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



 
  CREATING A MEDICARE PRESCRIPTION DRUG BENEFIT: ASSESSING EFFORTS TO 
                   HELP AMERICA'S LOW-INCOME SENIORS
=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 17, 2002

                               __________

                           Serial No. 107-101

                               __________

       Printed for the use of the Committee on Energy and Commerce


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






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                               __________
                    COMMITTEE ON ENERGY AND COMMERCE

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

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

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

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

                                 ______

                         Subcommittee on Health

                  MICHAEL BILIRAKIS, Florida, Chairman

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







                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Braun, Beatrice, Board of Directors, American Association of 
      Retired Persons............................................    70
    Fuller, Craig, President and CEO, National Association of 
      Chain Drug Stores..........................................    99
    Hillerby, Michael D., Deputy Chief of Staff for Nevada 
      Governor Kenny Guinn.......................................    92
    Lambrew, Jeanne M., Associate Professor, George Washington 
      University.................................................    63
    McClellan, Mark, Member, Council of Economic Advisers........    27
    Neuman, Patricia, Vice President, Kaiser Family Foundation, 
      Director of Kaiser's Medicare Policy Project...............    78
    Tyler, Brian, Senior Vice President for Business Development 
      and Strategy, McKesson Corporation.........................    96
Material submitted for the record by:
    Braun, Beatrice, Board of Directors, American Association of 
      Retired Persons, responses for the record..................   136
    Fuller, Craig, President and CEO, National Association of 
      Chain Drug Stores, responses for the record................   123
    Infectious Diseases Society of America, prepared statement of   120
    Lambrew, Jeanne M., Associate Professor, George Washington 
      University, responses for the record.......................   132
    Neuman, Patricia, Vice President, Kaiser Family Foundation, 
      Director of Kaiser's Medicare Policy Project, responses for 
      the record.................................................   128
    Rector, John M., Senior Vice President Government Affairs and 
      General Counsel, National Community Pharmacists 
      Association, prepared statement of.........................   114
    Tyler, Brian, Senior Vice President for Business Development 
      and Strategy, McKesson Corporation, responses for the 
      record.....................................................   126

                                 (iii)

  





  CREATING A MEDICARE PRESCRIPTION DRUG BENEFIT: ASSESSING EFFORTS TO 
                   HELP AMERICA'S LOW-INCOME SENIORS

                              ----------                              


                       WEDNESDAY, APRIL 17, 2002

                  House of Representatives,
                  Committee on Energy and Commerce,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Barton, Deal, 
Burr, Whitfield, Ganske, Norwood, Cubin, Pickering, Bryant, 
Buyer, Pitts, Brown, Waxman, Strickland, Barrett, Capps, 
Pallone, Deutsch, Eshoo, Stupak, Engel, Wynn, Green, and 
Dingell (ex officio).
    Also present: Representative Gordon.
    Staff present: Chuck Clapton, majority counsel; Steven 
Tilton, health policy coordinator; Eugenia Edwards, legislative 
clerk; Amy Hall, minority professional staff; Bridgett Taylor, 
minority professional staff; Karen Folk, minority professional 
staff.
    Mr. Bilirakis. Good morning. I now call to order this 
hearing of the Health Subcommittee, and would like to start by 
welcoming our witnesses and all of the subcommittee members. I 
would also like to thank our witnesses for taking the time to 
appear before the subcommittee today. I am sure your testimony 
will prove valuable as we consider how best to provide our 
Nation's Medicare beneficiaries with an affordable 
comprehensive prescription drug benefit. Moreover, I appreciate 
those of you in the audience for attending today's hearing. I 
know that you had a choice this morning to view a similar 
topic.
    On that point, I would like to reiterate that we are 
working jointly with our colleagues on the Ways and Means 
Committee to develop a comprehensive Medicare bill. I believe 
it is best for our committees to work together and develop a 
common package for the House to consider.
    We took this approach, if you will recall, on developing 
our Medicare Regulatory Relief Bill, which seems to be stuck in 
the Senate, and it proved very effective with the bill passing 
on the floor by a vote of 408 to zero.
    Prescription drugs serve as a vital component in the 
practice of medicine today, and it is unconscionable that our 
current Medicare program does not include this benefit. 
Millions of Medicare beneficiaries are finding it increasingly 
difficult to pay for their prescription drugs because they lack 
adequate drug coverage. Finding some way to help seniors pay 
for their drug coverage is a top priority not only for me, but 
I daresay for this entire committee. However, we must do so in 
a way that protects and strengthens Medicare and does not 
bankrupt this very vital program.
    I firmly believe that one of the greatest legacies we can 
leave for future generations is a Medicare program that is on 
sound financial footing, and that is why I would like to think 
that we are all determined to protect the long-term solvency of 
Medicare.
    We are also determined to provide our Medicare 
beneficiaries with a comprehensive prescription drug benefit 
that they can afford. Such a benefit would preserve individual 
choice without putting an excessive financial strain on the 
program. We will continue working to ensure that this vision 
becomes a reality as soon as possible.
    I also believe that limited Federal resources should be 
targeted toward areas where they will have the greatest impact. 
There are millions of Americans who are suffering now, and as 
we consider how to develop a comprehensive prescription drug 
benefit I believe that we should focus some of our attention on 
strategies that will best help our poorest and sickest Medicare 
beneficiaries.
    It is important to examine innovative ways to help 
vulnerable seniors within the context of a comprehensive 
benefit, and that is why I called today's hearing.
    I would like again to offer a warm welcome to all of our 
panelists and to thank them for their time and effort in 
joining us, and now recognize ranking member, Mr. Brown, for an 
opening statement.
    Mr. Brown. Thank you, Mr. Chairman. I first point out that 
in light of the tax cut that Congress passed last year, I am 
glad that we can still afford to spend money on ourselves in 
this nice, new committee hearing room.
    Mr. Chairman, I understand the title of this hearing is 
Creating a Medicare Prescription Drug Benefit: Assessing 
Efforts to Help America's Low-Income Seniors. I have read the 
testimony of our witnesses, and there clearly are lessons to be 
learned from these programs.
    Michael Hillerby's testimony, for example, discusses how 
Nevada addressed risk selection and other obstacles to maximize 
participation in the program. Notably, Nevada's program evolved 
from two plans which proved confusing for beneficiaries, as we 
remember from a year or so ago, to a single plan. Nevada also 
found that the cost-sharing burden needed to be modest to 
attract enrollees and prevent risk selection.
    Finally, based on written testimony in the Nevada plan 
submitted by State Assemblywoman Barbara Buckley, who testified 
here earlier, the decision to use a private insurer rather than 
directly administer the program has increased the State's cost 
significantly. Milliman and Robertson estimated the State could 
operate senior Rx in Nevada for $54 per member per month. The 
State is paying a private insurer, however, $81 per member per 
month to deliver the same benefit. Government simply does it 
better than the private sector, a single plan which could be 
administered at a lower cost by the government with modest 
cost-sharing. I don't know about you, but to me that sounds a 
lot like Medicare Part B. It is something we should think 
about.
    Congress should also take note of State efforts to achieve 
lower prices for prescription drugs. When it comes to making 
the prescription drug market more competitive, the States have 
been forced to do the heavy lifting on behalf of low-income 
seniors and all Americans. States are suing the drug industry 
for anti-competitive behavior and lobbying Congress about the 
Gap Bill. Joanne Emerson and I introduced the Gap Bill to close 
legal loopholes that drug companies consistently and 
persistently use to keep generics off the market.
    Timely access to generic drugs can save consumers and 
third-party payers literally billions of dollars, but just as 
the States can't shoulder our responsibility when it comes to 
prescription drug coverage, they cannot do our work for us when 
it comes to prescription drug competition. Drug companies 
exploit Federal laws to block timely access to generics. It is 
going to take Federal action to stop them.
    If Congress wants to provide meaningful assistance to the 
States without diverting finite resources away from a drug 
benefit for all seniors, we should take action on the Gap Bill. 
Note, I said ``all seniors.'' The title of this hearing could 
be interpreted to mean we are looking for guidance on federally 
finance Stop-Gap measures like those in the President's Budget. 
I won't be party to that.
    Low-income assistance, whether it takes the form of 
Medicaid or the form of State drug assistance programs or the 
much talked about discount card is a symptom of the problem, 
not a temporary or permanent solution to it. Of those seniors 
who lack drug coverage, 70 percent are above 150 percent of 
poverty--70 percent. Do we think those seniors are crying 
``wolf'' when they say they need prescription drug coverage? 
Should we wait until prescription drug expenses push them into 
poverty before taking action? I refuse to minimize, much less 
ignore, the plight of those seniors, and I won't cater to the 
notion that we can't add a drug benefit to Medicare quickly so 
we must start with low-income assistance. That is a 
manufactured problem. We, to be sure, could add Medicare drug 
coverage--or drug coverage to the Medicare benefits package, 
and we could do it soon.
    The inevitable delays are actually discretionary on the 
part of the administration and the part of Congress. The 
President and Congress do not have to tether prescription drug 
coverage to Medicare privatization. We don't have to force 
seniors into Medicare or into private drug plans, as my 
colleagues on the other side of the aisle have proposed, nor do 
we have to condition seniors' access to prescription drug 
coverage on their willingness to accept wholesale changes in 
the Medicare program, which is the position the President has 
taken.
    The President and Congress could prioritize prescription 
drug coverage ahead of additional tax cuts. We have that 
choice. This body could, this body should, discard the ulterior 
motives, put its money where its mouth is, and add prescription 
drug coverage to the Medicare benefits package.
    Mr. Chairman, that concludes my remarks. I would like to 
ask unanimous consent that anybody's statement, including Mr. 
Dingell's, be admitted into the record.
    Mr. Bilirakis. Without objection, that will be the case. 
The Chair now recognizes Mr. Norwood for an opening statement.
    Mr. Norwood. Thank you, Mr. Chairman, and thank you for 
holding this very important hearing. I am going to be brief so 
we can get right down to business and get down to our 
witnesses.
    I believe there are two critical issues that motivate our 
concern about seniors and prescription drugs. One is that 
seniors need the security of knowing that the cost of 
prescription drugs will not bankrupt them as they become 
severely ill. That is why we should make Stop-Loss coverage a 
critical component of any prescription drug package.
    The second critical issue is that low-income seniors are 
very sensitive to the cost of drugs. It doesn't take much 
before a senior is forced to decide between medications or 
food. Any prescription drug package must include comprehensive 
coverage for low-income seniors. That is why today's hearing is 
so very important.
    While we can all agree that providing a benefit for low-
income seniors is essential, we are far from consensus on how 
we should go about doing that.
    I am particularly interested in Doug McClellan's testimony 
on the President's approach and how it will affect the State's 
ability to pay for Medicaid. I am also interested in Ms. 
Braun's testimony on the AARP position. I have my concerns 
about the direction the AARP is taking. Apparently, you all 
think that we just simply have a trillion dollars lying around 
to spend particularly at this time where Homeland Security is 
so important and our Nation is at war. I am hoping this 
testimony is going to make me feel a lot better about that.
    I look forward, Mr. Chairman, to our witnesses' testimony, 
and I will yield back the balance of my time.
    Mr. Bilirakis. The Chair thanks the gentleman, and I will 
recognize Mr. Pallone for an opening statement.
    Mr. Pallone. Thank you, Mr. Chairman. Mr. Chairman, I must 
start out by saying that I disagree with the basic notion of 
today's hearing, that we should address prescription drugs in 
the context of low-income people somehow separately from 
everyone else. I think it goes against the fundamental 
principle of Medicare as a guaranteed benefit which should be 
universal.
    So, I think we should be talking about a Medicare 
prescription drug benefit that everyone has, that is 
guaranteed, and is not based on income. I think if you dwell on 
the low-income issue, you are basically, in a political sense, 
taking away from the larger issue. You are somehow giving the 
impression that if we address low-income seniors that that is 
okay, and that the rest of the seniors don't necessarily need 
to have a benefit.
    I am also concerned about the fact that I don't hear any 
statement on the part of the Republicans or the President 
addressing the cost issue. Ultimately, we have to address the 
issue of cost and pricing and, frankly, that is something that 
not only would help seniors, but would help everyone, that we 
don't want prescription drugs to get so unaffordable that 
people simply don't have access to them anymore.
    And in that context, I do want to mention generics as well. 
I think that it is quite clear that low-cost, quality generic 
drugs will help pay for benefits and lower the overall cost. 
There was a Brandeis University study that came out within the 
last couple of months that shows very dramatically that you can 
bring down costs considerably by using prescription drugs. And 
in that context, we also need to address the legislation, as 
our ranking member said, to end the tactics the brand industry 
uses to delay generic competition.
    Now, there are two proposals that have been put forward by 
the Bush Administration, and I think they are hardly adequate, 
with regard to low-income beneficiaries as well. One is the $77 
billion offered to provide a low-income benefit pursuant--I 
guess for seniors that did not qualify for Medicaid--but this 
$77 billion would only cover 3 million of the nearly 40 million 
Medicare beneficiaries, and there is no guarantee that the 
proposed benefit would provide significant prescription drug 
purchasing relief, the other 37 million Medicare beneficiaries 
struggle to pay for increasingly expensive drugs. This attempt 
at proposing a low-income drug benefit is, I think, a political 
attempt to avoid fulfilling the President's promise to provide 
decent health care to all seniors, regardless of their income 
situation.
    The administration's other proposal is, of course, the drug 
discount card, and I think that one is totally a sham because a 
number of individual companies like Merck and newly formed 
coalitions of drug companies already offer these kind of drug 
cards. I think those existing programs make the Bush proposal 
redundant, a sort of bandaid approach to solving the high cost 
of prescription drugs.
    The National Association of Chain Drug Stores and other 
groups representing pharmacies have already filed suit against 
the administration because the proposal places an unfair burden 
on pharmacies. The plan would require drug stores to lower 
their prices, but stores may not necessarily see a reduction in 
wholesale prices.
    So, basically, what I see here are two administration 
proposals--one to try to basically carve out low-income 
seniors, which I think takes away from the goal here of 
universal coverage that won't work, and the second one is the 
drug discount card which is essentially a sham.
    Let us get back to the real issue, a universal benefit for 
all Medicare beneficiaries. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Frank Pallone follows:]
  Prepared Statement of Hon. Frank Pallone, Jr., a Representative in 
                 Congress from the State of New Jersey
    Mr. Chairman, thank you for holding this hearing on prescription 
drugs for low-income Medicare beneficiaries.
    I commend you for addressing the needs of low-income seniors 
throughout the nation, and although I do agree that low-income seniors 
should receive extra assistance with prescription drug premiums and 
cost sharing, nevertheless, I think it is the responsibility of this 
Subcommittee to discuss and propose a universal prescription drug 
benefit.
    The only two proposals that have been put forth by the 
administration are hardly adequate and in fact, have not convinced me 
that even low-income beneficiaries will receive appropriate 
prescription drug coverage. The two proposals that I am aware of are: 
1) $77 million in funding to states for drug-only coverage for low-
income seniors that do not qualify for Medicaid and 2) A Medicare 
prescription drug card that would provide discounts on drugs.
    The $77 billion offered in the proposal is grossly inadequate to 
provide prescription drug coverage for seniors. This amount would only 
cover 3 million of the nearly 40 million Medicare beneficiaries, and 
there is no guarantee that the proposed benefit would provide 
significant prescription drug purchasing relief. The other 37 million 
Medicare beneficiaries struggle to pay for increasingly expensive drugs 
as well. This attempt at proposing a low-income drug benefit is clearly 
a political attempt to avoid fulfilling a promise to provide decent 
health care to seniors.
    The administration's other proposal builds on the proposed Medicare 
prescription drug card to supposedly give seniors access to drug 
discounts of 10 to 25 percent, by quickly putting in place the 
structure for a Medicare drug benefit that uses the best features of 
private drug benefits to get lower prices from drug manufacturers.
    The plan is a sham because a number of individual companies, like 
Merck-Medco, and newly formed coalitions of drug companies already 
offer similar programs. This makes the offer by Bush a redundant 
discount and a band-aid approach to solving the high cost of 
prescription drugs, which is the biggest health crisis facing America's 
seniors.
    The National Association of Chain Drug Stores and other groups 
representing pharmacies have already filed suit against the 
administration because the proposal places an unfair burden on 
pharmacies. The plan would require drugstores to lower their prices, 
but stores may not necessarily see a reduction in wholesale prices.
    What we need to accomplish for our seniors is a prescription drug 
benefit that is defined, guaranteed, voluntary, affordable and 
accessible to all beneficiaries and part of the Medicare program. 
Democrats have been advocating for this type of a prescription drug 
benefit for Medicare beneficiaries. It is now time for Republicans put 
aside their substandard proposals, put aside their attempts at 
privatizing Medicare and pay attention to the needs of all Medicare 
beneficiaries.

    Mr. Bilirakis. The Chair would recognize Mr. Whitfield for 
an opening statement.
    Mr. Whitfield. Mr. Chairman, thank you very much, and of 
course this hearing is one of the more important hearings we 
are going to be having, and this subject matter I think is a 
priority for all Members of Congress today.
    Those of us who represent rural areas particularly are 
aware of the needs of our senior citizens for a prescription 
drug benefit. Fifty percent of all beneficiaries living in 
rural areas lack drug coverage compared to 34 percent in 
metropolitan areas.
    As you remember, the House passed a prescription drug 
benefit last year, and the Senate did not act on it. And I am 
convinced that the House will pass another prescription drug 
benefit this year, and I hope that the Senate will act on that.
    Mr. Norwood mentioned the fact that there are so many 
different plans out there that it is difficult to come up with 
a consensus to move forward. We have plans ranging in cost from 
$70-75 billion a year up to $750 billion over a 10-year period, 
and I think that we do have to be responsible in moving 
forward, and we may not be able to come up with a Cadillac plan 
this year because we do not want to jeopardize the entire 
Medicare program with the cost of these programs.
    We have been criticized on the Republican side for reducing 
taxes and trying to move for a permanent tax reduction, but I 
think there is a large segment of people in America today, 
particularly young people with children, who want to help their 
senior citizens on Medicare have a prescription drug benefit, 
and they are willing to pay their payroll taxes to do that.
    They are also paying taxes so that those people in low-
incomes, $20,000-or-so and below, receive their health care 
from Medicaid, and prescription drugs from Medicaid, but many 
of these people in the middle range--they are not on Medicare, 
they are not on Medicaid--they cannot afford health care for 
themselves and their families, while at the same time paying 
for prescription drugs for seniors and those in low-income.
    So, I am convinced that we have the ability to come up with 
a meaningful prescription drug benefit for our senior citizens 
while at the same time not bankrupting those in the middle 
areas. I am convinced that the House will have a meaningful 
prescription drug benefit, and I am anxious to work with our 
fellow members on the other side of the aisle in coming up with 
a constructive plan that is affordable, that is meaningful, 
that can make a difference in the lives of seniors.
    I yield back the balance of my time.
    Mr. Bilirakis. Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman, and thank you for 
holding this hearing. Mr. Chairman, year after year we have 
held hearings on prescription drug benefits for seniors. Year 
after year we have had many of the same witnesses who appear 
before us today say the same thing. All of them emphasize the 
need for a prescription drug benefit, yet year after year we 
have done nothing. That is because year after year we argue 
about what form this benefit will take.
    We have in front of us today witnesses who will testify as 
to the various forms this benefit should take. I am concerned 
in particular with one proposal, that of a prescription drug 
card. Various prescription drug cards are already out there. 
Some of these cards are no solution at all.
    One of them, entitled the National Prescription Health 
Plan, works this way: One of my constituents came up to me at a 
town hall meeting over Easter break, in Dollar Bay, Michigan, 
took out his card, told me that he paid a premium for it, and 
went to the local pharmacist when they had to refill two of 
their prescriptions. According to this card, they would save 30 
to 35 percent. Using the National Prescription Health Plan, 
they saved 12 cents on one of their prescriptions, Combivent. 
The other prescription, Diltiazem, is actually a generic. But 
by using their National Prescription Health Plan, the price, by 
using the card, actually doubled. The cost of the generic high 
blood pressure medication jumped from $47.49 without the card, 
to $81.43 with the card. This makes me doubt the wisdom of this 
card. It is just another way for some pharmaceutical companies 
to game the system.
    If pharmaceutical benefit managers can steer consumers to 
one drug and charge exorbitant fees for another, how does this 
really help the consumer?
    I am a co-sponsor of Tom Allen's prescription drug bill, 
H.R. 1400, which would hold the cost down to the average of the 
prices paid by consumers in other foreign countries like Canada 
and Mexico. Perhaps it is time for Congress to consider cost-
control measures. Last year, the average pharmaceutical 
prescription drugs rose approximately 18 percent for the third 
year in a row of high, double-digit inflation on prescription 
drugs.
    I believe it is time for health care and prescription drug 
benefit for all Americans. I look forward to hearing testimony 
from our witnesses today, Mr. Chairman. I look forward to 
working with you in the future on this issue. Thank you.
    [The prepared statement of Hon. Bart Stupak follows:]
 Prepared Statement of Hon. Bart Stupak, a Representative in Congress 
                       from the State of Michigan

    Thank you, Mr. Chairman, and thank you for holding this hearing.
    Year after year we've held hearings on a prescription drug benefit 
for seniors.
    Year after year we've had the same witnesses in front of us, saying 
the same thing.
    All of them emphasize the need for a prescription drug benefit.
    We all realize the need for a prescription drug benefit.
    Yet year after year we've done nothing.
    That's because year after year we argue about what form this 
benefit will take.
    We have in front of us today witnesses who will testify as to the 
various forms this benefit should take.
    I am concerned in particular with one proposal, that of a 
prescription drug card.
    Various prescription drug cards are already out there.
    Some of these cards are no solution at all. One of them, entitled 
the National Prescription Health Plan, works this way.
    One of my constituents in Dollar Bay Michigan, took this card--
which they paid a premium for--to their local pharmacist when they 
refilled two of their prescriptions.
    Using this card, they saved 12 cents on one of their prescriptions. 
12 cents.
    The other prescription--if you can believe this--actually DOUBLED 
in price using this card.
    The cost of a generic high blood pressure medication jumped from 
$41 to $81.
    This makes me doubt the wisdom of a drug card.
    If pharmaceutical benefit managers can steer consumers to one drug 
by charging exorbitant fees for another, how does that help a consumer?
    I am a co-sponsor of Tom Allen of Maine's prescription drug bill, 
H.R. 1400, which would hold costs down to the average of prices paid by 
consumers in selected foreign nations.
    Perhaps it is time for Congress to consider cost control measures.
    Thank you Mr. Chairman, and I look forward to the testimony of 
today's witnesses.

    Mr. Bilirakis. I thank the gentleman. Ms. Cubin for an 
opening statement.
    Ms. Cubin. Thank you, Mr. Chairman. Congress has every 
intent of drafting a prescription drug benefit under Medicare 
and make no mistake about it, we will get it done. I would like 
to remind everyone that the House of Representatives passed a 
prescription drug program before. It did not pass in the 
Senate, but to suggest that the House isn't working on it in a 
sincere way to get a plan passed for the most needy seniors 
certainly is wrong.
    The problem we face at present is how to get some relief to 
seniors right now, as they face costs that continue to rise. 
This hearing will give us a good indication of the progress we 
are making with temporary prescription drug remedies, such as 
discount drug cards and expanding Medicaid programs.
    There are a number of drug cards in the pipeline that are 
designed to help those seniors who have the highest of drug 
costs, while at the same time very low incomes. I truly applaud 
the collaborative effort of so many in the private sector to 
work together to implement these drug cards at a time when very 
much is needed.
    I represent the State of Wyoming which is very, very rural. 
Seniors in my State not only need help with their drug costs, 
but they need help in accessing health care, period. For those 
who of you who are not familiar with Wyoming, the State goes 
beyond what is commonly known as ``rural status'' to something 
called ``frontier status,'' having a population density of less 
than six people per square mile. In fact, 22 of Wyoming's 23 
counties have this ``frontier'' designation. Wyoming relies 
almost exclusively on three health insurers in the State, and 
that is it--three. We have no other choices. There are no 
Medicare+Choice plans which traditionally offer drug coverage, 
and the State's Medicaid Pharmacy Program is buckling from the 
weight of increased utilization and higher drug costs. For 
example, expenditures for prescription medication in Wyoming 
Medicaid Pharmacy Program have almost doubled between 1996 and 
2000, from $13.3 million to $25.3 million. That is a staggering 
amount of money in a State that has only 490,000 people.
    I am also very receptive to any drug proposal that can 
offer some help in the interim to seniors. This committee will 
continue to work to enact a comprehensive prescription drug 
benefit program under Medicare, but in the meantime we should 
continue to entertain proposals put forth by those in the 
private sector to take care of those seniors who are the most 
needy.
    I am anxious to learn more from our witnesses today, and 
with that, Mr. Chairman, I yield back the balance of my time.
    [The prepared statement of Hon. Barbara Cubin follows:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress 
                       from the State of Wyoming
    Thank you, Mr. Chairman.
    Congress has every intent of drafting a prescription drug benefit 
under Medicare, and make no mistake about it we will get it done.
    The problem we face at present is how to get some relief to seniors 
right now as they face drug costs that continue to rise.
    This hearing will give us a good indication of the progress we are 
making with temporary prescription drug remedies, such as discount drug 
cards and expanding Medicaid programs.
    There are a number of drug cards in the pipeline that are designed 
to help those seniors who have the highest of drug costs while at the 
same time very low incomes.
    I applaud the collaborative effort of so many in the private sector 
to work together to implement these drug cards, at a time when it is 
very much needed.
    I represent the State of Wyoming, which is very rural. Seniors in 
my state not only need help with their drug costs, but they need help 
in accessing health care period.
    For those of you not familiar with Wyoming, the state goes beyond 
what is commonly known as ``rural'' status to something called 
``frontier'' status--having a population density of less than 6 people 
per square mile.
    In fact, 22 of Wyoming's 23 counties have this ``frontier'' 
designation (i.e., exception Laramie county).
    Wyoming relies almost exclusively on three health insurers in the 
state, and that is it.
    There are no Medicare+Choice plans, which traditionally offer drug 
coverage, and the state's Medicaid pharmacy program is buckling from 
the weight of increased utilization and higher drug costs.
    For example, expenditures for prescription medication in the WY 
Medicaid Pharmacy Program have almost doubled between 1996 and 2000, 
from 13.3 million to 25.3 million.
    That is staggering in a state with nearly 100,000 sq. miles and 
490,000 people.
    So I am very receptive to any drug proposal that can offer some 
help in the interim to seniors who need it most.
    We on this committee will continue to work to enact a comprehensive 
prescription drug benefit under Medicare, but in the meantime we should 
continue to entertain proposals put forth by those in the private 
sector. I am anxious to learn more from our witnesses today, with that, 
Mr. Chairman, I yield back the balance of my time.

    Mr. Bilirakis. The Chair thanks the gentlelady. Mr. Wynn, 
for an opening statement. The Chair apologizes to Mr. Wynn, he 
should have been called much earlier.
    Mr. Wynn. Thank you, Mr. Chairman. Certainly, no apology 
needed. I want to applaud you for calling this hearing. I think 
it is certainly very important. But I also want to join the 
chorus that is calling for a universal prescription drug 
benefit, a Medicare-type benefit.
    The fact of the matter is that over 50 percent of the 
beneficiaries have incomes above 175 percent of poverty, which 
is to say middle-class and working-class seniors who worked and 
saved all of their lives are not being covered by the 
prescription drug benefit that the Republican side is 
discussing. And I don't think that that's fair. They shouldn't 
have to compromise the quality of their lives because of the 
high cost of prescription drugs.
    Seniors suffer from heart disease, cancer, diabetes--you 
could name a wide range of illnesses--are basically having 
their lifestyle gouged because of the high cost of prescription 
drugs.
    I note that the President is budgeting about $270 billion 
for prescription drug coverage whereas a universal plan would 
cost about $700 billion. I also note that this week we are 
poised to make permanent tax cuts that basically benefit the 
very wealthy, again leaving middle-class and working-class 
seniors without a prescription drug plan.
    I think this is a worthy cause, this is an important issue, 
and we ought to be working toward a universal plan to cover all 
seniors. I relinquish the balance of my time.
    Mr. Bilirakis. Mr. Burr for an opening statement.
    Mr. Burr. I thank you, Mr. Chairman. I think most members 
of this committee would agree that in 1965 when Medicare was 
created, prescription drugs were not part of any health care 
plan. So it is not unusual to believe that at some point we 
would have a debate as to whether prescription drugs would 
become part of the seniors health plan in America. I think some 
may question why it has taken us so long to reach the point 
that we have, and it is because there are varying suggestions 
on how we get there, the scope of the benefit.
    In the end, it is this committee, Ways and Means, 
ultimately this Congress, who will be challenged to make sure 
that the benefit is what seniors need and, as importantly, that 
our children can afford it. We do absolutely no good if we 
design a benefit that 10 years from now we find America can't 
pay for and, therefore, we revert to some of the things we've 
already tried in health care, which is to just continue to cut 
what we are willing to reimburse for the program.
    I want to welcome all of our witnesses today. I think this 
is a valuable hearing, Mr. Chairman. I think that the benefit 
is needed. It is needed because, in fact, we have got to come 
up with a plan that is accessible, affordable and, more 
importantly, voluntary. It has got to incorporate the right 
incentives for employers that currently offer prescription 
drugs as a retirement benefit to stay in the business of 
supplying prescription drugs as a retirement benefit. It will 
challenge every bit of creativity that we can come up with, but 
I have got to go back to where I started.
    If, in the end, we haven't designed something that our 
children can afford, then this Congress will have made a grave 
mistake. I look forward to the witnesses today, Mr. Chairman, 
and the questions that will be asked by this committee, and I 
yield.
    Mr. Bilirakis. The Chair thanks the gentleman. Ms. Capps 
for an opening statement.
    Ms. Capps. Thank you, Mr. Chairman, and I want first to 
acknowledge the presence in our hearing room of 14 high school 
students from Santa Barbara, California, who are here in 
Washington, DC for the Washington Institute for Jewish 
Leadership and Values, with their Rabbi. And the fact that they 
are here, having traveled clear across the country from the 
central coast of California for this hearing on Medicare 
indicates to me the seriousness of this topic and the 
importance of it as well, importance of it in my congressional 
district when I go back on weekends to hold office hours, meet 
with senior and health groups, even if I am just walking down 
the street or in the grocery store, this is the issue that my 
constituents are talking with me about. It has not been on the 
front page of newspapers recently, or the lead story on the 
evening news, but it is foremost in the minds of my 
constituents. And I would note that in this morning's 
Washington Post, David Broder has a column called ``Health Care 
in a death cycle,'' in which he is referring to a related 
issue, the staggering increases in insurance premiums. So, 
seniors ask me when Medicare is going to cover their medicine. 
Younger men and women ask when their parents are going to be 
able to get help from the government. This is the issue that 
consumes their thoughts and causes their deepest worries. This 
is what people on a fixed income and whose lives are--and all 
of our lives--are dependent upon an always improving 
prescription drugs. And because medical advances that are 
understanding of aging and new miracle drugs, because of all 
these advances, their lives have been extended far beyond what 
they expected and prepared for. These increased medical costs, 
particularly the rapid growth in prescription drug costs, are 
spiraling beyond the ability of any of them to pay for. Almost 
all of them are falling into this category.
    Projections by the CBO give us information that seniors 
will spend $1.8 trillion over the next 10 years on prescription 
drugs not covered by Medicare. It is mind-boggling. We can't 
expect this to continue. That is why we are in agreement, we 
need to have a prescription drug benefit quickly dealt with.
    But I have, along with others, serious concerns about the 
proposals put by the President. His recommendation would only 
help the poorest seniors, and that is what the topic of our 
hearing is today. This leaves out millions of our parents and 
grandparents facing the same kind of choices about whether to 
take their medicine or to pay for their other basic expenses.
    I am also concerned about using a Federal matching system 
that would give seniors in different parts of the country 
different benefits with different cost-sharing. I am skeptical 
of approaches using private insurers to provide this benefit, 
as has been suggested by some.
    Medicare was established because the private insurance 
system could not provide health care to seniors in a way they 
could afford simply because it isn't good business for these 
older people. As we have experimented with privatization in the 
Medicare+Chose program, it has shown us the little success that 
we can expect. Since the program's inception, 2 million seniors 
have been dropped from their Medicare HMOs. Medicare+Choice is 
popular in my district primarily because of the prescription 
drug benefit it offers, but as the HMOs pull out, as cost-
sharing increases, and as the very benefits they want are cut, 
seniors are losing patience.
    Medicare is meant to help seniors get the care they need 
that private insurance won't provide, and now, as we update the 
standards of that care, I think it is important that we avoid 
making the mistakes of the past. We need to deliver a 
prescription drug benefit, Mr. Chairman. That benefit needs to 
be a standard benefit that they can count on no matter where 
they live or how much money they have.
    I appreciate the opportunity to hear from out witnesses on 
this subject, and I look forward to working with you on the 
solution to these problems. I yield back.
    [The prepared statement of Hon. Lois Capps follows:]
  Prepared Statement of Hon. Lois Capps, a Representative in Congress 
                      from the State of California
    Mr. Chairman, the single most important issue to the seniors in my 
district is a Prescription Drug Benefit.
    When I return to my district, hold office hours, meet with senior 
and health groups, even when I am just walking down the street, this is 
the issue they talk to me about.
    While this issue has not been on the front page of the newspapers 
recently, or the lead story on the evening news, it is foremost in the 
minds of my constituents.
    Seniors ask me when Medicare will cover their medicines. Younger 
men and women ask when their parents will be able to get help from the 
government.
    This is the issue that consumes their thoughts and causes their 
deepest worries.
    This is about people who are on a fixed income and whose lives and 
quality of life are dependent on always improving prescription drugs.
    And because medical advances, better understanding of aging, and 
new miracle drugs their lives have been extended far beyond what they 
expected and prepared for.
    The increased medical costs, particularly the rapid growth in 
prescription drug costs are spiraling beyond their ability to pay.
    According to projections by the Congressional Budget Office seniors 
will spend $1.8 trillion over the next ten years on prescription drugs 
not covered by Medicare.
    This is mind-boggling. We cannot expect seniors who have to limit 
their spending to foot the bill without help.
    That is why I think all of us are in agreement that we need to pass 
a prescription drug benefit quickly.
    But I have serious concerns about the proposals put forward by the 
President and others. His recommendation would only help the poorest 
seniors and leave millions of our parents and grandparents facing 
choices medicine and other basic expenses.
    I am also concerned about using a federal matching system that 
could give seniors in different parts of the country different benefits 
with different cost sharing.
    And I am skeptical of any approach using private insurers to 
provide this benefit, as has been suggested by some.
    Medicare was established because the private insurance system could 
not provide health care to seniors in a way they could afford, simply 
because it was not good business.
    And we have experimented with privatization in the Medicare + 
Choice program, but with little success.
    Since the program's inception 2 million seniors have been dropped 
from their Medicare HMOs.
    Medicare+Choice is popular in my district because of the 
prescription drug benefit it offers. But as the HMOs pull out, as the 
cost-sharing increases, and as the very benefits they want are cut they 
are losing patience.
    Medicare is meant to help seniors get the care they need that 
private insurance won't provide. And now, as we update the standard of 
that care, I think it is important that we avoid making the mistakes of 
the past.
    We need to deliver a prescription drug benefit, Mr. Chairman, and 
that benefit needs to be a standard benefit that they can count on no 
matter where they live or how much money they have.
    I appreciate this opportunity to hear from our witnesses on this 
subject and I look forward to working with you on a solution to these 
problems.

    Mr. Bilirakis. The Chair thanks the gentlelady, and would 
like to welcome the young group from Santa Barbara on behalf of 
the entire committee.
    Mr. Buyer for an opening statement.
    Mr. Buyer. Mr. Chairman, I will be brief. I love living in 
America, a place where it is okay to dream big, a place where 
individuals embrace freedom, innovation, initiative, where we 
take the great minds of not only our own country but that come 
from all over the world to be here so that here in America we 
can push the bounds in human health, of science, biology, 
engineering, physics, into a realm where Mother Nature has 
never been. There have been great benefits to our society. Who 
wouldn't want access to all of those ``benefits'' that come?
    Then the question about access is ``who pays''? As I sat 
here and listened to some of my colleagues this morning, it is 
sort of ``gee, let's just give everybody''--and you get the 
sense that it is ``something for nothing.'' It is not.
    I am anxious to hear from our witnesses, whether it is from 
the AARP or whomever, about what are the cost implications. 
Just as equally, what are the cost-shifting implications of 
what we are even proposing?
    So, my bottom line is--I am going to yield back--whatever 
we do, I don't want anything to ever have a chilling impact 
upon a great country that I love, and that can deliver medicine 
that has a great benefit not only to us, but under the world 
that is jealous about what we have. I yield back.
    Mr. Bilirakis. The Chair thanks the gentleman. Ms. Eshoo 
for an opening statement.
    Ms. Eshoo. Thank you, Mr. Chairman, for holding this 
hearing. It is an important one. It is not the first time we 
are discussing the issue. I think that everyone understands 
that we are not debating whether we should have a policy that 
guides us in offering a Medicare prescription drug benefit, the 
debate is over how. And I think that it is important to just 
give some ground truth on this thing.
    We all say that we are for it, and we are because we know 
what the needs of our people are at home. They tell us every 
week when we go back to our congressional districts.
    There is really a chasm between the Republican Party and 
the Democratic Party on this, and it really goes to the core of 
our views on how or what the government can and should do. This 
debate about only doing part of this--only doing part of this--
I would like to pose this question. If, in fact, you are only 
going to offer a benefit that touches a handful of 
beneficiaries that are in the system, why don't you repeal Part 
A and Part B? Why don't you rewrite that and bring the same 
principle that is being offered today by the administration and 
by my Republican colleagues, because that is really what you 
are talking about.
    I have heard members say here in this committee that to 
offer a universal benefit is the equivalent of reparations for 
the elderly. Come on. Come on. This week we are going to vote 
on making permanent--making permanent--the 10-year tax cut. In 
the second 5 years of the 10-year plan, we will put permanently 
into the Tax Code $4 trillion for that tax cut. I am for some 
tax cuts. I come from a place where people like them. Most 
frankly, every American likes a tax cut. But, you know, you 
really have to put--this is on its head. We are saying that we 
can't afford it. We are saying that it only should have 
parentheses around it. We are saying we can't do a Cadillac 
plan. It is all of this driving with an emergency brake on.
    I venture to say that if you are for something in Medicare, 
that you stick with the Medicare program. It is what people 
embrace. It is what they use. It is their insurance plan. And 
if you are not committed to that, the rest of it is just 
tinkering around the edges. And some of you may be surprised 
for me to come our really swinging as hard as I am on this, but 
what good is a plan if it isn't universal?
    Do people in the next bracket in terms of fixed income not 
ever get sick? Come on. We are not protected that way. If a 
senior has a $20,000 a year income, you mean they can't get any 
coverage through Medicare?
    I think the real test is, are you for A and B? If not, you 
know what? Repeal it. That is universal. One of it is 
voluntary. I support a voluntary participation in this.
    I offered something legislatively that had competition in 
it. Republicans didn't come on it. Most frankly, Democrats 
didn't like it too much either. But it did meld both public and 
private. But this business of only doing a slice of this and 
saying we are for it but we can't afford it, when this massive 
issue is going to come to the floor and it will pass--it will 
pass--I think that we can do some tax cuts, but I want to tell 
you something, I really think that we should all go home and 
collectively hang our heads in shame if we can't and don't do 
this.
    We are the greatest Nation on the face of this earth, and 
there is more than one national security here. Hubert Humphrey 
said that a Nation is measured on how it cares for those that 
are in the autumn of their lives as well as those that are in 
the spring of their lives. And you know what? Those words still 
stand. That is not just a bunch of junk. That is not a thought 
from the past.
    We are kidding ourselves when we say we are going to breach 
this gap. There is a huge difference--and I respect my 
colleagues that view it a different way--but let us just call 
it for what it is. We are not going to offer something to 
seniors in this country with what is being promulgated. It is 
not even a half-baked plan.
    So, you can tell that I am frustrated and I am a little 
angry, a little ticked off. I commend all those that are trying 
with the bandaids, the private sector, the drug companies to 
come up with cards and all that, the President's intentions are 
good, but you know what--they miss the mark. It is not enough.
    We can do this without damaging the rest of our economy. We 
have to have the political will to do it. That is what is 
lacking here. That is the prescription that is lacking. Thank 
you, Mr. Chairman.
    Mr. Bilirakis. The Chair thanks you. Mr. Pitts for an 
opening statement.
    Mr. Pitts. Thank you, Mr. Chairman for holding this 
important hearing today. The series of hearings that this 
committee have been very helpful in getting an overview of the 
program and how we should craft a prescription drug provision, 
and we all owe our gratitude to the Chairman for his aggressive 
leadership on this important issue. I will be brief.
    Almost daily we hear of new breakthrough treatments 
industry has developed to combat diseases, and I am hopeful 
that this committee will ensure that patients in need of these 
lifesaving treatments have access to them, and I am supportive 
of forming some sort of public-private partnership to make this 
happen.
    Mr. Chairman, I will submit my entire statement for the 
record, but I look forward to working with you to strengthen, 
and modernize the Medicare program, and appreciate the 
opportunity to hear from our witnesses on this subject today. I 
yield back the balance of my time.
    [The prepared statement of Hon. Joseph R. Pitts follows:]
    Prepared Statement of Hon. Joseph R. Pitts, a Representative in 
                Congress from the State of Pennsylvania
    Thank you, Mr. Chairman, for holding this important hearing today. 
I have appreciated the series of hearings this committee has held on 
this issue. The hearings have been very helpful to me in getting an 
overview of the program and how we should craft a prescription drug 
provision.
    We all owe our gratitude to the Chairman for his aggressive 
leadership on this important issue.
    I along with many of us here, have family members who are eligible 
for Medicare. And historically, Pennsylvania has one of the highest 
senior populations in the nation. For these reasons, it has become 
increasingly clear to me that Congress needs to modernize Medicare and 
bring the Program into the 21st Century as soon as possible.
    I have a strong interest in ensuring we address the needs of our 
growing population senior population.
    As you know, according to a recent Medicare Trustees Report, in the 
year 2030, there will be double the amount of beneficiaries than we 
have today. Conversely, the number of workers paying into the Medicare 
program will only increase by 15 percent. That is why, as we attempt to 
modernize the Medicare benefits package, we must also make necessary 
reforms to ensure the sustainability of the program.
    Mr. Chairman, almost daily we hear of new breakthrough treatments 
industry has developed to combat diseases. I am hopeful that this 
committee will ensure that patients in need of these life saving 
treatments have access to them. I am supportive of forming some sort of 
public-private partnership to make this happen.
    Mr. Chairman, I look forward to working with you to strengthen and 
modernize the Medicare program and to provide a quality, affordable and 
voluntary prescription drug plan.
    I look forward to hearing from our witnesses and I yield back the 
balance of my time.

    Mr. Bilirakis. I thank you, sir. Mr. Waxman for an opening 
statement.
    Mr. Waxman. Thank you very much, Mr. Chairman. I, too, want 
to welcome the group from California, before they leave, to 
tell them how fortunate they are to have such a terrific 
representative as Congresswoman Capps. And I am reluctant to 
say anything in my opening statement because I think her 
statement was so superb on the whole subject, and they should 
be proud of our colleague, Anna Eshoo from California, because 
the passion that she showed about this issue is exactly what I 
would hope the Congress would do when we look at the fact that 
so many seniors who were promised protection under the Medicare 
program have no prescription drug coverage. It would be like 
having a health insurance program that didn't cover doctor 
bills, or hospital bills. That would have been unthinkable in 
1965. It really is unthinkable now to have a health care 
insurance plan that doesn't cover prescription drugs.
    I have certainly been protecting low-income people. I have 
spent a great part of my career trying to expand programs for 
low-income. The coverage of long-term care services and 
prescription drugs that Medicaid have provided to supplement 
Medicare for low-income seniors and disabled persons has been 
absolutely critical in providing them with adequate health 
insurance, but the situation today demands that we approach 
coverage more broadly. We need a comprehensive uniformly 
available drug benefit for all seniors and disabled persons 
covered by Medicare. Drugs are a critical part of any health 
coverage plan today. It is not a benefit that can only be 
provided to a portion of the population. Of course, when a 
universal benefit is established, we will need to include extra 
help with cost-sharing and premiums for those without adequate 
income, just as we do now in the basic Medicare program. We can 
all expect to do that.
    But the point is, real coverage for low- and moderate 
income people and for all Medicare beneficiaries is going to be 
best achieved by moving now to put a comprehensive and 
universal benefit in place, modeled on the way all benefits are 
provided in Medicare. Any other step will simply delay 
achievement of our ultimate goal to divert resources to 
programs that are going to be slow to implement and ultimately 
ineffective, and fail to meet the promise we made to Medicare 
seniors and disabled persons.
    So, I am looking forward to the hearing today. I will have 
to be in and out of this hearing because there are conflicts in 
my schedule, but I would hope that we would have a record that 
would establish we care about low-income people, but if we are 
going to have prescription drug coverage, it ought to be for 
all Medicare beneficiaries. Everyone ought to have the benefit 
of a prescription drug package. Yield back the balance of my 
time.
    [The prepared statement of Hon. Henry A. Waxman follows:]
    Prepared Statement of Hon. Henry A. Waxman, a Representative in 
                 Congress from the State of California
    Mr. Chairman, I am proud of the work I have done throughout my 
career to help bring health care coverage to low-income people. I have 
spent many years working to support, improve and extend the Medicaid 
program, and the coverage it provides to low-income children, families, 
disabled persons, and seniors.
    The coverage of long-term care services and prescription drugs that 
Medicaid has provided to supplement Medicare for low-income seniors and 
disabled persons has been absolutely critical in providing them with 
adequate health care coverage.
    But the situation today demands that we approach coverage more 
broadly. We need a comprehensive, uniformly available drug benefit for 
all seniors and disabled persons covered by Medicare. Drugs are a 
critical part of any health coverage plan today. It is not a benefit 
that can only be provided to a portion of the population.
    Of course, when a universal benefit is established, we will need to 
include extra help with cost-sharing and premiums for those without 
adequate income, just as we do now in the basic Medicare program. We 
all expect to do that.
    But the point is, real coverage for low and moderate income people, 
and for all Medicare beneficiaries, is going to be best achieved by 
moving now to put a comprehensive and universal benefit in place, 
modeled on the way all benefits are provided in Medicare.
    Any other step will simply delay achievement of our ultimate goal, 
divert resources to programs that are going to be slow to implement and 
ultimately ineffective, and fail to meet the promise we have made to 
Medicare seniors and disabled persons.

