Drug Interaction Edits--on-line, electronic 
        feedback at the time of dispensing that prevents dispensing 
        drugs that could represent life-threatening interactions. This 
        situation often arises when an enrollee is seeing more than one 
        physician and the respective physicians are not aware of all of 
        the drugs the enrollee is taking. When one of these cases 
        arises, the pharmacist contacts the prescribing physician and 
        reviews the facts of the case before dispensing the potentially 
        conflicting medication.
 Digestive Health Solutions--addressing unique concerns of 
        patients with gastro-intestinal disease. It provides 
        educational materials to enrollees and encourages appropriate 
        prescribing practices by physicians.
 Dose Optimization--which simplifies the dosing regiment for 
        patients and capitalizes on cost savings of taking one pill 
        versus two.
 Generic Substitution Component--When an appropriate generic 
        drug is available it is dispensed unless the physician 
        specifies ``dispense as written'' or the enrollee requests the 
        brand drug. If the brand drug is dispensed at the enrollee 
        request, the enrollee pays the difference between the cost of 
        the generic and brand, in addition to the normal co-pay.
    This is not an exhaustive list, but will give you a feel for some 
of what we feel are important components of a well-managed pharmacy 
plan.

Cost Considerations
    I would be remiss if I did not tell you that regardless of the 
efforts discussed above, we are extremely concerned about our 
continuing ability to provide the kind of prescription drug coverage 
that our people have come to expect. Prescription drugs are the most 
inflationary component of our health care costs. Year-to-year increases 
for the last 3 years have averaged more than 19%. Future costs are 
projected to increase at even more alarming rates.
    Prescription drugs do not operate according to the traditional 
free-market model. Consumerism is limited. Patients are inundated by 
direct-to-consumer advertising yet lack the information to make fully-
informed decisions. Other practices that are a concern include 
unwarranted patent extensions and pharmaceutical manufacturers' pricing 
practices in the U.S., compared to their practices in Europe and Japan, 
or even other countries in North America. These factors impose 
unnecessary costs which, in turn, have a negative impact on 
competitiveness of U.S. firms which provide prescription drug coverage. 
It should not come as a surprise that such firms would consider 
implementing increasingly stringent controls, or discontinuation of the 
coverage altogether.

Potential Medicare Coverage of Prescription Drugs
    General Motors supports the addition of a prescription drug 
component to Medicare. We regard the coverage as necessary--not only 
for the treatment of illness and injury but because in many cases 
prescription drugs are the most clinically appropriate and cost-
effective treatment option. We believe Medicare prescription drug 
benefits should be universal so that access is available to all, and 
employ quality assurance features to assure that the drugs being 
covered are necessary, appropriate and effective. The Medicare program 
should have effective program controls or expenditure limits to ensure 
spending is controlled at a manageable level. It should have broad-
based equitable financing. To construct a program with less than 
universal coverage would be unfair to enrollees and employers who paid 
into Medicare for many years. Further, to the extent it might provide 
coverage only for those who have no coverage through employers, it 
would seem to penalize responsible employers who have voluntarily 
provided prescription drug coverage in the past.
Summary
    In closing, I must reiterate that General Motors is very concerned 
about the economics of continuing to provide prescription drug 
coverage. Obviously we hope to continue to provide prescription drug 
coverage for our employees, retirees and their families. It is our hope 
that a fair and equitable Medicare Program will be implemented to help 
seniors bear the cost of prescription drugs. Such a program should not 
put responsible employers, who have provided such coverage to date, at 
a disadvantage.

    Mr. Bilirakis. Thank you, Moroni.
    Ms. Rowland.

                   STATEMENT OF DIANE ROWLAND

    Ms. Rowland. Thank you, Mr. Chairman and members of the 
subcommittee. I am Diane Rowland, Executive Vice President of 
the Henry J. Kaiser Family Foundation and Executive Director of 
the Kaiser Commission on Medicaid and the Uninsured.
    I am pleased to be here at this hearing today to talk about 
the 35 million seniors and 5 million disabled Americans on 
Medicare who are in need of health care coverage, especially 
that of prescription drugs. Outpatient drug therapy has become 
an increasingly effective tool for managing many of the 
conditions faced by this population.
    As Mrs. Kessler has shown you today, these needs are 
substantial. She represents about one-quarter of all Medicare 
beneficiaries who have expenditures in excess of $2,000, but 
live on limited and modest incomes. In fact, 40 percent of all 
Medicare beneficiaries today live on an income of less than 
16,500 for an individual or 22,000 for a couple, and as you 
well know, most rely on Social Security as their main source of 
income.
    For these beneficiaries, the need for multiple medications 
to manage and treat their acute and chronic illness often 
results in substantial and rising financial burdens and means 
many leave needed prescriptions unfilled. Today one-third of 
all Medicare beneficiaries go without any form of prescription 
drug coverage. About half of those live below 175 percent of 
the poverty level.
    Lack of drug coverage disproportionately affects 
beneficiaries living in rural areas and the oldest old. As you 
will hear from the other witnesses, supplemental coverage does 
provide some assistance with prescription drugs to two-thirds 
of the elderly, but that coverage varies widely by income, is 
often costly, and appears to have a very unstable future.
    For the lowest-income population, Medicaid has played a 
significant role over the years and covers today roughly 14 
percent of all Medicare beneficiaries. Yet to be eligible for 
the Medicaid program, one must generally be eligible for cash 
assistance through the Supplemental Security Income program or 
be institutionalized in a nursing home. Medicaid does, however, 
cover nearly half of Medicare beneficiaries with incomes below 
the poverty level and covers 40 percent of the nonelderly 
disabled Medicare population. This population has a 
particularly important attachment to Medicaid because it is 
often--the disabled are often ineligible to obtain any kind of 
private-based coverage. Those eligible for both Medicare and 
Medicaid, the dual-eligible population, have poorer health care 
status and greater health care needs than other Medicare 
beneficiaries.
    In 1998, Medicaid spent $14.5 billion for prescription 
drugs, representing 8 percent of total Medicaid spending. 
However, without the Medicaid drug rebate program, an 
additional $2.5 billion alone would have been spent in 1998 on 
prescription drugs. Within the Medicaid program, the elderly 
and disabled account for over 80 percent of all Medicaid 
spending for prescription drugs. So this is a major item in all 
State budgets and in the Medicaid program.
    Coverage of prescription drugs, however, under Medicaid 
varies widely across the States. States are allowed to 
establish formularies that limit coverage of specific drugs and 
are permitted to require prior authorization before dispensing 
any drug. Almost all States maintain a formulary. Most place 
limits on the number of concurrent prescriptions, the amount of 
a given drug supplied at one time, or the number of refills 
permitted. Thirty-two States require copayments for 
prescription drugs ranging from 50 cents to $3 per prescription 
for beneficiaries with extremely low incomes.
    However, many States are now struggling with the impact of 
rapidly rising prescription drugs on their budgets. Rising 
costs stem from both the increase in the average cost of drugs 
and from the increased volumes of drugs prescribed. As a 
result, many States are now looking to restrain rather than 
expand their coverage of prescription drugs in the future.
    Building on Medicaid as well as some of the State-based 
pharmacy programs does provide a means to direct assistance for 
the lowest-income Medicare beneficiaries. However, the 
variations across States in existing coverage and the limited 
reach and scope of both State pharmacy assistance programs as 
well as Medicaid would perpetuate uneven coverage for low-
income Medicare beneficiaries based on where they live.
    In sum, today the likelihood of having drug coverage to 
supplement Medicare depends largely on where you worked and 
whether you have retiree benefits, on where you live and 
whether managed care plans are available in your area, on what 
your income is and whether you are eligible for Medicaid or can 
afford to purchase coverage, and how sick you are, and whether 
plans are willing to enroll you if you have high drug costs. 
This is neither a fair nor rational way to provide health 
insurance coverage to our Nation's 40 million Medicare 
beneficiaries.
    Including the drugs under Medicare would provide Medicare 
beneficiaries with needed coverage that is comparable to the 
benefits generally offered to the less--to the more healthy, 
nonelderly insured population. It would both help to stabilize 
coverage by leveling the playing field between traditional 
Medicare and Medicare+Choice plans, and it would serve to 
improve the quality of care for the Nation's Medicare 
population while shielding the most vulnerable from rising, 
potentially unaffordable prescription drug costs.
    Thank you.
    [The prepared statement of Diane Rowland follows:]

  Prepared Statement of Diane Rowland, Executive Vice President, The 
   Henry J. Kaiser Family Foundation, and Executive Director, Kaiser 
                Commission on Medicaid and the Uninsured

    Thank you, Mr. Chairman and members of the Subcommittee, for the 
opportunity to provide an overview of the Medicare population's access 
to prescription drug coverage. I am Diane Rowland, Executive Vice 
President of The Henry J. Kaiser Family Foundation and Executive 
Director of The Kaiser Commission on Medicaid and the Uninsured. I also 
serve as an Adjunct Associate Professor in the Department of Health 
Policy and Management at The Johns Hopkins University School of Hygiene 
and Public Health.
    The Medicare population is, by definition, a population that is 
older, sicker and more dependent on prescription drugs than those not 
enrolled in the program. While the range and continuing proliferation 
of new drug treatments have made the management of the many health 
conditions suffered by this population possible, traditional, fee-for-
service Medicare does not generally cover outpatient prescription drug 
costs. My testimony today will review sources of prescription drug 
coverage for the Medicare population, describe the scope and level of 
coverage offered by these various sources, and devote particular 
attention to Medicaid's role in providing drug coverage to Medicare's 
lowest-income beneficiaries.

The Medicare Population
    Any discussion of Medicare benefits must acknowledge the 
characteristics and needs of the elderly and disabled population that 
Medicare serves. The Medicare population, by definition, is older and 
less healthy than the general population. Those who are covered by 
Medicare must be at least 65 years old or, if under-65, totally and 
permanently disabled. Because health problems increase with age, those 
who are covered by Medicare tend to have greater health needs than the 
non-elderly population. (Exhibit 1). Nearly 7 in 10 Medicare 
beneficiaries living in the community (69 percent) have two or more 
chronic conditions; many report having serious or disabling health 
problems, including arthritis (56 percent), hypertension (53 percent), 
and heart disease (36%). (Exhibit 2). Outpatient drug therapy has 
become an increasingly effective tool for managing many of these 
conditions and for delaying and even preventing the onset of more 
serious illnesses.
    With health needs increasing with age, it is not surprising that 
prescription drugs are a particularly important part of the therapeutic 
regimen for millions of elderly and disabled Americans, and that drug 
use increases with age. Eight in ten Medicare beneficiaries utilize 
prescription drugs on an ongoing basis, filling an average of 19.6 
prescriptions in 1996. Outpatient drug therapy has come to substitute 
for inpatient hospital care and to help manage chronic conditions. Many 
expect outpatient drug therapy to play an even greater role in medical 
care in the future
    These prescription drugs often come at a substantial cost to the 
Medicare population--a population that generally lives on modest, and 
often fixed incomes. Over 40 percent of Medicare beneficiaries--14 
million people--today have incomes below 200 percent of the federal 
poverty level, or below $16,500 for an individual and just over $22,000 
for a couple (Exhibit 3). Twelve percent of beneficiaries have incomes 
below the poverty level.
    Not only do many Medicare beneficiaries live on modest incomes, but 
most rely on Social Security benefits as their main source of income. 
This is especially true for the 20 million low- and moderate-income 
elderly beneficiaries with incomes below $22,225 per year. They 
comprise 60 percent of Medicare beneficiaries and derive from 64 to 81 
percent of their income from Social Security (Exhibit 4). Living on 
fixed incomes with little potential for additional earnings leaves 
these beneficiaries with minimal cushion to absorb additional medical 
costs.

Why Is Drug Coverage Important?
    For many Medicare beneficiaries, the need for multiple medications 
to manage and treat their acute and chronic illnesses often results in 
a substantial and rising financial burden. Between 1996 and 2001, 
average total per capita drug expenses for the Medicare population 
increased from $798 to $1,402, while average out-of-pocket spending 
increased from $390 to $686 per year.
    Having insurance coverage to supplement Medicare and help finance 
the cost of prescriptions affects individuals' financial burdens of 
care and use of medications. Beneficiaries without any form of 
prescription drug coverage tend to have higher out-of-pockets drug 
costs than those with some form of drug coverage (Exhibit 5). Overall, 
those without coverage for prescription drugs spent more than those 
with coverage in 1996 ($463 vs. $253 in 1996). Differences in health 
status do not explain these differentials. Among those in poor health, 
the disparities in out-of-pocket spending widened; those who lacked 
coverage had substantially higher out-of-pocket costs than those with 
coverage ($423 vs. $749 in 1996).
    Beneficiaries without drug coverage incur relatively high costs 
because they do not have an insurer to share the cost of each filled 
prescription and because they tend to pay the full retail price when 
they go to the pharmacy. By contrast, those with prescription drug 
coverage are often shielded from the full effect of high and rising 
drug costs as they often benefit from the pharmacy discounts negotiated 
by their employer plan or HMO.
    While lack of coverage means higher out-of-pocket costs faced by 
the elderly and disabled on Medicare, these higher costs do not result 
from greater utilization. In fact, those without prescription drug 
coverage fill fewer prescriptions than those with coverage, even after 
adjusting for health status (Exhibit 6). Beneficiaries without drug 
coverage averaged five fewer prescriptions per year than those with 
coverage in 1996. Among those in poor health, those who lacked coverage 
averaged 11 fewer medications filled than their insured counterparts.
    Lack of coverage poses particular concerns for those with chronic 
conditions. For example, beneficiaries with hypertension who lacked 
drug coverage were 40 percent less likely than those with drug coverage 
to purchase antihypertensive medications, according to a recent study 
by Blustein. Systematic underutilization of prescribed medications 
poses a threat to quality of care for individuals and potentially 
increases costs to the system in terms of avoidable emergency room and 
hospital admissions, physician visits, and nursing home stays.

Who Lacks Drug Coverage?
    While two-thirds of the Medicare population receive some assistance 
with their prescription drug expenses, nearly a third (12 million) were 
without any form of prescription drug coverage in 1996--the most recent 
year for which national data are available. About half (6 million) of 
those without drug coverage had incomes below 175 percent of poverty, 
which was $14,600 for individuals in 2000 (Exhibit 7).
    Lack of drug coverage disproportionately affects beneficiaries 
living in rural areas and the oldest-old (Exhibit 8). Those in rural 
areas were substantially more likely than others to be without drug 
coverage in 1996 (43 percent vs. 27 percent) in 1996. Beneficiaries 
ages 85 and older were more likely to lack drug coverage than those 
between the ages of 65 and 74 (38 percent vs. 29 percent).
    The near poor are at high risk of being without drug coverage. 
Forty percent of beneficiaries with incomes between 100 percent and 150 
percent of the federal poverty level lacked coverage in 1996. By 
contrast, 24 percent of those with incomes above 300 percent of poverty 
and 32 percent of those with incomes below 100 percent of poverty, 
where about half received drug coverage under Medicaid.

What Are the Sources of Prescription Drug Coverage?
    Most beneficiaries have supplemental insurance to help fill the 
gaps in Medicare's benefit package, but the nature of that coverage 
varies widely by income (Exhibit 9). Those with higher incomes are more 
likely to have broader and more comprehensive retiree benefits, while 
those with low and modest incomes are more likely to rely solely on 
Medicare for coverage. Medicaid fills in gaps for those with the lowest 
incomes, but only assists slightly more than half of all poor Medicare 
beneficiaries.
    The nature of supplemental coverage has a significant impact on the 
scope of prescription drug coverage and the level of out-of-pocket 
spending. Those with employer-sponsored retiree health benefits, for 
example, have substantially lower out-of-pocket expenses than those 
with Medigap or no supplemental coverage at all (Exhibit 10).
    Employer-sponsored plans, the leading source of drug coverage for 
seniors, assisted 31 percent of the Medicare population in 1996, 
generally those with higher incomes. Half of those with incomes above 
200 percent of poverty had employer-sponsored supplemental coverage 
compared to only a quarter of the near-poor and 8 percent of the poor. 
Benefits offered by employers to their former employees and spouses 
tend to be more generous than drug benefits covered under Medigap 
policies or Medicare+Choice plans.
    Today's workers, however, are less likely than current retirees to 
receive drug benefits from their employer when they retire. The number 
of large employers offering health benefits to retirees 65 and older 
has declined from 80 percent in 1991 to 66 percent in 1999. 
Furthermore, among those employers that continue to offer benefits to 
retirees, reductions in drug benefits appear to be on the horizon. 
Forty percent of large employers report seriously considering cutting 
back on drug benefits for their retirees in the next three to five 
years, according to a recent survey of large employers conducted for 
the Kaiser Family Foundation by Hewitt Associates.
    Medicare supplemental insurance, known as Medigap, is another 
potential source of prescription drug coverage for the Medicare 
population. In 1996, Medigap provided prescription drug benefits to 
approximately 10 percent of all Medicare beneficiaries. These policies 
are individually purchased by Medicare beneficiaries to supplement 
Medicare, largely by paying cost-sharing and deductibles. Beneficiaries 
pay premiums to have this coverage, with premiums ranging from about 
$1,400 per year to as much as $4,700 per year, depending on where they 
live, the type of coverage they obtain, and their age.
    There are 10 standard Medigap policies (Plans A-J), three of which 
(Plans H-J) cover some prescription drug costs. Plans H and I have a 
$250 deductible and cover 50 percent of drug costs up to $2,500; Plan J 
covers 50 percent of drug costs up to $6,000. Premiums for Medigap 
policies that cover a portion of prescription drug expenses have risen 
dramatically in recent years, by as much as 20 to 30 percent in many 
markets across the nation. These high premiums appear to be making 
Medigap drug coverage increasingly unaffordable for the large share of 
beneficiaries who are living on modest incomes. In fact, only 537,000 
of the 6 million beneficiaries with standard Medigap policies had a 
plan that included prescription drug coverage in 1999, according to a 
new study by Chollet and Kirk (Exhibit 11). Access to Medigap drug 
coverage is further restricted by a provision of the law that permits 
insurers to deny Medigap drug coverage to the under-65 disabled on 
Medicare, and others who lose coverage when they disenroll from their 
HMO.
    In addition to employer-sponsored and Medigap coverage, a growing 
number of beneficiaries have turned to Medicare+Choice programs for 
assistance with their drug costs. Medicare HMOs assisted 8 percent of 
all beneficiaries with their drug costs in 1996 and as many as 12 
percent in 2000. In recent years, many HMOs have been able to offer 
supplemental benefits, such as drug coverage, because Medicare requires 
plans with costs below the Medicare payment level to return savings to 
beneficiaries in the form of additional benefits or lower cost-sharing.
    While HMOs in many parts of the country have until very recently 
been able to offer fairly generous drug benefits to enrollees, there is 
some uncertainty about the future capacity of Medicare+Choice plans to 
provide this coverage. The number of Medicare+Choice plans 
participating in the program has declined in recent years, as has the 
share of plans offering prescription benefits to enrollees. At the same 
time, Medicare+Choice plans that continue to offer prescription drug 
benefits are moving in the direction of capping their benefits as part 
of a broader strategy to reign in costs (Exhibit 12).
    Medicaid and state operated pharmacy assistance programs also 
assist many low- and moderate-income beneficiaries with their drug 
costs. For the lowest income population, most notably Medicare 
beneficiaries receiving cash assistance and those who are in nursing 
homes, Medicaid provides coverage to fill in Medicare's gaps.
The Role of Medicaid
    In 1997, 14 percent of Medicare beneficiaries (nearly 6 million 
people) depended on Medicaid for supplemental insurance coverage, and 
most were eligible for the full range of Medicaid benefits, including 
prescription drugs. Although coverage of prescription drugs is optional 
for states, all Medicaid programs currently provide prescription drug 
coverage for Medicaid enrollees. Medicare beneficiaries who receive 
cash assistance through the Supplemental Security Income (SSI) program 
(known as ``dual eligibles'') generally qualify for Medicaid 
prescription drug benefits.
    Medicaid covers nearly half of Medicare beneficiaries with incomes 
below the poverty level and 40 percent of the non-elderly disabled 
Medicare population. Near-poor Medicare beneficiaries with incomes 
between 100 and 200 percent of poverty receive more limited assistance; 
their incomes or assets generally exceed the low levels required to 
qualify for full Medicaid benefits.
    The Medicare-Medicaid dual-eligible population has poorer health 
status and greater health care needs than other Medicare beneficiaries. 
Over half of all dual eligibles report their health as fair or poor 
compared to a quarter of other beneficiaries. They are also more likely 
to have ongoing chronic illness and require long-term care assistance, 
leaving them particularly in need of assistance with medical care and 
prescription drug expenses (Figure 13).
    Prescription drug coverage is the second most widely utilized 
benefit in Medicaid, largely due to the elderly and disabled 
population's reliance on the program for prescription drug coverage. In 
1998, Medicaid spent $14.5 billion for prescription drugs, representing 
8.2 percent of total Medicaid spending. Usage and costs vary 
considerably by enrollee eligibility category. The disabled and elderly 
accounted for 80 percent of all Medicaid spending for prescription 
drugs (Figure 14). In 1998, the disabled alone constituted less than a 
fifth of enrollees but accounted for over half of Medicaid drug 
expenditures. By contrast, children represented over half of Medicaid 
enrollees and accounted for only 12 percent of drug payments.
    Prior to the Omnibus Budget Reconciliation Act of 1990 (OBRA 90), 
limited formularies were the main strategy used by states trying to 
control Medicaid drug costs. With OBRA 90, states were given a new 
tool--the drug rebate program, which uses the government's volume 
purchasing authority to get discounted prices. Under this program, in 
order for a state to receive federal Medicaid matching funds for a 
manufacturer's prescription drugs, the manufacturer must agree to 
rebate a portion of drug payments back to the government in return for 
Medicaid covering all prescription drug products manufactured by the 
company. More than 500 manufacturers, representing 55,000 drug 
products, currently have federal rebate agreements. Some states also 
have separate rebate agreements with manufacturers.
    The rebate program influences the acquisition cost for prescription 
drugs (purchase of the drug itself). Medicaid regulations limit 
payments for acquisition costs. While payment limits are based on the 
cost of specific drugs, these limits only apply to aggregate spending; 
states may set their own payment policies for individual prescription 
drugs as long as total expenditures for all drugs are at or below the 
amount determined using the payment limits. Medicaid payments for 
outpatient prescription drugs also include the dispensing fee, which 
pays pharmacists for filling the prescription. Medicaid regulations 
only require that dispensing fees be ``reasonable.''
    Coverage of prescription drugs under Medicaid varies across states. 
States are allowed to establish formularies that limit coverage of 
specific drugs and are permitted to require prior authorization before 
dispensing any drug. Almost all states maintain a Medicaid formulary or 
list of approved products. Most states attempt to control Medicaid drug 
costs by placing limits on the number of concurrent prescriptions (as 
few as three permitted in some states), the amount of a given drug 
supplied at one time, or the number of refills permitted. Thirty-two 
states require copayments for prescription drugs, ranging from 50 cents 
to 3 dollars per prescription for certain beneficiaries.
    As a quality control, states are also required to provide 
prospective and retrospective drug use review (DUR) for Medicaid 
enrollees who get drugs on an outpatient basis. Prospective drug use 
review (PDUR), performed by the pharmacist or practitioner prior to 
dispensing a drug, is intended to reduce medication errors and adverse 
drug events, while retrospective drug use review (RDUR) involves the 
review of provider drug prescribing history to identify safety and cost 
problem areas.
    Medicaid is a crucial source of prescription drug coverage for a 
significant portion of the Medicare population, but many states are now 
struggling with the impact of rapidly rising prescription drug costs on 
state budgets. Rising costs stem not only from the increased average 
cost of drugs, but also from the increased volume of drugs prescribed. 
Medicaid payments for outpatient pharmaceuticals rose from an estimated 
$4.8 billion in 1990 to $14.5 billion in 1998, an increase of almost 15 
percent annually, largely due to rising costs for the disabled and 
elderly (Exhibit 15).
    Because of Medicaid's coverage for the elderly and disabled, 
including nursing home residents, a greater share of the Medicaid 
dollar is devoted to prescription drugs compared to total national 
health care spending. Medicaid prescription drug expenditure growth 
consistently outpaces the total growth of prescription drug spending. 
Recent reports indicate that states are now seeking larger discounts 
from manufacturers, restricting access to expensive brand-name drugs, 
and proposing that local pharmacies lower their prices. As a result, 
states are likely to be looking to restrain--rather than expand--their 
coverage of prescription drugs in future years.
    At the same time, limits to Medicaid coverage and restrictive 
income and assets test for eligibility, coupled with variations across 
states in both eligibility and coverage, leave millions of low-income 
Medicare beneficiaries without drug coverage. Some states (26 as of 
January 2001) have enacted state-based pharmacy assistance program to 
supplement Medicaid, and these programs now provide assistance to about 
one million people. However, these programs are limited in their 
ability to fill the gaps in prescription drug coverage and vary widely 
in terms of structure, eligibility, and benefits. While most provide a 
direct subsidy to low-income seniors, other approaches include discount 
programs, tax credits, and private-insurance models. Most are 
relatively new and not widely utilized.
    Building on Medicaid and the state-based pharmacy assistance 
programs provides a means to direct assistance toward the lowest income 
Medicare beneficiaries. However, the variations across states in 
existing coverage and the limited reach and scope of most state 
pharmacy assistance programs perpetuates uneven coverage for low-income 
Medicare beneficiaries based on where they live.
Conclusion
    Prescription drug use and expenditures are not evenly distributed 
among the Medicare population. Among Medicare's 40 million 
beneficiaries, nearly a third (30%) will incur drug expenses of less 
than $250 per year. In contrast, eight percent of beneficiaries will 
experience drug costs of $4,000 or more this year and account for over 
a third (36%) of the $50 billion in drug spending attributed to 
Medicare beneficiaries (Exhibit 16). These striking variations in 
spending within the Medicaid population underscore the importance of 
pooling the risk for coverage broadly.
    Today the likelihood of having drug coverage to supplement Medicare 
depends largely on where you worked and whether you have retiree 
benefits, where you live and whether managed care plans are available 
in your area, what your income is and whether you are eligible for 
Medicaid or can afford to purchase coverage, and on how sick you are 
and whether plans are willing to enroll you if you have high drug 
costs. This is neither a fair nor rationale way to provide health 
insurance coverage to our nation's 40 million Medicare beneficiaries.
    Use of prescription drugs to maintain functioning and promote well-
being is an integral part of medical treatment today and should be an 
integral part of the health care coverage as well. Inclusion of 
prescription drugs into the Medicare benefit package would help to 
assure basic coverage for millions of our most vulnerable citizens and 
help to stabilize their coverage in either the traditional Medicare 
program or managed care plans. Broadening Medicare to cover 
prescription drugs would also help stabilize the current erosion of 
retiree health benefits and level the playing field between managed 
care plans and the traditional program, thus helping to both modernize 
Medicare and secure adequate future coverage.
    Medicare has served the nation's elderly and disabled population 
well for more than 35 years. Much progress has been achieved through 
Medicare in alleviating disparities in access to care and bringing life 
saving medical advances to our elderly and disabled citizens regardless 
of income or residence. Our challenge now is to build on the strengths 
of Medicare by addressing its gaps and securing its financial 
viability.
    I look forward to working with the Subcommittee to address this 
challenge. Thank you.

