[Senate Hearing 108-615]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-615

    DOES CMS HAVE THE RIGHT PRESCRIPTION? IMPLEMENTING THE MEDICARE 
                       PRESCRIPTION DRUG PROGRAM

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

                                HEARING

                               before the

                  OVERSIGHT OF GOVERNMENT MANAGEMENT,
    THE FEDERAL WORKFORCE AND THE DISTRICT OF COLUMBIA SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________



                             APRIL 8, 2004

                               __________

      Printed for the use of the Committee on Governmental Affairs


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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

           Michael D. Bopp, Staff Director and Chief Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                      Amy B. Newhouse, Chief Clerk

                                 ------                                

   OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL WORKFORCE AND THE 
                   DISTRICT OF COLUMBIA SUBCOMMITTEE

                  GEORGE V. VOINOVICH, Ohio, Chairman
TED STEVENS, Alaska                  RICHARD J. DURBIN, Illinois
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        FRANK LAUTENBERG, New Jersey
JOHN E. SUNUNU, New Hampshire        MARK PRYOR, Arkansas

                   Andrew Richardson, Staff Director
   Marianne Clifford Upton, Minority Staff Director and Chief Counsel
                      Kevin R. Doran, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Voinovich............................................     1
    Senator Lautenberg...........................................     4
    Senator Durbin...............................................    27
    Senator Pryor................................................    34

                               WITNESSES
                        Thursday, April 8, 2004

Michael McMullan, Deputy Director, Center for Beneficiary 
  Choices, Centers for Medicare and Medicaid Services............     5
Gail R. Wilensky, Ph.D., Senior Fellow, Project HOPE.............    19
Nancy-Ann Min DeParle, Senior Advisor, J.P. Morgan Partners, LLC.    23

                     Alphabetical List of Witnesses

DeParle, Nancy-Ann Min:
    Testimony....................................................    23
    Prepared statement...........................................    70
McMullan, Michael:
    Testimony....................................................     5
    Prepared statement with attachments..........................    41
Wilensky, Gail R., Ph.D.:
    Testimony....................................................    19
    Prepared statement...........................................    58

                                APPENDIX

Questions and responses for the Record from Ms. McMullan from:
    Senator Voinovich............................................    83
    Senator Durbin...............................................   180
    Senator Akaka................................................   183

 
    DOES CMS HAVE THE RIGHT PRESCRIPTION? IMPLEMENTING THE MEDICARE 
                       PRESCRIPTION DRUG PROGRAM

                              ----------                              


                        THURSDAY, APRIL 8, 2004

                                       U.S. Senate,
          Oversight of Government Management, the Federal  
       Workforce and the District of Columbia Subcommittee,
                        of the Committee on Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:42 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. George V. 
Voinovich, Chairman of the Subcommittee, presiding.
    Present: Senators Voinovich, Durbin, Lautenberg, and Pryor.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. The hearing will come to order.
    I do apologize to the witnesses for being late but the 
Members of the Senate were being briefed by the Secretary of 
Defense and the Chair of the Joint Chiefs of Staff about what 
is going on in Iraq today. So we stuck around a little bit 
longer just to get a real flavor for what is happening there. I 
apologize for being late.
    The Subcommittee on Oversight of Government Management, the 
Federal Workforce and the District of Columbia will come to 
order and we welcome you.
    Today's hearing is entitled, ``Does CMS Have the Right 
Prescription: Implementing the Medicare Prescription Drug 
Program.'' I thank all of you for coming today and hope that 
the hearing will provide an opportunity to have a forthright 
discussion about the management challenges facing the Centers 
for Medicare and Medicaid Services.
    The existence of these challenges should not detract from 
the agency's significant accomplishments. Medicare has been and 
continues to be a successful program for the American public, 
providing vital health care to our Nation seniors. Yet the 
agency currently has more on its plate than it has since the 
creation of Medicare and Medicaid in 1965.
    While Medicare and Medicaid have been essential for our 
Nation's seniors by providing coverage for the cost of doctor's 
visits and hospital stays, prior to enactment of the Medicare 
Prescription Drug Improvement and Modernization Act on December 
8, 2003, it was structured for a 1960's health care system. 
Unfortunately, the system did not evolve with the new 
developments in science that allows physicians to treat 
diseases that once required surgery with modern prescription 
medications.
    Thanks to Congress' action last year, our Nation's seniors 
will now have access to a prescription drug program through 
Medicare. It is now our responsibility to make sure that CMS 
has the means to implement this new benefit in an efficient and 
effective manner. While the task ahead of CMS is enormous, the 
agency has faced similar challenges in the past.
    In fact, implementation of this new benefit is similar to 
the previous administration's implementation challenge with 
Medicare Plus Choice. When Medicare Plus Choice was ready to be 
rolled out nationwide, I was serving as Governor of Ohio. I 
recall after reviewing the implementation plan I was concerned 
that the agency was not ready to handle all of the phone calls 
they were going to get after a massive advertising campaign.
    Ms. DeParle will remember my concerns at the time. She was 
the head of the agency preceeding CMS--HCFA. I approached her 
and then-Health and Human Services Secretary Donna Shalala. I 
told them that I felt that before they rolled it out nationwide 
they ought to do some pilot projects to see how it would work.
    To their credit, they adjusted the program. My State became 
one of the five test States and the program was implemented 
smoothly. I think that just like Medicare Plus Choice, CMS has 
a lot of work to do before it will be ready to roll out this 
benefit in 2006.
    Remembering this experience will help us keep in 
perspective the administrative challenges facing CMS, which we 
will learn more about today. I believe that when we begin to 
discuss the details involved in implementing such dramatic 
changes the perception will shift from why is it taking 2 years 
to provide the benefit to amazement that CMS intends to provide 
it in 2 years.
    I am encouraged to see that CMS already has taken 
substantial steps to offer a temporary drug discount card. On 
February 5, CMS announced that over 100 separate entities 
submitted applications to offer Medicare approved cards to 
beneficiaries.
    By March 25, CMS was able to announce that they had 
reviewed the applications and, I understand, awarded 28 private 
card sponsors. This is the first step, and we have to make sure 
that this progress continues, particularly as the mailings go 
out and beneficiaries are going to be asked a lot of questions 
about how to take advantage of the card.
    I understand Ms. McMullan will talk about the discount card 
but neither the details nor the merits of the program are the 
topic of this hearing. Understand that. I do not want to get 
into a debate about the program. There have been numerous 
Congressional hearings about that issue.
    The purpose of this hearing today is to discuss the 
capacity of CMS to respond to the challenge of implementing the 
drug benefit program by 2006 and to establish a baseline of 
where the agency is today.
    Even before passage of the Medicare Modernization Act, CMS 
was coping with administrative challenges. For example, a 2002 
report by the National Academy of Social Insurance highlighted 
the fact that between fiscal years 1992 and 2002 benefit 
outlays increased 97 percent and claims grew by 50 percent, 
however program management funds increased by only 26 percent 
and authorized full time equivalent positions only 12 percent. 
So the workload increased, but there was a question about 
whether the dollars were there to provide for the management 
that was needed to deal with the increases.
    One of the challenges facing CMS in moving forward with 
implementation of the prescription drug benefit is the agency's 
human capital resources. In general, governmentwide strategic 
human capital management remains on the General Accounting 
Office's high-risk list. Currently 18 percent of CMS workforce 
is eligible to retire. The number is significantly higher, 30 
percent, in the career Senior Executive Service. We are not 
talking about early retirement.
    In addition, over the past 3 years, CMS has lost a quarter 
of its career executives to retirement. If that does not seem 
like a daunting challenge, 46 percent of the existing CMS 
workforce will be eligible for regular retirement by 2009.
    These statistics leave me asking the question will CMS have 
the expertise and the leadership it needs to get the job done?
    During my time as Mayor of Cleveland and Governor of Ohio, 
I worked to address the workforce challenges within our local 
and State governments. Working with a wide range of 
stakeholders, we successfully empowered our employees while 
establishing a culture of quality management.
    Since coming to the Senate in 1999, I have stressed to my 
colleagues the urgency of the Federal Government's human 
capital challenges, the need to get the right people with the 
right skills and knowledge at the right place at the right 
time, something that has been ignored by this government for as 
long as I remember. And before I came here I lobbied this place 
for 18 years as a mayor and governor on this same issue.
    So the question is, do we have the people to get the job 
done?
    Human capital management is but one of the many management 
challenges we are going to touch upon today. For example, the 
Medicare program has been on GAO's high-risk list since 1990. I 
look forward to discussing what the future looks like for CMS.
    Testifying before the Subcommittee today are three 
individuals with significant expertise and insight into CMS. 
While I have highlighted what I see as some of the challenges 
facing CMS, I look forward to hearing from CMS about the 
challenges they have identified and the steps the agency has 
taken to address them.
    At this time I would like to welcome Michael McMullan.
    Ms. McMullan is the principal career executive in charge of 
the Center for Beneficiary Choices. She has been with the 
agency for 31 years and I certainly hope you are not 
considering retiring, Ms. McMullan.
    The Center is a focal point for innovation in the Medicare 
program, including clinical quality measurement and assessment, 
the Medicare Plus Choice program and beneficiary education.
    In addition, we are privileged of have testifying today 
before us two past administrators of the Health Care Financing 
Administration, Gail Wilensky, who served from 1990 to 1992, 
and Nancy-Ann Min DeParle, who served from 1997 to 2000. I have 
had the privilege of working with both Ms. Wilensky and Ms. 
DeParle during my time as governor.
    More recently it was their presentation at the John F. 
Kennedy Commonwealth Health Policy Conference in January that 
highlighted for me the tremendous management task before CMS.
    I look forward to their assessment of CMS's ability to 
manage the new drug program and what they would do if they were 
in charge of CMS today.
    I would now like to recognize Senator Lautenberg for an 
opening statement. Senator, thank you for being here.

            OPENING STATEMENT OF SENATOR LAUTENBERG

    Senator Lautenberg. Thank you, Mr. Chairman.
    You know that I think that Ohio had chosen wisely when they 
sent someone with the experience and the commitment that you 
have, Mr. Chairman, and I enjoy our chances to get together.
    I am sure that some of our meetings are not quite as 
pleasant as some of the others, but we always have the same 
mission in mind, Mr. Chairman. And so I look forward to this 
hearing and commend you for calling it.
    The Medicare Modernization Act is being closely scrutinized 
by all sides. We are not here to debate the merits of the new 
law, but rather to review how the Centers for Medicare and 
Medicaid Services will implement the most significant changes 
to Medicare since its inception. It is not going to be an easy 
job. It is precisely the implementation of this law that I have 
some serious concerns about.
    As you would expect, the view of the law where the class is 
half-full or half-empty is where we are. The Chairman sees it 
as half-full. I see it as half-empty. His interest in getting 
the program underway is one certainly that I think we all would 
like to see in place.
    Questions are raised about why the year 2006 was chosen, I 
think. I came out of the computer business and the Chairman has 
long studied Medicare and the health care problem. But I know 
that our recordkeeping is a lot better today than it was in 
1965 when Medicare was created and it took us only 11 months, I 
think, to get the Medicare program up and running. With the 
computer technology and the recordkeeping that we have today, I 
think it could take a lot less time. I am rather suspicious 
about deferring the date until 2006.
    I have repeatedly asked the Administration to stop 
producing misleading Medicare advertisements that have a 
political tone. The reality is that the recent print and 
television ads promoting the law do really little to inform the 
Medicare beneficiaries. Rather, they are thinly veiled 
political ads paid for with taxpayer funds.
    At my request, the General Accounting Office reviewed these 
ads and found that they contained ``notable omissions and other 
weaknesses'' such as misleading seniors about the prescription 
drug program's premiums, which will very likely exceed the 
Administration's estimate of $35 a month. These ads sugar coat 
the description of the Medicare drug discount card program by 
failing to note that the cards require the payment of annual 
fees and that the discounts will vary greatly. The ads promise 
the same Medicare when the law contains new structural 
incentives for the gradual privatization of Medicare.
    In a similar vein, false news reports scripted by the 
Administration repeat the litany of intentional errors and 
misleading statements. Masquerading as journalism, video news 
releases, VNRs, produced by the Administration tout the new 
legislation. In a video produced by HHS, the cheering crowd 
stands there applauding the President as he signs the Medicare 
Modernization Act into law. It is fairly obvious that this had 
to be staged.
    And even the government's official 1-800-Medicare help line 
extols the new law, literally forcing callers to describe the 
changes as Medicare improvement before permitting them to 
access a counselor. Once a caller submits to say Medicare 
improvement, he or she is led to an automated voice with a 
familiar misleading message. It says it is the same Medicare 
you have always counted on with more benefits. You can keep it 
as it is and you do not have to change a thing. The 
Administration's obligation is to educate and not spin.
    The legislation is now law and understanding its many 
changes, including some which will offer legitimate help to 
people with low incomes or high drug needs, is daunting enough 
for people without being misled by Administration ads or video 
news releases.
    If the Administration's primary interest truly lies in 
getting Medicare beneficiaries and their families to understand 
the changes under this law, we insist that it remove bias and 
distortion from its so-called educational efforts.
    Mr. Chairman, I would like to be as cooperative as I can to 
get the program underway, but I just have a concern about how 
this is being presented to the American public.
    Senator Voinovich. Thank you.
    It is the tradition of this Subcommittee to swear in the 
witnesses. Will the witnesses please stand as I administer the 
oath?
    [Witnesses sworn.]
    Senator Voinovich. The record should reflect that the 
witnesses responded in the affirmative.
    Ms. McMullan, I want to thank you very much for being here 
today. I want to also publicly thank you for your 31 years of 
service to our government and the people that you have come in 
contact with over the years. We look forward to your testimony.

