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



 
 A MEDICARE PRESCRIPTION DRUG SAFETY NET: CREATING A TARGETED BENEFIT 
                         FOR LOW-INCOME SENIORS

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

                                HEARING

                               before the

               SUBCOMMITTEE ON HUMAN RIGHTS AND WELLNESS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 24, 2003

                               __________

                           Serial No. 108-86

                               __________

       Printed for the use of the Committee on Government Reform


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

                                 ______

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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana                  HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
JOHN SULLIVAN, Oklahoma              C.A. ``DUTCH'' RUPPERSBERGER, 
NATHAN DEAL, Georgia                     Maryland
CANDICE S. MILLER, Michigan          ELEANOR HOLMES NORTON, District of 
TIM MURPHY, Pennsylvania                 Columbia
MICHAEL R. TURNER, Ohio              JIM COOPER, Tennessee
JOHN R. CARTER, Texas                CHRIS BELL, Texas
WILLIAM J. JANKLOW, South Dakota                 ------
MARSHA BLACKBURN, Tennessee          BERNARD SANDERS, Vermont 
                                         (Independent)

                       Peter Sirh, Staff Director
                 Melissa Wojciak, Deputy Staff Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
              Philip M. Schiliro, Minority Staff Director

               Subcommittee on Human Rights and Wellness

                     DAN BURTON, Indiana, Chairman
CHRIS CANNON, Utah                   DIANE E. WATSON, California
CHRISTOPHER SHAYS, Connecticut       BERNARD SANDERS, Vermont 
ILEANA ROS-LEHTINEN, Florida             (Independent)
                                     ELIJAH E. CUMMINGS, Maryland

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                      Mark Walker, Chief of Staff
                 Brian Fauls, Professional Staff Member
                          Mindi Walker, Clerk
                     Tony Haywood, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 24, 2003...............................     1
Statement of:
    Dooley, Hon. Calvin, a Representative in Congress from the 
      State of California........................................     6
    Haislmaier, Ed, Heritage Foundation; Jeff Lemeiux, 
      Progressive Policy Institute; Thomas Miller, CATO 
      Institute; and Joseph Antos, American Enterprise Institute.    14
Letters, statements, etc., submitted for the record by:
    Antos, Joseph, American Enterprise Institute, prepared 
      statement of...............................................    39
    Dooley, Hon. Calvin, a Representative in Congress from the 
      State of California, prepared statement of.................     9
    Haislmaier, Ed, Heritage Foundation:
        Information concerning alternative Medicare drug coverage 
          proposal...............................................    59
        Prepared statement of....................................    16
    Lemeiux, Jeff, Progressive Policy Institute, prepared 
      statement of...............................................    23
    Miller, Thomas, CATO Institute, prepared statement of........    30


 A MEDICARE PRESCRIPTION DRUG SAFETY NET: CREATING A TARGETED BENEFIT 
                         FOR LOW-INCOME SENIORS

                              ----------                              


                     WEDNESDAY, SEPTEMBER 24, 2003

                  House of Representatives,
         Subcommittee on Human Rights and Wellness,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 12:05 p.m., in 
room 2154, Rayburn House Office Building, Hon. Dan Burton 
(chairman of the subcommittee) presiding.
    Present: Representatives Burton, Watson and Cummings.
    Staff present: Mark Walker, chief of staff; Brian Fauls, 
professional staff member; Mindi Walker, professional staff 
member and clerk; Nick Mutton, press secretary; Danielle 
Perraut, intern; Tony Haywood, minority counsel; and Teresa 
Coufal, minority assistant clerk.
    Mr. Burton. Good afternoon. A quorum being present, the 
Subcommittee on Human Rights and Wellness will come to order.
    I ask unanimous consent that all Members' and witnesses' 
written and opening statements be included in the record. And 
without objection, so ordered.
    I ask unanimous consent that all articles, exhibits, and 
extraneous or tabular material referred to be included in the 
record. Without objection, so ordered.
    I ask unanimous consent that the following Members of 
Congress be permitted to serve as members of the subcommittee 
for today's hearing, Representative Calvin Dooley, Delegate 
Donna Christensen. Without objection, so ordered.
    Today's hearing is a continuation of the subcommittee's 
investigation into the high cost of prescription drugs in this 
country. As we have heard at previous hearings on this subject, 
American consumers pay a higher price on average for 
prescription drugs than citizens of any other country in the 
whole world. And the prices continue to go up and up. I have 
been told that over the last couple 3 years the price of 
prescription drugs has been increasing somewhere between 15 and 
17 percent a year, and that is way, way, way above the growth 
of the economy and everything else in the area of medicine.
    Thanks to the astronomical growth in prices, we now have a 
situation in this country where more than one out of five 
American adults are unable to take their drugs as prescribed 
because they simply cannot afford to buy them. That is 
terrible; one out of five. So we are acutely aware that 
something needs to be done to provide seniors with some relief 
from the high cost of prescription drugs.
    On June 27, 2003, in an extremely close vote, in fact, it 
was a one vote margin and they had to keep the machine open for 
about an hour to get that extra vote, the Medicare Prescription 
Drug Modernization Act passed, H.R. 1.
    At first glance, H.R. 1 might appear to be the answer to 
the prayers of every Medicare beneficiary who has been faced 
with paying outrageous prices for prescription drugs. However, 
when you start to examine the details of the legislation, it 
becomes very clear that the bill creates an ill-conceived and 
incredibly expensive new open-end entitlement that places a 
tremendous financial yoke around the neck of American taxpayers 
for decades and decades to come. There is no provision for 
negotiation between the Government and the pharmaceutical 
companies on the price of pharmaceuticals and so they can 
charge whatever the market will bear, and they have been doing 
that in the United States already. So the taxpayers will be 
bearing that burden that is already being borne by the 
consumers themselves.
    As reported in the Wall Street Journal, researchers with 
Texas A&M University have estimated that the Government's 
unfunded obligation for a new Medicare prescription drug 
benefit could be anywhere from $6 trillion to a high of 
approximately $12 trillion over the life of the program. And 
that is on top of Medicare's existing unfunded liability 
already estimated to be $30 trillion.
    At the same time, H.R. 1 potentially threatens the 
prescription drug coverage of millions of American seniors who 
already have comprehensive coverage through an employer-
sponsored retirement plan. I have been told, and we are 
checking this right now, that as much as 70 percent of the 
seniors in this country already have prescription drug coverage 
of one form or another. And I can tell you, almost without 
doubt, that the minute we pass a Medicare prescription drug 
benefit, many of those companies, in fact, probably most of 
them, are going to dump their employees into the Medicare 
prescription drug program, and that is going to add an 
unusually large burden on the taxpayer and is going to cost 
billions and trillions of dollars. Right now, they already have 
that coverage, and it seems to me rather than give coverage to 
people who are already covered, we ought to take care of those 
who are indigent, cannot afford it and do not have it, or those 
who cannot get it because of health reasons, and that is about 
30 percent of the senior population.
    It is my sincere hope that the joint House-Senate 
conference currently working to resolve the differences between 
H.R. 1 and the Senate's Medicare prescription drug bill, S. 1, 
will be able to produce a far better bill than the one that 
passed the House of Representatives back in June. I firmly 
believe the consequences of passing a bad bill will seriously 
outweigh the consequences of passing no bill at all. It is 
better to not pass anything than to pass one that is really 
going to be a pain for the American people.
    A perfect example of what can happen when Congress passes a 
bad bill is the catastrophic health care legislation that was 
passed in 1988. The vote, I remember the vote being only 11 
votes against it, but according to the record that we have, 
maybe this was a separate vote, the vote was 328 to 72, and I 
was one of the people that opposed it. We were vilified by the 
seniors across the this country because they said we did not 
care about them and we should have voted for that catastrophic 
health care bill. And I remember telling a lot of the seniors 
that wrote to me and talked to me, I said wait until you find 
out what is in that turkey and you are going to wish you had 
not passed it.
    And so what happened, less than a year later when they 
found out about it, they were chasing Dan Rostenkowsi, the 
chairman of the House Ways and Means Committee, and beating on 
his car because it was such a rotten bill. And yet a year 
earlier those of us who had voted against it were a bunch of 
bad guys and we were vilified. And poor Dan had his car damaged 
because they found out it was such a bad bill. In an unusually 