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    Mr. Bilirakis. Thank you very much, Ms. Rowland.
    Mr. Weller. Please proceed, sir.

                   STATEMENT OF WILLIAM WELLER

    Mr. Weller. Thank you, Mr. Chairman, members of the 
committee. I am Bill Weller, Assistant Vice President and Chief 
Actuary of the Health Insurance Association of America. I 
appreciate the opportunity to testify on this important issue. 
I arrived at HIAA just after OBRA'90 passed and have assisted 
the HIAA members who offer Medigap products as well as 
Medicare+Choice plans since then.
    Our members, including national Medigap writers, have a 
strong interest in meeting the needs of seniors. Medicare 
supplements are very popular with seniors; 90 percent have some 
type of additional coverage. HIAA is therefore concerned with 
any proposals to change these products. Changes designed to be 
improvements, if all the implications are not well understood, 
can create a worse situation for seniors, many of whom have no 
option other than Medigap.
    In addition, as an actuary I have been involved with 
studies of Medigap experience for the American Academy of 
Actuaries. The academy's reports can be a valuable resource to 
Congress. These reports provide insight into the effects, 
positive and negative, of various ideas. HIAA believes it is 
very important to take steps now to help seniors better afford 
needed prescription drugs, yet changes must be made carefully 
to avoid disrupting private coverage millions now rely on.
    I would like to take most of my time this morning comparing 
the principal factors I believe are needed for viable private 
drug coverage with the current rules and limitations of 
Medicare supplement, in particular the 10 Medigap standardized 
plans. But first, let me note that all seniors when they become 
eligible for Medicare have the right to purchase a Medigap plan 
which includes coverage of prescription drugs, plan H, I or J. 
Medigap carriers cannot deny coverage or charge these people an 
extra premium, for example, based on their poor health. 
However, the vast majority do not purchase drug coverage. It is 
expensive, and most are still healthy at that time.
    The additional cost of Medigap plans H, I and J reflects 
both the cost of the drugs and the higher use of medical 
services by these people. The added cost from both appears to 
about equal the maximum amount of reimbursement for drug 
benefits alone within those plans.
    Surveys document a high level of satisfaction among seniors 
with the Medigap coverage they maintain. Seniors recognize the 
value of this coverage if they need significant medical care. 
This can change if the Medigap policies that seniors buy 
quickly become unaffordable. Viable plans, public or private, 
that cover prescription drugs need to adequately address the 
following factors. They are discussed more fully in the written 
testimony.
    Insurance costs. Successful private insurance plans, as you 
have already heard, have adopted formularies, encouraged 
generic substitution and used PBMs as important tools to 
maintain quality and control costs. Copayments in the past 
several years have been changed to make insureds more aware of 
the substantial difference in costs for different drugs.
    On the other hand, Medigap is generally not allowed to use 
restrictive networks and cannot change copays after issues.
    The loss ratio standards in OBRA'90 are unlikely to leave 
enough margin for the cost of administering a modern drug 
benefit with these necessary tools.
    Future trends. Everyone is aware of the increases in cost 
of prescription drugs. Projections for the future are also 
worrisome. Managing an insurance program which includes drug 
coverage entails updating formularies, adjusting copays, et 
cetera, not just increasing premiums. Even determining an 
insurance company or employer's willingness to continue the 
coverage is an issue. However, Medigap carriers, by law, cannot 
change anything except the premium. For example, in force 
policies could not be changed to require a higher copay for a 
brand name drug when there is a generic equivalent. And once a 
Medigap policy is issued, the carrier must continue the 
coverage.
    Sources of revenue. Subsidies are generally considered 
necessary to generate high levels of participation in health 
plans. All the major drug proposals from the last Congress, 
whether relying on public or private insurance, included such a 
subsidy. A subsidy for added drug benefits within a Medigap 
plan where other benefits are not subsidized will have less 
perceived value. Thus, there is a lower likelihood of achieving 
satisfactory levels of participation.
    Finally, adverse selection. I suspect that you are weary of 
actuaries raising this concern. Unfortunately it is real, and 
it must be controlled. Most employer-based groups control 
adverse selection by requiring continuous coverage of retirees. 
If the retiree drops coverage, they can't get it back. Medigap, 
because of expansions to open enrollment, has become easy to 
get back into.
    Open enrollment is causing increases in rates for Medigap 
plans without drug coverage, and the effect would be even worse 
for new Medigap plans with drug coverage.
    In closing, I can state that HIAA shares the concerns of 
many about the issue of drug coverage for seniors. We believe 
the ultimate solution will provide meaningful drug benefits as 
part of changes to the underlying Medicare program. But if 
changes are made before broad restructuring takes place, we 
need to move with extreme caution. Changes to Medigap and 
Medicare+Choice without changes to Medicare itself could harm 
the private coverage seniors now rely on. It could also reduce 
the coverage choices for future seniors like me.
    Thank you.
    [The prepared statement of William Weller follows:]

  Prepared Statement of William Weller, Assistant Vice President and 
         Chief Actuary, Health Insurance Association of America

                              Introduction

    Mr. Chairman, distinguished members of the Subcommittee, I am 
William Weller, Assistant Vice President and Chief Actuary of the 
Health Insurance Association of America (HIAA).
    HIAA is the nation's most prominent trade association representing 
the private health care system. Its 290 members provide health, long-
term care, dental, disability, and supplemental coverage to more than 
123 million Americans.
    During the past 10 years with HIAA, I have been involved in the 
actuarial aspects of Medicare Supplement products starting with the 
implementation of the changes required by Omnibus Budget Reconciliation 
Act of 1990 (OBRA'90). Prior to joining HIAA in 1990, I worked in the 
insurance industry for 25 years. I received my fellowship in the 
Society of Actuaries in 1971 and became a member of the American 
Academy of Actuaries in 1972. During the past several years, I have 
been a member of the Academy's Medicare Supplement Insurance Work 
Group, reviewing the causes of premium increases on Medicare Supplement 
(or Medigap) plans. Their final report (Medigap Report) was presented 
to the National Association of Insurance Commissioners in June 2000.
    I am very pleased to be here today to speak with you about how the 
current Medigap market works, special challenges relating to the three 
Medigap plans that include prescription drug coverage, the impact of 
increasing costs and regulation on the premiums that seniors now pay 
for Medigap coverage, and the higher costs they would be asked to pay 
in the future if prescription drug coverage were to be expanded.
    In the last section of my testimony, I will address the differences 
between Medigap and other products that provide drug coverage, and the 
implications for actuarial models used to estimate the price of each 
such product.
    It is worthwhile to note the importance of the broad spectrum of 
Medicare Supplement products and the key role of Medigap plans within 
that spectrum. Because Medicare requires beneficiaries to pay 
deductibles and coinsurance amounts that can add up to substantial 
annual out-of-pocket expenses and because it does not cover the cost of 
care for truly catastrophic illnesses, 90 percent of seniors maintain 
additional, supplemental coverage.
    Approximately 20 million seniors have some Medicare Supplement 
coverage, either through an employer-sponsored plan for retirees (11 
million beneficiaries) or through an individually purchased Medigap 
plan (nine million beneficiaries). Many other seniors have supplemental 
coverage through Medicare+Choice or Medicaid. It is the nine million 
seniors who pay the total cost of supplemental coverage themselves by 
purchasing an individual Medigap plan who would have the biggest 
problem finding the resources to pay for new, mandated expanded 
coverage of prescription drugs.
    Surveys conducted bi-annually by the Inspector General of the 
Department of Health and Human Services continue to show a high level 
of satisfaction among seniors with Medigap and with their choices 
including options with and without outpatient prescription drug 
coverage. These surveys also note the importance seniors attach to 
having these choices include a wide range of premium levels to allow 
affordable options. Even with this range, the most popular Medigap 
plans cover the beneficiaries' obligations under Parts A and B but do 
not include drug coverage.

     SENIORS SHOULD HAVE EXPANDED ACCESS TO NEEDED PHARMACEUTICALS

    Pharmaceuticals have become a critical component of modern 
medicine. Prescription drugs play a crucial role in improving the lives 
and health of many patients, and new research breakthroughs in the 
coming years are likely to bring even greater improvements. As older 
Americans become an ever-increasing percentage of the overall United 
States population, the need for more outpatient medicines, including 
maintenance drugs for this sector of the population, is growing 
rapidly. There is continuing emphasis on new pharmaceuticals to treat 
diseases typically associated with aging. Over 600 new medicines to 
treat or prevent heart disease, stroke, cancer, and other debilitating 
diseases are currently under development. Medicines that already are 
available have played a central role in helping to cut death rates for 
chronic and acute conditions, allowing patients to lead longer, 
healthier lives. For example, over the past three decades, the death 
rate from atherosclerosis has declined 74 percent and deaths from 
ischemic heart disease have declined 62 percent, both due to the advent 
of beta blockers and ACE inhibitors. During this same period, death 
rates resulting from emphysema dropped 57 percent due to new treatments 
involving anti-inflammatories and bronchodilators.
    These advances have not come without a price. Rapid cost increases 
for prescription drugs are a major concern of our nation's seniors. We 
are using more drugs, and the average price for the drugs are rising. 
As a result, prescription drug spending has outpaced all other major 
categories of health spending over the past few years. For example, 
while hospital and physician services expenditures increased between 3 
percent and 5 percent annually from 1995 through 1999, the Academy of 
Actuaries' Medigap Report showed Medigap claim costs growing at 11 
percent annually (twice the rise in Medicare expenses) for the plans 
without drug coverage. The Academy also reported an increase of 16.5 
percent per year for a plan in one state that included extensive 
coverage of drugs and more frequent guarantee issue options.
    A study completed in 2000 for HIAA and the Blue Cross and Blue 
Shield Association by the University of Maryland's School of Pharmacy 
found that drug spending will increase at an even faster pace than the 
government had been predicting. The University of Maryland researchers 
project that the nation's expenditures for prescription drugs will 
increase at a rate of 15-18 percent per year over the next five years, 
more than doubling annual drug spending from $105 billion in 1999 to 
$212 billion by 2004. According to the lead author of the study, Dr. C. 
Daniel Mullins, 60 percent of those expenditures will be caused by 
increases in the price and use of drugs already on the market today, 
while 40 percent will be attributable to the cost of drugs still under 
development--so-called ``pipeline'' pharmaceuticals.
    These statistics all demonstrate the increasing proportion of 
seniors' overall medical costs, which are for outpatient prescription 
drugs. Probably as a result of this fact, roughly two out of every 
three seniors have some type of insurance coverage for 
pharmaceuticals--either through employer-sponsored retiree health 
plans, private Medicare+Choice plans, Medicaid or, in limited 
instances, individual Medigap policies. Yet, HIAA recognizes the 
concerns for those without any coverage, as well as those in fear of 
losing the coverage they currently have.
    Whatever path Congress chooses to follow to bring expanded drug 
coverage to Medicare beneficiaries, it is vitally important not to 
jeopardize the supplemental coverage that seniors now have, whether or 
not it includes coverage for drugs. Seniors rely heavily on their 
supplemental plans since Medicare now pays just 50 percent of their 
medical costs. As already noted, seniors are highly satisfied with 
their supplemental coverage and value the range of choices now 
available to them in supplemental plans.

 DETAILS OF THE CURRENT MEDIGAP MARKET AND ISSUES WITH EXPANDING DRUG 
                                COVERAGE

    The existing Medigap market provides 10 standardized plans, three 
of which include some prescription drug coverage (plans H, I, and J). A 
``high deductible'' option is also available with two plans (plans F 
and J), but has not proved popular with seniors. Except for the high 
deductible addition, these plans have not been changed since developed 
immediately following OBRA'90. The attached chart showing the benefits 
provided by the various Medigap standard plans is very familiar.
    The Medigap market also includes the Medicare SELECT option that 
allows the insurer to provide benefits through a network of health care 
providers who agree to provide care at discounted rates in return for a 
higher volume of patients. Certain Medigap benefits are not paid for 
out-of-network care. Medicare SELECT has grown steadily since the 
program was first authorized and is now allowed in all states.
    There are now a number of open enrollment opportunities for 
Medicare beneficiaries to purchase new or replace existing coverage 
with a Medigap plan. OBRA ``90 established a six-month open enrollment 
period for Medigap coverage beginning when a beneficiary is age 65 or 
older and enrolls in Part B. A beneficiary applying for a Medigap plan 
during this period may not be denied coverage and cannot be charged a 
higher premium because of poor health. All Medigap plans, including 
those with prescription drug coverage, are available during this open 
enrollment period.
    From 1991 through 1997, there was a small amount of expansion in 
open enrollment under laws enacted in a few states. Since then, federal 
legislation (BBA, BBRA and BIPA) has expanded the open enrollment 
opportunities and states have frequently gone beyond the federal open 
enrollment standards.

              ISSUES WITH EXPANDING MEDIGAP DRUG COVERAGE

    HIAA believes that Medigap is not a good starting point for 
legislative proposals to expand drug coverage for seniors. In addition 
to a host of other problems with this approach, which are discussed 
below, several studies show that adding a drug benefit to Medigap plans 
that currently do not include such coverage would increase premiums 
dramatically. Seniors who today have chosen to purchase Medigap 
policies that do not provide a drug benefit would be forced to pay an 
additional $600 or more a year (assuming a $250 deductible for expanded 
drug benefits), according to HIAA estimates.
    Revising the existing Medigap market to include expanded coverage 
of prescription drugs would need to address three key participants in 
the market--Insurance Regulators, Medicare Beneficiaries and Medigap 
Writers.
    Regulators--The National Association of Insurance Commissioners 
(NAIC) would likely have to develop standards for new Medigap plans. 
State regulators would have to approve new policy forms before they 
could be sold, as well as scrutinize their initial rates and any 
proposed rate increases. Even relatively straightforward product 
changes based on proven design formulas can take several years to 
progress from the design stage through the regulatory approval process 
and, finally, to market.
    The requirement that Medigap policies must be ``guaranteed 
renewable'' (GR) would exacerbate problems with creating insurance that 
reflects modern drug benefits. If the NAIC were to standardize a new 
set of GR plans with greater drug coverage, as some have proposed, it 
could impose unworkable limitations on the use of pharmacy benefit 
managers (PBM) or formularies. Once coverage is issued, insurance 
carriers would be prevented by contract from increasing co-payments and 
deductibles as drug costs continue to skyrocket. Effective cost 
management would be extremely difficult. On the other hand, allowing 
needed flexibility, including PBMs and formularies, would destroy the 
standardization of Medigap that Congress and the NAIC have worked so 
hard to achieve during the past decade.
    The states would also need to create a set of transition rules that 
are fair to both beneficiaries and companies with existing policies and 
that do not run afoul of the guaranteed renewability requirements for 
Medigap policies. Establishing and administering such rules would be a 
very difficult task.
    Medicare Beneficiaries--Surveys show that there is considerable 
recognition of the current plans among seniors. Thus, changes to the 
standard plans are likely to create some confusion. In addition, open 
enrollment opportunities for viable products with expanded drug 
coverage would need to be limited to avoid severe adverse selection. 
Finally, the level of initial premiums for Medigap plans and the size 
of premium increases over time will both need to rise substantially if 
there is expanded drug coverage. Even if proposed premium increases 
were consistent with state law parameters, seniors and state regulators 
would be likely to resist approving the magnitude of increases it will 
take to sustain an insurance policy as drug prices grow rapidly.
    Medigap Writers--Insurance carriers attempting to offer Medigap 
plans with expanded drug coverage for seniors would have to address 
difficult business decisions and cost issues:

 costs of development, marketing and administration of the new 
        plans;
 costs of new processes for drug benefits (e.g. PBM interface 
        and formularies);
 increasing and volatile cost of drugs to be reimbursed;
 reflecting the value of any government subsidy to some or all 
        seniors for their drug coverage; and
 estimating the impact of adverse selection.
    Premiums for the new Medigap form would have to reflect these 
costs. However, one substantial barrier is that the expense margin 
limitations insurance carriers must meet under OBRA ``90 (which are a 
function of the dollars paid to Medigap insured) are too small to 
support the expected administrative costs of expanded drug coverage. 
Finally, premium increases for Medigap plans would become even larger, 
generating further adverse selection with the potential that the 
product may not remain viable.
    In our view, the combined weight of these problems would doom any 
attempt to focus on private Medigap plans as a principle source of 
expanded drug coverage to seniors.