 TESTIMONY OF MICHAEL McMULLAN,\1\ DEPUTY DIRECTOR, CENTER FOR 
BENEFICIARY CHOICES, CENTERS FOR MEDICARE AND MEDICAID SERVICES

    Ms. McMullan. Chairman Voinovich, distinguished Members the 
Subcommittee, thank you for inviting me today to discuss 
implementation of the Medicare Prescription Drug Improvement 
and Medicare Modernization Act or MMA for short.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. McMullan with attachments appears 
in the Appendix on page 41.
---------------------------------------------------------------------------
    The Centers for Medicare and Medicaid Services is very 
proud----
    Senator Voinovich. Ms. McMullan, I usually ask people to 
speak for 5 minutes, but I do not want you to rush through 
this. We have three witnesses today and I want to make sure 
that we hear you.
    If you could just move up closer to the mike, too, so that 
we can hear what you have to say.
    Ms. McMullan. The Centers for Medicare and Medicaid 
Services is very proud to have a significant role in 
implementing this historic legislation and is working 
diligently to meet the numerous and aggressive deadlines 
outlined in the Act.
    The MMA represents a fundamental change in the Medicare 
program by offering our beneficiaries more choices in how they 
receive their care and by establishing a responsive 
relationship with providers of that care.
    This will begin with the Medicare-sponsored discount card 
and will continue as the full prescription drug benefit is 
implemented in 2006, and represents a lasting change in how CMS 
and the Medicare program will operate.
    CMS is unique among government agencies in that it 
accomplishes its mission principally through contractors and 
other government entities. The agency employes about 4,500 
people in locations across the country. However, these 
employers are only a small portion of a very large, complex 
network of people and groups that make our programs work 
successfully.
    The chart that I have attached to my testimony gives an 
idea of the scope of this contracted work.\1\ For example, in 
2003, it is expected that CMS contractors will have provided 
claims processing services to about 33 million beneficiaries, 
worked with approximately 1.1 million health care providers, 
processed more than 1 billion Medicare claims, paid more than 
$236 billion for beneficiary services, and handled more than 
7.3 million review requests and other kinds of appeals.
---------------------------------------------------------------------------
    \1\ The chart referred to appears in the Appendix on page 50.
---------------------------------------------------------------------------
    CMS' MMA implementation challenges can be categorized into 
a number of broad categories, including a prescription drug 
discount card and transitional assistance program, a new 
voluntary Medicare prescription drug benefit, modification of 
the existing Medicare Plus Choice program now renamed as 
Medicare Advantage, and contractor and regulatory reform.
    The MMA also modified numerous payment systems under 
Medicare and Medicaid, particularly those affecting rural 
providers. It established new preventive benefits, established 
a number of demonstration programs, provided for administrative 
improvements and regulatory process changes and numerous other 
provisions.
    Given the nature of the work before the agency and the need 
for effective steady leadership, we appreciate the Senate's 
swift confirmation of Dr. McClellan as our new Administrator.
    As an example of what we have already done to implement 
MMA, on December 15, 2003, just 1 week after the law was 
signed, CMS published a regulation establishing a new 
prescription drug discount card program. We solicited 
applications from organizations interested in sponsoring such a 
program, and on March 25 announced the approved applications.
    On April 1, CMS announced the actual drug discount cards 
that the sponsors will offer. And on April 29 we expect to post 
on our Web site specific discount prices available through 
these programs. Beneficiaries will be able to sign up for the 
cards in May and begin realizing the associated discounts on 
their drug purchases effective June 1.
    In addition, qualified low income beneficiaries will 
receive a significant additional benefit of a $600 credit 
applied toward their drug purchases.
    Establishing the drug discount card program, although a 
major effort, is not the only work that CMS has accomplished in 
the past 5 months when it comes to MMA implementation. The 
second attachment to my testimony details more than 100 tasks 
that CMS has completed to date. It is obvious from this list of 
accomplishments that CMS is making good headway in meeting the 
ambitious timeline within the MMA.
    The MMA provides CMS with about $1 billion to spend over 2 
years for implementation. This money will be spent on hiring 
additional personnel, upgrading and adding new information 
systems for operations and analysis, educating and providing 
information services to beneficiaries and providers. CMS has 
already made important funding decisions related to the 
implementation of the drug card and to hiring new employees. 
CMS continues to develop and implement the budget plan as it 
moves toward implementation of the remaining provisions.
    To implement the MMA, CMS will need to hire individuals 
with expertise in pharmacy benefit management, clinical 
professionals such as pharmacist and physicians, individuals 
experienced with disease management and prevention, health 
economists, public policy analysts, and individuals who know 
how employers structure their retiree benefit practice. CMS 
will also need additional IT professionals experienced in 
building systems and telecommunication infrastructure 
contemplated by the law. Finally, CMS will need to hire 
individuals experienced with government contracting, as much of 
the work under MMA, as with other Medicare operations, will be 
contracted out. We have begun staffing a number of these new 
positions.
    Once contracts have been established for the administration 
of the program set up by CMS, the work of the contractors must 
be monitored and supervised to ensure program integrity and 
effectiveness. The main oversight work of CMS is to see that 
contractors and providers implement these new programs as 
directed by statute and established by the agency.
    For example, CMS will need to monitor pricing of drugs and 
benefits provided under the drug discount card program, by the 
drug benefit plans, and the Medicare Advantage plans. The new 
programs must be studied for their effectiveness, to see 
whether they have carried out the statute as Congress intended, 
and if they have provided appropriate benefits and assistance 
to Medicare beneficiaries. Error rates in payment will need to 
be established and education made available to providers to 
help them avoid billing errors.
    CMS must also monitor for fraud and abuse. The agency needs 
to be able to address any inappropriate behavior, either 
through remedial education or punitive measures.
    The implementation of Part D and the new and revised 
payment systems require substantial IT development and changes. 
The agency will need to develop and manage plan enrollment and 
management systems, systems to process beneficiary eligibility 
requests and enroll beneficiaries in the new benefits, track 
utilization of services, and measure and track clinical 
quality.
    Revised and new IT systems will need to interact with 
systems supporting MMA managed by other Federal agencies such 
as the Social Security Administration and the Internal Revenue 
Service, States, and private insurers who contract for the new 
benefits under MMA and those offering Medigap plans.
    CMS recognizes that opportunities for beneficiaries to 
choose new benefits and how these benefits will be delivered 
represent a change for Medicare beneficiaries. Therefore, CMS 
has begun a substantial and varied education campaign to assist 
beneficiaries as they take advantage of these new benefits.
    The timelines required under MMA are ambitious and will 
require prudent planning and wise use of resources. Although 
there are many decisions left to make with respect to budget 
and personnel, CMS is committed to informing Congress about 
these issues as they progress.
    I thank you for your invitation to testify this morning and 
I welcome your questions.
    Senator Voinovich. Thank you, Ms. McMullan.
    I would like you to go back to about the last 2 minutes of 
your testimony. I would like you to repeat for us that last 
part about all the things that you have to do, that is a 
mouthful and you went quite rapidly through it. Just go through 
it real slow.
    It is right at the end of your testimony, you were 
discussing bringing IT people on board.
    Ms. McMullan. The types of people that we need to 
administer the programs?
    Senator Voinovich. That is right, could you repeat that 
again?
    Ms. McMullan. In order to implement MMA, we are going to 
need people who understand pharmacy benefit management, a 
principal task under the new Part D, clinical professionals 
such as pharmacists and physicians, individuals experienced 
with disease management and prevention, health economists, 
public policy analysts and individuals who understand how 
employers structure their employee benefit packages.
    We will also need IT specialists who understand how to 
structure the systems and the telecommunication infrastructure 
contemplated by the statute in implementing both Part D and the 
other programs under the statute.
    Senator Voinovich. That is a mouthful.
    Ms. McMullan, you have been in the agency a while. What 
lessons has CMS learned from the twin challenges passed by the 
Medicare reforms mandated by the Balanced Budget Act of 1997 
and the Y2K computer migration, in terms of prioritizing and 
implementing a lengthy list of important and complicated 
program changes?
    Just listening to what you have said, what have you learned 
from past experience that will help you now?
    Second, these people with specific expertise that you need 
to hire, are they available today to be hired? Is the budget 
that has been made available to the agency adequate enough to 
get the job done?
    And, finally, but not least, what I am most interested in 
is do you think that you need some additional workforce 
flexibilities in order to get the job done?
    For the last several years, I have been working on the 
issue of human capital management. One of the concerns I have 
had is that some agencies have been unable to keep people they 
need. And then, more important than that, agencies have been 
challenged in attracting new people into the agencies. I have 
worked to ensure agenceis have the flexibilities and the tools 
and the other things that are needed.
    You have been at CMS a long time. So if you would talk 
through these issues for me, I would appreciate it.
    Ms. McMullan. To start with the lessons learned, I think 
that the most important thing that we learned in both doing the 
implementation of the Balanced Budget Act and in Y2K is the 
need to think through the plan for each of the activities that 
is contemplated in the statute for us to implement and 
understand what the business requirements are for the task, and 
the critical path to implementing the different activities.
    And so, we are in a very careful planning and prioritizing 
stage now for many of the parts of the statute that have 
implementation dates in 2006 through 2011.
    So that is a critical task and activity that proved to be 
very useful and important in our implementation of the Balanced 
Budget Act (BBA) and in the Y2K management. So we are actively 
doing that, reporting on a regular basis on our accomplishment 
against those plans and working with our colleagues and other 
Federal agencies and the States to coordinate the activities 
that have to be implemented against the plan.
    So that is probably the greatest learning that we have done 
over time; understanding the importance of that first task of 
planning.
    Having said that, then you take those business requirements 
in the plan and look at what the tasks are ahead of us that are 
the most important for us to accomplish in implementing the 
statute. And for Part D, that is substantially information 
systems and contract development and management because we will 
be contracting out for the management of the Part D benefit to 
private drug plans as well as Medicare Advantage plans. The 
private drug plans is a new entity in the marketplace and so we 
are going to be working through and thinking about having to do 
that.
    Medicare Advantage offers a new option with the PPOs, so we 
are working to think through and understand how best to 
organize that and to be able to contract for it.
    The business requirements for the systems deal with how do 
you add to our already existing plan management and monitoring 
capacity that we have now for the Medicare Advantage plans? How 
do we expand out those systems that already exist? And then, 
for Part D, establishing new systems to manage eligibility and 
payment. It is a different program. So that we have to think 
through those requirements and put the systems in place.
    As far as the human capital aspect of that, significantly 
to accomplish the work done to implement those programs we will 
rely on contractors. And so the human capital that we need 
within CMS are the people who can define the requirements and 
manage the contractors. So it is very important that we have 
expertise inside of CMS and the Department.
    Senator Voinovich. An important part of this program, and I 
have been through it as a governor, will be putting requests 
for proposals together for private contracting. It takes some 
really good people to do that.
    Once it is done, it is important to have the people to 
review the proposals. Do you have that capacity now to do that?
    Ms. McMullan. We have the capacity now to do part of the 
work that we are doing now, and then we will build up the 
capacity over time to do the work that we will have to do 
between now and 2006. And then eventually, with contractor 
reform, through 2011.
    So we need to increase capacity both for people who 
understand government contracting and in the IT systems, as 
well as the expertise that we need in understanding how to 
manage the pharmacy benefit and the clinical staff that can 
help us understand the coverage and rules. We also have disease 
management and prevention, so we need more clinical staff in 
that area as well.
    So we do understand we have to build out the staff within 
CMS in order to manage the program. The significant human 
capital though, will be acquired through contracts as we do 
now.
    Senator Voinovich. Do you feel confident that the people 
you need to bring in to CMS to do the RFPs, request for 
proposals, are available to be hired?
    Ms. McMullan. We have had significant success hiring 
expertise in government contracting. We often acquire people 
from other government agencies that do contracting. There are 
significant resources out there in trained resources.
    So I think that on managing government contracts we 
probably do have a sufficient supply available to us within the 
existing government contracting world.
    We are also using ways to attract scarce resources by 
offering recruitment bonuses as well as for our clinical staff, 
special pay provisions for physicians and others that qualify 
for those provisions.
    Senator Voinovich. Do you have those flexibilities right 
now?
    Ms. McMullan. We have them and we are interested in 
employing some additional ones that can be made available to us 
through the direct hiring authority available through the 
Office of Personnel Management, as well as the hiring potential 
that is available through the statute itself. So we are 
interested in using those additional hiring authorities.
    Senator Voinovich. We are going to have a couple of rounds 
of questions. Senator Lautenberg.
    Senator Lautenberg. Thank you, Mr. Chairman.
    May I have your permission to show a short video just to 
clarify what was said and when, that kind of thing?
    Senator Voinovich. That is fine.
    [Videotape played.]
    Senator Lautenberg. Thanks, Mr. Chairman.
    This news story, fake news story, was produced by CMS. It 
was distributed to TV stations around the country, run as if it 
were just an unbiased news clip. The video did not identify 
that it was produced by the government. The GAO has launched an 
investigation concerning the legality of this video.
    And I thank you, Ms. McMullan, for your testimony. I know 
how arduous the task has been to get all these things into 
shape and I respect it greatly.
    I just have some questions that I think need clarification. 
Do you know who Karen Ryan is, the reporter in this video?
    Ms. McMullan. It was a name used in developing the video.
    We produce video news releases, audio news releases, and 
paper press releases that we give to the press in order to give 
them information. The way that the press stations use these, 
the VNR in particular, is to cut and paste certain portions of 
them.
    The use of a voice in going through the VNR from beginning 
to end is meant to provide context in ways that news stations 
may use them. Most news stations just use pieces of the VNRs. 
Very few of them use any of them from start to finish, and that 
is really the decision of the news director. But most of them, 
as I say, use them as just little snippets.
    And along with the information you show, we also include 
other kinds of materials that they can use called B-roll. I do 
not know what the B stands for, but it is called B-roll. That 
is added to the VNR just to provide them with other information 
that they can use.
    So it is very much like a paper press release that 
newscasters and others use at their discretion.
    Senator Lautenberg. But it does not identify anyplace that 
this was put out by CMS because it portrays what one would 
normally think of as a news report, ``today thus and so 
happened.'' The President signed the bill, and here is what the 
law is going to be.
    Usually that would carry a legend that says this is 
produced by, paid for by or otherwise.
    But I think what comes across is, as you have just 
confirmed, is that you use voices and people to portray things 
that usually always, I think, are required to identify the fact 
that this is produced by the government. This certainly did not 
have that character.
    How many stations played this so-called new report? Do you 
know?
    Ms. McMullan. No, I do not know but we will be happy to 
provide that for the record. We do have the information.