    Mr. Bilirakis. I thank the gentleman and now recognize Mr. 
Barton for an opening statement.
    Mr. Barton. Thank you, Mr. Chairman. It is important that 
you hold this hearing. This is an important issue. As you know, 
we are working to put together a package--hopefully a 
bipartisan package--to present an Energy and Commerce Committee 
bill for consideration on the floor.
    I will say that we need to be cognizant of the fact as we 
try to put the package together, that we also need to be 
cognizant of the cost of it. We are talking in numbers of $30-
40 billion per year out to infinity, and this is in a year in 
which we are now expected to have budget deficit. Today's Wall 
Street Journal talked about the deficits probably going into 
the middle of this decade. So, I am working with Congressman 
Sam Johnson, as you well know. One of the alternatives to look 
at would be some sort of prescription medical savings account 
program that would give the seniors the option to opt into 
that, and then they could take that money to purchase any 
number of private sector or private and public sector backed 
plans. That is a plan that we hope to have available for people 
to take a look at in the next week or 2.
    But I do appreciate you holding this hearing, and it is 
good to be in the hearing room. It is the first time I have 
actually been in the hearing room at a hearing since we had all 
this high-tech gadgetry. My question would be why you don't 
have the big screen at the back so we can see you. Chairman 
Tauzin, when he holds a hearing in here, I am told he has all 
the screens up and all the cameras focused on him. You are a 
much more humble man.
    Mr. Bilirakis. I will not comment. Mr. Deutsch for an 
opening statement.
    Mr. Deutsch. Thank you, Mr. Chairman. Having been back at 
home for the break and interacting with constituents, I can 
tell you that I don't think there is a more important, more 
real issue that people are facing, seniors are facing. I 
experienced it a little bit with my parents over the break as 
well when I had to fill a prescription for my dad who just had 
gotten out of the hospital. And this is real. It affects 
people's lives. And I think that we need to be broader, and I 
think ultimately we will be broader, and it is just a question 
of time before Congress catches up with the American people on 
this issue.
    Mr. Bilirakis. I thank the gentleman. Dr. Ganske.
    Mr. Ganske. Thank you, Mr. Chairman. I believe that health 
care issues are going to be important for at least the next 
decade. We have certainly seen premiums rising for employers 
significantly. The cost of prescription drugs have gone up a 
lot to, some say, on an average of 18 percent per year.
    I continue to get letters from senior citizens who are 
having to make decisions on whether to pay their high home 
heating bills or buy their prescription drugs, and I believe 
that we have an opportunity to at least make an important first 
step this year.
    We had $350 billion budgeted for Medicare in our budget. I 
had an opportunity to speak to President Bush just 2 days ago 
on this health care issue, and he, too, wants to do something 
about prescription drugs. But I pointed out to him that in Iowa 
where we rank 50th out of 50 States in terms of Medicare 
reimbursement, our small town rural hospitals are going 
bankrupt, payments to providers are so low that in many cases 
they are not taking new Medicare patients.
    So, I believe that in addition to doing something about 
prescription drugs, we ought to look at the issue of increasing 
reimbursement for rural hospitals, for teaching hospitals, and 
for some other providers, too, because what good will it do my 
senior citizens in rural Iowa if they now have a very rich 
prescription drug benefit, but they don't have a hospital or a 
doctor to go to in their communities?
    So, I think we need to look at something of a balanced 
approach when we are looking at a prescription drug benefit. I 
believe there is a way to offer help to low-income seniors. 
There is a way to offer a benefit to other seniors, and there 
is a way to help with other providers.
    I am happy to, Mr. Chairman, work on your task force along 
with Congresswoman Johnson, in consultation between the 
Commerce Committees and the Ways and Means Committees, and with 
the administration, and to see if we can solve some problems. I 
mean, we need to get past the tired, old, bitter, partisan 
politics of ``fingerpointing.'' This is just too important an 
issue to play political games with. And with that, I will yield 
back.
    Mr. Bilirakis. Thank you, Dr. Ganske. Mr. Engel for an 
opening statement.
    Mr. Engel. Thank you, Mr. Chairman. I look forward to this 
hearing. I believe there is nothing more significant that we 
can do to help seniors in this country than pass a meaningful 
prescription drug program. I speak with seniors all the time, 
and my mother is the best senior that I speak with, and she 
said that the best thing Congress can do, in her opinion, is to 
pass legislation providing for prescription drug help under the 
Medicare Health Program. I believe that is what this Congress 
ought to do.
    We have danced around this issue for far too long. We talk 
about discount drug cards, invoking meaningless legislation 
that provides little or no benefit for seniors, and I believe 
that we demonstrated gross irresponsibility by cutting taxes to 
the extent we did when we could have enacted a comprehensive 
benefit instead.
    We can't have it both ways. If we are going to cut back and 
cut back in taxes and go from a surplus to a deficit, then the 
truth of the matter is there is no money left for meaningful 
legislation for prescription drugs for seniors.
    So, I think at some point we have to get beyond the 
rhetoric and the talking and put our money where our mouth is 
and do something for the senior citizens of this Nation. 
Providing seniors with affordable access to prescription drugs 
has been a priority of mine for years. I, like everyone else, 
have a number of seniors in my district and, again, I think 
this is their No. 1 concern. Medicare was created to provide 
seniors with affordable access to high quality health care. It 
was enacted to prevent seniors from losing their life-savings 
when they became sick late in life.
    As President Johnson signed the Medicare legislation into 
law, he said, ``No longer will illness crush and destroy the 
savings seniors have so carefully put away over a lifetime so 
they might enjoy dignity in their later life.'' I believe the 
Medicare program, unfortunately, is no longer achieving that 
goal. Seniors are forced to spend their life savings on 
medicines or go without them, and we have heard, and my mother 
tells me stories of seniors cutting up pills or taking half-
doses to save money. That is not high-quality care, and that is 
not living with dignity.
    Congress cannot let this continue. We must enact a 
comprehensive benefit that will help all seniors--again, not a 
sham bill, but a comprehensive bill. We will hear testimony 
today about creating a drug discount card for seniors at 200 
percent or 300 percent of poverty, and we will arbitrarily draw 
a line in the sand saying that these seniors get some help and 
those seniors don't because they are not yet poor enough. I 
have so many people in my district who tell me they are just a 
little bit above the line, they are middle-class, they are 
working class, they have worked hard all their lives, and yet 
they are not eligible. That should change.
    So, I support helping low-income seniors with their drug 
costs, but I believe fervently a discount card is not the 
solution and will only impede efforts to enact a comprehensive 
benefit. I urge the committee to consider my legislation, H.R. 
339, which provides a comprehensive drug benefit for all 
Medicare beneficiaries.
    Again, I believe that with the huge tax cuts that Congress 
enacted, it really knocked a meaningful prescription drug 
benefit for seniors out of the box. We ought to right that 
wrong. Let us not continue to fail to enact a real meaningful 
prescription drug benefit under Medicare. Let us do it as soon 
as we can. I thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman. Mr. Deal for an 
opening statement.
    Mr. Deal. Thank you, Mr. Chairman. Having three senior 
citizens who reside in my home, two in the upper 80's and one 
in the middle 90's, I probably make as many runs to the local 
pharmacy to fill prescriptions as anyone in this room, and I 
understand the volume and the cost, and I understand the 
importance of it. But I think there are also some things we 
need to all keep in mind. All three of these who live in my 
home are retired school teachers, who have a pretty good 
prescription drug plan as a part of their retirement package. 
They don't want to lose that. They don't want the government to 
take that away from them. And they certainly don't want the 
government to replace it with something that is not as high a 
quality or is as good in terms of reimbursement as what they 
have, and that is certainly a concern.
    But I can't help but think that most of us in this room 
today were here in 1997 when we wrestled with the reality that 
Medicare was going to go bankrupt as of last year. And anytime 
that we start talking about adding new programs and new cost 
factors, I think we have to also ask the hard questions, how 
and who is going to pay for it? And those are hard questions.
    I think we don't need to be unrealistic in a program that 
we advocate. We need to make sure we can pay for it, and that 
we don't jeopardize the entire Medicare system in the process.
    Just as those three senior citizens who live in my home are 
concerned about their prescription drugs, by the same token I 
think they are concerned that their grandchildren not be 
burdened with a cost factor that cannot be sustained over the 
long period of time. Obviously, these are not the kind of 
``promise everything'' questions that some people want to talk 
about, but they are the realities of any program, and certainly 
one of the magnitude of the one we are talking about.
    I thank you, Mr. Chairman, for holding this hearing, it is 
certainly timely. I yield back the balance of my time.
    Mr. Bilirakis. Thank you, sir. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. Following my Georgia 
colleague, having a lot of retired district and my wife who 
will be a retired teacher in a couple of years, your Georgia 
plan must be better than our retired teachers plan in Texas for 
prescription drugs.
    I appreciate the Chairman for holding this hearing today, 
and also for Dr. McClellan being here because, again, a 
prescription drug benefit plan is not something that's new to 
our committee. We have held these hearings for a number of 
years.
    Prescription drugs are an essential component for our 
health care system for everyone, but especially for seniors. 
While seniors make up only 14 percent of our population, they 
use 43 percent of prescription drugs. In fact, more than 88 
percent of Medicare's 39 million beneficiaries use prescription 
drugs, with the average older American using 18.5 prescriptions 
annually--18.5. I am happy that I only have two. And so we see 
that prescription drug costs are important to everyone, 
including private sector, but we also know that for seniors it 
is even more important.
    Today, 38 percent of the beneficiaries have no insurance 
under Medicare for prescription drugs, and an additional 25 
percent have coverage that is unreliable. In fact, again, I am 
using my Texas experience on teacher retirement system and 
health care plan, most of those teachers aren't eligible for 
Medicare because they never paid in or not qualified for Social 
Security. So that is also a concern.
    The recent report by the Kaiser Family Foundation Health 
Research Education Trust found that the employer-sponsored 
health coverage is already eroding. There has been a decline of 
43 percent in number of firms offering retiree coverage. So 
that is why instead of employers not covering retirees, we are 
already seeing they are eroding it, and Congress hasn't done 
anything for prescription drugs.
    It is time for Congress to adopt a guaranteed Medicare 
prescription benefit for all seniors. This issue grows more and 
more urgent every year, especially as the drug costs continue 
to skyrocket.
    According to a recent published survey by the National 
Institute of Health Care Management, spending on outpatient 
prescription drugs in retail outlets rose 17.1 percent last 
year--17.1 percent--$131 billion to $154 billion. 17.1 percent 
is well above the inflation rate for last year. And can you 
imagine seniors on a fixed income having to cover that expense? 
About half of that increase occurred in the class of drugs that 
treat depression, high cholesterol, diabetes, arthritis, high 
blood pressure, and other chronic conditions that 
disproportionately affect seniors, and not surprising, the top 
50 selling drugs accounted for 44 percent of the total 
outpatient retail drug sales in 2001, and these are also the 
same drugs that are heavily advertised on television, radio and 
magazine ads.
    Whether or not Congress provides some assistance to low-
income beneficiaries, drug costs will continue to be a growing 
burden for middle income individuals who make up the bulk of 
the Medicare beneficiaries. Providing assistance only to low-
income beneficiaries will not do nearly enough to address the 
problem.
    I know some of our witnesses on the panel today will talk 
about prescription discount cards that are now available, and I 
appreciate that. In fact, we are marketing that with my seniors 
in my own district, both in Spanish and English, saying these 
are available for seniors, but they usually do only provide 
some relief for low-income seniors. These programs are a start, 
and I appreciate the industry doing that, but we have to do 
much more, but we cannot let it end just at these prescription 
cards by the private sector. The simple truth is we need a 
comprehensive voluntary guaranteed benefit for all Medicare 
beneficiaries. We've been debating this issue too long. We need 
to actually get it started, even though we may not be able to 
pay for it this year, we need to get it started so seniors will 
know that there is some light at the end of the tunnel. I yield 
back my time.
    [The prepared statement of Hon. Gene Green follows:]
  Prepared Statement of Hon. Gene Green, a Representative in Congress 
                        from the State of Texas
    Mr. Chairman, thank you for holding this hearing today on providing 
a Medicare prescription drug benefit to low-income seniors.
    Prescription drugs are an essential component of our health care 
system, especially for seniors.
    While seniors make up only 14% of the U.S. population, they use 43% 
of all prescription drugs. In fact, more than 88% of Medicare's 39 
million beneficiaries use prescription drugs, with the average older 
American using 18.5 prescriptions annually.
    Today, 38% of Medicare beneficiaries have no insurance coverage for 
prescription drugs. An additional 25% have coverage that is 
unreliable--inadequate, costly or both.
    A recent report by the Kaiser Family Foundation and the Health 
Research and Educational Trust found that employer sponsored health 
coverage is eroding. There has been a 43% decline in the number of 
firms offering retiree coverage.
    It is time for Congress to adopt a guaranteed Medicare prescription 
drug benefit for all seniors.
    This is an issue that grows more and more urgent each year, 
especially as drug costs continue to skyrocket.
    According to a recently published study by the National Institute 
for Health Care Management, spending on outpatient prescription drugs 
in retail outlets in the U.S. rose 17.1% in the last year, from $131.9 
billion to $154.5 billion.
    About half of that increase occurred in the classes of drugs that 
treat depression, high cholesterol, diabetes, arthritis, high blood 
pressure, and other chronic conditions that disproportionately affect 
seniors.
    Not surprisingly, the top 50 selling drugs accounted for 44% of 
total outpatient retail drug sales in 2001. These are the same drugs 
that are most heavily advertised on television, the radio and in 
magazine ads.
    Whether or not Congress provides some assistance to low-income 
beneficiaries, drug costs will be a growing burden for the middle 
income individuals who make up the bulk of Medicare beneficiaries.
    Providing assistance only to low-income beneficiaries will not do 
nearly enough to address this problem.
    I know that some of our witnesses will testify about the 
prescription drug discount cards that are available to some low-income 
seniors.
    I have always appreciated that the industry created these cards and 
programs, because they usually do provide some relief for low-income 
seniors.
    These programs are a start--but we cannot let them be the end.
    The simple truth is that we need a comprehensive, voluntary, 
guaranteed benefit for all Medicare beneficiaries.
    We have been debating this issue for the better part of the last 
decade. It is time for us to commit the resources, create the most 
cost-effective plan, and sign it into law.
    To do anything less would be to shirk our responsibilities to the 
seniors who have worked their entire lives to make this country great. 
They are counting on us to do the right thing and provide a meaningful 
benefit.
    Thank you, Mr. Chairman, and I yield back the balance of my time.

    Mr. Bilirakis. The Chair thanks the gentleman. Mr. 
Pickering.
    Mr. Pickering. Thank you, Mr. Chairman, and I want to thank 
you for the work that you have done on this very important 
issue and the progress that we are beginning to make. It is 
time to stop playing politics with prescription drugs. We have 
all heard too long the statement that seniors are having to 
choose between groceries and their prescription drugs. If that 
is the case, then we should do everything we can--we have a 
moral imperative that we should do everything that we can both 
in the short-term and the long-term to find a measure that will 
help those most in need, and a comprehensive solution that will 
look at the long-term viability of Medicare and prescription 
drugs for every senior. We have got to do both. We need to act 
now. And it is time for Republicans and Democrats, House, 
Senate, and the White House to work together to achieve this 
before the fall elections.
    I know too many seniors in my district, in a rural district 
where you have low incomes, that need prescription drugs. We 
know the sacrifice. We know the struggle. We know the pain and 
the hardship that this has caused for too many of our families. 
It is time to act. It is time to put politics aside. And it is 
time to get something done. Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman. Mr. Barrett.
    Mr. Barrett. Thank you, Mr. Chairman, and thank you for 
holding these hearings. I couldn't agree more with Mr. 
Pickering that we have to stop talking and have some action 
here because there are millions of people throughout this 
country who really are being affected in a negative fashion by 
Congress' lack of action, and it is imperative that we address 
this issue because every single member of this panel can tell 
horror stories of talking to seniors in their district about 
the difficulty that seniors have in affording prescription 
drugs.
    One of the earlier speakers talked about the fact that at 
least in his home State teachers were able to get their drugs 
paid for. I think that that's great, but the reality is that 
employer-sponsored plans are the leading source of drug 
coverage, assisting 28 percent of the Medicare population with 
costs. That means 72 percent of the Medicare population is not 
assisted with their costs.
    So to paint this picture that there are only a few people 
who are elderly, who are not able to deal with this problem, I 
think, is misleading. This is a huge problem for the vast 
majority of seniors in this country.
    Over the past decade, even more troubling is the fact that 
the availability of retiree health benefits has been eroding, 
so the trend is heading in the wrong direction. We are going to 
see fewer and fewer employer-sponsored plans that are providing 
these benefits. That is why it is up to Congress to act, and I 
do hope we act to include this as a Medicare benefit.
    It is also troubling to me to hear people say, ``Well, we 
can't do this now,'' but at the same time that this Congress is 
dipping into the Medicare Trust Funds to pay for a permanent 
tax cut, Congress is essentially fiddling its violin and 
nothing is getting done on this issue.
    Let us not have this permanent tax cut. Let us deal with 
this issue. This is a real pressing issue for people in this 
country. But even if we switch it to Medicare, we have to do 
more than that because simply switching who pays will not end 
the problem. As, again, probably everybody in this room knows, 
the rising prescription drug costs are the major factor in 
rising health insurance costs in this country.
    We have been criticized, those of us who want to do 
something, saying that if we somehow take on the pharmaceutical 
industry, that we are going to hamper research. The last thing 
I want to do is hamper research. I think that this industry has 
done a tremendous job with research. I think it has allowed 
people to live longer, and I think it has allowed them to live 
healthier lives. So, I applaud the research that is being done, 
but we would be remiss if we didn't point out that a lot of the 
basic research is paid for with Federal tax dollars, and that 
allows a lot of the basic research in this country to go 
forward, and that is an important contribution that the 
taxpayers in this country are making.
    The other part that is troubling to me--and there is a 
recent article that talks about--for the fourth straight year 
prescription drug spending rose more than 17 percent in 2001, 
driven in large measure by a few heavily advertised high-priced 
medications, a nonpartisan study released yesterday showed.
    We have all seen these commercials. I was just with my wife 
over the weekend. We were watching one of these commercials on 
television, and I said, ``Chris, I have got to get that drug.'' 
And she said, ``Tom, you don't even have the illness.'' But 
these advertisements are so effective and people are going out 
and asking to buy these drugs when they could simply get a 
package of Tums.
    What we have to do is we have to take this issue head-on, 
and I hope that this Congress finally, after years of talking, 
does that. And I would yield back the balance of my time.
    Mr. Bilirakis. I thank the gentleman. I believe that 
completes all of the opening statements of those who have 
chosen to attend the hearing this morning.
    [Additional statements submitted for the record follow:]
  Prepared Statement of Hon. James C. Greenwood, a Representative in 
                 Congress from the State of Pensylvania
    Thank you Mr. Chairman for holding this important hearing today. I 
will be brief so we can get to our witnesses.
    I believe there are two critical issues that motivate our concern 
about seniors and prescription drugs. One is that seniors need the 
security of knowing that the cost of prescriptions drugs will not 
bankrupt them if they become severely ill. That is why we have made 
stop-loss coverage a critical component of any prescription drug 
package.
    The second critical issue is that low-income seniors are very 
sensitive to the cost of drugs. It doesn't take much before a senior is 
forced to decide between medications or food. Any prescription drug 
package must include comprehensive coverage for low-income seniors.
    That is why today's hearing is so relevant. While we can all agree 
that providing a benefit for low-income seniors is essential, we are 
far from consensus on how we should do that. I am particularly 
interested in Dr. McClellan's testimony on the President's approach and 
how it will affect the states ability to pay for Medicaid. I am also 
interested in Ms. Braun's testimony on the AARP's position. I have my 
concerns about the direction the AARP has taken; apparently you all 
think that we have a trillion dollars just lying around to spend on 
prescription drugs. I am hoping you can make me feel better.
    I look forward to our witnesses' testimony and yield back the 
balance of my time.
                                 ______
                                 
Prepared Statement of Hon. Heather Wilson, a Representative in Congress 
                      from the State of New Mexico
    I want to thank the Chairman for holding this hearing to review the 
options to provide low-income seniors with prescription drug coverage. 
I hear from my constituents more about this issue than almost any 
other. One of my goals as we develop a new prescription drug benefit 
for Medicare is to offer extra help for low-income seniors.
    I am very pleased to see the pharmaceutical manufacturers working 
to provide help for seniors who need it. I believe we should not 
inhibit the creation of new wonder drugs, but at the same time, these 
drugs should not be denied to seniors on limited fixed incomes.
    I am also impressed by the work of the state of Nevada to cover its 
seniors. Many state budgets are currently facing several budget 
shortfalls, especially for their Medicaid programs, that I fear that 
few states will be able to afford similar programs to cover their 
seniors. Nonetheless, Nevada's commitment should be applauded and 
carefully studied as a model.
    I look forward to hearing the testimony of all the witnesses.
                                 ______
                                 
   Prepared Statement of Robert L. Ehrlich, Jr., a Representative in 
                  Congress from the State of Maryland
    Mr. Chairman, thank you for holding this important hearing on ideas 
to create a Medicare prescription drug benefit. There are many 
initiatives currently being pursued by the Bush Administration, the 
states, and the private sector. I appreciate this opportunity to learn 
from these different approaches as we craft our own legislation to 
provide a prescription drug benefit plan through Medicare.
    I am very concerned about the 13 million senior citizens in our 
country who do not currently have any insurance to help pay for their 
prescription drugs. While about two-thirds of all seniors do have some 
prescription drug coverage through employer-sponsored programs, 
Medicare+Choice plans, or supplemental Medigap or state Medicaid plans, 
still millions of seniors have no drug coverage at all. They are forced 
to make difficult choices every day to have the money they need pay for 
the bills and buy their medicines.
    We are here today because I believe most people recognize the need 
for a Medicare prescription drug plan to help these seniors. I know Dr. 
Mark McClellan, a member of the Council of Economic Advisors for 
President Bush, has been working on this issue for the President. 
Others from the public and private sector have offered their own ideas 
on how to approach this problem.
    As our Subcommittee examines ways to create a prescription drug 
benefit, there are a number of difficult questions we must answer, 
including: Who should such a plan cover? Should the plan cover all 
seniors or those most in need? How will the benefit plan work and how 
quickly can it be implemented to start benefitting seniors who need 
drug assistance now?
    Mr. Chairman, I would like to commend our witnesses. Each offers 
different and interesting ideas on how to provide prescription drug 
coverage through various means. With these ideas in mind, I look 
forward to our efforts to craft a fiscally responsible, sustainable, 
and quality prescription drug plan for our nation's needy seniors. Our 
seniors need our help, and I believe the federal government should 
create an affordable plan to help them. Thank you for holding this 
important hearing, Mr. Chairman.
                                 ______
                                 
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Mr. Chairman: Thank you for holding this hearing today on the very 
important issue of how to help low income seniors with their drug 
costs.
    This is an issue that is critically important to our most 
vulnerable constituents. Seniors back in my district in Louisiana have 
to regularly make difficult choices about how they will be able to 
purchase their prescription drugs. They want to know how we can help 
then right now, and not just two or three years from now--the time it 
will take to implement any comprehensive Medicare drug benefit.
    Make no mistake--transitional programs for low-incomes cannot and 
should not substitute for a comprehensive Medicare drug benefit. I 
continue to be absolutely committed to working with my colleagues to 
enact such a Medicare drug benefit this year. In fact, I expect that we 
will be moving legislation through the Committee within the next month 
that will create precisely this type of new Medicare benefit. It is my 
sincere hope that all of us in Congress can agree to pass this bill and 
send it to the President for his immediate approval.
    Any new benefit we enact will take several years to get up and 
running. In the meantime, however, we need to ensure that many of our 
low-income seniors gain better access to drug coverage and some of the 
price discounts that are available in the private market. This hearing 
will highlight some of the initiatives that the Administration, States 
and the private sector are already pursuing to provide assistance to 
low-income seniors. Hopefully, some of these examples can provide 
models for what we in Congress can do to assist these seniors with 
their drug costs. The new Together Rx drug discount card and the Senior 
Rx program in Nevada are two exciting examples of such models that use 
private, market based forces to reduce drug costs for low-income 
seniors right now.
    The Together Rx card will allow between eight and eleven million 
eligible Medicare beneficiaries with individual incomes of up to 
$28,000 to obtain significant discounts on 150 drugs made by the seven 
drug manufacturers who have agreed to participate in the program. It is 
estimated that these discounts will average between 20 and 40 percent, 
and will be passed along through the over 13,000 pharmacies that have 
agreed to serve in the Together Rx card network. This will mean real 
savings that will make an important difference in the lives of seniors 
who obtain this card.
    Now, some may attempt to argue that the discounts under this 
program are relatively insignificant and will not truly help seniors. 
Seniors know better, however, which is why almost 100,000 of them have 
asked about enrolling in Together Rx since the new program was first 
announced last week.
    Governor Guinn and his colleagues in the Nevada legislature should 
also be commended for coming up with a new and innovative model for 
assisting low-income seniors with their drug costs. Under the Nevada 
Senior Rx program, low-income seniors are able to receive their drugs 
and only pay modest co-payments. The State utilizes an insurance 
company that manages the program, which in turn contracts with a 
Pharmacy Benefit Manager to negotiate discounted drug prices for plan 
participants. Senior Rx cost Nevada only six million dollars last year, 
and it provided drug coverage for 6,000 low-income seniors, all of 
which was done without creating a major new state bureaucracy to manage 
this new benefit!
    I also look forward to hearing more about the discount card idea 
contemplated by the National Association of Chain Drug Stores. It is 
good to see that they are becoming an advocate for the drug discount 
card concept.
    I would be remiss if I did not take the time to also thank Mark 
McClellan for appearing today. He and the Administration should be 
congratulated for their excellent work in developing their proposals to 
provide assistance to low-income seniors. I look forward to working 
with Mark and this Administration to develop a comprehensive Medicare 
modernization bill--one that includes a universal prescription drug 
benefit and targeted reforms. We are fortunate to have an 
Administration so closely engaged in these important issues. With your 
help, Mark, as well as the help of all of the Members here today, 
perhaps we can find enough common ground to solve these vexing issues 
this year. I want to thank all of the witnesses for appearing today and 
will look forward to hearing their testimony.
                                 ______
                                 
Prepared Statement of Hon. Ted Strickland, a Representative in Congress 
                         from the State of Ohio
    Thank you, Mr. Chairman, for convening today's hearing, and I want 
to thank the witnesses for their testimony.
    Today we are going to hear about what I believe is one of the most 
important issues Congress is considering this year. One third of all 
seniors lack prescription drug coverage, and that percentage rises to 
nearly one half in rural areas.
    This problem is compounded because seniors are much more likely 
than the rest of the population to need prescription drugs, and seniors 
without drug coverage are forced to pay manufacturers' sticker prices 
because they don't benefit from the bulk purchasing power HMOs have.
    When Medicare was enacted, prescription drugs weren't as expensive 
or available as they are now, and I think it's safe to say that if 
Medicare was started today, it would be unthinkable not to include a 
prescription drug benefit in the program.
    The prospect of adding such a benefit now is expensive. Today's 
hearing is focused on providing a drug benefit for only low income 
Medicare beneficiaries instead of for all seniors: the Administration's 
proposals would give states the option to provide drug-only plans to 
low-income Medicare beneficiaries and would put the Medicare stamp of 
approval on a private drug discount card. Although I am glad the 
Administration understands the importance of helping to pay for the 
cost of prescription drugs, I am concerned about both of these 
proposals, which do little to provide new coverage for the population 
it seeks to help. States can already provide prescription drug coverage 
to low income Medicare beneficiaries, and the Administration's plan 
doesn't give states incentives to expand on their existing coverage. 
And, a variety of private discount drug cards already exist, creating 
an often confusing array of options for seniors. A Medicare endorsed 
card may only serve to add to the confusion; at best it adds no benefit 
that doesn't already exist under current law.
    Since its inception, Medicare has provided guaranteed quality 
health care for all seniors, regardless of their income or where they 
live, and these safety net characteristics have been the program's 
greatest success.
    We must strengthen Medicare by creating a voluntary, comprehensive, 
and affordable prescription drug benefit for all seniors. Such a 
benefit would not discriminate based on a beneficiaries' geographic 
residence and it would be dependable.
    Some of my colleagues might argue that this goal is an impossible 
burden given the state of our current budget, but I believe the costs 
to society and to the security of our seniors from the lack of an 
affordable, accessible drug benefit for all Medicare beneficiaries far 
outweigh the budgetary price tag. It is a matter of priorities: we must 
fulfill our obligation under the Medicare program to provide quality 
health care, which today must include prescription drugs, to our 
nation's elderly.
    Thank you again, Mr. Chairman, and I look forward to hearing the 
witnesses' testimony. I yield back the remainder of my time.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Thank you, Chairmen Tauzin and Bilirakis, for holding this hearing. 
I am pleased with the Committee's interest in a Medicare prescription 
drug benefit. I am also pleased that today's discussion will include 
the topic of additional protections for low-income seniors and people 
with disabilities. However, I think that we would be neglecting our 
responsibilities as members of Congress if we only provide drug 
coverage to low-income beneficiaries.
    The best way to help low-income seniors is to help all seniors. No 
senior is immune from the high cost of prescription drugs, and until we 
create a universal drug benefit, any senior is at risk of becoming low-
income after spending all of his or her spare resources on needed 
medications.
    Unfortunately, the President's budget contains no universal 
Medicare drug benefit. All the President's proposals concerning 
prescription drugs and Medicare are temporary measures designed to be 
implemented while Congress deliberates a universal drug benefit. I 
question whether we should be devoting our energies to temporary 
solutions, while ignoring the larger task at hand. Allow me to explain 
a few of the drawbacks I see with the President's partial solutions.
    The President's budget contains several proposals targeted towards 
low-income seniors, based on the belief that a universal drug benefit 
will take too long to implement. These proposals include state low-
income assistance programs, ``Pharmacy Plus'' Medicaid waivers, and 
discount drug cards.
    While state low-income assistance programs can provide some help, 
only a little over half of all states offer them. It could be three 
years before programs are up and running in the other half--about the 
same amount of time it would take to implement a universal benefit. 
Drug discount cards do not guarantee a discount on every drug, nor do 
they guarantee whether the specific drug a low-income senior needs will 
be available. The most potentially damaging proposal of all is the 
Administration's ``Pharmacy Plus'' Medicaid waivers, which allow states 
to cut benefits for some low-income people in order to extend drug-only 
coverage to other, relatively higher-income seniors.
    The President's budget includes one other temporary measure to 
provide assistance to low-income seniors. The Administration mentions 
that private plans have played an important role by offering drug 
coverage to seniors without supplemental insurance. However, instead of 
creating a Medicare prescription drug benefit for all seniors, the 
President's budget proposes increasing payments to managed care plans 
so that they can provide drugs to the 15 percent of seniors enrolled in 
them.
    The common themes in the President's proposals are troubling ones--
no guaranteed drug coverage for any senior, and what assistance seniors 
get and how much they pay for it depends on where they live. This is 
not the Medicare that seniors know and trust. I hope that this 
Committee does not go down this same path, because it would undermine 
all the principles that have made Medicare so successful.

    Mr. Bilirakis. We will move right on to the panelists now.
    The first panel consists of Dr. Mark McClellan, who is an 
M.D. as well as a Ph.D., member of the Council of Economic 
Advisers here in Washington. Doctor, we have set the clock at 
10 minutes. By all means, if you are rolling and need another 
minute or 2, we won't stop you, but please proceed, sir.

    STATEMENT OF MARK McCLELLAN, MEMBER, COUNCIL OF ECONOMIC 
                            ADVISERS

    Mr. McClellan. Chairman Bilirakis, Representative Brown, 
distinguished committee members, thank you for inviting me here 
today to discuss the President's framework for strengthening 
Medicare with prescription drug coverage in Medicare for all 
Medicare beneficiaries, as well as our proposal for 
transitional low-income assistance and other transitional steps 
to strengthen Medicare as part of legislation that implements 
an effective prescription drug benefit.
    As you all have made clear, the time is now to work 
together to address the urgent and fundamental challenges 
facing Medicare at the beginning of the 21st Century. Today, 
Medicare's promise of providing health security for seniors and 
persons with disabilities in the best health care system in the 
world, a private health care system, is threatened. It is 
threatened by outdated and inadequate benefits, including no 
prescription drug coverage, limited and costly protection 
against rising medical costs, an inability to deliver reliable 
health plan options, and a fee-for-service government plan that 
often fails to deliver responsive services to recipients and 
providers, or to ensure high quality care.
    President Bush is firmly committed to working closely with 
you and other Members of Congress to modernize Medicare and 
strengthen it for current and future seniors. The President has 
outlined a framework for strengthening and improving Medicare. 
This framework recognizes that while we all want to provide a 
drug benefit for seniors, we cannot do so in a vacuum. Medicare 
beneficiaries are facing rapid increases in their out-of-pocket 
costs and the Medicare program itself is in serious financial 
trouble. These problems will only deepen in coming decades 
unless we act now to give Medicare beneficiaries access to 
better, more effective and efficient services.
    We must get the most out of every dollar spent on 
Medicare's current benefits and any new benefits. Reflecting 
this goal, the President has developed a framework for 
bipartisan legislation. In this framework, all seniors should 
have the option of a subsidized prescription drug benefit as 
part of modernized Medicare. In particular, as I discuss in 
more detail in my written testimony, it is critical to provide 
drug coverage through competing private plans in which they, 
not the government, help seniors pick the coverage that is best 
for their own needs. It is also critical to give seniors 
affordable protection against very high drug expenses. But it 
is also clear that if we add a drug benefit to Medicare without 
improving the rest of Medicare, we will deepen Medicare's 
financial crisis and fail to give seniors the improved benefits 
they deserve to use their prescription drug coverage 
effectively.
    Therefore, the President believes that modernized Medicare 
should give seniors the option of choosing better coverage for 
preventive care and serious illnesses. In addition, the 
President believes seniors deserve reliable choices of 
different insurance options like those available to millions of 
Americans under 65, and to all Federal employees. Because the 
current Medicare+Choice payment system is fundamentally flawed, 
seniors are losing access to drug benefits and losing access to 
valuable disease management services, preventive care, and 
other innovative benefits, wellness programs and the like that 
help them use drugs more effectively and at a lower cost.
    Medicare legislation should also strengthen the program's 
long-term financial security. I understand the administration 
and many in Congress have sometimes differed in their numbers. 
As our budget indicates, we believe that we can provide a 
secure benefit for less than $350 billion in the House Budget 
Resolution. While there is a range of views, however, let me be 
clear that we are firmly committed to working with the House to 
enact legislation to improve Medicare this year.
    To make clear why we place such a priority on getting more 
value out of the Medicare program and on enacting a drug 
benefit that does not threaten Medicare's financial security, I 
would like to share with you an analysis done by the 
nonpartisan CMS actuaries of the implications for Medicare's 
benefit security of a drug benefit proposal to spend $750 
billion on prescription drugs, and it would devote Part A 
surpluses to the new benefit.
    If Part A surpluses of $400 billion were literally directed 
to the drug benefit, the consequences for Medicare's ability to 
provide benefits for the Baby Boom would be severe. The 
redirection of Medicare Part A funds could cut the life of this 
Trust Fund in half. The Trust Fund would begin losing money in 
2008 and would become insolvent by 2016. Some might instead 
propose to use accounting gimmicks by creating yet another 
trust fund for the drug benefit and leaving it to future 
generations to figure out how to pay for it. But no accounting 
gimmicks can hide the fact that such a drug benefit would 
increase the program's long-term financial challenges by 50 to 
100 percent. The excess cost of $400 billion in the first 10 
years would balloon to $1.2 trillion in the next ten, just when 
the Baby Boomers are beginning to count on Medicare. And by 
2030, this new drug benefit would require tax increases or 
reductions in government programs for future Americans 
amounting to almost 2 percent of our entire national product, 
and equivalent to a tax of almost $2200 in today's dollars on 
every working American.
    This example highlights that we must give seniors better 
benefits that will be there, and we must do it without 
overtaxing our children or threatening Medicare's existing 
benefits.
    The President's Budget also proposes urgently needed steps 
that should be incorporated into Medicare legislation because 
it isn't good for seniors or the Medicare program to wait 
several years and hope to implement a full drug benefit and 
other improvements from scratch. These steps include Medicare-
endorsed prescription drug card, transitional low-income drug 
assistance, more affordable Medigap option, and immediate steps 
to help make sure that seniors who prefer private health 
insurance coverage through the Medicare+Choice program can 
continue to get it.
    As I describe in more detail in my written testimony, these 
changes will both pave the way for a modernized program, and 
provide rapid relief, including prescription drug coverage, for 
many millions of Medicare beneficiaries before the full drug 
benefit can be implemented at least 3 years from now. They will 
allow many millions of the 9 million seniors who do not have 
drug coverage today to get it even before the full Medicare 
drug benefit is set up.
    Seniors need help now, and the Medicare program needs to 
start doing the work of implementing a drug benefit and other 
benefit improvements now.
    As you know, we are working to implement the drug card 
program effectively, and are awaiting the results of the public 
comment period open to comments from all interested parties on 
that program now. But the private sector has already started to 
respond to the President's call to make lower drug prices 
available to seniors.
    The recently announced drug card developed by the McKesson 
Corporation, the National Association of Chain Drug Stores, 
drug manufacturers, and other private organizations provide 
opportunities to make manufacturer discounts more widely 
available to seniors, especially those with low incomes. We 
applaud these private market approaches. They can provide 
significant help for seniors now and for keeping the cost down 
in a Medicare drug benefit in the future.
    Conversely, as the Kaiser Foundation and others have shown, 
some existing cards provide small, if any, actual discounts, 
and it can be very difficult for experts, let alone seniors, to 
compare cards and identify the program that is best for them 
with no help at all. By helping seniors pool together and 
choose among cards that would have to compete directly on 
manufacturer discounts and high quality pharmacy services, the 
Medicare-endorsed card program could give all seniors access to 
15 percent savings on drugs, and through innovative new 
programs like the McKesson Together Rx card, seniors with 
modest incomes could get savings of 20 to 40 percent, according 
to card sponsors.
    The drug card has another important aspect, experience. As 
AARP and other senior advocates have noted, seniors, drug 
benefit managers, and the Medicare program would all get 
valuable experience with implementing a choice-based drug 
benefit. This will be a significant advantage as CMS moves to 
implement a comprehensive Medicare prescription drug benefit, 
since all major Democratic and Republican proposals envision a 
competitive approach like this to providing drug coverage.
    The President also believes that comprehensive Medicare 
legislation should take advantage of existing State 
infrastructure to identify and help provide assistance to low-
income seniors right away, and should do so in a way that 
supports the integration of existing State low-income programs 
into the new Medicare drug benefit.
    The administration has proposed to provide immediate 
support for comprehensive drug coverage for Medicare 
beneficiaries up to 150 percent of poverty, about $18,000 for a 
family of two. For Medicare beneficiaries up to 100 percent of 
poverty, the program would provide new Federal matching funds, 
at the Medicaid matching rate, for expanding drug coverage. As 
an added incentive, Medicare would pay 90 percent of the 
State's cost of drug-only covered expansion above 100 percent 
of poverty. This proposal is projected to expand drug coverage 
for up to 3 million beneficiaries who currently do not have 
prescription drug assistance, before the full Medicare 
prescription drug benefit is up and running.
    The administration is ready to work with Congress to 
implement transitional low-income assistance effectively in a 
way that considers both the short-term goal of expanding 
coverage as quickly as possible, and the very important long-
term goal of getting all beneficiaries--all beneficiaries 
including low-income beneficiaries--into the Medicare drug 
benefit as quickly as possible. All beneficiaries should be in 
the same mainstream coverage structure. That is very important 
for getting the gains in efficiency needed to keep the overall 
cost of the benefit down.
    For example, using the transitional Federal funding that I 
just described, States could contract with one or more 
Medicare-endorsed drug cards to identify low-income residents 
and to provide additional prescription drug assistance beyond 
manufacturer discounts for them. The drug cards also provide a 
convenient mechanism for keeping track of out-of-pocket 
expenses so that States can work with the drug card 
administrators to provide assistance with catastrophic expenses 
for medically needy individuals who desperately need help right 
away.
    In addition, to make expanded coverage immediately 
available even before enactment of the low-income drug 
assistance program, States can now participate in a model drug 
waiver program called Pharmacy-Plus. A principal mechanism that 
States can use in this waiver program is to adopt cost-saving 
private sector approaches to manage their benefits, allowing 
them to achieve budget neutrality and taking a step toward the 
competitive Medicare drug benefit. This is the kind of approach 
already taken by States like Nevada, and we believe the waiver 
program will encourage many other States to do the same based 
on the strong number of inquiries and actual applications that 
we have received already.
    Thank you very much for this opportunity to discuss these 
critical topics for seniors and for the future of the American 
health care system today. Three decades from now, the promise 
of a financially secure retirement and the world's leading 
health care system should continue to be a reality for 
America's seniors. By working together to enact legislation to 
strengthen Medicare this year, we can make sure it will be.
    I ask that my written statement be submitted into the 
record, and I very much look forward to answering your 
questions. Thank you, Mr. Chairman.
    [The prepared statement of Mark McClellan follows:]
 Prepared Statement of Mark McClellan, Member, President's Council of 
                           Economic Advisors
    Chairman Bilirakis, Representative Brown, distinguished Committee 
members, thank you for inviting me to discuss the President's proposals 
for strengthening Medicare, including prescription drug coverage. The 
Administration also appreciates the opportunity to provide more details 
on our proposal for transitional low-income prescription drug 
assistance and other transitional proposals that we believe should be 
part of legislation to implement a Medicare prescription drug benefit 
for all beneficiaries. As you all well know, when Medicare's original 
legislation was enacted, President Johnson said: ``No longer will older 
Americans be denied the healing miracle of modern medicine. No longer 
will illness crush and destroy the savings that they have so carefully 
put away over a lifetime.'' Thirty-seven years later, President Bush 
believes it is time for our Nation to come together and renew that 
commitment. The President believes that we have a moral obligation to 
fulfill Medicare's promise of health care security for America's 
seniors and people with disabilities, and that we must take action now 
to do so.
    Medicare has provided health security to millions of Americans 
since 1965. But lack of prescription drug coverage is a clear 
demonstration that Medicare is not keeping up with the rapid advances 
in medical care. Looking ahead, medical care holds the promise of 
improving and extending life through countless innovations. But as we 
enter the 21st century, Medicare's promise is threatened by: outdated 
benefits; limited financial protection against high medical costs; a 
system that has not delivered reliable health plan options; and a 
traditional government plan that often fails to deliver responsive 
services to beneficiaries or ensure high-quality care.
    As we implement legislation to strengthen Medicare, we must 
remember that the 77 million Americans who will be entitled to Medicare 
in 2030 are counting on up-to-date benefits that will give them access 
to medical services that are scarcely imaginable today. Yet even 
Medicare's current, outdated benefits are not secure for the retirement 
of the Baby Boom generation. Medicare's fund for hospital insurance 
will face cash flow deficits beginning in about 15 years and is 
projected to become insolvent within 30 years. Medicare's fund for its 
other benefits will require nearly a doubling of beneficiary premiums 
and massive infusions of general revenues to remain solvent over the 
next 10 years. Medicare's accounting disguises the program's true 
fiscal health and makes it difficult to plan ahead.
                         strengthening medicare
    Recognizing these problems, President Bush has worked with members 
of Congress from both parties to develop a framework for a modernized 
Medicare program and for keeping Medicare's benefits secure. The 
President's framework includes the following eight principles:
    First, all seniors should have the option of a subsidized 
prescription drug benefit as part of modernized Medicare. In 
particular:

 Medicare's subsidized drug benefit should protect seniors 
        against high drug expenses and should give seniors with limited 
        means the additional assistance they need.
 The drug benefit should give all seniors the opportunity to 
        choose among plans that use some or all of the tools widely 
        used in private drug plans to lower drug costs and improve 
        quality of care.
 The drug benefit should support and encourage the continuation 
        of the effective prescription drug coverage now available to 
        many seniors through retiree plans and private health insurance 
        plans.
 The new drug benefit should also be available through Medigap 
        plans and as a stand-alone drug plan for seniors who prefer 
        these choices.
    We believe it is critical for seniors to have a choice of drug 
plans so that they can pick the one that is best for their needs. This 
is not a decision the government should make for them, just as we 
should not be picking their doctor, determining their drug treatment, 
or giving them a one-size-fits-all health plan. As the members of this 
Committee know, both the independent CMS actuaries and the non-partisan 
Congressional Budget Office experts fully expect private drug plans to 
participate in this benefit. As CBO and many economists have also 
confirmed, giving private plans the proper incentives to deliver high-
quality pharmaceutical services at a low price is the way to get the 
best deal for Medicare beneficiaries and the program--yielding lower 
drug spending and lower monthly premiums through competition. Of 
course, the government has important roles to play as well: making sure 
seniors can get the protection against catastrophic drug costs that 
they need--protection which is often lacking today; taking the steps 
necessary to ensure that all eligible seniors and disabled individuals 
get the benefits to which they will be entitled; and providing the 
information and support that all beneficiaries need to make informed 
choices.
    Some have argued that the criterion for designing a Medicare drug 
benefit should be whether most Medicare beneficiaries, many of whom 
have drug spending each year of $500 or less, are ``better off'' when 
taking into account the premiums they must pay and the additional 
assistance they will get beyond their existing coverage, based on their 
current drug spending. So, the argument goes, any kind of insurance 
protection against high medical costs that are rare today won't be 
popular. I believe this approach does a disservice to seniors who are 
counting on Congress enacting a drug benefit that will give them both 
health security and better care.
    First, coverage that provides protection against high out-of-pocket 
expenses for a low premium is something that seniors want as we enter a 
new era of breakthroughs in drug design. In my own medical practice, I 
have treated many seniors who had serious illnesses or faced the risk 
of serious illnesses that might require costly treatments--more and 
more of them in recent years, as more such treatments have become 
available. The potential for the next 10 years is even greater, as 
treatments based on understanding a person's genetic predisposition to 
diseases become more prevalent. Seniors are very worried about the 
possibility of not being able to afford potentially lifesaving but very 
costly new treatments.
    Second, the new Medicare drug benefit will get the most ``bang for 
the buck'' in improving coverage if it adds to rather than replaces the 
substantial private contributions already being made toward 
prescription drug coverage for Medicare beneficiaries. Many Medicare 
beneficiaries already have coverage for small to moderate drug 
expenses, through private plans, employer coverage, or (if they can 
afford it) Medigap plans. Providing protection against high drug 
expenses through a Medicare drug benefit not only is important for 
filling in the gaps in existing coverage, rather than simply replacing 
good coverage. It also makes generous insurance plans more affordable 
for all beneficiaries by reducing adverse selection. Right now, 
prescription drug coverage for seniors is subject to severe problems of 
adverse selection. Adverse selection occurs because beneficiaries who 
know for sure that they need such coverage buy it, driving up the 
premium, and then beneficiaries only think they might need coverage 
against high expenses don't buy it. By providing a large subsidy for 
drug coverage that protects seniors against high costs, Medicare would 
prevent persons with high costs from driving up the costs of the 
insurance premiums. This would reduce adverse selection, amounting to a 
premium subsidy for everyone to make comprehensive insurance more 
affordable. The potential for very high expenses would no longer drive 
up the costs of insurance that includes real protection against high 
out-of-pocket costs.
    Second, modernized Medicare should provide better coverage for 
preventive care and serious illnesses. Medicare's current cost-sharing 
often imposes the highest costs on those who need the most care. 
Individuals who need hospital care currently face a payment of more 
than $800 for each spell--and they can have many spells in a year--and 
Medicare's coverage for hospitalizations can eventually run out 
altogether. And unlike most private insurance, Medicare does not 
provide ``stop-loss'' protection to limit the financial obligations 
imposed on beneficiaries. At the same time, poor benefit design in 
Medicare itself--or in the first-dollar Medigap plans that seniors are 
required to buy to fill in Medicare's large coverage gaps--often gives 
seniors no choice other than paying high and rapidly rising Medigap 
premiums and other out-of-pocket payments, without yielding noticeable 
improvements in health. Thus we believe Medicare's coverage should be 
improved so that seniors can get better protection when serious 
illnesses occur, more affordable Medigap coverage, and better coverage 
to help prevent illnesses in the first place--like having zero co-
payments on Medicare's preventive benefits. Because the improved 
benefits will encourage better use of preventive care and other 
services, a better Medicare coverage package will also help seniors and 
the Medicare program get the best value from the new drug benefit. The 
savings from lower out-of-pocket payments will also make all medical 
services, including drugs, more affordable for seniors.
    Third, today's beneficiaries and those approaching retirement 
should have the option of keeping the traditional Medicare plan with no 
changes. The President strongly believes that no senior should be 
forced to accept sudden and significant changes they do not choose and 
are not prepared for. Although we believe that a modernized Medicare 
program will be attractive to many current beneficiaries, we believe 
the choice rightly rests with them on whether to move from the existing 
program to the modernized one.
    Fourth, Medicare should provide better health insurance options, 
like those available to all Federal employees and retirees. For too 
long, Medicare has been a ``one size fits all'' program. At a time when 
many other Americans have access to a range of private insurance 
coverage options to meet their needs, more and more seniors are finding 
that their only choice is a single, outdated fee-for-service plan. 
Medicare beneficiaries deserve better. They deserve access to the kind 
of innovative disease management programs and other benefits that 
Assistant Secretary Jindal described to your Subcommittee on Health 
last month. For example:

