[Senate Hearing 109-514]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-514
 
                       COST AND PAYMENT PLANS OF
                            MEDICARE PART D

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

                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                     INFORMATION, AND INTERNATIONAL
                         SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 22, 2005

                               __________


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                        and Governmental Affairs


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        COMMITTEE ON HOMELAND SECURITY AND 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
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
   Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL 
                         SECURITY SUBCOMMITTEE

                     TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska                  THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia             MARK PRYOR, Arkansas

                      Katy French, Staff Director
                 Sheila Murphy, Minority Staff Director
            John Kilvington, Minority Deputy Staff Director
                       Liz Scranton, Chief Clerk
                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coburn...............................................     1
    Senator Akaka................................................     3
    Senator Lautenberg...........................................     5
    Senator Carper...............................................    24

                               WITNESSES
                      Thursday, September 22, 2005

Leslie Norwalk, Deputy Administrator, Centers for Medicare and 
  Medicaid Services..............................................     7
Joseph R. Antos, Ph.D., Wilson H. Taylor Scholar in Health Care 
  and Retirement Policy, The American Enterprise Institute.......    18
Marilyn Moon, Vice President and Director, American Institutes 
  for Research...................................................    20
Jagadeesh Gokhale, Senior Fellow, Cato Institute.................    22

                     Alphabetical List of Witnesses

Antos, Joseph R.:
    Testimony....................................................    18
    Prepared statement...........................................    53
Gokhale, Jagadeesh:
    Testimony....................................................    22
    Prepared statement...........................................    77
Moon, Marilyn:
    Testimony....................................................    20
    Prepared statement...........................................    62
Norwalk, Leslie:
    Testimony....................................................     7
    Prepared statement...........................................    42

                                APPENDIX

Table III.B4.--Operations of the HI Trust Fund during Calendar 
  Years 1970-2014................................................    37
Table III.C1.--Operations of the SMI Trust Fund (Cash Basis) 
  during Calendar Years 1970-2014................................    38
Costs and Projections for Medicare and Part D....................    39
Chart entitled ``The Burden of Medicare's Unpaid Bills'' 
  submitted by Senator Coburn....................................    40
Chart entitled ``Pre-MMA: Where Beneficiaries Got Their Drug 
  Coverage'' submitted by Senator Coburn.........................    41
Questions and Responses for the Record from:
    Ms. Norwalk..................................................    90
    Mr. Antos....................................................    92
    Ms. Moon.....................................................    95
    Mr. Gokhale..................................................   100


               COST AND PAYMENT PLANS OF MEDICARE PART D

                              ----------                              


                      THURSDAY, SEPTEMBER 22, 2005

                                       U.S. Senate,
            Subcommittee on Federal Financial Management,  
         Government Information and International Security,
                                   Committee on Homeland Security  
                                          and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:34 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Tom Coburn, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coburn, Carper, Akaka, and Lautenberg.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. The hearing will come to order. I want to 
thank everybody for being here, and especially thank our 
witnesses. The purpose of this hearing is not to beat anybody 
up, but to find out facts.
    The stakes have changed. Katrina has opened the eyes to 
what the responsibilities are upon us. We have Rita as well. I 
would like to talk to the person who names these hurricanes, 
where they come up with some of these names.
    What we really hope to accomplish from this is to hear what 
we think is going to happen and what the costs are associated 
with what has been passed. I have a personal bias as a 
practicing physician, thinking that the Medicare Part D 
program, although it has great benefits in it, my personal 
belief is that it fixed the wrong problem. It is not about 
whether or not seniors need drugs--they do--and whether or not 
they need help getting those drugs--they do. I believe that. I 
see it every day in my medical practice. So I have a bias on 
the program.
    What I am going to do today is just give a short opening 
statement. Our Ranking Member is testifying before another 
committee. Senator Carper will be here soon. When he does come 
we will allow him the time to give an opening statement, and 
then we will proceed with the questioning. We hope to make this 
a very brisk and fast-paced exercise because of all of the 
other things that we have going on.
    Let me just start by asking unanimous consent to put my 
full statement in the record, and without objection, that will 
be made.
    [The prepared statement of Senator Coburn follows:]
                  PREPARED STATEMENT OF SENATOR COBURN
    Today's hearing will examine the unfunded liabilities the Medicare 
Modernization Act imposes on future generations and whether the new 
legislation will actually meet the needs of seniors.
    The Federal Government has more urgent demands to make on the 
American taxpayers than ever before. Our nation faces a constant threat 
of terrorism, made more ominous by nuclear proliferation in Iran, 
China, and North Korea. We know that these tyrannical governments could 
share their weapons with terrorists. Nothing about the so-called 
``security'' at our borders and ports prevents the transport of these 
weapons into our backyards. The war on terror requires massive 
military, intelligence, and law enforcement resources.
    We also face long-term, expensive and previously unforeseen 
financial obligations to rebuild Afghanistan and Iraq. There is no more 
important, appropriate or Constitutional use of taxpayer dollars than 
defending the nation from those who would destroy our cities and our 
citizens.
    Now, we must also reconstruct a disaster zone in our own country 
that covers 90,000 square miles. Millions of families, homes and 
businesses were affected by Hurricane Katrina. Cities and towns 300 
years in the making must be rebuilt out of the mud of the Mississippi 
delta. The Federal Government is on the hook for every penny of it.
    Americans are generous and proud, and so they will rebuild the Gulf 
Coast, Americans are far-sighted and security-minded, and so they will 
rebuild our new allies in the Middle East. What is unique, however, 
about these large new obligations is that they are occurring in the 
context of massive and unrestrained Federal deficits--already almost 
$600 billion this year. Unlike their elected officials, Americans 
understand about priority-setting from balancing their own checkbooks. 
When unexpected financial obligations arise, priorities must be set. 
Sacrifices must be made.
    Since 2001, non-defense discretionary spending has increased by 36 
percent. Let me repeat that. Since 2001, when we were attacked by a 
vicious enemy and embarked on an expensive war on terror, we increased 
NON-defense discretionary spending by a record-setting 36 percent.
    During those years, we were a nation at war. We were rebuilding 
lower Manhattan. Oil prices were on the rise. We were facing a 
recession and tentative economic recovery. Those were years where we 
should have seen belt-tightening for discretionary programs. It was 
during these same years that Congress passed the biggest expansion of a 
mandatory entitlement program in four decades.
    Every senior wants and needs access to life-saving medications. But 
when I go home and participate in town hall meetings, I ask this 
question of the seniors in the audience: ``How many of you would deny 
your grandchildren any health care when they grow old so that the 
government can buy you prescription drugs today?'' Not a single hand 
goes up. Today's hearing will examine if this is indeed the trade-off 
we're facing.
    With the drug benefit rolling out in January, I'm concerned if we 
can afford it. The President has identified ``long term unfunded 
promises of our entitlement programs'' as our greatest fiscal 
challenge.
    Entitlement spending already accounts for over 60 percent of the 
Federal budget. I understand that by 2040, the Medicare deficit alone, 
which is not the only entitlement program, will consume half of all 
Federal-income tax revenues, before paying for other entitlements such 
as Social Security and Medicaid. I hope that our witnesses will confirm 
today if it is true that the new drug benefit will add $8.7 trillion to 
the unfunded liability through 2078, bringing the total debt to $29.7 
trillion.
    Today, the Federal deficit is nearly $600 billion. Just this fiscal 
year, the unfunded liability of Medicare is $126 billion. that means 
that after revenues kick in $217 billion from payroll taxes, social 
security taxes for Medicare, and premiums, another $125 billion must be 
taken out of the general revenues to cover the shortfall. Each year, 
the amount required out of general revenues will increase.
    When Congress passed MMA, over 76 percent of all seniors ALREADY 
had drug coverage. Some argued at the time against expanding the 
program to pay for even the wealthiest Americans. They suggested that a 
more affordable approach would be to means-test the program, providing 
drugs for the neediest seniors.
    I'm concerned that Part D may have enacted a massive cost-shift 
from the private sector to the U.S. taxpayer. The consequence of MMA is 
to actually force Medigap carriers out of business. What's more, many 
private employers and unions are currently paying drug costs for their 
retirees. Come January, however, those private payers will simply drop 
coverage, or, if they retain coverage, they'll bill the Federal 
Government for a large share of the cost.
    There are plenty of reasons to worry about the fiscal outlook for 
Part D. However, just as worrisome is the potential effect it could 
have on patients. One of the best predictors of positive patient 
outcomes is the presence of private insurance. The reason is that you 
generally get better results when you keep the government out of the 
exam room. I worry that we are placing too much responsibility for a 
patient's treatment, especially his or her medication management, in 
the hands of a giant Federal bureaucracy instead of the important 
partnership between a patient, his or her doctor and family caregivers.
    I'm also worried that as demand increases under this universal 
benefit, a natural response to contain the inevitable sky-rocketing 
costs will be price-fixing. Price-fixing often leads to drug rationing 
in the form of restricted formularies and onerous authorization 
requirements imposed on patients and doctors.
    As Part D grows the Federal share of the U.S. drug market, there 
will be less competition--the ONLY downward pressure on prices. U.S. 
drug prices were high already, because American taxpayers subsidize the 
price-fixing behavior of other nations' socialized medical systems. 
Once we ourselves fall into the price-fixing trap, I'm concerned that 
innovation will disappear. More disincentives for innovation in drugs 
could spell disaster for patients. As a physician, I worry all the time 
about drug resistance. What will we do when there is no new antibiotic 
around the corner--when pharmaceutical companies only develop new 
lifelong drugs--specifically because these products won't be caught up 
in the new bureaucracy?
    Today is a fact-finding exercise. I hope to hear from the experts 
and get some of the latest numbers out in the open and on the record. 
As we evaluate this new program, its role in our economy, and prospects 
for the future, I am grateful for the time and expertise of our 
witnesses.

