[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



  DESIGNING A TWENTY-FIRST CENTURY MEDICARE PRESCRIPTION DRUG BENEFIT

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 8, 2003

                               __________

                           Serial No. 108-25

                               __________

       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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                            WASHINGTON : 2003
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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                      Ranking Member
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
CLIFF STEARNS, Florida               EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio                RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania     RICK BOUCHER, Virginia
CHRISTOPHER COX, California          EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina         SHERROD BROWN, Ohio
  Vice Chairman                      BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia             BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois               BART STUPAK, Michigan
HEATHER WILSON, New Mexico           ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING,       GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                THOMAS H. ALLEN, Maine
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
LEE TERRY, Nebraska                  HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho

                  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                   Ranking Member
JAMES C. GREENWOOD, Pennsylvania     HENRY A. WAXMAN, California
NATHAN DEAL, Georgia                 RALPH M. HALL, Texas
RICHARD BURR, North Carolina         EDOLPHUS TOWNS, New York
ED WHITFIELD, Kentucky               FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
  Vice Chairman                      BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           GENE GREEN, Texas
JOHN B. SHADEGG, Arizona             TED STRICKLAND, Ohio
CHARLES W. ``CHIP'' PICKERING,       LOIS CAPPS, California
Mississippi                          BART GORDON, Tennessee
STEVE BUYER, Indiana                 DIANA DeGETTE, Colorado
JOSEPH R. PITTS, Pennsylvania        CHRISTOPHER JOHN, Louisiana
ERNIE FLETCHER, Kentucky             JOHN D. DINGELL, Michigan,
MIKE FERGUSON, New Jersey              (Ex Officio)
MIKE ROGERS, Michigan
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Crippen, Dan, former Director, Congressional Budget Office...    11
    Feldman, Roger, Professor of Health Services Research/Policy, 
      University of Minnesota....................................    16
    Herman, David, Executive Director, Seniors Coalition.........    22
    Olsen, Erik, AARP............................................    34
    Vladek, Bruce D., Professor, Health Policy and Geriatrics, 
      Mt. Sinai University.......................................    28
Material submitted for the record by:
    Alliance to Improve Medicare, prepared statement of..........    66
    American Health Quality Association, prepared statement of...    67
    Center on Budget and Policy Priorities, white paper..........    73
    Long Term Care Pharmacy Alliance, letter dated April 7, 2003.
        1000.....................................................

                                 (iii)

  

 
  DESIGNING A TWENTY-FIRST CENTURY MEDICARE PRESCRIPTION DRUG BENEFIT

                              ----------                              


                         TUESDAY, APRIL 8, 2003

                  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, Upton, 
Deal, Burr, Whitfield, Norwood, Wilson, Shadegg, Buyer, 
Ferguson, Rogers, Brown, Waxman, Pallone, Green, Strickland, 
Capps, DeGette, and Dingell (ex officio).
    Also present: Representative Allen.
    Staff present: Chuck Clapton, majority counsel; Steve 
Tilton, majority health policy coordinator; Patrick Morrisey, 
majority deputy staff director; Eugenia Edwards, legislative 
clerk; Bridgett Taylor, minority professional staff; Amy Hall, 
minority professional staff; Karen Folk, minority professional 
staff; and Nicole Kenner, staff assistant.
    Mr. Bilirakis. The hearing will come to order.
    As per new rules of the House, any members who are here at 
the time of the gathering will have the opportunity and, 
hopefully, to waive their opening statements so we can get 
right into the witnesses, have that additional 3 minutes at the 
time of inquiry. Mr. Brown and I will have 5 minutes under the 
rules for an opening statement.
    I call to order this hearing of the Health Subcommittee. 
I'd like to, on behalf of myself and other members of the 
subcommittee, thank our witnesses for taking the time to appear 
before us today, and I am sure, and certainly hopeful, your 
testimony will prove valuable, as we consider the challenges 
inherent in designing an affordable Medicare prescription drug 
benefit.
    The Energy and Commerce Committee, and, particularly, this 
Health Subcommittee, has held numerous hearings on the need for 
a Medicare prescription drug benefit over the last few 
Congresses. I'm sure that with each of these hearings we all 
have taken away a particular point of view, but the one thing 
I'm sure we can agree on is that while prescription drugs have 
improved the lives of many beneficiaries there are still too 
many without prescription drug coverage. Given the fact that we 
all know about the problem, and I'd like to think by now we all 
know about the problem, need not really hear too much more 
about the problem, we must find a way to help Medicare 
beneficiaries. However, I continue to maintain that we must do 
so in a manner that protects and strengthens Medicare.
    While today's hearing will focus on strengthening and 
improving Medicare, we cannot design a benefit in a vacuum. We 
have to consider the impact that a new benefit will have in the 
long-term viability of Medicare.
    We also must ensure that a new benefit does not discourage 
competition and the innovation that is the hallmark of the 
healthcare industry and the practice of medicine. I've always 
said that doctors and the medical industry are the magicians of 
our society, and we must construct policies that support the 
development of this wizardry.
    In this context, as we do now under Medicare, we should 
continue to provide Medicare beneficiaries choices so they can 
select a program that best meets their needs.
    Last, I want to make it clear, though, that while we have 
spent the past several years debating this issue, millions of 
Medicare beneficiaries have suffered from a lack of 
prescription drug coverage. I introduced legislation back in 
1999 that would have provided immediate assistance to our 
poorest and sickest seniors. I never intended, and said so many 
times, for my bill to be a permanent solution, however, I did 
not have a lot of faith that we would be able to quickly work 
through this issue. Unfortunately, my fears were justified, and 
even though the House has passed comprehensive benefits in the 
past two Congresses some Medicare beneficiaries still don't 
have access to prescription drug benefits, and it's my hope 
that this changes in this Congress.
    I'd like to again offer a warm welcome to all of our 
panelists and thank them for joining us today, and now I 
recognize Mr. Brown for an opening statement.
    Mr. Brown. Thank you, Mr. Chairman, and thank you all, you 
witnesses, for coming today.
    The question you are being asked to consider is whether it 
would be better for seniors to get their drug coverage through 
traditional Medicare or through private drug plans. It seems 
like a silly question. Why would you force seniors and the 
disabled to buy one health benefit from a private company while 
receiving the rest of their coverage through Medicare Fee-for-
service? The answer is, you wouldn't. The private drug plan 
approach is laughable in its right.
    It all makes sense if goals other than fulfilling an unmet 
coverage need are being served. Proponents of private plans 
have been relatively forthcoming about some of these in the 
goals, less forthcoming about others. If pressed, they'll admit 
that private drug coverage is intended as an interim step 
leading to full Medicare privatization. They are less willing 
to acknowledge that Medicare privatization is itself a means to 
an end. Replacing traditional Medicare with a premium voucher 
is the easiest way to transform the program from a defined 
benefit to a defined contribution ending Medicare entitlement, 
ending Medicare as we know it.
    Instead of acknowledging that ideology, the government 
programs always are bad, entitlements are bad, rather than 
acknowledging that ideology is driving the Medicare 
privatization campaign proponents attempt to sell privatization 
on its own merits. I don't envy them that task.
    It's difficult to justify dismantling a popular, reliable, 
cost-efficient public insurance program, so the Medicare 
beneficiaries can once again experience the pre-1965 
uncertainty and volatility in the individual insurance market. 
Proponents tend to rely on vague assertions like the 
President's, Medicare should provide better help for its 
options like those available to all Federal employees. What 
does that mean exactly, traditional Medicare is more reliable 
and offers more choices than private health plans. 
Beneficiaries don't have to worry about disappearing coverage, 
their premiums and their cost sharing don't vary by county to 
county, by year to year, they can see the doctor and the 
specialist they trust, they can use the health care facility 
that best meets their needs.
    Proponents of privatization say we need more choice, and 
Medicare Fee-for-service gives the ultimate choice. Medicare 
operates more efficiently than the private sector. For the past 
30 years, Medicare has outperformed private insurance, even 
adjusting for coverage differences. Administrative costs have 
always been lower.
    Perhaps, what the President actual means is that seniors 
and the disabled deserve better benefits, like those available 
through employer-sponsored coverage. That's certainly true, but 
neither the President, nor Republican leadership here, has 
proposed spending anywhere near the amount necessary to provide 
seniors drugs or preventive benefits comparable to those 
available in private health plans. Apparently, seniors deserve 
more options, just not any good ones.
    Besides giving seniors better options, proponents say the 
private plan approach is a way of fending off prescription drug 
price controls. Just to clarify, the price a public purchaser 
like Medicare demands is a Draconian price control, the price a 
private purchaser, like an HMO, demands, is an all American 
discounted price per figure.
    According to private plan proponents, Medicare price 
controls would jeopardize the drug industry's ability to 
conduct life-saving research and development. I think we all 
lose sleep at night worrying that the industry's high profits 
could plummet from obscenely high to unbelievably high. Yet, 
the proponents claim that private plans would secure lower drug 
prices for seniors than would the old tired Medicare program. 
Private drug plans would be better at controlling drug costs 
than traditional Medicare, they tell us, but the drug 
industry's future is in jeopardy if we go to traditional 
Medicare rather than through private plans. Clearly, something 
is wrong with this picture.
    The President and the Congress, Mr. Chairman, should be 
concerned, in fact, should be concerned about the impact of 
Medicare prescription drug coverage on the industry that 
produces the drug. We also must be concerned about the impact 
on the Federal budget, not to mention the consequences for 
consumers and other purchasers if we do not confront spiraling 
prescription drug costs. We should bring these competing 
concerns out in the open and weigh them in a thoughtful manner.
    So far, however, proponents of the private plan approach 
have denied that this approach promotes a status quo when it 
comes to drug pricing. The most dangerous thing about the 
better option and lower prices rhetoric, upon which proponents 
of private plans rely, is that it obfuscates privatization's 
real goals and implications.
    If the President and the majority want to end the Medicare 
entitlement, if they want to reduce Federal spending on 
Medicare by shifting costs to the beneficiary, they want to 
take a laissez-fare approach to drug prices, do nothing to 
constrain prices, they should be up front about it. The 
President and the majority think seniors deserve better 
options, I think they deserve the truth.
    Mr. Chairman, I yield back my time. Thank you.
    Mr. Bilirakis. Mr. Whitfield, do you have an opening 
statement?
    Mr. Whitfield. Mr. Chairman, I'm going to waive my opening 
statement.
    Mr. Bilirakis. Mr. Dingell, opening statement?
    Mr. Dingell. Mr. Chairman, thank you.
    I commend you, Mr. Chairman, for holding this hearing, and 
I appreciate your courtesy to me and recognizing me.
    Mr. Chairman, this is on a very important subject that we 
meet today, providing a prescription drug benefit for Medicare 
beneficiaries.
    I want to thank our witnesses for being present today, 
especially Mr. Vladeck, who is not yet here, but for whom I 
have immense respect and high regard.
    The Congress has spent a number of years debating how to 
add prescription drug benefits to Medicare. Everyone agrees we 
need to act, but there's a fundamental difference over how it 
is to be done. The gulf is not just over the stewardship of a 
prescription pharmaceutical program, but also over the 
stewardship of Medicare itself.
    The issue at hand today is what role the government and the 
private sector should play in the delivery of prescription 
pharmaceutical benefits, and more broadly, in the Medicare 
program. I am very much concerned about the measure of the 
marketplace approaches taken by President Bush and my 
colleagues in the House amongst the Republicans, and what they 
would foist upon Medicare and Medicare recipients. We've made 
several forays into this area, and have found that we had some 
very significant hardships inflicted, and some very, very 
severe failures that we have undergone because of these 
efforts.
    We often hear how the private sector is more efficient than 
Medicare, and, therefore, we should turn our seniors' 
healthcare over to private companies. History I think tells us 
very different, and I think that the seniors also tell us quite 
different.
    I question whether the private sector is more efficient, 
and there are other concerns aside from efficiency that we 
should have at the forefront when thinking about Medicare--
quality, equity, stability and compassion--something that 
private companies are not always in the business of providing.
    I would note that excesses of the HMOs have been, quite 
frankly, recognizable best as not infrequently stupidity, and 
crass disregard of the well-being of their beneficiaries, or 
not infrequently just plain cold-hearted, flinty-eyed 
indifference to the needs of their patients, and abandoning 
hundreds of thousands of senior citizens who were silly enough 
to believe the promises that were made by the HMOs, which got 
them in in the first place and out of regular Medicare.
    I think it's not at all clear that private companies then 
are more efficient than Medicare. Even after adjusting for the 
coverage of comparable services, Medicare cost containment has 
been better than that of private insurance over the past 30 
years. The record is very irrefutable. And, current evidence 
suggests that neither managed care nor competition are likely 
on their own to generate sufficient savings through efficiency 
to address the baby boom's coming retirement and the demands 
created by the growth in technology. And I think we better look 
at some of these claims, because they seem to have about the 
same reality as Alice in Wonderland.
    If we want to reshuffle the future economic burden posed by 
demography, we should have a meaningful discussion on that very 
point. Those who do not agree we should honor our commitment to 
provide comprehensive affordable healthcare to our elderly and 
disabled should come forward and say so honestly, not engage in 
rather shabby misstatement of what they really intend, but come 
right flat out and tell us, this is what we want to do to the 
senior citizens. Those who believe this should then say it, and 
we should discuss how the elderly and disabled will meet their 
healthcare needs, and how their families, and especially their 
kids, are going to choose between taking care of their own kids 
and taking care of the needs of their parents.
    But, people should not hide their true intentions under the 
guise of buzz words like competition and choice, because there 
are some simple yardsticks, how much does it cost and how much 
benefits can actually be delivered on an actuarially sound 
basis. These will tell us a lot more things than a lot of the 
pie in the sky that we are hearing on these matters.
    These words are not infrequently, in fact, most commonly 
meant as euphemisms for limiting government assistance, 
shifting more costs onto seniors by forcing them into private 
insurance plans, and leaving plans that make key decisions 
about the seniors' coverage and out-of-pocket costs.
    I would mention that the administration's plan for Medicare 
recipients is quite frankly, simply, to herd them all, 
reluctantly and involuntary into something called HMOs.
    In any event, Mr. Chairman, I look forward to the hearing 
that you are going to have. I thank you for recognizing me, and 
I think we have a fine chance to explore what we are about to 
do today if we can get the truth out of the administration on 
these matters.
    Mr. Bilirakis. The Chair thanks the gentlemen.
    Ms. Wilson, for an opening statement?
    Ms. Wilson. Thank you, Mr. Chairman.
    I put my entire statement into the record, but I did want 
to highlight a couple of things I think are important.
    When we add a prescription drug benefit to Medicare there 
are some principles that I'll be looking for and working 
toward. One is that it should be available to all 
beneficiaries. Second is that it has to be voluntary. There are 
a lot of people who have earned their coverage in other ways, 
either through a previous employer, or because they are 
eligible for prescription drugs through the VA for example.
    I think that seniors do want choices, and I don't think 
there's anything bad about that word at all. My family gets 
their coverage from Loveless in Albuquerque. We like to get our 
medicine downstairs at the Loveless Pharmacy. I live in Santa 
Rosa, New Mexico, a long, long way from the nearest clinic. 
Perhaps, a mail order pharmacy is what I want, so that choices 
are a good thing to meet the individual needs of patients.
    I also think that we need to give the most help to those 
who are low income and those who are very sick and have high 
medicine costs, and the plan that the House passed last year, 
under the leadership chairman, I think we did a pretty good job 
of that. In New Mexico, where we have large numbers of seniors 
who are low income, 64 percent of seniors in New Mexico would 
have qualified to pay only a $2 or $5 co-pay, and that makes a 
very big difference to seniors who are living in poverty.
    In addition to creating this benefit, I think we have to 
look at innovative ways to reduce the cost of medicine, and 
certainly generic drugs have helped in that respect, but I also 
think we need to allow reimportation of medicine from FDA-
approved facilities abroad. I know that's a controversial issue 
for some, but for someone from a border State it really isn't. 
In fact, I would bet anyone here donuts for breakfast on this 
bet, in Demming, New Mexico, a little town on the border of 
Mexico and the United States, I would bet anyone donuts that 
more people buy their penicillin in Mexico than they do in the 
United States. It's a whole lot cheaper and it is effective.
    Finally, as we move forward on adding a prescription drug 
benefit to Medicare, we will have the opportunity for different 
elements of Medicare reform, and I think that the reform that 
is most needed in Medicare is that the system is fundamentally 
unfair in its reimbursement rates across this country. We no 
longer have a local market for healthcare providers. There is a 
national market for healthcare, and we continue to pay people 
differently based on where they live, with what they call the 
Physician Work Adjuster, which says that if you are a doctor 
practicing in Torrance County, New Mexico, your work isn't as 
valued by the Federal Government as if you were living in Dade 
County, Florida.
    We don't pay into Medicare based on where we live, and we 
shouldn't be denied access to healthcare because of where we 
live.
    Thank you, Mr. Chairman. I look forward to the testimony 
today.
    Mr. Bilirakis. The Chair thanks the gentlelady, and, of 
course, without objection, the opening statements of all 
members of the subcommittee will be made a part of the record.
    The Chair now recognizes Mr. Pallone.
    Mr. Pallone. Thank you, Mr. Chairman.
    In the State of the Union Address in January, the President 
promised a prescription drug plan for seniors, but offered no 
specifics as to how this would be accomplished. The President 
didn't expand further, knowing full well that under his plan 
the 37-year Medicare program would, essentially, be privatized. 
His plan is based on the unpopular premise of forcing seniors 
into joining private plans. Whether it's an HMO or a PPO, these 
are the same plans that have said they don't want to cover 
seniors, and that have a pitiful record of providing seniors 
with healthcare.
    The negative response from both Republicans and Democrats 
to the President's prescription drug proposal should have been 
a wake-up call to President Bush, that his Medicare 
privatization proposal would have a devastating impact on the 
health and security of our Nation's seniors. Seniors should not 
be forced to choose either a prescription drug benefit or their 
long-time doctor, and that's exactly what the President's plan 
would do, and, unfortunately, what it seems the GOP is also 
proposing.
    Mr. Chairman, I'd like to express my opposition to 
privatization of Medicare as a means for achieving a 
prescription drug benefit. We are more than capable of 
providing a universal, dependable benefit that is under 
Medicare, which is exactly what the Democrats have proposed, 
and any other type of approach would be risky and destructive 
to a program that seniors need.
    In my home State of New Jersey, we've been witnessing the 
effects of a privatized Medicare option. Nearly 80,000 New 
Jerseyans have lost their health coverage after their private 
HMOs concluded Medicare beneficiaries simply were not 
profitable. New Jersey's seniors also know all too well that 
private insurance companies are not willing to assist them with 
prescription drugs, and many seniors and HMOs nationwide say 
that prescription drug coverage is limited or the co-pay 
significantly increased, and I'm amazed that the President 
would ever believe his plan would not face a similar fate. 
That's exactly what would happen.
    I think the time has come for Congress to add a meaningful 
prescription drug benefit within the Medicare program so we can 
strengthen the program with the addition of this critical 
benefit, while at the same time we preserve the stability and 
quality of the program to ensure that seniors have access to 
reliable health services.
    Now, the Democrats have such a proposal. It's very similar 
to Medicare Part B, it pays your doctor bills, basically, 
provides for a voluntary $25 per month premium, $100 
deductible, 80 percent of the costs paid for by the Federal 
Government, 20 percent co-pay, and most important requires the 
Secretary of Health and Human Services to negotiate prices so 
that prices of prescription drugs are brought down. There has 
to be a price component in whatever we do, in order to make 
drugs more affordable, otherwise we will continue to have major 
problems.
    It's very simple to take up what the Democrats have 
proposed or something very similar to it. That's what we need, 
a guaranteed Medicare benefit that is voluntary and universal, 
people will have a choice that will be a meaningful choice.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. The gentleman's time is expired.
    Mr. Rogers, opening statement?
    Mr. Rogers. Mr. Rogers will waive.
    Mr. Bilirakis. Ms. Capps.
    Ms. Capps. I will waive my opening statement and submit it 
for the record.
    Mr. Bilirakis. Thank you.
    Mr. Ferguson.
    Mr. Ferguson. Thank you, Mr. Chairman.
    I want to thank you and members of the subcommittee and our 
witnesses for coming today and talking about a very important 
issue, our prescription drugs for our seniors.
    Prescription drugs have helped seniors to live happier, and 
healthier and more productive lives. Few things that we do in 
this committee could be more important than crafting a proposal 
to bring the miracles of prescription drug medication to more 
seniors throughout our country. No senior should be forced 
between paying for food and shelter or the needed life-saving 
prescription drug medication which, literally, transforms the 
lives of millions of people in America and around the world.
    It's tragic that over 1 million New Jersey seniors don't 
currently have prescription drug coverage. Health care security 
is a cornerstone to a secure retirement, and we must build on 
the significant progress that we made here in Congress last 
year to task legislation that would give our seniors that kind 
of security.
    I look forward to working with you, Mr. Chairman, and other 
members of the committee on passing a generous and responsible 
package again this year. Any proposal that we consider before 
this committee has to, in my mind, accomplish some very basic, 
but important, goals, which we actually laid out last year. The 
plan must lower the cost of prescription drugs immediately, 
must guarantee coverage to all senior citizens under Medicare, 
must strengthen and improve Medicare with more choices and more 
savings, and also must strengthen Medicare for the future.
    Last year, we did our work here in the House, we passed a 
strong bill, but the final product, of course, was elusive. 
This year, I hope this important legislation does not get 
bogged down once again.
    I ask my colleagues on both sides of the aisle to come 
together to pass a responsible bill that will become law and 
will guarantee seniors the prescription drug benefits that they 
need.
    I want to thank you, Mr. Chairman, for holding this 
hearing. I want to thank our witnesses for being here today. I 
look forward to working with you on this issue that's so 
important to our seniors, and I yield back.
    Mr. Bilirakis. The Chair thanks the gentleman.
    Mr. Waxman?
    Mr. Waxman. Thank you, Mr. Chairman.
    It's been obvious for a considerable period of time, in 
fact more than a decade, that we need to add a prescription 
drug benefit to the Medicare program. That issue is not in 
doubt. Prescription drugs are a critical part of healthcare, 
and they are no less basic to a good coverage plan than 
hospital or physician services. And the senior population, the 
disabled population, who are part of Medicare are the highest 
users of prescription drugs, and they are the people who can 
benefit greatly from them. They are the people who are least 
likely, however, to have added a drug coverage, and seniors who 
are left trying to pay for their own prescriptions face the 
highest prices with no one to bargain for them. They are 
discriminated against in the prices they pay.
    Coverage should be available to all beneficiaries, and the 
coverage should not be token coverage or used to discriminate 
against people who want to stay in traditional Medicare. It 
should be complete coverage, similar to the coverage we provide 
in Medicare to other medical benefits.
    There shouldn't be a hidden agenda. We shouldn't try to 
drive people out of Medicare fee-for-service. We should make a 
good drug benefit available to all beneficiaries, whether they 
choose to stay in traditional Medicare or elect to join a 
managed care plan. The point of covering prescription drugs 
should be to provide a healthcare benefit to people who need 
it, not to use it as either a carrot or a stick to push them 
into private insurance plans or managed care. Basic Medicare is 
a program that most beneficiaries prefer.
    It amazes me that those who seem so enamored by competition 
as a model for our healthcare system are determined to give a 
competitive edge to private plans by refusing to put a good 
drug credit in the traditional Medicare plan. Are they afraid 
that the reform people want in Medicare is the addition of 
drugs to the basic program? Are they unwilling to admit that 
the choice beneficiaries are supposedly pulling out for is, in 
fact, a choice to stay in Medicare as they know it, with the 
addition of a good drug benefit? I believe the answer to both 
is yes.
    So, I hope today we will concentrate on what should be the 
subject at hand, which should be, what should a drug benefit 
look like. And I believe the answer will be the same as what 
beneficiaries ask of all Medicare benefits: Make it available 
from the provider that they choose, cover the drugs their 
doctor prescribes, and make it affordable. It's really pretty 
simple.
    Mr. Bilirakis. I thank you, Mr. Waxman, and I, too, hope 
that we will concentrate on the subject at hand, and that is, 
what drug benefits should look like. We all acknowledge the 
fact that the need is out there and the problems are there, so 
it's a matter of finding the solutions.
    Let's see, Doctor Norwood.
    Mr. Norwood. I'll yield.
    Mr. Bilirakis. Thank you.
    Where are we now? Let's see now, Mr. Allen is not a member 
of this subcommittee. If you'd like a 1-minute opening 
statement out of courtesy I'll be glad to give it to you.
    Mr. Allen. Mr. Chairman, thank you. I will take this 1 
minute, and I appreciate the opportunity to say just a few 
words.
    I hope that in considering the Medicare benefit that would 
be appropriate for American seniors we look around the world 
and take some account of what the rest of the world does in 
this respect.
    I would urge that we not shrink from dealing with the issue 
of price. Several members have said, on both sides of the aisle 
have said, it's important to reduce prices, and I would simply 
say that if we get too--if we believe that competition among 
buyers of prescription drugs will lead, as the night follows 
the day, to lower prices, I think we are mistaken.
    It's vitally important that Medicare, that the Federal 
Government, have enough leverage over the sellers, over the 
pharmaceutical industry, in order to get the kind of prices 
that American seniors deserve.
    And, with that, Mr. Chairman, I yield back and thank you 
for your courtesy.
    Mr. Bilirakis. And, I thank the gentleman.
    Mr. Upton.
    Mr. Upton. Well, thank you, Mr. Chairman. I appreciate your 
leadership on this issue for sure, and I was delighted to be a 
member of the House Leadership's Prescription Drug Task Force 
with the last two Congresses.
    I have a full statement for the record, what I'd appreciate 
hearing from our witnesses today, particularly, as we look at 
the inequities in the current system, Medicare plus choice 
doesn't work in my district, doesn't work a lot in our State, 
and it really is unfair when you look at all of our seniors who 
pay taxes, and pay the Medicare premium, and yet, because we 
don't have Medicare plus choice in our district that other 
States and, obviously, thousands of people that benefit from 
better access and lower cost prescription drugs than they do in 
my district. And, how can we have equal access to drug coverage 
when, in fact, those inequities exist?
    So, there are obvious flaws to the present system, and I'd 
be anxious to hear from the witnesses as we address that, and I 
will be in and out as we have a number of different activities 
this morning, but I look forward to coming back and asking 
those questions and yield back my time.
    Mr. Bilirakis. The Chair thanks the gentleman.
    Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and I'll make a brief 
statement and ask that my full statement be in the record.
    I want to thank you for holding the hearing on creating a 
Medicare prescription drug benefit. I think there's no other 
issue, other than conflict in Iraq, that's more important to me 
and my constituents than this one, and I'm sure that most of my 
colleagues feel the same way. After all, this Congress has 
debated the creation of Medicare prescription drug benefits for 
the better part of the last decade, our committees have had 
endless hearings on the issue, it was debated on the floor 
numerous times, we even had a long, all-night hearing last 
year. And, I know most of us have campaigned on it, and we 
still have not been able to reach an agreement on how best to 
design a benefit.
    So, I look forward to the panel today. If you have some 
great words of wisdom that we haven't heard the last number of 
years, let me reiterate my support for providing some type of 
benefit under the traditional fee-for-service with Medicare, 
and that's where most of our seniors receive their healthcare 
from, through the fee-for-service, traditional Medicare, and we 
need to provide a benefit that's under that to make it 
effective.
    And, I'll yield back my time.
    Mr. Bilirakis. The Chair thanks the gentlemen. Opening 
statements of all members thus completed, and we'll get on to 
the panel now.
    The witnesses include Doctor Dan Crippen, former Director 
of the Congressional Budget Office; Doctor Roger Feldman, 
former Senior Staff Economist for Health Policy and Economics 
on the President's Council of Economic Advisors, and currently 
Professor Health Insurance at the University of Minnesota; Mr. 
David Herman, Executive Director of the Seniors Coalition; Mr. 
Bruce Vladek, former HCFA Administrator, and currently 
Professor of Health Policy and Geriatrics at Mt. Sinai 
University; and Mr. Erik Olsen, on behalf of AARP.
    Gentlemen, obviously, your written summation will be made a 
part of the record, and we would hope that you would complement 
that as much as you might. I'll set the clock at 5 minutes, and 
we'll try to stay as close to it as we can.
    Doctor Crippen, please proceed, sir.

