[Senate Hearing 108-228]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-228
 
                       DEBATE ON MEDICARE REFORM

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

                                 FORUM

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JUNE 23, 2003

                               __________

                           Serial No. 108-14

         Printed for the use of the Special Committee on Aging






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                       SPECIAL COMMITTEE ON AGING

                      LARRY CRAIG, Idaho, Chairman
RICHARD SHELBY, Alabama              JOHN B. BREAUX, Louisiana, Ranking 
SUSAN COLLINS, Maine                     Member
MIKE ENZI, Wyoming                   HARRY REID, Nevada
GORDON SMITH, Oregon                 HERB KOHL, Wisconsin
JAMES M. TALENT, Missouri            JAMES M. JEFFORDS, Vermont
PETER G. FITZGERALD, Illinois        RUSSELL D. FEINGOLD, Wisconsin
ORRIN G. HATCH, Utah                 RON WYDEN, Oregon
ELIZABETH DOLE, North Carolina       BLANCHE L. LINCOLN, Arkansas
TED STEVENS, Alaska                  EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
                                     DEBBIE STABENOW, Michigan
                      Lupe Wissel, Staff Director
             Michelle Easton, Ranking Member Staff Director

                                  (ii)

  




                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Larry E. Craig......................     1

                                 Panel

Dr. Robert Moffit, Heritage Foundation...........................     2
Ron Pollack, Executive Director of Families USA..................     3

                                 (iii)

  


                       DEBATE ON MEDICARE REFORM

                              ----------                              --



                         MONDAY, JUNE 23, 2003

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:30 p.m., in 
room SD-628, Dirksen Senate Office Building, Hon. Larry E. 
Craig (chairman of the committee) presiding.

     OPENING STATEMENT OF SENATOR LARRY E. CRAIG, CHAIRMAN

    The Chairman. Ladies and gentlemen, thank you for coming 
today. Normally in this room I would rap my gavel and say ``The 
Special Committee on Aging is now in order.'' That would not be 
in order today for the purposes of what some suggested is a 
debate or at least an enlightened discussion.
    Today's debate brings together two of the country's most 
prominent and articulate advocates on the Medicare issues. On 
one side we have Dr. Robert Moffit of the Heritage Foundation, 
a strong believer in a competition-based future for Medicare, 
and on the other side we have Ron Pollack, Executive Director 
of Families USA, who I think it is safe to say is an advocate 
of building upon the traditional Medicare framework.
    Ironically, as it turns out, Dr. Moffit and Mr. Pollack 
have both been quite critical of the specific Medicare reform 
bills now pending before Congress, although for very different 
reasons. Needless to say, this development was not anticipated 
when this event was planned some weeks ago. I am going to 
suggest to all of you who have chosen time in your schedules to 
come today, though, that between the two of these gentlemen, 
you will get a very aggressive and enlightened discussion.
    My own role here today is much easier. I am going to be the 
facilitator and the referee. Each debater will be allowed 
opening remarks of 5 minutes, and we will determine that order 
by a coin toss. Then each debater has the right, at the close 
of the opening remarks, to rebut or make additional comments 
for three minutes. Next, I will ask each debater a series of 
questions I have prepared. Each debater will have two minutes 
in which to respond to the questions. Then we will return to 
all of you, and we are going to ask that you help us out in the 
filling out of a card, and we will select randomly from those 
cards as to the questions that will get asked.
    So with that, we are going to get started, and for the next 
hour I think we are going to have a most enlightened discussion 
about the issue of the day, Medicare reform and prescription 
drugs, currently being debated on the floor of the U.S. Senate, 
and without question, probably one of the larger and more 
difficult issues that the Congress of the United States has 
tackled in some time.
    So with that, we're going to do a coin toss. I am never 
good at flipping coins, but I have just done so, and I have got 
the exposure, and gentlemen, call it.
    Mr. Pollack. Heads.
    The Chairman. Well, if he calls heads.
    Dr. Moffit. I have no choice.
    The Chairman. You call tails. It is tails. With that, Dr. 
Moffit, you may start with your opening statement of five 
minutes.

