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



THIRD IN SERIES ON MEDICARE REFORM: LAYING THE GROUNDWORK FOR A RX DRUG 
                                BENEFIT

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 27, 2001

                               __________

                            Serial No. 107-7

                               __________

         Printed for the use of the Committee on Ways and Means

                               ----------

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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

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

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                NANCY L. JOHNSON, Connecticut, Chairman

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

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________
                                                                   Page
Advisory of March 20, 2001, announcing the hearing...............     2

                               Witnesses

Congressional Budget Office, Dan L. Crippen, Ph.D., Director.....     9
Health Care Financing Administration, John A. Poisal, 
  Statistician, Office of Strategic Planning.....................    43

                                 ______

Frederick, Helen, Crownsville, MD................................    56
Institute for Safe Medication Practices, Michael R. Cohen........    49
National Committee to Preserve Social Security and Medicare, Max 
  Richtman.......................................................    61
Third Millennium, Maya MacGuineas................................    65
Wilkinson, Lore, Durham, NC......................................    58

                       Submission for the Record

American Society of Health-System Pharmacists, Bethesda, MD......    83

 
THIRD IN SERIES ON MEDICARE REFORM: LAYING THE GROUNDWORK FOR A RX DRUG 
                                BENEFIT

                              ----------                              


                        TUESDAY, MARCH 27, 2001

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:11 p.m., in 
room 1100 Longworth House Office Building, Hon. Nancy Johnson 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
March 20, 2001
HL-3

              Johnson Announces Third Hearing in Series on

                 Medicare Reform: Laying the Groundwork

                         for a Rx Drug Benefit

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on the addition of an outpatient 
prescription drug benefit to the Medicare program. The hearing will 
take place on Tuesday, March 27, 2001, in the main Committee hearing 
room, 1100 Longworth, beginning at 2:00 p.m.

    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include beneficiaries as well as experts on prescription 
drug coverage patterns, elements of benefit design, and the costs of 
drug coverage. However, any individual or organization not scheduled 
for an oral appearance may submit a written statement for consideration 
by the Committee and for inclusion in the printed record of the 
hearing.

BACKGROUND:

    This hearing will be the third in a series of Subcommittee hearings 
intended to lay the groundwork for the development of legislation to 
improve and strengthen the Medicare program--and the first to focus 
specifically on adding a much needed prescription drug benefit to the 
program. The first Subcommittee hearing, held on February 28th, gave 
Members a general overview of the reform debate. Our second hearing, on 
March 15th, addressed the need to bring regulatory relief while still 
protecting the program from waste, fraud, and abuse. Subsequent 
hearings will continue to target various aspects of the Medicare 
program in need of improvement.

    In announcing the hearing, Chairman Johnson stated: ``Nobody would 
design a seniors health program today which does not fully integrate 
prescription drugs. Adding a prescription drug benefit to an improved 
and modernized Medicare program is one of the most important tasks this 
Congress must accomplish this year. It will not be easy--the issues we 
will confront are extremely complicated. But it must be done. Next 
week's hearing will help us get started.''

FOCUS OF THE HEARING:

    This hearing begins the Subcommittee's consideration of the many 
issues surrounding the development of an outpatient prescription drug 
benefit within the Medicare program. The first panel will outline 
existing patterns of prescription drug coverage and spending, and 
witnesses will help Members begin to identify the many design decisions 
that will have to be made in structuring a new benefit. The second 
panel will turn to current and future beneficiaries to hear directly 
from them what they would like to see in a new drug benefit.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Tuesday, 
April 10, 2001, to Allison Giles, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, by close of business the day before the hearing.

FORMATTING REQUIREMENTS:

    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.

    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or 
MS Word format, typed in single space and may not exceed a total of 10 
pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.

    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.

    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.

    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.

    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.

    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://waysandmeans.house.gov''.

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                


    Chairwoman Johnson. The hearing will come to order.
    Today's hearing continues the Subcommittee's examination of 
Medicare modernization. Our first hearing focused on 
fundamental Medicare reform ideas, and our second hearing 
addressed Medicare's complexity and the regulatory burden on 
the providers that served beneficiaries. Last week, we heard 
from the Medicare trustees that the overall fiscal challenges 
to the program remained formidable. Today, we will examine the 
inadequacy of the current benefit package, specifically the 
absence of outpatient prescription drug coverage.
    Every Member of this Committee understands the importance 
of this issue to Medicare beneficiaries. Increasingly, 
medicines are the preferred method of treatment for a variety 
of ailments. This is particularly true for those with chronic 
diseases that disproportionately affect the Medicare 
beneficiary. Prescription drugs will only become more important 
as the biotechnology products currently in the pipeline are 
approved by the FDA for illnesses such as Alzheimer's, 
arthritis, cancer, osteoporosis, heart disease and stroke.
    Nevertheless, since its inception in 1965, the Medicare 
Program has generally excluded coverage of outpatient 
prescription drugs. While more than seven out of 10 
beneficiaries do have supplemental prescription coverage, 
millions of beneficiaries have none, and much of the current 
supplemental prescription drug coverage such as Medigap remains 
expensive and inadequate.
    Medicare beneficiaries consume more prescription drugs than 
any other demographic group, yet those without coverage have 
the least bargaining power and are therefore often paying the 
highest prices. Further, low-income beneficiaries often have to 
make unacceptable decisions between taking their medicines and 
having food on their table. No one would design a seniors' 
health plan today without fully integrating prescription drugs. 
The lack of coverage symbolizes just one of the many ways in 
which the Medicare benefit package has not kept pace with 
modern medical care.
    Today, we will hear testimony from the Congressional Budget 
Office about its new projections that any prescription drug 
benefit will cost us one-third more than projected last year. 
We will also hear CBO's analysis of the critical design 
elements that drive or constrain costs. Then, we will hear 
testimony from a researcher at the Health Care Financing 
Administration that seniors' prescription drug coverage 
increased from about 65 percent in 1976 to 73 percent in 1998. 
The research also makes clear that those seniors without 
coverage tend to consume far fewer drugs than those with 
coverage: not surprising but very unfortunate.
    Additionally, we will hear from Michael Cohen about ideas 
to reduce prescription drug errors and improve quality, 
critical aspects of any successful drug benefit. Finally, we 
will hear from current and future Medicare beneficiaries about 
the principles they think are important in the design of a 
prescription drug benefit. We will hear from a beneficiary 
without coverage, a beneficiary with good retiree coverage who 
wants to keep it that way, a young person representing the 
Third Millennium, concerned with the cost and structure of a 
Medicare benefit, and an advocate representing the National 
Committee to Preserve Social Security and Medicare.
    In short, this hearing will bring us up to speed on the 
status of prescription drug coverage and the challenges we face 
to successfully integrate drug coverage into a modernized 
Medicare program. Last year, our respective political parties 
toiled on this issue in separate rooms. It is my hope that 
through this series of hearings and our regular member 
seminars, we can bridge differences and develop a bipartisan 
consensus on how to tackle the complex and difficult issue of 
integrating prescription drugs into Medicare.
    Mr. Kleczka.
    [The opening statement of Chairwoman Johnson follows:]

  OPENING STATEMENT OF HON. NANCY L. JOHNSON, M.C., CONNECTICUT, AND 
                    CHAIRMAN, SUBCOMMITTEE ON HEALTH

    Today's hearing continues the Subcommittee's examination of 
Medicare modernization. Our first hearing focused on fundamental 
Medicare reform ideas. Our second hearing addressed Medicare's 
complexity and the regulatory burden on the providers that serve 
beneficiaries. Last week, we heard from the Medicare Trustees that the 
fiscal challenges to the program remain formidable.
    Today we will examine the inadequacy of the current benefit 
package--specifically, the absence of an out-patient prescription drug 
benefit. Every member of this committee understands the importance of 
this issue to Medicare beneficiaries. Increasingly, medicines are the 
preferred method of treatment for a variety of ailments. This is 
particularly true for those with chronic conditions, that 
disproportionately impact the Medicare beneficiary. Prescription drugs 
will only become more important, as the biotechnology products 
currently in the pipeline are approved by the FDA for illnesses such as 
Alzheimer's, arthritis, cancer, osteoporosis, heart disease and stroke.
    Nevertheless, since its inception in 1965, the Medicare program has 
generally excluded coverage of outpatient prescription drugs. While 
more than 7 out of 10 beneficiaries do have supplemental prescription 
drug coverage, millions of beneficiaries do not. And much of the 
current supplemental prescription drug coverage, such as Medigap, 
remains expensive and generally inadequate.
    Medicare beneficiaries consume more prescription drugs than any 
other demographic group. Yet those without coverage have the least 
bargaining power and are therefore often paying the highest prices. 
Further, low income beneficiaries often have to make unacceptable 
decisions between taking their medicines and other necessities of life. 
No one would design a seniors' health program without fully integrating 
prescription drugs. The lack of coverage symbolizes just one of the 
many ways Medicare has not kept up with modern health care.
    Today, we will hear testimony from the Congressional Budget Office, 
about its new projections that any prescription drug benefit will cost 
us one-third more than it projected last year. We will also hear CBO's 
analysis of the critical design elements of a prescription drug benefit 
that drive or constrain costs.
    Then we will hear testimony from a researcher at the Health Care 
Financing Administration that seniors' prescription drug coverage 
increased from about 65% in 1996 to 73% in 1998. The research also 
makes clear that those seniors without coverage tend to consume far 
fewer drugs than those with coverage. Additionally, we will hear from 
an academic about ideas to reduce prescription drug errors and improve 
quality, critical aspects of any successful prescription drug benefit.
    Finally, we will hear from current and future Medicare 
beneficiaries about principles they think are important in the design 
of a prescription drug benefit. We will hear from a beneficiary without 
coverage, a beneficiary with good retiree coverage who wants to keep 
it, a young person representing ``Third Millennium,'' concerned with 
the cost and structure of a Medicare drug benefit, and an advocate 
representing the National Committee to Preserve Social Security and 
Medicare.
    In short, this hearing will bring us up to speed on the status of 
prescription drug coverage, and the challenges in successfully 
integrating drug coverage into a modernized Medicare program. Last 
year, our respective political parties toiled on this issue in separate 
rooms. It is my hope that through this series of hearings and our 
regular Member seminars we can bridge differences and develop a 
bipartisan consensus on how to tackle the difficult and complex 
challenge of modernizing Medicare.

                                


    Mr. Kleczka. Thank you, Madam Chair.
    Madam Chair and Members, the Ranking Member, Mr. Stark, is 
running a little late. So on behalf of himself and myself, I 
would like to deliver the opening statement today.
    Madam Chair, thank you for holding today's hearings. This 
Subcommittee has been given a very important charge: crafting a 
meaningful prescription drug benefit for our Nation's seniors. 
And I appreciate the chairwoman's leadership and thoughtful 
approach to further educate Members on the various policy 
options. The year is young, and there is ample opportunity for 
us to try to find a bipartisan agreement on issues of mutual 
interest.
    Adding prescription drug coverage under Medicare is by far 
the single most important Medicare reform or modernization 
proposal under consideration this year. No matter where each of 
us lives, whether it is in Connecticut, Minnesota, Florida, 
Washington State or Wisconsin, we have seniors looking to us to 
modernize the Medicare Program and provide some assistance to 
help with the escalating costs of life-enhancing and life-
saving prescription medications.
    Unfortunately, if we are held to the budget before us, we 
are less likely to succeed. A budget is a statement of 
priorities, and drug coverage is clearly not a priority of this 
budget. Right now, our task is to develop a bipartisan 
prescription drug benefit that will provide adequate, 
sustainable assistance to senior citizens and disabled persons 
who depend on Medicare. The bottom line is that the Health 
Subcommittee should not be held hostage to a budget that 
shortchanges a Medicare drug benefit.
    If it turns out that a package that we believe is necessary 
to meet the needs of the Medicare beneficiaries doesn't fit 
within the budget currently before us, then the House will have 
to prioritize. Does Congress want an adequate prescription drug 
benefit for the elderly, or does it want to repeal the estate 
tax? Does Congress want an adequate drug benefit for senior 
citizens, or does it want a new missile defense system called 
Star Wars?
    The chairwoman is proceeding in the right way. She is 
holding educational seminars to help our Members focus on the 
important areas in the prescription drug debate and other 
issues before the Committee. We have scheduled hearings that 
will enable us to determine how best to help Medicare 
beneficiaries with prescription drug costs. However, so far 
this year, we have yet to see an appropriate drug benefit 
proposal, and I am not being partisan. I am putting the 
responsibility on all of us. I think we would be better off 
reporting no drug benefit than reporting a $105 billion to $153 
billion plan that would undoubtably fall so dramatically short 
of what is needed.
    We should develop a meaningful package. If the decision is 
made not to proceed with it, so be it. But we will have done a 
real service by developing a package that can work if and when 
we are willing to dedicate the necessary resources to make it 
work. We can even specify or suggest routes to obtain the 
needed resources through taxes, through premiums, through 
surplus expenditures or through a combination.
    In this era of record surpluses, we should be able to move 
with a real drug benefit, but if we cannot, then we should 
continue working on mechanisms to lower drug costs through drug 
reimportation, improved payment policies for the limited drugs 
Medicare currently covers, patent reform and other proposals to 
make drugs more affordable in the absence of coverage.
    Finally, while I look forward to the testimony from our 
witnesses, we should not be lulled into a sense of complacency 
because it appears that many beneficiaries currently have drug 
coverage. Coverage has declined since the study data were 
collected in 1998, and recent data from the Commonwealth Fund 
show that only 50 percent of beneficiaries have some type of 
coverage throughout a given year. In addition, only the poorest 
beneficiaries, who are also on Medicaid, have coverage that is 
comprehensive, affordable and reliable.
    That is why it is so important to have a Medicare drug 
benefit that is universally available. CBO's baselines and 
estimates should be a wakeup call to President Bush and 
Congress. Creating a prescription drug benefit will be costly, 
but we can afford it if we rearrange our priorities. I look 
forward to working with the chairwoman and our colleagues on 
the Committee to see if we can do better.
    Thank you, Madam Chair.
    [The opening statements of Mr. Kleczka and Mr. Ramstad 
follow:]

      OPENING STATEMENT OF HON. GERALD D. KLECZKA, M.C., WISCONSIN

    Madam Chair, thank you for holding today's hearing. This 
Subcommittee has been given a very important charge--crafting a 
meaningful prescription drug benefit for our nation's seniors--and I 
appreciate the Chairwoman's leadership and thoughtful approach to 
further educate Members on various policy options.
    The year is young, and there is ample opportunity for us to try to 
find bipartisan agreement on issues of mutual interest.
    Adding prescription drug coverage under Medicare is by far the 
single most important Medicare reform or modernization proposal under 
consideration this year. No matter where each of us lives--whether it 
is Connecticut, Minnesota, Florida, or Washington State--we have 
seniors looking to us to modernize the Medicare program and provide 
some assistance to help with the escalating costs of life-enhancing and 
life-saving prescription medications.
    Unfortunately, if we are held to the budget before us, we are less 
likely to succeed. A budget is a statement of priorities, and drug 
coverage is clearly not a priority of this budget.
    Right now, our task is to develop a bipartisan prescription drug 
benefit that will provide adequate, sustainable assistance to senior 
citizens and disabled persons who depend on Medicare. The bottom line 
is that the Health Subcommittee should not be held hostage to a budget 
that shortchanges a Medicare drug benefit.
    If it turns out that the package we believe is necessary to meet 
the needs of Medicare beneficiaries doesn't fit within the budget 
currently before us, then the House will have to prioritize.
    Does Congress want an adequate prescription drug benefit for the 
elderly or does it want to repeal the estate tax? Does Congress want an 
adequate drug benefit for senior citizens or does it want a new missile 
defense Star Wars program?
    The Chairwoman is proceeding in the right way. She is holding 
educational seminars to help our members focus on the important areas 
in the prescription drug debate and other issues before the Committee. 
We have scheduled hearings that will enable us to determine how best to 
help Medicare beneficiaries with prescription drug costs.
    However, so far this year, we have yet to see an appropriate drug 
benefit proposal. I am not being partisan--I am putting the 
responsibility on all of us. I think we would be better off reporting 
NO drug benefit than reporting a $105-153 billion plan that would 
undoubtedly fall so dramatically short of what is needed.
    We should develop a meaningful package. If the decision is made not 
to proceed with it, so be it. But, we will have done a real service by 
developing a package that can work if and when we are willing to 
dedicate the necessary resources to make it work. We can even specify 
or suggest routes to obtain the needed resources--through taxes, 
through premiums, through surplus expenditures, or a combination.
    In this era of record surpluses, we should be able to move forward 
with a real Medicare benefit. But, if we cannot, then we should 
continue working on mechanisms to lower drug costs through drug 
reimportation, improved payment policies for the limited drugs Medicare 
currently covers, patent reform, and other proposals to make drugs more 
affordable in the absence of coverage.
    Finally, while I am looking forward to the testimony from our 
witnesses, we should not be lulled into a sense of complacency because 
it appears that many beneficiaries currently have drug coverage.
    Coverage has declined since the study data were collected in 1998, 
and recent data from the Commonwealth Fund show that only 50 percent of 
beneficiaries have some type of coverage throughout  a given year. In 
addition, only the poorest beneficiaries who are also on Medicaid have 
coverage that is comprehensive, affordable and reliable. That's why 
it's so important to have a Medicare benefit that is universally 
available.
    CBO's baselines and estimates should be a wake-up call to President 
Bush and Congress. Creating a prescription drug benefit will be costly, 
but we can afford it if we rearrange our priorities. I look forward to 
working with the Chairwoman and our colleagues on the Committee to see 
if we can do better.

                                


         Opening Statement of Hon. Jim Ramstad, M.C., Minnesota
    Madam Chairwoman, thank you for calling this important hearing 
today to review proposals to expand access to prescription drug 
benefits for seniors.
    As founder and co-chair of the House Medical Technology Caucus, I 
appreciate the incredible advances that the medical technology and 
pharmaceutical industries have made in recent years to treat and cure 
many illnesses, diseases and conditions. These advances are truly 
breathtaking in their scope and will become more and more prevalent as 
medical science continues to advance.
    Unfortunately, the Medicare system penalizes seniors by 
incorporating these advances too late, if at all.
    Congress needs to comprehensively reform Medicare to modernize the 
program and expand access to critical new technologies and drugs. By 
acting this year, we can improve health, save lives and save the system 
money.
    The question of course is how to maintain the standard of care 
enjoyed by America's seniors, improve the system and meet the 
incredible demographic challenges coming in the very near future. This 
is not a simple task, and a prescription drug benefit will place new 
pressure on Medicare as our nation's senior population grows.
    Some propose to simply add a prescription drug benefit on top of 
the current system. I believe we've tinkered too long. We must 
modernize Medicare to provide these important new benefits and 
streamline their delivery to seniors.
    Since anything worth doing is worth doing well, we must carefully 
review all of the ideas that have come forward for their strengths and 
weaknesses, as well as for unintended consequences.
    I applaud the work of Chairwoman Johnson in tackling these issues 
and thank her for holding this hearing today to explore in depth the 
challenges in adding a prescription drug benefit to Medicare. I look 
forward to learning more from today's witnesses on how we can best 
address the critical issue of including prescription drug coverage in 
Medicare.

                                


    Chairwoman Johnson. I thank the gentleman, and I would just 
want to say, because we will have a spirited debate on the 
budget tomorrow on the floor, that if I didn't believe that a 
prescription drug bill was a great priority of my leadership, 
my colleagues and the President, I wouldn't be putting the kind 
of effort into it that I am. I believe there is very deep 
commitment on the Republican side as I believe there is on the 
Democratic side to provide prescription drugs through Medicare, 
and that is the course I am on and the course that I hope we 
will be able to complete.
    It is now my privilege to welcome Dr. Crippen of the 
Congressional Budget Office here today and thank you in 
advance, Dr. Crippen, for your extensive testimony and 
particularly for your dwelling on the difficult issue of what 
actually affects the national cost of a national prescription 
drug program.

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

    Dr. Crippen. Thank you, Madam Chairman, and Members of the 
Subcommittee.
    I hope today to describe some of the issues affecting the 
design of a Medicare prescription drug benefit and to give you 
some notion of what relative changes might do to the cost and 
the effect of such a benefit. But first, I think I would be 
remiss if I did not spend at least 30 seconds on the context in 
which we are having this debate. The annual report released 
last week by the Medicare Board of Trustees indicates that the 
Hospital Insurance (HI) trust fund's expenses will exceed its 
dedicated, noninterest revenues beginning in 2016. We actually 
believe it will be sooner, as soon as 2011, perhaps.
    And that is actually the good news. The bad news is that 
the retirement of the baby boomers between 2010 and 2020 will 
almost double Medicare's enrollment, while the number of 
workers will only increase by 15 percent. The cost per 
beneficiary will also continue to grow faster than the economy, 
and as a result, Medicare will consume an ever-increasing share 
of gross domestic product (GDP).
    It is important to keep in mind that Medicare is only one 
of the Federal programs that transfers resources from the 
working population to the retired and disabled. This poster, 
which you have all seen before, illustrates what the near 
future might look like if we take no action (chart 1). Just 
these three Federal programs--Medicare, Medicaid, and Social 
Security--will grow from 7 percent of GDP to 15 percent of GDP 
by the time the baby-boom generation is finished retiring in 
2030, and their spending will constitute nearly three-quarters 
of Federal spending as we now know it.
    And then, there is ``worse'' news. 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, the Congressional Budget Office (CBO) 
expects prescription drug costs for the elderly to grow at an 
average annual rate of over 10 percent per person--twice the 
pace of Medicare's growth and much faster than the growth of 
the economy--ultimately costing $1.5 trillion over the next 10 
years.
    In 1997, about one-third of the Medicare population had no 
prescription drug coverage, but nearly 70 percent had it. The 
next chart illustrates the distribution of spending for all 
prescription drugs for Medicare in 1997 (chart 2). The single 
largest component is out-of-pocket payments at 45 percent, 
which compares with out-of-pocket costs of about 39 percent for 
the total population. The second largest source of funding is 
employer-sponsored retiree health benefits, and the third 
largest is Medicaid. I should note that State-based programs, 
which covered 5 percent of the total in 1997, have been growing 
rapidly in both number and coverage and probably contribute a 
larger share today.
    Madam 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 of current 
funding. I have a few examples for the Committee today of the 
comparative magnitudes of some of the many parameters in a 
prescription drug benefit. For that purpose, we have 
constructed a prototypical benefit, a straw man, if you will, 
as a basis for comparison in making these changes. That base 
case is not the same as any of the existing proposals that you 
or we have seen before, and we present numbers for only 1 year, 
assuming that the benefit in that year is fully phased in.
    Conceptually, there are at least 6 steps we must go through 
in developing the specifications of a proposal for covering the 
prescription drug costs of Medicare beneficiaries. First, a 
proposal has to specify the rules for joining the program. Is 
the program voluntary or mandatory? If voluntary, is it a one-
time election? These rules, combined with the attractiveness of 
the benefit and premium, will determine whether all or only 
some Medicare beneficiaries participate. For the purposes of 
our exercise today, we assume that all part B beneficiaries 
enroll in the drug benefit and cannot disenroll in the future.
    Second, the proposal needs to specify what part of drug 
spending by or on behalf of the participants is excluded from 
coverage, such as initial deductibles or amounts in excess of a 
benefit cap. In our base case, there are no exclusions, no 
deductibles, no benefit cap, and no ``hole'' in the benefit.
    Third, a proposal should specify the share of covered 
spending that is paid by beneficiaries through cost sharing. 
Our prototype includes 50 percent coinsurance, up to the 
catastrophic cap.
    Fourth, a proposal should specify the share of benefit 
payments that will be funded by beneficiaries' premiums and the 
remainder, which, is paid for by Federal taxpayers in the form 
of general revenues. The base case today assumes that 
beneficiaries will pay for 50 percent of the program's 
benefits.
    Fifth, a proposal should specify what, if any, subsidy will 
be provided to low-income beneficiaries and under what rules. 
This, as the Committee is aware, is an exceedingly complex area 
with complicated interactions between Medicaid and any new 
Medicare drug benefit. Our base case assumes full Federal 
coverage of premiums and cost sharing for anyone with income of 
less than 135 percent of the poverty level and some subsidy for 
the premiums of beneficiaries with income up to 150 percent of 
the poverty level.
    Finally, Madam Chairman, a proposal should specify the 
rules for administering the benefit, such as the use of 
pharmacy benefit managers (PBMs); the level and nature of 
competition, constraints applying to cost controls on 
beneficiaries, and so on. Our prototype assumes the use of one 
PBM with some restrictions on cost controls.
    Members of the Committee, this series of posters, of which 
you have copies, is an attempt to depict some of these moving 
parts in a way we hope is helpful. The first is the base case I 
have just described (chart 3). As depicted, the beneficiary 
pays 50 percent of the cost of each prescription filled until 
his or her cost-sharing expenses reach the stop-loss amount. 
Note that this cost sharing need not necessarily be paid 
directly by beneficiaries; it could be paid by third parties.
    Above the stop-loss amount, 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, as I have described. In this 
case, the total cost to taxpayers is approximately $32 
billion--$26 billion for the Medicare benefit and $6 billion 
for low-income subsidies. Beneficiaries who purchased drugs 
would pay (or have paid on their behalf by third parties) $57 
billion in copayments; premiums from all enrollees, whether or 
not they filled any prescriptions, would total $26 billion.
    The first variation on the base case that we have made is 
the addition of a $250 deductible (chart 4). As you would 
expect, that change lowers taxpayers' costs, in this case by $2 
billion, and raises beneficiaries' cost exposure by a similar 
amount. That is Case A, the $250 deductible. Case B takes the 
base case again and, with no deductible, simply raises the 
catastrophic ceiling from $4,000 to $6,000 (chart 5). 
Taxpayers' costs in this case are reduced by about $1 billion 
from the base case, and beneficiaries' or third parties' costs 
are increased by a similar amount.
    The third variant on the theme here, Case C, again takes 
the base case and adds a benefit cap of $2,500 in drug spending 
(chart 6). The cap is well below the catastrophic ceiling of 
$4,000, creating a hole in the benefit design similar to that 
in many of the proposals that the Committee considered last 
year. Again, the taxpayers' share drops, while the 
beneficiaries' exposure increases.
    Our final poster depicts all of the previous changes 
applied to our prototype benefit: a $250 deductible, a benefit 
maximum of $2,500, and a $6,000 catastrophic cap (chart 7). Not 
surprisingly, the changes produce a more dramatic shift from 
taxpayers to beneficiaries. Perhaps in this case what is more 
important are the shifts within the two categories. The Federal 
share includes more low-income subsidies and much less indirect 
Medicare costs. The total cost exposure for beneficiaries is 
not only increased in this case by $12 billion but the relative 
contributions shift: Cost sharing by those who use drugs makes 
up a bigger share and premiums paid by all Medicare recipients 
a smaller share. In fact, the shift is so strong that this case 
has the lowest monthly premium of the four variants we present 
today.
    Madam Chairman, there are more variations on these themes 
in my written statement, and these themes, or policy levers, 
cover only the basics. There are a myriad of details that can 
have significant effects on our estimates. As a result, none of 
the numbers we show here should be taken too literally. They 
are meant to be illustrative, to show the relative effects of 
these options and variations.
    Let me conclude by returning to the amount currently spent 
on outpatient prescription drugs by the elderly--in a content 
of no Medicare benefit. That amount makes it obvious that it 
will be costly to provide a generous benefit to all 
beneficiaries. Either enrollees' costs or taxpayers' costs will 
be high.
    Over the period 2002 to 2011, CBO estimates that about $1.5 
trillion will be spent on prescription drugs for the elderly. 
Thus, a rough cut of a drug benefit that covered 50 percent of 
current drug spending would suggest a gross cost, before 
netting out any premiums, of at least $728 billion through 
2011. If, instead, all costs above $1,000 a year were covered 
for all beneficiaries, gross costs through 2011 would be $1.1 
trillion. If only costs above $5,000 a year were covered, gross 
costs through 2011 would be at least $365 billion.
    Madam Chairman, just as we are currently paying for much of 
our Medicare's 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 it was financed largely by enrollees, the burden on our 
children would be even greater.
    I look forward to answering your questions.
    [The prepared statement of Dr. Crippen follows:]