   STATEMENTS OF DAN CRIPPEN, FORMER DIRECTOR, CONGRESSIONAL 
  BUDGET OFFICE; ROGER FELDMAN, PROFESSOR OF HEALTH SERVICES 
    RESEARCH/POLICY, UNIVERSITY OF MINNESOTA; DAVID HERMAN, 
    EXECUTIVE DIRECTOR, SENIORS COALITION; BRUCE C. VLADEK, 
PROFESSOR, HEALTH POLICY AND GERIATRICS, MT. SINAI UNIVERSITY; 
                      AND ERIK OLSEN, AARP

    Mr. Crippen. Mr. Chairman, Mr. Brown, members of the 
committee, once again, I benefit from having a last name that 
begins early in the alphabet.
    I'm hopeful that I might be able to today put some context 
into these discussions very quickly. I'm not sure, in fact, 
probably sure the opposite is true, I can add any new words of 
wisdom, as Mr. Green suggested he was looking for.
    There are few things in public policy that I've worked on, 
I think, more difficult to design than a pharmaceutical benefit 
for Medicare. Many elderly have insurance coverage today and 
access to drugs currently, but some, of course, do not. 
Retirees pay roughly 40 percent out-of-pocket for their drugs, 
compared to 33 percent for the non-elderly, and that may be too 
much in some cases. As with many other medical services, a 
relative few incur the lion's share of costs 25 percent of the 
elderly spend 65 percent of the total on drugs. But targeting a 
benefit to those most in need is very tricky and too wide a net 
will greatly increase Federal expenditures and likely place a 
greater burden on our kids and grandkids.
    One place to start, Mr. Chairman, is an examination of the 
current use of pharmaceuticals by the elderly, as well as the 
source of funds for those purchases. Our public discussions are 
often framed in the objective of getting more drugs to the 
elderly, which is an admirable goal, but without fully 
considering who is paying now and who will pay under a new drug 
design.
    This first chart helps illustrate the point. Fully 75 
percent of the elderly, at least in 1999, and recognize that 
number may be changed some, fully 75 percent of the elderly 
have some form of insurance for drugs, although that number may 
be declining. Perhaps more important is that those with 
insurance fill an average of 32 prescriptions a year, those 
with private insurance fill 30 prescriptions a year, and the 
uninsured fill 25 prescriptions a year. While this gap between 
insured and uninsured, 32 versus 25, may imply that there are 
some elderly not receiving enough drugs, and surely some are 
sacrificing to pay, many elderly currently have access to 
pharmaceuticals.
    The paramount issue, I would suggest, is ``who should 
pay,'' both now and in the future-because much of what we are 
doing with virtually any drug benefit is shifting and moving 
spending that would occur in the absence of a benefit. That may 
be good news or bad news, depending upon which side you are.
    Now there may be good and compelling reasons to move 
current funding from the elderly and their former employers to 
current workers and taxpayers-perhaps a more uniform benefit, 
for example, but in so doing we need to recognize who is paying 
now and who will pay in the future.
    In this light, a pharmaceutical benefit for the elderly may 
be both more and less daunting. I could easily construct a 
benefit that would cost $900 billion over 10 years-exactly half 
of what we expect the elderly will spend over that time 
period--a cost that many have deemed, of course, to be ``too 
high.'' But much of that $900 billion is currently being paid 
by someone-it does not imply $900 billion in new spending for 
the economy. In fact, because most elderly are getting 
substantial pharmaceuticals now, some benefit designs could 
actually result in less spending overall in the Nation, but the 
payers will be different. Instead of the elderly paying as much 
of their own drug costs, current workers and taxpayers will pay 
more. Instead of retirees' former employers paying, all 
taxpayers will pick up some the tab. While these implications 
may not seem so great for current retirees and workers, surely 
my generation can afford to pay for drugs for our parents, the 
impact on future generations may be profound.
    This second graph, Mr. Chairman, depicts current and future 
spending on existing Federal programs for retirees. Currently, 
we devote about 8 percent of our economy or 40 percent of the 
Federal budget to these programs today, but as my generation 
retires and we increase the number of beneficiaries from 40 
million to 80 million we will more than double our obligations. 
Put another way, upwards of a fifth of what is produced in 
2030--every fifth car, every firth shirt, every fifth loaf of 
bread--will be consumed by retirees from the resources 
transferred by just these three Federal programs.
    These programs will consume roughly what we expend on the 
entire Federal budget today. In the extremes, to accommodate my 
generation's retirement, Mr. Chairman, we will have to either: 
borrow the equivalent of $1 trillion a year, something that's 
probably not sustainable for very long; virtually eliminate the 
rest of government as we know it, including education, defense, 
and all the rest; or, raise taxes by something like 8 to 10 
percent of GDP. If it were in the form of payroll taxes, for 
example, something like a 35 percent combined payroll tax would 
be required to support all of these programs in the rest of 
government, as compared to 15 percent today. This portends an 
historic change in government and the economy in this country.
    This graph, I would suggest, is also instructive on several 
other issues. Most important, there are only two moving parts 
here: the obligations and expenditures to the elderly and the 
size of the economy. So you can make retirement ``more 
affordable'' only by growing the economy or reducing 
obligations, not by shifting costs, stuffing mattresses or 
creating ``solvent'' trust funds.
    We need to recognize that no matter what we do it is our 
kids who will be financing our retirement, whether through 
income taxes, payroll taxes, whether we borrow from them, or 
whether we sell them a share of Microsoft out of our 401[k].
    Thank you, Mr. Chairman.
    [The prepared statement of Dan Crippen follows:]

                   Prepared Statement of Dan Crippen

    There are few things more difficult to design than a pharmaceutical 
benefit for Medicare beneficiaries. Many elderly have insurance 
coverage and access to drugs currently, but some do not. Retirees pay 
roughly 40% out-of-pocket for drugs--compared to 33% for the non-
elderly--and that may be too much in some cases. As with many other 
medical services, a relative few incur the lion's share of costs--25% 
of the elderly spend 65% of the total on drugs. But targeting a benefit 
to those most in need is very tricky and too wide a net will greatly 
increase federal expenditures and likely place a greater burden on our 
kids and grandchildren.
    One place to start is an examination of the current use of 
pharmaceuticals by the elderly as well as the source of funds for those 
purchases. Our public discussions are often framed in the objective of 
getting more drugs to the elderly without fully considering who is 
paying now and who will pay with a Medicare drug benefit.
    This first chart helps illustrate the point. Fully 75% of the 
elderly have some form of insurance for drugs, although that number may 
be declining. Perhaps more important is that those with insurance fill 
an average of 32 scripts a year--those with private insurance fill 30--
and the uninsured fill 25 scripts a year. While this gap between 
insured and uninsured, 32 vs. 25, may imply that there are some elderly 
not receiving enough drugs, and surely some are sacrificing to pay, 
many elderly have access to pharmaceuticals.
    The paramount issue, I would suggest, is ``who should pay,'' both 
now and in the future--because much of what we are doing with virtually 
any drug benefit is shifting and moving spending that would occur in 
the absence of a benefit.
    Now there may be good and compelling reasons to move current 
funding from the elderly and their former employers to current workers 
and taxpayers--perhaps a more uniform benefit or basic fairness. But in 
so doing we need to recognize who is paying now and who will pay in the 
future.
    In this light, a pharmaceutical benefit for the elderly may be both 
more and less daunting. I could easily construct a benefit that would 
cost $900 billion over 10 years--exactly half of what will be spent 
even without a benefit--a cost deemed by most to be ``too high.'' But 
much of that $900 billion is currently being paid by someone--it does 
not imply $900 billion in new spending. In fact, because most elderly 
are getting substantial pharmaceuticals now, some benefit designs could 
result in less spending overall in the nation than would occur in the 
absence of a benefit.
    But the payers will be different. Instead of the elderly paying as 
much of their own drug costs, current workers and taxpayers will pay 
more. Instead of retirees' former employers (and by implication their 
current workers and shareholders) paying, all taxpayers will pick up 
the tab. While these implications may not seem so great for current 
retirees and workers--surely my generation can afford to pay for drugs 
for our parents--the impact on future generations may be profound.
    This graph depicts current and future spending on existing federal 
programs for retirees. Currently, we devote about 8% of our economy or 
40% of the federal budget to these programs today, but as my generation 
retires and we increase the number of beneficiaries from 40 million to 
80 million we will more than double our obligations. Put another way, 
upwards of a fifth of what is produced in 2030--every fifth car, every 
firth shirt, every fifth loaf of bread--will be consumed by retirees 
from the resources transferred by just these three federal programs.
    These programs will consume roughly what we spend on the entire 
federal budget today. In the extremes, to accommodate my generation's 
retirement, we will have to either: 1) borrow the equivalent of $1 
Trillion a year; 2) virtually eliminate the rest of government, 
including education, defense, and all the rest; or, 3) raise taxes by 
something like 10% of GDP--if it were payroll taxes, something like 35% 
of payroll (from 15% now). This portends an historic change in 
government and the economy in this country.
    This graph is instructive on several other issues. Most important, 
there are only two moving parts: expenditures and the size of the 
economy. So you can make retirement ``more affordable'' only by growing 
the economy or reducing obligations, not by shifting costs, stuffing 
mattresses or creating ``solvent'' trust funds.
    We need to recognize that no matter what we do it is our kids who 
will finance our retirement--whether through income taxes, payroll 
taxes, whether we borrow from them, or we sell them a share of 
Microsoft out of our 401(k).

[GRAPHIC] [TIFF OMITTED] T7481.001

[GRAPHIC] [TIFF OMITTED] T7481.002

    Mr. Bilirakis. Thank you, thank you, Doctor Crippen. Of 
course, you haven't given us a solution.
    Mr. Crippen. No, only set the context so far.
    Mr. Bilirakis. Doctor Feldman.

                   STATEMENT OF ROGER FELDMAN

    Mr. Feldman. Mr. Chairman, and members of the committee, it 
is my pleasure to appear before you this morning, and possibly 
to offer some outlines for the solution.
    In my opinion, the private sector should run a prescription 
drug benefit for fee-for-service Medicare, but the government 
has an important role to play here, too, and I will discuss 
that as well.
    The private sector should run the program because it is 
better at discovering and implementing innovations to reduce 
the cost and improve the quality of drug benefits. An example 
of private sector innovation occurred in Minneapolis, 
Minnesota, where Blue Cross and Blue Shield educated physicians 
to increase their use of cost-effective drugs.
    The private sector can adapt quickly when the need arises. 
In response to rising drug costs, many employers have 
introduced multi-tiered drug benefits. In contrast, changing 
the delivery of Medicare benefits for any reason has proven to 
be excruciatingly difficult. Congress actually blocked a 
demonstration of competitive pricing for Medicare M+C plans.
    My next point is that Medicare beneficiaries should have a 
choice of drug benefit plans. Americans value choice, and 
having choices improves quality. Employers in Minneapolis found 
that technical quality of care improved when choices were 
introduced. Advocates of a single plan point to several 
supposed disadvantages of choice, including increased 
administrative costs, adverse selection, and the burden of 
protecting beneficiaries from the consequences of making bad 
choices. These criticisms don't stand up to close scrutiny.
    The minimum size for low administrative costs in a drug 
benefit plan is several hundred thousand enrollees, so 
statewide or regional bidding areas would be large enough to 
offer choices with low administrative costs. Whenever 
beneficiaries have choices, the sicker ones may be more 
attracted to some plans than to others. Plans may try to avoid 
high risks by skimping on quality. However, it is useful to put 
this problem in perspective.
    My colleagues and I recently found that M+C plans with drug 
benefits attracted enrollees who cost 3.6 percent more than 
average. If this difference is unacceptably large, it can be 
reduced by risk adjusting the payments to the drug plans.
    The purpose of risk adjustment is to compensate plans that 
enroll high-risk beneficiaries. In my prepared remarks, I lay 
out the details of one such risk sharing arrangement, in which 
plans are paid more for enrolling beneficiaries with higher 
expected use of prescription drugs. This is not an ideal 
system. Ideally, I believe that all plans, including fee-for-
service Medicare, should submit bids to cover all Medicare 
services. We proposed that system for the competitive pricing 
demonstration.
    I am, however, confident that the government can run a 
competitive pricing system for Medicare drug benefits. Our 
experience in Denver proved conclusively that CMS could issue 
an RFP for a complete package of Medicare services and evaluate 
the plan's responses in a very short time.
    The last question raised by choice of drug benefits is 
whether the information load on seniors would be unbearably 
difficult. My position is simple, of consumers care about drug 
costs they will become informed.
    My colleagues and I surveyed employees of Minnesota 
companies that switched from a single tier to a three tier drug 
benefit last year. Compared with employees in companies that 
kept their old single tier plan, they were more likely to know 
the correct price of new drugs. We also found that employees 
with more formal education were more likely to know that 
formularies, generic drugs, and mail order drugs have 
significant potential to reduce costs.
    To educate seniors, the government can publish information 
on drug benefits and summary measures of consumer satisfaction, 
as it does for the Federal Employees Plan.
    I've already argued that plans should bid on large regional 
areas, and I believe this would solve the problem of access for 
rural residents, which has so far plagued the M+C program. If 
local cost differences are discovered and Congress wishes to 
correct them, it can add explicit adjustment factors.
    I want to conclude by saying briefly that the M+C program, 
although we love to hate it, has been successful in offering 
drug benefits to a majority, that is a choice of drug benefits 
in an M+C plan, to a majority of Medicare beneficiaries in this 
country.
    Thank you for these remarks.
    [The prepared statement of Roger Feldman follows:]

      Prepared Statement of Roger Feldman, University of Minnesota

    It is my pleasure to appear before you this morning to discuss a 
vital issue for the Medicare program: the provision of an outpatient 
prescription drug benefit for fee-for-service Medicare. For the past 20 
years, I have studied the private health insurance industry from the 
vantage of a university researcher. From 1995 to 2000, I assisted the 
Centers for Medicare and Medicaid Services in designing a competitive 
pricing demonstration for Medicare. These experiences have been 
instrumental in shaping the ideas that I wish to share with you today.
    As you well know, the Medicare entitlement provides only limited 
coverage of outpatient prescription drugs. This is in sharp contrast to 
private insurance plans that cover most Americans under 65. Virtually 
all analysts agree that prescription drug coverage should be part of 
Medicare. Without it, the elderly not only must spend unbearably large 
sums of money out-of-pocket for drugs, but they may forego cost-
effective treatments. As President Bush said on March 4, ``Medicare 
will pay a doctor to perform a heart bypass operation, but it will not 
pay for drugs that could prevent the surgery.''
    Despite this apparent consensus, it has been extremely difficult to 
fashion a Medicare drug coverage plan. Much of the difficulty centers 
on debate whether the program should be organized by the public sector 
through a single government-administered entity, or offered by the 
private sector through competing pharmacy benefit plans. In my opinion, 
this debate has polarized the discussion and has obscured the solution 
that we should be working toward. That solution includes both the 
public and private sectors. The role for private sector plans is to 
operate the drug program, and the government's role is to set the rules 
under which those private plans operate.

                        WHY THE PRIVATE SECTOR?

    The private sector should run the program because it is better than 
the government at discovering and implementing innovations to reduce 
the cost and improve the quality of health insurance benefits. Let me 
describe one example of private sector innovation. As you know, 
pharmaceutical manufacturers have long promoted their products through 
the use of ``detailing'' representatives who visit physicians. Blue 
Cross and Blue Shield of Minnesota, a not-for-profit health benefit 
plan, was concerned that detailing was not in the interest of patients, 
employers and insurers because it advocates the use of drugs with high 
profit margins at the expense of alternatives that might be less 
expensive and more beneficial. So within each drug therapeutic class, 
Blue Cross declared that certain drugs would be preferred, whereas 
others would be given a yellow cautionary flag and some would be deemed 
as red agents--the least cost effective. Blue Cross conducted classes 
for physicians and sent pharmacists to visit clinics with messages 
promoting the plan's favored drugs. Andrea De Vries, a student from our 
doctoral program at the University of Minnesota, found that there was a 
consistent increase in prescribing preferred agents among clinics with 
more pharmacist visits.1 She concluded that it is possible 
to have a positive effect on drug utilization that is not driven by a 
financial incentive.
---------------------------------------------------------------------------
    \1\ Andrea De Vries, ``Affecting Physician Prescribing Behavior: 
Factors Influencing the Success of a Pharmacy Intervention,'' Ph.D. 
Dissertation, University of Minnesota, May 2000.
---------------------------------------------------------------------------
    This example illustrates the private sector's ability to recognize 
a problem, devise a solution, and implement it effectively. Pharmacy 
benefit management (PBM) companies that run prescription drug benefit 
programs for most insured Americans under age 65 are another example of 
private sector innovation. PBMs control the cost of prescription drug 
programs by targeting the behavior of pharmacists, drug manufacturers, 
consumers, and prescribing physicians. One study found that PBMs 
obtained discounts of 13.2% below the average wholesale price of drugs, 
as well as manufacturer rebates of about 5%.2 Researchers 
from the RAND Corporation reported that aggressive management through 
private PBMs has been shown to reduce drug expenditures by 15% or 
more.3
---------------------------------------------------------------------------
    \2\ David H. Kreling, ``Cost Control for Prescription Drug 
Programs: Pharmacy Benefit Manager Efforts, Effects, and 
Implications,'' background report prepared for the DHHS Conference on 
Pharmaceutical Practices, Utilization, and Costs, Washington, DC, 
August 8-9, 2000.
    \3\ Dana P. Goldman and Geoffrey F. Joyce, ``A Third--and Better--
Way for Prescription Dug Coverage,'' Los Angeles Times, November 5, 
2000.
---------------------------------------------------------------------------
    The private sector can adapt quickly when the need arises. For 
example, in response to rising drug costs, many employers have 
introduced multi-tiered drug benefit plans where employees have to pay 
more for non-preferred drugs. The use of ``3-tier'' pricing 
arrangements (lowest payment for generic drugs, middle payment for 
formulary or preferred brands, and highest payment for non-formulary 
brands) nearly doubled from 29% of covered workers in 2000 to 57% in 
2002 according to a survey by the Kaiser Family Foundation.4 
An additional 28% of workers had ``2-tier'' drug benefits with a lower 
payment for generics and a higher payment for brand name drugs.
---------------------------------------------------------------------------
    \4\ Kaiser Family Foundation, Employer Health Benefits Survey, 2002 
Summary of Findings, http://www/kff.org/content/2002/20020905a.
---------------------------------------------------------------------------
    In contrast, changing the delivery of Medicare benefits for any 
reason has proven to be excruciatingly difficult. For example, I know 
of only one instance where the government has used its purchasing power 
to contract with selected providers for Medicare services. That is the 
demonstration of competitive pricing for durable medical equipment 
(DME). Congress actually used its power to block a demonstration of 
competitive pricing for Medicare M+C plans, despite the support of the 
CMS Administrator and a direct mandate from Congress to conduct such a 
demonstration.5
---------------------------------------------------------------------------
    \5\ Bryan Dowd, Robert Coulam, and Roger Feldman, ``A Tale of Four 
Cities: Medicare Reform and Competitive Pricing,'' Health Affairs, 19:5 
(September/October 2000), pp. 9-29.
---------------------------------------------------------------------------
                         WHY MULTIPLE CHOICES?

    A closely related question is whether Medicare beneficiaries should 
have a choice of pharmacy benefit plans. Advocates of a single plan 
point to several supposed drawbacks of multiple choice, including 
increased administrative costs, adverse selection, and the burden of 
protecting beneficiaries from the consequences of making bad choices.
    Before dealing with these specific criticisms, let me say that 
choice of medical benefits should be good thing because Americans value 
choice. ``One-size'' benefits do not fit everyone. In the market for 
employer-based health insurance, for example, it has been demonstrated 
beyond a doubt that employers offer multiple health insurance plans 
because employees want to have choices.6 Even countries with 
national health insurance systems allow some individuals to opt out 
(Germany) or to purchase private insurance when they need to fill gaps 
in the government plan (Britain and Canada).
---------------------------------------------------------------------------
    \6\ Pamela B. Peele, Judith R. Lave, Jeanne T. Black, and John H. 
Evans III, ``Employer-Based Health Insurance: Are Employers Good Agents 
for Their Employees?'' Milbank Quarterly, 78:1 (2000), pp. 5-21; John 
H. Moran, Michael E. Chernew, and Richard A. Hirth, ``Preference 
Diversity and the Breadth of Employee Health Insurance Coverage,'' 
Health Services Research, 36:5 (October 2001), pp. 911-934; and M. Kate 
Bundorf, ``Employee Demand for Health Insurance and Employer Health 
Benefit Choices,'' Journal of Health Economics, 21:1 (January 2002), 
pp. 65-88.
---------------------------------------------------------------------------
    Having choices also improves quality. An evaluation of a health 
insurance purchasing coalition operated by large employers in 
Minneapolis found that introduction of multiple choices (as many as 15 
separate provider-controlled delivery systems) in 1997 was associated 
with improvement in technical quality of care for patients with 
diabetes.7 Rates of use of preventive services either 
remained stable or improved after the introduction of choice.
---------------------------------------------------------------------------
    \7\ Alan Lyles, Jonathan P. Weiner, Andrew D. Shore, Jon 
Christianson, Leif I. Solberg, and Patricia Drury, ``Cost and Quality 
Trends in Direct Contracting Arrangements,'' Health Affairs, 21:1 
(January/February 2002), pp. 89-102.
---------------------------------------------------------------------------
    What about the extra administrative cost of offering multiple 
choices? This is a true cost that can't be ignored. We know that large 
employers are more likely than small ones to offer multiple health 
insurance plans because they can spread the administrative cost over 
more enrollees. But it is easy to make too much of this problem. We 
could minimize the cost of buying automobiles if there were only one 
auto dealer in each city, and the administrative cost of grocery stores 
would be lower if there were only one of them. But we value choice of 
auto dealers and grocery stores quite highly, despite the extra 
administrative costs. Based on my discussions with a large PBM, I 
estimate that the minimum efficient size for low administrative costs 
is several hundred thousand enrollees. This estimate suggests that 
statewide or regional bidding areas composed of multiple states would 
be large enough to offer multiple choices with low administrative 
costs.
    Whenever beneficiaries have multiple choices, the sicker ones may 
be more attracted to some health plans than to others. This phenomenon 
is called ``adverse selection,'' and it can have implications for the 
efficiency of the health benefit program. Plans may try to avoid high 
risks by skimping on quality and cutting services that attract them. 
Adverse selection could be a problem for a multiple-choice prescription 
drug benefit in Medicare. However, it is useful (as it was for 
administrative costs) to put the problem in perspective. My colleagues 
and I recently completed a study of adverse selection in the M+C 
program, which will be published in the Health Care Financing Review. 
We estimated that M+C plans that offered drug benefits with an annual 
cap above $800 in 1999 attracted enrollees who cost 3.6% more than 
average.8 This is an upper limit on the cost of adverse 
selection, because adverse selection from offering drug benefits at all 
has to be larger than selection from tinkering with quality and 
services once the benefit is offered.
---------------------------------------------------------------------------
    \8\ Roger Feldman, Bryan Dowd, and Marian Wrobel, ``Risk Selection 
and Benefits in the Medicare+Choice Program,'' forthcoming in the 
Health Care Financing Review.
---------------------------------------------------------------------------
                         THE ROLE OF GOVERNMENT

    If this amount of adverse selection is unacceptable, it can be 
reduced further by ``risk adjusting'' the payments to the drug benefit 
plans. Risk adjustment means that payments are increased to account for 
the adverse selection experienced by a plan. A discussion of risk 
adjustment leads directly to the question of the government's role in a 
Medicare prescription drug plan. In my opinion, the government should 
set the rules for the program and make sure those rules are enforced.
    One of the most important rules is how to share risk with the 
participating plans. As I understand the proposals currently on the 
table, the possibilities range from government bearing all of the risk 
except for the plans' fees, to the private sector bearing most of the 
risk subject to risk-sharing corridors. For example, plans might be at 
risk for a target level of spending, plus or minus 5%. If costs exceed 
the upper limit, the government pays the extra amount, and conversely 
plans keep the extra savings if costs are less than the lower limit.
    Before discussing the details of my proposal risk-sharing proposal 
(which is only one among many), I want to emphasize that the purpose of 
risk bearing is to give private Medicare plans better incentives for 
cost containment. In order to accomplish this goal, as a general rule, 
private plans should bear the risk for events that they control, but 
they should not bear risk for events they do not control. In this 
context, private plans do not control the number of prescriptions that 
providers write within a therapeutic drug class. Thus, they should not 
be at full risk. However, private plans do control the choice of 
specific drugs to fill those prescriptions and the prices of those 
drugs. Thus, they should be at risk for the cost of drug management and 
drug prices. You could think of the cost equation as the product of 
three elements:

                         DRUG COST PER PERSON =
          (1) NUMBER OF THERAPEUTIC PRESCRIPTIONS PER PERSON *
            (2) SPECIFIC DRUGS USED TO FILL PRESCRIPTIONS *
                      (3) PRICES OF SPECIFIC DRUGS

    To implement a payment system based on this formula, the government 
could specify the number of prescriptions in each therapeutic class 
that are written for a ``standard beneficiary,'' who could be the 
average fee-for-service Medicare beneficiary for illustration. In a 
standard population of 1,000, there might be 50 prescriptions for ACE 
Inhibitors, 25 for Lipotriptics, and 10 for H2 Blockers per month. 
Using the preferred drugs on its formulary and its prices, a private 
plan might bid $100 per month to cover one standard enrollee. After all 
the participating plans have submitted bids, the government could use 
the bids to determine the enrollee's out-of-pocket premium 
contribution. For example, the government might pay 100% of the premium 
up to the higher of the median bid or the enrollment-weighted average 
bid, as we proposed for the M+C competitive pricing demonstration. 
Premium competition would provide powerful incentives for plans to 
submit low bids.
    Next, enrollees would sign up for the drug benefit program. Because 
of the large subsidy (e.g., the government pays 100% of the premium of 
at least one plan), enrollment would be nearly universal, so adverse 
selection between enrollees and the general Medicare population would 
be minimized. Additional restrictions such as a penalty for delayed 
enrollment in the drug benefit program could also be 
imposed.9
---------------------------------------------------------------------------
    \9\ John M. Bertko, ``Medicare Prescription Drug Plans: The Devil 
is in the Details,'' Washington, DC: American Academy of Actuaries, 
September 2002.
---------------------------------------------------------------------------
    After joining the program, enrollees would have an opportunity at 
regular intervals to select a particular private drug benefit plan, and 
the government would observe how many prescriptions were written in 
each therapeutic class for the plan's enrollees. This system requires 
the private plans to submit claims for each prescription, but that is 
their standard procedure for commercial business, so it is not an 
additional cost for them. If the plan that bid $100 for a standard 
enrollee attracts sicker beneficiaries who use twice the standard 
amount of prescriptions, it would be paid $200 per month. Because the 
plan is not at risk for the health of the enrollees it attracts, it 
does not have an incentive to skimp on covering drugs that attract 
them. However, if the plan overestimates its ability to manage the 
types of drugs used, or if it is overly aggressive in estimating its 
ability to get low prices, it must eat those extra costs.
    This is not an ideal bidding system. Ideally, all plans, including 
fee-for-service Medicare, should submit bids to cover all services. 
Consumers could then choose among all plans based on premiums, 
amenities, and their preferences for the plans' medical management 
styles. We proposed that system for the competitive pricing 
demonstration, although the demonstration eventually was restricted to 
M+C plans only.
    I am confident that the government--either CMS or a new, single-
purpose agency--is technically capable of running a competitive pricing 
system for Medicare drug benefits. Our experience in Denver proved 
conclusively that CMS could issue an RFP for a complete package of 
Medicare services in a very short time, and it could evaluate the 
plans' responses. Bidding for one piece of the benefit package must be 
easier than that experience. Later demonstration efforts in Phoenix and 
Kansas City explored the design of formularies, co-payments for single- 
and multiple-source drugs, expenditure caps, and which prices to apply 
against the cap.10 Solutions that were acceptable to the 
local stakeholders were found for all of those design issues.
---------------------------------------------------------------------------
    \10\ For example, the local advisory committee in Phoenix decided 
that the average wholesale price (AWP) for brand name drugs should be 
applied against the benefit cap. They concluded that it was too 
difficult to include plans' discounts in the calculation because of 
large variations among plans.
---------------------------------------------------------------------------
    The last question raised by multiple choice of drug benefits is 
whether the information load on seniors would be unbearably difficult, 
leading them to make bad choices. The main point I want to make is that 
the supply of information responds to the demand for it. If consumers 
have no reason to care about drug costs, then it follows that they 
won't demand information and they will remain ignorant. On the other 
hand, if they have a reason to care about drug costs, then there is a 
strong incentive to become informed. I know this from my own research, 
in which several colleagues and I surveyed employees of Minneapolis 
companies that switched from a single-tier to a 3-tier drug benefit 
last year. Compared with employees of companies that kept the old 
benefit, they were more likely to know the correct price of new 
drugs.11 We also found that more formal education was 
positively correlated with knowing that formularies, generic drugs, and 
mail order drugs have significant potential to reduce drug costs.
---------------------------------------------------------------------------
    \11\ Roger Feldman, Jean Abraham, Linda Davis, and Caroline Carlin, 
``Pharmacy Benefit Design and Consumer Knowledge of Prescription Drug 
Costs,'' Division of Health Services Research and Policy, University of 
Minnesota, April 2003.
---------------------------------------------------------------------------
    The second finding highlights the important role of education in 
informing consumers about drug costs. Our study looked at formal 
education, but there is also a role for specific drug education 
programs directed at seniors. The government has a major responsibility 
for providing those programs. Publishing information on drug benefits 
and summary measures of consumer satisfaction--as is done for the 
Federal Employees Health Benefits Program (FEHBP)--is an example of 
what the government can do for seniors. The FEHBP also encourages 
members to request generic drugs instead of brand name drugs and to use 
their plan's home delivery program if it has one.12 The 
government could also require plans to provide on-line access to their 
formularies.
---------------------------------------------------------------------------
    \12\ FEHBP 2002 Guide, United States Office of Personnel 
Management, www.opm.gov/insure. Home delivery enables members to get a 
90-day supply of a drug instead of the usual 30-day supply, often at 
lower out-of-pocket cost per unit.
---------------------------------------------------------------------------
    In addition to these information measures, the government could 
demand that sensible consumer protections be built into every plan. For 
example, although the bills under consideration are somewhat different, 
they all require private plans to include at least one and sometimes 
two brand-name drugs in each therapeutic class.13 An appeals 
process can offer protection against arbitrary coverage denials. 
Finally, the patient's doctor can always write ``dispense as written'' 
orders.
---------------------------------------------------------------------------
    \13\ H.R. 5019 requires that there is at least one branded drug in 
each therapeutic class; two, if the class includes more than one drug; 
or two and a generic, if available. S. 2625 requires the formulary to 
include all generics and at least one but no more than two branded 
drugs (with exceptions allowed if clinically inappropriate for a 
class). Other bills require unspecified ``drugs within each therapeutic 
class.''
---------------------------------------------------------------------------
              THE BIDDING AREA AND URBAN-RURAL DIFFERENCES

    I would now like to discuss two related questions that are very 
important in designing a Medicare drug benefit: Should plans bid on 
local or regional areas? And should there be adjustments for urban-
rural differences?
    The current M+C program allows risk-bearing organizations to 
designate service areas county-by-county (and even to select smaller 
areas if there is a significant geographic barrier to covering a whole 
county). Although there is some controversy around this definition, it 
makes sense for M+C plans to serve small areas because medical care 
markets are local. This is not the case for pharmacy benefit 
management. Prices that PBMs pay for drugs are determined by national 
volume, and utilization management techniques are national in scope as 
well. Because there is no distinct local market, it follows that the 
size of the bidding area should be determined by the minimum size 
needed to achieve economies of scale in administration. As I mentioned 
earlier, this might be at the statewide or regional level. Small states 
could be combined to achieve the critical mass needed for an efficient 
competitive bidding system.14
---------------------------------------------------------------------------
    \14\ In a speech on January 23, Senator Max Baucus said that plans 
should be required to serve large geographic areas of at least two 
states. Montana's population of 140,000 seniors would have more options 
if the service area included multiple states.
---------------------------------------------------------------------------
    Bidding for large regions would solve the problem of access for 
rural residents, which has plagued the M+C program. Plans would have to 
cover all areas, both urban and rural, in the region. If the cost of 
dispensing drugs were higher for rural pharmacies than for urban 
pharmacies (although I know of no evidence that this is the case), then 
urban residents would implicitly cross-subsidize rural residents in the 
same bidding region. If local cost differences were discovered and 
Congress wished to recognize them, it could add an explicit adjustment 
factor to the payment system.

                CONCLUDING OBSERVATIONS ON MEDICARE M+C

    I would like to conclude with a few observations on the much-
maligned M+C program, which has been accused by some of being 
unreliable and unstable.15 The reason why some HMOs have 
withdrawn from the M+C program is that the payment system is seriously 
flawed. Instead of having HMOs tell the government how much it costs to 
provide Medicare services through a competitive bidding process, the 
government--which knows almost nothing about HMOs' costs--tells them 
how much it will pay. Despite this flaw, the M+C program was still able 
to offer 391 separate products with some form of drug coverage in 
2001.16 288 of those products had coverage limits that 
exceeded $800 per year, and 177 had unlimited coverage for generic 
drugs. The average premium for M+C products with drug coverage was $41 
per month. Finally, about 54% of all Medicare beneficiaries had at 
least one drug-coverage M+C product available to choose in 2001. 
Therefore, although the M+C program is far from perfect, it has 
provided a choice of drug coverage for many Medicare beneficiaries, an 
accomplishment that has been beyond the ability of fee-for-service 
Medicare.
---------------------------------------------------------------------------
    \15\ Public Citizen, ``Proposals to Offer Drug Coverage Through 
Private Insurers and HMOs: A Step Backwards for Medicare,'' 
www.citizen.org/congress/reform/rx--benefits/drug--benefit.
    \16\ This information is courtesy of Rachel Halpern, a graduate 
student at the University of Minnesota. An M+C ``product'' is a benefit 
package with an associated premium and geographic service area. Since 
HMOs may offer more than one product, analysis of access to drug 
benefits in the M+C program at the product level is more accurate than 
simply looking at the number of HMOs that offer drug coverage.
---------------------------------------------------------------------------
    Thank you for allowing me to present these remarks.

    Mr. Bilirakis. Thank you, Doctor Feldman.
    Mr. Herman.

                    STATEMENT OF DAVID HERMAN

    Mr. Herman. Mr. Chairman and members of the subcommittee, I 
am David Herman, Executive Director of The Seniors Coalition 
(TSC). On behalf of our organization and its 4 million members 
and supporters, I want to thank you for convening this hearing 
and for your continued interest in studying the best means for 
adding a much needed prescription drug benefit to the Medicare 
program, while preserving Medicare for today's beneficiaries 
and tomorrow's retirees.
    We are grateful to you for this opportunity to present our 
findings about the needs and desires of seniors in the Medicare 
program, and our views on how best to meet those needs.
    We all know that 21st century Americans consider 
prescription medicine coverage to be a crucial component in 
addressing their health insurance needs, but it is a fact that 
seniors need that component more than other segment of American 
society. Prescribed medication use increases with age and its 
associated chronic and acute health problems. Yet, only two-
thirds of seniors have been able to address that need, and they 
are doing so at a great personal expense.
    The remaining one-third of the senior population that does 
not have any prescription medicine coverage has no means of 
ensuring adequate health coverage and treatment. Uninsured 
seniors either do without their medication or they take reduced 
quantities, thereby reducing and nullifying the benefits. 
Eventually, this tactic can lead to deteriorated health and 
more invasive and expensive health treatment. This is a 
travesty on Medicare's original promise to provide seniors with 
the highest quality health care in the world.
    The Centers for Medicare and Medicaid Services reported in 
2002 that Medicare paid only 53 percent of the total cost of 
beneficiaries medical care. Who among us would purchase a 
health insurance plan that covered only 53 percent of our 
medical care costs?
    In addition to coverage concerns, research conducted for 
the Seniors Coalition indicates that seniors key concerns for 
healthcare policy are: keeping healthcare affordable; providing 
healthcare access for everyone; free health wellness programs 
and illness protection; creating a prescription drug benefit 
for Medicare; strengthening financially the current Medicare 
program for the baby boomers who will soon enter the program; 
and, Medicare is out of date and out of touch with the needs of 
today's senior citizens.
    Solutions seniors can live with, it becomes obvious then 
from our research that all seniors need access to an affordable 
prescription medicine plan. They need changes and choices that 
take their varying financial and health status into 
consideration. They want an insurance plan that allows them to 
seek wellness care first, as opposed to illness treatment, and 
in keeping with this selfless legacy they want it strengthened 
for the next generation of beneficiaries, not just themselves.
    In my full testimony, the Seniors Coalition addressed these 
needs in detail. I'd like to highlight those now and 
respectfully request that the subcommittee refer to my full 
testimony for greater depth and detail.
    Our seniors desire that prescription coverage be made a 
core element of Medicare coverage through realistic legislation 
modeled on a market-based plan like the Federal Employees 
Health Benefits Program. To that end, our membership rallied to 
support H.R. 4954, the Medicare Modernization and Prescription 
Drug Act 2002, as an important first step toward such a market-
based plan.
    We believe there are certain safeguards that must be 
established in the prescription plans to ensure that seniors do 
not receive a substandard plan that will require changes within 
a few years. Specifically, we know that mandatory schemes 
imposed by Medicaid, such as prior authorization and preferred 
drug lists, are unacceptable limitations that can negate 
seniors' benefits.
    Our research indicates such schemes can result in a 
systematic under-utilization of prescribed medications, which, 
in turn, can pose a threat to quality of care and potentially 
increase costs to the system.
    Our research also indicates that seniors want a disease 
management component in their Medicare plan that will encourage 
and reward wellness and management of chronic diseases, and 
they want protection from long-term care costs which accounted 
for 41 percent of seniors out-of-pocket expenses in 1999. Non-
solutions seniors can live without.
    The most critical problem in consumer acquisition of needed 
medicine centers on price. The obvious culprits in the struggle 
to contain costs of needed healthcare are the brand name drug 
companies. While we realize we subject ourselves to criticism 
from those who make such attacks, we believe it is most 
important to the future of seniors' good health that we 
continue to uphold our free market system that is responsible 
for the remarkable products that such a system, and only such a 
system, encourages.
    While we've been a vocal advocate against exploitive 
tactics by patent holders to unfairly extend patents and, 
therefore, disadvantage consumers, at the same time we're 
vigorous advocates for preserving the incentives for 
development of innovative therapies to address age-related 
chronic disease and physical disabilities attended to age.
    Another suggested easy fix for the high cost of 
prescription drugs is drugs reimportation. Some have proposed 
that we simply establish a public policy that permits the 
importation of other government subsidized prescription drugs. 
Congress has previously received testimony on the deadly 
effects of such actions, and the U.S. Food and Drug 
Administration has definitely declared they cannot validate the 
safety and efficacy of reimported drugs.
    Our senior citizens want their own government, not foreign 
governments, to support and ensure their prescription coverage. 
When we compare the changes that have taken place in the health 
insurance business in the past four decades, since Medicare's 
inception, to the changes in Medicare there is no comparison. 
Medicare is pretty much the same one-size-fits-all plan that 
President Johnson initiated in 1965. Our seniors would like to 
see Medicare, the only insurance plan available to many of its 
35 million senior participants, catch up.
    Thank you.
    [The prepared statement of David Herman follows:]

  Prepared Statement of David Herman, Executive Director, The Seniors 
                               Coalition

    Mr. Chairman and members of the Subcommittee, I am David Herman, 
Executive Director of The Seniors Coalition (TSC). On behalf of our 
organization and its four million members and supporters, I want to 
thank you for convening this hearing and for your continued interest in 
studying the best means for adding a much needed prescription drug 
benefit to the Medicare program, while preserving Medicare for today's 
beneficiaries and tomorrow's retirees. We are grateful to you for this 
opportunity to present our findings about the needs and desires of 
seniors in the Medicare program, and our views on how best to meet 
those needs.

    SENIORS HAVE A DISPROPORTIONATE NEED FOR PRESCRIPTION MEDICATION

    We all know that 21st century Americans consider prescription 
medicine coverage to be a crucial component in addressing their health 
insurance needs, but it is a fact that seniors need that component more 
than other segment of American society. Prescribed medication use 
increases with age and its associated chronic and acute health 
problems. Yet, only two-thirds of seniors have been able to address 
that need, and they are doing so by meeting Medicaid requirements, by 
continuing in private insurance plans through former employers, by 
enrolling in Medicare+Choice, or by purchasing Medicare supplemental 
insurance policies at additional personal expense.
    The remaining one-third of the senior population that does not have 
any prescription medicine coverage has no means of ensuring adequate 
health coverage and treatment. They cannot afford supplemental 
prescription coverage, nor can they afford to pay for their 
prescriptions. To compound the problem, uninsured seniors do not 
receive a discounted price that insured seniors' insurance plans afford 
them. Uninsured seniors either do without their medications, or they 
take reduced quantities, thereby reducing or nullifying the benefits. 
Eventually, this tactic can lead to deteriorated health and more 
invasive and expensive health treatment. This is a travesty on 
Medicare's original promise to provide seniors with the highest quality 
health care in the world.

                   ACKNOWLEDGING MEDICARE'S PROBLEMS

    In a survey published in June 2002 from Medicare's 1996-1999 
beneficiaries, the Centers for Medicare and Medicaid Services (CMS) 
reports that Medicare paid only 53 percent of the total cost of 
beneficiaries' medical care. Who among us would purchase a health 
insurance plan that covered only 53 percent of our medical care costs? 
When prescribed medicines were considered separately, Medicare pays 
only 8.1 percent of all beneficiaries' cost, and that is inpatient 
prescription costs. CMS also reports that while those Medicare 
beneficiaries with drug coverage spend more on prescriptions than non-
covered beneficiaries, the non-covered beneficiaries pay 75 percent 
more in out-of-pocket costs. In other words, those able to afford 
prescription drug coverage are also able to afford more medications, 
while those unable to afford prescription medicine coverage are forced 
to pay very high out-of-pocket costs to attain those medicines they can 
afford. This is upheld by CMS's data that shows that beneficiaries with 
prescription drug coverage fill more prescriptions than those without 
drug coverage, regardless of the number of chronic conditions they 
have. For example, CMS reports that among beneficiaries with five or 
more chronic conditions, those with drug coverage filled 44.4 
prescriptions, while those without drug coverage filled only 38.6 
prescriptions. It has become abundantly apparent that Medicare's 
problem, the lack of a prescription medicine benefit, has become our 
seniors' burden.
    We certainly applaud the efforts that pharmaceutical companies have 
made to make medicines more affordable to seniors through their 
discount card programs. These programs have allowed millions of seniors 
to access needed medicines they might otherwise not have been able to 
afford. However, the utilization by seniors of these programs 
highlights how important it is to enact broader real coverage for 
prescription drugs under Medicare so that all seniors can benefit from 
the solution we are presently working towards. Discount cards alone, 
whether from the private sector or the public sector, does not equal 
coverage and is not a solution.
    That is not, however, the only problem our seniors experience in 
their Medicare coverage. In a survey prepared for TSC by The Luntz 
Research Companies, 42 percent of seniors listed the most important 
healthcare policy as keeping healthcare affordable, and the second most 
important healthcare policy as providing healthcare access for 
everyone. When asked to choose the specific Medicare benefit most 
important to them, 50 percent chose free health wellness programs and 
illness protection, and 43 percent chose creating a prescription drug 
benefit through Medicare. When asked to choose from several statements 
about Medicare two statements that they most agreed with, 55 percent 
agreed it was essential that we strengthen financially the current 
Medicare program for the baby boomers who will soon enter the program, 
and the second largest group agreed that Medicare is out of date and 
out of touch with the needs of today's senior citizens.

        ADDRESSING THE PROBLEMS: SOLUTIONS SENIORS CAN LIVE WITH

    It becomes obvious then from our research that all seniors need 
access to an affordable prescription medicine plan; they need changes 
and choices that take their varying financial and health status into 
consideration; they want an insurance plan that allows them to seek 
wellness care first as opposed to illness treatment; and, in keeping 
with their selfless legacy, they want it strengthened for the next 
generation of beneficiaries, not just themselves.
    For many years The Seniors Coalition (TSC) has communicated to 
Congress our members' desire that prescription coverage be made a core 
element of Medicare coverage through realistic legislation modeled on a 
market-based plan like the Federal Employees Health Benefits Program 
(FEHBP). This is the same model that was recommended by the 1999 
National Bipartisan Medicare Commission. To that end, our membership 
rallied to support H.R. 4954, The Medicare Modernization and 
Prescription Drug Act of 2002, as an important first step towards such 
a market-based plan. We support many of the provisions of this bill: A 
voluntary and affordable prescription program that provides permanent 
drug coverage while discounting medicines by as much as 60 percent to 
85 percent; a reasonable deductible of $250, with protection against 
catastrophic drug costs by capping them at $3,800 per year; choice in 
plans that provides standard drug coverage or an improved benefit 
package to meet individual seniors' needs; safeguarding the private 
healthcare coverage that seniors already have; and, stabilization of 
Medicare+Choice;
    In addition to those choices and changes, we believe there are 
certain safeguards that must be established in a prescription plan to 
ensure that seniors do not receive a substandard plan that will require 
changes within a few years. Specifically, we know that mandatory 
schemes imposed by Medicaid such as ``fail first requirements,'' prior 
authorization and preferred drug lists are unacceptable limitations 
that can negate seniors' benefits.
    Our research indicates that prior authorization schemes can result 
in the systematic underutilization of prescribed medications, which in 
turn can 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. Medicines that 
seniors' doctors prescribe may not be available because of these 
mandatory schemes. This ``one-size-fits-all'' mentality is 
counterproductive to the findings of pharmacogenetics, or personalized 
medicine, which tells us that small differences between your genes and 
those of your relative or neighbor can affect how you react--or don't 
react--to a medicine. In an age when personalized medicine is becoming 
the promise of safer, more effective treatment, we would not want to 
see the government given a veto power that ignores the progress in 
genetic research in favor of their corporate gain. The long-term 
consequences to seniors could be grave. That's why we need to be able 
to choose among plans.
    Our research also indicates that seniors want a disease management 
component in their Medicare plan that will encourage and reward 
wellness and management of chronic diseases. A successful disease 
management program has the potential to enhance a patient's health 
outcome, control their disease, and avoid more invasive care while 
reducing overall health care spending. Yet, Medicare does not provide 
for sound coordination of care or disease management programs.
    Another important protection that seniors need is protection from 
long-term care costs. A CMS study on 1999 cost and use by Medicare's 
beneficiaries showed that the majority of out-of-pocket spending was 
for Medicare cost-sharing and payment for non-covered services. Long-
term care accounted for 41 percent of those expenditures. It is 
estimated that more than half of all seniors may need long-term care 
(LTC) during their lifetime, a statistical measure that points to the 
importance of making long-term care an affordable component of 
geriatric healthcare. The federal government, through Medicare and 
Medicaid programs, is the largest purchaser of LTC, with expenditures 
through 2020 projected to be $77.2 billion. Out-of-pocket expenditures 
for LTC are expected to be $35.6 billion by 2020, and it is estimated 
that ``donated care'' will climb to a value of at least $45 billion, 
and possibly as much as $94 billion.
    In a detailed study on the problems with, and solutions to LTC, the 
Center for Long-Term Care Financing states that ``the current crisis is 
dire. Somehow, the profession of long-term care must reduce its 
dependency on public financing, which drags like an anchor on 
profitability and quality of care. By some means or another, long-term 
care must attract more of the consumer-driven, private financing that 
will lift all boats.''
    Despite such warnings, few Americans are prepared for the financial 
apocalypse that long-term care ushers in. TSC supports legislation that 
encourages the purchase of private insurance through tax deductible 
long-term care insurance premiums and a tax credit for those with out-
of-pocket long-term care expenses. We support legislation that is 
designed to protect seniors from the high and often financially 
devastating costs of long-term care by allowing a deduction for 
qualified LTC insurance premiums, use of such insurance under cafeteria 
plans and flexible spending arrangements, and a credit for individuals 
with long-term care needs.

