[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

                               __________

                              MAY 16, 2001

                               __________

                           Serial No. 107-28

                               __________

       Printed for the use of the Committee on Energy and Commerce


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

                               __________

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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
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  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:
    Braun, Beatrice, Member, Board of Directors, AARP............    65
    Chess, Robert, Chairman, Inhale Therapeutics Systems, on 
      behalf of the Biotechnology Industry Organization..........    83
    Crippen, Dan L., Director, Congressional Budget Office.......    18
    Lambrew, Jeanne M., Associate Professor, Department of Health 
      Services Management and Policy, George Washington 
      University.................................................    73
Material submitted for the record by:
    Pharmaceutical Research and Manufacturers Association of 
      America, prepared statement of.............................    98

                                 (iii)

  

 
   MEDICARE REFORM: PROVIDING PRESCRIPTION DRUG COVERAGE FOR SENIORS

                              ----------                              


                        WEDNESDAY, MAY 16, 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 2322, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Barton, Upton, 
Greenwood, Deal, Burr, Whitfield, Ganske, Norwood, Shadegg, 
Bryant, Ehrlich, Buyer, Pitts, Tauzin (ex officio), Brown, 
Strickland, Barrett, Capps, Hall, Pallone, Deutsch, Eshoo, 
Stupak, Engel, Wynn, and Green.
    Staff present: Tom Giles, majority counsel; Anne Esposito, 
health policy coordinator; Kristi Gillis, legislative clerk; 
Amy Droskoski, minority professional staff; and Bridgett 
Taylor, minority professional staff
    Mr. Bilirakis. I am being reminded by Mr. Brown that we are 
4 minutes late, so we had better get rolling. Good morning. I 
now call to order this hearing on Medicare Reform.
    In our first hearing of the year, this subcommittee 
examined ways in which Medicare beneficiaries are currently 
obtaining prescription drugs outside of the Medicare program. 
Today, we will assess the various needs of Medicare 
beneficiaries for prescription drug coverage.
    The hearing series is built around a critical concept 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. I 
remain determined that this Congress and this Administration 
can reach agreement on a plan to reform Medicare and establish 
a voluntary prescription drug benefit for all Medicare 
beneficiaries.
    I would like to welcome all of our witnesses today. Our 
first witness is Mr. Dan Crippen, with the Congressional Budget 
Office. Many policy experts believe that any policy we advance 
will be driven by the numbers. It is true that fiscal 
responsibility is of the utmost importance in crafting this 
benefit, however, it is also important that we fulfill the 
needs of the Medicare beneficiaries to the greatest extent 
possible, and this committee will rely heavily on the work of 
the CBO to help us understand the fiscal impacts of the 
policies we will create and, to that end, I know we all look 
forward to hearing about the work that CBO has done so far in 
this regard.
    I would also like to welcome the witnesses from our second 
panel, the Biotechnology Industry Organization, AARP, and Ms. 
Jeanne Lambrew. These organizations will be able to best 
explain the needs of Medicare beneficiaries. Ms. Braun, on 
behalf of AARP, has come before the committee before to be a 
voice of seniors who are the biggest and, in my opinion, the 
most significant stakeholders in this debate.
    Before we expand Medicare to provide a costly new benefit, 
we must ensure that the program is standing on solid fiscal 
ground. A benefit promised but not delivered is certainly no 
benefit at all, and I am determined to protect the long-term 
solvency of this vital program. I would like to think that the 
entire committee is equally determined.
    As members know, this subcommittee has a strong record of 
working on a bipartisan basis to tackle difficult legislative 
issues. I am hopeful that we can advance a bipartisan plan to 
improve prescription drug coverage for Medicare beneficiaries. 
By reaching agreement on an answer to this difficult question, 
we can also help advance broader efforts to preserve and 
strengthen Medicare for the future. In closing, I want to again 
thank our witnesses for their time and effort in joining us 
today, and now recognize our ranking member, Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. I would like to thank 
Mr. Crippen for joining us, and also Jeanne Lambrew and our 
other distinguished witnesses for coming to this hearing and 
sharing in their wisdom.
    Today's hearing is about the structure of prescription drug 
coverage, the access and cost implications of various coverage 
options. It is important to be clear about what actually is and 
isn't optional about prescription drug coverage for Medicare 
beneficiaries. Affordable, meaningful prescription drug 
coverage should be available to every Medicare beneficiary. In 
conjunction with establishing a prescription drug benefit for 
Medicare beneficiaries, the Federal Government must take action 
to reduce prescription drug prices. If we truly want to act in 
the best interest of Medicare and taxpayers, neither principle 
is optional.
    A fundamental principle of Medicare is universality, the 
goal is and has been since its inception in 1965, to ensure 
every senior access to appropriate medical care regardless of 
health, regardless of income. The same principle should apply 
to prescription drug coverage.
    Medicare prescription drug coverage as opposed to State 
assistance programs or private coverage for prescription drugs 
means stable benefits over time that leaves no senior behind. 
If we extend a helping hand to some subset of Medicare 
beneficiaries based on their being the poorest of the poor or 
the costliest of the costly, we are leaving seniors behind. If 
we create a Welfare benefit for prescription drugs, we are 
leaving seniors behind.
    At last count, a third of all seniors lack prescription 
drug coverage. That was before Medigap premiums spiked upwards 
37 percent between 1998 and 2000. That was before 900,000 
Medicare beneficiaries lost their coverage, their prescription 
drug benefits usually with it and, by the way, these same HMOs 
are tomorrow holding a rally to ask for a cut and a big share 
of the $300 billion included in the budget resolution for 
prescription drug coverage in unspecified Medicare reform.
    HMOs are making this request, having this rally, even 
though they know they received a third of the Medicare give-
back dollars last year even though they only served one-sixth 
of the Medicare population, even though they know every penny 
of the $300 billion is necessary for prescription drugs, even 
though the managed care companies know how important drug 
coverage is for seniors, and even though they know they stand 
to receive additional funding if we establish any kind of 
Medicare prescription drug coverage. And Medicare HMOs claim to 
be operating in the best interest of our seniors.
    But back to prescription drugs for a moment, if we can help 
some of those in need of coverage now, when will we get around 
to helping the growing number left out? Let us talk about 
dollars for a moment. Mr. Crippen's written testimony discusses 
the future financial viability of Medicare. Securing the long-
term solvency of Medicare as well as that of Social Security is 
very, very important, as the chairman said. Securing the value 
of these benefits that the programs deliver is equally 
important. Prescription drug inflation, to be sure, is eroding 
the value of Medicare and Social Security. Medicare covers 
doctors visits, it does not cover outpatient prescription 
drugs. If a Medicare beneficiary goes to a doctor but can't 
afford to fill a prescription, how does that affect the value 
of the doctor's visit?
    Prescription drug spending increased 19 percent last year. 
Seniors' monthly Social Security checks increased 2.4 percent 
last year. Put yourself in the shoes of a retired individual 
without prescription drug coverage. You live on an $844 a month 
Social Security check. Your doctor prescribes Celebrex or Zocor 
or Prilosec, maybe all three. Celebrex costs $80 a 
prescription, Zocor costs $105 a prescription, Prilosec costs 
$130 per prescription. All together, that is 40 percent of your 
monthly Social Security income. All these medications are 
important, no one disputes that.
    Take Celebrex. It can help individuals with arthritis live 
with less pain and disability. Let us give the drug companies 
the benefit of the doubt and assume it costs, as they tell us, 
$500 million to develop Celebrex. That is the per drug R&D 
estimate the industry has never substantiated, we are supposed 
to take it on faith. The makers of Celebrex earned $1.3 billion 
in 1999, $2 billion in 2000. Even if there initial investment 
were $500 million, they are raking in enormous profits on a 
drug they know seniors will buy even if it bankrupts them.
    Last year, the makers of Celebrex raised the price 11 
percent. One more point about Celebrex. Recent studies suggest 
that it and its rival, Vioxx, are no more effective in reducing 
the pain and inflammation of arthritis than other anti-
inflammatory pain killers.
    What is the biggest distinction between Celebrex and Vioxx 
and their less expensive counterparts? Extraordinarily 
aggressive direct-to-consumer advertising. What is the message 
here? The U.S. Government must stop the prescription drug 
industry from taking advantage of American consumers. We can't 
afford to permit drug companies to charge Americans twice, 
thrice, sometimes four times what consumers in other countries 
pay for prescription drugs, even though American taxpayers 
often paid for much of the research costs.
    We can't afford to permit drug companies to block access to 
less expensive but equally effective generic drugs. We can't 
afford to permit drug companies to exploit direct-to-consumer 
advertising, seducing us into clamoring for the newest drug 
regardless of its true effectiveness, regardless of its price.
    We need to join every other industrialized nation on this 
planet and demand reasonable prices from drug companies. We can 
reduce prices through competition by creating a system of 
royalties that would permit generic into the market sooner. 
That is the theory behind my compulsory licensing bill. We 
could reduce prices by making use of the collective purchasing 
power of 39 Medicare beneficiaries. That is the theory behind 
the Allen bill. We could reduce prices by closing loopholes 
that have enabled brand name drug companies to block access to 
generic alternatives. That is the theory behind the McCain-
Schummer bill and the Emerson-Brown bill which we will 
introduce later this week, bipartisanly.
    We can reduce prices through information by making drug 
purchasing decisions based on a drug's relative efficacy, not 
its ad campaign. That is the theory behind New Zealand's 
pricing reference--reference pricing system. There are many 
things we can do, the question is, will we, in this 
institution? Unfortunately, that is a matter of politics.
    The Federal Government, Mr. Chairman, must find the 
political courage to add prescription drug benefits to Medicare 
without paying excessive prices for prescription drugs. It 
would be irresponsible of us to pay anymore or to do any less. 
I thank the chairman for his indulgence.
    Mr. Bilirakis. There is a vote on the floor. Let us see if 
we can get in as many opening statements as we can, but limit 
them to 3 minutes, please. Under the rules, we can do that. Mr. 
Upton.
    Mr. Upton. Thank you, Mr. Chairman. I have a lengthy 
statement for the record, and to save on time, I'd like to say 
three things.
    Mr. Bilirakis. Without objection, the opening statements of 
all members of the panel will be made a part of the record.
    Mr. Upton. First of all, welcome to my long-time friend, 
Dan Crippen. We look forward to your testimony and interaction 
with us not only today, but in the months ahead.
    Second, prescription drugs is a big issue not only in my 
district, but across the country. A letter I received not too 
long ago from one of my constituents, and I quote: ``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 am a diabetic. My 
husband has glaucoma and high blood pressure and eyedrops are 
very expensive. We have no prescription drug coverage, so it is 
a very trying ordeal for us.''
    That is a typical letter, and I myself have seen friends 
and seniors literally cut their pills or dosages in half to 
make them go twice as far because of the cost and the other 
needs in the household.
    I was pleased to be part of the House Republican Leader's 
Task Force last year, I look forward to working with you, Mr. 
Chairman, on developing a plan and moving it through the 
Congress this summer, and I yield back the balance of my time.
    Mr. Bilirakis. I thank the gentleman. Three minutes, Mr. 
Pallone.
    Mr. Pallone. Thank you, Mr. Chairman. The lack of an 
affordable prescription drug benefit is, without question, the 
biggest problem with the Medicare program today, and the 
problem can't be corrected piecemeal by simply devising a plan 
to cover the poor seniors. A comprehensive affordable drug 
benefit should be available to all seniors regardless of 
income. Fifty percent of Medicare beneficiaries without drug 
coverage are middle-class seniors.
    Instead of providing a meaningful benefit through Medicare, 
it seems as though President Bush and the Republican leadership 
are preparing to either provide drug coverage to only low-
income beneficiaries, or to provide drug coverage that relies 
on private drug only insurance. Neither of these plans will 
allow beneficiaries to receive a comprehensive affordable 
guaranteed benefit and, in fact, these plans will nurture the 
price discrimination beneficiaries face when purchasing 
pharmaceuticals.
    Price discrimination has been well documented by Democrats 
and a number of consumer groups. Statistics have shown that 
seniors pay nearly twice as much for their prescription drugs 
than does the pharmaceutical industry's most favored customers. 
Robert Pare's article in the New York Times from earlier this 
month highlights the finding that a large increase in drug 
spending was disproportionately attributable to only a few top 
selling drugs marketed to seniors. Aggressive marketing by drug 
companies has contributed to this growth in addition to rising 
cost of drugs used most frequently by seniors.
    I want to note, Mr. Chairman, however, that price 
discrimination is only half the battle. The need for passing a 
comprehensive prescription drug plan is just as important. 
Twelve million Medicare beneficiaries, approximately a third, 
lack coverage for prescription drugs. Another one-third have 
unreliable coverage through Medigap or Medicare+Choice. Medigap 
coverage is inadequate and too expensive and needs to be 
reformed. As for Medicare+Choice, an increasing number of 
enrollees have prescription that is not good and getting worse. 
Most private health plans that provide services for seniors 
have unimpressive records of covering prescription drugs, yet 
the Republicans call for prescription drug plans that force 
beneficiaries to rely on private health plans to receive 
crucial coverage.
    In closing, I would like to reiterate that Democrats would 
like to see a voluntary prescription drug benefit through 
Medicare that is affordable to all beneficiaries regardless of 
income, accessible to all beneficiaries, and financed without 
reducing the solvency of Medicare and is a guaranteed benefit 
that is uniformly available across the country. Thank you 
again, Mr. Chairman.
    Mr. Bilirakis. And I thank the gentleman. Three minutes, 
Mr. Burr, the vice chairman of the full committee.
    Mr. Burr. Thank you, Mr. Chairman. Mr. Brown said the 
question is ``will they.'' I say the question is ``did they.'' 
When they controlled the White House and the House of 
Representatives and the U.S. Senate for a 2-year period, did 
they introduce a plan? Did they even talk about the need for a 
drug benefit? They didn't. And I think you heard from his 
opening statement that bipartisanship on a drug bill is going 
to be hard to find because, to them, this is about everything 
but a drug benefit. It is about the companies. It is about 
HMOs. It is about Medicare+Choice. It is not about the 
constructive advice of how you craft a very delicate plan, a 
plan that has to incorporate who is currently covered under 
Medicaid because they are low income; a plan that takes into 
account that some employers today still provide drug benefits 
for their retirees, and they are willing to do it in the future 
if there is a little bit of incentive in what we do.
    Twenty-six States currently have expanded drug plans for 
seniors that rate as high in Pennsylvania as 200 percent or 
over of the poverty line. And how we write a plan that 
integrates all these different approaches that they might have 
into some type of uniform national prescription drug benefit, 
one that is accessible to all, affordable for all and, most 
importantly--and not mentioned up to this point--is voluntary, 
one that seniors can choose whether they participate in.
    Mr. Chairman, I am hopeful, I am confident that we can 
reach a bipartisan bill this year, but we are going to have to 
drop the political rhetoric of this being an issue about 
everything but prescription drugs. We have got to work on 
language. We have got to work on the specifics. We have got to 
listen to Dan Crippen. We have got to understand that even 
though Dan mentions in his opening statement, if we extended 
the drug benefit to everybody under Part B and kept the current 
subsidy of 75 percent, then I think he would tell us we can't 
afford it under the current structure. I think we all know 
that. But the reality, Mr. Chairman, is that this committee has 
to do it this year, because next year CBO has to begin to score 
the Baby Boomers that hit the system. In the next 10 years, we 
will see the size of the senior population outnumber the amount 
of votes that either candidate got in the Presidential 
election. They will have a major voice in what the structure of 
a plan looks like if we wait that long.
    We have a unique opportunity on both sides of the aisle 
this year to craft a plan that can withstand the test of the 
increase in population and, consequently, the increase of cost 
of a drug benefit in the future. I hope we won't miss this 
opportunity. I yield back.
    Mr. Bilirakis. I thank the gentleman. Mr. Deutsch, for 3 
minutes.
    Mr. Deutsch. Thank you, Mr. Chairman. I have mentioned two 
statistics. Sometimes statistics can be very telling. I will 
mention them again. In 1965 when Medicare was created, the 
average life expectancy of Americans was 65 years old. Thirty-
six years later, it has increased almost 15 years. In 1965 
before Medicare was created, the average senior in America 
spent 11 percent of their income on health care costs. Today, 
with Medicare paying effectively most hospital and doctor 
costs, seniors in America spend 19 percent of their income on 
health care costs. Prescription drugs is a great part of that 
increase. It is sort of high-class problem, I think, accurately 
described as a high-class problem, that people living are 
living longer. It is a good thing, and prescription drugs in 
America have fundamentally changed our world. Tens of millions 
of Americans, let alone people throughout the world, in fact, 
are alive today because of prescription drugs. But I think it 
is inconceivable for any of us--and I think it is an important 
acknowledgement on this subcommittee, on this committee, and in 
this Congress, and in this country, to say that we can have a 
health care system like Medicare without prescription drug 
coverage. It is illogical, it wouldn't make sense. It is clear 
that if we were creating that system today, we would provide 
prescription drug coverage, period, without debate.
    So, where are we now? We are trying to change the system 
and make changes. My well-intentioned colleagues on the other 
side of the aisle, as well as the President, have talked about 
proposals to limit a prescription drug coverage only to low-
income seniors. I think it is unfair considering the majority 
of seniors currently without coverage are significantly above 
the poverty level. Let me point out, in Florida, 65 percent of 
the seniors would not qualify for low-income prescription drug 
coverage. Many of these seniors make as little as $15,000 per 
year, yet they would be ineligible for many of the programs 
debated last year.
    I think what is imperative and I think what is critical, 
and it is a philosophical divide, that I believe the American 
people are on our side and not, unfortunately, on the other 
side on this issue, which is that a prescription drug coverage 
has to be for all Medicare beneficiaries. It cannot be limited 
and it cannot be made income-eligible, that is a fundamental 
mistake, it changes the nature of the Medicare system from an 
insurance-based program to a need-based program and with all 
sorts of, I think, tremendously detrimental policy 
implications. Thank you, Mr. Chairman.
    Mr. Bilirakis. Thank the gentleman. We are going to break 
now for this vote, and as soon as I get back and Mr. Brown 
returns, we are going to start up again. Forgive us, Mr. 
Crippen.
    [Brief recess.]
    Mr. Bilirakis. Our hearing will be back in order. The Chair 
recognizes the chairman, Mr. Tauzin, for an opening statement.
    Chairman Tauzin. Thank you, Mr. Chairman. I want to thank 
you, first of all, for holding this hearing today because it is 
on a topic of utmost importance to all Americans. It is the 
second hearing in a series looking at Medicare reform and the 
lack of a prescription drug benefit today in traditional 
Medicare program, and the witnesses we will be hearing from 
today could be some of the most important that we hear from 
this year.
    The Medicare program affects every one of us, whether we 
are eligible for the program today, or we have family members 
like my own mother who is eligible. All of us have an interest 
in ensuring that the program will meet the health care needs of 
a growing senior population. We are all hopeful that we are 
part of that population, if we are lucky.
    Over the past few years, it has become increasingly clear 
that the Congress needs to modernize Medicare and to 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, is still 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 the room today would model a new system after Medicare's 
current benefit package.
    A large part of the debate will no doubt focus on the cost 
of adding an outpatient prescription drug benefit to Medicare, 
and I am happy today that CBO is with us. CBO has estimated 
that the aggregate Medicare spending for the next 10 years will 
equal $1.5 trillion. That is a 32 percent increase over last 
year's estimate alone. Given the new CBO estimates, adding a 
prescription benefit to Medicare will prove even more 
challenging, obviously, today than it was last year.
    We are fortunate also to hear today from the AARP, and they 
have a unique insight into the current outpatient drug needs of 
seniors and the disabled, even though they were, I think, a bit 
out-of-touch with the broadband argument we had last week.
    I am constantly amazed at the almost daily breakthroughs in 
science and technology. When I hear of treatments to combat 
diseases such as AIDS and leukemia it all gets put in 
perspective. If I can be helpful in my role as chairman of the 
full committee to ensure that patients in need of life-saving 
treatments have access to them, we will do all we can to make 
that happen.
    We don't have all the answers as to how the public-private 
partnership should be structured, but our committee is 
committed to finding that solution, and we intend to pass a 
prescription drug benefit in this Congress.
    I look forward to hearing from BIO, the industry 
representing the companies who are on the cutting edge of 
developing life-saving treatments. And I welcome Ms. Lambrew, 
who will provide us insight into the cost issues we need to be 
aware of as we structure the new prescription drug benefit to 
be incorporated in the Medicare program, which has been 
traditionally slow to adapt to a dynamic health care 
marketplace.
    And as we consider how to modernize the program, I would be 
remiss if I didn't mention the issue raised by AARP and others 
in their testimony. Preparing for the retirement of the Baby 
Boom generation, according to the most recent Medicare 
Trustee's report, there will be 77 million beneficiaries in the 
year 2030. That is about double the beneficiaries of today. 
Conversely, the number of workers paying for the Medicare 
program will only increase by 15 percent. To the extent that we 
analyze the Medicare program to modernize the benefits package, 
we should not squander the opportunity to make the reforms 
necessary to ensure the long-term sustainability of this 
increasingly vital program to Americans.
    It is a pretty exciting time to be involved in this debate. 
Our new President has expressed a strong interest in reforming 
Medicare. Many in the Senate have expressed a desire to move a 
reform package. My own Senator John Breaux has been 
instrumental in many of these recommendations, as has Bobby 
Jindal, who is now the new Assistant Secretary at the 
Department.
    As I stated at our first hearing on the topic, the 
committee is honored to have two members who participated in 
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 this debate.
    Mr. Chairman, I thank you again for this important hearing 
and, most importantly, for taking on this enormous challenge of 
both reforming Medicare and making sure we not leave this 
Congress without providing a prescription drug benefit within 
that Medicare reform. Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman for his remarks. The 
gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. I ask unanimous consent 
that all members not only have time to provide statements, but 
also to revise and extend their remarks.
    Mr. Chairman, I will be brief and easily within the 3 
minutes.
    I would like to thank you for holding this second hearing 
on the prescription drug benefit for our Nation's seniors, and 
I echo the sentiments of my colleagues who say that such an 
important and crucial issue for our constituents. Whether they 
are eligible for Medicare or not, we all have elderly family 
and friends who rely on prescription drugs to maintain their 
health.
    As our Chairman said, we wouldn't create Medicare today the 
way it was created in 1965, and I would hope if we created it 
today, we would provide a prescription drug benefit under 
Medicare because prescription drugs are just as important as 
your doctor, just as important as your hospital today as 
compared to 1965. The rising cost of medications make it more 
difficult for seniors to manage their prescription costs. In 
fact, the recent study by the National Institute of Health Care 
Management reported a dramatic increase in prescription drug 
cost over the last decade. The report indicates that the cost 
of prescription drug costs will continue to escalate, and I ask 
unanimous consent, Mr. Chairman, to place into the record this 
study by the National Institute of Health Care Management.
    Mr. Bilirakis. Without objection, that will be the case.
    Mr. Green. According to the study, from 1999 to 2000, 
retail outpatient prescription cost rose by 19 percent in 1 
year, and I am from Texas and we don't even have that high gas 
prices. So, 19 percent in 1 year. The increases are highest 
among our blockbuster drugs that most of our family and friends 
take--Vioxx, Celebrex for arthritis, Lipitor for high 
cholesterol, Glucopage for diabetes. Seniors have no choice but 
to pay these high costs. To make ends meet, most seniors are 
cutting their pills in half or not taking their dosage.
    Mr. Chairman, I will yield back my time and ask my full 
statement be included, but I appreciate the chance to try and 
work on a bipartisan effort for prescription drug coverage.
    Mr. Bilirakis. I thank the gentleman. Without objection, 
the opening statements, as I have already said, of all members 
of the panel will be made part of the record. Dr. Norwood, for 
an opening statement, vice chairman of the committee.
    Chairman Tauzin. Dr. Norwood, would you yield just 
temporarily, please?
    Mr. Norwood. Always.
    Chairman Tauzin. I thank my friend. I want to admit an 
error here. I must have been stuttering a while ago because I 
didn't say this properly. I also didn't read today's report 
from the Hill Briefs. AARP has asked to be removed from anti-
broadband spots so, obviously, I made a terrible mistake, and I 
want to congratulate you for that new decision. Thank you, Mr. 
Chairman.
    Mr. Bilirakis. Quick work. The gentleman from Georgia.
    Mr. Norwood. Thank you very much, Mr. Chairman, and I do 
appreciate your calling this hearing and most certainly applaud 
your efforts to a further review of Medicare and prescription 
drug coverage for seniors.
    We are here today because of the concern of those seniors 
that are in need of prescription drugs but due to the 
escalating cost are forced to choosing between purchasing the 
prescribed medication and the basic necessities.
    Mr. Chairman, I am deeply troubled by the potential cost of 
adding a comprehensive drug benefit to Medicare. The 
Congressional Budget Office has now projected that Medicare 
expenditures will be approximately $237 billion for this fiscal 
year. Last year, CBO estimated that adding a drug benefit would 
cost $1.1 trillion over 10 years. CBO has now revised that 
figure to an even more staggering $1.3 trillion, and if history 
has shown us anything, Mr. Chairman, CBO estimates are rarely 
under-estimates.
    When considering a prescription drug benefit for seniors, 
we must also realize that the population of our country is 
aging rapidly, with the Baby Boomer generation soon becoming 
eligible for Medicare benefits, prescription drug expenditures 
for a new Medicare benefit are sure to rise exponentially.
    So, today I am particularly interested in the testimony of 
Dan Crippen. You are a critical player, Mr. Crippen, in this 
process because CBO scoring, in essence, will guide our 
process. We are depending on your estimates to be accurate and 
your assumptions to be logical. It is my hope that you will be 
able to provide further insights and explanations to raise our 
comfort level that our confidence in CBO is warranted.
    Again, Mr. Chairman, I commend you for calling these 
hearings and leading the effort to ensure the America's seniors 
are not left behind and, with that, I yield back the balance of 
my time.
    Mr. Bilirakis. I thank the gentleman. Ms. Capps, for an 
opening statement.
    Ms. Capps. Thank you, Chairman Bilirakis, for holding this 
particular hearing. This subcommittee, of which I am proud to 
be a member, will deal and has dealt with many important topics 
in this session of Congress. Perhaps none is more important 
than this issue before us today--ensuring that seniors have 
access to quality health care.
    Many statements have been made on both sides of the aisle 
today, which I agree with. If we were designing Medicare today 
as opposed to 30-plus years ago, we would do so with a 
prescription drug benefit. And this benefit wouldn't be just 
for low-income seniors, it would be the kind of health care 
that each of us desires to have in our health coverage because 
we know how critically important prescription medications are. 
Yet look at who takes most of the medications in this country--
it is our senior population.
    The stories that I hear each time I visit my district echo 
those of my colleagues here as well. Seniors come to me and 
say, ``I can't afford my medications, I have to take one every 
other day,'' or the pharmacists who come out from behind the 
counter if they see me in the drug store and say, ``It is so 
troubling to have to advise seniors which of their five 
prescriptions they essentially need to take and which can they 
do without.'' This leads me to ask this basic question--what is 
it costing us as a country not to cover prescription 
medications?
    As exorbitant as the prices are, this is probably the most 
moderate form of health care that we can give. The cost of not 
taking prescription medication that doctors prescribe--to save 
lives, to add to quality of life, to allow for independence of 
seniors--lands people into hospitals, and into a very expensive 
form of Medicare coverage. And I would hope that we could get 
some estimate of the cost that our country is bearing through 
Medicare by the kind of health care that is being denied our 
seniors. In other words, when the seniors don't take their 
medications and their arthritis spirals out of control, or 
their cholesterol level goes way up and they end up in 
intensive care, what cost is that not only in their lives and 
in their health, but to our economy? So, I look forward to this 
discussion today, and yield back the balance of my time.
    Mr. Bilirakis. I thank you so much. Dr. Ganske, for an 
opening statement.
    Mr. Ganske. Thank you, Mr. Chairman. While there are 
several reasons why even in this time of budget surplus, it is 
difficult to do a prescription drug benefit that is 
comprehensive. First, we have made a bipartisan commitment not 
to use Social Security surplus funds. Second, there are people 
with no health insurance at all, much less prescription drug 
coverage. Should we expand coverage for some while the totally 
unprotected group grows? Third, Medicare is closer to 
insolvency than it was back in 1988, the last time Congress 
tried to do something on this. Shouldn't our first priority be 
to protect the current Medicare program?
    I want to address some comments by my friend from Florida, 
Mr. Deutsch. There are senior citizens who are in Medicare that 
already get a Medicaid benefit. They are low-income seniors. 
Their incomes are below the poverty line.
    As we look at the budgetary implications of a comprehensive 
plan, we have to look at what is called the ``adverse risk 
selection process.'' This is where, in a voluntary program, 
seniors who do not have much for drug costs won't sign up for 
the program. We know that this will happen because that is 
currently the system. In this Medicare voluntary drug program, 
the only seniors who generally sign up are those who have high 
drug costs. Consequently, the premiums are high for this 
program.
    We could address this comprehensive plan by making if 
mandatory. Which was tried back in 1988 and was later repealed 
in 1989. I think that to say a mandatory program would not have 
much support here on Capitol Hill would be an understatement.
    We could try a risk adjustment program. We have tried that 
in other cases but they are very difficult to do. A third way 
of handling this would be to have a mandatory benefits package, 
that would help a little.
    And, finally, we could, as I say, make the program 
mandatory, spread out the costs in insurance principal. Even 
so, these 10-year estimates only go up to the year 2011. But, 
in 2012, the Baby Boomers start to retire and then the cost 
will skyrocket. We are potentially looking at a benefit that 
could cost trillions of dollars.
    Therefore, at least for the time being, I have introduced a 
bill, H.R. 1387, which is a modest proposal to help those 
senior citizens who need a benefit the most. For who aren't 
below the poverty line now, but are having difficulty surviving 
only on their Social Security benefit checks. Under my program 
they could utilize the State Medicaid drug programs, paid for 
through their Federal side so we don't ask for a match. This 
plan would help about a third of the senior citizens, but the 
ones who need it the most, in my estimate. And this plan would 
probably cost pretty much all the money that we have budgeted 
for a prescription drug benefit. Later, in the context of a 
comprehensive Medicare reform bill, we could address the issue 
of a more comprehensive plan. I think that is the feasible, 
reasonable way to go about starting on a prescription drug 
benefit, and I hope that this committee looks at that. Thank 
you, Mr. Chairman.
    Mr. Bilirakis. Thank the gentleman. Mr. Hall, for an 
opening statement.
    Mr. Hall. Mr. Chairman, I have not heard the other opening 
statements. I subscribe to the things that I have heard so far, 
and endorse them. I can say this, we need to do something now.
    Mr. Bilirakis. I thank the gentleman. Mr. Whitfield.
    Mr. Whitfield. Thank you, Mr. Chairman. I think it is quite 
obvious that Congress could easily pass a universal 
prescription drug benefit with very low deductible, or zero 
deductible, and we would be all right for a few years but, in 
the long-term, I think everyone recognizes that it would be 
unfair to pay for that program. We need a balanced program that 
will provide assistance to seniors who, in their twilight 
years, need help in obtaining access to drugs that they need. 
At the same time, we need to be aware and concerned about those 
young couples who are paying their Social Security tax, the 
payroll taxes, to provide the money for these programs, and 
many of those families do not have any health coverage at all. 
Their employer doesn't provide it, they can't afford it, and so 
they are providing money to give someone else access to health 
care.
    So, I think we need to approach these hearings, and as we 
design this plan, with a sense of openness because I am 
genuinely convinced that there is a way to have a meaningful 
plan that will take care of those people who need it most.
    Thirteen percent of our seniors pay over $5,000 a year in 
cost for prescription drugs, and 46 percent of them spend less 
than $500 a year. So, I think we have a lot of room to work 
here, and I am optimistic that we can come up with a plan. I 
yield back the balance of my time.
    Mr. Bilirakis. I thank the gentleman. Ms. Eshoo.
    Ms. Eshoo. Thank you, Mr. Chairman, and good morning to 
you, and thank you for holding the first hearing in the 107th 
Congress on this all-important issue of providing prescription 
drug coverage for seniors in our country.
    I would like to start off by welcoming my constituent, 
Robert Chess, who is the Chairman of Inhale Therapeutic Systems 
from San Carlos, California and, of course, it is wonderful to 
see Dan Crippen here, who I am looking forward to hearing from.
    I want to associate myself with many of the comments that 
have been made this morning. I don't think anyone needs to be 
convinced that we need to do this, the question is ``how,'' and 
that is where Congress seems to be on the ropes.
    But I think it is worth restating over and over and over 
again, what some of the startling statistics are on this, and I 
can't help but think that every single one of us here, at both 
parts of the bench and across the aisle, we all have coverage 
for prescriptions in our insurance policies. Those are private 
sector policies, contracted for through the Federal Government, 
through our Federal Health Employee plan, and yet the public 
sector that we oversee is struggling with coming up with the 
same benefit for older people in our country through the system 
that was designed in 1965. As Lois Capps said, if it were being 
designed today, we would never leave out prescription drugs, 
and we know that in the beginning of this new century, how we 
have leap-frogged over so much, as is going to be given 
testimony to by Mr. Chess, in therapeutics, in all of the 
biotechnology that is really, I think, saving so much money.
    So, the question is, how are we going to do it? I think 
that we need a competitive scheme, multiple PBMs--I had that in 
my legislation last year. I think there needs to be a balance 
between how we do it and how we make competition between the 
drug companies work in all areas of the country. I believe that 
it shouldn't be administered by HCFA because, in fact, one of 
our more recent hearings--was it last week--was how to reform 
HCFA and to do that.
    So, I want to be part of putting out some of the best ideas 
on this, but I also want to say to my colleagues that as we are 
looking out 5 years, 10 years, 20 years, we kind of shy away 
from what the implosion of tax cuts are going to be that far 
out into the future. This is kind of like a pesky fly, and we 
kind of push that gnat away from us, and yet, oh, when it comes 
to Medicare and the prescription drug coverage, oh, my 
goodness, we just get white knuckles and rub our hands over and 
over again about what the costs are. Yes, the costs are 
important, but it is up to us to figure that out and to do it.
    I think the 107th Congress should be the Congress that 
accomplishes this, and I look forward to working with my 
colleagues on it, and I am, of course, interested to hear from 
those that are going to testify. Thank you, Mr. Chairman.
    Mr. Bilirakis. And I thank the gentlelady. Mr. Buyer.
    Mr. Buyer. Thank you, Mr. Chairman. I feel like I want to 
grab a machete here and just sort of work my way through the 
rhetoric of the high weeds. If I carry this unfair or fairness 
argument to a logical conclusion that I am hearing from the 
other side, I suppose it would be that the authors of the 
Medicare program, Democrats 40 years ago, that they were unfair 
in their discrimination toward seniors in our society. That was 
awful. The next step is, we apologize. The next step is, we 
should do reparations to seniors for the discrimination over 
the past. I mean, you see how the logic of the rhetoric just 
leads you to absurdity?
    I want to join with Mr. Burr who said it would be wonderful 
if we could get away from the high weeds of the rhetoric. This 
is Washington, you will never do that because of politics.
    The key is, as the last individual who spoke was, about how 
we structure this. That is why we welcome you to our panel 
today, Mr. Crippen, because that is what we are struggling 
with, is how we actually struggling with this--I am, 
personally. One of the reasons I came to this committee--
several reasons--one was it took me 3 years to restructure the 
pharmacy benefit for the military health delivery system and, 
as we extended that benefit for the military retirees, I have a 
lot of lessons learned. So, how we structure it is extremely 
important.
    And I do not believe we should give in to this ``we have 
got to do it, we have got to do it now.'' I am not going to 
give in to that because if there is one thing I have learned, 
it is ``do not succumb to such temptations and make decisions 
based on the emotion of the moment,'' especially in this town, 
because how we structure is extremely important because it may 
not be an issue that we may--we don't touch it for a very long 
time.
    So, the numbers that you are about to deliver to us, if it 
mirrors my studies, it will be very sobering. Mr. Chairman, 
when we had our meeting last week, when we started dealing with 
the year 2075--I don't know--has anybody thought where you are 
going to be in year 2075? Think about that.
    Now, the seniors that I represent are going to say, ``I 
don't care about year 2075, I care about my present problem 
right now.'' Well, we have to be very careful in what we 
structure because what I have learned in my 9 years here in 
Washington is, what we do and deliver, there are many 
unintended consequences. It is like when you take that pebble 
and you throw it into the pond, you may see the ripples, but 
what you don't see is that which goes out infinitum. So, we 
have to be very careful in how we properly structure this 
Medicare prescription drug benefit. I look forward to your 
testimony and the testimony of the witnesses, and I yield back.
    Mr. Ganske [presiding]. Mr. Wynn is recognized for 3 
minutes.
    Mr. Wynn. Thank you very much, Mr. Chairman. I will be 
brief, but I do want to thank the chairman for bringing this 
issue before the committee. It is certainly an issue on the 
minds of a great many Americans. It was brought home to me just 
this morning when my mother complained about a small bottle 
eardrops that cost $80, and she was appalled. She could not 
believe it. And that is just one of several medications she 
takes.
    It goes without saying that this is a critical issue. It 
seems to me this is really a question of priorities and 
political will. We have the money. We are in a very fortunate 
situation of having immense surpluses. The problem is, we want 
to give people a refund of their tax dollars. We want to oppose 
increased government spending. And in that environment, to say 
that we are really committed to a serious prescription drug 
plan is probably not accurate. People characterize it as ``tall 
weeds,'' and that is probably true, but the fact of the matter 
is, this problem requires money. It requires government 
spending. So, we cannot keep going down the road of ``no more 
government spending, cut back government spending'' and, at the 
same time, realistically expect to provide this kind of 
benefit. What we end up doing is cutting back on the spending, 
shaving the money, and saying, ``Well, gee, we can't really 
provide the benefit.'' We can provide the benefit, it is just a 
matter of setting the priority and finding the political will. 
It is certainly a complex issue, it is not given to simplistic 
solutions, but I think we do have to have a bit more candor 
about the fact that the money exists and we just need to put it 
behind this priority. I relinquish the balance of my time.
    Mr. Ganske. Mr. Bryant is recognized for 3 minutes.
    Mr. Bryant. Thank you, Mr. Chairman. In the interest of 
saving 3 minutes, I am going to yield back my time.
    Mr. Ganske. Mr. Barrett is recognized for 3 minutes.
    Mr. Barrett. Thank you very much, Mr. Chairman. I 
appreciate the fact that we are holding this hearing. I used to 
think that Members of Congress, every Member of Congress was an 
expert on election law because that was the one thing we all 
had in common. I am finding more and more that this issue of 
prescription drugs is an issue where we will all be experts as 
well because it has such a humongous impact in every single 
district in this country, and it should because it is really, I 
think, wreaking havoc upon the lives of millions of Americans 
who are unable to afford to purchase prescription drugs.
    Just a couple of thoughts, and I want to hear from the 
witnesses as well--and these may be considered somewhat 
tangential to this hearing, but I think that they are important 
for the Chair and others to hear. I spoke several weeks ago to 
the head of a Health Maintenance Organization in the State of 
Wisconsin, who told me that they had experienced some success 
in controlling the cost of pharmaceutical drugs in their plan 
by doing a simple thing, and that simple thing was prohibiting 
the free dispensation of trips that were being offered by the 
pharmaceutical companies, the dinners, all those freebies that 
had been offered to their staff. They made a corporate decision 
that no one on their staff could accept any of these perks 
anymore.
    What happened as a result of that is that a lot of these 
prescription drugs that were being magically prescribed all of 
a sudden after these trips, were not being prescribed as much 
and they were able to control costs in their plan as a result 
of that. And I would love to have that gentleman come before 
this committee to tell his story because I think it will show 
the impact that the industry's practice of providing trips and 
other perks to health care providers has on increasing the 
demand for drugs.
    I also think we have to look at the impact of advertising 
as well. I was watching one of these fancy commercials several 
weeks ago with my wife, and I said, ``Oh, that is fantastic. 
That is fantastic. I have got to get that drug.'' And she said, 
``But you don't even have the disease.'' I said, ``I know I 
don't have the disease, but look at those 80-year-old people, 
they are having the time of their lives, and they look like 
they are 35 years old.'' And I think what we are seeing is, we 
are seeing a lot of increased demand as a result of the 
advertising. I think that that is something that we have to 
explore because it obviously has a ramification on what is 
going on as well.
    I also think that we have to look in-depth at the whole 
debate over changing some of the drugs to over-the-counter 
drugs, and obviously this has some ramifications. We are 
reading about the fight right now between the insurance 
companies who, all of a sudden, have decided that a lot of 
these drugs should be sold over-the-counter. I think that some 
of their motives are laudatory, some of them obviously are 
financial self-interest because if they can switch them to 
over-the-counter they don't have to cover the cost in their 
plans. But we are also seeing a dramatic reduction in the cost 
of some of these in other countries where they are sold over-
the-counter.
    All of those, I think, are part of this huge jigsaw puzzle, 
and like some of the previous speakers, I certainly think we 
have to have this included within Medicare. But if we simply 
take the existing system and move it into Medicare, we are 
going to have the same problems, if not worse problems. And so 
I think we have to look at the big picture.
    I also have to say, listening to some of my colleagues 
talking about the unintended consequences about what will 
happen years out from now, I wish we were hearing those same 
speeches about the tax cut that we are going to be voting on, 
which is backloaded, which people who are pushing that through 
don't seem to be as concerned about the consequences of that. 
And with that, I would yield back the balance of my time.
    Mr. Ganske. The gentleman from Pennsylvania, Mr. Greenwood, 
is recognized for 3 minutes.
    Mr. Greenwood. Pass, Mr. Chairman.
    Mr. Ganske. The gentleman from Michigan, Mr. Stupak.
    Mr. Stupak. Mr. Chairman, I will pass, thank you.
    Mr. Ganske. And Mr. Deal.
    Mr. Deal. Pass.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress 
                       from the State of Wyoming
    The bottom line on the issue of prescription drugs is seniors need 
help with their drug costs. I want to help, and I think it's safe to 
say all my colleagues want to help.
    The monumental task we now face is trying to craft a prescription 
drug benefit under Medicare, and there is no disputing the fact that it 
is going to require some work.We not only have to reach some sort of 
agreement on the size and scope of the ultimate benefit, but we have to 
have a viable plan for getting there.
    This hearing will hopefully bring us one step closer to that point.
    The Medicare population is going to continue to grow, and we will 
see new drugs and biologics being developed--likely at greater cost.
    Pharmaceuticals are by nature less invasive than most procedures 
and treatments, which in turn makes them more attractive and more 
sought after by seniors--by everyone in fact.
    All of these different factors continue to fluctuate, making it 
hard to estimate the cost of any drug benefit. I am hopeful that 
today's testimony by the Congressional Budget Office will provide us 
with greater direction in that regard.
    The question that continues to plague me is how do we bring 
together innovation that knows no bounds--like miracle drugs and 
technologies, and an outdated Medicare program that is totally 
inflexible?
    As I see it, the ultimate success of any prescription drug plan 
under Medicare will depend on the strength, structure, and 
sustainability of the Medicare program itself.
    We can't build on unstable ground by adding a drug benefit to an 
already struggling Medicare program.
    I hope we keep that firmly in mind today as we discuss the present 
and future needs of our seniors when it comes to drug therapies.
    I look forward to hearing from our witnesses and yield back the 
balance of my time.
                                 ______
                                 