    Senator Coburn. I also will put into the record the 
information from the Medicare Trust Fund, and I would note that 
this year the trust fund, all of Medicare's expenses versus all 
of Medicare's revenues, ran a $125.6 billion deficit. That is 
``B'' with a billion.
    I would also put into the record that during the calendar 
year of 2006, that same deficit will rise to $187 billion. 
Those are not my numbers. Those are the Medicare trustee 
numbers. Those are the numbers that come from the trustees who 
are looking at the program. HI, the hospital insurance program, 
is doing well, based on how it has been managed, fees and 
everything that it has collected based on the premium. What is 
not doing well are the other programs that require 
participation. So without objection, I would like to enter the 
Medicare trustees' projections into the record, as well as the 
projection combining those on a yearly basis, rather than a 
fiscal yearly basis into the record.\1\
---------------------------------------------------------------------------
    \1\ The charts appear in the Appendix on pages 37 and 38.
---------------------------------------------------------------------------
    With that, I will ask Senator Akaka if he would like to 
have an opening statement.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Mr. Chairman, thank you so much for holding 
this hearing. This is very important to our Nation and our 
people. I want to apologize. I just got a call. I have to go 
back to the floor on my amendment that is pending, and ask that 
my full statement be placed in the record.
    Senator Coburn. Without objection, so ordered.
    Senator Akaka. Thank you.
    [The prepared statement of Senator Akaka follows:]
                  PREPARED STATEMENT OF SENATOR AKAKA
    Thank you Mr. Chairman. for many years, I supported efforts to 
establish a meaningful, comprehensive Medicare prescription drug 
benefit. However, I voted against the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA) for several reasons. I 
believed that the bill was extremely complicated. It contained lapses 
in coverage, and included burdensome means tests and a provision that 
will cost taxpayers huge sums of money that will largely go into the 
pockets of drug companies.
    The negative impacts of this new law will be even more troublesome 
given the disturbing trend of decreasing benefits for retirees over the 
past few years. Many seniors are being forced to rely on Medicare, 
which is providing a less generous benefit than what seniors currently 
enjoy. If Medicare beneficiaries lose their employer-based coverage, 
they may have to pay more for a Medicare drug benefit that provides 
less comprehensive coverage. It is estimated that approximately 2.5 
million people will lose their coverage and be forced to depend on a 
benefit that is not as good as their existing coverage. The intent of 
having a Medicare prescription drug benefit should be to expand and 
improve coverage for seniors, not merely shift the financial burden of 
existing coverage to the Federal Government.
    The prescription drug benefit is complicated. In October, Medicare 
beneficiaries will find out which Medicare drug plans are available in 
their area, and face a confusing set of questions. Beneficiaries will 
have to decide whether to enroll in the Medicare drug benefit and, if 
so, which drug plan to select. Those with existing coverage must first 
determine how their current drug coverage will be affected and, if 
continued, whether their current coverage will be more or less 
comprehensive than the Medicare drug benefit. also, the implementation 
of this benefit will be difficult due to the complex design of the 
prescription drug benefit plans and low-income subsidies.
    In particular, I am worried that seniors will not have access to 
the information they will need to make informed choices between private 
plans that would provide them with the best benefits. Further 
complication this arduous task is meeting the different needs and 
challenges of communities to make sure that no one will be unfairly 
denied access to assistance seniors are entitled to under the law. In 
crafting the law, I wanted seniors to have the option of participating 
in a Medicare administered drug plan rather than having to choose from 
private plans that will offer different benefits.
    Furthermore, the new Medicare drug benefit plan includes a major 
gap in coverage for drug spending between $2,251 and $5,100 for some 
beneficiaries. This is often called Medicare's ``doughnut hole.'' 
According to the Congressional Budget Office, more than on in every 
four of all Medicare beneficiaries are projected to have drug spending 
that falls in the range of the doughnut hole. I disagreed with the 
inclusion of the doughnut hole. No other insurance program that I know 
of operates like this program. Despite paying premiums, beneficiaries 
will not receive any help with their drug costs when they are in the 
doughnut hole.
    I also found the assets test used to determine the low-income 
subsidies for the prescription drug benefit to be unrealistic. 
According to Families USA, the assets test will deny subsidies to 2.8 
million low-income seniors with even a small amount of assets. 
Additional assistance should not be unfairly denied to deserving low-
income seniors.
    I also opposed the liegislation's imposition of a means test for 
Medicare Part B, which I did not believe was appropriate for an 
entitlement program. This will complicate the process for seniors and 
create administrative difficulties for the CMS.
    It is hard to imagine that, as the Federal Government has assumed 
the cost of helping seniors obtain their prescription drugs, Medicare 
would be prevented from using the bulk purchasing power of the millions 
of its beneficiaries to lower drug costs for the program. This onerous 
prohibition was also included in the MMA.
    In addition to ensuring adequate and affordable prescription drugs 
for the nation's senior citizens, we need to bring about massive reform 
of drug patent laws so that generic drugs can be made available more 
quickly in an attempt to slow the massive increases in drug costs. Too 
often drug companies are allowed to artificially extend the length of 
their patent protections on their products through the creative 
exploitation of loopholes in prescription drug patent laws. We must act 
to slow the increasing costs of prescription drugs.
    Before I conclude, I want to take a moment to recognize the work of 
all the individuals in Hawaii who help Medicare beneficiaries 
understand their options. I also wish to recognize Mary Rydell, the CMS 
Pacific Area Representative, Christine Messner, the Social Security 
Administration Pacific Area Public Affairs Area, and Pamela Cunningham 
from the Hawaii Department of Health's Sage Plus program, for their 
outstanding efforts in promoting the understanding of Medicare Part D. 
I greatly appreciate the efforts of Barbara Kim Stanton and the AARP 
who help increase the awareness of the choices that beneficiaries will 
soon have to make. I was delighted to take part in several events 
during the August recess with these dedicated individuals.
    Mr. Chairman, I remain committed to improving and simplifying the 
Medicare prescription drug benefit so that all seniors are able to 
obtain all of the medications that they need. Our seniors deserve no 
less. I look forward to working with my colleagues to correct the 
mistakes of the MMA and fulfill the promise to seniors that the Federal 
Government will help beneficiaries get the drugs they need.
    Thank you, Mr. Chairman.

    Senator Coburn. Senator Lautenberg.

            OPENING STATEMENT BY SENATOR LAUTENBERG

    Senator Lautenberg. I hate to rain on the parade, Mr. 
Chairman, but I will take an opportunity to make a fairly short 
statement.
    The one thing that I learned when working with you, with 
your background as a physician, that there are different 
perspectives on ways to solve problems that we can agree upon 
are necessary for resolution, but the question is how much of 
our national resource do we devote to health care?
    When you look at the results of the work done in our 
society on the medical research side, it is pretty astounding, 
thank goodness. And I confess to being not addicted, a user of 
some things that I get regularly, and it helps so many ways. 
When I look at the fact that my father died when he was 43-
years-old, and my father was a health faddist, and I look at 
the luck I have had in life and see that I am fairly fit for my 
age, and those in the room probably know I am more than 50, but 
the fact of the matter is it is helped by a cholesterol-
lowering drug, and something to keep tennis from getting too 
much of an elbow, etc. So I have great sympathy for the people 
who use these things. I believe that the beneficiary of 
appropriate means share the cost.
    So when we look at things, I think this is a timely 
hearing, and I respect so much your experience, but also your 
focus on how we reduce the cost of things. I know you are not 
picking on health care, that we talk about lots of things, and 
I share some of the anxiousness to get those costs reduced. But 
we found out last week, Mr. Chairman, that health care costs 
increased almost 10 percent last year.
    Now, one of the principle reasons for the skyrocketing 
health costs is the price of prescription drugs. You know this 
better than the people on Medicare, because Medicare does not 
currently cover prescription drugs. I have long supported the 
creation of a prescription drug benefit in Medicare, but I 
voted against the new Medicare drug bill 2 years ago because it 
is a totally, inadequately complicated plan that will leave 
many Medicare recipients with more confusion than coverage. In 
fact, the bill contains an unbelievable provision that actually 
forbids Medicare from using its buying power--this astounds me, 
Mr. Chairman--to bargain for the best possible price on 
prescription drugs. We see what happens with VA. VA has every 
right and every responsibility to negotiate for drug prices, 
and they get significant reductions.
    So we hear a lot about the free market, and I know 
something about that. I was in the business world for many 
years. But I can tell you this, in the free market, businesses 
always negotiate for the best possible price on everything they 
buy. That is far from the only problem with the current law.
    The new Medicare law simply does not provide adequate 
coverage for seniors whose lives are totally dependent on these 
drugs. We have all heard about the donut hole in the law. It 
means that after seniors receive a particular amount of drug 
coverage, they will then be cut off for a significant period of 
time, yet they still have to pay the premiums, and it is 
something around in the, I think, 3,000 plus area that they 
have to be responsible for. So they will pay the monthly 
premiums to insurance companies that are not going to cover 
their prescriptions.
    To make matters worse, when we were considering this bill, 
the Administration misled Congress about its cost. I am not 
saying it was intentional, but that was the ultimate outcome. 
Tom Scully, who is head of the Center for Medicaid and Medicare 
Services--he was the head at the time--threatened to fire the 
chief Medicare actuary if he revealed the true cost of this 
bill to Congress. I asked GAO to investigate the legality of 
Mr. Scully's action, and GAO found out that Mr. Scully was so 
far out of line that he should repay part of his salary to the 
government. That was more than a year ago. We are still waiting 
for him to pay back the taxpayers.
    Then there was more. We found out that there were some fake 
news stories about the new Medicare law, were distributing them 
to TV stations. One of our witnesses, identified by the fact 
that she is the only one at the table, was featured, as the 
reporter, Karen Ryan, who extolled the virtues of the Medicare 
law, did not talk about the donut hole or other problems. I 
asked GAO to evaluate HHS's activities. The GAO found that 
these fake news stories were illegal propaganda.
    Mr. Chairman, to sum it up, this new Medicare drug law has 
been plagued by lack of candor. The focus of our hearing today 
is on the failure to be honest about this bill's costs, but we 
are also seeing a lack of truthfulness to seniors about the 
problems like this donut hole, and we have seen the lack of 
accuracy for the American people, when the Administration 
concealed its role in the fake news stories. I did not think it 
was proper. It was decided and we are on our way.
    But I hope our hearing today is going to help us thrash out 
the truth about the upcoming Medicare drug benefit, and I thank 
you, Mr. Chairman, for doing it.
    Senator Coburn. Thank you, Senator Lautenberg. One of the 
things that I hope we will get into, if the witnesses would 
just consider this, your testimonies are going to be included 
in the record. We would like for you to limit your opening 
remarks, so we can ask questions. But one of the things I do 
not think the American people understand about the price of 
drugs in the United States, is that there are single purchasers 
in lots of other places in the world. So consequently, 
Americans pay two to three times the price at retail for the 
identical drugs that they could buy in countries where there 
are price controls.
    What that has essentially done is forced the cost for 
research for all the wonderful new drugs we have--I mean just 
to share with you, there is going to be a study that is going 
to be a breakthrough, going to be announced in the next 6 
months, on a treatment to stop Alzheimer's in its tracks. I 
mean it is great stuff. The enzyme that causes that disease has 
now been identified. It is the secretase enzyme. It is going to 
stop it.
    Now, the cost of that drug is going to be enormous. Why? 
One, there is margin, but because when they go to sell it, they 
are going to have to negotiate a low price everywhere else, but 
we are going to pay a high price.
    How does that work out? With Medicare Part D--and we have 
seen good competitive bids come in--which is lower than what 
they thought, but the total cost for drugs in the country is 
not going to go down. The total cost for the drugs in the 
country is going to stay the same or go up, because we are 
going to continue with the same cost shifting that Medicare has 
induced in every other aspect of health care. If you look at 
any drugs out there--and I see them every day as I practice 
medicine on the weekends and on Monday mornings from 6 to 9 
o'clock. What we see is price increases of 6, 8, 9, 10 percent 
this year. What we see is 30 percent price increases over the 
last 3 to 4 years when we have had total inflation of less than 
10 percent.
    Those price increases are coming because we are paying for 
the research. We are also paying to subsidize everybody else's 
drugs in the world. At the same time we are not protecting the 
intellectual property of the pharmaceutical industry. China 
copies it. We have not done a good job of enforcing that in 
trade.
    So there are a lot of reasons why our drugs cost so much in 
this country, but it is important for us to understand how we 
got where we are. That is why we want to know what is happening 
now.
    With that, I will turn to our first witness. Leslie Norwalk 
is the Deputy Administrator for the Centers for Medicare and 
Medicaid Services. She directs the task of--and she has had a 
tough job, I want to tell you, and by the way, done a great 
job, because I know lots of congressional offices and Senate 
offices have worked with you. Even though I do not agree with 
it, I am out there helping seniors try to figure it out.
    Ms. Norwalk. Thank you.
    Senator Coburn. Hundreds of changes that were made in the 
Medicare Modernization Act, as well as the Part D program and 
enrolling.
    We welcome you. Thank you for your hard work. Thank you for 
the service to our country and the service to seniors.