speedy turnaround, as I said, we repealed it by a vote of 360 
to 66.
    Now we owe it to American seniors as well as our children 
and grandchildren to move cautiously on creating a Medicare 
prescription drug benefit. It needs to be both responsive to 
the needs of seniors as well as fiscally responsible. To settle 
for anything less is to invite disaster and the wrath of the 
American taxpayer and consumer.
    Someone argued that not passing a conference report would 
be political suicide. And I would agree with that if the only 
alternative were to simply do nothing to help Medicare 
beneficiaries without prescription drug coverage. However, that 
is not the only alternative.
    This afternoon we are going to hear from several witnesses 
regarding the viability of enacting a Medicare prescription 
drug safety net focused exclusively on meeting the prescription 
drug needs of the most vulnerable Medicare beneficiaries, the 
approximately, I do not know how many Medicare eligible 
Americans who have no drug coverage at all, the approximately 
10 million Medicare eligible Americans who have no drug 
coverage at all.
    I have asked all of our witnesses to comment on a proposal 
that I asked the subcommittee staff to draft during the August 
work period. I will not go into too much detail here, as 
members of the subcommittee have already seen the proposal. I 
presume you have, Ms. Watson.
    Ms. Watson. Yes.
    Mr. Burton. I will say that what we have put together is an 
idea for a program that we believe is fiscally responsible as 
well as responsive to the needs of low-income Medicare 
beneficiaries who are unable to obtain other forms of 
prescription drug coverage. Each recipient in the program would 
receive a Federal contribution into a MSA, medical savings 
account, with the Federal payment scaled from $2,500 to $600 
depending on the recipient's most current income level, with 
the Federal Government providing 100 percent coverage for 
prescription drug costs beyond a catastrophic threshold of 
$3,000. Which means, if they have the ability and have an 
income that would demand we put $2,500 into an MSA account, 
that would cover them for the first $2,500, then the next $500 
they have would to pay out of their own pocket, and then above 
that $3,000 limit the Government would pay for all the costs 
for prescription drugs.
    In order to contain the cost of the program and prevent it 
from becoming a runaway entitlement, which is something that we 
cannot afford according to the studies that I have seen, I 
mean, $7, $8, $10 trillion over the next 10-15 years is 
something that we just do not have, in order to contain the 
cost of the program and prevent it from becoming a runaway 
entitlement, we provide a hard dollar cap on the program 
expenses over a 10 year period of $200 billion.
    In addition, we also give the Secretary of HHS the power to 
negotiate discount drug prices on behalf of beneficiaries. One 
of the things I cannot understand, and I wish everybody in 
America could hear this, is why in the world, if the Federal 
Government is going to be buying prescription drugs by the 
millions and millions and millions of dollars in pills, why can 
we not negotiate with the pharmaceutical companies on the cost 
of the prescription drugs that we are buying. But there is a 
prohibition against that.
    There is nothing in the legislation that allows our 
Government to negotiate the prices that the American people are 
going to pay through Medicare for these prescription drugs. It 
makes no sense. And we are not talking about cost controls. We 
are talking about negotiations that would provide a profit for 
the pharmaceutical companies and the best price for the 
American taxpayer as well as the recipients.
    Right now Tomoxifin, and I have used this example many, 
many times, if you do not have coverage of any kind, it can 
cost up to $360 for a 30-day supply in the United States. If a 
woman has breast cancer and she does not have any coverage, 
that is a lot of money, $360 for 30 days. In Canada it costs 
$50. In Germany it costs $60 for the very same thing. Now why 
in the world we cannot negotiate prices when we are talking 
about a Medicare prescription drug benefit is beyond me.
    The power to negotiate is perhaps the most crucial 
component of my proposal. Without this leverage, the Government 
would not be able to obtain the best price possible from the 
drug companies. We have seen how positively negotiated pricing 
works in the Department of Veterans Affairs. They negotiate 
prices over at the Department of Veterans Affairs, and we 
cannot get that information. I am going to write a letter to VA 
to find out what they are paying and how they negotiate those 
prices. But it is not in the public domain and we cannot get 
it. I guess we will have to break some heads to get it. We need 
to find out how they are negotiating over there with the 
pharmaceutical companies and what they are paying and how it 
works. It makes sense to carry that successful experiment over 
to Medicare prescription drug programs.
    Have we put together a perfect proposal? No, I am sure we 
have not. But the proposal on the table is, in my opinion, a 
good starting point for the discussion about a targeted and 
cost-effective prescription drug benefit. I expect to hear some 
constructive suggestions from our witnesses regarding 
improvements to the proposal, and I look forward to listening 
to their expert suggestions and discussing their ideas. I want 
to thank you very much for coming here today. I appreciate your 
coming today, especially since we had to postpone the hearing 
from last week.
    With that, I will now recognize the ranking member of the 
subcommittee, Representative Watson.
    Ms. Watson. Thank you so much, Mr. Chairman. Medicare 
beneficiaries have waited a long time for help. But, 
unfortunately, the House legislation falls short of what 
seniors and disabled Americans have been waiting for. Mr. 
Chairman, I want to especially commend you for your leadership 
and your strong resolve on this issue. I am pleased to see 
members from both sides of the aisle working to provide a 
prescription drug benefit that targets our seniors in order to 
help them in a practical manner.
    Price discrimination in the U.S. market is particularly 
harmful to the elderly who may rely on multiple medications to 
manage or treat one or more chronic conditions or illnesses. 
The lack of a prescription drug benefit under the Medicare 
program has meant that most seniors must pay most of the cost 
of prescription drugs out of their own pockets. A Medicare 
prescription drug benefit should be, first, affordable, 
reducing the exorbitant prices of drugs; and meaningful, with 
guaranteed benefits; within Medicare; and available to all 
regardless of where they might live.
    So it is with great disappointment that I look at the 
proposals that came to the House for Medicare reform. The House 
bill fails to meet each one of the basic standards.
    The House bill does nothing to reduce the cost of 
prescription drugs. It creates a coverage gap so wide that 
almost 50 percent of seniors will fall into it. Under the bill, 
seniors pay the first $250 of their drug costs, then 20 percent 
of the drug costs up to $2,000. They will receive no assistance 
at all between $2,000 and $4,900. That is what we call the 
``donut hole.'' They will fall into that hole and have to make 
the decisions, that too many of them have to make, whether to 
buy food or to buy drugs, or to buy half the prescription in 
order to pay between $2,000 and $4,900.
    The bill also allows insurers to vary their benefit levels 
and prices around the country. Insurers will be able to limit 
access to specific drugs and to pharmacies in particular places 
in this country. The bill even prohibits the Secretary of 
Health and Human Services, as the chairman has alluded to, from 
negotiating a better price for seniors. I do not understand 
that. And particularly in a State like mine, California, we 
have been able to negotiate better prices when we volume buy, 
because we have, Mr. Chairman, what we call the ``graying'' of 
California and our senior voters demand that we respond in 
Medicare to their needs.
    The bill passed by the House is designed to privatize 
Medicare, leaving seniors at the mercy of the HMOs, someone on 
the other end of that phone who does not have a clue making a 
decision. You know when the doctor prescribes and they have to 
call to get clearance to go forward, they get a secretary type 
who makes a decision, or they get a busy signal, or they have 
to wait in line for the call to be picked up. That is not the 
way we want to treat our seniors. This bill uses private drug-
only plans to administer the prescription drug program. These 
are plans that do not exist anywhere today.
    So, Mr. Chairman, I would like to say that we have now 
testifying our most esteemed colleagues, Representative Cal 
Dooley from my own home State, and then we will have 
Representative Donna Christian-Christensen, who is the one who 
heads up our Congressional Black Caucus Brain Trust. I just 
left her at one of our meetings at the Convention Center. But 
she has had periodic meetings where people come to Washington, 
DC, and they tell us how we are to make policy. Their guidance 
is very important. So she will come and talk about that 
experience and share her insights on health care in the United 
States, and particularly as an advocate of affordable 
prescription drugs. So I look forward to your testimony, Mr. 
Dooley, and to her testimony as well.
    I want to apologize for having to go back and be on duty 
with our Brain Trust that is over at the Convention Center. 
Thank you so much for this opportunity. I yield back.
    Mr. Burton. Thank you, Ms. Watson. Is Delegate Christensen 
here?
    Ms. Watson. She is on her way.
    Mr. Burton. OK. We will go ahead and start with Congressman 
Dooley. We appreciate very much our esteemed colleague being 
here. You are recognized for your statement.