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. I 
also want to thank our panelists for their testimony on this important 
issue. Providing seniors with affordable access to prescription drugs 
has been a priority of mine for several years. 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. But today, we may be giving up 
this opportunity.
    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 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.
    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 should not become 
an obstacle to implementing a prescription drug benefit within 
Medicare. Today, on the floor of the House we will be voting on a tax 
reconciliation bill. I do support certain tax cuts. In fact, I voted 
for the marriage penalty--but the package of tax cuts as a whole is too 
big. Let's be clear on this. By cutting federal revenues so much, we 
are eliminating our ability to fund a meaningful prescription drug 
benefit for seniors.
    Mr. Chairman, I do appreciate having this hearing today. But I wish 
it were a mark-up and I wish it were happening before we vote on the 
tax package.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan

    Chairman Bilirakis, I am pleased that the Subcommittee is 
continuing its series of hearings on the need for a Medicare 
prescription drug benefit. Although the Congressional Budget Office 
will provide some new estimates on spending for prescription drugs, 
much of the testimony will repeat what we already know. The witnesses 
will state that seniors are spending an ever-increasing share of their 
incomes on prescription drugs. Seniors with chronic diseases may fill a 
dozen or more prescriptions a year, and many of these seniors have 
insurance policies that cover only a fraction of their costs or provide 
no drug coverage at all. Potential therapies that could yield cures for 
Alzheimer's disease or slow the progress of arthritis are in the 
pipeline, but without a Medicare drug benefit, many people will not be 
able to afford these new treatments.
    We may also hear that Medicare is facing a long-term financial 
crisis and the program is unsustainable in its current form. We may be 
told that it is too expensive to enact a prescription drug benefit for 
all seniors until Congress reforms the Medicare program.
    My question is this: if not now, when? As of this year, the non-
Social Security, non-Medicare surplus totals about $2.7 trillion 
dollars over the next 10 years. The Medicare Part A Trust Fund is 
expected to remain solvent until 2029--the longest period of projected 
solvency in the history of the program.
    The Budget Resolution approved by the House and Senate last week 
provides for $300 billion over the next 10 years for a Medicare 
prescription drug benefit and Medicare reform. That amount is more than 
twice what the President wanted to allocate to the program, but it is 
not enough. If Congress were to provide seniors with the same 
prescription drug benefit that the Department of Defense provides for 
military retirees, we would need to spend one trillion dollars.
    If that amount seems staggering, let me compare it to another large 
sum that our President is ready to spend. According to the Joint 
Committee on Taxation, repealing the estate tax would cost $662 billion 
over the next 10 years. Only 43,000 Americans, or less than 1% of all 
taxpayers, would benefit from the estate tax repeal. However, that same 
$662 billion could help 43 million seniors with a comprehensive, 
universal benefit within the Medicare program.
    I hope my colleagues in Congress will consider these points as we 
work to create a Medicare prescription drug benefit.

    Mr. Ganske. I guess we will go ahead and start with Mr. 
Crippen's testimony.

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

    Mr. Crippen. Mr. Chairman and members of the subcommittee, 
thank you for inviting us to be here today. I have one primary 
purpose, which is to try to explain to you some of our 
thinking--share with you how we analyze this particular program 
or benefit--and in turn elucidate a couple of the policy levers 
that are obvious but, nonetheless, we can give you some sense 
of their import and how they affect the estimates.
    But before I do that, I would like, Mr. Chairman--as a 
number of members of your subcommittee have done as well--to 
kind of set the context for the larger and long-term cost of 
these benefits.
    The annual report released in March by the Medicare Board 
of Trustees indicates that the Health Insurance Trust Fund 
expenses will exceed dedicated noninterest revenues beginning 
in 2016. We actually believe it is going to be sooner than 
that, as early as 2011. And that, unfortunately, is in some 
ways the good news.
    The retirement of the baby boom, my generation and that of 
many of you, between 2010 and 2030 will almost double 
Medicare's enrollment, as I believe Chairman Tauzin said, but 
the number of workers will increase by only 15 percent. The 
cost per beneficiary in Medicare will also continue to grow 
faster than the economy. As a result, Medicare will consume an 
ever-increasing portion of GDP.
    And as this first chart suggests, Medicare is only one of 
the Federal programs that transfer resources from the working 
population to those who are retired and disabled. Just these 
three Federal programs will grow from 7 percent of GDP 
currently to 15 percent of GDP by 2030, an amount equal to 
nearly three-quarters of the current Federal budget. Adding a 
pharmaceutical benefit will obviously exacerbate this outlook.
    In recent years, growth in prescription drug spending has 
far outpaced growth in spending for other types of health care. 
Even without a Medicare drug benefit, CBO expects prescription 
drug costs for the elderly to grow at an annual rate of 10.3 
percent per person--nearly twice the pace of growth in the rest 
of Medicare and much faster than the growth in the economy--
ultimately costing $1.5 trillion over the next 10 years.
    In 1997, as many of you have stated today, about one-third 
of the Medicare population had no prescription drug coverage, 
but nearly 70 percent did. The next chart indicates the sources 
of funding for prescription drugs for the elderly in 1997. The 
single largest component, you will probably not be surprised to 
know, is out-of-pocket spending, at about 45 percent of total 
costs. However, that does compare relatively favorably with a 
39 percent out-of-pocket share of the cost of providing drugs 
for all the rest of the population.
    The second largest source of funding currently is employer-
sponsored retiree health benefits, and the third is Medicaid. I 
should note that State-based programs, which covered about 5 
percent of total spending in 1997, have been growing rapidly in 
both number and coverage and probably contribute a larger share 
today.
    But, Mr. Chairman, virtually any Medicare drug benefit will 
move a significant share of this non-Federal, mostly private, 
funding to the Federal budget, reducing and replacing State 
funding, employer contributions, and other sources.
    Before I turn to some examples, I want to attempt to 
explain the operation of a low-income subsidy for the payments 
otherwise made by beneficiaries--the cost sharing and premiums. 
That assistance, of course, could be an expensive proposition 
for taxpayers, given that nearly one-half of Medicare 
beneficiaries have incomes under 200 percent of the Federal 
poverty level. CBO estimates that those beneficiaries will 
spend approximately $650 billion on prescription drugs over the 
next 10 years.
    Several decisions must be made to design a low-income 
subsidy program for a Medicare drug proposal--who would be 
eligible, the amount of the subsidy, how it would be applied, 
who would administer the subsidy, and, if Medicaid did so, how 
much of the costs of the subsidy would be paid by the Federal 
Government versus the States. Overall, it may be obvious, but 
nonetheless true, that a low-income subsidy would add to the 
cost of any Medicare drug benefit--in some cases, 
significantly. What is not quite so obvious is that because the 
low-income subsidy usually covers the cost that the Medicare 
benefit does not, the subsidy cost will be greater with a less 
generous Medicare drug benefit.
    Now, Mr. Chairman, I would like to introduce a few examples 
of the comparative magnitudes of some of the parameters in a 
drug benefit. For that purpose, we have constructed a 
prototypical benefit--a straw man, if you like--as a basis for 
comparison. I stress that this is a base case; it is not any of 
the existing proposals and represents only numbers for 1 year, 
assuming that the benefit is fully phased in. In designing a 
drug benefit, policymakers must make four fundamental 
decisions--who may participate, how the program cost will be 
financed, how comprehensive coverage will be, and who will 
administer the benefit under what conditions.
    For our prototype--the one up on the board and the one you 
have in the packet before you as the base case--we assume 
everyone currently enrolled in Medicare Part B will enroll. We 
assume 50 percent coinsurance up to the catastrophic cap. We 
assume beneficiaries will pay 50 percent of the cost of the 
stop-loss protection. We assume full Federal coverage of 
premiums and cost sharing for anyone with income under 135 
percent of the Federal poverty level, and some subsidy for 
premiums for people with income up to 150 percent of poverty. 
We assume the use of one pharmacy benefit manager, with some 
restrictions on cost controls.
    Members of the subcommittee, this poster, of which you have 
copies, attempts to depict some of these moving parts in a way 
we hope is helpful. The first is the base case I just 
described. As depicted, a beneficiary pays 50 percent of the 
cost of each prescription filled until his or her cost-sharing 
expenses reach the stop-loss amount of $4,000. Note that this 
cost sharing need not necessarily be paid directly by 
beneficiaries; it could be paid by third parties.
    Above the stop-loss, the costs of the benefit are split 
between beneficiaries, who pay half the cost through premiums, 
and Federal taxpayers. In addition, low-income beneficiaries 
receive subsidies for the cost-sharing and premium expenses. In 
this case, as the chart and the tables in front of you show, 
the total cost to Federal taxpayers is approximately $32 
billion--$26 billion for the Medicare benefit and $6 billion 
for low-income subsidies. Beneficiaries would pay, or have paid 
on their behalf, $44 billion in cost sharing from those who 
purchased drugs and $26 billion in premiums from all enrollees, 
whether or not they filled any prescriptions.
    The first variation on the base case we have made--case A--
is the addition of a $250 deductible, which is common in many 
of the proposals we have seen. As you would expect, that change 
lowers the direct taxpayers' cost--in this case, by $2 
billion--and raises beneficiaries' exposure by a similar 
amount.
    Case B takes the base case with no deductible and simply 
raises the catastrophic ceiling from $4,000 to $6,000. The 
taxpayer costs are reduced by about $1 billion relative to the 
base case, and beneficiaries or their third-party payers pay a 
similar amount more.
    Case C again takes the base case and this time adds a 
benefit cap of $2,500 in drug spending--well below the 
catastrophic ceiling of $4,000--creating a hole in the benefit 
design similar to many of last year's proposals with the so-
called ``donut.'' Again, the taxpayer share drops while the 
beneficiary exposure increases.
    Our final poster, Case D, depicts all of the previous 
changes applied to our base case--a $250 deductible, a benefit 
maximum of $2,500, and a $6,000 catastrophic cap. Not 
surprisingly, the change produces a more dramatic shift of 
costs from current taxpayers to beneficiaries. Perhaps more 
important in this are the shifts within the two categories. The 
Federal share includes more in low-income subsidies here and 
much less in direct Medicare benefit costs. Further, the total 
exposure of beneficiaries is not only increased in this case by 
$7.5 billion but the relative contribution is shifted toward 
cost sharing by those who use drugs and away from premiums paid 
by all Medicare recipients. In fact, that shift is so strong 
that this case has the lowest monthly premium of all four 
cases.
    Mr. Chairman, there are obviously many more variations on 
these themes, and many of them are included in my written 
submission. These themes cover only the basics. There are a 
myriad of details that could have a significant impact on our 
estimates and how the program would work.
    Let me circle back, Mr. Chairman, to conclude where I 
began. CBO estimates that the amount spent on outpatient 
prescription drugs by the elderly, even without a Medicare drug 
benefit, over the period from 2002 to 2011, will be about $1.5 
trillion. Thus, a rough cut of a drug benefit that covered 50 
percent of current drug spending would suggest a gross cost, 
before any premiums or beneficiary contributions, of $728 
billion for the next 10 years. If, instead, all costs above 
$1,000 a year were covered for everyone, gross costs through 
the next 10 years would total $1.1 trillion. If only costs 
above $5,000 a year were covered, gross costs--that is, costs 
without beneficiary contributions--through 2011 would be at 
least $365 billion. It should be obvious that it will be costly 
to provide a generous benefit to all beneficiaries. Either 
enrollees' costs or taxpayers' costs will be high.
    Mr. Chairman, just as we are currently paying for much of 
the Medicare benefits for our parents and grandparents through 
payroll and income taxes, our children and grandchildren will 
pay for us after we retire. Adding a drug benefit would 
significantly increase Medicare's costs, and, unless the cost 
of the benefit was largely borne by enrollees, the burden on 
our children would be even greater. Thank you, Mr. Chairman.
    [The prepared statement of Dan L. Crippen follows:]

          Prepared Statement of Dan L. Crippen, Director, CBO

    Mr. Chairman and Members of the Committee, I am pleased to be here 
today to discuss some of the major issues affecting the design of an 
outpatient prescription drug benefit for Medicare beneficiaries. Those 
design issues pose some difficult choices among desirable, but 
potentially conflicting, objectives. Moreover, they need to be 
considered in the context of the growing financial pressures facing the 
Medicare program.
    I will emphasize several points about the Medicare program and 
proposals to establish a new prescription drug benefit for Medicare 
beneficiaries:

 The Medicare program faces increasing costs, particularly 
        after 2010 as the baby boomers become eligible for benefits. 
        Medicare will become more and more dependent on general 
        revenues and, ultimately, will be unsustainable in its current 
        form.
 Medicare does not provide the protection offered by most 
        private insurance, since it lacks coverage for prescription 
        drugs and does not provide insurance protection against the 
        consequences of very costly episodes of illness.
 Most Medicare beneficiaries have supplemental insurance that 
        covers some of their out-of-pocket costs for medical services. 
        However, nearly a third of the Medicare population had no 
        prescription drug coverage in 1997.
 The cost of a Medicare drug benefit would depend primarily on 
        the comprehensiveness of the benefit and the generosity of 
        governmental subsidies. The way in which a drug benefit is 
        administered could also affect its cost.
 Stop-loss coverage would protect beneficiaries from extremely 
        high expenses for prescription drugs, but few people spend more 
        than the typical stop-loss amount. In contrast, most Medicare 
        beneficiaries have some drug spending during the year and would 
        receive some benefit from a program that offered coverage above 
        a nominal deductible amount.
 Subsidies would help make a Medicare drug benefit more 
        affordable for low-income beneficiaries. In general, a more 
        comprehensive benefit would reduce federal costs for a low-
        income subsidy (including offsetting changes in Medicaid 
        spending) because Medicare would be paying for a larger portion 
        of drug spending. However, a more comprehensive benefit would 
        also raise total federal costs.

           PROJECTIONS OF MEDICARE SPENDING UNDER CURRENT LAW

    The growth of Medicare spending has been much slower in the past 
few years than it has been historically. In fiscal years 1998 through 
2001, the Congressional Budget Office (CBO) estimates that benefit 
payments will grow at an average annual rate of 3.1 percent, compared 
with 10.0 percent per year over the previous decade.1
---------------------------------------------------------------------------
    \1\ That statement reflects CBO's May 2001 projections of baseline 
spending.
---------------------------------------------------------------------------
    CBO further estimates that Medicare will spend $237 billion on 
benefits for 40 million elderly and disabled people in fiscal year 
2001. Despite the recent slowdown in spending growth, that amount is 
almost 25 percent more than Medicare spent five years ago. The program 
now accounts for about 13 percent of estimated total federal spending, 
or 2.3 percent of gross domestic product (GDP).
    Moreover, CBO is projecting faster Medicare growth over the next 
decade. We estimate that Medicare spending will more than double--
reaching $499 billion--by fiscal year 2011, reflecting an average 
increase of 7.9 percent per year (see Figure 1). At that rate, Medicare 
spending in 2011 will constitute 19 percent of the federal budget, 
assuming that no change occurs in current tax and spending policies. In 
fact, the program will account for 36 percent of the projected increase 
in federal spending by the end of the decade.

                         LONG-TERM PROJECTIONS

    Medicare spending occurs under two separate programs, the Hospital 
Insurance (HI) program, or Part A, and the Supplementary Medical 
Insurance (SMI) program, or Part B. HI spending will total an estimated 
$138 billion in fiscal year 2001, paying for inpatient hospital care, 
some stays in skilled nursing facilities, some home health care, and 
hospice services. SMI spending this year is projected to reach almost 
$100 billion, paying for services from physicians and outpatient care 
facilities, as well as medical supplies and home health benefits.
    The HI program is primarily financed by the Medicare payroll tax 
and the portion of income taxes on Social Security benefits that is 
earmarked for the HI trust fund. The SMI program is financed mainly 
from general revenues that cover about 75 percent of SMI costs, with 
the rest covered by monthly premiums paid by enrollees. It should be 
noted that 87 percent of total Medicare revenues in 2001 come from 
taxes paid by current workers; current Medicare beneficiaries pay the 
other 13 percent through SMI premiums and income taxes on Social 
Security benefits.
    The latest report from the Medicare Board of Trustees indicates 
that estimated total income to the HI trust fund will exceed estimated 
outlays by $29.8 billion in fiscal year 2001. But $12.6 billion of that 
amount comes from interest on the trust fund's assets and from other 
miscellaneous sources. If just the tax revenues dedicated to the HI 
trust fund were counted against the fund's outlays, its estimated 
surplus this year would be only $17.2 billion.
    The Medicare trustees also report that under their intermediate 
assumptions, the HI trust fund's expenses will exceed its dedicated 
revenues beginning in 2016. By 2030, the revenues dedicated to the HI 
trust fund will equal only 66 percent of costs; by 2075, that ratio 
will be only 32 percent.
    Those data do not take into account Medicare's SMI program, which 
is growing more rapidly than the HI program. As recently as 1997, HI 
benefit payments constituted 66 percent of total Medicare benefit 
payments. As of 2001, that proportion had declined to 58 percent, and 
CBO projects that it will decline to 53 percent by fiscal year 2011. 
Some of that change is due to the movement of home health care from HI 
to SMI according to the provisions of the Balanced Budget Act of 1997; 
that change increases the estimated balance in the HI trust fund in 
fiscal year 2011 by about $240 billion. The shift further blurs an 
already hazy distinction between the two programs.
    The Medicare trustees' report projects that total Medicare spending 
will increase from 2.3 percent of GDP in 2001 to 4.5 percent in 2030 
and 8.5 percent in 2075. Those numbers reflect a change in the 
trustees' assumptions from last year, following the recommendation of 
their panel of experts that they raise their projection of long-term 
growth in Medicare spending per beneficiary.2
---------------------------------------------------------------------------
    \2\ That change is consistent with the one that CBO applied in its 
most recent report (October 2000) on The Long-Term Budget Outlook.
---------------------------------------------------------------------------
    The mounting financial pressure on the Medicare program is 
highlighted by the large and growing difference between projected total 
Medicare spending and the total amount of federal revenues specifically 
dedicated to the program, including the Medicare payroll tax on current 
workers, the portion of the income taxes on Social Security benefits 
that are paid to the HI trust fund, and premiums paid by enrollees for 
SMI. To fund total Medicare expenditures, the difference would be made 
up of other taxes on current workers.
    According to the Medicare trustees, the discrepancy between total 
Medicare expenditures and dedicated revenues will be $64 billion in 
2001, or 0.6 percent of GDP (see Figure 2). By 2011, that gap is 
projected to rise to $139 billion, or 0.8 percent of GDP. That amount 
would represent 30 percent of Medicare's gross outlays, up from 26 
percent in 2001. By 2075, that gap is projected to grow to 6.0 percent 
of GDP.
    Beyond the next decade, use of Medicare-covered services is 
expected to accelerate. Medicare enrollment, which has increased at a 
rate of about 1 percent a year over the past 10 years and is expected 
to grow somewhat faster over the next decade, will rise even more 
rapidly as the baby-boom generation begins to retire in 2011. According 
to the Medicare trustees, there will be 77 million beneficiaries in 
2030--an increase of more than 90 percent over this year's enrollment. 
In addition, as technology advances, more services will be available 
for use by more patients, and those services will be more costly.
    At the same time, the number of workers whose taxes provide the 
bulk of Medicare's revenues will not keep pace with the growing number 
of beneficiaries. While the number of beneficiaries in 2030 will be 
more than 90 percent greater than it is now, the number of workers 
paying into Medicare will be only about 15 percent greater. As a 
result, the ratio of covered workers to Medicare beneficiaries is 
expected to fall from 4.0 to 2.3. Correspondingly, Medicare HI spending 
as a percentage of taxable payroll is expected to rise from 2.7 percent 
in 2000 to 4.9 percent in 2030 and to 10.7 percent by 2075 (see Figure 
3).
    These financial pressures have focused policymakers' attention on 
the issue of long-term reform of the Medicare program. Efforts to 
reform Medicare have focused both on improving the efficiency and 
financial viability of the program and on modernizing the benefit 
package, specifically to include prescription drug coverage. Adding a 
prescription drug benefit could close a significant gap in program 
coverage but only at a sizable cost to the federal government or to 
enrollees. Because of the long-term financing pressure facing Medicare, 
careful consideration needs to be given to the benefit package, cost 
sharing between the government and enrollees, and the design features 
of any new benefit.

 PROVIDING MEDICARE BENEFICIARIES WITH COVERAGE FOR PRESCRIPTION DRUGS

    Prescription drug spending by Medicare enrollees has grown rapidly 
in recent years and is likely to continue to do so. Although Medicare 
does not now have a prescription drug benefit, most enrollees have some 
drug coverage, but that coverage varies widely. The cost of a Medicare 
drug benefit depends on the decisions made about the structure, 
financing, and administration of the new benefit.

Baseline Projections of Beneficiaries' Spending on Prescription Drugs
    In recent years, growth in prescription drug spending has far 
outpaced growth in spending for other types of health care. Those 
rising expenditures have had a significant impact not only on Medicare 
beneficiaries but on employers who offer retiree health coverage and on 
state governments as well.
    Between 1990 and 2000, annual spending on prescription drugs in the 
United States grew nearly twice as fast as that for total national 
health expenditures, and it has maintained a double-digit pace since 
the mid-1990s. For the U.S. population as a whole, three factors 
explain most of that growth: the introduction of new and costlier drug 
treatments, broader use of prescription drugs by a larger number of 
people, and lower cost-sharing requirements by private health plans. 
Within some therapeutic classes, new brand-name drugs tend to be much 
costlier than older drug therapies, which has also contributed to 
growth in spending. Use of prescription drugs has broadened as well, 
because many new drugs provide better treatment or have fewer side 
effects than older alternatives and more people are aware of new drug 
therapies through the ``direct to consumer'' advertising campaigns of 
pharmaceutical manufacturers.
    Even without a Medicare drug benefit, CBO expects prescription drug 
costs for Medicare enrollees to grow at a rapid pace over the next 
decade (see Table 1). At an average annual rate of 10.3 percent per 
beneficiary, drug costs are expected to rise at almost twice the pace 
of combined costs for Medicare's HI and SMI programs, and much faster 
than growth in the nation's economy. (CBO's estimates of rising drug 
spending are based on the latest projections for prescription drug 
costs within the national health accounts.)
    CBO's baseline estimate of prescription drug costs for Medicare 
enrollees is up significantly over last year's because of higher 
projections of the rate of growth in per capita drug costs. Last year's 
analysis indicated that spending by Medicare enrollees on outpatient 
drugs not covered by Medicare would total $1.1 trillion over the period 
2001 through 2010 (see Table 2). This year, our projection for the same 
period is $1.3 trillion, or about 18 percent higher.
    Our estimate for 2002 through 2011, the current 10-year projection 
period, is roughly $1.5 trillion--which is about 32 percent higher than 
last year's projection for 2001 through 2010. The jump results from 
assuming a higher growth rate and replacing an early low-cost year 
(2001) with a late high-cost year (2011).
    Those changes to CBO's baseline estimate--higher per capita drug 
spending and the inclusion of a new high-cost year in the projection 
window--imply that proposals for a prescription drug benefit will have 
higher price tags than they did last year. But for any given proposal, 
the exact magnitude of the difference between CBO's estimate for last 
year and its estimate for this year will also depend on the bill's 
specific features.
    CBO projects that spending by or for Medicare beneficiaries on 
prescription drugs will total $104 billion in calendar year 2004--the 
first year in which Medicare could probably begin to implement a new 
benefit (see Table 3). In that year, nearly 60 percent of Medicare 
beneficiaries will spend $1,000 or more on prescription drugs. Enrollee 
spending above $1,000 is projected to total $72 billion in 2004, 
constituting about 70 percent of total drug spending by or for all 
Medicare enrollees. Only 13 percent of enrollees spend $5,000 or more 
on prescription drugs in a year. Spending at or above that threshold 
would total about $18 billion in 2004.