 A Medicare+Choice plan in Boston instituted a comprehensive 
        disease management program for its enrollees with diabetes. The 
        result has been significant increases in the share of enrollees 
        who received annual retinal eye exams and are monitored for 
        diabetic nephropathy and substantial improvements in the 
        management of their Hemoglobin and cholesterol levels. 
        Improvements in these measures through tight diabetes control 
        have been shown to improve quality and length of life 
        significantly.
 A Medicare+Choice plan in Florida instituted a comprehensive 
        disease management program to monitor, facilitate, and 
        coordinate care for enrollees stricken with cancer. As a 
        result, the number of acute hospital days per cancer case 
        dropped by about 15% over two years and the share of inpatient 
        admissions for complications with cancer has declined by 10 
        percent.
 Research has shown that individuals who receive after-care 
        following hospital stays for mental illness are more likely to 
        be compliant with their treatment regimens and less likely to 
        be readmitted to the hospital. One Medicare+Choice plan in New 
        York instituted a case management program for those 
        hospitalized for mental health disorders and nearly doubled the 
        share of its enrollees who received follow-up care within 7 
        days of their hospital discharge.
    All of these disease management programs, and many other programs 
to prevent diseases and improve quality of care through better 
coordination and integration of services, are immensely valuable to 
seniors. These innovative benefits help seniors manage their 
prescription drug costs and get the most value from the drugs they use. 
This greater efficiency has helped permit most private plans in 
Medicare to provide prescription drug coverage today, and to offer much 
lower cost sharing for many of Medicare's required benefits. Programs 
like these are the reason that private plans have long been the 
preferred choice of millions of Medicare beneficiaries.
    Unfortunately, the quality of care enjoyed by millions of seniors 
enrolled in these plans is threatened today by years of underpayments 
to the plans. The President's framework for strengthening Medicare 
calls for replacing the dysfunctional Medicare+Choice payment system 
with a fair payment system for private plan options for Medicare 
beneficiaries, like the system that provides reliable health insurance 
options to all Federal employees in the Federal Employees Health 
Benefits program. Private plans are a critical source of drug coverage 
and countless other innovative benefits for millions of seniors, and 
they should remain so.
    Fifth, Medicare legislation should strengthen the program's long-
term financial security. In light of the recent Trustees' Report on 
Medicare one could conclude that our guiding principle should be 
``first, do not harm.'' The President's budget recognized that 
strengthening Medicare would require substantial new resources and 
proposed $190 billion for this important purpose. Despite the 
unprecedented and unique challenges facing our nation today, the 
President and Congress have clearly demonstrated their commitment to 
meeting the needs of seniors. Of course we are more than willing to 
work with Congress this year to enact this long-overdue legislation, 
and we understand that there are a range of views regarding how much 
new spending needs to be allocated for this purpose. We believe an 
effective program for strengthening Medicare and including a 
prescription drug benefit can be accomplished within the amount the 
President has allocated in his Budget. Without strong measures to make 
the program more efficient being incorporated along with new benefits, 
Medicare's current benefits will become less secure under some 
proposals.
    At the same time, it is important to recognize risks to the long-
term security of Medicare's promised benefits. For example, some have 
proposed a drug benefit as large as $750 billion, financed using 
surpluses generated over the next 10 years by the Medicare Part A Trust 
Fund. If the Part A surpluses literally were directed to augmenting 
prescription drug coverage, the consequences for Medicare's ability to 
provide benefits for the Baby Boom would be severe. According to the 
nonpartisan CMS Actuaries, the redirection of Medicare Part A funds 
could cut the life of this trust fund in half--the trust fund would 
lose money beginning in 2008, and would become insolvent by 2016. Some 
might instead propose to use the accounting gimmicks that Medicare's 
bifurcated trust fund system encourages, by creating yet another trust 
fund for the drug benefit and leaving it to future generations to 
figure out how to pay for it. But no accounting gimmicks can hide the 
fact that such a drug benefit would increase the program's long-term 
financing challenges by 50 to 100 percent. The excess costs of $400 
billion in the first 10 years would balloon to $1.2 trillion in the 
next ten, just when the Baby Boomers are counting on Medicare. The 
government's Medicare spending for current benefits (even after 
subtracting beneficiary premiums) is already expected to grow from 2% 
of GDP today to 4% by 2030. This new drug benefit would increase that 
share to almost 6%--a tax increase or reductions in government programs 
for future Americans amounting to almost 2% of our entire national 
product, and equivalent to a tax of $2,170 (in today's dollars) on 
every working American.
    Thus, while we will work closely with Congress to enact a Medicare 
drug benefit this year, we also want to work closely with Congress to 
make sure that the benefits we promise today will be there for 
beneficiaries tomorrow. This is also why we support changes in 
Medicare's Trust Fund accounting to provide a plain and straightforward 
picture of Medicare's financial outlook. We have all seen clear 
examples of how poor accounting practices can lead to poor planning, 
with devastating consequences for many Americans. It is critically 
important that we avoid such practices in a program that is so 
important to all Americans.
    In this context it is also important to consider the issue of 
provider payment reforms. Although certain provider payments may 
benefit from adjustment, we believe such adjustments can be 
accomplished without using new funds that are even more urgently needed 
for improving Medicare benefits. Indeed, the Administration believes 
that the first priority in Congress should be enacting legislation that 
improves Medicare benefits, not legislation that focuses on provider 
payments. As we move forward to achieve our shared goal of modernizing 
and strengthening Medicare, the Administration is willing to work with 
Congress to consider limited modifications to provider payment systems 
in order to address payment issues. In doing so, we must be systematic: 
all provider payment updates must be considered and any package must be 
budget neutral in the short and long term.. As we consider these 
changes, we need to focus on the adequacy of payment systems for 
providing access to care for beneficiaries, and recall that any 
increases in spending will be borne in part by beneficiaries, and will 
also have long-term implications for the security of Medicare's 
benefits.
    Sixth, the management of the government Medicare plan should be 
strengthened so that it can provide better care for seniors. Secretary 
Thompson and Administrator Scully have taken many administrative 
actions to improve and streamline management at CMS. But legislation is 
required for further needed actions that have strong bipartisan 
support, such as competitive bidding so that Medicare and its 
beneficiaries can get better, market-based prices for the medical 
products it purchases while ensuring high quality, and Medicare 
contracting reform, to improve the cost-effectiveness of Medicare 
contractor operations and create an open marketplace for potential 
contracting partners.
    Seventh, Medicare's regulations and administrative procedures 
should be updated and streamlined, while the instances of fraud and 
abuse should be reduced. Here too Secretary Thompson and Administrator 
Scully have moved aggressively, but the Administration now needs help 
from Congress. Any Medicare legislation this year should include the 
kind of sensible improvements that this Committee led through the House 
of Representatives with unanimous bipartisan support. Regulatory 
reforms and simplifications are needed to reduce burdens on providers 
and on CMS, a critically important goal at a time when we need to 
direct attention to implementing new benefits in Medicare.
    Eighth, Medicare should encourage high-quality health care for all 
seniors. Recent reports from the Institute of Medicine and others have 
made clear that serious and widespread opportunities for improving 
patient care exist. These opportunities are especially likely to 
benefit seniors and persons with disabilities, because they tend to use 
more and more complex care. Many of the opportunities for quality 
improvement involve drugs--including the use of inappropriate and 
costly prescriptions when less costly treatments are available, and 
failures to use medications that could avoid complications. The reports 
provide compelling evidence that we need to change the environment for 
medical practice to one that encourages systematic and continuous 
improvements in care by dedicated professionals, not an environment 
that subjects them to endless and costly litigation.
    Looking ahead, we will continue to have a healthy debate about how 
we should meet these principles. The key, however, is to take action 
this year, we intend to continue to work closely with Congress to 
implement a prescription drug benefit that Republicans and Democrats 
can support, that achieves the President's principles for Medicare 
legislation, and that begins to bring relief to seniors next year.
     immediate steps toward improved benefits as part of medicare 
                              legislation
    The President recognizes that, under all Democratic and Republican 
proposals, it will take several years to implement the comprehensive 
improvements that Medicare needs. He also strongly believes that 
seniors have already waited too long for action to update their 
Medicare benefits, and that they need assistance now. Therefore the 
President's Budget also proposes urgently needed steps that should be 
incorporated into Medicare legislation: Medicare-endorsed prescription 
drug cards, transitional low-income drug assistance, more affordable 
Medigap options, and immediate steps to help make sure that seniors who 
prefer private health insurance coverage through the Medicare+Choice 
program in Medicare can continue to get it. These changes will both 
pave the way for a modernized Medicare program, and provide immediate 
relief including drug coverage for millions of Medicare beneficiaries 
before the full drug benefit can be implemented at least three years 
from now.
Medicare-Endorsed Prescription Drug Cards
    About 9 million Medicare beneficiaries have no prescription drug 
coverage at all. About thirty-five percent of these beneficiaries had 
incomes below 150 percent of poverty, or an annual income of about 
$18,000 for a family of two. These Medicare beneficiaries and the 
uninsured are just about the only people in America today that commonly 
have to pay full price for prescription drugs. Last year, the 
Administration took the first important step to provide price relief 
for seniors who need it when it proposed the creation of a new 
Medicare-endorsed drug card program. The drug card is not a drug 
benefit and it is not a substitute for one. It is, however, an 
important first step toward helping seniors afford the drugs they need 
today, and in helping them receive other valuable pharmacy services.
    The Medicare-endorsed drug card is a pooling mechanism modeled on 
private health insurance programs, where consumers routinely benefit 
from discounts of 10 to 35 percent. Private insurers, with their large 
numbers of customers, use their market power to secure significant 
rebates and discounts from manufacturers. This is exactly the kind of 
pooling envisioned as a source of lower drug prices in both Democratic 
and Republican drug benefit proposals. Under the President's proposal, 
Medicare would endorse private drug cards that met minimum standards, 
including a requirement of securing manufacturer discounts, allowing 
seniors to get the information they need to find the card that provides 
the best manufacturer discounts and other valuable pharmacy services 
for their needs. These third-party plans will negotiate discounts and 
rebates directly from drug manufacturers and pass the savings on to 
Medicare beneficiaries who choose to participate.
    As we continue to work to implement the drug card program, the 
private sector has already responded. The recently-announced discount 
cards developed by McKesson, the National Association of Chain Drug 
Stores, drug manufacturers, and other private organizations provide 
opportunities to make manufacturer discounts more widely available to 
seniors, especially those with low incomes. We applaud these private 
market approaches. They can provide significant help for seniors now 
and for keeping down the costs of a Medicare drug benefit in the 
future. Conversely, as the Kaiser Foundation and others have shown, 
some existing cards provide small if any actual discounts, and it can 
be very difficult for experts--let alone seniors--to compare cards and 
identify the program that is best for them. By helping seniors pool 
together and choose among cards that would have to compete directly on 
manufacturer discounts and high-quality pharmacy services, the 
Medicare-endorsed card program could give all seniors access to 15 
percent savings on drugs--and, through innovative new programs like the 
McKesson TogetherRx Card, seniors with modest incomes could get savings 
of 20 to 40 percent, according to card sponsors.
    The drug card has another important aspect: experience. As AARP and 
other senior advocates have noted, seniors, drug benefit managers, and 
the Medicare program would all get valuable experience with 
implementing a choice-based drug benefit. This will be a significant 
advantage as CMS moves to implement a comprehensive Medicare 
prescription drug benefit, since all major Democratic and Republican 
proposals envision a competitive approach like this to providing drug 
coverage. And as I will describe in more detail next, the Medicare-
endorsed drug cards can provide the infrastructure needed for rapid 
expansion of low-income assistance and other prescription benefit 
assistance.
Transitional Medicare Low-Income Drug Assistance Program
    After many years without Congressional action to implement a 
Medicare prescription drug benefit, states have acted themselves to 
assist seniors with the greatest needs. The lowest-income seniors have 
received prescription drug coverage under the Medicaid program. In 
addition, 30 states have set up additional prescription drug assistance 
programs for seniors, and more states are considering such programs. 
Yet millions of lower-income seniors still get no help. The President 
believes that comprehensive Medicare legislation should take advantage 
of existing state infrastructure to identify and provide assistance to 
low-income seniors right away, and to support the integration of 
existing state low-income programs into the new Medicare drug benefit, 
by helping states provide transitional drug coverage for low-income 
seniors as part of comprehensive Medicare legislation.
    The Administration has proposed to provide immediate support for 
comprehensive drug coverage for Medicare beneficiaries up to 150% of 
poverty--about $18,000 for a family of two. This proposal, called the 
Transitional Medicare Low-Income Drug Assistance Program, would use the 
existing administrative structure operated by the states to identify 
and assist low-income seniors, and would also encourage states to use 
the new Medicare drug card infrastructure or similar competitive 
approaches to provide expanded low-income assistance. For Medicare 
beneficiaries up to 100% of poverty, the program would provide new 
Federal matching funds at the Medicaid matching rate for expansions of 
drug coverage. As an added incentive for States to expand coverage up 
to 150% percent of poverty, Medicare would pay 90% of the States' cost 
of drug-only coverage expansion above 100% of poverty, leaving states 
responsible for covering the remaining 10%. This proposal is projected 
to expand drug coverage for up to 3 million beneficiaries who currently 
do not have prescription drug assistance. It would be fully integrated 
with the Medicare drug benefit once the reform Medicare program is 
implemented, as envisioned in all major Medicare drug benefit 
proposals.
    The Administration is ready to work with Congress to implement 
transitional low-income assistance effectively, considering both the 
short-term goal to expand drug coverage and the long-term goal of 
getting all beneficiaries into the Medicare drug benefit as quickly as 
possible. For example, using the transitional Federal funding, states 
could contract with one or more Medicare-endorsed drug cards to 
identify low-income residents and provide additional prescription drug 
assistance beyond manufacturer discounts for them. The drug cards also 
provide a convenient mechanism for keeping track of out-of-pocket 
expenses, so that states can work with the drug card administrators to 
provide assistance with catastrophic expenses for medically needy 
individuals. When the Medicare benefit is set up, the drug card 
providers would have a clearer idea about the utilization habits and 
profiles of their beneficiaries, so they would not have to start from 
scratch in setting up efficient universal drug benefit programs. Low-
income populations would even have a head start on getting a 
competitive, privately-provided drug benefit through a Medicare drug 
assistance infrastructure.
    In addition, to make expanded drug coverage immediately available 
even before the enactment of the Transitional Low-Income Drug 
Assistance Program, states can immediately participate in a model drug 
waiver program called Pharmacy Plus that can cover Medicare 
beneficiaries up to 200% of poverty. In Illinois, for example, 368,000 
additional low-income Medicare beneficiaries, up to 200% of poverty, 
will receive drug coverage under the waiver we approved last month. 
These waivers must be budget neutral to the federal government. A 
principal mechanism that states can use to provide this expanded 
coverage in a budget-neutral way is the adoption of private-sector drug 
benefit management tools. States like Nevada are already applying such 
tools to provide mainstream private drug benefits for lower-income 
seniors. The savings generated from these tools in states' existing 
populations can be used to finance additional drug coverage.
Reliable, Affordable Health Insurance Coverage Options In Medicare
    As I have already noted, the President believes that a critical 
issue for modernizing Medicare is to replace the failing 
Medicare+Choice system for paying private plans with a fair payment 
system that gives beneficiaries the innovative coverage options they 
deserve--options that have long been available to millions of Americans 
under 65 and all Federal workers. After years of inadequate payment 
updates, action is needed now to ensure that the valuable and 
innovative benefits offered by Medicare+Choice plans remain available 
to Medicare beneficiaries. Since the Medicare+Choice payment system was 
implemented in 1998, hundreds of private plans have left the program or 
reduced their service areas and benefits, adversely affecting coverage 
for millions of beneficiaries--reversing what had been an upward trend 
in private plan availability, benefits, and enrollment.
    The benefits offered by the plans that remain still provide a 
better deal for many seniors than fee-for-service Medicare plus an 
increasingly costly Medigap policy. But the remaining valuable benefits 
provided by private plans are threatened, and the trend away from the 
availability of affordable and innovative benefits in Medicare has made 
millions of seniors worse off. Without immediate corrective legislation 
this situation will only get worse--just at the time when rapid 
advances in care will make it even more important for seniors to have 
these options. Indeed, based on the latest projections of the 
Congressional Budget Office, enrollment in Medicare+Choice will fall by 
more than a million over the next 10 years as a result of inadequate 
payment updates. Moreover, open-network plans like Preferred Provider 
Organizations (PPOs) and point of service plans have become popular 
among privately covered individuals, yet only two PPOs participate in a 
few counties in the entire Medicare program.
    We seek to address these problems both through legislation and 
administrative action. For example, the Department of Health and Human 
Services just announced a demonstration project to expand health plan 
options in Medicare + Choice. Preferred Provider Organizations (PPOs) 
have been successful in non-Medicare markets and CMS is conducting the 
demonstration to test ways to provide more health plan options to 
people with Medicare. We hope to award demonstrations later this year 
in up to 12 geographic areas that will be available to enroll 
beneficiaries during the Fall open enrollment period and begin to serve 
enrollees next January. This demonstration program will test changes in 
methods of payment for Medicare services that may be more efficient and 
cost effective while improving the quality of services available to 
beneficiaries. The demonstration plans will be considered 
Medicare+Choice (M+C) plans and must offer all of Medicare's required 
benefits, but will also have the flexibility to offer greater access to 
drug benefits.
    The President's budget also proposes to take urgently needed 
transitional steps toward the equitable payment system for private 
plans proposed in the President's framework for strengthening Medicare. 
These proposals would modify the Medicare+Choice payment formula to 
better reflect actual healthcare cost increases, allocate additional 
resources in 2003 to counties that have received only minimum updates, 
and provide incentive payments for new types of plans to participate in 
Medicare+Choice, including PPOs. Together these augmented payments 
would address the problem of persistently low payment updates to most 
Medicare+Choice plans, making more plan choices available and improving 
benefits for millions of seniors. Because these proposals would allow 
many plans to provide or at least maintain drug coverage in their 
benefit package, they also provide another means of giving seniors 
prompt help with their drug costs.
New Medigap Options
    Because of the major gaps in the benefit package in the fee-for-
service program, supplemental coverage--often called Medigap--is an 
essential part of Medicare coverage for millions of our nation's 
elderly and disabled. The Administration shares the concerns some have 
expressed regarding the rapid increases in Medigap premiums in recent 
years: most seniors now pay much more for Medigap than they pay in 
Medicare premiums. We also agree with the leaders on this Committee 
that we can better design both Medicare and Medigap so that seniors and 
people with disabilities can get more affordable coverage, and get the 
most for the health care dollars they spend. Clearly the existing set 
of options, which require beneficiaries to purchase ``first-dollar'' 
coverage for hospitalizations and even basic services like doctor's 
visits before they can obtain any drug coverage, has become outdated.
    To improve beneficiaries' Medigap options during the several years 
it will take to make a better benefit package with prescription drug 
coverage available, we have also proposed that two new affordable 
Medigap plans be added to improve beneficiaries' options quickly. They 
would substantially reduce cost-sharing for beneficiaries and provide 
much better protection against high costs. And they would increase the 
number of seniors with drug coverage. If we provide a one-time opt-in 
for current beneficiaries, we estimate that up to one and a half 
million beneficiaries would choose these new policies once they are 
available--and that nearly half of these enrollees would be 
beneficiaries who do not have drug coverage now. Moreover, we can 
achieve this significant increase in drug coverage among seniors right 
away, not several years down the road, while saving money for 
beneficiaries and the Medicare program. Of course, as the President has 
made clear, seniors should be able to keep their existing Medigap 
coverage with no changes if they prefer it.
                               conclusion
    We are committed to working constructively with Congress to enact 
legislation consistent with the President's principles--so that we can 
get started on putting a prescription drug benefit into place this 
year. We all know that failing to act to meet these unavoidable 
challenges may lead to more extreme changes later, including government 
controls on prescription drugs and stricter coverage limits in 
Medicare. These changes would reduce access to needed treatments and 
slow the development of new technologies, such as promising new drugs 
for common cancers and other diseases. Instead, we must come together 
now to take the sound, careful, and deliberate steps needed to improve 
the Medicare program for today's seniors and tomorrow's. And we must 
take action now. These issues have been debated for years. Seniors 
cannot afford to wait any longer. Including the transitional steps that 
the President has suggested would begin to provide relief as soon as 
later this year--not off in the future. Millions of Medicare 
beneficiaries could get drug coverage, and all beneficiaries could 
benefit from lower drug prices and spending, well before the full 
prescription drug benefit is implemented.
    Finally, we must take action that preserves Medicare's promise for 
the future. Medicare's promise should enable seniors today and tomorrow 
to benefit from the tremendous potential of our health care system. 
Through private-sector innovation and flexibility to adopt new 
technologies, our health care system leads the world in giving patients 
access to medical treatments that improve their lives. Through action 
now to update Medicare's benefits and to keep them financially secure, 
the promise of secure health care coverage that President Johnson made 
thirty-seven years ago can be renewed for seniors and persons with 
disabilities in the twenty-first century. I thank you for the 
opportunity to discuss this very important topic with you today, and I 
look forward to answering your questions.