                          THE PRICE CONUNDRUM

    At its core, the most critical problem in consumer acquisition of 
needed medicines centers on price. The affordability of prescription 
drugs is a political hot-potato that seems to keep coming back year 
after year. You are all familiar with the heart-wrenching stories of 
seniors and economically fragile families, particularly those with 
young children, who cannot afford to purchase drugs that are prescribed 
by their doctors. We all know of seniors who are forced to make the 
choices I referenced earlier between buying food or their prescription 
drugs, or between the drugs and paying their rent or mortgage. It is 
the kind of dilemma that no senior should be caught in. The obvious 
culprits in the struggle to contain costs of needed health care, and 
the one who many well-meaning but plainly wrong senior advocates 
passionately attack, are the brand name drug companies.
    Blaming brand name drug companies makes all of us feel better. 
Blaming brand name drug companies is the intoxicating elixir of choice 
for self-styled consumer advocates, and let's be honest--for many 
Members of Congress--for relieving the political headache brought on by 
high drug prices. However attractive the target, however pleasing the 
rhetoric may sound as it fills the airways, and however simple a 
solution it may seem, it is wrong.
    Those who are hooked on the political elixir of blaming brand drug 
companies will immediately brand me as a biased advocate for the drug 
industry. That would be incorrect. The Seniors Coalition has been a 
strong critic of exploitation by brand drug companies of patent 
litigation for popular medications that effectively delays generic 
competition. We believe strongly that when a patent term runs its 
course, consumers have the absolute right to the benefits of a hotly 
competitive pharmaceutical marketplace. We therefore support the 
President's regulation that, once finalized, will prohibit patent 
holders to unfairly extend patents and thereby disadvantage consumers.
    But we also are vigorous advocates for preserving the incentives 
for development of innovative therapies to address age-related chronic 
disease and physical disabilities attendant to age. It is our 
fundamental philosophy that seniors benefit from new drug breakthroughs 
that help seniors avoid costly and often debilitating surgery; new 
drugs that allow seniors to be mobile rather than trapped in 
wheelchairs or in convalescent beds; new drugs that allow seniors to 
live independently rather than in assisted living facilities; new drugs 
that allow seniors to enjoy the quality of life rather than suffering 
from one painful minute to another in a body incapable of normal 
functions; and new drugs that literally extend the lives of seniors who 
would otherwise be condemned to an early death.
    The innovation that drives the development of such new drug 
therapies cannot, and does not, exist in a price controlled 
marketplace. Unfortunately, that is the remedy of choice now being 
seized by elected officials and regulators on both the state and 
federal level for high drug prices and the tool that is consistently 
applied by Medicare and Medicaid regulators. It is a solution that is 
so easy that it frankly seems too good to be true. It seems that way 
because it IS too good to be true.
    I would ask you to look at the benefits of new drug research that 
have made real, quantifiable differences in the quality of life, and 
indeed the length of lives of seniors.
    Over the past decade, pharmaceutical research companies have made 
dramatic advances in providing physicians more and more effective tools 
to treat disease. Between 1993 and 2002, 363 new drugs, biologics and 
vaccines that prevent and treat over 150 diseases and conditions were 
approved for marketing by the Food and Drug Administration.\1\
---------------------------------------------------------------------------
    \1\ Pharmaceutical Research and Manufacturers of America, New Drug 
Approvals Series (Washington, DC: PhRMA, 1994-2003).
---------------------------------------------------------------------------
    Let me describe a few of these advances that have impacted the 
quality and length of life of America's seniors:
    Beginning in 1995, a string of major advances in the treatment of 
type 2 diabetes has allowed diabetic patients to more effectively 
manage their condition. Prior to 1995, there was only one category of 
medicines, aside from insulin, that were available to patients with 
type-2 (also known as non-insulin dependent) diabetes. Since that time, 
there have been five new classes of medicines developed, allowing 
doctors to better customize treatment regimens to fit their patients'' 
needs. Because these medications have different mechanisms of action, 
and different side effects, combination therapy (using more than one 
type of medicine to treat the condition) can prevent patients from 
becoming hypoglycemic (having blood sugar levels that are too low), as 
well as prevent costlier complications, such as kidney problems.
    Alzheimer's disease is a progressive disease that causes those who 
suffer from it to gradually lose their ability to remember things and 
to think clearly.\2\ All four of the prescription medicines, belonging 
in two therapeutic classes, approved by the FDA to treat Alzheimer's 
disease have been developed in the past decade. Approximately three 
quarters of patients diagnosed with Alzheimer's disease are admitted to 
a nursing home within 5 years of diagnosis. As study of one 
cholinesterase inhibitor, rivastigmine, for treatment of mild to 
moderate Alzheimer's demonstrated improved cognitive function and a 
slowed rate of decline that delayed the move of patients to 
institutionalized care. Savings are realized in both the direct costs 
by delay of institutionalization and reduced caregiver burden. [H. Lamb 
and K. Goa, ``Rivastigmine: A Pharmacoeconomic Review of its Use in 
Alzheimer's Disease,'' Pharmacoeconomics, 19 (2001): 3.]
---------------------------------------------------------------------------
    \2\ National Institute on Aging, ``Alzheimer's Disease Fact 
Sheet,'' February 2003  (28 
February 2003).
---------------------------------------------------------------------------
    These are just a few examples of the types of new, innovative 
medicines whose discovery and development would well have been delayed 
or eliminated completely in a price-controlled pharmaceutical market. 
Please allow me to stress our strong belief that the solution is not to 
attack this problem by limiting the ability of researchers to fund this 
continuing valuable new drug research, but a clearly more rational 
approach would be to develop appropriate public policies that will 
permit patients who need financial assistance to access these 
medicines.
    The Seniors Coalition strongly repudiates price control schemes 
that have been and those that are being considered at both the state 
and federal level. Virtually all of these programs deny needed 
medicines to seniors; place patients at substantial health risk, 
including death; and deny seniors a quality of life that would 
otherwise be available if they had the financial means to pay for these 
needed medicines from their own pockets. That places seniors in a cruel 
public policy vise where they are denied access to medicines they 
desperately need today, and substantially limits the research for 
breakthrough drugs that would otherwise be available to them in the 
future.
    America's seniors have been called the ``greatest generation.'' The 
fruits of the sacrifice we have made are clearly evident. To call upon 
this greatest generation to now make the additional sacrifice of our 
health and well-being, to ask that we forfeit longer and more 
productive lives, to require that we not have access to medicines that 
would allow us to live independently and enjoy a quality of life would 
not just be a sacrifice, it would be a penalty on America's seniors.
    We look forward to working with this Subcommittee to develop more 
responsible and effective public policies to preserve and protect the 
secure and healthy retirement years of America's seniors.

                         THE REIMPORTATION FIX

    There is another seemingly easy fix for the high cost of 
prescription drugs. It is called reimportation. We simply establish a 
public policy that permits the importation of prescription drugs from 
one of our neighbors--the country of choice for many is Canada. We 
state that a consumer cannot be charged any more for those drugs that 
what a Canadian citizen pays. Drug costs in Canada are, for the most 
part, much lower than they are in the United States.
    That is such a simple solution that it too seems almost too good to 
be true. Again, that is precisely because it IS too good to be true.
    The primary reason Canadians can buy prescription drugs cheaper 
than we can in America is because Canada has a socialized medicine 
system that imposed strict price controls. So we are not really 
reimporting drugs into America from Canada, we are importing an 
economic policy that is antithetical to the free enterprise system we 
adhere to, and such policies undermine the American patent system that 
fundamentally recognizes the need for incentives for new drug 
development to assure a robust pipeline of new drugs in the future.
    Then, of course, there is the serious problem of patient safety. 
The U.S Food and Drug Administration has definitely declared they 
cannot validate the safety and efficacy of drugs imported from Canada. 
The lack of regulatory controls in Canada, a country that is among the 
better of many of our neighbors, is well documented with pervasive 
contamination and counterfeit drugs.

                               CONCLUSION

    The needs and desires of seniors might seem overwhelming if looked 
at as only a request for more spending on a growing senior population. 
But many, including the 1999 Bipartisan Medicare Commission, believe 
that increased competition through a variety of plans will make 
Medicare more efficient and save on its cost, while at the same time 
making Medicare more flexible and more responsive to beneficiaries' 
differing needs. Think of the changes that have taken place in the 
health insurance business in the four decades since Medicare's 
inception. Insured workers have gone from a one-size-fits-all plan to 
plans customized for specific family structures by particular 
industries. We have seen the addition and refinement of HMOs and PPOs, 
and we have seen the addition of tax benefits like MSAs and FSAs. The 
health insurance industry and the Congress have responded to the needs 
and desires of those they serve and made new products and new tax 
benefits available. But look at Medicare and what do you see? It is 
pretty much the same defined benefit, one-size-fits-all plan that 
President Johnson initiated in 1965.
    Finally, think of the changes that have occurred in the senior 
population since the 1960s. We enjoy better health, we have 20 percent 
less disabilities than we did 20 years ago, we have a better overall 
quality of life, and we live a lot longer. We'd like to see Medicare, 
the only insurance plan available to many of its 35 million senior 
participants, keep up with us.

    Mr. Bilirakis. Thank you, Mr. Herman.
    Mr. Vladek. Welcome, sir.

                  STATEMENT OF BRUCE C. VLADEK

    Mr. Vladek. Thank you, Mr. Chairman, good morning, it's a 
pleasure to be back here yet again. We haven't always agreed on 
every issue, Mr. Chairman, but I've always been treated with 
the greatest courtesy and consideration by you and your 
colleagues on the committee, and a special appreciation to Mr. 
Brown in that regard, and I'm pleased to be here again today.
    I have prepared a written statement, I hope that it can be 
put in the record, and I will try to be extremely brief in my 
comments this morning. I won't make the arguments for the need 
for a good prescription drug benefits for Medicare 
beneficiaries, many of the members have already done that more 
eloquently than I could, and I will not comment on specific 
proposals, since one of the luxuries of my current employment 
situation is I don't have to follow in detail all the current 
proposals.
    But, I do think as we try, as you try to work this year to 
finally achieve a prescription drug benefit, it would be useful 
to think about some of the lessons and from the experience with 
the Medicare program over the last 35 years and some of the 
lessons that have been learned in the life of the program as 
principles to keep in mind in designing a program.
    And, I think there are really five that are most important. 
The first is, the absolute importance of a benefit that is 
available to all seniors. I think we are all talking about a 
voluntary drug benefit, modeled on Part B. Once you have a 
payment involved, you need an opportunity for people to decline 
the coverage rather than have to pay the premium, but as I 
detail in my written testimony, unless the benefit is available 
on, essentially, equal terms to all beneficiaries you will 
create a web of inequities that I think is not otherwise 
soluble.
    Second, I think the benefit needs to be a good benefit. I 
understand all the fiscal constraints and the tradeoffs, but 
the fact of the matter is that if you look at prescription drug 
expenditures by Medicare beneficiaries they occur across a wide 
range of income distribution in many different parts of the 
country, for people in many different kinds of circumstances, 
and the more sophisticated and the more elaborate we get in our 
design of caps, and ``collars,'' and ``donuts,'' and ``donut 
holes'' and what else one might call it, the more folks who are 
going to find the benefit a hollow promise that is of very 
little value to them, and the fewer of those with the greatest 
needs we are going to effectively cover.
    In that regard, there's been a lot of talk with which I'm 
very sympathetic and with which I strongly agree in principle 
about designing special protections for low-income 
beneficiaries, I know in other instances this committee has 
spent a lot of time and effort on trying to protect low-income 
beneficiaries, and I would just cite one statistic in that 
regard. At the moment, despite vigorous efforts over the last 
several years, somewhere in excess of 40 percent of all the 
Medicare beneficiaries we believe are eligible for Medicare 
savings programs, for QMB or SLMB or QI1, QI2, are not 
enrolled, and in some States that number is as high as two 
thirds of beneficiaries. It's one thing to target this stuff on 
a chart in Washington to make up very fancy slides and graphs, 
it's another thing, as we've learned with the child health 
insurance program as well, to actually enroll people and keep 
them enrolled, and any efforts to target at low-income people 
our experience suggests are going to leave a lot of folks who 
have very significant needs outside the system.
    Fourth, when we talk about the use of private plans and the 
employment of private plans in Medicare, I think we really have 
to look at the record, rather than rhetoric, and we do have 20 
years of experience at paying private managed care plans in 
Medicare on a capitated basis, and I think there are a couple 
of conclusions one can draw in that regard.
    The first is that in administration of a drug benefit all 
the things that Mr. Herman describes as undesirable, whether 
they are lists of approved drugs, or differential prices for 
different categories of drugs, or so forth, are things that 
managed plans need to use.
    Second, I very much share the concerns of Mr. Upton and so 
forth about inequities in the existing Medicare+Choice system. 
We spent a lot of time on that in 1996 and 1997, if you'll 
recall, Mr. Chairman, I would argue that in a capitated or any 
fixed price, private competitive system those problems are 
inherently insoluble without incurring enormous additional 
expense for the program, and I'd be happy to expand on that 
further in the course of the discussion.
    Finally, there's always sort of the notion that by giving 
private plans responsibilities for certain administrative 
functions, Congress or the executive branch can somehow be off 
the hook from difficult decisions about who gets covered and 
how. I think that's not been our experience, you just have a 
different set of problems that you have to worry about.
    I've already exhausted my time. Again, I appreciate the 
opportunity to be here this morning and I thank you again, Mr. 
Chairman.
    [The prepared statement of Bruce C. Vladek follows:]

 Prepared Statement of Bruce C. Vladeck, Mount Sinai School of Medicine

    Mr. Chairman, Mr.Brown, Members of the Subcommittee, my name is 
Bruce C. Vladeck. I am currently Professor of Health Policy and 
Geriatrics at the Mount Sinai School of Medicine in New York City, and 
engaged in a number of other activities in health care, including 
Chairmanship of the Board of a developmental, pre-PACE, Medicaid 
managed care plan for the frail elderly. As you know, I was 
Administrator of the Health Care Financing Administration from 1993 to 
1997, and subsequently served as a Presidential Appointee along with 
Mr. Bilirakis and Mr. Dingell on the Bipartisan Commission on the 
Future of Medicare. It is a pleasure to have the opportunity to appear 
before you again. While we have not always agreed on every issue, I 
have always been treated with the greatest of courtesy and 
consideration by you, Mr. Chairman, and the Members of this 
Subcommittee, and I very much appreciate the opportunity to renew those 
acquaintances.
    I will not take much of your time this morning describing the 
importance of a prescription drug benefit for Medicare beneficiaries. I 
believe that, by now, the necessity of such a benefit is almost 
universally acknowledged, as is evidenced not only by the Members' 
opening statements today but by the range of proposals already being 
considered by this Congress. To me, it continues to be rather 
astonishing that, at this juncture in our history, some ten million 
senior citizens of the world's wealthiest nation lack even the most 
basic coverage for the costs of prescription drugs that might prolong 
their lives, reduce pain and discomfort, or prevent disability. But I 
am hopeful that, through the work of this Subcommittee and your 
colleagues in both Houses of the Congress, 2003 might finally prove to 
be the year in which a worthwhile, effective benefit is enacted.
    I will also not take up your time this morning commenting in detail 
on any specific proposal for a Medicare prescription drug benefit. One 
of the great advantages of my current circumstances is that I no longer 
need to remain current with all of the details of specific proposals, 
and I hope and expect that the legislative process before you is one in 
which useful concepts and innovative ideas from a variety of different 
sources will ultimately be melded into final legislation. Instead, 
given my perspectives and my experience, I thought the most useful 
thing I could do today would be to describe and comment on a handful of 
issues and themes that I think must be adequately taken into 
consideration in order to craft a Medicare drug benefit that will meet 
the needs of beneficiaries, make administrative and fiscal sense, and 
not hold out a promise to the nation's disabled and senior citizens 
which their government is then unable to fulfill.
    Specifically, I think there are five critical points that must be 
considered:

First, a Medicare prescription drug benefit must be universal.
    This is a large and heterogeneous country, and Medicare 
beneficiaries are a diverse and heterogeneous group. Their needs--
including their needs for prescription drugs--vary from one individual 
to another, and for individual beneficiaries over time. Further, while 
those needs are strongly correlated with socioeconomic and health 
status, they are not perfectly and uniformly connected to them. For 
example, nearly half of Medicare beneficiaries who lack adequate 
prescription drug coverage have incomes in excess of 200% of the 
federal poverty level. So any benefit designed to cover only part of 
the Medicare beneficiary population or only part of their costs will 
invariably exclude at least some people who really need it; will create 
inequities across geographical, social, and disease groups; and will 
unavoidably create a series of notches or boundaries which will 
invariably create resentment and perceptions of unfairness--not to 
mention significant headaches for the Congress in the future.
    Medicare's universality is one of its greatest strengths--both in 
terms of popular support and simple administrative practicality. 
Virtually every individual eligible for the program is enrolled, and 
once enrolled, they receive the same level of Medicare-funded benefits 
regardless of age, income, residence, or delivery system choice. Dr. 
Karen Davis, President of the Commonwealth Fund, has recently produced 
some estimates of the overall costs to the American health care system 
of the very fragmentation and decentralization of our health care 
system. Whether one agrees with every aspect of Dr. Davis's analysis or 
not, the underlying point is that universality simply takes off the 
table what is otherwise the source of considerable complexity, 
confusion, and expense.
    As the history of Medicare Part B over more than thirty-five years 
well demonstrates, one can have a universal benefit for which 
enrollment is voluntary. Every contemporary proposal for a Medicare 
prescription drug benefit that I have seen calls for such voluntary 
enrollment, and I agree that it is essential that beneficiaries have 
the option of declining a drug benefit for which they would have to pay 
an additional premium. But I would also remind the Members of this 
Subcommittee that, of all the possible insurance benefits for services 
heavily used by Medicare beneficiaries, insurance for prescription 
drugs is especially susceptible to adverse selection--a phenomenon that 
has already priced Medigap policies that cover prescription drugs out 
of the market in most of the country. This adverse-selection problem 
also helps explain the concerns that so many have raised about a stand-
alone drug benefit. Designing a prescription drug benefit that really 
works for Medicare beneficiaries will therefore require setting a 
premium level low enough to maximize enrollment, and thus avoid self-
selection by high-risk beneficiaries.
    I am also aware that roughly one third of Medicare beneficiaries 
currently receive prescription drug coverage through employment-related 
retiree benefits--although that proportion is expected to fall steadily 
in the coming years--and that it would be highly desirable, both for 
beneficiary convenience and federal fiscal purposes, to keep as many 
employers in the game as long as possible. There are a variety of ways 
in which employers could be given financial incentives to maintain such 
benefits, and so long as the net costs of the subsidies is no greater 
than direct Medicare coverage would cost, I would think we should want 
to do so.

Second, a Medicare Prescription Drug Benefit Must Be a Meaningful 
        Benefit
    In an understandable effort to minimize program expense or hit some 
sort of arbitrary budgetary target, many proposals for a Medicare 
prescription drug benefit have contained complex combinations of 
variable coinsurance, ``collars,'' ``caps,'' and ``donuts,'' to 
precisely define the relative shares to be paid by insurance and 
coinsurance at each level of beneficiary drug expense, and in many 
instances as well to target insurance benefits on certain sub-
categories of beneficiaries. Yet many of those efforts run counter to 
the basic underlying realities of Medicare beneficiaries and their 
expenditures for prescription drugs. About one third of Medicare 
beneficiaries spend $500 a year or less on prescription drugs; another 
ten percent spend more than $6,000. But the majority of beneficiaries 
are pretty evenly distributed across intervening levels of expenditure, 
with the average for all beneficiaries being somewhere between $2,500 
and $3000. At the same time, the median Medicare beneficiary living 
alone has an income of roughly $15,000 a year, and will be paying close 
to $800 of that for Part B premiums in 2004; the median couple, with an 
income of slightly more than $25,000, will pay $1600 in premiums. 
Assuming that any new drug benefit will carry an additional premium and 
some form of coinsurance, it's clear to me that any additional holes in 
coverage, above ordinary coinsurance, will vitiate the value of the 
supposed benefit for many beneficiaries, and leave us right back where 
we started in terms of the inability of beneficiaries to afford the 
drugs they need.

Third, We Shouldn't Fool Ourselves About the Ability to Target Lower-
        Income Beneficiaries
    Cognizant of the extremely limited incomes of many Medicare 
beneficiaries, the authors of most of the proposals for a Medicare 
prescription drug benefit currently being discussed have sought to 
provide additional protection for low-income beneficiaries, through 
lower premiums or coinsurance or both. Some proposals have extended 
prescription drug benefits to lower-income beneficiaries only. I 
certainly share the belief that lower-income Medicare beneficiaries not 
currently eligible for Medicaid are desperately in need of assistance 
in paying for prescription drugs, and I am sympathetic to efforts to 
tilt the design of any benefit structure in favor of those with lower 
income, but I think it's critically important that we not deceive 
ourselves about our ability to target benefits nearly as precisely as 
we would like.
    First, it's important to remember that something like 40% of all 
Medicare beneficiaries live in households with incomes below 200% of 
the federal poverty level. For some of those households, Medicaid 
currently provides prescription drug coverage, but that still leaves 
perhaps eight to ten million beneficiaries with low incomes and limited 
coverage, if any, for prescription drugs, while millions more with 
incomes just slightly above that level also have very limited financial 
resources. So even relatively narrowly-targeted coverage will still 
cost a substantial amount of money while leaving many beneficiaries 
with very real needs uncovered.
    Second, many of you will remember from our discussions of income-
related premiums during our work on the Balanced Budget Act the basic 
fact that neither the Centers for Medicare and Medicaid Services nor 
the Social Security Administration maintains any income information on 
beneficiaries, other than that which is obtained from sample surveys. 
The only comprehensive data on income of individual Medicare 
beneficiaries is that maintained by the Internal Revenue Service, and 
even that is extremely incomplete, since almost half of the elderly 
population has insufficient taxable income to require filing of income 
tax returns. IRS data, of course, is also retrospective and lagged; 
some time this coming summer, we will have information on the 2002 
income of roughly half of beneficiaries. Thus, any prescription drug 
benefit in which premiums, coinsurance, or benefits vary by income will 
require creation of an entirely new administrative apparatus, or 
reliance on existing State Medicaid agencies or, in a few instances, 
other State agencies that do income determinations for state-operated 
pharmaceutical assistance plans. This is not just a problem of 
bureaucratic complexity or expense; as our more recent experience with 
the SCHIP program has taught us all too well, effectively reaching 
individuals who are legally eligible for publicly-subsidized health 
insurance benefits requires a systematic investment of administrative 
commitment, time, and resources.
    In short, policy proposals for income-related targeting that look 
extremely elegant on the spreadsheets and PowerPoint presentations of 
Washington policy analysts are often highly inapplicable in the real 
world. This is not just a theoretical problem; we only have to look at 
the experience of the Medicare Savings Programs to recognize that, even 
under the best of circumstances, benefit programs that require 
specialized outreach and income-eligibility determinations are 
extremely unlikely to reach all who should be able to benefit from 
them. Under the most recent estimates, for example, more than 40% of 
Medicare beneficiaries eligible for SLMB/QMB benefits are not enrolled, 
and in some states that proportion exceeds 60%. What should also be 
recognized, in addressing the problems of low-income Medicare 
beneficiaries, is of course the interaction with Medicaid. States are 
now spending some $13-15 billion a year on prescription drug benefits 
for dually-eligible Medicare-Medicaid beneficiaries, of which $5-6 
billion is their own tax-levy money, with the balance being federal 
match. Even a relatively modest, universal Medicare prescription drug 
benefit would thus generate very substantial savings for the states, at 
a time when fiscal relief is desperately needed. Conversely, even with 
all of the fiscal pressure on state Medicaid budgets, it is not hard to 
envision building into Medicare prescription drug legislation some 
expectation of continued Medicaid wrap-around coverage not only for 
beneficiaries for whom Medicaid is currently paying the whole bill, but 
for a somewhat expanded pool of low-income beneficiaries in addition. 
Such an approach would be particularly desirable because the actual 
benefits provided under Medicaid are far superior to those offered by 
even the most generous Medicare prescription drug benefit proposals now 
before the Congress.

Fourth, the Design of a Medicare Drug Benefit Should Be Grounded in 
        Actual Experience with Private Health Plans, Not Rhetoric or 
        Special-Interest Pleading
    For those of us who participated in the debates leading up to the 
enactment of the Balanced Budget Act in 1997, the current preoccupation 
with the potential role of private plans in provision of a Medicare 
prescription drug benefit can't help but generate a disconcerting sense 
of deja vu. I am also reminded of the old adage about second marriages: 
that they represent the triumph of hope over experience. For while much 
of the rhetoric about the potential role of private plans is 
essentially unchanged from what we heard five or six years ago, we now 
have another five or six years' worth of actual experience from which 
we can deduce some pretty clear-cut conclusions.
    Private managed-care plans have participated in Medicare throughout 
its history, and significant participation by private plans paid on a 
capitated basis has now been going on for almost twenty years. We have 
a lot of actual experience, and a lot of data. While analysts can argue 
ad infinitum about almost any point that has ideological or political 
implications, I believe that several conclusions from that experience 
are crystal clear:

1. To date, participation of private plans in Medicare has yet to save 
        the Medicare program a nickel. Prior to the BBA, Medicare's 
        rate methodology, interacting with favorable risk selection for 
        the plans, produced payments to private plans significantly in 
        excess of what Medicare would have paid had those beneficiaries 
        remained in fee for service. Changes in the payment formula 
        contained in the BBA, along with the fact that private sector 
        costs have increased much more rapidly than those in Medicare 
        FFS, have largely eliminated this phenomenon by now, but have 
        also driven many plans out of the program.

2. Even if one could establish a perfectly ``level playing field'' in 
        payments between Medicare fee-for-service and private plans, 
        private plans would still incur marketing, enrollment, and 
        administrative costs (in addition to any possible profit) that 
        don't affect ``traditional'' Medicare. In order to provide 
        precisely the same services at the same costs, therefore, 
        private plans have to either be at least 15-20% more efficient 
        in their use of services than Medicare, or else extract prices 
        from providers lower than those Medicare pays, something that 
        was quite prevalent before the BBA, but that is no longer 
        possible in most communities. While private plans are often 
        more economical in their use of services than the traditional 
        system, documented evidence of a 15-20% differential is 
        extremely hard to come by.

3. Thus, historically, private plans have been able to provide 
        additional benefits to Medicare beneficiaries without 
        additional premiums only when they were overpaid.

4. When private plans are not happy with Medicare payment levels or 
        other environmental conditions, they leave the program. They 
        also leave as a side-effect of continuing consolidation, 
        reorganization, and corporate restructuring in the private 
        health insurance industry. One should hardly expect anything 
        different from private, for-profit firms, but the effect of 
        such departures on beneficiaries can be quite significant. Plan 
        turnover certainly raises significant issues about continuity 
        of care for beneficiaries. It should also be emphasized that 
        the widespread withdrawal of private plans from Medicare in 
        2001 and 2002 was hardly unprecedented: a proportionately 
        similar number of plans withdrew in the late 1980s.

5. In general, managed care plans are much more prevalent, and much 
        more successful, in urban than rural areas. Few rural 
        communities have the kind of oversupply of providers that gives 
        managed care plans their greatest leverage over prices and 
        patterns of care, and marketing and enrollment costs per 
        beneficiary are much higher in rural areas.

6. The data are also quite clear, and consistent over the past fifteen 
        years, that the overwhelming majority of the small minority of 
        Medicare beneficiaries enrolled in private plans are highly 
        satisfied with the choice, while the overwhelming majority of 
        those who have chosen not to enroll in, or who have left, 
        private plans are also highly satisfied with Medicare, and 
        don't want to enroll in private plans. One would hardly expect 
        anything different. Nor is it surprising that Medicare 
        beneficiaries, in general, are substantially more satisfied 
        with their health insurance than enrollees in private plans who 
        are denied the opportunity to make those kinds of choices.

7. Finally, as those private plans that have remained in Medicare + 
        Choice over the last several years have sought to adjust their 
        benefit and premium structures to survive economically in a 
        more difficult and rapidly-changing market, they have come up 
        with a variety of limits, coinsurance arrangements, and premium 
        structures for their prescription drug coverage that make 
        inter-plan comparisons increasingly difficult to describe, let 
        alone making the choice process more difficult and confusing 
        for beneficiaries.
    In sum, whatever the rhetoric may be, I think the data concerning 
the participation of private plans in Medicare leads unavoidably to the 
conclusion that, for a minority of beneficiaries, when payment levels 
and benefit structures are roughly equivalent with the fee-for-service 
program, private plans can produce some benefits--although cost savings 
are clearly not among them. Requiring beneficiaries to enroll in 
private plans in order to obtain affordable prescription benefits, on 
the other hand, would be inherently inflationary, would discriminate 
against rural beneficiaries and those in other low-managed care 
markets, would make a lot of beneficiaries very unhappy, and would 
cause considerable administrative and political turmoil when market 
exigencies induced lots of plan exits.