Existing Coverage
    While third-party coverage for prescription drugs has become more 
generous over time for the population as a whole, that trend is less 
clear for Medicare beneficiaries. In 1997, nearly one-third of the 
Medicare population had no prescription drug coverage. On average, 
Medicare beneficiaries paid about 45 percent of their drug expenditures 
out of pocket (see Figure 4). By comparison, all people in the United 
States paid an average of 39 percent of the cost of their 
prescriptions. Because Medicare beneficiaries are elderly or disabled, 
they are more likely to have chronic health conditions and to use more 
prescription drugs: nearly 89 percent filled at least one prescription 
in 1997. Medicare beneficiaries made up 14 percent of the population 
that year, yet they accounted for about 40 percent of the $75 billion 
spent on prescription drugs in the United States.
    Those factors suggest that growth in drug spending has a larger 
financial impact on the Medicare population than on other population 
groups. However, aggregate statistics mask a wide variety of personal 
circumstances. Nearly 70 percent of beneficiaries obtain drug coverage 
as part of a plan that supplements Medicare's benefits, but those 
supplemental plans vary significantly in their generosity.
    Traditionally, more seniors have received prescription drug 
coverage from retiree health plans than from any other source, and the 
plans' benefits have been relatively generous. In 1997, about one-third 
of Medicare beneficiaries had supplemental coverage through a current 
or former employer, and most of those plans provided drug coverage (see 
Table 4). Although specific benefits vary, it is common to find 
relatively low deductibles and copayments in employer-sponsored drug 
plans.
    However, because prescription drug spending by elderly retirees has 
become a significant cost to employers, many have begun to restructure 
their benefits. For example, a 1997 Hewitt Associates' study for the 
Kaiser Family Foundation found that among large employers, drug 
spending for people age 65 or older made up 40 percent to 60 percent of 
the total cost of their retiree health plans. Average utilization of 
prescription drugs among elderly retirees was more than double that for 
active workers. Although relatively few employers in the Hewitt survey 
have dropped retiree coverage altogether, most have taken steps to 
control costs, such as tightening eligibility standards, requiring 
retirees to contribute more toward premiums, placing caps on the amount 
of benefits that plans will cover, and encouraging elderly 
beneficiaries to enroll in managed care plans.
    Medicare+Choice (M+C) plans are another means by which the elderly 
and disabled have obtained prescription drug coverage. In 2000, for 
example, 64 percent of Medicare beneficiaries had access to M+C plans 
that offered some drug coverage, although a significantly smaller 
fraction of elderly people signed up for those plans. Many M+C plans 
have scaled back their drug benefits in response to rising costs and 
slower growth in Medicare's payment rates. Nearly all such plans have 
annual caps on drug benefits for enrollees--many at a level of only 
$500 per year--and a growing share of plans charge a premium for 
supplemental benefits.
    While 26 percent of the Medicare population relied on individually 
purchased (often medigap) plans as their sole form of supplemental 
coverage in 1997, less than half of that group had policies that 
covered prescription drugs. Medigap plans with drug coverage tend to be 
much less generous than retiree health plans; medigap plans have a 
deductible of $250, 50 percent coinsurance, and annual benefit limits 
of either $1,250 or $3,000. Premiums for plans that include drug 
coverage also tend to be much higher than premiums for other medigap 
plans, due in part to their tendency to attract enrollees who have 
higher-than-average health expenses.
    Certain low-income Medicare beneficiaries may also be eligible for 
Medicaid coverage, which generally includes a prescription drug 
benefit. All state Medicaid programs offer prescription drug coverage 
(usually involving little or no cost sharing) to people whose income 
and assets fall below certain thresholds. In addition, as of January 
2001, 26 states had authorized (but had not necessarily yet 
implemented) some type of pharmaceutical assistance program, most of 
which would provide direct aid for purchases to low-income seniors who 
did not meet the Medicaid requirements. About 64 percent of the 
Medicare population lives in those states.
    Thus, middle- and higher-income seniors can usually obtain coverage 
through retiree or M+C plans, while seniors with the lowest income 
generally have access to state-based drug benefit programs. However, 
beneficiaries with income between one and two times the poverty level 
are more likely to be caught in the middle, with incomes or assets that 
are too large to qualify for state programs and less access than 
higher-income enrollees to drug coverage through former employers. In 
1997, more than a quarter of Medicare enrollees had income between one 
and two times the poverty level, but more than 40 percent of them had 
no drug coverage (see Table 5). Consequently, half of the drug spending 
for people in that income group was paid out of pocket.

Design Choices for a Medicare Drug Benefit
    A Medicare drug benefit might address a number of objectives. The 
most fundamental would be to ensure that all beneficiaries had access 
to reasonable coverage for outpatient prescription drug costs--but this 
fundamental notion allows for considerable debate about what that would 
mean. The various objectives that might be thought desirable in the 
abstract are often mutually incompatible; as a result, difficult 
choices must be made. For example, it is not possible to provide a 
generous drug benefit to all Medicare beneficiaries at low cost--either 
premiums paid by enrollees or subsidies paid by taxpayers would be 
high. If most of the costs were paid by enrollees' premiums to keep 
federal costs low, some Medicare beneficiaries would be unwilling or 
unable to participate in the program. If costs were limited by covering 
only catastrophic expenses, few enrollees would receive reimbursement 
for drug costs in any given year, possibly reducing support for the 
program. (Such coverage, however, would provide insurance protection to 
those who enrolled.) If, instead, costs were limited by capping the 
annual benefits paid to each enrollee, the program would fail to 
protect participants from the impact of catastrophic expenses.
    In designing a drug benefit, policymakers must make four 
fundamental decisions:

 Who may participate?
 How will program costs be financed?
 How comprehensive will coverage be?
 Who will administer the benefit and under what conditions?
    Participation. Although most Medicare enrollees use some 
prescription drugs, the bulk of such spending is concentrated among a 
much smaller group. In 1997, about 13 percent of enrollees had 
expenditures of $2,000 or more, accounting for 45 percent of total drug 
spending by the Medicare population. Forty-six percent had expenditures 
of $500 or less, making up about 8 percent of total spending. Most 
spending is associated with treatment of chronic conditions--such as 
hypertension, cardiovascular disease, and diabetes. The skewed 
distribution of spending and the need for people with chronic 
conditions to stay on drug therapies over the long term makes stand-
alone drug coverage particularly susceptible to adverse selection, in 
which enrollment is concentrated among those who expect to receive more 
in benefits than they pay in premiums.
    Because of the likelihood of adverse selection, a premium-financed 
drug benefit offered as a voluntary option for Medicare enrollees must 
restrict participation in some way. If Medicare beneficiaries were free 
to enroll in or leave the program at will, only those who expected to 
gain from the benefit would participate each year. That would drive 
premiums up, which would further reduce enrollment as enrollees with 
below-average drug costs dropped out.
    Most of the drug benefit proposals developed in 2000 would have 
provided a voluntary drug option, but they attempted to mitigate the 
potential for adverse selection by one of two approaches: either they 
gave enrollees only one opportunity to choose the drug benefit, at the 
time enrollees first became eligible; or they imposed an actuarially 
fair surcharge on premiums for those who delayed enrollment. Another 
approach to avoiding the problem of adverse selection would be to 
couple the drug benefit with Part B of Medicare so that enrollees could 
choose either Part B plus a drug benefit or no Part B and no drug 
benefit. In that case, even if the drug portion of the benefit was not 
heavily subsidized, the current 75 percent subsidy of Part B benefits 
would ensure nearly universal participation in the coupled benefit.
    Financing. Program costs could be entirely financed by enrollees' 
premiums, or some or all of the costs could be paid by federal 
taxpayers. Given a one-time-only enrollment option, participation rates 
would be reasonably high, even if the program was largely financed by 
enrollees. If given only a one-time option to enroll, most 
beneficiaries would do so because virtually all of them would benefit 
from drug coverage at some time during their lives. The erosion now 
occurring in the comprehensive coverage provided by private plans would 
also spur participation. Further, employer-sponsored health plans would 
probably require that retirees eligible for a new Medicare benefit 
participate in it, just as they now effectively require that retirees 
participate in Part B. And state Medicaid agencies, even if not 
mandated to do so, would choose to enroll dual eligibles (people 
eligible for both Medicare and Medicaid) in a new Medicare drug benefit 
if their costs under the new program were less than the cost of the 
drug benefits now provided under Medicaid. However, if a generous drug 
benefit was fully financed by enrollees, premiums would be high, making 
the benefit difficult to afford for lower-income beneficiaries 
ineligible for Medicaid. The drug proposals developed last year would 
all provide full subsidies to low-income people for both cost sharing 
and premiums, in addition to partially subsidizing premiums for all 
other enrollees.
    Coverage. A Medicare drug benefit could be designed to look like 
the benefit typically provided by employer-sponsored plans. If so, it 
would be integrated with the rest of the Medicare benefit. Further, it 
would have cost-sharing requirements that were low (ranging from 20 
percent to 25 percent coinsurance or a copayment per prescription of 
$10 to $25) and stop-loss protection--a dollar limit above which no 
cost sharing would be required. Such comprehensive coverage would 
provide good protection for enrollees, but it would be very costly. Not 
only would it increase utilization among those who now have less-
generous coverage, but it would also transfer most of the costs of 
drugs currently used by enrollees to the Medicare program.
    One way to constrain costs and utilization is by limiting 
coverage--covering only catastrophic costs, for example, or imposing a 
cap on benefits paid per enrollee each year. If Medicare provided 
coverage only for catastrophic costs, most enrollees would receive no 
benefit payments in any given year. Nevertheless, it would be 
inaccurate to say that those enrollees would receive no benefit, since 
they would be protected against the possibility of catastrophic 
expenses--the main function of insurance.
    Alternatively, policymakers could take the other approach to 
limiting costs: covering a portion of all drug costs but only up to a 
benefit cap. However, because that approach would not protect those 
enrollees who were most in need, most of last year's proposals included 
stop-loss protection. The end result was a benefit unlike anything 
available in the private sector--a hybrid that had a capped benefit, 
then a ``hole'' with no drug coverage, and finally a stop-loss 
provision, beyond which the program would pay all drug costs (see 
Figure 5). The larger the range of spending encompassed by the hole, 
the less costly the program would be--but also the less coverage the 
benefit would provide.
    An approach to limiting costs within the context of a more 
traditional benefit would be to have a higher initial deductible 
amount, relatively high cost-sharing require-ments, and a high stop-
loss threshold. Or the program could provide a more generous benefit 
similar to those provided by employer-sponsored plans, with taxpayer 
costs limited by financing most of the program's costs through 
enrollees' premiums.
    Administration. The way in which a drug benefit is administered can 
also have a significant effect on how costly it is. All recent 
proposals have envisioned adopting the now common private-sector 
approach of using pharmacy benefit managers (PBMs) in each region. 
Proposals have differed, however, in whether only one or several PBMs 
would serve a region, in whether the responsible entities would assume 
any insurance risk, and in the kind of restrictions that would be 
placed on them.
    Private health plans use PBMs to process claims and negotiate price 
discounts with drug manufacturers and dispensing pharmacies. PBMs also 
try to steer beneficiaries toward lower-cost drugs, such as generic, 
preferred formulary, or mail-order drugs. In addition, because of their 
centralized records for each enrollee's prescriptions, they can help 
prevent adverse drug interactions. The likelihood that PBMs could 
effectively constrain costs depends on their having both the authority 
and the incentive to aggressively use the various cost-control 
mechanisms at their disposal. In the private sector, PBMs often have 
considerable leeway in the tools they can use, but they do not assume 
any insurance risk for the drug benefit. At most, they may be subject 
to a bonus or a penalty added to their administrative fee, based on how 
well they meet prespecified goals for their performance.
    Some of the proposals developed last year (such as the one 
developed by the Clinton Administration) adopted the typical private-
sector model, with a single PBM selected periodically to serve each 
region and with all insurance risk borne by Medicare, not the PBM. 
There are two main concerns about that model: it might prove 
politically difficult to allow the designated PBMs to use cost-control 
tools aggressively if enrollees have no choice of provider in each 
region, and non-risk-bearing PBMs might have too little incentive to 
use strong tools, even if they were permitted.
    Other proposals (such as the Breaux-Frist bills and the drug bill 
passed by the House) adopted a different model, more akin to the risk-
based competitive model characteristic of Medicare+Choice plans. Those 
proposals envisioned multiple risk-bearing entities (such as PBM/
insurer partners) that would compete to serve enrollees in each region. 
Enrollees would have some choice among providers so that beneficiaries 
who were willing to accept more-restrictive rules (such as a closed 
formulary) in return for lower premium costs could do so, while others 
could select a more expensive provider with fewer restrictions. If the 
entities bore all of the insurance risk for the drug benefit, they 
would have strong incentives to use whatever cost-control tools were 
permitted. However, they would also have strong incentives to try to 
achieve favorable selection by avoiding enrollees most in need of 
coverage.
    One of the concerns raised about this model was that no entities 
might be willing to participate if they had to assume the full 
insurance risk for a stand-alone drug benefit. To mitigate that 
concern, the proposals included federally provided reinsurance for 
high-cost enrollees. (Reinsurance means that the federal government, 
and ultimately taxpayers, share part or all of the costs of high-cost 
enrollees.) However, reinsurance would tend to weaken the plans' 
incentives to control costs. Another concern was that differences among 
plans in benefit structures or strategies for cost control could result 
in some plans attracting low-cost enrollees and others attracting more 
costly enrollees. The risk of that kind of selection would lead plans 
to raise the cost of the benefit. Moreover, to avoid such risks, plans 
would, over time, come to offer benefits that were very similar in 
design.

The Cost of Covering Prescription Drugs for Medicare Enrollees
    There are numerous design parameters that must be specified in 
developing a Medicare prescription drug benefit, and decisions 
concerning those parameters can greatly affect the benefit's cost to 
the taxpayer and to the beneficiary. CBO has not finished updating its 
estimates for several of the proposals developed in the last session of 
the 106th Congress. We can, however, provide some examples that show 
how costs would be affected by varying certain aspects of the benefit's 
design.
    The estimates that follow are approximate and subject to change; 
the cost of a detailed proposal would vary depending on its precise 
specifications. The estimates are for 2004 only.
    Base Case. For purposes of this testimony, the base case is a 
benefit that provides coverage for all of the outpatient drug costs of 
Medicare enrollees (see Table 6). The enrollee would be responsible for 
coinsurance equal to 50 percent of the cost of prescription drugs up to 
$8,000 of total spending. The new benefit would cover the entire cost 
of drugs above that amount. Thus, the enrollee would be liable for up 
to $4,000 in out-of-pocket spending before reaching the stop-loss 
amount.
    To pay for this program, enrollees would be charged a monthly 
premium designed to cover 50 percent of the cost of the benefit. The 
federal government would pay for the other 50 percent. In conjunction 
with several administrative features, we assume that a subsidy of that 
size would be sufficient to ensure that all enrollees in Part B of 
Medicare would participate in the prescription drug program.
    Low-income enrollees would receive a subsidy to enable them to 
participate in the Medicare drug program. Enrollees with income up to 
135 percent of the federal poverty level would receive a full subsidy 
of premiums and cost sharing. Those with income between 135 percent and 
150 percent of the poverty level would receive a premium subsidy (on a 
sliding scale that declined with income) but would be responsible for 
any cost sharing. States and the federal government would share in 
those subsidy costs for enrollees with income of less than 100 percent 
of the poverty level and for those who were dually eligible for 
Medicare and Medicaid. The federal government would cover 100 percent 
of the cost for people who qualified for the drug benefit's low-income 
subsidies but did not meet their state's eligibility criteria for 
Medicaid benefits.
    The base case also assumes that a single PBM would administer the 
program in each region, with all insurance risk borne by Medicare. The 
cases presented in this testimony do not consider another major 
alternative for delivering a Medicare drug benefit: instead of a single 
PBM, the program could be operated through multiple risk-bearing 
entities who would compete for enrollees. Competing PBM/insurer 
partners who bore insurance risk would have a strong incentive to use 
such tools as restrictive formularies and three-tier copayment 
structures to aggressively manage costs. However, they would also incur 
certain ``load'' costs--such as marketing expenses to attract enrollees 
and a premium for accepting insurance risk--that a single PBM would 
not. The net impact on program costs would depend on the specific 
details of the proposal.
    The benefit design assumed for the base case would cost the federal 
government about $31.6 billion in 2004. The Medicare benefit portion of 
that total is $26.0 billion, and the low-income subsidy (and 
interactions with the Medicaid program) account for the remaining $5.5 
billion (see Table 7). As we will see in comparisons with other cases, 
a less generous drug benefit would decrease Medicare costs but increase 
the cost of the low-income subsidy.
    In the aggregate, enrollees would pay a total of $26.0 billion in 
premiums, reflecting a monthly premium of $55.50 that they would pay 
under the base case plan. That total includes premiums that are paid on 
behalf of low-income enrollees through the low-income subsidy. In 
addition, enrollees would face about $44 billion in cost sharing for 
the prescription drugs that they used. Again, that amount includes some 
cost sharing that would be picked up by supplemental payers, including 
employer-sponsored insurance and medigap plans. As we will demonstrate 
below, a less generous benefit would lower premiums but raise the 
amount of cost sharing paid by enrollees.
    Federal costs could be reduced by imposing more cost sharing on 
enrollees or by varying other aspects of the design. The following 
discussion of alternative cases examines how the costs imposed on 
taxpayers and beneficiaries would change if one or more features of the 
program were varied.
    Change Beneficiaries' Cost Sharing. The overall federal cost of a 
prescription drug proposal would fall if beneficiaries were responsible 
for a greater share of program costs. Higher cost sharing would, of 
course, increase the cost of the low-income subsidy.
    Case 1-A is identical to the base case except for a $250 annual 
deductible. Nearly 89 percent of enrollees have some prescription drug 
spending during the year and would thus be liable for at least part of 
the deductible. Including a deductible would lower Medicare costs but 
raise low-income costs compared with the base case. On balance, the 
federal cost of the program would fall to $29.6 billion in 2004, and 
monthly premiums would decline to $50.90. Beneficiaries who had more 
than $250 in drug spending that year would face higher costs under this 
option because the added cost of the deductible would be only partly 
offset by the reduced premium.
    An even higher deductible would further reduce program costs. Case 
1-B imposes a $500 deductible on the base case, and the federal cost 
drops to $28.0 billion in 2004. Doubling the deductible amount from 
Case 1-A does not double savings from the base case, however, because 
some enrollees who would pay the full $250 deductible would spend less 
than $500 on drugs in a year and thus would not pay the full amount of 
the higher deductible.
    Lowering the coinsurance rate could alter program costs 
dramatically. The base case assumes a 50 percent coinsurance rate, 
while Case 1-C lowers that rate to 25 percent. That adjustment 
increases the program's net federal cost by one-third, to $42.0 billion 
in 2004. Medicare's cost would increase to $37.8 billion, while the 
low-income subsidy would fall to $4.3 billion.
    The lower coinsurance would drive premiums upward as program costs 
rose. Premiums would increase by nearly half, to $80.70 monthly. In the 
aggregate, beneficiaries would pay about $38 billion in premiums. 
However, aggregate cost sharing would decline precipitously as well, to 
roughly $24 billion. While all enrollees would face the higher 
premiums, the lower coinsurance rate would primarily benefit enrollees 
with significant drug costs.
    Raise the Stop-Loss Amount. The net federal program cost also could 
be reduced by raising the stop-loss amount, although the additional 
financial exposure would increase the cost of the low-income subsidy. 
Under the base case, the stop-loss amount is set at $4,000 paid out of 
pocket; a beneficiary who had used $8,000 in covered prescription drugs 
and paid 50 percent coinsurance would not be liable for any additional 
costs incurred during the year. (Enrollees who spend more than $8,000 
account for about 23 percent of total baseline spending in 2004.)
    Case 2-A raises the stop-loss amount to $6,000 in out-of-pocket 
spending. That higher level is equivalent to total spending by an 
enrollee of $12,000, which will account for less than 10 percent of 
total baseline spending in 2004. Under this option, the federal cost of 
the program would fall to $30.7 billion, a reduction of 3 percent from 
the base case. The low-income subsidy rises to $5.8 billion compared 
with the base case. Total premiums fall to about $25 billion, and 
aggregate cost sharing increases to over $46 billion.
    Raising the stop-loss amount by an additional $2,000--to $8,000--
lowers program costs by less than the previous difference found in Case 
2-A. The federal cost for Case 2-B is estimated to be $30.4 billion, or 
4 percent lower than the base case.
    Cap Benefits. A third approach would place a limit on drug costs 
covered under the Medicare benefit. Case 3 would impose such a limit 
when the enrollee reached $2,500 in total drug spending. That is, the 
enrollee would receive up to $1,250 in reimbursement for drug expenses 
before reaching the benefit cap. Such a cap could be absolute, with no 
additional reimbursement for spending at any level above the cap. 
However, Case 3 keeps the same stop-loss provision as in the base case 
so that the beneficiary faces no cost sharing beyond $5,250 in total 
charges. That structure leaves a ``hole'' in covered spending--a range 
of prescription drug spending for which most enrollees must pay all of 
their costs. (Individuals with income below 135 percent of the poverty 
level, whose cost sharing is fully subsidized, would be unaffected by 
this provision.)
    Relative to the base case, the limit on coverage in Case 3 would 
lower Medicare costs but increase the low-income subsidy. The net 
federal cost would total approximately $28.1 billion in 2004. The 
option's benefit cap would also lower premiums to about $22 billion and 
raise aggregate cost sharing to over $51 billion. The lower premiums 
simply reflect the less generous benefits under Case 3, compared with 
the base case.
    Combine Features. The above options were designed to show how 
varying one parameter of a prescription drug benefit would affect 
program costs. This section looks at alternatives that combine several 
changes at the same time.
    Case 4-A combines the base case with many of the features described 
above: a $250 deductible, benefits capped at $1,125 (after the enrollee 
reaches $2,500 in total drug spending), and stop-loss protection after 
the beneficiary spends $6,000 out of pocket. The costs of enrollees 
with income below 135 percent of the poverty level would be fully 
subsidized inside the benefit ``hole.''
    Such a benefit would be significantly less generous than the base 
case, but the costs of financing it would be significantly lower as 
well. In 2004, federal costs would be approximately $23.4 billion, or 
about one-quarter less than the base case. Likewise, monthly premiums 
would fall from $55.50 under the base case to $35.20 under Case 4-A. 
That causes total premiums to drop to $16.5 billion, with a 
corresponding increase in aggregate cost sharing to $61.5 billion.
    Case 4-B is identical to Case 4-A except that low-income 
individuals would not be subsidized inside the benefit ``hole.'' CBO 
estimates that in 2004, federal costs would total $21.4 billion. Nearly 
all of that savings comes from reductions in the cost of the low-income 
subsidy. Premiums would drop negligibly compared with Case 4-A.
    Case 4-C extends the low-income subsidy to individuals with higher 
income than those in previous cases. Specifically, it includes all of 
the features of Case 4-A but provides a full subsidy for premiums and 
cost sharing to enrollees who have income at or below 150 percent of 
the federal poverty level. Enrollees with income between 150 percent 
and 175 percent of the poverty level would receive a premium subsidy on 
a sliding scale. Medicare costs would remain roughly unchanged compared 
with Case 4-A, but the low-income subsidy would increase to $7.9 
billion in 2004.
    Increasing the federal subsidy for beneficiary premiums would 
substantially raise program costs. Case 4-D is identical to Case 4-A 
except that the subsidy is raised to 75 percent of premiums. That 
change increases Medicare costs by 50 percent compared with Case 4-A 
but reduces the cost of the low-income subsidy somewhat. The net 
federal cost would rise to over $30 billion in 2004. The sharp increase 
in Medicare costs is mirrored by the sharp drop in premiums, which fall 
from more than $16 billion in Case 4-A to about $8 billion in Case 4-D.
    Because we have assumed throughout this discussion that the federal 
subsidy would be at least 50 percent, the increase in Case 4-D does not 
yield an increase in participation by Medicare enrollees. However, if 
the federal subsidy declined below 50 percent, CBO assumes that 
enrollment would also decline somewhat.

                   SUBSIDIES FOR LOW-INCOME ENROLLEES

    Like the cases discussed above, all of the proposals put forward 
recently in the Congress would require a substantial contribution by 
enrollees--through both cost sharing and premiums. To make a new drug 
benefit more affordable for low-income Medicare beneficiaries, the 
proposals would at least partially subsidize those costs for eligible 
enrollees.
    Several decisions must be made in designing a low-income subsidy 
program for a Medicare drug proposal. Rules must be established to 
determine who would be eligible for a subsidy and the amount. Some low-
income Medicare beneficiaries currently receive assistance for some or 
all of their medical costs through Medicaid and other state-run 
programs. Most Medicare drug proposals have included prescription 
assistance to low-income beneficiaries, keying it to the following 
categories of Medicaid eligibility:

 So-called dual eligibles meet all state requirements for 
        Medicaid eligibility, either because they are below the limits 
        on income and assets set by the state or because they have 
        ``spent down'' their resources to those limits as a result of 
        high medical costs (the medically needy). For the first group, 
        their Medicare cost sharing and premiums are paid by Medicaid. 
        They also receive all Medicaid benefits, including coverage for 
        prescription drugs. Most medically needy enrollees receive 
        those same benefits, although a few states do not cover their 
        expenses for drugs.
 Qualified Medicare beneficiaries (QMBs) have income below the 
        federal poverty level. About 75 percent of that group qualify 
        as dual eligibles; the other 25 percent are eligible for 
        benefits only as QMBs. For the latter group, Medicaid pays 
        their cost sharing and premiums under Medicare, but they are 
        not eligible for other Medicaid benefits and they do not have 
        Medicaid drug coverage.
 Specified low-income Medicare beneficiaries (SLMBs) have 
        income between 100 percent and 120 percent of the poverty 
        level. About a third of this group qualify as dual eligibles. 
        The other two-thirds qualify only as SLMBs, and the only 
        Medicaid benefit they get is coverage for Medicare premiums.
    In addition to beneficiaries currently qualifying for Medicaid 
coverage, other low-income Medicare enrollees would also receive 
assistance under most recent Medicare drug proposals. Such plans would 
provide subsidies to all enrollees with income below 135 percent of the 
poverty level (and within certain asset limits) to cover cost sharing 
and premiums; they would pay some or all of the premiums for 
beneficiaries with income between 135 percent and 150 percent of the 
poverty level. A few proposals would extend the subsidy to enrollees 
with higher income.
    A key design choice for low-income subsidies is how much of those 
costs would be paid by the federal government and how much would be 
shared by the states. Currently, the federal government pays 57 percent 
of Medicaid costs on average, with the states paying the rest. Most of 
the proposals for a Medicare drug benefit would maintain the current 
federal contribution for dual eligibles and QMBs but allow full federal 
funding for other low-income beneficiaries with income and assets at or 
below the eligibility limits set specifically for the Medicare drug 
subsidy. A proposal that increased the federal government's share of 
the cost of low-income subsidies would reduce state costs.
    The cost of low-income subsidies would also depend on how many 
people participated in the program. Not all eligible beneficiaries 
would choose to avail themselves of the subsidies even if they 
participated in the drug benefit. Some beneficiaries would not want to 
be associated with a government ``welfare'' program; others might not 
believe that they were eligible or that they needed the subsidy. 
Participation rates would vary according to the design of the proposal.
    A further factor affecting participation is the entity designated 
to administer the subsidy program. Most recent proposals would rely on 
state Medicaid programs to determine eligibility and to enroll low-
income beneficiaries, but another option would be to have the Social 
Security Administration (SSA) provide those administrative services. 
Participation would be higher under the latter arrangement because 
there is less stigma associated with SSA than with Medicaid.
    Another factor is the size of the subsidy: a larger subsidy would 
probably induce more people to participate in the program. That effect 
would also depend on how the benefit was designed. High deductibles or 
premiums might persuade eligible low-income beneficiaries to enroll in 
the low-income subsidy portion of the program to cover those up-front 
costs. That incentive to enroll would be stronger if the drug benefit's 
coverage of expenses beyond the deductible was more generous.
    Perhaps the most significant issue affecting participation by low-
income beneficiaries is whether asset standards currently in place for 
Medicaid would be relaxed for the drug benefit. Less stringent asset 
standards would expand the number of people eligible for subsidies.
    With the introduction of a Medicare prescription drug benefit, 
there would be offsetting changes in the federal government's Medicaid 
spending. On balance, federal costs would increase when the effect of 
the low-income subsidy was combined with those changes in Medicaid 
spending. (Depending on how the subsidy was designed, states could also 
see a net increase in their costs.) A Medicare drug benefit would 
reduce Medicaid's costs for current dual eligibles because Medicare 
would pick up part of their prescription drug costs, in effect 
refinancing that portion of the current Medicaid drug benefit. However, 
some people who are now eligible for assistance do not enroll in 
Medicaid. A Medicare drug benefit would provide a new incentive for 
those people to enroll in Medicaid, which under most proposals would 
cover the drug benefit's cost sharing and premiums.
    The magnitude of any increase in federal or state costs depends on 
the interplay between the generosity of a Medicare drug benefit and its 
provisions for low-income subsidies. In general, for a given set of 
subsidy provisions, a less generous Medicare drug benefit would lead to 
higher federal spending (the result of combining the low-income 
subsidies and the effect on Medicaid).

                               CONCLUSION

    While policymakers are well aware of Medicare's long-run financial 
problems, they also know that its benefit package has deficiencies 
relative to the benefits typically provided by private-sector insurance 
plans. One such deficiency is that the program provides only very 
limited coverage for outpatient prescription drugs--an increasingly 
important component of modern medical care. But adding a drug benefit 
without other reforms would significantly increase Medicare's costs, 
and unless it was fully financed by enrollees' premiums, it would 
greatly increase the already large burden on the next generation of 
taxpayers.

  TABLE 1. CBO'S BASELINE PROJECTIONS OF PRESCRIPTION DRUG SPENDING AND
        MEDICARE BENEFITS PER ENROLLEE, CALENDAR YEARS 2002-2011
------------------------------------------------------------------------
                                     Spending per Enrollee     Average
                                           (Dollars)            Annual
                                  --------------------------  Percentage
                                                               Change,
                                       2002         2011      2002-2011
------------------------------------------------------------------------
Drug Spending \1\................        1,989        4,818         10.3
Medicare Benefits \2\............        6,841       11,268          5.7
Memorandum:
Gross Domestic Product per Capita       39,275       56,569          4.1
------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
\1\ Total spending per enrollee on outpatient prescription drugs not
  currently covered under Medicare, regardless of payer. Based on CBO's
  January 2001 baseline projections.
\2\ Medicare benefits per enrollee under the Hospital Insurance and
  Supplementary Medical Insurance programs. Based on CBO's May 2001
  baseline projections.


      TABLE 2. COMPARING CBO'S JANUARY 2001 AND MARCH 2000 BASELINE
                PROJECTIONS OF PRESCRIPTION DRUG SPENDING
               (By calendar year, in billions of dollars)
------------------------------------------------------------------------
                                                  January
                     Year                           2001      March 2000
                                                 Estimates    Estimates
------------------------------------------------------------------------
2001..........................................           71           66
2002..........................................           81           74
2003..........................................           92           82
2004..........................................          104           91
2005..........................................          117          101
2006..........................................          131          112
2007..........................................          148          124
2008..........................................          165          137
2009..........................................          185          152
2010..........................................          205          167
2011..........................................          228         n.a.
  Total
    2001-2010.................................        1,299        1,105
    2002-2011.................................        1,456         n.a.
Memorandum:
Percentage increase in total spending, January 2001                 17.6
 estimates over March 2000 estimates, for 10 years ending
 in 2010...................................................
Percentage increase in total spending, 10 years ending in           31.8
 2011 (using January 2001 estimates) over 10 years ending
 in 2010 (using March 2000 estimates)......................
------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTES: Numbers may not add up to totals because of rounding.
n.a. = not applicable.


  TABLE 3. PROJECTED SPENDING ON PRESCRIPTION DRUGS BY OR FOR MEDICARE
                     ENROLLEES IN CALENDAR YEAR 2004
------------------------------------------------------------------------
                                 Spending by      Share of
                                All Enrollees  Enrollees with   Share of
 Spending Level per Enrollee     At or Above       Spending      Total
          (Dollars)               the Level      Above  the       Drug
                                (Billions of        Level       Spending
                                  dollars)        (Percent)    (Percent)
------------------------------------------------------------------------
0............................           104.0            87.8      100.0
1,000........................            72.4            59.3       69.7
2,000........................            50.6            40.9       48.7
3,000........................            35.5            28.1       34.2
4,000........................            25.2            19.1       24.2
5,000........................            18.1            13.4       17.4
6,000........................            13.2             9.0       12.7
7,000........................             9.9             6.5        9.5
8,000........................             7.4             4.5        7.2
9,000........................             5.7             3.4        5.5
10,000.......................             4.4             2.4        4.3
------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTES: Based on CBO's January 2001 baseline projections.
Total Medicare enrollment for 2004 is projected to be 41.8 million
  people.


  TABLE 4. PRESCRIPTION DRUG COVERAGE AMONG MEDICARE ENROLLEES, BY TYPE OF SUPPLEMENTAL COVERAGE, CALENDAR YEAR
                                                      1997
----------------------------------------------------------------------------------------------------------------
                                            Number of Medicare Enrollees         Percentage of All Enrollees
                                                    (Thousands)             ------------------------------------
                                       -------------------------------------
                                          No Drug        Drug                  No Drug        Drug       Total
                                          Coverage     Coverage     Total      Coverage     Coverage
----------------------------------------------------------------------------------------------------------------
No Supplemental Coverage..............        2,941            0      2,941          7.4            0        7.4
Any Medicaid Coverage \1\.............        1,448        5,449      6,897          3.6         13.7       17.4
Employer-Sponsored Plans..............        1,671       11,163     12,834          4.2         28.1       32.3
Individually Purchased Policies.......        5,753        4,532     10,286         14.5         11.4       25.9
Other Public Coverage \2\.............            0        1,396      1,396            0          3.5        3.5
HMOs Not Elsewhere Classified \3\.....          678        4,696      5,374          1.7     11.813.5
                                       -------------------------------------------------------------------------
  Total...............................       12,491       27,236     39,728         31.4         68.6      100.0
----------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office based on data from the 1997 Medicare Current Beneficiary Survey.
NOTES: Some beneficiaries hold several types of coverage at once. The categories in this table are mutually
  exclusive, and CBO assigned people to groups in the order shown above. The numbers in the table may not add up
  to totals because of rounding.
HMO = health maintenance organization.
\1\ Comprises beneficiaries who received any Medicaid benefits during the year, including those eligible for a
  state's full package of benefits as well as others who received assistance for Medicare premiums or cost
  sharing through the Qualified Medicare Beneficiary, Specified Low-Income Medicare Beneficiary, and Qualifying
  Individual programs.
\2\ Beneficiaries who received aid for their drug spending through state-sponsored pharmacy assistance programs
  for low-income elderly make up 60 percent of this category. The remainder received prescription drug benefits
  through the Veterans Administration.
\3\ Primarily HMOs under Medicare+Choice risk contracts.