    Mr. Bilirakis. Thank you, Doctor. I haven't asked you this 
question either in committee or outside of committee. I think 
you know from the prior Congress my desire, outside of the 
scope of the Medicare program, to help the needy people, the 
poor people now, and the sick people now. We weren't able to 
get anywhere in the last Congress on that particular point.
    So, whether it be that type of a program or whether it be 
something else which is, I think, in the minds of all of us, 
perhaps a temporary fix, in lieu of a permanent comprehensive 
fix, which is what we all want but maybe not able to get 
because the checks-and-balances that the Founders put in the 
Constitution, et cetera. I think the feeling among many 
members, particularly on the other side of the aisle, is, well, 
if you do something like that, that ends it, you're never going 
to revisit it again, and therefore this thing that you now call 
a temporary fix will become a permanent fix. Do you have an 
opinion about that?
    Mr. McClellan. Yes, Mr. Chairman. Our view is that we need 
to move toward the comprehensive Medicare drug benefit as part 
of legislation, as I have said, to make efficient coverage and 
lower cost care more widely available to seniors as quickly as 
possible.
    In thinking about how to do that as quickly as possible, 
the administration recognizes that there are a number of steps 
that need to be taken now to put us in a position to implement 
a full drug benefit effectively in a modernized Medicare 
program in several years.
    To do that, Medicare needs some experience with providing 
competitive approaches to delivering a drug benefit, and our 
hope is that we can use that opportunity not only to give 
Medicare experience, but also to provide some help in the 
short-term for people who need it now. Our goal is not, by any 
means, to support a low-income-only approach to drug coverage, 
and I appreciate the opportunity to clarify that.
    Our goal is to implement a drug benefit effectively as 
quickly as we can, and to take advantage of existing key 
infrastructures to do that. That includes the mechanisms 
available today through cards like McKesson, the chain drug 
stores, and other opportunities to make discounts available to 
seniors, and to provide other valuable pharmacy services. These 
kinds of programs are going to be a key part of a full Medicare 
prescription drug benefit.
    It also includes taking advantage of the infrastructure 
that States have available now to identify low-income 
beneficiaries who need help and to get additional assistance to 
them. So, for example, by making Medicare-endorsed cards 
available that States could use to provide additional 
assistance to people with high costs and people with low 
incomes, we can both help give Medicare the experience it needs 
for a comprehensive benefit and we can give people who 
desperately need help right away, not 3 years from now, the 
kind of assistance they need on the way to integrating them 
into a benefit for all seniors and all Medicare beneficiaries.
    Mr. Bilirakis. So you have heard the opening statements and 
some members have made comments that the discount card is not 
the solution. I mean, you would agree that it is not a 
permanent solution, that the feeling on the part of the 
administration is that it might be a temporary measure, but 
even if it were to become permanent, that it would be a part of 
a comprehensive plan.
    Mr. McClellan. Yes, sir. As the President has made clear 
from the first time he has talked about this, as we have made 
clear over the past month, a discount or prescription 
assistance program that doesn't provide a drug benefit is no 
substitute for a Medicare prescription drug benefit.
    Our goal is simply to implement a Medicare drug benefit as 
quickly as possible for all seniors, and to get there we need 
to develop the kind of experience and take advantage of the 
infrastructure that exists already to help seniors.
    Mr. Bilirakis. I think it is noteworthy--you mentioned it 
and Mr. Green and others did, the fact that the chain drug 
stores and industry have taken it upon themselves to come up 
with these discount plan cards to help people even now. I mean, 
if it is only the poor who receive immediate assistance, it 
helps somebody at least. And I don't know that we should be 
looking a gift horse in the mouth.
    Now, I know that there is concern if we do something like 
that, that sort of puts the fire out, the immediate fire out, 
and therefore these guys are going to shift over into something 
else. Well, I suppose that can always happen, but I would like 
to think that would not be the case.
    We haven't heard from them yet, and I don't know what their 
statements will be other than what we have in writing, and we 
haven't been able to really peruse all of them all that well 
yet, but I think we do--on behalf of the committee, I commend 
them for at least coming up with something that will be of some 
help now.
    We will hear a witness on the second panel--my time is 
about to run out--regarding the Nevada plan. Just to shorten my 
question, very briefly, any comments on the Nevada plan?
    Mr. McClellan. We think it is a very constructive step. It 
shows how States can move in the direction of providing--using 
private sector tools to deliver a more effective drug benefit, 
and we do think that Nevada's experience applied nationally 
could be done at significantly lower cost. That is one of the 
main mechanisms that is available to States under our Pharmacy-
Plus waiver program, to adopt competitive approaches like 
Nevada has used to keep overall drug costs down, and to use 
those savings to provide more prescription drug coverage and, 
at the same time, move the Medicaid program in the direction of 
the privately provided drug benefit that we all, Democrats and 
Republicans, have advocated in a prescription drug benefit.
    Mr. Bilirakis. Will either you, or will you have someone 
sit in during the second panel so that they can listen to the 
testimony as well as the questions and the responses thereto, 
we would appreciate that.
    Mr. McClellan. Yes, sir.
    Mr. Bilirakis. Thank you very much. Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. Thank you, Dr. 
McClellan, for being here. I would add in response to the 
Chairman's question, that the private sector didn't do it as 
well--$81 per month to deliver when the State could have done 
it for less than $54. But on to the question.
    You spoke glowingly about the Federal Employee Health 
Benefit Plan, largely subsidized by taxpayers which provides a 
basic prescription drug benefit that's available to all Federal 
employees. Do you participate in the FEHBP, as do most members 
of the government?
    Mr. McClellan. Yes, sir.
    Mr. Brown. Would you describe briefly your prescription 
drug coverage?
    Mr. McClellan. It is a prescription drug coverage that uses 
the kind of widely available private sector tools to manage 
benefit costs and help encourage effective use of----
    Mr. Brown. I mean your prescription drug coverage. Could 
you tell me about yours?
    Mr. McClellan. It has a tiered formulary with co-pays at 
one level for drugs that are on-formulary, a higher level for 
drugs that are off-formulary, and it provides assistance with 
the cost of prescription drugs, has a deductible, I believe, 
and some protection against high out-of-pocket cost.
    Mr. Brown. Should seniors and other Medicare beneficiaries 
have a benefit that is significantly less generous, more 
generous, or significantly more generous, or about as generous 
as FEHBP does?
    Mr. McClellan. I think our goal is to provide effective 
drug benefits along the lines of FEHBP or other styles of 
benefits that could provide a significant degree of protection 
for seniors.
    I think, if I can read where your question is going, your 
question is, should the government pay for most of the cost of 
that benefit. What I would like to say is that there are some 
creative ways to provide protection on the back-end, stop-loss 
protection, as well as a good basic benefit package and the 
right structure for providing drug coverage assistance which 
seniors could then augment with private coverage or other 
sources of insurance to get more comprehensive assistance.
    Under our proposal, every senior of limited means would get 
comprehensive drug coverage paid for by the government, and we 
would very much like to set up a structure that would allow all 
seniors to get access to the kind of comprehensive assistance 
with their drug costs that the Federal employees title benefit 
provides.
    Mr. Brown. Precisely, should the plan that we pass here, 
regardless of how it is constructed, should it be a similarly 
generous benefit, similar kind of benefit in terms of the worth 
of the benefit, as we provide to Federal employees? Should we 
provide a similar kind of benefit to our Medicare seniors?
    Mr. McClellan. The plan that you pass, we believe, should 
provide the structure that would enable seniors to get the same 
kind of protection against high drug costs and assistance with 
managing their drug costs that Federal employees get. That 
doesn't necessarily mean a fully federally financed $801 
trillion drug benefit program. It means setting up a structure 
that ensures that seniors will have access to protection 
against high out-of-pocket cost and will have access to the 
tools widely available to Americans to keep their drug costs 
down, and will have the opportunity to augment that coverage 
with additional assistance like the kinds of employer plans 
that Representative Burr spoke about.
    Mr. Brown. So if I am reading between the lines--because 
you aren't quite as direct as I had hoped you would be--and we 
try to pass a benefit about as generous, roughly the same as 
FEHBP, the Congressional Budget Office said that will require 
Federal investment of over $800 billion in the next 10 years.
    Now, if that is what we want to do, a similar kind of 
benefit, then who are we asking to subsidize--you in the past 
have said, the administration has said, we will spend less than 
$200 billion on this benefit. So, are seniors out-of-pocket 
paying the extra $600 billion if we are going to do this? How 
are we going to do this?
    Mr. McClellan. No. We would rely on the existing coverage 
that many seniors have now. We would want to integrate the new 
benefit so that it takes advantage of the large amount of 
private contributions that already are out there for providing 
drug coverage.
    Before, we have discussed the employer contributions that 
exist. We have also discussed contributions of Medicare+Choice 
plans. Even now when there is no drug benefit in Medicare, as 
long as they are reimbursed adequately, they can make a 
significant contribution toward drug benefits. We don't want to 
replace all of those private contributions.
    The idea of a $750 or $800 billion program that really is 
crowding out $300 or $400 or $500 billion in existing private 
coverage is really not providing the kind of effective 
additional assistance that seniors need.
    Mr. Brown. I know this administration worships at the Holy 
Grail of free enterprise and free market solves all problems, 
but, Dr. McClellan, the fact is Medicare+Choice doesn't save 
money, that is pretty clear. They come back here--the only 
thing you put in your budget specifically to provide money for 
providers was money for Medicare+Choice.
    In Nevada, the example that the Chairman and you touched 
on, the government could do it for less than $54 a month, the 
private sector did it for $81 per month. I don't know how you 
can think we can close this $600 billion gap. You are only 
putting $200 billion--the Congressional Budget Office thinks we 
need $800 billion--and I guess all to make room for your tax 
cuts--how are we going to do this? I hear my friends on the 
other side of the aisle talking about they want to provide this 
benefit, but you are not paying for it. And it is pretty hard 
to come to this body and to this committee and say that this is 
going to be anything comparable to what Members of Congress and 
what Federal employees have in this benefit, except the seniors 
are going to have to reach in their own pocket and subsidize 
it. My time is expired.
    Mr. Bilirakis. You certainly are welcome to respond to 
that, if you would like.
    Mr. McClellan. Thank you, Mr. Chairman. We would very much 
look forward to continuing to work with you and your staff. We 
have had some discussions with your staff already. We would be 
happy to do a lot more. If you have a specific proposal for the 
kind of drug benefit that you would like to see, and the 
mechanism for paying for it, we would be open to doing that.
    It has been a little bit difficult for us to figure out 
exactly what that proposal would be since there hasn't been a 
House Democratic proposal on the budget resolution, and since 
the Senate is not really passing, as far as I can tell, a 
budget resolution, just what the package is that you are 
proposing and how it would be paid for.
    I just walked through some of the concerns that we have 
about a package of $800 billion that is not paid for. It 
amounts to a tax on every working American down the road of 
$2200 per person. That does not seem like a sustainable recipe, 
to me, for making a Medicare drug benefit that will be 
available to seniors in the future.
    What we think is a much more effective way to go is to get 
the private sector tools that have worked well in keeping drug 
benefit costs down in the private sector, and that CBO and the 
CMS Actuaries say would save money, get lower priced drugs and 
lower cost drug coverage into Medicare, and do that right away. 
Get the structure in place that would allow Medicare 
beneficiaries to have access to assistance with all their drug 
costs, and that would complement, not replace, the existing 
private coverage that most seniors have today. And we have 
looked forward to working with you on that.
    Mr. Bilirakis. The gentleman's time has expired. Dr. 
Norwood.
    Mr. Norwood. Thank you, Mr. Chairman. Dr. McClellan, I am 
glad you are here. I want to go back to some of your previous 
statements about stop-loss. Did I understand you to say that 
the administration feels that any plan we produce should have 
some stop-loss protection?
    Mr. McClellan. Yes, sir, that is correct.
    Mr. Norwood. And did I understand you to say that would be 
measured by out-of-pocket expense?
    Mr. McClellan. We think measuring it by out-of-pocket 
expense would be a potentially very effective way to do it, but 
obviously we want to work closely with you on exactly what 
the----
    Mr. Norwood. Not the total cost of the medications, but how 
much the patient actually spent out of their pocket, is that 
where you are coming from?
    Mr. McClellan. That seems like an effective way to go. It 
seems like it would be a natural way to complement a lot of the 
coverage that seniors have today. Many seniors--most seniors do 
have drug coverage. Too often, however, it is limited to a 
capped amount or it is threatened, especially in the case of 
employer coverage, by employers worried about the open-ended 
liability they might have for very high back-end costs. So 
providing drug coverage that kicks in after seniors have hit a 
certain level of out-of-pocket spending seems like a very good 
way to complement much of that existing drug coverage.
    Mr. Norwood. Two questions about that. How do you determine 
what out-of-pocket spending is?
    Mr. McClellan. One way to determine it would be to use the 
kind of infrastructure that we would like to get available----
    Mr. Norwood. What if you don't get the infrastructure?
    Mr. McClellan. Well, there are electronic mechanisms 
available now to process claims with pharmacies. Pharmacies 
have actually been leading the way in electronic data systems, 
and companies like McKesson who can talk to you more about 
this, I think, on the next panel, could tell you ways to do 
that. If you have a card or something like that----
    Mr. Norwood. Okay. You are telling me that physically can 
be done.
    Mr. McClellan. Sure.
    Mr. Norwood. You can determine what people actually pay out 
of their pocket?
    Mr. McClellan. We think it can be done fairly quickly with 
the Medicare-endorsed card structure proposal----
    Mr. Norwood. I catch on to that, but we don't know that 
that is going to be the case. What is a good stop-loss, $3,000? 
$4,000? $5,000?
    Mr. McClellan. Well, I think, obviously, we would want to 
consider the cost implications of a lower level versus the 
higher value that it provides, and that is something that--you 
know, we have looked at different numbers--$2,000, $3,000, 
$4,000--for out-of-pocket expenses, and we will want to work 
with you on those specific details of what----
    Mr. Norwood. What is the story on $3,000 then?
    Mr. McClellan. I don't have that off the top of my head, 
but I would be happy to----
    Mr. Norwood. When I call you this afternoon, will you tell 
me at the office?
    Mr. McClellan. I don't know if I will have it this 
afternoon, but I will have it for you very soon.
    Mr. Norwood. Do you know what $4,000 is?
    Mr. McClellan. Not off the top of my head.
    Mr. Norwood. But we can get that this afternoon by 
calling----
    Mr. McClellan. We can get it for you quickly.
    Mr. Norwood. It is pretty important. The last thing is, 
now, you are saying that you believe any package that Congress 
produced, at least this is a central part of what that package 
should be as a stop-loss?
    Mr. McClellan. That is right. We think it has two valuable 
purposes. One is that more and more seniors are facing high 
out-of-pocket costs as we have more and more very impressive 
and useful medications based on even the genetic code of an 
individual to get individually tailored treatments, but those 
are often costly treatments, and we know seniors want 
protection for that.
    Mr. Norwood. Are any of my colleagues aware of this? I 
wasn't aware this was going to be a central part of a package. 
Are any of my colleagues aware that this is where----
    Mr. McClellan. This is an element of the President's 
framework for prescription drug coverage in Medicare. He does 
think it is very important to give seniors the peace of mind 
that they need, especially in an era when we are seeing more 
and more valuable but costly drugs being developed and 
introduced. This is a critical part of Medicare going forward.
    Mr. Norwood. If I were king and had all the money I wanted, 
what I would like is every senior citizen to be covered for any 
amount of medication they needed, with maybe a $5.00 premium 
and a $1.00 co-pay. That is what I would really like to see us 
be able to afford.
    There are some in Congress and outside advocacy groups as 
well, that are advocating for creation of a new Medicare 
prescription drug plan that may cost in the neighborhood of 
$700 billion over 10 years. Now, I would like that, too, but I 
want you to be very specific with me. What effect will this 
type of entitlement have on Medicare, on the Medicare Trust 
Fund, on the Medicare Trust Fund as we go down the road in 
terms of specifically with its solvency. You know, it is great 
to have prescription drugs, but if you can't get access to the 
doctor who writes the prescription for the drug, something is 
not going to work right, is it?
    Mr. McClellan. That is right.
    Mr. Norwood. Tell me--just talk to me about that.
    Mr. McClellan. We are very concerned about the threat that 
very large drug benefit like that would pose to the ability of 
Medicare to provide all of its promised benefits to seniors in 
the years ahead. If that kind of drug benefit was actually 
funded partly out of the Part A Trust Fund, the Part A 
surpluses, the solvency date for the Medicare Part A Trust Fund 
would move from 2030, as it is today, all the way up to 2016, 
and the Trust Fund would start losing money as soon as 2008.
    If you try for the creative separate accounting and put it 
in its own separate trust fund and hope that somebody is going 
to figure out a way to pay for it later, the cost down the road 
would amount to almost 2 percent of our national product by 
2030, and that is a tax on every working American in 2030 
equivalent to $2200 today. That is a level of tax requirement 
or an equivalent impact on government's other priorities--
remember, that is $2 out of every $100 in the United States 
economy at that point--that would have a fundamental effect on 
either the ability of Medicare to pay for its existing 
benefits, or the other critical priorities of the U.S. 
Government and the American population.
    Mr. Norwood. Would that affect people under 65 and their 
ability to have health care?
    Mr. McClellan. Well, they are right now facing rapid 
increases in their own health care costs, and in some of our 
discussions about the problem of the uninsured, people have 
told me that a premium of $2,000 is not affordable. This would 
cost even more.
    Mr. Norwood. Thank you, Dr. McClellan.
    Mr. Bilirakis. The gentleman's time has expired. Mr. 
Pallone to inquire.
    Mr. Pallone. Thank you, Mr. Chairman. Dr. McClellan, let me 
say first of all that I totally disagree with your strategy 
here, which I think is that you would like to see a universal 
Medicare prescription drug program, but that is long-term, and 
in this transitional period of, I guess, 2 or 3 years, whatever 
it is, we have got to look at other things.
    I mean, I have two problems with that. I could be very 
cynical and say that this is part of some administration 
strategy that hopes that we will forget about the long-term 
proposal by concentrating on this low-income benefit and hoping 
that the other will simply go away, and that if we cover a few 
people who are low-income, then maybe politically that will 
satisfy our commitment long-term.
    But even if I wasn't cynical and wanted to take everybody 
on their word and say you are trying to do your best and you 
are really trying to come up with a strategy that is going to 
help people--and I will assume that--I just don't see it. I 
don't see why it works. In other words, we have an experience 
with the CHIP program where we tried to put in this complicated 
situation where States would try to cover the kids, and it is a 
few years now--it has taken 2 or 3 years, and now most of the 
States are on it, and it seems to be working well, but that 
took a long time.
    It seems to me that instead of looking at this transitional 
period and trying to help a few people--and it is going to be 
very few--it would make sense to just concentrate on trying to 
do the universal program, cover everybody, and spend our time 
and energy there.
    Let me give you an example. I want to ask you a question, 
but let me give you an example. In my own State of New Jersey, 
we have a very generous program, and right now the State--and I 
don't blame them, and I support it--is trying to use the waiver 
that the Secretary has proposed to get $150 million back in 
Federal funds to finance their existing program. Now, that is 
commendable. We should get it. We certainly deserve it based on 
fairness, and I support it, but it is not going to put one 
additional person--it is not going to provide drug coverage for 
one additional person. So I think you have got the situation 
where you are going to go through this drawn-out strategy that 
could take years to cover very few people, or maybe even no 
people in some States, and instead you should concentrate on 
just trying to put the universal program in place.
    Let me ask the question. The Congressional Budget Office 
analysis of the Bush Administration proposal indicates that--
this is the low-income proposal--it would only provide 18 
percent of low-income beneficiaries and 6 percent of all 
beneficiaries with a prescription drug benefit by 2007, while a 
Medicare prescription drug benefit for everyone would ensure 
nearly 100 percent coverage of all seniors as soon as it went 
into effect.
    So, doesn't it make sense that the Congress and the 
administration focus on a workable, meaningful, effective drug 
benefit that is available and accessible to all seniors, rather 
than design a complicated, inefficient, and I believe, highly 
ineffective low-income-only policy, especially when a low-
income-only policy would only be in effect until this universal 
benefit begins? Explain to me why you think that that makes 
sense. It doesn't to me.
    Mr. McClellan. Well, we are trying to work back from a 
comprehensive drug benefit that would be available to everyone. 
We completely agree with you, Representative Pallone, that that 
is our first priority--how can we get effective drug assistance 
implemented as quickly as possible?
    Working back from that, it is clear that the Medicare 
program needs experience with managing a drug benefit 
assistance program. It doesn't have that now and, again, that 
is where the Medicare-endorsed drug cards would come in. We 
would get experience with managing competing ways of providing 
drug assistance. Seniors would get some experience with 
choosing a plan that is best for them.
    Mr. Pallone. What I don't understand, Doctor, is why would 
we and the administration devote our time and energy to 
establishing these 50 different State assistance programs that 
are going to take a number of years, you said, to set up, only 
to replace them with the broader Medicare benefit in 2 or 3 
years? Doesn't it make more sense to just concentrate now on 
efforts to do a drug benefit for all? Politically, the 
atmosphere is right. Our constituents are demanding the 
comprehensive benefit. And I am just afraid that by doing this 
alternative which you have outlined today, you are missing the 
political opportunity to pass something that is going to help 
everyone, and instead put this complicated procedure that CBO 
says is going to help many people.
    Mr. McClellan. We want to get legislation that includes a 
comprehensive benefit and it implements as effectively as 
possible with some help on the way. According to the actuaries' 
estimates, the low-income assistance would benefit up to 3 
million seniors and could be done through the kind of drug 
cards and other competitive approaches to providing 
prescription drugs----
    Mr. Pallone. There are 37 million seniors that wouldn't 
benefit compared to those----
    Mr. McClellan. There are 9 million seniors without drug 
coverage now, 3 million seniors getting coverage through this 
approach, another 700,000 getting coverage through our 
additional Medigap option, another 100,000 getting assistance 
now through the improved Medicare----
    Mr. Pallone. Let me ask you, if this is such a priority--I 
mean, the administration has allocated $190 billion over 10 
years for Medicare prescription drugs in the 2003 budget. If 
this is such a priority for the President, why aren't they 
allocating more money?
    Mr. McClellan. We believe that with strong measures that 
make the program more efficient in the long-run, which Medicare 
really needs for all the financial reasons that we have just 
discussed, that a prescription drug benefit, an effective 
prescription drug benefit, can be implemented in 2003 for the 
kind of net dollar commitment in the President's Budget. We 
have made clear that we are willing to work with Congress on 
this, but in doing so we want to keep a focus on the 
implications of any prescription drug benefit and other new 
benefits that we add for the long-term financial solvency of 
the Medicare program and its ability to keep all its existing 
benefits secure.
    So, we will work closely with you on that, but we do not 
want to lose sight of the fact that Medicare is a promise that 
needs to be there for seniors not only today, but 20 or 30 
years from now as well, and needs to be done in a way that 
doesn't overly burden the next generations of Americans.
    Mr. Burr [presiding]. The gentleman's time has expired. The 
Chair would recognize himself for 5 minutes for questions.
    Mark, again, thank you. To some degree, what we ask at this 
stage of administration witnesses, to try to be specific on 
something that they can't be specific because you understand 
the role that the House and the Senate play in the formation of 
policy. And, clearly, you understand we are all across-the-
board today, even though this is the third or fourth or fifth 
year that I think we have debated the issue of prescription 
drugs, the one thing that certainly everybody here supports is 
the fact that we need to extend some type of benefit, and I 
think the White House has been bold in what they have proposed 
so far. And I would ask you simply about one specific piece and 
the importance that you feel that has, and that is the benefit 
card. That was something that the administration has proposed 
since the beginning, it is something that there has been a lot 
of effort put toward.
    How important a component do you see that to the final 
product?
    Mr. McClellan. We think it is a very helpful component 
for--as Representative Pallone was concerned about--making sure 
that we implement a comprehensive benefit effectively. I think 
all of us, Republicans and Democrats, agree that private sector 
tools should be used in providing the Medicare drug benefit 
when it is fully established. And the drug card is a good way 
to get the right tools in place early, to give seniors 
experience with it, to give the program experience with it, and 
to give the people that will actually be providing the drug 
benefit more direct experience with seniors and their drug 
costs and managing their benefits. So we think it is important 
from that standpoint.
    We also think it is important from the standpoint of 
providing some relief for seniors and helping make sure we work 
out the bugs before we are playing with the full benefit 
dollar, the literally many billions of dollars that will be 
involved in this drug benefit, and the kinds of responses that 
we have seen since the President laid out this issue, from 
companies like McKesson, give us some confidence that with 
Medicare endorsing the best kinds of programs out there and 
helping seniors choose among them, we will find ways to do this 
that deliver some real assistance for seniors in the short-run, 
20 to 40 percent reductions in drug prices seems nontrivial to 
me, before we get full drug coverage available, and also be 
done in a way that works for local pharmacies which are a 
critical part of delivering any drug benefit effectively.
    So we would like to see a way to make this work to get us 
on the road toward a comprehensive benefit, as part of an 
overall legislative package.
    Mr. Burr. In our second panel today, we will have testimony 
from the State of Nevada who, if I remember correctly, started 
with a benefit that had multiple plans and multiple options 
and, since that time, have honed that down to one plan, one 
option, an option that I think from their testimony has been 
very successful in Nevada.
    What should we, if anything, learn from their experience or 
the experiences that we have seen in any other State so far 
relative to prescription drugs and seniors?
    Mr. McClellan. I think it is a valuable experience and that 
it shows that moving toward private innovative coverage can be 
done now to take us on the way toward the kind of mainstream 
private coverage that we want to have available for all seniors 
in a prescription drug benefit in Medicare.
    Nevada, as a single State, with a limited number of seniors 
participating in the program--remember, many older Nevadans 
already have coverage through other means, this is a program 
targeted at lower income seniors that do not have coverage 
today--that is not an enormous number of people. It is not like 
the entire Medicare program that w would be talking about for a 
Medicare drug benefit. So, there are opportunities from the 
scale involved and the scope involved in the Medicare drug 
benefit to encourage effective competition and choices among 
private plans that may not be as easy to implement in a single 
State for a single low-income program, and that is what CBO, 
the CMS Actuaries and others have indicated is the right way to 
go for getting a Medicare drug benefit delivered as cost-
effectively as possible.
    Mr. Burr. Would you agree that there are multiple options 
that we could come up with to handle the low-income seniors 
based upon how targeted a population that is, not necessarily 
that we offer multiple plans, but we have multiple options now 
as to the directions that we could go in providing a benefit 
for low-income seniors?
    Mr. McClellan. Sure.
    Mr. Burr. If you will, comment on this last thing, and that 
is that first out of the chute this year was a plan--maybe not 
a plan--a dollar amount--AARP suggested that the drug benefit 
had to be $750 billion, if I remember correctly. I think since 
then maybe they have changed to some degree.
    Comment, if you will, from the standpoint of the 
administration, can America today or tomorrow afford a $750 
billion drug plan? If not, what would it cost?
    Mr. McClellan. We don't think that $750 billion would be 
affordable. Earlier and in my written testimony I go through in 
some detail what the numbers associated with that are, and it 
is a level of spending that we think would not make it easy to 
sustain Medicare's benefits for the Baby Boom, would not make 
it easy to pursue the other high priorities of the U.S. 
Government, if we are spending 2 percent of our entire national 
product and over 10 percent of all Government spending on a 
drug benefit alone, and that is why we think it is incumbent 
upon us to find effective ways to deliver and provide a 
universal drug benefit at a lower cost. As AARP has said, it is 
not going to be easy to do that for the amount that we 
described in our budget or the $350 billion in the House Budget 
Resolution, but that is the best way to balance the need for 
providing real assistance for seniors now, with the promise of 
Medicare to be there for seniors in the future.
    Mr. Brown. Could I ask the gentleman to yield just to point 
a clarification of the $2200. I assume that is with no price 
controls or no constraints at all on drug company pricing?
    Mr. McClellan. Well, that is the cost implication of 
spending $400 billion out of the Part A Medicare surplus funds 
in the next 10 years, and extending that same kind of spending 
for the 10 years after that and the 10 years after that.
    Obviously, we had hoped to use the most effective cost 
control mechanisms possible through these private sector means, 
as CBO has said, to keep the overall cost of the benefit down. 
But if you are spending $750 billion on net on a prescription 
drug benefit, it is going to have fundamental implications for 
taxes that need to be raised on all Americans, or for the 
ability of the government to do just very basic key functions, 
since it would be such a large part of Federal Government 
spending down the road.
    Mr. Burr. My time is expired. The gentleman from Michigan, 
Mr. Stupak, is recognized for questions.
    Mr. Stupak. Thank you, Mr. Chairman. Doctor, you said you 
want the most cost-effective plan, and your program here is 
based on the average wholesale price, correct?
    Mr. McClellan. Our program is not generally based on the 
average wholesale price. As you know, drugs that are covered by 
Medicare today----
    Mr. Stupak. What is it based on?
    Mr. McClellan. Our plan would be based on private sector 
competition, the same kind of approach that is used for the 
vast majority of Americans who have drug coverage today.
    Mr. Stupak. What is the private system? That is the price 
that is set by the drug companies, right?
    Mr. McClellan. The private system uses a mechanism for 
negotiating discounts from drug manufacturers to get prices 
down in health insurance plans. These discounts can range 
anywhere from 10 to 40 percent. They are not set by the 
government, they are negotiated by the private sector through 
competitive means.
    Mr. Stupak. Well, let us talk about your plan then because 
probably the most effective lowest price drugs come from the 
Federal Supply Service, FSS, correct?
    Mr. McClellan. The Federal Supply Service is one way of 
getting lower prices for more drugs.
    Mr. Stupak. We have done these studies in 1998----
    Mr. McClellan. And as you know, there are some questions 
about whether it is working effectively.
    Mr. Stupak. [continuing] and here is a copy of it right 
here. Federal Supply Service was the lowest price cost drugs. 
Those are drugs that the Federal Government buys for the VA, 
for Medicaid, for Indian Health Services, and other 
beneficiaries, and we negotiate--the Federal Government--the 
best possible lowest price. And study after study has shown it 
is by far about 40 percent less than the average wholesale 
price, the independent price, the chain price, the major 
wholesaler price.
    So, under your proposal then, are you going to guarantee 
that seniors will actually receive any savings?
    Mr. McClellan. Yes, we would expect seniors to receive 
significant savings through two means. One is through lower 
negotiated prices--and we want prices to be negotiated 
competitively, we don't want the government----
    Mr. Stupak. Lower negotiated prices, who is going to 
negotiate that price, the Federal Government or drug----
    Mr. McClellan. The same kinds of organizations that 
negotiate lower prices on behalf of the health insurance plans 
used by millions of Americans today.
    Mr. Stupak. So that is one way, you are going to have these 
drug managers negotiate price. What is the other way?
    Mr. McClellan. And the second approach is that--as you 
know, there is more to lowering drug expenses for seniors than 
just lowering prices. There are valuable tools provided to give 
seniors advice about generic alternatives. I think AARP is soon 
going to be working on a campaign about that, so making better 
information available to seniors about how to manage their drug 
costs.
    Mr. Stupak. Information and your price managers. I am 
trying to move on here because I have a number of questions and 
am limited in time.
    Mr. McClellan. Sure.
    Mr. Stupak. So, basically--I brought up in my opening 
statement, I believe you were here, that it is like this 
National Prescription Health Plan, that would be one way, 
right, using a card?
    Mr. McClellan. I don't think from the description I heard 
of that plan, that would be a drug card that would get any kind 
of Medicare endorsement. I think that is exactly why we need a 
Medicare-endorsement process.
    Mr. Stupak. Do you think Medicare is going to endorse which 
companies can do these drug cards out to seniors?
    Mr. McClellan. That is right. Medicare is going to set some 
standards that would make sure that companies are providing 
assistance with a full range of drugs, are offering lower 
prices through manufacturer discounts----
    Mr. Stupak. So, as you are guaranteeing which plans, then 
tell me, if you will, what kind of discounts will seniors get?
    Mr. McClellan. We think that the private sector would 
provide significant discounts. In the analysis that we did 
accompanying our release of the Notice of Proposed Rulemaking 
on this----
    Mr. Stupak. Significant discounts. Can you tell me 10 
percent, 20 percent, 30 percent?
    Mr. McClellan. Sure. Our analysis indicated savings of up 
to 15 percent on average for all seniors.
    Mr. Stupak. Fifteen percent, off of what----
    Mr. McClellan. Off of the----
    Mr. Stupak. [continuing] the average wholesale price or the 
price set by the----
    Mr. McClellan. Off of the price that seniors are paying 
today. Seniors are among the only people in the country----
    Mr. Stupak. [continuing] That seniors are paying today.
    Mr. McClellan. Right.
    Mr. Stupak. What seniors are paying today is the amount set 
by the drug companies. So, it would be 15 percent off the price 
set by the drug companies.
    Mr. McClellan. Well, and whatever markup the pharmacies 
provide but, as you know, that is a small markup.
    Mr. Stupak. All right, pharmacies is very small, 1, maybe 2 
percent, at most.
    Mr. McClellan. Well, it is more than that, but it is small.
    Mr. Stupak. The amount we pay is set by drug companies. 
That is what we do right now, and under your plan that will be 
the plan in the future. Whatever they set----
    Mr. McClellan. No. Seniors would get lower prices from the 
ability of the cards to negotiate and get lower prices from 
drug manufacturers. That is what cards like----
    Mr. Stupak. Here is what the pharmaceutical is going to 
charge you. There is going to be about 15 percent off, you 
think. Tell me, does the drug proposal require the discount to 
be passed on to the seniors?
    Mr. McClellan. The drug proposal would encourage seniors to 
sign up for cards that pass on discounts. Right now, seniors 
pay a full markup from manufacturers, private plans pay much 
less.
    Mr. Stupak. You said ``encourage.'' It does not require 
them to pass on that 15 percent to seniors because that 15 
percent can be given in other type of services, as you 
indicated, like talking to them about their drugs or counseling 
them about their drugs.
    Mr. McClellan. Well, that seems like a worthwhile option. 
If seniors want more valuable services along with the drugs, we 
want to encourage that.
    Mr. Stupak. Agreed, good option, but it is not a 15 
percent--does not necessarily have to then come off the drug, 
the cost of these other services.
    Mr. McClellan. I am sorry, I misunderstood. The 15 percent 
is the savings in drug prices that seniors would realize on 
average, and for some cards the savings could be much larger, 
like the low-income cards that are now going to be widely--and 
we hope very widely--available with our help to seniors savings 
of 20 to 40 percent off what they are saving now--or off what 
they are paying now.
    Mr. Stupak. We have got a system here designed that drug 
companies will determine the amount, you are hoping they will 
get 15 percent off, that 15 percent does not necessarily have 
to come off the price of the drug, that can go for other 
services.
    So, in short, you really believe that it is a good idea for 
Medicare, a program that is really recognized and respected by 
our seniors, to give its endorsement to these discount cards 
when the cards don't even have a discount that has to be given 
to the beneficiaries?
    Mr. McClellan. We think it is a good idea for Medicare to 
use the same kind of approach that has worked well for millions 
of Americans, to get much lower prices for their drugs than 
seniors are paying today. Seniors are paying full price today. 
People in private industry are paying up to 40 percent off.
    Mr. Stupak. What are you going to do about the cost of 
drugs? You are going to give them 15 percent off. Last year--
the numbers just came out about 2 weeks ago--it went up almost 
18 percent. So after 1 year on your program, the seniors are 
now 3 percent in the hole from where they were from the time 
they signed up.
    Mr. McClellan. That is the problem with rising drug costs, 
and that is why we need a Medicare prescription drug benefit 
along with other assistance implemented as soon as possible.
    Mr. Stupak. But you are going to do nothing----
    Mr. McClellan. No, we are going to implement a drug 
benefit, and we are going to take these steps to get prices 
down. Seniors are paying too much. They are paying the full 
list price for drugs. People in private insurance are getting 
anywhere from 10 to 40 percent off. We want those same kinds of 
savings available to seniors.
    Mr. Stupak. Other than the card----
    Mr. Bilirakis The gentleman's time has expired.
    Mr. Stupak. If I may just follow up----
    Mr. Bilirakis. Very quickly because what happened is we 
didn't set the clock when you first started, so you are 
probably on your seventh question.
    Mr. Stupak. Thank you, Mr. Chairman. So, other than this 
card which may give you 15 percent off, there is no other way 
to control the cost of the rising pharmaceuticals we pay every 
day?
    Mr. McClellan. According to CBO, the kind of approach that 
we are advocating is the approach that would provide the most 
savings for seniors and the most reduction in the cost of a 
drug benefit of any of the major proposals that have been----
    Mr. Stupak. That is for the government, but not for the 
beneficiary.
    Mr. Bilirakis. The subject of possibly another hearing. Mr. 
Deal to inquire.
    Mr. Deal. Thank you, Mr. Chairman. I would like to first of 
all ask you with regard to the Medicare+Choice programs, did 
most of those provide some form of prescription drug benefit as 
a component?
    Mr. McClellan. Historically, the vast majority of 
Medicare+Choice programs have well over 90 percent until just a 
year or 2 ago.
    Mr. Deal. Do you have any information as to whether or not 
that component of the Medicare+Choice package was a reason why 
many have now withdrawn from the program because of the cost of 
doing that?
    Mr. McClellan. The overall problem is one of Medicare 
reimbursements not keeping up now for year after year, with the 
cost of providing a modern benefit package including 
prescription drugs.
    As you know, since the Balanced Budget Act was implemented, 
the payments to Medicare+Choice plans in the vast majority of 
parts of the country have fallen well behind not only their 
cost increases, but the payment increases in the fee-for-
service program, and it is that differential that is making it 
more and more difficult for the plans to continue in the 
program and offer a modern benefit package.
    Mr. Deal. And the prescription drug component of it 
complicated it even further.
    Mr. McClellan. Absolutely.
    Mr. Deal. Is there any indication as to those plans whether 
or not the addition of the pharmaceutical benefit caused a 
significant increase in usage of pharmaceuticals as a result of 
that option being offered?
    Mr. McClellan. That is a good question. I think evidence--
and I don't have it all at my fingertips and I will try to 
follow up with you on that--I think there is some evidence that 
providing prescription drug coverage does lead to more use of 
prescription drugs, however, the way that a lot of these 
Medicare+Choice plans have provided the drug coverage is in 
conjunction with other benefits that are not available in 
Medicare as well. These are things like disease management 
programs, preventive benefits, wellness programs, all of which 
encourage more appropriate use of all the many complex 
medications that are out there.
    So, offsetting the fact that lower prices make it easier 
for seniors to use more drugs, is the fact that these programs 
enable them to use drugs more cost-effectively and to keep the 
overall costs down. These are benefits that I think are 
extremely important for seniors and need to be much more widely 
available in conjunction with the drug benefit.
    Mr. Deal. I understand that obviously the use of certain 
pharmaceuticals reduce the cost in other components of the 
Medicare service delivery package, but I would think it would 
be very difficult to project cost because of this extra usage 
component--very difficult to project the cost of a 
pharmaceutical program because I don't think you can really 
look at the Medicaid as a true indicator of what the cost is 
going to be. There is just really an unknown factor there in 
terms of what increased usage there might be to expand the 
benefit.
    Mr. McClellan. Yes, sir, I think that is true. We are 
obviously facing a lot of uncertainty here.
    Mr. Deal. But even with the best of certainty, your 
indication is that if we were to look at a universal plan such 
as has been discussed previously here of some $750 billion over 
a 10-year period, that that would have serious, serious 
consequences on the financial stability of Medicare. I believe 
you indicate that if that were done, that in 6 years, by 2008, 
it would start going in the red again and would be bankrupt in 
14 years. That is serious consequences as far as I would be 
concerned.
    Your projections, too, of the cost, as I understand it, you 
are saying that today the cost of Medicare, as we know it, is 
roughly 2 percent of GDP.
    Mr. McClellan. That is right.
    Mr. Deal. And if we added a prescription drug benefit, that 
by the year 2030 that prescription drug benefit alone would be 
2 percent of GDP.
    Mr. McClellan. Would be almost 2 percent of GDP, and by 
2030 as well the cost of Medicare's existing benefit----
    Mr. Deal. Is going to double.
    Mr. McClellan. [continuing] will have gone from 2 to 4 
percent of GDP.
    Mr. Deal. So we are faced with this multiplication factor 
that goes into place. I have just done some real quick 
calculating here. My only grandchild is going to be 30 as of 
2030, and if that is the case, the way I calculate it, she 
would have to pay about $550 a month just to sustain the cost 
of Medicare with that kind of drug component in it, $6,600 a 
year. I personally don't think that is a sustainable demand, 
and I compliment you for the proposal that approaches this in a 
much more modest fashion.
    I think all of us get carried away in making promises on 
something that sounds good, but the most unsustainable of 
options is not the best in the long-term. And I compliment you 
for the proposal that you have made.
    I assume, too, in the drug card program that you are 
proposing, that negotiated savings are what you anticipate is 
going to happen, and competition, of course, I think would 
stimulate those increased savings. Is that part of the factor?
    Mr. McClellan. That is correct, and we have started to see 
that already with some of the drug cards that have become 
available since the administration's announcement.
    Mr. Deal. Thank you, Mr. Chairman.
    Mr. Bilirakis. Ms. Eshoo to inquire.
    Ms. Eshoo. Thank you, Mr. Chairman, and thank you, Dr. 
McClellan, for your testimony today. Just a quick, but I think 
very important observation. There seems to be a highly 
concentrated effort here today to continue to describe what the 
burdens of a cost of a benefit would be in Medicare for a 
universal benefit.
    Woe is America, woe is every American, woe is every future 
generation, if we do this, if we make this a benefit through 
coverage through Medicare.
    What I have to observe--and I keep reading what CBO comes 
out with but, of course, the administration doesn't want to pay 
any attention to CBO, which is very interesting--I really think 
that the Republican mantle that has been carried for years 
about fiscal responsibility has not only fallen down, but it 
has crashed into a thousand pieces because what the 
administration is ignoring is fiscal responsibility of a $4 
trillion cost of making the tax break package permanent. That 
is being ignored, and the concentration of the effort is on 
this. In fact, we would have the resources for homeland 
security, for prescription drug coverage benefit in Medicare, 
and the war on terrorism, as well as our other 
responsibilities, but for this fiscal irresponsibility or the 
overlooking of and leapfrogging over what is going to come to 
the floor.
    So, when you are here representing economics, I think there 
is a 10,000-pound gorilla sitting in the middle of the room 
that is being ignored. And that is why I want to make this 
observation.
    I have two questions for you. In your testimony, you 
outline the President's vision for the drug benefit to protect 
seniors from catastrophic drug costs. Specifically, you say 
that many seniors have annual drug costs of under $500. I think 
your details are a little vague, and I am concerned that the 
plan creates a huge gap in coverage for those who have moderate 
to high drug costs perhaps of $100 per month. Can you tell us, 
or give us some more specifics, about how the President's plan 
is going to help those seniors, many who have incomes of less 
than $30,000 a year?
    And my second question is that in the President's Budget, 
in order to pay for prescription drug benefits, he has said 
that the AWP must be fixed. He accounts for it being fixed in 
his budget, but doesn't say how. Can you tell us how?
    And then the third point that I want to make is, what I 
want to give to you--and then I would like you to respond to me 
in writing--is the bill that I introduced, that I referenced in 
my opening statement. It has a voluntary Part B. There is stop-
loss coverage. There is competition through PBMs, and the OPM 
is the administrator, and not HCFA--I know we changed the name 
of HCFA, but I can't think of it--so to address that whole 
bureaucratic whatever issue. And I really would like a serious 
response to that.
    I think, obviously, that it is a helluva bill because it 
incorporates both coverage and public-private issues and 
competition. So, I want to give that to you and ask you to 
respond in writing, but if you could just comment on the two 
questions that I posed and, again, thank you for being here 
today. And you know that I don't agree with you, but obviously 
you are the game in town. You are the ones that we have to work 
with, but I think that we are fiddling while this issue burns 
across the country. Again, I want to acknowledge what others 
are doing, cards and discounts and all of that. But you know 
what, it is an attempt--and I think it is wrong to ridicule it 
and whatever, I am not here to do that. And I thank people for 
attempting to do something, but it is not going to do what 
needs to be done in terms of insurance coverage. Take it to 
your mother and explain it to her, Mr. McClellan. I have had a 
chance to do that already.
    Ms. Eshoo. She will give you hell. She is going to say, 
``It sounds terrific, but how does this work for me?'' So, your 
answer----
    Mr. McClellan. Very good question, and maybe a couple of 
minutes----
    Mr. Deal [presiding]. Well, the lady expired all of her 
time with her question, but we will allow you to respond.
    Mr. McClellan. We will take a close look at your bill. I 
think we have already had some opportunity to look at it, and 
especially if you have got a proposal for how the bill is paid 
for, you know, how it fits into a Budget Resolution which we 
are still hoping to see from the Democrats, that will be very 
useful because that would give us some confidence about making 
sure that this is a benefit that will really be there in the 
years ahead for the Baby Boom.
    With respect to your two questions, all of us here are 
clearly supportive of a comprehensive drug benefit for low-
income seniors, so that is going to be included in any kind of 
prescription drug bill----
    Ms. Eshoo. Why is that only low-income people get sick?
    Mr. McClellan. No, I didn't say that.
    Ms. Eshoo. What about others? How do they get----
    Mr. McClellan. The lower-income seniors are the ones that 
have the least ability to pay for their own benefit, and just 
as with other aspects of Medicare, there will be a basic 
benefit package that they would be in, a prescription drug 
benefit for all seniors, and they would get additional help so 
that they would have minimal out-of-pocket payments since they 
are least able to afford it.
    Beyond that, on both of these questions, I think my answer 
is in part going to be we want to work with you on this, on the 
drug benefit design. I think we, the committee, Ways and Means 
and so forth, all envision having a drug benefit that does more 
than just provide some back-end catastrophic or high expense 
protection, which I think we all agree also is very important. 
So we would be happy to work with you on ideas on how to 
specify that, and we do think that all seniors need some 
additional assistance beyond catastrophic-only.
    With respect to the AWP question, as we said in our budget, 
we want to work very closely with Congress on developing and 
implementing the best possible idea for reforming that payment 
system. Everyone agrees it doesn't work. You all have had 
extensive hearings about it. There is clear bipartisan support 
for moving forward. I know there are some ideas being developed 
around here on moving to an average sales price approach. Those 
are very good ideas, and our main goal is just to do this 
effectively and do this this year, and do it in a way that 
preserves access to Medicare drugs through fair payments, and 
also preserves adequate reimbursement for the physicians and 
others who are prescribing these drugs. We will do it this 
year.
    Mr. Deal. The Chair recognizes Mr. Barton.
    Mr. Barton. My question is a little bit simpler than 
Congresswoman Eshoo's. She knows the buzz words a lot better 
than I do. I couldn't even understand her question, it was so 
intelligent and well meaning.
    I come at this a little bit different way. I think our 
entire health care system is verging on collapse. It is very 
complicated. Patients are frustrated. The doctors are 
frustrated. The hospitals are frustrated. We have tried managed 
care for the last 10 years. It helped restrain cost, but it had 
some quality of service problems. So I am a long-term proponent 
of totally scraping the existing system and going to Medical 
Savings Accounts where it is the doctor, the health care 
provider and the patient.
    Now, in all this debate on a prescription drug benefit, I 
don't see anywhere in the Bush Administration any cognizance of 
the fact that we could do a prescription drug benefit savings 
account. So, as I said in my opening statement, I am working 
with Congressman Johnson on the Ways and Means Committee, and 
we are going to come up with some proposals that we are going 
to share with our colleagues on using a prescription drug 
benefit savings account approach where the money could be used 
for any number of options which might have to be precleared 
by--and I don't know what the success or buzz word is for HCFA 
either, so I will use HCFA, too. Has the administration looked 
at a prescription drug benefit savings account as an option, 
maybe either as a stand-alone option or as an option where you 
put the money in and you let the marketplace develop the 
option?
    Mr. McClellan. We have certainly looked at the general idea 
of that, but we would be very interested in seeing your 
proposal. As you know, we have been trying to work fairly 
closely with the committees in coming up with a consensus 
approach that is going to give seniors protection against very 
high costs, and it is going to provide a benefit that is 
effective and that will keep the cost down in the long-run.
    As you know, more generally, the administration strongly 
supports improving the existing medical savings account options 
that are available to Americans, and we would like to see an 
option for that approach to be available to seniors as well. It 
is clearly not working under the Medicare+Choice system, but we 
would be very interested in pursuing that.
    Mr. Barton. If you look at your bullets on page 3 of your 
written testimony, none of those general policy goals seem to 
be at variance with an option of a prescription drug benefit 
savings account either as the option or as one of several 
options that seniors could choose from. And that is all I am 
asking, is that we give it a chance because we have had several 
members talk about their mothers and their fathers. I will 
guarantee you, my mother--my father is deceased, but my mother 
has had years where she used almost no prescription drugs. She 
was very healthy. And then she has had two heart operations in 
the last 2 years, and now she is using a lot. So, if you had a 
savings account approach, in the lean years you save up and 
have some sort of a catastrophic prescription drug benefit, and 
in the years you need it, it is there, and it is money that is 
your money, and you work with your health care provider. I 
think it would be at least an option that a lot of seniors 
would look at.
    Mr. McClellan. Well, clearly, some new ideas are needed for 
keeping costs down and delivering effective care and, as you 
have said, what we have tried to do is lay out some general 
guidelines in our framework and then work closely with you here 
in the Congress----
    Mr. Barton. It is not something that you in your position, 
or others in the Bush Administration have taken off the table. 
It is something that you will work with us on, at least to 
pursue in a serious vein.
    Mr. McClellan. We would certainly like to pursue it in a 
serious manner. We know that time is short this year, and 
coming together in this committee and in the Ways and Means 
Committee in an approach to providing Medicare prescription 
drugs and modernizing the program effectively, but we would 
certainly like to consider all good ideas in that process, and 
this seems like it has got some promise.
    Mr. Barton. Thank you, Doctor, and I yield back.
    Mr. Deal. The Chair recognizes Ms. Capps.
    Ms. Capps. You didn't get to hear me say thank you very 
much, but I think you recognize that I did that, for the time 
that you have spent with us.
    I appreciate the seriousness of this topic, as you do as 
well, and I want to ask you a question based on your premise 
that of course our goal long-term is to include a prescription 
drug benefit as a part of Medicare so all seniors can take 
advantage of it, or at least something thereabouts, that that 
would be the ideal plan. And several who have also espoused the 
President's plan have reiterated that overlying goal. And I 
guess it is maybe too simple a question, but I would like to 
have you respond with when would such a time be? What would the 
scenario be that would allow us to consider this and what 
ingredients are now present today?
    I mean, we are now on the edge of the Baby Boom generation 
wanting to take advantage of the benefits of Medicare. And what 
would we need to have in place so that we could consider a 
universal--a Part D, if you will, of Medicare that includes 
prescription medication?
    Mr. McClellan. Let me be very clear that the President 
wants to see legislation enacted this year that provides a 
prescription drug benefit for all seniors--for all Medicare 
beneficiaries.
    Ms. Capps. This year?
    Mr. McClellan. This year. And he would also like that 
legislation to include the key steps that would be needed to 
make sure that we implement that benefit as quickly and as 
effectively as possible.
    Ms. Capps. Why don't we start on that now, then?
    Mr. McClellan. I couldn't agree with you more. So we would 
love to see this legislation include the prescription drug 
benefit and include a clear path for getting from here to there 
as quickly as possible, and for helping as many seniors on the 
way as possible. That is what we want.
    Ms. Capps. Well, then I propose that we--any plan that is 
an intermediary plan that is as widespread as Medicare that 
covers so many seniors is going to take some time and cost to 
implement. If we waste our time, if you will, on a first step, 
we will probably not get to the ultimate goal.
    But I want to shift a bit because Medicare was instituted 
in the 1960's because the private sector couldn't deal with 
health care for seniors, and we didn't include prescription 
drugs then. People acknowledge there weren't as many, but now 
it is a very different scene. However, you want us to be cost-
effective, and I just want you to comment on the fact that the 
Federal Employees Health Benefit Plan premiums went up 13 
percent in 2002. I acknowledged in my opening remarks that the 
1.2 million member California Public Employees Retirement 
System--it is supposed to be a really hard-nosed plan--has just 
announced that they are going to have premium increases of 13 
to 41 percent. This is in California where managed care has 
reigned supreme for a long time. We have many, many plans 
there. That is a pretty high percentage now.
    The OMB has projected that Medicare itself will increase 4 
percent between 2003 and 2012. Comment, if you would, on those 
comparisons.
    Mr. McClellan. I think they all go to the point that we do 
need to take action now to provide more assistance for 
seniors--and for other Americans, frankly--who are having 
trouble affording health care. I come from California as well, 
before being in the administration. Actually, Representative 
Eshoo is my representative. And I saw first-hand in my practice 
the consequences----
    Moving right along with this question, I actually was 
already moved to Washington by the time of the last election--
seeing first-hand in my practice the consequences of people not 
being able to afford health care, and it is not just seniors, 
it is many working Americans, people that have health insurance 
and are worried about losing it, and the growing number of 
people who are just deciding they can't possibly afford it. We 
need to do a lot more.
    I don't know that a solution is an approach that involves 
price controls. We have the most innovative privately based 
health care system in the world, and the kinds of medical 
technologies that have been made available in the past 30 years 
I think are just a fraction of what we are going to see over 
the next 30, if we keep encouraging that. It is probably going 
to cost more in the process, and that means that we need to pay 
very careful attention to doing all we can to help as many 
Americans as possible meet those rising costs. I very much 
appreciate your interest in trying to do that with the Medicare 
program here today.
    Ms. Capps. Well, the fact that you are--I guess I am quite 
surprised to think that the President would say that during 
this year we could consider a prescription drug benefit under 
Medicare, and with all due haste I believe we should set aside 
the intermediary step and get right to that most pressing task 
at hand. Thank you.
    Mr. Deal. The Chair recognizes Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. I do have a number of 
comments and some questions that certainly I feel like could be 
addressed, but I understand that our witness is very late for a 
press conference, and I simply will waive all that to the 
extent that I don't go ahead and submit statements to you for 
your answers to be late-filed. But I also want to commend the 
administration for your efforts and your support in this very 
important issue, and with that I will yield back the balance of 
my time.
    Mr. Deal. Thank the gentleman. The gentleman from 
California.
    Mr. Waxman. Thank you, Mr. Chairman, and Dr. McClellan, it 
is nice to see you here. I was concerned about this waiver 
program where the States, if they offered a prescription drug 
coverage, they could get Federal support for it. I think this 
was known as the administration's Health Insurance Flexibility 
and Accountability Act waiver process for drug-only pharmacy-
plus waivers.
    The pharmacy-plus-waiver proposal allows the States to get 
the Federal Medicaid funding for State-only programs that are 
currently in operation. It buys out the State programs, in 
effect. Will the pharmacy-plus-waivers require that the State 
expand coverage beyond the current level in order to be 
eligible for a Federal buyout for the program?
    Mr. McClellan. The entire point, as you know, of the 
pharmacy-plus-waiver program is to expand coverage. So, yes, we 
expect to see coverage expansions in every proposal we get. 
That has certainly been the case so far with the ten States 
that have either submitted applications or expressed interest.
    Mr. Waxman. Well, at a time when people believe that we 
can't afford a generous Medicare drug benefit because of budget 
pressures, aren't we spending Federal resources on programs 
that are already operational? Is there a requirement of new 
coverage, or are we simply going to supplant what the States 
are already doing?
    Mr. McClellan. The pharmacy-plus-waiver is intended to 
expand coverage, and your staff, I believe has seen--if they 
haven't, let me know and I will get it to you--the draft 
documents describing the details of the pharmacy-plus-waiver 
process. So, if there are some concerns about this not going 
far enough to encourage expansions of coverage, I hope you will 
let us know. We haven't finalized that yet, but absolutely the 
intent is to get States to expand coverage as much as possible.
    As you know better than anybody here, under Medicaid we 
can't require States, the scope, the duration, the content of 
benefits, all----
    Mr. Waxman. You can't require it, but there are some 
Medicaid standards in effect if they do have drug coverage. 
Would this waiver allow the States the option of less than the 
Federal requirements if a drug program is adopted by the State 
for their Medicaid population?
    Mr. McClellan. The Medicaid requirements for drug benefits 
would be the same as under current law. We are not changing 
current law, so the States have the freedom now to design 
waivers in terms of the scope and content.
    Mr. Waxman. Well, what I am asking is, if they want a 
waiver to include a new population in addition to the Medicaid 
population that is already there, would this waiver allow them 
to have a drug benefit that is less than what they have for 
their Medicaid population that is already covered?
    Mr. McClellan. For their existing population, it could. 
They could have higher co-pays. They could use different 
formulary structure, but the point would be, as you said, to 
expand coverage.
    Mr. Waxman. Well, I am troubled by that because then you 
have two classes of low-income people. One group will have more 
generous coverage for pharmaceuticals, another group could have 
less generous coverage for pharmaceuticals and, of course, at 
some point the State will say, ``Well, why don't we just make 
it all the same,'' and it is unlikely they are going to make it 
all the same for the higher benefit, they are going to make it 
all the same for the lower benefit.
    But isn't all this supposed to be cost-neutral?
    Mr. McClellan. Yes, it is supposed to be cost-neutral and, 
yes, we are concerned about the two different classes of low-
income citizens. I am actually more concerned about the two 
classes that exist now, those with coverage and those with no 
coverage at all.
    The way that this would be budget-neutral is, there are two 
main mechanisms. One is that there is clearly a number of 
people who are near the Medicaid eligibility line that in order 
to get drug coverage--and now, under current law, they have to 
get the entire Medicaid benefit package--so they will adjust 
their income downward, they will take steps to become eligible 
for Medicaid. They will become eligible for the entire Medicaid 
benefit package which is more costly than the direct coverage 
that they really need.
    Mr. Waxman. The cost-neutrality I was concerned about was a 
requirement of the States that if they get this waiver, they 
have got to make sure they are not spending anymore on the 
Medicaid program than they already are.
    Mr. McClellan. They have to do it in a budget-neutral way, 
that is right.
    Mr. Waxman. How would they do that? This is not a capped 
program. Would they have to anticipate their cost, make an 
evaluation of what the cost would be, and then stay to those 
costs? In other words, internally the State would have to 
figure out how to cap their programs so that they are not 
spending anymore overall on Medicaid.
    Mr. McClellan. My guess is that different States will take 
different approaches, and certainly different States have 
expressed interest in different kinds of approaches in their 
discussions with CMS so far.
    Mr. Waxman. They have to come in and talk to you and you 
have to approve them, or HCFA--the administration--and they 
will have to say, ``Well, we want this ability to cover drug-
only Medicaid, but we want it to be cost-neutral, and this is 
how we are going to have it cost-neutral,'' so you are going to 
have to approve whether it is really cost-neutral or not. What 
will you tell them if they ask you, ``How do we show the cost 
neutrality,'' will you require them to cut back on other 
benefits for people under Medicaid, to pay these new benefits?
    Mr. McClellan. It is true that one way to do it--and this 
may be what you are getting at, I am sorry if I missed that 
earlier--is that States could achieve budget neutrality by 
finding more cost-effective ways of delivering their Medicaid 
benefits. They could do that for the new population, they could 
do that for some of that for some of their old population, for 
example, by going to a private sector coverage----
    Mr. Waxman. If they can do something cost-effective, why 
aren't they doing it? After all, the States are putting in 
money. I think cost-effective becomes a euphemism for cutting 
back on a lot of low-income eligibility, don't you think that--
--
    Mr. McClellan. Well, we are certainly worried about that, 
and we think that the more that we can do to help States manage 
their benefits cost-effectively, the less real cutbacks we will 
see. There is a lot of pressure right now, as you know, for 
States to cut back their Medicaid programs, and we think that 
anything we can do to help them find more cost-effective ways 
of managing their benefits, keeping those benefits and 
hopefully expanding them is the right way to go.
    Mr. Waxman. Well, I think you ought to do that with an 
increase in the Federal match, and then we can make sure that 
they will have the resources to do it. My time is expired. 
Thank you, Mr. Chairman.
    Mr. Deal. I understand Mr. Gordon, a member of the full 
committee, has questions. Mr. Gordon.
    Mr. Gordon. Thank you, Mr. Chairman. Dr. McClellan, you 
have been in the hot seat a long time, so I will try to be 
quick here, and my apologies to the second panel that I know 
would like to get up and going, but I wanted just to follow up 
on a line of questioning.
    Within the context of Medicare, when a new drug is 
introduced and the drug is priced in such a way that it 
provides a financial incentive to the physicians and hospitals 
via higher AWP, what action can the CMS take to assess the 
impact on the Federal budget relative to the new drug?
    Mr. McClellan. CMS has--you are asking about a policy 
change and the way that we reimburse drugs under AWP, or an 
alternative mechanism?
    Mr. Gordon. Yes.
    Mr. McClellan. CMS has the flexibility under current law to 
adjust payment systems in cases where there are overpayments 
and Medicare is not billing efficiently. As we made clear in 
our Budget Proposal this year, we have some ideas about how to 
potentially do that for overpayments in the AWP system, 
recognizing the need to provide adequate reimbursement for the 
drugs and for the services in providing them.
    We would like very much to work with your committee in 
finding the most effective way to do that, and doing it 
legislatively would be just fine with us. We have participated 
in the hearings that you have had on this topic late last year, 
and I think we are working fairly closely with your committee 
now on ideas for going forward on finding a better payment 
system for correcting the imbalances in the AWP system.
    Mr. Gordon. And do you have a way to assess that impact on 
the budget?
    Mr. McClellan. We would, in conjunction with any kind of 
proposal, any kind of specific proposal, do a cost analysis, 
certainly.
    Mr. Gordon. What action can CMS take to reduce the cost to 
the system when there is a financial incentive that is provided 
to the hospitals and physicians by drugs with higher AWPs and 
currently covered by----
    Mr. McClellan. I think the goal is to get rid of the 
disturbing financial incentive of--that is created by basically 
the overpayment. If the hospital gets reimbursed at a much 
higher price than they are getting the drug for, and that they 
need to cover the cost of administering the drug as well, if 
there is a big margin there, then, sure, that is going to 
provide an incentive for hospitals, and doctors for that 
matter, to use those kinds of drugs in cases where they may not 
be the most appropriate or effective treatment, and it is 
exactly that problem that we would like to address, working 
with you, but, if necessary, we would address late this year or 
sometime soon, administratively.
    Mr. Gordon. Thank you, Dr. McClellan. Thank you, Mr. 
Chairman and Ranking Member Brown.
    Mr. Bilirakis. You are welcome, sir. I think that finally 
we can excuse Dr. McClellan.
    Mr. McClellan. Thank you, it has been a pleasure.
    Mr. Bilirakis. Thank you. Thank you so much for being here 
and for working on this issue, and it is a very important one 
to all of us not only politically, but practically out there, 
and we look forward to continuing to work with you. Thank you 
very much.
    The next panel consists of Dr. Brian Tyler, Senior Vice 
President for Business Development and Strategy with McKesson 
Corporation; Mr. Michael Hillerby, Deputy Chief of Staff for 
Nevada Governor Kenny Guinn; Mr. Craig Fuller, President and 
CEO, National Association of Chain Drug Stores; Dr. Patricia 
Neuman, Vice President, Kaiser Family Foundation, Director of 
Kaiser's Medicare Policy Project; Dr. Beatrice Braun, Board of 
Directors, American Association of Retired Persons, and Dr. 
Jeanne Lambrew, Associate Professor, George Washington 
University.
    Welcome. Thank you so much for your patience and for your 
understanding. Some of you have done this before, many like Dr. 
Braun many times, so you understand what it is like just 
sitting there waiting and waiting and waiting. We have been 
fortunate we haven't had any votes called, probably be another 
hour or so before we have any called, so hopefully we can 
continue on pretty well. I am advised by staff that I should 
start with Dr. Lambrew, so we will set the clock at 5 minutes 
and hopefully you all can sort of convey your message to us 
within that period of time, and continue on when we inquire 
with our questions. Dr. Lambrew, please proceed.