      STATEMENT OF DR. ROBERT MOFFIT, HERITAGE FOUNDATION

    Dr. Moffit. Thank you very much, Mr. Chairman, and thank 
you very much for sponsoring this debate. I also want to 
publicly thank the staff and the members of the Senate Aging 
Committee for sponsoring this great forum, and it is good to 
see Ron Pollack again. We see each other quite a bit, you can 
imagine.
    Beginning in about 8 years, the first wave of 77 million 
baby boomers are going to be eligible for retirement. In many 
ways they are very different from the current generation that 
now is enrolled in the Medicare program. They will have 
different expectations. They will have different perspectives. 
They will come to their retirement with very, very different 
experiences with the health care system.
    Medicare is going to be faced with an unprecedented demand 
for medical services, and a rapidly advancing medical 
technology. The demand for medical services that Medicare will 
experience is going to be unlike anything we have ever seen 
before in history. The question before the House is whether in 
fact the current Medicare program can absorb this demographic 
shock? My argument is that it cannot.
    Consider a concrete example. A few years ago Judge Robert 
J. Gerstung of Baltimore, my uncle, died of a sudden cardiac 
arrest. It is a rapid and irregular heartbeat; it usually 
strikes people with a history  of heart disease. Two years ago 
the Food and Drug Administration approved an implantable 
cardiodefibrillator, and clinical trials show that death rates 
with this device were reduced by 40 percent. Many private 
companies recognize the value of the device and they include it 
in coverage. So today, Cigna, Blue Cross and Blue Shield, Aetna 
and Kaiser, all cover this device. But the majority of patients 
who might need it are over the age of 65. Medicare had not 
approved reimbursement for this device until very recently. 
Finally this month, Medicare approved it.
    But while Cigna and Aetna make it available to everybody, 
only a portion of the Medicare population, the sickest one-
third of the Medicare patients who can benefit from the 
coverage will be able to get it. This will effectively ration 
care for this medical device and ensure more deaths, but will 
certainly save on Medicare costs.
    Does anybody think that for one blessed moment, that if in 
fact we have the Government control over the financing and 
delivery of prescription drugs or medical technology, the 
dynamics will be any different? If there is any doubt about 
this, consider the current practices right now in Medicaid, 
where prescription drug coverage is being cut back through 
price regulation, reimbursement restrictions and formularies in 
virtually every State in the union. The argument might be made 
by some in Congress that, well, Medicare will not treat seniors 
in the future as bad as Medicaid routinely treats poor people 
today.
    Ladies and gentlemen, do not bet on it, because we are 
going to see an unprecedented demand for services. In Medicare 
the Government defines every benefit, every medical treatment, 
every procedure. You get what they give you; every 
modification, every change in benefits is becoming a major 
political event. That's why we're having a conversation about 
whether to add prescription drug coverage to the current 
Medicare program. If it is not a congressional issue, it is 
worse. It is a decision that is authorized by the Medicare 
bureaucracy through a painful, often agonizingly slow and 
mysterious process.
    Do we really want to continue to do things this way in the 
future? If the Government defines the benefit, then the 
Government must also price the benefit, and we know exactly how 
that works. Medicare is a system not only of central planning, 
but of price controls. Every one of the 7,000 procedures that 
doctors authorize for Medicare patients is controlled. Every 
one of the hospital procedures is controlled. As my colleague 
formerly with the Urban Institute, Len Nichols, once said, one 
thing we can be sure of: Medicare controls 10,000 prices in 
3,000 counties and does not do a very good job of it. Do we 
want to continue doing business this way?
    Every benefit, every price, everything is regulated in 
detail to the point where tens of thousands of pages of rules 
and regulations and guidelines govern the program. Do we want 
to continue to do business this way in the future? Then, of 
course, if you are a doctor, you live in fear of audits and 
investigations.
    The Chairman. Dr. Moffit, you should begin your wrap up.
    Dr. Moffit. Thank you.
    Regardless of what you have been told, the Senate bill 
largely continues business as usual in the Medicare program. It 
is short on reform and very long on entitlement expansion. At 
the end of the day low-income working people are going to end 
up subsidizing the drug bills of Bill Gates. We can do much 
better.
    There is a far superior model. It is the Federal employees 
model. Congress ought to transition to that model and be done 
with it.
    Thank you.
    The Chairman. Thank you very much for your opening 
comments.
    Now let me turn to Ron Pollack, Families USA, for your 
opening comments.