    TABLE 5. MEDICARE ENROLLEES AND THEIR PRESCRIPTION DRUG COVERAGE AND SPENDING, BY POVERTY STATUS IN 1997
----------------------------------------------------------------------------------------------------------------
                                                                              Share
                                                                              Within
                                                                Share of     Poverty     Total Drug    Out-of-
                                                  Number of       All       Group That    Spending   Pocket Drug
               Poverty Status \1\                 Enrollees    Enrollees     Does Not    (Billions     Spending
                                                  (Millions)   (Percent)    Have Drug        of       (Billions
                                                                             Coverage     dollars)   of dollars)
                                                                            (Percent)
----------------------------------------------------------------------------------------------------------------
Less Than 100 Percent..........................          6.3         15.9         28.0          5.9          1.7
100-200 Percent................................         11.2         28.1         40.9         10.0          5.0
200-300 Percent................................          8.4         21.2         30.7          7.8          3.8
300 Percent or More............................         13.9         34.9         25.8         12.9          5.8
                                                ----------------------------------------------------------------
Total..........................................         39.7        100.0         31.4         36.7         16.2
----------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office based on data from the 1997 Medicare Current Beneficiary Survey (MCBS).
NOTES: CBO adjusted each enrollee's level of drug spending by 25 percent to reflect underreporting in the
  survey. Prescription drug spending for MCBS respondents who were in nursing homes was imputed from the
  expenditures of noninstitutionalized respondents who have difficulties with the same number of activities of
  daily living.
The numbers in the table may not add up to totals because of rounding.
\1\ Income relative to the federal poverty level.


                    TABLE 6. OPTIONS FOR A PRESCRIPTION DRUG BENEFIT THROUGH MEDICARE IN 2004
----------------------------------------------------------------------------------------------------------------
                                                                                        Federal
                                                                                         Cost     Beneficiaries'
                      Case                                  Description \1\            (Billions      Monthly
                                                                                          of          Premium
                                                                                       dollars)      (Dollars)
----------------------------------------------------------------------------------------------------------------
Base............................................  Federal government pays 50 percent        31.6          55.50
                                                   of premiums; no deductible is
                                                   required; beneficiaries pay 50
                                                   percent coinsurance; stop-loss
                                                   protection is provided after
                                                   $4,000 in out-of-pocket spending.
                                  Option 1: Change Beneficiaries' Cost Sharing
1-A.............................................  Require a $250 deductible.........        29.6          50.90
1-B.............................................  Require a $500 deductible.........        28.0          47.00
1-C.............................................  Reduce beneficiaries' coinsurance         42.0          80.70
                                                   to 25 percent.
                                     Option 2: Increase the Stop-Loss Amount
2-A.............................................  Raise the stop-loss amount to             30.7          53.10
                                                   $6,000.
2-B.............................................  Raise the stop-loss amount to             30.4          52.40
                                                   $8,000.
                                            Option 3: Cap the Benefit
3...............................................  Cap the benefit after $2,500 in           28.1          47.10
                                                   total drug spending; provide stop-
                                                   loss protection after $4,000 in
                                                   out-of-pocket spending; subsidize
                                                   low-income beneficiaries'
                                                   spending in the ``hole''.
                                             Option 4: Combinations
4-A.............................................  Require a $250 deductible; cap            23.4          35.20
                                                   benefits after $2,500 in total
                                                   drug spending; provide stop-loss
                                                   protection after $6,000 in out-of-
                                                   pocket spending; subsidize low-
                                                   income beneficiaries' spending in
                                                   the ``hole''.
4-B.............................................  Require a $250 deductible; cap            21.4          35.00
                                                   benefits after $2,500 in total
                                                   drug spending; provide stop-loss
                                                   protection after $6,000 in out-of-
                                                   pocket spending; provide no
                                                   subsidies for low-income
                                                   beneficiaries' spending in the
                                                   ``hole''.
4-C.............................................  Require a $250 deductible; cap            24.4          35.20
                                                   benefits after $2,500 in total
                                                   drug spending; provide stop-loss
                                                   protection after $6,000 in out-of-
                                                   pocket spending; subsidize some
                                                   or all cost sharing in the
                                                   ``hole'' for beneficiaries with
                                                   income at or below 175 percent of
                                                   the poverty level.
4-D.............................................  Increase the share of premiums            30.3          17.60
                                                   paid by the federal government to
                                                   75 percent; require a $250
                                                   deductible; cap benefits after
                                                   $2,500 in total drug spending;
                                                   provide stop-loss protection
                                                   after $6,000 in out-of-pocket
                                                   spending; subsidize low-income
                                                   beneficiaries' spending in the
                                                   ``hole''.
----------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
\1\ The options represent changes relative to the base case. The ``hole'' is the range of prescription drug
  spending above the benefit cap and below the stop-loss amount. To ``subsidize low-income beneficiaries'
  spending in the `hole,' '' the federal government and the states would provide aid in the following manner:
  beneficiaries with income at or below 135 percent of the federal poverty level could receive some or all cost
  sharing and premium assistance; and beneficiaries with income between 135 percent and 150 percent of the
  poverty level could receive premium assistance on a sliding scale.


                      TABLE 7. APPROXIMATE COST OF ILLUSTRATIVE CASES IN CALENDAR YEAR 2004
                                            (In billions of dollars)
----------------------------------------------------------------------------------------------------------------
                                          Federal Cost to Taxpayers           Payments by or for Participating
                                   ---------------------------------------             Beneficiaries
                                                  Low-Income              --------------------------------------
             Case \1\                             Subsidies/                              Medicare
                                      Medicare     Medicaid      Total       Medicare       Cost        Total
                                                 Interaction                 Premiums     Sharing
----------------------------------------------------------------------------------------------------------------
Base..............................         26.0          5.5         31.6         26.0         44.4         70.4
1-A...............................         23.8          5.8         29.6         23.8         48.1         71.9
1-B...............................         22.0          6.0         28.0         22.0         51.3         73.3
1-C...............................         37.8          4.3         42.0         37.8         24.5         62.3
2-A...............................         24.9          5.8         30.7         24.9         46.5         71.3
2-B...............................         24.5          5.9         30.4         24.5         47.1         71.6
3.................................         22.1          6.1         28.1         22.1         51.5         73.5
4-A...............................         16.5          7.0         23.4         16.5         61.5         77.9
4-B...............................         16.4          5.0         21.4         16.4         61.3         77.7
4-C...............................         16.5          7.9         24.4         16.5         61.6         78.1
4-D...............................         24.7          5.6         30.3          8.2         61.5         69.7
----------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTES: Based on CBO's January 2001 baseline projections.
Estimates assume that all costs are phased in fully by 2004. The numbers in the table may not add up to totals
  because of rounding. The table differs from Table 5 in CBO's March 27, 2001, testimony before the House
  Committee on Ways and Means, Subcommittee on Health, in that it reflects corrections to estimates of cost
  sharing for participating beneficiaries. Otherwise, it is unchanged. The approximate level of total drug
  spending by or for beneficiaries who participate in the new Medicare benefit is the sum of Medicare's federal
  cost to taxpayers plus Medicare premiums plus cost sharing paid by or for the enrollees. Total drug spending
  by or for all Medicare beneficiaries would also include spending by those who chose not to participate in the
  new Medicare benefit (in this case, those who enrolled in Part A but not Part B of Medicare).
\1\ For descriptions of the illustrative cases, see Table 6.

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    Mr. Bilirakis. I didn't expect you to finish up in 10 
minutes.
    Mr. Crippen. As I often say, I would rather hear what is on 
your mind than what's on mine.
    Mr. Bilirakis. Well, not only that, but I would imagine by 
the time we are all finished inquiring here, you would have 
been able to get your points across.
    Let me ask you a general or generic question. Did you 
consider the use of generic drugs in some capacity or another, 
in the process of determining your figures?
    Mr. Crippen. Yes, Mr. Chairman. In constructing our 
baseline against which, of course, we measure all of this--the 
baseline in which we have the $1.5 trillion over 10 years--we 
try to account for not only the current use of generics but 
also the fact that there are a number of fairly expensive drugs 
used by the elderly that will be coming off-patent in the 
middle of this 10-year period. So we have looked at what is in 
the pipeline for new drugs--although that is harder, of course, 
to estimate, both in terms of price and exact availability--as 
well as drugs that will be coming off-patent and an assumption 
about generics therefore kicking in. So, we have included 
current generic use as well as what we think will be more use, 
in some cases, for drugs over the 10 years.
    Mr. Bilirakis. I see. Well, Mr. Crippen, referring now to 
the $300 billion that was in the budget vehicle, some, of 
course, have argued that it is not near enough. Have you 
considered, in the process of doing this, any reforms to the 
Medicare program that would generate savings. For example, the 
thought of combining Parts A and B. Would you just expand upon 
that?
    Mr. Crippen. We have the luxury, Mr. Chairman, of reacting 
to policy proposals and not creating them. And so, in that 
sense, we are in the business of trying to estimate what you 
all and the President and others propose. So, in that sense, we 
don't have an independent policy proposal.
    Combining Parts A and B, however, has been in a number of 
proposals made over the last couple of years, and it would 
clearly depend on what else happened. Just simply combining 
Parts A and B is, if you will, an accounting change, of how one 
would count the money going in and out. Without changing the 
nature of the deductibles and the copayments and other aspects 
of the program, it wouldn't change the fiscal outlook at all.
    Mr. Bilirakis. So combining A and B would not change the 
fiscal outlook at all.
    Mr. Crippen. No, not unless you did some other 
restructuring at the same time.
    Mr. Bilirakis. Why is it that we seem to feel pretty good 
about doing something like that?
    Mr. Crippen. Well, it may make good, logical sense, as many 
of you will remember, the history of how we created A and B was 
one of grand compromise between the House and the Senate, but 
the shades of the lines between the two have grown hazy over 
time. You all have moved home health out of Part A to Part B--
what used to be a hospital benefit is now an outpatient or 
physician benefit. So there is a real melding of services 
anyway. It may make good, logical sense to combine the two. In 
so doing, there have been proposals to combine the deductibles 
and do some other things that could have some effects on costs, 
but simply combining the two programs into one will change the 
way we account for it but won't change the incentives for the 
beneficiaries or the providers to change their behavior.
    Mr. Bilirakis. I notice that in your written statement you 
refer to that hazy line that is between the two. Well, there is 
always and we should be concerned about the unintended 
consequences of our actions. One of the unintended consequences 
conceivably might be employers dropping their prescription drug 
coverage in retiree health plans. Any opinion on that?
    Mr. Crippen. Well, it is certainly possible. We have 
assumed, for purposes of this exercise, that employers would 
continue to provide coverage if they are covering now, but of 
course, they would take advantage of whatever the Federal 
benefit would allow. So that not unlike many of the employer 
retirement schemes now that wrap around Medicare, whatever 
Medicare doesn't pay, they may cover. And so in this case, if 
there was a Medicare or pharmaceutical benefit, we would assume 
the same kind of behavior from employers but not that they 
would change or drop their benefit altogether. They would wrap 
it around the Medicare benefit and therefore shift some of 
their costs to the Federal budget, but not drop coverage or not 
change coverage.
    Mr. Bilirakis. I see. So you assume that.
    Mr. Crippen. Yes, we do.
    Mr. Bilirakis. On the other hand, is it reasonable to 
expect that the dropping would take place?
    Mr. Crippen. I don't know that it is reasonable, Mr. 
Chairman. Certainly, employers have begun to scale back retiree 
benefits for pharmaceuticals in some ways. I am sure there are 
instances in which companies have dropped benefits. And so the 
provision of a Medicare benefit by the Federal Government may 
stop that erosion or help keep it from accelerating.
    So, it is entirely possible that the employer system the 
way we now know it, while taking advantage of whatever the 
Medicare drug benefit would be, would not necessarily change 
radically one way or the other. You might take that as one way 
of saying that we don't know.
    Mr. Bilirakis. My time has expired. Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. Earlier, I found Mr. 
Burr's comments--I am sorry he is not back here--but his 
comments about saying that our talking on this side of the 
aisle--I guess me, in particular--my talking about prescription 
drug costs as a partisan issue to say that if we don't do 
something about costs, this Congress and this President, who 
are not talking about costs, real costs of prescription drugs, 
that is a partisan statement.
    I find it curious especially because, Mr. Crippen, in your 
statement you said prescription drug costs will rise at an 
average annual rate of 10.3 percent per beneficiary, twice the 
combined--the pace of the combined costs for Medicare programs 
and much faster than the Nation's economy.
    My understanding is there is no accounting in the budget 
blueprint, no accounting by all of you, for prescription drug 
costs increase in Medicaid, correct?
    Mr. Crippen. In our Medicaid baseline, there certainly is. 
Over the next 10 years, we expect----
    Mr. Brown. In the Medicaid budget, there is no increase, is 
my understanding correct?
    Mr. Crippen. I don't know about--maybe my colleagues do--
what is in the President's budget.
    Mr. Brown. My understanding is there was a $13 billion 
Medicaid cut.
    Mr. Crippen. They remind me that without a change in law, 
it is an entitlement, and so it doesn't take an annual 
appropriation. So far, we include, obviously, increases in 
pharmaceutical prices in the baseline spending.
    Mr. Brown. In the budget that passed the House, there was a 
$13 billion cut in Medicaid. Now, we have not Medicaid cut. We 
have no addressing of the issue of Medicaid increased cost. The 
$300 billion for Medicare prescription drugs and Medicare 
privatization, reform, or whatever term my friends on the other 
side of the aisle want to use, we do that and then we are 
considering a $2 trillion, or $2.3 trillion, or $2.- whatever 
trillion tax cut, most of the money goes to people making over 
$2- or $300,000 a year, people who decidedly do not need, to 
the same degree as the rest of the population, need that 
prescription drug benefit.
    My question then is, can we do these tax cuts, these tax 
cuts especially that are loaded in the outyears--5, 6, through 
10 years--can we do these tax cuts, cover a prescription drug 
benefit that is at all adequate, without doing something on 
either compulsory licensing or the Allen bill where Medicare 
beneficiaries, as a group, are purchasers, in a sense, or 
parallel importing things that every other country in the world 
does, or what Canada does, where they use their 31 million 
beneficiaries to negotiate prices as a big buying pool, 
negotiate prices with the drug companies? Is there any way we 
can do this huge tax cut, with all its uncertainty, not account 
for Medicaid increases, do a prescription drug benefit that 
probably is inadequate anyway with $300 billion, and not do 
something strong or direct to control drug prices in some way--
not government price controls, but injecting competition in 
through compulsory licensing--or to find other ways that every 
other country in the world uses to keep drug prices down? Is 
that possible to fit together?
    Mr. Crippen. I don't know how many questions there are 
there, but I think----
    Mr. Brown. There is only one question. There is one 
question. Could we do a tax cut without finding a way to keep 
drug prices down? When I hear people in this institution say 
we've got to give this big tax cut, and then say we've got to 
do a prescription drug benefit, but then shy away, for whatever 
reason--whether it is soft money that the drug companies spend 
on campaigns, whether it is direct contributions to those of us 
in Congress, whether it is phony front groups like Citizens for 
Better Medicare--to keep this institution immobilized and 
unwilling to take on the drug companies, is there any way to do 
this, to do this tax cut, to provide a prescription drug 
benefit, and not to do something pretty direct about prices?
    Mr. Crippen. I answer any of this at my peril, of course. 
The best example I can give you--and, of course, the answer is 
going to be yes and no--the best example I can give you is a 
budget resolution, as it is passed, because it does add up in 
some sense with a tax cut and with $300 billion for a 
prescription drug benefit in Medicare. Obviously, it depends 
critically upon what kind of drug benefit you do and, 
ultimately, how the tax cut plays out.
    So, over the 10 years, with the way the budget resolution 
was constructed and the Conference report passed, things do add 
up. You can do all of the things you laid out without changing 
the nature of the pharmaceutical market. But that doesn't mean 
you are wrong; it simply means that there is a way to make it 
add up, and the budget resolution does add up, but it obviously 
depends very critically on what else you do and how the drug 
benefit is structured. There are any number of ways you could 
think about the benefit that would cost more than $300 billion 
or less. There is so much between here and there that----
    Mr. Brown. Too much uncertainty between here and there.
    Mr. Crippen. Sure.
    Mr. Brown. That is kind of our point, there is so much 
uncertainty----
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Brown. Thank you, Mr. Chairman. I have just one 
comment--there is so much uncertainty about what we do with the 
tax cut while we promise this prescription drug benefit, while 
we don't say anything with certainty about dealing with price.
    Mr. Bilirakis. The gentleman from Michigan, Mr. Upton.
    Mr. Upton. Thank you, Mr. Chairman. Mr. Crippen, again, 
thank you for your testimony and the documentation that you 
have provided for us. I look forward to the next number of days 
of going through this in real earnest, and perhaps coming back 
to it with some more questions as well.
    Have you all done a re-estimate of what the House passed 
last year with regard to our drug benefit bill?
    Mr. Crippen. We haven't yet. We are in the midst of 
updating all of the models after our baseline, and so we 
anticipate reestimating that before long, but we haven't yet. 
As you know, it hasn't been--what we do is analyze bills as 
reported from committee first. That is the first priority.
    Mr. Upton. So we have to do our work first.
    Mr. Crippen. Yes, kind of.
    Mr. Upton. So maybe come August----
    Mr. Crippen. Well, we hope before then.
    Mr. Upton. Do you have a sense of where we are going--the 
budget resolution that we passed a couple weeks ago ended up 
with a reserve, I believe, of about $300 billion for 
prescription drug benefit. Do you think that if we pass 
something very similar to what we did last year, that it will 
fit within that same $300 billion window, or do you think it 
will have to be scaled back?
    Mr. Crippen. Well, we don't know. I mean, we haven't 
rescored the bill, as you suggested, and given the new 
baseline--there are two big changes, of course, in just our 
baseline. The 32 percent increase that has been alluded to is a 
combination of two things. One is an increase in drug pricing--
or drug costs, more correctly put--of about 15 percent, or 
about 16 percent. The other half of the increase comes because 
we have moved in the 10-year timeframe down the road 1 more 
year, dropping 2001, which was relatively inexpensive, and 
adding to 2011. So by moving the 10-year timeframe, we have 
also added about 15 percent or so of costs. So we know that 
just the base is going to be 30 percent greater; therefore, the 
cost growth of any benefit would be in about that range, too. 
But, again, we haven't finalized any of the estimates of last 
year's proposals.
    Mr. Upton. So if you take those assumptions in line, if you 
looked even at a further point beyond 10 years, the number will 
go up quite dramatically on a chart.
    Mr. Crippen. Sure.
    Mr. Upton. I notice in your testimony on page 2, you 
indicated the growth of Medicare spending has been much slower 
in the past few years than it has been historically. In 1998 
through 2001, CBO estimated that the benefit payments will grow 
at an annual average rate of 3.1 percent compared with 10 
percent over the previous decade. How do you see that going in 
the future, as well?
    Mr. Crippen. Well, we think that the total program will 
grow at about 7.9 percent over the next 10 years. The per 
capita number is lower because we are also going to increase 
the number of recipients somewhat in these next 10 years or 
more anyway, growth is under 6 percent per capita but overall 
about 8 percent.
    In the back of the testimony, there is one page with a bar 
chart of the three different time periods: prior to 1998; the 3 
years of low growth, 1998 to 2001; and then what we foresee for 
the future. So we certainly don't expect that those low-growth 
rates over the last few years will give us--will produce the 
same kinds of results in the future.
    Mr. Upton. Thank you very much. I yield back.
    Mr. Bilirakis. Mr. Pallone, to inquire.
    Mr. Pallone. Thank you, Mr. Chairman. Mr. Crippen, I was 
just following up on what Mr. Brown said. You know, I was 
thinking last night, we were talking about the price of 
gasoline, and the President basically is saying that you can 
take your tax refund from the tax bill and pay for higher gas 
prices. And I guess you could make the same argument here and 
say that you could take your tax refund and pay for higher 
prescription drug costs. But the problem is that, you know, the 
middle-income seniors who pay out-of-pocket aren't going to get 
enough of the tax refund to do that, in my opinion. And that is 
my concern.
    I notice that in your testimony, you talk about 
beneficiaries with income between 1 and 2 times the poverty 
level are most likely to be caught in the middle. These are the 
people, you know, the sort of middle-income people that aren't 
eligible for Medicaid but, at the same time, don't have any 
benefit and are paying out-of-pocket, and that is what concerns 
me. And I really had two questions.
    One is, we have this $300 billion, I guess, over 10 years 
in the budget for a prescription drug program, but from what I 
can see, the budget also proposes twice that, $600 billion, to 
pay for repealing the estate tax. So, if you repeal the estate 
tax, you will benefit only 43,000 Americans, but if you use 
that money, the $600, for a prescription drug benefit, you 
would provide meaningful relief to 43 million Medicare 
beneficiaries. And I really believe that it is the middle-
income person is suffering, we have to have a Medicare 
prescription drug benefit that is universal and helps everyone 
because these are the middle-income people that are suffering.
    So, I just wanted to ask you, what kind of drug benefit 
could we provide to all seniors, you know, to all Medicare 
beneficiaries if we had $600 billion available, the same amount 
that is available in the budget for estate tax repeal?
    Mr. Crippen. We haven't--and you won't be surprised to know 
this--reverse-engineered anything from the basis of a level of 
spending. Most proposals we have seen don't cost that much. As 
you can see from our examples here, it is more in the range of 
$300 billion or so, but you could obviously change the 
parameters here and make it entirely possible to give a benefit 
totaling $600 billion.
    I can give you some examples that I brought with me on 
catastrophic coverage, for example, and how much you could 
ensure coverage on a catastrophic basis, but that wouldn't be 
probably the kind of benefit you have in mind.
    Mr. Pallone. I mean, there is no question, with $600 
billion you could provide some sort of universal benefit, you 
know, that was fairly decent. I mean, you are going to have to 
have some kind of premium contribution or whatever, but you 
could provide a pretty decent coverage.
    Mr. Crippen. Sure. That would cover, from our estimates, 
over 40 percent, or two-fifths, I should say, of all elderly 
drug care spending between now and 2011.
    Mr. Pallone. Okay. Then my second question is, with 
regard--I think the President is going to come up with a low-
income-only benefit, that is what I suspect he is going to do. 
And the problem that I see with that is, again, in your 
testimony you talk about how most States have some kind--well, 
not most, but a lot of States, I think you said 26 or so--have 
some kind of benefit for low-income.
    My concern is that, again, we are not--a lot of those 
people are already covered either through Medicaid or through 
whatever the States are doing, and we are just not going to be 
helping that many people who really need the coverage.
    Also, my fear is that if you only do what the President has 
proposed, the nature of it seems to be almost like a block 
grant, and there would be some concern whether or not they 
would just use it to pay for existing costs that they are 
already putting out, rather than expand coverage at all.
    But a third thing that comes to mind is the fact that in a 
number of States that have these programs, there are many who 
are eligible, who are not even enrolled. So, I wanted to ask, 
does CBO assume that all eligible seniors would participate in 
a low-income drug benefit that is administered by the States, 
and what factors make it less likely that seniors would 
participate in a low-income program? To what extent have you 
factored in those who are not enrolled? To what extent is there 
a danger that States would just use this money in some sort of 
block grant and not really cover anybody in significant 
numbers?
    Mr. Crippen. Let me start with the last first. Obviously, 
money is fungible, and once the States have it, it could 
displace spending of other kinds. Congress has fairly 
frequently included things like maintenance-of-effort 
requirements so that you couldn't actually just simply displace 
the money, but as rates of growth change, clearly, money is 
fungible. And so there is always that possibility that States 
could--with 26 States now planning or having some benefit in 
place, there is some possibility that the Federal block grants 
or grants to those States would have leakage into their 
existing programs. But, again, there have been a number of 
things that Congress routinely does to try and minimize that, 
like maintenance-of-effort requirements.
    Regarding who participates or not, in general, we assume 
for these purposes, for these estimates up here, that even with 
a low-income subsidy--which are in the base case and these 
alternatives here--that everyone who is now in Part B will be 
in this benefit because it is in their interest to be in it, 
just as the HCFA actuaries assume.
    If, however, there was a stand-alone program for low-income 
beneficiaries only, we don't know for sure if the participation 
would be quite that high. As we know, with the Medicaid program 
now--whether it is for children or for people who are off 
welfare because of the Temporary Assistance for Needy Families 
program--some people who may be eligible for Medicaid but have 
not taken advantage of it or signed up for it. Presumably that 
could happen to this population as well.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Pallone. Thank you.
    Mr. Bilirakis. Mr. Deal, to inquire?
    Mr. Deal. Thank you, Mr. Chairman. I, too, thank you for 
being here today, and thank you for your very well prepared 
information. I think that there is a lot that we all need to 
know about how the current programs work.
    Mr. Crippen. You can thank my colleagues for that, they do 
most of the work.
    Mr. Deal. As you know, the recent Conference agreement on 
the concurrent resolution on the budget, I believe, provides 
for about $300 billion over the next 10-year period. And I 
understand from your previous answer that you have not actually 
done a projection of that, but do you have a general sense of 
how that dollar figure would work to provide a basic program 
for pharmaceutical benefits?
    Mr. Crippen. I could refer you, Mr. Deal, to some of our 
examples up here. As you see, up and down the board here there 
are some--and these are, obviously, just very rough 
approximations--but you can pick one of these cases that was 
about $30 billion a year, and over 10 years it would be $300 
billion. Obviously, it depends on how soon you start and how it 
ramps up, and on lots of other details that would lie behind 
anything like this. But you could get a sense of what the kind 
of benefits you could provide for that number would look like.
    Mr. Deal. And, in fact, all of those scenarios fit within 
that general guideline, do they not?
    Mr. Crippen. Again, these are very rough numbers. We are 
trying to just show what the basic policy levers are. The cost 
depends a lot on how you structure the benefit, who administers 
it, and lots of other things, but this gives you a sense at 
least of the magnitude, and something like this--well, these 
are very rough. My colleagues are pointing out that the growth 
rates are quite dramatic, so that if you started at $30 billion 
per year, you would end up by the end of the period at probably 
over $60 billion. So these benefits are probably a little more 
generous than you could provide for $300 billion.
    Mr. Deal. In that regard, though, have you built into any 
of your calculations the argument that some make that if we 
provide pharmaceutical benefits, that that will then cut down 
on the cost of both Medicare Part A and Medicare Part B because 
the pharmaceuticals obviously would eliminate perhaps some of 
the hospitalization, some of the doctor visits. Has that been 
built in?
    Mr. Crippen. No, but it is not because we haven't 
considered it. We have looked at all of the research; of 
course, you might not be surprised to know that we have been 
offered much of that research by proponents. And, indeed, we 
have looked at it quite carefully, and find it so far not 
convincing. I mean, it is because this is a Medicare 
population--an elderly, not a general population--and the 
studies, many of them, haven't been constructed very well. And 
so we have looked at them and not been convinced that there are 
general savings from making pharmaceuticals available to 
people.
    In addition, there are going to be some additional costs 
because of adverse drug events happening for people who don't 
now get pharmaceuticals, and those are very expensive, 
emergency room kinds of treatment as well. So there are some 
costs. There may be some benefit. There is some evidence on 
that based on particular conditions, some heart conditions, 
that medication will save money. But, as a general matter, the 
access to pharmaceuticals and expanding pharmaceutical coverage 
on the one hand can cost money, and on the other can save 
money, and at the moment we are agnostic. We don't include 
anything in the baseline for that.
    Mr. Deal. Once again, a very subjective subject that is 
very difficult for you, as a number cruncher, I am sure, to 
calculate is another subject of, do we generally anticipate 
that our population, even though they are living longer as a 
general rule, that those entering the Medicare population 
figures are generally healthier than those who have preceded 
them? Is that a general fact that is confirmed?
    Mr. Crippen. Yes; not only are they younger but also, as 
longevity increases, 65-year-olds are more robust than maybe 
our parents were at 65.
    Mr. Deal. I believe that is all, Mr. Chairman, thank you.
    Mr. Bilirakis. Mr. Crippen, if the gentleman will yield 
very briefly.
    Mr. Deal. Yes, I will.
    Mr. Bilirakis. Should you not have considered that the 
availability of prescription drugs to all of the seniors would 
probably result in less hospitalization and less current usage?
    Mr. Crippen. As I told Mr. Deal, Mr. Chairman, we 
considered that, but as of now have seen no evidence we find 
convincing that access to pharmaceuticals among the population 
of the elderly that don't now get them will save substantial 
amounts of money.
    Mr. Bilirakis. There is a reluctance on the part of CBO to 
give any benefit to preventative care and that sort of thing, I 
have found over the years.
    Mr. Crippen. Sure; until we have fairly convincing 
evidence, we don't incorporate those kinds of savings into our 
baseline and, frankly, the studies are either quite weak or off 
the point that we have seen, and until we see some convincing 
evidence, we will not change that assumption.
    Mr. Bilirakis. Ms. Eshoo, to inquire.
    Ms. Eshoo. Thank you, Mr. Chairman. It is nice to see you, 
Dan, and thank you for your testimony. In the last Congress, 
President Clinton, as you know, introduced a plan to provide 
Medicare drug benefits. How much did CBO score that plan at? I 
remember it as $350 billion over 10 years, is that correct?
    Mr. Crippen. It sounds about right.
    Ms. Eshoo. Did CBO give any credit--is that your staff----
    Mr. Crippen. They are working as well; it is not just you 
and I.
    Ms. Eshoo. Did CBO give any credit for cost-savings in that 
plan, for the use of PBMs to deliver the benefit?
    Mr. Crippen. I think not much, if any--in part, first, 
because it was only required to be one PBM per region and, 
second, there were restrictions on what the PBMs could do in 
terms of management savings--they could not introduce a 
restrictive formulary, for example. So, I think we did not give 
much savings to--you are challenging my memory.
    Ms. Eshoo. Well, when you say not much, but it scored at 
$350 billion, I don't know what ``not that much'' is. I think 
that you understand the point I am trying to make.
    Mr. Crippen. I do.
    Ms. Eshoo. I think it is very important that we have 
competition in order to drive the price down. This is kind of 
an All-American agreement in terms of how our system works. And 
if anyone knows or realizes that we don't have a market, it's 
Californians and Westerners today, when we are talking about 
energy. So, we know that there needs to be competition in order 
to bring the price down, and that is why I am pursuing this 
thing about multiple PBMs. I think it is a very important 
approach about how we get it done.
    Didn't the actuary say that had President Clinton allowed 
PBMs to engage in open competition rather than limiting them to 
one PBM per region, they would have seen greater cost-savings?
    Mr. Crippen. Yes, and so would we, because we assume that 
multiple PBMs in competition----
    Mr. Crippen. Why wouldn't CBO do an analysis of that, 
though? I think that both sides of the aisle talk about the 
cost-savings that can be realized by seniors being able to have 
full access to prescription drugs, and that we encourage the 
new technologies to break through because we know that that 
drives that point home even more so, but it is only on our 
lips. We don't have a thorough analysis of it. And I think if 
CBO is going to really jump in with two feet, to be effective 
with the Congress, is that you do an analysis in these areas 
because that thorough analysis on a nonpartisan basis is going 
to give us that much better ammunition to pursue these various 
courses.
    So, I understand that there are groups and organizations 
that want you to accept their analysis. You need to do an 
independent analysis so that the Congress can make use of it. 
Can you tell us what you are prepared to do in this area?
    Mr. Crippen. Sure. We would like to think we have, although 
we can obviously always do more. Some of the proposals last 
year--the President's, as you said--have one PBM, and others 
have more than one; and so we did analyze the competitive 
effectiveness and discounts that might be available, if you 
will, or savings, but----
    Ms. Eshoo. And what were they relative to the plan?
    Mr. Crippen. Well, they range from 0 to 25 percent off 
retail pricing, but that depends critically on the details. For 
example, when you introduce----
    Ms. Eshoo. Did you develop the details?
    Mr. Crippen. We didn't. I mean, it depends on the details 
of your proposals, of the congressional proposals. There are a 
number of factors to be considered. Once you have competition, 
we presume there are some marketing costs because the competing 
plans are going to have to advertise for enrollees. If you make 
them take risk, the PBMs--which you probably want to do to give 
them incentives to save and manage--then there is going to be a 
risk premium. On the other hand, there are savings available 
through management of the drug benefit. But most of the 
proposals last year also included restrictions on the PBMs, as 
I suggested, like the President's. If they can't have 
formularies, if they can't do the kinds of things they do now--
encourage generics, for example--then they are not going to be 
able to realize the savings either. So there are some 
additional costs, there are potential savings----
    Ms. Eshoo. Well, we didn't have--we want them to take--to 
compete, I think it is very important. I think if we had one 
per region, then we are just back to square one. I mean, that 
is an old paradigm, and I don't think that that is going to 
work, myself. But, again, I think that--and the pharmaceutical 
companies have to have some risk in this, too. That is part of 
doing business. But they will have an awful lot of customers in 
this country.
    So, I hope that CBO will weigh in on these things and do 
some really specific, hard-nosed analysis because if we keep on 
the way we are going, it is going to be on our lips, there is 
not going to be the kind of analysis, and we get into political 
lockjaw. We just don't have the tools in the toolkit that we 
can take out to the American people and say--I mean, I used CBO 
as an example in my congressional district all the time.
    Mr. Bilirakis. The gentlelady's time has expired.
    Ms. Eshoo. At any rate, I hope that you will do this 
because I think that it is really important for you to do in 
this debate. Thank you.
    Mr. Bilirakis. Dr. Ganske, to inquire.
    Mr. Ganske. Thank you, Mr. Chairman. Mr. Crippen, I have a 
bill before Congress, H.R. 1387, which deals with high cost 
prescription drugs in a couple ways, one of which would be to 
raise the floor for the AAPCC payments for low-income rural 
areas primarily. Another would be to close loopholes in the 
drug reimportation bill that we passed last year, which would 
help everyone, I think. But the main component of the bill is 
basically to allow low-income seniors from the poverty line up 
135 percent of poverty to have a full Medicaid drug benefit 
through their State Medicaid drug programs, and then phase out 
the premiums for those from 135% of poverty to 175%. In your 
testimony you said you had made some estimates for something 
like that, phasing it out to 150 percent, I think.
    What I am interested in is this, can you give me an 
estimate for what my provision would cost if it is totally 
funded from the Federal side, taking into account that there 
are a number of seniors who are currently Medicaid-eligible but 
not in it, but probably would be if they had prescription drug 
benefit.
    Do you have an estimate for what that would be over 10 
years?
    Mr. Crippen. I don't know if we have an estimate with us. 
If we don't, we will certainly get you one because it is 
something we can do.
    Mr. Ganske. Will you look at the provision in my bill on 
that particular part, and see if you can give me an estimate.
    Mr. Crippen. Sure.
    Mr. Ganske. The way I look at it, it probably is going to 
be somewhere in the $300 billion range, $200 to $300 billion in 
additional costs. Some of it is already covered. But I 
mentioned in my opening statement that there was this adverse 
risk problem that Congress has been loathe to deal with. And 
which we currently have in three Medigap policies which do 
provide a prescription drug benefit, but, because of the 
adverse risk problem, are expensive since only seniors who have 
high drug costs tend to sign up for them.
    Do you have any suggestions for how Congress should deal 
with this problem?
    Mr. Crippen. Well, let me start out by saying that from 
what we are seeing on drug launch prices and on developments 
that your next panel will know much more about than I do, 
especially the BIO representative, there are going to be very 
specific drugs for very specific conditions, which, because of 
the smaller class of people that would need them, will probably 
be quite expensive. The only way to cover that in the way you 
are describing is to think of it as an insurance plan in which 
you have to attract many people who might potentially be 
eligible some day but who aren't currently--the classic 
catastrophic insurance benefit.
    How one does that on a voluntary basis is tricky. 
Obviously, there are many ways you could have the appearance of 
a voluntary program, but not a real one. If you made folks who 
wanted Part B accept a drug benefit at the same time, make it 
part of Part B, clearly most people would take it because of 
the 75 percent subsidy in Part B. But having a true voluntary 
benefit is always subject to adverse selection.
    With the Medigap policies, of course, it is not only true 
that there are three policies out of the ten prescribed by law 
that have pharmaceutical benefits. They are also the three at 
the bottom of the list, if you will, that have increasing 
coverage for other things. And so they are the most expensive, 
not only because they have pharmaceutical benefits but because 
they have kind of the most generous coverage for other things. 
Not that it is a good buy anyway, but you may want to think 
about how you structure the Medigap market to make 
pharmaceuticals closer to the top or a different kind of 
benefit. Those policies--while I know that many people are 
loathe to touch them--are prescribed in law, so they are an 
artifact of what the Federal Government is already doing.
    Mr. Ganske. When you make your estimate for prescription 
drug costs at over a trillion dollars for the next 10 years, 
how many multiples of that will it rise after the year 2012 
when the Baby Boomers start to retire?
    Mr. Crippen. We haven't done that--we have only a 10-year 
baseline--so we can't tell you, but one has to assume, as you 
say, that it is multiples, not only because you are doubling 
the population but because a pharmaceutical benefit would add 
to the utilization of prescription drugs. So we think it is 
currently $1.5 trillion for the next 10 years, without a 
pharmaceutical benefit. So, first, you have to double that for 
the doubling of the population over the next 20 years. Also, we 
believe drug costs are going to grow at about 10 percent per 
year per Medicare beneficiary, so that goes on top.
    So, as you suggest, it would be a multiple, certainly, of 
the $1.5 trillion for----
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Ganske. Will we be going back for a second round?
    Mr. Bilirakis. Well, I would prefer not, but I suppose we 
could go back for another minute or 2. Without objection, the 
gentleman's time is extended for an additional minute.
    Mr. Ganske. Thank you, Mr. Chairman. See, Mr. Chairman, you 
interrupted my line of thought.
    Mr. Bilirakis. Well, that is my job.
    Mr. Barton. The clock is ticking.
    Mr. Ganske. I know it. I will tell you what, I will finish 
it up later, Mr. Chairman. Thanks.
    Mr. Bilirakis. The Chair apologizes.
    Mr. Ganske. I was on a roll.
    Mr. Bilirakis. Mr. Green, to inquire.
    Mr. Green. Thank you, Mr. Chairman. Your question a few 
minutes ago about not the ability of CBO to quantify the 
preventions that would be used from taking your medication as a 
cost-savings, I think that would be good for whether it is CBO 
or someone else to do a real study to see if you can quantify 
that because we have all sorts of things that talk about 
immunizations prevention, we can save dollars on that, and it 
seemed like you could do the same thing, and maybe, Mr. 
Chairman, our committee ought to work on getting, whether it is 
CBO or CRS or someone else, to see if we can't quantify that 
for seniors on the medication cost. I think that is a good 
idea, which leads me to my question about the cost, Mr. 
Crippen.
    CBO is increasing the amount that we would expect on the 
baseline estimates for spending on prescription drugs over the 
next decade by one-third. As a result of your new assumption, 
CBO ought to be rising its estimates on whatever bills that are 
introduced this session.
    If CBO is increasing its baseline spending for prescription 
drugs by one-third, what does that mean for the cost of senior 
citizens without a prescription drug benefit for their cost. We 
are assuming it will also go up one-third because the report we 
put in the record, they went up 19 percent for those highest-
use drugs just in 1 year. So the out-of-pocket expenditures for 
seniors will go up one-third, maybe even more. Could you just 
respond?
    Mr. Crippen. That is entirely possible. Certainly, when we 
increase the baseline without a drug benefit, a Medicare drug 
benefit, that means that spending for pharmaceuticals for the 
elderly, absent a change in law, has gone up, we believe, over 
this 10-year period, by 30 percent. That is half due to the 
cost increase, and half due to just the 10-year period moving 
up 1 year. But we don't know how the proportions change.
    There is some anecdotal evidence that employers are 
tightening their retiree benefit package, especially for 
pharmaceuticals. If that is the case, then one would assume 
that the elderly are either not going to get as many 
pharmaceuticals or will pay more out of pocket. So it depends a 
lot on the reaction of the third-party payers as well. It isn't 
clear that it would just simply raise out-of-pocket spending by 
a third; it could be more, it could be less.
    Mr. Green. When we see what happened in that study that, 
again, is part of the record, the 19 percent, and when you 
factor that in with seniors, their retirement income, for 
example, Social Security payments over the last 2 or 3 years 
has fluctuated at an increase between 1.5 and 3.5, I guess for 
the last 6 years.
    So, if Social Security payments are only going up less than 
3.5 percent yet on an annual basis for those five mostly used 
drugs, at least a third, but maybe even substantially more for 
the highest use drugs, I think that probably makes the case on 
why Congress needs to do something because, whether it be the 
Federal Government doing it, the taxpayers, the Medicare, or 
through the seniors who are going to have to be paying it out-
of-pocket, the cost is going to be there, one way or the other.
    Mr. Crippen. Of course, while you are right that the growth 
rates are much different, certainly, than that of the Social 
Security benefit, other income could be growing faster. But, 
more important, it really depends on how much of their income 
is dedicated to pharmaceutical benefits versus anything else. 
As always, the rates of growth are important, but also the 
relative size. If it is $10 out of $1,000, then the fact that 
it grows faster than the $1,000 is less important. But, 
clearly, pharmaceuticals are a growing proportion of what the 
elderly are buying.
    Mr. Green. The Democratic proposal last year on 
prescription drug benefit offered a 50-percent premium subsidy 
for seniors who participate in the program. The subsidy was 
included in order to get enough seniors to enroll, so we would 
limit the adverse selection problem. And, again, a voluntary 
program, you want to make it--you want to sweeten it enough to 
get more people to come into it, other than the people who just 
have ten medications they have to take.
    CBO stated that the premium subsidy necessary in order to 
maximize participation and decrease that adverse selection. 
What percentage government subsidy do you assume is necessary 
and what percentage of government subsidy would result in 
nearly universal participation, as is true with Medicare Part 
B, for example.
    Mr. Crippen. We have adopted the assumption that the HCFA 
actuaries have been using, and that is that a 50 percent 
subsidy will get you near-universal coverage--that is, anyone 
who is currently in Part B would also enroll in the drug 
benefit with a 50 percent subsidy.
    Mr. Green. So, when we are crafting legislation, we 
probably ought to look at that to make sure we don't create 
adverse selection?
    Mr. Crippen. Certainly, yes.
    Mr. Green. Thank you, Mr. Chairman. I yield back.
    Mr. Bilirakis. Thank the gentleman. Mr. Whitfield, to 
inquire.
    Mr. Whitfield. Thank you, Mr. Chairman. I think Mr. Ganske 
has regained his thought process, so I am going to yield him 30 
seconds.
    Mr. Ganske. Mr. Crippen, when you made these calculations 
for this comprehensive bill, did you take into account whether 
private employers will then drop away from providing coverage?
    Mr. Crippen. We assume, Mr. Ganske, that they will take 
advantage of whatever the Federal benefit is, to the extent 
they can--that is, like they do now, wrap around the existing 
Medicare program if it is to their benefit--but we don't assume 
they will drop coverage. In fact, we assume they will continue 
coverage but take advantage of whatever the Federal program 
will pay.
    Mr. Ganske. And, finally, now much of an increase in the 
baseline did you increase the cost from 6 months ago when you 
gave us the estimates on the bills that were before Congress?
    Mr. Crippen. It is a little over 30 percent.
    Mr. Ganske. So, if we increase the baseline by 30 percent, 
do we not disproportionately increase the cost of that 
catastrophic part because it increases the coverage?
    Mr. Crippen. We certainly could. It depends on where the 
increases are--as I said, in which parts of the population, of 
course--and on what is driving the price increases or the cost 
increases. Let me back up 1 second. There are two pieces to the 
baseline increases. One is just moving 1 year down the road 
from 2001--dropping that year and adding 2011. That added about 
15 percent because it is a higher-cost year out in the future. 
So about half of the increase is due to that. The other is just 
due to cost increases that we have seen in the recent past. 
Whether it is prices or utilization, it is a cost increase. So 
it depends on where those cost increases are taking place, and 
I am not sure we have good assumptions about which part of the 
distribution is seeing increases. For example, if the cost 
increases all took place among people who were normally buying 
$500 worth of drugs a year, that wouldn't change the 
catastrophic threshold--that wouldn't change the catastrophic 
cost. But what you are saying is not a bad assumption as a rule 
of thumb.
    Mr. Ganske. I thank the gentleman for yielding me the time, 
and I just point out that in just 6 months we have had a 30-
percent increase in the baseline estimate.
    Mr. Whitfield. Mr. Chairman, would you tell me how much 
time Mr. Ganske took?
    Mr. Bilirakis. Half of your time.
    Mr. Whitfield. Give him an inch, he will take a mile.
    Mr. Crippen, in your base case, you are assuming there 
would be one PBM per area.
    Mr. Crippen. Right.
    Mr. Whitfield. Did your assumption also include that there 
would be a reduction, overall reduction, in the cost of the 
prescription drug because of the PBM's management?
    Mr. Crippen. Yes, some.
    Mr. Whitfield. And what was the percentage?
    Mr. Crippen. I don't remember what the--12.5 percent. Think 
of that as a discount from the retail price.
    Mr. Whitfield. Okay. Now, under the base case, the total 
cost to the Federal Government under that case would be the 
$31.6 billion plus the $44 billion cost-sharing on the other 
side?
    Mr. Crippen. No, the cost sharing is what the beneficiaries 
would pay, those beneficiaries that actually bought drugs. 
Their half, their copayments, their cost share, would be $44 
billion, so that the--that is part of what the beneficiaries 
are paying in this base case, plus premiums.
    Mr. Whitfield. So, in this base case, they would pay half, 
up to $8,000, so they would pay $4,000 for an $8,000 
expenditure, and anything past that the Federal Government 
would pay all of that?
    Mr. Crippen. Well, anything past that all Medicare 
beneficiaries--not just those who had drug costs--would pay, 
half of it through premiums. So the difference is that those 
who used the benefit or bought prescription drugs would pay 
$44.4 billion here, in this base case. Every Medicare 
beneficiary, through premiums, would add up to $26 billion.
    Mr. Whitfield. Now, you would expect a Medicare drug 
benefit would hopefully reduce the cost of hospitalization. Did 
you all consider that in any way?
    Mr. Crippen. No, we haven't. We have considered it, but we 
haven't included it because, as I told a couple of the other 
gentlemen, we haven't seen convincing evidence that it 
systematically saves money. There are certainly some particular 
diseases in which it could; on the other hand, it will cause 
some additional adverse drug reactions because more people will 
be taking drugs. So at this point, we don't think it saves a 
considerable amount of money in other parts of the benefit.
    Now, we remain to be convinced, and can be convinced, but 
we haven't seen any evidence so far.
    Mr. Whitfield. Twenty-six States provide a prescription 
drug benefit through the Medicaid program. Do you have any 
concern that if we adopt a program at the Federal level, that 
the States would start dropping their Medicaid prescription 
drug benefit and those people would move over?
    Mr. Crippen. It is certainly possible that States--
actually, most States now have a Medicaid drug benefit of some 
kind, and 26 States are actually adding benefits above that to 
other beneficiaries. And as we were discussing, they could 
either fail to put more money in, those 26 States, if we had a 
Federal benefit, or the States certainly could benefit from a 
Medicare program in which those dual-eligibles that are now in 
Medicare and Medicaid--those folks, of course, could save the 
States money if Medicare were paying the pharmaceutical 
benefit.
    So it is entirely possible that Medicaid expenditures--of 
both the Federal and State governments--could decrease, 
depending upon how the benefit is structured.
    Mr. Whitfield. Do you have any sense on whether--I see my 
time has expired, Mr. Chairman.
    Mr. Bilirakis. Very quickly, if you have something.
    Mr. Whitfield. I would have to see.
    Mr. Bilirakis. I appreciate that. Mr. Wynn, the gentleman 
from Maryland, to inquire.
    Mr. Wynn. Thank you, Mr. Chairman. Mr. Crippen, I also want 
to thank you for your presentation, it has been an excellent 
presentation. I have learned a great deal.
    Question. If I understand correctly, the $300 billion that 
has been itemized in the budget proposal by the Majority 
identifies this is for Medicare reform, is that correct, that 
is specifically for prescription drugs.
    Mr. Crippen. My impression was, and this is more--maybe my 
colleagues know, and I will refer this to them in just a 
second. My impression was that it was to be used for Medicare 
and be released by the Budget Committee Chairman, and I think 
it is both for reform and pharmaceuticals. My colleagues tell 
me that is about right.
    Mr. Wynn. Now, I think what you have said, and correct me 
if I am wrong, that this figure could fund baseline or within 
the parameters of your examples, a prescription drug plan, but 
that would absorb all of the $300 billion, leaving none for the 
reforms. So my question is, what are the other reforms that are 
contemplated, and how much do they cost?
    Mr. Crippen. So far, we haven't seen any legislative 
proposals for reforms, and you are probably not surprised 
because most of the reforms that have been discussed have to do 
with how one would save money, reducing costs in the future. 
So, the peril, of course, of proposing that very specifically, 
for us to estimate the savings, is obvious. We haven't seen any 
reform legislation that would cost more either, so the answer 
is, I don't know.
    Mr. Wynn. So you would say that we could use all $300----
    Mr. Crippen. You could use more or less than that for a 
drug benefit, as you can see from some of our examples. We 
aren't trying to propose this as a drug benefit; we are just 
using this as an example to say, this is how it would change.
    Mr. Wynn. I think you also said that at some point along 
the 10-year spectrum, the $30 billion would be inadequate and 
you would begin to move toward something more akin to $60 
billion, is that correct?
    Mr. Crippen. Correct.
    Mr. Wynn. At what point does that begin to occur?
    Mr. Crippen. My colleagues tell me that a $30 billion 
first-year benefit would likely double in about 6 years.
    Mr. Wynn. So----
    Mr. Crippen. So if you started something in 2004, which is 
probably the first year you could do it, by the end of 2010, or 
2011, you would have doubled it to $60 billion.
    Mr. Wynn. Which would mean we really would need about $600 
billion to make it through the entire----
    Mr. Crippen. Well, the average would be probably $45 
billion yearly, if it had a----
    Mr. Wynn. So we really need about $450 billion rather than 
$300.
    Mr. Crippen. Over the 10 years.
    Mr. Wynn. Over 10, all right.
    Now, you say there is a 50-percent subsidy, is that in 
premium and co-pay?
    Mr. Crippen. Yes.
    Mr. Wynn. Your base example had a 250 deductible, is that 
reduced participation?
    Mr. Crippen. We assumed it did not, that anyone who was 
eligible--or anyone who was currently in Part B of Medicare, 
because there would be a 50-percent subsidy overall--would 
enroll in this benefit.
    Mr. Wynn. And not be deterred in any way by the deductible.
    Mr. Crippen. Exactly.
    Mr. Wynn. And so the absence of a deductible is not a 
problem at all.
    Mr. Crippen. We don't assume any change in participation--
which is not to say there couldn't be, but, certainly, for 
purposes of this exercise, we don't assume any change in 
participation because of the deductible.
    Mr. Wynn. If you would indulge me, I know you covered this 
with my colleague, Ms. Eshoo, but I wasn't exactly clear on it. 
You are recommending only one PBM, is that fair?
    Mr. Crippen. No, we are not recommending it; we use that in 
this example because many of the proposals last year--like the 
President's proposal--had one. We would--and I didn't get a 
chance to go completely through it with her--we would say that 
more than one PBM likely would save money over these estimates, 
if you had two or more in competition. But there are other 
factors that apply. Competition costs money as well: you have 
to pay risk premiums and marketing costs. And depending upon 
what restrictions you put on the PBMs or the managers, you 
could have two or three, but if you didn't let them do anything 
to save money, it wouldn't do you any good--for example, 
disallowing them from having tight formularies or generic 
promotion or other things. So, it depends----
    Mr. Wynn. Let us assume you did those types of things, 
would you claim a net gain or a net loss?
    Mr. Crippen. Net gain. I mean, if you put restrictions on--
I'm sorry?
    Mr. Wynn. If you put restrictions on----
    Mr. Crippen. Probably a wash then, or a slight gain.
    Mr. Wynn. Slight gain being an increase in cost?
    Mr. Crippen. I'm sorry--slight decrease in cost.
    Mr. Wynn. So you have a slight decrease in cost with 
multiple PBMs even though you impose conditions?
    Mr. Crippen. Yes. But, again, it would depend on what the 
conditions weren't--some of the things they can do save more 
money than not--and how much risk they were being asked to 
take.
    Mr. Wynn. One final question. There is a lot of talk, I 
guess these high weeds again, about the outyear impacts of the 
tax cut, particularly with respect to the rate adjustment and 
also with respect to the estate tax.
    What is the impact of those outyear costs increasing at the 
same time that the outyear costs for the prescription drug plan 
also begin to, in your words, double? I mean, do we in fact run 
into a deficit situation, given the figures that have been laid 
out for tax cuts and the figures that have been laid out for a 
prescription drug plan?
    Mr. Bilirakis. The gentleman's time has long expired. 
Please answer, but keep it brief.
    Mr. Crippen. In these next 10 years--which is all we have 
from the Joint Committee on Taxation, I believe, but certainly 
for spending--the things add up, as we suggested earlier. After 
that, we don't know, and, fortunately, we don't do, in this 
case, tax estimates. So the Joint Committee would have to 
provide year 10 through year 30, or year 20, and I am not sure 
they can do that, either. So over the next 10 years, the answer 
to your question is, the budget resolution numbers do add up, 
but how it gets implemented is critical, and we don't know what 
happens after the 10 years.
    Mr. Wynn. Mr. Chairman, could I ask for 5 seconds, and I 
promise I will stay----
    Mr. Bilirakis. You have already used the 5 seconds in your 
request.
    Mr. Wynn. Thank you, Mr. Chairman.
    Mr. Bilirakis. Go ahead, please.
    Mr. Wynn. Thank you, Mr. Chairman. Does that include your 
projection that the cost will double beginning in year 6?
    Mr. Crippen. No, because we don't have any--I mean, we 
don't have a drug benefit in our projection. What we have is a 
baseline, and then if you take those numbers minus $300 
billion, the numbers can still add up in some sense, but we 
don't have a particular drug proposal that we have priced. So 
if you had a drug proposal that started at $10 billion and grew 
to $20 billion, obviously, it would fit very well. If you had 
one that started at $30 billion annually, however, and it grew 
to $60 billion, the $300 billion wouldn't accommodate it. So it 
depends on where you start.
    Mr. Wynn. Thank you very much. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Crippen, of course, will respond to 
written questions.
    Mr. Crippen. Absolutely.
    Mr. Bilirakis. Dr. Norwood, to inquire.
    Mr. Norwood. Mr. Crippen, I have a number of questions that 
I would like for you to respond in writing. I can't get to them 
all right this minute.
    Mr. Crippen. Sure.
    Mr. Norwood. Just a quick little history lesson. When did 
CBO come into being?
    Mr. Crippen. 1975.
    Mr. Norwood. 1975. Who was around in 1965 that was able to 
give an estimate to President Johnson for the cost of Medicare?
    Mr. Crippen. I assume it was then the Department of Health, 
Education, and Welfare.
    Mr. Norwood. Is there any way to find out what that 
estimate was? Is that----
    Mr. Crippen. I think we actually have it. I am sure we 
don't have it with us, but----
    [The following was received for the record:]