 TESTIMONY OF LESLIE NORWALK,\1\ DEPUTY ADMINISTRATOR, CENTERS 
               FOR MEDICARE AND MEDICAID SERVICES

    Ms. Norwalk. Thank you, Mr. Chairman, Senator Lautenberg 
Thank you for having me here today to discuss the cost of the 
Part D benefit. I think this coverage is critically important 
as we go forward for reasons that you both mentioned. Medicare 
beneficiaries today, and certainly those of tomorrow, 
desperately need drug coverage in order to reduce their costs 
for health care.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Norwalk appears in the Appendix 
on page 42.
---------------------------------------------------------------------------
    I would like to start today with a little bit of background 
about how this came to pass, and one of the many reasons why it 
is that the Medicare drug benefit is so necessary. When 
Medicare was created in 1965 the cost of health care was mainly 
in physician office visits and hospital visits, and 
prescription drugs did not play a critical role in the 
treatment of individuals. I suspect at the time there might 
have even been house visits by doctors. Certainly things have 
changed a great deal in 40 years. Part of that great deal is, 
in fact, Mr. Chairman, all the new drugs that are coming down 
the pike to do things like help cure Alzheimer's. And yet, if 
you do not have access to those drugs, they cannot help you. It 
is quite true that many of them can be very expensive.
    One of the things is that we spend a lot of money on heart 
disease. Just for example, in this country, we spend a lot of 
money on angioplasty and bypass surgery. These are two things 
that Medicare currently covers, and yet today, the Medicare 
program does not cover basically beta blockers and statins 
which cost around $1,000 or less a year. And it does not really 
make sense in this day and age for a government program as a 
public policy to not do things like preventative care and to 
not have prevention as a focus. I am sure as a physician it is 
going to be one of the key things you do with every patient.
    So from a government perspective, we need to be out there 
talking about prevention. One of the things that the Medicare 
Modernization Act in fact did was allow a ``Welcome to 
Medicare'' physical for those who enter the Medicare program, 
in those first 6 months, so that we can stop the need for 
angioplasties and bypass surgeries, and give them the 
prescriptions that they need and a way to afford them so that 
they do not incur the costs on the Part A and Part B side of 
Medicare.
    Of course, when you do that scoring, any savings that would 
have accrued to the hospital side or the physician side is not 
counted in that score, just to make that point.
    Senator Coburn. I run into that problem all the time up 
here. [Laughter.]
    Ms. Norwalk. One of the things I would like to do is talk 
about the five basic principles of the Medicare Modernization 
Act surrounding the drug benefit, just as a context setting 
exercise.
    The first is that it is available to all beneficiaries, 
whether they are 65 and over, whether they are disabled, 
whether they are in Medicare fee-for-service or in a 
coordinated care plan, something known as Medicare Advantage. 
It does not matter if they have a preexisting condition, or if 
they get their drugs by mail or retail. All individuals in the 
Medicare program are eligible for this coverage.
    While that is terrific, there are lots of beneficiaries 
that need additional help. As Senator Lautenberg pointed out, 
there are often either gaps in coverage or premium payments, 
and many beneficiaries cannot afford those. Consequently, the 
program is set up to provide additional help, not just for 
those who are dual eligible, but also for individuals who are 
not in the Medicaid program, yet still have incomes limited 
enough that they need additional help. We have been working 
very diligently to find those individuals to get them enrolled 
so that they do not have the burden that some other 
beneficiaries may have in terms of just paying the basic 
premium, for example.
    The third important tenet is keeping retiree health plans. 
About 11 to 12 million individuals in the Medicare program 
today are fortunate enough to receive their coverage through a 
retiree health care plan. Each plan is different depending on 
the employer and the union, certainly, that would offer it. But 
every beneficiary I have ever met who has this coverage is very 
interested in retaining that coverage, and over time they had 
been concerned about losing it. The reason that concern exists 
is because in 1988, merely 17 years ago, 66 percent of all 
large employers had retiree health plans. That number today is 
33 percent, cut in half. For those who are newly hired, only 10 
percent and fewer have access to retiree health plans.
    Fourth is catastrophic coverage. No matter what your 
income, if you are going to have a blockbuster drug--say you 
have cancer or leukemia and you need Gleevec, and it is $40,000 
a year, except for maybe Warren Buffett, that is something that 
really gives you pause. How can I keep myself alive and spend 
$40,000 a year? So no matter what your income, the catastrophic 
coverage piece is a very important part of the program.
    And finally, it is voluntary. Many beneficiaries do not 
like change. They may not be interested in this benefit for 
whatever reason, and may take a year or two to feel, ``Yes, 
maybe I do need this coverage after all.'' They can choose, and 
if they like it, fantastic, and if they do not like it, that is 
their option.
    I am going to have to sum up quickly, but I wanted to talk 
briefly just about the five different categories of individuals 
if I may, and how it is that we look at the program going 
forward. I think it helps us categorize costs as well when we 
get to those questions.
    The first of the five are those that are dual-eligible. 
There are about 6.2 million beneficiaries that are dually 
eligible. They will all automatically be enrolled in the 
Medicare prescription drug program between now and January 1, 
so that each and every one of them will have coverage, 
regardless of where they live, including in a hurricane 
impacted area, so that they can have access to drugs anywhere.
    In the second group are those in the Medicare Advantage 
program, that more comprehensive program outside of fee-for-
service. There will be, we expect, about 6 million 
beneficiaries enrolled in that program. They too will be 
automatically enrolled in the same Medicare Advantage plan that 
they are in now, except that plan will have drug coverage. They 
can opt out later if they choose to.
    The third group are those employers that I mentioned 
before, those in retiree health plans. We expect about 10 
million of them will still be in these plans beginning next 
year. Rather than being in the Medicare drug benefit, these 10 
million will be in a plan that would be considered creditable 
coverage and that their plan is worth as much as the Medicare 
benefit. Those 10 million, each of them as individuals, the 
subsidy would go to their retiree health plan for a portion of 
their drug costs.
    The fourth group are those people that are eligible for 
extra help, and yet are not in the Medicaid program. There are 
about 8.4 million of them we think, and we are searching long 
and hard to find as many of them as we can before November 15, 
so that when they sign up they will know that they will have 
that extra help.
    Then finally, the fifth is the general Medicare population. 
There are about 12 million that I did not include in the first 
four buckets.
    I personally believe strongly in the Medicare drug benefit. 
I am happy to address any of the concerns that Senator 
Lautenberg or you have raised about cost and coverage, and am 
certainly happy to talk about the positive things. I think 
there are many. I just thank you for inviting me and giving me 
this opportunity to explain the drug benefit.
    Senator Coburn. Thank you very much, Ms. Norwalk. Let me 
clarify. You said it is voluntary, but if you are dully 
enrolled, it is not voluntary.
    Ms. Norwalk. That is correct. You would automatically be 
enrolled, but there would be no cost to you from a premium 
perspective except you would pay copayments for drugs just 
like----
    Senator Coburn. Except it is not voluntary.
    Ms. Norwalk. I suspect if you did not want drug coverage, 
you could opt out, but there is no----
    Senator Coburn. There is no mechanism for--I think that is 
just one of the important things, and if you are in a Medicare 
Advantage program now, it is not voluntary. You can later opt 
out, but you are going to get in it, you are going to be 
enrolled in it whether you want to be enrolled in it or not 
right now; is that correct?
    Ms. Norwalk. You would be automatically rolled over, but 
you do have the option even before December 31, before the 
coverage starts, to not elect that prescription drug coverage.
    Senator Coburn. There is a lot of debate among fellow 
Senators and throughout the country about what this thing 
really costs. If we are going to state here unequivocally, 
prevention is important, access to medicines is important. And 
I talked about this a lot because I have a lot of seniors today 
that may choose between eating and taking a pill. It is a real 
problem out there. Part of the problem is my profession because 
we prescribe the most expensive medicines that do 100 percent 
when we can prescribe one that costs 10 percent that does 95 
percent, so part of it is on our part that this has happened. 
Part of that is demand pulled from the drug industry in 
creating that such as buying the lunches for everybody in an 
office every day, which we do not accept in our office, by the 
way.
    But the CBO estimated last month that Part D will actually 
cost, over the next 10 years, $855 billion. What do you think 
about that?
    Ms. Norwalk. I would first start out by saying projections 
are incredibly difficult, whether it is the Office of the 
Actuary or the Congressional Budget Office, and both would 
admit that estimating something even before it is begun has 
been incredibly hard.
    Two of the key components of that estimate--if I just leave 
it to 2006, for the first year--two important components of 
that are something called the benchmark or what the average 
premium is of all the plans that have come in. Now, this 
average is not a weighted average, it is just every single plan 
that comes in is worth one. What is the average of that?
    That average is important because the Medicare program 
subsidizes 74.5 percent of that average. The original estimates 
were overstated, and you can see that in the beneficiary 
premium numbers, that the initial estimate was $37 a month and 
now it is $32.20. What that means is actually a fairly 
significant change in what you will see between the mid-session 
review numbers that the Office of the Actuary has out now and 
what will be in the President's budget next year. There has not 
been a re-estimate. But because of that change in per 
beneficiary subsidy, it is many billions of dollars cheaper 
than they originally estimated in 2003 because of competition, 
frankly, and the fact that the drug companies did a good job of 
negotiating with the insurance companies who are offering this 
benefit, and bringing in a lower price, not just the drug 
companies, but the pharmacies.
    I do think that the cost will actually come down from the 
estimates that were in the mid-session review numbers, and I 
suspect that the Congressional Budget Office as well will take 
another look once they have the new numbers.
    Senator Coburn. But according to your testimony, from $37 
to $32, or $36.50 to $32, that is about one-ninth to one-
eighth. So if you take this $855 billion and you take $110 
billion off it, we are still at $745 billion, compared to $460 
billion, which was the Administration's original estimate 
through OMB for the cost of this program over 10 years.
    Ms. Norwalk. Let me say a couple of things. The first point 
is that the Office of the Actuary's initial estimate was $535 
billion, just to be accurate, and it spanned the years of 2004 
to 2013. If you think about how that--because it is a 10-year 
number, what happens 2 years later is that 2004 and 2005 drop 
off. Those are 2 years where we do not have a drug benefit at 
all. And instead you add on the back end two expensive years 
because we have more beneficiaries, and those beneficiaries for 
each year, basically when you add 2014 and 2015 to it, you are 
taking off 2 years at basically zero and adding 2 years which 
are basically----
    Senator Coburn. That is a great explanation. Now give me 
your opinion. Is it going to cost more than the $530 billion in 
real dollars over the next 10 years that you all estimated?
    Ms. Norwalk. Over the next--$535 billion between now and 
2013, in my estimate, no. And the reason I would say no is 
because I am hopeful that we will have a very high number of 
participants. The Office of the Actuary estimated 39.4 million 
in this first year. I am hopeful that we do that well. I think 
Wall Street has been a little more skeptical, and has come in 
with estimates that are less than that. And if fewer people 
sign up, you have two things that--two different interactions 
that can occur first. Just the overall subsidy would decrease 
by the numbers that do not sign up for the benefit because it 
is voluntary. And the second part that happens really depends 
on those who do sign up, what is the mix; is there adverse 
selection, for example; and are only the sickest people signing 
up?
    And figuring out that number for one year alone is 
difficult, but when you do it over year after year, and how 
that compounds is also difficult.
    I think the other reason that these are complicated figures 
and difficult to discern, is that what happens this year? What 
is the experience that the drug plans have in offering the 
benefit in year one, and how does that impact on how they bid 
in year two?
    Certainly when we have an average premium of $32, that 
means that a significant number of plans will offer at less 
than that. Almost every beneficiary in the country will have 
access to a plan that will be less than $20 a month, and a 
significant number of them will have access to plans even less 
than $10 a month. So in that regard, well, if the lower 
premiums mean that more will sign up, there may not be adverse 
election.
    Senator Coburn. So if there is not and everything goes the 
best it can go, everybody that is not on a Medicare drug plan 
is going to pay a significantly higher price for their drugs in 
the future; is that true?
    Ms. Norwalk. Repeat the question, please?
    Senator Coburn. If everything goes as best it can go to 
where you got the enrollments and there is not adverse 
election, everybody in this country who is not on Medicare D is 
going to pay a higher price for their drugs? Somebody is going 
to pick up this difference.
    Ms. Norwalk. I actually think it depends on the type of 
drugs. Fifty-five percent of all the drugs consumed in the 
United States are generics. Generic drugs are cheaper in the 
United States than in nearly every other country in the world 
in spite of price fixing. Not true for brand name drugs, 
certainly, but as more drugs become available off patent in 
generic form, I do think those prices will come down. So I 
think it really depends on the drug mix that an individual is 
taking and whether or not a generic is available for that 
individual.
    I think even that is a more complicated question than just 
if you are not in the Medicare program will you pay more. I 
think it depends on what disease you have and what drugs you 
need to take going forward.
    Senator Coburn. What is going to happen, in your estimate--
and this is a guess and nobody is going to hold you to it. What 
happens if the formulary is such that patients cannot really 
get what they need because a decision has been made to make the 
formulary--and by formulary I mean the choice of drugs that you 
can have--you cannot have the best or you cannot have the one 
you need, you can have second or third best? If we are getting 
close on numbers, what is going to happen in terms of--are you 
all going to change the formulary to stay within the numbers?
    Ms. Norwalk. Well, one of the things that the Medicare 
Modernization Act requires is that we use U.S. pharmacopeia to 
put together a standard set of classes and classifications as a 
model. If the drug plans come in with drugs according to that 
model, then they can have an automatic pass, if you will, at 
the formulary.
    Now, we have been reviewing--each and every formulary was 
reviewed by CMS and approved prior to being used. The second 
important piece in terms of how the formulary is done is that 
we have required six classes of drugs that all or substantially 
all of them must be covered in a formulary, including 
antidepressants, antipsychotics, anticonvulsives, anti-cancer 
drugs, immunosuppressants and HIV/AIDS drugs. So a significant 
number of drugs in fact must be covered by these plans, and 
that will, I think, limit the number of appeals that we have 
and any possible disruption we might have as individuals move 
from, say, Medicaid to Medicare, or frankly, other forms of 
insurance into the Medicare program. I know there has been 
great concern about that in particular.
    Senator Coburn. You concern me a little bit, as a two-time 
cancer survivor, that oncologic drugs were not mentioned.