             STATEMENT OF RON POLLACK, FAMILIES USA

    Mr. Pollack. Thank you so much, Senator.
    I want to start by making two points, one of which I hope 
that all three of us on this panel will actually have an 
agreement about, and on the other one, undoubtedly, we will 
have a difference.
    The first point I want to make is that the exercise to get 
a prescription drug benefit is very carefully circumscribed. It 
is circumscribed by the budget resolution and, as probably all 
of you in this room know, the budget resolution says that there 
will only be $400 billion available for Medicare related 
changes including a prescription drug benefit over the course 
of the next 10 years. Now, over that same period of 10 years, 
the amount of money that seniors will be spending on 
prescription drugs is over $1.8 trillion. So even if all of the 
$400 billion is spent on prescription drugs--and clearly that 
will not be the case because there will be some relief for 
rural hospitals and other rural providers and some other fixes 
in the Medicare program--it means at best only about one out of 
$5 spent by seniors could be subsidized by a change in the 
legislation that is currently being debated.
    A point I hope that we can all agree on is that when we 
have limited resources, especially in comparison to the amount 
of monies that seniors will be spending on drugs hopefully, we 
choose wisely in terms of what those priorities are. I would 
suggest to you, and I hope we actually have agreement on this 
one point, to the extent that we can only go an incremental 
step in terms of subsidizing seniors' drug costs, that we focus 
them most heavily on those people in greatest need, the poor. I 
have many misgivings about the Senate bill. It is complex. It 
has lots of different failures. But one of the things that the 
Senate bill does, and certainly does in sharp contrast with the 
House bill, is that it really provides some significant new 
relief for low-income seniors. I think that is good, and I hope 
that is an issue that does not divide conservatives and 
liberals. I hope that, on an issue where we are trying to 
stretch our resources as best as possible, we focus them on 
those with the greatest need. I would be happy to elaborate 
further on that.
    The point where I think we depart company is on the 
question of traditional Medicare versus private plans. I wonder 
what it is that makes people think that moving to private plans 
is going to be any better than what we have today? Take rural 
communities. Eighty percent of the people who live in rural 
counties do not have a private plan that serves them. Private 
plans do not wish to serve people in rural communities. In 
those communities where private plans have served people, they 
have abandoned people left and right. Two point four million 
people have been abandoned by private plans because those plans 
said those communities were not profitable. Why is that we 
would want to move people into private plans when, after all, 
if you do that,you lose your choice of doctor? Well, maybe you 
can get the doctor you want, but at a higher price if that 
doctor is not in your network. Why is it that we think it's 
good for seniors to give up something they consider precious, 
namely the right to choose their physician, their providers? I 
think it would be a mistake to go in an opposite direction.
    But then I think what's most telling is that you look at 
the data, not by some of the advocacy groups either on the left 
or the right, but you take a look at what CBO says or what 
General Accounting Office says or the Inspector General says. 
What you find is the cost of coverage for people in private 
plans is considerably more expensive than it is in the Medicare 
program. So what is it that has people say that to lower costs 
and save Medicare we should move to private plans rather than 
the traditional Medicare program that most seniors want. 
Eighty-nine percent of seniors are on the traditional Medicare 
program. I think we should not push them out.
    The Chairman. Right on time. Thank you very much, Ron.
    Now, we'll turn to 3 minutes each of rebuttal, and we will 
turn back to you, Bob, for any rebut you have in relation to 
what Ron has said. He has laid down the challenge. Are we going 
to focus on the poor because that is all the money we have?
    Dr. Moffit. I think Ron has certainly contributed to the 
debate. If he can convince Senator Kennedy to go along with it, 
I think we will have a good outcome.
    The fact is 78 percent of senior citizens, according to the 
Joint Economic Committee, already do have prescription drug 
coverage. The generosity of that coverage varies. Some, of 
course, is not so good. Other coverage is actually quite good. 
So, if we are going to solve the problem, then yes. If we are 
going to deal with the Medicare issue and prescription drug 
coverage and Medicare, let's target the resources that we have 
to low-income people who do not have access to either Medicaid 
coverage or to coverage through supplemental insurance or 
former employers. I agree with Ron on that. That makes a great 
deal of sense.
    Congressman Stark, last week, offered an amendment in the 
House Ways and Means Committee that the CBO estimated at $1 
trillion over 10 years, to solve the problem of 8 to 10 million 
Americans without drug coverage. It is not necessary really to 
spend $1 trillion. Then the question is, what do we do about 
private plans? What is the value of private plans? I am not in 
favor of forcing anybody into anything. I am not in favor of 
forcing people into private plans, nor do I think that 
conventional private health insurance is indeed the best model 
for Medicare reform. In fact, as the Chairman knows, I am an 
advocate of a Government program. I have supported the idea of 
a public/private partnership based on the program that covers 
many people in this room and 2 million Federal retirees and 2 
million Federal workers, the Federal Employees Health Benefits 
Program. It is a system that is based on personal choice. 
Nobody is forced to take anything. If you want an HMO, you can 
have it. Most people do not choose HMOs. They choose fee-for-
service plans or PPOs and have the choice of doctor that they 
want. As far as rural coverage is concerned, it is nothing like 
Medicare+Choice. The evidence is overwhelming. In 87 percent of 
the rural counties in the country, retirees have at least 6 to 
9 plans. The cost of coverage in FEHBP is actually competitive 
with Medicare. The Joint Economic Committee found that indeed 
comparing the cost increases over time over the past 20 years, 
FEHBP, a system of private competitive plans, actually 
outperformed Medicare.
    The Chairman. Thank you very much.
    Now your 3 minutes of rebuttal.
    Mr. Pollack. Thank you. Thank you, Senator.
    First, I am glad that--I believe I heard you say, Bob, that 
we do have some agreement on focusing on low income first.
    Dr. Moffit. Yes, we do.
    Mr. Pollack. I just want to say a word about how different 
the Senate and the House bills are in this respect because it 
is important to note. When we are talking about folks below the 
poverty line, for a senior living alone, we are talking about 
somebody who has an annual income of $8,980, less than $9,000 a 
year. Now, under the Senate bill, if that senior has $3,000 in 
drug expenditures, then under the Senate bill that senior would 
only have to pay $75, a big improvement. In the House bill, 
that senior would have to pay $1,114. Now, if that same senior, 