    [GRAPHIC] [TIFF OMITTED] T2830.009
    
    [GRAPHIC] [TIFF OMITTED] T2830.010
    
    Mr. Norwood. I would love to know.
    Mr. Crippen. Again, I have seen it alluded to, but 
obviously the estimates were ten times too low, or something 
like that.
    Mr. Norwood. I have heard some very interesting numbers, 
and I would like to know exactly what they are. Now, what you 
have given us today is not a formal CBO estimate, but I think 
we are calling it a ballpark estimate, and one of the important 
issues not addressed by the model is how CBO will adjust its 
estimate to account for an increase in demand, which is going 
to result from increase in drug coverage. Can you give us some 
idea of how you are going to account for that? I mean, we know 
that is going to happen, I think. Perhaps we don't have any 
evidence, but we certainly can assume that it is going to 
happen.
    Mr. Crippen. There are two aspects that we have included 
some of, I believe, in the models, and that is, first, there is 
going to be a price increase because of the demand increase--
about 10 percent, as I recall, over the 10 years. And there 
will be some increase in utilization as well. I don't remember 
what our assumption is for sure there, but it is one of those 
areas, as I think you are suggesting, if I understand you, that 
we don't know very well how much more utilization there will 
be. We have a fair number of people insured now--70 percent--so 
that leaves 30 percent of beneficiaries. But it is important 
for all of us to remember, too, that just because you are 
insured doesn't mean you have adequate pharmaceutical coverage. 
Likewise, just because you are uninsured doesn't mean you don't 
have adequate coverage. The same study that was entered in the 
record earlier today, I think, is the one that suggests that 
those folks who are the insured elderly are filling 
prescriptions at a rate of about 24 or 25 a year, and those who 
are uninsured are filling about 15 prescriptions a year. So, 
the elderly are getting----
    Mr. Norwood. Are you going to be able to give us those, 
perhaps not formal, but ballpark estimates of that?
    Mr. Crippen. On utilization?
    Mr. Norwood. Yes.
    Mr. Crippen. Sure.
    Mr. Norwood. I was very intrigued by some earlier questions 
about the comment about employers dropping coverage should we 
have universal prescription drug benefit, and you said that you 
have made some assumptions that that probably is going to 
happen.
    Mr. Crippen. What we assume is that whatever the Federal 
benefit would provide, employers would no longer provide. They 
would wrap around that benefit, as they do now.
    Mr. Norwood. That is a logical assumption. I would assume 
the same thing.
    Mr. Crippen. But if they now have benefits that are, say, 
more generous than whatever the Medicare benefit was, they 
might continue to add to the Medicare benefit. We don't assume 
that they will drop coverage altogether.
    Mr. Norwood. That leads me then to another part of this 
question. I am a little amazed that you don't seem to find a 
way to score prevention. And your answer about that was that 
there is no evidence. But that is a very good place to make 
some assumptions that can be fairly intelligent.
    If a patient has, for example, a chronic bleeding ulcer, 
and they need medication for that, Prilosec which is very 
expensive--let us make a number, $100 a day--and we also know 
for sure that hospital cost is going to be $3,000 a day, and if 
the patient goes to see the doctor and the doctor prescribes 
Prilosec and the patient can't afford to fill the prescription, 
and 3 weeks later ends up in the hospital for 3 weeks, it is 
not hard to figure out we have spent a lot of money, and we 
could have preventively saved a lot of that money for the Trust 
Fund.
    I would like for you to go back again and make some 
assumptions in that area, since you obviously don't have 
evidence in that area, because it makes it very hard for me to 
take numbers credible when you assume in one area but won't 
assume in another area because of evidence. And I would like 
for you to speak to that because it has got to be a savings if 
we get people on their medications.
    Mr. Crippen. There is certainly--in the kind of case you 
just outlined, there would obviously be savings. As I said, 
there is some anecdotal evidence that other conditions--for 
some heart conditions, medications clearly save money. But, 
overall, the studies we have looked at--which try to look at 
all of the drugs for the Medicare population or try and make 
some inferences about beneficiaries--don't apply, and it isn't 
systematically evident that all available drugs would--or that 
making drugs more available would have savings everywhere.
    If, for example, the person who got the Prilosec had an 
adverse drug reaction because they were on another drug, that 
would cost money as well. I mean, we concede that there may 
well be savings, but we don't have evidence for how much it 
would be and where it would occur. We do know there would be 
some costs as well. So, until we see that kind of systematic 
evidence, again, we note the anecdotal cases, and, clearly, in 
some cases drug coverage would save money.
    Mr. Bilirakis. We really should finish up with Mr. Crippen 
before we go over to vote because it is not fair otherwise. I 
brought up that point before and I really feel that CBO has 
been wrong over the years in not providing more attention to 
preventative health care.
    Mr. Norwood. Well, assumptions could be in order, Mr. 
Chairman, not just necessarily just evidence. I mean, common 
sense leads us to believe----
    Mr. Bilirakis. And the entire thing is based on assumption, 
let us face it. Well, Mr. Engel, if you can do it quickly, I 
would appreciate it because we have Mr. Greenwood yet, and we 
have to take those votes.
    Mr. Engel. Yes, I will be quick, Mr. Chairman. First of 
all, thank you, and I have a statement which I would like to 
submit for the record.
    Mr. Bilirakis. Without objection.
    Mr. Engel. My beef is that I think there was a lot of talk 
before the election about prescription drugs for seniors, and I 
hear less talk about it now that the election is over. And I am 
very concerned that the $350 billion is not going to be enough, 
and that while we are saying that we are going to put money--
give money--have money for this program for poor seniors, in 
reality, a lot of the seniors who really are poor are going to 
be excluded because they are going to be deemed not poor 
enough, and that is my big fear.
    The one question I would like to ask is that many seniors 
have large amounts of bills, but they have drug expenditures 
that probably would not meet a catastrophic limit. So, what I 
would like to ask you is, the President has proposed creating a 
drug benefit for low-income seniors and a catastrophic benefit 
that would help all seniors with very, very high drug costs. 
And while it is true that a small number of seniors have very, 
very high drug costs, the vast majority of seniors whose drug 
costs are high enough, would not be helped by a catastrophic 
plan. It is probably not uncommon for a senior without drug 
coverage to spend $1,500 or $2,000 a year on prescription drug 
costs, and it may not sound like a huge amount, but it is a 
sizable chunk for a senior with an income of 175 percent of the 
Federal poverty level, which is $15,000 a year for a single 
person, and that person would not qualify for the President's 
low-income assistance plan.
    So, my question is, does CBO have an estimate as to what 
percentage of seniors have drug costs in the $1,000 to $3,000 
range, and what percentage of total drug spending for Medicare 
beneficiaries falls within this range?
    Mr. Crippen. We do. I don't know that I brought along the 
number of people, but you wanted $1,500. Was that----
    Mr. Engel. Well, $1,000.
    Mr. Crippen. I could give you almost anything and will be 
happy to, but----
    Mr. Engel. The $1,000 to $3,000 range. What I am trying to 
figure out is what percentage of seniors would really benefit 
from this catastrophic plan because it seems to me that a lot 
of seniors who should benefit, who need the help, wouldn't be 
covered under this plan.
    Mr. Crippen. At a $1,000 catastrophic limit, you would 
cover $1.1 trillion of the $1.5 trillion in costs over the next 
10 years. So you would get a lot--obviously, a lot of spending, 
but you would cover a lot of people. I don't have the number of 
folks that this would cover, but it would be a very large 
percentage.
    Mr. Engel. Could you get that to my office, I would 
appreciate it.
    Mr. Crippen. Sure. I am happy to give you other--I brought 
this little table that has all these ranges; some of it is on 
page 33 of my prepared statement.
    Mr. Engel. I am just, again, very concerned that, you know, 
I always get complaints, and rightfully so, from seniors who 
say, ``You know, we really need help, and yet we are just a 
little bit above so we don't qualify,'' and I am afraid that 
the monies that we are putting forth and the President's plan 
is going to perpetuate that, and there are a heck of a lot of 
seniors out there that really need our help, and my fear is we 
are not going to give it to them.
    Mr. Crippen. We have included in the submitted testimony--
on page 33--Table 3, which has some--it may not have every 
breakdown you want, but it has spending for all enrollees above 
a given level and the share of enrollees that would be covered. 
So the second part of your question, which is not on this 
table, is included in the written testimony.
    Mr. Engel. Okay. We will follow up, I would like that. 
Thank you, and thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman. Mr. Crippen, thank 
you so very much for being here, you have been an awful lot of 
help. You are going to continue to be a lot of help, I trust, 
in this process because in spite of what some of the people 
have said here this morning, the No. 1 issue insofar as the 
entire Congress is concerned, particularly the House, is 
prescription drugs for seniors on a universal type of a basis. 
Thank you very much. And, of course, you are available for any 
written questions.
    Mr. Crippen. Absolutely, or any other.
    Mr. Bilirakis. We are going to recess. Hopefully the next 
panel can then come forward, but we will recess for this vote, 
and come back and go right into it. I don't think it is right 
to take a break for lunch because you have been waiting here 
for so very long. About 15 or 20 minutes, for however long it 
takes 3 or 4 of us to get back.
    [Brief recess.]
    Mr. Bilirakis. The Chair apologizes to the witnesses. I 
think at least a couple of you are experienced at this game, 
and so you know what it is like. Hopefully, we will be able to 
get finished up, before we get called again.
    Panel 2 consists of Dr. Beatrice Braun, a Member of the 
Board of Directors of AARP. She has appeared here before and 
does a terrific job. Glad to see you back.
    Dr. Jeanne Lambrew, Associate Professor of the Department 
of Health Services Management and Policy, right here at G.W. 
University, and Mr. Robert Chess, who is the Chairman of Inhale 
Therapeutics Systems in San Carlos, California, here on behalf 
of Biotech Industry Organization.
    Welcome. We will set the clock at 5 minutes. Obviously, 
your written statement is already a part of the record. 
Hopefully you would complement it or supplement it, and we will 
start off with Dr. Braun. Please proceed, ma'am.

STATEMENTS OF BEATRICE BRAUN, MEMBER, BOARD OF DIRECTORS, AARP; 
 JEANNE M. LAMBREW, ASSOCIATE PROFESSOR, DEPARTMENT OF HEALTH 
 SERVICES MANAGEMENT AND POLICY, GEORGE WASHINGTON UNIVERSITY; 
  AND ROBERT CHESS, CHAIRMAN, INHALE THERAPEUTICS SYSTEMS, ON 
       BEHALF OF THE BIOTECHNOLOGY INDUSTRY ORGANIZATION

    Ms. Braun. Thank you, Mr. Chairman and members of the 
committee. I am Beatrice Braun, from Springhill, Florida, just 
about 5 miles from the chairman's district, and a member of the 
AARP's Board of Directors. Thank you for the opportunity to 
come before you today.
    As a Medicare beneficiary, I would like to reiterate the 
statement that many members made this morning, that Medicare is 
the indispensable source of health benefits for older Americans 
and those with disabilities, but over the last two decades, a 
lack of a prescription drug coverage in Medicare has become a 
critical gap as modern medicine has turned increasingly to drug 
treatment.
    A prescription drug benefit in Medicare would improve 
quality of care, reduce unnecessary hospitalizations, and also 
offers a potential to reduce the risk of drug interactions and 
polypharmacy.
    Private health benefit plans generally have kept pace with 
advances in their benefits for workers, but not so for 
retirees. In the 1980's, an estimated 60 to 70 percent of large 
employers offered retiree health benefits. By 1993, that had 
dropped to 40 percent, and in 2000 it had gone from 70 percent 
down to 24 percent.
    Other sources of drug coverage for Medicare beneficiaries 
are also inadequate or undependable. Medigap plans provide 
prescription drug coverage in only three of the standard ten 
plans, and these plans are expensive and have limits on the 
benefit.
    Medicare+Choice plans are dropping out of Medicare, as I 
know too well in my county, increasing premiums or reducing 
benefits. One-third of Medicare beneficiaries do not have any 
prescription drug coverage, but this figure obscures the 
shortcomings of current coverage options, and the fact that 
only 53 percent of beneficiaries have prescription drug 
coverage all through the year.
    AARP is committed to creating a prescription drug benefit 
in Medicare, and has identified fundamental design features for 
developing a prescription drug benefit. In the simplest terms, 
the benefit under Medicare needs to be available and affordable 
to all beneficiaries. A prescription drug benefit in Medicare 
should also be voluntary so that beneficiaries who already have 
coverage can keep it if they want to.
    But designing a viable voluntary benefit is challenging. 
Beneficiaries must want to buy into a voluntary benefit. It 
must be attractive and affordable enough to draw a broad, 
stable risk pool. What does this entail?
    First, availability must be nationwide. Beneficiaries 
living in rural, suburban, and urban areas must be assured that 
the drug benefit is not only going to be part of 
Medicare+Choice plans, but that it will always be available in 
their community. In short, it must be available in the 
traditional Medicare fee-for-service plan.
    It must be affordable. This means the premiums and cost-
sharing must be reasonable in the eyes of middle-income and 
healthy enrollees. Thus, the government contribution must be 
adequate to ensure enrollment of a balanced risk pool. Without 
a broadbased risk pool, a voluntary benefit will be left with a 
disproportionate number of beneficiaries with high drug costs, 
prompting a rapid rise in premiums.
    A Medicare prescription drug plan should include a defined 
benefit. A defined benefit package is easy for consumers to 
understand, it is dependable, and it will improve the risk 
pool.
    Mechanisms to constrain cost must ensure that beneficiaries 
and other taxpayers receive value for their premium and tax 
dollars. And cost restraint cannot simply involve the shifting 
of cost to beneficiaries.
    Affordability also requires additional subsidies for 
beneficiaries with low incomes. Improvements are needed in the 
current low-income protection known to this committee as the 
QMB and SLMB programs. These programs are funded through 
Medicaid, but they are paid for by Medicare premiums, 
deductibles and co-insurance of beneficiaries below certain 
income thresholds.
    It is essential that similar protections complement a 
prescription drug benefit and continue to be funded through 
Medicaid to help low-income beneficiaries pay for their 
prescription drugs and other Medicare services.
    Part of the debate over adding a prescription drug benefit 
in Medicare is whether and to what extent additional changes to 
Medicare are necessary. Some changes in Medicare are necessary. 
Incremental, step-by-step improvements can begin to make a 
difference in the program without being disruptive to current 
and future beneficiaries.
    Without attempting to be all-inclusive about possible 
reforms, I would highlight the need to expand and adequately 
fund beneficiary education and outreach, which is vital to 
Medicare+Choice, and to build a modern, efficient information 
technology system for the program.
    In broader terms, Medicare's administrative structure must 
guarantee seamless operation of traditional fee-for-service, 
private plan options, and any prescription drug benefit, and 
the agency that oversees Medicare must have the resources and 
the flexibility it needs to continue to improve the program.
    AARP is ready to continue to work with the committee, the 
Congress and the Administration to help shape a benefit in 
Medicare that will be affordable and meaningful and will make 
room for the changing role of pharmaceuticals in medicine. 
Thank you.
    [The prepared statement of Beatrice Braun follows:]

        Prepared Statement of Beatrice Braun, AARP Board Member

    I am Beatrice Braun from Spring Hill, Florida and a member of 
AARP's Board of Directors. Thank you for the opportunity to discuss 
with you today the need for a prescription drug benefit in Medicare.
    The Medicare program has been, is, and will likely remain the 
nation's principal source of health benefits and a key source of 
financial protection for older Americans and those with disabilities. 
The program also provides financial protection for the families of 
Medicare beneficiaries, and it further serves younger Americans with 
its guarantee of future protection as they plan their retirements. In 
addition, Medicare is a strong and stable underpinning of the financing 
of our nation's health care system.
    As we examine approaches to updating Medicare, it is essential that 
we modernize the Medicare benefit package. In particular, it is time to 
add an outpatient prescription drug benefit in recognition of the 
changing health care technology that has made prescription drugs an 
increasingly important--now central--component of modern medical care. 
A prescription drug benefit in Medicare would improve the quality of 
health care received by millions of older Americans. It could reduce 
unnecessary hospitalizations and shorten nursing home stays. A well-
managed benefit also offers the potential to reduce the risks of drug 
interactions and polypharmacy by helping to assure that beneficiaries 
are taking the right medications in the correct dosages. It makes no 
more sense to have a Medicare program today without prescription drug 
coverage than it would to have a program that excludes inpatient 
hospital or physician coverage.