    Ms. Norwalk. No. Anti-cancer drugs, yes, they are.
    Senator Coburn. Thank you. I have one final question and I 
will go to you, Senator Lautenberg.
    In your testimony you mentioned that 76 percent of the 
seniors prior to Medicare Part D had some drug coverage.
    Ms. Norwalk. Correct.
    Senator Coburn. I am not going to put you on record with 
this question, but I am going to put you on record with a 
second one. Senator Lautenberg alluded to the fact that lots of 
people are going to get this benefit that have tremendous 
means, and very few people are going to need the drugs that you 
described, thank goodness. Would you not agree that a 
significant means testing for Medicare Part D would be a way, 
in what we face today, to put this benefit to the people who 
really need it and to those that are secure enough and have the 
resources to pay for it themselves, like myself, that we would 
be better off as a Nation?
    Ms. Norwalk. So you are suggesting that like we will be 
starting to do in Medicare Part B, that we should, as we call 
it, income relate the premium?
    Senator Coburn. You have a very smooth means test. You can 
call it ``income relate the premium,'' but what it is is the 
cost of Part B goes up if you have more assets and you earn 
more income. If that is good enough for getting into a doctor's 
office, why is it not good enough for buying your drugs?
    Ms. Norwalk. I am glad you are not putting me on the record 
for this question.
    Senator Coburn. I am not asking you to give an answer 
reflective of the Administration. I am just asking you to 
logically answer that question. Why would Senator Lautenberg 
and I both be eligible for this? Granted there is a slight 
means test in this--I do not mean to imply there is not--but 
why should the government pay 30 percent of my drugs?
    Ms. Norwalk. I think part of the answer is, for whatever 
reason, if someone is--I am quite sure that you would be very 
good to take your beta blockers and statins and so on and so 
forth. I have no idea what the mentality is, why someone 
actually might not take them, whether it is income related or 
otherwise, but we certainly hope that whatever we do as a 
public policy, even if it were to cost more or less depending 
on your income, that we would at the end of the day encourage 
people to take the beta blockers and statins and avoid the 
angioplasty and bypass surgery, because even though it does not 
count, it is an important piece of the overall Medicare program 
on the A&B side.
    Senator Coburn. More importantly, that we have government 
programs of prevention so that you do not end up with 
hypertension, hyperlipidemia and all the other diseases that 
preclude the need for beta blockers and ACE inhibitors and 
statins.
    Senator Lautenberg, you have been very patient with me. 
Thank you so much. I would note that we have a vote that starts 
at 3:10. We will allow Senator Lautenberg to continue his 
questioning. Then if you have any additional statements on the 
basis of questions that have been asked of you, I will submit 
some in writing for you to answer, and hopefully Senator Carper 
will be here at that time too.
    Senator Lautenberg.
    Senator Lautenberg. Interesting exchange, Senator Coburn. I 
do not know about Ms. Norwalk, but there were times when you 
left me sufficiently far behind in terms of the types of 
products that we are talking about. I just do what the doctor 
tells me. [Laughter.]
    Ms. Norwalk. Wise counsel.
    Senator Coburn. As long as you have a good doctor, that is 
great.
    Senator Lautenberg. So far he is doing well. I hope he 
lives a long time. [Laughter.]
    Senator Coburn. Senator Lautenberg, you do know the rule, 
is you always want to have a doctor far younger than you.
    Senator Lautenberg. Well, as Strom Thurmond once said at 
his 90th birthday, talking about his health, he thanked 
everybody for being there, and he said, ``I hope you'll all 
join me on my 100th birthday.'' And he said, ``You'll be able 
to if you exercise and eat right.'' You will be here.
    Enough of this good feeling. Let us get on to the business. 
You raised an interesting question about means testing, and 
unfortunately, I do not think we can accomplish a full review 
of that in this kind of forum, but that policy is kind of live 
and let live, and I think it has been said by other people. It 
would require a very thorough exam, and I would drag it into 
tax policy all together, because when I hear that we are going 
to have an $850 billion cost over a 10-year period, I think is 
what you said, and I look at how people like you and me got tax 
reductions, they are going to cost closer to a trillion over 
the 10-year period, so we have enough money there. So if we are 
going to have a means test, we are going to open up a subject 
that will keep us all sitting here for a long time.
    Ms. Norwalk, you talked about the premium that is going to 
be paid for the year 2006. I think you said that was fixed for 
the year 2006?
    Ms. Norwalk. May I clarify?
    Senator Lautenberg. Please.
    Ms. Norwalk. The average premium is $32 if you simply took 
in every single bid that came in from all of the drug plans 
that want to offer benefits, and you take that and you get an 
average. Well, the average is $32.20. But as in any average, 
you have some plans that would be offered at above that and 
some that would be offered below that average.
    Senator Lautenberg. What do you think the scaling would be 
like in 2007 on? Is there any prediction that we would be close 
to those numbers?
    Ms. Norwalk. I do not know that the actuaries have looked 
at it for the following years. They did in the beginning which 
they had the average premium going up one year after the next. 
I think what we are likely to see is, depending on what happens 
the first 6 months of the benefit, as the drug plans are taking 
a look at the experience that has come in based on what they 
have bid now, because many drug plans will be significantly 
less than even $20, some less than $10, and how do they do in 
terms of managing costs?
    For many of them, what they do for a living is help manage 
costs and formularies, and they do things like step therapy or 
making sure that people are getting generics before brand name 
drugs, for example. How the companies do individually will 
obviously greatly impact what the average is for next year, but 
at least they will have a few months of seeing what the 
expenditures look like----
    Senator Lautenberg. But if you had to guess, would you 
guess that costs could be lower in the years----
    Ms. Norwalk. It is possible that they would be lower 
because the plans that bid higher this year for the standard 
benefit package would probably not be viable, so may drop out, 
and consequently, the lower costing plans would stay in.
    Senator Lautenberg. However, if we look at past experience, 
we have not seen any decline at all in prescription drug costs 
as a total, but we have seen the demand go up. And I suspect--
and I was excited to hear, Tom, what you said about the 
prospects for Alzheimer's--if we could find a way to deal with 
these long-term illnesses, it would be fantastic for people as 
a whole, but it would also be great on the spending side for 
our lives.
    I think it is fair to say that if one looks out ahead, we 
are entered into fairly precarious ground about predicting 
price and costs on these things. So the warranties I do not 
think--it is a statement but it is not a representation really 
in terms of the long term.
    One of the problems Senator Coburn talked about, and that 
is the dual-benefit programs, and people are confused about 
where they go, how they get there. There is a lot of confusion 
in the material that people are offered. I wonder whether it is 
not possible for CMS to develop an easy-to-comprehend piece of 
literature, give them a reference that eases the burden of 
making--it is very complicated and confusing.
    The Government Accountability Office came to the conclusion 
that the former Medicare head, Tom Scully, broke the law when 
he prevented an HHS employee from giving cost information about 
the new Medicare drug program to Congress. GAO directed HHS to 
recover Scully's salary for this time period, and I am sure 
that you have heard that. Do you know what steps HHS has taken 
toward recovery of his salary?
    Ms. Norwalk. Well, a couple points to that. I would say, 
first of all, I am not sure that was the--in fact, I am certain 
it was not the conclusion of the Office of the Inspector 
General that also took a look at this issue, at least that is 
not my recollection.
    I do know from remembering reading about it in the Wall 
Street Journal that the Wall Street Journal actually wrote an 
article in September 2003 before this was voted on in either 
the House or the Senate, that there were significant 
differences between the Congressional Budget Office and the 
Office of the Actuary, and it may not have been quite to the 
tune of $135 or $140 billion, but it was to the tune of, say, 
$80 billion, certainly enough to put people on notice that 
there were significant differences between the Congressional 
Budget Office and the Office of the Actuary. So I am not sure 
that it was the secret that people seem to think of it now 
because there was actually a fair amount written about it in 
advance.
    I am not sure what people did ask to specifically look at 
those different points.
    Senator Lautenberg. The IG did answer questions when it 
came to law. That is not his responsibility. But the conclusion 
given by the Government Accountability Office was that there 
was an overpayment of some $80,000 for the time that he was on 
HHS business. But nevertheless, it was not the course of action 
that HHS chose to follow, and I think it was an unfortunate 
outcome.
    As you know GAO ruled that some of the news stories on the 
drug benefit were propaganda, considered propaganda. Now, has 
CMS, HHS stopped producing these VNRs?
    Ms. Norwalk. I do not know that we have done any recently. 
I would say that I think they are an important source of 
information, but you raise a very good point. At least I have 
heard you raise it before, which is, it is critical that they 
be labeled as from the Department of Health and Humans 
Services, not that it is an important way to get at information 
as any other press release might be, but it is important to 
make sure that the people identified are in fact identified as 
coming from the Department and so on and so forth.
    Senator Lautenberg. Thanks. Because it is very important 
that people not be led to believe that this was an interesting 
news report that came out, but it was a prescribed structured 
thing that was designed to create a different opinion. And the 
disclaimer is very important there.
    Mr. Chairman, there are lots of things--and I would ask 
that the record be kept open and Ms. Norwalk be responsive to 
those questions.
    Senator Coburn. Without objection.
    Ms. Norwalk. Sure.
    Senator Lautenberg. I would say this. You raise a very 
important--the vote is just starting?
    Senator Coburn. Yes. We have made arrangements, Senator 
Carper has gone to vote. He will come back and chair the 
Committee so we can keep going, so we are respectful of your 
time. And then I will go vote and then come back.
    Senator Lautenberg. You raise a critical question about 
what is the national obligation to provide as much good health 
as we can to people. I know we certainly try to do it at times 
of disaster and times of immediate crisis. But it is an 
important philosophical question. I agree totally with you. 
When we look at the cost that is passed on to the American 
people that is not passed on in countries other than ours, 
where the product is identical and we observe all the costs for 
research and marketing as well, by the way. So the topic is an 
appropriate one, and I hope that we will be able to help there.
    You know what happens? I am so accustomed to my wife 
saying, ``Frank, quiet.'' [Laughter.]
    Senator Coburn. Ms. Norwalk did not say that, Senator 
Lautenberg.
    Ms. Norwalk. Absolutely not.
    Senator Lautenberg. Anyway, thanks very much for your 
testimony.
    Senator Coburn. The record will remain open for additional 
questions. Ms. Norwalk, I have three questions that I will 
submit, and then I have one last question before I go vote. 
Remember Medicare Plus Choice?
    Ms. Norwalk. Absolutely.
    Senator Coburn. Describe for us what happened to Medicare 
Plus Choice?
    Ms. Norwalk. It exists. It is called now--it went through a 
name change through the Medicare Modernization Act. It is now 
called Medicare Advantage. We expect that at least two-thirds 
of all beneficiaries will have access to a Medicare Advantage 
plan in 2006 that includes zero premiums for drug benefits and 
zero premiums for their physician benefits.
    Senator Coburn. That is a great point. I want you to give 
the historical representation of what went up and then what 
went down, why it went up and why it went down.
    Ms. Norwalk. Sure. The program initially started in the 
early 1970s, gained significant numbers of enrollees peaking, 
in the late 1990s. In 1997 when the Balanced Budget Act passed, 
they changed the way that Medicare Plus Choice plans were paid 
in hopes of encouraging them to go into rural areas, and 
frankly, putting money aside, if you will, to pay those who did 
show up in rural areas.
    Well, the money was put aside but they never came to the 
rural areas, or very few of them, and so that money went away. 
Their plan payments plummeted. Consequently, the Medicare Plus 
Choice plans were trying to figure out how could they, (a) stay 
in business, (b) keep up their physician and hospital networks, 
or increase premiums or reduce benefits.
    And overall, they lost it, not surprisingly, as that 
financial pressure continued after 1997, mainly in 1998 and 
1999, and we started to see a decline in the enrollment in--I 
think it is 2001 if I recall--basically because of these 
reduced benefits and limited networks.
    Senator Coburn. Actually what you saw is fewer people 
wanted to come in and be providers for Medicare Plus Choice 
because the margin was not there for an insurance or health 
maintenance organization to survive.
    Ms. Norwalk. That is correct.
    Senator Coburn. So my question for you is, how do we know 
that is not going to happen on Medicare Part D?
    Ms. Norwalk. I think a couple things are important with 
that. One of the reasons that we talk about benchmarks in the 
average premium is because we totally changed the way that we 
do the plans, that rather than pegging something based on 
Medicare fee-for-service payments, which is what it used to be 
in the Medicare Plus Choice program, the Medicare Part D 
program uses an average of all the plans that come in, and we 
look to competition to keep that price low because Plan A wants 
to get more enrollees than its neighboring plan, Plan B.
    And in fact, that is what happened with the premiums coming 
down. That was because, I think personally, of competition.
    The payments that way are no longer based or pegged to some 
Medicare number or whether that goes up or down depending 
frankly, on what Congress does. But the drug benefit instead is 
focused on competition in looking and coming up with averages.
    Now, if it turns out, for example, that a plan wanted to 
charge a premium that was over $32.20, the government is going 
to continue to pay exactly that same subsidy that it paid, and 
a beneficiary would pay anything additional. If someone charges 
less than the average premium, the beneficiary will then pay 
less. So what happens is the government is paying the same for 
everyone, and what the beneficiary then pays will depend on the 
plan they choose, and perhaps it may impact the benefit 
package.
    So rather than having it attached to something in Medicare 
fee-for-service, it is based on competition, which is why I 
think it is more sustainable in the long run than the Medicare 
Plus Choice plan was going forward because of its tie to the--
as we call it--the AAPCC.
    Senator Coburn. There is probably not anybody more 
knowledgeable about this issue, and I am sure a lot of people 
were lost with that explanation. [Laughter.]
    Ms. Norwalk. Sorry.
    Senator Coburn. I did follow you, and that is fine.
    Thank you so much for coming before us. Thank you for the 
hard work that you are doing.
    Ms. Norwalk. Thank you.
    Senator Coburn. What we will do is seat the next panel, and 
Senator Carper will be here. I will run to vote, and Senator 
Carper will start our next panel.
    Ms. Norwalk. Thank you, Mr. Chairman.
    [Recess.]
    Senator Coburn. We will resume. I apologize. We had two 
votes, which they did not tell us, and it took that long to get 
all the Senators to the floor, and I was the first one to vote 
on the second one, so we will resume.
    We have in our next panel Dr. Joe Antos, the Wilson H. 
Taylor Scholar in Health Care and Retirement Policy at the 
American Enterprise Institute; Dr. Jagadeesh Gokhale, Senior 
Fellow at the Cato Institute; and Dr. Marilyn Moon, who is the 
Vice President and Director of Health Program at the American 
Institutes for Research.
    Let me welcome each of you, apologize again for the delay 
in the time, and your complete statement will be made a part of 
the record. Try to limit your statement to 5 minutes if you 
can, but let us do a good job with this.
    Dr. Antos.