Fifth, No Matter How Much Privatization is Involved in Construction of 
        a Medicare Prescription Drug Benefit, There Will Still Be A 
        Complex, Unavoidable, Difficult Federal Role
    One of the great attractions of private managed care for purchasers 
both public and private, I've long believed, was the illusion that 
turning health insurance functions over to private plans would reduce 
the burden on purchasers of making difficult decisions about coverage, 
benefit design, and access to care. But both employers and legislators 
have learned that it's not so easy to get off the hook; the same 
problems come back in new forms.
    Widespread participation by private plans in the delivery of a 
Medicare prescription drug benefit, for example, might produce 
considerable variation in benefit design, formulary composition, 
substitution policies, and customer service strategies, but if Medicare 
beneficiaries throughout the country are to receive relatively uniform 
benefits and relatively equal access to needed drugs, and if there is 
to be sufficient accountability in the expenditure of public funds, 
then the more participation there is by private plans, and the more 
freedom they are given in benefit design and administration, the more 
formidable the federal standards-setting and monitoring task will be. 
Unless private plans were required to cover every drug listed in the US 
Pharmacopeia with uniform coinsurance, the opportunities for 
manipulating formularies, appeals mechanisms, and/or tiered coinsurance 
levels to achieve favorable risk selection are so substantial and so 
pervasive that uniform national policies will be unavoidable, and 
someone will have to not only figure out how to establish them, but how 
to enforce them. Marketing practices and public disclosure issues pose 
similar challenges. And as the growing volume of litigation around PBMs 
suggests, ensuring program integrity in an industry in which rebates, 
proprietary pricing information, and sophisticated, complex, promotion 
schemes are widespread will also require considerable effort by the 
federal government.
    Indeed, given the history of the pharmaceutical insurance and 
distribution industries over the last decade or so, I think it's no 
exaggeration to suggest that widespread participation by private plans 
in delivery of a Medicare prescription drug benefit would leave the 
Congress with a policy choice between a highly regulated private 
``market'' and a scandal waiting to happen. Either of those 
alternatives is likely to be more expensive, in the aggregate over 
time, than a uniform benefit directly administered by government 
contractors through well-established, existing mechanisms.
    In summary, I think that there are many who believe that we now 
have an historic opportunity to enact a real, effective, administrable 
prescription drug beneficiary that will provide critical access to 
needed pharmaceuticals for millions of Medicare beneficiaries, ease the 
financial burden on millions of hard-pressed families, and make 
available to Medicare patients and their health care providers the full 
armamentarium of modern medicine, with all the benefits that can 
produce. But I very much hope that we can get it right the first time; 
that our policies will be guided more by realism and experience than by 
theories or ideologies--no matter how seductive some of those might be; 
and that we do our best to avoid policies or processes that are bound 
to fail.
    Again, it's been a pleasure and a privilege to have the opportunity 
to appear before you again, and I'd be delighted to try to respond to 
any questions you might have.
    Thank you very much.

    Mr. Bilirakis. Thank you, Mr. Vladek.
    Mr. Olsen, please proceed, sir.

                   STATEMENT OF ERIK D. OLSEN

    Mr. Olsen. Mr. Chairman and members of the subcommittee, my 
name is Erik Olsen. I am a member of AARP's Board of Directors. 
On behalf of our 35 million members, I want to thank you for 
including us in this discussion of how to design a Medicare 
drug benefit. A meaningful and affordable Medicare drug benefit 
remains a top priority for AARP. As a Medicare beneficiary 
myself, I can tell you personally about the importance of drug 
coverage. Yet, despite the promise of relief, older and 
disabled Americans continue to face double digit increases in 
both drug spending and fewer options for coverage, through 
employers or managed care.
    Our members and their families are counting on your 
leadership and action for this year. Our members also tell us 
that a Medicare drug benefit should have several key features.
    It should be available to all beneficiaries, whether they 
choose traditional Medicare, managed care, or a new coverage 
option.
    It should be stable to provide coverage that we can rely on 
from year to year.
    It should provide extra help for people with low incomes.
    It should protect those with the highest costs, and 
moreover, it should not create more incentives for employers to 
drop current retiree coverage for disadvantaged beneficiaries 
in the traditional Medicare program.
    More specifically, we have learned from research we 
conducted with AARP members and the general public that 
acceptable premiums should be no more than $35 a month. A 
$6,000 catastrophic cap is generally viewed as too high to 
provide real assistance.
    Benefit designs that have gaps in coverage are viewed 
negatively. Some believe drug coverage should be linked to 
fundamental changes in Medicare. AARP does believe there is 
room for some improvements in Medicare. We support sensible 
improvements, as long as they start with drug coverage and they 
would not put the traditional fee-for-service program and the 
millions of beneficiaries who rely on it at a disadvantage.
    We also urge you to consider the following in designing a 
drug benefit. It should promote safety and quality, and be 
integrated into the program, so it can foster better care 
management for chronic diseases. It should include cost 
containment mechanisms that do not compromise safety or access 
to needed drugs. It mus also have adequate financing. We 
recognize that a meaningful benefit requires a sizable 
commitment of Federal dollars, and that budget constraints are 
greater than last year. Nevertheless, the situation facing 
millions of older and disabled persons, who cannot afford the 
drugs they need, continues to worsen, and constitutes a 
healthcare and financial emergency that must be addressed.
    We learned from last year's debate that more than $400 
billion will ultimately be needed to design a meaningful 
benefit. Any Medicare reforms or provider give backs will 
require additional funding.
    We understand the challenges in designing a meaningful 
Medicare drug benefit. We will provide assistance in every way 
we can to work with members on both sides of the aisle, because 
we all share the same goal, enactment of a meaningful and 
broadly supported Medicare prescription drug benefit this year.
    I thank you again for inviting us to be here, and I'd be 
happy to answer any questions you might have.
    Thank you, Mr. Chairman.
    [The prepared statement of Erik D. Olsen follows:]

         Prepared Statement of Erik D. Olsen, AARP Board Member

    Mr. Chairman and members of the Subcommittee, my name is Erik 
Olsen. I am a member of AARP's Board of Directors and a Medicare 
beneficiary. On behalf of the organization and our 35 million members, 
I want to thank you for convening this hearing and for including us in 
your discussions about how to design a much needed prescription drug 
benefit for Medicare beneficiaries.
    Members of this Subcommittee have noted many times before that, 
given the prominence of drug therapies in the practice of medicine, if 
Medicare was designed today--rather than in 1965--not including a 
prescription drug benefit would be as absurd as not covering doctor 
visits or hospital stays. The focus of this hearing, therefore, is very 
important--rather than questioning whether to add prescription drug 
coverage to Medicare, the issue before us is how to do so. Enacting a 
meaningful and affordable prescription drug benefit for beneficiaries 
remains a priority for AARP, our members and their families. The 
addition of a prescription drug benefit is central to a 21st century 
Medicare program.
    I am pleased to discuss AARP's recommendations and share with you 
some recent findings of what our members tell us they need in terms of 
Medicare prescription drug coverage. AARP members and their families 
are looking to you for leadership this year in making a prescription 
drug benefit in Medicare a reality.
    Older and disabled Americans continue to face double-digit 
increases in drug spending and fewer options for coverage through 
employers or managed care. Thus, while modern medicine increasingly 
relies on drug therapies, the benefits of these prescription drugs 
elude more Medicare beneficiaries every day. The lack of drug coverage 
threatens access to needed medications for many older Americans.
    Furthermore, the lack of a drug benefit in Medicare today poses ``a 
perfect storm'' scenario for the future:

 Changing Demographics--The retirement of the ``baby boom'' 
        generation will nearly double the number of Medicare 
        beneficiaries in the program. As people are living longer, they 
        become more likely to develop chronic conditions treated with 
        medications. Medicare must be prepared to handle the unique 
        health care needs of a growing number of older Americans who 
        reach not only age 65, but age 85, or even 100--and also a 
        growing number of disabled individuals.
 Increased Reliance on Drugs--Prescription drug use increases 
        not only with age but also with the prevalence of chronic and 
        acute health problems. Nearly 90% of Medicare beneficiaries 
        filled at least one prescription in 1999.
 Higher Drug Spending--Prescription drug costs among the 
        Medicare population are rising rapidly. Total spending for 
        prescription drugs is increasing at an annual rate of around 12 
        percent. By 2002, average annual out-of-pocket prescription 
        drug spending by Medicare beneficiaries reached $860. This 
        trend is projected to continue in the near future due to limits 
        on drug coverage and other factors, including the continued 
        introduction of new, high-priced drugs and potential increases 
        in demand stemming from direct-to-consumer advertising.
 Higher Prices--While the majority of the increase in drug 
        spending is due to greater utilization and shifting from older, 
        lower cost drugs to newer, higher cost drugs, increasing drug 
        prices are still an important component. Between 1993 and 2001, 
        prices for all prescription drugs rose at more than triple the 
        rate of inflation. Prices of brand name prescription drugs have 
        been rising at three and a half times the rate of inflation.
 Declining Coverage--Most Medicare beneficiaries have some form 
        of supplemental drug coverage, but access to these benefits is 
        declining. 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. 
        About 40% of Medicare beneficiaries lack prescription drug 
        coverage at some point in the year; most of these beneficiaries 
        lack coverage for the entire year.
 Impact on States, Private Sector, and Public Policies--
        Increasing drug costs combined with the surging older 
        population are already taking a toll on state budgets, private 
        sector offerings and public policies. Medicaid spending on 
        prescription drugs increased at an average annual rate of 
        nearly 20% between 1998 and 2001. Medicare HMOs covering 
        prescription drugs have reduced their benefit--more than 4 in 
        10 enrollees have a drug benefit cap of $750 or less. Until we 
        achieve affordable and sustainable drug coverage in Medicare, 
        pressures for other cost-reducing measures--re-importation, 
        price controls, litigation--will only increase. Pressures will 
        continue to squeeze not only public programs, but also 
        businesses that will drop or restructure drug coverage.
    Therefore, the need for a Medicare drug benefit for all 
beneficiaries will only continue to grow. Congress must act this year 
to provide Medicare beneficiaries with relief from the devastating 
costs of prescription drugs. Our country cannot afford to wait any 
longer.
    What Older Americans Need in a Drug Benefit Design--Our members 
tell us that a Medicare prescription drug benefit should be:

 Universal--All Medicare beneficiaries need access to 
        affordable, meaningful prescription drug coverage--whether they 
        choose to stay in the traditional fee-for-service option or 
        participate in managed care or any other coverage option.
 Stable--Medicare beneficiaries need stable and dependable drug 
        coverage that they can rely on from year to year. Current 
        prescription drug options are not reliable. For example, the 
        share of large employers offering retiree health benefits is on 
        the decline--24 percent of employers with 200 or more employees 
        offered health coverage to their Medicare-age retirees in 2001 
        compared to 31 percent in 1997. 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 their 
        participation in Medicare. For example, 50 percent of Medicare 
        beneficiaries nationwide had access to a Medicare+Choice plan 
        with prescription drug coverage in 2002 compared to 65 percent 
        in 1999. Of the Medicare+Choice plans providing a drug benefit, 
        51 percent only covered generic drugs in 2002 compared to 18 
        percent in 2001.
 Catastrophic Coverage--Medicare beneficiaries need protection 
        from extraordinary out-of-pocket costs.
 Low Income Assistance--A Medicare drug benefit should provide 
        low-income beneficiaries with additional assistance.
 Not Disruptive--A Medicare drug benefit should not create more 
        incentives for employers to drop current retiree coverage or 
        disadvantage beneficiaries in the traditional Medicare program.
    Over the course of the last two years, AARP has conducted research 
asking our members and the general public about the attractiveness of 
benefit design options. An attractive benefit is necessary in order to 
generate the high level of participation needed (i.e., the necessary 
risk pool) for a workable Medicare benefit. We have the learned the 
following thus far:

 Medicare beneficiaries are willing to pay their fair share for 
        a meaningful 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. Our research suggests 
        that a $35 a month premium is nearing the maximum amount that 
        the public indicates it is willing to pay for a stand alone 
        drug benefit, although willingness to pay any premium is highly 
        dependent on the cost of the plan's other components.
 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 
        assess a single component of a package. For example, some 
        beneficiaries might look more favorably on a higher level of 
        coinsurance if the premium was lower, or vice versa. In a poll 
        conducted last year for AARP, of 885 individuals age 45 and 
        over, only one-third of those 65 and over said they would be 
        likely to participate in a prescription drug plan that 
        included: a $35 monthly premium, 50% coinsurance, a $200 annual 
        deductible, and a $4000 stop loss.
 Most Medicare beneficiaries are concerned about the 
        unpredictability of health care costs and want to know what 
        they will pay out-of-pocket. This makes real catastrophic stop-
        loss protection that limits out-of-pocket costs an important 
        component of any package. Our members have indicated that a 
        $6,000 catastrophic stop-loss is viewed as too high--since most 
        believe they will never reach a cap at that level--and even a 
        $4,000 cap is not viewed as providing adequate benefit 
        protection.
 Public reaction to gaps in drug coverage (``donut holes'') is 
        highly emotional and deeply negative. Thus, any proposals 
        containing such provisions, regardless of the cost of the other 
        components, have always been very poorly rated in our research.
 Discount cards with discounts in the 10-25% range are viewed 
        as not providing much assistance, particularly because this 
        level of discount is available from other sources, such as 
        current buying clubs or pharmacy chains. In addition, members 
        question the price to which any discount will apply. Increasing 
        the discount to a 30-35% range somewhat improves overall 
        reaction.
    Our findings thus far indicate--not only beneficiary preference--
but also what is necessary to create a benefit that is attractive 
enough to yield a broad risk pool and to build a strong and viable 
program. We will continue to seek the views of AARP members and future 
members on specific design packages and we would be happy to work with 
this Committee as proposals are developed.

      ADDITIONAL POLICY CONSIDERATIONS IN DESIGNING A DRUG BENEFIT

    Adequate Financing--The first step in designing a Medicare drug 
benefit will be to ensure that enough money is available in the budget 
to accomplish this goal. We recognize that to design the kind of 
prescription drug coverage that beneficiaries will find meaningful 
requires a sizeable 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 must be addressed.
    The House and Senate budget resolutions now in conference allocate 
$400 billion over ten years for prescription drugs, program reforms, 
and provider givebacks. As we all learned from last year's debate, more 
than $400 billion will ultimately be needed to design a Medicare 
prescription drug benefit that will attract enough beneficiaries. AARP 
has urged the budget conferees to allocate the full $400 billion for a 
prescription drug benefit and we further believe that Congress will 
need to revisit the budget amount in order to facilitate the enactment 
of a workable benefit design. Any Medicare reforms or provider 
givebacks will require additional funding.
    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 prescription drugs is not impeded. We also support the 
responsible promotion of generic drugs as one effective cost 
containment tool.
    Chronic Care--Improving how chronic care services are provided in 
Medicare is another major challenge facing the Medicare program of the 
21 century. The inclusion of a prescription drug benefit in Medicare 
would greatly advance efforts to address this challenge, because high 
quality treatment of many chronic conditions is inextricably linked to 
prescription drug therapy. Millions of beneficiaries who suffer from 
chronic conditions must have access to such state-of-the-art drug 
therapies if they are to receive high quality chronic care. Further, in 
order for Medicare to ensure high quality care and quality improvement, 
it must have access to prescription drug claims and utilization data. 
Having such data would permit providers and QIOs to link information on 
prescription drug use with hospital and claims from other care 
settings, thereby facilitating disease management and similar 
strategies that help to address the needs of individuals with chronic 
conditions. In the long run, such efforts should not only help to 
improve care, but may also reduce unnecessary hospitalizations or 
nursing home stays.
    Quality and Safety--A Medicare prescription drug benefit should 
also be designed and administered in a way to promote higher quality 
and safe use of pharmaceuticals. This can be accomplished, for example, 
through discount cards that track pharmaceutical purchases and are 
connected to electronic systems that flag potential problems for the 
physician or pharmacist.
    Structural Reforms--Some policy makers have urged that prescription 
drug coverage not be undertaken without fundamental changes in 
Medicare. AARP believes that there is room for some improvements in 
Medicare. The addition of a prescription drug benefit is one example. 
Better delivery of care to chronically ill beneficiaries is another 
necessary improvement. Any changes to Medicare, however, need to 
improve the program and its ability to provide affordable health care 
to older and disabled Americans. We would not support reforms that put 
the traditional fee-for-service program, upon which millions of 
beneficiaries rely, at a disadvantage.
    AARP believes we should strengthen Medicare for the decades ahead. 
We must acknowledge the fundamental importance of this program to older 
Americans who have come to rely upon and value the health coverage it 
provides. Medicare is a great success story in a health care system 
where tens of millions of Americans remain uninsured. We advocate 
sensible improvements to strengthen Medicare, as long as they include 
prescription drug coverage and ensure that the program remains the 
solid rock of health care upon which more than 40 million Americans 
rely.
    Conclusion--Our members believe that Congress should work to 
achieve the goal of an affordable Medicare drug benefit this year. We 
understand the challenges in designing a proposal for a responsible 
Medicare drug benefit that can take us through the 21st century. We 
pledge that we will provide assistance in every way we can to work with 
Members on both sides of the aisle to adopt a meaningful and broadly 
supported Medicare prescription drug benefit.