Background
    Medicare today--while the centerpiece of health benefits protection 
for retirees and those with disabilities--covers only about half of the 
health spending of older Americans. Further, Medicare beneficiaries 
spend a significant share of their income on health care. In 2000, out-
of-pocket costs for older beneficiaries averaged $2,580 or 19 percent 
of their income. While Social Security and Medicare have done a 
wonderful job in assuring a floor of income support and financial 
protection for older Americans, the fact remains that increasing health 
costs for older individuals coupled with lower incomes in their 
retirement years often makes the costs of uncovered benefits 
unaffordable.
    As illustrated in Charts 1 and 2, more than half of individuals age 
65 and older live in households where the total income is less than 
$25,000 per year. Looked at another way, more than half of individuals 
over 65 have per capita income of less than $15,000 per year. Fewer 
than 10 percent of individuals and fewer than 20 percent of households 
had income over $50,000 in 1999.

The Need for a Prescription Drug Benefit in Medicare
    Over the last two decades, the lack of prescription drug coverage 
has become a critical gap in the Medicare program as modern medicine 
has turned increasingly to drug treatments. Our nation's long-term 
investment in biomedical research has yielded enormous scientific 
progress--and the recent budgetary commitment to doubling the NIH 
budget highlights our intent to continue that progress. Those 
investments, coupled with the pharmaceutical industry's spending on 
research and development, have yielded an array of medications that 
could not have been even imagined when Medicare was enacted in 1965.
    Private health benefit plans throughout the nation generally have 
kept pace with these advances in their benefits for workers. Employers 
have recognized the longer-term economic and health care value of 
providing coverage for prescription drugs. Medicare should do the same. 
According to a 2000 Mercer/Foster Higgins survey, 99 percent of 
employer-sponsored health plans offered outpatient prescription drug 
coverage to current workers. However, employers are finding it 
increasingly difficult to offer health benefits to retirees to 
supplement their Medicare protection. As a result, health care coverage 
for retirees is plummeting. An estimated 60 to 70 percent of large 
employers offered retiree health benefits in the 1980s. But by 1993 
only 40 percent of employers with 500 or more employees offered health 
benefits to future Medicare-eligible retirees, and by 2000 this number 
had dropped even further to 24 percent [2000 Mercer/Foster Higgins 
Survey (forthcoming)]. Of employers who do offer retiree benefits, 21 
percent do not include prescription drug coverage for Medicare-eligible 
retirees. Moreover, a recent Hewitt survey of large employers indicates 
that 36 percent of those employers are considering cutting back on 
prescription drug coverage for Medicare-eligible retirees over the next 
three to five years.
    Other major sources of prescription drug coverage for Medicare 
beneficiaries are also proving inadequate or undependable. Medigap 
plans provide prescription drug coverage in only three of the standard 
ten plans, and these plans place limits on the benefit, including a 50 
percent coinsurance and caps on the benefit at either $1,250 or $3,000 
annually. Roughly 600,000 Medicare beneficiaries are enrolled in one of 
the standardized Medigap plans (H, I, or J) that cover prescription 
drugs. Another group of beneficiaries are enrolled in pre-standardized 
Medigap plans that provide some prescription drug coverage, but those 
plans generally have even more limited prescription drug coverage.
    Medicare+Choice plans are another source of prescription drug 
coverage. In the mid-1990s growing numbers of beneficiaries began 
moving to Medicare HMOs, often to take advantage of the prescription 
drug coverage they were offering. But today, many of these plans are 
dropping out of Medicare, making such coverage very unstable for 
beneficiaries. In 2001, 30 percent of Medicare+Choice plans do not 
offer a drug benefit at all, meaning that only 3.8 million 
Medicare+Choice enrollees have prescription drug coverage. In addition, 
many Medicare+Choice plans that have remained in the program have 
increased their premium charges or reduced benefits; most noticeably 
for prescription drugs. In 1999, 78 percent of Medicare+Choice 
enrollees were in basic plans that charged zero premiums and offered 
some drug coverage; this has dropped to 35 percent in 2001. HCFA has 
not yet released additional information that describes Medicare+Choice 
prescription drug benefits in 2001, but we have no reason to believe 
that there has been any expansion of the benefit.
    Without Medicare coverage of prescription drugs, older Americans 
must depend on supplemental sources of financing for their medications 
or pay for them directly out-of-pocket. On average, an estimated one-
third of Medicare beneficiaries lack prescription drug coverage. 
However, this figure obscures the variations in drug coverage among 
certain subgroups of beneficiaries. For example, as shown in Chart 3, a 
much smaller share of Medicare beneficiaries in rural areas have some 
form of supplemental drug coverage than do beneficiaries in urban 
areas.
    Moreover, prescription drug coverage data--which focus on coverage 
at one point in time--obscure the problem of obtaining continuous 
coverage. While the data indicate roughly two-thirds of beneficiaries 
have drug coverage at some point during a year, recent research 
indicates that only 53 percent of beneficiaries have prescription drug 
coverage for the entire year.
    The rising cost of prescription drugs, their large and growing role 
in good medical care, and the gaps in Medicare beneficiaries' current 
coverage for medications reinforce the need for a prescription drug 
benefit that extends to all Medicare beneficiaries. While there has 
been some discussion of a benefit that would extend only to low-income 
beneficiaries, this approach has been increasingly recognized as 
inadequate since a large number of older and disabled Americans with 
incomes above 175 percent of the federal poverty level lack drug 
coverage. As Chart 4 illustrates, an estimated 8.2 million 
beneficiaries above 175 percent of the federal poverty level ($14,600 
for singles, $19,700 for couples in 2000) lacked any coverage for 
prescription drugs in 2000.
    The following table presents the 2001 poverty guidelines published 
in the Federal Register, February 16, 2001, pages 10695-10697, for 
singles and couples. Income measures for the near-poor and moderate 
income are also included.

                         2001 Poverty Guidelines
------------------------------------------------------------------------
                                                      Single     Couple
------------------------------------------------------------------------
48 States and DC..................................     $8,590    $11,610
Alaska............................................    $10,730    $14,510
Hawaii............................................     $9,890    $13,360
48 States and DC
100 Percent of Poverty............................     $8,590    $11,610
125 Percent of Poverty............................    $10,738    $14,513
135 Percent of Poverty............................    $11,597    $15,674
150 Percent of Poverty............................    $12,885    $17,415
175 Percent of Poverty............................    $15,033    $20,318
200 Percent of Poverty............................    $17,180    $23,220
250 Percent of Poverty............................    $21,475    $29,025
------------------------------------------------------------------------

AARP's Policy Approach to a Prescription Drug Benefit
    The coverage gap in Medicare is clear. Medicare is the basic health 
plan for the population that is most in need of these new tools of 
modern medicine, but it does not cover prescription drugs. For current 
and future Medicare beneficiaries a prescription drug benefit would 
improve the quality of their health care and even their quality of 
life. AARP is committed to creating a prescription drug benefit in 
Medicare and has identified fundamental design features for developing 
a prescription drug benefit.
    In the simplest terms, a prescription drug benefit under Medicare 
needs to be available and affordable to all beneficiaries.
    To understand what this means, it is first necessary to recognize 
the general consensus among most players that a prescription drug 
benefit in Medicare should be a voluntary benefit. This conclusion is 
based on the fact that some beneficiaries, as noted above, do have 
alternative sources of coverage. Beneficiaries need to be able to keep 
the benefits that they currently have if they choose to do so.
    Designing a viable voluntary benefit, however, requires careful 
attention to how to make the benefit widely available and affordable. 
Availability must be nationwide. Beneficiaries all over the country--
living in rural, suburban, and urban areas--must be assured that the 
drug benefit is not only going to be a part of Medicare+Choice plans 
wherever feasible, but that it will also always be available in their 
community to accompany the traditional Medicare fee-for-service plan.
    The benefit must also be affordable, which means not only that 
premiums and cost-sharing must be reasonable, but also that healthy as 
well as sick beneficiaries see it as a ``good buy.'' Affordability is a 
critical feature in assuring that this new benefit actually helps 
beneficiaries gain access to their new coverage and benefit from the 
prescriptions that their physicians determine are necessary for their 
health. But the implications of affordability go far beyond that, 
especially in the design of a viable voluntary program.
    In any voluntary insurance arrangement, affordability for the 
individual is essential to assure that a substantial portion--and broad 
mix--of eligible individuals actually enroll. Making enrollment 
attractive and affordable requires a careful balance of covered 
benefits and government premium subsidies. The government contribution 
for a drug benefit in Medicare, as in any well-designed employer plan, 
must be adequate to assure enrollment of a balanced risk pool of 
enrollees. Part B of Medicare--a voluntary program in which 95 percent 
of Medicare beneficiaries participate--is a model in this regard. 
Without a broad-based risk pool, a voluntary benefit will attract a 
disproportionate number of beneficiaries with high prescription drug 
costs, prompting a rapid rise in benefit premiums.
    Medicare has always benefited from being a defined benefit plan, 
and we believe that approach should apply to the implementation of a 
prescription drug plan as well. A defined benefit package is readily 
understood by beneficiaries and their families, and provides 
dependability and certainty for beneficiaries planning for the future. 
In addition, a defined benefit is an important element in lessening 
selection problems and instability that result from plan design, 
sometimes known as ``cherry picking.''
    Affordability also requires that there be adequate mechanisms and 
incentives to constrain the rate of increase in spending under the 
program and to ensure that beneficiaries and other taxpayers receive 
value for their premium and tax dollars. Cost constraint cannot simply 
involve shifting of costs to beneficiaries, nor can it rely on 
arbitrary underpayments to providers--in this case pharmacies and drug 
manufacturers. It should feature drug-purchasing strategies that enable 
beneficiaries and Medicare to take advantage of the purchasing power of 
the program. Further, the program must make available reliable, 
objective, and understandable information that allows providers and 
beneficiaries to make the best choices among the treatments available 
to them.
    Affordability in any new prescription drug program also requires 
additional subsidies for beneficiaries with low incomes, for whom the 
traditional Medicare premium and cost-sharing would be simply 
unaffordable. Improvements are needed in the current income protections 
available to low-income beneficiaries. In particular, the income 
thresholds for eligibility need to be increased and program 
participation must grow. The current programs, known as the Qualified 
Medicare Beneficiary (QMB) program and the Specified Low-Income 
Medicare Beneficiary program (SLMB), are funded through the Medicaid 
program and pay for the Medicare premiums, deductibles and coinsurance 
of beneficiaries below certain income thresholds. It is essential that 
similar protections complement a prescription drug benefit and continue 
to be funded through Medicaid to help low-income beneficiaries pay for 
their prescription drug and other Medicare services. While a 
prescription drug benefit under Medicare must not be limited to 
individuals with low incomes, nationwide availability for all 
beneficiaries must be coupled with extra support for those who have low 
incomes.
    Finally, amidst all of the features of program design, we need to 
keep attention focused on the reason for the prescription drug 
benefit--access to medically appropriate drug therapies. The new 
benefit design must include the right to a timely appeal and external 
review of coverage denials, as well as quality improvement components 
that reduce medication errors and mismedication--thereby improving 
quality of care and reducing overall health costs.

Medicare Reform
    Part of the debate over adding a prescription drug benefit in 
Medicare is whether--and to what extent--additional changes to Medicare 
are necessary. Proponents of completely restructuring Medicare argue 
that the program is antiquated, unable to respond to the changing 
health care marketplace, and in need of a major overhaul.
    We agree that some changes in Medicare are necessary to modernize 
the program, secure its long-term financial future, and ready it to 
handle retirement of the ``baby boom'' generation. We believe that 
incremental, step-by-step improvements can begin to make a significant 
difference in the success of the program and would be far less 
disruptive to current and future beneficiaries than an abrupt and 
comprehensive overhaul. Under any scenario, however, Medicare's defined 
benefit must be preserved.
    To that end, this Committee is to be commended for convening the 
task force that is assessing the oversight of the Medicare program. 
Effective administration of Medicare is critical and changes that 
enable the agency that oversees the program to better serve 
beneficiaries and providers should be considered. We encourage the 
Committee to give serious consideration to some of the recommendations 
made last week by the four previous Administrators of the Health Care 
Financing Administration (HCFA).
    In particular, AARP believes strongly that beneficiary education 
and outreach efforts must be expanded and adequately funded. 
Beneficiaries must have good information in order to make the right 
choices about their health care options. We also believe that a program 
that serves 40 million Americans, processes roughly 1 billion claims a 
year, and is responsible for overseeing beneficiaries' quality of 
health care needs a modern, efficient information technology system. In 
this regard, the current constraints on Medicare's administrative costs 
should be reevaluated as part of any reform.
    In broader terms, the administration of Medicare must be structured 
in such a way as to prevent fragmentation of the program and to 
guarantee seamless operation of traditional fee-for-service, private 
plan options and any prescription drug benefit. The administering 
agency must remain fully accountable to Members of Congress and to 
beneficiaries. And, the agency that oversees Medicare must have the 
tools and the flexibility it needs--such as the ability to modernize 
fee-for-service so that it remains a viable option for beneficiaries--
to continue to improve the program.

Conclusion
    In many respects it seems only a statement of the obvious to say 
that Medicare beneficiaries need a prescription drug benefit in 
Medicare. Americans age 65 and older account for over one-third of all 
drug spending, but represent only about 12 percent of the population. 
Our nation's health care system relies more and more on prescription 
drugs to provide high quality care for acute and chronic conditions. 
Prescription drugs make us well, and they keep us from getting sick. 
Most private health benefit plans throughout the nation have kept pace 
with these advances in their benefits for workers, but Medicare has 
not. That must change.
    It will not be an easy change, and it will involve trade-offs on 
the part of all players. Nevertheless, it must be done so that all 
older and disabled Americans can be assured that they will have the 
option of enrolling in an affordable Medicare prescription drug 
benefit.
    AARP believes that there are important principles that must be 
followed in the development of a drug benefit; we have outlined those 
in this testimony. We are ready to continue to work with this 
Committee, the Congress, and the Administration to help shape a benefit 
in Medicare that will be affordable and viable, and will make room for 
the changing role of pharmaceuticals in medicine.

[GRAPHIC] [TIFF OMITTED] T2830.015

[GRAPHIC] [TIFF OMITTED] T2830.011

    Mr. Bilirakis. Were you finished, Dr. Braun, did you 
complete?
    Ms. Braun. Yes.
    Mr. Bilirakis. Thank you very much.
    Dr. Lambrew.

                 STATEMENT OF JEANNE M. LAMBREW

    Ms. Lambrew. Chairman Bilirakis, Congressman Brown, and 
distinguished subcommittee members, thank you for the 
opportunity to offer my views on prescription drugs. I am an 
Associate Professor at George Washington University, and worked 
for the previous Administration coordinating its estimates on 
prescription drugs for its Medicare Reform Plan. I will be 
drawing on this experience for my testimony today.
    Although extending Medicare to cover prescription drugs is 
a major policy challenge, there appears to be the will and the 
funding to do so. A consensus has emerged that a Medicare drug 
benefit should be available and affordable to all 
beneficiaries. There is also widespread support for a drug 
benefit that has reasonable cost-sharing and protection against 
catastrophic costs, and we have a budget surplus whose revenues 
will be necessary to support a Medicare drug benefit, given its 
costs.
    My remarks today focus on the issue of cost. Last week, 
Congress passed a budget resolution that allocates up to $300 
billion over 10 years for Medicare reform and prescription 
drugs, and it should be noted that that allocation was to 
Medicare and not to Medicaid, so it is not clear how low-income 
protections will be funded.
    The committees of authorization will be expected to fit a 
policy to this cost target. This raises three questions. First, 
is $300 billion enough for a prescription drug benefit that is 
meaningful and helps all uninsured beneficiaries?
    Second, if $300 billion is not enough, is higher spending 
affordable?
    And, third, will decisions about the approach to Medicare 
payment policy for a drug benefit affect its costs? I discuss 
this third question in my written testimony, but to keep within 
5 minutes I will not discuss it right now.
    As Mr. Crippen has testified, CBO has not yet provided any 
official estimates of prescription drug proposals this year. 
However, it has provided to congressional staff a useful tool 
to assess the effects of different premium subsidies and cost-
sharing policies. Using this ballpark estimator, it appears 
that $300 billion could buy a policy with a $5 premium, but 
such a policy would have a $500 deductible and no catastrophic 
protection. This benefit is less generous than virtually all 
previous congressional proposals, and is not significantly 
better than Medigap.
    Alternatively, $300 billion could provide for a decent 
benefit with a $200 deductible and $4,000 stop-loss, but this 
benefit would have a monthly premium of $65-70. This premium is 
probably too high to encourage all seniors who lack drug 
coverage to participate, and thus would leave millions 
uninsured.
    This raises a question: How much would an adequate 
prescription drug benefit cost? As can be seen in the first 
chart, if Medicare were to spend the same percent on 
prescription drugs that private health insurance does, then 
Medicare drug spending would be about $750 billion over 10 
years. And if Medicare were to extend to all beneficiaries what 
Congress enacted for military retirees last year, then Medicare 
would spend $1 trillion from 2004 to 2011. This helps to 
explain why organizations such as AARP and other senior groups 
are concerned about the level of spending that is in the budget 
resolution.
    If, as it is likely to be the case, policy options under 
consideration are estimated to cost more than $300 billion, a 
second question gets raised. How much is too much? To be 
conservative, this analysis assumed Medicare spending of $400 
billion over 10 years. As can be seen in the second chart, a 
prescription drug benefit of this size will comprise about 11 
percent of total Medicare spending for the next 10 years. It 
would only constitute about 5 percent of total public spending 
on health services, and $400 billion is not much more than what 
the drug industry is projected to spend solely on promoting 
their products, as can be seen in the third chart.
    Finally, Congress is considering a major tax cut bill. The 
President's proposed reduction in taxes for the top 1 percent 
of tax filers reduces revenue by $237 billion over 10 years. 
The cost of a full immediate repeal of the estate tax will cost 
about $652 billion over 10 years. Mr. Crippen's testimony 
states that Medicare funding of a prescription drug benefit 
would ``greatly increase the already large burden on the next 
generation of taxpayers.'' I would argue the opposite, that 
reducing the tax burden on this generation of taxpayers without 
redirecting some of today's surplus toward the obligations of 
Medicare is what will create problems for the next generation 
of taxpayers.
    In closing, how much a policy costs is clearly a critical 
piece of information in the policy debate. However, these cost 
estimates should be put into the proper perspective in the 
policymaking process. We have the resources necessary to 
provide for a basic drug benefit. We can assure taxpayers that 
an investment of even $400 billion is not overspending relative 
to private health benefits, relative to Medicare spending, and 
relative to other priorities like tax cuts.
    This gives you the opportunity to focus on what 
prescription drug policy is best for the program and the 
beneficiaries it serves. Thank you for the opportunity to share 
my views.
    [The prepared statement of Jeanne M. Lambrew follows:]

 Prepared Statement of Jeanne M. Lambrew, Associate Professor, George 
                   Washington University 1

    Chairman Bilirakis, Congressman Brown, and distinguished 
Subcommittee Members, thank you for the opportunity to offer my views 
on prescription drugs. By way of introduction, I worked for the 
previous Administration as the Principal Associate Director for Health, 
Personnel and Veterans at the Office of Management and Budget and as 
the lead health policy analyst at the White House National Economic 
Council. Part of my job was coordinating the analytic work for 
President Clinton's Medicare reform plan. Today, I am an Associate 
Professor at George Washington University.
    Covering prescription drugs in Medicare is a top health care 
priority. As AARP and BIO will testify, prescription drugs are 
essential to the health of seniors and people with disabilities. Yet, 
too many beneficiaries face financial barriers to needed medications 
since Medicare does not cover them.2 This problem will only 
grow worse over time since there inevitably will be a greater reliance 
on ever-improving pharmaceutical therapies at the same time that there 
is a deterioration of private insurance coverage for prescription drug 
coverage for the elderly.3
    Although extending Medicare to cover prescription drugs is a major 
policy challenge, this nation has never been better able to undertake 
it. We have a budget surplus--in no small part created by recent 
reductions in Federal health care spending.4 Given the cost 
of a Medicare drug benefit, revenues from this surplus will be 
essential to funding a prescription drug benefit.
    There appears to be bipartisan support for at least two basic 
principles for a prescription drug benefit. First, most Members of 
Congress agree with states, advocates of seniors and Americans with 
disabilities, and policy experts that a prescription drug benefit 
option should be offered through Medicare to all beneficiaries--not 
just through states to the low-income. Low-income policies like the 
President's Immediate Helping Hand not only exclude millions of middle-
class beneficiaries with incomes over $20,000 who lack insurance, but 
are unlikely to help even those it targets (all states will not expand 
coverage and, in states that do expand coverage, not all eligible 
seniors will participate).5 Instead, most Members are now 
concluding that a Medicare drug benefit option should be available and 
affordable to all beneficiaries. Second, there appears to be widespread 
support for a drug benefit that is meaningful, defined as having 
reasonable cost sharing and protection against catastrophic 
prescription drug costs. Agreement on these principles, coupled with 
the budget surplus and the urgency of the problem, may mean that this 
Congress successfully accomplishes what others have failed to do, which 
is to enact a bipartisan, meaningful Medicare prescription drug 
benefit.
    My remarks today focus on the issue of cost. Cost estimates for 
prescription drug benefits--and, indeed, most public policies--have 
taken on unparalleled importance in developing the policies themselves. 
This is, in part, due to the budget process. The Budget Committees must 
decide on how much to allocate for prescription drugs and other 
policies often in the absence of a Congressional Budget Office (CBO) 
cost estimates of specific policies. Last week, Congress passed a 
budget resolution that allocates up to $300 billion from 2002-2011 for 
Medicare reform and prescription drugs--without knowing what that would 
buy. The Committees of authorization, thus, will be instructed to 
retrofit policies, using CBO estimates, to hit these targets. So, 
rather than beginning with policies, you and other Members of Congress 
are expected to begin with the cost constraint and work 
backwards.6
    Given this expectation, I'd like to discuss three questions related 
to the cost of a Medicare prescription drug benefit. First, is $300 
billion enough for a drug benefit that is meaningful and helps all 
uninsured beneficiaries? Second, if $300 billion is not enough, is 
higher spending affordable? And, third, will decisions about the 
approach to Medicare payment policy for prescription drugs affect 
costs? The answers to these questions will help determine whether 
bipartisan support can be translated into enactment of a bipartisan, 
meaningful Medicare prescription drug benefit in this Congress.
Is $300 Billion Enough?
    As Mr. Crippen has testified, CBO has not yet provided any official 
estimates of prescription drug proposals this year. However, it has, in 
the interim, provided to Congressional staff a useful tool to assess 
the effects of different premium subsidies and cost sharing policies on 
total costs and beneficiary premiums. This ``ballpark estimator'' tool 
is used in the analysis that I have prepared for today's 
testimony.7 It is important to note that these are not CBO 
estimates and that the ultimate CBO scoring may be quite different.
    Using this tool, it appears that $300 billion will probably buy a 
limited Medicare prescription drug benefit. Two illustrative policies 
that could be affordable at this level include:

 No catastrophic protection and $500 deductible. One $300 
        billion option would maintain a 50 percent premium subsidy (the 
        lowest subsidy that would likely ensure that all currently 
        uninsured Medicare beneficiaries participate 8) but 
        constrain Federal spending by increasing beneficiary cost 
        sharing. Such an option would have $45 to $50 monthly premium, 
        a $500 deductible, and 50 percent coinsurance for spending 
        above the deductible, with no catastrophic protection. This 
        deductible/copay structure is less generous than virtually all 
        previous Congressional proposals and is not significantly 
        better than Medigap.
 Catastrophic protection with high premium. A different 
        approach to spending $300 billion would be to make the 
        deductible/copay structure more comparable to private plans but 
        reduce the premium subsidy. This option would have a $200 
        deductible, 50 percent coinsurance, and $4,000 stop-loss--but a 
        $65 to $70 premium. This premium is about equivalent to the 
        premium that beneficiaries are expected to pay in 2004 for all 
        Part B services (e.g., physician and hospital outpatient 
        department care).9 This premium is probably too high 
        to encourage all seniors who lack prescription drug coverage to 
        participate in a voluntary benefit and thus would leave 
        millions uninsured.
    One could, with $300 billion, create a hybrid proposal that 
includes a 50 percent premium subsidy and catastrophic benefit but has 
a ``gap''--meaning that, Medicare pays 50 percent coinsurance up to a 
fixed dollar limit, then the beneficiary is liable for 100 percent of 
costs until out-of-pocket spending hit a particular stop-loss 
threshold. However, such policies have come under criticism from 
beneficiary groups and experts and, as Mr. Crippen testified in March, 
it is ``unlike anything available in the private sector.'' 
10
    Since the definition of what is ``adequate'' is relative, it is 
useful to compare the type of benefit affordable at $300 billion with 
other benchmarks that make sense for Medicare. One such benchmark is 
private health insurance. For 2002-2010, the percent of private 
insurance spending on prescription drugs is projected to be 19 percent, 
according to the Administration's Office of the Actuary.11 
If Medicare were to spend the same percent of total spending on 
prescription drugs as does private insurance, then the cost of a 
Medicare drug benefit would be about $750 billion over 10 years (see 
chart 1).12 Another benchmark is the prescription drug 
benefit enacted last year for military retirees. This benefit, which 
has no beneficiary premium and low copays would, if extended to the 
entire Medicare population, cost about $1 trillion from 2004 through 
2011 13--clearly much higher than any proposal under 
consideration. This helps explain why organizations such as AARP 
advocate for significantly higher spending on a prescription drug 
benefit.
    In summary, this analysis suggests that $300 billion is well below 
the amount needed for a benefit equivalent to a standard private 
insurance benefit, and is probably insufficient to extend a meaningful 
prescription drug benefit to all Medicare beneficiaries.
Is $300 Billion--Or Even $400 Billion--Too Much?
    If, in developing options for a prescription drug benefit, the 
policies' cost estimates rise above the budget target, questions will 
surface about whether this is too much to spend on a Medicare drug 
benefit. Some still argue that $300 billion itself is excessive. One 
way to evaluate this claim is to compare the proposed prescription drug 
spending to other types of health spending and other budget priorities. 
For illustration, this analysis assumes that $400 billion over the 10 
years is being proposed for a prescription drug benefit, since this is 
probably closer to cost estimates for proposals introduced in the 106th 
Congress using this year's baseline.
    The most immediate way to assess whether $400 billion is too large 
is to compare it to projected Medicare and overall Federal health 
services spending. A prescription drug benefit of this size would 
comprise about 11 percent of total Medicare spending from 2002-2011. 
Such an amount would be about equal to projected spending on Medicare's 
long-term care benefits (hospice, home health and skilled nursing 
facility care), even though many more beneficiaries would use a drug 
benefit.14 In addition, a new Medicare drug benefit that 
costs $400 billion would comprise about 5 percent of the total national 
public spending on health services (see chart 2).
    It is also instructive to compare $400 billion to projected 
spending on prescription drugs. CBO projects that prescription drug 
spending by the Medicare population will total $1.5 trillion from 2002 
through 2011. A bill whose cost estimate is $400 billion would cover 
only about one-fourth of this spending (less if some of the $400 
billion replaces existing spending or pays for administrative costs). A 
different type of comparison looks at private pharmaceutical industry 
spending. A rough estimate suggests that the pharmaceutical industry's 
budget for activities to promote prescription drugs (e.g., marketing, 
physician ``detailing'') will total about $300 billion from 2002-
2011.15 This is as much or a large fraction of the amount 
that Congress is contemplating spending on the entire prescription drug 
benefit for 39 million beneficiaries (see chart 3).
    A more conventional way to assess how much is too much is to 
compare proposed prescription drug spending to other budget priorities. 
The Joint Committee on Taxation recently estimated that, if the estate 
tax repeal were fully implemented immediately, it would cost $662 
billion over 10 years.16 The President's proposed top tax 
bracket change alone, which would help only about half a million 
households, would cost $237 billion 17--slightly less than 
the budget resolution's allocation for Medicare, but helping tens of 
millions fewer people.
    These comparisons are not intended to imply that $300 billion is an 
insignificant commitment. Indeed, such a dedication is a major step 
forward. They are intended to help frame the discussion of the numbers, 
and to illustrate that spending that is more commensurate with 
proposals that provide a meaningful prescription drug benefit to all 
beneficiaries is not necessarily ``excessive''.

Will Medicare payment policy for prescription drugs affect costs?
    The third and final question is how will the structure of a 
Medicare prescription drug benefit affect costs? As described 
previously, most of the cost of a prescription drug benefit will result 
from its benefit design: the level of premium subsidy, amount of cost 
sharing, and level of catastrophic protection (if any). Last year, CBO 
assumed that there was basically no difference in the overall cost of a 
prescription drug benefit administered through the two major 
approaches, all else held constant.18 I'd like to make the 
case that total costs should differ depending on how the prescription 
drug benefit is structured, and that paying for drugs on a fully 
capitated basis will be more costly than assumed--and could have 
serious side effects.
    To review, two major approaches have been proposed for paying for 
and administering a Medicare prescription drug benefit. The first 
relies on pharmaceutical benefit managers (PBMs) which would be 
competitively chosen to negotiate price discounts and deliver 
prescription drugs in a local area. The second relies on private, risk-
based insurers that compete directly for beneficiary enrollment to 
deliver prescription drugs.19 These approaches have some 
common elements. Both give private organizations primary responsibility 
for the management and delivery of the benefit. Both give these 
organizations similar tools to reduce prescription drug prices (e.g., 
authority for prior authorization; incentives for generic 
substitution). And both contract with private organizations to 
negotiate prices for covered drugs. The major difference is that, under 
the PBM approach, the government pays a percent of the negotiated 
prices to PBMs selected by Medicare because they offer low prices. 
Under the risk-based plan approach, the government pays a fixed, 
capitation rate to risk plans selected by beneficiaries.
    In 2000, CBO assumed that, relative to PBMs, risk-based plans would 
achieve lower prescription drug spending per beneficiary, but that this 
extra savings would be offset by their higher marketing costs and a 
``risk premium'' (a contingency amount built into premiums to offset 
risk). It is true that full capitation is a powerful incentive for 
plans to contain costs. Plans paid this way are liable for all excess 
costs. The key question is how will insurers respond to this incentive. 
Will they reduce prices through more aggressive negotiation with drug 
manufacturers, reduce use of and/or access to medications, or ``risk 
select'' (seek out enrollees whose average cost falls below the 
capitation rate).
    To my knowledge, no major employer or insurer pays for prescription 
drugs through full capitation. Thus, experience in the Medicare managed 
care system may help answer this question. Studies have found that HMOs 
have reacted to the pressure of capitation through risk 
selection.20 Avoiding sicker, more expensive beneficiaries 
while enrolling those with low to no costs may be a more effective 
strategy to managed fixed payments than reducing prices or utilization 
of services. Prescription drug coverage is particularly susceptible to 
risk selection since most seniors and people with disabilities use 
prescription drugs, and much of the expense is predictable by plans. 
While risk selection may reduce plans' costs, it will not reduce the 
Federal government's costs since the government will ultimately have to 
pay for those beneficiaries in some type of plan.
    Even assuming no risk selection, risk-based plans may focus less on 
price and more on utilization to reduce costs. Numerous private 
insurers that compete for enrollment on an annual basis may have a 
harder time negotiating price discounts with manufacturers than PBMs 
(this is the experience in Medigap today). This may lead to aggressive 
attempts to limit utilization. Recent experience in managed care and in 
state pharmacy assistance programs suggests that increasingly popular 
cost containment tools include limiting participating pharmacies and 
tight appeals processes for medically necessary drugs. Congress can 
legislatively draw the line between cost containment tools that ensure 
appropriate utilization and those that limit access. If so, risk-based 
plans may not be able to constrain costs better than PBMs. If not, then 
the pressure of capitation may succeed in lowering costs--but at the 
expense of access to needed prescription drugs. For all these reasons, 
I would argue that CBO's assumption last year, that risk-based plans 
result in overall, lower spending per beneficiary (offset by their 
higher administrative costs), is overly optimistic.21
    The alternative approach for administering a prescription drug 
benefit is competitive contracting with PBMs. This approach has a 
different incentive structure for achieving lower costs. PBMs that have 
neither lower prices nor strong utilization control systems than their 
competitors would lose the Medicare contract and thus be denied access 
to Medicare beneficiaries. Since, once they have been competitively 
selected, PBMs are paid on a claims rather than a fixed capitation 
basis, they would not benefit from risk selection or access 
restrictions. And PBMs may be better positioned to get better price 
discounts since they are bidding for a local area with a known set of 
enrollees. This approach may not have the same incentives to control 
utilization but offers much lower administrative costs and fewer of the 
potential problems for beneficiaries that risk-based plans do. This may 
explain why virtually all private insurers and employers who offer 
prescription drug benefits today competitively contract with PBMs for 
prescription drugs.
    Thus, I believe that these very different approaches to paying 
private plans for prescription drug coverage will have different 
effects on Medicare costs. I hope that CBO considers these issues 
carefully before finalizing their estimates and would urge Members of 
Congress to seriously weigh the policy implications of alternative 
administrative structures.