 STATEMENT OF HON. CALVIN DOOLEY, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF CALIFORNIA

    Mr. Dooley. Thank you, Mr. Chairman, and thank you, 
Congresswoman Watson, too, for the opportunity to testify on 
the important issue of Medicare prescription drug coverage. As 
the conference committee continues to struggle with a 
reconciliation of the House and Senate-passed bills, many 
seniors, advocacy groups, and Members of Congress have 
recognized, as have both of you, that there is a better way to 
provide universal, affordable Medicare drug benefit to our 
Nation's seniors.
    I would like to also spend a little bit of time talking 
about a bill that I introduced that we had over 45 Democrats 
co-sponsor as well as a Republican co-sponsor. This legislation 
was H.R. 1568, the Medicare RX Now Act. It provided a universal 
zero premium Medicare drug benefit that would target assistance 
to seniors who need the most help--the Nation's sickest and the 
lowest-income seniors--and provide market-based discounts for 
all Medicare beneficiaries. As you recognize, the majority of 
seniors already have some form of prescription drug coverage, 
and our benefit was designed to maintain existing coverage 
provided by employers, by the States, and by private insurance 
options. In addition, we designed our benefit with the goal of 
spending no more than the $400 billion provided in the 
Republican budget.
    We need I think to also provide for an element of universal 
coverage for this prescription drug benefit. And we have tried 
to obtain that with universal coverage for high drug costs. 
Under H.R. 1568 all seniors would be entitled to a new Medicare 
Part B drug benefit at no additional premium. Each senior would 
select a Medicare approved drug card that would provide him or 
her with immediate access to negotiated prices, projected to 
save that senior anywhere between 10 and 20 percent off the 
prices they currently pay. This card would also act as an 
accounting mechanism to track all drug spending. Seniors with 
very high drug costs--in excess of $4,000 a year--would trigger 
the catastrophic benefit, and then the Government would pay 
roughly 80 percent of the drug costs after that $4,000 has been 
triggered and the individual would pay a flat co-pay.
    Because the coverage would be automatic and provided at no 
additional premium, it would avoid the adverse selection 
problems that plague many other proposals and provide seniors 
with a new benefit for no additional out-of-pocket cost to 
seniors.
    And I would also like to reference the importance of 
integrating this drug benefit into Medicare Part B, because if 
we do not do that, we can set up a serious problem of adverse 
selection. And as a policy, we should be indifferent to whether 
the health care that is providing the benefit to a senior is 
pharmaceutical-based care, doctor-based care, or hospital-based 
care. We do not want to do what the House bill has done where 
you create a Part D stand alone prescription drug benefit. That 
could, in fact, create a situation where you will have rising 
premiums on that drug benefit but in many instances we might 
have the development of a drug that could be cost-effective. We 
might see the development of a drug that is effective at 
limiting the amount of dialysis treatment, that drug could be 
expensive, that premium would go up, but we would have no 
recognition of the savings that could potentially accrue to the 
Part A and the Part B. So that is one of the reasons why we 
have integrated our plan into Medicare Part B.
    We also acknowledge, as you do, we do not have enough money 
to provide a universal benefit that provides first dollar 
coverage to every senior on Medicare today. So we agree with 
you that we ought to target that assistance to those most in 
need. Considering the current budget shortfalls and the 
projected deficits for years to come, we must target our 
resources to seniors with the greatest need. In addition to the 
universal benefit for all seniors who incur very high drug 
costs, our legislation recognizes that some low-income seniors 
do not have the ability to pay large deductibles and need 
immediate assistance.
    Under H.R. 1658, seniors up to 200 percent of poverty would 
be eligible for first dollar coverage with a three-tiered 
individual co-payments; giving a lower co-payment for a 
generic, a little bit higher co-payment for a preferred drug, 
and a very high co-payment for a non-preferred. Seniors above 
the full Medicaid eligibility but below 135 percent of poverty 
would pay flat co-payments equivalent to about an 80-20 cost 
share. Those seniors with incomes between 135 and 150 percent 
of poverty would receive a subsidy equivalent to about a 70-30 
co-pay. And States would have the option of covering seniors 
between 150 percent and 200 percent of the Federal poverty 
level where the Federal Government would match the State 
payments at the existing SCHIP rate.
    The most important thing, which you recognize, our plan, as 
yours, would not disrupt current coverage. H.R. 1568 recognizes 
the first principle of medicine--to do no harm. We cannot 
afford to enact a Medicare prescription drug benefit that would 
leave the majority of seniors who already have some form of 
prescription drug coverage worse off than they are today. 
According to CBO, under the proposals being considered by the 
conference committee, between 37 and 32 percent of employers 
who provide retiree drug coverage today would drop their 
existing coverage. That translates into almost 4 million 
beneficiaries losing their existing employer-sponsored 
prescription drug coverage. It is unconscionable to think that 
we would enact a drug benefit that would spend hundreds of 
billions of dollars to make seniors worse off than they are 
today.
    My legislation would not require seniors to switch out of 
their current coverage to get the new drug benefit. Instead, it 
would reinforce all current forms of drug coverage, including 
employer-based retiree coverage and State-based pharmaceutical 
assistance programs. Because its benefits are based on all drug 
spending, including drugs purchased under insurance plans 
seniors already have, not just out-of-pocket, the proposal is 
fair to seniors who have existing coverage and to the employers 
who provide it. This will provide an incentive for employers to 
maintain their coverage, unlike the House plan or the Senate 
plan that has passed that gives a tremendous incentive for 
employers to reduce or eliminate their prescription drug 
coverage. With the deficit for fiscal year 2004 approaching 
$500 billion, it is fiscally irresponsible to replace 
prescription drug coverage financed by private sectors dollars 
with Federal dollars.
    Thank you, Mr. Chairman, for the opportunity to testify 
today. In summary, we need to enact a Medicare prescription 
drug bill that provides a benefit that seniors can understand, 
that targets the most assistance to seniors with high drug 
costs and with low incomes, and keeps employers and States in 
the system. The Medicare RX Now Act is easy to understand and 
within the Medicare Part B system that seniors trust.
    I look forward to working with you and members of your 
committee and the rest of our colleagues toward enacting a 
Medicare prescription drug benefit that our Nation's seniors 
deserve.
    [The prepared statement of Mr. Dooley follows:]
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    Mr. Burton. It sounds like you have given this an awful lot 
of thought, like we have. I would like to take a close look at 
your plan. I have a couple of questions about it. You said it 
would be within the constraints that were set in the House bill 
of about $400 billion over a 10 year period. How do those 
constraints work? I mean, you are putting a cap on it, but is 
that a workable cap or is that just a hopeful cap?
    Mr. Dooley. It is a projected expenditure.
    Mr. Burton. But there is no hard cap on it?
    Mr. Dooley. There is no hard cap. But I am one who believes 
very strongly that any benefit that we provide has to be 
realistic in terms of being affordable and being able to fit 
within the budget. The model that we have developed is one 
which allows you to easily adjust in order to obtain the 
savings that you might need in order to fit within the budget 
cap. We think, again, that we ought to maintain our priorities, 
which is to help those seniors in greatest need. Those are the 
low-income seniors that are struggling today and most likely do 
not have coverage. So that is where we have a fairly generous 
benefit at the low income, similar to what you have done.
    But on the high cost, the most expensive component of any 
prescription drug plan is the catastrophic plan and where you 
kick it in. The majority of the co-sponsors of this legislation 
recognize that if we have to adjust in order to get savings, we 
might have to adjust that catastrophic up in order to fit 
within that $400 billion parameter, if that is still the will 
of Congress.
    Mr. Burton. That is where we might have a little difference 
of opinion. But I would like to work with you on that, because 
if somebody goes above whether it is the medical savings 
account approach that we have or the approach that you have, 
they may not be able to afford that 20 percent match, the 80-20 
on the catastrophic, above whatever the top is in yours.
    Mr. Dooley. That is a problem that we recognize. What our 
response to that would be is that this is a zero-premium 
benefit because we are rolling this into Medicare Part B. What 
we think also will happen in the private sector as a result of 
this is that you will have plans that will be developed that 
will have more affordable premiums than there are today because 
we will limit the exposure by the private sector plans to some 
extent and even employer-based plans because they will then 
know that once their person that they are covering triggers 
this cap then they have some limits in terms of what their 
financial obligations will be. So we think that the marketplace 
will respond to help provide some insurance products that can 
help seniors manage that gap.
    And the other thing to keep in mind is that those seniors 
that have incomes less than the 200 percent or 150 percent of 
poverty will have first dollar coverage indefinitely.
    Mr. Burton. I just have a couple more questions. If I 
understand you correctly, let us say a person works for General 
Motors right now and they have a plan that is a good plan, you 
are saying that there would be a point at which General Motors 
coverage would stop and they would go into the plan that you 
have suggested. Right now they would not because they already 
have that coverage. So it would be a cost savings long-term to 
General Motors.
    Mr. Dooley. For a private sector plan that does not have a 
capped benefit, this could provide some element of savings to 
them. But what we see happening in the marketplace today in the 
private sector is that the majority of prescription plans that 
are being offered are now capping their benefit. Even under a 
lot of the managed care plans you are seeing the benefits being 
capped. And so what our plan does recognize is that, yes, we 
will be assuming some of the financial responsibilities after 
the private sector plan provided up to that $4,000 in coverage, 
and from that point on we would have it be a Medicare 
responsibility.
    Mr. Burton. Well, a lot of the seniors who see a limit to 
their catastrophic coverage have been able to buy supplemental 
policies that take them above that. And I am not necessarily 
for means testing, but in effect that is probably what you are 
looking at. For those who can afford to buy an excess policy 
above the catastrophic policy that they have with their 
company, I do not see why they should not do that. Because if 
you load that on the back of the American taxpayer and put 
everybody under the plan, I still think you have a problem with 
that cap down the road. It could go way, way above the $400 
million. That is my major concern. But I would like to work 
with you on that.
    I had one more thing I would like to say. I think whoever 
made the projection that under the plans that have been 
discussed so far in the conference only 37 or 32 percent of the 
companies will drop their plan and put them on the back of the 
Government, I think that is very, very low. I think that once 
they see there is a Government plan that is almost all 
inclusive, I think they are going to drop those things like hot 
cakes, because they are all looking at the bottom line. So I 
think that figure is low and that is why I think we need to 
come up with a more realistic approach.
    But I would like very much to work with you on this. Maybe 
we could take a look at your plan and ours and see where they 
dovetail and see if we can work something out.
    Mr. Dooley. I look forward to that, Mr. Chairman.
    Mr. Burton. I appreciate very much you, individually, 
working so hard on this. So many of us sit around and just wait 
until a committee does something and then we end up with a real 
turkey, like we did with that bill back in 1988. So, thank you 
very much.
    Mr. Dooley. Thank you.
    Mr. Burton. Is Delegate Christensen here? I guess she has 
not yet arrived.
    Let us go on with our panel of experts that we have here. 
Our next panel is Joseph Antos of the American Enterprise 
Institute, Thomas Miller of CATO, Jeff Lemeiux of Progressive 
Policy Institute, and Ed Haislmaier of the Heritage Foundation. 
Since we are just discussing these things today, I am not going 
to swear you fellows in because I do not think you are going to 
mislead us, and if you do, we will be after you. But I would 
like to hear what your views are on the plan that we have sent 
to you. I presume all of you have had a chance to review it; is 
that correct? And I appreciate very much your institutions 
taking a hard look at that and looking at alternatives to what 
has been presented. This is a major, major issue, as you know, 
and what might end up being one of the biggest programs we have 
ever passed in the Federal Government. Mr. Haislmaier, you are 
recognized.

STATEMENTS OF ED HAISLMAIER, HERITAGE FOUNDATION; JEFF LEMEIUX, 
 PROGRESSIVE POLICY INSTITUTE; THOMAS MILLER, CATO INSTITUTE; 
        AND JOSEPH ANTOS, AMERICAN ENTERPRISE INSTITUTE