              Information provided for the Record follows:

    The video news release (VNR) was aired on 40 different 
stations in 33 local markets throughout the country.

    Senator Lautenberg. I think the number was about 40, but I 
would appreciate your confirmation.
    Should CMS be in the business of covertly distributing news 
stories that are not really representative of just the issue, 
but rather, in my view, certainly has a political overtone 
here? Do you think that is appropriate to pitch, cut, and 
paste, and do that kind of thing, presented as if it was pure 
news without saying that this is a program that still has some 
way to go, and things to do?
    We talk about senior citizens being able to get all kinds 
of drugs, everything they want. But the fact of the matter is 
they cannot get the health savings account if they are a 
Medicare beneficiary. That was pulled, Mr. Chairman, from the 
first circular that was printed because it is not a benefit 
that is available to those who are beneficiaries of the 
Medicare program.
    The General Accounting Office found that the Medicare flyer 
and the ad campaign that the Centers for CMS produced contained 
notable omissions, had a political tone, and overstated the new 
drug law's benefits. These are tough criticism by a nonpartisan 
organization, GAO. And will CMS revise these materials in 
response to GAO's criticisms?
    Ms. McMullan. The materials that GAO reviewed were ads that 
had been on the air. We will be airing additional new ads on 
the drug discount card. We use the power of television to reach 
the maximum audience that we can.
    The information that we include in ads, and note that ads 
are 30-second ads, so that there is not a significant 
possibility to include all information about all parts of the 
program. So we try to target it on one or two messages to make 
sure that people understand, particularly where do they go to 
get additional information on any of these.
    When we do the ads, we substantiate the information in the 
ads to make sure that it is accurate and presented correctly. 
So we do intend to continue to use television advertising to 
help people understand Medicare.
    Senator Lautenberg. So you dismiss the commentary, the 
response by GAO that said that there were notable omissions, 
the ads had a political tone, and overstated the new drug law 
benefits? You dismiss those as not being meritorious in this 
case?
    Ms. McMullan. I would never dismiss any good advice that we 
get from anyone. In looking at what they had to say, we take 
all of that into consideration in moving forward. But I would 
just note, in providing a 30-second ad, we have to limit the 
number of messages just because of the time. And we want to 
make sure that people understand what they are getting.
    Senator Lautenberg. But that does not mean that you would 
change the facts.
    Ms. McMullan. We do not change the facts. They are fact-
based.
    Senator Lautenberg. Then what is the 30-second relevance, 
in terms of when I say over----
    Ms. McMullan. Well, when you mention that there are 
significant omissions, it is hard to include a complete 
analysis of anything in a 30-second ad, so we target it to just 
a few facts.
    Senator Lautenberg. How about overstating the benefits and 
the political tone? Will those ads in the future say produced 
by the CMS and so forth? Should that legend be on there, do you 
think at all? Or is it appropriate to just have this out there 
and let us say pretend that it is a news story? Because it is 
not basically a news story.
    Ms. McMullan. You have two different issues here. One is 
that the ads are always attributed to the Department of Health 
and Human Services.
    Senator Lautenberg. This was not.
    Ms. McMullan. The television ads. The video news release is 
much like a press release. The video news release, when we send 
it out, we send it out from the Department of Health and Human 
Services. So it is attributed to the Department of Health and 
Human Services when it goes out to the new stations, just like 
the press releases and fact sheet include our information.
    What news stations choose to use is at their discretion, 
just like a newspaper reporter would not necessarily attribute 
a paragraph in a news story to a fact sheet that he gets from 
Health and Human Services. So it is much more akin to a press 
release than it is to the television advertisement, which on 
the television ads we do include an attribution.
    Senator Lautenberg. How do you differentiate, who makes the 
decision that this one is supposed to create the impression 
that it is a news release, that it is a discovery by the 
reporter or the station? As opposed to an ad? Why was this not 
an ad? Because to me it looks like one.
    Ms. McMullan. For the ads, we buy time on television to 
present them to the public. The VNRs we produce and send out to 
the news stations and they make the choice as to whether they 
use any of it or not. We do not pay for the release of that 
information.
    Senator Lautenberg. Did any other networks, the larger 
stations, use this, that you are aware of?
    Ms. McMullan. I do not know but I will be happy to provide 
that for the record.

              Information provided for the Record follows:

    The VNR was not aired on national network newscasts but was 
aired only by local affiliate stations of all four major 
networks (ABC, NBC, CBS and Fox), as well as Telemundo and some 
independent stations.