              PRIVATE INSURANCE OPTIONS WITH DRUG BENEFITS

    As already noted, a significant number of Medicare beneficiaries 
already have insurance for their prescription drug expenses from the 
private market. In addition, Medicaid as a public option provides 
insurance for many low-income beneficiaries.
    The vast majority of the private options rest on four 
characteristics to maintain a viable insurance product:

1. The full cost of the drug program is not expected to be paid by the 
        individual.
2. The drug benefits are part of comprehensive, coordinated care 
        management so that the risk taker for the full set of benefits 
        will receive any offset from lower required use of other 
        medical services.
3. The drug benefit is managed and, if necessary, modified to control 
        growing costs, by utilizing formularies, generic substitution, 
        and other cost saving opportunities, consistent with good 
        medical care.
4. The option is structured to avoid adverse selection by giving 
        beneficiaries strong incentives to maintain coverage even when 
        their expected drug costs are low.
    Employer-based coverage is the primary source of existing drug 
coverage for seniors. Most employer-sponsored plans incorporate the 
``viability'' factors listed above or are rapidly moving to incorporate 
them. Yet, even these plans are finding the private option increasingly 
expensive. Recent surveys indicate that employers are contemplating 
several changes for their retiree health care plans over the next 
several years, including increasing premiums and cost-sharing (81 
percent of respondents to a 1999 Hewitt Associates survey sponsored by 
the Kaiser Family Foundation) and cutting back on prescription drug 
coverage (40 percent).
    Medicare+Choice plans, the second most utilized option for 
prescription drug coverage, have used the savings they have achieved 
through efficient total care management to offer drug benefits. 
Unrealistically low increases in government payments to Medicare+Choice 
plans, however, are having the effect of reducing drug coverage for 
many seniors enrolled in these plans and threatening the very 
continuation of the Medicare+Choice program.
    Medigap plans H, I, and J (which cover drugs) are subject to 
underwriting, except during open enrollment. The ability to underwrite 
these plans is the only one of the four ``viability'' factors currently 
available to insurers offering these plans. Even so, studies have shown 
that these plans experience higher use of part A and B services. As a 
result, costs of non-drug Medigap benefits for plans H, I, and J are 
higher than the same benefits within Medigap plans A through G. These 
are major reasons why the cost of plans H, I, and J is often 
prohibitive.
    There is a growing use of ``drug discount cards.'' These non-
insurance programs provide access to discounted drug prices. However, 
drug discount card programs do not spread the cost of prescription 
drugs as with insurance products. Instead, these cards provide seniors 
with significant discounts to retail prices at designated pharmacies. 
The vast majority of Medigap writers offer such opportunities where not 
restricted by state regulation. Some of these drug discount cards are 
now being advertised on television, reflecting their growing 
attractiveness to seniors as a viable alternative to the increasingly 
expensive insurance options for drug coverage.

            MODELING A PRESCRIPTION DRUG BENEFIT FOR SENIORS

    Insurance products rest on actuarial models to estimate the future 
benefits, costs, and revenues necessary to support the product. 
Modeling coverage of prescription drug benefits involves:

 projecting costs for different subgroups of the insurable 
        population (minus the portion to be paid by the insured);
 adjusting these base year costs for periodic cost increases 
        (trend) and shifting patterns of care;
 approximating government provided payments, if any;
 reflecting the expected willingness of these various subgroups 
        of the population to purchase the coverage; and
 allowing for the chance that new, higher premiums will cause 
        healthier Medicare beneficiaries to discontinue their coverage.
    Costs for drug coverage for seniors, prior to any of the other 
adjustments, are projected to rise by 15 percent each year. A table in 
another Academy of Actuaries report, Medicare Reform: Providing 
Prescription Drug Coverage for Medicare Beneficiaries, shows the effect 
of various cost-sharing provisions on this base rate of increase. The 
table (Table 3 is attached) demonstrates that premium rates for 
universal coverage would need to increase more than 15 percent to keep 
pace with rising drug costs. For example, the impact of a deductible 
increases insurance costs at a faster rate than the cost of the 
underlying benefits (e.g. a $500 deductible would require an 18.8% 
increase to offset the effects of ``deductible leveraging'' when all 
costs increase by 15%).
    If the ``benefit maximum'' were changed to an ``out-of-pocket 
maximum'' to include stop-loss or catastrophic coverage (part of many 
of the proposals from last year), this feature, along with the others, 
could generate premium increases of 25 to 30 percent per year for the 
first few years. Products that contractually cannot adjust benefits 
(e.g. Medigap) can only increase premiums. Rate increases of this 
magnitude would create additional problems.
    Volatility in pharmaceutical cost trends also makes private drug 
coverage difficult to price. While there has been relative stability in 
the rate of increase of hospital and physician costs during the past 
two decades, pharmaceutical costs have been more difficult to predict. 
In March 1999, for example, HCFA estimated that prescription drug 
expenditures would reach $171 billion by 2007. Just six months later in 
September, HCFA was forced to revise these projections and the new 
prediction was that prescription drug spending will reach $223 billion 
by 2007, which is a 30 percent increase over the previous estimate.
    Several legislative proposals in the past have included some 
government contribution to eliminate the ``individual pay-all'' 
problems when using voluntary programs. It was often stated that this 
subsidy would result in almost universal acceptance of any offer to 
provide coverage. However, many actuaries do not believe 25 percent or 
even 50 percent subsidies are sufficient to achieve 70 percent 
acceptance, much less universal acceptance. These actuaries point to 
the increasing unwillingness by some employees to pay the required 
employee contribution for employer-sponsored coverage as evidence.
    In addition, the ability of government contributions to maintain a 
consistent share of the costs of a private option over 20 years is hard 
to imagine. Errors in cost assumptions, changes in patterns of 
including drugs in comprehensive medical care, and other budgetary 
dictates could reduce the level of subsidy. The insurers' obligations 
to Medicare beneficiaries are not likely to be reduced simply because 
of a shortfall in the percentage of costs contributed by the 
government.
    Appropriate oversight of the use of PBMs and/or formularies will 
likely be a part of any successful legislation that includes a 
government subsidy for prescription drug coverage. Actuaries will look 
to existing examples of this oversight to estimate its likely effect 
and cost to be included in the price of the new coverage. The two 
representative examples are the oversight of employer-plans and 
Medicare+Choice Organizations. Medicare+Choice Organizations are 
subject to more restrictive controls, so there is a higher level of 
administrative cost to meet the control requirements. The employer-
based market has lowed costs and flexibility to quickly adjust to 
changing circumstances.
    The most difficult factor to model, however, will be ``adverse 
selection.'' Adverse selection, which tends to drive up premiums, 
occurs because those who expect to receive the most in benefits from 
the policy will purchase it immediately, while those who expect to have 
few claims will forego purchasing it. When people with low drug costs 
choose not to enroll in coverage while those with high costs do enroll, 
insurance carriers are forced to charge higher premiums to all 
policyholders. The more opportunities there are for enrollment, the 
greater the risk of adverse selection.
    Adverse selection is and will be a very real problem for private 
insurers, particularly those selling coverage on an individual basis. 
Using cost estimates for the year 2000, one-third of seniors (even if 
all had coverage for outpatient prescription drugs) would have drug 
costs under $250 per year, with the average cost estimated at $68 
annually. These seniors are unlikely to purchase any type of private 
drug coverage without almost a complete subsidy of the cost, given that 
the premium for such coverage would be at least 10 times higher than 
their average annual drug costs. Of the two-thirds who might buy the 
coverage, many would be doing little more than dollar trading without a 
significant subsidy. Some may actually end up much worse off: a person 
with $500 of drug expenses could have premium, deductible, and 
coinsurance costs of about $1,000 or twice the actual costs of drugs. 
Consequently, many relatively healthy seniors are not likely to 
purchase the product, resulting in further premium increases for those 
that do.
    Employer plans control this type of adverse selection by limiting 
eligibility to employees and spouses at the time they retire. In 
addition, beneficiaries with coverage must maintain the coverage 
continuously, even in years when their expected use of the insurance 
coverage is low. Re-enrollment is not permitted.
    Medicare+Choice Organizations cannot directly control adverse 
selection due to the annual open enrollment requirement. This has 
caused Medicare+Choice Organizations to be very concerned that rich 
drug benefits would lead to disproportional enrollment of those with 
high drug costs. Offsetting this risk to some extent has been the 
ability of Medicare+Choice Organizations to manage the entire medical 
and pharmacological risk. But the manner in which the Health Care 
Financing Administration is implementing risk adjustment sharply 
reduces the value of this offset since there is no risk adjustment 
factor attributed to drug benefits.
    As previously noted, Medigap has seen considerable expansion of 
open enrollment opportunities. Actuarial models would likely anticipate 
a similar expansion for drug coverage even if the legislation only 
provided a single eligibility period initially.
    The expansion of Medigap open enrollment opportunities is generally 
felt to be one of the causes of above average increases in Medigap 
costs since 1996. The American Academy of Actuaries Medigap Report to 
the NAIC noted:
        ``While it is too early to evaluate the quantitative effects of 
        the 1997 Balanced Budget Act requirements for the guaranteed 
        issue of certain Medicare Supplement plans to individuals who 
        lose Medicare+Choice health coverage, this requirement may 
        provide opportunities for anti-selection. The level of anti-
        selection will be affected by individuals' health status, by 
        whether Medicare+Choice alternatives exist, and the ease [for 
        beneficiaries] to move in and out of plans (e.g. in 
        Massachusetts, there are virtually no limits on individuals 
        moving in and out of plans).
    In the other Academy report on prescription drug coverage, they 
address this issue as well:
        ``Seniors (many of whom are on drug therapies for chronic 
        medical conditions) can more easily predict the level of their 
        out-of-pocket drug costs than is the case with their other 
        health costs. They also frequently know the specific drugs they 
        will need. Accordingly, adverse selection presents a greater 
        technical obstacle for programs with voluntary elements; for 
        example, when there are different choices in the levels of 
        coverage (e.g., different deductibles or annual maximums) or in 
        the particular drugs covered (e.g. formularies). Similarly, the 
        overall level of both prescription and other expenditure 
        required by beneficiaries who use a specific drug is more 
        predictable than the case with other acute health care 
        services''
    Illustrating the concern, Table 2 (attached) from this last report 
shows that seniors with at least an average of three prescriptions per 
month make up 40 percent of seniors. Their costs are over 3.5 times the 
average costs of the other 60 percent. In addition, the table notes 
that these more frequent users, reflecting greater incidence of 
maintenance drugs, have a lower rate of using generic drugs.
    Adverse selection is considered within actuarial models when 
coverage must be offered in open enrollment situations. It is also 
considered when insurers must increase premiums by 20-30 percent each 
year to cover rising costs. Policyholders will compare the higher 
premiums to their current and expected costs. Those who expect to 
receive relatively little in benefits (generally due to low actual use 
of drugs in the prior year) are much more likely to lapse their 
existing coverage (citing unaffordability as their reason) than those 
who recognize that their insured drug costs have been more than the 
premiums they have been paying.
    Drug discount card programs are not likely to suffer from adverse 
selection because, unlike insurance programs, there is no spreading of 
costs. At present, they have no method to provide any subsidy beyond 
the discounts provided by the pharmacies in their network.

                               CONCLUSION

    There is no question that seniors, especially seniors with low 
incomes, need help with the cost of the prescription drugs vital to 
their health. However, the likely effects of any new policy proposal 
must be carefully examined to ensure that unintended consequences do 
not erode the private coverage options that beneficiaries rely on today 
to meet their health care needs. Actuarial models have significant 
value in projecting the implications of proposals on the premium costs 
for various groupings of likely insureds. More important, these models 
also address the impact of potential ongoing changes--legislative, 
economic and insurance related.
    HIAA shares the concerns of many public voices today calling for 
measures to help seniors better afford prescription drugs. HIAA 
developed a proposal in 2000 which, we still believe, represents an 
immediate and workable step that will provide meaningful relief for 
seniors before addressing needed changes in the underlying Medicare 
program.
    HIAA is extremely concerned with proposals that would require 
Medicare supplement insurance or Medicare+Choice plans to cover the 
costs of outpatient prescription drugs without the addition of 
prescription drug coverage as a Medicare covered benefit. Mandating all 
Medigap policies to include a drug benefit would not be popular with 
seniors--who would experience diminished choice of policies, higher 
prices, and in some cases, loss of coverage.
    HIAA stands ready to work with the members of this Subcommittee, 
and all in Congress and the Administration, to ensure that all seniors 
to have access to affordable prescription drugs.
                              Attachment A

                                   Benefits Covered By Standard Medigap Plans
----------------------------------------------------------------------------------------------------------------
                                                                   Standard Medigap Plans
             Covered Benefits              ---------------------------------------------------------------------
                                              A      B      C      D      E     F**     G      H      I     J**
----------------------------------------------------------------------------------------------------------------
Core Benefits*............................     P      P      P      P      P      P      P      P      P      P
Part A Deductible.........................  .....     P      P      P      P      P      P      P      P      P
SNF Coinsurance...........................  .....  .....     P      P      P      P      P      P      P      P
Foreign Travel Emergency..................  .....  .....     P      P      P      P      P      P      P      P
At-Home Recovery..........................  .....  .....  .....     P   .....  .....     P   .....  .....     P
Part B Deductible.........................  .....  .....     P   .....  .....     P   .....  .....  .....     P
Part B Excess Charges.....................  .....  .....  .....  .....  .....     P    \1\   .....     P      P
Prescription Drugs........................  .....  .....  .....  .....  .....  .....  .....   \2\    \2\    \3\
Preventive Medical Care...................  .....  .....  .....  .....     P   .....  .....  .....  .....     P
----------------------------------------------------------------------------------------------------------------
* Core benefits include Part A co-payment for days 61-90 in the hospital, Part A co-payment for each lifetime
  reserve day in the hospital, up to 365 additional days of hospital coverage after Medicare coverage is
  depleted, the first three pints of blood used under Part A or Part B, and the 20-percent coinsurance for Part
  B services after the Part B deductible has been met.
** Plans F and J also have a high deductible option. The high deductible, which is adjusted for inflation, is
  $1,530 in 2000.
\1\ Medigap policy pays 80 percent of balance billing charges.
\2\ After $250 deductible, policy covers 50 percent of prescription drug costs to a maximum of $1,250.
\3\ After $250 deductible, policy covers 50 percent of prescription drug costs to a maximum of $3,000.


                         Table 2--Distribution of Prescription Expenditures for Seniors
----------------------------------------------------------------------------------------------------------------
                                                     Percent of         Relative to Population    Generic Drugs
                                            ---------------------------         Average        -----------------
              Scripts per Year                                         ------------------------   % of     % of
                                             Members  Scripts   Costs     Scripts      Cost     Scripts    Cost
----------------------------------------------------------------------------------------------------------------
0 to 12....................................     21.9      4.4      2.1        0.20        0.10       69       41
12 to 24...................................     20.0     11.0      7.1        0.55        0.36       58       30
24 to 36...................................     18.2     16.2     12.6        0.89        0.69       54       27
36 to 54...................................     20.3     26.4     24.5        1.30        1.21       50       24
54 or more.................................     19.5     42.0     53.6        2.15        2.74       47       21
----------------------------------------------------------------------------------------------------------------
Source: Data provided by a national Medicare+Choice Health Plan


 Table 3--Annual Rates of Increases in Prescription Drug Insurance Plan
 Costs Per Capita Assuming 15 Percent Per Year Increases in the Cost of
                                  Drugs
------------------------------------------------------------------------
                                                Annual Rate of Increases
                                               -------------------------
             Cost Sharing Feature                Through CY   Through CY
                                                    2005         2020
------------------------------------------------------------------------
A. Fixed Dollar Amounts
Co-payments ($10 Generic/$20 Brand)...........        18.5%        15.5%
50% Coinsurance with annual deductibles of:
  $100........................................        15.7%        15.0%
  $500........................................        18.8%        15.4%
  $2,000......................................        29.2%        16.9%
50% Coinsurance with benefit maximums of:
  $2,500......................................        10.9%         2.4%
  $5,000......................................        13.6%         4.3%
B. Amounts Adjusted for 2.5% annual increases
 in CPI
Co-payments ($10 Generic/$20 Brand)...........        17.9%        15.6%
50% Coinsurance with annual deductibles of:
  $100........................................        15.6%        15.0%
  $500........................................        18.2%        15.5%
  $2,000......................................        27.1%        17.3%
50% Coinsurance with benefit maximums of:
  $2,500......................................        11.9%         5.4%
  $5,000......................................        14.0%         7.6%
------------------------------------------------------------------------
Note: Trend in per capita spending assumed to be 15 percent per year.
  Per capita expenditures trend comprised of prices (3 percent), mix of
  drugs (8 percent) and volume (3.5%).


    Mr. Bilirakis. That is a good way to finish.
    Ms. Buckley to tell us about Nevada.

                 STATEMENT OF BARBARA E. BUCKLEY

    Ms. Buckley. Thank you, Mr. Chairman, members of the 
committee. For the record, my name is Barbara Buckley. I am 
serving my fourth term as the assembly representative for 
district 8 in Clark County, Nevada, which is Las Vegas. I also 
serve as the majority leader for the Nevada Assembly. I have 
served on the commerce and labor committee for four terms, and 
on the health and human services committee for three terms.
    In my tenure in the Nevada Legislature, I have worked 
extensively on health care issues, sponsoring our Nevada 
patients' bill of rights in 1997 and expanding our work by 
creating an cabinet level ombudsman for patients in 1999.
    In 1999, I was also part of the assembly leadership team 
that fought to ensure our tobacco dollars were earmarked for 
health care, senior programs, and programs to prevent tobacco 
use in our State. I am proud to say that those efforts were 
successful, and as a result, 60 percent of our funds were 
earmarked for these purposes.
    Like most legislation enacted in Nevada and indeed 
everywhere, our tobacco legislation was a result of compromise 
between both parties with divergent opinions on how best to 
achieve our goals. We were committed to securing a portion of 
the funds to promote independent living programs for seniors as 
well as establishing a prescription drug plan.
    When our Governor asked that we try an insurance-based 
prescription drug plan for seniors, many of us were skeptical 
about whether such a plan could work, but agreed to try the 
plan to ensure that all of our goals for our tobacco 
legislation were met. And so with the unanimous support of the 
1999 Nevada Legislature, we began our experiment with an 
insurance-based senior prescription drug plan.
    The statute sets forth the details of our plan. A senior is 
eligible for a subsidy from our tobacco funds based on their 
income level. Generally from zero to $12,000, they are eligible 
for a 90 percent subsidy. It goes up to $21,500, and at that 
income level a senior is eligible for 10 percent subsidy. The 
maximum amount of subsidy that could be awarded to a senior is 
capped at $480 per year. $4.2 million was set aside to begin 
our program. It was estimated that 10,000 seniors could be 
served.
    Implementation of our program was left to the Department of 
Human Resources. They issued a request for proposal to hundreds 
of insurance companies. Only one unlicensed insurance company 
bid. The RFP was reworked, relet. At that time six insurance 
companies bid, and one was selected.
    The successful bid resulted in our senior RX program. As 
you can see from the testimony and the handouts, there are two 
programs contained in this, a blue and a silver program. The 
premium for a blue program is approximately $75 a month or $900 
a year. There is a $100 calendar year deductible. A managed 
formulary is utilized. Generic drugs cost $10; preferred drugs 
cost $35 or 50 percent of the cost of the drug, whichever is 
greater. Nonpreferred drugs are not covered, and there is a 
$5,000 maximum annual plan benefit.
    There is also a silver program which costs approximately 
$99 a month. Generic drugs are $10; preferred brands are $25; 
nonpreferred brands are $40 or 40 percent of the cost of the 
drug. There is also a $5,000 cap on that program as well.
    As of January 26, 2001, 1,400 applications have been 
received, and 124 seniors were enrolled. I learned from our 
Governor yesterday we have had 65 people enroll. Almost 700 
people are eligible for the subsidies, but have not yet chosen 
to sign up for the benefits or pay their share of the premiums.
    Reviews of the program are decidedly mixed. I am pleased 
that the Nevada Legislature and the Governor felt that 
establishing a drug program was important for our State. I am 
also pleased that our State chose to go forward instead of 
waiting for Congress to act. No offense meant.
    The program, though, has a number of shortcomings. First, 
the program only covers 10- to 12,000 seniors who earn less 
than $21,000. That means there are over 100,000 additional 
seniors earning below 21,000 who are unable to take advantage 
of our program due to funding limitations. Seniors who earn 
21,000 or more are not eligible at all. These excluded seniors 
should not have to choose between paying their power bill and 
affording prescription drugs, a very real choice today.
    For those that are offered coverage, the insurance model 
does not result in an affordable prescription drug model for 
many. I have attached charts showing sample seniors. In one, a 
senior must pay $35 a month in premiums and still $327 in 
copays. If her income is $12,000 a year, she is still spending 
34 percent of her income for drugs.
    It is also difficult for seniors to figure out how the 
program works, and it also excludes all Medicaid beneficiaries 
who are not seniors. In March of 2001, the Nevada Legislature 
is going to begin hearings on a number of different 
alternatives that other States are considering, and I have 
outlined those in my testimony, and I am sure you are very 
familiar with them. I know this committee has been studying 
this issue for some time and has great expertise.
    In conclusion, I will offer a couple of observations from 
my vantage point some 3,000 miles away. A private insurance 
plan is not successful in helping our seniors if it is 
unaffordable. At this point, for many, our plan is 
unaffordable. And even if we had the lowest-cost plan in the 
Nation, we would only cover 10,000 people when hundreds of 
thousands need help.
    I believe we need to add a prescription drug benefit to 
Medicare so that everyone in need can be helped. Our State 
resources are strapped in implementing new programs. A uniform 
program passed by this Congress that would apply to all seniors 
would be most effective in helping our Nevada seniors in need.
    My experience with this insurance-based approach is that 
its elements are often confusing for seniors, and if the 
insurance companies find that they cannot make money, they 
withdraw from the market, again leaving our seniors without 
help.
    Thank you.
    [The prepared statement of Barbara E. Buckley follows:]

   Prepared Statement of Barbara E. Buckley, Assemblywoman, State of 
                                 Nevada

    Mr. Chairman, members of the Committee, for the record my name is 
Barbara E. Buckley. I am serving my fourth term as the Assembly 
representative for District 8 in Clark County, Nevada. I also serve as 
the Majority Leader for the Nevada Assembly. I have served on the 
Commerce and Labor Committee for all four terms and served on the 
Health & Human Services Committee for the previous three terms.
    In my tenure in the Nevada Legislature, I have worked extensively 
on health care issues, sponsoring the Nevada Patient's Bill of Rights 
in 1997 and expanding on our work by creating a cabinet level position 
of Ombudsman for Health Care Consumers in 1999.
    In 1999, I was part of the Assembly leadership team that fought to 
ensure our tobacco dollars were earmarked for health care, senior 
programs, and programs to prevent tobacco use in our state. I am proud 
to say that those efforts were successful and that Nevada dedicated 50% 
of its tobacco dollars to these programs.
    Like most legislation enacted in Nevada, and indeed all 50 states, 
our tobacco legislation was the result of compromise between elected 
officials of different parties with divergent opinions on how to 
accomplish what is best. The Assembly leadership was committed to 
securing a portion of the funds to promote independent living programs 
for senior citizens as well as establishing a prescription drug plan.
    When our governor asked that we try an insurance-based senior 
prescription drug plan, many of us were skeptical about whether such a 
plan could work but agreed to try the plan so as to ensure our other 
goals in the legislation were met. And so, with the unanimous support 
of the 1999 Nevada Legislature, we began our experiment with an 
insurance-based senior prescription drug plan.
    The statute sets forth basic details of the insurance-based 
prescription drug plan. A senior would be eligible for a subsidy 
depending on his or her income. The attached chart reflects the subsidy 
available:

------------------------------------------------------------------------
                            Income                               Subsidy
------------------------------------------------------------------------
$0-$12,700....................................................       90%
$12,700-14,800................................................       80%
$14,800-17,000................................................       50%
$17,000-19,100................................................       25%
$19,100-21,500................................................       10%
------------------------------------------------------------------------

    The maximum amount of subsidy that could be awarded to an 
individual was capped at $480.00 per year. $4.2 million was set aside 
to begin the program; it was estimated that approximately 10,000 
seniors could be assisted.
    Implementation of the program was left to the Nevada Department of 
Human Resources. The department decided to initiate a request for 
proposals to all insurers for participation in the Senior RX program. 
They decided at the outset to set few, if any, parameters on program 
design. For example, it did not require compliance with any sort of 
affordability design for co-payments or deductibles; it did not require 
adherence to any sort of appeal process if the insurer were to use a 
formulary. The administration wanted to ensure that it received as many 
bids as possible and left program design to the insurance companies.
    In March of 2000, Nevada released its first request for proposals. 
The results were disappointing; only one insurance company applied and 
it was not licensed in the State of Nevada. The request for proposals 
was redesigned and re-released. Five companies submitted a bid and in 
the fall of 2000, Fidelity Security Life Insurance Company was 
selected.
    The successful bid resulted in the Senior Rx Program. Attached to 
my testimony is its outline. As you can see, there are two programs--a 
blue and a silver.
    The premium for blue program costs $74.76 a month or $897.12 a 
year. There is a $100 calendar year deductible. A managed formulary is 
utilized. Generic drugs cost $10.00; preferred drugs cost $35 or 50% of 
the cost of the drug, whichever is greater. Non-preferred drugs are not 
covered. The maximum annual plan benefit is $5,000.
    The premium for the silver plan's premium is $98.31 a month or 
$4,179.72 a year. Generic drugs are $10.00; preferred brands are $25. 
Non-preferred brands are $40 or 40% of the cost of the drug, whichever 
is greater. The maximum annual plan benefit is also $5,000.
    As of January 26, 2001, 1,457 applications for the program have 
been received; 124 are enrolled. Almost 700 people are eligible for the 
subsidies, but they have not yet chosen to sign up for the benefits or 
pay their share of the premiums. They have 60 days to do so.
    Reviews of the program are decidedly mixed. I am pleased that the 
Nevada Legislature and the Governor felt that establishing a 
prescription drug program is a high priority for our state. I am 
pleased that our State chose to go forward instead of waiting for 
Congress to act. However, our program has many serious shortcomings.
    First, the program only covers 10,000-12,000 seniors who earn less 
than $21,500. That means there are over 100,000 additional seniors 
earning below $21,500 who are unable to take advantage of the program 
due to funding limitations. Seniors who earn $21,501 and higher are not 
eligible at all. These excluded seniors should not have to choose 
between paying their power bill and affording prescription drugs--a 
very real choice right now.
    For the few that are offered coverage, the insurance model approach 
does not result in an affordable prescription drug model for many. For 
example, if Mary Smith earns $12,000, and needs two generic drugs, one 
preferred drug, and one non-preferred drug, (NAME THEM) and selects the 
Blue plan, she must pay the following:

$417.12 a year on premiums
$100 annual deductible
______________________CO-pays
    As you can see, the program penalizes Medicare beneficiaries who 
need brand name drugs by charging unaffordable co-payments, even though 
there may not be generic drugs that are medically appropriate for them.
    On the other end of the user extreme, if John Doe uses __________, 
__________, and __________, and he earns ______ a year, he will be 
required to pay ______ in premiums, a $100 deductible and ______ in co-
payments. Purchasing the drugs without any insurance would cost only 
__________. (CONTRAST WITH SENIOR USING JUST ONE OR TWO GENERICS)
    The prescription drug program also excludes Medicare beneficiaries 
with disabilities. These beneficiaries are likely to be poorer, sicker, 
and have less access to alternative sources of payment for drugs such 
as Medigap or Medicare HMOs.
    In March, 2001, the Nevada Legislature will begin hearings on 
prescription drug issues. I believe that the Governor and the 
Legislature is committed to making whatever changes are necessary to 
improve our program for our seniors. The Task Force for the Fund for a 
Healthy Nevada, chaired by myself and Assemblywoman Vivian Freeman, 
requested bill drafts which will be considered at that time.
    One bill will create a state-administered prescription drug plan 
similar to those run by 26 other states with more affordable co-
payments. Another makes improvements to the existing insurance based 
program, such as the right of a senior to pay the lower price when a 
generic drug is not recommended by the their physician and the right to 
appeal a denial of a certain drug.
    On a broader level, we will also hear testimony on the price of 
prescription drugs and approaches other states have taken in examining 
these price increases. We will no doubt hear from individuals who go to 
Mexico to purchase drugs cheaper than they are in the United States.
    Finally, the Nevada Legislature will consider measures recently 
adopted by other states--requiring pharmacies to honor Medicaid prices 
for prescription drugs needed by individuals on Medicare (with a state 
established dispensing fee) and the use of bulk purchasing to lower the 
price of drugs.
    The Legislature will also examine a recent University of Boston 
study by Alan Sager and Debbie Socolar entitled ``A Prescription Drug 
Peace Treaty: Cutting Prices to Make Prescription Drugs Affordable For 
All and to Protect Research: State by State Savings''. Sagar and 
Socolar argue that the marginal cost of production for producing more 
pills once they have been developed is only 5% of retail price. They 
argue that Wall Street analysists concur that drug companies could make 
up for price cuts by selling more medications and suggest that if drug 
prices are set at the Federal Supply Schedule price, government could 
subside all necessary drug costs for people who cannot afford the 
discounted price. This study notes that there are 557,000 people in 
Nevada without any drug coverage at all. This includes 75,000 seniors 
without any drug coverage, 398,000 uninsured people, and 84,000 
privately insured people with no drug coverage. Our State ranks 4th 
highest among the states in the percentage of people without drug 
coverage. This study indicated that Nevada could have saved $186 
million dollars this year alone by purchasing drugs at the Federal 
Supply Schedule utilized by the Veterans Administration. Hearings will 
be held on this study in Nevada.
    I know that this Committee has been studying these issues for some 
time and has great expertise in this area. I would offer a few 
observations from my vantage point three thousand miles away in Nevada. 
A private-insurance plan is not successful in helping our seniors if it 
is unaffordable. At this point in time, for many, our plan is 
unaffordable. Even if we had the lowest cost plan in the nation, we 
would cover only 10,000 people when 150,000 need help.
    I believe we need a prescription drug benefit added to Medicare so 
everyone in need can be helped efficiently and effectively. I believe 
that block-granting to the states would be inefficient--it would 
require 50 different administrations to struggle the way Nevada did 
while seniors wait for help. It also taxes a state's already strapped 
human resources.
    For example, it has taken the Nevada Department of Human Resources 
three years to increase the number of insured children in our Nevada 
Check-Up program--the CHIP program--from 1,400 to 16,000. Nevada's 
Medicaid waiver program for individuals with disabilities is still not 
off the ground even though it was approved by the 1997 Legislature. 
This is not because they do not want to help children or people with 
disabilities--it is a resource issue. To add yet another program to be 
implemented to the State's taxed resources is not efficient when the 
Medicare program exists and could be improved. It would also allow us 
to use our scarce state resources and help other programs in need. One 
that immediately jumps to mind is the need to help those on fixed 
incomes with assistance in paying their utility bills--our electric 
bills alone will jump 60% by 2003 and gas rates have also climbed.
    Thank you for the opportunity to share a few thoughts on Nevada's 
experience and I would be happy to answer any questions.

    Mr. Bilirakis. Thank you very much, Ms. Buckley, for 
sharing with us the experience of Nevada in this area.
    Mr. Smith.

                   STATEMENT OF JAMES F. SMITH

    Mr. Smith. Mr. Chairman and members of the subcommittee, I 
am Jim Smith, senior vice president of health care services of 
CVS Pharmacy. As the largest pharmacy provider in the Nation, 
CVS operates 4,126 community pharmacies in 27 States. CVS 
operates 278 pharmacies in districts of this subcommittee's 
members.
    I am also here on behalf of the National Association of 
Chain Drug Stores. NACDS represent about 170 chain pharmacy 
companies that operate about 33,000 retail pharmacies all 
across the United States. We very much appreciate this 
opportunity to testify before the subcommittee today.
    We believe that Congress should develop a pharmacy benefit 
for seniors, not just a prescription drug benefit. Because 
seniors take so many more prescription medications than younger 
individuals, they need ready access to community pharmacy-based 
education, counseling, and medication therapy management so 
that they can take their medications appropriately to achieve 
the intended medical outcomes.
    Mr. Chairman, we especially applaud your leadership in 
recognizing the essential nature of these services by including 
a comprehensive medication therapy management benefit in your 
legislation, H.R. 5151. It is absolutely critical that any 
Medicare prescription drug benefit that Congress approves 
includes coverage for these services.
    About 69 percent of seniors have some form of prescription 
drug coverage through a variety of sources. About 31 percent of 
the seniors do not have any form of prescription coverage and 
pay for their prescriptions out of pocket. What can pharmacies 
do to help those seniors without coverage who pay for their 
prescription drugs? First, our pharmacists work with patients 
and their doctors to try to maximize the use of lower-cost 
generics when they are available on the marketplace. The 
savings for using generics are remarkable and unmistakable. At 
CVS the average brand of prescription price is about $65, while 
the average generic prescription price is about $15, difference 
of 333 percent.
    With billions in dollars in brand names drugs coming off 
patents over the next few years, we believe it is critical that 
any Medicare drug benefit includes incentives to encourage 
greater generic use. We are concerned, however, about some of 
the tactics being used by brand name companies that may delay 
the availability of many of these lower-cost generics and thus 
increase costs for all prescription drug users.
    Second, many of our pharmacies already offer discounts to 
seniors on prescription drug purchases. These discounts are 
usually about 10 percent, but each pharmacy has its own policy 
on discounting their prices for seniors. We are a fiercely 
competitive industry as evidenced by our 2 percent net profit 
margins. If you don't like the price at one pharmacy, you can 
go to another. Many pharmacies will match their competitor's 
prices. And, yes, retail pharmacy prices do vary from store to 
store, reflecting differences in cost of doing business, loss 
leaders, and other factors. The fact is, however, consumers can 
and should shop around for prices.
    We believe that two good principles for the committee to 
keep in mind when developing senior drug benefits are, first, 
don't overpromise to the seniors; and second, make sure that 
you understand how all the pieces fit together in the pharmacy 
marketplace.
    Having said this, we are concerned about policy approaches 
that would seek to control or target retail prescription prices 
as the solution to the high cost of prescription drugs for 
seniors. Here is why: Almost 80 percent of the cost of the 
average retail prescription price represents the cost, the 
pharmacy's cost, of acquiring the drug product from the 
manufacturers, over which we have no control. The remaining 20 
percent of the prescription price represents our operating 
costs, such as heat, light, rent, salaries, computers, 
counseling and overhead expenses. Currently our salary budgets 
are experiencing significant upward pressure as a result of the 
critical pharmacy shortage.
    We look forward to working with you this year, Mr. 
Chairman, on alleviating this shortage and ensuring that an 
adequate supply of pharmacists exists to serve all Americans.
    Given these facts, any initiatives that seek to control and 
limit our retail charges do nothing to affect our cost of 
buying the drugs. For example, these so-called cash discount 
card programs essentially require pharmacies to provide a 
discount on the retail prescription price without lowering the 
cost of providing the product. In other words, the pain doesn't 
flow upstream.
    We also believe that these prescription cash discount cards 
create unfulfilled promises for seniors. If a senior cannot 
afford a drug at $100, it is very unlikely that this senior can 
afford it at $90.
    Second, some say you may be able to obtain better 
prescription prices for the elderly by pooling their purchasing 
power so they can get the same volume discounts obtained by 
other pharmaceutical purchases. Be wary of this line of 
argument. The pharmaceutical marketplace does not work that 
way.
    Let me give you a case in point. If volume purchasing drove 
manufacturer discounts, then why do some of the largest 
pharmaceutical purchasers, such as CVS, other large drug 
chains, as well as many independent pharmacies that belong to a 
large buying group, pay higher prices for brand name drugs than 
smaller pharmaceutical purchasers who buy less volume? 
Insurance plans and PBMs say that they can volume purchase and 
get lower prescription prices for seniors. All this really 
means is they require the pharmacy to give a discount to the 
seniors without passing along to the seniors any of the 
manufacturers' discounts, rebates or other financial incentives 
being given to the plan.
    We also believe that the subcommittee should take a good 
hard look at the use of competitive-based premium support 
models and pharmaceutical benefit managers, also known as PBMs, 
in providing any new Medicare drug benefit. For example, how 
did PBMs achieve most of their savings? In 1998, CBO said much 
of the savings that PBMs achieve appear to come from the lower 
drug prices paid to pharmacies rather than rebates offered by 
drug manufacturers.
    So then what works for seniors in terms of providing them a 
meaningful pharmacy benefit? First let me say we support the 
establishment of a meaningful voluntary pharmacy benefit 
program for all seniors that need and want it. For the short 
term we believe that the best course that Congress can take is 
provide Federal funds to States to help low-income seniors 
obtain this pharmacy benefit. Many States already have these 
programs in place, like New York, Pennsylvania, New Jersey, 
Illinois, and they work. Almost every State is now considering 
enacting or developing some sort of prescription assistance 
program for seniors. For that reason we believe that States are 
in good position right now to help those most in need. For the 
long term we believe that any new drug----
    Mr. Bilirakis. Would you finish up, please, Mr. Smith.
    Mr. Smith. I am summing up right now.
    For the long term we believe that any new drug benefit for 
seniors should promote the utilization of generic drugs, 
provide seniors with access--with meaningful access to 
community-based medication therapy management, give seniors 
access to the community-based pharmacy provider of their 
choice; not economically coerce seniors to using prescription 
delivery mechanisms such as mail order, not include price 
controls on retail pharmacy prices including cash discount 
cards, and assure that the community pharmacies are adequately 
compensated and providing services to meet the needs of our 
seniors.
    We look forward to working with you and the committee on 
these issues. Thank you.
    [The prepared statement of James F. Smith follows:]

  Prepared Statement of James F. Smith, Senior Vice President, Health 
                     Care Services, CVS Corporation

                              INTRODUCTION

    Mr. Chairman and Members of the Subcommittee. I am Jim Smith, 
Senior Vice President of Health Care Services of CVS Corporation. As 
the largest pharmacy provider in the nation, CVS operates 4,126 
community pharmacies in 27 states. In 2001, we will provide an 
estimated 320 million prescriptions. CVS operates 278 pharmacies in 
districts of this subcommittee's members.
    I am also here on behalf of the National Association of Chain Drug 
Stores (NACDS). NACDS represents about 170 chain pharmacy companies 
that operate about 33,000 retail pharmacies all across the United 
States. Chain pharmacy is the single largest segment of pharmacy 
practice. We filled about 60 percent of the 3.1 billion prescriptions 
provided across the nation last year. NACDS operates 2,112 stores in 
the districts of this subcommittee's members.
    We very much appreciate this opportunity to testify before the 
subcommittee today. We believe that our experience in delivering and 
managing pharmacy benefits can be of value to the subcommittee as you 
begin your important work this year in determining what works, and 
doesn't work, for seniors in helping them obtain their vital 
prescription medication and pharmacy services.

        DEVELOP A PHARMACY BENEFIT, NOT ONLY A ``DRUG'' BENEFIT

    Today, when a patient arrives at their local community pharmacy, be 
it a chain pharmacy or an independent, they come into contact with one 
of the most accessible and trusted providers in the entire health care 
system. It is estimated that 95 percent of Americans live within five 
miles of a retail community pharmacy.
    Thus, the vast majority of Americans are never far from a highly 
trained health professional that can provide medications or advice on a 
wide range of health care issues. Convenient access to community 
pharmacies makes us a critical part of society's health care safety 
net.
    Prescription medications are the most widely used and cost-
effective health care interventions used by patients today. Modern 
prescription drugs have extended and improved the lives of millions of 
Americans and saved millions of dollars through shortened length of 
illnesses, increased productivity, and reductions in hospitalization 
and medical procedures. Community pharmacy is proud of the role we have 
in assuring the safe and effective use of these therapies.
    That is why we believe that any new program to expand prescription 
drug coverage to seniors should be a pharmacy benefit, not just a 
prescription drug benefit. Too often, we think of a prescription drug 
benefit as only providing a ``drug product'' to seniors. We believe 
that this is a serious mistake. Seniors take so many more prescription 
medications than younger individuals. For that reason, seniors need 
ready access to community-pharmacy-based education, counseling, and 
medication therapy management, in addition to the drug product, so they 
can take their medications appropriately to achieve the intended 
medical outcomes.
    We believe that insurers, payors, pharmaceutical manufacturers, and 
seniors themselves can agree that these important community-based 
pharmacy services help make better use of prescription products. To 
play off a popular catch-phrase, ``pharmacy doesn't make the drugs, but 
pharmacy does make the drugs work more effectively.''
    We applaud forward thinking members of this House who supported 
inclusion of medication therapy management services in various 
prescription drug proposals introduced last year. Mr. Chairman, we 
especially applaud your leadership for recognizing the essential nature 
of these services by including a comprehensive medication management 
benefit in your legislation, H.R.5151. It is absolutely critical that 
any Medicare prescription drug benefit that Congress approves includes 
coverage for these services.

           EXISTING PRESCRIPTION COVERAGE SOURCES FOR SENIORS

    Now let me turn to our perspectives on the various approaches being 
used to provide prescription drug benefits to seniors, and what 
pharmacies already do to help uninsured seniors obtain their 
prescription medications. As the Committee knows, about 69 percent of 
seniors have some form of prescription drug coverage through a variety 
of sources.1
---------------------------------------------------------------------------
    \1\  Kaiser Family Foundation, ``The Medicare Program'', Issue 
Brief, October 2000.
---------------------------------------------------------------------------
    About 50 percent of seniors obtain their coverage through private 
sector sources, such as employer-sponsored retiree plans, Medigap 
plans, and Medicare managed care plans. The remaining seniors obtain 
their prescription coverage from public-sector sources, predominantly 
Medicaid and state-based pharmaceutical assistance programs.
    About 31 percent of seniors do not have any form of prescription 
coverage and pay for their prescriptions out of pocket. Clearly, we see 
first hand that many seniors without prescription drug coverage, and 
even those with it, struggle to pay their prescription drug bills.
    What do pharmacies do to help these seniors obtain their 
prescription drugs? First, our pharmacists work with patients and their 
doctors to try to maximize the use of lower-cost generics when they are 
available on the market. The savings from using generics are 
unmistakable. At CVS, the average brand name prescription price is 
about $65, while the average generic prescription price is about $15, a 
difference of 333 percent.
    Obviously, if a generic substitute is not available, we will try 
and work with the doctor to see if the patient can, in fact, take a 
generic version of another drug. With billions of dollars in brand name 
drugs coming off patent over the next few years, we believe that it is 
critical that any new Medicare drug benefit have both patient and 
pharmacy incentives in order to encourage greater generic use. We are 
concerned, however, about some of the tactics being used by brand name 
companies that may delay the availability of many of these lower cost 
generics, and thus raise costs for all prescription drug users.
    Second, many of our pharmacies also offer discounts to senior 
citizens on their prescription drug purchases. These discounts are 
usually about 10 percent, but each pharmacy has its own policy on 
discounting their prices for seniors. Consumers already reap the 
benefits of the highly-competitive retail pharmacy marketplace. We are 
a fiercely competitive industry, as evidenced by our 2 percent net 
profit margins. If you don't like the price at one pharmacy, you can go 
to another. Many pharmacies will match their competitors' prices. And 
yes, retail pharmacy prices do vary store to store, reflecting 
differences in cost of doing business, loss leaders, and other factors. 
The fact is, however, consumers can and should shop around for prices.
    Third, we can help the poorest seniors access the patient 
assistance programs that pharmaceutical manufacturers have established. 
Clearly, these programs provide a short-term benefit to some low income 
seniors, but they are not an adequate solution or appropriate 
substitute for meaningful, long-term prescription drug coverage.

          DON'T OVER PROMISE SENIORS AND UNDERSTAND THE MARKET

    Regardless of how seniors obtain for their prescription drugs, 
whether through public or private prescription programs, or pay out of 
pocket, community retail pharmacies are in a good position to help 
evaluate for the Committee the effectiveness of various options for 
prescription drug coverage. In other words, because we are at the point 
of service where the ``rubber meets the road'', we can help determine 
what works and what doesn't.
    When considering approaches to prescription drug coverage, we 
believe that two good principles for the Committee to keep in mind are: 
first, don't over promise seniors; and second, please make sure that 
you understand how all the pieces fit together in the pharmacy 
marketplace.
    For example, many of you often receive mail from constituents 
asking the simple question: ``Why do my drugs costs so much?'' Well, 
pharmacy economics 101 is not that difficult to understand. 
Reimbursement for almost 85 to 90 percent of all our prescriptions is 
set by third party plans, such as insurance companies, HMOs or PBMs. 
Third party plans keep squeezing down reimbursement rates in order to 
control exploding costs, but these policies do little to control 
escalating expenditures. Under these plans, most patients simply pay a 
copay for these prescriptions. Patient copays have been increasing over 
the last few years also because of the escalating costs of prescription 
benefit programs.
    Having said this, we are concerned about policy approaches, both at 
the Federal level and the state level, that would seek to target retail 
prescription prices as the solution to the high cost of prescription 
drugs for seniors. Here's why. The Committee should be aware that 
almost 80 percent of the cost of the average retail prescription price 
represents costs to the pharmacy over which we have absolutely no 
control (See Attached). These are predominantly the cost of acquiring 
the drug product from the manufacturer, which is passed through to the 
consumer, and thus reflected in the retail price charged.
    The remaining 20 percent of the prescription price represents our 
operating costs, such as heat, light, rent, salaries, computers, 
counseling, and other overhead expenses. Currently, our salary budgets 
are experiencing significant upward pressures as a result of the 
critical pharmacist shortage. We look forward to working with you this 
year, Mr. Chairman, on alleviating this shortage and assuring an 
adequate supply of pharmacists exists to serve all Americans, including 
Medicare beneficiaries.
    With this as background, let me now talk about some of our 
perspectives and cautions on other approaches that you may consider 
this year.