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

    Madam 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 present some difficult choices among desirable, but 
potentially conflicting, objectives and need to be considered in the 
context of the growing financial pressures facing the Medicare program.
FINANCIAL PRESSURES FACING THE MEDICARE PROGRAM
    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 3.4 percent, compared 
with 10.0 percent per year over the previous decade.
    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 12 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 $491 billion--by fiscal year 2011, reflecting an average 
increase of 7.7 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.
    The Medicare trustees' report that was released last week projects 
that total Medicare spending will increase substantially in the long 
run, rising from 2.2 percent of GDP in 2000 to 8.5 percent in 2075. In 
addition, the difference between projected total Medicare spending and 
total federal revenues specifically dedicated to the program is 
expected to grow substantially. Sources of those dedicated revenues 
include the Medicare payroll tax, the portion of the income taxes on 
Social Security benefits that is paid to the Hospital Insurance (HI) 
trust fund (Part A of Medicare), and premiums paid by enrollees for 
Supplementary Medical Insurance (SMI, or Part B of Medicare). According 
to the Medicare trustees, the discrepancy between total Medicare 
expenditures and dedicated revenues will be $64.0 billion in 2001, or 
0.6 percent of GDP (see Figure 2). By 2075, that gap is projected to 
grow to 6.0 percent of GDP. The growing difference between spending and 
dedicated revenues indicates the Medicare program's increasing 
dependence on general revenues to pay its bills.
    These financial pressures have focused policymakers' attention on 
restructuring the Medicare program. There are two potentially 
conflicting considerations:
     First, Medicare spending is expected to grow at a rapid 
rate, making the program increasingly dependent on general revenues 
and, ultimately, unsustainable in its present form.
     Second, Medicare does not provide the protection offered 
by most private insurance, since it lacks a stop-loss provision and 
coverage for prescription drugs.
PROVIDING MEDICARE BENEFICIARIES WITH COVERAGE FOR PRESCRIPTION DRUGS
    Modernizing Medicare's benefit package by 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.
Beneficiaries' Current 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 at nearly twice the rate 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 nearly 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 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 
a higher price tag 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.
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 3). 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 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, retiree health plans have provided prescription drug 
coverage to more seniors than any other source, and their 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 3). 
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 also may 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 income or asset levels 
that are too high to qualify for state programs and less access than 
higher-income enrollees to drug coverage through former employers.
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 
enrollees' premiums or the government's subsidy costs 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 benefit in any given year, 
possibly reducing support for the program. 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, 
where enrollment is concentrated among those who expect to receive more 
in benefits than they would 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 the federal 
government. Given a one-time-only enrollment option, participation 
rates would be reasonably high, even if the program was largely 
financed by enrollees' premiums. If enrollees lived long enough, 
virtually all of them would benefit from drug coverage, and 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 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 all 
provided full subsidies to low-income people for both cost-sharing and 
premium expenses, in addition to partially subsidizing premium costs 
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 low cost-sharing requirements (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 transfer 
most of the costs of drugs currently used by enrollees to the Medicare 
program, but it would also increase utilization among those who now 
have less generous coverage.
    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. Public support for a drug 
benefit might be stronger, though, if most enrollees could reasonably 
expect to receive some benefit payments each year.
    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 4). 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 requirements, and a high stop-loss 
threshold. Or the program could provide a more generous benefit similar 
to those provided by employer-sponsored plans, with federal 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 House-
passed drug bill) 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 
shares 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 very similar plan designs.
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 4). The enrollee would be responsible for 
coinsurance equal to 50 percent of the cost of prescription drugs up to 
$8,000 of 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. We assume that a 
subsidy of that size would be sufficient to ensure that all enrollees 
in Medicare Part B 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 amounts. 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 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 the other 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 5). 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 $55.50 monthly premium that they would pay under 
the base case plan. That total includes premiums that are paid by 
Medicaid on behalf of low-income enrollees. In addition, enrollees 
would face about $57 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 are 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 
just over $30 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 jumps to almost $60 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 $8,000 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 about $66 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 $78.9 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 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 federal subsidy is raised to 75 percent of premiums. 
That change increases Medicare costs by 50 percent compared with Case 
4-A but lowers 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 about $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 decline somewhat.
CONCLUSIONS
    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 
would significantly increase Medicare's costs, and unless it was fully 
financed by enrollees' premiums, it would exacerbate the imbalance 
between the program's projected spending and its dedicated revenues.
    We are extremely unlikely to see a new drug benefit that has no 
adverse impact on Medicare's long-term financial status. But, as I have 
discussed today, there are important design features that could be 
built in to such a benefit to limit federal costs while providing 
important insurance protection for enrollees. In developing a realistic 
policy proposal, hard decisions must be made to establish the proper 
balance among competing objectives.

 TABLE 1.--CBO'S BASELINE PROJECTIONS OF PRESCRIPTION DRUG SPENDING AND
        MEDICARE BENEFITS PER ENROLLEE, CALENDAR YEARS 2002-2011
                              [In dollars]
------------------------------------------------------------------------
                                     Spending per Enrollee     Average
                                  --------------------------    Annual
                                                              Percentage
                                       2002         2011     Change 2002-
                                                                 2011
------------------------------------------------------------------------
Drug Spendinga...................        1,989        4,818         10.3
Medicare Benefitsb...............        6,512       10,538          5.5
Memorandum:
Gross Domestic Product per Capita       39,275       56,569          4.1
------------------------------------------------------------------------
a Total spending per enrollee on outpatient prescription drugs not
  currently covered under Medicare, regardless of payer.
b Medicare benefits per enrollee under the Hospital Insurance and
  Supplementary Medical Insurance programs.
Source: Congressional Budget Office.


     TABLE 2.--COMPARING CBO'S JANUARY 2001 AND MARCH 2000 BASELINE
                PROJECTIONS OF PRESCRIPTION DRUG SPENDING
               [By calendar year, in billions of dollars]
------------------------------------------------------------------------
                                          January 2001      March 2000
                 Year                      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,  ...............            17.6
 January 2001 estimates over March
 2000 estimates, for 10 years ending
 in 2010..............................
Percentage increase in total spending,  ...............            31.8
 10 years ending in 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.--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 Coveragea....................       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 Coverageb....................           0       1,396      1,396           0         3.5        3.5
HMOs Not Elsewhere Classifiedc............         678       4,696      5,374         1.7        11.8       13.5
                                           ---------------------------------------------------------------------
      Total...............................      12,491      27,236     39,728        31.4        68.6      100.0
----------------------------------------------------------------------------------------------------------------
a 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.
b 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.
c Primarily HMOs under Medicare+Choice risk contracts.
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.


  TABLE 4.--OPTIONS FOR A PRESCRIPTION DRUG BENEFIT THROUGH MEDICARE IN
                                  2004
------------------------------------------------------------------------
                                        Federal Cost     Beneficiaries'
   Case           Description a         (Billions of     Monthly Premium
                                          dollars)          (Dollars)
------------------------------------------------------------------------
Base......  Federal government pays               31.6             55.50
             50 percent 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                        29.6             50.90
             deductible.
1-B.......  Require a $500                        28.0             47.00
             deductible.
1-C.......  Reduce beneficiaries'                 42.0             80.70
             coinsurance to 25
             percent.

                 Option 2: Increase the Stop-Loss Amount

2-A.......  Raise the stop-loss                   30.7             53.10
             amount to $6,000.
2-B.......  Raise the stop-loss                   30.4             52.40
             amount to $8,000.

                        Option 3: Cap the Benefit

3.........  Cap the benefit after                 28.1             47.10
             $2,500 in 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                        23.4             35.20
             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''.
4-B.......  Require a $250                        21.4             35.00
             deductible; cap
             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                        24.4             35.20
             deductible; cap
             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                 30.3             17.60
             premiums 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''.
------------------------------------------------------------------------
a 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 through one of two approaches: beneficiaries with income
  at or below 135 percent of the 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.
Source: Congressional Budget Office.


                     TABLE 5.--APPROXIMATE COST OF ILLUSTRATIVE CASES IN CALENDAR YEAR 2004
                                            [In billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                 Federal Cost to Taxpayers              Payments by or for
                                          --------------------------------------          Beneficiaries
                                                        Net of Low-             --------------------------------
                  Casea                                   Income
                                            Medicare   Subsidies and    Total     Medicare     Cost      Total
                                                         Medicaid                 Premiums   Sharing
----------------------------------------------------------------------------------------------------------------
Base.....................................       26.0             5.5       31.6       26.0       57.0       83.0
1-A......................................       23.8             5.8       29.6       23.8       61.7       85.5
1-B......................................       22.0             6.0       28.0       22.0       65.8       87.8
1-C......................................       37.8             4.3       42.0       37.8       31.4       69.2
2-A......................................       24.9             5.8       30.7       24.9       59.6       84.5
2-B......................................       24.5             5.9       30.4       24.5       60.4       85.0
3........................................       22.1             6.1       28.1       22.1       66.0       88.1
4-A......................................       16.5             7.0       23.4       16.5       78.9       95.3
4-B......................................       16.4             5.0       21.4       16.4       78.7       95.0
4-C......................................       16.5             7.9       24.4       16.5       79.0       95.5
4-D......................................       24.7             5.6       30.3        8.2       78.9       87.1
----------------------------------------------------------------------------------------------------------------
a For descriptions of the illustrative cases, see Table 4.
Source: Congressional Budget Office.
Note: Estimates assume that all costs are phased in fully by 2004. Numbers may not add up to totals because of
  rounding.


 FIGURE 1. ANNUAL AVERAGE MEDICARE SPENDING GROWTH FOR VARIOUS PERIODS
[GRAPHIC] [TIFF OMITTED] T3534A.001

 SOURCE: Historical data from the Health Care Financing Administration 
          and projections by the Congressional Budget Office.

[GRAPHIC] [TIFF OMITTED] T3534A.002

  FIGURE 3. DISTRIBUTION OF DRUG SPENDING FOR MEDICARE ENROLLEES, BY 
                              PAYER, 1997
[GRAPHIC] [TIFF OMITTED] T3534A.003

SOURCE: Congressional Budget Office tabulations from the 1997 Medicare 
Current Beneficiary Survey. Drugs currently covered by Medicare are not 
                             included here.

  FIGURE 4. POSSIBLE FEATURES OF A PRESCRIPTION DRUG INSURANCE BENEFIT
[GRAPHIC] [TIFF OMITTED] T3534A.004

                  SOURCE: Congressional Budget Office.

                    CHARTS PRESENTED AT THE HEARING
[GRAPHIC] [TIFF OMITTED] T3534A.005

[GRAPHIC] [TIFF OMITTED] T3534A.006

[GRAPHIC] [TIFF OMITTED] T3534A.007

[GRAPHIC] [TIFF OMITTED] T3534A.008

[GRAPHIC] [TIFF OMITTED] T3534A.009

[GRAPHIC] [TIFF OMITTED] T3534A.010

[GRAPHIC] [TIFF OMITTED] T3534A.011

                                