    Senator Lautenberg. We did some checking because we take 
heed to what GAO said.
    The VNR did not go out from CMS. It went out from HHS 
public relations firm, a professional firm. So there was no ID 
on the videos as to the source from whence they came.
    And to me, Ms. McMullan, as we discuss this I am more 
convinced than ever that there was something out there that was 
deceptive, misleading and ought to be reviewed very seriously 
by CMS and by HHS.
    And I am going to go further with this and see if we cannot 
insist that all of these carry the legend that this is sent out 
by either CMS or HHS to make sure that people understand that 
this is not just some news story that you go ahead and run, 
because it is misleading in character.
    Mr. Chairman, what is your preference on time?
    Senator Voinovich. I would like to ask some questions and 
then return to you.
    Senator Lautenberg. Thank you.
    Senator Voinovich. I would just like to comment, this is 
not the purpose of this hearing. But let me clarify.
    The ad that we have seen was sent out as a news release, a 
television news release. When it was sent to the stations, they 
knew that it came from CMS and HHS; is that correct?
    Ms. McMullan. Yes.
    Senator Voinovich. The point you were making is when they 
got it, stations could use the whole thing or a snippet of it. 
It was their decision to make, in terms of what they were going 
to use; is that right.
    Ms. McMullan. Correct.
    Senator Voinovich. Sometimes I sent a news release out when 
I was governor. We would do a TV spot, put it together, and 
send it to the stations. And most of the time they did not use 
it but sometimes they did. But rarely did they ever run the 
whole piece. They just took parts of it. OK, that is one thing.
    The other thing, you are guaranteeing to us that for any 
30-second commercial that you paid for will notify everyone 
that it has been paid for by the Department or the government, 
so that there is no question about where it is coming from; is 
that correct?
    Ms. McMullan. Yes.
    Senator Voinovich. OK, clear.
    One of the things I am really worried about is the 
advertising of the 1-800-Medicare number. I had a little 
experience last night. I called the company that takes care of 
my drugs with a question about whether one drug that I was 
getting was cheaper or more expensive than another one that 
supposedly is the same thing.
    I am writing to the president of this company. I waited for 
15 minutes before I got a pharmacist, 15 minutes. And then, 
when I got the pharmacist, I could not understand the 
pharmacist.
    I do not know where this person was, but I was really 
upset. Finally, after 5 or 6 minutes, I got what I needed, but 
it was unbelievable.
    What testing have you done on the 1-800 number? How much 
time are you going to be giving the individuals that are making 
the call? And the people answering going to be U.S. citizens, 
who can enunciate their words? And I have nothing wrong with 
accents. My grandmother and grandfather on both sides, they 
learned to speak English.
    My concern is that you are dealing with senior citizens. 
You must have people answering questions that have good 
diction, understand callers, and can communicate.
    How much testing have you done on this 1-800-Medicare 
number. Once people start calling that number, if they are not 
happy with it, they are calling my office. They are going to 
call Senator Lautenberg's office. They are going to call our 
Department of Aging in Ohio.
    So I would like to know, what testing have you done to make 
sure that thing really works.
    Ms. McMullan. At our 1-800-Medicare number, we have 
increased the number of customer service representatives from 
352 to 1,400 people. To answer your question about volume, will 
we be able to handle the volume.
    They are scripted with answers to questions that we 
carefully develop and test with both the customer service 
representatives and with Medicare beneficiaries.
    We also provide a quality assurance activity within the 
call centers where their managers listen in on the calls to 
make sure that people are following the direction carefully and 
answering the questions with the right kind of consideration to 
the caller.
    We have another tool that we use where we can offline watch 
the calls being answered and how people are navigating through 
the scripts to make sure that they are using the right answers 
to the scripts.
    And we also have something called mystery shopping where we 
have contractors who call, ask questions as if they are a 
Medicare beneficiary, and tell us whether or not they are 
getting the appropriate answers in return.
    Senator Voinovich. How long have you had the 1,400 people 
on? Are they all hired?
    Ms. McMullan. They are being hired and will all be 
available by May. So they are being hired and trained now.
    Senator Voinovich. But people are already calling 1-800-
Medicare.
    Ms. McMullan. And we are able to answer the questions now. 
The people there are being trained and scripted as we speak. So 
as we started with the marketing and advertising campaigns, we 
had the ability to answer those calls.
    The calls are answered within a very short wait time, 
almost immediately. If there is a period of the day when there 
is a heavy call volume and they have to wait more that 2 
minutes, we let them know that they can either wait or call 
back another time when there is less volume. But no one waits 
15 minutes.
    Our call center is operated 24 hours a day, 7 days a week 
with English and Spanish speaking customer service 
representatives. And all of the call centers are in the 
continental United States.
    Senator Voinovich. Good. Senator Lautenberg.
    Senator Lautenberg. Thanks again, Mr. Chairman.
    Ms. McMullan, is Homefront Communications a division of 
government, do you know?
    Ms. McMullan. Homefront Communication is one of our 
contractors who developed the VNR on our behalf.
    Senator Lautenberg. You said that they would know that this 
came as a news release from CMS. But here is the script and it 
says the address for this is Homefront Communications at 1620 I 
Street, and the phone number is definitely not a government 
phone number.
     So is this not a little deceptive to have this released as 
if it was fresh news without saying hey, this is put out by our 
Department in the interests of selling this program? Because it 
has a political bias to it that is, I think, almost impossible 
to challenge.
    We have seen a few things, Ms. McMullan, that are 
disturbing. You know the claim that there will be a $35 premium 
for the Medicare drug plan. It is only an estimate of what the 
actual premiums are going to be in 2006. And you know what 
happens with estimates, invariably they go up. The CMS 
materials give the misleading impression that the premium will 
be about $35 when, in reality, it could be substantially 
higher.
    Would you stake your family farm on the fact that this is a 
$35 charge and nothing more?
    Ms. McMullan. Like many things we estimate prospectively 
what we anticipate it will be and that is our current estimate. 
That is our best knowledge at this time.
    Senator Lautenberg. How long do you think the $35 premium 
will last, Ms. McMullan?
    Ms. McMullan. I do not know. I do not know what our 
analysis showed as far as how long we thought that would be 
$35. The estimates are done by people who do these kinds of 
estimates all of the time based on the information that they 
have. So I expect that they do the best that they can.
    Senator Lautenberg. Do you know what the cost of this new 
program will take over the next 10 years? How much it will cost 
to do, to put this program into place?
    Ms. McMullan. Those estimates are available. I do not know 
them off the top of my head, I am sorry.
    Senator Lautenberg. Do you recall the number $400 billion 
over a 10-year period?
    Ms. McMullan. The CBO estimate was close to that, $395 
billion was the CBO estimate.
    Senator Lautenberg. Are you aware of the contest that 
emerged with a re-estimate of that by Mr. Foster, whose name I 
am sure you have heard, suggesting that it might be 30 percent 
higher than was originally, 30 or 40 percent than originally 
estimated? You are aware that there was a challenge to that?
    Ms. McMullan. I am aware that the CMS actuaries had a 
different estimate based on a different set of assumptions that 
went into those estimates.
    Senator Lautenberg. But you are satisfied that the $35 is 
an estimate that we can live with?
    You are aware of the flyer, familiar with the flyer that 
was sent out, that was prepared for mailing, 36 million, I 
think, of these pieces; am I correct?
    Ms. McMullan. It was mailed to every Medicare beneficiary 
household, which is about 36 million.
    Senator Lautenberg. When this was examined, we challenged 
the section called News for All Americans that talked about 
starting immediately so Americans would be able to set aside 
money, in the health savings accounts.
    This was stricken from the later production because it was 
challenged. The GAO looked at this. Are you aware that there 
was a section removed in this?
    Ms. McMullan. Yes.
    Senator Lautenberg. So was that a mistake or was that as a 
result, if I may suggest, that this was kind of a knuckle rap 
by GAO and some review of this?
    Ms. McMullan. In the initial development of the flyer, we 
were responding to the fact that we were getting lots of 
inquiries from people with Medicare trying to understand what 
was in the new Medicare Modernization Act. The health savings 
account information is in the Medicare Modernization Act. So in 
developing the first version of it we thought that we should 
explain that important attribute.
    Since people with Medicare can, before they become Medicare 
eligible, have an HSA we thought we should explain it. However, 
you are right. Once you are Medicare aged, you can apply for a 
Medicare savings account but not an HSA. So upon further 
review, we decided that we needed to remove it.
    Senator Lautenberg. Thank you, very much.
    Senator Voinovich. One of the questions that I had was the 
same as Senator Lautenberg, in terms of the cost. And I had it 
explained to me by the Secretary.
    CBO still claims it is going to cost $395 billion over 10 
years. It is OMB that came back and said that it is going to 
cost, I think, $530 billion or $540 billion, a substantial 
increase from the $395 billion.
    It is my understanding that the difference is the estimate 
of how many people will take advantage of Part D. And I think 
CBO based their estimate on the percentage of people that are 
currently taking advantage of Part B of Medicare. Do you know 
what that percentage is?
    Ms. McMullan. It is about 90 percent.
    Senator Voinovich. It is my understanding that when OMB 
looked at it they said that they thought a larger percentage. 
In other words, when CBO did its analysis, it said 90 percent 
participate in Part B. I think the Secretary gave me a larger 
number. Are you sure that number is right, 90 percent for Part 
B?
    Ms. McMullan. We are pretty sure that that is correct, but 
we will also provide that for the record if it is not.

              Information provided for the Record follows:

    Generally, 91 percent of those beneficiaries eligible 
participate in Medicare Part B. We assume that about 94 percent 
of those eligible for Part D will choose to participate.

    Senator Voinovich. If you could do that.
    But the fact is that there is a difference of opinion about 
how many people are going to take advantage of this Part D that 
will be offered to them in 2006. And that is the reason why we 
have different numbers. But CBO, at this stage of the game, has 
not backed off the $395 billion and there is a difference.
    Quite frankly, if we are being honest about it, we are not 
really sure. It may be between $395 billion and $540 billion. 
Hopefully, it is not going to be more than $540 billion, but 
only time will tell because we just do not know how many people 
are going to take advantage of the program.
    In line with having people take advantage of the program, 
you are going to have a Web site; is that correct?
    Ms. McMullan. Yes.
    Senator Voinovich. One of my concerns is that you have a 
lot of vulnerable people out there. The ones that I am really 
concerned about in this country are the least of our brothers 
and sisters, the people who today are poor and are unable to 
buy prescription drugs or, in the alternative, buy them and 
ration them.
    One of the things that this program is aimed at is that 
vast number of people, particularly those under 150 percent of 
poverty. They are most vulnerable people in this country today 
because they do not have prescription drug benefits.
    How can somebody that is in this vulnerable position, that 
does not have a computer, or maybe like this Senator, is not 
computer literate--thank god that my wife is--going to get the 
information so they can intelligently decide which card they 
should receive? What efforts are going to be made to help them 
take advantage of this program?
    Ms. McMullan. We are making a significant commitment to 
reach out to the low income population. We have several 
strategies that we are using. In fact, we have 700 people in 
Washington yesterday and for half a day today, that come from 
States and other organizations that assist people with 
Medicare, and understanding how to take advantage of the drug 
discount card program, particularly those people who qualify 
for the $600 credit. So we are training people, through this 
approach, with the conference.
    We have put additional resources into our regional offices 
to work with State and local organizations to train additional 
community-based organizations to reach out to the low income 
population.
    We have our State Health Insurance and Assistance programs 
which are grants to States that we have added money to so that 
they can also assist the low income individuals and find those 
opportunities to engage the low income population.
    We are putting additional resources into establishing 
longer term partnerships with organizations that reach low 
income beneficiaries because that is also a very important 
aspect of Part D. So we have a significant amount of resources 
going to exactly the population that you are speaking about.
    Additionally, anyone calling 1-800-Medicare can be walked 
through the Web site and helped to narrow the choices of drug 
cards that are available to them and also get additional 
information about other drug discount programs that may be 
available to them such as State pharmacy assistance programs in 
those States that offer those programs.
    Senator Voinovich. I will close on this one comment. I have 
really worked with our governor and our Office on Aging and the 
Department of Insurance to expand OSHIIP. We started that 
aggressive program when I was governor. This has been very 
helpful and it seems to me that you ought to be encouraging the 
States to really go out and recruit more people in the OSHIIP 
program.
    It seems to me that you ought to have an expert at every 
senior citizen club, every senior facility, living facility, so 
that there is somebody there that can help these individuals 
take advantage of it.
    I just want to, for the record, say I had a staff member 
call 1-800-Medicare. For the record, there was approximately 90 
seconds of recorded information. After that an agent picked up 
immediately. So far, so good, Ms. McMullan.
    Senator Lautenberg.
    Senator Lautenberg. That is better than you get from the 
telephone company if you call for a service call.
    I would just ask one other thing, Ms. McMullan. I thank you 
for your cooperation and your patience in this, but we want to 
get to the bottom of it and we will be sending you additional 
questions for response to the record.
    But the subject of the pharmacy assistance program was 
brought up. There is automatic enrollment for those who are 
presently in Medicare, in the discount drug program. Why are we 
prohibiting the pharmacy assisted program beneficiaries from 
automatically being enrolled?
    Ms. McMullan. There is no automatic enrollment in the drug 
card. We have been working closely with the States that offer 
pharmacy assistance programs to look at the opportunities to 
allow automatic enrollment for their pharmacy assistance 
members, and we will do that. It is an interesting combination 
of both Federal issues and State law issues. But we have worked 
out a mechanism where we can provide the opportunity for 
automatic enrollment.
    The one issue that we need to have, because it is stated in 
the rules around the drug card, is that we have to have a 
signature. So we are working with those programs to offer their 
members to make sure that they understand that they are being 
enrolled in this benefit. But we will allow the States that 
have pharmacy assistance programs to automatically enroll, 
given the fact they ask for a signature of those members.
    Senator Lautenberg. Thanks, Mr. Chairman. Thank you again, 
Ms. McMullan.
    Senator Voinovich. Ms. McMullan, I have several other 
questions I would like to ask you, but I am going to submit 
them to you in writing and would appreciate your responding to 
me in regard to those questions.
    You have been very gracious to come here this morning. We 
really appreciate your testimony. You have a very formidable 
task ahead of you. I have been involved in implementing 
programs, and god bless.
    Ms. McMullan. Thank you.
    Senator Voinovich. I would now like to call Gail Wilensky 
and Nancy-Ann Min DeParle to come forward.
    As I mentioned earlier, Ms. Wilensky and Ms. DeParle are 
former administrators of HCFA, CMS's predecessor. I look 
forward to hearing what they believe are the major challenges 
facing CMS as the agency moves forward with this benefit.
    Ms. Wilensky, if you could start. Again, I really am 
grateful that the two of you are here today and I am so glad 
that I was with you at the John F. Kennedy School of 
Government's 2-day health seminar. Had I not been there and 
heard from you, we would not be having this hearing, and I 
would not have been on the phone and working so aggressively to 
make sure that Mr. McClellan was confirmed to take Mr. Scully's 
position. A lack of leadership by CMS at this time would have 
been a disaster.
    Ms. Wilensky.