 STATEMENTS OF JEANNE M. LAMBREW, ASSOCIATE PROFESSOR, GEORGE 
  WASHINGTON UNIVERSITY; BEATRICE BRAUN, BOARD OF DIRECTORS, 
AMERICAN ASSOCIATION OF RETIRED PERSONS; PATRICIA NEUMAN, VICE 
   PRESIDENT, KAISER FAMILY FOUNDATION, DIRECTOR OF KAISER'S 
 MEDICARE POLICY PROJECT; MICHAEL D. HILLERBY, DEPUTY CHIEF OF 
STAFF FOR NEVADA GOVERNOR KENNY GUINN; CRAIG FULLER, PRESIDENT 
 AND CEO, NATIONAL ASSOCIATION OF CHAIN DRUG STORES; AND BRIAN 
   TYLER, SENIOR VICE PRESIDENT FOR BUSINESS DEVELOPMENT AND 
                 STRATEGY, McKESSON CORPORATION

    Ms. Lambrew. Thank you, Chairman. Thank you, Congressman 
Brown and distinguished subcommittee members. I am an Associate 
Professor at the George Washington University, who worked for 
the previous administration, and I would like to address this 
issue of the President's Proposal for low-income drug benefits.
    There is no question that low-income Medicare beneficiaries 
need extra assistance in affording prescription drugs. As 
previous witnesses have described, low-income beneficiaries, 
like other beneficiaries, face high prescription drug costs, 
but have far fewer resources to pay for needed medications.
    Recognizing this, all major legislative proposals to add a 
prescription drug benefit to Medicare have, to different 
degrees, provided extra assistance to make Medicare drug 
coverage affordable for low-income beneficiaries. The question 
is whether Congress should create a new low-income prescription 
drug benefit to provide relief before the implementation of a 
Medicare drug benefit.
    As Dr. McClellan testified, the President's proposal will 
allow States to receive Federal matching payments up to 90 
percent for extending prescription drug coverage to Medicare 
beneficiaries whose income is below 150 percent of poverty. 
This proposal costs $77 billion over 10 years according to the 
administration, $57 billion over 10 years according to the 
Congressional Budget Office.
    Some low-income seniors in some States would likely benefit 
from a State-based low-income prescription drug policy prior to 
the implementation of a Medicare benefit. However, I would like 
to make four points about this proposal.
    First, all States will not opt to extend prescription drug 
coverage to additional seniors. States are strong and essential 
partners in providing health care to vulnerable populations. 
The success of the Children's Health Insurance Program proves 
that States can come to the plate when there is bipartisan and 
Federal and State agreement on the goal. However, there is no 
such agreement when it comes to Medicare beneficiaries.
    States argue that the Federal Government should bear the 
cost and responsibility for seniors health care, including a 
prescription drug benefit. Medicaid already pays for one-fifth 
of the Nation's prescription drug spending, and while there are 
many non-Medicaid programs aimed at filling benefit gaps, 
States have only invested $1.7 billion in these programs, less 
than 2 percent of all drug spending for Medicare beneficiaries 
in 2002.
    The increased Federal contribution may not be enough to 
offset concerns about the rising cost in strained State 
budgets. Moreover, States may not want to make investments in 
temporary programs. Under all proposals, Medicare will assume 
responsibility for prescription drugs when its benefit finally 
takes place. Reflecting these issues, the Congressional Budget 
Office assumed that States with 35 percent of eligible low-
income Medicare beneficiaries would not participate in the 
President's plan.
    My second point is that State-based low-income programs may 
miss many eligible seniors. Nearly one in four Medicare 
beneficiaries is eligible for some type of Medicaid assistance, 
yet only about 45 to 55 percent of eligible beneficiaries are 
estimated to enroll in such programs. Some of this may be 
explained by lower priority given to States to the elderly 
versus other populations like children. There also may be lack 
of information, misperceptions about eligibility, and a 
reluctance to ask for help.
    My third point is that leaving benefit standards out of 
this proposal could cause access problems, yet putting benefit 
standards into this proposal could also cause delays in 
enactment. The President's plan appears to give States full 
discretion to define the low-income drug benefit. That means 
that they could charge deductibles as high as $500, cap 
benefits, and limit the types of drugs that are covered.
    Congress could, and probably would, limit these potential 
health and financial consequences, yet, in so doing, it may 
take time. The experience in CHIP suggests that developing 
benefit standards is not easy, and it may be even less 
contentious than the process of developing a Medicare drug 
benefit itself.
    My fourth point on a low-income drug benefit is that 
Medicare would probably provide low-income seniors with a 
better prescription drug benefit more quickly and more 
effectively than the 50 States combined. A Medicare drug 
benefit would help all low-income Medicare beneficiaries in all 
States. If enacted this year, a Medicare benefit could be 
implemented in 2005, 2 years before the Congressional Budget 
Office assumes the States that opt for the President's plan 
would fully implement their own programs.
    I would like to close by stressing the urgency of acting on 
a meaningful Medicare prescription drug benefit. The budget 
outlook, although weakened, is strong enough to fund more than 
the $190 billion allocated by the President. This amount could 
only buy a proposal like that passed by the House 2 years ago, 
which has a $72 monthly premium, includes a benefit gap of 
$4700, and does not help over two-thirds of Medicare 
beneficiaries who lack prescription drug coverage today 
according to recent estimates by the Congressional Budget 
Office.
    CBO projects that there is a Federal budget surplus of $2.3 
trillion over the next decade. A $750 billion investment, which 
would barely afford the Federal Employees Health Benefit that 
was described earlier, would represent about one-third of that 
projected surplus and, in fact, is less than the amount in the 
President's budget for Medicare and tax cuts combined.
    I would quickly like to make three observations, if I may, 
about the analysis that Dr. McClellan presented today. The 
first is, to the best of my knowledge, no Member of Congress 
has proposed to divert payroll revenue dedicated to covering 
Part A services for a prescription drug benefit. All new 
general revenue and premium contributions, to different 
degrees, to fund a prescription drug benefit.
    Second, Dr. McClellan claimed the $750 billion investment 
will cost $1.2 trillion in the next decade and that we can't 
afford that. Yet, as Representative Eshoo noted, the 
administration is advocating for extending a tax cut that would 
reduce the General Revenue base by $4 trillion by in the next 
decade. This is not a debate about resources, it is a debate 
about priorities.
    And, third, less than 10 years ago, the same CMS Actuaries 
projected that the Medicare Trust Fund would be insolvent 
today, in 2002. Congress acted, projections changed, and now 
the Trust Fund is projected to be solvent for the next 28 
years. Thus, we should take projections of what the individual 
tax burden of a drug benefit in 2030 would be with a grain of 
salt.
    I would like to close by saying that developing a 
bipartisan Medicare prescription drug benefit is a major 
undertaking that I would argue should be put ahead of all other 
Medicare reforms, as well as legislative efforts to provide 
Stopgap or interim prescription drug coverage. Each year a 
greater number of Medicare beneficiaries lose their 
prescription drug coverage. The time is right to make the 
necessary investment and enact a single Medicare reform that 
has eluded so many Congresses, the addition of a meaningful 
drug benefit to Medicare.
    [The prepared statement of Jeanne M. Lambrew follows:]
 Prepared Statement of Jeanne M. Lambrew, Associate Professor, George 
                   Washington University 1
---------------------------------------------------------------------------
    \1\ The views expressed in this paper do not represent those of 
George Washington University or the Department of Health Services 
Management and Policy.
---------------------------------------------------------------------------
    Chairman Bilirakis, Congressman Brown, and distinguished 
Subcommittee Members, thank you for the opportunity to offer my views 
on a prescription drug benefit for Medicare beneficiaries. I am an 
Associate Professor at the George Washington University. I worked for 
the previous Administration as the Principal Associate Director for 
Health, Personnel and Veterans at the Office of Management and Budget 
and at the White House National Economic Council. My past policy 
experience and current research include the study of how to best 
provide a prescription drug benefit to Medicare beneficiaries.
                                summary
    In this testimony, I would like to make two points. First, the 
quickest and most effective way to provide prescription drug coverage 
for the nation's low-income seniors--as well as middle-class 
beneficiaries who also need such coverage--is to enact a Medicare 
prescription drug benefit. Evidence and analysis suggest that a new 
low-income prescription drug program neither provides immediate relief 
to all eligible low-income seniors nor prepares states for their role 
in supplementing a Medicare prescription drug benefit. These seniors 
would receive better, more accessible and, in some states, more 
immediate prescription drug coverage through Medicare.
    Second, if adding a prescription drug benefit to Medicare is 
inevitable, now is the time to do it. A Medicare prescription drug 
benefit enacted this year would provide all beneficiaries, including 
low-income seniors, with prescription drug coverage by 2005. The budget 
outlook, while weaker than in recent years, remains sufficiently strong 
to finance a meaningful Medicare prescription drug benefit, defined as 
one that ensures continuous insurance coverage, extra protection for 
financially vulnerable beneficiaries, and an affordable monthly 
premium. With a $2.3 trillion surplus over the next 10 years, there is 
no budgetary reason to provide a drug benefit only to low-income 
beneficiaries or to skimp on a drug benefit for all beneficiaries. 
Moreover, it is probably more affordable to implement and improve a 
prescription drug benefit in this decade before Medicare is confronted 
with the challenges of the retirement of the baby boom generation. 
Finally, while other Medicare reforms are needed, none are as 
compelling or as difficult as adding a prescription drug benefit to 
Medicare. I urge this Committee and this Congress to make enacting a 
Medicare prescription drug benefit its first priority and its lasting 
legacy.
       helping low-income beneficiaries access prescription drugs
    There is no question that low-income Medicare beneficiaries need 
extra assistance in affording prescription drugs. About 40 percent of 
Medicare beneficiaries with income below $20,000 lack coverage for 
prescription drugs.1 The average Medicare beneficiary is 
projected to spend $2,440 for prescription drugs in 2003 2; 
even a fraction of this amount would consume a large proportion of a 
low-income beneficiary's income. All legislative proposals to add a 
prescription drug benefit to Medicare have, to different degrees, 
provided extra assistance to make Medicare drug coverage affordable for 
low-income beneficiaries.
    As such, the question is not whether to help low-income 
beneficiaries, it is whether Congress should create a new low-income 
prescription drug program to provide relief before the implementation 
of a Medicare drug benefit. The President has proposed to do this. His 
budget includes a proposal that allows states to:

 Extend prescription drug coverage (as a stand-alone benefit) 
        to Medicare beneficiaries with income up to 100 percent of 
        poverty, with the Federal government matching state costs at 
        the regular Medicaid matching rate (which averages a 57 percent 
        Federal contribution); and
 Extend prescription drug coverage to beneficiaries with income 
        from 100 to 150 percent of poverty, with a 90 percent Federal 
        matching rate.3
    Since this new benefit does not appear to be part of Medicaid, 
states could provide a less generous prescription drug benefit than 
Medicaid's (e.g., limit the amount of assistance) or cap enrollment. 
This Federal funding could also be used by states to refinance existing 
state pharmacy assistance program spending.4 The President's 
budget estimates that this proposal costs $77 billion over 10 years, 40 
percent of its $190 billion allocation for Medicare and prescription 
drugs. The Congressional Budget Office (CBO) estimates that the same 
proposal costs $57 billion over 10 years.5
    While some low-income seniors in some states would likely benefit 
from a state-based low-income drug policy prior to implementation of a 
Medicare benefit, evidence and arguments suggest that:

 Not all states will participate, since many want neither the 
        responsibility nor the costs of a prescription drug benefit for 
        seniors (CBO assumes that states with 35 percent of eligible 
        low-income beneficiaries would not participate in the 
        President's proposal);
 Not all eligible individuals in participating states will 
        enroll (CBO assumes that 40 percent of eligible low-income 
        beneficiaries would not participate the President's proposal);
 Lack of benefit standards could result in access problems and 
        defining benefit standards would likely cause delays in 
        enacting and implementing legislation, given experience with 
        the State Children's Health Insurance Program (CHIP); and
 Medicare could implement a prescription drug benefit faster 
        than could 50 states, and would be more effective at assisting 
        all low-income beneficiaries (CBO assumes that a Medicare 
        benefit with low-income protections would provide 100% of 
        Medicare beneficiaries with drug coverage by 2005 6 
        while a state-based low income benefit would provide 18% of 
        low-income beneficiaries and 6% of all beneficiaries with drug 
        coverage by 2007).
 These points are described in greater detail below.
    Low-income seniors in some states will not be eligible. States are 
strong and essential partners in providing needed health care to those 
low-income and disadvantaged populations who have no other health 
insurance options. Today, Medicaid covers as many people today as does 
Medicare; 30 percent of Medicaid beneficiaries are eligible at states' 
discretion.7 Recent experience with CHIP proves that 
policies to give states additional funding and flexibility--when there 
is bipartisan and Federal-state agreement on the goal--can successfully 
expand coverage and reduce the number of uninsured. In 2001, nearly 5 
million children were helped by CHIP 8 and the number of 
uninsured children in the United States fell in 1999 and 
2000.9
    However, recent arguments and evidence suggest that, even with the 
increased funding and flexibility, some states will not voluntarily 
extend prescription drug coverage to Medicare beneficiaries. Most 
governors and the National Governors' Association (NGA) have argued for 
years that the Federal government, not states, should bear 
responsibility for Medicare beneficiaries.10 States have 
expressed strong concerns about the sustainability of financing 
services not covered by Medicare and its premiums and cost sharing for 
low-income beneficiaries. These concerns extend to prescription drugs. 
Prescription drug costs are named by 48 states as a major factor in 
Medicaid cost growth.11 In 2002, Medicaid will pay an 
estimated $28 billion for prescription drugs--nearly 20 percent of the 
nation's total prescription drug spending.12 This helps 
explain the official position of the NGA: ``If Congress decides to 
expand prescription drug coverage to seniors, it should not shift that 
responsibility or its costs to the states and territories.'' 
13
    Reflecting these concerns, states' efforts to extend prescription 
drug coverage, to date, have been limited. Only 15 states and the 
District of Columbia have elected to extend Medicaid coverage, 
including prescription drugs, to all poor seniors and people with 
disabilities.14 Ten of these states plus 14 others have 
implemented non-Medicaid state pharmacy assistance programs that 
provide partial or full coverage for certain low-income Medicare 
beneficiaries. An additional 5 states offer discounts (rather than 
coverage) for prescription drugs for certain low-income 
elderly.15 While the majority of states are involved in such 
activities, their combined impact is relatively small. Self-reported 
data suggest that states spend about $1.7 billion on non-Medicaid 
prescription drug coverage 16, less than 2 percent of CBO's 
2002 baseline for Medicare beneficiaries' prescription drug spending.
    States' reaction to the President's proposal to provide incentives 
to extend drug coverage to Medicare beneficiaries is likely to be 
mixed. States with existing programs would probably participate in the 
President's proposal, since they could receive Federal matching 
payments for their existing programs. However, states with no or 
limited programs must balance the increased Federal contribution with 
the risk of rising drug costs, unmet need, and limited state budgets. 
This calculation is complicated by the temporary nature of a low-income 
drug program: it would stop providing primary prescription drug 
coverage when a Medicare benefit is implemented. All proposals would 
shift primary coverage for prescription drugs to Medicare, leaving 
states with the much-simpler job of providing additional assistance 
with premiums and cost sharing, as they do today for Medicare's current 
benefits. As such, even those states that are willing to take on an 
extension of prescription drug coverage may find that the start-up 
costs for a temporary program outweigh the benefits of this time-
limited assistance. One of CHIP's lessons is that considerable time and 
investment are required to set up a new health insurance program, 
especially if it is not a simple extension of Medicaid.
    Probably reflecting some of these issues, CBO did not assume that 
all states would participate in the President's low-income prescription 
drug proposal.17 States where 65 percent of eligible low-
income beneficiaries live are assumed to participate. In other words, 
an estimated one in three low-income Medicare beneficiaries would not 
be eligible for assistance under the proposal.
    Low-income programs often miss many eligible seniors. A problem 
that has plagued Medicaid and other state-based programs for Medicare 
beneficiaries is low participation. Since the early 1990s, Medicaid has 
been authorized to pay Medicare's premiums and most cost sharing for 
poor beneficiaries.2 Nearly one in four Medicare 
beneficiaries is eligible for some type of Medicaid assistance, yet 
only about 45 to 55 percent of eligible beneficiaries are estimated to 
enroll in such programs.18 Some of this may be explained by 
the lower priority that states give to this population versus others, 
like children. For example, one study found that only 24 states used a 
simplified application, 12 states had outreach materials about 
eligibility in other languages, and about one-third of states made 
eligibility screening tools available to outside agencies (e.g., 
clinics, senior centers rather than welfare offices) 19--all 
strategies used my most states in CHIP. Lack of information, 
misperceptions about eligibility, and reluctance to ask for help appear 
to be equally important barriers to enrollment. A focus-group study 
found that being ``in the right place at the right time'' had a greater 
impact on enrollment than official outreach efforts.20 Some 
state prescription drug programs have experienced similar problems. 
Several of the major state programs (e.g., Massachusetts and New York) 
found that they had to change and increase their outreach efforts due 
to low enrollment and that, even with changes, enrollment has been 
lower than expected.21
---------------------------------------------------------------------------
    \2\ The Qualified Medicare Beneficiary (QMB) program pays for 
Medicare's premiums, deductibles and coinsurance for all beneficiaries 
whose income is below 100 percent of the Federal poverty level and 
whose resources are at or below twice the SSI limits. The Specified 
Low-Income Medicare Beneficiary (SLMB) program pays for the Medicare 
Part B premium (not the Part A premium) for beneficiaries with income 
between 100 and 120 percent of poverty. The Qualified Individual-1 (QI-
1) program provides states an option--with 100 percent Federal funding 
through a capped grant that expires in FY 2002--to pay for the Part B 
premium for beneficiaries with income between 120 and 135 percent of 
poverty. And the Qualified Beneficiary-2 (QI-2) program uses the same 
structure as QI-1 to subsidize the part of the Medicare Part B premium 
attributable to the increase in that premium do to shift of the home 
health benefit to Medicare Part B.
---------------------------------------------------------------------------
    CBO assumed that, within states that extend coverage through the 
President's proposal, 60 percent of eligible low-income beneficiaries 
would participate when state programs are fully implemented, in 2007. 
This participation rate drops to 39 percent when compared to the low-
income beneficiaries who would be eligible if their states 
participated; 18 percent when compared to all low-income beneficiaries 
(including those covered by Medicaid); and 6 percent when compared to 
all Medicare beneficiaries regardless of income.
    Lack of a standard prescription drug benefit could cause access and 
other problems. Even the minority of low-income beneficiaries that 
would be helped by this proposal may find that this help is limited. It 
appears that states have full discretion under the President's proposal 
to determine the nature of the drug coverage offered to low-income 
beneficiaries. Under Medicaid rules, states may limit the number of 
prescriptions filled per month, but cannot charge significant cost 
sharing, place dollar limits on the amount of coverage, use restrictive 
formularies, or limit enrollment through caps. Such practices are 
common in state pharmacy assistance programs: several states require a 
$500 deductible for some or all participants (e.g., AZ, NY, PA, SC); 
some states cap the annual amount of assistance a beneficiary may 
receive (e.g., IN, MO, WI, NC, OR); and a smaller number of states 
limit the type of drugs that are covered (e.g., KS covers only 
maintenance drugs).22 Thus, what low-income Medicare 
beneficiaries would get under a state-based program would depend on 
there they live.
    Research suggests that practices like high cost sharing or 
enrollment caps could defeat the goal of improving access to 
prescription drugs for low-income seniors. A recent study found that 
one-third of non-elderly Medicaid beneficiaries in states with 
aggressive cost-control methods (e.g., restricting the number of 
covered prescriptions, imposing cost sharing) could not get a 
prescription drug due to cost.23 Experience with CHIP shows 
that enrollment caps could make the already-difficult challenge of 
encouraging low-income seniors to enroll even more daunting. When North 
Carolina capped its enrollment of children at 72,000, actual enrollment 
fell by over 20,000 children, in part due to a loss of trust in the 
program. A local official stated, ``We think we're going to have to put 
more energy in because this program hasn't delivered. It was shut down 
for nine months; now we have to build people's support and confidence 
that this is a real program that's going to be continuing.'' 
24
    Congress could and probably would limit the potential health and 
financial consequences of unrestricted benefit flexibility through 
standards--especially since the proposed Federal investment exceeds 
that of CHIP. Yet, the process of developing those standards would take 
time and is not without controversy. It took months for the House, 
Senate and White House to come to agreement over the minimum benefit 
standards for children in CHIP and, in fact, these standards were among 
the last issues resolved in the entire Balanced Budget Act of 1997. It 
is not safe to assume that achieving a bipartisan consensus on 
standards for a new low-income prescription drug program will be easier 
than it was in CHIP--or less contentious than the process of developing 
a Medicare prescription drug benefit itself.
    Medicare would be more effective at quickly providing a meaningful 
drug benefit to all low-income beneficiaries. If Congress is seeking 
the most effective way to provide prescription drug coverage to low-
income Medicare beneficiaries, it should look to Medicare. Experts 
agree that all Medicare beneficiaries, including those with low income, 
would be eligible for and receive prescription drug coverage under 
proposals that include adequate Federal assistance.3 All 
major proposals charge no prescription drug premium for beneficiaries 
with income below 150 percent of poverty, and most proposals subsidize 
cost sharing for those with income below 135 percent of 
poverty.4 As such, Congress has already come close to 
consensus on providing a meaningful prescription drug benefit for low-
income beneficiaries. This benefit may be accessible more quickly for 
many (if not most) low-income seniors through Medicare than through a 
state-based low-income program. If enacted this year, a Medicare 
benefit could be implemented in 2005, two years before CBO assumes that 
states that opt for the President's plan would fully implement their 
programs (see Exhibit 1). While 2005 may seem too long to wait, 
consider that if Congress had passed a drug benefit in 1999, when the 
current debate over a prescription drug benefit began, Medicare would 
be providing prescription drug coverage today.
---------------------------------------------------------------------------
    \3\ CBO estimated that proposals by President Clinton and Senator 
Robb would ensure that 100 percent of Medicare beneficiaries have 
prescription drug coverage; proposals by Senators Breaux and Frist and 
HR 4680 would exclude 8 to 18 percent of Medicare beneficiaries, 
respectively (CBO, April 8, 2002).
    \4\ Note that proposals by Senators Breaux and Frist and HR 4680 
include benefit ``gaps'', meaning that the insurance benefit is capped 
at an annual dollar limit after which beneficiaries pay 100 percent of 
drug costs until their total out-of-pocket spending exceeds a stop-
loss. Neither proposal subsidizes low-income beneficiaries for 
prescription drug spending in this gap (which would total $4,700 in 
2005) (CBO, April 8, 2002).
---------------------------------------------------------------------------
      importance of enacting a prescription drug benefit this year
    Providing relief to low-income beneficiaries is one of several 
reasons why Congress should pass a Medicare prescription drug benefit 
this year. While weakened, the budget outlook is strong enough to pass 
a meaningful prescription drug benefit. In March, CBO projected a 
Federal budget surplus totaling $2.3 trillion over the next 
decade.25 Medicare was created during a time of budget 
deficits, and all subsequent health reforms have been enacted during 
periods with far fewer Federal resources. An $750 billion investment, 
which could buy a decent prescription drug benefit with an affordable 
premium, would represent about one-third percent of the projected 
surplus and would equal the amount in the President's budget for 
Medicare and tax cuts combined.5 Thus, different policy 
priorities are what drive discussions of rationing or scaling back on a 
meaningful prescription drug benefit, not real budget constraints.
---------------------------------------------------------------------------
    \5\ The President's budget includes $603 billion for tax cuts and 
$169 billion for Medicare for FY 2003-12, according to CBO.
---------------------------------------------------------------------------
    Not only can this nation afford a prescription drug benefit; we may 
not be able to afford to wait. In the next decade, not only will 
Medicare enrollment surge as the baby boom begins to retire, but the 
first round of genetically engineered drugs may begin entering the 
market.26 It seems inevitable that Medicare will cover these 
prescription drugs for this population, but waiting to implement a new 
benefit until that point is probably more expensive than implementing 
it now. This is because operating a Medicare drug benefit in the next 
several years without the cost pressures of the baby boomers would 
allow for learning from early mistakes and making mid-course 
corrections. These same mistakes committed in the next decade would 
probably be many times more expensive.
    Finally, Medicare faces no equally compelling problem in 2002. Its 
cost growth is under control and its Hospital Insurance Trust Fund is 
solvent through 2030. Medicare's provider payment rates may need 
adjustments, per the recommendations of the Medicare Payment Assessment 
Commission 27, but these adjustments are minor relative to 
the cost and need for a drug benefit. Supplemental coverage, through 
private sources and Medicare managed care, is deteriorating, but the 
fact remains that 3 times as many beneficiaries lack prescription drug 
coverage as lack supplemental coverage (37.7 versus 12.5 percent in 
1999).28 In contrast, developing a bipartisan Medicare 
prescription drug benefit is a major undertaking that I would argue 
should be put ahead of all other Medicare reforms as well as 
legislative efforts to provide stop-gap and interim prescription drug 
coverage. Each year, a greater number of Medicare beneficiaries lose 
their prescription drug coverage, causing problems in accessing needed 
drugs.29 Prescription drug costs are crippling not only for 
low-income beneficiaries but also for the millions of middle-income 
beneficiaries whose limited savings are being eroded by the costs of 
needed medications. The time is right to make the necessary investment 
and enact the single Medicare reform that has eluded so many 
Congresses: the addition of a meaningful prescription drug benefit to 
Medicare.

    1 Laschober MA, Kitchman M, Neuman P, Stabic AA. 
(February 27, 2002). ``Trends in Medicare supplemental insurance and 
prescription drug coverage, 1996-1999.'' Health Affairs, Web Exclusive, 
pp. W127-W138.
    2 Crippen DL. (March 7, 2002). ``Projections of Medicare 
and Prescription Drug Spending,'' Testimony before the Committee on 
Finance, United States Senate. Washington, DC: Congressional Budget 
Office.
    3 Office of Management and Budget. (February 2002). 
Budget of the United States Government. Washington, DC: U.S. Government 
Printing Office.
    4 National Governors Association. (February 22, 2002). 
``Medicare/Prescription Drug Coverage for Seniors: Issues,'' http://
www.nga.org/nga/lobbyIssues/1,1169,D--2009,00.html.
    5 Crippen DL. (March 7, 2002). ``Projections of Medicare 
and Prescription Drug Spending,'' Testimony before the Committee on 
Finance, United States Senate. Washington, DC: Congressional Budget 
Office.
    6 Congressional Budget Office. (April 8, 2002). 
``Updated Estimates of Proposals for a Medicare Prescription Drug 
Benefit.'' Washington, DC: CBO.
    7 Kaiser Commission on Medicaid and the Uninsured. (June 
2001). Medicaid ``Mandatory'' and ``Optional'' Eligibility and 
Benefits. Washington, DC: The Henry J. Kaiser Family Foundation.
    8 Centers for Medicare and Medicaid Services. (February 
6, 2002). ``The State Children's Health Insurance Program Annual 
Enrollment Report, Federal Fiscal Year 2001.'' Baltimore, MD: CMS.
    9 U.S. Census Bureau. (2000, 2001). Health Insurance 
Coverage: 1999, 2000. Suitland, MD: U.S. Department of Commerce, 
Economics and Statistics Administration, Reports P60-215 and P60-211.
    10 Sheppach R. (February 24, 2001). ``Finding the Right 
Fit: Medicare, Prescription Drugs, & Current Coverage Options,'' 
Testimony before the Committee on Finance, United States Senate. 
Washington, DC: National Governors Association.
    11 Kaiser Commission on Medicaid and the Uninsured. 
(October 2001). The Role of Medicaid in State Budgets. Washington, DC: 
The Henry J. Kaiser Family Foundation.
    12 Office of the Actuary. (March 2002). ``National 
Health Expenditures, Projections.'' Baltimore, MD: Centers for Medicare 
and Medicaid Services.
    13 National Governors Association. (Winter 2002). ``HR-
39. Seniors Prescription Drugs Policy.'' Washington, DC: NGA, http://
www.nga.org/nga/legislativeUpdate/1,1169,C--POLICY--POSITIOND--
557,00.html.
    14 Schwalberg R; Bellamy H; Giffin M; Millder C; 
Schreiber S; Elam L. (October 2001). Medicaid Outpatient Prescription 
Drug Benefits: Findings from a National Survey and Selected Case 
Highlights. Washington, DC: Kaiser Commission on Medicaid and the 
Uninsured.
    15 National Governors Association. (December 17, 2001). 
``State Pharmaceutical Assistance Programs.'' Washington, DC: NGA, 
http://www.nga.org/cda/files/STATEPHARM.pdf.
    16 National Governors Association. (December 17, 2001).
    17 Crippen DL. (March 6, 2002). ``An Analysis of the 
President's Budgetary Proposals for 2003,'' Testimony before the 
Committee on the Budget, United States Senate. Washington, DC: 
Congressional Budget Office.
    18 Laschober MA, Topoleski C. Barrents Group LLS. (April 
7, 1999). A Profile of QMB-Eligible and SLMB-Eligible Medicare 
Beneficiaries. Baltimore, MD: U.S. Health Care Financing 
Administration; General Accounting Office (April 1999). Low-Income 
Medicare Beneficiaries: Further Outreach and Administrative 
Simplification Could Increase Enrollment. Washington, DC: U.S. GAO, 
GAO/HEHS-99-61.
    19 Nemore PB. (December 1999). State Medicaid Buy-In 
Programs: Variations in Policy and Practice. Menlo Park, CA: The Henry 
J. Kaiser Family Foundation.
    20 Perry MJ; Kannel S; Dulio A. (January 2002). Barriers 
to Medicaid Enrollment for Low-Income Seniors: Focus Group Findings. 
Washington, DC: The Kaiser Commission on the Future of Medicaid and the 
Uninsured.
    21 Tilly J; Wiener JM. (September/October 2001). ``State 
pharmaceutical assistance programs for older and disabled Americans.'' 
Health Affairs, 20(5): 223-232.
    22 National Governors Association. (December 17, 2001).
    23 Cunningham PJ. (April 2002). Prescription Drug 
Access: Not Just a Medicare Problem. Washington, DC: Center for 
Studying Health System Change, Issue Brief No. 51.
    24 Wilson T. (September 29, 2001). ``Freeze hits health 
plan hard; growing pains dog kids' program.'' Raleigh News and 
Observer. Raleigh, NC.
    25 Congressional Budget Office. (March 18, 2002). 
``CBO's Current Budget Projections: Effects of the Economic Stimulus 
Package on CBO's Baseline Projection of the Surplus.'' Washington, DC: 
Congressional Budget Office.
    26 Collins F. (April 2001). Interview in ``Cracking the 
Code of Life,'' NOVA, Public Broadcasting System.
    27 Medicare Payment Advisory Commission. (March 2002). 
Report to the Congress: Medicare Payment Policy. Washington, DC: 
MedPAC.
    28 Laschober et al. (February 27, 2002).
    29 Briesacher B; Stuart B; Shea D. (January 2002). Drug 
Coverage for Medicare Beneficiaries: Why Protection May Be in Jeopardy. 
New York: The Commonwealth Fund.

    Mr. Bilirakis. Thank you, Doctor. Before we continue, Dr. 
Braun, Dr. Neuman, let me ask you, have you had the testimony 
of Mr. Fuller, Mr. Hillerby, Dr. Tyler available to you? Are 
you familiar with their testimony? Are you familiar with, let 
us say, the Nevada Plan that Mr. Hillerby is going to talk 
about?
    Ms. Braun. Not in detail, but in general.
    Mr. Bilirakis. Dr. Neuman, you are?
    Ms. Neuman. Yes.
    Mr. Bilirakis. The discount card concept that Dr. Tyler and 
Mr. Fuller are going to talk about, you are familiar with 
those?
    Ms. Neuman. Yes.
    Mr. Bilirakis. Well, all right. I was just wondering if 
maybe we should hear from them first so that you might comment. 
No. All right. Dr. Braun, go ahead.

                   STATEMENT OF BEATRICE BRAUN

    Ms. Braun. Mr. Chairman and distinguished committee 
members, thank you for inviting AARP to again address the need 
for a Medicare prescription drug benefit. Comprehensive 
prescription drug coverage in Medicare this year is an urgent 
priority for our 35 million members and for virtually all 
Americans.
    Our older members now find their drug coverage options 
increasingly limited, expensive, unstable, or unavailable. Our 
members and their families need and expect a meaningful 
Medicare benefit that is affordable and available to all 
beneficiaries.
    It is important to note that this is a problem for nearly 
all older Americans, and not just those with low income. 
Further, while AARP strongly supports additional financial 
assistance in Medicare for low-income individuals, low-income 
assistance is not a substitute for a prescription drug benefit 
in Medicare. It will not solve the problem for millions of 
beneficiaries who are unable to afford their medications. In 
addition, because AARP opposes means testing within Medicare, 
we could not support a low-income-only benefit unless it were 
outside of Medicare.
    The challenge in crafting a voluntary Medicare drug benefit 
is considerable. To succeed, it must attract enough enrollees 
to make it a viable program. We realize this will require a 
sizable commitment of Federal dollars. We also recognize that 
budget constraints are greater this year than last year. But a 
program funded inadequately, which means meager benefits and 
high premiums, is going to fail because it won't pass the 
``kitchen table'' test and not enough beneficiaries will 
enroll, and you will have an insurance death spiral.
    That is why AARP recommended a flexible budget approach. In 
addition to the money the House earmarked in its budget 
resolution, we also proposed a reserve fund to give the 
Congress the flexibility to allow sound policy to guide the 
benefit design rather than an arbitrary budget ceiling.
    At this point, we don't know what workable affordable 
benefit will ultimately cost, but we do know that proposals 
offered last year were not sufficient to attract enough 
beneficiaries to enroll. Based on our research, only a small 
fraction of beneficiaries would find the kind of benefit 
package proposed worth the relatively high premiums.
    There were also two more components to our prescription 
drug recommendation. The first is that we would oppose funding 
for a give-back package before agreement is reached on a 
Medicare prescription drug benefit. While we have always said 
that providers should be paid fairly, it is inappropriate to 
use Medicare or Social Security surplus dollars to increase 
provider payments, without first ensuring that older Americans 
get the drug coverage they need. Every dollar for a give-backs 
package means one less available dollar for a Medicare drug 
benefit.
    The second additional component is that we believe cost-
containment measures are necessary to help keep a Medicare drug 
benefit fiscally sustainable over time. We also recognize the 
serious quality problems in the over-use, under-use, and mis-
use of drugs. I would just say that we just lost an AARP Board 
of Directors member, and it looks as if it was a medication 
error.
    We believe there is a role for both the Government and 
consumers to play here, and AARP is taking several initiatives 
to address these problems. This month, AARP is launching a 
National Public Education Program designed to improve the wise 
and safe use of medications. Part of this campaign will focus 
on the savings to consumers from greater use of generic drugs. 
We also intend to become involved in litigation against drug 
companies that have delayed the entry of lower-priced generics 
into the market.
    We pledge to provide assistance in every way we can, and to 
work with members on both sides of the aisle to promote a 
meaningful Medicare drug benefit for all beneficiaries. The 
needs of older and disabled Americans who lack adequate drug 
coverage can no longer go unheeded. Older Americans have waited 
a generation for a drug benefit. We call on Congress to act 
now. Thank you, and I would be happy to take any questions you 
have.
    [The prepared statement of Beatrice Braun follows:]
        Prepared Statement of Beatrice Braun, AARP Board Member
    Mr. Chairman and members of the Committee, I am Bea Braun, a member 
of AARP's Board of Directors. On behalf of our organization and its 35 
million members, I want to thank you for convening this hearing and for 
continuing your efforts to consider approaches for adding a much needed 
prescription drug benefit to the Medicare program.
    As AARP looks toward building retirement security for today's older 
Americans and the baby boom population, we believe no person is 
economically secure without adequate medical insurance. The structure 
of retirement security is no longer simply the ``three-legged stool'' 
of Social Security, private pensions, and personal savings, but rather 
four pillars consisting of: Social Security, pensions and savings, 
earnings, and, importantly, stable, affordable and adequate health 
insurance.
    Consequently, now more than ever, Americans of all ages are looking 
to Medicare's guarantee of affordable health care coverage as part of 
the foundation of their retirement planning. But there is a serious gap 
in Medicare's protection--the absence of reliable prescription drug 
coverage.
    While modern medicine increasingly relies on drug therapies, the 
benefits of these prescription drugs elude more Medicare beneficiaries 
every day. Drug costs continue to rise unabated. Employer-based retiree 
health coverage is eroding. Managed care plans in Medicare have scaled 
back their drug benefits. The cost of private coverage is increasingly 
unaffordable. State programs provide only a limited safety net. 
Therefore, the need for a Medicare drug benefit for all beneficiaries 
will only continue to grow.
    Given the prominence of drug therapies in the practice of medicine, 
if Medicare were being designed today--rather than in 1965--not 
including a prescription drug benefit would be as absurd as not 
covering doctor visits or hospital stays. That is one of the reasons 
why ensuring that prescription drug coverage is included in Medicare's 
defined benefit package is AARP's number one legislative priority this 
year. Our members and their families need and expect a meaningful 
benefit that is affordable and available to all beneficiaries. They 
expect us to be their champion on this issue, and we will be.
    We are pleased to be here today to discuss the need for a Medicare 
prescription drug benefit, some of our recommendations for moving 
forward, and some initial findings of the public's reaction to 
prescription drug proposals as well as comment on the President's 
prescription drug proposal.
           the need for a medicare prescription drug benefit
    Increasing need, high drug prices, and inadequate insurance 
coverage pose serious problems for today's Medicare beneficiaries. A 
chronic health problem necessitating new and expensive prescription 
drugs can quickly deplete a retiree's financial resources. Even a 
beneficiary who has planned well for his or her retirement may not be 
prepared for drug bills that exceed several hundred dollars a month. 
Further, it is important to note that support for making a prescription 
drug benefit part of Medicare is overwhelmingly high for all of our 
members. Americans of all ages recognize the value of prescription drug 
coverage. In recent polling conducted for AARP, eight in ten Americans 
age 45 and over favor making prescription drug coverage part of 
Medicare. Support was, in fact, greatest among the younger age 
brackets.
    The majority of Medicare beneficiaries--not just those with low 
incomes--need drug coverage. While AARP strongly supports additional 
financial assistance in Medicare for low-income individuals, low-income 
assistance is not a substitute for a prescription drug benefit in 
Medicare. It will not solve the problem for millions of people with 
Medicare who are unable to afford their medications. Further, because 
AARP opposes means-testing within the Medicare program, we could not 
support a low-income-only drug benefit unless it were outside of 
Medicare.
    Because of Medicare's current lack of prescription drug coverage, 
many beneficiaries must pay for all or some of their prescription drugs 
out-of-pocket. Although about two-thirds of Medicare beneficiaries have 
some type of coverage for prescription drugs, this figure can be very 
misleading. The principal sources of coverage that offer a prescription 
drug benefit--employer-based retiree coverage, private supplemental 
coverage, or Medicare HMOs--are often inadequate, limited, expensive, 
and unstable. Moreover, many Medicare beneficiaries do not have 
continuous prescription drug coverage. A Commonwealth study released 
earlier this year reported that nearly 42 percent of beneficiaries 
lacked drug coverage at some point in 1998. More recently, a new study 
published by Health Affairs reports that nearly 40 percent of Medicare 
beneficiaries had no drug coverage in the fall of 1999. It is also 
important to understand that those Medicare beneficiaries without 
coverage pay top dollar for their prescriptions because they do not 
benefit from discounts negotiated by third party payers. Most of those 
currently covered by insurance, including most workers, benefit from 
such discounted prices.
    Let me give you some illustrative examples of how middle income 
people have difficulty in obtaining access to affordable and dependable 
drug coverage:

 A retired couple has significantly saved for retirement and 
        have an income of $40,000 a year. Both take prescription drugs 
        for heart disease and high cholesterol and the wife also needs 
        medication for breast cancer and osteoporosis. They do not have 
        access to retiree health benefits through a former employer, 
        there are no Medicare+Choice plans available in their area, and 
        a Medigap plan offering some drug coverage would cost them $260 
        a month each.
 A retired couple have an income of $30,000 a year, 
        significantly above the threshold for Medicaid and most state 
        and private pharmacy assistance programs. They have 
        prescription drug coverage through a Medicare HMO. This year 
        they learn, however, that their HMO plans to terminate its 
        contract with Medicare, effective December 31. There are no 
        other Medicare HMOs in their area, and while they can afford 
        supplemental insurance and are guaranteed access to certain 
        Medigap plans (A,B,C, and F), none of these plans include drug 
        coverage.
 A 75-year old widow is enrolled in a Medicare HMO that offers 
        drug coverage. She currently has prescriptions for a 
        cholesterol-lowering medication at $97.51 a month and an 
        allergy medication at $46.94 a month. While initially her drug 
        coverage was quite generous, this year her drug benefit is 
        capped at $300 a year. As a result, she basically has no drug 
        coverage for three-quarters of the year.
    As the Committee moves forward with a prescription drug proposal, 
it will be critical to judge the proposal on not only whether it could 
improve the situation for people illustrated in the examples above, but 
also if it is both affordable and attractive enough to yield a broad 
risk pool and viable program.
                       what older americans need
    Affordable Drug Coverage--Older Americans need affordable drug 
coverage. A voluntary drug benefit needs to be affordable to assure 
enough participation to avoid the dangers of risk selection. The 
government contribution will need to be sufficient to yield a 
beneficiary premium that is affordable and a benefit design that is 
attractive to the majority of beneficiaries. If the benefit is not set 
at an affordable level, only those beneficiaries who have high risk 
will want to purchase it. This will lead to a risk pool composed only 
of those with high drug costs, and program costs will escalate rapidly 
into what is often referred to as an ``insurance death spiral.'' This 
is not simply a matter of what beneficiaries would like to pay, it is 
an issue of how to assure fiscal viability of the risk pool. Medicare 
Part B is a model in this regard.
    The Part B benefit is voluntary on its face, but Medicare's 
contribution toward the cost of the benefit elicits virtually universal 
participation. Actuarial work done for AARP last year by the William M. 
Mercer Company that we shared with the Committee identified the keys to 
success for a Medicare prescription drug benefit:

 develop a benefit design that will encourage participation by 
        a broad range of beneficiaries in order to spread risk;
 ensure clear and concise communication to improve 
        participation;
 balance the breadth of coverage and beneficiary premium;
 implement cost-containment techniques; and
 limit the enrollment period.
    Dependable Drug Coverage--Older Americans also need dependable drug 
coverage. Current prescription drug coverage options are not reliable. 
For example, beneficiaries who obtain prescription drug coverage from 
their former employer are finding that coverage to be unstable. Retiree 
health benefits that include prescription drug coverage are becoming 
more scarce. While an estimated 40 percent of employers with 500 or 
more employees offered retiree medical coverage in 1993, only 23 
percent did so in 2001. Of those employers who offered retiree medical 
benefits, 21 percent did not offer drug coverage to Medicare eligible 
retirees.
    In addition, beneficiaries who have drug coverage through Medicare 
HMOs cannot depend on having this coverage from year to year, as plans 
can change benefits on an annual basis or even terminate participation 
in Medicare. For example, this year many beneficiaries in 
Medicare+Choice plans are living through abrupt changes in their 
prescription drug coverage that they did not foresee when they 
enrolled. Some of the most visible of these changes include:

 Increasing premiums. Over the past few years, more and more 
        Medicare+Choice plans have been charging premiums for their 
        coverage, and those premiums are escalating. For example, 
        between 2001 and 2002, the percentage of Medicare HMO enrollees 
        with zero premiums declined from 47 to 39 percent. This year, 
        nearly one-third of Medicare HMO enrollees (32 percent) will 
        have basic premiums over $50 compared to 14 percent in 2001.
 Higher cost-sharing--Unlike the 1990s, all Medicare HMOs that 
        offer prescription drugs are charging copays for prescription 
        drugs and the average beneficiary copay has increased 
        significantly.
 Decreasing benefit--More plans are lowering the annual cap on 
        the typical Medicare+Choice drug benefit. While in 1999 10.6 
        percent of Medicare HMOs had an annual cap of $500 or less on 
        their drug benefit, 20.6 percent of plans had a $500 cap in 
        2000.
 Loss of benefit--Over the last few years, several 
        Medicare+Choice plans have dropped their prescription drug 
        benefit entirely. While 88 percent of Medicare HMOs offered 
        some drug coverage in 1999, that number declined to 63 percent 
        in 2001. Although Medicare+Choice has provided beneficiaries 
        with an opportunity for drug coverage, the volatility of the 
        Medicare+Choice market has made that coverage unpredictable and 
        unstable from year to year.
                          aarp recommendations
    Adequate Funding--AARP knows that to craft the kind of prescription 
drug coverage that beneficiaries will find affordable and reliable--and 
will thus voluntarily choose to sign up for--will require a sizable 
commitment of federal dollars. We also recognize that budget 
constraints are greater than last year. But while the budget situation 
changes from year to year, the situation facing millions of older and 
disabled persons who cannot afford the drugs they need continues to 
worsen, and constitutes a health care and financial emergency that 
cannot continue to be ignored.
    We do not, at this point, have an estimate of what an adequate drug 
benefit will cost. We know the plans costing $300 billion offered last 
year did not find public acceptance. However, we believe the new CBO 
estimates for drug proposals that include beneficiary monthly premiums 
starting in the $50, $60, and $70 range will not yield an acceptable 
benefit. We believe Congress and this Committee should focus on the 
design of a sustainable benefit that will work for beneficiaries and 
remain flexible as to the projected cost.
    That is why in our budget recommendation we asked Congress to renew 
its commitment from last year, adjust it for inflation and another year 
of coverage, and earmark $350 billion for prescription drugs and 
reforms that strengthen the program. However, because we believe that 
even this level of funding is inadequate to pay for what our members 
would consider an adequate and affordable benefit, we also recommended 
that Congress create a reserve fund of about $400 billion, or an amount 
roughly equal to the amount of the 10-year surplus in the Medicare 
Hospital Insurance (HI) Trust Fund. A majority of the respondents to 
our recent poll favored borrowing from the Medicare surplus to pay for 
a prescription drug benefit. The range created by the $350 billion 
commitment based on last year, plus the roughly $400 billion reserve 
fund, will give the Congress the flexibility it needs to craft a 
prescription drug benefit that beneficiaries will perceive as having 
real value.
    Priority for drugs--In addition to our prescription drug 
recommendation, we also have said that it would be inappropriate to use 
Medicare or Social Security surplus dollars to increase provider 
payments without first ensuring that older Americans get the 
prescription drug coverage they need. Our members would not understand 
why Congress could find money to help providers but not to meet their 
increasing prescription drug needs. Further, every dollar for a 
``givebacks'' package means one less available dollar for a Medicare 
prescription drug benefit. And any giveback package that increases 
Medicare Part B spending will increase beneficiary premiums because 
monthly premiums represent 25 percent of Part B costs. We, therefore, 
would strongly oppose funding for a givebacks package before agreement 
is reached on a Medicare prescription drug benefit.
    Cost Containment--We recognize that strong and effective cost 
containment measures are a necessary part of a Medicare prescription 
drug benefit. In order for a drug benefit to be sustainable over the 
long run, mechanisms must be in place to control the rising costs of 
prescription drugs. AARP actively supports solid cost containment 
methods as long as patient safety and well-being is not compromised and 
access to needed prescription drugs is not impeded. Therefore, we 
support the use of formularies, such as a 3-tiered approach, as long as 
they are developed in a responsible manner and include an exceptions 
process.
    We also support the responsible promotion of generic drugs as one 
effective cost containment tool in a Medicare benefit. In fact, because 
we believe both the government and the consumer have an important role 
to play in helping to control costs, AARP is rolling out a national 
public education campaign, beginning this month, to educate our members 
and the public at large about the wise use of medications--including 
generic drugs. We will encourage our members to talk with their doctors 
and pharmacists to reduce unnecessary costs associated with use of 
medications.
    In addition to these cost containment methods, we also would like 
to work with the Committee in other efforts to control drug costs, 
including correcting the current AWP pricing structure and stopping 
abuse of current drug patent laws. AARP has already begun to pursue the 
need to correct abuse of drug patents through the courts. AARP intends 
to be involved in litigation against certain brand and generic 
companies that made agreements that delayed the entry of a generic drug 
into the market and in litigation against a brand name drug company 
that unfairly extended its patents to forestall its generic 
competition.
                  initial reactions to drug proposals
    We have asked our members and the general public what kind of 
benefit package would generate the kind of high level of participation 
necessary for a viable benefit, and we have learned the following thus 
far:

 Beneficiaries will generally perform what we call the 
        ``kitchen table test'' in determining whether they would 
        purchase a new voluntary drug benefit. That is, they will 
        likely calculate their current prescription drug costs, their 
        Medicare premium ($54 a month in 2002 and rising to $104.90 in 
        2012), any drug coverage they might have, and their present 
        financial situation, to determine whether a proposed benefit is 
        a real value for them.
 Medicare beneficiaries are willing to pay their fair share for 
        a solid prescription drug benefit, but the premium and 
        coinsurance must be reasonable. We know, for instance, that 
        beneficiaries would not be likely to enroll in a prescription 
        drug plan with a premium of $50 a month.
 While the amount of the beneficiary premium drives the 
        equation, our members also look at the program design features 
        in combination with one another. This means it is difficult to 
        simply assess a single component of a package. For instance, 
        some beneficiaries might look more favorably on a higher level 
        of coinsurance if the premium was lower, or vice versa. In a 
        recent poll conducted for AARP of 885 individuals age 45 and 
        over, only one-third of those 65 and over would be likely to 
        participate in a prescription drug plan that included: a $35 
        monthly premium, 50% coinsurance, a $200 annual deductible, and 
        a $4,000 stop loss. Clearly, this low level of voluntary 
        participation is not enough to create a broad risk pool and 
        sustainable program.
 Most Medicare beneficiaries are concerned about the 
        unpredictability of health care costs and want to know what 
        they will be expected to pay out-of-pocket. This makes real 
        catastrophic stop-loss protection that limits out-of-pocket 
        costs an important component of any package. We know from past 
        experience that a $6,000 catastrophic stop-loss is viewed by 
        beneficiaries as too high, and even a $4,000 cap is not viewed 
        as providing meaningful benefit protection. For example, if 
        there were a $4,000 cap included in a benefit that also imposed 
        50 percent beneficiary co-insurance, a beneficiary would have 
        to incur $8,000 (and a couple $16,000) in prescription drug 
        costs before the stop-loss protection would kick in. With the 
        majority of beneficiaries earning less than $25,000 a year, 
        those figures are not seen as providing realistic protection.
    We realize that some on the Committee may believe that we are 
asking for a ``Cadillac plan,'' however, we emphasize we are bringing 
to you what our members are telling us they need and expect to join a 
voluntary drug benefit. We will continue to try to educate our members 
about what is realistic and seek the views of current and future 
members on specific design packages. We will be happy to work with the 
Committee as your proposals are developed to test our members' 
reactions.
    As for the President's FY 2003 budget request and proposal to 
modernize Medicare that was released at the start of the year, AARP is 
pleased that the President continues to make Medicare prescription drug 
coverage a priority for his Administration and has indicated his 
willingness to work with the Congress on this issue, but we believe 
that the dollar amount proposed is insufficient to provide an 
affordable and meaningful drug benefit for all Medicare beneficiaries. 
We also have raised several questions about how the various components 
of the proposal would help people with Medicare.
    In particular, we have raised questions about $77 billion earmarked 
for low-income drug coverage. The budget proposes an enhanced federal 
match to enable states to cover drug costs for Medicare beneficiaries 
between 100 and 150 percent of poverty.
    However, the Administration's proposal does not provide details on 
how the proposed targeted low-income assistance would be used (e.g., in 
Medicaid expansions or state pharmacy assistance programs), how this 
effort would improve the current patchwork of drug assistance 
available, and how many people would actually be helped. Further, the 
Administration's budget leaves open the question of whether states that 
could not raise their Medicaid thresholds would be eligible for the new 
enhanced federal match between 100 to 150 percent of poverty.
    The Administration's proposal also does not prevent ``dollar 
trading'' by the states that already have higher thresholds. The end 
result for $77 billion in federal funding could be little or no 
extension of prescription drug protections for more needy seniors than 
are being served now.
    The President's budget also includes the Administration's proposal 
to implement a Medicare drug discount card that would give 
beneficiaries immediate access to drug discounts and other pharmacy 
services.
    AARP is working with the Administration as it continues to refine 
its drug discount card proposal. There are several issues that we will 
try to clarify and some consumer protections we will try to add, 
including: defining what constitutes a ``substantial'' discount, 
obtaining firm details on how manufacturer discounts will be disclosed 
and passed on to consumers, assuring that consumers can compare drug 
card discount rates to actual retail prices, and making sure drug cards 
help consumers get generic drugs whenever they are medically 
appropriate and the least costly option.
    However, AARP is encouraged that--unlike current industry card 
proposals--the President's proposed discount card is designed to 
establish the drug card program as a building block for a full Medicare 
drug benefit. We emphasize, however, that neither the Administration's 
discount card nor the current industry cards are a substitute for a 
real drug benefit.
    We also believe that while the actual discounts would be relatively 
modest, the President's discount card program would provide at least 
some help to beneficiaries in buying the drugs they need. It could 
provide important safeguards to improve the appropriate use of 
prescription drugs, and this could help avoid unnecessary health care 
costs due to drug interactions, mis-medications, or poor compliance. It 
also, importantly, would help the federal government learn valuable 
lessons about the pharmacy benefit managers (PBMs) that run discount 
card programs and are included as the delivery system in virtually 
every drug benefit proposal before Congress. As a result, it will help 
the Medicare program become more familiar with how PBMs and drug 
benefit programs work.
    Finally, we are concerned that the limited amount of funding in the 
Administration budget for both drug coverage and other program changes 
is insufficient to add a meaningful drug benefit and strengthen the 
program for current and future beneficiaries.
    AARP supports efforts to modernize the Medicare program. Clearly, 
the creation of a prescription drug benefit that is available in all 
Medicare options is the most significant improvement, but other changes 
are also important and would serve beneficiaries and the program well. 
For instance, most private health insurance plans offer a cap on out-
of-pocket expenses, yet there is no such limit in the Medicare program. 
Creating an out-of-pocket cap for services currently covered by 
Medicare Parts A and B would not only bring Medicare more in line with 
what individuals under the age of 65 currently have, but would also 
make the program more affordable for beneficiaries.
    AARP also remains open to the possibility of combining the Part A 
and B deductible, provided it is structured to be affordable and does 
not produce beneficiary ``sticker shock.'' Since most beneficiaries 
meet the annual $100 Part B deductible but significantly less meet the 
Part A hospital deductible, a combined and increased deductible will 
affect the majority of beneficiaries. We are opposed, however, to 
merging the Part A and B Trust Funds. The new solvency measure included 
in the President's budget, and suggested in the recent Medicare 
Trustees' Report, appears to indicate that Medicare should be financed 
wholly from its Trust Funds. That is, its financing should come 
predominantly, if not exclusively, from payroll taxes and beneficiary 
contributions, with little or no contribution from general revenues. 
This would represent a radical shift in funding for the Medicare 
program. The impact of such a shift would be to significantly increase 
beneficiaries' costs for Medicare, reduce provider payments, or a 
combination of both.
                               conclusion
    AARP is pleased that the Committee is examing the issue of a 
Medicare prescription drug benefit and is developing a proposal. The 
work you are embarking upon is extremely challenging; it is also 
immensely important to millions of Americans who take prescription 
medications. It is our hope that today's hearing will help focus 
attention on the need for an affordable and dependable Medicare 
prescription drug benefit for all beneficiaries.
    Our members believe that Congress should be able to work across 
party lines to enact and begin to implement an affordable Medicare drug 
benefit. We pledge to you that we will provide assistance in every way 
we can to work with members on both sides of the aisle and to promote a 
meaningful and broadly supported Medicare prescription drug benefit. We 
also know that our members will not accept failure or delay. The needs 
of older and disabled Americans who lack adequate drug coverage can no 
longer go unheeded. We call on Congress to act now. A prescription drug 
benefit in Medicare is an urgent priority for our members and for the 
American people.
                                ADDENDUM
      Perceptions of a Medicare Rx Plan Among the Public Aged 45+
                           selected findings
 Eight in ten Americans aged 45 and over favor making 
        prescription drug coverage part of the Medicare system. 67% 
        strongly favor this benefit.
 Almost eight in ten Americans aged 45+ consider providing a 
        Medicare prescription drug benefit to be an extremely or very 
        important priority for the President and Congress.
 A majority of Americans aged 18 to 64, and 48% of Americans 
        aged 65+, favor borrowing from the Medicare Trust Fund surplus 
        to finance a Medicare prescription drug benefit. Lower 
        percentages among all age groups favor borrowing from Social 
        Security Trust Fund surpluses to finance a Medicare 
        prescription drug benefit.
 Respondents aged 65 or older (22%) are less willing than those 
        between the ages of 45 to 64 (29%) to pay a $35 monthly premium 
        for a Medicare prescription drug benefit that has a $200 
        deductible, pays for 50% of the cost of prescriptions, and has 
        a catastrophic coverage cap of $4,000. Overall, 27% of 
        Americans aged 45+ are willing to pay a $35 monthly premium for 
        this coverage.
 Of the 61% of Americans aged 65+ who identified a premium 
        amount less than $35, one-quarter (or 15% of all respondents 
        aged 65+) said they would pay the $35 premium when asked 
        directly if they would be willing to pay that amount for 
        coverage.
 While 41% of the public aged 45+ would be likely to 
        participate in the above Medicare prescription drug plan, only 
        33% of those aged 65+ would participate. Almost half (47%) of 
        those aged 45 to 54, and 41% of those 55 to 64, say they would 
        be likely to participate in this plan.
 Americans aged 65+ with prescription drug coverage are less 
        likely to participate in this plan than those without coverage. 
        However, the lack of prescription drug coverage may not be a 
        factor in whether or not a person would participate in this 
        plan since individuals aged 65+ with no coverage are split as 
        to whether they would participate--42% would be likely to 
        participate in this plan while 39% would not be likely to 
        participate.
 The role existing coverage plays in individuals' decision to 
        participate in this plan is complicated by the fact that 
        monthly out of pocket prescription drug expenses are also 
        related to whether or not individuals aged 65+ will accept the 
        plan. Majorities of people aged 65+ (54%) without prescription 
        drug coverage and with current monthly average out of pocket 
        drug expenses of $60 or more are likely to accept the plan.
 Among individuals aged 65+ who have prescription coverage, out 
        of pocket drug expenses are also a factor in whether or not 
        they will accept this plan. Almost four in ten (38%) of those 
        aged 65+ with drug coverage but with current average monthly 
        out of pocket expenses of $60 or more are likely to accept this 
        plan. Only 23% of the 65+ population with drug coverage and 
        monthly out of pocket expenses lower than $60 are likely to 
        accept this plan.
                              Methodology
    Reed Haldy McIntosh collected the data contained in this survey for 
AARP through the Market Facts Telenation omnibus survey conducted March 
1 through March 3, 2002. All questions in the survey were asked of 
those aged 45 and over (n=885), with the exception of questions 10 and 
11 which were asked of all age groups (18+) in the omnibus (n=2,000). 
The margin of error for this survey is +/- 3.5 percentage points.

    Mr. Bilirakis. Thank you very much, Doctor.
    Dr. Neuman.

                  STATEMENT OF PATRICIA NEUMAN

    Ms. Neuman. Thank you, Mr. Chairman and Mr. Brown and 
members of this committee. I am pleased to be here to discuss 
the very pressing issue of Medicare and prescription drugs. 
Thirty-eight percent of all Medicare beneficiaries lacked drug 
coverage in the Fall of 1999. Seniors living in rural areas, 
those 85 and older, are most apt to be without drug coverage. 
Lack of drug coverage affects beneficiaries at all income 
levels, but it is the near-poor who are most likely to be 
without it.
    Today, beneficiaries rely upon a patchwork of supplemental 
sources to help with their drug costs, but as drug costs rise 
current sources of coverage are eroding.
    There are several approaches for improving prescription 
drug coverage for Medicare beneficiaries under discussion, 
ranging from short-term incremental strategies to comprehensive 
proposals. A Medicare discount card is one of the proposals by 
the administration that would be an interim strategy giving 
seniors access to drug discounts, building on the experiences 
of existing programs.
    Today, private discount card programs vary widely in terms 
of how they operate, the savings they offer, and ultimately 
their impact on consumers. In general, these programs are not 
considered insurance and are not regulated. Discount cards tend 
to be available to consumers of all ages and incomes. They are 
often sponsored by pharmacy benefit managers and retail stores, 
although cards sponsored by drug manufacturers, such as 
Together Rx, are increasingly common.
    For the consumer, cost comparisons across existing discount 
card programs can be a challenge. There is no single place 
where seniors can go to get drug prices under the many 
available programs. Often, prices are not posted on the Web. 
Even when cost information is available, the manner in which 
discounts are presented varies from program-to-program, making 
simple cost comparisons nearly impossible even for the same 
drug with the same strength and the same number of doses.
    Frequent fluctuations in prices further complicates 
comparisons, while making it hard for seniors to budget for 
their drug expenses. It is difficult to assess the extent to 
which drug cards reduce seniors' drug costs. Savings would 
depend on the medication seniors take, their access to specific 
pharmacies, and their comfort using mail order. In all 
likelihood, seniors using multiple medications may do best with 
multiple cards, if no single card offers discounts on their 
prescriptions. When seniors do use a drug card, they typically 
pay less than full retail, but still far more than they would 
with drug coverage.
    Figure 9 of my testimony compares monthly drug expenses for 
an illustrative elderly woman living on a mean annual income of 
$16,000 per year. A discount drug card would clearly lower her 
monthly bills, but still would require her to pay 25 percent of 
her income on prescriptions. If she had the BlueCross/
BlueShield PPO plan, her prescriptions would amount to 8 
percent of her income.
    A Medicare endorsed card as proposed by the administration 
could lower cost, if Medicare seal of approval attracts 
beneficiaries, and helps card sponsors negotiate steeper 
discounts, but if discounts are not passed on to consumers or 
do not apply to all drugs, then the value to consumers would be 
limited.
    A program that is targeted to low-income beneficiaries is 
another option to incrementally improve coverage. The 
administration's proposal would use Medicare funds to extend 
drug coverage under Medicaid or other State programs, as we 
have heard this morning. Another approach featured in many 
proposals would create a national Medicare drug benefit, with 
additional protections for low-income beneficiaries 
administered and supplemented by the States. Targeted low-
income assistance would help seniors in greatest financial 
need, and clearly be less costly than a universal Medicare 
benefit, but a low-income program would leave millions of 
seniors without drug coverage. The majority of beneficiaries 
without drug coverage today have incomes above 150 percent of 
poverty.
    Furthermore, if a low-income program builds on State 
programs, it would likely perpetuate existing disparities in 
drug coverage for Medicare's poor, given already wide variation 
in both eligibility and benefits under Medicaid and State 
pharmacy assistance programs. And in the current fiscal 
climate, it is unclear whether States would be willing to 
expand drug coverage beyond current levels. Less than a third 
of all States today have elected to provide Medicaid drug 
benefits to those with incomes up to the poverty level.
    Beyond incremental strategies, there appears to be broad 
consensus on the goal of assisting all seniors needing drug 
coverage, yet debate continues over how to finance, structure 
and deliver affordable drug coverage to all beneficiaries no 
matter where they live or what their incomes are.
    In sum, Medicare without medicine is anachronism. 
Incremental approaches could offer relief to some on Medicare 
who lack drug coverage, but are not a substitute for a Medicare 
benefit. A meaningful drug benefit will require a substantial 
investment of Federal dollars and, as we have heard today, this 
puts seniors and their prescription drug needs in direct 
competition with other national spending priorities. Thank you, 
and I would be happy to take your questions.
    [The prepared statement of Patricia Neuman follows:]
  Prepared Statement of Patricia Neuman, Vice President and Director, 
     Medicare Policy Project, The Henry J. Kaiser Family Foundation
    Thank you, Mr. Chairman and Members of the Committee, for the 
opportunity to testify on efforts to improve prescription drug coverage 
for Medicare beneficiaries. I am Patricia Neuman, a vice president of 
the Kaiser Family Foundation and Director of the Foundation's Medicare 
Policy Project. I am also an associate faculty member in the Department 
of Health Policy and Management at The Johns Hopkins University School 
of Public Health.
    By many measures, Medicare has been and continues to be one of the 
nation's most successful federal programs. Medicare has provided a 
vital source of health coverage for seniors and younger Americans with 
disabilities, a population that faced significant difficulties 
obtaining health insurance before Medicare was created. Since its 
enactment in 1965, Medicare has been reformed incrementally over time 
to address many of the program's problems as they have emerged. In the 
current environment, finding affordable prescription medicines is a 
critical issue for many beneficiaries.
    My testimony today begins with a brief review of existing sources 
of prescription drug coverage and a discussion of how the lack of 
coverage affects beneficiaries. It then reviews broad approaches to 
improving prescription drug coverage, considers the key tradeoffs that 
each presents, and the implications for beneficiaries.
                 who lacks prescription drug coverage?
    Thirty-eight percent of all Medicare beneficiaries living in the 
community were without drug coverage in the fall of 1999, according to 
recently published national survey data (Figure 1). Lack of drug 
coverage disproportionately impacts beneficiaries living in rural 
areas, the oldest-old (ages 85 and older), and the near-poor (Figure 
2).
    Fully half of all beneficiaries living in rural areas (50 percent) 
lacked drug coverage in the fall of 1999, compared to 34 percent of 
those in metropolitan areas. Seniors in rural areas tend to be poorer 
and less healthy than those living in urban areas, but are less likely 
to have been in jobs that offer retiree health benefits or to live in 
areas where drug coverage is available through Medicare+Choice plans. 
Nearly half of all beneficiaries ages 85 and older (45 percent) were 
without coverage in the fall of 1999 compared to 35 percent of those 
ages 65 to 74, despite the need for multiple medications that commonly 
arises with advancing age. This lack of drug coverage comes at a time 
when the income and retirement savings of seniors are often 
insufficient to pay for expensive medications.
    The absence of drug coverage is a problem for beneficiaries in all 
income groups, but it is the near-poor who are the most likely to be 
without drug coverage. Forty-four percent of those with incomes between 
$10,000 and $20,000 lacked drug benefits in the fall of 1999, compared 
with about a third of those with higher incomes. The near-poor are less 
likely than higher income beneficiaries to have employer-sponsored 
coverage, but have incomes and assets that typically exceed the levels 
required to qualify for Medicaid, which leaves them vulnerable to being 
without drug coverage.
        what is the current state of prescription drug coverage?
    More than half of all Medicare beneficiaries have some type of 
supplemental coverage that helps with drug expenses. Sources of 
coverage include employer-sponsored retiree plans, Medigap policies, 
Medicare+Choice plans and Medicaid. During the period between 1996 and 
1999, there was an increase in the share of beneficiaries with drug 
benefits, from 56.8 to 62.3 percent (Laschober et al, 2002). This 
increase appears to have been due to the rapid rise in Medicare+Choice 
enrollment, which offset a decline in Medigap coverage. Since 1999, 
however, the evidence points to attrition in drug coverage across a 
variety of sources ``reversing the more positive trend in the late 
1990's.
Employer-Sponsored Retiree Health Benefits
    Employer-sponsored retiree health benefits, the leading source of 
drug coverage for seniors, provided relatively comprehensive drug 
benefits to 28 percent of the Medicare population in the fall of 1999. 
Since then, the share of firms with 200 or more workers that offer 
health benefits to Medicare-age retirees declined from 33 percent in 
1999 to 23 percent in 2001, according to a report released earlier this 
week from the Kaiser Family Foundation, the Commonwealth Fund, and 
Health Research and Educational Trust. Among employers who continue to 
offer health benefits to Medicare-age retirees, 32 percent say they 
increased cost-sharing for drug benefits in the past two years. Looking 
to the future, continued reductions in drug benefits appear to be on 
the horizon, with half (51 percent) of all surveyed employers that 
offer retiree benefits saying they are likely to cut back on drug 
benefits for retirees in the next two years (Figure 3).
Medicare+Choice
    Medicare+Choice plans, once a promising source of affordable drug 
coverage, assisted 15 percent of beneficiaries in 1999. Since that 
time, however, access to drug coverage under Medicare HMOs has been on 
the decline. Since 1999, the number of HMO plans contracting with 
Medicare dropped from 309 to 178; the share of Medicare HMOs that offer 
prescription drug benefits in their basic plan fell from 84 percent to 
70 percent; while the percentage of plans imposing an annual drug cap 
of $750 or less increased from 21 percent to 39 percent (Figure 4). 
Recent trends call into question the future capacity of the 
Medicare+Choice program to meet the prescription drug needs of seniors 
who choose to enroll in them.
Individually-Purchased Medigap
    Individually-purchased Medigap policies have been another source of 
prescription drug coverage for the Medicare population, although only 
seven percent of all beneficiaries reported having drug coverage 
through a Medigap policy in the fall of 1999. In more recent years, 
however, Medigap premiums have experienced double-digit increases, 
climbing by 16 percent, on average, between 1998 and 2000 for the seven 
Medigap plans that do not cover pharmaceuticals and by 37 percent for 
plans that offer limited drug benefits, according to Weiss Ratings, 
Inc. Increasingly unaffordable premiums are likely to make Medigap an 
even less affordable source of drug coverage in the future.
Medicaid
    For Medicare beneficiaries with low incomes, Medicaid is a critical 
source of drug coverage primarily helping those receiving cash 
assistance through the Supplemental Security Income (SSI) program and 
those living in nursing homes. Although states are not required to 
provide drug coverage under Medicaid, all include it as part of their 
Medicaid benefits package. While Medicaid remains a safety net for 
Medicare's poor, close to half of all beneficiaries living below the 
poverty level do not have Medicaid (Figure 5). Relatively low 
participation in Medicaid among the low-income Medicare population is 
due to a variety of factors that vary by state, including strict 
eligibility criteria, limited knowledge about the program's benefits 
for seniors or how to apply, and the administrative challenges of 
signing up and remaining enrolled in the program.
    Many states are experiencing tremendous financial pressure as a 
result revenue shortfalls and increases in Medicaid costs. Among the 
forces driving overall Medicaid spending is the rapidly rising cost of 
prescription drugs. In response to these revenue and cost pressures, 
many states have begun to implement strategies to limit the costs of 
their Medicaid drug benefits.
State Pharmacy Assistance Programs
    To help fill the gaps in coverage, 30 states have established or 
authorized some form of pharmacy assistance program to help lower drug 
costs for seniors living on fixed incomes, according to the National 
Conference of State Legislatures. These programs vary widely in terms 
of structure, eligibility, and benefits. While most provide a direct 
benefit to low-income seniors, other approaches include discount card 
programs, tax credits, and private-insurance models. As most of these 
programs are relatively new, they reach a small share (less than 3 
percent) of the Medicare population, with enrollment concentrated in 
three states (NY, NJ and PA).
    In sum, the current patchwork of programs and plans that assist 
seniors with their drug costs have helped to compensate for the absence 
of a Medicare prescription drug benefit. With the rapid rise in drug 
costs, many expect a continued erosion of drug coverage in the future.
                    why is drug coverage important?
    Prescription drug coverage matters to people of all ages, but it is 
especially important to the elderly and disabled on Medicare, who rely 
heavily on medications to manage their many acute and chronic health 
problems. The need for prescription drugs often comes at a substantial 
cost to the Medicare population--a population that generally lives on 
fixed incomes. Forty percent of all Medicare beneficiaries--14 million 
people--have incomes below 200 percent of poverty, or below $16,500 for 
an individual (Figure 6).
    Lack of drug coverage takes a toll on seniors and younger Medicare 
beneficiaries with disabilities. Virtually all Medicare beneficiaries 
use pharmaceuticals on a regular basis, filling 22 prescriptions, on 
average, in 1998. Beneficiaries without drug coverage averaged 8 fewer 
prescriptions per year than did those with drug coverage. Even more 
striking, beneficiaries in poor health without drug coverage averaged 
15 fewer medications than did their insured counterparts (Figure 7). 
There is also evidence of beneficiaries not taking their medications as 
prescribed by their doctor because of costs, by skipping doses, 
splitting pills, and sharing medicines with friends or family members. 
Systematic underutilization of prescribed medications may pose a threat 
to quality of care and potentially increase costs to the system in 
terms of avoidable emergency room and hospital admissions, physician 
visits, and nursing home stays.
    Beneficiaries without drug coverage also face high out-of-pocket 
costs. Those without coverage spent, on average, $247 more in 1999 than 
did beneficiaries with drug coverage, according to a recent study by 
Bruce Stuart of the University of Maryland (Figure 8). Beneficiaries 
without drug coverage incur relatively high costs both because they do 
not have an insurer to help pay for their prescriptions and because 
they often pay the full retail price when they go to the pharmacy. By 
contrast, those with drug coverage are at least partially shielded from 
the full effect of high and rising drug costs because their plan covers 
a portion of their drug expenses and they benefit from pharmacy 
discounts negotiated by their health plan. But even among those with 
drug coverage, there are substantial differences in the level of 
financial protections provided, reflecting the variability in benefit 
design across plans. Beneficiaries with Medigap, for example, spent on 
average, $261 more than did beneficiaries with Medicare+Choice drug 
coverage ($545 vs. $284).
    Drug costs are predicted to rise rapidly over the course of the 
next decade, which will likely compound fiscal concerns facing health 
plans and programs, potentially shifting costs on to beneficiaries and 
increasing the burden on those without coverage.
          approaches for expanding prescription drug coverage
    With rising drug costs, declining benefits, and the steady influx 
of new, promising drugs, public support for a Medicare drug benefit 
remains strong. A variety of options are now under consideration, 
ranging from short-term, incremental strategies in anticipation of a 
more universal benefit down the road, to full-blown comprehensive 
proposals. These approaches include a Medicare-endorsed discount card 
program modeled on the array of discount programs currently available 
in the private market; a benefit that would be targeted--at least 
initially--to low-income Medicare beneficiaries; and a voluntary 
Medicare drug benefit that would be available to all beneficiaries.
A Medicare-Endorsed Discount Card Program
    As an interim strategy, the Administration recently proposed a 
Medicare-endorsed discount card program to give seniors access to 
discounts on the drugs they take, while giving qualified discount card 
sponsors the opportunity to use a Medicare emblem in their marketing 
materials.
    According to a recent study prepared by Health Policy Alternatives, 
Inc. for the Kaiser Family Foundation, private discount card programs 
currently being offered vary widely in terms of how they operate, the 
savings they offer, and ultimately, their impact on consumers. These 
programs are relatively new. They are generally not considered 
insurance and are typically unregulated. Most are marketed nationwide 
and are available to the public regardless of income or age. Typically, 
there is an enrollment fee and consumers are free to sign up for more 
than one program. Some offer additional benefits such as dental and 
vision discounts.
    Discount drug card programs tend to be sponsored by private 
entities such as pharmacy benefit managers and retail stores, although 
cards sponsored by drug manufacturers are becoming increasingly common. 
Just last week for instance, seven drug companies announced their plan 
to offer a single discount card, Together Rx, which would offer savings 
on the prescription drugs they produce to low- and moderate-income 
seniors.
    Discount drug card programs offered by entities other than the 
manufacturers themselves achieve savings off full retail prices by 
negotiating lower pharmacy dispensing fees, using internet and mail-
order services, and obtaining volume discounts or rebates from drug 
manufacturers. Most of the consumer discounts result from concessions 
on pharmacy mark-ups and dispensing fees, rather than manufacturer 
rebates, according to the report by Health Policy Alternatives, Inc. 
And, among programs that do get rebates, there is considerable 
variation in the degree to which they are passed on to consumers.
    In the current environment, it is difficult for consumers to 
determine if discount card programs will help lower costs. There is no 
central source of information that describes available discount drug 
card programs or publishes cost information to permit consumers to shop 
for the best price. It is up to seniors, or their families, to consult 
each discount card program individually to get prices for each of the 
drugs they take. And, even if seniors are able to obtain prices from 
several programs, the discounts are not presented in a standard manner, 
making direct comparisons--even for the same drug--virtually 
impossible. Some programs show the actual cost of a 30-day 
prescription. Others present discounts as ``retail minus a specified 
percentage.'' Still others show the dollar amount of the discount 
without disclosing what consumers would ultimately pay. Comparisons are 
further complicated by frequent fluctuations in drug prices, enrollment 
fees, and postal fees for mail-order options.
    In addition to the basic challenge of comparing prices, it is 
difficult to assess how effective these cards are in lowering seniors' 
drug costs. When seniors go to a pharmacy with a discount card, they 
tend to pay less than full retail, but still far more than those with 
drug coverage. Take, for example, an elderly woman who uses four 
commonly prescribed medications and is living on about $1,300 a month 
or $16,000 a year, which is the mean annual income for women ages 65 
and older. As Figure 9 shows, she would save money by using her 
discount card, but still spend about 25 percent of her income filling 
her prescriptions. By contrast, her prescriptions would account for 
only 8 percent of her income if she had drug coverage under the Federal 
Employees Health Benefits Program Blue Cross/Blue Shield PPO plan.
    As the General Accounting Office recently reported, discount cards 
can lower costs somewhat, but discount levels vary widely across 
programs and, within program, from drug to drug. For a given 
individual, the potential savings from a discount card program would 
depend on the specific drugs they take and for how long, their access 
to specific pharmacies, and their level of comfort with using the mail-
order option. The bottom line is that a card that is good for one 
senior may not be good for another.
    Under the Administration's proposal, qualified private discount 
drug card programs would receive a Medicare endorsement, with the hope 
of using Medicare's seal of approval to attract more beneficiaries and 
negotiate steeper discounts. If the endorsement increases volume, then 
the proposal could lower drug costs somewhat further than under 
existing programs. However, if negotiated discounts under Medicare-
endorsed discount card programs are not passed through to consumers or 
do not apply to all drugs, then the value to the individual could be 
compromised.
A Low-Income Drug Benefit
    Another general approach under discussion is the idea of moving 
forward on a Medicare drug benefit incrementally by beginning with 
assistance targeted to low-income beneficiaries. While lack of drug 
coverage is not strictly a low-income problem, greater than four in ten 
without drug coverage have incomes below 150 percent of the federal 
poverty level (Figure 10). With this in mind, the Administration has 
proposed a strategy that would expand state programs, such as Medicaid, 
to help the low-income population while the debate over a universal 
Medicare drug benefit proceeds. Others have proposed subsidized 
benefits for the low-income population in the form of a national 
Medicare benefit, but one that is administered and supplemented by 
states.
    The Administration's proposal would use Medicare funds to extend 
prescription drug coverage to low-income beneficiaries under Medicaid 
or other state programs. As under current law, states would be 
permitted to extend drug coverage only to Medicare beneficiaries up to 
100% poverty (about $8,900 per year for a single individual) at current 
Medicaid matching rates of about 57% on average, but ranging from 50 to 
83 percent. (States already have the option to extend all Medicaid 
benefits, including drug coverage, to these Medicare beneficiaries). 
For those beneficiaries with incomes between $8,900 and $13,300 per 
year (100-150% of poverty), states could offer drug assistance through 
the Medicaid or other state programs, at a 90% federal matching rate.
    In addition, the Administration proposes to use existing waiver 
authority under section 1115 of the Social Security Act to allow states 
to use Federal Medicaid matching funds to purchase drug coverage for 
Medicare beneficiaries who are not eligible for Medicaid and whose 
incomes are below 200% of poverty, or about $17,700 per year. One 
state, Illinois, has already been granted such a waiver, and the 
Administration is developing a template for other states to use. 
Because these waivers are by definition budget neutral, they do not 
bring more Federal Medicaid matching funds into a state for drug 
coverage than the state would otherwise receive under current policy. 
Savings on the current population could need to be achieved in order to 
offset the costs of new individuals who receive drug coverage.
    While an approach targeted to low-income seniors would both extend 
benefits to those in greatest financial need first and impose 
considerably less fiscal pressure on the federal government than would 
a benefit for all people on Medicare, it also raises several challenges 
and issues for consideration.
    The first and perhaps most obvious consideration is that such an 
approach would not reach more than half of all beneficiaries who lack 
drug coverage today. While the near-poor--those just above the poverty 
level--are the most likely to be without coverage as they are generally 
ineligible for Medicaid coverage, even those with moderate incomes 
currently face substantial out-of-pocket burdens given the high and 
rising costs of prescription drugs.
    Another consideration is the potential challenge in ultimately 
creating a national Medicare benefit, given the wide variations in 
state-based programs. Today, there are differences across the states in 
terms of their Medicaid eligibility criteria, whether they offer drug 
coverage through a state pharmacy assistance program, and--if so--what 
type of benefits they offer. For example, less than half of all states 
(17) offer Medicaid drug benefits to Medicare beneficiaries with 
incomes up to 100 percent of the federal poverty level. Of these 17 
states, 12 also have a state pharmacy assistance program. The majority 
of states do not currently cover seniors with incomes up to the poverty 
level, although many of these states have some form of pharmacy 
assistance program (Figure 11).
    In addition, there are also significant differences in the scope of 
drug benefits covered under Medicaid by state, involving cost-sharing 
requirements, limits on prescriptions and refills, generic substitution 
rules and other utilization controls. Because of these variations in 
eligibility and coverage, the safety net for Medicare's poor varies 
widely from state-to-state. As a result, an approach to expanding 
prescription drug coverage that builds on a state base could perpetuate 
existing geographic disparities in drug coverage for low-income 
Medicare beneficiaries.
    Another key consideration to this type of an approach must 
acknowledge the fiscal environment in many states. Prescription drugs 
are the fastest-rising cost item in state Medicaid budgets, with a 
disproportionate share of Medicaid drug spending on aged and disabled 
beneficiaries (Figure 12). In the face of current budgetary shortfalls, 
many states are beginning to implement a range of cost-control 
strategies to constrain spending on their prescription drug benefits. 
Under these circumstances, it is unclear whether and how states--
particularly those that do not do not now offer coverage up to 100 
percent of poverty--will find the funds or be willing to extend drug 
coverage any further.
    Finally, implementing a new program, with a new administrative 
structure, can take a considerable amount of time, based on the 
experiences of both the State Children's Health Insurance Program and 
many state pharmacy assistance programs.
A Medicare Drug Benefit
    There appears to be broad consensus on the goal of assisting all 
beneficiaries needing prescription drug coverage with a Medicare 
benefit. However, there continues to be debate over difficult issues 
involving how to design and implement the new benefit. Bridging these 
differences remains a major challenge particularly in light of today's 
fiscal environment.
    Drawing on models recently introduced in Congress, the basic 
approaches to a universal benefit that have been proposed include: an 
integrated Medicare drug benefit to be administered by private entities 
such as pharmacy benefit managers; a drug benefit that would be offered 
along with other Medicare benefits through high-option plans as part of 
a broader framework for reform; and a stand-alone Medicare drug benefit 
that would be offered by private health insurance plans. While these 
approaches reflect a range of philosophical perspectives and policy 
priorities, there are notable areas of agreement.
    First, most proposals offer additional protections for low-income 
beneficiaries, recognizing the needs of seniors living on fixed 
incomes. Second, most would provide relief to the relatively small 
share of beneficiaries with high-end, or ``catastrophic'' drug 
expenditures. Third, reflecting one of the chief lessons of the ill-
fated Medicare Catastrophic Coverage Act (MCCA) of 1988, virtually all 
proposals would create a voluntary benefit, rather than require seniors 
to participate.
    Despite these areas of agreement, there remain a number of critical 
decisions and policy challenges that have significant implications for 
beneficiaries and program spending. Chief among these is the difficult 
process of designing a benefit that guarantees meaningful and 
affordable drug coverage to beneficiaries in the context of current 
federal budget considerations. With this in mind, perhaps the biggest 
policy question is that of how much to spend on a new Medicare drug 
benefit, and how to finance it. Based on the new spending estimates 
recently released by CBO, drug coverage comparable to what most workers 
get today would require a major commitment of national resources.
    Clearly, the design of the Medicare drug benefit will influence the 
extent to which the plan shields beneficiaries from rising drug costs, 
the level of program spending that will be required, and the rate at 
which spending will grow over time. Seniors are eager for coverage that 
resembles the benefits offered to most insured workers today, yet the 
benefits specified in many proposals would involve relatively 
substantial enrollee contributions through premiums, deductibles, 
coinsurance, and other cost-sharing requirements, which sometimes 
result in what is known as the ``hole in the donut''. Proposed Medicare 
drug benefits generally provide less assistance than do drug benefits 
typically covered by large employers.
    In addition to questions involving benefit design and program 
spending, other critical policy questions remain. For example, while 
most would agree on the need to assist low-income beneficiaries, there 
is less agreement on the tougher questions involving who should receive 
subsidies, the level of assistance, or how subsidies should be 
administered and financed. Another issue concerns the role of private 
plans in administering the new Medicare benefit, including both the 
extent to which they should be required to bear risk and also the 
latitude they are given to control costs. Finally, a key outstanding 
question is the extent to which a new Medicare benefit should be linked 
to broader efforts to reform and restructure the program.
    The resolution of these policy issues will have important 
implications for beneficiaries, and have a significant impact on 
federal and state budgets.
                               conclusion
    Medicare without medicine is an anachronism. When the public is 
asked about modernizing or reforming Medicare, our research shows they 
are thinking almost exclusively about benefit improvements, primarily 
prescription drugs (McInturff and Garin, 2001). Incremental strategies, 
such as discount card programs, may help lower costs for some 
beneficiaries for some drugs, but are not a substitute for Medicare 
coverage. As the Administration notes, the proposed discount card 
program would not deliver the same level of savings as a full Medicare 
benefit.
    Targeted assistance for the poor could offer help to those with 
greatest financial need, depending on how well the program is designed, 
promoted, and implemented. Yet, even if successful, more than half of 
all seniors without coverage today would remain unprotected under most 
low-income approaches.
    A universal approach to a Medicare drug benefit will require a 
substantial investment of federal dollars ``putting seniors and their 
prescription drug needs in direct competition with other national 
spending priorities. However, given current trends in drug coverage and 
spending, the absence of a Medicare drug benefit will impose higher 
costs onto our nation's parents and grandparents.

                               References

    Achman, Lori and Marsha Gold, ``Medicare+Choice 1999-2001: An 
Analysis of Managed Care Plan Withdrawals and Trends in Benefits and 
Premiums,'' for the Commonwealth Fund, February 2002.
    Kaiser/HRET/Commonwealth, ``Erosion of Private Health Insurance 
Coverage for Retirees: Findings From the 2000 and 2001 Retiree Health 
and Prescription Drug Coverage Survey,'' April 2002.
    Lake, Snell, Perry and Associates, ``Barriers to Medicaid 
Enrollment for Low-Income Seniors: Focus Group Findings,'' for the 
Kaiser Family Foundation, January 2002.
    Laschober, et al., ``Trends in Medicare Supplemental Insurance and 
Prescription Drug Coverage, 1996-1999,'' Health Affairs, 27 February 
2002.
    Public Opinion Strategies and Peter D. Hart Research Associates, 
``Medicare and Prescription Drug Focus Groups,'' for the Kaiser Family 
Foundation, July 2001.
    Schneider, Andy and Linda Elam, ``Medicaid: Purchasing Prescription 
Drugs,'' prepared for the Kaiser Commission on Medicaid and the 
Uninsured, January 2002.
    State Pharmaceutical Assistance Programs, National Conference of 
State Legislatures, , 
as of 16 April 2002.
    Weiss Ratings, Inc., ``Prescription Drug Costs Boost Medigap 
Premiums Dramatically,'' 26 March 2001.
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    Mr. Bilirakis. Thank you very much, Doctor. I am going to 
skip Mr. Fuller for the time being. I guess you are getting 
accustomed to being skipped, aren't you. Mr. Hillerby.

                STATEMENT OF MICHAEL D. HILLERBY

    Mr. Hillerby. Thank you, Mr. Chairman and members of the 
committee. For the record, my name is Michael D. Hillerby, 
Deputy Chief of Staff to Nevada Governor Kenny Guinn.
    Thank you for this opportunity to testify on Nevada's work 
to help low-income seniors with their prescription drug needs. 
Your recognition of the success of this unique State program is 
appreciated, and on behalf of Governor Guinn I look forward to 
answering your questions about our efforts.
    I would like to provide you with a brief history and 
overview of Nevada's Senior Rx Program, and the reason we build 
this first-of-its-kind program using private insurance to 
underwrite the risk involved.
    First, here are the highlights of the current plan: To be 
eligible for the plan, seniors must be age 62 or over; have an 
annual income of $21,500 or less--that is roughly 250 percent 
of poverty, and we do not use an assets test; they cannot be 
eligible for Medicaid assistance; and they must have been a 
Nevada resident for 12 months.
    This application process also allows us to notify those 
seniors that would be Medicaid-eligible that we can enroll them 
in our plan.
    The benefits of the plan include a maximum benefit per year 
per member of $5,000--that is relatively unique in the pharmacy 
benefit in the insurance market; seniors pay a $10 co-pay for 
generic medications; $25 co-pay for Preferred medications, or 
for any other drug deemed medically necessary; all other drugs 
to be available at provider's discounted rate; and there is no 
premium expense to the senior.
    The program costs the State annually $981, or roughly 
$81.75 per month, that is inclusive of a prepayment discount. 
Approximately $66 per month is the anticipated cost of 
prescriptions per member. The remaining less than 20 percent of 
the premium pays for the insurance premium tax charged by the 
State, management, marketing, enrollment, pharmacy benefit 
manager, and the reinsurance product to insure claims over $66.
    In the new contract beginning in 2002, the State will 
receive 100 percent of any savings between projected and actual 
claims levels--the $66 per month fee. These funds will be used 
to enroll more seniors.
    That addresses the comments Mr. Brown made earlier about 
the Milliman and Robertson actuarial study. The administration 
did not believe that those numbers were adequate for either the 
claims volume that was expected, did not adequately address the 
actual cost of administering the State program, and didn't 
acknowledge the fact that we use a set funding source for ours, 
and if the claims did come in higher, there was no financial 
backstop for that.
    Senior Rx is funded by a set percentage of Nevada's tobacco 
settlement, projected at just over $6 million this year 
dedicated to this program.
    The senior, again, pays no premium or deductible cost and 
is only responsible for the co-pay on actual prescription 
filled.
    Demographics of our program: 75 percent of our enrollees 
make less than $17,500 per year, and half have incomes less 
than $12,700. Sixty-one percent of enrollees are between the 
ages of 65 and 80, 20 percent are 81 or older.
    The plan was improved in 2001 with administrative and 
legislative changes, and is now running at full capacity and 
has enrolled 7,500 seniors in Nevada. Based on national 
statistics, this may be as many as 30 to 50 percent of low-
income seniors in Nevada who do not currently have prescription 
drug insurance.
    The committee has received previous testimony questioning 
the quality of the program, its costs to seniors, and the 
success of using a private insurance model. While there were 
challenges involved in building the current successful Senior 
Rx, the lessons we learned may be helpful to you and to other 
States considering such a program.
    Because Senior Rx is a voluntary, stand-alone product, the 
risks of adverse selection are very real. That is, participants 
could easily weigh the costs of their premium against their 
current prescription bills, and only enroll when they would see 
a net benefit. This could obviously create a plan where most 
members received more in benefits than was paid in premiums. 
Because the plan is now free to low-income seniors, it benefits 
both those with low and high prescription bills.
    When originally devised, the State asked insurers to submit 
proposals that included specifying plan design and benefit 
levels. Because of both the novelty of this type of program and 
the risk of adverse selection, insurers were hesitant to bid on 
a confusing RFP. States considering such a plan should do an 
honest assessment of their own strengths in contracting, plan 
design and managing such a program. A voluntary program takes 
significant outreach and marketing to reach the target 
population.
    Once successfully awarded, Senior Rx consisted of two plan 
levels, each with different premiums, co-pays, formularies and 
benefits. Co-payments ranged from $10 for generic drugs to as 
much as 50 percent of the cost of a preferred drug. Seniors 
would apply to the State for a subsidy based on their income, 
and then enroll in one of the two plans at a cost of anywhere 
from $39 to $94 per month, plus prescription co-pays. Seniors 
told us loud and clear that the process was somewhat confusing, 
and because they still paid a share of the monthly premium, a 
deductible and co-pays, it was still too expensive. This cost 
share also exacerbated the problem of adverse selection, and 
the claims exceeded premiums throughout much of the first year 
of operation.
    In 2001, we made significant changes, both legislative and 
administrative, to the plan. Senior Rx now offers one plan 
level that retains the $5,000 annual benefit, and is now free 
to qualifying seniors. The formulary is better, includes more 
drugs senior advocates asked for, and Senior Rx is easier to 
apply for and use.
    Because funding for Senior Rx is limited to a set 
percentage of the tobacco settlement, it was essential that we 
use an insurance model to cover the risk of offering each 
senior a maximum benefit of $5,000 per year. Risk was also 
spread across the full spectrum of seniors because Senior Rx is 
now free, and attractive to those with limited prescription 
needs as well. While not every senior will use such a rich 
benefit, the theoretical risk to the State is over $35 million. 
Nevada does not have the financial resources available to cover 
the full risk involved.
    In addition, the insurer has significant resources, 
experience, marketing and management expertise, and economies 
of scale that the State does not. Our approach also limits the 
size, complexity and cost of a State bureaucracy, enabling us 
to dedicate the money to covering seniors.
    Governor Guinn believes that Senior Rx can be a model for 
other States, and potentially for a national prescription 
benefit for seniors. Our participants should provide useful 
statistical data about the potential for such a program, as 
well as the real prescription needs and expenses of low-income 
seniors. While we all face the same budget realities, it is our 
hope that our country can at least begin to offer low-income 
seniors some assistance with their prescription bills. This is 
not a battle States can win on our own, and this population 
desperately needs our assistance.
    Thank you for the opportunity to speak with you today, and 
I look forward to answering any questions.
    [The prepared statement of Michael Hillerby follows:]
   Prepared Statement of Michael D. Hillerby, Deputy Chief of Staff, 
                Office of the Governor, Carson City, NV
    Mr. Chairman and members of the Committee, for the record my name 
is Michael D. Hillerby, and I am Deputy Chief of Staff to Nevada 
Governor Kenny Guinn.
    Thank you for this opportunity to testify on Nevada's work to help 
low-income seniors with their prescription drug needs. Your recognition 
of the success of this unique state program is appreciated, and on 
behalf of Governor Guinn, I look forward to answering your questions 
about our efforts.
    I would like to provide you with a brief history and overview of 
Nevada's Senior Rx Program, and the reasons we built this first-of-its-
kind program using private insurance to underwrite the risk involved.
    First, here are the highlights of the current plan:
Eligible Seniors:
--Age 62 or over;
--Annual income $21,500 or less (no assets test);
--Not eligible for Medicaid assistance;
--Nevada resident for 12 months.
    (The application process allows us to notify seniors who qualify 
that Medicaid benefits may be available to them.)
Benefits:
--Maximum benefit of $5,000 per year;
--$10 copay for generic medications;
--$25 copay for Preferred medications; or for any other drug deemed 
        medically necessary; all others at provider's discounted rate;
--No premium expense to senior.
State Costs:
--Annual premium is $981, or $81.75 per month (inclusive of prepayment 
        discount).
--Approximately $66 per month is the anticipated cost of prescriptions 
        per member.
--The remaining less than 20% of the premium pays for the insurance 
        premium tax, management, marketing, enrollment, pharmacy 
        benefit manager and the reinsurance product to insure claims 
        over $66.
--In the new contract, the state will receive 100% of any savings 
        between projected and actual claims levels (the $66 per month 
        fee). These funds will be used to enroll more seniors.
--Senior Rx is funded by a set percentage of Nevada's tobacco 
        settlement, projected at just over $6 million dedicated to the 
        program this year.
--Approximately $135,000 is used by the State of Nevada for 
        administrative expenses related to eligibility determinations, 
        contract management, outreach and related staffing.
--The senior pays no premium or deductible costs, and is only 
        responsible for the copay on actual prescriptions filled.
Demographics:
--75% of enrollees make less than $17,000 per year, and half have 
        incomes less than $12,700. These seniors who make too much to 
        qualify for Medicaid, but $1,000 per month or less, are those 
        that need this program the most.
--61% of enrollees are between the ages of 65 and 80, while 20% are 81 
        or older.
    The plan was improved in 2001 with administrative and Legislative 
changes, and is now running at full capacity and has enrolled 7,500 
seniors in Nevada. Based on national statistics, this may be as many as 
30%-50% of the low-income seniors in Nevada who do not currently have 
prescription drug insurance.
    The Committee has received previous testimony questioning the 
quality of the program, its costs to seniors, and the success of using 
a private insurance model. While there were challenges involved in 
building the current successful Senior Rx, the lessons we learned may 
be helpful to you and to other states considering such a program.
    Because Senior Rx is a voluntary, stand-alone product, the risks of 
adverse selection are very real. That is, participants could easily 
weigh the costs of their premium against their current prescription 
bills, and only enroll when they would see a net benefit. This could 
obviously create a plan where most members received more in benefits 
than was paid in premiums. Because the plan is now free to low-income 
seniors, it benefits both those with low and high prescription bills.
    When originally devised, the State asked insurers to submit 
proposals that included specifying plan design and benefit levels. 
Because of both the novelty of this type of program, and the risk of 
adverse selection, insurers were hesitant to bid on the plan. States 
considering such a plan should do an honest assessment of their own 
strengths in contracting, plan design and managing such a program. A 
voluntary program takes significant outreach and marketing to reach the 
target population.
    Once successfully awarded, Senior Rx consisted of two plan levels, 
each with different premiums, co-pays, formularies and benefits. 
Copayments ranged from $10 for generic drugs to as much as 50% of the 
cost of a preferred drug. Seniors would apply to the state for a 
subsidy based on their income, and then enroll in one of the two plans 
at a cost of anywhere from $39 to $94 per month, plus prescription 
copays. Seniors told us that the process was somewhat confusing, and 
because they still paid a share of the monthly premium, a deductible 
and co-pays, it was also still too expensive. This cost share also 
exacerbated the problem of adverse selection, and the claims exceeded 
premiums throughout much of the first year of operation.
    In 2001 we made significant changes, both legislative and 
administrative, to the plan. Senior Rx now offers one plan level that 
retains the $5,000 annual benefit, and is now free to qualifying 
seniors. The formulary is better, includes more drugs senior advocates 
asked for, and Senior Rx is easier to apply for and use. It is managed 
by PRAM Insurance Services, uses PCN as the Pharmacy Benefits Manager, 
and is underwritten by Fidelity Security Life Insurance.
    Because funding for Senior Rx is limited to a set percentage of the 
tobacco settlement (approximately $6 million this year), it was 
essential that we use an insurance model to cover the risk of offering 
each senior a maximum benefit of $5,000 per year. Risk was also spread 
across the full spectrum of seniors because Senior Rx is now free, and 
attractive to those with limited prescription needs, as well. While not 
every senior will use such a rich benefit, the theoretical risk to the 
state is over $35 million. Nevada does not have the financial resources 
available to cover the full risk involved.
    In addition, the insurer has significant resources, experience, 
marketing and management expertise, and economies of scale that the 
state does not. Our approach also limits the size, complexity and cost 
of a state bureaucracy, enabling us to dedicate the money to covering 
seniors.
    Governor Guinn believes that Senior Rx can be a model for other 
states, and potentially for a national prescription benefit for 
seniors. Our participants should provide useful statistical data about 
the potential for such a program, as well as the real prescription 
needs and expenses of low-income seniors. While we all face the same 
budget realities, it is our hope that our country can at least begin to 
offer low-income seniors some assistance with their prescription bills. 
This is not a battle states can win on our own, and this population 
desperately needs our assistance.
    Thank you for the opportunity to speak with you today and I look 
forward to answering any questions you might have.