same income level, happened to have drug expenditures of 
$5,000, under the Senate bill that senior would pay $138. Under 
the House bill they would pay $3,114, a huge difference. I 
would be happy to take Bob's challenge and talk to Senator 
Kennedy about making sure that the Senate provisions with 
respect to low-income seniors prevail in conference. I think it 
would be a great thing to do.
    Now, Bob, you have talked about FEHBP and I am glad you 
did. Many people who like the FEHBP system say let us give 
seniors what members of the U.S. Senate, or the House, or the 
President has, and I am in favor of that. I am not in favor 
though of packaging it that way and not actually providing it 
that way. How many Senators--and I am not criticizing any 
single Senator or all 100 Senators for that matter--how many 
Senators have a doughnut hole in their coverage? First, in this 
bill, there is a $275 deductible. Then it pays 50 percent of 
the copayments, and then there is a doughnut hole which is a 
huge hole in which many fall. I do not think anyone who is in 
the FEHBP system has that kind of a system.
    So, Bob, I would suggest, as long as you are promoting the 
FEHBP system, let us do it right. Let's actually provide 
America's seniors with comparable benefits that is going to 
cost a little more money. My hope is that you and your 
colleagues will support providing that additional money so that 
we can provide a benefit that is comparable.
    But last, I guess I want to say I know that there are some 
faults with the traditional Medicare program, certainly there 
are, but I would like to stack them up against the private 
insurance industry. You talked about new procedures. They are 
very slow in approving new procedures. In 1999 there were 9 
states that had no private plans with a drug benefit. In 2002, 
there are 15 states without a drug benefit. I do not think 
going to the private sector is something seniors are going to 
appreciate. Thank you.
    The Chairman. Ron, your time is up. Your timing is 
excellent. Well, thank you both very much for your opening 
comments and rebuttals.
    I will now ask a series of questions, and after 15 or 20 
minutes of that, or a little less maybe, I will turn to the 
audience, and we hope you will have filled out the cards and 
have your questions available.
    As I ask these questions, both of you may respond if you 
would, and I will ask Ron the first question because Bob got 
the first word out here in his opening comments.
    Short of a wholesale rewriting of the legislation that is 
before the U.S. Senate today, could you make just two or three, 
or would you propose just two or three targeted changes that 
you think would greatly improve the current legislation?
    Mr. Pollack. I am delighted to do so, Senator. Thank you 
for the question.
    First let us go back to the issue I raised first about low-
income seniors. I would make some improvements in what we have 
today for low-income seniors. First, the Finance Committee bill 
that is now on the floor, for the first time treats the very 
poorest of the poor exclusively in Medicaid and not in 
Medicare. I think that is a mistake. I think we should put 
everybody into the same plan. I do not think we should isolate 
the poor and separate them. I think ultimately it means they 
are going to get treatment as if it is a welfare program. So 
the very first change I would make is that change. I know there 
is an amendment being offered on the floor to that effect. I 
support that.
    Second, with respect to the poor once again, there is an 
extremely low so-called assets test for eligibility for low 
income benefits. Anybody who has income below the poverty line, 
below $9,000, probably is not sitting on a Donald Trump set of 
assets. Otherwise, they would probably be over the income 
level. The problem with the assets test is if you take a look 
at all of the States that have an assets test in their low-
income programs, it requires enormous verification, enormous 
amounts of time for people to ferret together all the details 
about this little amount in their savings account, this little 
amount in a burial plot and so on. I would eliminate that 
because I think the income test is sufficient and it would 
reduce significantly the bureaucracy needed to administer.
    There is also an amendment I believe on the Senate floor to 
deal with that.
    I guess, Senator, to answer your question in a larger 
sense, the reality is that----
    The Chairman. Wrap up with this if you would.
    Mr. Pollack. With $400 billion in the budget resolution, 
when seniors are going to be spending over $1.8 trillion, many 
of the gaps I think will be very difficult to fill.
    The Chairman. Thank you very much. Now we turn to you, Dr. 
Moffit. Same question.
    Dr. Moffit. My suggestion would be to strike everything in 
Title I and replace it with a low income assistance for 
prescription drug purchases. I would structure it in the same 
way that the American Enterprise Institute has proposed to do 
it, which is: provide a prescription drug card to senior 
citizens, attach a subsidy to that prescription drug card at 
some amount between $600 and $800, and establish a catastrophic 
coverage for those seniors. That would target the people who do 
not have prescription drug coverage today. If we wanted to add 
money later on or if we felt it was necessary to add money 
later on for hardship cases, we should do it. But, in any 
event, target the funding for drugs that way.
    With regard to the other provisions, I think the best thing 
for Congress to do would be to start the transition to a 
genuinely competitive system where drug coverage is fully 
integrated into insurance, set up the structure now under the 
Senate bill and the House bill and create a system where you 
would have a competitive market, and start the transition in 
about 2007. There are several ways to do this. One would be to 
give new retirees the option as to whether they want to stay in 
traditional Medicare or go into a private system administered 
much like the Federal employee system is administered, with a 
Medicare administrator. At the same time give opportunities to 
employees: You want to have a situation where people who want 
to take their private employment based health insurance with 
them into retirement can do so and get a premium offset or a 
premium subsidy to support that. That would be another way to 
go.
    The idea is not to separate out the drug benefit, but to 
create a system where the drug benefit is fully integrated into 
a system of insurance just like normal human beings have in the 
private market. That's a much better idea.
    The Chairman. Well, doctor, we are going to stay with you 
to begin the second question, and we would ask that both of you 
respond to it, setting aside bill specifics for a moment.
    Many argue that greater competition in Medicare will 
improve quality, innovation and long-term cost management, 
while others say that the reverse is true. What is your view 
and why?
    Dr. Moffit. I think Adam Smith was right. I think when you 
have competition, you will improve efficiency, you will 
increase the quality of services and you will increase the 
productivity of services, whether it is in other sectors of the 
economy or the health care sector of the economy. The most 
important thing is that this sector of the economy be consumer-
driven, not driven by third party payment decisions; not made 
by other parties who, in fact, actually do not make the 