TESTIMONY OF GAIL R. WILENSKY, Ph.D.,\1\ SENIOR FELLOW, PROJECT 
                              HOPE

    Ms. Wilensky. I agree with your assessment. I believe the 
people running the January meeting, sponsored by the 
Commonwealth Fund and the Kennedy School, should feel this is a 
signal of the success of that meeting. And Senator Lautenberg, 
I hope sometime you will join us, as well. It is open to all 
Members of Congress.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Wilensky appears in the Appendix 
on page 58.
---------------------------------------------------------------------------
    Mr. Chairman, Members of the Subcommittee, thank you for 
inviting me to appear before you.
    I am currently a Senior Fellow at Project Hope, an 
international health education foundation. As you have 
indicated, I am a former administrator of the Health Care 
Financing Administration from 1990 to 1992.
    I also served as the first chair of the Medicare Payment 
Advisory Commission, MedPAC, from 1997 to 2001, and chaired the 
Physician Payment Review Commission from 1995 to 1997.
    I say that because it has given me a very broad perspective 
of issues both from an operational and administrative point of 
view, running the program but also advising the Congress on 
issues of payment and change.
    Additionally, I have spent 8\1/2\ years in the Federal 
Government as a senior researcher and career staff person and 
that allows me to have a somewhat better understanding of the 
issues that career people have faced.
    What I would like to do is review some of the challenges 
that I believe are present with regard to the regulation and 
implementation phase of the Medicare prescription drug program, 
to consider the adequacy of resources available, and also to 
provide some suggestions about how Congress might be helpful.
    Before I start, I would like to make a comment in regard to 
a statement Senator Lautenberg had made about the timing, 
because I agree with the statement you made earlier, that 
having the full drug benefit occur January 2006 is going to 
require a Herculean task. I appreciate the assessment from 
somebody who has had a very successful career in the private 
sector in the computer industry that it seems like a long time 
to get a new benefit implemented.
    But the computer industry and the rest of corporate America 
do not have to go through the APA process. It truly is not just 
a question of making the decisions and of implementing them. 
Although there are many discussions to be made, I am just going 
to hint at some of them. Nancy-Ann DeParle, because she was 
present to implement the Balanced Budget Act, can give you more 
of them.
    But I have had the experience of having controversial 
regulations have to go through the APA process, including the 
process of proposing the regulation, of putting it out for 
comment, of having hearings and dealing with comments, 
particularly for controversial regulations. And some aspects of 
the regulations included in this bill will indeed be 
controversial, either with the provider community, industry or 
with senior citizens.
    That process, along with the decisions and the 
implementation, will in my mind make 2006 a very difficult date 
to meet, although one that I think is possible.
    It is not just the series of benefit changes. Although 
these will also be challenging. We have, as one of the specific 
challenges, the provision of a new benefit, the Part D benefit, 
using a new delivery system or, if it is not done as Part D 
benefit directly, it will be done as part of the Medicare 
Advantage program.
    Initially these are just payment increases, but by 2006 
there also are a number of specific new issues involved in the 
Medicare Advantage program in terms of bids, regions, appeals 
processes, etc., that will also have to occur for the Medicare 
Advantage program to hit full force in 2006.
    There are, in addition, a series of changes to the 
outpatient drug program that is currently covered under Part B. 
I am just going to mention them briefly, as well as the usual 
host of payment changes and adjustments and modifications to 
all of the other Medicare providers.
    I thought I understood the Medicare payment system rather 
well after spending 2\1/2\ years at HCFA, but I was constantly 
astounded at PPRC and MedPAC about the enormity of the changes 
and detail that is involved in the Medicare program. I had not, 
when I was at HCFA, focused on post-acute care in the way that 
MedPAC and the Congress has focused on what goes on in both 
home care and long-term care.
    Let me just remind the Senators about a few of the issues 
that will need to get taken care of regarding Part B drug 
coverage. Then I would like to comment about the early results 
of implementation. And more importantly, I have a few 
suggestions to make about how to proceed over the next period 
that I hope you will find useful.
    With regard to Part B drugs, and I am assuming that Nancy-
Ann DeParle is going to comment more on some of the Part D drug 
issues as she did down in Florida, at the Kennedy School/
Commonwealth meeting.
    But let me remind you, while all the effort is being 
directed for the introduction of the drug discount card, which 
appears to be going well, and the Part D benefit for January 
2006, Part B drugs will continue as Part B drugs at least for 
now. These are the drugs, outpatient drugs, mostly chemotherapy 
or other related drugs, that have to be provided by a physician 
and have previously been covered by Medicare.
    Up until now, the reimbursement mechanism has been a 
percentage of the average wholesale price or AWP. The Congress 
has noted, the GAO has noted, the IG has noted that average 
wholesale price is not a very satisfactory measure to use. 
Initially reimbursement will be a lower percentage of AWP. But 
starting in 2005 the basis will be average selling price, a 
different measure that will become the basis of reimbursing 
Part B drugs.
    And then, in 2006, physicians will have the choice either 
of continuing with the ASP or going to a competitive 
acquisition process, a very different process, one that they 
may or may not choose. We will have to see what happens.
    In order to have that in place for 2006, a lot of decisions 
will have to be made and regulations issued about the 
competitive acquisition process. The number of regions, the 
kind of appeals process, what happens if there are not two 
contractors, etc. And it will have to be done by 2005 so that 
it can be in place for 2006.
    None of this is impossible. It is just a lot of work, given 
all of the work that will be going on to get the Part D benefit 
to start in January 2006.
    Early results are looking good. The regulations about the 
discount card got out in December. Of course, we need to 
remember this was a strategy or a plan that the program, that 
the Administration had been thinking about for at least 2 
years. So in some ways it is not surprising that they could 
respond so quickly. There appear to be a large number of 
sponsors. There appears to be good response in terms of trying 
to make the adjustment from the State pharmacy assistance 
programs for low income populations, as you mentioned and as 
Ms. McMullan mentioned, to the low income support program. It 
appears to be going well and those are good signs.
    The fact that Mark McClellan was able to be confirmed 
within one quarter, one calendar quarter, from the time that 
his predecessor left is something I do not remember ever 
happening. I applaud the Senate for helping that to occur so 
rapidly. It would have been very bad to have had a leaderless 
CMS during this period. Not that the acting people are not 
capable, but for all the reasons that you need to have 
presidential appointees in place to lead their agencies, to 
deal with the Congress, to make decisionmaking, it would have 
been an awful time to have not had a leader in place. I am 
astounded it happened so quickly.
    The Congress also wisely recognized the burden that was 
being put on the agency by making $1 billion available from the 
trust fund through September 2005, and $500 million available 
to Social Security. That is the good news.
    Let me give you a few thoughts about what I think might 
help to have this all happen. First, recognize the Herculean 
task that has been put on CMS' plate.
    Second, remember that if the Congress chooses to make any 
significant changes to the legislation between now and January 
2006 that affect the decisionmaking, the implementation or the 
rulemaking process, this will seriously jeopardize the ability 
of the agency to meet the January 2006 deadline, which really 
is October 2005. That is when the materials have to be out to 
the seniors so they can enroll in November 2005.
    You are, of course, entitled to make those changes as you 
wish. It is just important to make sure the consequences are 
known.
    The third is that it may be useful for relevant 
Congressional committees to have occasional briefings on the 
progress that is being made to implement the legislation. It 
should not occur too frequently or it will become another 
burden to the agency. But if there is a problem either in the 
way the legislation is written or in the adequacy of CMS 
funding, knowing sooner rather than later would improve the 
likelihood of a successful resolution to the problem.
    I had a problem with legislative language, implementing the 
relative value scale for physician payment. It caused a lot of 
internal frustration and some time could have been saved 
perhaps if that had been vetted with the Congress.
    I would consider, if there is a problem, allowing the 
agency to use temporary hires, such as IPAs from other parts of 
government or universities, and other flexible hiring 
strategies in order to try to help solve what may be a 
temporary problem with a temporary solution.
    It will be very difficult to hire people who have 
experience in rulemaking. If you can have them come in in a 
temporary way, that would help.
    The agency will need more people with private sector 
experience than they have had. I assume that should be 
relatively easier to find. I do not know whether the salaries 
will be competitive.
    Finding people who know how to write rules for Medicare, 
rules from any regulatory agency, and to work the process is 
difficult to find. It is not a skill you need in the private 
sector.
    CMS and HCFA have had a long history of having a disconnect 
between funding and the responsibilities that are given the 
agency. This disconnect was recognized in an open bipartisan 
letter that was published in Health Affairs several years ago. 
I was a signatory to it. There are a number of individuals who 
have been both directly involved and who worked for the 
Congress, Republicans and Democrats, as well as public policy 
analysts who signed this letter. It was reaffirmed in a MedPAC 
report while I was chair to the Congress, just reminding the 
Congress that either it needs to make sure there are adequate 
resources to match the increasing responsibilities that it puts 
on the agency or the Congress should turn to other agencies 
that it is more willing to fund.
    It is in this vein that I commend the $1 billion that was 
made available.
    And finally, the new CMS Administrator Dr. McClellan will 
have his own vision of how the agency can best function to meet 
the needs of the people that receive its benefits, the 
providers that provide the services, and of course the 
taxpayers that fund these services. Congress should pay serious 
attention to what he thinks needs to be done in order to have 
this new legislation implemented on time.
    Thank you for inviting me and I would be glad to answer any 
questions.
    Senator Voinovich. Thank you very much. We really 
appreciate your testimony. Ms. DeParle.