   TESTIMONY OF JOSEPH R. ANTOS, PH.D.,\1\ WILSON H. TAYLOR 
    SCHOLAR IN HEALTH CARE AND RETIREMENT POLICY, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Antos. Thank you, Mr. Chairman. Passage of the Medicare 
Prescription Drug, Improvement, and Modernization Act in 2003 
marked a major milestone for Medicare. For the first time, all 
beneficiaries will have access to outpatient prescription drug 
coverage under Medicare rather than anywhere else. Special low-
income subsidies will be available to needy beneficiaries, and 
absolutely millions of seniors and disabled people will save 
money when they buy their medicines under the new program. 
Those are good things.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Antos appears in the Appendix on 
page 53.
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    All of this comes at a cost. The new program is the largest 
entitlement expansion since Medicare was established more than 
four decades ago. The huge sums that the Federal Government 
will spend through this program will largely be funded out of 
general tax revenues. That means the new drug benefit was 
enacted without being fully financed through specifically 
earmarked funds, and every dollar spent by beneficiaries will 
add 75 cents to the Federal Government's budget deficit. By 
adding the new benefit without full funding, Congress has 
increased the cost pressures that threaten Medicare's 
stability. So how much money are we talking about?
    Now, actually, Mr. Chairman, I think you and the first 
witness covered this very well, so I will not repeat the 
numbers except to say that it has seemed, especially this year, 
that there have been many estimates coming out first from the 
Administration and then from the Congressional Budget Office, 
and every time you turn around, the numbers appear to go up. 
But that is somewhat misleading, as I think the first witness 
tried to indicate.
    In fact, we have not spent the first dollar on prescription 
drugs for the full drug benefit yet. That means that the 
actuaries do not have any basis, really, for estimating--or 
making a new estimate of the cost of the full drug benefit. All 
that has happened, as the first witness pointed out, is that we 
have shifted the observation period from a period of 10 years 
where only 8 of the years involved a vast amount of spending 
and now it is a full 10 years of the full drug benefit and a 
lot of money every single year.
    That is the reason the numbers seem larger. However, the 
fact is that this is a program that has no sunset. So the fact 
that the numbers seem larger is not just an optical illusion. 
The actual cost of the program could well be much higher even 
in the next 10 years than either CBO or the Administration 
estimate. There are all sorts of reasons for that, as laid out 
in my testimony. One of the most important reasons, however, is 
what policymakers might choose to do. New legislation, for 
example, might be considered here on the Hill to make the 
benefit richer, to fill the doughnut hole, for example, a 
particularly sore point with a number of Members of Congress.
    If that were to happen, that would substantially increase 
program costs not just for 10 years but forever. In any event, 
even the most accurate budget estimate, 10-year window 
estimate, does not tell us how much the program will spend past 
2015. The amount is stupendous. The Medicare trustees estimate 
that Part D spending net of beneficiary premiums and State 
payments--that is the so-called clawback--will total about $8.7 
trillion over the next 75 years. That is measured in present 
value terms.
    Now, that is the amount of money that must be transferred 
from general tax revenues over the next 75 years to pay the 
full cost of Part D. That is a very large amount of money. That 
is well over the $725 billion over the next 10 years estimated 
by OMB or the $850 billion from CBO. And while that is a long-
term projection rather than a known fact, it still tells us the 
direction of this program.
    The direction clearly is to make a huge commitment of our 
Nation's resources to this benefit. However, the drug benefit 
by itself is not the whole story. Medicare Parts A and B also 
are underfunded. As you mentioned with the first witness, Part 
A is reasonably well funded, but that will change. Part B is 
not.
    So what can we do? We cannot expect the economy to grow our 
way out of this. The Congressional Budget Office, in a report 
several years old, indicated that if you look at all of the 
major entitlement programs oriented to the elderly--that is, 
Medicare, Medicaid, and Social Security--by 2030 we could be 
spending 17.4 percent of GDP on those programs. That is a lot 
of money. CBO says that is an unsustainable level of spending.
    We could raise taxes. If we raise taxes, however, that cuts 
into our economy's ability to grow. My colleague at the 
Heritage Foundation Tracy Foertsch and I did an estimate of 
that impact. We have looked at what the economic effects would 
be if we were to fully finance Medicare A, B, and D for the 
next 10 years. That is just 10 years of full funding. If we do 
that, then we will have a serious impact on the economy. GDP 
will fall by an average of $87 billion a year. Employment will 
drop by an average of 816,000 jobs per year. That is really 
serious.
    We need to do something about Medicare, but growing our way 
out of it is not the answer. It will help. Taxing our way out 
of it is not the answer. We probably will increase taxes. What 
we have to do is look at the incentives that are driving the 
costs in the program.
    I have a lot to say about that in the written testimony, 
but the bottom line here is that we have made promises that we 
cannot keep, and I believe it is incumbent on Congress to look 
carefully at those incentives that are driving Medicare 
spending today and will drive Medicare spending tomorrow. Thank 
you.
    Senator Coburn. Dr. Moon, I am going to ask you to go next, 
if you would.