    Chairwoman Johnson. Thank you, Dr. Crippen.
    I just call Members' attention to the last chart which does 
have the monthly premiums of the cases that you described. I 
just want to run through some quick things, and then, I want to 
give everybody a chance to question, so I will try to keep my 
time limited.
    Do your estimates--first of all, does this presentation, 
particularly where there is a cap, assume that during the hole, 
so to speak, there is a discount that seniors enjoy? Do you 
take that into account in your estimate of patient burden?
    Dr. Crippen. No, we do not. In one variation, we assume no 
coverage at all other than the low-income subsidies.
    Chairwoman Johnson. I see. So if we were to negotiate that, 
that a PBM would have to provide a discount during that period, 
that would shift these numbers.
    Dr. Crippen. It would shift them slightly, yes.
    Chairwoman Johnson. Then, in terms of the role of the PBM, 
you do mention in your written testimony that the costs would 
shift depending on the powers of the PBM to control costs. How 
much would they shift, and what would be the key tools?
    Dr. Crippen. There are, of course, several tools that PBMs 
could use, ranging from formularies to discounts. Whether or 
not the PBM assumes risk is also important. So costs would 
depend critically on how all of those factors apply--as well as 
on whether there is more than one PBM. I don't have for you 
today a range of figures on what would help, but certainly, the 
more tools that the PBMs are allowed to have, and the fewer the 
restrictions on things like formularies, the more the discount 
could be.
    Chairwoman Johnson. Well, we would certainly need to know 
that. We would certainly need to know what would be the 
implications of the PBMs having the right to negotiate 
formularies, because if you were going to give them that right 
because it would impact costs, you would certainly want to have 
more than one PBM. So the issue of whether you have one or more 
PBMs has to do to some extent with what powers you give them.
    Another thought that has come forward is to require that 
every PBM who participates provide two options, you know, a 
tight option with a lower premium and a looser option with a 
higher premium. So actually, if you had two PBMs, you would 
have four plan choices. So if you could pursue that for us, I 
would appreciate it.
    Then, briefly, do your estimates take into account the 
reduced hospital and ER usage of having a prescription drug 
plan? I mean, over and over again, our community providers tell 
us and our doctors tell us, everybody tells us, that if they 
had prescription drugs, they would not end up back in the ER 
and in the hospital and needing home care and so on. Do you 
take that into account in your estimates?
    Dr. Crippen. We have looked very carefully at that issue 
and at what evidence is available, and frankly, it is a mixed 
bag. Most of the studies that suggest there are savings to 
overall medical expenditures from access to pharmaceuticals are 
not very compelling, although there are a couple that are more 
so. But on the other side, there are costs as well, having to 
do with things like adverse events from prescriptions. So at 
the moment, we assume no net savings to other parts of Medicare 
from the implementation of a pharmaceutical benefit.
    Chairwoman Johnson. OK.
    Dr. Crippen. It would save some, but it would also cost 
some.
    Chairwoman Johnson. On the issue of errors, of prescription 
drug errors and interactions, if we put in place a system that 
reduced errors and reduced the likelihood of adverse 
interactions, would that help the scoring, and might that help 
the scoring on this first point too?
    Dr. Crippen. It could, in theory. Again, at the moment, 
given the evidence we have seen, we don't assume that PBMs in 
and of themselves reduce dramatically the number of adverse 
events.
    Chairwoman Johnson. So you would need to know whether--and 
we would need to know from you--whether or not we adopted some 
of the recommendations in the National Institutes of Medicine 
study to reduce errors was if we developed a fairly tight 
system that we thought would do that?
    Dr. Crippen. Yes. The places that seem to show the most 
promise are hospitals that have implemented very tight systems 
of control, including integration of the results of lab tests 
and control of prescriptions. In contrast, PBMs look mainly for 
drug interactions among different prescriptions. But there is a 
lot more to it than that; drug interactions are just a small 
piece of what ultimately you might want to be able to control 
to avoid adverse outcomes.
    Chairwoman Johnson. And then, along the same line, if we 
were able to involve more seniors with chronic illness in 
disease management plans so that they actually stuck to their 
regimen more effectively and thereby benefitted from the 
medications recommended by the physician, would there be any 
implications of that kind of provision for scoring?
    Dr. Crippen. Yes, there should be--again, depending in part 
on whether the acceptance of such a disease management plan by 
a beneficiary was voluntary on whether a person got into the 
plan only after developing the condition, and so on. The 
acceptance of case management can reduce costs, but how much it 
reduced them would depend a lot on the rules of the road and 
how people got in and out.
    Chairwoman Johnson. And lastly, you did mention this 
briefly, that a prescription drug benefit in Medicare would 
have an impact, would have the effect of shifting costs from 
the State public sector to the Federal public sector. Would you 
enlarge a little bit on the impact that we might have on the 
employer sector and if there are things that we could do to 
reduce the likelihood that employers would drop their retiree 
plans.
    In the bills that were presented in the last Congress, 
there was quite a variation in your analysis of the degree to 
which a public plan would encourage employers to drop their 
plans. Could you just bring to our attention the factors that 
would most affect that employer decision?
    Dr. Crippen. It would depend a great deal, again, on the 
details of the plan itself. It varies a lot, as our analysis 
last year suggested. For example, if the program were 
constructed, say, like our Case D here, our fourth case, with 
more beneficiary exposure but a lower premium, it might induce 
employers to subsidize or pay for the premium for their 
retirees and then get out of the program altogether. So 
employers' decisions will depend critically on how the program 
is constructed and what the beneficiaries are exposed to. We 
would expect some employers to find ways to shift some of their 
prescription drug benefit costs, to eliminate their benefit, or 
change their benefit's structure so that it wraps around the 
Medicare benefit.
    Chairwoman Johnson. Thank you, Dr. Crippen. Mr. Stark, and 
welcome back.
    Mr. Stark. Thank you, Madam Chairman.
    I apologize, Dr. Crippen, for being late, but let me just 
see if you can help me out a little bit. A lot of what I am 
trying to understand here regarding the costs of these various 
plans I presume depends on adverse selection. And I don't know 
how big a factor that is in how the estimates change.
    Dr. Crippen. In these examples, we haven't included an 
assumption about adverse selection.
    Mr. Stark. OK.
    Dr. Crippen. Certainly, it could have an effect.
    Mr. Stark. OK. What do you assume the cost of the 
pharmaceutical drugs is under these estimate? In other words, I 
guess if you would say the top end of the range were full 
retail, and the bottom end were I have always been under the 
assumption that the VA buys at about 50 percent of retail. 
Where in that range did you assume we would come in, or 
whatever plan it was, what would be the actual cost to the 
plan? Did you have an assumption on that?
    Dr. Crippen. We made an assumption for today's purposes; it 
is a combination of price and utilization controls that comes 
to about 12.5 percent.
    Mr. Stark. Off retail?
    Dr. Crippen. Yes, but that is 12.5 percent off the gross 
amount, figured as price times the number of prescriptions.
    Mr. Stark. So it is pretty linear? In other words, if you 
could get down, if you get a third off retail, would the cost 
drop quite a bit?
    Dr. Crippen. Sure.
    Mr. Stark. If it is fairly linear and easy to do, could you 
give us some idea of the estimates for a plan with somewhere 
between 12 and 35 percent off retail?
    Dr. Crippen. Part of the problem, Mr. Stark, is that there 
are offsetting factors. The more you get the price of a drug 
down, the more likely you are to increase utilization. So in 
terms of gross spending, you may have more drugs out there, 
which may be part of the----
    Mr. Stark. You mean utilization by number of beneficiaries 
signing up or----
    Dr. Crippen. It could be just in the number of 
prescriptions, which is what we are seeing in the VA, for 
example. The cost of prescription drugs at the Veterans 
Administration is going up, not so much because of prices--they 
have a fairly strict regimen and formulary--but because the 
same people are getting more prescriptions and using more 
drugs.
    Mr. Stark. I would have no way of knowing what that means. 
Is that good or bad?
    Dr. Crippen. I don't know either. All I am saying is that 
for purposes of----
    Mr. Stark. Arguably, physicians may disagree about what is 
overutilization and what is underutilization. And I don't know 
that we have any way of determining that.
    Dr. Crippen. We don't. All I am saying is that for costing 
purposes, you have two main factors that can change. The price 
may go down, but the number of drugs being used may go up.
    Mr. Stark. OK, but it is limited to drugs prescribed by the 
doctors, I would guess, but I don't know.
    Do you have any idea of where the prices might be on any of 
these plans? If we just made this basically not voluntary, made 
it like part A: you want Medicare, you have got to be in the 
drug benefit plan. Would the cost drop substantially?
    Dr. Crippen. Not according to what we have assumed here. We 
assumed, for the purpose of these examples, that the benefit 
was not voluntary.
    Mr. Stark. No, but that is what I meant. What if you 
assumed that it was not voluntary, that everybody was in?
    Dr. Crippen. That is what we assumed.
    Mr. Stark. You assumed that?
    Dr. Crippen. Yes, we assumed that every Part B beneficiary 
would enroll in this plan because the subsidies were big enough 
to entice them.
    Mr. Stark. You are figuring there are going to be 40 
million whatever people in it? All right. Does the cost go up a 
lot if you are wrong, I mean, if it is only 50 percent 
participation because they stay in private plans?
    Dr. Crippen. It could. That is where adverse selection 
could be a major factor--if you had less than 100 percent 
participation and/or let people move in and out at will.
    Mr. Stark. I guess my last question: is this stuff all 
fairly linear? I mean, I don't want to have you invite us to 
send you a lot of what ifs, but with your modeling, are what 
ifs relatively easy using your scales here if we wanted to fine 
tune? Could we send you a letter and say what if we went to 
1,500 instead of 2,000.
    Dr. Crippen. Yes, we can certainly analyze many of those 
variations that we couldn't before, and we would be happy to do 
that. However, I would not characterize the relationships as 
linear.
    Mr. Stark. OK.
    Dr. Crippen. They do change as you move things around.
    Mr. Stark. Yes.
    Dr. Crippen. Let me give you a stark example, one that is 
not here. If you used reinsurance, so that you are paying an 
after-the-fact risk adjustment, the more reinsurance you 
introduce, the more the benefit looks like the fee-for-service 
side of Medicare and the less risk the provider has, whether it 
is a PBM or another provider. Thus, you have some benefit from 
reinsurance in the first instance, but as you increase that 
reinsurance, you start losing some of the benefits of requiring 
providers to bear some of the insurance risk.
    In sum, there are continuums here and things that work at 
cross purposes. Some factors may go up, and some may go down. 
You cannot just take something and multiply it by the number of 
years or divide it by something.
    Mr. Stark. You have given us a lot to chew on, and I just 
hope you are leaving the door open for us to come back.
    Dr. Crippen. Oh, absolutely.
    Mr. Stark. Because I appreciate it, and it will be very 
helpful. Thank you.
    Dr. Crippen. Part of what we are trying to do is to show 
you how we do these estimates so that you have some 
understanding of our methods. These things are not black boxes; 
you might not agree with all of our assumptions, and we can 
talk about that.
    Mr. Stark. No, it isn't that. It is just that having fussed 
with this off and on over 10 years, I have never found 
universal agreement that we should have a big copay or a big 
deductible or have the catastrophic level at a low rate or a 
high rate. Everybody kind of wants to--has their own assumption 
of what would be most useful to a beneficiary, and I include 
myself because I am not sure, but this will give us a lot to 
stew on. Thank you. Thank you, Madam Chair.
    Chairwoman Johnson. I would note that this only deals with 
a few variables, and as Dr. Crippen has pointed out, then the 
Committee would have to discuss what level of participation 
this would incentivize, because that has a big--so it is a 
bigger picture, but if we begin with the building blocks, I 
think we will all be able to be better architects. Mr. McCrery.
    Mr. McCrery. Thank you.
    Dr. Crippen, Mr. Stark asked you if we only had 50 percent 
participation, the cost would go up, and you said yes. Do you 
mean per capita costs would go up?
    Dr. Crippen. Yes.
    Mr. McCrery. You don't mean overall program costs.
    Dr. Crippen. No, that would not be likely, no; I meant----
    Mr. McCrery. In fact, if we had fewer seniors 
participating, the overall program costs would likely be 
smaller than you have predicted.
    Dr. Crippen. Yes, depending on what you were covering for 
that number of people. If, for example, the benefit had a low 
catastrophic, or stop-lose, amount and somehow you had adverse 
selection operating, you could spend a lot of money per capita 
on those beneficiaries. But, you are absolutely right: I did 
not mean to say that total program costs would go up but that 
the cost per beneficiary would.
    Mr. McCrery. So if we could figure out a way to get a 
benefit through Medicare that would not supplant all of the 
coverage that is out there in the private sector already, we 
would substantially reduce the program costs compared to what 
you have predicted in your testimony.
    Dr. Crippen. Yes, certainly you would.
    Mr. McCrery. In your testimony and in another response to 
Mr. Stark, you said that these predictions are based on only 
using one PBM per region, and you said that the use of a PBM is 
likely to result in a 12 and a half percent discount from 
retail, let us say. Last year, when we were debating 
prescription drugs, you testified that if we use multiple PBMs 
per region, we would get a discount of about 25 percent. But 
your testimony today equivocates a little bit on that. In fact, 
in my quick reading of it, you seem to say that you don't know 
whether multiple PBMs would in fact result in a bigger 
discount. What is the status of your thinking today?
    Dr. Crippen. There are two points I would make. First, what 
we said last year was in the context of a specific proposal, 
and it may be possible to get back to that kind of a discount 
depending on the details of the proposal. But the point we 
would make here today is that in general, more PBMs--that is, 
more competition--offer the prospect of saving more in a gross 
sense, through the discount.
    There are, however, offsetting factors that we need to be 
aware of and think about when we look at a proposal. Those 
offsetting factors are things such as marketing costs. If you 
have competition, there will be some marketing. And how much 
will the risk premium be? If you have more than one PBM, and 
you require them to bear some risk, we assume that the PBMs 
would demand a risk premium that would reduce the net discount 
somewhat.
    These are some of the other factors that we look at in 
addition to the number of PBMs. The size of the discount that 
we estimated last year was in the context of a very specific 
proposal.
    Mr. McCrery. And in the context of that specific proposal, 
you haven't changed your estimate of the savings of multiple 
PBMs versus a single PBM.
    Dr. Crippen. We haven't, reestimated that proposal under 
our new baseline.
    Mr. McCrery. So at least last year, in the context of that 
specific proposal, your best estimate was that multiple PBMs 
would save twice as much in terms of getting a discount on the 
price of drugs as the single PBM.
    Dr. Crippen. Yes, last year, in the context of that 
proposal, we did estimate that.
    Mr. McCrery. So I take it, then, that regardless of what 
some may read in your testimony today that you are not here 
today to pooh-pooh, if you will, the use of multiple PBMs per 
region; you are simply saying that you would have to see a 
specific proposal in order to specifically estimate what 
savings there might be, what greater savings there might be 
with the use of multiple PBMs.
    Dr. Crippen. Yes, that is absolutely right. For this 
prototype case, we just assumed one PBM. Assuming more than one 
would change the assumptions we applied to all of these 
alternatives.
    Mr. McCrery. And on your colorful chart that was up, you 
cut it off at 2030, and you were here the other day, and I 
asked you if you extended this chart out to the 75-year 
actuarial window that the trustees look at, this would actually 
get a lot higher, wouldn't it?
    Dr. Crippen. It would go higher--not as dramatically, of 
course, in the next----
    Mr. McCrery. Social Security would level off.
    Dr. Crippen. Yes.
    Mr. McCrery. But Medicare and Medicaid keep rising.
    Dr. Crippen. Keep going up.
    Mr. McCrery. And I believe you testified that by 2030, 
these program costs, these three program costs, could account 
for as much as 75 percent of the budget of the United States.
    Dr. Crippen. Yes, as we now know it.
    Mr. McCrery. Yes, and if you were to carry this out, again, 
to 2075, I believe you testified last time that these program 
costs could account for as much as 100 percent of the budget of 
the United States.
    Dr. Crippen. Yes, using roughly what we are spending 
today----
    Mr. McCrery. Right.
    Dr. Crippen. Or 20 percent of GDP.
    Mr. McCrery. If we continue to spend about 19 percent of 
GDP----
    Dr. Crippen. Yes.
    Mr. McCrery. That would account for 100 percent of the 
budget.
    And finally, just one quick question. It appears that based 
on the figures you have given us, total Medicare spending over 
the next 10 years if we added a prescription drug benefit that 
is about $365 billion or so, which you estimated the cost would 
be, that we would increase total program spending by about 30 
percent if we added the prescription drug benefit.
    Dr. Crippen. I am trying to remember what the 10-year----
    Mr. McCrery. You said $1.3 trillion was the 10-year cost, I 
believe.
    Dr. Crippen. That $1.3 trillion figure is the estimated 8-
year cost of a pharmaceutical benefit.
    Mr. McCrery. No, no, no; OK.
    Dr. Crippen. CBO projects a 10-year cost for Medicare, I am 
told, of $3.6 trillion.
    Mr. McCrery. OK; and 10-year cost?
    Dr. Crippen. So $360 billion would be 10 percent.
    Mr. McCrery. OK; thank you.
    Chairwoman Johnson. Mr. Kleczka.
    Mr. Kleczka. Thank you, Madam Chairman.
    Dr. Crippen, could you repeat for me a statement you made 
in your opening remarks? It was right at the beginning. I 
cannot find it in your printed remarks. It was to the effect of 
Medicare being the only program and transferring something to 
retirees or seniors. Could you just reread that?
    Dr. Crippen. I think that this may be what you are looking 
for: ``It is important to keep in mind that Medicare is only 
one of the Federal programs that transfer resources from the 
working population to the retired and disabled.''
    Mr. Kleczka. OK; what is the significance of that 
statement? Because we, as the Federal government, also transfer 
resources for the poor when we provide for Medicaid. We also 
transfer resources to only students when we provide Pell grants 
and other educational aids. Are you being critical on that 
point, or are you just stating a fact?
    Dr. Crippen. No, I am trying to state a fact, Mr. Kleczka. 
Retiree programs are somewhat unique; that is, we are taking 
resources from the current working population and transferring 
them to the retired and disabled people who are not working.
    Mr. Kleczka. Well, we do that with tax revenues every day 
and in every annual budget here.
    Dr. Crippen. But in these retirement program, we have made 
long-term commitments over at least the next 75 years, and they 
involve intergenerational transfers of very large magnitudes.
    Mr. Kleczka. OK.
    Dr. Crippen. The point I am trying to make is that when you 
and I retire, we are going to have a significant impact on what 
our kids are able to afford for themselves and to provide in 
support for us. That is why these programs are unique in that 
we are going to go from 7 percent of GDP----
    Mr. Kleczka. Well, I heard that same statement last week by 
another speaker before the Committee. It might have been the 
full Committee, and I cannot recall if it was the Secretary of 
the Treasury, but it seems to be some kind of a theme going on 
here that we have to be careful of these programs that spend 
money for our seniors and our retirees, but other Federal 
expenditures are OK, and I just--I am saying, you know, as a 
nation, we try to take care of all of our individuals, all of 
our people. And some are retirees; some are poor; some are 
students; some are military, you know, manufacturers, you know. 
That is what makes up the entire budget.
    So being that this is the second time I heard it in such a 
short period, I was getting a little concerned.
    I have before us a copy of a chart from the Budget 
Committee, and it shows the House Budget Resolution. Now, we 
are talking about modernizing Medicare. The Committee is 
involved in trying to put together a drug benefit. You 
presented four options that we can, you know, just look at to 
see what the cost might be, and they range from $29 billion to 
$31 billion per year, and costed over 10 years that is, you 
know, almost $300 billion for a modest drug benefit which 
covers half the drug costs for $55 per month premiums.
    Let me ask you, Dr. Crippen, if you look at the pie chart, 
we have a contingency reserve in the budget that will be coming 
up on the House floor for debate today and vote tomorrow, and 
there is a contingency reserve made up of three components, two 
of which are Medicare-related. One is a contingency for 
Medicare of $240 billion and another one a Medicare 
modernization of $153 billion, which I assume is earmarked to 
be the drug benefit.
    Now, clearly, that is less than half of any proposal you 
have shared with the Committee today. Is it your opinion that 
that amount of money would still provide a pretty slim benefit 
package?
    Dr. Crippen. There are at least two points to be made. 
First, you can't just multiply these numbers by any given 
number of years. There are only eight policy years.
    Mr. Kleczka. Right, but in the ball park, you know.
    Dr. Crippen. Second, we don't know--and maybe the Committee 
has more information than we do, which is entirely possible--
but we don't know what that $153 billion is in the resolution. 
It could be a prescription drug benefit. It could be a net 
benefit--that is, a savings somewhere netted out with something 
else. So we can't tell. But the relationship is certainly true: 
starting with $1.5 trillion, roughly, in estimated spending for 
a drug benefit, that $153 billion would cover about 10 percent 
of total Medicare spending if you were going to provide a 
uniform benefit to every beneficiary.
    On the other hand, if you were going to provide a benefit 
to the 12 million beneficiaries who currently appear to have no 
prescription drug coverage, it could cover up to 40 percent of 
their annual spending on average.
    Mr. Kleczka. So the concern I have, first of all, it is my 
understanding that that is the drug benefit that is going to be 
provided for in this budget bill, and Mr. McDermott and I serve 
on the Budget Committee, and that was my impression. Maybe Mr. 
McCrery differs with that. But the problem I have with that is 
we are taking those dollars out of Medicare hospitalization 
revenues. Now, the trustee was before the Committee last week 
indicating the Medicare Hospitalization Trust Fund will be 
solvent through approximately the year 2029. But, now, if 
Congress keeps dipping into those revenues and not only taking 
money out of the hospital portion, which is not drugs--I didn't 
say drugs; I said hospital--but if we take it out of the 
hospital revenues, that is less for hospital coverage, and if 
we take another $240 million out of the Hospital Trust Fund for 
modernization, that is less for the hospital benefit.
    And so, we are going to come to a day here in Congress 
where all of a sudden, there will be very little money left in 
the hospital benefit, and we are going to tell our seniors that 
money is gone. Well, if you rob Peter to pay Paul time after 
time, yes, the money is going to be gone. And so, we are just 
setting ourselves up for a real fall in this budget that is 
coming up on the House floor shortly by taking those dollars 
out for purposes other than what the workers of the country 
intended them to be used for when they were deducted from the 
paychecks. Thank you, Madam Chair.
    Chairwoman Johnson. Before I recognize Mr. Crane, I just 
want to remind the Members and the public that is watching that 
in Clinton's last budget, he cut Medicare deeply. In a number 
of bills he brought up, he cut Medicare more to get money to 
pay for other things. It is up to us in the end to determine 
what we are going to spend the tax dollars of the nation on, 
and in the budget fund that is over and above the 4 percent of 
spending that is included in the baseline, that is an 
assumption that every year, spending will go up 4 percent, and 
that is more than inflation, we think, in most years.
    In that fund, there is money outside of the Hospital Trust 
Fund that I am assured can be used for prescription drugs. But 
our job is to try to design a prescription drug benefit that is 
adequate for our seniors but takes into account what Dr. 
Crippen commented on at the beginning of his testimony. There 
are three large programs that transfer resources from working 
people to people over 65, and if we aren't careful, the 
majority of the Federal budget will be a generational transfer 
which would make it very hard for our kids to fund public 
education, environmental enforcement, roads and bridges and all 
of those things.
    So, I mean, in the end, we are going to work together to 
construct a cost-effective but beneficiary-friendly 
prescription drug bill, and while that is not going to be 
clearly evidenced in the budget we are going to debate, because 
we don't have a plan yet, we are going to be able to fund the 
plan we think is responsible. There may be differences amongst 
us as to what is responsible emanating from our decision as to 
what that generational transfer can and should be, but here 
today, the purpose of this hearing is to get a better 
understanding of how we could construct a benefit that would be 
both good for beneficiaries and fiscally responsible in the 
light of the burden our children are going to carry for 
retirees in the future, which will be larger than the burden 
that we carry for current retirees; larger than the burden that 
any generation in the history of our country has ever carried 
for retirees.
    So that budget debate tomorrow is there for all of us to 
participate in, but I am very pleased, Dr. Crippen, that you 
brought such specific knowledge of the building blocks to us, 
and I hope to have a very fruitful discussion. Mr. Crane.
    Mr. Crane. Thank you, Madam Chairman.
    Dr. Crippen, some lawmakers believe that the Medicare 
trustees' projection of 4 more years of Medicare solvency is a 
sign that we should not address fundamental reforms to the 
Medicare program but rather focus on adding additional benefits 
to the program like a prescription drug benefit.
    In your opinion, if the Congress were to simply add on a 
prescription drug benefit to the existing program, how would 
that change the outlook of the program?
    Dr. Crippen. Mr. Crane, as I have testified before this 
Committee and others, the trust fund accounting mechanism 
performs only the very narrow purpose of looking at one 
program. In this case, it is only part of Medicare; it is not 
even just one program. And so the fact that the trust fund's 
solvency date has been extended doesn't give me any comfort 
whatsoever. For example, you could do anything you wanted with 
the surplus or the budget for next year. You could spend all 
$5.6 trillion in surpluses over the next 10 years. You could 
cut taxes by $5.6 trillion, and it would not change the 
trustees' report one iota. The solvency date would stay the 
same.
    But the rest of the budget would change, and, potentially, 
the impact of those actions on the economy would change, 
depending on what you are doing with that money. So the 
actuarial extension doesn't give me much comfort.
    Moreover, adding a prescription drug benefit on top of 
current spending--on top of the picture that I showed initially 
of Medicare and other retirement programs going to 15 percent 
of GDP--would mean that those programs were going to be more 
than 15 percent of GDP. That may be entirely possible, doable, 
appropriate, but to me, the real measure is, what percentage of 
the economy that our kids are generating, that they are 
earning, are we going to force them to give us? Adding a 
prescription drug benefit to this 15-percent picture will just 
make it worse.
    Mr. Crane. I am concerned about the increase in the CBO's 
recent study that found annual pharmaceutical spending for 
seniors will likely rise from $1,989 in 2002 to $4,818 in 2011, 
a 30 percent higher than previous estimate. Given the 
uncertainty about and the recent surge in drug estimates or 
prices, rather, how confident can we be about future 
projections relating to the cost of Medicare prescription drug 
benefits?
    Dr. Crippen. Well, about as confident as we can be about 
other things. In this case, the price increases that we adopted 
came from the Health Care Financing Administration (HCFA) 
actuaries, so we are in accord with what they are doing on 
their national surveys. Their estimates are thought to be 
fairly good; however, the projections have gone up more than 
expected.
    The other piece of why our estimates over the 10-year 
projection period are going up is that, just as in the case of 
the surplus totals, we have substituted a more expensive year, 
2011, for a less expensive year, 2001. So in total, about half 
of the change we made over last year's estimate is due to just 
switching those years, moving the projection forward by one 
year. The other half is due to increased cost trends that the 
HCFA actuaries believe have shown up in the last 12 to 18 
months.
    So it is a combination. Regarding your question of how 
confident are we, these estimates are probably better than most 
because a number of agencies look at them and outside reviewers 
do a lot of work with them. And they have gone up significantly 
just in 1 year.
    Mr. Crane. Thank you, Dr. Crippen, and I yield back the 
balance of my time.
    Chairwoman Johnson. Thank you. Dr. McDermott.
    Mr. McDermott. Thank you, Madam Chair.
    Dr. Crippen, on page 10 of your testimony, it says to pay 
for this program, enrollees will be charged a monthly premium 
designed to cover 50 percent of the cost of the benefit. The 
Federal government would pay the other 50 percent. I assume 
that you stand by those. But then, I go to page 21, and I look 
at these illustrative cases. The base case, it looks like the 
cost to the Federal taxpayer on the base case is $31.6 billion, 
and the payments for the beneficiaries are $83 billion. I am 
having a little bit of trouble meshing, because it does not 
seem like 31 is half of 83. It seems like it is about a third 
by the Federal Government and two-thirds by the patients. Could 
you help me out here?
    Dr. Crippen. I will try. If you can go to the chart on the 
base case, which I think you have up there, it will help show--
--
    Mr. McDermott. Is there a number on that one? Or which one 
of your many----
    Dr. Crippen. It says base case.
    Mr. McDermott. Ah, yes, base case.
    Dr. Crippen. The base case.
    Mr. McDermott. OK.
    Dr. Crippen. The chart shows how much the beneficiaries pay 
in this case and, over what terms, and what the taxpayers' 
share is. At the bottom, it summarizes the same numbers you 
have cited from the table on page 21 of my statement.
    Mr. McDermott. So basically, the patients are paying two-
thirds of the cost of it, and one-third comes from the Federal 
Government rather than 50-50.
    Dr. Crippen. In this case, yes; I mean, in total. What we 
were talking about, though--the part that you cited earlier--
was premiums.
    Mr. McDermott. Yes.
    Dr. Crippen. And here, as you see, Medicare premiums----
    Mr. McDermott. I don't want old people to get confused with 
the difference between the cost and the premium.
    Dr. Crippen. Right.
    Mr. McDermott. Because the premium is one part of what they 
are paying, but then, they are going to have to pay this 50 
percent on top of that.
    Dr. Crippen. Yes. The difference I tried to emphasize in my 
statement is that the premiums are paid by everybody in the 
program. More than 39 million people will be paying the 
premiums, whether or not they fill a prescription. The cost-
sharing piece, which changes between these variations, is what 
people who actually use the drugs will face. In the first 
instance--the base case--they pay 50 percent of the value of 
the drugs they are buying. So that is the difference, and it is 
a distinction that is important: the elderly will be paying $83 
billion in our base case, $26 billion of it through premiums 
and the rest through cost sharing.
    Mr. McDermott. And the thing that I found probably the most 
amazing here was that you assume that everybody will enroll.
    Dr. Crippen. We do.
    Mr. McDermott. So in spite of all this stuff we have been 
hearing around here about people who already have coverage 
under their retirement plans, or they have got a Medigap policy 
or whatever, you think they are all going to drop their 
coverage and jump into this Federal program.
    Dr. Crippen. We think that the 50 percent coinsurance and 
50 percent subsidy and premium is enough to induce everybody 
who is in part B to enroll in the drug program. But that 
doesn't mean that they will necessarily drop other coverage. 
They may drop Medigap, or new type of Medigap policies may be 
formed. Again, the cost sharing part of this doesn't mean that 
beneficiaries pay it themselves. They can insure against it, or 
their employer could pay it. In many cases, Medicaid or the 
States will pay it, or Medicaid will pay premiums. So there are 
third parties involved in paying this money, too. It is not 
strictly from beneficiaries.
    Mr. McDermott. So what you are saying is you think it is 
generous enough that everybody is going to want to get in to 
get the Federal piece----
    Dr. Crippen. Yes.
    Mr. McDermott. Of whatever they can.
    Dr. Crippen. Exactly.
    Mr. McDermott. OK; now, I want to come back with something 
that Mr. Kleczka was pushing on. That is the whole question of 
how much money is in the budget that we are going to vote on in 
an hour or two or five on the floor. My remembrance of the 
proposal put forward by the Republicans last year was that it 
was cost out by CBO at $159 billion; is that correct?
    Dr. Crippen. I don't remember exactly, but that sounds 
about right, yes.
    Mr. McDermott. OK; and the President, in his campaign, said 
we are going to put $153 billion in for the drug benefit, 
right?
    Dr. Crippen. Yes--I am sorry; I shouldn't say that so 
quickly. I don't know what the $153 billion is. I mean, is it 
just a drug benefit? Is it something else? We don't have 
anything to tell us in the President's budget blueprint, in 
anything we have gotten from the Office of Management and 
Budget (OMB). We don't know.
    Mr. McDermott. So you are saying that the Congress is 
flying blind at this point.
    Dr. Crippen. The $153 billion could be a net number. It 
could be anything as far as we know.
    Mr. McDermott. I think you are confirming what all of us 
believe, which is that nobody in the House knows what they are 
doing on this budget, because the President hasn't said. But 
the $153 billion has been told to us as the amount for the drug 
benefit.
    Dr. Crippen. OK.
    Mr. McDermott. But my understanding is that the recosting 
of the Republican plan from last year now puts it up over $200 
billion.
    Dr. Crippen. We haven't reestimated.
    Mr. McDermott. Nobody has recosted it?
    Dr. Crippen. No. Presumably, it is going to be more, but I 
don't know how much more.
    Mr. McDermott. Boy, it is going to be interesting over 
there on the floor to hear the argument, won't it be? Everybody 
will talk like they know what they are talking about, and no 
one will know, because CBO doesn't know.
    Dr. Crippen. We don't know what you are talking about. You 
might know, but we don't know.
    Mr. McDermott. Well, I know you would never question a 
Member certainly, but what we are going to hear over there is a 
lot of wind. None of it is based on any facts that anybody 
really knows.
    Chairwoman Johnson. Mr. Johnson.
    Mr. Johnson OF TEXAS. Thank you, Madam Chairman.
    Let us talk about some facts that somebody knows; what do 
you think? According to your testimony, the average beneficiary 
spends about $1,989 on prescription drugs in 2002, and the 
median is about $1,163. HCFA says the average beneficiary 
spends $550 on drugs in 1997. Do you agree with their analysis, 
first, and how can the spending go up so much in just 5 years?
    Dr. Crippen. There are two factors in the analysis that 
account for the difference, and your two questions address 
them. First, we think that the spending per capita is a little 
higher than HCFA thinks it is because there are two elements 
that HCFA has not taken into account. One is the 
institutionalized population--that is, anyone who might be in a 
nursing home or in the hospital for an extended stay. 
Prescription drug use by those elderly people is not included 
in the HCFA numbers.
    Mr. Johnson OF TEXAS. Why are they not?
    Dr. Crippen. Up until now, their analysts have not included 
the institutionalized population. They are going to. We have 
not seen their new baseline for this year.
    Mr. Johnson OF TEXAS. That says HCFA is never up-to-date.
    Dr. Crippen. I would not say that of my friends at HCFA, 
but we have included them at population for the last couple of 
years, and I think they will this year. We have not seen their 
baseline. So that is part of why the base on which HCFA is 
figuring per capita spending is smaller. The second is that 
there is pretty good evidence----
    Mr. Johnson OF TEXAS. Well, could I interrupt you just a 
moment? Do we have good data on those institutionalized 
patients?
    Dr. Crippen. We have some data that we consider to be 
fairly good, and so we make the adjustment. We do adjust up, 
but I think it is about 25 percent of the total--I am sorry, it 
is 5 percent of the total. So we add 5 percent to the total for 
the institutionalized population.
    Mr. Johnson OF TEXAS. OK.
    Dr. Crippen. The second factor, which I think is 25 
percent, is underreporting. We believe that the survey from 
which HCFA develops its numbers has a fair amount of 
underreporting. People aren't telling HCFA what they are 
spending, or if they are, they're doing it inaccurately. And so 
we add a certain amount for that underreporting. HCFA does some 
of that as well. Last year, its analysts added 15 percent; we 
added 25.
    So for those reasons, some of HCFA's base numbers are 
lower. But there has also been tremendous growth in spending in 
the past few years. I mean, if spending grows at a rate of 8 
percent to 10 percent a year, it does not take long to double 
it, as you well know.
    Mr. Johnson OF TEXAS. Why do people underreport?
    Dr. Crippen. In many cases, they don't remember what they 
spend. I wouldn't--if someone asked me what I spent on drugs 
last year, I wouldn't know exactly. So there seems to be a bias 
in the survey toward reporting less drug spending than actually 
occurs.
    Mr. Johnson OF TEXAS. Some people deduct it from their 
income tax.
    Dr. Crippen. I am sure they know what it is.
    Mr. Johnson OF TEXAS. That is right.
    As you know, the current fee-for-service programs and any 
willing provider program, if we perpetuated that structure in a 
prescription drug program and prohibited the use of restrictive 
formularies and selected contracting with pharmacies, what 
impact would that have on our ability to control costs? And 
additionally, what are the incentives to control costs if we 
let the government provide 100 percent of the risk?
    Dr. Crippen. To answer your last question first, we think 
that having the PBMs share some risk will give them incentives 
to help control costs.
    Mr. Johnson OF TEXAS. Right.
    Dr. Crippen. So in our estimate, we give some credit for 
that. However, as I said a little bit earlier, there is a limit 
to how much of that you can do without adverse consequences as 
well. But if PBMs bore some risk, there would be some 
additional control of costs.
    In terms of other controls, the more the Congress says you 
cannot have a formulary or you, cannot use these other cost-
control mechanisms that are now common tools then the less cost 
control we think the program can have and the more expensive it 
will be. Is that responsive to your first question?
    Mr. Johnson OF TEXAS. Yes; thank you very much.
    Dr. Crippen. OK.
    Mr. Johnson OF TEXAS. One other question if I might, Madam 
Chairman. The cost of prescription drugs is defined within a 
fairly wide margin. Nobody really knows what it is. Do you 
think we can do it for the amount that is set aside in the 
budget?
    Dr. Crippen. That depends, Mr. Johnson, on a number of 
things and is part of the conversation we have been having with 
Mr. McDermott as well. If you target the drug benefit toward a 
very specific population, then $150 billion can buy a lot of 
drugs. If you give a uniform universal benefit, it is about 10 
percent of what everybody spends in total. So you could do a 
drug benefit of substantial size for a small number of people 
at that rate. But I would also stress again that I don't know--
and I don't know if anybody does--exactly what the $153 billion 
in the President's budget blueprint is. It could be a net 
number, with a prescription drug benefit, for example, that 
costs $300 billion minus savings from Medicare reform of $150 
billion. We don't know what the number represents, so it is 
kind of hard for us to say what it will do or will not do. I 
can tell you roughly what $150 billion would do, but I don't 
know what that number represents.
    Mr. Johnson OF TEXAS. Well, if we don't know the actual 
costs, we also can surmise that we can do it for that number.
    Dr. Crippen. Yes.
    Mr. Johnson OF TEXAS. Thank you very much. Thank you, Madam 
Chairman.
    Chairwoman Johnson. Representative Thurman.
    Mrs. Thurman. Thank you, Madam Chairman.
    Dr. Crippen, let me--so, then, you would have to agree that 
none of the plans that you have run A through D would fit under 
the $153 billion.
    Dr. Crippen. Probably not.
    Mrs. Thurman. I know that number keeps showing up.
    Dr. Crippen. The dollar amount in our examples are 1-year 
numbers, and you can't just assume that you can multiply them 
by eight to see the long-term policy implications or anything 
else. We constructed these cases to look only at 1-year costs, 
because there are numerous details that we have not made 
assumptions about. My purpose today was not to show you exactly 
what a drug benefit would cost but rather to give you relative 
scenarios, to show what would change if you changed deductibles 
or catastrophic coverage or other factors and how those changes 
would affect the cost to beneficiaries and taxpayers.
    So my attempt today was not to----
    Mrs. Thurman. OK.
    Dr. Crippen. Estimate what the cost of a reasonable drug 
benefit might be. In fact, we are trying very hard not to say 
that these illustrations are proposals.
    Mrs. Thurman. And I don't blame you, because I know that we 
have got the Senate stuff that says----
    Dr. Crippen. Right.
    Mrs. Thurman. One-hundred and fifty-three billion dollars 
would give us a very narrow or not much of a drug benefit at 
all.
    So let me ask you, though, because as you know, there is a 
lot of conversation up here about how we are going to change 
Medicare, potentially change Medicare and modernize or redo. In 
looking at any of these numbers, have you all done any 
comparisons to--and let us take one that certainly we are 
involved with the Medicare choice programs, specifically 
looking at what the copayment and then also what the 
beneficiary would pay in a premium.
    Have you looked at anything comparable in the private 
sector or something that we do in the Medicare choice just to 
get an idea of kind of what we are looking at here?
    Dr. Crippen. Do you mean, as to how people behave?
    Mrs. Thurman. Well, not behave but just in the cost part of 
it, because, I mean, we know we have specifically a Medicare 
choice program. We recognize today that first of all, some of 
us are very unhappy with the Medicare choice program because 
they move in and out, but one of the reasons people sign up for 
it is a prescription drug benefit. And if the success part of 
this program is based on potentially 100 percent of Medicare 
beneficiaries signing up, you know, you have to have an 
incentive for why they would want to come over here, and we are 
seeing a lot of changes in that market. There used to be zero 
premium. Now, there is--actually, I have seen it go up as far 
as $179 in premium but not with the benefit in itself. Have you 
done a comparison on that in particular?
    Dr. Crippen. We haven't. We are aware of some of the 
developments you are talking about: the enrollment flattening 
out, in fact, probably declining; the number of withdrawals by 
plans; and the fact that the drug benefits are either getting 
thinner--less generous--or the premiums are going up. We have 
not done a thorough comparison across Medicare+Choice plans to 
know exactly how they are developing, but we have the same 
kinds of both anecdotal and underlying evidence that you do 
about the changes.
    Mrs. Thurman. It would seem to me that would be something 
we would want to look at, because if we are going to look at a 
Medicare benefit, we need to figure out----
    Dr. Crippen. Right.
    Mrs. Thurman. How we best do this.
    Dr. Crippen. Part of the problem with doing that--and I 
think we have talked about this before in this setting--is that 
there is a very substantial lag in the data that are collected. 
You see us using data from 1997, for example, or maybe even 
1998, but those are the newest ones we have. Much of the M-
plus-C developments that we are all talking about here have 
taken place since 1997 or 1998. So it is a little hard to get 
as current an analysis as you would like in order to make good 
decisions.
    Mrs. Thurman. Let us go back a little bit to the PBMs, 
because those obviously have a big effect on what the cost or 
not cost. Can you review for me the various private sector 
mechanisms that the pharmacy benefit providers used to contain 
the prescription drug cost? And what I am most concerned about 
is, you know, we give them the opportunity to go in and 
negotiate, which would be the competitive part of this, but are 
there any things that we do to make sure that this cost savings 
is given back to the beneficiary so that they could actually 
see a reduction in their cost?
    Dr. Crippen. To answer the last question first, we assume 
that if you have multiple PBMs, a good portion of whatever they 
save goes back to beneficiaries because of competition. 
Regarding the first part of your question--what are some of the 
things that we assume PBMs do to cut costs and that therefore 
have an effect on our estimates--we consider such factors as 
the level and nature of the competition, whether there is one 
or more PBMs and how they compete; constraints on the cost 
controls that they can institute--if the PBM is told, you 
cannot do certain things, that will make a difference in how 
much they can save for themselves and for beneficiaries; rules 
for establishing formularies; and conditions for determining 
pharmacy networks. Those are some of the things that we look at 
to say whether or not PBMs have effective cost-control tools.
    Mrs. Thurman. But even in using multiple, I mean, you have 
looked at the administrative costs when you use a lot more that 
you are spending a lot more on administrative----
    Dr. Crippen. Yes.
    Mrs. Thurman. And/or marketing that where some of the 
savings that you actually would hope to retain and use to 
subsidize or lower the cost would not necessarily be there.
    Dr. Crippen. There are two offsetting factors that we look 
at. One is marketing costs, and another is risk. Because there 
is more risk to the prover in a multiple-PBM setting, we 
consider the amount that the PBMs need to compensate them for 
the risk they are undertaking. So there are offsetting costs.
    Mrs. Thurman. Thank you.
    Chairwoman Johnson. And thank you, Representative Thurman, 
and thank you very much, Dr. Crippen. There are lots more 
questions I am sure we will have for you as we get into 
weighing these things as a group, and we appreciate your 
testimony today.
    I am going to call the next two panels together so that 
Members will have at least the chance to hear the testimony of 
each of our last six guests, and as you are coming forward, 
John Poisal, who will start, is from the Office of Strategic 
Planning at the Health Care Financing Administration. He is a 
long-time employee of HCFA with a great depth of knowledge in 
this area, and we are pleased to have him.
    Michael Cohen, who is president of the Institute for Safe 
Medication Practices; Helen Frederick of Crownsville, Maryland; 
Lore Wilkinson of Durham, North Carolina--we appreciate how far 
you have come, Lore, and also, Helen, your participation; Max 
Richtman, the executive vice-president of the National 
Committee to Preserve Social Security and Medicare; and Maya 
MacGuineas, the national board Member from the Third 
Millennium, who has come down from New York, and we thank you 
for being here with us.
    Let us start with John Poisal.