     PRESCRIPTION DRUG ``CASH DISCOUNT CARDS'': UNFULFILLED PROMISE

    We have no upward negotiating leverage with brand name drug 
manufacturers, so any initiatives that seek to control or limit our 
retail charges do nothing to affect our cost of buying the drug. For 
example, these so-called ``cash discount'' card programs essentially 
require pharmacies to provide a discount on the retail prescription 
price, without lowering our cost of providing the product. In other 
words, the pain doesn't flow upstream.
    We also believe that these prescription cash discount cards create 
unfulfilled promises for seniors. If a senior cannot afford a drug at 
$100, it is very unlikely that the senior can afford it at $90. In 
addition, as stated above, many of our pharmacies already give senior 
citizen discounts, which reduce the retail price essentially to the 
price that the senior would pay under the cash discount card. Finally, 
many of these cash discount card programs also often use out-of-state 
mail order as an incentive to steer patients to certain drugs that may 
be inappropriate for the senior. Mail order also takes the senior out 
of the neighborhood pharmacy setting.
    On this topic, we'd like to draw your attention to a recent report 
from the Massachusetts Institute of Technology that said, ``the 
individuals who face the greatest burden lack insurance coverage for 
prescription drugs are in relatively poor health with severe chronic 
conditions, have relatively low income, and do not qualify for existing 
state prescription drug coverage programs. These individuals need 
benefits that far exceed the savings attainable from a pure discount 
card program.'' 2
---------------------------------------------------------------------------
    \2\  Massachusetts Institute of Technology, The HOPE Plan and the 
Section 271 Discount Drug Purchase Program for Massachusetts: An 
Economic Analysis. December 21, 2000.
---------------------------------------------------------------------------

              THE MYTH OF VOLUME PHARMACEUTICAL PURCHASING

    Some may say that you can obtain better prescription prices for the 
elderly by ``pooling their purchasing power'' so that they can get the 
same volume discounts obtained by other pharmaceutical purchasers. What 
I am here to tell you is be wary of this line of argument--the 
pharmaceutical marketplace doesn't work that way. Volume purchasing 
does not drive pharmaceutical manufacturers to give discounts--you have 
to move a manufacturer's ``market share'' to obtain these discounts.
    Let me give you a case in point. If ``volume purchasing'' drove 
manufacturer discounts, then why do the largest pharmaceutical 
purchasers, such as CVS and other large chain pharmacies, as well as 
many of the independent pharmacies that belong to large buying groups, 
pay higher prices for brand name drugs than smaller pharmaceutical 
purchasers who buy less volume?
    Here's what the proponents of ``volume purchasing'' for seniors 
don't and won't tell you. All this really amounts to is simply 
discounting the retail prescription price that seniors pay at their 
pharmacy, without affecting our cost of buying the drug or without 
requiring the insurance plan or PBM to ``pass through'' to the senior 
any and all of the financial incentives that are given to them by the 
manufacturer. If these plans were required to pass through all the 
discounts that they negotiate, both pharmacy discounts and manufacturer 
discounts, the senior would truly benefit from lower prescription drug 
prices. Without these other ``pass throughs'', the entire burden of so-
called ``volume purchasing'' falls squarely and unfairly on the 
shoulders of community pharmacies.
    We also believe that some of the estimates being made of the size 
of the discounts that volume pharmaceutical purchasing would attain for 
seniors are unrealistic and will create serious unfulfilled promises. 
For example, there were several numbers floating around last year that 
indicated that private sector entities, or PBMs, would be able to lower 
retail prescription prices paid by consumers by 25 percent, with some 
estimates as high as 30 to 39 percent.3
---------------------------------------------------------------------------
    \3\ Price Discounting Practices for Pharmaceuticals in the U.S. The 
Lewin Group, April 2000.
---------------------------------------------------------------------------
    We do not know where these numbers come from or how they are 
calculated. The only remotely conceivable way that this discount size 
could be attained is if the PBM is required to pass along to the 
consumer any and all financial incentives (e.g. rebates or discounts) 
that they negotiate with pharmaceutical manufacturers. I am here to 
tell you that this does not happen today in the marketplace and is 
creating false and unrealistic expectations.

            ``DRUGS ONLY'' PLANS AND INSURANCE-BASED MODELS

    We understand that there is support among Members for creating 
``drugs only'' insurance-based models to provide prescription drug 
coverage to seniors. Recent experience in Nevada should tell us that, 
just because you ``build it'', doesn't mean that ``seniors will come.'' 
In a genuine effort to help seniors obtain prescription drugs, Nevada 
embarked upon establishing an insurance-based model to provide 
prescription drug coverage to seniors. After several attempts to 
finally find a company that wanted to administer the program, reports 
are that only a handful of seniors have signed up because of the high 
premiums and cost sharing in the program.
    We are concerned about a similar fate if such an approach is tried 
at the Federal level. In general, these programs are subject to 
significant ``risk selection'', and tend only to attract those seniors 
that need protection against high prescription drug bills. Many seniors 
will not see the benefit in obtaining this coverage because of the 
significant deductibles and premiums that have to be paid before any 
benefit is derived from the coverage. Thus, because the cost will keep 
many seniors out of the ``risk pool'', premiums will keep increasing 
for those remaining in the pool, making it less and less affordable for 
those that need the coverage.
    Moreover, the cost of these private-sector insurance plans can also 
be prohibitive, as was reported last week in the New York Times. The 
premiums for Medigap plans with prescription drug coverage, the model 
on which these insurance-based programs are based, will increase 31 
percent in New York, 26 percent in Illinois, 24 percent in Wisconsin, 
16 percent in Arizona, and 14 percent in Ohio.4
---------------------------------------------------------------------------
    \4\ Insurers Push Rates Higher for Medicare Supplement. Milt 
Freudenheim, New York Times, February 8, 2001.
---------------------------------------------------------------------------

                ``PREMIUM SUPPORT'', CAPITATION AND PBMS

    We also believe that the subcommittee should take a good, hard look 
at the use of the competition-based ``premium support'' model and 
pharmaceutical benefit managers, also known as PBMs, in providing any 
new Medicare drug benefit. For example, how do PBMs achieve most of 
their savings? By focusing on squeezing pharmacy reimbursement or 
negotiating rebates and discounts from drug manufacturers?
    The track record of PBMs in being able to manage pharmaceutical 
costs was called into question by CBO in a 1998 study, which said: 
``Much of the savings that PBMs achieve appear to come from the lower 
prices paid to pharmacies rather than from the rebates offered by drug 
manufacturers.'' 5 The study found that 50 percent to 70 
percent of the drop in the plans' spending on prescription drugs 
resulted from lower retail prescription prices. Only 2 to 21 percent of 
the savings resulted from manufacturer rebates that the PBMs shared 
with the health insurance plans.
---------------------------------------------------------------------------
    \5\ Congressional Budget Office, How Increased Competition from 
Generic Drugs Has Affected Prices and Returns in the Pharmaceutical 
Industry, July 1998, p 8.
---------------------------------------------------------------------------
    This study reflected the experience of the three largest PBMs that 
manage the 9-million member Federal Employees Health Benefits Program 
(FEHBP). Members of Congress should be aware that this program, which 
is being talked about as the basis for a future Medicare ``premium 
support'' model, has been experiencing double-digit increases in 
prescription drug expenditures over the last several years, 22 percent 
for 1998 alone.
    In announcing significant health premium increases for the 2000 
FEHBP plan year, a significant percentage of which was to account for 
escalating prescription drug costs, Office of Personnel Management 
(OPM) Director Janice LaChance said that ``it is clear that competition 
in the marketplace has not effectively slowed the growth in FEHBP 
premiums.'' 6
---------------------------------------------------------------------------
    \6\ U.S. Office of Personnel Management, ``Plan to Control Health 
Premiums for Federal Employees and Retirees announced with Release of 
Premium Increases for 2000. September 20, 1999.
---------------------------------------------------------------------------
    We believe that the experience of FEHBP should be instructive to 
Members of Congress as they consider the ``premium support'' model for 
Medicare. Please note that these prescription drug cost increases are 
occurring in a population that is not representative of the Medicare 
population. FEHBP generally serves a younger population that uses fewer 
prescription drugs than the Medicare population. More significant 
increases are likely to occur in an older, Medicare-based population.
    Moreover, some of the proposed ``premium support'' models would pay 
a fixed, ``capitated'' rate to providers of the pharmacy benefit. Past 
experiences is using capitation models for pharmacy benefits have been 
unsuccessful. There is no reason to believe that they would be any more 
successful today, given the impact that manufacturer direct-to-consumer 
advertising has had on fostering increased prescription drug use. We 
are concerned with this model and the impact that it would likely have 
on the health of Medicare beneficiaries and on the economic viability 
of community pharmacies.

                    SO . . . WHAT WORKS FOR SENIORS?

    What works for seniors in terms of providing them a meaningful 
pharmacy benefit? First, let me say that we support the establishment 
of a meaningful, voluntary pharmacy benefit program for all seniors 
that need and want it.
    For the short term, we believe that the best course that Congress 
can take is to provide Federal funds to states to help low income 
seniors obtain this pharmacy benefit. We know that there are many mixed 
feelings among Members of Congress about this approach. However, given 
that almost every state is now considering enacting or developing some 
form of prescription assistance program for seniors, we believe that 
states are in a good position, right now, to help those most in need.
    And data indicate that 60 percent of those seniors without 
prescription drug coverage, or about 7.2 million seniors, have incomes 
of less than 200 percent of poverty.7 We see many of these 
seniors in our pharmacies every day, struggling to pay their 
prescription bills. For them, they just want some help to get them 
their medications.
---------------------------------------------------------------------------
    \7\ Kaiser Family Foundation. ``The Medicare Program'' Issue Brief, 
October 2000.
---------------------------------------------------------------------------
    For the long term, we want to work with this Committee, the rest of 
the Congress, and the Administration to achieve long term reform of the 
Medicare program to provide the type of quality pharmacy benefit that 
seniors need and deserve.
    We believe that this benefit should:

 promote the utilization of generic drugs when appropriate;
 provide seniors with access to meaningful, community-based 
        medication therapy management services with appropriate 
        compensation for pharmacies;
 give seniors access to the community-based pharmacy provider 
        of their choice;
 not economically coerce seniors to use other prescription 
        delivery mechanisms, such as out-of-state mail order;
 not include price controls on retail pharmacy prices, 
        including prescription cash discount card programs; and,
 assure that community pharmacies are adequately compensated in 
        providing services to meet the needs of our nation's seniors.
    We look forward to working with you and the Committee on these 
issues, and that you for the opportunity to testify today.