    Mr. Bilirakis. Thank you, very much, Mr. Olsen.
    Well, in 1988, and we'd like to more often than not forget 
this, Congress passed a Medicare Catastrophic Coverage Act, 
which among other things added, as you may recall, catastrophic 
drug benefit to the traditional Medicare program. The 
legislation was repealed months after it was enacted in 1989.
    It would have provided a drug benefit with a $600 
deductible and 50 percent co-insurance at drug purchases, et 
cetera, et cetera. There are more parts to it.
    Doctor Crippen, this certainly was not your responsibility 
at the time, I really don't know off hand what you were doing 
back in 1988-1989.
    Mr. Crippen. Actually, I was working for President Reagan 
on this issue at the time.
    Mr. Bilirakis. Oh, you did. Well, in any case, the CBO cost 
estimate of the plan at the time of enactment was $5.7 billion 
over 3 years, and we know that less than a year later these 
estimates doubled to $11.8 billion. What was the reason for 
that, very briefly.
    Mr. Crippen. I'll tell you that I don't know the exact 
reason for that doubling. I will tell you that having been 
working in the administration at that point we thought at that 
time the CBO estimates were too low. In fact, the HHS actuaries 
were, I think, as I recall, in the neighborhood of $12 to $15 
billion. So, I think the CBO estimate was just, frankly, too 
low. I don't know exactly why.
    Mr. Bilirakis. What did they do during that particular 
period of time to, basically, double the estimates? Did they go 
back into it?
    Mr. Crippen. They reexamined their techniques. I'd like to 
think we talked them into reality from the other end of the 
street, but I'm not sure. Doctor Reichauer, as I recall, was 
the Director then, and I have not discussed with him what 
exactly changed in that period, but it was not a change of 
facts so much as it was a change of projection of the future.
    Mr. Bilirakis. Mr. Olsen, you heard Mr. Herman, and I've 
heard from many beneficiaries who, basically, have said, look, 
give us a plan, make available to us a plan that's similar to 
the plan that you have as a Federal employee. And, Mr. Herman, 
basically, thinks that we ought to have a drug benefit modeled 
after the Federal Employee plan.
    Well, tell me, what would be wrong with that?
    Mr. Olsen. First of all, I want to emphasize that the 
current Medicare program, including Medicare+Choice, have 
rather substantial private sector components involved in them 
at the current time.
    Mr. Bilirakis. All right.
    Mr. Olsen. So, there is----
    Mr. Bilirakis. And, that's bad.
    Mr. Olsen. [continuing] ``private sector'' no, I'm saying 
that is true, and Medicare is a very popular program, as I 
think you all understand.
    One of the concerns that we would have is there is a 
different population with different needs, and more chronic 
illnesses, and that type of thing. Also, there are many seniors 
who are on fixed incomes which do not increase year to year, 
and, therefore, there's probably a greater concern relative to 
the stability of the program from year to year, so that the 
rates go up but my fixed income does not go up.
    Mr. Bilirakis. Of course, Part B keeps going up.
    Mr. Olsen. I understand that.
    Also, it's very critical for seniors to know, as far as the 
stability, to know that they have a defined benefit, guaranteed 
by the Congress in the law, that they can receive so that they 
don't have to worry, like current participants, some of my 
friends in Medicare+Choice, to wonder if their plan will 
include prescription drugs this coming year or not. So, the 
stability, or in some cases even if they are going to be in 
business, if they go out of business, so it's very important 
that the benefit be defined and there not be a year-to-year 
concern by the beneficiaries and they get yanked back and 
forth.
    Also, there does seem to be a problem in the geographical 
differences, and not, for instance, Medicare right now not all 
areas are covered by private, by Medicare+Choice. That would 
have to be.
    So, those are some of the elements we would be concerned 
about as we build.
    Mr. Bilirakis. Of course, if this were to take place, 
obviously, you'd have to solve that particular problem, make 
sure that the access is virtually equal all over the country.
    In your opinion, do you feel that the Medicare, that 
today's Medicare beneficiaries versus, let's say, 20 years from 
now the Medicare beneficiaries, would have a bigger problem in 
terms of making the choices, arriving at the choices?
    Mr. Olsen. You raise an interesting point and probably not. 
I can't really look ahead 20 years, but in one way I can look 
back 20 years. I had the assignment, if I might say, of when 
they passed in 1997 the balanced budget with all the new 
choices, the different alphabet choices, of explaining that to 
one of the senior areas of Sun City in Arizona. And so, I got 
up and started explaining. I was at least 20 years junior of 
anyone in that room probably, lots of widows, and I'm sure 
you've done this. I was so proud of myself, it was hot off the 
press, I was explaining all these new alphabet choices, and I 
got about half way through and I saw everybody out there in the 
audience was aghast. And so, I finally figured out that what I 
said to them, but, wait a minute, I says, you don't have to 
change out of your current plan or change your doctor, and you 
could almost see the audience----
    Mr. Bilirakis. Sigh of relief.
    Mr. Olsen. [continuing] sit back in their chair.
    So, I relate back to 20 years ago. They were worried about 
choice of doctor, and so have we changed in 20 years, to say 
myself, probably. Will we change in 20 more years? I suppose.
    Mr. Bilirakis. People will be going on to Medicare who had 
been parts of managed care plans through their employer for the 
most part, and somewhat more familiar than they were 20 years 
ago, or even today, would you say?
    Mr. Olsen. I would say that's true, but I think we still 
ought to probably recognize very much that as when people get 
to the age probably of the people I was talking to at that 
time, they are not, you know, you really have to have it as 
adaptable to change.
    Mr. Bilirakis. Yes, I've experienced that, too, in my 
congressional district.
    Thank you, Mr. Olsen.
    I'm sorry I took a little more time.
    Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Crippen, you made a very cogent case against the 
President's tax cuts. I very much appreciate that. I've 
noticed, if I could enter it into the record, budget and policy 
priorities points out that the tax cut will consume over the 
next 75 years between 2.3 and 2.7 percent of GDP, the Medicare 
and Social Security deficits will consume about half that. The 
tax cuts will be somewhere between $12 and $14 trillion over 75 
years. The deficits of Social Security and Medicare funds will 
be about slightly under $10 trillion, so I think the gloom and 
doom about Medicare and Social Security are a bit overstated, 
and I think our country absolutely can afford this program.
    Mr. Chairman, I'd like to enter this in the record, if I 
could.
    Mr. Bilirakis. Without objection.
    Mr. Brown. I would like to ask Mr. Vladek a question. First 
of all, thank you for your emphasis on simplicity. I sat 
through this mark-up last summer in this subcommittee and in 
the full committee on the prescription drug bill, and then the 
Republican plan was so confusing with donuts, and co-pays and 
deductibles, and I think seniors, the importance of simplicity 
cannot be overstated.
    Mr. Vladek, as you know, premiums in private plans have 
increased rapidly in the past few years. The FEHB has increased 
9 percent per year for the last 5 years, in fact, it increased 
13 percent last year, employee share of Blue Cross, Blue Shield 
standard option has gone up 15 percent. CALPERS, the California 
State Employees system, similar to FEHB saw premiums increase 
25 percent last year.
    And, if you would, when you look at people wanting to go in 
and privatize this system, and push a lot of managed care into 
the full panoply of choices that they misleadingly talk about 
with private systems, what happens to the whole issue of 
defined benefit versus defined contribution with seniors having 
to pick up more of the cost? Is that as big a problem as some 
might suggest?
    Mr. Vladek. I would have a great deal of concern that any 
effort that turned all of the Medicare program into a fixed 
contribution, rather than a purchasing of a defined set of 
benefits, would, in fact, over time lead irresistibly in years 
of tight budgets, in years of other demands on the Federal 
Treasury and so on and so forth, of a shift of an increasing 
share of the costs of the program to Medicare beneficiaries on 
average. But, I'm even more concerned, and particularly when we 
talk about the particular issue of prescription drugs, with the 
ability to manipulate formularies, with the ability to 
manipulate coverage patterns, or patterns of co-insurance and 
deductibles, to shift relatively more costs to the sicker 
beneficiaries, rather than less sick beneficiaries.
    In insurance for prescription drugs, the penalties to the 
insured from adverse risk selection are potentially so great 
that unless you standardize the nature of the benefit, in which 
case you wonder why you need the private plans at all, the 
necessity to prevent gaming of that in order to maximize risk 
selection on the part of the insurers seems to me to be very 
substantial, and I don't know how to do that, from the point of 
view of administering the Medicare program.
    So, I would be concerned, in general, about efforts to move 
Medicare from a defined benefit to a defined contribution 
program. I'd be particularly concerned in the context of a 
discussion of the drug benefit about the creativity of private 
insurers and private PPMs to target high risk, high cost 
beneficiaries and design their plans to minimize the benefits 
they'll have to provide to them.
    Mr. Brown. Do you see evolving a two-tier kind of Medicare, 
where the sickest have the highest costs, and those costs are 
often shifted to the beneficiary?
    Mr. Vladek. That's where I would be concerned about, if 
we're not very careful. I think we devoted a lot of time on 
both sides of the aisle in constructing the Balanced Budget 
Act, and constructing Medicare+Choice to minimize that in 
Medicare+Choice. That may be why Medicare+Choice hasn't 
enrolled more people than it has, but I would just, again, as 
we design a prescription drug benefit, I think given the nature 
of the use of prescription drugs, and of the insurance for 
prescription drugs, that's a particularly significant risk, and 
we need to be very careful about it.
    Mr. Bilirakis. Do you see, Mr. Vladek, an effort on the 
part of the majority party to shift possibly the costs to the 
low-income people, as Mr. Brown put it?
    Mr. Vladek. I have expressed concern, Mr. Chairman, in the 
past on the part of advocates from both the majority party and 
the minority party, for so-called support or other approaches 
to the Medicare program, which I fear over time would, in fact, 
shift more of the costs to beneficiaries.
    Mr. Bilirakis. Thank you.
    Mr. Whitfield, for 8 minutes.
    Mr. Whitfield. Thank you, Mr. Chairman.
    I want to thank all of you for attending today. We 
genuinely appreciate your comments, and as we prepare to pass 
another prescription drug benefit on the House side, of course, 
we've already done it twice before, and the Senate still has 
not acted, but as we prepare to do that again, I think Mr. 
Crippen touched on something that all of us are thinking a 
little bit about, and that is Medicaid is in dire financial 
straits right now, almost every State is running a deficit. We 
know that Medicare is becoming more and more expensive each 
year, and the Part B, paid by the government, is increasing, 
and the percentage paid by the beneficiaries is decreasing 
percentage-wise.
    In addition to that, our Social Security program, by the 
year 2012, there's going to be more money going out than coming 
in through the payroll tax. And, we set aside $400 billion over 
10 years for this prescription drug benefit, and I think 
everyone recognizes that it's probably going to be much greater 
than that, and it will be an entitlement so it will have to be 
paid.
    And, as we think about that, I think it's imperative that 
we also consider those uninsured people out there in our 
society, many of whom do not have any health insurance at all. 
Their employer doesn't provide it for them, they can't afford 
to buy it themselves and provide healthcare for their families, 
because they are just a little bit over the line so they are 
not eligible for Medicaid, they are not old enough to be on 
Medicare. And so, that's a big segment out there that right now 
they have nothing.
    So, in trying to balance all of these, I would like to ask 
Mr. Olsen, it's my understanding that your organization's 
position has been that this benefit would be available to 
everyone, every senior citizen, and I know the means testing is 
not a popular word, but considering the financial situation of 
our country today, and all those things that I mentioned, why 
would your organization be opposed, for example, if somebody 
like Warren Buffet paying for his health, his prescription 
drugs?
    Mr. Olsen. I can't speak for Warren Buffett. However, first 
of all, the first part of your question had to do with the 
general problem of the uninsured and the critical problem of 
the uninsured between and before they get to Medicare, which 
probably just highlights the importance of Medicare in another 
way.
    I can assure you that it's also one of AARP's priorities, 
it's not the subject of this hearing this morning, but that is 
another one of our top priorities, is to work in that area.
    But, let me talk about, you mentioned means testing and 
Warren Buffett, or Bill Gates. I would like to be sure we 
define the terms, means testing and income relation. Means 
testing is putting a dollar amount on income, or net assets, or 
something, and beyond that point you do not get whatever it is.
    Mr. Whitfield. Well, let me just give you a hypothetical. 
Considering the situation today, and we're just trying to get 
this program going, which is what we want to do, just from a 
philosophical standpoint, are you and your organization 
opposed, for example, to saying any senior whose income is 
above $80,000 a year, let's say, they would have to pay for 
everything, for prescription drugs.
    Mr. Olsen. Okay. Our position is, we do oppose what I 
defend as means testing, but we are willing to discuss, and 
think it should be part of the discussion as we build this 
structure, something called income relation. And, there are 
administrative problems with doing that, but that would imply 
that those with higher incomes, and I don't have any idea what 
that number is, but higher incomes, would, perhaps, pay a 
higher premium for some coverage. So, we are open for that 
discussion.
    But, we are opposed to means testing, which cuts off a 
certain element, because it seems to me that somewhat violates 
the social contract that those who paid in will receive the 
benefits. So, I hope that clarifies where we are on that issue.
    Mr. Whitfield. And, I appreciate that, because I think 
that's a reasonable step, that there would be some relationship 
to salary on what you pay.
    Mr. Barton. Would the gentleman yield?
    Mr. Whitfield. Yes, sir.
    Mr. Barton. Define income relation. I mean, I've never 
heard that term.
    Mr. Olsen. There's a subtle distinction, and a lot of 
people use the word means test, but means test is a more 
limited. That's, at some point, you just don't get the benefit, 
you make too much, or you have too many assets. That we are 
opposed to.
    Income relating is probably your income on the 1040 or 
whatever, at a certain level you would pay more, but you would 
still receive the benefits.
    Mr. Barton. It's a sliding scale.
    Mr. Olsen. It would be more that, yes. And, I'm glad that 
question was asked, because I think there is not total 
understanding between the two, and we think that second part 
should be open for discussion as we build on the framework of 
this program.
    Mr. Bilirakis. Would the gentleman yield, so, basically, 
you don't like the term means testing, because you feel that 
every Medicare beneficiary who has paid into the system ought 
to be able to receive the benefits. But, what you are saying, 
that they would receive the same benefits, but in terms of 
their contribution would be related to their income.
    Mr. Olsen. I think that can be a part, you know, not 
total--that can be part of the discussion, yes.
    Mr. Bilirakis. Good, thank you.
    Mr. Whitfield. I want to thank you all for asking questions 
on my time.
    I would like to ask, last year we passed a plan that, 
basically, said that there would be a $250 deductible, the 
first $1,000 the beneficiary paid 20 percent of that, the 
second $1,000 the beneficiary paid 50 percent of that, and then 
between there and $3,700 the beneficiary pay all of it, and 
then after $3,700 the government would pay because there would 
be a cap on our out-of-pocket expenses.
    And, Mr. Vladek and Mr. Olsen, I would like to ask you, 
what is about that particular plan that you have problems with?
    Mr. Vladek. Well, Mr. Whitfield, I can't do all the 
arithmetic as I'm sitting here, but looking at those numbers 
and looking at drug expenses for Medicare beneficiaries, I 
think any arrangement of that sort, wherever you put the exact 
points in coverage, means that for many beneficiaries the net 
value of the benefit, over and above what they are paying in a 
premium, gets to be very, very small. And, some of those are 
people with very significant needs.
    The extent to which a plan like that one effectively meets 
the objective of providing financial protection and improved 
access for beneficiaries varies then enormously, depending, to 
some extent, on happenstance, or whether one's principal 
problem is a cardiac problem for which there happened to be 
generic drugs, or a kidney problem for which all the drugs are 
brand name and, therefore, more expensive. And, it would 
produce, I think, very significant inequities among similarly 
situated Medicare beneficiaries, which I think is exactly the 
sort of thing we don't want to do in designing a benefit.
    I understand the need to get control of expenditures and 
make the numbers work out right, but I think arrangements of 
that sort, given patterns of drug use among Medicare 
beneficiaries, create a real risk of significant inequities 
between similarly situated beneficiaries.
    Mr. Olsen. I'm not an actuary, and I defer to that, but I 
would refer back to my experience at Sun City trying to explain 
it to someone. Be as simple as possible.
    Mr. Bilirakis. The Chair thanks the gentleman.
    Mr. Pallone for 5 minutes.
    Mr. Pallone. Thank you, Mr. Chairman.
    I wanted to ask Mr. Vladek and Mr. Olsen, in my opening 
statement I mentioned how in New Jersey we have about 80,000 
seniors who have lost their health coverage after the private 
HMOs, basically, dropped them. I know that the administration 
and the Republicans may not say that they are necessarily 
privatizing or relying strictly on HMOs to provide a 
prescription drug benefit, but that's the way I see it, and I'm 
sort of operating on that assumption in answering my--asking 
these questions.
    I don't understand how, you know, all I hear from my 
seniors is, we joined an HMO and they dropped us, or we joined 
an HMO and they've cut back on the benefits, or we've joined an 
HMO and, you know, the co-pay is going up, or, you know, the 
premium costs are going up and I can't afford it, in order to 
keep, you know, their prescription drug benefit. And, how in 
the world the administration or the Republicans figure they are 
going to come up with a new program to cover prescription drugs 
when the existing program is, essentially, a failure in 
providing the very benefit that they are now saying they are 
going to provide with it. So, to me, it's just amazing.
    I mean, if you look at this chart, this shows how, 
basically, premiums under various programs, you know, private 
programs if you will, have gone up on the average per year, I 
guess, for the last 10 years. If you compare that to Medicare, 
which has gone up 6.7 percent per year, the premium cost, over 
the 10-year period on average, I mean the bottom line is that 
premiums are going up in these private plans, it's costing more 
and more.
    So, when the Democrats say, look, the best thing to do is 
provide a guaranteed benefit under Medicare, like Part B, for 
prescription drugs, and then the Republicans say, no, that's 
not a good thing to do, we're going to rely on the private 
sector, we have nothing out there to indicate that this is 
going to happen successfully, only a series of failures over 
the last five or how many years that, you know, the HMO option 
has been out there.
    So, I guess I would just ask, I guess I'll start with Mr. 
Vladek, and then Mr. Olsen, how do you build a program of this 
magnitude on a series of failures, or am I missing something?
    Go ahead, Bruce, if you will, and then I'll ask Mr. Olsen.
    Mr. Vladek. Mr. Pallone, just a quick thing, I think these 
charts are the most recent year's increase. I think, in fact, 
private health insurance premiums have grown more quickly than 
Medicare costs over the last decade, but CALPERS hasn't 
averaged 25 percent a year, it's just this past couple years 
have been very bad.
    But, I think it's important to emphasize that there are 
still 5 million plus Medicare beneficiaries enrolled in 
Medicare+Choice plans, and many of them are very happily so, 
and some of them are getting relatively good benefits. The 
problem is, I believe, if you look at the history of private 
plans and Medicare, that what you can't do at the same time is 
provide additional benefits, attract and keep private health 
plans in the system, and save money. The three are mutually 
incompatible. It is almost impossible for a private managed 
care plan, as the heads of some of the best private managed 
care plans in northern California or in the Twin Cities will 
tell you, to provide high-quality services at a cost equivalent 
to Medicare fee-for-service costs in their communities. They 
have marketing costs, and enrollment costs, and administrative 
costs, let alone the issues of profitability that the Medicare 
fee-for-service program doesn't have, and even if they are more 
efficient in utilization they are not that much more efficient 
in utilization.
    So, the Balanced Budget Act, when we were overpaying the 
HMOs very substantially in Medicare, they wanted to come in the 
program and they were happy to provide additional benefits in 
order to get enrollees, and it was still a very good 
experience. When we brought the price differential between what 
we were paying the private plans and what we were paying in 
fee-for-service down in the Balanced Budget Act, a growing 
proportion of the private plans couldn't compete under those 
circumstances.
    So, I believe, and again, there are these problems of 
inter-regional differences, which are horrendous and I believe 
insoluble, and which, given the organization of the House of 
Representatives in the U.S. Congress will present enormous 
problems no matter what you do, because one district will be 
different from another district.
    So, you can have more participation of private plans, you 
can use private plans to get more benefits, if you are prepared 
to pay a substantial premium for it. But, if you are trying to 
minimize expenditures then a centrally administered, government 
administered plan, is going to be more cost effective.
    Mr. Pallone. I don't know if we have time for Mr. Olsen, go 
ahead.
    Mr. Olsen. Again, I want to emphasize that all elements of 
the current Medicare system have private elements in it, 
including all the proposed prescription drug.
    I want to emphasize again, we are looking for stability 
from year to year, and that I don't see how it can be 
accomplished other than have a defined benefit within the plan. 
And, what we are really interested is that whatever private 
plans the Medicare beneficiary has a choice for does not 
undercut the current Medicare program or disadvantage any of 
the current Medicare beneficiaries, so that there's an equal 
playing field and an equal choice. That's our position.
    Mr. Pallone. Thank you, Mr. Chairman.
    Mr. Bilirakis. Ms. Wilson for 5 minutes.
    Ms. Wilson. Thank you, Mr. Chairman.
    Doctor Feldman, I noticed in your testimony that you talk 
about and give some examples of some of the partnerships and 
things that have worked with the private sector. I wonder if 
you could expand a little on that and see whether, and share 
with us more than just the example, but what you think there is 
in behavior that we can learn from here, and how we might 
incorporate some of those principles into a Medicare 
prescription drug benefit.
    Mr. Feldman. That's a big question.
    Ms. Wilson. Yes, it is.
    Mr. Feldman. Let's just start off with the formularies that 
most of the private drug management firms use. Those have the 
potential to reduce costs by somewhere between 5 to 9 percent, 
according to one estimate by Merck Medco, according to another 
one by Express Scripts they might reduce the costs by 6 
percent. They do that by redirecting the incentives of 
providers and consumers to use the drugs that are on the 
formulary and to substitute for generic drugs if those are 
available.
    The episode that I mentioned in Blue Cross and Blue Shield 
showed that it's also possible to redirect physician 
prescribing patterns without using financial incentives, and 
that was done by educating physicians to use drugs that our 
Blue Cross plan had deemed to be the most cost effective. So, 
those are two examples that I would give you, the use of 
financial incentives in a formulary, and educational programs 
that private health plans can run with their providers who 
redirect behavior.
    Ms. Wilson. Thank you.
    I had question, and, perhaps, Doctor Feldman, you are also 
the one to answer it. Why do you think that the Medicare+Choice 
competitive demonstration model was never implemented?
    Mr. Feldman. Quite simply, I believe it was opposition from 
the interests who opposed it on the grounds, essentially, that 
it would reduce the prices that were being paid, the premiums 
that were being paid in the demonstration areas.
    Ms. Wilson. Thank you.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. The Chair thanks the gentlelady.
    Ms. Capps, for 8 minutes.
    Ms. Capps. Thank you to each of you panelists, since I 
didn't do my opening remarks I'll take a minute to tell you, 
and also to thank our subcommittee chair for holding this 
hearing.
    Across this country, no matter what is going on in the 
world, a sizable percentage of our population has this topic as 
its highest priority for us to do something about, and they've 
been waiting rather impatiently over the years.
    As you did give in your testimony, and as I've listened to 
some of my colleagues, I've been mindful of the reasons 
Medicare was enacted almost four decades ago. Wasn't it because 
the private insurers were not able to cover this population, 
higher-risk population, in an affordable way? And so, Medicare 
was created, and I'm going to ask you pointedly in a minute, 
Mr. Olsen, but since you represent probably more seniors here 
at the table than anyone, I think I'm a member of your 
organization as well, what seniors want is stability and a 
defined benefit that they can count on over time. Medicare has 
come to mean that for more than one generation of seniors by 
now.
    So, here we are, at the cusp of a--well, many of us feel we 
are in a crisis, because of the cost of prescription 
medication, the way seniors are staying healthy and alive is 
not the same as it was in the `60's, yet we have this burst of 
technology that gives us possibilities for living 
independently, being healthy and productive much longer, many 
more decades than before, and that's the challenge of paying 
for the means whereby this generation now, and particularly the 
baby boom one coming behind it, is going to be able to have at 
its disposal the means to be healthy and to continue to be a 
vibrant part of a community.
    So, we have, in the last 5 years or more, Medicare+Choice 
as an option, and it's now being proposed that it become a 
central part of Medicare prescription drug coverage. However, 
it's interesting, and this has been talked about a bit, it's 
interesting that Medicare+Choice enrollment since 2000, this is 
from the Kaiser Family Foundation, has declined by 27 percent. 
Now, it is no longer 4.6 million beneficiaries, but it is now 
11 percent of the Medicare population, and that's what I wish 
to discuss with you.
    Let me ask you, am I correct in listening to you, Mr. 
Olsen, that when you speak to the seniors in Sun City they 
really are, they are interested in choice, but mostly of their 
physician, that Medicare fee-for-service has provided them over 
the years, and with respect to their prescription medications 
are interested in stability, that the price that they are 
paying this year, they are already paying way more than they 
can afford on their fixed income, these are not salaries, these 
are fixed income seniors, that as time goes on they want that 
price to stay where it is.
    Mr. Olsen. I'm not sure of your question, but I have a 
couple of comments on your's.
    You mentioned about that we are having this discussion 
today, and people are still interested even while we are at 
war. I had a presentation in Ohio on about September 14th of 
2000, right after 9/11, and it was on prescription drugs for 
Medicare. We thought no one would show up, went ahead with the 
presentation. The place was packed, and I think that while 
everybody was still in mourning over this.
    So, and you know you say is this still needed, I talked to 
my own Medicare doctor about a week ago, I had an appointment, 
I asked him about, you said about the middle income and fixed 
income, I says, how does this work in your practice? He says, 
``I have a lot of people, middle-income people, that are having 
big problems.'' Especially, he noticed the diabetics, they need 
some rather, a series of expensive drugs, $300, $400, $500 a 
month, they do not have that much money.
    I said, ``What do you do?'' He says, ``I give them samples, 
and when I run out of the samples I give them a different 
drug.'' Then what he said, ``If I run out of that sample, they 
are out of luck.''
    Ms. Capps. And, Mr. Olsen, I want to stress, this physician 
is talking about his, not his low-income patient.
    Mr. Olsen. No, not his low income, he specifically said his 
average working man, middle income, and this is in Carson City, 
Nevada, working class city.
    Ms. Capps. So, a program that is specifically targeting 
low-income seniors is not really going to adequately address 
the challenge that we face in terms of talking about 
prescription drug benefits.
    Mr. Olsen. I don't want to, you know, in any way say that 
there shouldn't be additional assistance for low-income people, 
but probably it should be outside of the Medicare program, 
because the program goes way, way beyond that.
    You know, two thirds of the people over age 65 rely on 
Social Security for at least half their income.
    Ms. Capps. That's correct.
    Mr. Olsen. I don't think that falls in the wealthy 
category.
    Ms. Capps. I agree.
    I want to just make one comment about something that, Mr. 
Herman, you said, in terms of holding up FEHBP as a model, and 
believe me for a Federal employee it is a wonderful healthcare 
benefit, I wish everyone in the country could have it. However, 
it's not the same risk pool as Medicare, I hope you agree with 
that, and I just want to mention the fluctuation within the 
plans, and the terminating plan service area withdrawals, since 
1998 that year 66 plans terminated, 1999 42, 2000 32, maybe 
it's stabling down, but there certainly is not total stability 
within the plans even offered by FEHBP.
    But, I really want to concentrate on a topic, Mr. Vladek, 
that I want to address to you, and this has to do with a person 
who came to me in my office hours, sidewalk office hours, in 
front of a grocery store in Santa Maria, a rural agriculture 
community, because we are talking about a rural population, she 
was 55 in a wheelchair, but she wasn't--she was coming on 
behalf of her parents pushing 90.
    This is not unusual nowadays, and they were enrolled in a 
Medicare+Choice plan that had subsequently left, and she was 
struggling. She had her own health needs and her own needs as a 
Medicare recipient herself. Here's two generations worth, how 
are we going to address, and you touched on some regional 
issues, but I really want to deal with this, it's going to be 
really hard for these constituents of mine in the rural part of 
my district to buy into a plan that's being proposed by the 
administration where all of the benefits, or almost all the 
benefits, and for prescription medications, are a part of an 
HMO that they have had very, very poor success with?
    Mr. Vladek. Well, I think that if you are serious about 
choice, that there has to be the full choice, that's the heart 
of FEHBP. I don't know what the numbers are now, the last time 
I looked 70 or 75 percent were in one of the two Blue Cross 
standard option or plus option, which looks a lot like the 
Medicare program to me except that Blue Cross takes a few 
percent off the top that doesn't occur in the Medicare program.
    But, I think the real issue is that people should no more 
be required to enroll in a private plan that they don't like 
than the fact that they should not have the option to enroll in 
a private plan if it's there and if they like that better than 
the traditional fee-for-service Medicare. It's about choice.
    Mr. Bilirakis. The gentlelady's time has expired. You've 
had 8 minutes, Lois.
    Ms. Capps. Okay, thank you.
    Mr. Bilirakis. Doctor Norwood, 8 minutes.
    Mr. Norwood. Thank you very much, Mr. Chairman, and I'd 
like to thank the panelists, one and all, for being here, and 
particularly Mr. Herman who was here up from Georgia, we are 
glad to see you all today.
    Mr. Crippen, I want to ask you a question in just a minute, 
and I'm going to tell it to you now and want you to think about 
it. I'd like you to summarize your statement, the important 
part of your statement, in about three or four sentences in 
just a second. I'll come back to you.
    Mr. Olsen, I'm curious, the AARP membership, what percent 
of your membership, for example, is 60 years and older?
    Mr. Olsen. I don't have that number, we'll get it to you, 
but to give you a little perspective, about half of our 
membership, and it just varies a half, is still working. So, I 
don't know the exact number at 60, but we'll get that to you.
    Mr. Norwood. I'm curious.
    Mr. Olsen. But, that will probably give you a--that's 
probably not so far off from the number who are working, let's 
say, so it's about half are still working and half retired.
    Mr. Norwood. It is of interest to me which side you'd take 
on this. One side----
    Mr. Olsen. I'll get that information for you.
    Mr. Norwood. [continuing] wants affordable, I think is the 
word you used, and meaningful benefits, and the other side is 
worried about making their house payments or sending their 
children to school, and that's got to be quite a conflict for 
you, if half of them really aren't on Medicare and half are.
    What, by the way, does affordable mean? You pointed out 
that the AARP wanted an affordable benefit. Mr. Herman, I'm 
going to ask you the same question, what does affordable mean?
    Mr. Olsen. Well, you can look at it from two directions, I 
suppose. We talk, we've done some research on the premium I 
mentioned in my testimony, and I gave the number $35 as 
premium, but, you know, it gets better for them at $25, so 
that's one level of affordability.
    Mr. Norwood. So, if we had a premium of $35 you would 
consider that affordable?
    Mr. Olsen. Well, you see, everybody has got to make the 
kitchen table test on this, and the research we get is 50 is 
way too much, 25 is a lot better, but there's some number in 
this. That's one thing.
    Mr. Norwood. No matter what we make it somebody is not 
going to like it.
    Mr. Olsen. Of course, yes.
    Mr. Norwood. We were trying to do exactly like you wanted 
it, I was hoping you'd tell us what affordable would make all 
of your members happy.
    Mr. Olsen. Oh, all of them? Actually, of course, in any 
program premium is just one element of it, and there will be 
co-payments, there will, perhaps, be deductibles. I hope there 
isn't a donut hole, there will be catastrophic levels, whatever 
there might be, so all that is interchangeable.
    Mr. Norwood. Well, I agree with you, all of us want to give 
everybody everything they want. We just don't want to back up 
from anything.
    Mr. Olsen. We also understand----
    Mr. Norwood. Mr. Herman, tell me what you think affordable 
means?
    Mr. Herman. A couple things. Firstly, we don't think a 
program that pays 53 percent of medical costs in 2002 as 
reported by CMS is affordable, it's pretty darn expensive.
    We understand that to someone poor full coverage is 
affordable. They can't pay anything more. We also understand 
from a lot of our membership that they've worked five decades, 
they've saved something, they'd like to pass a little of it on. 
A cap on prescription costs is affordable, they can pay 
something, they've paid all their lives.
    But, right now there is no cap. I have a father, I had a 
father who died a year ago of Alzheimer's. Let me tell you, it 
wasn't affordable. Well, so everybody is talking about 
affordable, they mean what is affordable to the receiver of the 
benefit, not necessarily what is affordable to the payer of the 
benefit, meaning the taxpayer. I'm just trying to make sure we 
are all focusing on just one part of this.
    The 53 percent that Medicare pays, that sounds to me like 
somebody is managing the costs for it to be just 53 percent.
    Mr. Herman. There are a number of things that are 
happening. We spoke with a doctor last week who is dropping his 
Medicare practice, he's not going to do it anymore. And, it's 
his words, not our's, but he says that, you know, I'm being 
made a partner with the government, when all I really want to 
be is a doctor and take care of people. I can't pay my bills. 
I'm not getting reimbursed very well, and every time I turn 
around what is reimbursed to me has been reduced, and I've got 
a family to take care of and I'm moving on now.
    Mr. Norwood. So, CMS is managing cost and care exactly or 
much like the private industry, referred to earlier by Mr. 
Brown, is managing cost in care.
    Mr. Herman. Yes.
    Mr. Norwood. You can't really sit here and say I hate 
managed care, because when you say I hate managed care you've 
got to mean you hate managed care CMS just as much as you hate 
managed care in the private industry. By the way, I fall in 
that category.
    Mr. Crippen, your turn. Summarize quickly for me what you 
said.
    Mr. Crippen. I thought I did that before.
    Mr. Norwood. No.
    Mr. Crippen. There are only two larger points. One is, many 
of the elderly today are getting--have access to drugs, not 
necessarily in a way that's the best way. Many of them may not 
be able to afford what they are paying out of pocket, but most 
of the elderly, 75 percent are insured some way or another.
    Mr. Norwood. Their outcome in 2030 is where I'm trying to 
get you to go.
    Mr. Crippen. Right.
    Mr. Norwood. If we do nothing, what do you anticipate our 
problems will be, at the taxpayer level, the Federal Government 
level, in 2030?
    Mr. Crippen. Even without a drug benefit, Mr. Norwood, it's 
likely we would need a payroll tax equivalent of about 35 
percent of payroll on workers at that time, in order to----
    Mr. Norwood. What if we didn't do that?
    Mr. Crippen. What if we didn't?
    Mr. Norwood. Yes. What if we didn't have a payroll tax, 
what is the cost to our annual budget?
    Mr. Crippen. Well, it's, roughly, a trillion dollars a year 
in current dollars.
    Mr. Norwood. What percentage would our annual budget go?
    Mr. Crippen. To about 25 to 30 percent.
    Mr. Norwood. I've heard 35.
    Now, does that include, are you calculating that number 
based on if there are any tax reductions or if there are not, 
or is that based on just as we are today?
    Mr. Crippen. In this point of view, the tax reductions are 
relevant, and the point is, how much are our obligations to the 
elderly versus how big is the economy that our kids are going 
to have to pay us with.
    Mr. Norwood. Is that sustainable?
    Mr. Crippen. I suspect it's not in this country. We've only 
collected, since World War II, an average of 18 percent of GDP 
in Federal taxes, and it's actually been relatively constant. 
It goes up and down, obviously, but 18 percent has been the 
average since World War II.
    We are talking about going to 28 percent, for example, in 
order to sustain these programs. Now, you know better than I 
what's politically acceptable and sustainable, but we will look 
very much like some of our European counterparts in terms of 
Federal tax policy if we just increase taxes to cover these 
costs.
    Mr. Norwood. Not necessarily that statement, but I'm 
interested to know from the rest of the panelists, do they 
agree with Mr. Crippen on this. If we do nothing, if we 
continue to let the program go like it is, not add a drug 
program, just let things go like they are, in 25 or 27 years, 
if we are at the point 35 cents out of every dollar goes to 
these programs, do you all think he's wrong? Is he overstating 
that?
    Mr. Bilirakis. You don't have the time for every member of 
the panel to respond to that.
    Mr. Norwood. How about a yes or no?
    Mr. Bilirakis. Yes or no, yes.
    Mr. Vladek. He's not wrong.
    Mr. Bilirakis. Mr. Vladek can't hold himself to a yes or 
no.
    Mr. Vladek. He's not right because we can't predict 25 
years.
    Mr. Olsen. I'm not an economist, but I thought the seniors 
and doctors were part of the economy, too.
    Mr. Bilirakis. Mr. Green to inquire.
    Mr. Green. Thank you, Mr. Chairman.
    Let me ask this, although, Mr. Feldman, since you mentioned 
it in your testimony, that administrative costs, and marketing 
costs, and payments to investors, would not outweigh the 
private plan savings, would it be able to generate due to the 
increased competition efficiency under private plans. And, Mr. 
Vladek mentions that typically the cost of 15 to 20 percent of 
the total cost.
    I know that traditional fee-for-service Medicare has about 
a 2-percent overhead, and not only Mr. Feldman, but anyone, how 
can we--how can the fee-for-service, the 2 percent, compare 
with the Medicare+Choice or the proposals when we have to take 
15 to 20 percent of it for administrative costs?
    Mr. Feldman. Sir, I'd like to respond. I can design a 
system that has no administrative costs or virtually none. 
Providers submit bills electronically, and the insurance 
company automatically pays them, but no one would want that 
system. We need some administration, the question is how much.
    Mr. Green. Does CMS provide that administration now, 
because I know there are doctors' bills that are submitted to 
CMS that don't get paid.
    Mr. Feldman. I don't believe that CMS provides enough 
administration now. Granted that HMOs take ten or 15 percent 
off the top, but let's look at what the HMOs in the Medicare 
program have been able to provide in the way of extra benefits 
that fee-for-service Medicare can't provide in their areas. 
That suggests that the administration cost is not eating up the 
total difference in the payment rates for those HMOs.
    Mr. Green. Well, go ahead, anyone else to address the 15 to 
20 percent administrative costs, considering 2 percent for fee-
for-service?
    Mr. Vladek. I would just point out that the addition, as 
every member of this subcommittee knows, the additional 
benefits provided by Medicare+Choice plans are provided to 
beneficiaries only in some communities and not in others.