decisions about consuming care. I think it is critical, if we 
are going to try to create a competitive market, that we do not 
do what we do today in employer based health insurance. We 
create a division between the customer for the service and the 
consumer for the service. Ideally the customer for a service 
and the consumer of the service should be the same personality.
    The Chairman. Ron.
    Mr. Pollack. Senator, I believe in competition, but I very 
strongly disagreed with the President's proposal because I 
think it was anticompetitive. The President's proposal was 
labeled as being a competitive model. But what did the 
President do? The President said, let us provide significant 
amount of additional goodies to private plans. Let us give them 
a significant prescription drug benefit. Let us give them a 
catastrophic benefit. But let us not provide those same things 
to the traditional Medicare program. Well, I do not call that 
competition. I call that stacking the deck. Now, if the private 
plans can do better than the public traditional Medicare 
program, so be it. Then they deserve people going into those 
plans. But I do not think people deserve going into those plans 
if they are pushed into those plans by virtue of stacking the 
deck. Clearly, if a senior citizen knows that they are going to 
get very substantial prescription drug benefits in a private 
plan but not in traditional Medicare; if they know they are 
going to get a whole host of other benefits in a private plan 
but not in traditional Medicare; then of course, they are going 
to go to a private plan. But that is not a triumph of 
competition. That is a triumph of stacking the deck.
    So I am hopeful that we are going to see a system where 
each of the plans and the traditional Medicare program can 
compete with one another. I would suggest to you when that 
happens, I think the traditional Medicare program is going to 
come out in pretty good shape, and that is because the cost of 
the traditional Medicare program is considerably cheaper than 
it is for the private plans. Traditional Medicare does not have 
to pay for marketing and advertising and the same 
administrative costs. They do not have to pay for agents fees. 
They do not have to pay for profits. They do not have to pay 
for profligate salaries of chief executives of those private 
plans. For that reason, I think that the traditional Medicare 
program can compete very well in this competitive model.
    The Chairman. Thank you. We are going to stay with you, 
Ron, to begin the third question round. In your view is drug 
coverage provided in the Senate bill too much or too little or 
just enough to meet the true needs of our seniors today?
    Mr. Pollack. Well, I think it is too little. I spoke 
somewhat about that a moment ago.
    The Chairman. You did.
    Mr. Pollack. I do not think it is anywhere comparable to 
the FEHBP system at all. It is not only, I think, too little 
and only covers a tiny fraction of the cost that seniors are 
going to experience, it is extremely confusing. You and I 
talked about this a moment ago, Senator. You have got the 
premium, then you have got a deductible. Then you have got a 
certain kind of copay. Then you fall within the doughnut hole. 
Then you have a catastrophic benefit, and then you have 
different levels of subsidies. The subsidies depend on whether 
you are below poverty, you are below 135 percent of poverty, or 
you are below 160 percent of poverty. It is very confusing. I 
believe that most seniors are going to feel that this does not 
provide them with enormous relief. For most seniors, between 
now and 2006, when the benefit first is implemented, I think we 
are going to see that the prices of drugs will have risen so 
substantially that they are going to more than consume the 
relatively small benefit that most seniors will receive.
    So I believe it is too small. I believe we should get 
started, however. I do not think we should have gridlock, but I 
do not think seniors are going to be tremendously happy. With 
one exception and that is, I do think that a reasonable start 
was made for low-income seniors, and I treasure that and I hope 
we build on that. To the extent we have any resources that are 
discretionary, I would put it into that. I hope that is 
something where liberals and conservatives really join hand in 
hand.
    The Chairman. Thank you. Dr. Moffit.
    Dr. Moffit. Well, the Senate benefit and the House benefit, 
has been described by Bob Reischauer of the Urban Institute, as 
plans that do not exist in nature. They do not exist in nature 
because you actually could not buy such a benefit. Nobody would 
sell it. Consider the benefit structure of the Senate bill. I 
mean who would actually go out and buy that thing?
    The Senate and the House are trying to set up a stand-alone 
drug benefit and try to make it cost effective. That is tough. 
Administratively it is very, very tough. This is a complicated 
benefit. It will probably result in an explosion of regulatory 
detail in the administration of the benefit, and my concern is, 
at the end of the day, that it may not prove politically 
successful. The unintended consequences are going to hit the 
senior citizen population good and hard. The evidence is now 
that 37 percent of retirees will be dropped out of their 
private drug coverage under the Senate bill, about 32 percent 
out of the House bill. This is rotten public policy.
    The right way to do this, once again, is to integrate the 
drug benefit into insurance and allow people to pick an 
insurance package which makes sense.
    I want to mention one thing that Ron raised, and that is 
the administrative cost of Medicare. You have heard it 50,000 
times, that Medicare's administrative costs are very low, I 
think between one and two percent. Ladies and gentlemen, if you 
believe that Medicare is a model of administrative efficiency, 
you are a candidate for membership in the Flat Earth Society. 
[Laughter.]
    The Medicare program is in fact enormously complex and the 
administrative costs are not showing up in the Federal budget. 
The administrative costs are pushed over to doctors and 
hospitals and home health agencies and other providers who have 
to comply with Medicare's regulatory regime and that cost is 
huge.
    The Chairman. We are going to stay with you for the next 
question, doctor. Experts at CMS and the CBO differ 
significantly in their prediction of how many seniors will 
choose to enroll in the new competitive Medicare Advantage 
program, with CMS predicting enrollment upwards of 40 percent, 
and CBO predicting only 2 to 10 percent. Whose estimates do you 
believe are more accurate, and what is your prediction for the 
future of the Senate's Medicare Advantage Program?
    Dr. Moffit. Well, Senator, they both cannot be right. We 
know that. You have a wildly different estimate based on very, 
very different assumptions. My own view is that the structure 
of the Senate bill is such that it is not likely to encourage 
widespread participation of private plans. Let me tell you why.
    One of the things that is overlooked in this debate is the 
whole question of payments. Medicare+Choice was not successful 
largely because of the payment structure of the Medicare+Choice 
system. Health care costs were going up 8, 9, 10, 11, 12 
percent, but under the administrative pricing of the Medicare 
program they would get cost increases on an annual basis of 2 
percent. But beyond that, there was another problem with 
Medicare Choice. There was not one aspect of plan operation in 