    Mr. Bilirakis. Thank you very much, Mr. Smith.
    I will start the questioning. Mr. Smith, I will start with 
you.
    In your testimony you state that it is important for 
Members of Congress to understand how all of the pieces fit 
together in the pharmacy marketplace. God knows, that certainly 
is true. And you have touched on that, but not in very much 
detail. I wonder if you could help me understand the chain that 
takes place as a prescription drug tablet journeys from the 
manufacturing plant to the medicine chest of a senior citizen. 
I appreciate the fact that you represent the chain drugstores, 
but take into consideration in addition to the chain drugstore 
the little family drugstore, which there aren't many left out 
there. Could you do that for me?
    Mr. Smith. Sure. There are many parts to this, but in 
essence the delivery--the distribution system, is that what you 
are interested in? It comes from the pharmaceutical----
    Mr. Bilirakis. I am interested in the distribution system, 
but also your opinion. And you touched on this in terms of the 
costs of that particular tablet as it goes through the system.
    Mr. Smith. I will give it to you from the chain 
perspective. And today most independents form buying groups, 
and they operate very similar to a chain, so I think you can 
use that model for everyone.
    Mr. Bilirakis. Do most----
    Mr. Smith. Most independents, and as you said there are 
fewer of them today, but they are actually stabilizing out 
there and are much stronger today than they were in previous 
years. So we do have a very strong community-based system out 
there. But most of them buy by either of two mechanisms. They 
buy directly from the manufacturers where that is permitted, or 
they buy from a wholesaler.
    Mr. Bilirakis. Who is that wholesaler?
    Mr. Smith. Wholesaler could be somebody like Cardinal 
Health or McKesson or somebody like that, and they will have 
daily deliveries. The bulk of what we purchase in dollar volume 
is usually purchased through a manufacturer directly. Now, we 
warehouse that in certain warehouses across the Nation, or 
stores order that medication and is delivered to the stores. 
But obviously you can't be in supply of every medication every 
day, so we use wholesalers on a daily basis to supplement our 
inventories.
    Mr. Bilirakis. Are these wholesalers, the warehouses that 
you are referring to, are some of those CVS warehouses?
    Mr. Smith. Yes. We have CVS warehouses across the Nation 
where our stores are located, which supplies not only on 
pharmacy items, but also over-the-counter items. We also have 
wholesalers located geographically which we use a primary 
wholesaler and generally a backup wholesaler.
    Mr. Bilirakis. Can you take the cost of that tablet----
    Mr. Smith. The cost of a tablet, and I will break it to the 
brand side and generic side. If we go and we buy from pharma 
company A, whatever the medication we are buying, whatever 
class it is, we are going to pay on the brand side the exact 
same price as our competitor from Rite Aid, Walgreen's, or 
Eckerd's or the independent buying group. On the brand side 
there is no volume purchasing.
    Mr. Bilirakis. That is if you purchase it from the 
manufacturer?
    Mr. Smith. Manufacturer or wholesaler.
    Mr. Bilirakis. All right then. Or wholesaler. So if it goes 
from the manufacturer to, let's say, one of your warehouses, 
then what does your warehouse do? Does the warehouse purchase 
that tablet from the manufacturer?
    Mr. Smith. The warehouse is just a holding point to 
distribute the medications to the individual pharmacy stores.
    Mr. Bilirakis. So it doesn't really--it doesn't purchase it 
and then resell it?
    Mr. Smith. We purchase centrally from our home office in 
Woonsocket, Rhode Island, and we have it delivered to our 
distribution centers, which then distribute it to the stores. 
We also use--the individual stores on an as-needed basis will 
order daily from a wholesaler to get medications which they are 
out of stock on and they have to get to the store. Those are 
preset prices on contracts or arrangements. But as I said on 
the brand side, those prices are relatively the same across the 
industry. There are some volume purchase arrangements on the 
generic side. So the larger you are, the better you can buy 
some of those products. So there is a little bit of slight 
advantage on buying generics, although the bulk in dollars of 
what we buy is obviously on the branded side.
    Now, what we sell those--what we sell in medications is 
certainly dependent on the plan which we have. And CVS, 90 
percent of the business we do from pharmacy is through some 
type of third-party arrangement. And we negotiate with that 
third-party plan whether it is a Medicaid or whether it is a 
private PBM or HMO. Each one of those are different contractual 
arrangements based on administrative costs.
    Mr. Bilirakis. Did you say 90 percent?
    Mr. Smith. Ninety percent of CVS business, higher than most 
of the industry. Most of the industry is somewhere in the 80's. 
But 90 percent of our business is done through some type of 
third party, and those arrangements are all separate. And once 
again, the arrangements there are done from the HMO, PBM to the 
plan, so they arrange on rebates or whatever else they do. So 
the financial gain there would be from the PBM or the insurance 
agency, not to the retailer pharmacy.
    Matter of fact, just the opposite really occurs at the 
retail because we are the ones who end up administering the 
care, administering the formulary or whatever. So additional 
costs end up being promoted at the retail setting because our 
pharmacists are required to explain, try to explain to plan 
design why they can't get the medication they have been taking 
for 20 years.
    As you all hold your town meetings next week and on a 
regular basis in your district, I also visit our pharmacists in 
each of the locations, and we hold town meetings, and the one 
thing that they tell me is, please take away the administrative 
burden of filling a prescription. Give me the ability to do 
what I have gone to school for 6 years for. Let me talk to my 
patients and my customers, explain to them the medications they 
are taking.
    Right now as we try to----
    Mr. Bilirakis. Well, my time has expired, Mr. Smith. I will 
tell you, as we will announce when we finish up, there will be 
questions that will be submitted to all of you, and I plan to 
go into some of the details regarding my questioning in more 
detail to you.
    Mr. Smith. I would love to do that.
    Mr. Bilirakis. I appreciate that.
    Mr. Brown.
    Mr. Brown. Thank you.
    The chairman in his opening statement linked Medicare 
reform and prescription drug coverage, that this Congress 
perhaps or maybe likely will pursue them together. I think the 
more critical link is between prescription drugs and the $1.6 
trillion proposed tax cut.
    If you look at the cost of prescription drugs, one plan 
that we considered last year was $80 billion over 5 years, 
which is--under Medicare, which is adequate, but hardly as 
generous as many of us would like. A plan with more of an 80/20 
split that would be--would really, I think, better meet the 
needs of Medicare beneficiaries would be at least half again as 
expensive as that.
    Then you also consider in the years ahead, 30 years from 
now, the projections of the Medicare population, today 40 
million will then be some 80 million beneficiaries, and the 
huge burgeoning of costs that come with that.
    Ms. Rowland, if you have done any analysis, if Kaiser has 
done any analysis on this, or if you haven't, if you would, 
just draw on your knowledge and experience of how this all 
collides in the next couple of decades if we pursue the $1.6 
trillion tax cut and we pursue a good prescription drug 
benefit, at least the $80 billion over 5 years; understanding 
the increased costs will cost later and the burgeoning numbers 
of Medicare beneficiaries in the next couple or three decades, 
sort of where we go and what happens.
    Ms. Rowland. Well, clearly as you look at the expanding 
Medicare population, as you look at the history that we have 
just laid out today of the rising cost of prescription drugs, 
but also the increased need of the population for the use of 
prescription drugs, we have no way to really anticipate what 
additional drugs will come onto the market over the next 10 
years. So I think we can really look at this area as one that 
is going to grow, and the cost is going to grow. Some estimate 
that a comprehensive drug benefit under Medicare could cost as 
much as $300 billion over the next 10 years. Obviously when you 
begin to use the surplus for prescription drugs, it requires 
then a substantial commitment of that surplus. A substantial 
tax cut would really leave that fairly limited.
    So I think you really need to look at the fact that if you 
are going to do a meaningful drug benefit, it is probably going 
to be expensive. It is going to grow in cost over time, and you 
are either going to have to commit what resources the surplus 
offers or additional tax revenue.
    Today the elderly pay about 20 percent out of pocket on 
drugs. That is expected to rise to about 30 percent by 2025. So 
we are kind of on a collision course here of increasing costs 
for a very needed medication and the need to pay it down 
through either increased commitment of Federal revenues through 
the surplus or whatever means.
    Mr. Brown. Ms. Rowland, let me go in a different direction 
for a moment, too. Some are advocating--in Congress are 
advocating a drug proposal to specifically target low-income 
individuals. What is your research showing us about coverage, 
who doesn't--about who has coverage, who doesn't, and where the 
real need is?
    Ms. Rowland. Well, the very poorest of the population 
obviously receive coverage through the Medicaid program. Those 
who are basically receiving cash assistance through 
Supplemental Security Income are also eligible for coverage 
under Medicaid, which today includes a prescription drug 
benefit. So it is really the near poor and the modest income 
that have the greatest need for prescription drug coverage, 
although the other thing that one needs to look at is within 
the Medicare population, income and need for drugs are not 
directly related. And so when we look at those with the highest 
drug expenditures and those who don't have coverage today, it 
crosses all income spectrums. In fact, people, for example, in 
rural areas have particular problems. They are less likely to 
have access to HMOs, less likely to have worked in a situation 
giving them retiree benefits. So we really see that the need 
for prescription drug assistance, I think, is fairly universal.
    Mr. Brown. So if someone is 200 or 250 percent of poverty, 
and our program is targeted to those at 175 or below, we really 
are missing out at helping a good number of people who won't 
get help otherwise and will face pretty----
    Ms. Rowland. Right. Like a third of Medicare beneficiaries 
without prescription drug coverage today. About half of them 
have incomes below 175 percent of poverty, so you inevitably 
leave out 6 million people above that who today go without drug 
coverage.
    Mr. Brown. Mr. Chairman.
    Mr. Norwood [presiding]. There are so many of us here, 
happily, today that I am going to keep us on the 5-minute 
schedule, but hopefully we will have time for another round 
because I am absolutely certain that everybody up here has lots 
of questions, and that includes myself, who happily is next.
    Mr. Weller, I would like to ask you some quick questions of 
which I hope, you know, I can get fairly quick answers and then 
go on to Mr. Moroni. Of the 9 million people who purchase 
individual Medigap coverage today, H, I and J, I believe, all 
of those are the prescription drugs, how many of the 9 million 
actually purchase those Medigap policies?
    Mr. Weller. I believe that the 9 million includes both of 
the prestandardized plans, many of which had some prescription 
drug coverage, as well as the 10 standardized plans. Studies 
have shown that less--less than--around 10 percent, I guess, of 
people purchase H, I or J, one of those three.
    Mr. Norwood. Could you compare the price for me real 
quickly as to what perhaps an H or I Medigap policy might cost 
with drug prescription drug benefits versus one that doesn't?
    Mr. Weller. It appears that those policies cost about 
$1,000 more, 1,000 to 1,200. It is very close to the amount of 
the maximum drug benefit in those plans, which is 1,250 and 
$250 deductible. As I noted, the difference in cost is because 
of the difference in other--utilization of other services as 
well as the drugs.
    Mr. Norwood. How many seniors in these plans actually hit 
their caps? Can you give me some percentage of that?
    Mr. Weller. I have not seen any study that had a good 
distribution of that.
    Mr. Norwood. You can get back to me.
    Mr. Weller. I will try.
    Mr. Norwood. I was pretty startled to read that seniors 
electing the drug coverage option, they actually have a higher 
A and B cost than those seniors that are in non-drug plans. Is 
that true?
    Mr. Weller. Yes, that is true.
    Mr. Norwood. Mr. Moroni, I particularly wanted to ask you a 
couple of questions because I think GM is a pretty good model. 
You guys do a lot of things right and have a lot of information 
in terms of the numbers of people that you insure. My 
understanding from what you said was that as you look at your 
coverage for your employees, you are finding that prescription 
drug costs are rising or escalating. Is that still--that is a 
true statement?
    Mr. Moroni. Yes, at approximately 19 percent annually.
    Mr. Norwood. Do you believe that cost is because your 
seniors are actually taking more medications because more are 
available, or do you believe that cost is up there because 
there is an increase in the price of the medications that you 
are buying?
    Mr. Moroni. It is obviously a combination of both. I mean, 
we do have an aging population, like all groups, so part of it 
is that people are taking more drugs. However, you also see 
different factors there; not just more drugs, it is inflation, 
and it is trading up of drugs. So it is really both. And I 
guess I would comment that you want your seniors on the right 
drugs. You know, you want them on hypertension, heart 
medication, whatever it is they need. You also want everything 
that they need to be appropriate and nothing more.
    Mr. Norwood. Tell me, do you see--I mean, as we are taking 
or prescribing more medications, there are a couple of reasons 
that may be true, but one of which is--I hope is that people 
are healthier; in other words, it can be preventative in 
nature. Are you seeing any decrease at all in your health care 
treatment costs as you are seeing an increase in your 
prescription drug costs?
    Mr. Moroni. That is a question we get asked often in 
various forms, and we have seen no decrease in our--we call it 
hospital surgical medical, everything other than the drug 
costs, as the drug costs have increased. So----
    Mr. Norwood. Is the medication a quality of life issue or 
extending life issue more than fewer costs in actual treatment? 
That is an important question. I don't mind you getting back to 
me either if you want to. But that is--if you can know that, it 
would be helpful for us to know.
    Now, you said in your statements that you support a 
universal drug benefit with Medicare. Does your company then--
if and when we do some form of that, do you believe that your 
company would then drop drug benefit coverage for your 
employees because then they could use Medicare?
    Mr. Moroni. I think what we would like to do is have the 
option to see what Congress enacts and then decide how we may 
want to wrap around or provide coverage, you know, within the 
coverage that is enacted. Today we provide wraparound coverage 
for the nondrug benefits to Medicare. So it is all dependent.
    Mr. Norwood. Has there been any discussions with UAW about 
that, any talk about, well, if Congress actually furnishes a 
Medicare coverage, then what General Motors might want to do 
with their plan?
    Mr. Moroni. Not that I am aware. I mean, that conversation 
just hasn't occurred that I am aware of.
    Mr. Norwood. Is that a reasonable concern for people to 
believe that if we go to a full Medicare coverage, that people 
such as yourself that are offering benefits might get out of 
that totally, particularly in view of the rising costs?
    Mr. Moroni. I guess the way that I would--I think the best 
way to answer that without seeing what might be enacted is that 
we hope that it is a universal type of coverage, that----
    Mr. Norwood. Well, you support universal. Let's presume 
that it is universal.
    Mr. Moroni. You know, I think it would be our hope that 
such coverage as universal coverage, it has good controls, and 
it might help some of the employers, whoever they are, whether 
it is General Motors or other employers providing retiree 
benefits, continue to maintain the benefits they are providing. 
I think it is a challenge today for people to do that.
    Mr. Norwood. I will get back with that on the next round. I 
have a minute or so left.
    Mr. Smith, in your purchasing--time is up? Well, my time is 
up. I will get back to you next time. I would like to give the 
time to my good friend John Dingell all the way down at the 
end.
    Mr. Dingell. Mr. Chairman, I thank you for your courtesy.
    Mr. Jones, welcome to the committee. What percent of the 
counties in the United States have HMOs within their borders?
    Mr. Jones. I am not sure. That is not something I would 
know.
    Mr. Dingell. Is it all or part?
    Mr. Jones. I would say it is not all. It is part.
    Mr. Dingell. Would you submit that for the record?
    My information is that 38 million Medicare beneficiaries 
live in areas where there are no HMOs, and that 68.1 percent of 
the beneficiaries live in a county with at least one HMO. Now, 
do you agree with that?
    Mr. Jones. Again, that is not my speciality.
    Mr. Dingell. What would the statement be with regard to 
PacifiCare?
    Mr. Jones. We operate in eight States.
    Mr. Dingell. Eight States. All right. Now----
    Mr. Jones. And not all counties of those eight States. 
There are some counties we don't have HMO benefits in or health 
plan benefits.
    Mr. Dingell. Usually you don't do business in rural 
counties because there aren't enough people there, right?
    Mr. Jones. It is hard to get physicians to----
    Mr. Dingell. So usually the HMOs stay out of the rural 
counties. Yes or no?
    Mr. Jones. Rural counties are difficult, yes.
    Mr. Dingell. So you stay out of the rural counties.
    Now, what criteria do you have at your HMO for going into a 
particular county or staying out of it?
    Mr. Jones. I am a pharmacist, and I don't make those 
decisions. I am not----
    Mr. Dingell. So you don't know.
    Mr. Jones. I don't know.
    Mr. Dingell. But it would be fair to assume you go where 
you make money, right?
    Mr. Jones. I assume.
    Mr. Dingell. I assume.
    Now, what did your HMO do with the money that was given to 
the HMOs in the last Congress? What percentage of it went to 
beneficiaries, and what percent went to profits, and what 
percent went to dividends, and what percent went to the 
corporate officers in salaries or bonus?
    Mr. Jones. Seeing that I am not a financial officer of the 
company----
    Mr. Dingell. The answer is you don't know.
    Mr. Jones. I don't know.
    Mr. Dingell. So if I made the statement that you folks cut 
a fat hog on that, and that the rest of the industry did, you 
would not be able to deny it, would you?
    Mr. Jones. I wouldn't be able to comment.
    Mr. Dingell. Well, I am going to make the statement. You 
cut a fat hog on it, and nobody but you and the HMOs got 
anything out of this.
    Now, having said that, what commitment did the HMOs make 
with regard to the administration bill? This bill, as you note, 
gives money to the States, who are then supposed to give it to 
the HMOs in the somewhat dubious expectation that that money 
will then flow forward and through to the HMO patients. Do the 
HMOs make any commitment on this matter, or do you just intend 
to pocket that fine generosity which flows through from the 
Federal Government?
    Mr. Jones. As I understand, and again, the pharmacy part of 
our company, our parent company, does other things, but as I 
understand, the money flowed through to providers, paid 
providers.
    Mr. Dingell. Now, I note here that in some 66 counties the 
maximum benefit is $1,000 under most of the HMO prescription 
pharmaceutical benefits. I note that the copay is 50 percent, 
and I note that in most instances the plan premium per month is 
somewhere between $29 and $75 a month. Do those figures sound 
right to you?
    Mr. Jones. We don't have percentage copays for our--not at 
our company.
    Mr. Dingell. As a matter of fact, this is interesting. My 
staff informs me that this is your company, and that you do 
have a copay.
    Mr. Jones. We have copays, but not percentages. They are 
individual copay amounts.
    Mr. Dingell. It says brand mail order copay percentage 50 
percent. And this is in Oklahoma: Creek County, Grady County, 
Lincoln County, Logan County, McClain County, Nowata County, 
Okfuskee County, Oklahoma County, Osage, Pottawatomie, Rogers, 
Tulsa, and so on. Is this a surprise to you?
    Mr. Jones. I don't know every single county and every 
single State of our eight States; however, the vast majority of 
our business, in fact----
    Mr. Norwood. Mr. Jones, go ahead and complete the answer, 
and that will end the questioning for Mr. Dingell and yourself. 
We will come back.
    Mr. Dingell. I feel sad about this because I know Mr. Jones 
has been enjoying this questioning.
    Mr. Norwood. I feel sad about it, too, but I was sad about 
my 5 minutes, too.
    Mr. Jones. I would say that greater than 90 percent of our 
copays are fixed. Again, I wasn't aware--you may be entirely 
right.
    Mr. Dingell. I notice that you have a copay----
    Mr. Norwood. Thank you very much, Mr. Dingell. I am sorry 
to interrupt you.
    Mr. Buyer, you are next.
    Mr. Buyer. Mr. Weller, I want you to know that I agree with 
your comments that you made that we should not add a 
prescription drug benefit without doing some structural reforms 
in Medicare, and I think that we should make it as part of a 
comprehensive plan would be my position, so I want to agree 
with your comments.
    Second, to the gentleman from General Motors, I recall in 
the early 1990's when there was this euphoria over Clinton 
care, the major automobile manufacturers supported a provision 
that permitted the government to assume the health care costs 
for your retiree population 55 and older. You wanted to trigger 
them on to the taxpayers; is that correct?
    Mr. Moroni. I can't comment on that. I was not--but that 
would not be my understanding of the triggering on to the 
taxpayers, no.
    Mr. Buyer. Well, I don't know who else was going to pay for 
it if you wanted to trigger them into the universal Clinton 
government health care system. One of the biggest concerns that 
many of us had was when the Big 3 came in, they negotiated a 
lot of different contracts, and then the escalating costs, they 
were very eager to sort of dump retirees onto the government. 
Who is the government? It is the taxpayers.
    So you got my attention here today and so has Ms. Rowland 
in her testimony. I pick up her testimony and she says that 
``40 percent of large employers report seriously considering 
cutting back on drug benefits for their retirees in the next 3 
to 5 years, according to a recent survey of large employers 
conducted for the Kaiser Family Foundation by Hewitt 
Associates.'' So I want to continue with the questions of 
earlier.
    You have some negotiated benefits with union employees. You 
also now have retirees that are nonunion, whether they are 
administrative or white collar. My fear is that while the 
unions are going to put up a really big fight if you think you 
are going to trigger them into some type of plan, they are in a 
comfort zone; but you have a lot of employees, independents, 
widows who may not have that coverage or protection like the 
union retiree may have, and my fear is you are going to trigger 
them into something different.
    So will you please--what do you tell the retirees--I used 
to have a GM facility, a lot of retirees in Kokomo, I have some 
in Marion. What do you say to them? They are on fixed incomes 
right now.
    Mr. Moroni. You know, I think the best way to look at this 
from our perspective is the way to ensure that employers 
continue to provide some sort of retirement benefit, the 
responsible employers that there are right now; to make sure 
that Congress swiftly enacts a type of broad-based universal 
prescription drug Medicare, either program or supplement.
    So I think it just has to be viewed that there are a lot of 
responsible employers out there right now that are still 
providing health care coverage, drug coverage and whatever, 
that probably want to continue to provide such coverage, and 
they are looking for different avenues to help them through the 
challenges of trends that we are seeing. So I think the best 
way to make sure that that continues is by Congress swiftly 
moving toward some sort of universal Medicare coverage. That is 
what will help in our opinion, that is what will help the 
employers who are being responsible right now to continue to be 
responsible.
    Mr. Buyer. Do you have sort of an idea of what the cost of 
prescription drugs are added to the price of an automobile?
    Mr. Moroni. You know, I should. That is not one figure I 
have with me.
    Mr. Buyer. Is the General Motors executive sort of looking 
at this and saying that the dollar is fungible, that someone 
out there in America is going to be paying for this, and if you 
have this 19 percent increase in cost, well, we can't eat it, 
so we add it to the price of automobiles and the consumers pay, 
or we wrap them into some systems that we create here, and the 
general population pays?
    Mr. Moroni. I guess--could you redirect something more 
specific to me, because I really think that what we are really 
trying to say is that we are feeling very pressured by the type 
of trends that we are seeing. We still want to be a responsible 
employer. We are looking for all avenues to be able to, you 
know, still provide comprehensive coverage. We are also seeing 
that there are gaps, and that a universal type of plan by 
Medicare will help offer----
    Mr. Buyer. Let me----
    Mr. Norwood. I am sorry, Mr. Buyer. Your time is up.
    Mr. Green, you are next.
    Mr. Green. Thank you, Mr. Chairman. Again, hopefully we 
will have a second round for those of us who can stay around.
    Let me first start off by saying that in 1965, if we could 
have created Medicare without covering doctors or hospitals, we 
would have thought it was crazy. And here we are in 2000 where 
we have seen over the years our prescription costs, both for 
seniors, but for the private sector has gone up, compared to--
along with other costs, but it is so much more a part of our 
health care dollar today than it ever was. So I think if we 
recreated Medicare here today, we would have prescription drugs 
as part of it.
    I thought it was interesting, the adverse selection 
concern, Mr. Weller, because that is why Medicare was created. 
Insurance is there for adverse selection. You want--insurance 
companies have to make a profit. They don't want people--all 
their claimants--to claim, so they can make that profit. They 
couldn't make a profit in 1965, and so that is why Medicare was 
created, or really 20 years before that, because that is when 
the bills were introduced.
    So that is what troubles me about trying to have the 
private sector provide for a prescription drug benefit and make 
a profit on it without a great deal of subsidization that we 
would have to do.
    Mr. Jones, we work with PacifiCare a great deal in Houston, 
because after all, the other HMOs, Secure Horizon stayed in the 
Houston market and I appreciate that, and I appreciate Secure 
Horizon working with my staff on individual constituent cases, 
and really good to work with. NICARE, 65 withdrew from the 
Houston market last year, along with about 60 percent of our 
seniors--they covered 60 percent of our seniors, NICARE did, 
and they withdrew.
    We do have two new companies that just announced coverage 
in Houston, one a PPO and one an HMO. The HMO will not cover 
prescription drugs, and the other one, the PPO will, but they 
are charging $85 per month premiums in addition. National 
Medicare+Choice plans are dropping their drug benefits, 
lowering payment caps, imposing stiff premium surcharges, and 
the portion of Medicare+Choice plans with a payment cap of $500 
or lower has increased by 50 percent in the last 2 years since 
1998--3 years. Nearly three-quarters of the Medicare+Choice 
plans have capped benefits at $1,000. I know, I think Secure 
Horizon's prescription drug benefit in Houston, at least Harris 
County, is $1,200.
    How can seniors rely on Medicare+Choice plans to provide 
coverage that they need when we see what is happening in the 
market?
    Mr. Jones. It is a challenge for Medicare+Choice plans. We 
do what we can to manage the pharmacy benefits to where people 
can continue to afford them. Increasing costs are a continued 
challenge for us and we have to come up with methods of dealing 
with the increasing cost of drugs, increasing utilization. We 
do all of that, and we do it in a fairly flexible manner. We 
try to change with the changing times. But reimbursement is 
always an issue for us.
    Mr. Green. How many--what percentage of Secure Horizon's 
customers do you think--has your company done any research--
joined your HMO because of prescription drug benefit?
    Mr. Jones. I am sure there are figures, and I could 
certainly get back to you on that.
    Mr. Green. I would appreciate it, because just again, 
nonscientific in my own district, a huge percentage of our 
seniors joined an HMO simply because they didn't have any 
options, they needed some type of prescription drug benefit.
    Mr. Jones. I don't doubt it.
    Mr. Green. Mr. Moroni, you state in your testimony that 
prescription drug cost increases for GM have averaged 19 
percent annually for the last 3 years.
    Mr. Moroni. Correct.
    Mr. Green. And you expect them to continue to rise, and you 
also reference that 80 percent of the prescription drug costs 
for your retirees are for your retirees, surviving spouses and 
their family. Eighty percent of the drug costs that GM pays for 
are for retirees, surviving spouses and their families?
    Mr. Moroni. Correct.
    Mr. Green. So only 20 percent is for current GM employees?
    Mr. Moroni. Correct.
    Mr. Green. That is an amazing percentage. I mean it shows 
that the older you get, the more medicine we need, which is, 
again, seems like it should be given.
    Mr. Norwood. Thank you, Mr. Green. I am new at this. I 
forget to turn the microphone on. Thank you very much, Mr. 
Green. You have 5 seconds and I wanted to say you are getting 
into a long, lengthy question.
    Mr. Green. Let me just ask to Mr. Moroni, both--GM is 
trying to curb costs and however you can answer it, if you have 
to get back, but what is GM doing to solve the problem of 
adverse selection that we heard from other witnesses?
    Mr. Norwood. Mr. Moroni, if you would submit that in 
writing, please. I have to go to Mr. Greenwood, and now it is 
his turn.
    Mr. Greenwood. Thank you, Mr. Chairman.
    I would like to direct some questions to Mr. Jones and Mr. 
Weller, and anyone else who would like to comment, it would be 
helpful.
    I want to focus on Medicare+Choice plans. It is sort of 
interesting that we get two completely different perspectives, 
depending upon who we are listening to, about how 
Medicare+Choice plans operate. In listening to Mr. Dingell, it 
sounds like the Medicare+Choice plan is some sort of carnivore 
that wanders into a region and gets fat on profits and, after 
fattening up, gluttonly wanders off for some strange reason, as 
if it doesn't want to eat anymore. The way it looks to me is 
that the Medicare+Choice plans go out there, and we started 
feeding them well enough when we started out with 95 percent of 
the average area per capita cost, and they could provide a 
nice, full plate of all of the regular Medicare benefits, plus, 
plus. There was the plus. The prescription drugs and the dental 
and hearing benefits and so forth. And then we stopped--we 
stopped feeding them. We didn't pay them enough to keep up with 
the costs. So after they got down to skin and bones, they 
wandered out and said, we are not going to starve to death.
    That is a bit of an exaggeration, but it seems to me that 
those are the prevailing perspectives on how Medicare+Choice 
plans are operating. I wondered if you could comment on--I 
mean, to me, we have, as I said in my opening statement, we 
have a lot of work to do to try to provide a prescription drug 
benefit, but at least for a while there, the Medicare+Choice 
program seemed to be a great option. It certainly was for my 
mom and dad. They didn't have to buy Medigap anymore, they got 
their prescription drugs, they got good health care, everything 
was going fine.
    Now, in my district, what has happened is A, we didn't keep 
up paying these plans, the premiums that they needed; and B, we 
have a screw-up, because in Philadelphia, which is not in my 
district but borders my district, there is a zero premium 
prescription plan. But in my district, it is very expensive to 
get exactly the same package.
    I wonder if you could comment on what I have just said in 
terms of really what has been driving the Medicare+Choice plans 
and what their options have been, and these two perceptions.
    Mr. Jones. I think that this industry has been fairly 
competitive among the various players, and where there was 
fairly reasonable reimbursement in a region, they would enrich 
their benefits to attract members into their plans. As the 
reimbursement levels were reduced, so was the richness of the 
benefits that were offered. And everyone needs to be able to 
break even or show a profit in order to continue their 
business. It has been unfortunate for seniors because they did 
get used to companies competing for their attention and trying 
to get them into their programs, which included very reasonable 
benefits for a pharmacy. There were no caps in some programs, 
the competition was such.
    That has all changed. I certainly empathize that we have 
done whatever we could to keep that benefit there, but there 
have been caps put on it, higher copays, more cost-sharing by 
the seniors, and it is a difficult situation we are all put in.
    Mr. Greenwood. Is there a Medicare beneficiary in the 
country that you wouldn't cover with a very nice 
Medicare+Choice package, including a nice prescription drug 
package, if you were paid by HCFA an annual premium for that 
patient that--for that beneficiary that allowed you to, on 
average, actuarially cover your costs and earn what--fill in 
the blank--and what percent profit?
    Mr. Jones. Our profits last year were 2.3 percent. It is 
not a large profit. But no, we took all comers.
    Mr. Greenwood. So 2.3, 3 percent, that range of profit, 
just do the math, the Federal Government pays your company and 
any other Medicare+Choice company enough to cover the benefit, 
plus prescription drug benefit and make 2 to 3 percent profit, 
you cover everybody in the country, right?
    Mr. Jones. I can't speak for our parent company and its 
goals, but that has been traditionally where we are.
    Mr. Norwood. Thank you very much, Mr. Greenwood. Now we go 
to Mr. Engel.
    Mr. Engel. Thank you, Mr. Chairman.
    Mrs. Kessler, since you are the only one on the panel that 
actually is a consumer and has experienced some of these 
programs, we have people on the panel from a number of 
different groups that provide prescription drugs for Medicare 
beneficiaries. You have heard, Medicare Choice plans, Medigap 
plans, employee retirement plans, a State program and a 
pharmacy program. I believe that while these programs provide 
assistance for some seniors, not all can benefit from them, and 
I am wondering--you alluded in your testimony, and I am 
wondering if you could give us some more detail about your 
experiences with these types of programs?
    Mrs. Kessler. Well, I was on HMO and I was not very happy 
with it. Of course, I have been well practically all of my 
life, and then all of a sudden, it caught me. So my daughter, 
who is a nurse practitioner, made me get off HMO, and I got on 
to AARP, and of course, I pay for my drugs. I get a little 
percentage here and there, but that is about it. And there are 
plenty of senior citizens like me who really couldn't afford 
all of these medicines that I take, that they take. We save all 
of our money all of our lives and then all of a sudden we get 
sick, and we are afraid that the money that we have saved would 
have to go for the drugs, which scares the heck out of us.
    Mr. Engel. Well, it seems that now there is a patchwork of 
options, but what you are saying is none offer the safety and 
security of a comprehensive Medicare benefit. So you are 
actually saying that a uniform universal benefit for everyone 
in Medicare is really the way we should go?
    Mrs. Kessler. Yes, definitely so.
    Mr. Engel. Now, the Florida program that is similar to New 
York covers seniors over age 65 who are duly eligible for both 
Medicare and Medicaid with an income of under $11,000 per year. 
So obviously a lot of seniors are left out of that. The State, 
I understand in Florida, has a discount program which allows a 
discount on the cost of drugs at pharmacies, but you and others 
don't qualify for that because you have a program through AARP?
    Mrs. Kessler. Yes.
    Mr. Engel. So many seniors actually get lost in the shuffle 
and find that they don't have the care that they need; is that 
an accurate statement?
    Mrs. Kessler. That is right. That is right.
    Mr. Engel. Thank you very much.
    I want to raise an issue that Charlie Norwood had mentioned 
before. I wonder if Ms. Rowland or Mr. Moroni could comment.
    When you talk about the increasing cost of prescription 
drugs, it would seem to me that on the other end of it, 
Medicare would save money because of beneficiaries getting the 
proper medication at the proper dosage as opposed to taking a 
half dose or going without certain drugs due to cost. So I am 
wondering, Ms. Rowland, if you could comment about--are there 
any real numbers that measure potential savings due to proper 
drugs which will lead to decreased hospital stays and fewer 
acute care conditions as a consequence of a prescription drug 
benefit? And also, after that, if Mr. Moroni can mention if you 
have noticed a decline in costs of other areas of care as you 
initiated the prescription drug benefit?
    Ms. Rowland. We don't have any hard statistics on what 
happens when individuals cut their prescriptions in half and 
only take half of what they need. We do know when we look at 
some experience in the Medicaid population, that when cost-
sharing was imposed on some of the lowest-income Medicaid 
beneficiaries, they went without their drugs and ended up more 
often in nursing homes. So we in the State of New Hampshire, 
for example, the cost of nursing home care increased when they 
imposed additional cost-sharing for prescription drugs.
    There is a new study just out from Canada looking at the 
imposition of cost-sharing for low-income elderly and disabled 
people in Canada, showing a greater use of emergency rooms as a 
result of lack of taking proper medications.
    So while we don't have a lot of studies in the U.S., we do 
have a lot of stories about people who don't take their 
medications properly, and we know that for many of the 
medications that the elderly take today, lack of taking them on 
a regular basis can really lead to complications.
    Mr. Engel. And more expense.
    Ms. Rowland. And more expense.
    Mr. Engel. Thank you. Mr. Moroni.
    Mr. Moroni. From our data, we have not seen a decrease in 
the hospital-surgical-medical side of the expense due to the--
or I should just say in conjunction with the higher drug costs. 
So I think you would have to think about although there may be 
certain hospitalizations you avoid, with the trend of just your 
normal hospital-surgical-medical coverage, and then on top of 
that, you put on something like as high a trend as 19 percent, 
and actually, in 1999, it was actually 23 percent, it just 
averaged out.
    Mr. Engel. Can you comment, Mr. Moroni, on PBMs to manage 
the drug benefit? Some of the Medicare drug proposals would 
rely on PBMs to provide a drug benefit. Could you talk about 
some of the things they do for GM to manage the pharmacy 
benefit like reducing cost and providing quality assurance?
    Mr. Moroni. Yes. Actually, we do think that our PBMs help 
kind of optimize cost and quality. Most importantly, I would 
say our PBMs look for drug-to-drug interactions on a real-time 
basis, which you do fine. Especially, as I said, when people 
see multiple physicians. We also have programs like, you know, 
a preferred formulary that our PBM has assigned to hopefully 
optimize some of the costs. Their dosing authorization 
programs, generic substitution programs, disease management 
programs--all of which we think has helped us save costs, and 
that was part of my testimony--that even with the extensive 
programs we have in place, both on a quality side and a cost 
side, our costs are still at 19 percent. Actually, safety is 
another major issue that I cannot really leave out of there, 
because there are specific drugs actually cited in a GAO report 
that our PBMs make sure that our elderly people are not on it, 
they are safe for the elderly.
    Mr. Norwood. Thank you, Mr. Moroni and Mr. Engel. Now, Mr. 
Shadegg.
    Mr. Shadegg. Thank you, Mr. Chairman. I want to commend you 
for holding this hearing today.
    It is very obvious that in this country we need to be 
looking at how we make sure seniors get the drugs they need to 
be able to care for themselves. No one wants a Nation where 
people have to make a decision between paying rent or buying 
groceries and taking the medicines they need.
    By the same token, I have to say that I think to a certain 
degree, a lot of the discussion and a lot of the focus on how 
we create the right program to do this, in the context in which 
we are not looking at the cost of doing this, the staggering 
cost of doing this is literally whistling past the graveyard 
and missing a huge issue. I think, Mr. Moroni, your testimony 
drives that point home pretty clearly. I can imagine that 
General Motors would be in favor of a universal drug benefit if 
General Motors for the past years has seen an average of a 19 
percent increase in its prescription drug program.
    Now, I hope everyone in this panel and everyone in this 
Congress understands that if we, in a well-intentioned fashion, 
create a universal drug benefit and we face the kind of 
escalating costs GM has faced over the past 3 years of 19 
percent per year, we are in deep trouble. So I would like to 
focus on what foundation we need to be looking at in terms of 
drug pricing and drug costs before we jump into creating this 
program. Because I have not seen anything in the discussion of 
the shape of the program or the structuring of the program, 
whether you favor one over the other, that is going to address 
the issue of cost. And in looking at these facts, I want to 
point out that the more things change, the more they stay the 
same.
    In 1959, the Senate Judiciary Subcommittee on Antitrust and 
Monopoly, led by Estes Kefauver of Tennessee did a study, a 
2\1/2\ year study of drug pricing in America, and you will be 
surprised to learn that they found almost exactly what we are 
finding today. They found, for example, that Eli Lilly was 
selling 100 tablets of an antibiotic called V-Cillin, and they 
are selling it in England for $6.50, in Australia for $10.75, 
and in the United States for $18. So the pricing in the United 
States was roughly three times the price in England. For 100 
capsules of Tetracycline, the production cost for Bristol Myers 
was $1.67. Its price to druggists was $30.60, and consumers 
paid $51.
    You then come flash forward to today. Here is a study done 
by Life Extension Network, on the most outrageously high-priced 
drugs in America, one called Premarin. For 28 capsules of 6 
milligrams, the U.S. price is $14.98; the European price is 
subsidized, $4.25. For Coumadin, which is a blood thinner that 
my mother-in-law takes, for 25 10-milligram capsules of 
Coumadin, the U.S. price is $30.25, the European price is 
$18.50.
    Another study done by USA Today in November 1999, I will 
just pick a couple, there are many on here, and I would like to 
put both of these in the record--for Prozac, the U.S. price, 
$2.27; in Canada, less than half of that, $1.07; in Britain, 
$1.08; and in Australia, 82 cents. Zocor for high cholesterol, 
U.S. price $3.16; Canadian price $1.47; British price $1.73; 
Australian, $1.75. Again, we are more than twice. Claritin, 
everybody hears about Claritin; it is one that is a demand pull 
drug, and I want to talk about demand pull in a moment; U.S. 
price, $1.96; Canadian price a little closer, $1.11; British 
price, 41 cents; Australian price, 48 cents.
    [The information referred to follows:]