  TESTIMONY OF NANCY-ANN MIN DePARLE,\1\ SENIOR ADVISOR, J.P. 
                      MORGAN PARTNERS, LLC

    Ms. DeParle. Thank you, Chairman Voinovich, Senator Durbin, 
and Members of the Subcommittee.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. DeParle appears in the Appendix 
on page 70.
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    As you know, I served as the Administrator of the 
predecessor agency to CMS, HCFA, from 1997 to 2000. It was my 
honor to work with many of you on the Subcommittee and I 
appreciate your having this hearing today to focus on the real 
management challenges that I think face the agency as it 
undertakes probably its biggest mission ever, which is to 
provide a prescription drug benefit to some 42 million 
beneficiaries.
    I want to begin by noting that Michael McMullan, who 
testified here on behalf of the agency this morning, is one of 
the finest public servants that I have ever had the honor of 
working with.
    In fact, Senator Voinovich, you referenced the meeting in 
Florida, the Kennedy School meeting at which Dr. Wilensky and I 
talked about CMS. And I think you asked a question there about 
whether I thought CMS could get the Medicare prescription drug 
benefit implemented by January 2006. And I answered you, in 
part, by saying there is one person that I have in mind. And if 
she is there, and if she is allowed the flexibility to get the 
job done, I think that it can be done.
    Michael McMullan was the person I had in mind. She has, as 
you heard, served at the agency for 30 years and is a 
tremendous asset to the government. I want to thank her for 
everything she did while I was there.
    So I do think that CMS can get the job done but I also 
think that there are some significant execution risks. And 
there are some particular things that this Subcommittee can 
help CMS with.
    I think, if you look back at the record of the past few 
years, you will see a couple of things. One is that the agency 
Dr. Wilensky just alluded to, has been asked over a decade or 
more to do more and more with less and less, fewer and fewer 
people, fewer and fewer resources. That is something that has 
to change or we are going to be facing some real near-term 
problems as both we try to implement this prescription drug 
benefit and CMS tries to do all the other things that it needs 
to do to improve the health care services that we are offering 
to millions of Americans.
    I think the record shows, though, that when CMS has a major 
project and it has adequate resources and flexibility, focused 
and stable leadership, and the support of Congress that it can 
get the job done. In my written testimony I gave you a number 
of examples of where I think the agency has been successful 
there.
    Let me focus this morning, though, just on the execution 
risks because I know you have a tight agenda. The first risk I 
think that exists is one that I would characterize as a 
leadership risk. When we were in Florida I spoke about my 
concern that the agency was left without an administrator who 
had been confirmed as soon as the bill was signed. A number of 
other key political appointees had left as well. And the agency 
does not have that much depth in terms of political leadership. 
It is a relatively small agency.
    As Dr. Wilensky said, the career people are terrific. They 
are focused. But you need a clear point of view, you need a 
leader who can be depended on. For the first few months of the 
implementation of this drug bill they did not have one. That is 
beginning to be corrected with Dr. McClellan having been sworn 
in a week or so ago.
    I think there is still some risk around this, though, 
because, as I pointed out in Florida, Secretary Thompson said 
more than a year ago that he would be leaving HHS soon after 
the election. He has confirmed that recently, saying that he 
would not be there for the launch of the prescription drug 
benefit in January 2006.
    So given the difficulty of working within the Department of 
Health and Human Services just to get regulations issued and 
things like that, I do think there is a political instability 
that should continue to be focused on.
    But the more troubling concern that I have about leadership 
is one that is, in some ways, highlighted by Michael McMullan's 
presence here today. As I pointed out to you, I looked back at 
my redimentary list of the senior staff when I was there. There 
are a number of ways you can look at this, but I looked at the 
Senior Executive Service (SES), the most senior career folks in 
the agency, the real leadership that you depend on. And there 
has been a real brain drain of those people over the past few 
years.
    In the Spring of 2001 there were 43 SES staff members. 
Since that time more than half of those people have left the 
agency. These are people who were working shoulder to shoulder 
with Michael McMullan. These are presidential rank award 
winners. These are people who I depended on when I was 
implementing the Balanced Budget Act.
    It is an unprecedented loss. You highlighted, Chairman 
Voinovich, some of the additional losses that we may be facing 
in the future. And I think that is something for this 
Subcommittee to really grapple with as you look at the 
importance of these programs and the unfortunate timing of the 
departures of these staff. Because I would not have wanted to 
be trying to do this without them.
    The administrative complexity is the other big execution 
risk.
    Senator Voinovich. To clarify for Senator Durbin, the 
number I used was 30 percent of the Senior Executive Service 
currently are eligible to retire. So they could walk out the 
door tomorrow.
    Ms. DeParle. That is on top of the more than half who have 
left since the Spring of 2001. As I said, these are the people 
with the experience, the knowledge, and the history to get the 
job done. And that is what concerns me.
    But to talk about the other execution risk, that is, I 
think, administrative complexity. Dr. Wilensky alluded to that 
in her testimony, as well.
    The BBA, which we went through together, as you all know, 
was complex and contentious. We had to design new payment 
systems for virtually every provider. Virtually every hospital 
and doctor in the country, as well as almost every other health 
care provider, had their reimbursements cut. I think I heard 
from just about every one of them. I know all of you did and 
you told me about them. So it was a very difficult and 
contentious period.
    That said, in the BBA, CMS was dealing with a familiar set 
of providers and a familiar benefit. And we knew a lot of the 
providers. We knew the trade associations. We kind of had an 
established process of working with them.
    The difference here, and I think Michael McMullan talked 
about this, this morning, is that the Medicare prescription 
drug benefit poses a different kind of a challenge because CMS 
is being asked to build a whole new delivery system for a 
product it has never offered before with a whole new set of 
partners that it has never worked with before. Now it is 
getting some experience with those partners, with some of them, 
with the prescription drug cards that it is doing now. But the 
fact remains that CMS needs not only human capital but, along 
with that, intellectual capital around things like how to 
manage prescription drugs in a smart way.
    And frankly, the severe time constraints that are built 
into the law pose a really huge execution risk. We have already 
had some discussion about that this morning, but I agree with 
Dr. Wilensky that the notion that on January 1, 2006 your 4 
million--how many beneficiaries are in Ohio? I do not even know 
exactly any more.
    Senator Voinovich. We have 1.7 million.
    Ms. DeParle. One-point-seven million Medicare beneficaries 
in Ohio are going to be expecting to have a prescription drug 
benefit available to them 20 months from today. And really I 
think even that is unrealistic when you think about what CMS 
has to get done in order to have the open enrollment as the law 
mandates start in November 2005. Beneficiary education is 
supposed to start October 1, 2005.
    Chairman Voinovich, you recalled our interaction over the 
beneficiary education campaign in the BBA, and one can wonder 
whether starting the beneficiary education campaign, as far as 
telling beneficiaries how much the premiums are going to be, 
what the drugs are going to be that are available in October, 
is really sufficient time to allow them to understand it 
without being confused.
    But if you just stick to the deadlines in the law, CMS 
basically has 18 months to build a brand new delivery system. 
And I think that is going to be a big challenge, 
notwithstanding what Senator Lautenberg said about computer 
systems. In fact, I think computer systems are a big part of 
the issue. Michael McMullan talked about that, as well.
    I attached to my testimony a very high-level, abstract list 
of the steps that CMS has got to take between now and basically 
November 1, 2005 to get open enrollment going. And Michael 
McMullan alluded to the list they have, and I am sure their 
list has much greater detail than what I put forward. But just 
looking at my list, I think you can get an idea that these are 
not easy little things you can just check off the box on.
    For example, how is CMS going to design an information 
system to keep track of what each beneficiary spends on drugs? 
They have to be able to do that: To make the deductibles, the 
catastrophic limits that you put in the bill, the so-called 
``doughnut hole,'' to make all those details work, they have to 
be able to keep track of what beneficiaries are spending on 
drugs.
    Now the law stipulates certain ways that the spending is to 
be counted. For example, spending in the ``doughnut hole'' is 
supposed to count. I apologize for using that terminology but 
that is what you all are familiar with, I think.
    But it does not count if you buy drugs in the doughnut hole 
that are not on the formulary of the plan that you were in, 
even if your plan is not contributing during that time.
    And it does not count if it is for a drug in the beginning 
if it was not on your plan's formulary. And if it is paid by a 
family member it can count, but if it is paid by a third party 
it cannot count.
    All of those are things that we could sit here and write 
the rules for but then somebody has to program computers to 
keep track of that. I believe CMS will have to modify the 
massive database that it maintains what is known as the Common 
Working File, which is a repository of all the claims that come 
in on each beneficiary, in order to keep track of this.
    That is not going to be a simple task and it is a high-risk 
task as well. I know this from my experience with Y2K, which 
you alluded to, Mr. Chairman. We were successful there in 
remediating all the computer systems but that was a terribly 
high-risk and difficult chore.
    Senator Voinovich. Senator Durbin has to go to another 
meeting. Would you mind if he asked some questions here before 
he leaves?
    Ms. DeParle. Of course not.

              OPENING STATEMENT OF SENATOR DURBIN

    Senator Durbin. Thank you very much. Thank you, Mr. 
Chairman, for that. Senator Pryor, thank you, as well.
    I was happy to vote for Dr. McClellan because I have a lot 
of confidence in him. I think he has done a fine job at the FDA 
and I believe he has an extraordinary challenge here and I hope 
that he can meet that challenge, for his sake and for all the 
people who will depend on him.
    I told him when I met with him that I think this whole 
program is fatally flawed. As you describe the complexity of 
this law, it was an effort to superimpose a new system of 
reimbursement instead of turning to the obvious. And that is 
using the Medicare system to create a prescription drug option 
for seniors. We decided we were going to invent something new. 
And we put in rules that are unintelligible to the senators and 
to the seniors. And now, this agency is going to have to try to 
make something intelligent out of them.
    I bet there are not too many survivors, but it would be 
great some time to have some people who were in on the 
implementation of Medicare to come and explain to us how, 
before computers, they established a Medicare program for 
America 8 months after the bill passed and was signed by the 
President. How did that happen? Miracle of miracles.
    Well, it could have been that the concept, as big as it 
was, was very basic and simple in its approach. We have, 
instead, taken off on an opposite course. We have built into 
this so much complexity and we have given a 2-year opportunity 
to implement it.
    And when I read statements by Mr. Scully, they really 
relate to, I think, the reason for this hearing and the passion 
of Senator Voinovich here. Mr. Scully said, in January of this 
year to a group, and I will read this from the Pink Sheet, 
which is probably the best place to turn. It is the 
Prescription Pharmaceuticals and Biotechnology Newsletter. Here 
is what they said: CMS itself has ``no idea how they are going 
to do it, he declared. They do not have a staff so they are 
probably looking to quit like I did, he joked.'' And then he 
goes on to say, ``Congress gave them about $1 billion in new 
funding to hire more people but there is going to be complete 
chaos in this whole area brought in from the outside world and 
at CMS in the next couple of years.''
    He went on to say, when he was asked about how they were 
going to deal with coverage decisions, which you have just 
referred to ``this is something CMS has no clue how to do, by 
the way. It is completely new for them and they are not 
particularly well set up to do it.''
    Thank you, Mr. Scully, for your observations. So a law that 
I think is fundamentally flawed and extremely complex and has 
avoided the obvious of using Medicare to deliver a prescription 
drug benefit, is now going to be implemented by an agency that 
Mr. Scully announced in his sayonara is totally unprepared for 
the job. Well, there is good news for America. Anything more we 
can tell them, in terms of what we are doing to help them here?
    Ms. DeParle, what you have said here, when you start 
describing how to deal with the computer program, you can 
imagine how much fun it is for me to stand in front of a group 
of seniors and explain how this is going to work in their real 
lives. And Ms. Wilensky, there is an assumption in your 
testimony and others that all seniors are going to sign up for 
this. We have to at least prepare for that eventuality.
    I think there is more skepticism out there at this point, 
when you are told you cannot buy a Medigap policy and the like. 
And the skepticism is built on this same complexity.
    I guess the horse is out of the barn here, but do you 
conclude as I do that we have created the mess that we now find 
ourselves in with this legislation?
    Ms. Wilensky. It is a complex program, there is no 
question. Let me try to guess at the answer as to how did it 
happened in 1965? The original Medicare looked exactly like 
BlueCross BlueShield, which was the predominant financing 
system in the private sector. It is an interesting question 
about how did they pull it off. My guess is the government made 
Medicare look like what everybody else had.
    The problems of turning to Medicare, and this is clearly a 
discussion for a different committee, and putting the drug 
benefit in traditional Medicare had to do with whether having 
Medicare use its usual administered pricing was the best way to 
provide this new drug. This has been subject to a lot of 
controversy in the Clinton Administration and in the current 
Bush Administration. I believe it was the majority consensus 
that that was not going to happen.
    The question of whether this is the right answer, whether 
it is workable, is something else. I think it can be done but 
it is a complex issue.
    Senator Durbin. But you have admonished--admonished is not 
the right word. You have warned us, make any changes here and 
all bets are off. And I am sitting back here and saying well 
first, I did not vote for it because I thought it was not fair. 
I thought the pharmaceutical companies made out like bandits in 
this deal. I do not think it really was designed for seniors as 
it should have been.
    Now to step back and kind of be forewarned any changes are 
going to delay implementation and complement it, that I think 
on its face is obvious. Any changes have to be assimilated into 
the program and its administration.
    But it strikes me that if there is a way to cut through the 
complexity of this, to get down to something that is just basic 
that you can understand and explain it to the average person, 
that is going to help us in setting up computer programs and 
appointing people to administer them.
    So I may not follow your warning about changes. I think 
honestly a few changes might be for to benefit of the program 
we need to make it more reasonably understood and easily 
administered.
    Ms. Wilensky. Solve some problems and create others. And 
obviously that is your job as members of the Congress to 
decide.
    Ms. DeParle. The one I talked about, in particular, the 
problem of keeping track of beneficiary spending, if you could 
fill in the doughnut hole, that might help you some there. But 
the problem is that would cost hundreds of billions of dollars, 
I suppose, which is why it is there to begin with.
    Senator Durbin. If you are not negotiating with the 
pharmaceutical companies to keep prices under control, then 
frankly the costs are going to outstrip the resources of this 
program is such a short period of time. But again, that gets 
down to the policy side of it.
    But I really do go back to the original premise. We created 
Medicare in 8 months. We may have modeled it after BlueCross 
BlueShield. We were up and running and rolling in 8 months 
after the bill was signed into law.
    Now with a 2-year timeframe, people are in a genuine panic 
in this town as to whether or not this can happen. I think it 
reflects on the fact that we made this too complicated. It 
should have been more straightforward.
    Ms. DeParle. That is part of it. And also, the 
Administrative Procedure Act and the rulemaking requirements 
are much more onerous now than they used to be. But I do not 
think you have any disagreement here that this is very complex.
    Senator Durbin. Ah, for the good old days.
    Mr. Chairman, with your permission, I would ask my full 
opening statement be included in the record.
    Senator Voinovich. Without objection.
    Senator Durbin. Thank you.
    [The prepared opening statement of Senator Durbin follows:]

              PREPARED OPENING STATEMENT OF SENATOR DURBIN

    The Center for Medicare and Medicaid Services (CMS) has a 
monumental task ahead. The Balanced Budget Act of 1997 was a complex 
bill that forced the agency to go in directions it had never gone 
before, but BBA pales in comparison to this new Medicare bill.
    In the next 20 months, CMS will have to not only figure out exactly 
how this bill is going to work at a practical level, it will also have 
to set up complex new administrative systems and ensure seniors know 
how to get their benefits.
    Seemingly, the most challenging part, from a management 
perspective, is the constantly changing environment the bill creates. 
Prescription drug plans can drop in and out of the program, as can 
PPOs; drugs can drop on and off formularies; drug prices can rise at 
unpredictable levels; and seniors can rise above or drop below 
eligibility levels for low-income benefits and means-testing limits. 
These are only a few of the fluctuating parts of the bill that will 
make CMS's job hard and confuse seniors.
    Take the drug discount card, which should be the simplest part of 
the bill. However, even it is complex at the management level and 
confusing at the senior level. Different drug cards will offer 
different discounts for people on different drugs at different 
pharmacies in different locations for different fees. The volume of 
calls CMS will get from confused citizens will probably rival any 
previous piece of major social legislation.
    While CMS is answering questions from seniors, it will also have to 
monitor pharmacy benefit managers, pharmacists and Prescription Drug 
Plans to make sure the savings garnered from drug manufacturers are 
being passed to the seniors. CMS will have to ensure there is 
appropriate management of the $600 each low-income senior will receive; 
ensure people are not being disenrolled; ensure there is pharmacy 
network access where it is supposed to be, guarantee beneficiary 
privacy is being protected, and make certain enrollment fees do not 
exceed $30.
    CMS will also need to monitor drug prices on a weekly basis to 
identify drug discount card programs that are deviating from ``expected 
changes'' in drug prices.
    These are no small tasks, and my list is not even fully 
comprehensive. This Committee appreciates the job you have ahead of you 
and wants to make sure you have the resources to do it. The seniors of 
America are depending on it.