Medicare Choice that did not come under the regulatory 
juggernaut of the CMS. That means that virtually every aspect 
of plan business activity was subjected to the regulatory reach 
of the CMS. They could not even make normal business decisions. 
The regulatory regime and lower payment discouraged plans from 
staying in the program.
    In this particular case, Medicare payment to the new 
Medicare Advantage programs is based not on anything that looks 
like a market formula. It is based, rather, on the 
administrative pricing of the current Medicare program. In 
other words, the benchmark is the fee-for-service system in the 
current Medicare program. As health care costs increase and as 
the demand for the baby boomers creates a greater demand on the 
system, what will the government do? Well, basically what they 
will do is what they have always done in the past, start to 
reduce reimbursement. This means they will also reduce 
reimbursement for the private plans.
    Second, looking at the actual structure of the bill, Title 
II and Title III, what you have is a highly prescriptive 
statutory program. It looks much more like Medicare+Choice than 
it does the Federal Employees system, which in fact is low on 
regulation and bureaucracy.
    The Chairman. Is it 40 percent of 2 percent, Ron?
    Mr. Pollack. I think it is relatively small, but if I may, 
Bob offered me a membership in one of his favorite clubs. I 
thought I would return the favor. [Laughter.]
    Bob, if you believe that the private insurance companies 
can do a much better job in keeping administrative costs down, 
I am prepared to sell you all the bridges, all the tunnels and 
all the ferry boats leading into Manhattan. The private 
insurance industry has not distinguished itself in terms of 
administrative costs compared to the public sector.
    Senator, I believe that there will be relatively few 
people, Bob and I agree on this, who are going to go into the 
private plans, but not for the reason that Bob indicated. You 
know, we have seen a precipitous drop in the number of people 
who are in private plans, the Medicare+Choice plans, and this 
is despite the fact that Congress, with each passing year, has 
showered those plans with increasing amounts of money. The 
Congressional Budget Office, the General Accounting Office, the 
Inspector General's Office, all three, none of whom have got an 
ax to grind in this debate, have been saying that it costs more 
to serve people in these private plans than it has in the 
public plans. It is not surprising that after the 
Medicare+Choice plans initially offered fairly generous drug 
benefits, they have been reducing those benefits. They have 
been increasing premiums and they have been reducing benefits. 
So people have been voting with their feet.
    People are happy with the traditional Medicare program and 
I think they are going to be loath to give up their freedom of 
choice of physician to go to a private plan.
    The Chairman. I will ask one more question, and then we 
will turn to you, the audience, and get response to some of 
your questions.
    Both of you have been reasonably or very critical of the 
Senate and House bills that are before us, for a variety of 
different reasons. However, do you believe there are any 
positive aspects to the current legislation? If so, why?
    Ron, we will stay with you.
    Mr. Pollack. Well, I hate to sound like a broken record on 
this question but, on the Senate bill, I think that the one 
very significant achievement in that bill is it does provide 
very substantial relief to low-income seniors. Now, as I said, 
``I think there are some significant improvements that still 
need to be made on that score, particularly the elimination of 
the assets test and making sure that low-income people are in 
Medicare not just in Medicaid.'' But I think that is the 
singular important achievement in the Senate bill, and I think 
people, irrespective of ideology, should take pride in that. I 
think it is a step in the right direction.
    I am also pleased that we did not do what the President had 
asked, namely that we load the decks on behalf of private plans 
at the cost of the traditional Medicare program. Even though 
that is a negative I think it was a step in the right 
direction, and it enables the Senate to pass legislation 
potentially on a bipartisan basis.
    The Chairman. Doctor.
    Dr. Moffit. I would say that probably the best single 
provision in both Houses is the proposal in the House Ways and 
Means Committee to transition to a competitive system in the 
year 2010 with a real premium support system. That, frankly, 
makes the best sense to me. I think that is where we have a 
greater opportunity for change. My suggestion would be to 
accelerate that, speed it up. Instead of waiting to 2010, go 
earlier and go in 2006 or 2007, and get this show on the road. 
That would be my suggestion.
    The Chairman. Thank you, gentlemen, both very much.
    Now, we will turn to you, the audience, and while I have 
your question in front of me, I would ask that you come to the 
microphone right over here and ask the question of either one 
or both of the gentlemen. We have got about four of you or five 
of you already, and any more who have not submitted your 
questions, please do, if you would.
    Ms. Cameron. Joy, would you come forward and ask your 
question?
    Ms. Cameron. My question was about dual-eligibles----
    Mr. Pollack. About what?
    Ms. Cameron. Dual-eligibles, people that are eligible for 
both Medicaid and Medicare. My question had to do with on the 
House plan, there is a Federal plan to phase in the dual-
eligibles over 14 years, where they take to FMAP rate and 
increase it by 6\2/3\ percent every year to essentially 
Federalize a program as a way of offering relief to the States. 
The Senate offers to pay their premiums for Part B for States 
that already have a prescription drug plan.
    I was just wondering if the Senate would consider adopting 
the House plan because it provides more fiscal relief for the 
States and----
    The Chairman. Your question is?
    Ms. Cameron. My question is, is it cost or what is 
hindering something like that?
    The Chairman. Both gentlemen.
    Mr. Pollack. Well, I am happy to. This is a pretty arcane 
subject, but a very important one, so I am glad you raised it. 
The question of dual-eligibles is not just a question for the 
beneficiaries of the program, but also has a big impact on the 
States. The States have been complaining about extraordinary 
costs that they bear as a result of these dual-eligibles, 
people eligible for Medicaid and Medicare. The States have 
said, with ample justification, that they thought, since they 
are in effect wrapping around the Medicare program, that this 
should be a Federal expense, not a State-Federal expense.
    I believe that is the right thing to do. I think it would 
provide the States with significant relief, and in the process 
it would put less pressure in cutting back Medicaid programs, 
which many States are experiencing.
    I think my only caveat about that is that we have got a 
very limited amount of money that is available under the budget 
resolution, $400 billion. So we have a zero sum game that we 
are playing with in terms of the amount of money. If you spend 
it on one thing, you cannot spend it on another thing. So to 
the extent that fiscal relief is provided to the States, less 
money is available to provide help to low-income seniors or 
other seniors. So while I think the cause is just and I think 