    Mr. Haislmaier. Thank you, Mr. Chairman. I have submitted 
testimony for the record. I will just take a few minutes to 
make a few brief points and then we can go on. I am very 
encouraged that you are looking at an alternative to the 
legislation that passed the House and Senate this summer. I 
think there are substantial problems, as you do, with that 
legislation.
    The two biggest problems that I see are, as you have 
pointed out, the inducement to employers who provide retirees 
with coverage to drop that coverage or, actually, I would say 
to scale that coverage back. I think those employers that can 
drop it will drop it. I am not sure anybody has a good handle 
on what that number is. I think it is much more certain that 
the employers who do not drop it will scale it back and they 
will either conform to the new benefit design or they will 
provide front-end wrap around coverage and then leave the 
retiree exposed to the rest of it.
    The other problem is, as your colleague pointed out, the 
donut hole or the strange coverage design. That is simply a 
function of trying to provide something to everybody but then 
also squaring it with the principles of insurance, which are 
that a few people get a lot of the benefit because they are the 
neediest. So I am encouraged to see that you are pursuing a 
different path.
    Conceptually, there are some similarities to what I would 
recommend and have recommended in my testimony and what you are 
pursuing. Essentially, I think that we can all do ourselves a 
favor by recognizing that a lot of prescription drug expenses 
are predictable for this population and that the best way to 
handle it is with some sort of cash equivalent, and that is the 
approach that you and others have taken in your legislation.
    I think where the differences come down on Mr. Dooley's 
approach, your approach, what I would recommend and what others 
have is how do you handle the portion that is an insurable 
benefit or is close to an insurable benefit; meaning some sort 
of catastrophic coverage. I would simply favor a system in 
which you had as many options as possible for retirees to 
obtain catastrophic coverage. You simply say that any employer 
has to have coverage above X, whatever X is, it could be 
$10,000, $6,000, whatever, if they are going to offer a plan. 
We do not care what you do below that, but above that you have 
to have coverage. You could allow Medi-gap plans to provide the 
same coverage. You could allow people to offer stand alone 
plans if they wanted to, certainly the Medicare Plus Choice 
plans or Medicare Advantage plans, to offer that. And then tell 
the enrollees here is the cash, and that will vary based on 
your income, as you do in your proposal, and to get the cash 
you have to sign up with a plan that provides catastrophic 
coverage, so we do not wind up coming back and having to deal 
with that problem, whether you have catastrophic expenses or 
not. So it would be voluntary but they would be leaving money 
on the table if they did not take you up on the offer.
    I think it is virtually impossible to spend more money--
well, it is not impossible--but it is virtually impossible to 
spend more money than is already being spent in H.R. 1 and S. 1 
on taking that kind of an approach. Essentially, I think you 
are on the right track here. I think there are some differences 
in the details.
    Finally, I just wanted to address one point that you made 
in your opening statement, because you asked the question why 
cannot the Federal Government negotiate prices, could somebody 
please explain. So let me take a stab at doing that, if you do 
not mind. Somebody said in a debate I was recently in, I favor 
the Government using its negotiating power to drive down drug 
prices, and I flippantly responded that I favored the 
Government using its negotiating power to drive up your tax 
payments. My point in that is that Government does not really 
negotiate. Government ultimately has the power to force you to 
take their terms. That is why negotiating with the Government 
is always, whether it is negotiating with the IRS over how much 
you really owe or negotiating drug prices, is always an uneven 
playing field and different from private sector entities 
negotiating.
    And finally I would say that, paradoxically, I think the 
complexity of the whole issue of medical care and prescription 
drugs is a subset--what is the right price, what is the right 
treatment, what is the benefit of drug A versus drug B if they 
are similar. Because of the complexity of that, it argues for, 
in my view, more market solutions because the market has the 
flexibility to adapt and adjust quickly as opposed to 
Government solutions where you have to follow rules and 
procedures and if they do not exist somebody has to come up 
with one of them whenever a new case comes along.
    So with that, I will conclude. I would be happy to take any 
questions you have.
    [The prepared statement of Mr. Haislmaier follows:]
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    Mr. Burton. You will have some.
    Mr. Lemeiux.
    Mr. Lemeiux. Thank you, Mr. Chairman. I really appreciate 
the invitation to come talk to you today. And I congratulate 
you on your effort to try and create a Medicare drug benefit 
that would work and that could pass possibly even with some 
bipartisan support. I have four specific suggestions. I will 
just mention them quickly and if you would like I can answer 
questions with more explanation or respond to questions in 
writing from your staff later.
    My first point is when you are targeting a benefit to low-
income people, if you just limit it to low-income people who do 
not already have coverage, you can create some bad incentives. 
If someone, for example, is just as poor as the next person but 
they have worked all their life to get that retiree drug 
benefit or they have saved money so that they can afford some 
sort of Medi-gap coverage, you do not want to create a plan 
that the irresponsible person over here with the same low-
income gets but the person who took responsibility to take care 
of themselves either through an employer or purchasing 
something cannot get. So I encourage you to make your low-
income benefit available to anybody with low-income, not just 
people who do not already have coverage. That way people who 
have already been responsible would not have an incentive to 
drop the coverage they already have in order to pick up the 
Government benefit that they need. So that was point No. 1.
    Point No. 2 echoes a point that Mr. Dooley made, which is 
that there is really a right and a wrong way to do catastrophic 
coverage. I think that the right way is to do catastrophic 
coverage that is based on total drug spending. So that if 
people wish, they can get extra insurance below the 
catastrophic cap and still not disqualify themselves from the 
catastrophic benefit that is being provided through the 
Medicare program. Again, this is the sort of benefit that would 
allow employer coverage to still operate, but then once you hit 
the cap you are still eligible for the Government catastrophic, 
for the Medicare catastrophic. That way you do not create an 
incentive for employers to drop their coverage and, again, for 
people not to go out and try and take care of themselves.
    Both of these two suggestions will raise the cost of your 
bill. To compensate, you would have to scale back the benefits 
some for low-income or maybe increase the catastrophic cap 
some. But both of them are probably the right thing to do to 
keep incentives for people to be responsible and to keep as 
much of that private coverage out there still in place.
    The third suggestion I would make, and again it echoes Mr. 
Dooley's plan, is that it is probably appropriate from a social 
insurance point of view, I believe, and appropriate for trying 
to attract bipartisan support to try and get the catastrophic 
coverage of at least some level, even if it is a very high 
level, to everybody in Medicare, all seniors. It seems like it 
is appropriate for social insurance, we like to have people get 
things that are pretty similar regardless of how their 
circumstances ended up in life, and it just seems appropriate 
that everyone could be faced with catastrophic drug costs and 
this social insurance/Medicare should cover that. And then 
offering extra benefits to seniors with low-incomes seems 
appropriate and fine.
    And then my fourth suggestion echoes something that Ed 
Haislmaier said, which is, I think it is appropriate to allow 
all sorts of companies to offer the discount cards that you 
have put in your bill and that would also have this debit cash 
and it would also possibly have a catastrophic benefit, whether 
that is employers offering it, HMOs and PPOs that some people 
have in some areas, pharmacies, drug companies or coalitions of 
drug companies, Medi-gap plans, just as pluralistic as 
possible. I think that would create a healthy market.
    My final three points are that, I think when you look at 
Mr. Dooley's bill, he had a standard sort of insurance for low-
income people that has benefits and co-payments, and what you 
have suggested is a debit card approach where you get cash on 
your discount card and you could use that to some extent, and I 
think there are a lot of health analysts, Democrats, 
Republicans who are very interested in your approach as an 
alternative and think that might be something they could work 
with.
    The capped entitlement idea that you have put forward I 
think is also probably something that people on both sides of 
the aisle that I talk to can work with. I know there was a 
version of Mr. Dooley's bill that was floating around in the 
Senate earlier this year as an amendment and it had a capped 
entitlement approach where we would specify the amount of money 
and then the Secretary of Health and Human Services would 
decide, based on that capped amount, what the catastrophic 
level would be for the upcoming year.
    And finally, I helped originate some of the ideas of 
Medicare reform that came out of the Breaux-Thomas Medicare 
Reform Commission, I was a staffer for that commission. So I 
have been a supporter of the premium support idea for some 
time, but only as it relates to comprehensive health plans 
where you get all of your health insurance from a Government 
run plan, you get all of your health insurance from a private 
plan. The idea of trying to transfer these premium support 
concepts to a stand alone drug benefit, which I think is what 
has caused the House-passed plan and the Senate-passed plan to 
be so problematic, I think that we could make a mistake in 
developing a more targeted benefit if we tried to privatize too 
much, if we did not just say, look, after a certain point, if 
the Government is going to provide a catastrophic benefit, 
let's say, the Government should just be on the hook for it and 
it can negotiate risk-sharing arrangements with private 
entities. But we should not try to place too much of the risk 
burden off on the marketplace for such a limited benefit, 
which, as Representative Watson mentioned, there is not a very 
good market for stand alone drug benefits already. So it is 
already going to be pretty iffy.
    With that, I will be happy to answer any questions you 
have.
    [The prepared statement of Mr. Lemeiux follows:]
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    Mr. Burton. Thank you, Mr. Lemeiux.
    Mr. Miller.
    Mr. Miller. Thank you, Mr. Chairman, for inviting me to 
testify today as director of health policy studies at the CATO 
Institute.
    Just following up on what Jeff said, I think with Congress 
in charge there is no danger of privatizing too much here. 
Current proposals to create a Medicare prescription drug 
benefit do too little to reform the overall Medicare program to 
improve the value of the services that beneficiaries receive, 
they also do too little to protect current and future taxpayers 
from runaway budget costs, and too little to target affordable 
and sustainable benefits to those low-income seniors most in 
need.
    An MSA-like benefit tied to a catastrophic insurance policy 
that was delivered through private sector competition with 
beneficiary choice and targeted to seniors with the lowest 
incomes and the largest drug expenses could provide a more 
cost-effective solution. However, such a benefit must be 
structured properly, with features that reduce the inherent 
dangers of Federal price controls, over regulation of private 
plan options, and escalating costs, and also with features that 
improve incentives to maximize value by allowing funds and 
individual accounts to be portable, personally controlled 
property they can roll over each year without penalties.
    In brief, the two bills providing a Medicare prescription 
drug benefit that were approved by the House and Senate earlier 
this year squandered scarce resources by focusing on 
subsidizing the discretionary, early dollar drug expenses of 
upper- and middle-income seniors.
    H.R. 1 and S. 1 also failed to provide a credible and 
effective route to comprehensive market-based reform of the 
overall Medicare program. That kind of reform would expand the 
availability of a wider range of competitive benefits, 
affordable choices of drug benefits within integrated packages 
of linked benefits that provide the greatest value by 
coordinating tradeoffs between various treatment options. 
Absent sustainable, serious reform provisions within whatever 
is likely to emerge, finally, kicking and screaming from a 
House and Senate conference committee later this fall, a better 
alternative would be to do more by doing less. A far simpler 
combination of a limited drug discount card, additional 
financial assistance to low-income seniors, and a very modest 
catastrophic coverage benefit would solve the key problems of 
access to necessary drugs. It also would avoid causing further 
damage to future Medicare reform efforts, to our overall health 
care system, and to the deteriorating balance between our 
available resources and the increasingly overstretched 
commitments to capture more of them within the Federal budget.
    In pursuing the alternative of a more narrowly targeted 
interim drug benefit with second-best limits and safeguards 
against the political dangers even it may pose, we should be 
careful not to undermine market-based incentives to control 
catastrophic level drug costs as well. Instead of providing 
relatively open-ended subsidies for such protection and 
delegating key financial and administrative decisions to 
Medicare program managers, we should instead place direct 
control, direct control of subsidized dollars for limited drug 
coverage in the hands of the eligible Medicare beneficiaries 
and then, through open competition, encourage at-risk private 
insurers to offer higher value catastrophic protection to them.