    Senator Voinovich. Before we go to Senator Pryor, have you 
finished your testimony? Would you like a few more minutes?
    Ms. DeParle. I had a couple of more points to make. May I?
    Senator Voinovich. Sure, go ahead.
    Ms. DeParle. I was talking about the difficulties of the 
computer system, so let me just go on to say that is just one 
example of a lot of high risk activities that CMS will have to 
undertake.
    And as you pointed out, Mr. Chairman, if these things are 
not done perfectly all of you will be hearing about it. So it 
is not as though CMS can just do it quickly. They have to be 
very careful about how they do this. And they have to do it 
under the structures of the Administrative Procedure Act.
    And my experience was, when I was there, we did a very 
simple, pretty straightforward rulemaking about modifying the 
conditions of participation for hospitals and got 50,000 
comments. And there have been others that have gotten more 
comments than that.
    And I cannot imagine that a drug bill that is going to 
involve $500 billion or so changing hands over the next 10 
years is going to elicit few comments. I think it is going to 
be a massive number.
    So the rulemaking is going to be very difficult here, too.
    In the meantime, CMS has a lot of other challenges. Just 
finishing up the implementation of the other provisions of a 
MMA could be a full-time job. Dr. Wilensky talked about the AWP 
changes to the other Part B drugs. There are all sorts of other 
administrative changes, changing Medicare Plus Choice into 
Medicare Advantage. So just finishing up MMA could be a full-
time job.
    And then, in addition, they have to run all the other day-
to-day things that go with managing the Medicare program. And 
then there is Medicaid and S-CHIP, which all of you care about 
as well, and which some of you do not think the agency is doing 
an adequate job with now. So all of that is on their plate.
    I made three recommendations to this Subcommittee, the 
first of which was that you request that CMS provide you with 
an updated strategic plan, including a human capital plan of 
the sort that you talked about, Mr. Chairman, detailing what 
they are going to need to get this job done. And I recommend 
that you provide them with the resources.
    The MMA took a step in the right direction in giving the 
agency $1 billion but it really did not say what the money was 
to be used for. And it disappears in September 2005. That 
really does not make sense. And so in the next budget, the 
Administration should tell you what it is going to need to 
really manage this benefit. And the Congress should look 
seriously at that request and try to help CMS here instead of 
asking it to do more and more with less and less.
    There are also some gaps in their current budget. I 
mentioned the fact that it is my understanding that the OIG and 
the DOJ are facing layoffs in their program integrity efforts. 
It seems to me to be the wrong time to have that happening with 
Medicare spending getting up to almost $300 billion this year.
    Senator Voinovich. Where did you say that was, what gaps?
    Ms. DeParle. First of all, it is my understanding that the 
funding that the Congress gave to the Department of Justice and 
the Office of Inspector General under HIPAA, the Health 
Insurance Portability and Accountability Act, to do Medicare 
program integrity activities, that is now flat and that those 
programs are facing layoffs. That is my understanding.
    And if that is the case, it seems to me to be the wrong 
time to be doing that when Medicare spending is supposed to 
increase to almost $300 billion this year, without a 
prescription drug benefit. We are introducing a whole new 
prescription drug benefit that, depending on whose estimates 
you believe, is going to cost at least $500 billion over the 
next 10 years. We need to pay attention to the program 
integrity side of this, as well.
    In addition, the agency has been, for years, sort of 
robbing Peter to pay Paul to come up with its beneficiary 
education plans. It seems to me that needs to be a more serious 
plan that they work out with the Congress and where there is a 
specific appropriation for beneficiary education. And that has 
not been the case in the past.
    Second, I would recommend that you give CMS more 
flexibility. I talk in my written testimony about personnel 
flexibility. They need to be able to bring back retirees. They 
need to be able to hire more high-level staff without FTE 
restrictions. I suggested to them that they might want to put 
together a SWAT team of some people with experience in writing 
regulations and things like that from other agencies.
    Those kinds of things are what happened when the original 
Medicare was implemented back in the 1960's and I think they 
need to do some of those things now.
    Finally, I would agree with Dr. Wilensky that the Congress 
needs to make sure that it allows CMS time to focus, that if 
you add new legislative mandates this year or next year on top 
of requiring the prescription drug benefit to be up and running 
January 1, 2006 you will probably not be able to get it done. 
So you need to understand that there are going to be some other 
things that will probably suffer in the next few months as they 
focus their time on the drug benefit.
    Thank you, Mr. Chairman.
    Senator Voinovich. Thank you very much. I am really 
grateful to the two of you for coming here today.
    Senator Pryor, you came in late and I do not know what your 
schedule is, but I would invite you to ask some questions.
    Senator Pryor. I am OK. I want you to go first. I will go 
second. Thank you.
    Senator Voinovich. Do you believe that we are going to be 
able to pull this off?
    Ms. Wilensky. It can happen. It will be hard.
    I have thought about whether at some point it would be 
prudent to have a backup plan in case CMS is a quarter late. 
What happens if CMS is not really ready to have educational 
materials mailed out October 1 but could be ready by December 
1? Is it possible to have the first year be a three-quarter 
year?
    I would recommend, without having given it sufficient 
consideration, that that type of planning be put in place 
because it is easy to imagine the need arising. Controversial 
regulations are very difficult to deal with.
    I had two during my tenure, CLIA and the proposed rule for 
the RBRVS, the reform payment for physicians. HCFA got 100,000 
comments on RBRVS.
    I do not know whether there is anything that is that 
controversial. A lot of comments are part of letter campaigns. 
But the agency, under the APA, has to respond in writing at the 
interim final rule with how it has dealt with each of the 
issues that have been raised. And that is difficult.
    There are a lot of reasons that the timeframe is a very 
tight squeeze. Understanding what would be acceptable to the 
Congress and the Administration if the agency is a quarter 
behind schedule for the first year is very important.
    Obviously, should the Congress choose to go in a completely 
different direction in terms of a drug benefit bill, that would 
stop the clock at that point. But I would assume until such 
time as that were to happen, the perception is this is the 
legislation you have, recognition that change really impedes 
its implementation, and have a backroom plan for what happens 
if CMS is a quarter late.
    I recognize there are a lot of political issues about why 
that would be difficult to make public.
    Senator Voinovich. Ms. DeParle.
    Ms. DeParle. I agree. Yes, I think it can be done. But I 
would want to be working with the Congress on a contingency 
plan and I will tell you why.
    I think Dr. Wilensky is right that the rulemaking on this 
will be very difficult. Just the amount of time that it takes 
to get a rule written, cleared through the Department, cleared 
through OMB, and then out on the streets and then to allow 
sufficient time for the public to comment is going to take a 
number of months.
    But that is not even the thing that makes me the most 
concerned. It is more that this bidding process that has to 
occur for the prescription drug plans and the Medicare 
Advantage plans to say how much they are going to charge 
beneficiaries and what their drug plan is going to look like. 
All that has to be done by October 2005 so that if a 
beneficiary in Cleveland is thinking about signing up for this 
they will know here are the plans that are available to me. 
Here is how much each one of them would charge me in a premium. 
Here is how much my subsidy will be if I am a low-income 
person.
    There is a lot of details that will have to be final when 
they get a piece of paper in the mail in October that says here 
is what you have. That is my concern, is getting all of those 
things finalized.
    And also, if it is not done well, I am harking back to your 
concern about beneficiary education. The soft kind of 
beneficiary education that has been occurring so far that 
Senator Lautenberg highlighted, that is one thing. But when you 
get down to sending someone a piece of paper and telling them 
here is how much the premiums are under the plans you are 
looking at, you need to allow them some time to figure out, 
``OK, I take Lipitor. Is that on here? Can I get that?''
    And I am just concerned that you want to do this right. 
That is very important, I think, to you and the Congress and to 
all of us. If I were at CMS, I would work with the Congress to 
design a contingency plan, as well.
    Senator Voinovich. I want to clarify something. I go to 
meetings and I think I have had 9 or 10 meetings already in 
Ohio where I have had listening sessions with senior citizens 
and get a chance to get some input from them. This is 
complicated stuff.
    It seems to me that if it is going to work they are going 
to have to have the best information that they can have to make 
good decisions. We are going to need a whole lot of help. 
Governor Taft and I are going to go to an OSHIIP training 
session this month to find answers so that we are more 
sophisticated in terms of our interface with people. I also am 
bringing all of my regional representatives in so that they are 
better educated. But this is going to be a monumental 
undertaking in Ohio to make sure it gets done.
    So the first thing you would do if you were in Dr. 
McClellan's place is to look at the big picture and determine 
what the reality is and then maybe come back with some 
suggestions on how to maybe do it better?
    But one fact, and I want to clarify this, is that this is a 
monumental task. It is not something you can snap your fingers 
at and have it done. At some of my listening sessions seniors 
will ask me why they cannot have it now. I try to explain to 
them that there is a whole lot of work that has to be done 
before this program can be rolled out. I suspect also that 
there might be some consideration given to cascading 
implementation over a longer period of time. This would give 
the agency some experience with the program rather than just 
launching the rocket and not knowing if it will get off of the 
ground and what will happen when it does.
    Ms. Wilensky. Senator Voinovich, it would have been easier 
if the Congress had chosen to stagger the changes that came in 
place, for example, of not doing anything to the Part B drug 
coverage until 2006 and only then start to change Part B 
coverage. Or having fewer changes with regard to other parts of 
payments, for it to change to the rurals, changes to oncologist 
payments, which involve a lot of recalculations with regard to 
physician payments. I am not suggesting delaying these changes, 
either politically or at a policy level, would have been 
necessarily desirable.
    It is the fact that these changes, each of which probably 
could have been accomplished and may well be accomplished 
during the relevant time period, are happening at the same time 
as Part D coverages is starting is what makes it so difficult. 
The Medicaid changes are also huge--neither of us have spoken 
about Medicaid but next week I am going to speak twice about 
it, so I have been thinking about what happens to the dual 
eligibles.
    Many changes are required so that beneficiares are regarded 
as being seniors first and second, in terms of whether they are 
Medicare or Medicaid participants, plus all of the other 
Medicaid changes that are going on because of waivers and the 
children's health insurance program and all of the HIPAA 
changes. It is astounding how much one agency has going on, 
change in at least three different areas, only one of which is 
Medicare Advantage and Part D drugs.
    That is the part most peole don't understand. I do not know 
if it will help you in responding to your seniors, as to why 
implementing the new benefit is so difficult and takes so long.
    Of course, in 1965 we had a very narrow program, basically 
hospital and physician coverage, modeled to look like something 
that was out there, BlueCross and BlueShield. The complexity of 
all that this agency does now, did not exist then.
    Again, I am not willing to say it cannot be done. But it is 
important to understand how many moving parts there are, not 
just because the delivery mechanisms are complex but because so 
much is included in this one bill that impacts a single agency. 
That is ignoring all of the problems that have been raised 
about the unusual numbers of people who are retiring.
    I had the advantage of thinking about this problem in the 
early 1990's. We could see what was going to happen over the 
next decade because of the age structure of the workforce, 
recognizing it was a significant problem on the horizon, and 
having the advantage of knowing it would be somebody else's 
problem.
    Senator Voinovich. Thank you. Senator Pryor, thank you for 
coming today.