it does make sense to try to have the Federal Government 
ultimately assume those costs, I would like to see it happen on 
a slower basis so that more of the dollars can be used to help 
people who right now do not have drug coverage.
    The Chairman. Doctor.
    Dr. Moffit. I was just going to say, as far as the dual-
eligibles are concerned, it makes sense. The House provision 
makes sense in terms of addressing that question. Once again, 
what I would do of course is I would stress the opportunity 
here. There is an opportunity here to create a real market, and 
I would subsidize them directly rather than the way they have 
it in the House bill. I would create something that looks like 
the AEI drug account. I just think it is a much better way to 
go.
    Ms. Cameron. Thank you.
    The Chairman. Thank you.
    Now, let's have Craig Principi, is it? Craig? A tantalizing 
question, please ask it.
    Mr. Principi. My question is for Mr. Pollack. I am 23-
years-old right now, and I would like to know from your 
perspective, when I am 43 and ready to put my own kids through 
college, what percentage of my income do you think I should 
have to pay for other people's medical care?
    Mr. Pollack. I presume, given the context of our 
discussion, we are talking about our parents and grandparents, 
people who might be on Medicare.
    I am not sure I have a precise answer to that. I do know my 
parents benefited from the Medicare program and in the process 
I felt I benefited as well. I actually do not look at it 
generation by generation, although that is important to do. I 
do not discount at all the thrust of your comment. But I like 
to look at it as the whole family. When my parents get helped 
or your grandparents get helped, I think it actually does help 
all of us. So I am in favor of having a program like Medicare 
and like Social Security. I think it enhances the well being of 
all of us, even though from a generational standpoint it might 
well be a money transfer from the young to the old. But I think 
in terms of our well being as a society, I think it does 
something very important and helpful.
    I want to remind you, in 1965 when the Medicare program was 
enacted, almost no insurance companies were willing to sell 
insurance to seniors. Why is that? Because they make high 
claims. They are sick. They are more likely to need health 
care. I think that one of the things we should cherish was in 
1965 we passed Medicare and we provided relief for seniors, who 
are now living longer and I think live a much better life. In 
the process, their children can rest assured that their parents 
will be taken care of.
    The Chairman. Now, Craig, in the element of fair play, we 
are going to return to Dr. Moffit to respond to that. In 
turning to him, in this room about 2 months ago we had that 
noted expert on health care, Alan Greenspan. Chairman Greenspan 
said, ``As a percentage of total income today, there is still a 
margin that could be spent on health care that is not.'' He is 
claiming that the average American today is getting more for 
their money than they are actually paying in. Interesting 
comment.
    Doctor.
    Dr. Moffit. I think the question is a fair question because 
it really goes to the heart of the current debate. The current 
debate is not about the current World War II generation. The 
current debate is about how we are going to be able to absorb 
the costs of the next generation of retirees. Now, we have an 
idea about what those costs are going to be, and they are very, 
very unpleasant. According to Public Trustee, Tom Saving, he 
made a projection that if we did nothing, if we just kept the 
current Medicare program, the current Medicare entitlement 
system as it is today, by 2026 when the Medicare Part A program 
goes bankrupt, actually goes under, roughly 24 or 25 cents out 
of every Federal dollar that is collected in income taxes will 
go to the Medicare system.
    If we added a prescription drug benefit, said Professor 
Saving, and we had, let us say, the Federal Government pick up 
75 percent of the cost of that drug benefit, then 35 cents out 
of every Federal dollar would be going to pay for Medicare.
    We have to ask ourselves a very, very big important 
question today and in the next couple of weeks. Can we afford 
the entitlement program that so many in Congress seem hellbent 
on establishing? A more important question--at least at a 
preliminary level Ron and I agree is whether the focus should 
be on low income people who do not have access to health 
insurance and drug coverage. Why should a low income working 
family that is struggling to put their kids through school, 
struggling with a mortgage, struggling to make ends meet, have 
the responsibility of paying the drug bills of six-figure 
retirees living in Boca Raton, FL? Are we going to establish a 
universal entitlement? It seems irresponsible to do so.
    The Chairman. All right. Now, Dave from New Jersey. If you 
would ask your question relating to orphan drugs.
    Audience participant. This question goes, I am addressing 
both of you. How do you plan to include orphan drugs under each 
plan? Are you familiar with the----
    Mr. Pollack. Yes, but I have not frankly thought about how 
to--so I am happy for Bob to take that first. [Laughter.]
    The Chairman. It is the ``doctor'' in front of his name 
that gives him the chance to lead on this one.
    Dr. Moffit. Right. I am not a real doctor. [Laughter.]
    I have not got a clue really about orphan drugs, except 
that I think it is a question of what kind of a system we set 
up. I mean if you have a competing system of private plans and 
you have orphan drugs in the private plans, that is fine.
    Audience participant. Well, my concern is I personally am 
on a drug, an orphan drug, and I do not fall under the poverty 
line, but I still have to worry about coverage. So for certain 
situations where someone needs coverage that is above and 
beyond the typical cost, how do you plan to provide to people--
--
    Dr. Moffit. I think there is a simple answer to that. I do 
not think they should sell any kind of insurance in this 
country, whether it is in the private sector, or for that 
matter in a public program or a public/private partnership, 
which does not have catastrophic requirements. If you are 
talking about catastrophic coverage, yes.
    Mr. Pollack. I would go a step further than that, I think, 
Bob. Any medically necessary drug, whether it is an orphan drug 
or some other, should be part of a prescription drug regimen. 
So that is the real question. Is it medically necessary? If it 
is an orphan drug or not is irrelevant.
    The Chairman. Thank you very much, Dave. You almost stumped 
the panel. [Laughter.]
    Joe Mosier. Joe.
    Mr. Mosier. My question was specifically for Ron Pollack. I 
was wondering if you support targeted benefits for the low 
income seniors, how can you oppose the President's plan which 
includes a $600 subsidy for first-dollars drug expenses for the 
low income, and full premium support for low income seniors?
    Mr. Pollack. I appreciate that question. Providing only 
$600 in subsidies for low-income seniors means that a senior, 
say, who has $3,000 in expenditures, is going to have to pay 
$2,400 out of pocket. Now, a low income senior has an income of 
less than $9,000, $8,980 or lower, so if you are saying that a 
senior with $3,000 expenditures should be paying $2,400, you 
are in effect saying it is appropriate to charge such a senior 