    An MSA-like account, combined with private catastrophic 
level protection against high cost along with the price 
protection of negotiated rates for expenses below deductible 
and stop-loss levels, could provide the vehicle for eligible 
seniors to receive and accumulate funds to afford better both 
the purchase of catastrophic insurance and essential out-of-
pocket spending for prescription drugs.
    Now beneficiaries spending more of their own money could 
also adjust the initial shell of such coverage to provide more 
customized options. Initial deductible limits also could be 
adjusted to target additional layers of subsidized coverage to 
those seniors facing the most difficult medical and financial 
challenges.
    But this skewed nature of drug spending among Medicare 
seniors means that nearly one-third of all out-of-pocket drug 
spending will be incurred by the 5 percent of beneficiaries 
with annual out-of-pocket expenditures above $4,000. 
Subsidizing the early dollar drug purchases of most Medicare 
beneficiaries instead would leave fewer funds available to 
assist other more financially stressed seniors with multiple 
chronic conditions that require more expensive, longer term 
drug therapy. So we need to walk more slowly and carefully 
instead of racing ahead blindly.
    The fundamental solution, of course, is to reform the 
overall Medicare program and allow seniors to determine the 
best uses of the taxpayer subsidies dedicated to them. It may 
well be the best we can do at the moment is to provide limited 
assistance to those seniors with the greatest drug expenses, 
along with more limited financial protection for uninsured 
seniors who otherwise would face the highest list prices for 
drugs when they purchase them on an out-of-pocket basis.
    Thank you.
    [The prepared statement of Mr. Miller follows:]
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    Mr. Burton. Thank you, Mr. Miller.
    Mr. Antos.
    Mr. Antos. Thank you, Mr. Chairman. Being the cleanup 
hitter, I probably will repeat some of the things that my 
colleagues have already said. But I want to say, Mr. Chairman, 
that I agree with you that a carefully designed drug benefit 
targeted on those most in need could be a very good investment 
of taxpayer dollars. But we have to be very careful about 
exactly what that design means and what we are doing with the 
rest of the program.
    I want to emphasize two points. First, full consumer choice 
and active and strong competition among health plans are 
necessary to assure that beneficiaries receive the best value 
from a Medicare prescription drug benefit, or, indeed, the best 
value from Medicare as a program on the whole. Second, a 
targeted drug benefit is likely, no matter what we try to do, 
to mushroom into an expensive entitlement within a few years 
through future legislative expansions. I think it is virtually 
inevitable. Just look at the history. To ensure that the 
Medicare program will be able to accommodate future fiscal 
shocks, including shocks associated with Congress realizing 
they need to cut the budget generally, and cut the Medicare 
budget, in particular, any prescription drug proposal should 
contain at least a few elements that can form the basis for 
future reforms, not be the future reforms but a few elements 
that could be the basis.
    I am strongly supportive of your general structure, Mr. 
Chairman, and Mr. Dooley's structure as well. I agree that 
having a medical savings account approach puts the incentives 
where they belong. Beneficiaries knowing that they have their 
own money to spend on drugs would tend to ask that all 
important question, should I go with the generic or not? They 
will ask the question, the pharmacist will not have to. So I 
think that is a very important and good feature.
    But as you know, you have struggled with this yourself in 
your own bill, setting the levels of subsidy and setting the 
catastrophic stop-loss level and so on, these decisions are 
very, very difficult to get right, so to speak, especially if 
we are trying to stay within budget limits. Your bill takes 
several additional steps to try to stay within the limits, 
including restricting the eligibility to the benefit to 
individuals who are both low-income and do not have access to 
other kinds of prescription drug coverage, regardless of what 
that coverage might be. You also have a budget cap, and you 
also adopt a very regulatory approach for managing the benefit.
    I am not going to say too much about eligibility. I would 
be concerned though that being able to actually implement and 
eligibility rule that went beyond income I think would be very 
difficult. The absence of something typically does not leave a 
trace, a paper trail. So I think that is going to be a real 
difficult problem.
    The budget cap. I know you have been worried about the 
budget for years. Most of us have been worried about the budget 
for years. I think we should admit that budget caps do not 
work. They have not worked in the past. It is unlikely that 
they will work in the future. The fact is that nothing can stop 
a future Congress from enacting legislation that would blow the 
cap. It is difficult to impose a strict cap. What it means in 
the case of your bill is to reduce the value of the benefit to 
low-income people. That is very difficult politically, and 
especially if those reductions look like they have to take 
place year after year, which I think we would all agree would 
likely be the case.
    But let me turn to this question of competition and 
Government control. I believe that the best solution to the 
cost problem is to harness the forces of competition. This 
strategy has worked well for at least a decade in private 
insurance with documented savings of 35 percent or more when 
pharmacy benefit managers have been permitted in the private 
sector to use their cost management tools aggressively.
    Your proposal and other proposals like it take a more 
regulatory approach. You would have private entities 
participate in this but only in the way that Part B carriers 
participate in the Medicare program today. They do not function 
as independent health plans, they pay bills, they do not make 
decisions, or at least some think they should not make as many 
decisions as they actually do, and they have little or no 
financial interest in keeping costs down. As Mr. Haislmaier 
said earlier, negotiations really in this case is going to be a 
rate-setting exercise, very much like the physician payment fee 
schedule that we have today except expanded by far because we 
are talking about thousands of prices. It is a much bigger deal 
here. And however the prices are set the first year, after that 
we would almost certainly see an inflation factor that would be 
ratcheted up. Congress would, of course, go through the usual 
budget games of having lower updates like we do with hospital 
payment and physician payment as well. Negotiations would 
occur, but they would be very limited and they would be 
necessary primarily when a new drug appeared on the market, or 
tried to appear on the market. The Secretary of HHS would be 
able to withhold access to any new pharmaceutical, which is 
obviously an extremely powerful threat that could lead to low 
prices for new drugs under Medicare, if the new drugs actually 
emerge.
    There are some really bad side effects, however, to this 
policy. First of all, if we do have a rigid structure, as under 
physician payment, and I know that your bill does not say this 
but I think it is virtually inevitable, then one of the bad 
things is that generics will no longer be a competitive factor 
in forcing prices down for name brand drugs. There is a lot of 
price competition now in the market associated with generic 
drugs and associated with branded drugs that have similar 
therapeutic values but different chemicals. Delaying the entry 
of a drug to a Federal formulary could harm patients. And the 
threat of low launch prices would inevitably deter research and 
development for potentially valuable or life-saving drugs, 
particularly those that treat illnesses associated with older 
age groups.
    So you can have some immediate budget savings, and they are 
very attractive--I agree with you, they are very attractive--
but the long term consequences are serious, they are virtually 
permanent, and we will never really know, again, there is no 
paper trail if a drug does not show up, we do not know what 
could have existed. But we do know that this would discourage 
research and development that could lead to more effective 
therapies that could actually reduce costs in the rest of 
Medicare. I think it is a very serious problem.
    I think we need to be very careful about other provisions. 
The whole idea of having the Government absorb the full 
financial risk of insurance at any level inevitably means, even 
under the Dooley bill, that there will be a Federal fee 
schedule for drugs. How else can the Government compensate drug 
plans, even under the Dooley bill, for their costs if they do 
not have a price upon which to base the payment. It is a real 
problem.
    I think we need to be very careful about this. But I think 
there is an opportunity here to do some very good things for 
beneficiaries and for the program. Thank you.
    [The prepared statement of Mr. Antos follows:]
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    Mr. Burton. We have two votes on the floor. So I will be 
back in just a few minutes.
    We stand in recess.
    [Recess.]
    Mr. Burton. The subcommittee will be in session.
    Let me start off by asking a general question. A number of 
you mentioned that you thought that there was going to be a 
problem with cost containment over the long term, putting caps 
on. Do you not think, and any of you can answer this, do you 
not think that if we went with medical savings accounts where 
people were having the money put into their account, people 
would husband that money very well, most of them, and would not 
spend it unless they really felt like they had to, and they 
would decide what product they should buy, what prescription 
they should buy, and shop around, which would have a dilatory 
effect on overall spending and could keep us within the caps? I 
think what you said was that the caps eventually were going to 
be breached. You do not think that even with the medical 
savings account we could keep control of the costs?
    Mr. Antos. I do not think it is the seniors. Seniors are 
well known for watching how they spend their money. So I agree 
with you, I think an MSA-type of an approach makes a lot more 
sense than first dollar coverage. What I was really pointing to 
was future Congresses will have a hard time resisting the 
temptation to substantially expand the scope of the benefit in 
terms of who is eligible and in terms of the generosity of the 
subsidy. I think that is where the caps fall down. I really 
think that is the history that we have seen with, for example, 
the Gramm-Rudman-Hollings overall budget cap. I believe that 
what really happened was that spending priorities took over 
from deficit reduction priorities. And I really think that we 
would see a similar sort of situation in the Medicare program 
as well. But as far as the behavioral implications of giving 
people money that is theirs to spend, I think that is a very 
powerful incentive and it works the right way.
    Mr. Burton. That is probably one of the best cost 
containment tools we could use. And we could also use that in 
Medicare in general. I know you guys are all in favor of 
Medicare reform, complete Medicare reform, and this being a 
part of that. But the fact is we are not going to get to that 
enchilada this time. They are having enough trouble with just a 
prescription drug benefit and I do not see us doing any major 
revision.
    Mr. Miller. Mr. Chairman, if I may?
    Mr. Burton. Yes.
    Mr. Miller. We have a medical savings account plan at CATO 
Institute, so we are quite familiar with how it operates. But 
it would operate a little differently than what would be this 
targeted MSA account for just spending on drug benefits. Let us 
remember what the real MSA works like. It means that if you 
save your money, you actually get to get it back or keep it and 
use it for other things. You can pass it on to your heirs, 
eventually you can receive it as income, you can spend it on 
other types of health care. This is much more targeted so you 
already have an ingrained requirement that you better spend it 
on drugs. It is good that it stretches it beyond the 1-year use 
it or lose it perspective, so that gets you part of the way. 
And even with the MSA account, you are still talking about most 
of the drug spending being at the catastrophic level. And since 
we are talking about structuring, this is in your bill a 
Government defined catastrophic benefit largely delivered 
through secondary administrators of what is, in effect, 
Government control. You are not getting the dynamics of the 
type of private sector variety which makes people be sensitive 
to those costs at the upper end as well as at the lower end.
    Mr. Burton. Well how would you change that?
    Mr. Miller. Well, if our hands are tied behind our backs 
without, in effect, reforming the rest of the Medicare program, 
I would say the first way you would change it is kind of have 
all the benefits on the table. So that is the reason why it is 
like you are in a box, you cannot do this, and that is why you 
are kind of doing it awkwardly.
    A couple of points. One would be, if people are financially 
needy, if you want to determine that, you should give them 
money and let them determine what they need to spend their 
money on. They might need to spend their money on other types 
of health care, they might need some food, they might need some 
shelter. If they are over 65, they have other needs than just 
drug benefits. Let them decide that that cash you gave, because 
they are income needy, that cash is necessary for drug 
benefits. Give them the negotiated prices through private 
sector negotiators so they are not paying list prices, but they 
may determine they have a different set of priorities than what 
everyone else has determined you must spend it on prescription 
drugs regardless of anything else. Why not allow them to decide 
where they need to spend their money.
    Mr. Burton. You are preaching to the choir. I am with you 
100 percent. I would like to go to medical savings accounts for 
everybody with government participation setting some parameters 
on them so that we could get control of the overall spending. 
Right now if somebody goes to the doctor and he says it is 
covered under your insurance or under Medicare, they say OK. 
But if it were their money, they would not do that. They would 
say do I really need to spend this. So, yes, I am for that. But 