    And again, that has to do with the extent to which the 
inadequate payment structure that we have for Medicare+Choice, 
which replaced a differently inadequate payment structure we 
had under the Balanced Budget Act, produces overpayment 
relative to fee-for-service in certain communities, which makes 
the provision of additional benefits by the plans affordable.
    One of the places that couldn't make it under pre-BBA 
rates, and that has had a great deal of difficulty keeping 
private plans in the program since, is the place, the Twin 
Cities, where some of the most efficient and best managed care 
plans in the country are.
    Mr. Green. Let me go on to my next question, since I only 
have 5 minutes.
    Let me point out, fee-for-service Medicare can't provide 
additional benefits, because, you know, of law, whereas, a fee-
for-service can, but again, the 15 percent, the 20 percent 
concerns me depletes its 2 percent to such a huge volume of the 
seniors who receive, you know, their traditional healthcare 
under fee-for-service.
    Mr. Herman, let me ask you, on page three of your testimony 
you talked about discount cards alone, whether from the private 
sector or the public sector, does not equal coverage, is not a 
solution. And, I know in your testimony you talk about some of 
our pharmaceutical companies who have done, you know, they've 
created different cards in vacuum and jointly created one, and 
so your testimony is, is that discount cards alone can't 
provide the solution, whether it's by pharmaceutical companies, 
the proposal by the administration.
    Mr. Herman. Yes, sir, that's correct. We need the ability 
to take care of prescription benefits. We've been waiting 37 
years.
    Mr. Green. Strictly under Medicare.
    You mentioned also in your testimony on page five that 
HR4954, the one our committee spent a great deal of time on 
last year, one of the provisions in that, a volunteer 
affordable prescription provides permanent drug coverage while 
discounting medicine by as much as 60 to 85 percent. I have 
some concern about that, because the bill that I remember 
spending many hours on talked about potential for discount, but 
I never saw it quantified. And, would that discount go to the 
PBMs as created by that legislation, or would it actually come 
back to where seniors would see their prescriptions reduced, or 
maybe the taxpayers would see what we provide for Medicare?
    Mr. Herman. We saw that as the seniors themselves and, 
ultimately, the taxpayers, one evolves to the other.
    Mr. Green. Okay.
    Again, during a lot of our testimony and our long all-night 
debate I don't remember hearing a quantification of 68, I think 
that's what our provisions I would like to see, because we've 
seen success whether it's veterans, whether it's, you know, the 
Federal health insurance, whether it's, I know up on the board 
the State of Texas employees actually can provide prescription 
drug benefits, and also because of their negotiation ability.
    Thank you, Mr. Chairman.
    Mr. Norwood [presiding]. Thank you, Mr. Green.
    I think it's important that the record state that Mr. 
Vladek said that the inadequate payment structure is why 
Medicare+Choice doesn't work, and it's important to understand 
that inadequate payment structure coming out of CMS is why we 
have so many physicians quitting Medicare today, it, basically, 
is not working in Medicare either.
    I'd like to recognize now Chairman Barton for 8 minutes.
    Mr. Barton. Thank you.
    My good friend and former Senator Phil Graham used to say, 
``We all want to get to heaven, we just all don't want to do 
what you have to do to get there.'' And, I think that's kind of 
where we are in the prescription drug benefit for Medicare.
    I want the panel to stand up and look at the audience, just 
look behind you. Just stand up and look behind you, very 
briefly. Now, how many people out there do you all see that 
appear to be 65 or older? A handful maybe.
    Mr. Brown. How many do you see up here?
    Mr. Barton. If Chairman Bilirakis were here, I think 
Chairman Bilirakis would be close to it.
    Well, here's the deal, if you polled the people up here we 
all want a prescription drug benefit for senior citizens. We 
voted on the House floor last night, we had three suspension 
votes. We named two post offices and passed a resolution, I 
think, in support of youth literacy. I think they were all 
unanimous, because there's no cost to it. It was a good thing 
to do, and there was no cost to it.
    But, the test on a prescription drug benefit, in the 
current Medicare system, or even reforming Medicare system, is 
not just to provide an adequate benefit that our friends at 
AARP are going to support, but to make sure that all those 
people sitting out there behind you have a benefit when it gets 
to be their turn. In other words, we have to try to come up 
with a defined benefit that doesn't break the bank on down the 
road. And, that's why not one of you, not one of this panel in 
your opening statement, proposed a solution. Not one of the 
experts proposed a solution.
    Now, here's the AARP solution, implicitly, not explicitly, 
you want a universal benefit. You want a catastrophic stop loss 
that's not more than $3,000. You want a premium that's not more 
than $35. You'd prefer a deductible that's not more than $100 
on an annual basis. You don't want any donuts in your coverage, 
and you'd like a discount card that's going to have a 
prescription drug discount card that's at least 40 to 50 
percent.
    And, on page seven, and I quote, you want enough money, 
``Enough money is available in the budget to accomplish this 
goal.'' That's a solution, except that they don't say what the 
amount of the money is.
    Now, Mr. Olsen, you are a great guy, and you have obviously 
been very well coached, or you are just naturally a very good 
speaker in presenting your positions. Does AARP, based on your 
testimony, have an estimate of what that prescription drug 
benefit plan would cost on an annual basis, because you outline 
it, universal coverage, catastrophic stop loss not more than 
$3,000, premium not more than $35, deductible not more than 
$100, no donuts, and a discount card that gives at least 40 to 
50 percent discount.
    Mr. Olsen. First of all, thank you for the compliment, but 
I'm not sure----
    Mr. Barton. It is. I want you to testify for me if I'm ever 
before a Grand Jury.
    Mr. Olsen. We believe the debate last year clearly showed 
that $400 billion over 10 years is not enough.
    Mr. Barton. I didn't ask that question.
    Mr. Olsen. I understand that.
    We do not have a number we can give you, it will depend on 
how all these elements are put together, and we will be happy 
when the structure has started to coalesce to work with the 
committee and develop a bipartisan approach.
    Mr. Barton. Then, let me rephrase the question. How much do 
you think the people behind me should be willing to pay 
starting next year and every year thereafter, adjusted for 
inflation, what's fair to them?
    Mr. Olsen. Our----
    Mr. Barton. $40 billion a year is not enough, how much is 
enough that provides a benefit that you would prefer for the 
AARP'ers, that they can afford to pay, and understand this, 
once they start paying it they are going to pay it every year 
the rest of their working lives. The young man in the green 
suit, the young lady in the red sweater, the young man over 
here in the black suit, they are going to pay it the next 30 to 
40 years.
    Mr. Olsen. First of all, the people in the back of the room 
are probably the ingenious ones that are going to figure out 
how it will be done, let's start on that one.
    But, I would, and maybe they should be up here testifying, 
I am a beneficiary myself now, I used to be----
    Mr. Barton. And, we want you to continue to be a 
beneficiary for a long time.
    Mr. Olsen. [continuing] one of those folks sitting in the 
back of the room, my reaction was that I was taking care of my 
parents, so that I did not have to do it myself. It's an 
intergenerational thing. Our research shows that there's great 
support among the people under 65 for a prescription drug 
program that is affordable, it's meaningful, and it's 
available, and you don't----
    Mr. Barton. I've got all that. I understand that. I didn't 
hear an answer.
    Now then, but you said something that I want to ask 
everybody on the panel. I'm a part of the task force that's 
trying to come up with some innovative ways to, perhaps, solve 
this. How would you folks react if the Congress passed a law 
that said, any family member that buys a prescription drug for 
their mother, their father, or anybody over 65, their aunt, 
their great aunt, could fully deduct it from the cost of their 
taxes if they owed taxes, and if they didn't owe taxes get an 
earned income credit for it?
    Mr. Olsen. It's never occurred to me, so I couldn't 
respond.
    Mr. Barton. Well, be a human being, think without getting 
briefed on it. What do you all think about that? I just--my 
mother was in the hospital 2 years ago, when I got her out of 
the hospital I went down to the hospital pharmacy, I paid $247 
bucks for her initial prescriptions. I don't know if I could 
deduct that from my taxes the year after that.
    Mr. Olsen. Again, it gets to what are the merits of the 
drugs you bought for your parents, as opposed to those you buy 
for yourself. The out-of-pocket nationally----
    Mr. Barton. I'm not 65 yet, I hope to be 65 in 1 year.
    Mr. Olsen. But, you'll pay 40 cents out of your pocket for 
your parents and 33 cents out of your pocket for yourself and 
your kids.
    Mr. Barton. Well, look guys, I'm getting back to what I 
said at the beginning, we all want to get to heaven, but none 
of us want to do what it takes to get there. The Federal 
Government cannot afford a prescription drug benefit that AARP 
is just going to hug to death and say it's great.
    Now, we might be able to afford something that you all 
accept grudgingly, kind of behind the back, or, you know, if 
that's the best we can do, but we should be family friendly. 
Why would it be wrong to say if my mother is on Medicare and 
needs prescription drugs, and there's not a prescription drug 
benefit and I buy them for her I can deduct dollar 1, all those 
costs, up to some amount, what's wrong with that? It doesn't 
cost the tax--it's a tax credit next year. I bet the answer is, 
there's some seniors that don't have children that could do it, 
so then how do you take care of that? Then you let non-profit 
charities. If you wanted to be really creative about it, you'd 
say let churches, but heaven help us to get started in that 
debate, just say non-profit charities, to think about it. We 
need some innovative solutions.
    Mr. Feldman. Mr. Barton, I'm a little bit reluctant to get 
into the debate with you, I'm afraid I'm going to lose.
    Mr. Barton. That's okay with me.
    Mr. Feldman. I like, I think your idea is very similar to 
an insurance policy for drugs, which has the government pick up 
a certain proportion of the cost, and I like it for that 
reason. But, where I think it falls down is for the people who 
have very high costs who really need the insurance, you still 
are only paying them 30 or 40 percent of the cost, instead of 
even as I understand the last Republican proposal there was a 
$3,700 cap. So, I'm worried that your proposal doesn't have----
    Mr. Bilirakis. I thank the gentleman. The time, I'm sorry, 
has expired.
    Mr. Strickland, you are recognized for 5 minutes.
    Mr. Strickland. Thank you, Mr. Chairman, and I have an 
answer for my friend from Texas, as to how we can do what AARP 
wants or come close to doing it. What about $726 billion? That 
would go a long way toward accomplishing what AARP----
    Mr. Barton. You just happened to pull that number out of 
the air?
    Mr. Strickland. I just happened to pull that out of the 
air, and I'd like to say to all those young people back there, 
if they make less than $1 million a year it will cost them very 
little.
    And, I'm being a little facetious, but I'm also trying to 
illustrate something that I think is accurate. We are not 
talking about money here, we are talking about values. Do we 
have the will to do what we've all told the American people we 
want to do for them?
    When it comes to the national security of this Nation, we 
say there are no limits that we will not go to achieve safety 
and security for our people. Well, we are talking about health 
security, and it seems to me that we need the same kind of 
attitude about prescription drug coverage.
    I believe that we don't argue here between parties or among 
those of us with different philosophical points of view about 
the size of the pie. I think we argue about how that pie is 
going to be cut up, and who is going to get the larger pieces, 
and I'm talking in terms of our Federal resources.
    So, we find money to do that which we truly believe is 
worthy of being done. I believe that, and I will challenge any 
of my colleagues to take a different point of view. When we are 
fighting a war, we say we will do whatever it takes. There are 
no limits to our national will, to spend money, or to do 
whatever it takes to get the job done. But, when it comes to 
the health and security of the American people we have a 
different set of values. That's where we are.
    Question for Mr Vladek, I hope I'm pronouncing that 
reasonably correctly. I heard a lot that we need to improve 
Medicare so that beneficiaries can have better disease 
management. Now, the Bush Medicare proposal gives a more 
generous drug benefit and better preventive benefits in private 
plans and not in Medicare, but I'm wondering whether we really 
need private plans to do what needs to be done in terms of 
these improvements.
    Do we have an definitive evidence that HMOs or private 
plans do better with respect to quality than Medicare? I know 
there has been some work done that shows in several instances 
Medicare beneficiaries with chronic conditions in HMOs show a 
worse quality of care than those in regular Medicare. Can you 
respond to that, please?
    Mr. Vladek. Thank you, sir.
    I think it's fair to say that the evidence is fragmentary 
and spotty, but when talking about the management of chronic 
illnesses, or the treatment of Medicare beneficiaries with 
chronic diseases, I don't even want to say as much, because 
it's all over the place, but there is evidence that managed 
care plans have done less well, and there is some anecdotal 
evidence that they've done as well or better.
    The most recent published data on quality of care for 
Medicare beneficiaries looked at the fee-for-service sector, 
which showed really quite substantial improvements in the 
quality of care provided to Medicare beneficiaries and Medicare 
fee-for-service in the 1990's, and I'm not familiar with any 
data from the managed care sector for the Medicare population, 
or any other population that shows qualitative improvements 
quite as dramatic as the Jinx article in JAMA several months 
ago.
    Mr. Strickland. Thank you.
    I'd like to say to Mr. Feldman, who indicated the improved 
services or enriched services that are possible through 
Medicare+Choice. That may be true if you have Medicare+Choice 
options available to your constituents. In southeastern Ohio 
they are gone, and so that's not an option for most of the 
people that I represent.
    One follow-up question, Mr. Vladek. If it is true that 
private plans don't have documentation, or we don't have data 
to suggest that they do better quality of care, or even as 
good, why don't we just give Medicare the tools that they need 
to do better disease management activities? Why only give 
private plans these tools and these extra benefits, why not 
give them to Medicare as well? I just don't understand why we 
wouldn't choose to handle Medicare with the same level as we do 
these private plans.
    Mr. Bilirakis. It's a good question. The gentleman's time 
is expired.
    Bruce, if you have just a few minutes to respond to that, 
we'd like to hear it.
    Mr. Vladek. Very briefly, the most effective disease 
management programs, the most important thing they do, which 
Medicare doesn't now do, is pay for prescription drugs. For 
congestive heart failure, for diabetes, for the other places 
where disease management has been most effective the key is the 
drugs, and the rest of it is cheap and largely peripheral.
    Mr. Strickland. Thank you, Mr. Chairman, for giving me 
those extra few moments.
    Mr. Bilirakis. Mr. Buyer, to inquire, for 5 minutes.
    Mr. Buyer. Thank you.
    First I'd like to thank Doctor Crippen and Mr. Vladek for 
your services and contributions to your country.
    This is my 11th year here on Capitol Hill, and I've spent a 
lot of time in the VA health delivery system, and as the 
chairman for 4 years over the military health delivery system, 
and 3 years to design, do the pharmacy redesign, that was far 
easier than this.
    Now, as I am learning more about the intricacies of 
Medicaid and Medicare, as we try to perfect these systems I 
still come with a market-based approach. I still believe in the 
innovations out there, but I'm a little concerned. I'm 
concerned because I don't want to make changes, give 
improvements to a model that I know is going to crash in the 
future. I'm very concerned.
    And, I want to get a quick feeling for the opinions of 
everyone here, since I don't have much time, I only have 4 
minutes, there have been some recommendations with regard to 
reforms in Medicare itself. I'd like to know how your support 
is, let's go down the line, who here would support increasing 
the program's eligibility age. Since Congress addressed this 
back in 1983 they increased it for Social Security but not for 
Medicare. Let's go right down the line. Who would support 
increasing the age to make Medicare match Social Security, to 
age 67?
    Doctor Crippen?
    Mr. Crippen. I think it's an inevitable we'll end up there 
some day, particularly if we enhance disability.
    Mr. Buyer. Doctor Feldman?
    Mr. Feldman. I think we are going to have to face that 
choice. What you are talking about here----
    Mr. Buyer. I don't have that kind of time.
    Mr. Feldman. Excuse me.
    Mr. Buyer. All I need from you is whether you support that 
or not.
    Mr. Herman?
    Mr. Herman. Yes.
    Mr. Buyer. Mr. Vladek?
    Mr. Vladek. If you really match it to Social Security and 
let people collect something at 62.
    Mr. Buyer. That's not the question now. Would you support 
what has been proposed?
    Mr. Vladek. I would match it to Social Security for 
eligibility age, both for full benefits and reduced benefits.
    Mr. Buyer. That's an answer.
    Mr. Olsen?
    Mr. Olsen. My answer would be, I do not favor that. It's 
come to occur to me that----
    Mr. Buyer. All right, let me ask a second question then.
    With regard to, I guess AARP doesn't like the terms means 
tested, but whether it's means testing or income relation, with 
regard to Part B would you support doing that?
    Doctor Crippen? Examining means testing or income relation.
    Mr. Crippen. Yes.
    Mr. Buyer. Medicare Part B.
    Mr. Olsen. By the way, we did that in `88 and it's one of 
the things that probably killed the program.
    Mr. Buyer. Is that true, Mr. Feldman?
    Mr. Feldman. I know the very short answer is yes.
    Mr. Buyer. Thank you.
    Mr. Herman?
    Mr. Herman. I'd have to get back to you, I'm not sure.
    Mr. Vladek. Yes, just as we supported it in `97.
    Mr. Buyer. Thank you.
    Mr. Olsen?
    Mr. Olsen. Well, I've already answered.
    Mr. Buyer. You said that you would support.
    Mr. Olsen. We absolutely want to discuss the income 
relating and to finish my last question----
    Mr. Buyer. I can't, I haven't got time.
    With regard to increasing the beneficiary cost sharing, if 
we increase Part B co-insurance 20 to 25 percent, or Part B 
deductibles from $100 to make them compatible with the private 
sector, is this an alternative that we should be examining?
    Doctor Crippen?
    Mr. Crippen. Yes, increase the deductible.
    Mr. Buyer. Thank you.
    Yes on both? I'm sorry, Mr. Herman was yes on both.
    Mr. Vladek?
    Mr. Vladek. I would say no on both.
    Mr. Buyer. You'd say no on both?
    Mr. Vladek. That's correct.
    Mr. Buyer. Wow.
    Mr. Vladek. I think they are interrelated questions of the 
total program. You can't make an answer until you see the total 
structure.
    Mr. Buyer. With regard to the fourth question, introducing 
market-based innovations into the current fee-for-service 
program, whether it would be case management programs for heart 
disease, chronic pain, diabetes, would everyone concur? Can we 
find some middle ground here? Everyone concurs in the positive. 
The record will reflect that.
    With regard to major structural reforms, there have been 
suggestions with regard to combining Parts A and B of the 
program for a single deductible of up to $400. It was 
introduced by the Breaux/Thomas proposal.
    Doctor Crippen, would you support this?
    Mr. Crippen. I don't think that's a major reform.
    Mr. Buyer. Yes, would you support that? You would.
    Mr. Herman, would you support it?
    Mr. Herman. Yes.
    Mr. Buyer. Mr. Vladek, with A and B?
    Mr. Vladek. I would support that.
    Mr. Buyer. You would support that.
    Mr. Olsen?
    Mr. Olsen. At this time.
    Mr. Buyer. At this time. So, it's something the AARP may, 
in fact, support in the future, if you find yourself the only 
one saying no?
    Mr. Olsen. We want the whole subject open for bipartisan 
discussion.
    Mr. Buyer. The Breaux/Thomas proposal was bipartisan, 
through a bipartisan commission, was it not?
    Mr. Olsen. Yes.
    Mr. Buyer. Thank you.
    I'll yield back my time.
    Mr. Bilirakis. Thank you, sir.
    I recognize Mr. Burr for 5 minutes.
    Mr. Burr. Mr. Chairman, do I get extra time since I did not 
give an opening statement?
    Mr. Bilirakis. You have to be here, Mr. Vice Chairman of 
the committee.
    Mr. Burr. The chairman cannot fault me for trying.
    Bruce, welcome, Dan, as well as our other distinguished 
panelists. It troubles me slightly to see the lack of a crowd 
in this hearing room and the lack of press representation, 
because, honestly, I can't think of an issue that's more 
important than what we are setting out to do.
    Mr. Olsen, I'm delighted to hear that AARP would like to 
see something. We want to pass something that's signed into 
law, and I think that what you need for a product to do that is 
willing partners. And, I think for once we have enough willing 
partners at the table.
    Let me launch into a few questions, if I can.
    Dan, you very specifically covered three items in your 
testimony that I think you predicted would happen, or the 
budgetary one, that we would need to borrow the equivalent of a 
trillion dollars a year to virtually eliminate the rest of 
government, including education, defense and all the rest. 
Three, raise taxes by something like 10 percent of GDP, if we 
were able to afford this in the future.
    And, I guess my question, quite frankly, is, have you taken 
into account growing the economy as an option, and could we 
grow the economy sufficiently to support this type of cost?
    Mr. Feldman. Those numbers actually include about a 3-
percent real growth a year, so there's an assumption that the 
economy does keep growing, but you could not grow your way out 
of this, no. I mean, the fact that we are going to double the 
number of retirees without changing much the size of our work 
force makes it impossible to do that.
    Mr. Burr. But, could you grow the economy and reform the 
system in a way that financially you could keep the promises?
    Mr. Feldman. You'd have to do both, yes.
    Mr. Burr. You said it was easy to construct a $900 billion 
plan, much of the $900 billion is currently being paid by 
somebody. How much, in your prediction, is currently being paid 
for?
    Mr. Feldman. I'll have to rely on my old colleagues here, 
they know a lot more than I do, frankly, the current 
assumption, baseline, it's $1.8 trillion over this 10 years. 
The $900 number I picked just as being roughly half of that. My 
point was, it's easy to figure out how to spend the $900 
billion as a Federal benefit. That's not the hard thing to do, 
it's how you are going to target that to folks who now are not 
getting drugs or can't afford it.
    Mr. Burr. But, my question was, how much, you said an ideal 
plan you could design is $900 billion, but much of that is 
already being paid for by somebody.
    Mr. Feldman. Right.
    Mr. Burr. How much is--well, actually----
    Mr. Feldman. Some of the plans that we looked at at CBO in 
the past, some of them would say that we could spend less than 
$900 billion with a Federal benefit if it had a lot of----
    Mr. Burr. No, but how much is currently being spent in the 
population by somebody?
    Mr. Feldman. The entire amount, almost the entire amount.
    Mr. Burr. There's currently a drug expense that people are 
paying, somebody is paying, out of their pocket, out of a plan, 
out of the State Medicaid. How large a pot of money is that 
today? Is it $900 billion?
    Mr. Feldman. No, it's actually twice that, $1.8 trillion.
    Mr. Burr. Okay, thank you.
    Mr. Olsen, if the plan provided health to the most at risk, 
meaning that we have targeted those low-income individuals, and 
assume for the purposes of this discussion that we said we're 
going to pay 100 percent of your drug costs, and there were a 
separate policy that dealt with catastrophic. So, in other 
words, people above a certain income line were not provided 
first dollar drug coverage, but they were provided a policy for 
catastrophic los, would AARP be supportive of that approach?
    Mr. Olsen. Going back to my testimony, I think it's five 
elements that I thought were critical, and those are two of 
them, the low-income assistance program outside of Medicare, 
which you indicated, and a catastrophic.
    In addition, we would hope that the structure would include 
also the other elements that we indicated, which is, you know, 
affordable prices and available to everyone, and a stability 
from year to year.
    So, those are two of the elements that we consider very 
important, but we don't think that gets us there.
    Mr. Burr. Let me cut you short, though.
    Mr. Olsen. We don't think that's where we need to go.
    Mr. Burr. I've got 2 seconds.
    Is there anybody on the panel that feels that to provide a 
low-income drug benefit, that it has to have an insurance 
product to provide it?
    Mr. Vladek. I'm sorry, with the time, as opposed to what, 
as opposed to a direct provision by purchase from the 
manufacturers and delivery by the government?
    Mr. Burr. We have a whole world of options that don't 
demand that there be an insurance product to supply something 
that the Federal Government is saying we are picking up 100 
percent of the tab, so I guess for the purposes of Dan's world 
that he deals in, could we self-insure a defined population 
without bringing a third party insurer into that?
    Mr. Feldman. Sure.
    Mr. Norwood [presiding]. Thank you, Mr. Chairman, and let 
me suggest that is an important question, and, perhaps, you 
would be kind enough to respond to the committee in writing on 
that.
    I recognize Mr. Deal for 5 minutes.
    Mr. Deal. Mr. Chairman, first of all, I will yield back to 
you for a question you wanted to ask.
    Mr. Norwood. Thank you, Mr. Deal.
    Mr. Olsen, after reading your testimony and hearing then 
Chairman Barton outline what you recommend as a plan, does that 
mean that the AARP doesn't any longer support the Graham/Smith 
bill that came out last year? My understanding was you did 
support that, it's about low-income and catastrophic, and does 
that mean you've got a change of heart this year?
    Mr. Olsen. You'll pardon me, I'm not an expert on policy, 
so I don't remember the exact details, but in my recollection 
there was a gap in there, and our current policy is one that 
everyone would have, you know, it would be available to 
everyone in the program. So, that's our position.
    Mr. Norwood. So, your policy this year is different than at 
that point last year that Mr. Graham and Mr. Smith altered 
their bill?
    Mr. Olsen. I don't recall the specifics of that bill, I'm 
sorry.
    Mr. Norwood. Would you give me an answer to that in 
writing?
    Mr. Olsen. I'll absolutely do that.
    Mr. Norwood. Thank you very much, Mr. Deal.
    Mr. Deal. Thank you, Mr. Chairman.
    I'd like to ask just a couple of rather quick questions, 
hopefully. One is, have there been any study done on whether or 
not we could achieve a satisfactory result and achieve a 
satisfactory cost line by simply restricting the formularies 
that are available? In other words, rather than across the 
board have a restricted formulary, and if you have any 
information on that would you comment?
    Mr. Feldman. Sir, I think it depends on what you mean by 
satisfactory. It's not going to reduce the trend of drug costs, 
which, ultimately, is going to be driven by technology and an 
aging population.
    However, it can get us the drugs at a lower cost than we 
could get them without a formulary. Estimates for two-tier 
formularies suggests that the savings are a couple percent. 
Estimates for the three-tier formularies, which is the most 
common design now in the private sector, range from five to 9 
percent.
    Mr. Deal. Anyone else?
    Mr. Vladek. I believe in the Medicaid law, the adoption by 
States of formularies produced savings of that magnitude or 
somewhat more, low double-digit percentages over what they 
otherwise would have paid.
    Mr. Deal. Those formularies adopted under Medicaid at the 
State levels, have there been any significant complaints with 
regard to those formulary approaches?
    Mr. Vladek. There have been very, very significant 
complaints. How valid the complaints have been I couldn't 
totally comment on.
    Mr. Deal. Is that mostly from somebody who wasn't in the 
formulary?
    Mr. Vladek. Or particular beneficiaries who have become 
attached for whatever reason to a particular drug that's not in 
the formulary.
    Mr. Herman. Formularies can be extremely difficult for 
senior citizens. You are telling them that you've got to take 
this, here it is, you come back, you've got the side effects 
that occur with that, now you've got to get another one, you 
are not particularly mobile. Even at our age, I ran into 
formulary problems with an HMO. I went through four different 
drugs, the number of times I had to go back in there and get 
permission to get something else was ridiculous for just 
hypertension.
    You start spreading that over a population that isn't 
mobile, and that isn't really very effective, but it's darn 
sure harmful.
    Mr. Deal. Yes, sir.
    Mr. Olsen. I think we realize that there needs to be a 
professionally developed, something called a formulary or 
something, we just think it's critical that whatever is in 
there has some kind of an appeal or an escape mechanism so that 
when what was just described happens there is a quick way to 
appeal and out of that.
    Mr. Deal. Okay.
    With regard to the purchasing mechanism for this, we've all 
had the complaints from our small local pharmacist that 
whatever plan we adopt they are going to be left out of the 
process. Would any of you comment with regard to a purchasing 
arrangement, if it were not privately handled, a purchasing 
arrangement that would maybe track what we have at VA and other 
Federal agencies that have mass purchasing processes in place, 
is that something that--what has been the thought process 
that's been given, if any, to a mass purchasing of drugs 
through some government entity that would maybe follow the 
pattern of VA and other Federal agencies?
    Mr. Herman. Our members want choice. They want the ability 
to go to their local pharmacist, or their mailbox, depending on 
what the situation is. The mass buying side of this opens up a 
giant can of worms. On the one hand, you start hearing, well, 
that's going to stop R&D, and on the other hand you hear 
nothing ever stops R&D. But, we would say that when you start 
getting into mass buying, price control, which is really what 
you are getting into, that you do stop a portion of R&D, and 
it's the portion of R&D that isn't the most profitable. So, you 
now have drug companies that will have a profit motive, and 
they'll be looking at 15 items, and they'll exclude three of 
them because they are going to be under a cap and there's no 
money in that. So, let's go over here and look at the cancer 
drug and ignore the Alzheimer's drug.
    So, from a standpoint of that kind of buying, you are not 
going to stop R&D, but you may well stop significant R&D for 
senior citizens.
    Mr. Deal. I think my time--Dan, do you have a comment?
    Mr. Feldman. I was just going to say that dispensing is a 
separable issue, I think, from the purchasing, and in 
competition, and negotiable ought to be dispensing fees like 
everything else. The friends at the other end of the table, 
AARP, are one of the largest distributors of pharmaceuticals 
today through the mail, so there are lots of ways that this may 
be cracked, but there's always a place for a distribution 
system separate from the purchasing.
    Mr. Deal. Okay, thank you.
    Thank you, Mr. Chairman.
    Mr. Norwood. Thank the gentleman.
    Mr. Allen, you are now recognized for 5 minutes.
    Mr. Allen. Mr. Chairman, thank you. I appreciate the 
courtesy of being able to participate in this hearing. I thank 
you all for testifying.
    Just a few comments and then a question. I think the bill 
that I had would contain costs as much as any bill in the 
Congress, costs of prescription drugs for seniors, so I care 
about cost control. But, I'm struck by the fact that many 
people who talk about the cost of this system and how much it 
will cost in the future never talk about the added value to 
seniors. And, I just think we ought to remember that if we do 
this and get it right, whichever way it is, the health of our 
seniors will be a lot better than it is today.
    Second, Medicare+Choice is always thrown up, those who 
advocate private plans will talk about Medicare+Choice. This is 
just an anecdote, I'm not relying on it, but my parents were on 
Medicare+Choice in their mid 80's, they are both gone now, but 
it was a nightmare. It was an absolute horrific nightmare, 
because no matter what procedure they went for the claim was 
denied and we had to go back to my father's law firm and they 
had to somehow manage the claim. And, the prospect of seniors, 
you know, trying to cope with a private plan has always struck 
me as being a problem.
    There are those who hold up the FEHBP as a model. Well, I 
was looking at the 2003 handbook, and guess what, there is no, 
zero, there is no plan, an HMO plan or a point of service plan 
in the State of Maine for Federal employees, none. Just 
skimming through this, there are nine States where there is 
only one plan. The choice, I would argue, is often, appears to 
me, the choice from private sector involvement in many cases I 
think would be a myth and we'd get the kind of variation across 
the country that I think is a tremendous problem.
    Mr. Vladek, I want to ask you a question about how well the 
private health care system is doing right now in the area of 
prescription drugs, because, of course, you have these private 
plans and the employer for people who are employed, and in many 
cases I think they work well, but when it comes to the 
companies, the entities which are managing these prescription 
drug plans for employers it seems to me there are a lot of 
problems.
    A number of lawsuits have been filed against plans for 
negotiating hidden deals for their own benefit, at the expense 
of employers. Switching employees to higher priced drugs, for 
the benefit of the pharmacy, benefit manager, of they get kick 
backs from drug companies, or they fail to pass on millions of 
dollars in rebates and other financial incentives to employers 
that the PBMs then pocket for themselves.
    I would just like, what I think is going on is that 
employers don't have the market power to leverage discounts 
from the manufacturers, so they hire these private companies, 
but the private companies strike their own deals with 
particular manufacturers.
    Mr. Vladek, would you be able to comment on that, and talk 
a little bit about what those kinds of problems mean for a plan 
under Medicare that relies on private PBMs or on other such 
intermediaries?
    Mr. Vladek. Thank you, Mr. Allen.
    In some of the details of the way the pharmaceutical 
industry, the wholesale and distribution industry is, Doctor 
Feldman probably knows more than I do, but I've had some 
exposure to it in recent months, and I've never seen anything 
as baroque, or as complicated, or as hidden, as the way in 
which prices and actual--both nominal prices and real prices 
are manipulated in the flow for the supply chain from the time 
it leaves the manufacturer to the time it reaches the retail 
consumer.
    There are all kinds of rebates of shadow prices, of private 
deals and so on and so forth, and I think there's some major 
litigation now involving the PBMs for failure to disclose to 
their customers the fact that they were getting very 
substantial rebates for certain drugs, and, therefore, 
benefiting themselves rather than their customers in that 
regard.
    I do think, to be very blunt about it, the issue of the 
PBMs and the private intermediaries has arisen because we've 
been unwilling politically to talk about government leverage 
over pharmaceutical prices in the Federal programs or in 
Medicare, while we are willing to talk about it for the VA, we 
are willing to talk about it for the Public Health Service, or 
we are willing to talk about it in State Medicaid programs. 
But, that's what it comes down to.
    And, if you need to disguise efforts to do something about 
price controls, then you need some kind of intermediary, but 
I'm not sure that the track record of any of the existing 
intermediaries is particularly encouraging in that regard.
    Mr. Allen. I thank you.
    Thank you, Mr. Chairman.
    Mr. Norwood. Thank you very much, Mr. Allen.
    Gentlemen of the panel, thank you for taking your time. 
We'll be anxiously looking forward to hearing from you and some 
of the questions that time didn't permit to be answered.
    With that, this hearing is now adjourned.
    [Whereupon, at 12:36 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
         Prepared Statement of The Alliance to Improve Medicare
    The Alliance to Improve Medicare (AIM) is pleased to submit this 
statement for the hearing record to the Energy & Commerce Health 
Subcommittee. We applaud the Subcommittee's continued dedication to 
improving and strengthening Medicare. AIM has developed a set of 
recommendations on providing access to prescription drug coverage 
though Medicare and we are pleased to share these recommendations with 
the Subcommittee. The recommendations provide guidance for developing 
prescription drug coverage through both the traditional fee-for-service 
Medicare program and Medicare's managed care program, Medicare+Choice.
    Medicare was designed and created in 1965 when hospital-based care 
was the standard. Today's standard of care, however, includes a greater 
reliance upon modern technologies such as prescription drugs to treat 
patients and reduce the number and length of hospitalizations. Designed 
today, Medicare would no more exclude prescription drug coverage from 
the standard benefit package than it would exclude hospitalization or 
physician services. Current statistics show that nearly one-third of 
Medicare's elderly and disabled beneficiaries lack outpatient (Part B) 
prescription drug coverage. The balance of Medicare beneficiaries have 
some level of coverage through retiree health benefits, Medigap 
policies, Medicare+Choice plans or Medicaid.
    AIM believes all Medicare beneficiaries should be offered 
prescription drug benefits as an integral part of Medicare health 
coverage and as part of broader efforts to strengthen and improve both 
the traditional fee-for-service program and Medicare's managed care 
program, Medicare+Choice. Further, AIM believes prescription drug 
benefits should be designed with adequate financial support and 
effective management tools to ensure reliable coverage and long-term 
success. AIM also believes that equal financial resources should be 
dedicated to both the fee-for-service program and the Medicare+Choice 
program for the development of prescription drug benefits. Finally, AIM 
believes health plans should have flexibility in designing prescription 
drug coverage benefits and opposes bureaucratic prescription drug 
proposals and government price controls.
Prescription Drug Coverage in Fee-For-Service Medicare
    AIM believes fee-for-service Medicare beneficiaries should have 
private health care coverage options that include prescription drug 
coverage as part of the basic benefit package. AIM supports efforts to 
add prescription drug coverage to the fee-for-service benefit package 
through a new, comprehensive benefit package. Medicare fee-for-service 
program beneficiaries should have a comprehensive benefit package that 
includes basic prescription drug coverage.
    Further, a comprehensive benefit package in fee-for-service 
Medicare should include appropriate use of private sector management 
tools. Private sector health plans have developed proven tools to 
ensure safe and cost effective use of prescription drugs. These 
management tools, including formularies, tiered co-payments, and drug 
interaction prevention programs, are essential to high-quality coverage 
for beneficiaries and should be incorporated into a new comprehensive, 
fee-for-service benefit package while allowing access to all classes of 
drugs.
    Finally, a fee-for-service benefit package that includes 
prescription drug coverage should avoid government imposed price 
controls.
Prescription Drug Coverage in Medicare+Choice
    Congress created the Medicare+Choice program as a health care 
coverage option for Medicare beneficiaries. The option was designed to 
offer more health care coverage choices and organized health care 
systems to beneficiaries. However, Medicare reimbursements which fall 
below cost increases, severe payment cuts, and increased costs due to 
excessive regulation have caused many Medicare+Choice plans to reduce 
or eliminate prescription drug coverage in order to maintain plan 
offerings in some counties.
    AIM's recommendations to ensure prescription drug coverage for 
Medicare+Choice program beneficiaries require adequate payments to all 
providers. The current Medicare+Choice payment formula has resulted in 
inadequate payment levels which have not kept pace with overall medical 
costs for Medicare+Choice plans in many parts of the country. 
Stabilization of the Medicare+Choice program will minimize disruption 
of benefits, including prescription drug benefits, among beneficiaries. 
Recent reductions in funding for Medicare+Choice health plans have 
caused many plans to reduce the scope of their prescription drug 
benefits or to increase beneficiary cost sharing.
    Further, AIM believes that Congress must ensure a sustainable 
funding and financing mechanism for a prescription drug benefit. The 
additional Medicare program costs associated with providing 
prescription drug benefits should be accompanied by a reliable and 
sustainable financing mechanism.
    Finally, health plans must be allowed flexibility in the design of 
benefits packages. Beneficiaries should have the option of selecting 
from among many different plans and plan types to best suit their own 
coverage needs. Statutorily mandated benefit requirements will 
unnecessarily restrict beneficiary options for coverage.
Conclusion
    AIM appreciates the opportunity to provide these comments to the 
Health Subcommittee and applauds Chairman Bilirakis for his efforts to 
improve Medicare. AIM urges the Subcommittee to consider these 
recommendations to ensure a sustainable Medicare prescription drug 
benefit for all Medicare beneficiaries. We look forward to working with 
the Subcommittee and other members to further improve and strengthen 
Medicare this year.
                                 ______
                                 