somewhere between a quarter and maybe 30 percent of their 
income just on drugs. I think not only is that inappropriate, 
it is clearly unaffordable.
    So it is not the idea that the President said he wanted to 
do something special for low-income seniors that I am 
quarreling with. It is that what he is doing is wholly 
inadequate, and for most seniors is simply going to leave those 
costs unaffordable.
    The Chairman. Thank you, Joe.
    Dr. Moffit. I would just like to respond. I would think----
    The Chairman. Joe directed it at Ron, but I control the 
microphone. You wish to respond?
    Mr. Pollack. You paid for the mike?
    The Chairman. No, I just control it.
    Dr. Moffit. No, Ron, we all pay for the mike. [Laughter.]
    The Chairman. Any further comment there?
    Dr. Moffit. I would just say that the issue here has to do 
with high drug cost. Once again my response is the same as the 
response I made earlier. I do not believe that we should have 
any kind of a drug program or a drug insurance program without 
catastrophic coverage, so catastrophic coverage should kick in. 
There should be a stop loss to cover high costs. There is 
nothing wrong in concept with the idea clearly. If we go to low 
income people with insufficient resources, we can set up an 
account. There is no reason why they should not have the option 
to pick and choose what they think is best for them.
    We have a very, very diverse senior population. The senior 
population is diverse in terms of its needs, it is diverse in 
terms of its health status, it is diverse in many, many 
different ways. We should not set up a system that 
straitjackets their options.
    The Chairman. Larry Litman, to ask of both of our 
participants.
    Mr. Litman. The reform proposals on the table are based on 
two assumptions. One, that private insurers will offer a drug-
only benefit, and two, that people will sign up for these 
plans. You talked about the second part already. Could you talk 
about the validity of the drug-only benefit?
    Mr. Pollack. Well, I think Bob and I have somewhat of an 
agreement on that score. Bob quoted Bob Reischauer earlier, 
saying these plans do not exist in nature. Not only is that 
true, it is also true that the insurance companies do not want 
to offer these plans.
    As you know, Larry, I developed a friendship with my 
ideological opposite, Chip Kahn, when he was head of the Health 
Insurance Association of America. When he was CEO of HIAA, Chip 
was very forthright and said the insurance companies he 
represented had no interest whatsoever in providing a drug-only 
policy. The reason he said that, aside from the data he had 
been receiving from his membership, was that what the insurance 
industry believes is that when you provide a drug-only policy, 
the only people who are going to buy into them are the people 
who have a high predictability of needing drugs. He was 
terribly worried that the insurance companies would therefore 
have to ratchet up the premiums over time, and that the 
insurance industry would be blamed for this.
    I do not think it makes a lot of sense to have drug-only 
policies. Bob, I think, is right. They should be integrated 
into a full insurance package, but they should be available 
both under traditional Medicare and in private plans. My hope 
is that ultimately that is the direction we are going to go.
    The Chairman. Dr. Moffit.
    Dr. Moffit. Well, no. I think it is a risk, a drug-only 
policy. I do not think there is going to be a lot of enthusiasm 
for it, but we will see. I mean this is an opportunity to 
actually find out. This is a creation of both the House and 
Senate, and it is a creation which is grounded in the desire to 
establish a separate standing drug benefit. The question is, 
can we make this work, either in the public sector or the 
private sector. I do not think you can make it work in either 
one.
    We did, a few years ago, try to create a drug benefit in 
Medicare. It turned out to be a political debacle. We had a 
situation where we said, OK, fine, we are going to have senior 
citizens covered by prescription drugs. That was back in 1988. 
We enacted it. Everybody was in it. The projected premiums went 
through the roof. Utilization, the projections went through the 
roof, and within one year the program was repealed.
    My view on this is that we have got to get beyond the drug 
benefit issue and start thinking about Medicare reform. That is 
the real issue facing the country. It is not just simply the 
provision of prescription drugs. I think where I agree with my 
colleague here is that we should start focusing on low income 
people who do not have access to private options or who are not 
eligible for Medicaid.
    The Chairman. There you have it.
    Let me turn to you gentlemen. We will give you one minute 
each in wrap up. Let us see, you had the first word. We will 
allow Ron the last word, so we will come back to you for that 
minute of wrap up.
    Dr. Moffit. My turn.
    The Chairman. Your turn.
    Dr. Moffit. OK. We are in a historic debate. At the end of 
the day, the outcome of this debate is going to determine the 
character and quality of American life for as long as we live. 
If we do the right thing we can create a responsible targeted 
prescription drug benefit to the senior citizens who really 
need the help, and at the same time create a transition to a 
superior health care system where people will have an 
opportunity to be able to enjoy high quality health care in 
their final years. We can do that.
    We have to recognize that, in the meantime, Congress cannot 
provide an artificially cheap drug benefit. It is not going to 
happen. We have to recognize that when we talk about how 
Medicare has superior cost control what that means is that 
Medicare is going to reduce the supply of services to senior 
citizens, and will do it through price regulation and 
restrictions on access. We do not need to go that way. Too many 
countries have. We can do much better.
    The Chairman. Thank you, doctor.
    Now let me turn to Ron.
    Mr. Pollack. Senator, thank you for inviting me. I am glad 
I did not bring my flak jacket. At superficial glance, I think 
all of our major parts are still in order. I appreciate that.
    I look forward to this debate moving forward. It is high 
time that seniors got prescription drug coverage. Everyone else 
in the population essentially has it. I hope we do it in a way 
that achieves true competition among private plans and public 
plans. There is no reason to move toward private plans by 
tipping the scales toward them. They do not serve rural 
communities. They have pulled out of a lot of places. You lose 
your choice of doctors. It costs more money, and it provides 
less satisfaction to America's seniors.
    I think we can provide a decent prescription drug benefit, 
at least make a decent start. I am glad we agree on starting 
with low-income seniors and disabled. Hopefully we can do 
better for other seniors as well.
    Thank you, Senator, for inviting us.
    The Chairman. Well, gentlemen, thank you. Dr. Bob Moffit of 
Heritage and Ron Pollack of Families USA.
    Now if this were a hearing I would rap the gavel and say 
the committee is adjourned. But it is not a hearing. It is a 
debate or a discussion, and if you enjoyed it, you may applaud. 
[Applause.]
    Thank you gentlemen both, and thank you all for coming 
today. We hope you enjoyed it.
    [Whereupon, at 3:30 p.m., the proceedings were adjourned.]

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