STATEMENT OF JOHN A. POISAL, STATISTICIAN, OFFICE OF STRATEGIC 
         PLANNING, HEALTH CARE FINANCING ADMINISTRATION

    Mr. Poisal. Good afternoon. Good afternoon, Chairman 
Johnson, Congressman Stark, distinguished Subcommittee members. 
Thank you today for inviting me to discuss my analysis of data 
on prescription drug use and spending patterns of Medicare 
beneficiaries recently published in Health Affairs, entitled 
Growing Differences Between Medicare Beneficiaries With and 
Without Drug Coverage.
    This research, as presented in the article, is based on 
data collected by the Health Care Financing Administration 
through the Medicare Current Beneficiary Survey (or the MCBS) 
from 1998 as well as survey data collected in previous years. 
The MCBS is an ongoing survey of a representative sample of the 
entire Medicare population. One of the strengths of the MCBS is 
that it collects information about what Medicare does and does 
not cover, which would include prescription drugs. My research 
focuses on historical prescription drug coverage, utilization 
and spending.
    The research resulted in two main findings regarding drug 
coverage among the Medicare population. First, the proportion 
of Medicare beneficiaries with prescription drug coverage at 
some point in the year did not change between 1997 and 1998, 
after having increased annually over a number of years. Second, 
the differences in the levels of use of prescription drugs and 
total spending on prescription drugs in 1998 widened between 
beneficiaries with drug coverage and those without drug 
coverage.
    Since 1992, the first year of the MCBS, the data have shown 
that the prescription drug coverage rate for Medicare 
beneficiaries has risen steadily. In 1998, however, coverage 
levels remained flat. In 1998, we estimate 73 percent of 
noninstitutionalized Medicare beneficiaries had drug coverage 
at some point during the year. On the other hand, slightly more 
than 27 percent of beneficiaries, or about 10 million, had no 
drug coverage whatsoever. These findings are identical to what 
was found in the 1997 survey data.
    Although a fairly high proportion of Medicare beneficiaries 
had some type of supplemental prescription drug coverage in the 
1990s, a month-by-month analysis of the data revealed that this 
coverage was far from stable. The trends in use and spending 
for beneficiaries with and without prescription drug coverage 
differed for the first time in 1998. The data showed that 
beneficiaries without coverage purchased fewer medications than 
the year before, while their expenditures were nearly 
identical. By contrast, beneficiaries with coverage in 1998 
continued their previous trend of increases in utilization of 
drugs and in total expenditures. Their drug purchases increased 
by 9 percent, and their total expenditures increased by 14 
percent.
    Also, the gaps in utilization and expenditures between the 
two populations increased from a difference of five 
prescriptions in 1997 to a difference of eight prescriptions in 
1998. Their total expenditure gap also increased from a 
difference of $330 in 1997 to a difference of $453 in 1998. The 
data also show, in the aggregate that utilization and total 
expenditures for all levels of income were higher for 
beneficiaries with drug coverage than for those without such 
coverage.
    The differences in both utilization and total expenditures 
were particularly notable in certain subgroups. For example, 
the differences for beneficiaries with and without coverage 
were greatest for the disabled population under age 65. 
Beneficiaries without drug coverage in that age group used less 
than half as many prescriptions, and their total expenditures 
were only one-third as high when compared to disabled 
beneficiaries with drug coverage.
    In addition, there were large differences in utilization 
and spending between those with and without drug coverage for 
beneficiaries below the poverty line. The gap in utilization 
between the two groups was nearly 14 prescriptions in 1998. 
Moreover, differences in total expenditures for beneficiaries 
with and without coverage and who had five or more chronic 
conditions increased by about 70 percent and increased by 
approximately 30 percent for all other beneficiaries with 
chronic conditions. Utilization differences between these 
groups of beneficiaries also increased in 1998.
    Clearly, prescription drugs continue to play an 
increasingly important role in the health care of Medicare 
beneficiaries. Having prescription drug coverage makes a 
difference in beneficiary drug use and spending, particularly 
for low-income seniors and those with many chronic health 
problems.
    Thank you again for the opportunity to testify today, and I 
will be happy to answer any questions you have.
    [The prepared statement of Mr. Poisal follows:]

    STATEMENT OF JOHN A. POISAL, STATISTICIAN, OFFICE OF STRATEGIC 
             PLANNING, HEALTH CARE FINANCING ADMINISTRATION

    Chairman Johnson, Congressman Stark, distinguished Committee 
members, thank you for inviting me here today to discuss an analysis of 
data on prescription drug use and spending patterns of Medicare 
beneficiaries recently published in Health Affairs, ``Growing 
Differences Between Medicare Beneficiaries With and Without Drug 
Coverage Volume 20, Number 2. Prescription drugs provide a vital tool 
for our nation's young and old in treating both chronic and acute 
medical conditions. In 1998, total spending for prescription drugs in 
the United States totaled $91 billion, more than double the total 10 
years ago.
    The research, as presented in the article, is based on data 
collected by the Health Care Financing Administration through the 
Medicare Current Beneficiary Survey (MCBS) from 1998, as well as survey 
data collected in prior years. The MCBS is an ongoing survey of a 
representative sample of the entire Medicare population. Survey 
respondents are interviewed every four months and are asked to record 
their drug purchases and save their medicine containers to assist them 
in recalling their drug purchases.
    The research resulted in two main findings regarding drug coverage 
among the Medicare beneficiary population. First, the proportion of 
Medicare beneficiaries with prescription drug coverage at some point in 
the year did not change between 1997 and 1998, after having increased 
annually over a number of years. Second, the differences in the levels 
of use of prescription drugs and total spending on prescription drugs, 
in 1998, widened between beneficiaries with drug coverage and those 
without.

PRESCRIPTION DRUG COVERAGE
    Since Medicare currently provides very limited coverage of 
outpatient prescription drugs, Medicare beneficiaries obtain coverage 
from a variety of sources. For example, many beneficiaries receive 
coverage through Medigap plans, their employer-sponsored retiree 
insurance plan, as well as through enrollment in Medicare HMOs, the 
Medicaid program, or State-sponsored prescription drug assistance 
programs. The MCBS collects information on the number of Medicare 
beneficiaries with prescription drug coverage and the sources of that 
coverage.
    Since 1992, the first year of the MCBS, the data have shown that 
the prescription drug coverage rate for Medicare beneficiaries has 
risen steadily. From 1995 to 1997, the level of estimated drug coverage 
increased, but in 1998 coverage levels remained flat. As indicated in 
Chart 1, in 1998, 73 percent of non-institutionalized Medicare 
beneficiaries had drug coverage at some point during the year. On the 
other hand, slightly more than 27 percent of beneficiaries, about 10 
million, had no drug coverage whatsoever. These findings are identical 
to what was found in the 1997 survey data.
    The increase in the proportion of beneficiaries with drug coverage 
in the mid-1990s appears to most likely be a result of increased 
beneficiary enrollment in Medicare HMOs offering an additional drug 
benefit (Chart 2). During the mid-to late 1990s, Medicare HMO 
enrollment was growing at about 30 percent annually. The provision of 
drug benefits by Medicare HMOs during this period, as well as the 
increase in beneficiary enrollment resulted in more than 15 percent of 
all Medicare beneficiaries receiving drug coverage from a Medicare HMO 
in 1998, an increase of 2 percent since 1997, and of 7 percent since 
1995.
    Although a fairly high proportion of Medicare beneficiaries had 
some type of supplemental prescription drug coverage in the 1990s, a 
month-by-month analysis of the data revealed that this coverage was far 
from stable. For instance, only 46 percent of beneficiaries were 
covered for all 24 months of 1995 and 1996. In 1997, only 54 percent of 
beneficiaries had drug coverage for the entire year, and 27 percent had 
no coverage at any time (Chart 3)

PRESCRIPTION DRUG USE AND SPENDING
    The trends in use and spending for beneficiaries with and without 
prescription drug coverage differed for the first time in 1998. The 
1998 data showed that beneficiaries without drug coverage purchased 
fewer medications than they purchased the year before, filling an 
average of 16.7 prescriptions, a 2.4 percent decline from 1997. At the 
same time, those same beneficiaries spent an average of about $550 on 
their prescription purchases, nearly identical to their expenditures 
the previous year.
    Beneficiaries with coverage continued the trend of increases in 
both utilization and total expenditures. They purchased a little more 
than 24 prescriptions per person, up 9 percent from 1997, and total 
expenditures, including out-of-pocket and payments from drug insurance 
coverage, increased 14 percent, totaling $999. The gap in utilization 
between the two populations grew from an average difference of 5 
prescriptions in 1997 to 8 in 1998. The difference in total 
expenditures between the two populations also increased from about $330 
in 1997 to $453 in 1998. In addition, the survey data have been 
consistent in demonstrating gaps in utilization between beneficiaries 
in both populations for almost every demographic category including 
age, race, health status, and income.
    These differences in utilization and expenditures were particularly 
notable in certain sub-groups. The differences were greatest for 
disabled beneficiaries under age 65, a group that has a high level of 
drug use. Disabled beneficiaries under age 65 without drug coverage 
used less than one-half as many prescriptions (16 prescriptions), as 
disabled beneficiaries with coverage used (33 prescriptions). In 
addition, total drug expenditures for disabled beneficiaries without 
drug coverage were only one-third as high ($493) in per capita spending 
as disabled beneficiaries with drug coverage ($1483).
    Utilization differences between beneficiaries, with or without drug 
coverage, with varying levels of chronic conditions also increased in 
1998, by approximately two prescriptions per beneficiary. For example, 
the utilization gap between beneficiaries, with or without coverage, 
who had five or more chronic conditions, grew from eight prescriptions 
in 1997 to 10.8 in 1998. Differences in total expenditures for 
beneficiaries with and without drug coverage also increased by about 70 
percent for beneficiaries with five or more chronic conditions and by 
approximately 30 percent for all other beneficiaries with chronic 
conditions.
    In 1998, total drug expenditures for beneficiaries in poor health 
with drug coverage were $910 higher than total expenditures for 
beneficiaries in poor health without drug coverage. This represented a 
30 percent increase over the 1997 difference of $695. Average drug 
expenditures for beneficiaries in excellent health were $250 higher for 
those with coverage than for beneficiaries with identical self-reported 
health status who were without coverage. In 1997, the difference in 
expenditures between these two groups was $203.
    Utilization and total expenditures, for all levels of income, were 
higher for beneficiaries with drug coverage than for those without such 
coverage. Differences in utilization and total expenditures were 
greatest between beneficiaries with and without drug coverage below the 
poverty line and reached a difference of almost 14 prescriptions per 
beneficiary in 1998.
    Beneficiaries without drug coverage spent more out-of-pocket, than 
those with coverage, but continued to receive fewer medications. 
Beneficiaries without drug coverage had to pay an average of $546 out-
of-pocket in 1998, compared to $325 for beneficiaries with coverage. In 
other words, beneficiaries without drug coverage paid an average of $33 
per prescription compared to $13 for beneficiaries with drug coverage 
(Chart 4). For beneficiaries without drug coverage, out-of-pocket 
expenditures, which are equal to their total expenditures, were 
virtually unchanged from 1997 to 1998, while out-of-pocket and total 
expenditures for beneficiaries with drug coverage increased by almost 
18 percent. Moreover, beneficiaries with drug coverage paid a slightly 
larger portion of their total drug expenditures (33 percent) in 1998 
than they did in 1997 (31 percent). Beneficiaries in Medicare HMOs with 
drug coverage and those enrolled in individually purchased supplemental 
plans experienced the greatest out-of-pocket cost increases between 
1997 and 1998.

CONCLUSION
    Prescription drugs continue to play an increasingly important role 
in the health care of Medicare beneficiaries. The research presented in 
the Health Affairs article demonstrates that beneficiaries with drug 
coverage used more drugs and had higher total expenditures than 
beneficiaries without coverage, and the gap in expenditures and 
utilization between those with and without coverage increased. Clearly, 
having prescription drug coverage makes a difference in beneficiary 
drug use and spending, particularly for low-income seniors and those 
with many chronic health problems.

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    Chairwoman Johnson. Thank you very much for your testimony.
    Mr. Cohen. We will come back for questions when everyone 
is--Mr. Cohen.

 STATEMENT OF MICHAEL R. COHEN, PRESIDENT, INSTITUTE FOR SAFE 
     MEDICATION PRACTICES, HUNTINGDON VALLEY, PENNSYLVANIA

    Mr. Cohen. Good afternoon, Madam Chairman.
    I represent a nonprofit organization called the Institute 
for Safe Medication Practices. It is independent, and it is 
composed of physicians, nurses, pharmacists and consumers, and 
our focus has been on medication safety for many years. We work 
with the United States Pharmacopeia's medication error 
reporting program and also with the Food and Drug 
Administration's Medwatch program data to review reported 
errors from practitioners and make recommendations for 
prevention. This is published widely, and all the hospitals get 
our material; a number of journals and newsletters.
    We think that the proposed legislation is important to 
drive medication safety, or it can be, at least. And so, we 
really appreciate having the opportunity to speak today. To a 
large extent, payers such as Medicare bear some responsibility 
for medication errors if they don't support basic quality 
issues and safety requirements. It has to be more than just 
dispensing accurately. It also has to be looking at the drug 
therapy and monitoring it and making sure that it is important 
for the patients. I think that is critical.
    So we have identified three areas to think about that we 
believe are appropriate for legislation related to this 
prescription drug benefit: continuous quality improvement 
activities to enhance safety in our nation's pharmacies and 
other practice sites; largely, that is not done now; better 
clinical utilization of community pharmacists and the 
beneficiaries themselves and expanded use of effective 
technology, the computerized prescribing, barcoded drug 
administration, and so forth.
    We know what to do to prevent medication errors. There is 
loads of research out there. People, out of altruism, the 
practitioners, the doctors, nurses, pharmacists are willing to 
come forward and give us the story about errors that they have 
made and tell us how they have prevented future events.
    And we have found that they are repetitive in nature. What 
happens in California happens in Connecticut and Massachusetts 
and everywhere else. And I think it is time that we put a stop 
to this. One of the things I think that we could really use 
help with here would be the idea of legislation that requires, 
as a condition of participation, that pharmacies would perform 
continuous quality improvement. So far, this is only done in 
three States that we know of where it is required, where the 
pharmacist and the pharmacy teams and anybody that dispenses 
medication, frankly, would seek out information about errors 
and then apply this information and the expert recommendations 
to make sure that they don't happen again rather than waiting 
for another incident to take place. We think that that is 
critical.
    And we have publications that provide this information. I 
think it should also involve the PBMs and the payers. I think 
some of the policies that are out there cause some serious 
problems: lots of interruptions. We talked about the formulary 
considerations before. It is a mess out there trying to keep 
things straight about who is getting reimbursed for what, and 
the pharmacists spend a lot of time with that right now.
    Importantly, I think if we are going to do this, the 
information has to be protected from discovery in a lawsuit. I 
think that is critical, and the legislation that we have seen 
so far in the three States that I mentioned have moved in this 
direction. I also want to tell you that we believe that each 
provider should do, on an annual basis, a self-assessment. We 
actually prepared a self-assessment along with the American 
Hospital Association last year which has 200 characteristics of 
a safe medication system for hospitals, and currently, along 
with the American Pharmaceutical Association and National 
Association of Chain Drug Stores, although we prepared it 
independently, they are helping to support it, and we have 
developed a similar project for community pharmacies where they 
can actually find areas of weakness where they need to focus.
    And I think that is something also that can drive quality 
improvement projects. So I think that is another thing that 
ought to be required in this legislation.
    As far as utilization of pharmacists, it bothers me 
tremendously that we are wasting a tremendous quality resource 
in the community pharmacists. Right now, they are frequently 
tied up with the dispensing activities, the technical 
activities, but where they could be monitoring drug therapy, 
they could be, for example, looking at new drugs that patients 
are on, trying to identify side effects and adverse reactions 
quickly, even looking at drugs that might otherwise come off 
the market and making recommendations for improvement.
    They could be doing reviews of a patient's drug regimens. 
We have seen this in the long-term care industry, for example. 
The pharmacists there, the consultant pharmacists, have done a 
tremendous job, and research has shown a decrease in cost of 
$3.6 billion in the long-term care field, and improvements in 
outcome in patients in long-term care are 43 percent. This same 
thing could be required for Medicare beneficiaries, and I 
really don't think there is a reason that we should not look 
into this activity at least.
    We have about 80,000 certified technicians. We have 
automated technology that is going to help. We have pharmacists 
now who are graduating at the doctoral level. I believe, we 
believe, that they can cut down on the number of drugs that are 
being provided. I think they can really help to reduce the 
possibility of errors with this drug regimen review.
    I also think that another important area that we should be 
involved with is the technology. We are at the cusp of using 
devices like this to reduce ambiguity: the look-alike names, 
for example; the sound-alike names. I would think that there 
ought to be some incentive in the bill for physicians that 
actually use computerized prescribing, because it cuts down on 
the possibility of medication errors. And I think most 
important, it allows communication of patient information. We 
don't have that right now in the pharmacy. We don't know when a 
patient has renal impairment, kidney disease, for example, and 
a drug dose might have to be changed. We don't even know for 
sure what drugs they are on, because right now, the 
beneficiaries may go to several different pharmacies to get 
their medication. With devices like this, I think we can pull 
all that together and reduce the possibility of patient harm 
and also reduce some of the costs that you are concerned about.
    Thank you.
    [The prepared statement of Mr. Cohen follows:]

STATEMENT OF MICHAEL R. COHEN, PRESIDENT, INSTITUTE FOR SAFE MEDICATION 
               PRACTICES, HUNTINGDON VALLEY, PENNSYLVANIA

    Good afternoon. Madame Chairman and Members of the Committee, thank 
you for the opportunity to speak with you this afternoon about 
important health care quality issues related to the design of a 
prescription drug benefit program for Medicare beneficiaries. I am 
Michael R. Cohen, a pharmacist and president of the Institute for Safe 
Medication Practices (ISMP). ISMP is an independent, nonprofit 
organization that works closely with practitioners, regulatory 
agencies, health care institutions, professional organizations and the 
pharmaceutical industry to provide education about adverse drug events 
and their prevention. A board of trustees representing the health care 
community at large governs this interdisciplinary effort by nurses, 
pharmacists, physicians and health care consumers. Our primary focus 
has been on proper and safe use of medications. We have a long history 
of learning about medication errors from health care practitioners and 
consumers who voluntarily report medication errors and hazardous 
conditions through a national reporting program operated by the United 
States Pharmacopeia. All reports are shared directly with the US Food 
and Drug Administration, Office of Post-marketing Drug Risk Assessment. 
Dialog with FDA is ongoing when reports relate to drug nomenclature 
issues (proprietary and nonproprietary names), or pharmaceutical 
labeling, packaging and medical device design.
    Information about medication errors, other adverse drug events, and 
recommendations for prevention are shared with the medical community 
through our web site (www.ismp.org); ongoing columns in 16 professional 
journals that reach nurses, nurse practitioners, pharmacists, 
physicians, and physician assistants; and a biweekly publication, ISMP 
Medication Safety Alert! that reaches all US hospitals. Currently, we 
are preparing to launch a similar newsletter for chain and independent 
community pharmacies. In addition, we reach regulatory authorities and 
pharmaceutical manufacturers internationally through regular 
publications in international journals and newsletters. Information 
from ISMP has been used to effect thousands of improvements in 
professional practice and commercial drug labeling, packaging and 
nomenclature. The organization has gained the trust and respect of 
practitioners and senior officials in health care throughout the 
nation.