    Mr. Bilirakis. Thank you very much, sir.
    Dr. Tyler.

                    STATEMENT OF BRIAN TYLER

    Mr. Tyler. Thank you, and good afternoon, Mr. Chairman, 
members of the committee. My name is Brian Tyler. I am Senior 
Vice President with McKesson Corporation. McKesson is a Fortune 
35 health care services company. We are not a manufacturer of 
drugs, but we do occupy a fairly unique position in the supply 
chain serving both the retailer and the manufacturer 
constituents.
    As part of our reach and services available to them, we 
have been asked to administer the Together Rx card, and I ma 
here today to talk about McKesson's role as the administrator 
of the Together Rx Card Program.
    The Together Rx card from the beginning was designed as an 
interim solution. It is a savings program targeted at Medicare 
enrollees with incomes below 300 percent of the Federal poverty 
level, and no existing prescription coverage. It was funded by 
seven leading manufacturers--Abbott Labs, AstraZeneca, Aventis, 
Bristol-Myers Squibb, GlaxoSmithKline, Johnson & Johnson, and 
Novartis. I would like to quickly just highlight four important 
elements of the program.
    First, savings. The design is to provide meaningful savings 
direct to the eligible senior participant. We offer an average 
savings of 20 to 40 percent of the drugs on this program. I 
should also note importantly, the enrollment process will be 
linked to existing patient assistance programs. These programs 
for the most needy of the eligible enrollees provide drugs at 
no cost or at nominal fee. This will further enhance the 20 to 
40 percent savings.
    The second aspect I would like to outline is broad access 
to medications. Currently there are over 150 medications as 
part of this program, drugs like Glucophage, Voltaren, Paxil, 
Gleevec and Pravachol, for the treatment of diabetes, 
depression, cancer and high cholesterol, just to name a few.
    The third thing I would like to point out is the wide 
reach. This is the most inclusive program in terms of 
eligibility requirements, and we estimate that between 8- and 
11 million Medicare enrollees will be able to participate in 
this program.
    And, last, and very importantly, the ease of use aspect. 
This card is easy to use for the senior. It is easy to use for 
the pharmacist. It is free to the patient. It is a single card, 
which eliminates a lot of confusion and disruption at the 
pharmacy counter. There is a single enrollment process, one 
phone number, to be eligible for all the products covered under 
this card. And, again, it is tied to the seven distinct patient 
assistance programs. This program requires only a signature to 
enroll and become eligible for.
    The Together Rx card has been endorsed by many of our 
friends in the retail community, including Wal-Mart, CVS, 
Eckard, Safeway, Albertson's, Costco, many others. Independent 
pharmacists will be accepting this card, including the 4,000 
members of McKesson's voluntary network. We also have been very 
fortunate to have the support by many leading health care 
agencies and senior organizations, including AARP and the 
National Council on Aging.
    We have very significant plans to promote this card to make 
sure we get the uptake we all desire. Let me highlight two of 
these features. One, the 3,000 sales representatives of the 
member manufacturers will be distributing materials directly to 
the physician's office, and NCOA, through its 17,000 affiliated 
community centers, will make enrollment forms available.
    The program has just very recently been announced, April 10 
was the official announcement of this program. The response has 
been extraordinary. Over 50,000 individuals accessing our Web 
site, generating 2 million hits, over 40,000 calls to our call 
center. We have received numerous expressions of interest from 
additional manufacturers, retailers, existing discount card 
programs, and other interested agencies on how they, too, might 
collaborate. And we are excited about following up on all those 
conversations.
    I want to stress, we view this as an interim solution, and 
we commend the President and the Members of Congress who are 
pursuing a more comprehensive Medicare prescription benefit 
program. The Together Rx card is senior-friendly, pharmacist-
friendly, and we believe will provide significant benefit to 
those in need.
    Thank you very much, Mr. Chairman and members of the 
committee.
    [The prepared statement of Brian Tyler follows:]
  Prepared Statement of Brian Tyler, Senior Vice President, Business 
              Development & Strategy, McKesson Corporation
    Good morning, Mr. Chairman and members of the committee.
                              introduction
    My name is Brian Tyler, and I am Senior Vice President, Business 
Development and Strategy, at McKesson Corporation. Thank you for 
inviting me here today on behalf of McKesson Corporation to discuss our 
role as the administrator of the Together Rx TM Card.
                     together rx TM card
    Medicare seniors on limited income who don't have prescription drug 
coverage sometimes have to make difficult choices between essential 
medicines or food on the table. The Together Rx TM Card 
combines the resources of seven major pharmaceutical manufacturing 
companies to address this need by offering average savings of 20% to 
40% on more than 150 widely prescribed medicines. This free, easy-to-
use card is available to seniors who lack any public or private 
prescription drug coverage and have incomes that meet the eligibility 
thresholds. These income thresholds, at $28,000 per year for 
individuals or $38,000 for couples, or approximately 300% of the 
federal poverty level, exceed those of any other drug savings card now 
available; thus, more seniors in need will be eligible for this Card.
    The founding members of Together Rx, L.L.C., are: Abbott 
Laboratories, AstraZeneca, Aventis Pharmaceuticals, Bristol-Myers 
Squibb Company, Glaxo
SmithKline, Johnson & Johnson (through its Ortho-McNeil Pharmaceutical, 
Inc. and Janssen Pharmaceutica Products L.P. companies.), and Novartis 
Pharmaceuticals Corporation. McKesson is facilitating this single card 
that offers access to savings on more medicines than any existing 
pharmaceutical company prescription savings program. As a result, the 
Together Rx TM Card makes it more convenient and easier for 
those enrolled in Medicare to get medicines, such as Glucophage, 
Voltaren, Paxil, Monopril, Reminyl, Glivec, Synthroid and Pravachol, 
which they so critically need to fight diabetes, arthritis, depression, 
hypertension, Alzheimer's disease, cancer, hypothyroidism and high 
cholesterol.
    We have seen tremendous enthusiasm for and interest in this 
initiative. In the first 24 hours since the Card was unveiled on April 
10, more than 10,000 consumers visited the Together Rx Web site and we 
received nearly 11,000 phone calls. As of two days ago, that number had 
grown to 50,000 consumer visits to the Web site and 40,000 calls. By 
June 1, when the Card is effective, we hope to reach a large percentage 
of the estimated eight million to 11 million Medicare recipients who 
are eligible for this Card.
    This is truly an extraordinary response, which we hope will 
continue as the seven manufacturing companies combine their marketing 
expertise to expand the universe of eligible seniors. More than 30,000 
sales representatives of the seven manufacturers will distribute 
enrollment materials in physicians' offices, while the Card is also 
promoted through continued advertising and outreach at senior centers. 
Together Rx TM has been endorsed by many leading healthcare 
and senior citizen organizations, including AARP and the National 
Council on Aging, both important partners in publicizing this Card. 
Through the NCOA's extensive network of over 17,000 affiliated 
community centers and its online web site, benefits checkup.org, we 
will be able to reach out widely and quickly to Medicare enrollees in 
communities across the country, and ensure they have the necessary 
information to enroll in the program.
    As noted earlier, McKesson Corporation serves as the administrator 
of the Together Rx TM Card. We currently administer the 
prescription discount program for Novartis and have scaled our offering 
(enrollment processing, consumer and pharmacist hotlines, pharmacy 
transaction adjudication, manufacturer-to-pharmacy reimbursement) to 
facilitate the technological standardization of the prescription 
savings programs offered by the seven Together Rx companies. As the 
Together Rx TM Card administrator, McKesson will process 
card applications, offer help and information via a dedicated toll-free 
number (1-800-865-7211) and Web site (www.
Together-Rx.com), distribute cards to enrollees, facilitate pharmacy 
participation and adjudicate transactions. We are uniquely positioned 
to connect three important constituencies: the low-income senior 
citizen, the pharmacy and the manufacturer. Our technology makes it 
possible for savings to be realized at the point-of-sale in the 
pharmacy, and the use of a single card offers unprecedented ease of use 
to patients and pharmacists.
    McKesson was chosen to administer this Card as a result of our 
unique position and capabilities in the U.S. health care delivery 
system and our proven expertise and experience in providing services 
and technological connectivity to deploy programs such as the Together 
Rx TM card successfully. Headquartered in San Francisco, 
McKesson is a Fortune 35 corporation and the world's largest healthcare 
services company. As one of the largest nationwide distributors of 
pharmaceuticals and medical-surgical products to pharmacies and other 
health care providers, we serve as the interface between the 
manufacturing and the retail pharmacy community. For the past 165 
years, McKesson has served as a safe and efficient channel for the fast 
delivery of critical medicines to our pharmacy customers, which include 
thousands of independent and chain drug stores as well as hospitals, 
clinics, nursing homes and physicians' offices across the country.
    Through our expertise in advanced healthcare information 
technology, McKesson is also a leader in designing Patient Assistance 
Programs (PAPs), which allow many of the world's leading drug companies 
to meet the needs of lower income patients who lack insurance coverage. 
We currently manage 10 PAPs and have served more than 2 million 
patients over the past few years. As a unique characteristic of the 
Together Rx TM, McKesson will screen applications during the 
enrollment process and notify those at the very lowest income levels of 
their eligibility for even greater savings--and, in some cases, free 
medicines--from the patient assistance programs offered by the 
individual pharmaceutical companies or by foundations supported by the 
individual companies. Currently, such eligibility is determined by 
physicians or other health care providers, and many eligible and 
underserved populations are unaware of these patient assistance 
programs.
    Let me emphasize that the Together Rx TM Card has no 
formulary. McKesson is not paid to drive compliance or market share, or 
encourage therapeutic substitution. McKesson will receive an 
administrative fee for its role in the Together Rx TM Card 
program that is borne entirely by the participating manufacturers, but 
neither McKesson nor the pharmacist retains any portion of the savings 
provided by the manufacturer. Chain drug stores across the country, 
including Wal-Mart, Rite Aid, Walgreens, Target, Albertson's, Costco, 
Kroger, Safeway, and Eckerd have shown strong support for the Together 
Rx TM card, along with thousands of independent drug stores, 
including the over 4000 retailers who are part of McKesson's voluntary 
network of Valu-Rite stores. By accepting the card at their retail 
outlets in communities across America, participating pharmacies have 
made the commitment to pass through directly to the patient 100% of the 
savings being offered by the pharmaceutical companies. We are actively 
speaking with many other pharmacies and expect to enlist additional 
support and commitment in the near future.
                                closing
    I would like to close by reiterating that the Together Rx 
TM Card provides much-needed assistance to people on 
Medicare who are of limited income and currently struggle with the lack 
of prescription drug coverage. This program is an immediate, interim 
step that will provide drugs in a convenient and expeditious manner to 
those most in need of drug coverage until a comprehensive Medicare 
prescription drug benefit is enacted and implemented.
    The lack of prescription drug coverage among Medicare beneficiaries 
remains a serious national problem that no single company can solve. We 
at McKesson commend President Bush and those in Congress who are 
calling for enactment of a comprehensive Medicare prescription drug 
benefit this year.
    While we wait for that to become reality, however, we would like to 
applaud the efforts of the founding members of the Together Rx 
TM Card program. We are proud to be part of an interim 
solution to help low-income seniors realize needed savings at the same 
time that they gain broad access to medicines.
    Thank you very much, Mr. Chairman and members of the Committee. I 
would be happy to take your questions.

    Mr. Bilirakis. Thank you very much, Dr. Tyler.
    Last, but not least, Mr. Fuller.

                  STATEMENT OF CRAIG L. FULLER

    Mr. Fuller. Thank you very much, Mr. Chairman, Mr. Brown, 
good to be with you today. I have a statement which I will 
submit to the record, but I thought I might best use a few 
minutes here before going to questions just to talk a little 
bit about the path we have traveled.
    I represent the National Association of Chain Drug Stores. 
We have some 200 retail members, with some 35,000 chains. 
Nearly 90 percent, in some stores more than 90 percent, of the 
people that come to those stores purchase their prescription 
medication with some sort of third-party payer. Indeed, most 
seniors have some kind of a plan for their prescription drugs. 
But our pharmacists, 100,000-some strong, are faced every day 
with the senior who lacks any drug coverage whatsoever, trying 
to pay for that product which is going to help them either 
recover from an illness or deal with a chronic illness, and so 
we have been very concerned about this issue. And I guess I am 
here to say, with all due respect to the members' opening 
comments, that I don't think one should walk away from interim 
measures because I think they can be bold, I know they can be 
very beneficial for the families of people who can't afford 
their prescription medication.
    We looked last year very closely at what the administration 
was proposing. We believed and said then, and we continue to 
say, that the proposal the administration has come forward with 
on a discount card ought to come here for airing and 
discussion. And so we were very pleased that Dr. McClellan was 
here. Indeed, we have had a number of conversations with him, 
and understand their approach, and to share with him our 
approach.
    I thought one of the most important developments last year 
actually was the fact that manufacturers looked at ways, 
innovative ways, to come forward with programs and card 
programs that would provide seniors with meaningful benefits. 
And, indeed, over time, I think the natural competition out in 
the marketplace delivered at the end of the cycle, before this 
most recent announcement, delivered benefit cards from 
manufacturers where there is no guessing. For one of the 
manufacturers the drug is $15, for the other it is $12.
    We believe now with seven companies--actually, one of them 
already was in the plan, but six new companies coming onboard 
with the Together Rx card--a total of nine companies now having 
programs for seniors that are available through cards, that 
this is a good development, that in fact it is a very 
meaningful development for seniors.
    Our concern was that for seniors to take advantage of these 
programs, they had to be able to get the best program available 
through a single card, or at least fewer than ten of 15 cards. 
And so we began last year and early this year, a process of 
looking at ways that that might be accomplished.
    We do believe, and we would support legislation, that would 
within CMS or HCFA--as some fondly still refer to it--that we 
do believe that an entity could be created that would retain an 
administrator for a single card program. A single card program 
would allow manufacturers to come forward with whatever program 
they wanted to provide to seniors, and that program could be 
made available in the retail setting to the seniors currently 
without coverage.
    Another very important role for government in that regard 
is the whole determination of eligibility because, obviously, 
there are privacy concerns and other issues, and we think the 
government could play an important role there.
    Perhaps most importantly, and I think addressing one of the 
messages we have certainly heard from a number of the members 
this morning, is that with a stop-loss provision, all Medicare-
eligible seniors could have a benefit, a stop-loss benefit, 
that they would be entitled to if there was an outlay of cash 
equal to whatever level you want to set. We haven't priced it 
out precisely. I would look forward to the administration's 
estimates of that. We would look favorably at $6,000, $4,000, 
whatever level was felt could be afforded. But the combination 
of a stop-loss provision and a single card program within CMS, 
we think, would be very beneficial.
    Last, I will say that in the course of developing this, we 
found a number of manufacturers interested in looking at simply 
a private step and, therefore, we sought and we announced 
recently the creation of a program we think would be helpful, 
the creation of a Pharmacy Care Alliance, that we would try to 
bring as many groups into as possible to help educate low-
income seniors on the availability of these benefits, and the 
creation of a Pharmacy
CareOneCard.
    We are not really in a naming competition, and I am very 
pleased to say that we have had a number of talks for several 
weeks--actually, 2 months--with McKesson and with the companies 
there, and the concept of a common card with multiple 
manufacturers is something that we think is very beneficial to 
seniors, and it is much more workable in the marketplace, so we 
applied what they have done, and we look forward to working 
with them to make that a reality.
    I will stop there, and would welcome your questions.
    [The prepared statement of Craig L. Fuller follows:]
   Prepared Statement of Craig L. Fuller, President & CEO, National 
                    Association of Chain Drug Stores
    Mr. Chairman and Members of the Subcommittee, I am Craig Fuller, 
President and CEO of the National Association of Chain Drug Stores 
(NACDS). NACDS represents about 200 chain pharmacy companies that 
operate about 34,000 retail pharmacies all across the United States.
    Chain pharmacy is the single largest segment of pharmacy practice. 
Our members include the traditional chain pharmacies, the food/pharmacy 
combinations, and the mass merchandise pharmacy operations. We filled 
about 70 percent of the 3.1 billion prescriptions provided across the 
nation last year. We appreciate the opportunity to describe for you our 
ideas on both interim steps that the Congress can take to help seniors 
obtain necessary medications, as well providing a comprehensive 
Medicare prescription drug benefit.
                interim approaches to pharmacy coverage
    First, let me talk about interim steps that we encourage Congress 
to take if a comprehensive drug benefit is not achievable this year. If 
we cannot come to agreement, or insufficient time exists to develop a 
voluntary benefit for all seniors, then we think we should start with 
making medications more accessible for the most vulnerable in society, 
and those with the highest medication bills.
    Consolidated Manufacturer Card Program with ``Stop Loss'' Coverage: 
NACDS supports an interim approach that would have two components. The 
first component would create the necessary Federal infrastructure for 
low-income seniors to more easily access the various drug manufacturer 
medication subsidy and discount programs that are being developed. The 
second component would provide a full pharmacy benefit for seniors who 
need ``stop loss'' coverage because they have high out of pocket drug 
costs.
    First, let me talk about our ideas on the manufacturer-based 
programs. At last count, nine manufacturers have developed these 
programs over the past few months. Some of these programs provide 
discounts, while others provide subsidies, such as paying the full cost 
of the prescription other than a $12 or $15 co-pay.
    However, each program has been issuing its own ``card'' to seniors 
to access these discounts and subsidies at the pharmacy. Moreover, each 
program has different eligibility criteria and enrollment forms, and 
other requirements to access the program. While NACDS views these 
programs as very worthy, we are concerned that seniors will be confused 
by the multiple programs, and that they will create operational 
difficulties for pharmacies having to deal with multiple cards for 
seniors.
    As a result, NACDS announced last month that it was launching the 
Pharmacy Care Alliance, which represents a strong first step by retail 
pharmacy leaders to help seniors obtain needed prescription drugs. 
Among other activities, the Alliance will help educate seniors about 
these programs so that they can be used to the maximum extent possible.
    We have also created the PharmacyCareOneCard--a new concept that 
would allow low-income seniors to carry a single card for participating 
in a broad number of these manufacturers' discount and subsidy 
programs. We hope all pharmaceutical manufacturers that sponsor special 
programs for seniors ``whether they maintain their own card program or 
not--will become partners in the Alliance and offer their programs to a 
national network of retail pharmacies through the PharmacyCareOneCard. 
We hope to build an open, flexible program that allows individual 
manufacturers and retailers to choose whether and how to participate.
    We already have seen results from our efforts to push for a 
consolidated approach. Over the last few days, several manufacturers 
have responded to our call for a ``one card'', and have joined forces 
to create the ``Together Rx'' program, which would allow seniors to 
access these manufacturers' discount programs through the use of one 
card. We are hopeful that this card program might eventually be joined 
with our program--as well as other manufacturer card programs that 
exist in the market--to offer these programs to seniors through the use 
of a true, single standard card.
    While the ``Together Rx'' card clearly moves in the right 
direction, we believe that legislation is needed to facilitate the 
evolution of the goal of creating one card, and making the program more 
permanent for seniors. We believe that Federal legislation should be 
enacted to create a single administrative structure that can be used by 
any manufacturer that wants to offer a discount or subsidy program. 
Seniors would be able to use one card at the pharmacy--rather than 
multiple cards--to obtain lower medication prices.
    Quality of care would also be enhanced, since a single electronic 
prescription processing system would allow the pharmacist to check for 
any potential adverse reactions in filling prescriptions for seniors. 
This could not be achievable without a Federal solution. Our hope is 
that all manufacturers with these programs would use this approach to 
offering their discounts and subsidies.
    Second, as part of our interim proposal, we would support full 
pharmacy ``stop loss'' coverage for seniors who incur more than a 
certain amount in unreimbursed drug expenses each year, such as $6,000. 
The same infrastructure that is used to administer the manufacturer 
subsidy and discount programs can be used to implement this ``stop 
loss'' coverage program. Offering this coverage will start us down the 
road to providing more comprehensive coverage for prescription drugs, 
beginning with the population that needs help the most. Over time, 
Congress can take steps to lower the ``stop loss'' amount so that more 
seniors become eligible for coverage. But, at least we've been able to 
take the first step this year.
    Medicare-Endorsed Discount Card: Before turning to comprehensive 
approaches to pharmacy coverage, I should share with you that we 
continue to oppose the Administration's efforts to establish a 
Medicare-endorsed prescription drug discount program. The Bush 
Administration does, however, deserve credit for starting last year a 
serious examination of innovative private approaches that can provide 
meaningful pharmacy benefits to low-income seniors. However, their 
program will not result in meaningful reductions in the price of 
prescription medicines for seniors. Moreover, any reductions will 
likely just come from reduced pharmacy prices, and not a reduction in 
the price of the medication from the drug manufacturer. This debate was 
moved forward in very productive ways with the result that many 
manufacturers are now offering meaningful price reductions on the cost 
of their medications.
    In addition, we don't think that HHS should be picking winners and 
losers in this market through their endorsement program, or that its 
appropriate to lend Medicare's time-trusted name to private-sector 
entities without strict standards. Finally, we do not believe that the 
Department has the legislative authority to develop this program, not 
do we support Congress giving it to them as an interim measure.
             comprehensive approaches to pharmacy coverage
    Now, let me turn my attention to our ideas for comprehensive 
pharmacy coverage. NACDS supports enactment of a comprehensive pharmacy 
benefit for seniors. In particular, we strongly support H.R. 3626, the 
Medicare Drug and Service Coverage Act of 2002, which has been 
introduced by Representatives Jo Ann Emerson and Mike Ross. This is the 
only comprehensive bipartisan prescription drug bill that has been 
introduced in the House, and contains the many elements that we think 
are important in a meaningful, quality drug benefit for seniors.
    This includes ensuring that seniors have access to the pharmacy of 
their choice, that they are provided with community-based pharmacy 
services with provisions for adequate payment for these services, and 
that the use of low-cost generic drugs is encouraged. We are grateful 
to these two members for their leadership on this issue, and we also 
appreciate the cosponsorship of the Members of Congress that support 
this bill. This bill is supported not only by NACDS, but the entire 
pharmacy community, including the independent pharmacies, hospital 
pharmacies, and nursing home pharmacies.
    In terms of the recent drug benefit proposal that passed the House 
in June 2000, HR 4680--the Medicare Rx Act--you should know that NACDS 
and all of organized pharmacy is concerned with the approach used in 
that bill. I believe we would have similar concerns with that type of 
bill if it were brought to the House floor again this year. In general, 
we have concerns with ``drugs-only'' insurance-based and PBM-based 
approaches to providing prescription drug benefits. We do not support 
the approaches used by these entities to contain costs, because they 
are primarily focused on reducing access to prescription medications, 
and reducing pharmacy reimbursement. Moreover, we also do not believe 
that the Medicare program needs to turn to these middlemen to obtain 
the savings on medications that Medicare should obtain, given its 
purchasing power in the market.
    We believe that the experience of the government's own FEHBP should 
be instructive to Members of Congress as they consider the true 
effectiveness of this approach to providing a prescription drug benefit 
for seniors. Our analysis indicates that escalating prescription drug 
spending in the FEHBP program--which is administered by the same PBMs 
that would be used for Medicare--has contributed significantly in 
recent years to the sharp premium increases seen in the program.
    For example, in 2001, 40 percent of the 10.5 percent increase in 
FEHBP premiums was attributable to drug spending increases. In 2002, 37 
percent of the 13.3 percent increase in FEHBP premiums was attributable 
to drug spending increases.
    Keep in mind that the FEHBP population is not typical of the 
traditional older Medicare population, which uses more drugs and has 
higher per capita expenditures than the much-younger FEHBP population. 
If the PBMs have not been able to manage prescription drug spending in 
the FEHBP program, why should we believe that they would be any more 
effective in the higher-cost Medicare population?
                               conclusion
    Mr. Chairman, NACDS wants to be constructive players in the debate 
on both interim and comprehensive solutions to pharmacy coverage for 
seniors. Our industry is an important player in this debate, because we 
are the primary vehicle by which pharmacy services are actually 
delivered to the patient. We operate an efficient, low-margin, but 
highly effective primary health care delivery system that is accessible 
in many places 24-hours a day, 7-days a week.
    We look forward to working with you and members of the Committee in 
making this happen now and in the future. Thank you again for the 
opportunity to be here today.

    Mr. Bilirakis. Thank you very much, Mr. Fuller.
    Well, those of you who have attended some of our hearings 
and testified--even if you have attended and haven't 
testified--know what my general philosophy is. My general 
philosophy is the intent here is to help people in such a way 
so hopefully they can help themselves when it comes to health 
care.
    It seems like an awful lot of Members of Congress are 
concerned about doing it and doing it one way and only one way, 
and if that isn't the way that it is done, then don't do it. 
And that has been sort of my biggest--I am frustrated with a 
lot of things up here. This is my 20th year, and I don't know 
how in the world I have been able to take it for 20 years. So 
there are many things that I am frustrated with, but that 
particularly.
    I know a few years ago we had a piece of legislation, and 
it would have helped people right then and there. And, well, it 
wasn't what other people wanted and, therefore, it just went by 
the wayside. In the meantime, I wonder how many poor and very 
sick people were not able to get the pharmaceuticals that they 
needed, that they could have gotten if we had done something as 
an interim.
    I mean, all of you have used that. I appreciated Dr. 
Braun--I know she has testified here so many times and does 
such a great job--but I appreciated her making the comment that 
if there is something done for the low-income that it would be 
outside of the scope of Medicare, but the point is she was 
willing to go along with something like that. And I am very 
pleased that AARP has--I don't know whether ``endorsed'' is the 
right word--endorsed the drug discount card, the McKesson, 
discount card. Is ``endorsed'' the right word?
    Ms. Braun. I think we have seen perhaps advantages with the 
discount card that the President is suggesting, or a multi-
card. I think that does have its advantages.
    I would just like to bring up, Mr. Chairman----
    Mr. Bilirakis. Yes, please do.
    Ms. Braun. [continuing] another thought on the discount 
card. I do think our members do want a comprehensive plan. I 
mean, I think that ought to be----
    Mr. Bilirakis. Yes, we all do.
    Ms. Braun. [continuing] but as far as the discount card, I 
certainly would agree with Dr. McClellan that it has 
possibilities of educating, helping CMS understand how these 
kinds of things work and so forth. And one of the things that 
comes to my mind that did not come up this morning is that 
hopefully, if CMS is involved, there would be some ability to 
find out what the costs actually are to the PBMs and what is 
being passed on to the consumers.
    I just recently have had the experience, about a year ago a 
drug that I am taking went off patent. So I checked to see--I 
was paying $153 for my prescription. Went off patent, and I 
checked where I could get it, and I found I could get it for 
$10, what they had charged $153, which is a drug company in 
Long Island, by mail order.
    Mr. Bilirakis. You did that through the Internet?
    Ms. Braun. No, I was aware of this--for years I had been 
getting generic drugs from this company, so I knew--and I 
wanted to see what they would be charging for it--to be exact, 
$9.35.
    So then I decided to see what would happen--that is 
someplace where physicians can get medication. However, I 
decided to find out what someone else would pay for it if I 
gave them a prescription for this medication. What I found out 
was that what I could pay $10 for, they could get it from Wal-
Mart for $49. They could get it from AARP mail order for $84. 
They could get it from Walgreen for $107. Or they could go to 
Eckard's and pay $137.
    Now, true, they would save something on $153, but it is 
nothing compared to what could be saved, and obviously all of 
those other PBMs, chain drug stores, what have you, they could 
be getting it from the same source. I am sure Darby's Drug is 
not losing money selling it to me for $9.35.
    So, I have a real concern about that gap. I would be 
hopeful that if something did come up with a discount card, 
that if the government is involved, if CMS is involved, they 
can require that they know what the costs are to the PBM, just 
like they require to find out what the cost is----
    Mr. Bilirakis. Well, that is right. You know, we see 15 
percent and 20 percent and 40 percent and all that, and that is 
a question that we all raise. Actually, you are leading me on 
to exactly what I wanted to talk to Dr. Tyler about.
    But I would ask you this, because the discount cards are 
out there--and my time is already up--but because the discount 
cards are out there, is AARP making available to its members 
information on the cards, how to use them, and things of that 
nature?
    Ms. Braun. Well, I think that may be part of this campaign 
that we are going to do, but I do think it is getting more and 
more confusing, and none of the cards really give you any 
decent amount of discount.
    Mr. Bilirakis. Including the McKesson? I realize it is 
brand new, but----
    Ms. Braun. I have not really seen the McKesson situation 
and what that will do, but I do think ultimately--of course, 
the members are very anxious to have an insurance program that 
will cover all of them, but I do think that it would be helpful 
if CMS was involved with these cards, and not just with the 
drug companies starting them when we have no idea.
    Mr. Bilirakis. Any comment on that, Dr. Tyler?
    Mr. Tyler. Yes. Thank you, just maybe a couple of quick 
things. One, we would ask for a little bit of time to improve 
our communication and get the information out and widely 
available. The program has been live for only 5 days, and I can 
assure you you will continue to see a stream of information 
forthcoming.
    I think the question was raised as to whether the discount 
will be meaningful, and I think based on the experiences of a 
lot of discount cards previously in the marketplace, that is 
probably a fair question to ask.
    I can tell you that the design of this program is different 
than the programs that you have seen in the past, which were 
mainly funded by retailers and/or PBMs.
    This plan is sponsored by the drug companies. They have 
specified specific discounts off of their wholesale acquisition 
costs. That creates a specific dollar amount for each product 
that is intended to be passed through to the patient. Think of 
that as an electronic coupon, if you will.
    Mr. Bilirakis. So that would be the wholesale acquisition 
cost?
    Mr. Tyler. That is correct, which essentially think of as a 
list price. So they have created a discount off of a list 
price, an absolute dollar amount, with the intention to be 
passed through to the customer at the time of the point of sale 
transaction.
    Now, another nuance in the program is it essentially sets a 
maximum price by linking the maximum price you can charge to an 
AWP. So it was just referenced that lots of products are 
charged lots of different prices in lots of different 
marketplaces based on lots of different local competitive 
dynamics. This would essentially set a maximum reimbursable 
price off of which the discount would come.
    So, with time, as this program comes to market and 
transactions are being processed, which should be in June, the 
discounts--there should be great transparency.
    Mr. Bilirakis. Mr. Fuller, any comment?
    Mr. Fuller. Well, I think that, first of all, I would say 
that one of the issues is delivering to the senior an easily 
accessible and meaningful benefit, and I think that when you 
see the kinds of benefits that are recently being offered where 
manufacturers are taking brand name products that might be 
selling for $100 or $150 and selling them for $12 or $15, or as 
Dr. Tyler is describing, having a set reduction, that is 
meaningful, and that is a very important step forward, which I 
think we ought to embrace and help seniors understand how to 
take advantage of that.
    I would also indicate and associate myself with some of the 
comments Dr. Braun made by saying that the role of the 
pharmacist in this, when individuals come in as cash-paying 
customers without benefits, the role of the pharmacist is very 
beneficial for all of the health-related reasons and counseling 
reasons we have talked about, but also because it is pretty 
clearly demonstrated that there is a much higher utilization of 
generic drugs. And I think the point being made is that 
patients who need medication ought to get counseling and 
understand how to find the best drug for them that they can 
also afford.
    And so some of these discrepancies that were being 
described relate to the difference between the cost of a 
generic drug and the cost of a brand drug, and that is 
something that we in pharmacy do support and are supportive of. 
And I think that is another area where there are some very 
important savings for seniors.
    Ms. Braun. Those were all generic.
    Mr. Bilirakis. I am sorry, what?
    Ms. Braun. Those were all generic, the prices that I 
quoted.
    Mr. Bilirakis. All generic, and yet such a wide range.
    Ms. Braun. The brand price was $153. All the others were 
generic. Everywhere from $10 to $137 for the same drug.
    Mr. Bilirakis. Well, I am going to yield to Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. It is a pleasure, Dr. 
Braun, to hear a consumer so sophisticated that she counts down 
the number of days until a drug goes off patent.
    Ms. Braun. You are right.
    Mr. Brown. You don't see that often, obviously. I think 
your statement at the end, when you said that, just underscores 
so much of what all of this is about.
    The loopholes created accidentally, obviously, by Waxman-
Hatch on generics that we want to close, that Representative 
Emerson and Mr. Stupak and some of us want to close the so-
called GAP bill as supported by Mr. Fuller's group and 
supported by all the auto companies, the United Auto Workers, 
by all the telecom companies, the Baby Bells and the CWA, it is 
supported by Marriott, it is supported by BlueCross/BlueShield 
and other insurers, it is supported by darn near everybody 
except the prescription drug companies and the Bush 
Administration and, come to think of it, those are many of the 
same people. And it is important, I think, when I hear the 
previous witness come in--I just sit here amazed today when I 
think about--he talked about--over and over and over the script 
was, from many people on that side of the aisle, it is going to 
cost $2200 down the road, per person. We are going to have to 
raise taxes to do that.
    The same week that the majority is going to pass a huge tax 
cut that goes overwhelmingly to the richest people in this 
country, at the same time the administration nor the majority 
will do anything about the price of prescription drugs, 
allowing these drug companies to continue to scam on the 
patent, on the extension of the patent. You know, you 
illustrated that very well.
    There is a wide range of generic costs, that is 
competition. That is fine as long as the competition is there. 
Mr. Fuller's stores can compete among one another. Maybe some 
of them will charge $100, maybe some of them will charge $10, 
that is all fine.
    But the fact is, we sit here, we bemoan the cost of $2200 
per senior--wherever that came from, from the previous panel 
witness--but nothing about these tax cuts and nothing about any 
cost controls or price controls or restraints on costs. As Dr. 
Lambrew said so well, it is clearly a question of--it is not a 
question of resources, it is a question of priorities, and this 
Congress doesn't have it together. We are going to continue to 
put off this decision. We can include this in a Medicare 
prescription drug benefit. We could do something about prices. 
Instead, Congress' priorities are let us do a huge tax cut for 
our richest friends and the largest corporations in the 
country, and all come to committee, and let us just talk about 
how much we all want to do a prescription drug benefit, and 
send a news release out to our constituents saying ``I am for 
prescription drug benefit,'' even though I am not really 
funding it, even though I am more for a tax cut, but they 
forget to write that part.
    Dr. Lambrew, the President's Budget, as you know, contains 
no comprehensive drug benefit for all beneficiaries in States 
that access--would be part of a Medicare Reform Plan, a plan 
presumably to, in some form, privatize Medicare. The President 
has had principles for reform for almost a year, but we have 
not seen a plan there. What does all this mean? The President 
seems to believe that Congress can't afford to add a 
prescription drug benefit until the entire program is reformed, 
while at the same time having far too few dollars because we 
have to pay for the tax cut. Where does this take us?
    Ms. Lambrew. I would just make two comments on that. The 
first is, when we think about Medicare, we should recognize the 
fact that today, in 2002, we haven't seen such a positive cost 
outlook in decades, that Medicare per capita cost curve is now 
growing below the private sector--we heard about this health 
care crisis coming back--is not in the projections for Medicare 
yet. Equally important, the Trust Fund is solvent through 2030, 
according to the latest projections.
    So the question is, what is the financial crisis that 
Medicare is facing today? And you could make a clear case that 
it is not necessarily facing a financial crisis today. 
Certainly, it may be, you know. As soon as the Baby Boom 
generation comes into the system, we will have challenges, but 
do we need to focus on it this year? I would argue no. We do 
know that Medicare beneficiaries are losing prescription drug 
coverage almost on a daily basis. We do know that drug prices 
are going up 17, 18 percent every year. So, that, I think, you 
could define as a real crisis whereas the financing issues are 
at least not in the next decade as pressing.
    Mr. Brown. Thank you. I have a couple more questions, but 
just so the panel doesn't have to stay through the votes, I 
will yield my time to Mr. Stupak, if you want to do that, or 
just give him the 5 minutes.
    Mr. Bilirakis. I will just give him whatever time we can 
take, and obviously questions will be raised to you in writing, 
and we are requesting, as per usual, that you respond to them. 
You have waited a long time, and we have rushed right through, 
and we apologize for that, but your testimony is in the record 
itself. Go ahead.
    Mr. Stupak. Thank you, Mr. Chairman. Sorry I missed part of 
it, I had some conflicts so I couldn't be here through the 
testimony, but I did read some of it. Dr. Tyler, I had a 
question I wanted to ask you on the McKesson Company.
    We are looking at it there, and a drug card, as I said in 
my opening statement, sometimes promises big savings, sometimes 
does not. For one constituent it was 12 cents, and when they 
used their drug card again, it actually doubled the cost of it. 
So, I was disturbed.
    And the way I understood your testimony was that you are 
going to be offering discounts on a number of drugs, but not 
necessarily generics. And in your testimony, you said it wasn't 
really McKesson's policy to encourage therapeutic 
substitutions. So, in other words, the way I took that was if 
your card is for a regular drug but there is a cheaper generic, 
how does the senior ever know, if they are using your card, 
that they could actually buy something cheaper, like a generic 
drug as opposed to McKesson's drug?
    Mr. Tyler. Let me make a couple of points. One, the 
physician in writing the prescription plays an important role 
in this process. Certainly, we don't want to begin to influence 
that in our role as the administrator.
    Two, we certainly welcome generic companies to participate 
in this program. It is an open program. We would like to make 
it as inclusive as possible. And, last, to note that if the 
price of the brand is not taken below the generic, there is 
still no reason that the consumer can't purchase the generic 
alternative, and that is part of the value of the conversation 
with the pharmacist.
    Mr. Stupak. But my question to the last witness, the Doctor 
who was here on behalf of the administration, you were looking 
for efficiency and effectiveness and save everybody money, but 
if they are dealing--according to your testimony, the burden is 
really upon the patient to explore that out, that just because 
you have a card, that is not----
    Mr. Tyler. This is not a benefit, this is a savings program 
for the products that are included under that program, many of 
which don't have generic alternatives. It produces meaningful 
savings for each of the drugs, and if there is a generic 
alternative, we hope that the consumer finds his way.
    Mr. Stupak. Let the buyer beware, in other words, Mr. 
Tyler. Well, it is no different than the system is today. The 
only difference is we have taken discounts off of the brand, 
which translates directly into the pocket of the senior.
    Mr. Stupak. And the reason why we are having this hearing, 
because the system we have today doesn't work.
    Mr. Tyler. And we haven't professed this to be the complete 
answer to----
    Mr. Stupak. For the drug companies, it is working, I will 
grant you that, when you can raise it 17 and 18 percent per 
year, that is a pretty good return on your buck. But isn't 
there some responsibility here for these drug benefit managers 
and for the companies that are participating, when you get that 
card, to make sure that not only does the senior get the best 
possible price, but also let them know that there are these 
generics, because according to the last witness, instead of 
passing the alleged 15 percent savings to the consumer, you 
could use that 15 percent for consulting and telling the 
patient--I am sorry--the consumer how best to reduce their 
cost, at least to the Medicaid program, so there are other 
alternatives in there. Don't you feel like you have a sense of 
responsibility here to help out these consumers when they come 
there and they look at these exorbitant prices that they have 
to pay?
    Mr. Tyler. I guess I would say I feel that compared to what 
was available prior to the announcement of this program, we 
have taken significant steps to deliver meaningful value by 
reducing the price of what today is 150 products, part of our 
role as the administrator is to be neutral in administering 
that program.
    Mr. Stupak. So, bottom line is consumer beware, basically.
    Mr. Tyler. Bottom line is 20 to 40 percent savings.
    Mr. Stupak. The last witness was pushing the plan that was 
going to be 15 percent. Underneath your 150 products, it would 
be 20 to 40 percent?
    Mr. Tyler. We project the average saving is 20 to 40 
percent.
    Mr. Stupak. On each prescription?
    Mr. Tyler. On each product in the program, there is a 
minimum savings amount that you must contribute to be eligible 
for the card.
    Mr. Stupak. For each product in the program?
    Mr. Tyler. One hundred fifty products.
    Mr. Stupak. Were your newest drugs in the program? Because 
we all know the expensive part of drugs are the top 50 sellers, 
not the 2,000 that are out there.
    Mr. Tyler. I am not a manufacturer. I can tell you that the 
way the drugs were chosen for the program was for the disease 
states that are common in the elderly population and treated in 
the outpatient setting.
    Mr. Stupak. Sure, but take Tagament The brand price is 
$144, generic price is $28. There is a difference of 80 percent 
there. So, is Tagamin going to be part of it, or are we going 
to have some other drug substitute for Tagamin that doesn't 
cost as much? Are we getting the popular brand drugs here, or 
are we just getting whatever the companies want to put up 
there?
    Mr. Bilirakis. We have got 3 minutes left before we have to 
cast our vote.
    Mr. Tyler. I believe at our Web site you can find a list of 
all the drugs, and there are many common ones in addition to 
the ones I named in my testimony.
    Mr. Brown. Mr. Chairman, I would like to ask unanimous 
consent before we go, to enter the statement in the record from 
Majority Floor Leader Buckley of Nevada, and the statement from 
GM calling for universal----
    Mr. Bilirakis. Without objection, that will be the case.
    [The prepared statement of Barbara E. Buckley follows:]
        Prepared Statement of Barbara E. Buckley, Assemblywoman
    Dear Chairman Bilirakis and Ranking Member Brown: Thank you for the 
opportunity to provide written testimony on the issue of U.S. House of 
Representatives providing prescription drugs for seniors. I enjoyed 
testifying before your committee last year and appreciate the 
opportunity to offer additional thoughts this year.
    At the outset, let me state that seniors are in as desperate need 
of prescription drug coverage this year as they were last year. While 
the attention of the nation has turned to the tragic events of 
September 11th and the war on terrorism, seniors on fixed incomes 
continue to go without prescriptions because of their unaffordability. 
It is also clear to me that adding a prescription drug benefit to 
Medicare makes the most sense; states are grappling with finite 
resources and severe budget shortfalls. States cannot make much of a 
dent in this problem; a national solution would also allow each State 
to use its finite resources on other senior needs, such as receiving 
long term care in their own homes instead of being institutionalized.
    As to Nevada's own Senior Rx program, you are fortunate to have 
Michael Hillerby, Senior Advisor to the Honorable Kenny C. Guinn, 
Governor of the State of Nevada, at your hearing to offer testimony. He 
will undoubtedly share much of the same information with you. I am 
honored to be asked to share my perspective with you as well.
                               background
    The program was an insurance-based program and was operational from 
January 2001-June 2001. The program was administered through a contract 
with a private insurance company. The state was responsible for 
eligibility determinations and contract monitoring. The maximum benefit 
was $5,000 per year and participants were required to pay a deductible 
of $100 per year. Benefits were provided to seniors 62 years of age or 
older with a household income under $21,500 per year. A base premium of 
$40 per month was subsidized by the state based on the annual income of 
the participant. For those individuals with household income under 
$12,700, the state paid 90 percent of the base premium with the 
remaining 10 percent the responsibility of the participant. The subsidy 
was graduated with only 10 percent of the base premium being paid by 
the state for those individuals with household income between $19,100 
and $21,500. In addition, participants were required to pay a monthly 
premium for the two programs that were offered: Nevada Blue and Nevada 
Silver.
    The additional monthly premium paid by participants for the Nevada 
Blue Program (base benefits) was $34.76, while the premium for the 
Nevada Silver Program (enhanced benefits) was $58.31 per month. 
Therefore, the total cost (premium + subsidy) of the Nevada Blue 
Program was $74.76 per month ($40 +$34.76) and the total cost of the 
Nevada Silver Program was $98.31 per month ($40 +$58.31). These costs 
do not include the cost of eligibility determinations and contract 
monitoring done by the State of Nevada.
    Co-payments required under the Nevada Blue Program were $10 for 
generic drugs and $35 or 50 percent of the cost (whichever was greater) 
for preferred drugs. Non-preferred drugs were not covered. Under the 
Nevada Silver Program co-payments of $10 for generic drugs and $25 for 
preferred drugs were required. Non-preferred drugs required a co-
payment of $40 or 40 percent of the cost (whichever was greater). 
Nevada physicians reviewing the formulary felt it did not include drugs 
seniors commonly needed.
    Only a few hundred individuals actually enrolled in the Senior Rx 
Program through the first six months of operation. The lack of 
enrollment in the Senior Rx Program prompted decision-makers to 
question whether the program should be restructured in order to 
increase the number of seniors receiving benefits.
    Discussions that took place during the 2001 Legislative Session 
centered on how the program should be structured. The Governor favored 
continuing Senior Rx on an insurance-based model. A working task force 
of Assembly members favored contracting with a pharmaceutical benefit 
manager or going to a state-operated program. The Legislature engaged 
the actuarial firm of Milliman & Robertson to estimate the cost of a 
state-operated program. Milliman & Robertson's review indicated that a 
state program could be operated at an estimated cost of $53.95 per 
member per month including the cost of administration. The argument for 
retaining an insurance-based program was that the cost to the state was 
fixed and the insurance company assumed the risk of program costs 
exceeding projected levels. The argument for a PBM or state-operated 
program was that it could be run at a lower cost and therefore provide 
benefits to a larger number of seniors.
    After spirited debate between the Governor and the Legislature, 
Senate Bill 539 was enacted into law. The program continues to operate 
as an insurance-based model. Eligibility for the program also remains 
unchanged and is provided to seniors 62 years of age or over with 
household income under $21,500 per year. Individuals are no longer 
required to pay a monthly premium to participate in the program; the 
entire premium cost is paid by the state. A deductible paid by the 
participant is no longer required. The maximum benefit remains at 
$5,000 per year. Co-payments of $10 for generic drugs and $25 for 
preferred drugs are required. Non-preferred drugs are provided based on 
medical necessity. The formulary was revised to include drugs seniors 
commonly need. The premium paid by the state was $106.64 per member per 
month from July 2001-December 2001. The premium paid by the state was 
reduced to $85.27 per member per month for calendar year 2002 (the 
monthly premium can be further reduced by 3 percent if paid in advance 
for the entire year). It should be noted that there is a provision in 
the contract effective January 1, 2002, that should paid claims fall 
below $65.55 per member per month, the entire amount below $65.55 per 
member per month will be returned to the state.
    The monthly premium cost does not include the expenses incurred by 
the State of Nevada for eligibility determinations and contract 
monitoring. In fiscal year 2001-02, approximately $136,000 in 
administrative expenses is allocated to the Senior Rx Program for the 
cost of the eligibility function and contract monitoring. Based on full 
enrollment of 7,500 individuals for the entire year, this represents an 
additional $1.51 per member per month over the current premium paid of 
$85.27 per month.
    As of April 5, 2002, a total of 7,252 participants are enrolled in 
the Senior Rx program. Applications are currently being processed to 
increase enrollment in the Senior Rx program to the maximum level of 
7,500 participants. However, with 15 percent of Nevada's tobacco 
settlement proceeds funding the Senior Rx Program, funding will not 
support 7,500 participants on an ongoing basis. Due to the slow start 
of the program a funding reserve has been generated which is being 
utilized to increase the number of individuals that can be served. If 
reserve funds were not available, the ongoing funding stream would only 
support approximately 6,600 participants at the current premium cost of 
$85.27 per member per month.
    Demand for the Senior Rx Program has increased dramatically based 
on the legislative changes made to the program. Currently there are 741 
individuals on a waiting list to receive benefits from the program.
    The actual cost of the Senior Rx Program has been much lower than 
the premium paid by the state under the terms of the contract with the 
insurance company that operates the program. For the period of July 
2001 through December 2001 there were an average of 3,029 participants 
per month (as of April 5, 2002 there are 7,252 participants). During 
this six-month period the per member per month (PMPM) cost averaged 
$37.64 in direct pharmacy costs. This PMPM cost does not include the 
contractor's administrative costs for items such as insurance premium 
taxes paid to the state, risk charges, reinsurance costs, and other 
administrative costs including payments made to the pharmacy benefits 
manager. The contractor's administrative costs are not specifically 
identified so only rough approximations can be made in estimating these 
costs. However, based on the premium paid during the July 2001 through 
December 2001 period of $106.64 per month, it is clear that the 
contractor made a significant amount of money during this six-month 
period. Even if the contractor's total administrative costs amounted to 
35 percent of the PMPM costs, the contractor would have received in 
excess of $1 million over the total program costs incurred during the 
six-month period between July 2001 and December 2001.
    As indicated earlier, the premium was lowered to $85.27 per month 
beginning January 2002. The latest information available on costs is 
for the month of February 2002. The PMPM cost in February 2002 was 
$38.46 which does not include administrative expenses of the insurance 
company or the state for the eligibility function and contract 
monitoring. The PMPM costs will be monitored throughout the year to 
determine if the monthly premium is appropriate or needs to be modified 
when the contract is awarded for calendar year 2003.
                               conclusion
    With mounting fiscal problems in many states, States do not have 
the financial ability to help all seniors in need of help with 
prescription drug coverage. Individuals with disabilities are receiving 
no help in many states. Individuals moving from state to state have a 
difficult time accessing different state programs with different 
eligibility standards. Adding a prescription drug benefit to Medicare 
would be the best solution for those on Medicare without prescription 
drug coverage.
    In our own state, the debate between models for prescription drug 
coverage will likely be settled objectively: which program is the most 
cost effective and covers the largest number of seniors. I believe 
every elected official wants to make the most of our limited funds and 
will support the program that accomplishes that goal. In another year, 
we should have enough actuarial information to tell us which model is 
most affordable and can guide our future action accordingly. In the 
meantime, I urge our federal representatives to take meaningful action 
to help the states with this critical need.
                                 ______
                                 