as I said earlier, this is not likely to happen because we are 
having enough difficulty with this one facet right now.
    One of the things that we have been working on, and I know 
that you all disagree with, is the reimportation of 
pharmaceutical products. I think a couple of you alluded to 
that in your remarks and indicated that there would be less 
research and development if you forced the pharmaceutical 
companies and the Government to allow for reimportation. I 
would just like to ask you a question. How do you explain to a 
senior citizen right now who lives in Minnesota, Indiana, 
Michigan, up along the border there, who have been buying their 
pharmaceuticals through the Internet, how do you explain to 
them why a product costs one-third in Canada what it does in 
the United States and why they should not buy it up there? It 
is OK to say, sure, research and development costs, and 
advertising costs, and everything else, and we are paying for 
that down here. But how do you tell them when they are dying of 
cancer and they need Tomoxifin, how do you tell them they have 
to pay five or six times as much for it when they live on one 
side of the border than the other? Give me an answer to that 
one.
    Mr. Antos. Of course, there is no good answer for that, Mr. 
Chairman.
    Mr. Burton. There is no answer.
    Mr. Antos. But let me make the point that the real problem 
that we have is the usual myopia that everybody has--you can 
see what is in front of you, you cannot see what is ahead. In 
this case, it is a particularly serious and disturbing kind of 
a situation. What we can see in front of us is we have this 
product, Tomoxifin, we see the prices--you are more familiar 
with the prices of this drug than I am--and it is easy to make 
the comparison and say why am I paying more than somebody else. 
What we cannot see is the drug that does not exist now that 
pharmaceutical companies are working on now that they can turn 
around on a dime and decide it is not worth putting any more 
money into the development of that drug. So what we will not be 
able to see, because it will be the absence of something, we 
will not be able to see the real consequences in a way that the 
average person would say, oh, yes, that is right, we could have 
had drug X but it did not come down the road.
    Mr. Burton. I am for research and development. I am for the 
taxpayers paying for some research and development, as we have 
been doing to a large degree through HHS. We have been paying 
for an awful lot of this R&D and we have been giving all kinds 
of tax breaks. For instance, some of the pharmaceutical 
companies get all of the payroll that they expend in Puerto 
Rico deducted from their taxes under the 936 program simply 
because they are providing employment. The problem is they hire 
somebody and they work for them for 10 years and they get that 
salary written off year after year after year; it saves them 
millions of dollars. So there is a lot of benefits that they 
accrue that is not readily apparent.
    What I would like to see is them spread the cost of R&D and 
advertising and everything else out in other areas, not just on 
the United States. Then the argument comes back, and I would 
like you to respond to it because you are the learned people, 
the argument comes back that, well, there are cost controls and 
price controls and there are negotiated prices in these other 
countries. Well, that is true to a degree. They use parallel 
pricing in Europe where they go across the border and get the 
best price and their costs are much lower as well. But if we 
really believe in free trade and free enterprise, why should we 
exempt pharmaceuticals alone. We import meat, we import fruits, 
we import vegetables, we import every other thing you could 
think of from Central and South America, from Mexico and 
Canada, but we cannot do it with things that save people's 
lives.
    Now I understand what you are saying about the research and 
development. But why should Americans bear all that cost and 
why should it not be spread out among the others?
    Mr. Antos. I think that is a very fair question. I think 
that is a question on the minds of most Americans today. And 
there is no easy answer to this. Clearly, the pharmaceutical 
companies could choose, in theory, to not sell one of their big 
products to a Germany or an England or a Canada. They could 
choose to do that as a way of giving those countries the strong 
message that we cannot sell at that price any more. That would 
have been a great strategy on introduction, by the way. It is a 
much harder strategy if you have been selling the stuff for 5 
years. But nonetheless, yes, it would be great if they would do 
that if they did not have an additional threat, and the threat 
is that at least some countries are well equipped to simply 
take over the published information about how to produce the 
drug. It is very simple to do.
    Mr. Burton. And go to generic and break the trade 
restrictions?
    Mr. Antos. Yes. That is right. So if we view this as a 
trade issue, then the interesting question is where is the U.S. 
Government in all of this.
    Mr. Burton. Well we have the World Trade Organization, 
GATT, we have NAFTA, all these things that would be violated 
and there would be all kinds of litigation I am sure. And that 
is one of the things that maybe we are going to have to deal 
with because you cannot load all these profits and costs on the 
back of one segment of society.
    One of the things that bothered me, and I do not want to 
lecture you guys because you are the experts and you work on 
this all the time, was when we had loans that we gave to Latin 
America and other parts of the world and they defaulted on 
those loans, and they had a very good interest rate, the banks 
were losing their shirts and it was never said to the American 
people you are going to pick up those costs with higher 
interest rates. But we did. The interest rates went up, the 
banks got well, the South American countries did not have to 
pay for their losses, we wrote those off and we wrote them off 
in other parts of the world, and the American people paid for 
it. There has to be a limit to that. And when you are talking 
about people's health, there has to be some balance. And the 
Think Tanks, like you folks, I would hope would try to come up 
with some kind of a solution. I have talked to a number of the 
pharmaceutical companies and some of their CEOs and said let us 
sit down together and try to work this out, let us find some 
solution. It is a Gordian knot, no doubt, but it is something 
that we need to sit down and try to work out so that the 
Americans are getting as close as possible a fair price for the 
products they are buying.
    Did you have a comment?
    Mr. Haislmaier. Mr. Chairman, if I could just make one 
comment. I certainly would agree with my colleagues on this, 
the best way to think of this really is that it is not a 
problem so much with the pharmaceutical companies because they 
are dealing with what is dealt them in many ways, it is a 
problem with other countries in effect cost-shifting their 
health system's cost onto us. You may recall the arguments a 
number of years ago about whether the private sector was cost-
shifting to Medicare back in the 1970's, and then in the 1980's 
we had the argument that by putting on all these price controls 
in Medicare that Medicare was shifting costs onto the private 
sector. Well that is what is going on, it is just going on on a 
global scale. And specifically, it is not the majority of 
countries, it is not the Third World countries, really, it is 
the peer group of ours, the developed, industrialized western 
countries which have, by and large, national health systems and 
they are dictating these prices. And the reason they can do it 
there and shift it onto us and the pharmaceutical companies 
simply go along with it is the difference in population. Their 
populations on an individual basis are smaller than ours. 
Canada is, what, 25 million people versus 280 million people. 
So the pharmaceutical company will say, all right, I can live 
with that, especially if the threat is that if I do not go 
along with it you are going to take away my patent and give it 
to somebody else to produce the drug.
    So, yes, I think the solution is that we have to engage 
this on a government-to-government basis. I think that is 
vitally important, not just for drugs but for everything else. 
You can play the same game with our other industries in this 
country. Software. What happens to software in this country if 
other countries say give us the price we want for software or 
we will just take it away and copy it and the heck with your 
copyright laws.
    Mr. Burton. We fought that fight with Taiwan, China, and 
others on intellectual property rights.
    Mr. Haislmaier. Right. But I think it is very important 
that we in this country understand that whether it is the 
entertainment industry, movies, singers, etc., or the software 
industry, or the pharmaceutical industry, more and more of our 
economy in this country is dependent on intellectual property 
rights and our whole economy is in trouble if we do not defend 
those rights and force other countries to recognize those.
    Mr. Burton. Well, you make my point.
    Mr. Haislmaier. Yes. We are not that far off.
    Mr. Burton. You are making my point, and that is that our 
Government and the pharmaceutical companies combined ought to 
sit down together and say, OK, what are we going to do to 
protect the property rights, the patent rights, while at the 
same time making sure that we are protecting Americans' health 
and helping the rest of the world. With the Internet the way it 
is right now, I think it is a fait accomplis. I mean, if they 
stop selling pharmaceuticals in Canada, like some of the 
companies are doing, people are going to get on the Internet 
and buy them from Germany, France, Spain, or elsewhere. And the 
world population is pretty big, especially in the 
industrialized nations, it is not just us. So if you push in on 
one side of the balloon, it is going to pop out someplace else.
    What I would like to see, and I do not know if the 
pharmaceutical companies are listening, they usually do not 
listen much to me, they just jump on me, but I would like to 
see them sit down and become a partner with the Government in 
negotiating and working out this solution so they can go ahead 
and do R&D, they can go ahead and make 16, 17, 18 percent a 
year profits, and they can expand and do the things they want 
to do. But it should not all be done and loaded on the back of 
the American people. My wife died of breast cancer. 
Fortunately, we had insurance. But there were women out there 
who could not get Tomoxifin, could not afford it because it was 
so costly and they did not have insurance, and right across the 
border in Canada they could get it for one-seventh of what it 
cost here. That is not right.
    Mr. Haislmaier. Mr. Chairman, just since you brought that 
up, I wanted to followup on Joe Antos' comment. You have been 
around here a while and I think all of us on this panel 
remember the Medicare Catastrophic Act in 1988, you talked 
about it in your opening statement, and I would simply make the 
point that if that bill had gone through and if you had had the 
kind of price controls on pharmaceuticals, your wife never 
would have had Tomoxifin because it would not have happened. 
The incentives to do that would have been taken away and that 
drug never would have happened.
    Mr. Burton. I voted against it.
    Mr. Haislmaier. Yes, I know. You were right to.
    Mr. Burton. I voted against it for that reason and for a 
number of other reasons. But the point is that we are at a 
point now where we have to do something. We are talking about a 
prescription drug benefit and there is no negotiating in any of 
the bills that I have seen before the Congress. Which means, 
simply, that if we pass one of these bills as they are 
presently written, as the bill that passed the House, for 
instance, the Government cannot even negotiate prices with the 
pharmaceutical companies. They cannot do it. And so if they 
want to charge six times what it costs it Canada, or five times 
what it costs in Germany for a pharmaceutical product, the 
taxpayer is going to have to pay for that. It is going to cost 
a lot more. I think it is going to cost up to $5-$6 trillion if 
we pass it in the form it is.
    So what we have to do is we have to say, OK, we want them 
to make a profit, we want there to be free enterprise, we do 
not want there to be cost controls, but there should not be a 
gouging of the American people to the extent of the rest of the 
world. And toward that end, there ought to be some negotiation. 
Now we do it with the Veterans Affairs right now. The VA 
negotiates prices with the pharmaceutical companies. We tried 
to get that information. They will not give it to us. Now I am 
going to get it, you can count on it. You know that I will get 
it. But the point is why is it that we can negotiate on 
veterans and we cannot for the rest of the population, 
especially our seniors.
    Mr. Haislmaier. The answer is the VA does not negotiate. 
They more or less dictate. And they have another lever, correct 
me if I am wrong, but one of the levers is if you do not play 
ball with the VA, then you are not only out of the VA, you are 
out of Medicaid as well. So that was my point in the earlier 
remarks, is the Government does not negotiate the way private 
players negotiate, they always are holding a gun there.
    The negotiation that I would see, and this gets back to the 
cost control, I think you are on the right track here. I think 
all of us agree, if you are giving beneficiaries the money and 
saying you make the choices in the private market, and I would 
argue in terms of the catastrophic insurance and not just the 
drugs, then you are going to see a whole bunch of agents 
involved in negotiating on their behalf--the pharmacy benefit 
managers, the insurance plans, etc.
    Let me give you an example. The FEHBP, which presumably you 
and your wife were in, the Federal Employees Health Benefits 
Program, covers 9.5 million Federal workers and retirees. You 
pick your own plan and those are private plans. Now instead of 
the Government saying I have 9.5 million people here and I am 
going to ``negotiate'' prices for these 9.5 million people, 
what they do is they are allowed to choose their own plan. So 
let us say half a million people choose Aetna, but Aetna has 
millions of other subscribers, so they are putting them 
together and negotiating. The same thing is going to happen 
with Medicare.
    Mr. Burton. Who does the negotiation for Aetna with the 
pharmaceutical companies?
    Mr. Haislmaier. They probably have a pharmacy benefit 
manager. It is either in-house or----
    Mr. Miller. You can bring it in-house, Ed, actually.