Recommendations to Reduce Error and Improve the Quality of Medication 
        Use
    Medications are a blessing, but humans must safely prescribe, 
prepare, dispense, and administer these drugs. Yet humans are fallible, 
and as clearly articulated in the recent reports by the Institute of 
Medicine (IOM), errors and other adverse events occur and cause 
unbearable human and financial cost. Medication use has been further 
complicated by the large number of new drugs and technologies 
introduced every year, an increasing elderly population with chronic 
and acute conditions requiring complex treatment strategies, and the 
proliferation of over-the-counter products. In light of this fact, much 
can and should be done to enhance medication safety.
    The current prescription drug benefit legislation is a strong and 
appropriate vehicle to drive medication safety. Payers bear 
responsibility for medication errors when they occur because of 
insufficient support of basic services and lack of quality/safety 
requirements. As purchasers of pharmacy services through mail and 
community pharmacies, payers--including Medicare--should require 
providers to comply with standards most likely to enhance medication 
safety. They should offer their beneficiaries some assurance of safe 
pharmaceutical care, which includes important monitoring of the 
appropriateness of drug therapy and its effects, not just accurate 
dispensing.
    ISMP has identified several focal points that would be most 
appropriate for legislation related to prescription drug benefits:
           Continuous quality improvement activities to enhance 
        safety in our nation's pharmacies;
           Better clinical utilization of community pharmacists 
        and pharmacy beneficiaries; and
           Expanded use of effective technology.
Achieving and maintaining standards related to these focal points will 
likely require resources that are not currently available. Thus, 
legislation must also include changes in the current reimbursement 
systems to properly support any required safety enhancements.

Continuous Quality Improvement
    Data from the USP-ISMP Medication Error Reporting Program reveals 
that medication-related problems are repetitive in nature. An incident 
of misuse in one setting is likely to repeat itself in another. Most 
importantly, the system changes necessary to prevent errors are similar 
and a growing body of literature is available to guide these efforts. 
Tragically, too many organizations and individual providers do not 
believe similar incidents could happen to them. They fail to use 
information about errors occurring elsewhere as a roadmap for 
improvement in their own organization or practice. It is not until a 
serious error hits home that aggressive prevention efforts are 
implemented. With so much evidence-based information about error 
prevention at hand, there is little excuse for reacting to errors after 
they happen instead of preventing them. We need Congress to help 
shorten the interval between the lessons taught by errors and the 
widespread corrective action to prevent future errors.
    The development and implementation of continuous quality 
improvement (CQI) efforts should be the highest priority in all 
pharmacies. Such efforts must be aimed specifically at preventing well-
known and repetitive categories of prescribing and dispensing errors, 
which erode patient confidence in our health care system. For example, 
in order to participate in the prescription drug benefit program, 
pharmacies should be required to seek out medication safety information 
and use it proactively to prevent medication errors. At the same time, 
safety issues recognized internally and reported by patients must be 
documented and analyzed, and a process must be established to determine 
the best strategies to prevent future problems and ensure its 
implementation. An annual survey to assess consumer perceptions of the 
quality of pharmaceutical products and professional services might also 
be required to supply additional information upon which to base 
improvement strategies.
    Informational tools like our ISMP Medication Safety Alert! 
publication, or ISMP's Quarterly Action Agenda, which is a readily 
available list of medication problems compiled from our nation's 
reporting programs, can be a backbone of any CQI effort. The very 
purpose of the USP-ISMP Medication Error Reporting Program--indeed the 
purpose of any type of safety reporting program and the expert 
recommendations that stem from it--is to guide the implementation of 
quality improvement initiatives by practitioners and organizations. If 
this is not accomplished, the value of any medical safety-reporting 
program is diminished. Thus, appropriate funding is needed to ensure 
that information flowing from error reporting programs are efficiently 
transformed into learning programs to prevent future errors. Research-
based information, anecdotal reports of adverse events, reports from 
the Joint Commission on Accreditation of Healthcare Organization's 
Sentinel Event Newsletter, and information from other sources are also 
instrumental in this effort. ISMP is prepared to assist the Secretary 
of Health and Human Services, as well as the nation's professional 
licensing boards, health departments, accreditation agencies, 
regulatory authorities, and individual organizations in using such 
informational tools to develop effective CQI strategies that can 
successfully stop repetitive medical errors.
    Practice sites should also be required to conduct self-assessments 
to help prioritize improvement projects at least annually. In a 
cooperative project with the American Hospital Association (AHA), ISMP 
recently developed and distributed the ISMP Medication Safety Self-
Assessment to virtually all US hospitals. This weighted self-assessment 
instrument provides a list of nearly 200 effective medication error 
reduction strategies in the general hospital setting. Nearly 1,500 
hospitals participated fully in the project, which resulted in a large 
national database of hospital efforts to improve patient safety with 
medications. This database will allow health care providers to identify 
areas of weakness and focus improvement activities upon system elements 
and characteristics that are known to be effective for preventing 
patient harm. We will also be able to track improvement efforts in the 
nation's hospitals over time by repeating the process at a later date.
    While 1,500 hospitals completed the assessment and sent data to 
ISMP, there are approximately 6,000 acute care hospitals in the US. 
Through 1,000 follow-up telephone calls to a randomized list of 
hospitals, we learned that many more hospitals would have participated 
had it not been for advice given them by a national risk management 
organization to seek legal counsel before returning data to us. This 
letter instilled a renewed fear of discoverability in a future lawsuit, 
which had a chilling effect on the ability of hospitals to participate 
in this extremely valuable project. Unless the basic problem--
discoverability of information used in quality improvement projects 
like this one--is addressed by Congress, we will continue to lose 
valuable opportunities to address costly (both human and financial) 
patient safety issues. Records of quality improvement activities must 
be afforded protection under available state peer review or other 
protective statutes and thus protected from discovery during civil 
litigation. It should be noted that Governor Gray Davis of California 
signed legislation last August to require quality improvement 
activities following written policies and procedures in the state's 
pharmacies. A process must be in place to detect and analyze medication 
errors. Importantly, information that is part of the proceedings and 
records of review are protected from discovery. Texas and Florida also 
have quality improvement requirements that include the above protective 
provisions and several other states are now considering them. This 
should be a nationwide standard.
    Recently, the American Pharmaceutical Association Foundation and 
the National Association of Chain Drug Stores agreed to fund ISMP to 
independently develop and implement a similar self-assessment tool for 
the nation's community pharmacies (chain, independent as well as 
hospital and clinic ambulatory care pharmacies).
    Quality improvement requirements should involve all participants in 
pharmaceutical care, including claims processors and pharmacy benefit 
managers. Unfortunately, payment policies actually contribute to error. 
Underpayment of pharmacists, lack of standards for claims processing, 
numerous interruptions, and phone calls for prescription reimbursement 
adjudication and pre-approval have resulted in less time available for 
drug monitoring and patient education activities. An example is 
requiring pharmacists to dispense drugs at a dose higher than 
prescribed and making patients split the tablets--an error-prone 
process--to decrease the cost of a prescription medication. For 
example, the manufacturer may similarly price an 80 mg, 40 mg, 20 mg, 
and 10 mg tablet. Although the physician may prescribe 20 mg tablets to 
be taken four times a day, the pharmacist is required to dispense the 
80 mg tablet and tell the patient to take \1/4\ tablet four times a 
day. Some patients may become confused and take the full tablet or 
inaccurately split the tablet. In many cases, to assure that the 
patient takes the medication properly, a pharmacist will actually break 
the tablets into one-quarter size. However, the split tablets may begin 
to crumble in the prescription vial, leading to inaccurate doses.
    I would also underscore the need for Congress to oversee providers 
and payer activities and that participants agree, as a condition of 
participation, to periodic visits from appropriate authorities to 
review documentation of quality improvement activities. Currently, 
little or no oversight exists from standards organizations such as the 
Joint Commission on Accreditation of Healthcare Organizations (JCAHO) 
or the Medicare Peer Review Organizations, state professional boards, 
departments of health, etc. Without oversight, the private sector has 
not solved problems associated with safe medication use.
    Surely, continuous quality improvement activities are better for 
the health care provider and public since it offers the potential for 
reducing the number of prescription errors. A new study released in the 
American Pharmaceutical Association's (APhA) March/April Journal of the 
American Pharmaceutical Association (JAPhA) has updated an analysis of 
prescription drug use problems in the United States. It estimates that 
drug misuse costs the economy more than $177 billion each year. The 
estimated number of patient deaths has increased from 198,000 in 1995 
to 218,000 in 2000. Clearly, we must have required quality improvement 
activities to reduce this unnecessary burden. In the legislation, the 
Secretary of Human Health and Services should be directed to form a 
task force to examine these and other suggestions to formulate quality 
improvement requirements that would accompany the prescription drug 
benefit program. Funding for these activities must be assured.
Improved utilization of pharmacists and pharmacy beneficiaries
    The value of medications used appropriately is immense. But, if 
pharmaceutical care involves reimbursement for only dispensing 
activities, the drug safety problem will only worsen. Worse, we are 
overlooking one of the nation's most valuable allies in assuring proper 
drug use. A trip to the local pharmacy often provides clear evidence 
that many pharmacy graduates, now educated at the doctoral level with 
advanced clinical training, are sorely underutilized in the fight 
against costly adverse drug events. Instead of performing clinical 
functions for which they are well trained--overseeing a competent 
technical dispensing staff, screening new prescriptions for safety 
concerns, educating patients on proper drug use, monitoring patients 
for side effects--many are tied instead to dispensing activities, 
managing pharmacy benefit plans and drug inventories, and performing 
clerical tasks. Further, with improving technologies (robotics, bar 
coding of pharmaceuticals and computerized prescriptions) and 
increasing numbers of certified pharmacy technicians (over 80,000 
currently), more of the pharmacist's time will be available for 
clinical functions.
    The Institute of Medicine (IOM) Committee on the Quality of Health 
Care in America, in their most recent report, Crossing the Quality 
Chasm: A New Health System for the 21st Century IOM urges a strong 
national commitment to improve health care across six broad dimensions 
of quality: safety, effectiveness, responsiveness to patients, 
timeliness, efficiency, and equity. The authors suggest that the 
current health care system is failing to provide safe, high-quality 
care consistently to all Americans because it is poorly designed and 
relies on outdated systems. The report envisions a revamped system 
which is centered on patient needs and preferences, encourages teamwork 
among health care providers, and makes greater use of evidence-based 
approaches to care and information technology. The IOM Committee 
members recognized that, if organizations are expected to change the 
processes of care, broader environmental changes are also needed. 
Importantly, examination of current payment methods (e.g., fee for 
service, capitation, etc.) to remove barriers to innovation and 
quality, and testing of options to better align payment methods with 
quality goals. Realigning the payment to recognize pharmacist clinical 
services fits right into that idea.
    To prevent adverse drug reactions, we need better ways to detect 
problems early. Pharmacists can serve well in this role, also. They 
could manage the risk of existing technologies by aggressively 
monitoring the effects of new drugs on the market and identifying the 
need for special monitoring to prevent serious adverse events. Thus, 
pharmacists could safely monitor new and useful drugs that might 
otherwise be removed from the market because they are being prescribed 
inappropriately. With the new prescription drug benefit program, strong 
consideration should be given to reimbursing pharmacists for time spent 
monitoring patients closely to detect and report anticipated or 
previously unrecognized problems to the FDA. This would result in 
earlier detection of medication-related problems and their timely 
resolution.
    Further, we should learn from the valuable experience of the HCFA-
required drug regimen review process in long term care, which has saved 
billions of dollars in prescription drug benefits while also protecting 
residents from preventable adverse drug events. A comprehensive, on 
site, drug regimen review is conducted initially upon a patient's 
admission to a facility and reassessed monthly. As part of drug regimen 
review, the pharmacist evaluates appropriateness and safety of 
medication orders and verifies documentation. The pharmacist 
investigates possible adverse drug reactions in residents who exhibit 
various identified disorders. A current written diagnosis or identified 
need and relevant diagnostic data must support medication orders. As 
needed (PRN) medication orders must include specific written 
indications for use. Medications selected must be consistent with 
patients' care plans and shall have a favorable benefit-to-cost ratio 
reflecting consideration of medical history, the significance of any 
past drug reactions, and cost. When problems arise, the pharmacist 
makes recommendations (including identification of the concern, 
specific means to correct the situation and a determination of how and 
when improvement will be measured) to appropriate personnel. Consultant 
pharmacist-conducted drug regimen review improves optimal therapeutic 
outcomes by 43% and saves $3.6 billion annually in costs from avoided 
medication-related problems. (Bootman JL, Harrison DL, Cox E: The 
health care costs of drug-related morbidity and mortality in nursing 
facilities. Arch Int Med 1997; 157:1531-36. The recommendations must be 
addressed as a condition of participation.
    In the ambulatory care setting, beneficiaries themselves should be 
required to undergo at least a quarterly review of their prescription 
and over-the-counter medication regimen by a pharmacist. Similar to the 
above functions, the requirement would establish that presently 
prescribed drugs are necessary, that possible adverse effects are 
identified and reported to the patient's primary care provider, that 
the beneficiary is aware of proper storage requirements, dosing 
schedules, side effects, and so on. Pharmacists would be paid to 
monitor patients closely to detect problems with new drugs or for 
suspected problems. Not only would this improve care and vastly reduce 
the nearly $200 billion dollar cost of adverse drug events, it would 
also eliminate the cost of unneeded medications that patients may still 
be receiving! The savings to Americans would be enormous. We believe 
that the legislation should not move forward without a provision for 
this drug monitoring review with logistics determined by the Secretary.
    Another important component is improving patient understanding of 
their important role in safe medication use and error prevention. About 
25% of medication errors reported to our program and FDA's MedWatch 
program stem from confusion between proprietary and nonproprietary 
names. An educated patient or caregiver can be a crucial last check on 
the safety of any medication. For example, if patients are aware of the 
name and purpose of their medication, they are better able to recognize 
if a pharmacist misread the prescription and dispenses a different 
medication for an unexpected purpose. Legislation should require that 
the medication's purpose and full instructions be written on each new 
prescription so that pharmacists can educate patients properly and 
prevent errors if the purpose and prescribed drug do not match. Listed 
indications for the drug will also help patients and pharmacists ensure 
that their interpretation of the prescription is consistent with the 
prescriber's intent.
    Regrettably, the requirement for patient counseling in OBRA 90 
legislation is vastly underutilized. Few patients take advantage of the 
pharmacist's offer to counsel. Instead, they rush the pharmacist to 
fill a prescription and may not read accompanying drug information 
material that could prevent adverse events. The new legislation must 
address the issue by insisting that patients and caregivers have full 
explanations of new medications while in the doctor's office or 
pharmacy.
    Further, legislation should facilitate health care practitioners' 
access to crucial information about the patient. Harvard researchers 
(Leape LL et al. Systems analysis of adverse drug events. JAMA 1995; 
274:35-43) showed that over 40% of adverse drug events can be tied to 
insufficient information about the patient or drug at the time of 
prescribing, dispensing and administration of medications. The most 
recent IOM report notes that clinicians operate in silos without the 
benefit of complete information about the patient's conditions, medical 
history, treatment received in other settings, or medications 
prescribed by other clinicians. The report encourages cooperation among 
clinicians to exchange appropriate information and coordinate care.
    Indeed, the same researchers (Leape LL et al. Pharmacist 
participation on physician rounds and adverse drug events in the 
intensive care unit. JAMA 1999;282:267-270) showed that pharmacists 
could prevent 66% of adverse drug events if given access to clinical 
information to screen and adjust doses and suggest other interventions 
when clinical indicated.
    For example, if a physician fails to adjust the dose of a 
potentially toxic medication that is excreted through the kidneys in a 
patient with poor renal function, costly hospitalization, dialysis, 
transplant, or death may result. While renal function and other 
important clinical information may be residing in hospital or physician 
office records, it is often inaccessible to community pharmacists. But 
with better access to clinical information such as laboratory data, 
chronic diseases, organ function, allergies, and weight, the pharmacist 
can screen drug orders appropriately and prevent untold numbers of 
errors, injuries, and associated costs. The use of web sites or ``smart 
cards'' where patients could voluntarily maintain confidential clinical 
information accessible to their health care practitioners could 
significantly improve access to information.

Improved use of technology
    Health care remains relatively untouched by information technology 
that has transformed so many other aspects of society. Patient 
information, including medication prescriptions, is still dispersed on 
paper, poorly organized, often illegible, and difficult to retrieve. 
Yet, research shows (Bates DW et al. Effect of computerized physician 
order entry and a team intervention on prevention of serious medication 
errors. JAMA 1998;280:1311-16) that over half of all medication errors 
can be prevented through computerization physician order entry (CPOE). 
An ISMP survey (ISMP Medication Safety Alert! February 10, 1999--
www.ismp.org) of our nation's computer systems shows that fewer than 
13% of US hospitals even have the capability for CPOE. Even fewer 
ambulatory care physicians are using electronic prescribing technology 
(estimated to be under 5%). Nevertheless, our survey shows that most 
in-use prescribing software today does not alert users to errors in an 
accurate and efficient manner. System vendors and organizations must 
jointly accept responsibility for designing and implementing systems 
that offer clinical support to providers and warn about potentially 
unsafe prescriptions.
    Most of the technology software problems stem from the lack of 
interface and compatibility standards to allow stand alone systems to 
be fully integrated with each other to ensure that appropriate patient 
and drug information is available to providers. For example, standards 
are needed to ensure that any physician can send a prescription to any 
pharmacy electronically. This eliminates the risk of misinterpreting a 
handwritten prescription while increasing the detection of potential 
adverse drug events. We also need to address regulatory and legal 
barriers that prevent use of electronic prescribing. For example, in 
many states, verified electronic signatures are not acceptable, thus 
prescribers must physically sign each prescription. Further, incentives 
should be provided to reward health care practitioners and 
organizations that adopt technology known to reduce medication errors, 
such as electronic prescribing and bar code technology.
    Bar coding technology can greatly enhance the accuracy of drug 
dispensing and administration. Although the use of such technology is 
expanding in ambulatory care pharmacies, mainly through robotics, the 
pharmaceutical industry must join in this effort by assuring that all 
drug packages have a standardized, readable bar code or other machine-
readable code.

                                


    Chairwoman Johnson. Thanks very much, Mr. Cohen. Helen 
Frederick, from Maryland.

      STATEMENT OF HELEN FREDERICK, CROWNSVILLE, MARYLAND

    Ms. Frederick. Good afternoon. My name is Helen Frederick.
    Chairwoman Johnson. Excuse me, Ms. Frederick. Could you 
pull the microphone down a little bit, the top of the 
microphone down there? That is good. There.
    Ms. Frederick. Good afternoon. My name is Helen Frederick. 
I am very happy to be here today, and I am really glad to hear 
that Congress is trying to make Medicare better for senior 
citizens. I would like to tell you a little about my own 
situation, because I think there are many other people on 
Medicare just like me who need some help.
    I live in Crownsville, Maryland, a small town outside of 
Baltimore. I am 80 years old, and I have Medicare along with a 
supplemental policy, United Methodist American. My supplemental 
policy does a good job of paying for many of the things that 
Medicare doesn't pay for, but it doesn't pay for prescription 
drugs. Not all insurance companies of Medicare supplement 
policies cover prescription drugs, and my insurance company is 
one of those. The cost of a supplement policy that would have 
covered my prescriptions would have cost quite a bit more. I 
couldn't afford it, since I am living on a fixed income.
    I am very lucky that I have a home that my husband and I 
bought. It is paid for now, so I don't have to pay rent, 
because otherwise, I probably wouldn't be able to pay for the 
cost of my supplemental policy. Most of the other senior 
citizens I know also don't have coverage for their 
prescriptions, but I know a few who have prescription drug 
coverage through their supplementary policies or through their 
former employers.
    I have diabetes, heart trouble, glaucoma, arthritis, high 
blood pressure. My medications together cost about $400 a 
month. And one of my medications by itself costs $109 a month. 
It is a big part of my total monthly income. And sometimes, I 
have to skimp on groceries to afford my medication.
    I am happy that the prescription drugs I take helped me all 
these years, but it seems like each year, the costs get higher 
and higher; that I need to take more medicine. I would like to 
go to work to help pay for these medications, but my doctor 
says no, no, I can't.
    In the area where I live, there aren't any Medicare HMOs 
available, so I don't have the option to get on that type of 
plan. I would like to be able to stay with the doctor I go to 
now anyway, since I have several different medical problems, 
and they know my medical history. But I know that some people 
like HMOs and that they are able to get some of their drugs 
covered in those plans. I think everyone should be able to 
choose the plan that is best for them.
    I do wonder why we haven't changed Medicare in all these 
years, since there are so many advances in medical treatments 
and in medicines. The policies young people have seem to cover 
most services all on one policy, including prescriptions. I 
have been on Medicare for 15 years, and it hasn't changed much 
at all. The hospital deductible has increased, of course, but 
the outpatient deductible has been $100 as long as I can 
remember. I don't exactly understand why Medicare is divided 
into two parts, and it is hard to believe that a health 
insurance for everybody today would not cover prescriptions as 
expensive as they are. But since I know that my own 
prescriptions are so expensive, I wonder how the Government 
could pay all that cost for everyone. It seems like it would 
have to be paid for from somewhere.
    I don't have a solution to offer today, but I hope that 
whatever Congress does, it will look at the whole Medicare 
program and try to bring it up to date. I also hope that people 
will have choices so that we all don't have to have the exact 
same type of coverage or all go to the same doctors. Even 
though I really like to have help with my prescriptions right 
now, but I worry about how people will be covered in the future 
and what options my grandson will have when he gets old, and I 
hope when we do get coverage for prescription drugs, we will, 
though, think about how it will be paid for, because we need a 
benefit that will be around for the future.
    Thank you for inviting me today. May God bless all who have 
a voice in planning for our future health.
    [The prepared statement of Ms. Frederick follows:]

          STATEMENT OF HELEN FREDERICK, CROWNSVILLE, MARYLAND

    Good afternoon. My name is Helen Frederick. I'm very happy to be 
here today, and I'm really glad to hear that Congress is trying to make 
Medicare better for senior citizens. I'd like to tell you a little bit 
about my own situation, because I think there are many other people on 
Medicare just like me who need some help.
    I live in Crownsville, Maryland. Crownsville is a small community 
just outside of Baltimore. I'm 80 years old, and have Medicare along 
with a supplemental policy with United American. My supplemental policy 
does a good job of paying for many of the things that Medicare doesn't 
pay for, but it doesn't pay for prescription drugs. Not all insurance 
companies offer Medicare supplement policies that cover prescription 
drugs, and my insurance company is one of those. The cost of a 
supplemental policy that would have covered my prescriptions would have 
cost quite a bit more, and I couldn't afford it since I am living on a 
fixed income. I am very lucky that the home my husband and I bought is 
paid for now so that I don't have to pay rent, because otherwise I 
probably wouldn't be able to pay for the cost of my supplemental 
policy.
    Most of the other senior citizens I know also don't have coverage 
for their prescriptions, but I know a few who have prescription drug 
coverage through a supplemental policy or through a former employer.
    I have diabetes, heart trouble, glaucoma, and arthritis. My 
medicines together cost about $400 a month, and one of the medicines by 
itself costs $109. $400 a month is a big part of my total monthly 
income, and sometimes I have to skimp on groceries to afford my 
prescriptions. I'm happy that the prescription drugs I take have helped 
me all of these years, but it seems like each year the costs get higher 
and higher and that I need to take more medicines. I'd like to go to 
work to help pay for these medicines, but my doctor says I just can't.
    In the area where I live, there aren't any Medicare HMOs available, 
so I don't have the option to get on that type of plan. I would like to 
be able to stay with the doctors I go to now anyway since I have 
several different medical problems and they know my medical history. 
But I know that some people like HMOs and that they are able to get 
some of their drugs covered in those plans. I think everyone should be 
able to choose the plan that is best for them.
    I do wonder why we haven't changed Medicare in all these years 
since we have so many advances in medical treatments and in medicines. 
The policies younger people have seem to cover more services all on one 
policy, including prescriptions. I've been on Medicare for fifteen 
years and it hasn't changed much at all. The hospital deductible has 
increased of course, but the outpatient deductible has been $100 for as 
long as I can remember. I don't exactly understand why Medicare is 
divided into two parts, and it's hard to believe that a health 
insurance policy for anybody today wouldn't cover prescriptions, as 
expensive as they are. But since I know that my own prescriptions are 
so expensive, I wonder how the government could pay all of that cost 
for everyone. It seems like it would have to be paid for from 
somewhere.
    I don't have a solution to offer today, but I hope that whatever 
Congress does, it will look at the whole Medicare program and try to 
bring it up to date. I also hope that people will have choices so that 
we don't all have to have exactly the same type of coverage, or all go 
to the same doctors. Even though I'd really like to have help with my 
prescriptions right now, I worry about how people will be covered in 
the future and what options my grandson will have when he gets older. 
And, I hope when we do get coverage for prescription drugs, we've 
thought about how it will be paid for, because we need a benefit that 
will be around for the future.
    Thank you for inviting me today.

                                


    Chairwoman Johnson. Thank you very much, Ms. Frederick. 
Mrs. Wilkinson.
    Ms. Frederick. You are welcome.