Prepared Statement of Bruce E. Bradley, Director, Health Plan Strategy 
             and Public Policy, General Motors Corporation
    Mr. Chairman and distinguished Committee members, I am Bruce 
Bradley, Director of Health Plan Strategy and Public Policy at General 
Motors (GM). It is an honor to submit this statement to this Committee 
as you work to design and to pass a Medicare prescription drug benefit.
    There are few issues more important to seniors, eligible people 
with disabilities, their families--and employers--as filling the 
coverage gap represented by the absence of a Medicare prescription drug 
benefit. Moreover, a meaningful prescription drug benefit is critically 
important to employers, who are struggling to provide retiree health 
coverage while facing double-digit increases in health insurance 
premiums and pharmaceutical costs.
    GM faces extraordinary financing and delivery challenges in the 
administration of our prescription drug benefits, particularly as it 
relates to the benefits we provide to our retirees. We have a great 
deal of experience in administering drug benefits and well recognize 
the challenges you face in attempting to design a workable and 
meaningful drug benefit for the Medicare program.
    We commend the Energy and Commerce Committee for addressing this 
issue. My statement will focus on the challenge GM faces in the 
delivery of our pharmaceutical benefit, how we manage it, and what our 
priorities would be for a Medicare prescription drug benefit. It is our 
hope that the lessons we've learned can be useful to this Committee as 
it takes critical steps towards achieving a bipartisan agreement on a 
meaningful and universal Medicare prescription drug benefit.
              prescription drug cost challenges facing gm
    GM insures 1.2 million workers, retirees and their families. We are 
the largest private provider of health care coverage. GM spends over 
$1.3 billion a year on prescription drugs for its current and retired 
workforce and their families. Despite our aggressive management of our 
prescription drug benefit and associated costs, the current 15-20 
percent annual growth rate still more than quadruples the general 
inflation rate, and clearly represents a troubling trend.
    From our perspective, these drug costs are driven by a multitude of 
factors, including increased utilization (both appropriate and 
inappropriate), and price. While we are attempting to manage these 
costs through a number of interventions that will be outlined later in 
this testimony, we do not see significant potential to reduce the trend 
without assistance from the federal government. More specifically, only 
the federal government can pass legislation to increase coverage by 
enacting a Medicare drug benefit.
    Although GM's Medicare-eligible population represents only 33 
percent of our covered population, it accounts for about nearly half of 
the prescription drug cost or $508 million. The current financing 
challenges that our Medicare-eligible population poses will only grow 
worse as the baby boom generation starts to retire less than ten years 
from today. The growing financial burden posed by prescription drug 
costs literally threatens the ability of many U.S. companies to be 
effective competitors within the world marketplace. If we do not get a 
handle on these costs in short order, companies will have to make 
undesirable choices that may limit access or shift costs to current and 
retired workforce. Faced with overwhelming retiree health cost 
challenges, many other companies have actually chosen to drop health 
benefits for this population. In fact, between 1994 and 2001, there was 
a 43 percent decline in firms offering retiree coverage.1
---------------------------------------------------------------------------
    \1\ William P. Mercer. Health Benefit Costs Up 11.2% in 2001--
Highest Jump in 10 Years. National Survey of Employer-Sponsored Health 
Plans 2001. New York: William P. Mercer, Inc.
---------------------------------------------------------------------------
                  gm management of drug benefit plans
    GM has responded to the multi-faceted challenge of rising 
prescription drug costs with a multi-faceted management response, with 
a mind to assuring the best medical outcomes and value. We have a great 
deal of experience in administering a drug benefit and believe that our 
management techniques have made a positive difference in the quality 
and value of the benefit we offer, and could be applied to the design 
of a Medicare drug benefit.
    We have utilized pharmacy benefit managers (PBMs) to help 
effectively purchase medications, and have ensured that the company 
receives the benefits of their negotiations through very explicit 
performance standards. Our contracts with PBMs encourage medically 
appropriate and cost-effective prescribing and dispensing practices. 
Among the tools our PBMs use are:

 Partners for Healthy Aging: An enrollee/patient and physician 
        education effort which provides information on issues of 
        pharmaceutical safety and use among the elderly
 Therapeutic Interchange: Contacts with physicians to encourage 
        use of formulary medications
 Physician Profiling and Peer Rating: An expansion on the above 
        which provides feedback on quality and utilization performance
 Severe Drug-Drug Interaction Edits: On-line, electronic 
        feedback at the time of dispensing that prevents dispensing 
        drugs that could represent life-threatening interactions. This 
        situation often arises when an enrollee is seeing more than one 
        physician and the respective physicians are not aware of all of 
        the drugs the enrollee is taking. When one of these cases 
        arises, the pharmacist contacts the prescribing physician and 
        reviews the facts of the case before dispensing the potentially 
        conflicting medication.
 Digestive Health Solutions: Addresses unique concerns of 
        patients with gastro-intestinal disease. It provides 
        educational materials to enrollees and encourages appropriate 
        prescribing practices by physicians.
 Dose Optimization: Simplifies the dosing regimen for patients 
        and capitalizes on cost savings of taking one pill versus two.
 Encourage High Quality, Cost-Effective Generic Drug Use: When 
        an appropriate generic drug is available, it is dispensed 
        unless the physician specifies ``dispense as written'' or the 
        enrollee requests the brand drug. If the brand drug is 
        dispensed at the enrollee request, the enrollee pays the 
        difference between the cost of the generic and brand, in 
        addition to the normal co-pay.
                 gm's priorities for a medicare benefit
    GM believes that all Medicare beneficiaries--both seniors and 
eligible people with disabilities alike--should have access to an 
affordable, meaningful Medicare drug benefit. Notwithstanding our 
concerns about prescription drug costs, we regard such coverage as 
necessary because in many cases, prescription drugs are the most 
clinically appropriate and cost-effective treatment.
    We therefore believe that any Medicare drug benefit should include 
the following four components:

 First, a Medicare drug benefit should be universal in nature. 
        All Medicare beneficiaries should have the choice of an 
        affordable drug benefit. The Medicare program has largely been 
        a great success, representing the only population in this 
        nation with the benefit of universal coverage. Virtually every 
        private insurer for the under-65 population recognizes that it 
        is essential to have a prescription drug benefit for quality 
        medical care today.
 Moreover, the distribution of seniors without prescription 
        drug coverage is not limited to low-income populations. In 
        fact, fully half of those seniors without coverage have incomes 
        over 200 percent of the poverty level. Further, of those 
        seniors who do have coverage today, many have extremely limited 
        coverage or are at risk of losing their good coverage because 
        of cost. Addressing this problem effectively, therefore, means 
        designing a universal benefit.
 Second, a Medicare prescription drug benefit should be 
        meaningful and affordable to both beneficiaries and taxpayers. 
        To ensure a stable and accessible drug benefit that is 
        voluntarily chosen by all beneficiaries, it will be necessary 
        to design a substantive benefit that has an affordable premium. 
        This will require a significant investment of federal dollars. 
        We well recognize, however, that Congress has to achieve a 
        bipartisan consensus around what level of federal dollars are 
        available for such an investment, and clearly resources are not 
        infinite. This underscores the importance of a well-managed, 
        cost-effective prescription drug benefit.
 Third, the design of the Medicare prescription drug benefit 
        must be oriented to achieve positive medical outcomes and 
        value. Just as important as designing an affordable, 
        meaningful, and universal drug benefit is managing it well. It 
        would be irresponsible for the Congress to pass a drug benefit 
        without significant attention towards ensuring that the benefit 
        is cost-effectively designed and managed. To that end, the 
        benefit should be designed to encourage appropriate use of 
        high-quality, cost-effective generic medications, require cost-
        sharing that guards against excessive and inappropriate 
        utilization, and integrates state-of-the-art pharmacy 
        management techniques that ensure the use of high-quality, 
        high-value pharmaceuticals.
 Lastly, a prescription drug benefit should provide incentives 
        for employers who are already financing prescription drug 
        coverage for Medicare-eligible individuals to continue to do 
        so. We recognize that the Congress may not be able to afford 
        the same level of benefits that many leading corporations 
        provide to their beneficiaries, but it should provide a much-
        needed floor of protection. As such, it should ensure that 
        employers and health plans currently providing drug coverage 
        can design benefits to wrap around Medicare. Or, alternatively, 
        Medicare should provide these entities with direct financial 
        subsidies that are equivalent to the value of the underlying 
        Medicare benefit. Such policies would appropriately avoid 
        penalizing firms who have generously and voluntarily provided 
        such coverage and slow the recent trend of companies 
        withdrawing their benefits for these populations.
                               conclusion
    GM well recognizes the design, financing, and other challenges the 
Congress faces in constructing and passing a Medicare prescription drug 
benefit. There are few domestic policy issues that are more important 
to successfully address. We hope that our experience, as well as our 
support, can help you develop and pass a long-overdue Medicare drug 
benefit. We look forward to working with you in the days and months to 
come.

    Mr. Bilirakis. Additionally, I have already indicated we 
will have a large number of questions for all of you. Thank you 
so very much for taking time to be here. Appreciate it.
    [Whereupon, at 1:33 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
Prepared Statement of John M. Rector, Senior Vice President Government 
Affairs and General Counsel, National Community Pharmacists Association
    Mr. Chairman, Members of the Committee,\1\ I am John M. Rector, I 
serve as Senior Vice President Government Affairs and General Counsel 
for the National Community Pharmacists Association.
---------------------------------------------------------------------------
    \1\ Members of the House Committee on Ways & Means: William M. 
Thomas (CA), Chairman, Philip M. Crane (IL), E. Clay Shaw, Jr. (FL), 
Nancy L. Johnson (CT), Amory Houghton (NY), Wally Herger (CA), Jim 
McCrery (LA), Dave Camp (MI), Jim Ramstad (MN), Jim Nussle (IA), Sam 
Johnson (TX), Jennifer Dunn (WA), Mac Collins (GA), Robert Portman 
(OH), Phil English (PA), Wes Watkins (OK), J.D. Hayworth (AZ), Jerry 
Weller (IL), Kenny C. Hulshof (MO), Scott McInnis (CO), Ron Lewis (KY), 
Mark Foley (FL), Kevin Brady (TX), Paul Ryan (WI), Charles B. Rangel 
(NY), Ranking, Fortney Pete Stark (CA), Robert T. Matsui (CA), William 
J. Coyne (PA), Sander M. Levin (MI), Benjamin L. Cardin (MD), Jim 
McDermott (WA), Gerald D. Kleczka (WI), John Lewis (GA), Richard E. 
Neal (MA), Michael R. McNulty (NY), William J. Jefferson (LA), John S. 
Tanner (TN), Xavier Becerra (CA), Karen L. Thurman (FL), Lloyd Doggett 
(TX), and Earl Pomeroy (ND).
---------------------------------------------------------------------------
    The National Community Pharmacists Association (NCPA) represents 
more than 25,000 independent pharmacies, where over 75,000 pharmacists 
dispense more than 50% of the nation's prescription drugs and related 
services. Independent pharmacists serve 18 million persons daily. NCPA 
has long been acknowledged as the sole advocate for this vital 
component of the free enterprise system. For decades NCPA has been the 
only national pharmacy association with universal state association 
membership, including those of the Committee's members.
    The National Association of Retail Druggists (NARD), founded in 
1898, has been the association representing the professional and 
proprietary interests of the nation's community pharmacists. To mark 
our centennial year, the NARD House of Delegates voted to change the 
Association's name to the National Community Pharmacists Association 
(NCPA).
    NCPA members are primarily family businesses. We have roots in 
America's communities. The neighborhood independent pharmacist typifies 
the reliability, stability, yet adventuresome ness that has made our 
country great.
    As owners, managers and staff pharmacist employees of independent 
pharmacies, our members are committed to legislative and regulatory 
initiatives designed to protect the public and to provide pharmacists a 
level playing field and a fair chance to compete. We appreciate the 
opportunity to assist the Committee in fashioning a new benefit for 
Medicare beneficiaries to include drug product coverage and related 
pharmacist professional services.
    Competition in retail pharmacies is alive and well. Competition is 
an incentive for efficiency and the price competition in retail 
pharmacy is typically greater than can be found among other providers 
of health services and products.
    The independent community pharmacist of today is simultaneously a 
health care professional and a small businessperson. NCPA and its 
members vigorously support the American free enterprise system, which 
provides the only meaningful climate under which a small business can 
economically survive, have the opportunity to succeed through personal 
efforts, and provide an important and essential service to the 
community.
    Community pharmacists are especially trained to assist you and your 
constituents with the proper use of medications. Medicines, only when 
used properly, can save lives and improve the quality of lives, and 
only when medicines are used properly can consumers, employers and 
governments enjoy actual systemic savings.
    The pharmacies and the 75,000 pharmacists that NCPA represents are 
interested in a wide range of health and business issues such as estate 
tax reform, ergonomics, small business tax relief, confidentiality of 
pharmacist-physician-patient communications and of pharmacy records, 
payment for pharmacists professional services and assuring that PBMs 
process claims but are not allowed to practice medicine or pharmacy, 
accountability for ``managed care,'' elimination of discrimination in 
favor of mail order, and internet sales tax collection.
    The small business independent health care professionals we 
represent are the preferred choice of American consumers, including 
your constituents. Our members function in the market in a variety of 
forms. They do business as single stores ranging from apothecaries to 
full line high volume pharmacies; as independent chains (e.g. 100 
pharmacies) and as franchises. Whatever the form of business entity, 
independent pharmacists are the decision makers for the diverse NCPA 
member companies.
    The most in-depth consumer pharmacy preference survey to date, was 
published by Consumer Reports, in October of 1999. They surveyed 18,000 
consumers and found that consumers, especially seniors, preferred 
independently owned pharmacies for several reasons:

Independents provided more personal attention
Independents provided more useful information about both prescription 
        and nonprescription drugs
Independent druggists were seen as more professional, more sensitive to 
        families' needs, and easier to talk to
Independents kept consumers waiting less time for drugs, had 
        prescriptions ready for pickup more often, and provided out-of-
        stock medicine faster
    The 1200 plus independently owned pharmacies in the Medicine 
Shoppes franchise were ranked second; the supermarket drugstores (7,800 
stores) were third, the mass merchandisers (5,300 stores) were fourth; 
and last were the big corporate run chains (19,300 stores). No 
preference was expressed for mail order.
    Numerous studies have documented the cost savings of comprehensive 
community pharmacy services.
    When properly utilized, community pharmacists services including 
compliance and persistence programs, for example, can save the health 
care system billions of dollars by reducing the need for much more 
costly medical services, including emergency room visits, 
hospitalization, and nursing home admissions.
    The failure by the insurers/PBMs to provide incentives for full 
pharmacist services has led to unnecessary and inappropriate 
prescriptions; to uncounseled prescription drug use; and to reduced 
patient compliance with appropriate drug regimens. In the long run, 
this devaluation of professional pharmacists services and the adoption 
by the insurance industry of a ``commodity only'' approach has 
increased total annual health care expenditures by billions. In 
summary, there is less payment for less care. Consequently, we believe 
that the Committee should be very skeptical of so called ``managed 
care'' which has declined to acknowledge or pay for professional 
community pharmacist services.
    Consumer choice of provider is the life-blood of competition. 
Limits on consumer choice inhibit competition. In our view Medicare 
beneficiaries should be entitled to choice of plan, pharmacist 
provider, and prescription products.
    Consumer choice means cost effective prescriptions. The average 
cash price in a community pharmacy for an Rx drug is $40.47; if insured 
$44.61; and if mail order $52.42. While NCPA members dispense 55% 
generic Rxs, the mail order generic rate is 28%.
    If pharmaceutical products and pharmacist services are to become a 
basic core benefit under Medicare, it is essential, as we stressed to 
the National Bipartisan Commission on Medicare Reform in September 
1998, that:

 Medicare beneficiaries have full access to community pharmacy 
        and community pharmacy has full access to the marketplace.
 All pharmacies, irrespective of practice settings, must be 
        able to acquire prescription drugs at the same price, subject 
        only to economies of scale including volume.
 There be established a realistic professional dispensing fee 
        that recognizes the valuable patient care services provided by 
        the nation's community pharmacists.
 Community pharmacists are able to join together to negotiate 
        with Medicare and its intermediaries.
 Medicare beneficiaries are able to receive prescriptions that 
        are compounded by pharmacists to meet their individualized 
        needs.
 Payments be authorized to pharmacists for disease state 
        management on per-encounter basis for such services as smoking 
        cessation, diabetes, arthritis, asthma, lipids, osteoporosis, 
        cardiovascular and coagulation care management when provided by 
        credentialed pharmacists.
 Beneficiaries retain the right to contract with health care 
        providers including pharmacists for products and services not 
        covered by Medicare.
    Additionally, in conjunction with various national pharmacy 
associations, we have adopted parallel core recommendations for the 
establishment of an outpatient pharmacy benefit for Medicare 
beneficiaries. (See Exhibit 1).
    It is important to understand that the pharmacy benefit managers 
(PBMs) not only dictate unilaterally what pharmacies will be paid, but 
PBMs directly compete with our small businesses through their mail 
order pharmacy subsidiaries or through contracts with other mail order 
companies.
    Today the marketplace for insured prescription coverage is 
dominated by so-called ``managed care'' companies (a.k.a. PBMs). The 
dominance of such companies has created additional barriers to 
competition, it has not enhanced competition. Those attempting to 
``manage'' our market seek to reduce the number of viable competitors 
and to steer unwilling consumers to a few select competitors often 
including, as noted, their own mail order companies.
    It is important to understand that your independent pharmacists are 
not engaging in idle speculation when they express concerns that 
unrestricted PBMs would shift consumers away from their local pharmacy 
to the PBM's own mail order companies with their characteristic high 
profits and under utilization of generic drugs. It is estimated by Wall 
Street PBM analysts that the PBM makes 2 to 4 times as much profit on 
an insured mail order prescription than on an insured prescription 
dispensed in a community pharmacy.
    For the past several years the major PBMs have aggressively 
attempted to switch patients to their mail order programs often 
switching them to a prescription drug not based on the patients health 
care needs but based on rebates from the highest bidder. Often the 
patient is switched to more expensive drugs and denied access to 
appropriate generics.
    The impact of their ``so-called'' care has been equally negative: 
reduced quality control and reduced quality of providers to which 
consumers have access, including providers unlicensed in the consumer's 
state. In fact, the trend for the past decade for insured prescriptions 
has seen PBMs focus exclusively on the prescription drug product and 
eliminating payment for traditional professional community pharmacist 
services. Among the consequences of this ``commodity only'' approach 
has been a significant increase in non-compliance with the drug regimen 
prescribed by physicians and as a consequence diminished quality of 
life for covered consumers and their families.
    NCPA members are forced to accept whatever payment the insurance 
industry and its PBMs dictate. Simultaneously the insurance industry 
and its' allies brazenly characterize such payments as discounts 
``negotiated'' by pharmacies.
    Experts on the insurance industry and their PBM's practices know 
that to characterize the payment for pharmacists fixed by the insurance 
industry and its PBM intermediaries in ``take-it-or-leave it'' 
contracts as negotiated by the pharmacists is akin to characterizing 
the victim of an armed robbery as having donated cash to the 
assailant's favorite charity.
    PBMs refuse to negotiate with independent pharmacies and it is 
unlawful for several independent pharmacies to collectively negotiate 
prescription drug contracts with PBMs. In the last Congress the House 
of Representatives voted 276 to 136 for H.R.1304, the Quality Health 
Care Coalition Act, which would have authorized such small business 
contract negotiations. It is enlightening to recall that the PBMs, 
represented by Express Scripts, unsuccessfully urged the House 
Judiciary Committee to deny independent pharmacists and their 
consumers, including seniors, economies of scale regarding products and 
services achievable through fair negotiations.
    Rather than further erode the small business pharmacy 
infrastructure through the dictates of our ``managed care'' 
competitors, the Committee should guarantee Medicare beneficiaries 
protections similar to those provided by H.R.1304. Allowing pharmacists 
to negotiate would help put an end to the present ability of the 
insurance industry and its PBM intermediaries to unilaterally fix 
pharmacy payments and to reduce the quality of care. Negotiations would 
help to put an end to the tying of prescription insurance coverage to 
the mandatory or coercive use of mail order pharmacy, which denies 
consumers equal access to neighborhood pharmacies and the services of 
independent pharmacists. Incidentally, this bipartisan legislation has 
been reintroduced as H.R.3897, by Representative Bob Barr (R-GA) and 
John Conyers (D-MI).
    We also recommend that the Committee carefully review the growing 
number of lawsuits against PBMs brought by patients, health plans, 
employers, and others alleging PBM violations of their fiduciary 
duties. The PBMs have countered by claiming that they are not obligated 
to fulfill a fiduciary duty and are only obligated to lookout for their 
bottom line interests. Would this be the case with Medicare?
    Regarding the affordability of prescription drugs for all 
Americans, including Medicare eligible persons, we recommend two steps: 
First, the full implementation of the Medicine Equity and Drugs Safety 
Act (MEDS) P.L.106-387, which would allow the importation by 
pharmacists of FDA approved drugs from select countries, principally, 
Canada, United Kingdom, and the European Union. Secondly, the enactment 
of Representatives Cliff Stearns (R-FL)--H.R.1127, which would restore, 
for federal tax purposes, the first dollar deductibility of 
prescription drugs.
    On behalf of the members of the National Community Pharmacists 
Association, we thank the Committee for the opportunity to provide our 
views on Medicare reform.
                              (Exhibit 1)
   Assuring a Quality, Cost-Effective Pharmacy Benefit for America's 
                                Seniors
                 A Unified Agenda for American Pharmacy
       academy of managed care pharmacy (amcp) (withdrew support)
              american college of clinical pharmacy (accp)
               american pharmaceutical association (apha)
           american society of consultant pharmacists (ascp)
          american society of health-system pharmacists (ashp)
           national association of chain drug stores (nacds)
           national community pharmacists association (ncpa)
    national council of state pharmaceutical association executives 
                                (ncspae)
    As policymakers discuss a comprehensive Medicare outpatient 
pharmacy benefit, we encourage Congress and the Administration to 
carefully consider the views of the nation's pharmacists--the third 
largest, most accessible, and consistently most trusted group of health 
professionals.
                               who we are
    Our organizations represent the entirety of the practicing 
pharmacist and corporate business communities that comprise American 
Pharmacy--independent and chain community pharmacists and pharmacies; 
hospital and health-system pharmacists; clinical pharmacists in 
academic health centers, medical group practices, and clinics; 
pharmacists practicing in managed care organizations; consultant 
pharmacists in long-term and senior care facilities; home health care 
pharmacists; and virtually every other type of pharmacist and setting 
where patient care and medication use occur. Our collective memberships 
span the breadth and depth of the entire profession of pharmacy. And we 
are unified in our core beliefs concerning an outpatient pharmacy 
benefit for Medicare beneficiaries.
                            what we believe
 Medicare Should Provide a ``Pharmacy Benefit''--Not a ``Drug 
        Benefit''
    Medications are safe and effective only when they are used 
appropriately. Inappropriate medication use leads to hospitalizations 
and other unnecessary medical costs for which Medicare is already 
paying a substantial price. Seniors need and want pharmacists to help 
them understand how to take their medications appropriately so that 
medication--related adverse events are avoided or minimized. That's 
because the public recognizes that pharmacists are the most qualified 
health professional to provide this level of care and service to them. 
Consumers should have the choice of and access to the pharmacist and 
pharmacy that best meet their specific health care needs.
    For that reason, proposals to modernize Medicare need to provide 
for the addition of a ``pharmacy benefit,'' not simply a ``drug 
benefit.'' Pharmacists who work together with patients and their 
physicians are seniors' (and Medicare's) best ally for ensuring that 
the medications being used are as clinically appropriate, cost-
effective, and free from preventable side effects, drug interactions, 
and other medication-related problems as they possibly can be. Any 
``benefit'' from adding outpatient prescription drugs to Medicare will 
only be realized if we can assure their proper and effective use. That 
is the professional expertise, and value, that pharmacists bring to 
patient care and the health care system.
 Medicare Must Provide Appropriate Payment to Pharmacists and 
        Pharmacies for their Services
    A Medicare pharmacy benefit must recognize that the nation's 
pharmacists and pharmacies are the individuals and entities that 
actually provide the drug products, professional services, and 
medication therapy management (MTM) programs that are essential to 
assure that medications are optimally used. Payment to pharmacists and 
pharmacies for providing these products and services must be reasonable 
and adequate to cover the professional, administrative, and business 
costs of providing these services and products--as well as a reasonable 
return on investment--in every type of pharmacy practice setting in 
which the care and services are provided.
                            our key concern
    None of the legislative proposals introduced to date in the 107th 
Congress adequately address our two core beliefs: access to and 
coverage of both medications and pharmacists' medication therapy 
management services. In reviewing the bills currently being considered, 
one would conclude that Congress believes that it will have served 
Medicare beneficiaries well if it can simply find a way to help 
Medicare buy medications at the reduced prices currently being paid by 
other federal purchasers and then turn the administration, management, 
and delivery of services over to 91 private sector'' entities sometimes 
referred to as prescription benefits managers (PBM's).
    For example, under several existing proposals, PBM's are charged 
with ``managing care,'' ``developing drug formularies,'' ``increasing 
generic drug use,'' ``negotiating discounts with pharmaceutical 
manufacturers,'' ``placing price controls on community pharmacies,'' 
and ``providing medication therapy management programs to seniors.''
    While we believe that PBM's can and do have an important role in 
performing many of the administrative tasks associated with providing 
the pharmacy benefit to seniors, we have serious reservations about the 
nature and scope of ``patient care and cost management'' tasks that 
many of the current proposals would assign to PBM's. In fact, some 
evidence suggests that PBM's are not effective in performing these 
latter activities. Pharmacists and pharmacies are the real ``private 
sector' providers of care and service to patients. Pharmacists and 
pharmacies provide services and work with patients at their point of 
care to accomplish appropriate medication use and accurate dispensing. 
It is pharmacists and pharmacies, our members, upon whom senior 
citizens and the Medicare program will ultimately rely to achieve the 
outcomes we all seek for a successful Medicare pharmacy benefit.
                          what should be done
    Our organizations are jointly committed, prepared, and able to work 
with the 107th Congress, the Bush Administration, the pharmaceutical 
industry, HCFA, physician organizations, senior advocacy groups, and 
other interested parties to help design a Medicare outpatient pharmacy 
benefit that improves medication use, helps control overall health care 
costs, and enhances the quality of seniors' lives. The pharmacy, 
medical, and health care literature all provide ample evidence that 
these goals are compatible, not mutually exclusive. But we have to work 
together to achieve them.
    We therefore encourage HHS Secretary Tommy Thompson to establish a 
national panel of all of these stakeholders to assist the Bush 
Administration and Congress in designing a Medicare pharmacy benefit 
framework that achieves these important objectives.
    A Medicare outpatient pharmacy benefit will be the single most 
substantial and important addition to the program since its inception 
35 years ago. We must not only do the right thing--but we must do it 
the right way. Beneficiaries, taxpayers, and the public at large 
deserve nothing less than our best effort.
                                 ______
                                 
                 National Community Pharmacists Association
                                                     April 22, 2002
Allison Giles
House Committee on Ways & Means
1102 Longworth House Office Building
Washington, DC 20515
    Dear Ms. Giles: We certainly appreciated the opportunity to present 
our views to the House Committee on Ways & Means at the public hearing 
on Integrating Prescription Drugs Into Medicare on April 17, 2002. 
Given the situation that evolved regarding the individual from Maine 
and the limited time available to provide helpful information to the 
Committee, I am forwarding the enclosed addendum to my prepared 
statement for submission in the Record.
            Sincerely,
                                             John M. Rector
          Sr. Vice President Government Affairs And General Counsel
                Addendum, John Rector 4/17/02 Statement
    1. Examples of misrepresentation that our members negotiate with 
PBMs include:

a) The PCMA testimony to the Committee on June 13, 2002 at page 5, 
        where they stated: ``Any legislation that does not empower us 
        as PBMs to negotiate discounts and other pricing concessions 
        from drug manufacturers and pharmacies--as we do today in 
        private plans--will not be able to deliver the anticipated cost 
        savings. Our members are strongly united on this point.''
b) The 3/22/00 GAO presentation to the Committee and to the Senate 
        Finance Committee entitled Prescription Drug Benefits: Applying 
        Private Sector Management Methods to Medicare at page 6: 
        ``Similar to their negotiations with manufacturers, PBMs 
        negotiate with retail pharmacies to obtain prices that are well 
        below pharmacies' usual price for customers without drug 
        coverage.''
c) The PhRMA 6/12/00 ad in National Journal's Congress Daily AM at page 
        7, which states ``For 150,000 Americans with a prescription 
        drug insurance benefit, their private health plans have had 
        considerable success negotiating meaningful price discounts on 
        pharmaceuticals. However, 12 million senior Americans now have 
        no prescription drug insurance coverage. As a result, most of 
        them pay full price for their medicines. That's because they 
        don't have the market clout that comes with a drug insurance 
        benefit. If all seniors had access to private market discounts, 
        the medicines they need, on average, would cost 30% to 39% 
        less.''
    As noted in 2000, H.R.1304, which would allow our members to 
negotiate with health plans and PBMs was approved on 6/29/00 by 276 to 
136. Committee members voted 19 to 37 (9 R's and 10 D's) for H.R.1304.
    2. Regarding the PBM corporate strategy to shift patients to their 
highly profitable mail order businesses the following references are 
enlightening:

 FAC Equities--Division of the First Albany Corporation--
        October 4, 2001 Research Report on Express Scripts, Inc. 
        recommending a Buy
    Page 3 of the report under Investment Merits states that ``mail 
order sales are roughly 2 times to 3 times more profitable on a per 
adjusted script basis than retail script.''
 WR Hambrecht Company Report--March 22, 2001 on CareMark Rx 
        recommending a Buy
    Page 2 of the report notes ``PBM mail order script margins are 4 
times higher than retail scripts.
 CareMark Rx Inc. 10K--December 21, 2000
    Page 3 ``In 2002 the company, implemented a program designed to 
encourage its' customers to refill prescription which were originally 
filled in its' retail network through its automated mail service 
pharmacy.'' The company also operates a network of 17 smaller mail 
service pharmacies.
    3. According to IMS Health (See enclosed bar graph), the PBMs under 
utilize generic drugs. We believe that the Committee should help assure 
that any new Medicare benefit provide seniors with no fewer than the 50 
to 55% level of generic prescriptions made available currently to 
seniors and others through independents community pharmacies.
    A related issue is the pricing of generic drugs. PBMs seem not only 
to under utilize generics but also reportedly charge significantly 
higher prices for generics. For example, earlier this year, a Merck-
Medco plan for Connecticut state retired teachers entitled 
``Prescription Drug Server'' mandated mail order coverage. One 
consequence of eliminating local pharmacies as a choice for retired 
teachers was prices for generic drugs three times greater than the 
change in independent community pharmacies in Connecticut. (For 
example, the charge for a community pharmacy of $34.23 and for Merck-
Medco mail a order charge of $100.38 for a 90 day supply of 300 tablets 
of the same generic drugs). Fortunately, on April 1, 2002, this Merck-
Medco mandatory mail order program for Connecticut retired teachers 
dropped its' mandatory mail order requirement in response to protests 
about the Merck-Medco generic drug overcharges. Unfortunately, the 
retired teachers plan still discourages the teachers from using their 
community pharmacy through discriminatory co-payments that favor Merck-
Medco's mail order business.
    Initially, the AARP mail order pharmacy business was synonymous 
with generic drugs. Since IMS Health data does not capture the 
marketing practices of our non-profit competitors, such as AARP, we can 
only speculate as to whether AARP may also under utilize generic drugs.
    4. Numerous studies, as noted, underscore the systemic value of 
coverage and payment for pharmacist care services. On such study is 
entitled ``The $76 Billion Dollar Question'' funded by our foundation; 
the National Institute for Pharmacist Care Outcomes; and Merck. 
Interestingly, the former director of health benefits at GM, Mr. Beach 
Hall in 1992 observed in this study, ``that pharmacist care is the most 
critical quality and cost controlled vehicle we have in the entire 
health care system.''
    As Committee member, Representative Portman observed rather than 
$76 billion, our health care system is now wasting $150 billion 
annually due to inappropriate prescription drug use and unnecessary 
hospitalizations and nursing home placements. In other words, a dollar 
wasted for every dollar spent annually on prescription drugs. 
Appropriate payment for pharmacist professional services could 
significantly reduce these unnecessary expenditures.
    It is important, in our view, that the Committee is aware of the 
joint statement on prescription drug benefit under Medicare announced 
by our group and Pfizer on 6/11/01. It stresses the value of pharmacist 
care services, including, persistency, patient compliance, and 
appropriate counseling.
    It is noteworthy that the 1988 Medicare catastrophic law 
established per prescription payment for a participating pharmacy as 
AWP + $4.50 indexed. In today's marketplace, fourteen years later, had 
the bipartisan law signed by President Ronald Reagan not been repealed, 
the payment would be $10.94.
    Representative Nussle raised a question regarding the ability to 
retain pharmacists in rural areas. Senate legislation, S.10 has an 
incentive provision for payment for independent pharmacists in rural 
areas. Importantly, H.R.3626 by Representatives Emerson and Ross 
recognizes the value of pharmacist professional services for a new 
Medicare benefit.
    5. Regarding Representative Foley's expressed enthusiasm for the 
Administration's ``so-called'' discount card, the Committee should 
carefully review the 12/01 GAO report stating an average savings of 
approximately 11%. This percent did not reflect the monthly fees, (for 
example, $9.95 for an individual and $19.95 for a family) charged for 
the cards. Savings, if any, were somewhere between 1 and 5 percent.
    Regarding Mr. Foley's expressed intent to legislate the 
Administration' s proposed card, it is important to recall the Federal 
Judge Paul Friedman on 9/6/01 in NACDS/NCPA v. HHS enjoined the plan 
because HHS had no authority to undertake an endorsement plan and had 
proceeded unlawfully. The bottom line, however, was that the Court 
found that implementation of the plan would cause irreparable harm, 
especially to the small business pharmacies that we represent. Enacting 
legislation would only institutionalize the irreparable harm to small 
businesses.
    6. Mention was made that allowing Medicare to negotiate with drug 
makers could ``distort'' the marketplace. The independent pharmacy 
marketplace where pharmacists are not able to negotiate has been 
totally distorted by one sided contracts dictated by PBMs. Assuring 
pharmacists, the ability to negotiate would help ameliorate the 
distortion.
    Please see the enclosed 4/02 article in America's Pharmacist 
entitled ``The Tug of Wars with PBMs'', which highlights the various 
facets of PBM distortion of our marketplace.
    Once again, we especially appreciate the opportunity to assist the 
Committee and staff as you revisit the subject of Medicare pharmacy 
benefit.
                                 ______
                                 
      Prepared Statement of Infectious Diseases Society of America
    As the House Ways and Means Committee debates providing 
prescription drug coverage to one of the nation's most vulnerable 
populations--the elderly--under the Medicare program and develops 
legislation to implement this important change, the Infectious Diseases 
Society of America (IDSA) strongly urges Committee Members to include 
coverage for home-based outpatient intravenous (IV) antimicrobial 
therapy and the related physician case management services and supplies 
in this new benefit. IDSA represents nearly 7,000 physicians and 
scientists devoted to patient care, education, research, and community 
health planning in infectious diseases. As the physicians who 
coordinate care for patients with serious infections, our members are 
keenly aware of the how Medicare's failure to cover home-based 
outpatient IV antimicrobial therapy disadvantages both American 
taxpayers and the Medicare beneficiaries.
    Medicare policy prohibiting coverage of outpatient, self-
administered drugs has severely limited access of Medicare patients to 
ambulatory IV therapy, thus forcing them to rely on more costly and 
less-convenient inpatient hospital care. Covering home-based outpatient 
IV antimicrobial therapy and its related services and supplies under 
Medicare would greatly benefit American taxpayers as home-based therapy 
is a safe and much less-expensive alternative to providing it in the 
hospital. This is why most private insurers and many Medicare HMOs 
cover this service. The benefit to elderly patients receiving this 
therapy in their home is improved quality of life, convenience and 
time-saved.
    IDSA understands that Congressional leaders are considering adding 
a limited drug benefit that would cover cancer drugs to the Medicare 
program. We applaud and encourage the addition of this important new 
benefit, but strongly urge that such a benefit also include coverage of 
outpatient IV antimicrobial therapy. In addition to IDSA, the American 
Medical Association also has endorsed this approach. Their written 
policy states that AMA ``endorses the use of home injections and/or 
infusions . . . (including chemotherapy and/or antibiotic therapy) for 
appropriate patients under physician supervision, and encourages [CMS] 
and/or other insurers to provide adequate reimbursement for such 
treatment'' due to ``the benefits of such treatments in terms of cost 
savings, increased quality of life and decreased morbidity.'' [AMA 
policy H-55.986]
The Problem
    Unlike many private insurers and Medicare health maintenance 
organizations (HMOs), the Medicare fee-for-service program does not 
cover IV antimicrobial therapy provided in the home whether self-
administered or administered by a trained health professional. This 
means that patients must stay in a hospital, sometimes for several 
weeks, where they are at risk of exposure to hospital-acquired 
infections, or travel to their physician's office, sometimes twice a 
day to receive this treatment. Not only is home-based drug infusion 
therapy safe and effective, it also is much less expensive. Whereas 
hospital-based antimicrobial IV therapy typically costs $1,000 per day, 
home-based therapy costs less than $200 a day. One study estimates that 
Medicare can save approximately $5.3 billion in 10 years simply by 
covering home-based IV antimicrobial therapy.
    Medicare patients are often outraged when they discover that 
Medicare won't cover this essential therapy unless they are 
hospitalized for long periods of time or visit their doctor's office as 
often as seven days a week for weeks on end. For rural patients, this 
can mean traveling 150 miles a day to receive this 15-minute treatment 
that they could easily receive at home. Their frustration is 
exacerbated when they discover that patients who are privately insured 
or covered by Medicare HMOs are released from the hospital to continue 
drug therapy at home.
    Treating Medicare beneficiaries in their homes also would reduce 
their exposure to hospital-acquired, antimicrobial-resistant 
infections. Hospital-acquired infections affect over 5 percent of 
hospitalized patients and result in increased costs to the Medicare 
program. On average, hospital-acquired infections tend to add four days 
to a patient's hospital stay and cause more than 20,000 deaths a year.
When is IV Antimicrobial Therapy Necessary?
    Physicians routinely prescribe antimicrobial IV therapy for serious 
infections that cannot be treated with oral antimicrobial agents. When 
prescribed with a physician's oversight, IV antimicrobial therapy is a 
safe and effective way to treat a number of infections, including 
certain bone and skin infections, endocarditis (an infection of the 
heart valves), pneumonia, bronchitis, urinary tract infections and 
pelvic inflammatory disease. Osteomyelitis, a bone infection, 
frequently requires long courses of therapy with high concentrations of 
intravenously administered antimicrobials. Drug treatment for four or 
more weeks is common. Cellulitis, an infection of the skin and 
surrounding tissue, is another condition commonly treated in this 
manner. Serious fungal and viral infections often occur in people who 
have impaired immune systems, such as those with AIDS, diabetes or who 
have received an organ transplant. Moreover, antimicrobial infusion 
therapy can be tremendously beneficial for people predisposed to 
repeated infections, such as those with cystic fibrosis. Traditionally, 
these individuals must be admitted to hospitals frequently to treat 
recurring infections. They also are those at highest risk for catching 
new infections in a hospital.
    Osteomyelitis, cellulitis, endocarditis, and pneumonia account for 
over 80 percent of all cases requiring IV antimicrobial therapy. 
Together, these conditions account for nearly six percent of the 12 
million annual Medicare hospital discharges, at a cost of over $4 
billion annually.
Services and Supplies Necessary for Outpatient Drug Therapy
    In addition to antimicrobial drugs, other services and supplies are 
necessary for safe and effective outpatient IV antimicrobial therapy. 
First, physicians must prescribe and oversee the therapy. Physicians 
select the appropriate drug, dosage, and length of treatment; monitor 
the patient's progress; look for side effects of the therapy; and 
respond to any emergencies. Second, nurses usually educate patients and 
their caretakers about administering the infusion and caring for the 
infusion site. They also may monitor the patient's progress, coordinate 
care, and oversee the actual IV infusion. Third, pharmacists prepare 
and distribute the prescribed drugs and respond to patients' questions 
regarding the therapy and its side effects. Sometimes they monitor 
laboratory results and collaborate with physicians and nurses to adjust 
drug dosages. Finally, laboratory services are necessary to monitor the 
patient's status and response to therapy.
    Medicare currently does not reimburse physicians for their services 
unless they see the patient directly or the patient is enrolled in the 
home health or hospice program. Safe and effective home drug therapy, 
however, requires continuous, active oversight by a knowledgeable 
physician. Ongoing physician involvement is as important in the 
outpatient setting as it is in the hospital. Although physicians 
probably will need to meet with patients weekly while the outpatient IV 
antimicrobial therapy is underway, they also will need to spend a 
significant amount of time coordinating care with the patient and other 
health professionals, reviewing laboratory test results, and generally 
monitoring the patient's progress and any complications.
    As for equipment, two types are critical. First, there must be an 
access device to insert the drug into the body. Peripheral (IV) 
catheters, central catheters and subcutaneous ports are examples. Next, 
an infusion device controls the rate of drug flow. Infusion devices 
range from sophisticated pumps that allow for the infusion of multiple 
drugs at different rates to simple syringes and gravity drip systems. 
As opposed to narcotics and other pain medication, IV antimicrobial 
agents tend to use fairly simple and inexpensive access and control 
devices. Other equipment that may be needed include IV poles, tubing, 
and dressing supplies.
    Finally, it is not clear that physician dispensing of the drugs and 
pump used in outpatient antimicrobial therapy to patients in their 
homes is exempt from the Stark law's prohibition on self-referrals. 
Thus, we urge Congress to strongly consider a remedy to ensure that 
physicians be permitted to dispense these drug therapies and the 
necessary pumps.
    The expansion of Medicare coverage to include outpatient IV 
antimicrobial therapy is a cost-effective reform that will give 
Medicare beneficiaries access to the same therapies, safety and 
convenience as their private sector counterparts. Modernizing Medicare 
benefits to include coverage for this drug therapy makes good common 
sense and is essential to the good health of our nation's elderly 
people.
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