Importance of Putting Cost Estimates into Perspective
    The purpose of my testimony has been to discuss cost issues related 
to Medicare prescription drug proposals. How much a policy costs is 
clearly one of the most important pieces of information in a policy 
debate. It is essential, however, that these cost estimates be put into 
the proper perspective in the policy making process. As Members of this 
Committee know, cost estimates are informed guesses, not actual costs. 
Developing a prescription drug benefit by solving for total costs based 
on cost estimates may result in flawed policy. This was what happened 
in the Balanced Budget Act of 1997 when Medicare provider payment 
policy was changed to meet somewhat arbitrary budget targets using cost 
estimates that were, in retrospect, too pessimistic. We have been 
paying for this mistake ever since, and it is important that we not 
repeat it.
    To that end, I would respectfully suggest that this Committee focus 
on what prescription drug policy is best for the program and the 
beneficiaries it serves. We now have the resources necessary to provide 
for a basic benefit that can improve, extend, and literally save lives. 
We can assure taxpayers that even an investment of $400 billion is not 
overspending, relative to private insurance benefits and relative to 
Medicare and Federal health spending. This creates the opportunity to 
finally bring Medicare into the 21st century by adding a meaningful 
prescription drug benefit for all its beneficiaries. Thank you for the 
opportunity to share my views.

                                 Notes:

    1 The views expressed in this paper do not represent 
those of the University or Department of Health Services Management and 
Policy.
    2 Poisal JA; Murray L. (2001). ``Growing Differences 
Between Medicare Beneficiaries With and Without Drug Coverage.'' Health 
Affairs 20(2): 74-85. Office of the Assistant Secretary for Planning 
and Evaluation. (April 2000). Prescription Drug Coverage, Spending, 
Utilization, and Prices: Report to the President. Washington, DC: U.S. 
Department of Health and Human Services.
    3 For information on declines in retiree health 
coverage: see Foster-Higgins, Kaiser Family Foundation/HRET Employer 
Surveys. For information on increasing premiums in Medigap coverage: 
see Weissratings.com, ``Prescription Drug Costs Boost Medigap Premiums 
Dramatically,'' and for Medigap coverage declines see Chollet D. (April 
24, 2001). ``Medigap Coverage for Prescription Drugs'', Testimony 
before the Senate Finance Committee, Washington, DC: Mathematica Policy 
Research.
    4 OMB analysis, for President Clinton's speech to the 
National Governors' Association, July 10, 2000.
    5 See Scheppach R. (April 24, 2001). ``Finding the Right 
Fit: Medicare, Prescription Drugs, and Current Coverage Options,'' 
Testimony before the Senate Finance Committee, Washington, DC: National 
Governors' Association. Also, National Economic Council/Domestic Policy 
Council (September 2000). Low-Income Prescription Drug Plans: An 
Unworkable Prescription for America's Seniors. Washington, DC: The 
White House.
    6 Note: The budget process for developing the 
President's budget requires that cost estimates on major policies like 
a Medicare prescription drug benefit be completed before decisions 
about budget allocations.
    7 The estimator allows for input of two parameters: 
premium subsidy and cost sharing. It then produces rough estimates of 
total Medicare costs for 2004-2001 and monthly beneficiary premiums for 
2004. It does not include: discounts, administrative costs, utilization 
effects, Medicaid costs and is thus incomplete. For this analysis, the 
Medicare costs were increased by 20 to 25 percent (depending on the 
proposal's generosity) as a proxy for Medicaid costs, since virtually 
all proposals provide extra assistance for low-income beneficiaries 
through Medicaid (based on Medicaid estimates in CBO's March 27, 2001 
testimony).
    8 CBO and the Administration's Office of the Actuary 
have generally assumed that premiums for prescription drug benefits 
that are voluntary need a 50 percent premium subsidy to encourage all 
uninsured Medicare beneficiaries to participate.
    9 Health Care Financing Administration Office of the 
Actuary (March 2001). 2001 Annual Report of the Board of Trustees of 
the Federal Supplementary Medical Insurance Trust Fund. Washington, DC: 
U.S. Department of Health and Human Services, Table III.C.1.
    10 Crippen DL. (March 27, 2001). ``Laying the Groundwork 
for a Medicare Prescription Drug Benefit.'' Testimony before the 
Committee on Ways and Means, Subcommittee on Health, U.S. House of 
Representatives. Washington, DC: Congressional Budget Office.
    11 Health Care Financing Administration Office of the 
Actuary (March 2001). National Health Expenditures Projections; Table 
5: Personal Health Care Expenditures; and Table 11: Prescription Drug 
Expenditures. Private health insurance spending for 2002-10.
    12 Based on CBO projected Medicare net expenditures for 
2002-11 (about $3.2 trillion according to January 2001 baseline).
    13 Estimated by using the CBO ballpark estimator. See 
note on Chart 1.
    14 Since CBO has not yet released the service-specific 
projections for Medicare, this is estimated by taking the 2000 Medicare 
baseline projected spending for FY 2001-2010 for skilled nursing 
facilities, home health and hospice; dividing their total spending into 
net outlays for this period; and applying this percent (14%) to the 
January 2001 net outlays. This equals about $450 billion for FY 2002-
2011.
    15 According to IMS HEALTH, the pharmaceutical industry 
spent $13.9 billion on promoting drugs in 1999 (see April 20, 2000 
press release at: www.imshealth.com). If that investment were to grow 
by the CBO projected average prescription drug baseline growth (10.3 
percent) for 2002-2011, then it would equal $302 billion for this 
period.
    16 Joint Committee on Taxation. (March 26, 2001). 
Memorandum to John Buckley; Subject: Estate and Gift Tax Estimates. 
Washington, DC: U.S. Congress.
    17 Joint Committee on Taxation as reported by Friedman 
J; Greenstein R. (May 3, 2001). Reduction of Top Rate Cost $237 Billion 
over Ten Years, Even Though Fewer than 1% of Filers Are in the Top 
Bracket. Washington, DC: Center on Budget and Policy Priorities.
    18 Note: this is mostly based on informal communication. 
A summary of the CBO approach to discounts and administrative costs is 
included in a letter to Senator Daniel Patrick Moynihan from CBO 
Director Crippen dated September 1, 2000.
    19 This testimony focuses on proposals like H.R. 4680 
(House Republican bill) that pay private plans for prescription drugs 
through full capitation and S. 2342 (President Clinton proposal) that 
competitive contract with a single PBM to deliver prescription drug 
benefit in local areas. A number of hybrid proposals have also emerged 
(e.g, use of multiple PBMs, partial risk payments, etc).
    20 See, for example, General Accounting Office. (August 
2000). Medicare+Choice: payments exceed cost of fee-for-service 
benefits, adding billions to spending. HEHS-00-161. Washington, DC: 
GAO.
    21 In addition to these doubts about their cost 
effectiveness, other major policy issues are raised by risk-based 
prescription drug proposals. Premiums under most of these proposals 
would vary from place to place, as they do in Medicare managed care, 
but would do so without having an underlying, nationwide traditional 
Medicare option. Plans that enroll older or sicker beneficiaries might 
charge them higher premiums or pull out of the system altogether--a 
phenomenon in the Medicare+Choice system that has caused serious 
disruption for seniors. And, although most risk-plan proposals have a 
PBM-like ``fallback'' in areas where no plans operate, this, too, 
presents problems. Beneficiaries' access to a stable, affordable plan 
will depend on where they live and what risk-based plans decide to 
participate there. This raises equity concerns, especially in light of 
a significant Federal investment in a prescription drug benefit.

[GRAPHIC] [TIFF OMITTED] T2830.012

[GRAPHIC] [TIFF OMITTED] T2830.013

[GRAPHIC] [TIFF OMITTED] T2830.014

    Mr. Bilirakis. Thank you, Dr. Lambrew. Mr. Chess, please 
proceed, sir.

                    STATEMENT OF ROBERT CHESS

    Mr. Chess. Good afternoon, Chairman Bilirakis, Congressman 
Brown, and members of the subcommittee. My name is Rob Chess, 
Chairman of Inhale Therapeutic Systems. I am here today 
representing the Biotechnology Industry Organization, BIO. I am 
particularly honored to be here to describe BIO's views on 
Medicare drug coverage issues.
    Our company, Inhale Therapeutic Systems, is developing a 
family of technologies to enable patients to inhale drugs for 
diabetes, osteoporosis, multiple sclerosis, genetic emphysema, 
and several other diseases that would otherwise have to be 
given by injection. In essence, what we are doing is we are 
taking drugs that have to be given by shot and making them so 
you can breathe them in through this device right here.
    Our most advanced product is inhaled insulin, which has 
recently completed Phase III trials, and we believe our product 
would encourage patients to take their insulin more frequently 
and lead to a major improvement in the health care of diabetic 
patients. We hope to make similar contributions to the 
treatment of many other diseases.
    Developing and testing this technology has been very time 
consuming and very expensive. We started our company in 1991 
and, since then, we have raised over $700 million in 13 
financings. This year we expect to lose $75 million, and we 
still do not have our first product on the market. My company 
hopes to help many patients, but that will depend on whether or 
not patients have coverage for our products. That is why I am 
here today to testify in favor of extending drug coverage to 
senior citizens and those in need.
    A full description of BIO is included in my written 
statement, but of the 950-plus members, 90 percent do not have 
a single drug product on the market. Many more have only one 
product. BIO members are clearly in the research and 
development phase.
    For many of the BIO members, the level of investment in 
innovation is far from an academic concern, and more a question 
of survival. Most BIO members aren't members of the Fortune 
500, rather, they are small companies funded by venture 
capital, companies that may hold the key to many potentially 
life-saving therapies.
    When the Clinton Health Care bill was being considered in 
the mid-1990's, which had the effect of indirect price 
controls, company financing was hurt. We at Inhale were one of 
the lucky few at that time still able to raise about 60 percent 
of what we sought in our IPO. We may have lost a year of 
progress as a result of that, though.
    BIO urges Congress to ensure that any Medicare drug 
coverage proposal considered or enacted does not upset the 
delicate balance of the biotechnology industry.
    Over the past two decades, biotechnology has produced 110 
drugs and vaccines, and there are 350 more in late-stage 
development. The 110 products that have been approved by FDA 
are the work of only 71 of BIO's members.
    The biotechnology industry invested nearly $10 billion in 
R&D in 1999, reinvesting, on average, up to 50 percent of its 
revenues into R&D. This is an environment when most of BIO's 
members have no product revenues at all, those companies can be 
said to be investing more than 100 percent of revenues in R&D. 
Across all other industries, the average re-investment in R&D 
is just 4 percent. The biotechnology industry as a whole lost 
approximately $5 billion last year.
    Many biotechnology products are oriented toward treating, 
preventing and diagnosing diseases of the aging and are 
targeted toward small segments of disease categories and thus 
small patient populations. One example of this sort of 
treatment is Gleevec, a leukemia drug approved by the FDA just 
last week. According to Dr. Richard Klausner of the National 
Cancer Institute, Gleevec represents the first molecularly 
targeted drug. The drug is specifically targeted to disrupt 
cancer cells, unlike most cancer therapies that can harm even 
healthy cells. This type of product is expected to become more 
and more common in the coming years.
    The issue of Medicare modernization and the proposal to add 
a prescription drug benefit to the program is of high interest 
to the members of the BIO and the patients we serve. Many of 
the products in biotech companies' pipelines target diseases 
that predominantly affect seniors. Accordingly, BIO believes 
that all Medicare beneficiaries should have drug coverage.
    In recent years, drugs and biologics have become an even 
more integral part of health care, while the drug coverage 
available to seniors has increasingly included lower coverage 
limits and higher premiums. BIO strongly believes that 
pharmaceutical benefit options should be offered to 
beneficiaries in the context of an overall, market-based reform 
of the Medicare program, but we believe that seniors need 
coverage now. Thus, we support efforts to enact a Medicare drug 
benefit in 2001, but we must also continue to work to make 
Medicare a program that reflects the best of the 21st Century 
marketplace. If interim prescription drug proposals must be 
considered, they should facilitate and not deter the adoption 
of comprehensive reforms to the Medicare program.
    BIO's priority in the debate is to ensure that any steps 
taken to increase seniors' access to drugs today is consistent 
with the incentives needed to develop breakthrough medicines to 
treat the seniors of tomorrow.
    To guide our review of various proposals, we have adopted a 
set of six principles, outlined in my written statement, but 
let me reinforce three of them. We urge Congress to 1) rely on 
the private marketplace and competition, not price controls 
that harm innovation; 2) include stop-loss protection and 
protection of those most in need first; and 3) do no harm to 
current coverage and reimbursement.
    Based on our principles, BIO has tended to be most 
supportive of drug coverage plans that focus beneficiaries with 
very high prescription drug costs, as well as those with low 
incomes. We have been the strongest advocate of what many in 
Congress are calling ``stop-loss'' or ``catastrophic coverage'' 
to cover all or a high percentage of prescription drug costs 
after a certain level of out-of-pocket spending. We are 
encouraged that most of the major drug coverage proposals, from 
both sides of the aisle, now include some sort of catastrophic 
coverage.
    While most seniors will not make claims under stop-loss 
coverage, the coverage will provide valuable protection and 
peace of mind for all by ensuring that high-cost therapies are 
available to those who need them.
    These new products, by reducing hospitalizations and 
improving overall health, could generate savings in the health 
care system. They will allow people to remain productive 
longer, with potentially corresponding economic benefits.
    Mr. Bilirakis. Excuse me, Mr. Chess, would you please 
summarize?
    Mr. Chess. I am just about done. Thank you. While we 
understand that CBO may find these savings difficult to score, 
we are firmly convinced they will represent a net savings to 
patients.
    That concludes my formal testimony. Be delighted to take 
any questions.
    [The prepared statement of Robert Chess follows:]

   Prepared Statement of Robert Chess, Chairman, Inhale Therapeutic 
                                Systems

Introduction
    Good morning, Chairman Bilirakis, Congressman Brown, members of the 
subcommittee. My name is Robert Chess, Chairman of Inhale Therapeutic 
Systems. I am here today representing the Biotechnology Industry 
Organization (BIO). As you know, the Energy and Commerce Committee has 
jurisdiction over many of the issues that my company, along with BIO, 
is concerned about: it oversees the basic research done by the National 
Institutes of Health (NIH), it regulates the applied research and 
development (R&D) of the biotechnology industry and the drug approvals 
that result from that R&D and it oversees the Medicare and Medicaid 
coverage of those products. I am particularly honored to be here to 
describe BIO's views on Medicare drug coverage issues.
    Inhale Therapeutic Systems is developing a family of technologies 
to enable patients to inhale drugs that would otherwise have to be 
given by injection. We are developing inhaleable versions of drugs for 
diabetes, osteoporosis, multiple sclerosis, genetic emphysema, and 
several other diseases. Our most advanced product is inhaled insulin, 
which recently completed Phase III trials. This product represents an 
important advance since it would be far more convenient for diabetics 
to take than the current injectable insulin. A nine-year, $150 million, 
1,400 patient study funded by NIH found that if patients took their 
insulin 3-6 times per day the complications from diabetes, such as 
blindness, amputations, and kidney-failure, could be reduced by 35-60%. 
Despite this striking result, most diabetics take insulin less than 
twice a day, primarily because of their dislike of injections. We 
believe our product would encourage patients to take their insulin more 
frequently and lead to a major improvement in the health of diabetic 
patients. We hope to make similar contributions to the treatment of 
many other diseases.
    Developing and testing this technology has been very time consuming 
and expensive. We started our company in 1991, and since then have 
raised over $700 million in 13 financings. This year we expect to lose 
$75 million, and we still do not have our first product on the market. 
I am excited about all the different ways that my company may be able 
to help patients, but I know that our ability to do so will depend on 
whether or not patients can gain coverage for our products. That is why 
I am here today to testify in favor of extending drug coverage to 
senior citizens and those in need.

About BIO
    BIO represents more than 950 biotechnology companies, academic 
institutions, state biotechnology centers and related organizations in 
all 50 U.S. states and 33 other nations. BIO members are involved in 
the research and development of health care, agricultural, industrial 
and environmental biotechnology products. Ninety percent of our 
companies are involved in health care product development and 90% of 
those companies do not have a single product on the market. Many more 
have only one product. Clearly, the vast majority of BIO's members do 
not have an array of health and/or other consumer products to absorb 
the cost of R&D, more importantly, many biotech drugs are for small 
populations. Forty-five percent of FDA-approved biotech products have 
orphan status.
    For many of BIO's members the level of investment in innovation is 
far from an academic concern and more a question of survival. Most BIO 
members aren't members of the Fortune 500; rather, they are small 
companies funded by venture capital, companies that may hold the key to 
many potentially lifesaving therapies. Anything that could upset the 
delicate balance these companies live in could deprive patients of 
these important breakthroughs--because if venture capital investment is 
reduced, many companies will be unable to survive. The President of 
NASDAQ recently wrote that a ``decrease in investor confidence [in the 
biotechnology industry] can only result in a decrease in investment 
dollars, thereby placing critical research at risk.'' When the Clinton 
Health bill was being considered in the mid-1990s, the growth rate of 
R&D investment dropped markedly, potentially delaying new products on 
their way to American consumers. In addition, venture capitalists 
became less willing to invest in biotech companies, forcing 13 out of 
16 companies to withdraw their initial public offerings (IPOs) of stock 
and their efforts to go public.
    While we at Inhale were one of the lucky few to go public during 
consideration of the Clinton healthcare plan, we were only able to 
raise about 60% of what we sought. We may have lost a year of progress 
as a result. Clearly, many biotech companies are fragile and would be 
devastated by a drop in investor confidence. BIO urges Congress to 
ensure that any Medicare drug coverage proposal considered or enacted 
does not upset the delicate balance of the biotechnology industry.
    Over the past two decades, biotechnology has produced 110 drugs and 
vaccines, and there are 350 more in late stage development. The 110 
biotech products that have been approved by FDA are the work of only 71 
of BIO's members. The biotechnology industry invested nearly $10 
billion in R&D in 1999--reinvesting, on average, up to 50% of its 
revenues into R&D.1 This is in an environment when most of 
BIO's members have no product revenues at all--those companies can be 
said to be investing more than 100% of revenues in R&D. Across all 
other industries, the average re-investment in R&D is just 4%. The 
biotech industry as a whole lost approximately $5 billion last year.
---------------------------------------------------------------------------
    \1\ Ernst & Young LLP, Annual Biotechnology Industry Reports, 1999.
---------------------------------------------------------------------------
    In addition to the hope of promising new therapies offered by 
biotechnology, I also want to point out that BIO's members are an 
important part of the U.S. economy. According to Ernst & Young Report, 
the biotechnology industry employs more than 150,000 people--this 
excludes companies that are mostly pharmaceutical in 
nature.2 We have employees in all 50 states and add more 
than $20 billion to the economy annually.
---------------------------------------------------------------------------
    \2\ 2000 E&Y LLP, The Economic Contributions of the Biotechnology 
Industry to the U.S. Economy.
---------------------------------------------------------------------------
    Many biotechnology products are oriented toward treating, 
preventing and diagnosing diseases of the aging and are targeted toward 
small segments of disease categories and thus small patient 
populations. Recombinant DNA technology has enabled us to target 
products at the genetic or cellular level. Increasingly, new therapies 
will be designed specifically for unique and small populations. While 
we expect this to allow for more effective treatments, many with fewer 
side effects, it will also mean smaller markets in which we can spread 
the cost of R&D investment. One example of this sort of treatment is 
Gleevec, a leukemia drug approved by the FDA just last week. According to Dr. Richard Klausner of the National Cancer Institute, Gleevec represents the ``first molecularly targeted drug.'' The drug is specifically targeted to disrupt cancer cells--unlike most cancer therapies that can harm even healthy cells. While Novartis, the drug's maker, is hopeful that it will be approved 
for more indications, it has currently been approved only for a 
relatively rare type of leukemia. This type of product is expected to 
become more and more common in the coming years.
    The bottom line is that the biotechnology industry, while being a 
vital part of the current economy and the source for many potential new 
cures, is still fragile. We would urge you to take care when designing 
a Medicare drug coverage plan not to upset the delicate balance of the 
industry.
BIO's Medicare Reform Principles
    The issue of Medicare modernization and the proposal to add a 
prescription drug benefit to the program is of high interest to the 
members of the BIO and the patients we serve. Many of the products in 
biotech companies' pipelines target diseases that predominantly affect 
seniors.
    Accordingly, BIO believes that the Medicare program should include 
drug coverage for all Medicare beneficiaries. In recent years drugs and 
biologics have become an even more integral part of health care, while 
the drug coverage available to seniors has increasingly included lower 
coverage limits and higher premiums. BIO strongly believes that 
pharmaceutical benefit options should be offered to beneficiaries in 
the context of an overall, market-based reform of the Medicare program, 
but we believe that seniors need drug coverage now--and comprehensive 
reform may take years to enact. Thus, we support efforts to enact a 
Medicare drug benefit in 2001, but we must also continue to work to 
make Medicare a program that reflects the best of the 21st Century 
marketplace. If interim prescription drug proposals must be considered, 
they should facilitate and not deter the adoption of comprehensive 
reforms to the Medicare program.
    BIO's priority in the debate is to ensure that any steps taken to 
increase seniors' access to drugs today is consistent with the 
incentives needed to develop breakthrough medicines to treat the 
seniors of tomorrow.
    To guide our review of various proposals, we have adopted the 
following principles:
    1) Rely on the private marketplace and competition, not price 
controls that harm innovation--BIO believes that Medicare benefits--
including coverage for prescription drugs and biologics--should be 
delivered through a decentralized, pluralistic market structure that 
encourages meaningful competition in order to preserve patient choice, 
improve quality and encourage innovation. Government regulation should 
be limited and market-based delivery mechanisms should be utilized. 
Explicit or indirect price controls that stifle innovation must be 
avoided.
    2) Include stop loss protection and protection of those most in 
need first--Federal assistance for Medicare beneficiaries should be 
targeted to those with the greatest economic and medical need in order 
to focus limited funds where they can have the most impact. Inclusion 
of ``stop loss'' coverage in order to protect the financial security of 
the sickest and neediest Medicare beneficiaries must be a top priority 
of any Medicare drug proposal.
    3) Expand beneficiary choices among private plans--Medicare 
beneficiaries should have expanded choices of quality health plans and 
benefit packages that include prescription drug coverage to ensure that 
all of the elements of modern health care are provided in a system 
built on the advantages of our market-based economy.
    4) Improve patient care through innovations in biotechnology--The 
future of patient care and our ability to prevent, diagnose and treat 
illness is inextricably tied to innovation in health care. By promoting 
strong incentives for the discovery and development of innovative new 
prescription drugs and biologics, America can assure that the new tools 
of biotechnology are applied as quickly as possible to create medicines 
for our aging population. BIO believes that such innovation and 
discovery will generate real savings by reducing the need for hospital, 
long-term care, and other expensive services and procedures.
    5) Maintain Medicare solvency--In the context of over-all market-
based reform, we must ensure that drug coverage for Medicare 
beneficiaries does not jeopardize the financial security of the 
program. Medicare needs to be modernized in such a way as to assure 
that it is a fiscally responsible program for the coming generations of 
seniors.
    6) Do no harm to current coverage and reimbursement--A majority of 
Medicare beneficiaries have some form of drug coverage today. 
Additionally, Medicare does cover prescription drugs and biologics in 
certain circumstances. BIO believes strongly that any Congressional 
action on Medicare prescription drugs must avoid interfering with 
existing coverage and payment rules for the types of drugs and 
biologics currently covered by Medicare.

BIO's Recommendations
    Based on our principles, BIO has tended to be most supportive of 
drug coverage plans that focus beneficiaries with very high 
prescription drug costs, as well as those with low-incomes. We have 
been the strongest advocate of what many in Congress are calling ``stop 
loss'' or catastrophic coverage to cover all or a high percentage of 
prescription drug costs after a certain level of out of pocket 
spending. We are encouraged that most of the major drug coverage 
proposals--from both sides of the aisle--now include some sort of 
catastrophic coverage.

Stop Loss Design Issues
    There have been a variety of different stop loss coverage plans 
introduced in various bills in the 106th and 107th Congresses. In our 
opinion, it is the presence of stop loss coverage that is important--
coverage that is important for a variety of reasons.
    We support stop loss coverage because we are quite concerned that 
the fruits of the most promising research that some of our members are 
conducting are likely to be quite expensive--and we want to be sure the 
results of this research is widely available. Because of some of the 
dynamics of the biotech industry discussed earlier, the populations 
they treat are often small, sometimes very small. Moreover, biological 
products are often more expensive to produce than traditional 
pharmaceuticals because Biotech products are generally made through 
recombinant techniques. The reagents and tools necessary to make a 
recombinant protein are generally more costly than traditional 
pharmaceutical products. As a result, we expect that some new 
biotechnology products may be too expensive for many seniors that lack 
prescription drug coverage.
    While most seniors will not make claims under stop loss coverage, 
the coverage will provide valuable protection and peace of mind for all 
by ensuring that high cost therapies are available to those who need 
them. Stop loss coverage is true insurance against the cost of 
debilitating, and potentially financially devastating disease. While 
few people ever have their houses burn down, we all believe that fire 
insurance is valuable. Senior citizens should have the same protection 
from the potentially devastating costs of disease.

Other Coverage Design Issues
    BIO also believes that all beneficiaries should have Medicare drug 
coverage with greater subsidies targeted to those with low incomes. We 
believe that subsidies should be carefully crafted to emphasize the 
private market. Some low-income subsidies could have the effect of 
expanding Medicaid--with the corresponding government rebates and price 
controls that program entails. BIO believes that the private 
marketplace offers cost control mechanisms that will not threaten 
research and development investment. Private sector discount 
arrangements are made in exchange for movement of market share, while 
Medicaid rebates are unilateral government price controls.
    One issue that we at BIO have spent considerable time wrestling 
with is the gaps contained in some drug coverage proposals between the 
initial coverage limit and the attachment of stop loss coverage. Since 
some of these bills contain no subsidies during these gaps, we are 
particularly concerned about how the gaps will affect low-income 
beneficiaries.

Moving Forward This Year
    BIO believes that it is important to move forward this year. The 
Medicare benefit package becomes more antiquated with each passing 
year, and we believe that the time is now to at least begin the process 
of bringing drug coverage to senior citizens and the disabled.
    We believe that in this environment, the best plans will emphasize 
stop loss coverage and subsidies targeted to those most in need, as the 
best interim steps toward more comprehensive coverage for seniors and 
the disabled. Based on the numbers CBO has provided, we believe that 
stop loss protection, and some level of subsidies could be affordable. 
Such a plan would also provide benefits to all Medicare beneficiaries, 
since all would benefit from the peace of mind that stop loss coverage 
would offer. Moreover, by taking over some of the risk of rising drug 
expenditures, government subsidies for stop loss coverage could make 
primary prescription drug coverage more affordable for seniors.
    BIO prefers comprehensive drug coverage in a fully modernized 
Medicare program. We still think it is important to take the first 
steps now so that a fully modernized Medicare program can be ready 
before the new influx of baby boom generation beneficiaries arrives.
    Twenty new biotechnology products were approved in 2000. Of the 350 
products currently in the pipeline, many are targeted toward 
Alzheimer's, Parkinson's, cancer, diabetes, osteoporosis and other 
diseases of aging. The products that make it through clinical trials 
will be on market before baby boomers retire. BIO's first priority 
after bringing these new therapies to market is to make sure that 
patients have access to these new medicines that may save lives and 
improve overall health and quality of life.
    These new products, by reducing hospitalizations and improving 
overall health could generate savings in the health care system. They 
will allow people to remain productive longer, with potentially 
corresponding economic benefits. While we understand that CBO may find 
these savings difficult to score, we are firmly convinced that they 
will represent a net benefit to patients in the United States and 
around the world.
    In closing, Mr. Chairman and members of the subcommittee, I invite 
you to think of a future without Alzheimer's Disease. Think of a future 
without Parkinson's Disease, without leukemia. Think of a future where 
cures are targeted to patients where treatments can be highly effective 
with very limited side effects. In the biotechnology industry, we 
firmly believe that these hopes will be realized. However, in order for 
these visions to become a reality, we must continue to invest heavily 
in the research and development of new and potentially lifesaving 
therapies. Moreover, in order for new treatments to have any benefits, 
the patients who need them must be able to obtain them. This is why BIO 
believes that coverage and stop loss protection are so important.
    Mr. Chairman, I want to commend you for holding this very important 
hearing, and for your leadership on drug coverage and stop loss 
coverage issues. I will be happy to attempt to answer any questions you 
may have.