      STATEMENT OF LORE WILKINSON, DURHAM, NORTH CAROLINA

    Mrs. Wilkinson. Good afternoon. It is a great honor to be 
here today before the Committee on Ways and Means to share my 
thoughts about the Medicare program and prescription drugs.
    My name is Lore Wilkinson, and I am 70 years young, and I 
live in Durham, North Carolina. I live a very active lifestyle. 
I teach a computer class at a magnet school, and I tutor second 
graders. In addition to that, I walk three miles every day in 
order to stay healthy.
    I am a firm believer in the importance of wellness and 
preventive care. To that end, I also take some prescription 
medicines on a daily basis. Because of osteoarthritis and a 
hypertensive condition in my eyes, I take three doses of 
medications daily. These medications keep me active and 
therefore keep me well. One of the reasons I appreciate my 
private retiree plan coverage is because I have a range of 
options. Recently, retirees of the company I worked for learned 
that we would have the option of enrolling in an HMO coverage 
or choosing one of the other employer-sponsored plan options 
available to us.
    I am enrolling in the HMO coverage because it will continue 
coverage of my prescription drug needs, and the doctors I see 
participate in this particular HMO. I made this decision after 
I learned that the medicines I take were included in their 
approved list, because not all are. I used the information my 
employer gave me to comparison shop and found a plan that best 
suited my medical and financial needs.
    I am here today because it is very important to me to have 
those choices, and I appreciate having an employer-sponsored 
coverage. I am concerned that if the government decides to 
offer a one-size-fits-all Government-run plan, I and millions 
of others will no longer be able to make these choices about 
their coverage. I do not want a government plan to disrupt my 
ability to choose a private coverage that best meets my needs.
    The even more important issue I would like to raise is the 
possibility that employers will not continue offering coverage 
if a government-run plan is adopted. If employers see that the 
Government will finance coverage for retirees, I am positive 
that employers would make business decisions to stop offering 
health care coverage to retirees. The result for many seniors 
like me would be to lose our choices of coverage and face 
increased costs and hassles in a government-run program.
    I agree that it is important for seniors to have access to 
prescription drug coverage, but I also think it is very 
important that it is structured in such a manner that employers 
will continue to maintain coverage for the millions of retirees 
who are happy with their employer-sponsored plans. Such plans 
were, in essence, computed into retirees' compensation, and we 
were told that every year.
    Earlier, I referenced some medical conditions which I am 
currently taking medications to manage. I would like to share 
with you a little bit of background about one experience I had 
relating to another condition. Last year, at a long-overdue 
physical after 10 years as I was recovering from a hip 
fracture, my physician pointed out to me that I was measuring 
one and a half inches shorter than what I had always been. The 
recommendation was that I needed to have a bone density test 
done to determine the severity of my condition.
    After obtaining the results, the doctor was able to 
recommend calcium pills which helped me to regain my strength 
and maintain my exercise and community service commitments. 
Yet, Part B Medicare run by the Government initially denied my 
claim for the bone density measurement, and it took me 3 months 
of fighting with Medicare representatives to finally get 
reimbursed for my test, even after a diagnosis of being three-
tenths of a percent away from having osteoporosis. I know I am 
one of the lucky ones to have been able to resolve the claim in 
only 3 months.
    There are two problems with this situation. One is that the 
inefficiency and bureaucracy of the government-administered 
program makes obtaining health care services a daunting task 
for many seniors and actually more expensive for the Government 
to administer. I have no problem asking questions, and I am 
well-informed and a careful consumer. I have learned how to ask 
questions and shop around to find the right solution for my 
needs. Those skills were developed because I have options and 
have not been forced into a large Government program.
    The second problem is something I also ask you to keep in 
mind as you begin your important work on modernizing Medicare. 
I would like to take this opportunity today to emphasize the 
importance of preventive medicine and wellness. If I only had 
the government-run Medicare plan, some of the medical 
conditions I have had would not have been treated at all until 
it was a debilitating condition warranting an inpatient 
hospital stay and/or surgery.
    Yet there are so many new treatments available which help 
seniors to achieve wellness, remain active in our communities, 
enriching other lives, and help us to get more out of lives 
ourselves. I know how fortunate I am to have a good employer-
sponsored coverage which affords me the choice of private 
coverage that best meets my needs, but I do worry that a big 
new Government program plan could eliminate those choices for 
me and millions of others like me.
    I ask you to keep my experience in mind as you begin 
crafting your proposal to improve access for all seniors to the 
prescription drug coverage. Thank you.
    [The prepared statement of Mrs. Wilkinson follows:]

          STATEMENT OF LORE WILKINSON, DURHAM, NORTH CAROLINA

    Good morning. It is a great honor to be here today before the 
Committee on Ways and Means to share my thoughts about the Medicare 
program and prescription drugs.
    My name is Lore Wilkinson. I am 70 years old and I live in Durham, 
North Carolina. I live a very active lifestyle, volunteering in various 
community service projects and I also walk 3 miles every day. I am a 
firm believer in the importance of wellness and preventive care. To 
that end, I also take some prescription medicines on a daily basis. 
Because of arthritis and a hypertensive condition, I take 3 doses of 
medication daily. These medications keep me active and therefore keep 
me well.
    One of the reasons I appreciate my private retiree plan coverage is 
because I have a range of options. Recently, retirees of the company I 
worked for learned that we would have the option of enrolling in HMO 
coverage or choosing one of the other employer-sponsored plan options 
available to us. I am enrolling in the HMO coverage because it will 
continue coverage for my prescription drug needs and the doctors I see 
participate in this HMO. After some research, I learned that the 
medicines I take were included on their approved list. I used the 
information my employer gave me to comparison shop and found a plan 
that best suited my needs.
    I am here today because it is important to me to have those choices 
and I appreciate having employer-sponsored coverage. I am concerned 
that if the government decides to offer a ``one size fits all'' 
government-run plan, I will not be able to make choices about my 
coverage. I do not want a government plan to disrupt my ability to 
choose private coverage that best meets my needs.
    The even more important issue I would like to raise is the 
possibility that employers will not continue offering coverage if a 
government-run plan is adopted. If employers see that the government 
will finance coverage for retirees, I am sure employers would make 
business decisions to stop offering health care coverage to retirees. 
The result for many seniors like me would be to lose our choices of 
coverage and face increased costs and hassles in a new government-run 
program. I agree that it is important for seniors to have access to 
prescription drug coverage. But, I think it is very important that it 
is structured so that employers will continue to maintain coverage for 
the millions of retirees who are happy with their employer-sponsored 
plans. Such plans were, in essence, computed into retirees' 
compensation.
    Earlier, I referenced some medical conditions which I am currently 
taking medications to manage. I would like to share with you a little 
bit of background about one experience I had relating to another 
condition. Last year, at an examination as I was recovering from a hip 
fracture, my physician pointed out to me that I was measuring at one 
and a half inches shorter than what had always been my height. Her 
recommendation was that I needed to have a bone mass measurement done 
to determine the severity of my condition. After obtaining the results, 
my doctor was able to recommend calcium pills which helped me to regain 
my strength and maintain my exercise and community service commitments. 
Yet, Part B Medicare, run by the government, initially denied the claim 
for the bone density measurement and it took me three months of 
fighting with Medicare representatives to finally get reimbursement for 
my test. I know I am one of the lucky ones to have been able to resolve 
the claim in only three months.
    There are two problems with this situation. One is that the 
inefficiency and bureaucracy of the government-administered program 
makes obtaining health care services a daunting task to many seniors.
    I have no problem asking questions. I am a well-informed and 
careful consumer. I have learned how to ask questions and shop around 
to find the right solution for me. Those skills were developed because 
I have options and have not been forced into a large government 
program.
    The second problem is something I also ask you to keep in mind as 
you begin your important work on modernizing Medicare. I want to take 
this opportunity today to emphasize the importance of preventive 
medicine and wellness. If I only had the government-run Medicare plan, 
some of the medical conditions I have had in retirement would have been 
treated by doing nothing about it until it was a debilitating condition 
warranting an inpatient hospital stay and surgery. Yet, there are so 
many new treatments available which help seniors to achieve wellness, 
remain active in our communities and help us to get more out of life.
    I know how fortunate I am to have good employer-sponsored coverage 
which affords me the choice of private coverage that best meets my 
needs. But, I do worry that a big, new government plan could eliminate 
those choices for me. I ask you to keep my experience in mind as you 
begin crafting your proposal to improve access for all seniors to 
prescription drug coverage.

                                


    Chairwoman Johnson. Thank you very much, Mrs. Wilkinson. 
Mr. Richtman

 STATEMENT OF MAX RICHTMAN, EXECUTIVE VICE PRESIDENT, NATIONAL 
       COMMITTEE TO PRESERVE SOCIAL SECURITY AND MEDICARE

    Mr. Richtman. Good afternoon, Madam Chairwoman and Members 
of the Subcommittee. I am Max Richtman, executive vice 
president of the National Committee to Preserve Social Security 
and Medicare. The National Committee is also currently chairing 
the Leadership Council of Aging Organizations, and as you know, 
that is a coalition of 46 national nonprofit organizations 
dedicated to the concerns of aging America.
    Although Americans have been enjoying a period of economic 
prosperity, we have not yet addressed one of the most dire 
health needs of seniors today, and that is access to affordable 
prescription drugs. A CNN-Gallup-USA Today poll conducted 
earlier this year ranked 13 possible priorities for the new 
administration's use of the Federal surplus dollars. 
Strengthening Social Security, helping seniors pay for 
prescription drugs and ensuring the long-term strength of 
Medicare all ranked among the top five priorities, while 
cutting Federal income taxes ranked second to last.
    President Bush has said repeatedly that a large part of the 
budget surplus is the people's money and should be returned to 
the people. We believe that a fair way to return part of this 
surplus to the people would be in the form of a universal 
voluntary and affordable prescription drug benefit as part of 
the Medicare Program for all seniors. This polling reflects the 
views of our Members as well. Medicare solvency and access to 
prescription drug benefits remain two of our top priorities.
    In February of last year, the National Committee to 
Preserve Social Security and Medicare joined the Leadership 
Council of Aging Organizations in developing a set of 
principles for a Medicare prescription drug benefit which I 
have attached to my testimony. These principles continue to 
guide our efforts in this Congress. Essentially, we believe 
that seniors deserve a prescription drug benefit that is 
comprehensive in coverage; affordable and regularly adjusted to 
account for inflation; voluntary but guaranteed to all who want 
it regardless of income or health status and available as part 
of the Medicare Program, including traditional fee-for-service 
Medicare.
    We are concerned about various proposals that do not meet 
our basic standards and principles. We are concerned about 
proposals to pay for the prescription drug benefit by using 
Medicare Part A Trust Fund moneys. This would have a major 
impact on the solvency of the existing trust funds which 
finances benefits under the current law. Some premium support 
proposals suggest that private managed-care organizations offer 
seniors drug coverage. However, access to Medicare managed care 
has already proven to be unreliable.
    Following the Balanced Budget Act of 1997, many seniors 
enrolled in managed care plans, in large part for the 
prescription drug coverage. As of January of this year, nearly 
a million people, one out of every six Medicare plus choice 
enrollees, were dropped from their managed care plus choice 
plans. More and more managed care plans are deciding not to 
participate in Medicare, abruptly dropping seniors, 
particularly those in rural and hard-to-serve areas.
    The dramatic increase in Medigap premiums that include 
prescription drugs is clear evidence that the private sector 
cannot provide adequate access to prescription drug coverage 
for a reasonable cost.
    Another concern of the National Committee and the 
Leadership Council is that managed care plans, as they have 
historically done, could participate in favorable risk 
selection by offering Medicare beneficiaries low-cost, low-
coverage plans that will attract younger, healthier seniors, 
leaving the sickest and oldest unable to afford the more 
generous plans. As you know, the President's blueprint budget 
provides $153 billion for Medicare reform, including $48 
billion for a prescription drug plan called Immediate Helping 
Hand.
    The Immediate Helping Hand proposal will only reach the 
lowest-income seniors through State-based plans. Even the 
National Governors' Association has said that it does not want 
the Federal Government to impose the responsibility of 
prescription drug plans on States. The 23 States that already 
provide such assistance reach, on average, about one-fourth of 
those in need. The National Committee and the Leadership 
Council agree that these plans do not meet our principles.
    Most premium support models being considered cannot 
guarantee affordability for all seniors, and the President's 
proposal is far from universal in coverage. About one-half of 
seniors who lack prescription coverage today have incomes above 
175 percent of poverty.
    I am going to skip my example because I am running out of 
time, but let me just finish by saying it is unclear exactly 
how much it would cost to provide a prescription drug benefit. 
We heard today from the CBO that it could cost nearly $1.5 
trillion over the next 10 years. The National Committee and the 
Leadership Council estimates that a meaningful, comprehensive 
benefit to match what seniors truly need and expect would 
require a 10-year commitment of about twice what the 
President's Medicare reform proposal calls for. Precise numbers 
are not available, but it is obvious that there could be cost 
savings from the overall system due to the dramatic decrease in 
costs for treatment and hospitalization as a result of 
patients' ability to comply with their physician's prescribed 
drug regimes.
    The Leadership Council and the National Committee asks the 
Congress--this Subcommittee, this Committee and the Congress--
to pass a prescription drug bill that makes drugs affordable; 
that it is included in the basic Medicare package; is universal 
and includes a broad spectrum of financing elements including 
beneficiary contributions and general revenue contributions 
and, very importantly, utilizes Medicare's size to achieve 
volume price discounts for beneficiaries.
    Thank you very much.
    [The prepared statement of Mr. Richtman follows:]

STATEMENT OF MAX RICHTMAN, EXECUTIVE VICE PRESIDENT, NATIONAL COMMITTEE 
                TO PRESERVE SOCIAL SECURITY AND MEDICARE

    Good Morning, Madam Chair and distinguished Members of the 
Committee. I am Max Richtman, Executive Vice President of the National 
Committee to Preserve Social Security and Medicare, a grassroots 
education and advocacy organization with several millions of members 
and supporters around the country. The National Committee is currently 
chairing the Leadership Council of Aging Organizations, a coalition of 
forty-six national, non-profit organizations dedicated to the concerns 
of an aging America.
    Although Americans have been enjoying a period of economic 
prosperity, we have not yet addressed one of the most dire health needs 
of seniors today, access to affordable prescription drugs. In the year 
2000, eight out of ten Medicare beneficiaries reported using 
prescription drugs on a daily basis, with the average senior taking 
four prescriptions daily and filling an average of 28 prescriptions a 
year. Because people are living longer, they are experiencing more 
chronic conditions than ever before. According to HCFA, 73 percent of 
women and 65 percent of men who are Medicare beneficiaries have two or 
more chronic conditions, which are more likely to require prescription 
drug treatments. The high cost of prescription drug prices, which 
continues to rise, creates an additional burden for the majority of 
seniors who are on low, fixed incomes. The SPRY Foundation, a research 
and education arm of the National Committee, predicted that seniors 
spend approximately three times as much on out-of-pocket expenses as 
the under 65 population, due substantially to the fact that just over 
one-third of the beneficiaries (12 million seniors) have no drug 
coverage, with access for the remaining two-thirds either declining, or 
becoming more costly, or both. In the year 2000, the average 
expenditure for prescription drugs for a senior was $1,205, with an 
average of $590 as their out-of-pocket expense. Drug costs for seniors 
are also expected to double by 2008, partly due to the rising cost of 
development of breakthrough drugs and the increased cost of advertising 
to consumers. In 1996, overall drug spending has increased from $30 
billion in 1996 to $50 billion in the year 2000. Escalating drug costs 
and increased prescription drug use are not just problems for our 
senior population. It also is becoming a burden for the younger 
generations, who must help support their parents, as well as their own 
families.
    A CNN/Gallup/USA Today Poll conducted earlier this year ranked 
thirteen possible priorities for the new administration's use of 
federal surplus dollars. Strengthening Social Security, helping seniors 
pay for prescription drugs, and ensuring the long term strength of 
Medicare all ranked among the top five priorities while cutting federal 
income taxes ranked second to the last. President Bush has said 
repeatedly that a large part of the budget surplus is the people's 
money and should be returned to the people. A fair way to return part 
of this surplus to the people would be in the form of a universal, 
voluntary and affordable prescription drug benefit as a part of the 
Medicare program for all seniors. This polling reflects the views of 
our members as well. Medicare solvency and access to prescription drug 
benefits remain two of our top priorities.
    In February 2000, the National Committee to Preserve Social 
Security and Medicare joined the Leadership Council of Aging 
Organizations in developing a set of principles for a Medicare 
Prescription Drug Benefit, which I have attached to my testimony. These 
principles continue to guide our effort in the 107th Congress. 
Essentially, we believe that seniors deserve a prescription drug 
benefit that is comprehensive in coverage, affordable and regularly 
adjusted to account for inflation, voluntary but guaranteed to all who 
want it regardless of income or health status and available as part of 
the Medicare program including traditional fee-for-service Medicare. We 
are concerned about various proposals that do not meet our basic 
standards and principles. We are also concerned about proposals to pay 
for the prescription drug benefit by using Medicare Part A trust fund 
monies. This would have a major impact on the solvency of the existing 
trust fund, which finances benefits under the current law.
    Some premium support proposals suggest that private managed care 
organizations offer seniors drug coverage. However, access to Medicare 
managed care has already proven to be unreliable. Following the 
Balanced Budget Act of 1997, many seniors enrolled in managed care 
plans, in large part for the prescription drug coverage. This year, 
about one million beneficiaries in these plans have been dropped from 
their managed care Plus Choice plans. More and more managed care plans 
are deciding not to participate in Medicare, abruptly dropping seniors, 
particularly those in rural and hard-to-serve areas. The dramatic 
increase in Medigap premiums that include prescription drugs is clear 
evidence that the private sector cannot provide adequate access to 
prescription drug coverage for a reasonable cost.
    Another concern of the National Committee and Leadership Council is 
that managed care plans, as they have historically done, could 
participate in favorable risk selection by offering Medicare 
beneficiaries low-cost, low coverage plans that will attract younger, 
healthier seniors, leaving the sickest and oldest unable to afford the 
more generous plans.
    As you know, President Bush's Blueprint Budget provides $153 
billion over 10 years for Medicare reform, including $48 billion for a 
prescription drug plan called Immediate Helping Hand. The Immediate 
Helping Hand Proposal will only reach the lowest income seniors through 
state-based plans. The bipartisan National Governors Association has 
said that they do not want the federal government to impose the 
responsibility of prescription drug plans on the states. The twenty-
three states that already provide such assistance reach, on average, 
only about one-fourth of those in need. The National Committee and the 
Leadership Council agree that these plans do not meet our principles. 
Most premium support models being considered cannot guarantee 
affordability for all seniors and the Bush proposal is far from 
universal in coverage. About one-half of seniors who lack prescription 
coverage today have incomes above 175 percent of poverty. Ms. Sylvia 
Kessler, an 81-year-old National Committee member from Florida, is an 
excellent example of a middle-income senior who does not qualify for 
her state based prescription drug plan because she is above the income 
level required. She also would not be eligible for Immediate Helping 
Hand because she is over 175% of the poverty rate. Ms Kessler testified 
in February of this year before the House Energy and Commerce 
Committee's Subcommittee on Health, as a middle-income senior who can 
barely afford her nine prescriptions for heart disease and high 
cholesterol. Because her prescriptions cost $2,300 per year (over 10 
percent of her annual income), Ms. Kessler must work two part-time jobs 
at the local Board of Elections and a flea market in order to make ends 
meet.
    Last week, the Chairman of the Senate Finance Committee said that 
President Bush's $153 billion would not be enough to offer drug 
benefits to all 39 million elderly and disabled on Medicare. Exactly 
how much is required to provide a drug benefit has been debated, but 
CBO recently estimated that spending on prescription drugs for Medicare 
beneficiaries would cost nearly $1.5 trillion from 2002 to 2011. The 
National Committee and Leadership Council estimates that a meaningful, 
comprehensive benefit to match what seniors truly need and expect would 
require a 10 year commitment of more than twice President Bush's 
Medicare reform amount for the drug benefit alone. Obviously, this 
endeavor would be expensive. Although precise numbers are not 
available, it is obvious that there would be cost savings for the 
overall system due to the dramatic decrease in costs for treatment and 
hospitalization as a result of patients' ability to comply with their 
physician's prescribed drug regimes.
    The Leadership Council and the National Committee calls on members 
of this body to pass a prescription drug bill that makes drugs 
affordable, includes drugs in the basic Medicare package, and is 
universal. It should include a broad spectrum of financing elements 
including beneficiary contributions and general revenue contributions 
and utilize Medicare's size to achieve volume price discounts for 
beneficiaries. Thank you for your time.

               LEADERSHIP COUNCIL OF AGING ORGANIZATIONS

LCAO principles for a Medicare prescription drug benefit
    In February 2000, the Leadership Council of Aging Organizations 
(LCAO) forwarded a set of principles to the Congress and the 
Administration outlining the critical issues that must be addressed in 
any Medicare prescription drug benefit that will gain LCAO support. The 
LCAO continues to support these principles as essential elements that 
must be incorporated into any major legislation to expand seniors' 
access to outpatient prescription drugs. Below are the highlights of 
the LCAO principles:

Benefits
    Medicare should guarantee access to a voluntary prescription drug 
benefit as a part of its defined benefit package.
    Medicare's prescription drug benefit should provide comprehensive 
coverage, including the most current, effective, and individually 
appropriate drug therapies.
    Medicare's contribution toward the cost of the prescription drug 
benefit must keep pace with the increase in prescription drug costs and 
must not be tied to budgetary caps.
    Adding a Medicare benefit must not reduce access to other Medicare 
benefits.

Coverage
    The Medicare prescription drug benefit should be available to all 
Medicare eligible older Americans and persons with disabilities, 
regardless of income or health status.
    The Medicare prescription drug benefit must be voluntary and 
provide safeguards against erosion of current prescription drug 
coverage provided by others.

Affordability
    The financing of a new Medicare prescription drug benefit should 
protect all beneficiaries from burdensome out-of-pocket expenses and 
unaffordable cost sharing, particularly low-income beneficiaries.
    The new benefit must protect individuals from extraordinary 
expenses for prescription drugs.
    The government subsidy must be sufficient to guard against risk 
selection and to provide an attractive benefit design.
    Sufficient subsidies should be provided for low-income 
beneficiaries to ensure that they have access to the benefit.

Administration
    The new prescription drug benefit should be efficiently managed, 
include appropriate cost-containment, and reflect the purchasing power 
of the Medicare beneficiary pool.
Quality
    The new Medicare prescription drug benefit must meet rigorous 
standards for quality of care, including appropriate monitoring and 
quality assurance activities.

    The Medicare program should work to prevent the overuse, underuse, 
and misuse of prescription drugs.

    Adopted, February 2000

                                


    Chairwoman Johnson. Thank you, Mr. Richtman. Ms. 
MacGuineas.

  STATEMENT OF MAYA MacGUINEAS, NATIONAL BOARD MEMBER, THIRD 
                 MILLENNIUM, NEW YORK, NEW YORK

    Ms. MacGuineas. Good afternoon, Madam Chairwoman and 
Members of the Subcommittee. My name is Maya MacGuineas, and I 
am a board member of Third Millennium, a national, nonpartisan 
organization founded by young adults to help offer solutions to 
long-term problems facing the country. Professionally, I am a 
fellow at a think tank here in Washington, D.C., the New 
America Foundation, where I work on fiscal policy issues, 
primarily the budget, taxes and entitlements.
    Thank you for including us in the discussion today about 
whether or not to include a prescription drug program in 
Medicare. We are honored to be here and appreciate that you 
have chosen to include the voices of young adults in this 
discussion.
    Madam Chairwoman, Members of my generation think that a 
prescription drug benefit should be included in Medicare, but 
we believe that if one is created, it should be targeted toward 
poor and low-income seniors. When ranking their preferences for 
spending initiatives, my peers put education, health care for 
the uninsured and reforming Social Security all before 
providing a new prescription drug benefit. As the trustees 
reiterated last week, Medicare faces tremendous funding 
pressures that will materialize before anyone in my generation 
reaches retirement age.
    The recent news paints a startling picture: we are now 
talking about an astounding difference between benefits and 
payroll taxes and premiums of $333 trillion over the next 75 
years, and on its current course, by 2075, Medicare will 
consume more than 8 percent of GDP. That number may not seem 
relevant to many of us here today, but to our children and 
grandchildren, it certainly will be.
    The momentum to add a prescription drug program to Medicare 
has accelerated rapidly, and there is indeed good reason to 
consider this new benefit. Nonetheless, we believe that the 
certainty that something should be done should not replace 
contemplation of how to do it right. The structure of any new 
benefit will have tremendous budgetary consequences for decades 
to come. And this is nothing the Subcommittee doesn't already 
know, but what you may not know are the specifics about how my 
generation feel about creating a new prescription drug benefit, 
and I would like to share with you the results of a just-
released national survey Third Millennium commissioned from the 
bipartisan polling team of Democratic Jeffrey Pollock and 
Republican Frank Luntz.
    My peers clearly support a prescription drug benefit for 
seniors, but the level of support dropped dramatically as the 
would-be recipient's income increases. For example, more than 
four out of five of my peers would support a prescription drug 
benefit for seniors with household incomes of $20,000 or less. 
Three out of five would support a benefit for seniors with 
household incomes of $40,000 or less.
    Above that $40,000 level, however, support drops off 
considerably, and only one-third would give the benefit to 
seniors with household incomes of $60,000 or more, and merely 
one out of five would support it for those with incomes of 
$100,000.
    And let me put this another way: while most of my 
generation is more than willing to help a low-income elderly 
widow in Connecticut's Sixth District or California's 
Thirteenth, 82 percent of my contemporaries say it is unfair to 
give prescription drug benefits to Ross Perot or Larry King. 
Young adults feel similarly when it comes to catastrophic 
coverage. Thirty-five percent of them would support the program 
to cover annual, out-of-pocket expenses of over $6,000, though 
61 percent would not. However, if the program were targeted 
toward seniors with low to moderate incomes, support is 
overwhelming, with an 87 to 12 percent margin.
    Now, we know that there are millions of middle to high 
income seniors who would like a new prescription drug benefit, 
and indeed, there are members of both parties who want to 
provide one. My question is this: is it fair to ask low-wage 
workers in each of your districts who themselves can barely 
afford health care and prescription drugs and many of whom who 
have no health insurance whatsoever to subsidize the drug 
benefits of those who want a handout but don't, in fact, need 
one?
    And it is worth noting that many seniors are, in fact, far 
wealthier than their incomes imply. Americans over 65 have an 
80 percent homeownership rate, twice that of adults under 35 
years old. More to the point, 80 percent of these older 
homeowners own their houses outright, carrying no mortgage, 
while only 24 percent of those under 65 are in that enviable 
position.
    Looking more broadly at total assets, our elderly families 
between ages 65 and 74 have median assets of $147,000, the 
highest of any age group. For all age groups, median assets are 
$72,000. For those under 35, they are just $9,000. Third 
Millennium is very excited about the kinds of innovations that 
we are seeing in the field of medical technology, and as time 
marches on, Medicare will be looking toward some of these new 
programs and technologies to incorporate into the program. But 
Third Millennium believes that the cost of these advances 
cannot be borne entirely by younger generations, who already 
face a tremendous financing burden.
    We are currently on a budgetary path where Social Security 
and Medicare and Medicaid will consume more than three-quarters 
of the Federal revenues in the budget by 2030, and somewhere--
it looks like in the late 2040s--there will be nothing left to 
pay for other programs besides these three programs. 
Oftentimes, this discussion is painted as a battle between 
young and old, and that blurs the point. This should be a 
discussion about who among us, of all ages, receives the 
benefits and who among us, of all ages, pays.
    Madam Chairwoman, what I would like most to stress today is 
this: adding a prescription drug benefit to the Medicare 
Program must be part of a more comprehensive reform to 
strengthen the Medicare Program. When a program is facing a 
long-term financing shortfall, expanding benefits is not 
reform. There are many options: raising the eligibility age, 
means-testing premiums and boosting national savings, that will 
help keep Medicare in balance.
    We should also rely on increased premiums, deductibles and 
copayments rather than just higher payroll taxes or general 
revenue transfers. A new benefit should be targeted only toward 
those who both need and cannot afford them on their own. Two-
thirds of seniors do currently have prescription drug coverage. 
The answer is not, then, to provide a massive new universal 
benefit. We must acknowledge that adding prescription drug 
benefits may be a desirable thing to do, but at the same time, 
it will affect the cost of other reforms. Therefore, the issue 
of prescription drugs and Medicare reform are inseparable and 
we hope will be treated accordingly.
    Once again, I thank you for inviting Third Millennium to 
appear before you today. I hope I have helped to shed some 
light on how many in my generation hope the discussion will 
proceed. Thank you.
    [The prepared statement of Ms. MacGuineas follows:]