                   10 Best-Selling Prescription Drugs in the USA Cost less in Other Countries
           (Retail Price of the most commonly prescribed dose of each drug, converted to U.S. dollars)
----------------------------------------------------------------------------------------------------------------
              Rank                      Drug              Condition        U.S.     Canada    Britain  Australia
----------------------------------------------------------------------------------------------------------------
1..............................  Prilosec..........  Heartburn/Ulcer...     $3.31     $1.47     $1.67      $1.29
2..............................  Prozac............  Depression........     $2.27     $1.07     $1.08      $0.82
3..............................  Lipitor...........  High colesterol...     $2.54     $1.34     $1.67      $1.32
4..............................  Prevacid..........  Ulcer.............     $3.13     $1.34     $0.82      $0.83
5..............................  Epogen............  Anemia............    $23.40    $21.44    $27.48     $29.24
6..............................  Zocor.............  High colesterol...     $3.16     $1.47     $1.73      $1.75
7..............................  Zoloft............  Depression........     $1.98     $1.07     $0.95      $0.84
8..............................  Zyprexa...........  Mood disorder.....     $5.27     $3.39     $2.86      $2.63
9..............................  Claritin..........  Allergies.........     $1.96     $1.11     $0.41      $0.48
10.............................  Paxil.............  Depression........     $2.22     $1.13     $1.70      $0.82
----------------------------------------------------------------------------------------------------------------
Source: USA Today, November 10, 1999


                      Outrageously High Drug Prices
------------------------------------------------------------------------
                                                       U.S.      Euro.
              Drug (Quality/Potency)                  Price      Price
------------------------------------------------------------------------
Premarin..........................................     $14.98      $4.25
Synthroid.........................................     $13.84      $2.95
Coumadin..........................................     $30.25      $2.85
Prozac............................................     $36.12     $18.50
Prilosec..........................................    $109.00     $39.25
Claritin..........................................     $44.00      $8.75
Augmentin.........................................     $49.50      $8.75
Zocor.............................................     $96.99     $45.00
Prempro...........................................     $23.49      $4.75
------------------------------------------------------------------------
Source: Life Extension Network.


    Mr. Shadegg. I would like to ask Mr. Moroni and Mr. Jones a 
series of questions, and if others of you would like to 
comment, I would be happy to do that.
    Have any of you, since you buy large quantities of drugs, 
done a study of your own to try to find out why drug prices in 
the U.S. are so much higher than they are in other countries?
    I don't want to run out of time. Let me give you the other 
questions. Have you studied demand pull marketing? Because I 
saw from your expressions you haven't done the other. Demand 
pull marketing is kind of a new phenomenon in the United States 
where we are telling the American people hey, there is this 
prescription drug that will go out and solve every problem you 
have. I would suggest to General Motors that part of the reason 
you are facing a 19 percent increase in your drug 
prescription--prescription drug program--is demand pull 
marketing, and I wonder if anybody has looked at that.
    I want people to get the drugs they need, but I am not 
certain that--I talk to a lot of doctors back in Phoenix, 
Arizona who tell me patients are watching television, coming in 
demanding the drug. The doctor has to talk them out of that 
drug.
    Mr. Norwood. Thank you very much, Mr. Shadegg, and remember 
the question, because the second round we need to have an 
answer for that.
    Now I think it is Mr. Strickland's turn.
    Mr. Strickland. Thank you, Mr. Chairman. To follow up on my 
friend's comments, I would like each of you to respond to these 
two questions and I think you can do it in one or two words.
    Do you think that the issue described by my colleague 
regarding Americans being charged so much more than other 
citizens in other countries is a serious problem in terms of 
the costs of prescription drugs in this country? And I think 
you can do that with a yes or no. And then I would like for you 
to say, hopefully with a yes or no, if you think it would be 
appropriate for this Congress to consider some legislation to 
deal with this price inequity. Two questions. Would you mind 
beginning here and just going down the table?
    Mrs. Kessler, what is your opinion there?
    Mrs. Kessler. Yes, I would say that that would be a good 
idea, that that should be a question about the drugs, why it is 
so high here, definitely so. This should be one of the 
requirements to judge so that we can get all of our 
prescriptions paid.
    Mr. Strickland. Thank you. Mr. Jones?
    Mr. Jones. The differentials between our prices and those 
abroad is a very complex issue which we have not taken a very--
--
    Mr. Strickland. Do you think it results in Americans being 
charged more, regardless of the complexity of the reasons?
    Mr. Jones. Drugs cost more here, there is no question about 
it.
    Mr. Strickland. Do you think drugs would cost less here if 
there wasn't this price disparity?
    Mr. Jones. Again, therein lies the complexity of an 
international market.
    Mr. Strickland. Okay. Second question. Do you think we 
should address this disparity problem legislatively?
    Mr. Jones. I think that it is one that will bedevil 
Congress. It is one that will probably have to be looked at one 
way or the other.
    As far as a poll marketing, we have a very aggressive 
physician education campaign to counter some of that type of 
marketing, and we understand that people are subject to it.
    Mr. Strickland. Okay. Could we go ahead?
    Mr. Moroni. As I said in our testimony, we do believe that 
the pricing practices are a concern and we do feel that they 
affect some competitiveness of U.S. industry.
    Ms. Rowland. I think you should clearly look at the pricing 
policies, and I think in looking at this examination you might 
also want to take a look at the current Medicaid program which 
has a drug rebate provision that allows Medicaid to at least 
get a discounted price in some of the States for that.
    Mr. Weller. I would agree with Mr. Jones that it is a 
complex issue, but as a straight question of does it cost more, 
clearly, yes. What Congress should do, we believe that you need 
to restructure and reform Medicare, the entire program; that 
has as part of that, you need to deal with prescription drugs 
and you need to deal with the cost of them to the Federal 
Government, to the beneficiaries.
    Ms. Buckley. Yes, there are clearly price inequities; yes, 
Congress should look at it and look at it in a comprehensive 
way to ensure research and development is not hurt, and to look 
at ways we can cover everyone, increase sales to pharmaceutical 
companies so that they can lower costs.
    Mr. Smith. Eighty percent of the price of a prescription is 
bound in product cost. If you can reduce that product cost, the 
price will absolutely come down.
    Second, I do believe Congress should look at those 
inequities and try to find out why and try to alleviate those 
problems.
    Mr. Strickland. Thank you. The comment was made that we 
should have the restructuring of Medicare, and the concern I 
have there is because I think this may be a euphemistic way of 
saying we should basically destroy Medicare as we know it and 
go to a system that would be quite different than Medicare.
    Ms. Rowland, I serve a rural area. You know, I think, that 
the people who live in rural areas do not have the same 
opportunities and access. Can you speak a little bit more about 
that and what you think we can do as we try to plan a fix to 
this terrible situation that we all know exists?
    Ms. Rowland. We know that around a quarter of all Medicare 
beneficiaries live in rural areas, but we also know that those 
in rural areas are more likely to go without drug coverage. 
Roughly 40 percent are without drug coverage today.
    That is largely due to the fact that many of the 
Medicare+Choice plans aren't out there in rural areas, and I 
think with the withdrawals, you are not likely to see a large 
increase in rural areas in the near future.
    Second, many of the people living in rural areas have not 
worked for some of the large employers that offer the retiree 
benefits, so they are the most likely to go without the more 
comprehensive retiree wrap-around benefits to Medicare that do 
include prescription drugs, and they tend to have lower and 
more fixed incomes. So even when a Medigap policy may be 
available, the ones that include prescription drugs are largely 
unaffordable. I think that is one of the reasons why one needs 
to really look at providing a comprehensive benefit within 
Medicare so that people get the same benefits under Medicare, 
whether they live in urban or rural areas, just as they do with 
physicians' services and hospital care today.
    Mr. Strickland. Thank you.
    Mr. Bilirakis. The gentleman's time has expired.
    The vice chairman of the committee, Mr. Burr.
    Mr. Burr. Thank you, Mr. Chairman.
    Let me take this opportunity to thank all of our witnesses 
today. I am not going to ask you any questions, so I will 
relieve you of that burden. But I did want to thank you for the 
information that you brought to the committee. I assure you 
that it will be extremely helpful as we proceed on.
    This is a very talented committee. The members as well as 
the staff have spent a tremendous amount of time understanding 
the complexities that each of you brings with your testimony. 
They understand the scope of the population that is covered 
under the proposed benefit that we all seek. We understand the 
geographical challenges that we have. We also understand that 
it is a population that needs it today. I am convinced, more so 
than I was last year, that because of the passion and the 
talents of this committee, we can achieve a legislative 
proposal that benefits patients. And that is ultimately where 
we have to keep our focus.
    I would tell you that there are 3 major components: .
    Access. Some do, some don't today; all should. I think that 
every member of this committee would agree with that statement.
    Affordability. Affordability sometimes is a function of 
competition. We have certainly seen that in private sector 
areas. And I would tell you that when you look at this 
population because of the size, when you find a way to 
negotiate based upon the size of the population, you find 
better pricing. It is what you referred to, Ms. Rowland, as it 
related to Medicaid, even though that was a legislative 
mandate. But clearly, we have seen the private sector markets 
respond the same way relative to a population large enough that 
you can negotiate on their behalf, brings you levels of pricing 
we never dreamed of 10 years ago in health care. So we have to 
understand that component.
    The third piece is voluntary. We can't force anybody to 
participate, nor should we. We should not discourage employers 
from extending that benefit to retirees; we should find ways to 
support it even greater than we do today. But the reality is, 
over time, as we incorporate a benefit, if we don't make a 
component of that the ability for employers to fit into it, to 
piggyback onto it, to dovetail into some section of it, we will 
allow them to remove that forever as a benefit that they extend 
to retirees.
    We need your help. We will need your continued help. No 
matter who the new Administrator is at HCFA, I am convinced 
that if the support of Congress dries up or the support of 
those individuals who are really the brain trust of this issue 
is not there to support them as well as the American people, 
they will not accomplish the structural changes that I 
personally believe have to be made in HCFA, nor will they 
accomplish a drug benefit that can withstand the test of time 
and money that we all know it goes into.
    Let me suggest that we are not here just considering this 
benefit for today. Our focus should be for tomorrow. We have 
heard a number of examples of meds that were mentioned and 
prices and individuals who were covered and weren't covered, 
and it was broken down in whatever way it was advantageous to 
those that either asked it or answered it. We have to get past 
that. We are headed into an age, with the completion of the 
Human Genome Project, where we will talk about medications that 
cure, for the first time, diseases that we have maintained or 
treated up to this point. We will have to go through a whole 
new cultural change of assessing medications based upon not 
their value at the beginning, but their cost-savings because 
they are now available.
    Somewhere in that component, hopefully first on my mind, 
but every member will have to make that up on their mind, will 
be the quality of the patients. We will offer in many cases the 
ability to relieve what is a constant chronic or terminal case 
for what is now 35-plus million Americans and 15 years from now 
will be 70 million Americans: my parents, your parents, 
somebody's grandparents.
    This is an important thing. It is the most important thing 
for this subcommittee today. I am confident that we can 
accomplish it, Mr. Chairman, with our friends on the other side 
of the aisle, with the support of the brain trust that is 
willing to come up and share their information with us. It 
won't be easy, but we can come up with a plan.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Burr. The gentleman is finished. Thank you, Mr. 
Chairman.
    Mr. Bilirakis. Mr. Ganske.
    Mr. Ganske. Mr. Chairman, I am juggling simultaneous 
hearings on high energy costs and high prescription drug costs 
and unfortunately, we do have people in the country who are 
having to make decisions on whether to pay their power bills or 
whether to buy their medicines, and that is a problem.
    Mr. Chairman, I need to speak briefly about an arcane item 
called adverse risk selection. I have felt like a voice crying 
in the wilderness in my floor speeches late at night on this 
issue, but in my opinion, it is the single most important issue 
that we need to face as we are talking about this additional 
benefit.
    The designers of many Medicare prescription drug proposals 
recognize this problem. Some try to address it by saying that 
if a beneficiary doesn't sign up for the drug insurance program 
on an initial registration for Medicare, then, thereafter, when 
he or she wants to sign up for the drug insurance program the 
program would be quote, ``experienced-based,'' and potentially 
more costly. The theory is that the threat of higher premiums 
would act as an inducement for seniors with no or low drug 
costs to sign up initially.
    But, Mr. Chairman, if everyone had already acted with such 
prudence, we wouldn't be here today, because the low 
participation in the current voluntary Medigap programs 
indicates that unless seniors must sign up initially, a large 
number won't. They will wait until they need drugs and then 
they will complain vociferously to Congress about their high 
premiums and we will be right back here where we started. And 
since other seniors will have a prescription drug benefit, 
there will be enormous pressure on legislators to further 
subsidize the seniors who are tardy in signing up for a drug 
program. That, of course, will significantly increase the cost 
of the program.
    Now, another way to control adverse risk selection is to 
try to devise a risk adjustment system. This committee has been 
involved in that many times. We will wait eagerly for the day 
to show that we can actually devise that type of program in 
other parts of Medicare.
    Now, another way would be a similar benefit package to help 
control that. Consumers would then be able to select plans 
based on price and quality rather than benefits, but if plans 
are allowed wide variation in benefits, some plans, I guarantee 
you, will be more likely to attract low-cost beneficiaries and 
we will again see adverse risk selection.
    Now, a sure way to avoid adverse risk selection would be to 
mandate enrollment, and that was the approach in 1988 with the 
Catastrophic Coverage Act, and we saw what happened to that 
law. And to say, Mr. Chairman, that mandatory enrollment today 
has little appeal to policymakers is an understatement, to say 
the least. All they have to do is remember the Grey Panthers 
jumping up and down on Dan Rostenkowski's car.
    Now, finally we could avoid adverse selection for a 
voluntary prescription drug benefit if we subsidized this 
benefit so much that seniors won't have much cost, and with 
that huge subsidy, the benefit would then become cost effective 
for the vast majority of seniors. But, Mr. Chairman, we are 
then likely facing a $400 billion or $500 billion subsidy.
    That reminds me of an article by Dan Rostenkowski in the 
Wall Street Journal, who said, ``The problem was, and still is, 
a lack of money.'' And yes, we have a surplus, but the 10-year 
cost of a more highly subsidized drug coverage could, in my 
opinion, easily double or triple the cost, and that is where I 
am in line with Congressman Shadegg who just spoke about this.
    So what do we do? Well, it is clear that there are seniors 
that really need the help right now, and there are seniors who 
are getting the help in the State Medicaid drug programs. And 
those programs are in every State, and they are, as Ms. Rowland 
pointed out, getting discounts from pharmaceuticals.
    My proposal is that we build on that, that we try to get 
something done on this at a cost that we can absorb right now, 
and the way to do that would be to add the qualified Medicare 
beneficiaries and the select low-income beneficiaries up to 175 
percent of poverty, give them their little Medicaid card, tell 
the Governors, we are going to pay for it from the Federal 
side; and this provision can be implemented immediately and it 
will help take care of the large number of beneficiaries who 
need that help right now, and we can move on to a comprehensive 
Medicare benefit in terms of prescription drugs in the context 
of a comprehensive Medicare bill.
    Mr. Bilirakis. The gentleman is granted 2 additional 
minutes, without objection.
    Mr. Ganske. Thank you, Mr. Chairman.
    Mr. Bilirakis. And we will not have a second round, but we 
will grant everyone an additional 2 minutes if they like.
    Mr. Ganske. I very much appreciate that, Mr. Chairman, 
because I wanted to get to your and my feelings on this, and 
that is that you have advocated a similar approach in terms of 
block grants to States who have in some cases set up programs 
to help subsidize citizens in those States with prescription 
drugs.
    I think that, Mr. Chairman, you and I are closer to each 
other on this than we actually were to either the Democratic or 
the GOP bill last year. I have some concerns with the block 
grant, because I have some concerns about how you control fraud 
and abuse with the block grant program and I have concerns that 
in some cases they aren't set up in any of the States; you have 
some variability, and I believe for that reason that tying this 
in with Medicaid could be accomplished immediately, and there 
are controls already built in for fraud and abuse in those 
programs, and that this is something we should look at.
    Mr. Chairman, as I pointed out, you and I are much closer 
together on this than we are far apart. And I just look forward 
to, Mr. Chairman, working with you on this issue, because this 
is something that we could do now and not have another 2 years 
go by and have that widow who isn't so poor that she is in 
Medicaid, that she is a dual-eligible, but who is just above 
that margin who is really scraping by on her energy bills and 
her prescription drug bills, and we could give her help right 
now and it would be a simple thing to do. And that is what I 
think this Congress should look at.
    In addition, we ought to look at fixing the drug 
reimportation bill that we passed last year to close some of 
the loopholes, particularly on labeling, and that should be 
part of it too. I thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman. Mr. Brown, for 2 
additional minutes.
    Mr. Brown. Just a couple of comments rather than questions. 
I very much appreciate the panel's insight and I want to thank 
you all for that. There was some talk earlier of the amount 
of--how we have overfed and then starved or something--the 
metaphor--some Medicare+Choice. There is a GAO report of August 
2000, and I want to enter one page into the Record, page 3, and 
I want to site that paragraph real quick. ``In addition, the 
combination of spending forecast areas built into plan payment 
rates and BBA payments cause an additional $2 billion, or 8 
percent, excess payments to plans. Instead of paying less for 
health plan enrollees,'' this is from the GAO, ``we estimate 
that aggregate payments to Medicare+Choice plans in 1998 were 
about $5.2 billion, 21 percent, or about $1,000 per enrollee 
more than if the plan's enrollees had received care in the 
traditional fee-for-service program.''
    [The information referred to follows:]

    . . . In addition, the combination of spending forecast 
errors built into plan payment rates and BBA payment provisions 
caused an additional $2.0 billion, or 8 percent, in excess 
payments to plans. Instead of paying less for health plan 
enrollees we estimate that aggregate payments to 
Medicare+Choice plans in 1998 were about $5.2 billion (21 
percent) or approximately $1,000 per enrollee, more than if the 
plans' enrollees had received care in the traditional FFS 
program. . . .