  TESTIMONY OF MARILYN MOON,\1\ VICE PRESIDENT AND DIRECTOR, 
        HEALTH PROGRAM, AMERICAN INSTITUTES FOR RESEARCH

    Ms. Moon. Thank you very much, Mr. Chairman. It is a 
pleasure to be here, and I thank you for the invitation.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Moon appears in the Appendix on 
page 62.
---------------------------------------------------------------------------
    For 40 years, Medicare has provided nearly universal 
coverage to a vulnerable population, changed with the times, 
and done a better job of constraining costs than has the 
private sector for much of that period. From the perspective of 
Medicare beneficiaries, the goal of changes in Medicare should 
be to seek genuine efficiencies in the delivery of medical 
care, to assure access to care for this population, 
particularly those with limited resources, and to find an 
equitable way to finance the program over time.
    While concerns about the costs of Medicare are important, 
it is also the case that Medicare cannot function well if it is 
inappropriately restricted. The new prescription drug benefit--
although limited in its comprehensiveness--is an important 
addition that is essential to assuring access to good health 
care. No one would imagine today starting a new health care 
insurance program without prescription drug coverage, for 
example, as Medicare was in 1965. But it is important to find 
the right balance of benefits, access, and sources of 
financing.
    I make several points in my testimony today that I am just 
going to briefly summarize here.
    First, historically, Medicare has done as well or better in 
holding down the costs of care as has the private insurance 
system, and I think that was indicated earlier when others 
talked about the costs of health care. They are going up 
everywhere. It is a problem throughout the system--or it is an 
issue throughout the system, I should say. We should be 
concerned about the problems that are created when health care 
grows rapidly and whether or not it is necessary to do so. But 
I would also point out that we have gotten a lot out of the 
very positive effects of changes in health care in recent 
times.
    Second, improvements in the efficiency and appropriateness 
of care can help to reduce costs, but will not be enough to 
avoid a need for greater financing from Medicare over time. 
People are often looking for the magic bullet to avoid having 
to pay more. It simply is not out there. It would be nice if, 
for example, a change in the delivery system by itself would 
suddenly reduce health costs substantially. Others would like 
to pass costs off onto beneficiaries and solve the problem that 
way. Actually, passing the costs off onto beneficiaries is not 
a way of saving society money. It is simply a way of saving the 
government money. It is effectively a form of financing. It is 
implicitly a way to finance the program by asking beneficiaries 
to pay more either through higher premiums or a higher age of 
eligibility, for example.
    In addition, it is often thought to be a magic bullet to 
income-relate the program. I wish that all Americans over the 
age of 65 and those with disabilities were wealthy enough that 
income-relating was a viable option and could solve the problem 
on its own. But over half of seniors in the United States have 
incomes of less than $25,000 a year, and they are simply not 
well off enough to be able to fund a substantial additional 
amount out of their own pockets. Already, individuals over the 
age of 65 pay more for their health care, not counting long-
term care, than they did before Medicare came into being in 
1965. Just as the Federal Government and other health care 
payers have been affected by higher health care costs over 
time, so have seniors who pay for, on average, about 45 percent 
of the costs of their own care.
    Medicare pays only about 55 percent of the costs of the 
care. Either individuals pay or someone else pays on their 
behalf. And in the case of the Medicare program itself, it is 
split such that about 70 percent of the costs of Medicare are 
paid by the Federal Government and about 30 percent are paid by 
beneficiaries out of premiums and out of taxes they pay.
    So one of the important lessons is not to overstate what is 
possible to get out of seniors over time, although we certainly 
should look at who could and should pay for this program over 
time. A better way to think about Medicare is to assess who is 
best able to pay for the care. This is something that will need 
to be looked at periodically over time. It is very difficult to 
know, for example, whether future beneficiaries will be 
substantially better off as compared to future workers.
    If you look at the Actuary's estimates from the most recent 
Board of Trustees Report, you will find that per worker GDP--
that is, a measure of how well off people will be after 
controlling for inflation--will increase by approximately 66 
percent into the future. If you assume there would be no 
savings from Medicare from any changes, which I do not believe 
we will allow to happen, the Medicare burden on workers would 
lower per capita GDP, but still leave workers 57 percent better 
off than they are today, even after controlling for inflation.
    It is going to be a tough challenge to look into the future 
and decide how to balance who should pay, but that one of the 
important things to remember is that Medicare has been a 
successful program and that seniors and persons with disability 
need to have this program continue. Thank you.
    Senator Coburn. Thank you very much. Dr. Gokhale.