STATEMENT OF MAYA MACGUINEAS, NATIONAL BOARD MEMBER, THIRD MILLENNIUM, 
                           NEW YORK, NEW YORK

    Good afternoon, Madam Chairwoman, and members of the Subcommittee. 
My name is Maya MacGuineas and I am a board member of Third Millennium, 
a national non-partisan organization founded by young adults offering 
solutions to long-term problems facing the United States. 
Professionally, I am a fellow at the New America Foundation, a non-
partisan think tank here in Washington, where I study fiscal policy 
issues, in particular those related to taxes, the budget and 
entitlement programs.
    Thank you for including us in the discussion today about whether to 
include a prescription drug benefit in Medicare. We are honored to be 
here and appreciate that you have chosen to include young adults in 
this discussion.
    Madam Chairwoman, members of my generation think that a 
prescription drug benefit should be included in Medicare, but believe 
that if one is created, the benefit should be targeted toward poor and 
lower income seniors. Furthermore, among various new spending options 
Congress might consider, a drug benefit is a much lower priority than 
improving education, providing health insurance for the uninsured, and 
fixing the Social Security system. Given the choice, my peers, young 
Democrats, Republicans and Independents alike, would not rush to 
subsidize prescription drugs.
    As the Trustees reiterated on March 19th, Medicare faces tremendous 
funding pressures that will materialize before anyone in my generation 
reaches retirement age. The recent news paints a startling picture. We 
are now talking about an astounding difference between benefits and 
payroll taxes and premiums of $333 trillion over the next 75 years. 
That's one-third of a quadrillion dollars!
    Throughout its history, Medicare has grown more rapidly than the 
economy and its growth is expected to accelerate with the retirement of 
the Baby Boom generation and increasing health care costs, leading to 
mounting expenses and an-ever expanding share of our nation's resources 
needed to fund the program. On its current course, by 2075, Medicare 
will consume more than 8% of GDP. That number may not seem relevant to 
some of us here today, but to our children and grandchildren, it 
certainly will be.
    The momentum to add a prescription drug program to Medicare has 
accelerated rapidly and there are indeed good reasons to consider this 
new benefit, not the least of which is the many seniors who need but 
cannot afford necessary medications. Nonetheless, we believe that the 
certainty that ``something should be done'' must not replace thoughtful 
contemplation of how to do it right.
    First, we believe the issue should not be looked at in a vacuum, 
but rather in the context of the entire Medicare program. To expand the 
program without regard to the costs--both today's and tomorrow's--and 
without addressing the current funding and structural problems plaguing 
Medicare will only exacerbate the looming financing crisis. And the 
costs we are talking about are not insignificant. A new prescription 
drug benefit could easily eat up all of Medicare's surpluses over the 
next decade and more. This is not a responsible way to prepare for the 
tremendous costs we know are just around the corner.
    This is nothing the subcommittee doesn't already know. But what you 
may not know are the specifics about how younger generations feel about 
creating a new prescription drug benefit. I would like to share with 
you today the results of a just-released national survey Third 
Millennium commissioned from the bipartisan polling team of Democrat 
Jefrey Pollock and Republican Frank Luntz. I have submitted the results 
in their entirety with my written testimony. After randomly 
interviewing 500 young adults between the ages of 18 and 34, our poll 
found the following:
    My peers clearly support a prescription drug benefit for seniors, 
but that level of support drops dramatically as the would-be 
recipient's income increases. For example, more than four out of five 
of my peers would support a prescription drug benefit in Medicare for 
seniors with household incomes of $20,000 or less. Three out of five 
would support a prescription drug benefit in Medicare for seniors with 
household incomes of $40,000.
    Above that $40,000 level, though, support drops off considerably. 
Only one-third would give this benefit to seniors with household 
incomes of $60,000, and a mere one out of five would support it for 
those with incomes of $100,000.
    Let me put it another way: While most of my generation is more than 
willing to help a low-income elderly widow in Connecticut's 6th 
District or California's 13th, 83% of my contemporaries say it is 
unfair to give a prescription drug benefit to Hugh Hefner, Ross Perot, 
or Larry King.
    The subject of recipient income arises again when younger adults 
are asked whether wealthy seniors should have their prescription bills 
subsidized if their out-of-pocket expenses are more than $6,000 
annually. While 35% would support such a subsidy, 61% would not. 
However, when the exact same question is asked about seniors with low 
to moderate incomes, supporters overwhelm opponents by an 87% to 12% 
margin.
    My generation's message to Congress is clear: If you want our 
political support, you need to means-test a new prescription drug 
benefit. We cannot afford to provide a massive new entitlement for 
those who don't need it.
    We know there are millions of middle-to-high income seniors who 
would like a new prescription drug benefit. Indeed, there are members 
of both parties who want to provide one. And my question is this: Is it 
fair to ask low wage workers in each of your districts, who themselves 
can barely afford prescription drugs and some of whom have no health 
insurance at all, to subsidize the drug benefits of those who want a 
handout but don't need one? Beyond that, is it wise? Two-thirds of 
retirees currently have prescription drug benefits. If the government 
introduces a universal program, many current corporate retirement 
programs are likely to drop that component of their coverage. Couldn't 
one argue that Uncle Sam's assuming this responsibility would be a form 
of corporate welfare?
    It is worth noting that many seniors are in fact far wealthier than 
their incomes imply. Retirees are one of the best-off segments of the 
population, wealthier, in fact, than any previous generation. This in 
large part is due to the high home ownership rates of older Americans; 
as many of you know, one's home is the most valuable asset for most 
families.
    The Census Bureau found Americans over 65 have an 80% home 
ownership rate, twice that of adults under 35. More to the point, 
according to AARP, 80% of these older homeowners own their homes 
outright, carrying no mortgage, while only 24% of those under 65 are in 
that enviable position. Looking more broadly at total assets, the 
Census Bureau found elderly families between ages 65 and 74 have median 
assets of $147,000, the highest of any age group. For all age groups, 
median assets are $72,000; for those under 35, they are just $9,000.
    Furthermore, Medicare has been and remains a very generous program. 
Current retirees are expected to receive two to four times as much as 
they paid in, according to economist Eugene Steuerle of the Urban 
Institute. Because of the intergenerational nature of the program, each 
new expansion provides a windfall for recipients who gain access to new 
benefits they didn't support during their working years. Now this is 
not entirely surprising; as time marches on, so too do medical 
innovations. We are grateful for the many new life-saving and enhancing 
medicines that have been brought to market over the past decades.
    But Third Millennium believes that the costs of these advances 
cannot be borne entirely by younger generations, who already face a 
tremendous financing burden. As the GAO recently reported, we are 
currently on a budgetary path where Social Security, Medicare, and 
Medicaid will consume more than three-quarters of total federal 
revenues by 2030. Somewhere in the 2040s, there will be nothing left 
for any other government spending. The Medicare Trustees contend that 
just to bring Medicare Part A back into line, program income will have 
to be increased by 60%.
    Oftentimes this discussion is painted as a battle between young and 
old. That blurs the point. This should be a discussion about who among 
us--of all ages--receives the benefits, and who among us--of all ages--
pays for them.
    Therefore, we must target a new benefit only to those who have no 
other options and who cannot afford prescription drugs on their own. 
And we must spread those cost among those who can afford them--of all 
ages. Additionally, we think there is a good argument for providing 
some type of catastrophic benefit coverage for those who have 
inordinately high drug costs. But again, we think this should only be 
done with need and costs in mind.
    Madam Chairwoman, what I would most like to stress today is this: 
Adding a prescription drug benefit to the Medicare program must be part 
of more comprehensive reforms to strengthen the Medicare program. Since 
we know that Medicare will face a significant funding shortfall, to 
ignore this reality while expanding the obligations of the program is 
not a responsible approach to mending what ails the system. Rather, I 
fear it will add to the cynicism many young people feel about 
government and whether the programs they pay for today will be 
available to them tomorrow.
    Indeed, our survey found that nearly half (43%) of people 18-34 
think that the TV soap opera ``General Hospital'' will outlast the 
Medicare system!
    When a program is facing a long-term financing shortfall, expanding 
benefits is not reform. There are many options--raising the eligibility 
age, means-testing premiums, relying more on managed care for seniors, 
and boosting national savings--that will help keep Medicare in balance. 
We should also rely on increased premiums, deductibles and co-payments 
rather than just higher payroll taxes or general revenue transfers.
    We must acknowledge that adding a prescription drug benefit may be 
a desirable thing to do, but at the same time it will affect the cost 
of other reforms. Therefore, the issue of prescription drugs and 
Medicare reform are inseparable and we hope, will be treated 
accordingly.
    Once again, I thank you for inviting Third Millennium to appear 
before you today to discuss this very important topic. I hope I have 
helped to shed some light on where many in our generation hope the 
discussion will go. I look forward to your questions.

 Medicare/Prescription Drugs Phone Survey of 500 Americans Ages 18-34, 
                               March 2001

    Hello. This is ____ of ____, a national research firm. We are 
calling people across the nation to get their views on important 
national issues. Your views will help shape the issues being debated in 
Congress. This will only take about eight minutes.
    (DO NOT PAUSE)
    (1) First, I need to find someone in your household that is between 
18 and 34 years old. What is your age, please? (If not qualified, ask 
for someone else in the Household who is. Otherwise, terminate)
          26% 18-24
          29% 25-29
          45% 30-34
          --Over 34 (Terminate)
          --Under 18 (Terminate)
          --Don't know/refused (terminate) (don't read)
    The following set of questions deal with Medicare, the Federal 
government program that provides health insurance for Americans age 65 
and older, regardless of their income. As you may or may not know, 
Medicare covers hospital costs, and seniors pay a small premium to help 
cover doctor costs, but Medicare does not cover most prescription 
drugs. About two-thirds of all seniors, however, have prescription drug 
insurance through other sources, such as retiree benefits or private 
insurance.
    (2) Congress is currently debating whether to add a prescription 
drug benefit to Medicare.* * *
    Some Members of Congress want to provide prescription drug coverage 
To All seniors regardless of income, at an estimated cost of roughly 98 
billion dollars over four years. * * *
    Other Members of Congress want to provide prescription drug 
coverage to only lower income seniors at an estimated cost of roughly 
48 billion dollars over four years. * * *
    Which type of prescription drug plan do you think Congress should 
create? (READ ALL ANSWERS--ROTATE)
          38% a 98 billion dollar drug benefit for all seniors--
        regardless of income; or
          48% a 48 billion dollar drug benefit only for seniors with 
        lower incomes; or
          4% the country cannot afford to offer seniors a drug benefit 
        of any type; or
          10% don't know/refused (Don't read)
    Would you strongly support, somewhat support, somewhat oppose or 
strongly oppose allocating tax dollars to pay for prescription drugs 
for seniors with household incomes of
    (3) $16,000 per year?
          48% strongly support
          38% somewhat support
          4% somewhat oppose
          6% strongly oppose
          3% don't know/refused (Don't read)
    (Rotate top to bottom or bottom to top questions #4-#7)
    (4) And what is your response if they had an annual income of 
$20,000 per year?
          47% strongly support
          37% somewhat support
          7% somewhat oppose
          5% strongly oppose
          5% don't know/refused (Don't read)
    (5) And what if they had an annual income of $40,000 per year?
          20% strongly support
          41% somewhat support
          21% somewhat oppose
          14% strongly oppose
          4% don't know/refused (Don't read)
    (6) And what if they had an annual income of $60,000 a year?
          9% strongly support
          26% somewhat support
          28% somewhat oppose
          34% strongly oppose
          4% don't know/refused (Don't read)
    (7) And what if they had an annual income of $100,000 a year?
          6% strongly support
          14% somewhat support
          18% somewhat oppose
          61% strongly oppose
          2% don't know/refused (Don't read)
    (8a) (Split sample) And would you [Read responses] providing tax 
dollars to wealthy seniors whose out-of-pocket prescription drug bills 
are more than $6,000 per year?
          11% strongly support
          4% somewhat support
          29% somewhat oppose
          32% strongly oppose
          5% don't know/refused (Don't read)
    (8b) (Split sample) And would you [Read responses] providing tax 
dollars to seniors with low to moderate incomes whose out-of-pocket 
prescription drug bills are more than $6,000 per year?
          55% strongly support
          32% somewhat support
          6% somewhat oppose
          5% strongly oppose
          1% don't know/refused (Don't read)
    Now, according to official government projections, the Medicare 
system will begin paying out more in benefits than it will receive in 
taxes well before most of the Baby Boom generation is retired. Knowing 
this, I'd like to ask whether you support or oppose the following 
proposals for reforming Medicare.
    (9) Currently, Medicare pays doctors and hospitals directly for 
covered benefits received by seniors. One reform proposal would instead 
provide each beneficiary with a fixed amount of money each year to buy 
coverage from the private insurance plan of his or her choice. Seniors 
could stay in the existing Medicare system if they preferred. Is this 
something you would *  * *?
          23% strongly support
          52% somewhat support
          12% somewhat oppose
          8% strongly oppose
          2% no opinion (Don't read)
          2% don't know/refused (Don't read)
    (10a) (Split sample) Currently, individuals become eligible for 
Medicare at age 65. [One proposal is to gradually raise the Medicare 
eligibility age to 70 over the next 20 years. Is this something you 
would * * * ?]
          10% strongly support
          13% somewhat support
          24% somewhat oppose
          52% strongly oppose
          1% no opinion (Don't read)
          --Don't know/refused (Don't read)
    (10b) (Split sample) Currently, individuals become eligible for 
Medicare at age 65. [One proposal would gradually raise the Medicare 
eligibility age to 67 to mirror the Social Security eligibility age 
increases that are already required by law. Is this something you would 
* * * ?]
          14% strongly support
          26% somewhat support
          27% somewhat oppose
          28% strongly oppose
          2% no opinion (Don't read)
          2% don't know/refused (Don't read)
    (11) Currently, all seniors pay the same amount of money for 
Medicare coverage, regardless of their income. One proposal would tie 
the amount of money seniors pay for Medicare to their household income, 
so wealthier retirees would pay more and lower income seniors would pay 
less. Is this something you * * *
          49% strongly support
          29% somewhat support
          9% somewhat oppose
          11% strongly oppose
          1% no opinion (Don't read)
          1% don't know/refused (Don't read)
    (12) Today, workers and their employers pay a combined 2.9 percent 
of their wages for a Medicare payroll tax. In the future, it is 
projected that this tax will no longer generate enough money to cover 
the cost of Medicare benefits for everyone who will need them. One 
proposal is to increase this payroll tax rate on workers to fund 
Medicare for the future. Is this something you would * * * ?
          15% strongly support
          40% somewhat support
          19% somewhat oppose
          23% strongly oppose
          1% no opinion (Don't read)
          2% don't know/refused (Don't read)
    (13) Currently, only a small percentage of senior citizens get 
their health care through managed care plans, such as HMOs. Would you 
[Read responses] offering seniors financial incentives to enroll in 
managed care plans in order to slow the growth of Medicare, as long as 
they could choose another plan later if they were dissatisfied in any 
way?
          31% strongly support
          48% somewhat support
          9% somewhat oppose
          8% strongly oppose
          3% no opinion (Don't read)
          2% don't know/refused (Don't read)
    (14a) (Split sample) Currently, 36% of all federal spending goes to 
programs for the elderly, mainly for Social Security and Medicare. Do 
you think spending just over one-third of the federal budget on the 
elderly is: (Read and rotate top to bottom or bottom to top)
          16% too high
          55% just right
          21% not high enough
          7% don't know/refused (Don't read)
    (14b) (Split sample) Currently, 36% of all federal spending goes to 
programs for the elderly, mainly for Social Security and Medicare. 
[Thinking about all of the programs the Federal government needs to 
spend money on,] do you think spending just over one-third of the 
federal budget on the elderly is: (Read and rotate top to bottom or 
bottom to top)
          20% too high
          48% just right
          21% not high enough
          11% don't know/refused (Don't read)
    (15) And what do you believe should be the proper ratio of 
government spending in the federal budget on seniors as compared to 
children? (Read and rotate top to bottom or bottom to top)
          3% $8 spent for seniors, for every $1 spent for children
          9% $4 spent for seniors, for every $1 spent for children
          38% $1 spent for seniors, for every $1 spent for children
          31% $1 spent for seniors for every $4 spent for children
          9% $1 spent for seniors for every $8 spent for children
          9% don't know/refused (Don't read)
    (16a) (Split sample) By most estimates, [adding a prescription drug 
benefit to Medicare for all seniors would cost roughly 98 billion 
dollars over the next four years]. With that in mind, which of the 
following should be the most important funding priority? (Rotate)
          9% paying down the national debt
          19% Strengthening Social Security
          34% Increasing spending on education
          11% Adding a prescription drug benefit to medicare
          22% Providing health care for the uninsured
          5% Don't know/refused (don't read)
    (16b) (Split sample) By most estimates, [adding a prescription drug 
benefit to Medicare for low or modest income seniors would cost roughly 
48 billion dollars over the next four years]. With that in mind, which 
of the following should be the most important funding priority? 
(Rotate)
          12% Paying down the national debt
          13% Strengthening Social Security
          34% Increasing spending on education
          8% Adding a prescription drug benefit to medicare
          25% Providing health care for the uninsured
          8% Don't know/refused (Don't read)
    Now, please take the next two questions seriously:
    (17) Considering that they both started in the mid-1960s, which do 
you think will last longer, the Medicare system or the TV soap opera 
``General Hospital``? (Rotate Answers)
          43% General Hospital
          52% Medicare
          5% Don't know/refused (Don't read)
    (18) In general, do you think it would be fair or unfair for 
taxpayers to pay for part of the cost of prescription drugs for very 
wealthy elderly people who might use them, such as Hugh Hefner, Larry 
King or Ross Perot?
          14% Fair
          83% Unfair
          3% Don't Know/Refused (Don't read)
    Now a few final questions for demographic purposes only----
    (19) In terms of family status, are you:
          6% Single with children
          30% Single without children
          2% Divorced with children
          1% Divorced without children
          42% Married with children
          16% Married without children
          2% Other (Don't read)
    (20) Do you have health insurance of any kind?
          90% Yes
          9% No
          1% Don't know/refused (Don't read)
    (21) In the 2000 Presidential election, did you vote for George 
Bush, Al Gore, someone else, or did you not vote? If you were not 
registered to vote, just say so.
          35% Bush
          29% Gore
          6% Someone else
          20% Did not vote
          7% Not registered
          4% Don't know/refused (Don't read)
    (22) Do you generally consider yourself to be a Republican, a 
Democrat or an Independent?
          29% Democrat
          31% Republican
          34% Independent
          6% Don`t know/refused (Don't read)
    (23) And what is the final level of formal education you completed?
          4% Less than high school
          21% High school graduate
          28% Some college or technical school
          34% Four-year college graduate
          12% A post-graduate degree of some kind
          1% Don't know/refused (Don't read)
    (24) Region (From sample)
          24% Northeast
          22% South
          31% Industrial midwest
          16% Midwest/west
          6% Pacific
    (25) Gender (By voice; do not ask)
          48% Male
          52% Female
    Methodology: Using the traditional random digit dial technique, a 
nationwide sample of 500 adults aged 18 to 34 was surveyed by telephone 
from March 6-7, 2001 by the Republican polling firm The Luntz Research 
Companies and the Democratic polling firm Global Strategy Group. The 
margin of error for telephone surveys of this type is 4.5%.

                                