    Mr. Haislmaier. Yes. Well Point has an in-house one, some 
of them go with----
    Mr. Burton. I know. But the point is they negotiate with 
the pharmaceutical companies for the prices that they pay for 
the pharmaceuticals that they are giving to us at a discount.
    Mr. Haislmaier. Right. Yes. And so the same thing would 
work in Medicare.
    Mr. Burton. I have no problem with whether it is an 
individual company doing it or if we do it through the 
Government, but there has to be some mechanism for negotiation 
on these prices because we cannot have Americans paying six or 
seven times what they are paying in other parts of the world.
    Mr. Haislmaier. I think the important thing is, and Jeff 
and Mr. Dooley are on one side on this and I am a little 
different on this because I think it is important to have 
private catastrophic insurance, but I think the minute you have 
private catastrophic insurance for these Medicare 
beneficiaries, the first thing that those insurance companies 
will do is either they will use their in-house pharmacy benefit 
manager or, if they have not got one, they will contract with 
one on the outside to help keep the cost down, and to not only 
keep the cost down but appropriately use the medications. You 
do not even have to write that into the law. They will do it 
automatically because it is in their own interests. If they 
keep the cost down, they keep the premium down, if they keep 
the premium down, they have more market share. They will just 
do it themselves.
    Mr. Burton. Let me get back to some of the other questions. 
I do not want to belabor this point. It is nice to hear what 
you folks have to say and, hopefully, we will be able to 
resolve that. We have put out the olive branch to a number of 
pharmaceutical companies saying let us sit down and try to 
figure out some way to try and solve this problem so you do not 
get hurt and we also help the American consumer. And I am not 
sure that is something that cannot be done.
    What about these out-of-pocket expenditures that will be 
made by individuals who have these gaps in their coverage, 
should that be tax deductible? Have you guys thought about that 
at all?
    Mr. Miller. You are saying for the gap between what the 
funds are in your account and above that?
    Mr. Burton. Right.
    Mr. Miller. Well, we are walking in two directions at once. 
We always salute the idea of having some degree of cost 
sensitivity by the empowered consumers feeling real market 
prices in order to kind of choose wisely, and then we try to 
bulletproof them from actually seeing what those prices are. So 
I guess the first answer is, if you are having a deductible or 
co-insurance or co-payment beyond that, why have it unless it 
is going to be 100 percent of the price. Determine how much you 
want to subsidize on a need basis and then you should be facing 
the real prices in order to make the right decisions, because 
you are making those decisions with everything else you buy in 
your life, it is what it actually costs in order to allocate it 
properly.
    Second, in terms of a tax benefit, you are going to be 
steering that in the other direction in which you want to be 
doing these subsidies. Based upon the senior population, you 
have a substantial number of Medicare beneficiaries who will 
not file any income taxes or be liable for them. So you are 
actually going to be doing a regressive subsidy to the higher 
income people by giving them a tax benefit. We have done that 
elsewhere in our health care system with some pernicious 
results. So I do not think that is the way to go. We ought to 
deal with the most important things first, the highest 
expenses, the lowest income people, and try to do less harm to 
kind of figuring out where prices should go apart from that.
    Mr. Burton. So you like the sliding scale that we start off 
with at the beginning. Once we get to that gap between the 
underlying coverage and the catastrophic, that should not be 
tax----
    Mr. Miller. Actually, I am not that crazy about sliding 
scales, that just kind of stretches out the distortion. The 
better approach is to actually figure out how to do the best 
job for the people who really, really need the help. See if you 
have any money left over. After you have already taken care of 
the folks with high costs and the folks at the low end of the 
income scale, let us see what is left on the table rather than 
try to spread it even wider and thinner.
    Mr. Burton. We were talking about the people who have 
higher income that qualify for the plan, they would get maybe 
$600 toward their MSA, and the people at the lower end of the 
scale who cannot afford it would get $2,500, and then there 
would only be a $500 gap between that and the catastrophic 
care. You say that you do not believe in that sliding scale?
    Mr. Miller. Those are political tradeoffs which may be done 
for political purposes. But in order to pay for that, you are 
preventing people who have even higher expenses from being 
assisted or lower incomes from being assisted in order to put 
the political package together. Recognize who you are not 
helping while you are trying to, in effect, provide additional 
political benefits elsewhere.
    Mr. Burton. I am not sure I follow. Did you follow what he 
said?
    Mr. Antos. We will find out more later.
    Mr. Miller. Let me put it real simple. There are disabled 
people, there are people with long-term health care problems, 
there are people in horrible straits. But every dollar we take 
away from assisting them to give to middle class seniors means 
we have, in effect, redirected our charitable impulses for 
political reasons. So let us have folks who can afford to pay 
their own pay their own way, and help those who are most needy, 
first. And then tell me if you have any money left on the 
table.
    Mr. Burton. I want to tell you just one thing that you may 
find interesting. When I go to a town meeting and we have 
people there who are senior citizens, Social Security 
recipients, and I look in the parking lot and I do not see 
anything smaller than a Cadillac, I go into the meeting and 
they all say what are you going to do about my Social Security 
COLA this year. Do you see the political problem you are 
talking about? If you say to those people who have an income 
above the poverty level, and you are only going to give them 
$600 toward their Medicare MSA prescription drug benefit, you 
say we are not going to give you anything while we are giving 
others $2,500, and you are, in effect, means testing, that is a 
toughie for an awful lot of people. And to get 218 votes in the 
House and 51 in the Senate, maybe even 60 in the Senate, that 
is virtually impossible. So while you are talking pie in the 
sky, and I might agree with a lot of that, it ain't going to 
happen. You understand what I am saying there?
    Mr. Miller. Yes. I just wanted you to understand what I am 
saying.
    Mr. Burton. I understand now.
    Mr. Antos. I would like to support you, Mr. Chairman, in 
terms of simple pragmatism. In the end, all we are really 
talking about is what is the net subsidy to different groups of 
people. And it is, I agree with you, it is often very helpful 
to have different mechanisms. And, frankly, complication can be 
our friend in Government, as we both know. Let me say there is 
actually a good economic reason sometimes to also, as Tom said, 
spread out the subsidy, and that is, economists think in terms 
of marginal tax rates. So a not very good situation would be if 
there was a gigantic subsidy, say a $5,000 subsidy, for 
everybody up to a certain income level, but $1 more and the 
subsidy was zero. You would find all sorts of unfortunate 
personal reactions to that to avoid being on the wrong side of 
the cusp. Of course, there would be people with much higher 
incomes who would not worry about it. But people pretty close 
to where you hit the cliff on the subsidy will do all sorts of 
things to try to conceal income, shed themselves of any proof 
that they may actually be slightly above. So there is good 
reason to avoid that problem.
    Having said that, however, income may not really be the 
only measure to think about. As I think everybody knows, the 
elderly as a group have the highest average asset level of any 
population group. That will always be the case just because of 
the normal pattern of the way we live. And so if you tie it to 
income, you are still not quite there. This is not an argument 
for it making more complicated. We just have to recognize the 
inevitable inability to fully target the people we really want 
to hit.
    Mr. Burton. You all read the bill that we proposed, you had 
a chance to look at it. Let me just go down the line and ask, 
real quickly, are there parts of the bill that you think are 
workable and should be in a prescription drug bill, and what 
are they? What I would like to find out is, is there anything 
that all four of you and your institutions can agree upon that 
should be in the bill that is in it currently. Let me start 
with you, Mr. Haislmaier.
    Mr. Lemeiux. I will start. I have the microphone in front 
of me.
    Mr. Burton. Sure.
    Mr. Lemeiux. I think it would probably be hard because I do 
not think that our group would be interested in a discount card 
and catastrophic benefit that only applies to the low-income. 
We would like to see everybody in Medicare get at least 
discounts and a catastrophic benefit. So the idea of targeting 
this cash benefit to the poor and people with low incomes is 
fine, but it seems like some sort of universal discounts 
availability and catastrophic would be pretty important to our 
group.
    Mr. Burton. What would that do to the cap that we are 
talking about, the $200 billion cap over 10 years?
    Mr. Lemeiux. You would have to have a higher catastrophic 
level than $3,000, probably by far, to fit a more universal 
catastrophic into a $200 billion cap.
    Mr. Burton. So you are talking about a bigger gap between 
the underlying coverage of $500 for a person who got $2,500 
and, say, if you went to $4,000, it would make it $1,500.
    Mr. Lemeiux. Yes. You might have to go above $4,000.
    Mr. Burton. There again is another political problem. I 
think you would have a problem with the more liberal Members 
saying that the poorer people could not afford that gap. But if 
you did that and you did not have that gap that you are talking 
about, then you would have to go way above the $200 billion cap 
over 10 years we are talking about. Therein lies the rub.
    How about you?
    Mr. Haislmaier. As you put it forward, it is just a 
catastrophic and then there is really nothing below the 
catastrophic. So, in effect, as I understand this, you are 
looking at, say, $3,000. That is really both a stop-loss and a 
deductible in one, if I understand this correctly.
    Mr. Burton. Well, it is, in effect, a deductible. But they 
get the MSA money----
    Mr. Haislmaier. Right. And I absolutely agree with that. 
But my point is that, in terms of the benefit design, it is 
both a stop-loss and a deductible. In other words, below 
$3,000, the beneficiary pays, albeit with some help from the 
funds you are providing depending on their income, and above 
that the beneficiary basically does not pay, if I understand 
this. It is a no co-insurance. So one way to adjust that is to 
actually separate the deductible and the stop-loss which allows 
you to move from $3,000 in opposite directions. And you benefit 
here from the fact that they have made such a mess of the 
existing bills with the donut hole that your reference point is 
now not the perfect or the ideal but what is in H.R. 1 and S. 
1.
    If you were to do this. If you were to say $1,000 
deductible, and a $6,000 stop-loss, and 50 percent co-insurance 
in between, 50-50, and that is the standard, and we will leave 
aside the question of whether the Government does it or the 
private plans----
    Mr. Burton. What do you do about the $6,000 stop-loss?
    Mr. Haislmaier. That is what I am saying. It is 100 
percent. The beneficiary pays nothing above $6,000 in total 
drug spending. And by the way, I agree with Jeff that the right 
way to do this is to say that it is based on total drug 
spending. And I also agree with Jeff that you want catastrophic 
for everybody. That is not only an equity issue but I think it 
makes good health policy. So above $6,000 in drug spending, the 
beneficiary would pay nothing. The first $1,000, the 
beneficiary would pay 100 percent. Between $1,000 and $6,000, 
the beneficiary would pay 50 cents on the dollar. OK? Let us 
just use that as an example. If you did that, that would have 
total cost-sharing of $3,500, which is what is in the House 
bill, better than what is in the Senate bill, less cost-sharing 
than what is in the Senate bill, but you have gotten rid of the 
donut hole because you have put a front end deductible on it, 
and at the same time you have raised the catastrophic.
    Mr. Burton. But for the indigent and the poor that we 
have----
    Mr. Haislmaier. Well, so what you have is you are saying 
their maximum cost-sharing is $3,500, what are we going to put 
toward that. Are we going to give them $2,500? Are we going to 
give them $1,500? $1,000? Then you decide how much you are 
going to put toward that in your MSA debit card kind of 
arrangement.
    Mr. Burton. So you are talking about an adjustment in the 
bill saying, OK, we would, for instance, the sliding scale, 
which some of you do not like, $600 up to $2,500, and then 
between that and some figure that would be actuarially sound we 
would go to a 50 percent match.
    Mr. Haislmaier. You could do something like that. And then 
for the employers, you could say, look, if you are an employer 
plan, you need----
    Mr. Burton. I understand. But what do you do with the 
indigent who gets the $2,500, for instance, as a base and you 
go up to, say, 50 match to $6,000, that means they would have 
to pay half of the $3,500, what do you do with them if they 
cannot afford that?
    Mr. Haislmaier. That is what I am saying. You really have 
to sit down and figure out where you want your budget number to 
come out. But it is one of two things. Either you adjust the 
benefit for everybody, in other words, instead of saying it is 
$1,000 and the stop-loss is at $6,000, we will say the stop-
loss is at $5,000, or something, but you can either adjust the 
benefit, which impacts everybody, or you adjust the 
contribution, which impacts only those people that need it. So 
you can say for these lowest of low-income people, instead of 
$2,500, we will give them $3,000.
    Mr. Burton. Have you drafted anything like that as a 
proposed model?
    Mr. Haislmaier. Yes. I have a set of specs I can share with 
you, Mr. Chairman.
    Mr. Burton. Would you send those to us because I would like 
to see those.
    Mr. Haislmaier. I will send it to the staff.