    Mr. Brown. So I think that we--people in this institution 
have sort of tried to convince others that we have overpaid--
that we have underpaid HMOs and that they have been starved, 
and there really is no evidence for that.
    Second, I appreciate the comments of Mr. Shadegg about the 
cost of prescription drugs in the United States and overseas, 
and it begs the question, obviously, of why, and the answer. 
And I appreciate his siting.
    I saw an article recently in the Post, I saw some of those 
numbers that were there that he had, but every other country in 
the world has a legislature which has stood up to conservative 
politicians and prescription drug lobbyists and actually passed 
legislation that does something about the cost of prescription 
drugs.
    I don't know that Mr. Moroni, when he talks about the costs 
that GM is almost buried by, and that all of you see with 
health plans or whatever, that you understand that this is 
going to be awfully difficult to afford any of these Medicare 
prescription drug plans unless we do something about cost, 
compulsory licensing. That article talked about and was tried 
by Senator Kefauver, defeated in the Senate again, because the 
hordes of prescription drug lobbyists were all over the Capitol 
then as they are now. And until we do something about 
compulsory licensing or reimporting, which country after 
country after country around the world has done, it injects 
competition, not price controls, but competition in this whole 
morass of prescription drug price gouging, and it clearly is 
the way to go to explore these kinds of alternatives.
    Mr. Chairman, I am well beyond my 2 minutes.
    Mr. Bilirakis. Mr. Shadegg, 2 minutes.
    Mr. Shadegg. Thank you, Mr. Chairman. Let me just say that 
I am not going to ask you today to answer any further 
questions. I am going to give you a little more information 
from the Kefauver study and then ask, if you would, to answer 
two questions for us in writing after we finish today.
    First of all, let me make it clear, I do not favor drug 
price controls mandated by the government. What I want to look 
at is competition in the drug industry and make sure that the 
industry is, in fact, competitive and that we are not suffering 
because it is not competitive.
    Interestingly, one of the findings of the Kefauver 
committee study that went on in this industry said that of the 
22 largest pharmaceutical manufacturers, those firms were 
spending, on average, 24 cents out of every dollar on 
promotion. Now, interestingly, that was before demand pull 
marketing of prescription drugs began in America, because this 
was, remember, 1959, and I believe it was also before the 
lavish marketing to doctors that goes on today. I can tell you, 
you can read about them, and I have an article here about the 
dinners that doctors are taken to, the gifts that they are 
given, the golf outings that they are taken to.
    I have been told by doctors in Phoenix, Arizona that they 
will be taken for a night of entertainment out by a drug firm 
and they will be taken first to a cigar shop where they can 
walk in and pick out anything they want in the entire cigar 
shop. They are then taken to a florist where they can pick out 
any flowers they want for their spouses, no holds barred; then 
they are taken to a restaurant, the highest end restaurant and 
fed a lavish dinner. And we have all heard those stories.
    So I am concerned and I am not an advocate of government 
regulation or government price controls, but I am concerned.
    The three questions I would like you to answer are----
    Mr. Bilirakis. Please ask the questions. I don't think we 
will have time for the responses now.
    Mr. Shadegg. No, no. That is why I say answer them in 
writing.
    First, have you or your organization studied or analyzed 
the effect or the phenomenon of these very high U.S. drug 
prices versus low foreign prices of drugs, prescription drugs? 
That is question one.
    Two, do you think the Congress should do that before it 
enacts a comprehensive Medicare drug benefit?
    Third, have you studied demand pull marketing and its 
effect on drug prices in the United States? And if you have or 
haven't, do you think the Congress should do that before--and 
we will get you these in writing, we will type them and send 
them to you--do you think the Congress should do that before it 
enacts a comprehensive drug benefit?
    And then the third is, have you or your organization 
studied the marketing practices of the drug, some of these 
parties, golf outings, et cetera, to see the effect of those 
marketing strategies on drug pricing in the United States? And 
if you have or haven't, do you think the Congress should study 
those again when it enacts a comprehensive Medicare drug 
benefit?
    Mr. Bilirakis. As I indicated, there will be questions 
submitted to you and this is among them. Sooner rather than 
later, it would be very helpful.
    Mr. Shadegg. I appreciate your time.
    Mr. Bilirakis. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. I would like to follow 
up.
    Mr. Moroni, if you could tell the committee or GM could 
tell the committee of the concern of overutilization, today's 
National Journal talks about our Republican Majority Leader 
saying that when you have the coverage, you will use it more. 
And I know there is a way that that can be dealt with, if you 
would get that to the committee.
    Ms. Buckley, to follow up on my colleague's questions, I 
know Nevada is trying to put together a bipartisan 
collaboration. Do you think--what do you think about every 
State having to take the responsibility, 50 different States, 
each coming up with some way to address the issue of financing 
prescriptions for seniors? And also, does the Nevada plan cover 
the disabled like Medicare does?
    Ms. Buckley. Thank you, Mr. Chairman. I do not think it 
would be effective or efficient for seniors to have all 50 
States struggle to develop their own programs. It has taken us 
2 years to develop our program, and numerous RFPs, and so far 
benefits are still unaffordable. I think it would create a 
patchwork of ineffective programs when Medicare can be 
utilized.
    Mr. Green. The concern I have, Mr. Chairman, if we do the 
block grant that is proposed, is that the fear of most seniors 
is that there are some Members of Congress who fear that we 
would block grant all of Medicare in a Medicare reform, and 
again we would end up with 50 States trying to provide senior 
citizen coverage not just for prescriptions, but for Medicare 
in general. And our example with the Medicaid, the diversity of 
the benefits under Medicaid is just outrageous. And I can talk 
about my own State of Texas. It provides very little Medicaid 
coverage compared to other States. So Medicare is a Federal 
program and we should coverage prescriptions under the Federal 
program.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Green. Can I just get a----
    Mr. Bilirakis. Yes or no. Who did you ask that of?
    Mr. Green. Ms. Buckley.
    Mr. Bilirakis. Ms. Buckley.
    Ms. Buckley. Yes, we would like Congress to act so that it 
is a more uniform program. States don't have the resources to 
provide effective senior prescription drug programs for 
seniors. We would like to take our senior prescription drug 
money and help seniors with utility bills that they can't 
afford.
    Mr. Bilirakis. Mr. Engel may inquire for 2 minutes.
    Mr. Engel. Thank you, Mr. Chairman. I want to thank the 
whole panel, and again, Ms. Buckley, I couldn't agree with you 
more. I think that we cannot have a hodgepodge of different 
States with different programs. We have the EPOC program in New 
York which is a pretty good program, and yet there are 
literally hundreds of thousands of seniors that are not 
covered. I think Mrs. Kessler is a perfect case in point. 
Someone who worked hard all of her life, does not ask for a 
handout, a middle class person, and she is just above the 
threshold for this and above the threshold for that and gets 
very, very little help.
    We have to help those seniors. I think it should come down 
in this Congress. We should not wait for total Medicare reform. 
We need to deal with the prescription drug problem now. I know 
that the chairman--under his leadership, we are dealing with it 
now.
    The bill that was passed in the Congress, the last 
Congress, I think is woefully inadequate. Private industry 
doesn't want it. Very few seniors would be covered by it. I 
think, quite frankly, it is a way of killing real reform in 
helping seniors with prescription drugs, and I think that is 
not a path that we should go down in this Congress again. I 
still maintain that if we provide prescription drug coverage 
for seniors, ultimately health care costs in many areas will go 
down because preventive care helps do that, and if people are 
getting the medication that they need, they will be less sick 
later on.
    So again, thank you, Mr. Chairman. I look forward to 
dealing with all of these issues, and again, I hope we can deal 
with this in this Congress so that seniors like Mrs. Kessler 
and my mother who reside in the same place, and millions and 
millions of seniors all over this country, can get the health 
coverage they deserve.
    Mr. Bilirakis. I thank the gentleman. I would just merely 
say in closing that first of all, Mr. Barrett, I believe it 
was, said it well when we were talking about the cost of drugs 
in some of these foreign countries versus the cost here. And he 
said something about the Americans are subsidizing the cost of 
drugs there, and when you stop to think about it, he said it 
well there. Now, what is the solution to that is the difficult 
part.
    But I would say, Mr. Engel brought up--I mean, there are an 
awful lot of good arguments against doing something now. There 
is concern, there is a fear that if you put some temporary fix 
in place to help the needy and the sickest now, that that means 
that prescription drugs as a part of Medicare is just something 
that is not going to be addressed by this Congress, because the 
immediate solution, so to speak, would be considered the final 
solution.
    I don't believe that. I think that Mrs. Kessler is hurting 
now and I think that if we help Mrs. Kessler now--I mean there 
is no sin in that--but at the same time, continue to work 
toward prescription drugs in Medicare. I feel very strongly 
that we have to have prescription drugs in Medicare. I daresay 
there aren't many Members of Congress who don't feel that way. 
It is just a case again of how you go about it all. And also it 
is the complexities of these partnerships that enters the 
picture, turf fights enter the picture, all sorts of things 
that can.
    Can we do it in this Congress? God knows, we have to do it 
in this Congress, but we may not; and that means another 2 
years plus for Mrs. Kessler to continue to have problems with 
her prescription drugs when, in fact, we could probably help 
Mrs. Kessler and Mrs. Tauzin and Mrs. Engel and whatnot now and 
in the meantime, so to speak.
    So I don't know. There are a lot of arguments certainly 
against doing anything other than universal. I realize that. 
But common sense dictates to me that our job is to help people 
now, not necessarily say we will help you 3 or 4 or 5 years 
from now.
    Well, having said that, we have kept you here a long time 
and I really appreciate your patience and your willingness to 
be here and to help out, and you have helped. We will be 
submitting questions to you, and hopefully all of us working 
together, if we can toss aside demagoguery and partisanship for 
a change, we can get the job done. Thank you very much. The 
hearing is----
    Mrs. Kessler. May I say something? I want to thank all you 
gentlemen. You have reaffirmed my faith in the U.S. Government.
    Mr. Bilirakis. Isn't that nice.
    Mrs. Kessler. And I know I am going to go back and tell 
this to everybody. So I know I would like to see this happen 
before I die.
    Mr. Bilirakis. And this comes from a Floridian, I want you 
to know, Mr. Brown. Thank you very much. The hearing is 
adjourned.
    [Whereupon, at 1 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                                   Kaiser Family Foundation
                                                     March 19, 2001
Hon. Michael Bilirakis
Chairman
Subcommittee on Health
Committee on Energy and Commerce
United States House of Representatives
Room 2125, Rayburn House Office Building
Washington, DC 20515-6115
    Dear Chairman Bilirakis: Thank you again for the opportunity to 
testify before the Subcommittee on Health on February 15, 2001 
regarding ``Medicare Reform: Providing Prescription Drug Coverage for 
Seniors.'' I received the follow-up questions and am submitting the 
following information for the record.
Pharmaceutical Company Marketing:
    What effect does direct-to-consumer advertising have on 
utilization? What effect does pharmaceutical company marketing have on 
health care providers? What is your experience with pharmaceutical 
prices in other countries versus the United States? If there is a 
difference, can you explain why?
    Spending by drug manufacturers on direct-to-consumer (DTC) 
advertising has increased substantially in recent years, from $266 
million in 1994 to $1.3 billion in 1998. However, I am unfortunately 
not aware of any systematic analysis of the effect of direct-to-
consumer advertising on utilization. We are beginning such a study in 
conjunction with researchers at Harvard University, and I would be 
happy to forward the results to you when they are completed.
    Indications of the extent to which DTC advertising has reached 
consumers can be found in a September 2000 survey we conducted with The 
Lehrer Newshour. The survey found that 91% of Americans say they have 
seen or heard a drug advertisement in the past 12 months, and over a 
third of those who had been exposed to an ad talked to their doctor 
about the drug that was advertised. I have enclosed a copy of the 
toplines and the summary chartpack from that survey.
    While there has been substantial public focus on the growth in DTC 
advertising for prescription drugs, marketing targeted to physicians 
remains a much larger share of pharmaceutical promotional activities--
drug manufacturers spent an estimated $7 billion on professional 
promotion in 1998 compared to $1.3 billion for direct-to-consumer 
advertising. This difference is not surprising given the fact that 
physicians must prescribe a medication in order for a consumer to have 
access to it. We are in the process of conducting a survey of 
physicians that includes some questions about drug advertising and 
would be happy to also forward those results to you when they are 
available.
    I have enclosed a copy of our Prescription Drug Trends chartbook 
for your reference. This publication provides information about the 
trends in prescription drug coverage, spending, prices, use, and 
industry structure, and contains additional data on pharmaceutical 
company marketing efforts. In addition, the office of the Assistant 
Secretary for Planning and Evaluation (ASPE) at the Department of 
Health and Human Services is planning a conference to examine and 
develop research designs to explore the impacts of direct-to-consumer 
pharmaceutical advertising on health care costs and patient outcomes. 
The conference will be held on May 30, 2001 in Washington, DC and is 
likely to produce additional information on this topic.
    Finally, our research has focused primarily on domestic 
pharmaceutical issues, so I am unfortunately unable to provide any 
information on drug prices in other countries. I would be happy to 
provide the Subcommittee with suggestions for other possible sources of 
information if that would be helpful.
Delivery of Prescription Drugs Under the Medicaid Program
    Please explain the chain that takes place as a prescription drug 
tablet journeys from the manufacturing plant to the medicine cabinet of 
a senior citizen who gets prescription drug coverage from you.
    Every state's Medicaid program operates in a different way, and, 
even within a state's Medicaid program, delivery of prescription drugs 
may vary depending on beneficiaries' enrollment in a managed care plan. 
However, there are general rules and processes that all states share in 
delivering prescription drugs to Medicaid beneficiaries.
    Each Medicaid program has a formulary consisting of drugs that are 
available to all beneficiaries eligible for prescription drug coverage. 
The formularies are determined, in large part, by which manufacturers 
have agreed to participate in the federal Medicaid drug rebate program. 
Participating manufacturers agree to rebate a set amount of payments 
for their products, and, in return, the Medicaid formulary includes all 
participating manufacturers' products. A few formulary exclusions are 
permitted, such as for products with a high risk of abuse or products 
that the FDA has determined to be ineffective. In addition, a state can 
require the prescriber to seek prior authorization before a particular 
drug can be dispensed--a strategy often used for more costly 
medications.
    When a Medicaid beneficiary receives a prescription, he or she has 
it filled at a participating pharmacy that gets its stock either 
directly from manufacturers or through wholesalers. Many states have 
provisions that require or encourage the use of generic substitutes 
when available. Medicaid beneficiaries can face limits to the number of 
prescriptions they may fill, quantity of medication dispensed at any 
one time, or dollar amounts on the cost of the prescription. 
Beneficiaries may also be charged a nominal co-payment for their 
medications.
    I hope that this information is useful to the Committee as it 
considers options for extending prescription drug coverage among 
Medicare beneficiaries. Please do not hesitate to contact me if you 
need any additional follow-up information. Thank you.
            Sincerely,
               Diane Rowland, Executive Vice President,    
                          The Henry J. Kaiser Family Foundation    
     Executive Director, The Kaiser Commission on Medicaid and the 
                                                          Uninsured
                                 ______
                                 
                 Prescription' Solutions
                                       Costa Mesa, CA 92626
                                                     March 23, 2001
Questions for witnesses of February 15, 2001
Energy and Commerce Subcommittee on Health
Hearing on Medicare Prescription Drugs

    Question 1. What effect does direct-to-consumer advertising have on 
utilization?
    Direct-To-Consumer (DTC) advertising provides information about 
diseases and drugs that treat those ailments. DTC advertising has been 
shown to increase utilization of specific drugs according to a report 
published in the Journal of Family Practice, December 2000. Physicians 
admit to prescribing drugs that patients request even though there are 
other less expensive drugs that achieve comparable results. In the same 
article, Dr. Richard L. Kravitz, Director of the UC Davis Center for 
Health Services Research in Primary Care, has stated ``these ads are 
designed to encourage patients to request the advertised drugs from 
physicians. In some cases, the request may be appropriate, but the ads 
can also result in doctors prescribing drugs they don't deem 
necessary.'' For Prescription Solutions, utilization (based on number 
of prescriptions/member/year) has increased 17% over the past 3 years.
    Question 2. What is your experience with pharmaceutical prices in 
other countries versus the United States? If there is a difference, can 
you explain?
    There have been reports of pricing disparities regarding the cost 
of drugs in other countries, but Prescription Solutions has no direct 
experience in the pricing of foreign drug products. This subject is 
complex since access to certain pharmaceuticals and drug price controls 
vary by country and it is difficult to speak generally regarding the 
international markets.
    Question 3. What effect does pharmaceutical marketing have on 
health care providers?
    Physicians are susceptible to marketing pressures much as any other 
segment of society. Pharmaceutical marketing to providers may take the 
form of advertising and visits by sales representatives but is often in 
the form of drug samples. According to a New York Times article, 
November 15, 2000, some physicians that have responsibility for 
pharmacy budgets believe that the ready availability of samples in 
medical offices increases inappropriate drug utilization. In the 
article, Dr. John B. Chessare, chief medical officer at Boston Medical 
Center, states that his hospital was strongly discouraging its doctors 
from accepting free drug samples. Health care administrators also 
assert that the samples are helping to inflate their drug costs.
    Focus groups conducted by Prescription Solutions have demonstrated 
an interest by physicians in generic drug sampling that would encourage 
use of appropriate and cost effective therapies. A generic sampling 
program has been initiated to help physicians counteract the effect of 
pharmaceutical samples of new, branded drugs.

                            MEDICARE REFORM

    Question 1. Please explain the chain that takes place as a 
prescription drug tablet journeys from the manufacturing plant to the 
medicine cabinet of a senior citizen who gets prescription drug 
coverage from you.
    The diagram below shows the ``high level'' flow of a prescription 
drug from the manufacturer to the patient. It doesn't account for all 
areas of interaction, however. There are negotiations with the 
manufacturer for discounts and rebates on formulary drugs selected. 
There are also computer systems that support the insurance eligibility 
of the patient, check for drug interactions, and price the 
prescriptions so the pharmacy can be paid. The patient also has a 
choice of pharmacies between either a retail pharmacy (patient picks up 
the prescription) or a mail service pharmacy (prescription is delivered 
to patient's home).
    A patient visits their doctor and may receive a prescription for a 
medicine, which they will take to the pharmacy to be filled. If the 
drug is on the health plan formulary, it will be dispensed to the 
patient with instructions for proper use and storage of the medication. 
The patient pays a co-pay that is predetermined according to their 
benefit and then takes the medication home for use. If the medication 
is not on the formulary, the physician will be contacted. The physician 
will call in the request or fax a form for the request of a 
nonformulary drug. Clinical guidelines have been established for the 
use of nonformulary drugs. If the patient meets those criteria, 
approval will be given, and the drug will be dispensed by the 
pharmacist. If approval is denied, the physician will often be given 
formulary options to use that will be therapeutically equivalent to the 
requested drug.
    Non-formulary drugs are reviewed via a Prior Authorization process 
for medical necessity. Guidelines have been established by the Pharmacy 
& Therapeutics Committee for the appropriate use of non-formulary 
drugs. Drugs are chosen for the formulary based on safety and efficacy. 
There are more than 1600 drugs on the formulary, and 24 million 
prescriptions filled annually for our Medicare members. Occasionally, 
medications are requested that are not on the formulary and must be 
evaluated on an individual basis. About one percent of all 
prescriptions require prior authorization before being filled, and of 
these cases, 75% of the prescriptions written are approved without 
further action. Approximately one-fourth of one percent of all 
prescriptions are denied.
    Question 2. To the extent that you or the organization you work 
for, have experience with the purchase and supply of prescription drugs 
abroad, please identify any differences you are aware of in the 
international systems.
    We are a domestic company. Since we are subject to the drug 
importation laws, we do not buy drugs from foreign countries.
    Thank you for the opportunity to provide clarification on these 
questions.
            Sincerely,
                                    John Jones, R.Ph., J.D.
                                          V.P. Legal and Regulatory
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