    Chairwoman Johnson. Well, thank you very much, Ms. 
MacGuineas, and it is extremely important that your generation 
be a part of this discussion, and I was pleased that Ms. 
Frederick did note in her testimony that she is concerned about 
what her grandson's options will be, and certainly, we want him 
to have the opportunity to educate his children; to own a home 
and to do those things as well as to discharge his 
responsibilities to those over 65 with compassion and dignity.
    I also want to mention, Mrs. Wilkinson, that it is just 
frustrating to sit here. First of all, I am very interested 
that so many of you spoke about choice. I just want you to know 
how hard sometimes it is to provide benefits through Medicare, 
and that is one reason why choice is so important. We did 
actually deal with this issue of bone density testing in 1997, 
and that you should have had such a hard time getting payment 
for it so many years later is just one small evidence of the 
difficulty we face in distributing benefits from Washington.
    But for all three of you, your testimony was eloquent, and 
to have your voices here at this table has been very important 
for us, and I thank you for being here today.
    Mr. Cohen, I did want to ask you--let us see; I am sorry; I 
guess it was Mr. Poisal--no, it was Mr. Cohen on the----
    Mr. Cohen. We will do it together.
    Chairwoman Johnson. Coverage. And you may actually both be 
interested in addressing this.
    This issue of utilization and coverage, it is only common 
sense that if you have coverage and help in paying for 
prescription drugs that you can then buy the drugs that you 
need. On the other hand, with the amount of advertising now 
that is commonly associated with the drug industry, is there 
any evidence, either from the experience of pharmacists or from 
your research, Mr. Poisal, is there any evidence that some of 
this utilization is actually not good for your health or 
doesn't improve your health? And should we be cognizant of that 
as we develop a prescription drug benefit so we get the 
advantages of being able to afford the medicines you need 
without the disadvantages to both the senior and the taxpayer 
of drugs that you don't need?
    Mr. Cohen. Well, I do have a concern about that, as a 
matter of fact. I remember when FDA first approved the 
prescription drug advertising, for example. I had hoped that it 
was going to be more education than marketing, and I think that 
has not been proven to be the case. For example, I certainly 
would agree with advertising to consumers for a new vaccine 
that they should get, like a pneumococcal vaccine, for example, 
to prevent pneumonia. That is important but not what I am 
seeing. And I think it does drive the prescription drug use. I 
do know just yesterday, I saw that the Food and Drug 
Administration was about to conduct a survey of both physicians 
and consumers to try to gauge the impact, so I think that is 
something that the agency is looking into right now.
    Mr. Johnson OF TEXAS. Thank you.
    Mr. Poisal.
    Mr. Poisal. The Medicare Current Beneficiary Survey does, 
in fact, demonstrate what you have indicated, and that is that 
people with prescription drug coverage do indeed use more 
prescription drugs than those who do not. Our research, looking 
from 1997 into 1998, saw that the discrepancy between the two 
populations grew from five prescriptions on average per 
beneficiary to eight prescriptions on average.
    Unfortunately, the Medicare beneficiary does not capture 
health outcomes, so it is difficult to ascertain the effect on 
a beneficiary's health by virtue of, you know, taking 
medications or not getting medications. The survey is not 
designed for that type of analysis.
    Chairwoman Johnson. Mr. Cohen.
    Mr. Cohen. Yes; may I just make one more comment? I think 
that you should be concerned about the number of drugs that 
patients take. We know that as the number of individual agents 
that they consume go up, the number of adverse reactions and 
drug interactions also go up exponentially. So it is a very 
serious issue. And that is exactly why I was talking about this 
need to have somebody, on a regular basis, looking at the 
medication regimens and trying to discontinue unnecessary 
drugs.
    Chairwoman Johnson. I do think it is very important. You 
could even be taking aspirin regularly, and that could be 
undercutting other things that you are doing.
    Mr. Richtman, you mentioned voluntariness twice in your 
testimony. I don't know whether either of the bills that were 
proposed last session that had broad backing would meet your 
definition of voluntary. One of the bills allowed you a one-
time option to sign up, and then, you could not sign up again. 
The one that went to the floor allowed you a one-time option, 
but if you wanted to sign up again, then, you could do so, but 
you lost community rating. You got to be health-rated, so your 
premiums were going to be higher.
    Now, if you did move from an employer-provided plan, you 
could sign up, or if you moved from Medigap, you could sign up, 
but you couldn't just wait until you needed it and then sign 
up. So I just wonder whether that definition of voluntary, 
which I consider terribly narrow but I see no way around, 
frankly, because otherwise, people will wait until they need 
it, and furthermore, we will have a terrible problem of 
selectivity and so on. So whether that definition of 
voluntariness does meet your----
    Mr. Richtman. Well, I don't think we mean to take that 
definition to an extreme. I think the way Medicare Part B works 
and the way people are able to enroll in that, we would 
consider that voluntary.
    Chairwoman Johnson. OK; well, I think that is as far as I 
am concerned----
    Mr. Richtman. And I think that is a fair definition.
    Chairwoman Johnson. What I call mandatory voluntary, 
because you get all or nothing, and nobody in their right mind 
could not take it. But if that is satisfactory, that is what I 
wanted to know. Mr. Stark.
    Mr. Stark. Well, I want to thank all of the panel very much 
for their contribution, and your organizations' interest for 
the seniors, we appreciate it, us seniors.
    Ms. MacGuineas, your organization's concern I think is 
important, too. In reading through your questionnaire, it 
appears that a large majority of your group, which I think this 
was in the 18-to-34-year-olds, voted, and you split it pretty 
evenly, but I think 70 percent voted, which is about three 
times as high as your age group in general. So you, some way or 
another, in this poll were able to find those very 
disproportionate share. Do you know why? Did you look for 
people who voted in the survey?
    Ms. MacGuineas. Oh, no, absolutely not. We interviewed a 
random, selected population, and those were people who were 
willing to respond.
    Mr. Stark. You managed to come out pretty evenly on 
Republican and Democrat and all of those things.
    Ms. MacGuineas. Right.
    Mr. Stark. But you are way off the scale as voters, which 
is good.
    Ms. MacGuineas. Yes, if only we did vote 70 percent.
    Mr. Stark. I wish that were representative of your age 
group. First, I would take quarrel with you on the issue of 
home ownership, which is a wash. We decided that on a 
bipartisan basis in the Reagan administration when we basically 
gave home ownership as a way to qualify for SSI and other 
things. The theory that most seniors have their home paid for, 
as you indicated in your statistics, and at that point, they 
may be paying $150 a month in taxes for a $147,000 or a 
$100,000 house on average. If you made them sell the house, 
their rent would immediately go up to $600 a month, and they 
would pretty much go out the same door that they came in.
    The statistics are right but we encourage you at a young 
age to buy a home, get a mortgage, and pay it off. Then, you 
can live in that home. But you are not getting rich on it. I 
mean, it is an asset which does you no good. You have to pay 
the taxes; you have to paint the house. And if you were not 
there, you would be paying rent. And so, the idea that the 
seniors have a lot of money because they own homes, I don't 
think washes.
    And I think we would all agree. Over 90 percent of the 
seniors have less than $50,000 in income, and that is just what 
your respondents said. They would strongly support--61 percent 
of them would support a drug benefit for those under $40,000, 
right? And then, at $60,000, you drop to 35 percent, so one 
could assume that the majority of the people polled, if you had 
split it at the $50,000 level, would support this drug benefit, 
and that would be for over 90 percent of the seniors.
    So your survey is right on target. I am further elated to 
find that you think that 36 percent of all Federal spending 
going to programs for the elderly is either just right, 48 
percent, or not high enough, 21 percent, which is good. I mean, 
that is generous of your respondents, more generous, perhaps, 
than I would think people would suggest if they talk about a 
disparity between the generations. And I think that you are 
right on opposition to the idea of increasing the eligibility 
age. Seventy-six percent of your group said they did not 
support, either strongly opposed or somewhat opposed, raising 
eligibility for Medicare to 70 and 55 percent said they opposed 
even raising it to 67. They are correct.
    The one area that I think there was some question is the 
issue of encouraging people to join HMOs. Do you think that the 
people taking this poll had a reason to suspect that HMOs save 
money?
    Ms. MacGuineas. Can I answer all of your questions or just 
the last one?
    Mr. Stark. None of the rest were questions. I was just 
complimenting your group on their perspicuity. But now, I am 
wondering: do you suppose they were aware that managed care 
really costs Medicare money? So that for everybody who joins a 
managed care plan, the evidence is that Medicare loses money.
    Ms. MacGuineas. Right; I think what we have seen is that 17 
percent of people are members of HMO programs, and 17 percent 
of the costs still go to HMOs. I have also seen that part of 
the problem is that the competition hasn't been complete yet; 
that there are ways to restructure some of the competitive 
forces, hopefully, so that HMOs could be more efficient.
    Mr. Stark. But there is no evidence that----
    Ms. MacGuineas. I am not sure whether that is true or not.
    In answer to your question, I would imagine most people 
taking this poll wouldn't know those details. This is a very 
complicated topic and program, as both of you brought up, and 
so, I don't think they would.
    Mr. Stark. Well, it says here, ``would you enroll in 
managed care plans in order to slow the growth of Medicare''? I 
mean, that was your question. And I think that was kind of 
assuming, don't you, that it would save money. That is how I 
read the question, and I think that was a little tilted. Other 
than that, I thought your poll was right on, and I thought your 
group was doing the responsible thing. You are to be commended.
    Ms. MacGuineas. Thank you. I am glad you thought we were--
--
    Mr. Stark. I hope you will go back now and explain to them 
that managed care costs us money, and we should find better 
ways----
    Ms. MacGuineas. Well, we will try to follow up with more 
polls.
    Mr. Stark. Great.
    Ms. MacGuineas. One of the questions I just wanted to draw 
to your attention also, though, was after it talks about how 
much of the Federal budget should be spent on the elderly, 
which I think you said you commended, the highest proportion of 
people who were interviewed thought that the budget should be 
split basically one-to-one, so we spend one dollar on the 
elderly for every one dollar we spend on children.
    As you all well know, that is not the case right now. We 
spend $7 on the elderly for every $1 we spend on the children, 
and there actually was extreme support in our poll for 
increasing the amount we spend on children to at least as much 
as we spend on the elderly.
    Mr. Stark. But even more said you should spend between $4 
and $8, $1 for every $4, $1 for every $8.
    Ms. MacGuineas. I think that is right. There is even a 
stronger preference to spend more on children. That is where a 
lot of people think we should be making investments.
    Mr. Stark. And which just goes to show that my kids are 
more interested in their grandchildren--in my grandchildren 
than they are in my grandchildren's grandparent. That makes 
sense. Thank you.
    Ms. MacGuineas. Thank you.
    Mr. McCrery. [Presiding.] Thank you, Mr. Stark. Mr. Poisal.
    Mr. Poisal. Yes, sir?
    Mr. McCrery. You said that--or in your testimony, you noted 
that seniors with prescription drug coverage tended to use more 
prescriptions each year than those without such coverage.
    Mr. Poisal. That is correct.
    Mr. McCrery. Did your review attempt to compare differences 
in health status or outcomes between those two groups?
    Mr. Poisal. We did for health status. As I mentioned 
earlier, the MCBS is designed to track health care utilization 
and expenditures, and it is not, in fact, designed to follow 
outcomes, to evaluate outcomes of beneficiaries' health. 
However, that said, we do ask when we interview our 
beneficiaries every 4 months, we go through and interview about 
4,000 bennies in their homes every 4 months, three times a 
year. We do ask them to self-report their health status.
    And indeed, when you control for health status--that is to 
say, regardless of whatever health status you are in--
beneficiaries with prescription drug coverage have higher 
utilization and have higher total expenditures for their 
prescription drugs than do beneficiaries in that same health 
status without drug coverage.
    Mr. McCrery. Can you draw any conclusions from that data as 
to the outcomes?
    Mr. Poisal. Again, the MCBS isn't designed to evaluate 
outcomes. So I am afraid I can't answer that question.
    Mr. McCrery. Did your study attempt to analyze whether the 
presence of coverage led to inappropriate utilization, for 
example, seniors getting unnecessary prescriptions or maybe a 
branded product rather than a generic product?
    Mr. Poisal. Well, we capture all of the utilization that 
beneficiaries have; that is to say, whether they had a brand 
name or a generic-named drug. The analysis that would look at 
whether or not these particular prescriptions would be 
considered inappropriate was beyond the scope of the research 
that we did.
    Mr. McCrery. Did your study attempt to identify whether the 
differences between those with coverage and those without 
coverage stemmed from the fact that those with coverage may 
have been sicker and therefore had a greater likelihood of 
purchasing coverage for drugs in the first place?
    Mr. Poisal. What we know from looking at our data is that 
the health status mix for the covered population and the non-
covered population, that mix is essentially the same across 
both of those populations. However, the covered population is 
slightly more likely to have slightly more chronic conditions 
than the non-covered population. So, you know, again, self-
reported health status is essentially the same, but when you 
examine chronic condition counts, they are slightly more likely 
to have slightly more chronic conditions than the non-covered.
    Mr. McCrery. Thank you. Mr. Kleczka.
    Mr. Kleczka. We have had this discussion before about 
people with drug coverage taking more drugs than people without 
drug coverage, and as I think about that, it is also true that 
people with cars drive more than people without cars. And so, 
what I am trying to get at is people--and I found this in my 
district--people without drug coverage go without. In fact, I 
talked to a gentleman from my district who retired. He is 58 
years old; his wife is 62. They have no supplemental. She just 
gets her Medicare; he has no coverage. He has hypertension and 
some other ailments, and I said, well, do you take drugs for 
this? He said I do not; I cannot afford it.
    So that is why we are getting the phenomenon that if you 
don't have drug coverage, you are not going to use as much 
drugs, because in that class, people aren't buying them because 
they can't afford them. That is number one. The other thing 
that strikes me is when we talk about Medicare and Social 
Security and spending money on the seniors, my friends, this is 
called a generational transfer. But every and any other program 
the Federal Government spends money on is called an 
authorization and an appropriation and an expenditure.
    So now, we are getting into some nomenclature that is a 
little scary, because if you are gray, and the Federal 
Government spends money on you, it is a generational transfer, 
as if we are stealing it from someone. But if you are student 
going to school, and we are putting millions and billions of 
dollars into Pell grants and student guaranteed loans, that is 
an expenditure. And if we are going to go on and spend billions 
of dollars for Star Wars and give all these billions of dollars 
to defense contractors, that is an expenditure.
    Do you see what I am getting at? There are two different 
standards for expending the Federal receipts, and if you happen 
to be old and gray, it is a generational transfer. And this is 
just popping up this year. We are going to hear more and more 
about it, OK? This is the second hearing that I have been at 
where this has been used. And I know, Mrs. Wilkinson, you are 
ready to answer me, but I am going to ask one question, and 
then, I will ask you to answer me or respond to me.
    Max, you couldn't see the chart I had up, but the reason is 
because I had taken it to the House floor to use it in the 
budget debate that is coming up at 5:00. But in this House 
budget chart, the House Budget Resolution that we are going to 
be debating, it is very evident that there are plans to spend 
HI, Hospital Trust Fund, revenues on things other than hospital 
care for seniors, and on this chart, $240 billion is called 
Medicare Contingency Reserve, whatever that is. And then, there 
is another chunk, $153 billion, for Medicare modernization. And 
I suspect that is where the drug benefit is going to come out 
of, because it is similar to the amount that has been 
recommended by the President under this new welfare drug 
proposal.
    What is your group's view of using Hospital Trust Fund 
dollars for something other than hospital costs?
    Mr. Richtman. Well, Congressman, as I pointed out in my 
testimony, we are concerned about the way the Part A Medicare 
Trust Fund is designated in the budget and using it----
    Mr. Kleczka. In the law; OK.
    Mr. Richtman. And using it in the way you describe would 
obviously affect the solvency of the Medicare Part A Trust 
Fund, and we have made that very clear in the statement today 
and in press conferences that we have held in the last couple 
of weeks on Capitol Hill both on behalf of the organization 
that I represent and the Leadership Council of Aging 
Organizations.
    Mr. Kleczka. Thank you.
    And Mrs. Wilkinson, could you respond to my perplexion here 
of this new nomenclature: for you, anytime I vote for a dollar, 
it is a generational transfer, and when I vote for somebody, 
for a dollar for another group around here, it is just an 
expenditure. What is going on here?
    Mrs. Wilkinson. Well, when we were raising children, we 
were paying the school taxes, and the people before we were 
raising children paid for school taxes, and after your children 
graduate, you are still paying for school taxes. So it is a 
continuum. So I don't consider it a generational transfer, 
because we keep helping each other. We are a community of human 
beings, and we have to keep helping each other.
    And my reason for being here is just to implore you as you 
wrestle with this difficult problem not to break the two-thirds 
that work in order to fix the one-third that doesn't work.
    Mr. Kleczka. Thank you very much.
    Chairwoman Johnson. [Presiding.] Representative Thurman.
    Mrs. Thurman. Thank you, Madam Chairman.
    Just to follow along with Mr. Kleczka here on the using 
Part A, they are not the only ones who are concerned about it. 
I mean, we have got the American Hospital Association; 
Association of American Medical Colleges; the Catholic Health 
Association; Federation of American Hospitals. So, I guess it 
seems to be kind of cutting across all lines here as to the 
solvency and the issues of not using those dollars.
    Mrs. Wilkinson, I need to ask a question because in 
September 1999, IBM actually was getting ready to--a new, 
controversial, new pension plan, and they came to their 
Congresspeople, and we raised questions about it, and they 
backed off, and things went forward, and you are getting a 
great pension now. Well, I mean, at least you are getting what 
you were told you were going to get, because some of those 
things--but that is not my point, okay? My point is, and what I 
am asking you is because in your testimony, you had said the 
retirees of the company I worked for learned that we would have 
the option of enrolling in HMO coverage or choosing one of the 
other employer-sponsored plan options.
    You decided to enroll in the HMO coverage because it would 
continue coverage for your prescription drug needs, so I am 
assuming, then, the others did not.
    Mrs. Wilkinson. No.
    Mrs. Thurman. OK.
    Mrs. Wilkinson. That is not correct.
    Mrs. Thurman. OK.
    Mrs. Wilkinson. I did not want to run over my time.
    Mrs. Thurman. OK.
    Mrs. Wilkinson. I had actually six options.
    Mrs. Thurman. OK.
    Mrs. Wilkinson. One was to continue with the plan that I 
had, which was part of my, quote, compensation up to this year, 
but starting this year, I was supposed to pay for it.
    Mrs. Thurman. So the benefit changes, so you went into the 
HMO because you could get the same coverage as that particular 
option.
    Mrs. Wilkinson. I had four choices where I could pay 
varying amounts.
    Mrs. Thurman. But it did change.
    Mrs. Wilkinson. Yes, definitely, it changed in January 
2001.
    Mrs. Thurman. OK; so that was an issue for you when you 
were looking at it. The other thing----
    Mrs. Wilkinson. But the one other point that I wanted to 
make is that fortunately, we can make a choice every year. So 
if this plan does not work for me this year, I can switch in 
December to another plan.
    Mrs. Thurman. OK; and then, you also have this insurance 
through your company, but Part B Medicare actually, which is 
run by the Government, in fact, did pay for your bone density. 
It was not your company that paid for that.
    Mrs. Wilkinson. When you turn 65, Medicare becomes your 
primary, and you are required to pay for Part B, or you have no 
company insurance.
    Mrs. Thurman. OK.
    Ms. MacGuineas, I need to ask you a question, because one 
of the things that was interesting about the survey and 
certainly one that would skew my feelings about any of the 
coverage that I had or was looking at for somebody else, 90 
percent of the participants in your survey specifically have 
insurance, correct? I mean, that is what the survey said, 
which, of course, is not necessarily what we see in some of the 
other parts of it.
    If you wouldn't mind, because we are sitting here talking 
about prescription drugs, could you tell us about your coverage 
right now?
    Ms. MacGuineas. My personal coverage?
    Mrs. Thurman. Do you have insurance, and do you have a 
prescription drug?
    Ms. MacGuineas. That is sort of personal, but I will tell 
you. I do have insurance, but I had a preexisting condition, so 
it was very difficult for me to get insurance. So I pay for my 
own insurance. It is rather costly, and I don't have 
prescription drug coverage.
    Mrs. Thurman. OK.
    Ms. MacGuineas. So----
    Mrs. Thurman. And do you know about any of these other 
participants? I mean, did you all look at any of what they 
have? What I am trying to get at--of the coverage that they 
might have. Do they have HMO coverage? Did they----
    Ms. Macguineas. I don't believe our survey looked at the 
details of their coverage. We were limited both with resources 
and time for how many questions we could ask them.
    Mrs. Thurman. Mr. Richtman, let me ask you a question, 
because when I go to my district, and I have a large senior 
population who has had a very uncomfortable relationship with 
Medicare choice programs pulling in, pulling out; in any 
surveys that you have done, has there been any conversation 
about seniors who participate in Medicare or who have been in 
Medicare choice and are now back into Medicare? Do you feel 
that--or questions that have been asked to them--that they 
would prefer to have a Medicare prescription drug program as 
versus all of these other things that are going on in their 
lives and why?
    Mr. Richtman. Well, we have not focused on that specific 
question in surveys, but we, as you know, conduct a lot of town 
meetings all over the country with our Members, and that issue 
comes up every time. Medicare is a known entity and is a 
trusted entity, and the way our Membership looks at Medicare is 
that it has worked well and that it makes sense to add--whether 
you call it a Part D or some other designation--a prescription 
drug benefit, and I know there is a lot of talk around 
Washington, around the country, about this big surplus. Whose 
money is it, who do you trust with this money, and that is 
apparently the way the issue is--some are trying to frame the 
issue that way: ``who do you trust``?
    For us, the issue is really a question of priorities. There 
is this large surplus, and what are the priorities that we 
should really be looking at in dealing with the surplus?
    Mrs. Thurman. But do you get the impression because they 
have had to do premiums before in Medigap or whatever that they 
would be willing to help pay for this cost if the benefit was--
--
    Mr. Richtman. Absolutely.
    Mrs. Thurman. Provided through Medicare?
    Mr. Richtman. Absolutely, and during the Clinton 
administration's proposal that was floated during the last 
year, year and a half, some of the numbers were--starting at 
$25 a month and going up over, I think, 4 or 5 years to $44 a 
month. There was no rebellion at the meetings we were involved 
in with those numbers, as long as there was some consideration 
of a cap for catastrophic, out-of-pocket costs. That kind of a 
ball park figure was talked about.
    Chairwoman Johnson. Thank you. Just to close off, Mr. 
Richtman, are you aware that Title 18 of the Social Security 
Act is the section of the law that makes Medicare an 
entitlement?
    Mr. Richtman. I am sorry; say that again, please?
    Chairwoman Johnson. That Title 18 of the Social Security 
Act is the section of the law that creates the entitlement of 
Medicare?
    Mr. Richtman. I take your word for it.
    Chairwoman Johnson. Are you aware that both the bills from 
both parties last year amended Title 18?
    Mr. Richtman. Yes.
    Chairwoman Johnson. Was it accurate, then, to say that the 
House-passed prescription drug bill rejected a drug benefit in 
Medicare?
    Mr. Richtman. Well, we didn't think it was--the way it was 
going to be administered, the way we interpreted----
    Chairwoman Johnson. I understand that. But please, as we 
move forward in this debate, you see what a challenging debate 
it is. You see how important it is that we provide prescription 
drugs. You see how important it is that we provide it in such a 
way that we don't make seniors sicker instead of better. You 
see that it is important that we provide it in a way that young 
people have a burden that they can bear in the future. You see 
that it is important that we provide it in a way that the 
benefits actually get to the senior.
    So I hope that your organization, which has had quite an 
honorable history in a number of debates, would try to make 
sure that your participation in this debate is a little more 
accurate and a little more constructive. There should be no 
doubt in anyone's mind who heard the Congressional Budget 
Office at the beginning of the debate that this is going to be 
expensive and a challenging endeavor, and we really have to all 
work together.
    The hearing is adjourned.
    [Whereupon, at 4:30 p.m., the hearing was adjourned.]
    [Submission for the record follows:]

    STATEMENT OF THE AMERICAN SOCIETY OF HEALTH-SYSTEM PHARMACISTS, 
                           BETHESDA, MARYLAND

    The American Society of Health-System Pharmacists (ASHP) is writing 
to commend the chairwoman and members of the subcommittee for holding 
the March 27, 2001 hearing on Medicare reform and allowing the 
subcommittee to hear from a broad spectrum of interested parties. The 
hearing provided valuable information on devising a drug benefit that 
will meet the needs of all seniors and enhance their quality of care. 
ASHP hopes that the committee will continue to hear from interested 
parties, such as pharmacists, who will play a critical role in 
achieving this goal. We stand ready to provide any requested 
information.
    ASHP strongly supports efforts to add a drug benefit and to reform 
the overall Medicare program. We take this opportunity to share with 
the subcommittee the pharmacists' role in devising a rational and cost-
effective benefit. ASHP is the 30,000-member national professional 
association that represents pharmacists who practice in hospitals, 
long-term care facilities, home care, hospice, health maintenance 
organizations, and other components of health care systems.
    ASHP believes it is the role of the pharmacist to help patients 
make the best use of their medicines. The first step in this process is 
of course to ensure that beneficiaries have access to the prescribed 
dosage at the prescribed time; to ensure that beneficiaries are not 
splitting pills or skipping doses in order to make their supplies last. 
A true drug benefit, rather than mere price reductions, will go a long 
way towards achieving this goal.
    Increasing access to pharmaceutical products however, is only part 
of the challenge. Assuring appropriate outcomes, preventing adverse 
effects and medication errors, and enhancing patient understanding and 
involvement in their drug therapy are equally important components of a 
successful Medicare outpatient pharmacy benefit. Simply increasing 
access, without taking this other piece into consideration, will not 
assure the safe and effective use of medications and could actually 
result in increased medication-related errors. This is particularly 
true for seniors who see several doctors or take multiple medications.
    Pharmacists are the health professional uniquely trained and 
committed to assuring appropriate drug therapy regimens. Working in a 
true collaborative relationship with patients and the prescribing 
physician, pharmacists are the best ally for ensuring that medications 
are being used in a clinically appropriate, cost-effective manner, free 
from preventable side effects, drug interactions, and other medication-
related problems.
    As the November 1999 Institute of Medicine report, ``To Err is 
Human: Building a Safer Health System'' points out: ``Because of the 
immense variety and complexity of medications now available, it is 
impossible for nurses and doctors to keep up with all of the 
information required for safe medication use. The pharmacist has become 
an essential resource * * * thus access to his or her expertise must be 
possible at all times.''
    Currently, the expertise and value that pharmacists bring to 
patient care is not widely accessible through Medicare. This is because 
pharmacists are the only primary health care professional not 
recognized under the Medicare program as health care providers. As a 
result, pharmacists are not eligible to bill Medicare for the services 
they provide to beneficiaries.
    This lack of recognition for pharmacists is consistent with the 
lack of coverage for pharmaceuticals. Thirty-six years ago, when the 
Medicare program was established, both pharmacists and prescription 
drugs were a miniscule part of health care. Since then times have 
changed. Drug therapy has become the preferred method of treatment for 
most illnesses. According to a recent ASHP consumer survey, 
approximately half of the senior population is now taking 5 or more 
medications each day. At the same time, the pharmacist's traditional 
role of ensuring accurate, safe medication compounding and dispensing 
has evolved into a more comprehensive set of clinical, consultative, 
and educational services.
    Medicare must update its policy to be consistent with current 
health care practice. The new IOM report, ``Crossing the Quality Chasm: 
A New Health System for the 21st Century,'' recognizes that financial 
barriers embodied in both public and private payers payment methods 
create significant obstacles to high-quality health care. The report 
states: ``[e]ven among health professionals motivated to provide the 
best care possible, the structure of payment incentives may not 
facilitate the actions needed to systematically improve the quality of 
care, and may even prevent such actions.'' Our members have 
increasingly reported this to be true for pharmacists. Health systems 
often, even when acknowledging the pharmacists specialized expertise, 
cannot afford to fully utilize the pharmacists' services since they are 
non-revenue generating. This is especially contrary to modern practice 
in the Veterans Health Administration and the Indian Health Service 
where pharmacists are explicitly recognized as clinical specialists and 
are providing these services on a broad basis. But again, are not 
eligible to bill Medicare for the services they provide. Moreover, 
thirty states have authorized pharmacists to provide these patient care 
services in collaboration with physicians. Most other states are in the 
process of doing so.
    Research has overwhelmingly demonstrated that quality improvement 
measures, such as the improved coordination and preventive care that 
results from pharmacists' drug therapy management services, can 
translate into dollar savings. This is true for Medicare since it is 
already paying for the increased hospitalizations, emergency room and 
physician office visits, as well as nursing home admissions, that 
result from medication-related complications. According to a 1995 study 
published in Archives of Internal Medicine, drug-related morbidity and 
mortality in the ambulatory setting alone cost the nation $76.6 billion 
annually.\1\ An updated analysis, projected this number to have more 
than doubled in the last 6 years to $177 billion annually.\2\ According 
to the 1995 study, the addition of pharmacists' collaborative drug 
therapy management services would reduce negative therapeutic outcomes 
by 53-63% and avoid $45.6 billion in direct health care costs.\3\
---------------------------------------------------------------------------
    \1\ Johnson and Bootman. Drug-Related Morbidity and Mortality. 
Archives of Internal Medicine. 1995; 155:1949-1956.
    \2\ Ernest & Grizzle. Drug-Related Morbidity and Mortality: 
Updating the Cost-of-Illness Model. Journal of the American 
Pharmaceutical Association 2001; 41: 192-199.
    \3\ Johnson and Bootman. Supra. FN1.
---------------------------------------------------------------------------
    A key provision therefore to achieving a comprehensive drug benefit 
and obtaining even incremental reform to Medicare is the formal 
recognition of pharmacists as providers under the Social Security Act. 
This recognition will ensure that the drug ``benefit'' is beneficial to 
both Medicare beneficiaries (improving quality of care) and the 
Medicare system as a whole (improving quality of care and enhancing the 
efficient use of limited Medicare dollars).
    ASHP appreciates this opportunity to present its views to the 
Subcommittee and looks forward to a continuing dialog on this important 
health issue. ASHP, in conjunction with the American College of 
Clinical Pharmacy (ACCP), has established the Pharmacy Provider 
Coalition to improve patient outcomes through collaborative drug 
therapy management. Do not hesitate to call either organization as you 
continue your deliberations and develop meaningful, bipartisan 
legislation. We look forward to assisting you in this significant 
undertaking.