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    Mr. Burton. That is what I am trying to get out of you guys 
today. Not that you are going to agree with me 100 percent, 
which you should, which I am sure you are not, but I would like 
to get your ideas so we can try to incorporate them into a 
final bill draft that has as broad support as possible. I know 
we are not going to get everybody. But that bill that is in 
conference probably is not going to get everybody either. It 
may not even pass.
    Mr. Haislmaier. My point is simply that the bill in 
conference does actually work to your advantage because you now 
have that as the comparison. So if you can say well, look, for 
the same cost-sharing, I get rid of the donut hole and this 
looks more like real insurance, then, yes, it has higher 
deductibles but we are going to give people money up front to 
help pay for it, you may have a case there.
    Mr. Burton. If you have a model like that, I would like to 
see those specs.
    How about you, Mr. Lemeiux?
    Mr. Lemeiux. Just let me add to that. It is still not going 
to solve your cost problem. The cost problem is just going to 
be intense. And what I was wondering is, to try and compete 
with H.R. 1 or S. 1 in terms of we are going to give you more 
for your money, it might be very difficult because they have 
already gone to such enormous contortions to try and get that 
thing so that it looks OK within the $400 billion budget. What 
they have done, of course, is made it so that it does not work 
and it is politically probably impossible to pass.
    But what I was suggesting is maybe it is time to just sort 
of say, look, if our budget is only $200,000, or $300,000, or 
$400,000, or wherever it ends up, that we just have to be up 
front and say we cannot afford something that looks like a drug 
benefit. Therefore, all your guys over there are going to get 
is catastrophic and discount, and then we're going to set aside 
a big chunk of money to help the poor as best we can, and it 
still might not be sufficient. You know, people will say, 
``It's just not enough for the poor.'' And that could be just a 
negotiable item, to try to do as well as we can.
    But I still think that even if you work with the Dooley 
bill, if you work with that Haislmaier plan, you're still going 
to run up against this cost constraint, and at some point, 
trying to compete with H.R. 1 and S. 1 on the desirability of 
the benefit package is just going to be hard.
    Mr. Burton. Well, the one thing we have to do is we have to 
be as realistic as possible and not be ``pie in the sky,'' and 
that's why I'm asking for your recommendations.
    Mr. Burton. Mr. Miller.
    Mr. Miller. Compromise is usually not the first criteria or 
priority at the CATO Institute. [Laughter.]
    Mr. Burton. I understand. I understand.
    Mr. Miller. Just common sense proposals for the average 
American.
    Mr. Burton. That sounds like a good political theme, 
compassionate--[laughter.]
    Mr. Miller. But let me kind of suggest a couple of kind of 
markers in this regard. If you are going to count other 
spending as qualifying for the out-of-pocket costs beyond real 
out-of-pocket costs, then let us make sure that they are close 
to out-of-pocket as opposed to kind of the amount you spend 
under employer coverage or a Medi-gap coverage or some other 
type of third party coverage. Do not count all those dollars, 
just count how much you paid for that spending, in other words, 
the premiums you spent rather than what it might have covered, 
because there is a mismatch between those two. So let us get 
equivalence in what people are spending at some point out of 
their own pocket if we are going to use that to trigger what 
the deductible or the stop-loss levels are equivalently.
    Second, I think that most of these bills, yours is at 250 
percent of poverty, Congressman Dooley's bill is at 200 percent 
of poverty, we need to look at the numbers here and say we are 
not targeting, we are actually spreading this pretty broad. Two 
hundred percent of poverty, by the last set of numbers I saw, 
is 55 percent of all Medicare beneficiaries. That does not 
sound like targeting to me. I would say we ought to get down to 
about 150 percent of poverty and see what we have left at that 
point where we are actually targeting on the basis of income.
    In addition, I concur in general terms, the problem is 
always with the details, with Ed and Jeff on the need for 
catastrophic coverage. That is the most important type of 
insurance to have, although a lot of people do not want 
catastrophic coverage, they want first dollar coverage, they 
want something they can have. But if you are going to have 
catastrophic coverage, you have to have more than one source of 
the negotiated prices. You have to have a number of bidders out 
there, finding out how they mix and match the prices, the 
particular drugs, the way we should deliver it, you are trading 
off prices for one and the other. So that is why we want to 
have multiple private players determining what that 
catastrophic coverage is and what it costs. If you then want to 
subsidize the premiums for that catastrophic coverage once you 
know what it actually costs in a real market, then determine 
how you want to subsidize the premiums for it. But do not 
forestall the process of figuring out what that catastrophic 
cost actually requires and how different people go about 
delivering it.
    Finally, just to focus, and I agree on kind of the general 
concepts in terms of the sickest and the poorest, we need to 
determine who we are going to subsidize first, how much we are 
going to subsidize them, and what is the sustainable criteria 
by which we determine that. If we do not have that anchored in 
place, then it is just going to be which ever way the winds 
blow from year to year.
    Mr. Burton. Do you have on paper proposed legislation that 
would do what you are talking about?
    Mr. Miller. I am always concerned that any legislation I 
would propose would be adopted must be a mistake on my part. 
[Laughter.]
    I immediately rethink it. However, we are forthcoming with 
a lengthy overview of the Medicare legislation.
    Mr. Burton. As a possible adjunct to something we are 
working on, I would like to have your thoughts in writing, if I 
could get those. That is really something, any legislation that 
you would propose would be wrong because it was passed into law 
and you made a mistake, right?
    Mr. Miller. It is worth a second thought.
    Mr. Burton. It is worth a second thought. OK.
    Go ahead, Mr. Antos. And then I have one more question I 
want to ask and then I will let you guys go.
    Mr. Antos. I feel Tom's pain. Rather than repeat some of 
the things that people have said, I would urge you to hold to 
the idea of a $200 billion bill. Just do not imagine that you 
can do it the easy way by saying it will be $200 billion. That 
just does not work. Design the bill so that it will be $200 
billion. Now, of course, we have a bit of a problem. As you 
know, I used to work at the Congressional Budget Office and one 
man's $200 billion is another man's $600 billion, so we could 
get into theological debates about that. But in truth, it is 
the design of the program that really should drive this.
    Mr. Burton. As a former member of CBO, maybe you could give 
us your thoughts in writing as well that would keep us within 
those cost confines.
    Mr. Antos. I will do the best I can.
    Mr. Burton. I would like to have it.
    The last thing I want to ask you, and we have addressed 
this a little bit, how do you keep the private sector, assuming 
that the plans you are talking about were adopted or enacted 
into law, how do you keep the private sector in the game by 
keeping their plans instead of junking them and trying to throw 
them on the Government?
    Mr. Haislmaier. Basically, what I would propose is if you 
have private sector catastrophic insurance that any of those 
employer provided plans would automatically qualify provided 
they met the catastrophic cap, whatever that was.
    Mr. Burton. What about some of them have first dollar 
coverage, some----
    Mr. Haislmaier. Well that is fine. They could offer more. 
There is nothing wrong with them offering more. It is saying 
here is the minimum. In other words, what you are doing is you 
are putting a minimum standard.
    Mr. Burton. What I am saying, though, is if they have first 
dollar coverage and they have the other things you are talking 
about, what is to keep them from dumping a large part of the 
coverage and saying, OK, we will only do the minimum that we 
have to do in order to qualify?
    Mr. Haislmaier. There is an economic and there is a quasi 
political. The economic is, as part of what I am proposing, is 
that everybody would be able to reinsure their catastrophic. So 
that would help to keep them in the game. The political is, the 
reality is that a lot of these employers want to dump it but 
they are trying to use you as an excuse and blame you, the 
Congress. So if you take yourself out of the game and you say 
that all we are going to do is say that your plan, if you have 
one, has to have catastrophic, then you have backed off the 
game and they are back to square one, which is saying, oh, if I 
am going dump them I am going to have to do it myself and I am 
not going to be able to blame Congress for it. So that sort of 
quasi political thing is what is keeping them from dumping 
right now and would still have some effect.
    Will they scale back? Yes, there will be some scale back. 
But as they point out, they are doing it already. For them it 
is a question of how hard or easy do you make it for them. This 
makes it harder for them to do it. The current H.R. 1 and S. 1 
make it a lot easier for them to do it because they say, oh, 
well, Medicare has a new benefit, we will just wrap around it.
    Mr. Burton. Well, include that in the things you give to 
us, if you would please.
    Mr. Lemeiux. Just to add to that. The Senate and House 
passed bills set up a benefit design that gives employers every 
incentive to drop coverage. But then they say if you do not 
drop coverage, we are going to give you this little extra 
subsidy. And so the employer has to say, well, will that 
subsidy still be there a few years down the road, or am I just 
going to go with this big incentive to drop. And what Mr. 
Dooley's bill would do is say, look, if you qualify, if you 
sign up and the Medicare program approves of the way you are 
providing drug benefits, then if you have someone on your rolls 
that hits the catastrophic limit the Government will start to 
help pay for that. And that gives them an incentive to actually 
stay in the game because the Medicare program would help them 
pay for their highest cost cases. So it is just the opposite, 
where the benefit design gives them an incentive to stay in 
rather than to get out. And then you do not have to provide 
subsidies and whatnot to try and persuade them to stay in the 
game. So it is a design issue.
    Mr. Burton. OK. Mr. Miller.
    Mr. Miller. The short answer always is if you want to keep 
the private sector in, keep the Government out. But beyond 
that, we are seeing in terms of the private sector coverage 
that they are increasingly hitting their caps and they are 
going to, in effect, more of a front-end loaded type insurance, 
particularly in the employer plans. If you look out about 10 to 
15 years, the trends are going to magnify and private employers 
are going to increasingly be organizing insurance arrangements 
for their employees but subsidized at very little, if at all. 
So in that sense, I think wrapping this around a type of 
broader catastrophic coverage will allow the private players 
who wish to remain in the field to probably be about where they 
are in any case, and that is about what we are going to be able 
to do.
    But in the longer term, we want to be able to have 
individuals carrying their lifetime compensation and lifetime 
savings and not being forced to fit their spending decisions to 
the particular silos we have constructed for them where they 
cannot move between one and the other. And in that regard, we 
need to kind of step on a broader playing field of kind of 
providing tax advantages for saving for your entire life cycle 
of needs and responsibilities.
    Mr. Burton. Yes. Yes. But you are saying that you think in 
10 or 15 years the employers are going to be out of funding and 
turning it all over to their individuals?
    Mr. Miller. They will not be out of an essential role, 
which is that you do not want to have isolated beneficiaries 
having to find something, an individual market without any 
choices. It is very important to kind of give you good buying 
options. But if you look at what is being done with the younger 
employees, the subsidies are being rolled back. Ultimately, you 
are going to pay for your coverage but you can get smarter, 
better coverage through an enlightened employer. And that is an 
important role for employers to continue to perform in the 
future.
    Mr. Burton. OK. Mr. Antos.
    Mr. Antos. I guess I would concur with Tom's remarks, in 
particular. No matter what we do, short of paying 100 percent 
of the cost, we will not be able to keep some employers in the 
game. It is just impossible. The question really is, is 
anything Congress enacts this year or next year going to 
accelerate the dropping of employer-sponsored coverage. I think 
that is the issue. So I think most of the numbers that people 
have been talking about have confused sort of the total change 
and the acceleration due to the bills.
    I agree with having catastrophic coverage that runs through 
the Government but is operated through private plans and where 
the individual is invested with, in essence, his own subsidy. I 
think that strikes me as the most sensible way to go from all 
perspectives. First of all, the individual's hands are no 
longer tied. Second of all, the individual has ownership of the 
resources, something that no Medicare beneficiary has today. I 
think that is more important as an objective than trying to 
hold back the tide. The tide is going out.
    Mr. Burton. The tide is going out. So you would put a 
little more competition in the whole system if they had control 
of their own resources, as much as possible.
    Mr. Antos. I think that is critical.
    Mr. Burton. Well if I could get all of you to give us these 
vast ideas we have talked about in writing, we will try to 
retool our proposal and see if we can incorporate some of your 
ideas.
    I appreciate very much your taking the time to come and 
talk with us today. Thanks an awful lot.
    We stand adjourned.
    [Whereupon, at 2:10 p.m., the subcommittee was adjourned, 
to reconvene at the call of the Chair.]
    [Additional information submitted for the hearing record 
follows:]
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