    TESTIMONY OF JAGADEESH GOKHALE,\1\ SENIOR FELLOW, CATO 
                           INSTITUTE

    Mr. Gokhale. Chairman Coburn, Senator Carper, thank you for 
the opportunity to testify at this hearing. I am quite honored 
by it.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gokhale appears in the Appendix 
on page 77.
---------------------------------------------------------------------------
    Senator Lautenberg reflected earlier that the extent to 
which the National Government should assist people in spending 
healthier lives and improving their health is a philosophical 
question. He did not answer that question, but economists have 
a definite answer to the question regarding the extent to which 
the Federal Government should be involved in any particular 
activity, and that answer is market failure. If there is a 
clearly perceived market failure, then government intervention 
is justified.
    We know that the vast majority of seniors have prescription 
drug coverage. The numbers that I have seen suggest that up to 
90 percent of them have access to prescription drugs--which 
does not indicate a clear market failure. Indeed, I believe 
that implementing this law as is will cause market failure and 
will displace the private provision of prescription drug 
insurance for retirees. It will also displace and worsen the 
quality of prescription drug insurance provision for non-
retirees as well.
    This law will improve access to prescription drugs for low-
income retirees, both those who are and those who are not 
currently covered under Medicaid. Upper-income retirees and 
those with high drug expenses will also benefit substantially. 
But some retirees may experience higher out-of-pocket costs and 
worse quality of coverage if employers and other providers 
reduce or withdraw their higher-quality retiree supplemental 
plans over time.
    So MMA, therefore, appears to be designed to displace first 
private drug coverage in the insurance market, and that will be 
followed, I anticipate, by sustained pressure in Congress to 
further liberalize the law that is on the books today.
    The difficulties of improving the operation of prescription 
drug and drug insurance markets are well known. But this 
program is actually likely to worsen the performance of those 
markets.
    Theoretical reasoning and empirical studies suggest that 
private drug prices would increase following the entry of a 
large number of additional government-subsidized patients. 
Existing patients would increase their demand for drugs because 
of the additional subsidy. Doctors will also prescribe more 
drug therapies as a result of people having access to more 
generous drug insurance.
    Most of the burden of drug price increases will fall on 
workers because employer provision of health insurance to 
workers will become more expensive as drug prices increase. 
That will have adverse effects on labor markets.
    The drug law represents a very large addition to the 
already considerable financial shortfall faced by the rest of 
the Medicare program. Unresolved, this shortfall will grow 
larger and impose higher fiscal burdens on future generations, 
erode economic productivity, and decrease the growth of 
national output. I think very few people are really 
appreciative of how huge an addition to Medicare's unfunded 
obligations this program represents and the adverse impact 
those obligations will have on other sectors and the economy as 
a whole.
    Finally, the Medicare Modernization Act will change 
workers' and younger generations' perceptions of how much they 
should save for their own future health care needs. Studies 
have shown that an expansion of Federal entitlement obligations 
increases consumption and reduces national saving and 
investment, and that would cause a further negative impact. So 
there are three tiers of negative impact that the economy will 
experience: first, worse health coverage for workers; second, 
higher tax burdens to finance this additional entitlement 
obligation; and, third, reduced savings that will reduce our 
investment and capital formation and, therefore, reduce worker 
productivity going forward. That will have a negative effect on 
future output.
    This law was passed rather hastily. The program lacks 
appropriate controls against spending escalations. That means 
future Congresses may be induced to regulate the actions of 
various players--pharmacies, drug manufacturers, employers, 
plan providers, and so on. And those regulations will have 
counterproductive effects. They may reduce or cause drug 
supplies to be restricted. They may induce illegal drug sales 
and worsen the quality of doing insurance for everybody in the 
economy.
    So my recommendation really would be to repeal this law. 
But if doing so is impractical, I would certainly recommend 
downsizing it to cover only low-income retirees, those with 
inadequate drug insurance, and those with high drug costs. And 
that would be, I think, a financially and economically sensible 
course to follow.
    I think I will stop there and welcome your questions. Thank 
you again.
    Senator Coburn. Thank you very much. Right now I want to 
call on my Ranking Member, Senator Carper.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Thanks very much. I think I can withhold 
any kind of statement now and just maybe I could ask some 
questions. Thanks very much.
    To our witnesses, thanks a whole lot for being here. I 
apologize for missing the testimonies of several of you. We 
have votes on the floor, trying to get a military construction 
appropriation bill passed, and I have some input there. And I 
had another committee I was testifying before, so I apologize. 
I am usually a better, more attentive Ranking Member than I 
have been this afternoon.
    Let me just start off, if I could, by asking each of you 
maybe to comment on some of the reasons why you believe that 
health care costs in general are rising, not just in Medicare 
but in general, some of the reasons why you think that is 
happening, and maybe you could share with us a couple of useful 
tools that you think might be out there for us to constrain the 
growth of those costs.
    Mr. Antos. Well, let me start, Senator. I think perhaps the 
most important factor that is driving health care costs in 
general has to do with the very nature of health insurance. 
Health insurance by its nature subsidizes people. They don't 
pay out of pocket for the full cost of their care.
    In this country, as we all know, for the last 50 years or 
so, we have had a very generous tax break for employer-
sponsored coverage. So most people get their health insurance 
through employers. I can speak personally on this. They are not 
very much aware of what the full premium is that is being paid 
for directly out of their pay and partially on their behalf by 
their employers. So we are unaware of that. We are also unaware 
of the real cost of an office visit, a prescription drug, or 
any of the other medical interventions that might be before us. 
So we are cost-unconscious. This is one of the rare sectors in 
our economy where people buy things without knowing what they 
cost and only finding out later.
    That has to be driving a lot of the cost. If people were 
more aware, for those things that are optional--not those 
services that you can't avoid, but for those things that are 
optional, people would think, Do I really want this? And in 
particular, in the case of prescription drugs, people would be 
incented and they are increasingly incented to think about 
generic drugs rather than the brand name equivalent.
    Senator Carper. Thank you. Dr. Gokhale.
    Mr. Gokhale. I agree that there is a tremendous amount of 
government involvement in the health care market. Low-income 
individuals have government subsidies. Employees have 
government subsidies through a tax deduction for employer-
provided insurance. And retirees have government subsidies. 
Pretty much everybody in the economy is affected by government 
subsidies. This third-party payment system that we have 
established makes people insensitive to the cost of the health 
care they are consuming. And insensitivity to the price means 
people are going to demand health care even if the benefit is 
very slight. Health care services are consumed for the most 
minor illnesses, when they are probably not needed. For 
example, if I have the flu, I would run to the doctor because 
it is easier to take care of it that way if it doesn't cost me 
anything.
    This is especially true for prescription drugs. 
Prescription drug prices have been growing three times as fast 
as health care costs have been growing in general, and that is 
because there is a shift in emphasis on----
    Senator Carper. Is that when we include generics as well as 
non-generics?
    Mr. Gokhale. I am talking about all prescription drugs. 
That is because there is more emphasis now on drug therapies, 
so the demand for drugs is rising. Doctors are prescribing 
drugs more frequently. So, obviously, the pressure of rising 
demand for drug therapies that are easy to administer is 
escalating faster.
    Ms. Moon. I have a different view than my colleagues. 
Although we are all economists, everyone sees this a little bit 
differently. I do believe that there are a lot of market 
failures in health care, partially because of very poor 
information. It is very difficult for individuals to know what 
care is necessary and what is not necessary. And although I do 
think that, at the margin, people are using extra services, I 
personally do not know many who say, ``I would like to run to 
the doctor today. I am a little bored and it is going to be 
free,'' or ``I am feeling a little blue, so perhaps I will get 
knee replacement surgery and I will move around a little 
better.''
    In terms of the large expenditures, I do not believe 
overuse is a major issue. The major issue is that individuals 
right now, without information about quality, necessity and 
effectiveness, see that the way to protect themselves is to 
overuse services to a certain extent, to ask for extra tests if 
there are things that are uncertain, to go to a different 
doctor if they are not finding what they want from the first 
doctor. We could do a lot better with information and educating 
the public that sometimes more is not better. That would be one 
thing that would help substantially, but I don't think we 
should kid ourselves. We are getting a lot from the health care 
system. Our lives have improved. Our health status has 
improved. And most Americans are willing to pay a lot, and I 
don't think we have seen the end of what Americans are willing 
to pay for health care.
    Even in the case of prescription drugs, which is much less 
well covered for seniors than are other aspects of their health 
spending, they use drugs just as fast as they use 
hospitalization. We need better information for consumers, but 
it is going to be very difficult to wrestle this tiger to the 
ground.
    Senator Carper. I have some more questions, but let me wait 
for the second round. Thanks, Mr. Chairman.
    Senator Coburn. Do any of you know any government program 
where the estimated costs went down versus what they were 
estimated when they first started?
    Ms. Moon. Medicare. When we adopted the relative value 
scale for physician services----
    Senator Coburn. No, I said when they were first started.
    Ms. Moon. When they were first started?
    Senator Coburn. Yes. When Medicare was first started, their 
first year, their second year, they weren't anywhere close on 
the estimate. Relative value scale, there is no question it did 
better than what they thought. But I am talking about 
government programs--do you know of any government programs 
that had an estimated cost that are mandatory or entitlement 
programs that cost less than what they were estimated at the 
initial onset of them? Does anybody know one? I don't. I just 
thought there might be one out there.
    What is the debate in Germany today? Forty percent of their 
GDP is consumed by the government programs, right? They have an 
unemployment rate of 12 percent, they have a tax rate twice 
ours, and they have a stagnant economy. How do we not get there 
with this program and others?
    Mr. Gokhale. There was a study done by Edward Prescott, who 
is the latest Nobel Laureate in economics, which compared the 
U.S. and Europe now versus in the 1970s. Both countries have 
essentially the same technologies, so productivity per worker 
is pretty much the same, has been the same in the 1970s and is 
the same today. But in the 1970s, tax rates, marginal tax rates 
in the U.S. compared to those in European countries on average 
were similar. And so hourly work rates for workers were also 
similar. Therefore, output levels per capita and living 
standards per capita were similar across the two countries in 
the 1970s.
    Today, however, because a much higher fraction of workers' 
earnings are taxed to support the entitlement system--much more 
generous entitlement system in Germany and other European 
countries--those high tax rates mean there is less work effort 
by those who work, and workers prefer to take more vacations. 
There is more unemployment. There is less flexibility in the 
labor force as a result. Although productivity per worker is 
the same between the U.S. and Europe (because the technology 
available to both areas is the same), output per capita in 
Europe is much lower because of lower work effort.
    Therefore, living standards in Europe are only about 80 
percent as high as those in the United States. So high tax 
rates to finance entitlement obligations that will not over 
time, will surely make the U.S. economy more similar to that of 
European countries in the future if the current laws are 
continued and the fiscal shortfalls that the country faces 
remain unrsolved.
    Senator Coburn. OK. Well, that is my view. I have studied 
what has happened in Europe in terms of the percentage of GDP 
that has been consumed by the government and the drag it is on 
the economic progress, which inhibits growth, which inhibits 
all that.
    Dr. Moon, what is your solution? How do we fix this? Do you 
have a solution for us? How do we take this $29.7 trillion 
unfunded liability over the next 75 years. How do we handle 
that and not kill our economy or lower the standard of living? 
How are we going to do that? Do you have any suggestions for 
us?
    Ms. Moon. One of the things that we should continue to do 
is to seek ways to improve the efficiency of the Medicare 
system. For example, the changes that occurred in 1997 with the 
Balanced Budget Act served to lower substantially the 
projections for the future, and, in fact, even with the 
addition of the prescription drug benefit, the actuaries are 
not projecting that Medicare spending will reach the same level 
in 2025 as they had projected in 1997.
    So there are things that can be done gradually over time 
that are effective. I think it is----
    Senator Coburn. Do you see a requirement by the government 
making it mandatory that physicians care for Medicare patients?
    Ms. Moon. I would hope not. I would hope that this 
continues to be a voluntary program. What it means, if we are 
to keep it voluntary, is that Medicare will have to pay at a 
reasonable level as compared to what other parts of the health 
care system pay physicians for health care.
    Senator Coburn. But they don't, do they?
    Ms. Moon. Actually, physicians' payments now are pretty 
comparable to what a lot of private insurers pay. In some 