   Prepared Statement of David G. Schulke, Executive Vice President, 
                  American Health Quality Association

    The American Health Quality Association represents independent 
private organizations--known as Quality Improvement Organizations 
(QIOs)--that work under contracts with the Centers for Medicare and 
Medicaid Services (CMS) to improve the quality of care for Medicare 
beneficiaries in all 50 states and every U.S. territory. Congress 
created the QIOs to monitor and improve the quality of care delivered 
to Medicare beneficiaries and supports the national work of the QIOs 
with approximately $333 million annually from the Medicare Trust Fund, 
or about $8 per beneficiary per year.
    Past policy efforts to develop a Medicare prescription drug benefit 
for the 21st century have focused almost exclusively on financing a 
benefit. Very little attention was given to including initiatives in 
the drug benefit to ensure a benefit is safe and continuously monitored 
to maximize the quality of outpatient pharmacotherapy.
    In the 107th Congress the Energy and Commerce Committee became the 
first congressional committee to recognize this challenge by including 
language in House Report 107-551 directing the administrator of the 
Medicare prescription drug benefit to make Part D claims available to 
QIOs for quality improvement efforts. The American Health Quality 
Association commends the Energy and Commerce Committee for their 
leadership in this regard. It is absolutely critical to create an 
integrated quality improvement program. Otherwise, beneficiaries are 
likely to be ill-served by a carved-out drug benefit that operates 
separately from the Medicare hospital and outpatient benefits and data 
systems.

                     BUILDING A SAFE DRUG BENEFIT.

    A Medicare outpatient prescription drug benefit presents an 
opportunity to improve the quality of life for our nation's seniors, 
but also brings the real risk of increased morbidity and mortality 
associated with an increase in the use of medications. It is reasonable 
to predict that with an outpatient prescription drug benefit, more 
seniors will receive more drugs. Expanding access to and availability 
of drugs, without a complementary investment in quality improvement, 
will exacerbate the unacceptable cost and incidence of hospital and 
long-term care admissions associated with medication use. A recent 
meta-analysis of 11 different studies reviewing drug use in the elderly 
population found that ``[t]he reported prevalence of elderly patients 
using at least one inappropriately prescribed drug ranged from a high 
of 40% for a population of nursing home patients to 21.3% for 
community-dwelling patients over age 65.'' 1
    Pharmacoeconomists at The University of Arizona have tracked the 
costs associated with drug therapy since the early 
1990s.2,3 In the spring of 2001 these researchers 
published the following statement: ``Overall, the cost of drug-related 
morbidity and mortality [in the ambulatory care environment] in the 
United States exceeded $177.4 billion in 2000. Hospital admissions 
accounted for nearly 70% ($121.5 billion) of total costs, followed by 
long-term-care admissions, which accounted for 18% ($32.8 billion).'' 
4

  INTEGRATING MEDICAL AND PHARMACY DATA SYSTEMS THROUGH MEDICARE QIOS.

    Historically, attempts to address the morbidity and mortality 
associated with medication use have been stymied by the inability of 
practitioners in various disciplines to access certain medical or 
pharmacy records that would otherwise provide a comprehensive picture 
of a patient's true medication use history. As this committee discusses 
building a Medicare prescription drug benefit for the 21st century, it 
is essential that the new statutes and regulations include language 
that provide the QIOs with access to pharmacy claims data. Regardless 
of how a drug benefit is administered, the Secretary of HHS must have 
unrestricted access to pharmacy claims data to use in directing the 
activities of the QIOs. QIOs were created by Congress with the 
necessary confidentiality protections and staff expertise to permit 
them to combine medical and pharmacy data to guide health care systems 
improvement.
    Most congressional proposals forwarded to date rely on the pharmacy 
benefit administrators to process pharmacy claims data and take certain 
quality improvement steps at the point of service when the pharmacy 
claims data suggests medication misadventures. The good work of the 
pharmacy benefit administrators is limited by the information present 
in the pharmacy claim. Without integration of the data present in the 
medical record and pharmacy record, systematic failures leading to 
inappropriate prescribing and dispensing will continue to happen 
everyday.

   INTEGRATION OF DATA SYSTEMS THROUGH QIOS IS CRITICAL--A STUDY OF 
          OUTPATIENT BETA-BLOCKER USE IN HEART ATTACK VICTIMS.

    QIOs use data to track progress and improve provider performance, 
reducing errors by focusing on treatment processes, mostly 
pharmacotherapy. Since 1996, QIOs have worked on local projects to 
improve clinical indicators in care for diseases and conditions that 
broadly afflict seniors. Among the diseases targeted for quality 
improvement by the QIOs, treating heart attack victims with beta-
blockers offers an example of how the QIOs could further their current 
inpatient efforts with appropriate access to data gathered with an 
outpatient prescription drug benefit.
    Medical practitioners have known for several decades that the 
secondary prevention benefits of beta-blocker therapy after heart 
attack include reduced hospital readmissions, reduced incidence of 
further heart attacks, and decreased overall mortality.5 The 
evidence is so convincing that the American College of Cardiology and 
the American Heart Association guidelines for the management of heart 
attack recommend routine beta-blocker therapy for all patients without 
a contraindication.6 Despite the evidence and expert 
recommendations, the use of beta blockers after heart attacks remains 
considerably suboptimal, with 20-30% of appropriate patients lacking 
this essential therapy.7 The reason is unlikely to be cost. 
Beta-blocker therapy in the outpatient setting is one of the most 
affordable medications available to patients. A 90-day supply of this 
life-saving medication usually costs less than $10.00.
    QIOs work to ensure that patients discharged from the hospital 
following a heart attack leave the hospital with a prescription for a 
beta-blocker. In the November 2002 issue of the Journal of the American 
College of Cardiology (JACC), researchers report that many patients 
never fill prescriptions for their discharge medication, and many of 
those that do discontinue the use of beta-blockers shortly after 
filling the prescription. The study's authors conclude: ``Patients not 
discharged on beta-blockers are unlikely to be started on them as 
outpatients. For patients who are discharged on beta-blockers after 
AMI, there is a significant decline in use after discharge. Quality 
improvement efforts need to be focused on improving discharge planning 
and to continue these efforts after discharge.'' 8 During 
the QIO's Sixth Scope of Work (1999-2002), QIOs were responsible for 
improving the national rate of beta-blocker order at discharge by 
7%.9
    In his study published in JACC, Butler and colleagues found that 
the first step to preventing heart attack recurrence is to make sure a 
prescription is written and ordered at the time of the patient's 
discharge from a heart attack hospitalization. If this is done, the 
study shows there is a 10 TIMES greater likelihood of getting that 
patient started on inexpensive, effective beta blocker drugs that 20-
30% of Medicare heart attack patients still do not receive, almost 40 
years after the first marketing of propranolol, the first beta blocker.
    The authors of the study utilized data for the dually enrolled 
population of patients (those receiving Medicare and Medicaid benefits 
simultaneously), as this is the only population of seniors for which 
there is comprehensive drug therapy claims data. This same kind of 
monitoring should be available for all beneficiaries. It is critical 
for Medicare to have the drug claims/ utilization data so QIOs can 
identify heart attack patients who don't fill a prescription for beta 
blockers post discharge, or who stop filling prescriptions (almost one 
quarter do after 6 months, according to the study)--and give their 
physicians assistance in getting the prescription started or changed 
(the latter might be needed if the patient didn't like the particular 
beta blocker initially prescribed and has consciously stopped taking it 
due to unacceptable or intolerable side effects). QIOs are ideally 
suited to identify patients at highest risk for hospital readmission or 
death due to poor beta-blocker adherence (i.e., patients taking beta-
blockers post heart attack). We believe the QIOs unique ability to 
integrate medical information with pharmacy claims/utilization data 
complement pharmacy adherence programs that may be currently managed by 
benefit administrators.

                   QIO CONFIDENTIALITY REQUIREMENTS.

    The confidentiality of information collected or developed by a 
Medicare QIO is assured by Section 1160 of the Social Security Act. It 
was the intent of Congress in drafting this provision to provide 
safeguards for information identifying a specific patient, practitioner 
or reviewer. These safeguards foster an environment that is conducive 
to quality improvement efforts.

                            RECOMMENDATIONS.

    The American Health Quality Association has drafted the following 
legislative specifications we ask the Committee to include in this 
year's Medicare outpatient prescription drug benefit bill.
Legislative Specifications for the 108th Congress.
    1) Give the QIOs responsibility for the outpatient drug benefit 
analogous to the responsibility they have for all other Title 18 
benefits:
    Add new `Sec-------- . Review Authority--. Section 1154(a)(1) is 
amended by adding `and section ------ after `1876'.
    2) Instruct the QIOs to make assistance available to providers, 
practitioners and benefit administrators to improve the quality of care 
under the new drug benefit.
    Prescription Drug Therapy Quality Improvement.--Section 1154(a) is 
amended by adding a new paragraph 17:
    ``(17) With respect to items and services provided under Title 
XVIII Part ------ the organization shall execute its responsibilities 
under subsection (a)(1)(A) and (B) by making available to providers, 
practitioners and benefit administrators assistance in establishing 
quality improvement projects focused on prescription drug or drug-
related therapies. For the purposes of this part and title XVIII, the 
functions described in this paragraph shall be treated as a review 
function.''
    3) Include legislative language instructing prescription drug 
benefit administrators to provide patient specific pharmacy claims and 
drug utilization data to the Secretary of HHS. Suggested wording:
    ``Requirements for Prescription Drug Plan Sponsors, Contracts, 
Establishment of Standards.--Any agreement between the Secretary and a 
benefit administrator for this purpose shall provide the Secretary with 
all patient specific pharmacy claims and drug utilization data.''
    4) Include legislative language providing appropriate availability 
of prescription drug claims data to the QIOs for quality improvement 
purposes. Suggested wording:
    ``Data Availability.--The Secretary shall provide the utilization 
and quality control peer review organizations with the patient specific 
pharmacy claims and drug utilization data to permit the organizations 
to perform the functions described in 1154(a)(17).''

                               References

    1 Lui GG, Christensen, DB, ``The Continuing Challenge of 
Inappropriate Prescribing in the Elderly: An Update of the Evidence.'' 
J Am Pharm Assoc, 42(6), p847-857, 2002.
    2 Johnson JA, Bootman JL, ``Drug-related morbidity and 
mortality. A cost-of-illness model.'' Arch Intern Med (United States), 
155(18), p1949-56, 1995.
    3 Harrison DL, Bootman JL, Cox ER. ``Cost-effectiveness 
of consultant pharmacists in managing drug-related morbidity and 
mortality at nursing facilities.'' Am J Health Syst Pharm, 55(15), 
p1588-94, 1998.
    4 Ernst FR, Grizzle AJ, ``Drug-related morbidity and 
mortality: updating the cost-of-illness model.'' J Am Pharm Assoc, 
41(2), p191-199, 2001.
    5 Soumerai, SB, McLaughlin TJ, et al. ``Adverse outcomes 
of underuse of beta-blockers in elderly survivors of acute myocardial 
infarction.'' JAMA, 227, p115-121, 1997.
    6 Ryan TJ, et al. ``ACC/AHA guidelines for the 
management of patient with acute myocardial infarction. A report of the 
ACC/AHA Task Force on Practice Guidelines (Committee on Management of 
AMI).'' J Am Coll Cardiol, 28, p328-348, 1996.
    7 Krumholz HM, et al. ``National use and effectiveness 
of beta-blockers for the treatment of elderly patients after AMI: 
National Cooperative Cardiovascular Project.'' JAMA, 280, p623-629, 
1998.
    8 Butler J, et al. ``Outpatient adherence to beta-
blocker therapy after AMI.'' J Am Coll Cardiol, 40(9), 1589-1595, 2002.
    9 Jencks SJ, et al. ``Change in the Quality of Care 
Delivered to Medicare Beneficiaries 1998-1999 to 2000-2001.'' JAMA, 
289, p305-312, 2003.

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