               OPENING STATEMENT OF SENATOR PRYOR

    Senator Pryor. Thank you Mr. Chairman. Thank you.
    Let me first ask a question based on my old job as Attorney 
General of the State of Arkansas. In my 4 years there, we had a 
number of incidents where scam artists would come to seniors 
and convince them to purchase fake drug cards. Then these 
unsuspecting seniors would purchase these cards and would take 
them down to the local pharmacy, to realize that the cards were 
worthless.
    We also had another occurrence where legitimate companies 
were aggressively marketing drug cards. But when you actually 
took the drug cards to the pharmacist, they really did not live 
up to the senior's expectations. So now the Congress has passed 
into law and the President has signed a bill that will have a 
national drug card.
    So my question for the two of you is, given potential for 
fraud and scams, etc., should CMS somehow begin educating the 
public to beware of bogus drug cards and how to recognize the 
real drug card? I would just like to get your thoughts on that.
    Ms. DeParle. Yes. It is my understanding that there has 
been a spike in the incidents of the type you are describing 
where there have been perhaps some new shysters who are going 
door-to-door with what they are offering as cards and asking 
for payment for them. And I think the agency has put out an 
alert on that. But it may be that it will require something 
more aggressive either from CMS or the Justice Department.
    Ms. Wilensky. I have read that exact situation you are 
describing has indeed been happening. There has been an alert. 
There is a lot of money at stake here. That usually invites 
scam and fraud artists to join. It will be very important that 
while everything else is going forward that some attention is 
being paid to this issue so that you do not frustrate the 
seniors and bilk them of their funds and, of course, bilk the 
taxpayers as well.
    Senator Pryor. One thing, Mr. Chairman, that does concern 
me about this is a lot of times these scam artists and these 
folks who are going to rip seniors off and prey on the 
unsuspecting, a lot of times they will take some sort of event 
out there that sounds plausible and all of a sudden they come 
in and offer some sort of service.
    We had that after 9/11 where people would come in and try 
to rip people off and say we are sending money to New York 
City, and they were not.
    Unfortunately, you see these types of scams in many 
situations. I just see the potential right there so I am glad 
to hear that CMS is taking steps.
    Let me also ask about something else that made a lot of 
news in the last few weeks and that is where Tom Scully, 
potentially, told one of his employees not to be candid with 
Congress. In my view it is extremely important that CMS, your 
former agency, is candid with Congress because we are the 
policymakers. We are going to pass this law. And now a lot of 
us feel like we did not receive accurate information as we were 
deliberating this.
    Let me just ask, from your experience at HCFA, now CMS, are 
you aware of anything like this happening on your watch when 
you were there? When you told someone in the agency not to 
provide information to Congress? Are you aware of anything like 
that?
    Ms. Wilensky. I am not. I actually had a conversation about 
this with Guy King, who was the chief actuary for 16 years or 
so, including the period when I was there and during both 
President Carter and the Reagan/Bush Administration.
    There does seem to be some change. He indicated it would 
have been very uncommon for the HCFA actuary to have had 
conversations with the Congress on new legislation unless they 
involved the Trust Fund. Otherwise that conversation normally 
would not have occurred.
    There is a long history of CBO and HCFA actuaries having 
different estimates. And my experience has been that once CBO 
has made an estimate about the cost of new legislation Congress 
really did not care what administrations said because Congress 
basically follows its advisers, the CBO, and not the 
Administration. That is why the CBO was created.
    But I am not aware of anybody either being directed or to 
not come forward with information or threatened if they did.
    Ms. DeParle. I worked with the CMS actuary, Rick Foster, 
for 3 years when I was Administrator and it was an honor to 
work with him. And not only did I not ever instruct him not to 
give information to Congress or to be candid with Congress, in 
fact I urged him to speak directly with members of Congress 
whenever they needed information and not even to tell me what 
they asked. Because I do think there is a public interest in 
members of Congress having as complete and accurate information 
as they can have. Actuaries can be wrong. So can economists. 
But I think we, as citizens, have an interest in your having as 
much information as possible when you make your decisions.
    Senator Pryor. Thank you and I agree with you both on that.
    Mr. Chairman, if I may, I would just like to ask one or two 
more questions. And that is a little bit of a follow up on 
Senator Durbin's question a few moments ago. He quoted an 
interview by Tom Scully. One of the things Mr. Scully said is 
that CMS is not going to be a passive payer anymore. CMS is 
going to be a market organizer.
    I am interested if you have any thoughts on Mr. Scully's 
comment there that CMS's role has changed so much that it will 
now, under this bill, be a market organizer.
    Ms. Wilensky. Well, CMS follows administered pricing for 
the most part. That is set in statute. Medicare pays a price 
for individual physician services or hospital discharges or 
nursing days that is not negotiable. So to that extent, it has 
been passive.
    But it has not been passive in a lot of other ways in terms 
of who is allowed to participate or determining quality and 
appropriateness. This mix of authorizing complicates what the 
agency can do. Prices are set, whether or not the service is 
being performed with different quality or even if it was 
medically appropriate.
    I presume what Mr. Scully was referencing to is the bidding 
process that will go on both for Medicare Advantage and for the 
Part D private prescription drug plan participation. We will 
see whether or not there is enough participation to have very 
much competition.
    I am a big supporter of the Federal Employees Health Care 
Plan which negotiates the prices and benefits that the plans 
offer.
    I think it is a little early to predict a dramatic change 
for Medicare. The bidding process system is influencing only, 
at least at this point, a relatively small part of the Medicare 
program. If the CMS actuary is correct and there is substantial 
participation in the Medicare Advantage program, which is one 
of the reasons that there was such a big difference between CMS 
and CSO, the agency may become involved in price negotiations 
and become more of a market organizer.
    But I would like to remind the Congress that both the 
actuary and CBO radically overestimated the participation of 
private plans in the Medicare Plus Choice program, and the 
actuary was even more bullish than CBO. So I think it is a 
little early to predict a major change in function for the 
agency.
    The basic choice is either to do administered pricing or to 
rely on competitive purposes to moderate spending. This bill 
moves towards a bidding process and is why CBO has said that it 
would not score additional savings if administered pricing 
power was granted to CMS regarding Part D drugs.
    Senator Pryor. Do you have any comments on that?
    Ms. DeParle. No, I am sitting here trying to guess what he 
means by that. I am not even really sure.
    Senator Pryor. Mr. Chairman, if I might ask one last 
question. Again, Mr. Scully in this interview said ``You are 
going to find that most of the expertise to pull this off, this 
new Medicare drug benefit at CMS, lies on the Medicaid side of 
the agency. I can tell you, having run the place for 3 years, 
the relationship between the people who run Medicare and the 
people who run Medicaid is a little like the Serbs and the 
Croatians. They do not really talk to each other that much.''
    I am curious about your experience there with the Medicare 
side versus the Medicaid side and who, in the agency, has the 
expertise to administer this?
    Ms. Wilensky. The reason Medicaid would be more relevant, 
although not at the Federal level, is Medicaid covers 
prescription drugs. So a lot of the issues that need to be 
dealt with are dealt with in Medicaid.
    But the major role of the Federal Government in Medicaid is 
mostly oversight. Medicaid is basically a State program that 
has Federal oversight, very different from Medicare which 
clearly is a Federal program.
    I disagree with the characterization of the people running 
Medicare and Medicaid. When I went to HCFA, I pulled the people 
out of Medicare who were working in both Medicare and Medicaid 
and created a center for Medicaid or Medicaid bureau because I 
was afraid Medicaid was getting short shrift by having the same 
people working in both areas, given that Medicare dominates 
everything that HCFA did. And it was a way to try to give more 
attention and focus to the people who did work in Medicaid.
    But I am not aware, or do not believe, at least when I was 
there, that there was any friction or difficulties between the 
group working on these two programs.
    Some of the issues in Part D will have to be helped by 
bringing in people from the private sector who have worked for 
PBMs. People who have worked for insurance companies that 
worked on the prescription drug side, could provide some 
private-sector expertise.
    The fact is I do not think either Medicare or Medicaid 
provides the right expertise.
    To the extent that you are using private prescription drug 
plans, however, it does not require the hands-on expertise that 
Medicare needs when it is trying to price out DRG 351 or which 
of all of the 9,000 CPT codes should get included in the RBRVS.
    One of the advantages of having the kind of program 
structure that is in the legislation is Medicare actually is 
not responsible for individual price negotiation of individual 
drugs or their presence on a formulary. That is done by the 
plan. Medicare's major involvement is in determining the 
bidding process and the definition of geographical areas, and 
the appeals and the rights processes that are put in place.
    So I am not even sure that private prescription drug 
experience you mentioned is needed.
    Ms. DeParle. I agree. I would not characterize it that way, 
either. I did not see friction.
    I think every administrator struggles with trying to 
balance the focus on the two programs. And frankly, I came out 
of the State of Tennessee where I had worked on Medicaid 
issues. And I think the agency's focus is, to some extent, 
reflective of the Administration's focus and the Congress' 
focus.
    President Clinton was very interested in Medicaid so we 
spent quite a bit of time on it. But the fact is for every one 
letter I got from a member of Congress about Medicaid, I got 50 
about Medicare. And perhaps that is somewhat symptomatic of the 
time I was there, because I was there during the Balanced 
Budget Act. And as we have discussed, every provider in the 
country was upset about getting their Medicare reimbursements 
cut.
    So I found it was difficult to spend as much time on 
Medicaid as I would have liked. But I did not find the Serbs 
and Croatians.
    What I think he is referring to is that there are two 
career staff in the Medicaid bureau who had experience with the 
prescription drug rebate law, which I know you know about. And 
they had a lot of the intellectual capital when we began 
looking at prescription drugs and the pharmaceutical companies 
and all those sorts of things that CMS has never dealt with 
before. Those two gentlemen had the experience in dealing with 
them.
    But as Dr. Wilensky says, substantial intellectual capital 
will have to be built now, building on what is there in 
Medicaid as well as bringing in some people from the private 
sector.
    A lot of this though is not even going to be intrinsic to 
prescription drugs. It is just getting rules written, figuring 
out how to oversee contracts, the hard stuff that you talked 
about earlier in your statement. And for that, I think, you 
could bring over some good people from SSA if there are some 
people there who could be spared, as well as from some of the 
other agencies who do that kind of thing, and get them on a 
SWAT team to help the agency.
    That is what I would be looking at.
    Senator Pryor. Thank you.
    Senator Voinovich. I want to thank you very much for being 
here today. I can assure you that not only your written 
testimony but the responses that you have made today will be 
sent over to Mr. McClellan. I think your suggestion that it 
might be good to have him in here to have an opportunity to 
spend some time with us is a good one, to ascertain what it is 
that he thinks we need to do to be of help to him.
    I think the issue of workforce flexibilities in order to 
hire the people that they need to get the job done is one 
issue. Another, I think is the issue of the budget, a $1 
billion deal. But what will CMS need, in terms of additional 
money, to get the job done once this program is up and running? 
This is just a one-shot deal.
    Looking at some of the other areas in the Department where 
they have been shortchanged in terms of dollars are also issues 
that we need to really get at right away.
    One of the things I have learned here and Senator Pryor 
probably joins me in that because he was an attorney general, 
is Congress in so many instances has really no appreciation for 
the management challenges of some of these programs.
    We get this idea that we pass a law, snap your fingers and 
it is all done. A lot of my colleagues have never been a mayor. 
They have never been a governor or an attorney general. And so 
they just have no idea about how much work it takes to get 
something done.
    It seems to be illogical because if you look at any 
organization its strength really is in the people that are in 
that organization. We just do not pay enough attention to that.
    So I am really grateful that the two of you have come over 
here today. Dr. McClellan can learn a great deal from your 
testimony.
    I was thinking about whether we would do that or not, but I 
would like to invite him in and give him a chance to share with 
us his observations and maybe discuss some of these issues that 
you have raised. Are we too ambitious? Are we being asked to do 
too much at the same time? Are some of the things that Congress 
asks for in this legislation things that maybe we could delay 
for a year or 2 years rather than trying to get it all done at 
one time?
    Or is the alternative cascading some of this over a period 
of time so we get a little more experience with it, so that we 
can determine whether or not the grand plan is really doing the 
job that we expect it to do?
    Again, thank you very much. The hearing is now adjourned.
    [Whereupon, at 11:53 p.m., the hearing was adjourned.]


                            A P P E N D I X

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