    Mr. Bilirakis. Thank you very much, Mr. Chess. The Chair 
will yield to Mr. Brown now, and advise the members that after 
his questioning, we will run over, cast our votes, and come 
right on back and finish up. Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. Mr. Chess, thank you 
for what you are doing on the Hill, that is a terrific thing, 
so thank you for that.
    Dr. Lambrew, I am intrigued by your chart on Medicare, the 
marketing versus Medicare prescription drug allocation. Is that 
a projection of what they are spending on marketing based on 
last year, or how did you do that?
    Ms. Lambrew. Yes. IMS, which is a private consulting firm, 
estimated that in 1999 the drug industry spent $13.9 billion on 
prescription drug promotion. That includes marketing, 
advertising, physician detailing--which means going and talking 
to physicians, giving free samples.
    If you take what Mr. Crippen said is a 10.3 percent growth 
for prescription drugs, and you trend that $13.9 billion, that 
is what sums up to $302 billion over 10 years.
    Mr. Brown. And I have got to think that if you base it on 
the 2000 figures, it would be significantly higher because I 
have got to think that the 1999 to 2000 was much bigger 
increase than that percent Mr. Crippen talked about for the 
whole.
    Mr. Crippen had said--and it was a difficult question to 
answer, I understand--my question about if we do the tax cut, 
considering the increase Medicaid costs that are not reflected 
in the budget resolution, can we provide--with the $300 million 
available, can we provide this prescription drug benefit 
without major cost containment on prescription drug prices?
    Ms. Lambrew. I think it is a good question, and I agree 
with Mr. Crippen, that it is a hard question to answer. I will 
say that, you know, irrespective of exactly the dollar amount 
that a prescription drug benefit will cost, it is a significant 
investment. Nothing that I have said is meant to say it is not 
a significant investment. And to the extent that we can figure 
out not just ways to insure beneficiaries, what this is about 
and what these numbers are about is insuring them, but it is 
also about how we contain the costs which are so rampant.
    I think there are a lot of ideas on the table about how you 
do that. There was some discussion about PBMs and multiple 
PBMs, et cetera. There are also clearly proposals out there 
that would help do this, but I do think that in light of 
competing priorities for the Federal budget surplus, most 
obviously, the tax cut and a prescription drug benefit, there 
will be increasing attention drawn to this issue of how do we 
keep the prices low so we can afford a better benefit.
    Mr. Brown. Thank you. One of the sort of presumptions on 
which this hearing is based is that Medicare fiscally is in big 
trouble, that we have got to--this hearing isn't just on 
prescription drugs, it is also on Medicare reform. The 
President talks about them together. The Republican Majority 
typically talks about them together.
    Share with us your thoughts on the fiscal outlook for the 
Medicare program--in particular, is it a problem that Medicare 
needs general revenues to finance benefits?
    Ms. Lambrew. I think it is an interesting point. This 
Congress, or the past several Congresses I should say, have 
really done a good job at looking at Medicare and trying to 
restrain its cost growth when, in 1993, Medicare was projected 
to be insolvent in 1999. Today, it has the longest prognosis 
than it has had in its history. It is projected to be solvent 
through 2028. Now, that doesn't mean that we don't have a 
doubling of the Medicare population. Truly, there will be a 
cost pressure as the retirement of the Baby Boom generation 
takes place. But what are the responses to that?
    One is cut provider payment rates, two is to cut benefits, 
and three is to increase revenue dedicated to Medicare. Dr. 
Crippen talked about a Medicare per capita cost growth rate of 
5.3 percent projected. That is below what the private sector 
health spending projections are going to be. So, I am not sure 
how much room there is to address this doubling of the Medicare 
population through provider payment cuts.
    In terms of cutting back on benefits, well, we already know 
Medicare only covers 55 percent of the seniors' health care 
costs. And if you look at some work done by Marilyn Moon, out-
of-pocket spending for beneficiaries will grow from 22 percent 
today to 30 percent by 2025. So, I am not sure how much room 
there is to cut benefits. That does leave a third question 
about revenues.
    As Mr. Crippen said, merging the Trust Funds does nothing 
for the fiscal outlook of the program. The only way to really 
add new revenues is to explicitly do that, either through some 
sort of dedicated tax or through budget proposals like have 
been proposed in the past, to dedicate part of the on-budget 
surplus toward Medicare. But I think that the solutions for 
reform are challenging, and I hope that people recognize that 
the challenge of prescription drugs is immediate. I hope that 
we don't hold our prescription drug benefit debate hostage to 
trying to address these harder, long-term issues.
    Mr. Brown. Thank you.
    Mr. Bilirakis. Well, I think we are going to run out of 
time as far as casting the vote is concerned, so with your 
indulgence, we are going to have to break for another few 
minutes and run right on back. If I am the only one here, we 
are still going to go forward. Thank you.
    [Brief recess.]
    Mr. Bilirakis. The committee is back in session. I do want 
to apologize to the witnesses not only for having to run back 
and forth, but for the lack of people up here. It is quite an 
existence up here. We all have so many commitments, and it is 
very difficult.
    Dr. Braun, we just got word--and I haven't gotten the 
details yet--that BlueCross-BlueShield just pulled out of all 
three of my counties as far as Medicare.
    Ms. Braun. Oh, my goodness.
    Mr. Bilirakis. Yes.
    Ms. Braun. That is too bad.
    Mr. Bilirakis. Well, I don't have any of the details yet.
    Ms. Braun. Your county will suffer like ours, or your 
counties.
    Mr. Bilirakis. Isn't it interesting, Dr. Braun, that CBO 
will not score the savings that you mentioned--for instance, 
the fact that probably having more drugs available would be 
beneficial insofar as less hospitalization and less current 
usage. Do you have an opinion about that? You were in the 
audience, I know, you were sitting over there. Do you have any 
opinion about why they just won't take into consideration those 
savings?
    Ms. Braun. They are talking about there not being really 
any evidence for it. I just happened to notice a National 
Academy of Science report on the decrease in chronic disability 
over the past few years, and that certainly is due to--I 
wouldn't be sitting in front of you today if it weren't for--
the present-day medicine. I would have had another heart 
attack, or I would have had a stroke----
    Mr. Bilirakis. I read that article.
    Ms. Braun. [continuing] and be chronically disabled.
    Mr. Bilirakis. And that is evidence, it seems to me.
    Ms. Braun. I think that is evidence of savings, but I think 
it probably would be pretty difficult to score, and they like--
--
    Mr. Bilirakis. They make it awfully difficult. A few years 
ago, in a very bipartisan piece of legislation--we added the 
preventative health benefits to Medicare--but we really had a 
tough time. We thought that we probably wouldn't be able to 
even get that through, because CBO would not be very helpful as 
far as scoring was concerned.
    Ms. Braun. I was thinking of the immunizations, too, and 
how many fewer pneumonia cases we have among seniors now, with 
the pneumonia vaccine and the flu vaccine.
    Mr. Bilirakis. Mr. Chess, is there data to suggest that 
paying for high-cost drugs, saves money through a reduction in 
more expensive treatment?
    Mr. Chess. The one area that I am pretty familiar with 
there is in the diabetes field. There was a study done a few 
years ago in a Minneapolis HMO with about 3,100 patients that 
showed that if you were able to control diabetes better--for 
each point of control that is better, sort of going from 10 to 
7, you were able to reduce health care costs, not just the 
health care costs of diabetes, but the overall health care 
costs of the patient around anywhere from 30 to 40 percent. And 
so at least in the diabetes field, there is a very direct 
correlation between better control of the disease, which really 
is taking the medicines and having access to them, and lower 
health care costs, in addition to the most important health 
care benefit, that the people live longer and better lives.
    Mr. Bilirakis. Yes. What is the source of that information?
    Mr. Chess. We can probably get you a copy of it.
    Mr. Bilirakis. Would you get that to us as soon as you can?
    Mr. Chess. Yes.
    Mr. Bilirakis. Appreciate that. Dr. Lambrew, any comment on 
that particular point?
    Ms. Lambrew. I actually would like to make just one 
comment, which is one demonstration that the last 
Administration approved was a Medicare demonstration to ask 
this very question--will covering prescription drugs have any 
sort of effect on Part A and Part B service use? We just 
approved that demonstration in January. It is going to be 
conducted on United Mineworkers enrollees in West Virginia, and 
we are hoping that we can use that demonstration in Medicare to 
kind of collect this evidence that would, I think, prove this 
is common sense.
    Mr. Bilirakis. It is not going to help us for right now.
    Ms. Lambrew. I am afraid not. I am afraid not.
    Mr. Bilirakis. Yes, that is going to be taking place. Thank 
you for your position on the idea of combining Parts A and B. 
Again, I am not attacking CBO. If there is a representative 
here, I don't want them to think that, we need them. We have 
got to be friendly toward them.
    But the gentleman, Mr. Crippen, indicated that he didn't 
think there would be any savings in combining the two, so I 
won't go into whether you all think there would be savings. But 
let me ask Dr. Braun, what is the AARP position on that? Any 
position on combining A and B?
    Ms. Braun. I think we would have to look at just how you 
were doing it. As you say, Mr. Crippen seemed to be thinking it 
would be set up the same way that it is now and just combined. 
I think there are many other possibilities that people are 
looking at as to having one deductible and so forth. And there 
certainly may be some value to doing that, but we would need to 
know the particulars before we would know.
    Mr. Bilirakis. That is a good, safe response. Any other 
comments on that? Dr. Lambrew?
    Ms. Lambrew. I would say very briefly, there basically are 
sources and uses of spending for Medicare. The sources is 
really what the Trust Funds are about. What you do is you pool 
different sources of revenue to offset the Medicare costs.
    I think that Mr. Crippen is right, that if you do nothing 
else but just merge those two Trust Funds, it is the same 
amount of money and it has no effect on spending.
    Mr. Bilirakis. Depending on what the deductible is.
    Ms. Lambrew. Well, that is actually a policy change. You 
have to merge the Trust Funds to change the deductible. I mean, 
I think they are two separable policies. I will say one thing 
that does happen, or has to happen if you are merging the Trust 
Funds is, you have to rethink how much general revenue will be 
going toward Medicare.
    Currently, what we do is we spend 75 percent of Part B 
costs, those come from the general revenue funds. If you merge 
the two Trust Funds, you have to answer the question, what now? 
There is no longer a Part B spending, so what is the general 
revenue contribution to Medicare? That will create, I think, a 
big debate. How much is too much? How much should we put in 
from general revenues to Medicare? And I think in the past, the 
Medicare Commission had raised this very issue, and there were 
concerns because capping it at, say, 40 percent of Medicare 
spending will actually make Medicare insolvent earlier. It 
doesn't mean you have done anything to change Medicare 
spending, it just means you have limited the source of funding. 
So, I think it raises a lot of questions that will encounter if 
you go down this path.
    Mr. Bilirakis. Well, I think Dr. Braun basically said the 
same thing, that it depends on the details. And you all agree 
that a stop-loss provision of some sort should be a part of 
whatever we do.
    Okay. Very quickly, I just want to say that everything we 
get from the White House, and from the majority leadership is 
that we should have universal coverage of prescription drugs as 
a part of Medicare, and that it should be voluntary. I am not 
sure really what the White House parameter is, but I believe 
that is one of their principles.
    I think we would kind of all agree. The only point that the 
White House is making, is that this idea of the helping hand--
which is similar, Dr. Braun, to the legislation that we talked 
about when you previously spoke here, but that was outside of 
the scope of Medicare, was only going to be a temporary plan to 
help needy people right now until we are able to get the whole 
thing done. And I know that an awful lot of people on the other 
side of the aisle were concerned that if we do something like 
that, it takes the pressure off, and then we probably will 
never do the universal coverage. I would like to think that 
would not be the case, and I also like to think we won't have 
to resort to the State-based plans or to the helping-hand type 
of proposal, but that we will do what we say we are very 
hopeful of doing.
    We have been given a timeline from the leadership. It is a 
tough timeline to meet, because of all the complexities 
involved. The seriousness is really there to get the job done.
    Having said that, the Chair now yields to Mr. Deutsch.
    Mr. Deutsch. Thank you, Mr. Chairman. Actually, I 
appreciate those comments as sort of a segue into the questions 
I want to focus on. In my introduction when we were doing 
opening statements, I talked about exactly what you are talking 
about, that from a policy perspective, I think all of us would 
want there to be universal Medicare drug coverage, and what we 
have heard from members--in fact, Dr. Ganske specifically 
talked to it--and my opening statement and his opening 
statement about the cost issue. And the President specifically 
has proposed drug costs for seniors with incomes under 135 
percent of the Federal poverty limit, and just to mention those 
numbers, that is an income of $11,600 a year for a single 
person, $15,700 for a couple. The President's plan would offer 
partial assistance for seniors who earn up to 175 percent of 
poverty, $15,000 a year for a single, $20,300 for a couple.
    Dr. Braun, specifically to you, I know the AARP has done 
research that seems to point out that a low-income benefit 
would miss a great many people. Specifically, who would be left 
out if a target such as the President proposed would occur?
    Ms. Braun. Certainly, the next group above those who would 
be helped, would be left out, and that is a big concern because 
when you are talking about couples income, if both of those 
couples are on medication, they could be spending a very large 
proportion of their income, even if the income is $20,000 or 
$25,000, and then you are talking about a big half of your 
Medicare beneficiaries. So, it would miss a great many people 
who very much need help.
    Mr. Deutsch. I think that is the thing to point out, that 
the vast majority of seniors are not at, they are getting by, 
and what could be $1,000 a month prescription drug bill could 
obviously make a dramatic difference in their lives.
    Could you specifically comment in terms of AARP's position 
regarding the type of proposal that the President has 
suggested, which is targeting a drug benefit just for low-
income seniors, or does AARP support drug benefit only for low-
income seniors? What is your sort of official position?
    Ms. Braun. I think, in fact, I know AARP wants a universal 
benefit in Medicare, defined benefit, and the low-income 
benefit would not do that. I do think, though, that the 
President is now speaking of universal coverage, as the 
chairman just said, of universal coverage for all Medicare 
beneficiaries, and he has also talked about that before. So, 
one would hope that we would be able to do that this year, and 
not just do low-income.
    Mr. Deutsch. Well, you must know something we don't know 
because, again, based on the comments of this committee, I 
think they want in a very theoretical sense, but no one is 
willing to talk about it in a practical sense. And, you know, 
giving lip service to the theory when the legislation doesn't 
do that, I really see that as a fundamental divide. Hopefully 
they have come onboard because I think you are reflective of 
what most seniors in America and what most Americans want.
    Ms. Braun. Well, we hope to be able to help you out a 
little bit, help the committee out a little bit next month, 
because we have actuaries working on plan designs and what 
would be acceptable for beneficiaries and so forth, which is a 
question that committee members have asked frequently. So, I 
hope we will be able to give you some help in another month or 
so on that.
    Mr. Bilirakis. Would the gentleman yield? You say next 
month you are expecting that information?
    Ms. Braun. I understand that we could have something.
    Mr. Bilirakis. Could you get that to us? As I say, we are 
on a fast-track. And we are always concerned about unintended 
consequences and about haste making waste. The more help you 
can be, the better. Thank you.
    Mr. Deutsch. Again, in terms of any specifics that we have 
seen, I have seen no proposals, and I would love that there 
existed--and I know the chairman is well-intentioned in terms 
of where he wants to see the policy ending up--but in terms of 
specific proposals from any Republican for universal coverage, 
as you defined, as an additional benefit for Medicare, I have 
not seen that. And if there is a specific thing that exists, I 
am happy and hope we can do it on a bipartisan basis, but I 
think that really is a policy divide that exists at this point.
    What the President has proposed is a catastrophic 
protection coverage for all seniors with very high drug costs, 
and although this level is not defined, it would mean a lot 
more seniors would benefit, or would most seniors be left out 
of that type of situation, if it is just a catastrophic 
coverage in terms of drug costs.
    Ms. Braun. Well, I think we have the same problem if it is 
just catastrophic and low-income. I think we really need a 
universal benefit in Medicare so that we pick up all of the 
people.
    Mr. Deutsch. Let me just give Dr. Lambrew or Mr. Chess, do 
you want to respond, just in terms of the policies?
    Mr. Chess. Well, I think the only thing I want to mention 
there is in terms of BIO and our members--our focus, given the 
resources available, has really been around low-income coverage 
and stop-loss, and with stop-loss obviously--you know, there 
are various proposals out there in Congress regarding what 
appropriate levels are. We really don't speak for that. But we 
view it very much as actually a benefit for all seniors 
because, while every senior may not necessarily draw on drugs 
up to the level of the stop-loss, all of them would benefit 
from the peace of mind that it would give. It is very much like 
I buy fire insurance at my house, and while I assume my house 
isn't going to burn down next week, it does give a lot of peace 
of mind and a lot of comfort knowing that we have that covered 
and we have that situation that we don't need to worry about. 
So, in some ways, we view it as a benefit for everyone, though 
not necessarily every person, may necessarily be drawing on it 
each year.
    Ms. Lambrew. I would like to make two quick comments. One 
is that I think that Mr. Crippen said that about $1 trillion of 
the $1.5 trillion that is projected to be spent on Medicare 
beneficiaries for prescription drugs is below some pretty low 
threshold. I thought he said $1,000, but I would have to go 
back and look. So, even though I agree that insurance is 
important, we can't forget that the dollars are often for 
people who don't have spending that high.
    And, second, on the low-income benefits, as Dr. Braun said, 
we do miss many, if not half, of the uninsured beneficiaries 
who lack prescription drug coverage, but it is also important 
to note that the policy itself will miss low-income 
beneficiaries. First of all, we know that States are not that 
interested in doing the type of policy. The National Governors' 
Association testified to the Senate Finance Committee saying 
this should be a Federal responsibility. It is not like the 
Children's Health Insurance Program where all States were 
supportive. So, it is not clear that all beneficiaries in all 
States will have access to this.
    And, second, within those States even that do expand, it is 
not clear that all beneficiaries will participate. Mr. Crippen 
said that he does think a stand-alone, State-only drug proposal 
has lower participation than providing a Medicare benefit and 
having States wraparound. Truly, the best way to help low-
income beneficiaries is to provide a Medicare benefit and have 
States provide that extra assistance for low-income folks.
    Mr. Bilirakis. The gentleman's time has expired. And the 
Chair appreciates the gentleman from Tennessee and Mr. Deutsch 
for having returned to the hearing.
    Mr. Bryant. Thank you, Mr. Chairman. I have about 5 
minutes, and an office full of songwriters waiting on me, so I 
am going to be brief here.
    Dr. Braun, I wanted to ask you, in your statement--and this 
has to do with making sure that any plan we have does not 
affect an existing plan in a way that would be detrimental or 
even deter perhaps other people from providing this benefit--
you say making enrollment attractive and affordable requires a 
careful balance of covered benefits and government premium 
subsidies.
    I am wondering, too, what AARP's position is on a mandatory 
date, if we have a program of requiring an opt-in/opt-out, a 
date to enter or not enter, one-time position. To me, that 
would be encouraging, too, if you had to make a choice. Does 
AARP have a position on that?
    Ms. Braun. I don't think we have a specific position, but 
we certainly realize that that is probably going to be the 
route that we are going to have to go because, otherwise, 
people will wait and you won't get the healthy people into the 
pool because they are going to wait until their drug costs are 
going up, and then you don't have an insurance program. What 
you have then is just paying, like you do with Medicaid now, 
just for drug costs. So, I think you are going to have to have 
that sort of arrangement.
    Mr. Bryant. I agree with you. I come from the insurance 
business of defending companies, you know, we couldn't have 
people having a car wreck and then coming in trying to get the 
insurance after-the-fact. The pool doesn't work so well that 
way.
    Dr. Lambrew, on this chart, I am interested in that in 
terms of spending of the drug industry roughly equivalent to 
what our budget resolution would have in it. I have heard that 
before in terms of criticism of the drug industry, and given 
all the reasons they would advertise, like anybody else--I 
mean, I suppose they have a right like anybody else in the 
First Amendment and so forth--and, as well, they have a 
relatively short period of time--I say relative--to recapture 
their profits and their expenses on not only that drug, but 
others that don't make any money for them under our patent 
laws. Is there really any relevance to this? I mean, how and 
why would we want to stop them from advertising?
    Ms. Lambrew. I probably should make it clear, what this 
chart is intended to do is not necessarily say this is wrong, 
or this shouldn't be happening, or we should use some of the 
savings for a Medicare drug benefit. Instead, the goal of this 
chart is to say $300 billion is not that much. I think that we 
have a situation where policymakers are focused on dollars, and 
we have a process that forces you to be focused on these 
dollars because the Budget Committee and the budget resolution 
say this is how much you all should be spending in the 
committees to do things like drug benefits.
    So, this is just basically to say, look, put aside how much 
is being spent on actual prescription drugs. If you just look 
at drug promotional costs alone, it is about the same that 
we're considering spending on all 39 million Medicare 
beneficiaries. It is not intended to say, this is inaccurate or 
wrong or something we should be looking into.
    Mr. Bryant. I have been in and out, I didn't hear all of 
the testimony. I do know there is that criticism from some in 
Congress, and somehow trying to tie the two together, and I 
don't know realistically how or why we would want to do that.
    Mr. Chess, I don't know if you have any comments on that 
issue, but recalling your testimony, I had a couple of 
questions I wanted to ask you. I am trying to remember what my 
question was. It is on your comment about do no harm to current 
coverage and reimbursement. I think it is a similar one I asked 
Dr. Braun. Any ideas there in terms of a mandatory day, or any 
other ideas of how we could not--would not do any harm. And 
also, I guess, any comment you might make on the related 
question I asked Dr. Lambrew, coming from the industry and 
talking about the numbers in the first part of your statement 
about how expensive all this is, and how--I am shocked that 
there are that many companies that far in debt. You have got 
some great venture capitalists that will underwrite this, but 
it is--and I don't think people on the outside understand, 
appreciate it, because the drug companies are the whipping dog 
right now, but how much is involved in researching and 
developing and marketing a drug before you ever make the first 
penny on it, and if we don't do that, and if we had price caps, 
for instance, that is not going to happen, and we are not going 
to have these new technologies and new drugs. Did I lead you 
enough on that one?
    Mr. Chess. I can certainly tell you enough in our 
situation. I mean, I think I mentioned that we got started in 
1991, and what we had to do was develop a whole family of 
technologies--make this powder, also how to process the 
powders, how to get them to be stable for years, how to make 
this device. It took us several years to figure out that. Then 
you need to go through several years of clinical testing, and 
then on an individual drug, you know, things that enter 
clinical testing--you probably know the statistics--about 1 in 
8, 1 in 10, make it to the other side. And we have had, in the 
history of our company, to go out--it is funny--13 times in 1 
year. We do more than one financing a year, just to kind of 
keep this alive. And the basis of it all is really around, you 
know, when the product gets out there, we think it is going to 
deliver a huge amount of value and be able to price it from a 
value side.
    One anecdote, if you don't mind me sharing, is when we 
first went out on inhaled insulin, which is the product that we 
are most known for, we talked to U.S. and European companies to 
partner with them. And we found we couldn't get any interest 
out of the European companies because they were unsure how 
their pricing authorities would deal with the product. And if 
we were a European-based company and only had companies that 
were basically government entities or other types of entities 
that were dealing with it, and you couldn't value price our 
product--we never would have raised the money and we never 
would have gotten our product as far as we have. And I don't 
think that is uncommon in our industry.
    In terms of your question, sort of on advertising, most of 
us are in the same boat in our business. We haven't gotten to 
the point where we have to worry about that yet, but I can 
certainly say for a product like ours, making consumers aware 
of it, I think, is actually a valuable service for them. Where 
you are giving a more convenient therapy you want people to 
know that they have choices out there. So I actually think 
there is a component of it that is actually education in 
addition to a component that may actually be product 
advertising.
    Mr. Bilirakis. The gentleman's time has expired. I wish the 
ranking member, Mr. Brown, were here to hear the anecdote that 
you shared with us.
    We are finishing up. First of all, I hope that you accept 
the fact that we are serious about doing something. We have got 
to work together. Mr. Deutsch spoke about bipartisanship and 
that sort of thing. Well, we ought to concentrate on what is at 
hand, and what is at hand is trying to do something regarding 
prescription drugs. If we get off onto too many issues which 
are behind us, it doesn't do any good. Right now we are trying 
to do something with prescription drugs, and if we are all 
serious about doing it, we are going to get it done.
    Mr. Chess, I understand you have had to pass up meetings 
with the Speaker and with other leaders in order to be here all 
day long, and we very much appreciate it, and appreciate, of 
course, Dr. Braun and Dr. Lambrew being here.
    Again, use us. We will have written questions, as we always 
do. We expect that you would be willing to respond to those 
but, at the same time, please take the initiative. Any ideas 
you have, suggestions--Dr. Lambrew, you mentioned a number of 
things--please share them with us because it is a tough job and 
we have a short period of time to do it in, and you can only be 
helpful. Thank you. Thank you so very much. The subcommittee is 
adjourned.
    [Whereupon, at 2:02 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

    Prepared Statement of Pharmaceutical Research and Manufacturers 
                         Association of America

    America's innovative pharmaceutical industry welcomes the 
opportunity to share its views at today's hearing about an issue that 
is vitally important to all of us--prescription drug coverage for 
seniors and disabled citizens. Across America, 40,000 scientists in our 
research labs work day and night in hopes of finding the next cure or 
the next treatment to allow individuals to live long, healthy, and 
productive lives (see attachment). On average, it takes 12 to 15 years 
and $500 million to develop a new drug and bring it to market.
    Today, industry has more than 1,000 new medicines in development to 
treat hundreds of serious illnesses including Alzheimer's and 
Parkinson's diseases, cancer, stroke, arthritis, and depression. We are 
confident that, in time, we will find the cures for these and other 
conditions that are so prevalent among our aging population.
    The 21st century brings even greater promise. As the human genome 
is mapped, many new targets for pharmaceutical innovation will be 
identified. Today's 500 or so targets for drug interventions are 
expected to increase to 3,000 to 10,000 targets in the near future. 
When these treatments and hopefully cures are brought to market, we 
want to ensure that seniors have access to them--without discouraging 
the discovery and development of new medicines.
    We believe there is bipartisan consensus on four key points :
    First, expanded drug coverage for seniors will happen. The question 
is not whether it will happen, but when, how, and with what effects on 
the quality of health care for seniors and disabled Americans and on 
drug discovery and development. If we work together, it could happen in 
this Congress. Most Medicare beneficiaries have prescription drug 
coverage through their (or their spouse's) current or former employer, 
a Medicare supplemental insurance (or Medigap) policy or a 
Medicare+Choice plan, or by qualifying for Medicaid or other 
governmental programs. But many of those who do not have the coverage 
they need require additional assistance. The pharmaceutical industry 
wants to be part of a sound, market-based solution that will help all 
patients today and into the future.
    Second, expanded drug coverage for seniors will be a positive 
development. Prescription drugs are increasingly the most effective and 
cost-effective therapy with which to treat diseases or conditions. Some 
Medicare beneficiaries are in need of prescription drug coverage and 
our medicines provide extraordinary value to them.
    Third, as we expand drug coverage for seniors, we must sustain the 
American pharmaceutical industry's worldwide leadership. The industry 
has developed new medicines that benefit all patients--young and old--
and their families. We do not want to harm the environment in the U.S. 
that has allowed our industry to thrive. In the1990s alone, 370 
prescription drugs, biologics, and vaccines developed by industry were 
approved for patients' use with a physician's prescription. Almost half 
of the globally important new medicines in the world are discovered by 
the U.S. industry. We are the world's leader in pharmaceutical research 
and development.
    As we work together to expand access to prescription drug coverage, 
we must remember that Medicare beneficiaries want access to new 
medicines because they were invented.
    Finally, we need to always remember to put the interests of 
patients first. In an environment where we discuss 10-year forecasts, 
adverse selection, risk pools, and premium calculations, we must not 
forget that the real focus is on patients. Our goal should be to expand 
Medicare drug coverage in the way best for patients, their children, 
and their grandchildren--who need access today to medicines already 
developed, and who also depend on the pharmaceutical industry to 
continue to lead the way in developing new medicines and hopefully 
cures that exist today only in our dreams.

    THE PHARMACEUTICAL INDUSTRY SUPPORTS EXPANDED PRESCRIPTION DRUG 
              COVERAGE FOR ELDERLY AND DISABLED AMERICANS

    Since February 1999, the pharmaceutical industry has strongly 
supported strengthening and modernizing Medicare, including expanding 
Medicare coverage of prescription medicines. We believe that the best 
way to expand prescription drug coverage for Medicare beneficiaries is 
through comprehensive Medicare reform. The current program is based on 
a 1960s-style, one-size-fits-all model that relies on centralized price 
controls and complex regulations. The result is a program that is 
confusing for patients and providers, difficult to administer, and 
inadequate to meet the health care needs of the 21st century.
    If the Congress decides to pursue instead interim expansion of drug 
coverage through private-sector insurance (using choice and competition 
to ensure quality and contain costs), PhRMA can be supportive so long 
as the interim measures would improve, rather than impede, 
opportunities for future comprehensive reform.
    With respect to the delivery system for any proposal, law and 
policy makers need to ask:

 Should the drug benefit be delivered by the government or the 
        private sector?
 Should the benefit be a single, one-size-fits-all program, or 
        should seniors and disabled beneficiaries have a range of 
        choices?
    We believe several principles are key components of any interim 
proposal. As Congress continues to grapple with this complex issue, we 
will support proposals consistent with these key principles:

 All beneficiaries would have the ability to enroll in a 
        private insurance coverage plan of their choosing, ranging from 
        private fee-for-service to HMOs and various private-sector 
        options in between.
 Federal subsidies would help low-income beneficiaries afford 
        coverage.
 Plans would provide coverage for beneficiaries with high 
        pharmaceutical expenditures.
 Beneficiaries would have access to all medicines.
 Plans should be overseen by a new government entity.
 The new program would be consistent with, and a step toward, 
        needed comprehensive modernization of the Medicare program.
 Coverage would be offered through competing, private insurance 
        or health plans that rely on marketplace competition to control 
        costs and improve quality.
    Government price controls are unacceptable because they would 
inevitably harm the industry's ability to develop new medicines for 
patients. We urge you to say ``no'' to price controls in any form, not 
direct price controls, not indirect price controls, not by design, not 
by accident, not by stealth, not by baby steps.

A PRIVATE INSURANCE INCREMENTAL APPROACH WILL BEST SERVE PATIENTS TODAY 
                              AND TOMORROW

    The pharmaceutical industry believes that if Congress decides to 
provide an incremental prescription drug benefit, the best approach 
would be to provide seniors access to private insurance products. This 
approach would fit easily into the current marketplace, since well over 
150 million people get their drug coverage through private entities. In 
delivering drug coverage, these private entities would do more than 
simply pay the claims. They could provide disease management programs, 
drug utilization review, patient education, and help to reduce medical 
errors. We in the research-based pharmaceutical industry believe that 
seniors and disabled beneficiaries would benefit greatly by having 
access to these private insurance products, with the government 
providing subsidies for those in need.
    Skeptics point to complex issues, such as ``adverse selection,'' 
and claim that a private insurance program will not work. Adverse 
selection can occur because individuals purchase insurance only when it 
is in their best interest. If an individual could purchase insurance at 
any time, it would be perfectly rational for them to wait until they 
were sick. Consequently, insurers often place limits on when 
individuals can purchase insurance and under what conditions.
    Recognizing that adverse selection is an important issue, we asked 
the experts for assistance. We turned to leading actuarial and economic 
firms, including Milliman and Robertson, Abt Associates, and Towers-
Perrin. These actuaries and economists note that a private prescription 
drug insurance program can work if designed properly. They also note 
that adverse selection is ``one of the most difficult issues in 
designing any insurance program involving individual choice.'' 
Actuaries and economists have several tools to minimize the impact on 
adverse selection. These include:

 Limiting election opportunities for enrollment;
 Providing low-income subsidies for premiums and deductibles;
 Establishing a high-risk pool for enrollees with very high 
        expenditures;
 Requiring up-front cost sharing, such as an annual deductible; 
        and
 Allowing insurers to negotiate with manufacturers and 
        distribution networks to reduce costs.
    We believe that a properly designed prescription drug insurance 
benefit would attract many Medicare purchasers and many private market 
sellers. Why are we so confident? In the market today, there are 
private health insurance policies for cancer, sports accidents, 
emergency room visits, pregnancy complications, and campers. There are 
private insurance products for goats, carriage rides, and the weather 
on the day of your daughter's wedding. We believe that there are 
similar opportunities for private-market solutions to increase access 
to prescription drug coverage for the elderly and disabled Americans.

                               CONCLUSION

    The pharmaceutical industry supports expanded drug coverage for 
seniors and disabled Americans--done the correct way.
    Some say that this issue is life or death for the pharmaceutical 
industry, America's premier high-technology industry. After the debate 
is over and the dust settles, we will still have a pharmaceutical 
industry--but depending on what you do, the industry could be 
profoundly different, and the results for patients could be 
demonstrably less. As the debate unfolds, we hope you'll remember the 
millions of Americans and their families waiting impatiently for new 
treatments and hopefully cures. We can provide quality health care for 
seniors and the disabled, including better prescription drug coverage, 
but we need to do it the correct way. If we do it the wrong way, the 
industry and the patients we serve will undoubtedly suffer the 
consequences.

                               Attachment

     the research-based pharmaceutical industry: facts at a glance
A Strong Commitment to Research and Development
 This year, research-based pharmaceutical companies will invest 
        $30.5 billion in research and development (R&D) on innovative 
        new medicines. This represents an increase of 12.5 percent over 
        research spending in 2000. Since 1980, research-based companies 
        have multiplied their R&D investment 13-fold.
 Domestic R&D is expected to increase by nearly 18.2 percent in 
        2001.
 R&D conducted abroad by U.S. based companies will grow only 
        1.02 percent--a clear sign that the American system nurtures 
        innovation and discovery.
 Over the past two decades, the percentage of sales allocated 
        to pharmaceutical R&D has increased from 11.9 percent in 1980 
        to approximately 20.3 percent in 2000, higher than virtually 
        any other industry. The average for all U.S. industries is less 
        than four percent.
 Approximately 36 percent of pharmaceutical R&D conducted by 
        companies worldwide is performed in the United States, followed 
        by Japan with 19 percent.
 This U.S. industry investment is very efficient. Of 152 major 
        global drugs developed between 1975 and 1994, 45 percent are of 
        U.S. origin.
Drug Discovery and Development Are High-Risk
 During the 1990s, the average time it took to discover, test 
        and develop a single new drug increased to nearly 15 years. 
        This was almost twice the development time in the 1960s.
 Of every 5,000-10,000 compounds tested, only five enter human 
        clinical trials, and only one is approved by the FDA for sale 
        in the U.S. Of every 10 medicines in the market, on average, 
        only three generate revenues that meet or exceed average R&D 
        costs.
 The Boston Consulting Group estimates that the pre-tax cost of 
        developing a drug introduced in 1990 was $500 million, 
        including the cost of research failures, the opportunity cost 
        of capital over the period of investment, and the increasing 
        cost of clinical trials.

Medicines in Development
 The research-based pharmaceutical industry currently has more 
        than 1,000 new medicines in development to treat hundreds of 
        serious diseases.
    -- There are nearly 1000 biotech medicines in the pipeline to 
            combat scores of diseases. Almost half the medicines--402--
            are for cancer, the second leading killer of Americans. 
            Biotechnology and new technological tools have 
            revolutionized cancer research.
    -- Among these drugs and biologics in development are promising new 
            treatments for cancer, heart disease, Alzheimer's, AIDS, 
            diabetes, multiple sclerosis, Parkinson's, stroke, 
            rheumatoid arthritis, and depression. The

Value of Medicines
 The estimated life expectancy of an American born in 1920 was 
        54 years. By 1965, life expectancy had increased to 70 years. 
        The average American born today can expect to live more than 76 
        years, and life expectancy has risen dramatically for all age 
        groups. Every five years since 1965, roughly one additional 
        year has been added to life expectancy at birth. These 
        improvements in life expectancy are due to advances in medicine 
        and our improved ability to prevent and treat disease:
    -- Antibiotics and vaccines have virtually wiped out such diseases 
            as diptheria, syphilis, whooping cough, measles and polio 
            in the U.S.
    -- The influenza epidemic of 1918 killed more people than all the 
            battles fought during the First World War. Since that time, 
            medicines have helped reduce the combined U.S. death rate 
            from influenza and pneumonia by 85 percent.
    -- Over the past 30 years, innovative medicines have helped reduce 
            deaths from heart disease and stroke by half, enabling 4 
            million Americans to live longer, better lives.
    -- Since 1965, drugs have helped cut emphysema deaths by 57 percent 
            and ulcer deaths by 72 percent.
 In a year-long disease-management program for about 1,100 
        patients with congestive heart failure run by Humana Hospitals, 
        pharmacy costs increased by 60 percent, while hospital costs 
        (the largest component of U.S. health care spending) declined 
        78 percent. The net savings were $9.3 million.
 A National Institutes of Health (NIH) study showed that while 
        it initially costs more to treat stroke patients with a clot-
        busting drug, the expense is more than offset by reduced 
        hospital rehabilitation and nursing home costs. Treatment with 
        the clot-buster costs an additional $1,700 per patient, but 
        reduced hospital rehabilitation and nursing home costs result 
        in net savings of more than $4000 per patient.
 According to a study published in the New England Journal of 
        Medicine, the use of ACE inhibitor drugs for patients with 
        congestive heart failure reduced mortality by 16 percent, 
        avoiding $9,000 in hospital costs per patient over a three-year 
        period. Considering the numbers of people at risk for 
        congestive heart failure, additional use of ACE inhibitors 
        could potentially save $2 billion annually.
 According to a study conducted at the University of Maryland 
        Medical Center, patients treated with beta-blockers following a 
        heart attack were up to 40 percent less likely to die in the 
        two-year period following the heart attack than the patients 
        that did not receive the drugs. According to another study, use 
        of beta-blockers resulted in an annual cost savings of up to $3 
        billion in preventing second heart attacks and up to $237 
        million in treating angina.
    -- Unfortunately, a study published in the Journal of the American 
            Medical Association found that only half the people who 
            could be helped by these medicines are getting them.
 Estrogen-replacement therapy can help aging women avoid 
        osteoporosis and crippling hip fractures, a major cause of 
        nursing home admissions. Estrogen-replacement therapy costs 
        approximately $3,000 for 15 years of treatment, while a hip 
        fracture costs an estimated $41,000.
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