places the level is higher, some places it is lower--not so 
much because Medicare has gotten more generous, but because the 
rest of the system has gotten a little tighter.
    Senator Coburn. Do you have a reference for me for that?
    Ms. Moon. MedPAC, the Medicare Payment----
    Senator Coburn. MedPAC study?
    Ms. Moon. Yes.
    Senator Coburn. OK. What I hear continually from providers 
is not next year, and that is what we are seeing, is the 
providers, they can't--what used to happen--and that is why I 
took issue with one of your other statements. This is a cost-
shifting program, and in your statement you are denying that it 
is a cost-shifting program. And what used to cover for covering 
the differential in Medicare in terms of providers and 
hospitals was the fact that they had this other private sector 
out there that paid a higher premium, and that was cost shifted 
and there was not a problem.
    As we have held down Medicare and as the other costs of 
health care have risen, then that ability to cross-subsidize, I 
believe, has lessened, and that is why you are starting to see 
people wanting to move away from it.
    The real question I guess I would come back and ask you is: 
How do we fix the costs in health care? Because we are never 
going to fix Medicare until we change the incentives. And I 
loved what you said about markets. There is no market 
transparency in health care. Would you agree?
    Ms. Moon. Yes.
    Senator Coburn. And so we are never going to be able to use 
market forces unless there is market transparency in terms of 
price, quality, outcome, and availability. Would you agree with 
that? Would everybody agree with that?
    Ms. Moon. Yes.
    Mr. Antos. Yes.
    Mr. Gokhale. Yes.
    Senator Coburn. So is that one of our solutions, to create 
market transparency to help create competition?
    Ms. Moon. To some extent, although this is a market in 
which I do not believe that price works as well as in a lot of 
markets. When someone becomes very ill, which is where most of 
the health care spending occurs, on average, they are not going 
to be very price-sensitive. They are going to want the care 
that they need for their loved ones.
    Senator Coburn. But you do not believe, if there is a 
quality indicator in the market and I become ill and a price 
indicator, that even though it may be a major illness, I will 
not have the capability through my family or myself to make a 
value judgment on that. I will go to get the care and not 
consider price and outcome. Is that your testimony?
    Ms. Moon. No. I think that there is a little bit of 
sensitivity to price and a lot of sensitivity to outcome if 
people know what it is.
    Senator Coburn. They don't know, though, right?
    Ms. Moon. They don't know very well.
    Senator Coburn. That is right.
    Ms. Moon. But I really do not believe that most people are 
inhibited, for example, if they are told that their family 
member needs an operation, they are going to try to get it. If 
they can get someone to help them pay for it, of course, they 
will. But I do not believe that it is very much of a deterrent 
to health care spending, nor do I think it should be when we 
are talking about really serious illnesses.
    Senator Coburn. Do you remember when we used to have forced 
second opinions in health care?
    Ms. Moon. Yes.
    Senator Coburn. What did that show?
    Ms. Moon. What it largely showed is that a second opinion 
that was different just confused people and they didn't quite 
know what to do with that. We are in a much better position now 
to take advantage of a lot of information that is out there. We 
need a lot of sorting out of the quality of that information 
and some feeling on the part of individuals that they are 
getting credible information. But we are a lot closer to being 
able to have good information than we were.
    Senator Coburn. I do, too. Thank you. Senator Carper.
    Senator Carper. Thank you, Mr. Chairman.
    I am torn as to which way to go with a question or two. 
First let me make a comment. I voted for the Medicare 
prescription drug bill, not because I was deeply enamored with 
it, but we were sitting around in my office with my senior 
advisers and asking, Well, what is your advice? It was 
literally almost time to vote, and I had been wrestling with 
this for some time. And most everybody around the table said 
the politically smart thing to do would be to vote no. If it 
becomes law, people who wanted it to become law won't be mad at 
you because, even though you voted no, they will still get the 
benefit. And the people who wanted you to vote no, they will be 
glad you did even though the measure was approved.
    And I said, well, all well and good to give me political 
advice. Just tell me what you think is the right thing to do. 
And I will never forget one of the fellows, one of my allies, 
who is now gone, one of my legislative aides who is now gone, 
he said, ``I think the right thing to do is to go ahead and 
vote for it. This is a flawed program, but we need to get 
started somewhere. There are a lot of things we can do with 
pharmaceuticals today that we could not do 40 years ago when 
Medicare was introduced. And for a lot of people around the 
country who don't have anything at all, for a lot of people who 
are really poor who don't have any kind of coverage at all, for 
a lot of people who have very high, very expensive drug costs 
and prescription costs, this is a pretty good benefit.''
    And in the end, I was persuaded to vote for it, and I have 
not regretted it, at least not yet.
    I missed the part of the conversation where you all talked 
about means testing. I think it was Part B of Medicare, which 
is something I support. I think the Chairman does as well. I 
see in the Medicare Part D program that it is means tested to 
some extent. If you happen to be poor, you do not pay the 
monthly premium. If you happen to be poor, you do not pay the 
deductible. If you happen to be poor, you do not--there is not 
much of a doughnut hole there. If you happen to be poor, you 
get a pretty good benefit. If you happen to have huge out-of-
pocket drug costs of $1,000 a month or so, I mean, it is a 
pretty good benefit.
    So it is really a program that is, I think, most beneficial 
to people who are poor and folks who have really catastrophic 
needs. If you happen to be middle class and you do not have 
huge prescription drug needs or you happen to be wealthy and 
you do not have large prescription drug needs, it is not a 
great program. For folks who have something that they like that 
is reasonably good, I basically say to them in Delaware, ``You 
should probably just keep doing what you are doing, using what 
you are using, until you lose it, and then you may want to 
consider this.''
    There was a very good cover story, I think it was Business 
Week, a couple of weeks ago where they talked about the new 
generation of pharmaceuticals that are being developed, which 
are designed to take advantage of our ability to map the human 
genome and to develop almost like personalized drugs. We have a 
pharmaceutical company in Delaware, AstraZeneca, that has 
developed a drug--it starts with an ``I.'' I can never remember 
the name of it. It is something like ``intressa'' or something 
like that. And they have come up with this drug, and they 
found--it is weird. They found that people in Asia--it is a 
cancer, an oncology drug. They found that people in Asia who 
are treated with this drug do reasonably well, but folks, maybe 
in the United States or in Europe, don't. They had a hard time 
figuring out why for a couple years, and I think they finally 
figured out it has something to do with the DNA or the genetic 
makeup of some of the folks in Asia who are benefited by this 
drug is maybe different somehow than we are. I will leave it to 
the doctors on this Committee to figure out why that is the 
case.
    But I make the point just to say that we can do so much 
more with pharmaceuticals today than we could 40 years ago when 
Medicare was introduced, and I think that argues for our 
benefit. I think as work goes on by large and small 
pharmaceutical companies in this country, they are going to be 
able to develop medicines that are almost like designer drugs, 
in the best sense of the word, designer drugs for us to help 
us. And we may have as many blockbuster drugs, but we are going 
to have more drugs that are particularly good for me or for Dr. 
Coburn or for Dr. Moon or anyone else in this room. So I am 
rather encouraged by that.
    There is more I would like to say, but I am going to maybe 
offer a statement for the record. But let me just ask a 
question, another question, if I could.
    Senator Coburn. We have agreed to leave the record open for 
a period of time.
    Senator Carper. That is great. Thanks. Thanks very much.
    What I want to ask you to do is help us look at the VA 
system for just a little bit. I was a naval flight officer back 
in the Vietnam War. I remember coming back from Southeast Asia, 
getting out of the Navy in California, and just moving over to 
Delaware and going to get an MBA at the University of Delaware. 
And almost the same day I enrolled at the U of D, I went to the 
VA hospital about 15 miles down the road and signed up for, oh, 
gosh, whatever benefits I was eligible for, including the GI 
bill.
    I remember getting some dental work done there. I found out 
that I could get a physical and that sort of thing, and for a 
year or two I could get some medical care at that hospital.
    At the time, I remember talking to the providers. People 
were not anxious to be doctors or dentists or nurses at that VA 
hospital. They were not anxious to be doctors or dentists or 
nurses in the VA system, and it was not the place--it was like 
a backwater rather than a cutting-edge sort of place to 
practice business.
    Boy, that has changed in the last 10 years, in really more 
in the last 5 years, but really over the last 10 years. And 
they are doing something right there.
    One of the things they seem to be doing is harnessing the 
information technology in ways that makes them more productive. 
If you go to the VA, you have an electronic health record. They 
use that and a lot of other tools in a real smart way to 
provide better health care, better outcomes. They have been 
able to reduce the level of employment within the VA system. 
They have taken a whole boatload of new patients because of the 
war in Afghanistan and Iraq. And it is really rather remarkable 
that the backwater that nobody wanted to work in when I first 
came out of the Navy is a place where people actually think it 
is a neat place to work and to get care.
    Let me just ask you if there are any implications there for 
us from the VA system. If you would, don't take a long time but 
just give us some thoughts, if you would. It is not exactly the 
free enterprise system, but something good is going on there.
    Mr. Antos. A lot of good is going on there. They have 
certain advantages over the rest of the health care system in 
the sense that everybody is an employee. So the doctors adhere 
strictly to the formulary. It is more than a formulary. You are 
going to prescribe drug X for condition Y, that is it. That is 
a great advantage, especially if your patients will respond 
properly to drug X. Presumably they have some safety valve 
there, but, by and large, there is strict adherence to the 
formulary. You don't see this anywhere else.
    As far as information management is concerned, absolutely, 
they are way ahead of everybody else now. But, again, the 
advantage is that they are buying the computers, they are 
putting the software in, and everybody is doing the same thing.
    Maybe we do not have to make everybody do the same thing, 
but there is a strong sense that I have that HHS in particular 
should begin to take an initiative about not just saying, well, 
let's get together and talk about it, but let's decide what the 
electronic standards are, let's decide what the minimum data 
set is, not the maximal data set. If we can do that on 
electronic health records, then we could let the private sector 
go ahead and develop the products more appropriately. But we 
have to take that first step, and honestly I don't see anybody 
else doing it. I really think it is the job of the government 
to make that step.
    Senator Carper. All right. Thanks. Dr. Gokhale.
    Mr. Gokhale. I imagine there is going to be a fairly steep 
and long learning curve before people trained in medicine, non-
information technology disciplines, who already bear a huge 
burden about being good at their fundamental profession, to 
then adopt new technology when they are not used to it--haven't 
done it ever before--to streamline all their information flow, 
keep their patient records, do proper diagnostics, and provide 
the information in a streamlined way so that it can be used in 
a high-tech manner, stored in a high-tech manner, and retrieved 
in a high-tech manner by those who need it.
    Getting all of that together is going to take some learning 
and take a lot of adjustments. I don't think it is a short-term 
solution. Health care costs are rising much faster than the 
cost reduction that the adoption of this kind of technology-
intensive approach can bring about. So I think that it is a 
good idea, a good approach, but it is going to take time.
    Senator Carper. All right. Thank you. Dr. Moon.
    Ms. Moon. The VA system is in some ways like a very well 
run coordinated care system that, first of all, looks at the 
whole of the treatment of people, which is a very good idea.
    But, in addition, the VA brought in respected people who 
had a lot of knowledge and were really pushing to be on the 
frontiers of knowledge. That develops a trust so that people 
will comply if they think things are being done for a good 
reason. And, in particular, their drug formulary is based not 
just on the best price they can get from a particular drug 
manufacturer but, rather, on studies of equivalence and which 
drugs work the best, with some ability then to recognize that 
not everything works the same way for every person.
    Senator Carper. Mr. Chairman, thanks for being generous 
with the time. I realize we face these huge cost concerns with 
respect to Medicare, and with the addition of Part D, it does 
not make it any easier.
    Having said that, this is one of those deals where I think 
the glass is also half-full, and I was a supporter of health 
savings accounts--my guess is you may have been as well--and 
the kind of consumer-directed health care that I think it helps 
to foster. I am encouraged by these developments with respect 
to drugs that are more like designer drugs where they can 
actually figure out what our genetic makeup is and which ones 
might work better for particular people than others.
    I am encouraged by the work that--and it is not just the 
work they have done at the VA, although they are a good example 
of how we can get a little more productivity out of a health 
care delivery system by harnessing IT, just like we got more 
productivity out of the rest of our economy back in the 1990s, 
with the exception of health care maybe.
    I am going to walk out of here and go catch a train, but 
this is something I am really interested in. I am not a doctor, 
but I am still really interested in it. I think it is just 
hugely important for our country because--I will close with 
this. I was talking with Rick Wagner the other day, who is the 
chairman of GM, and we were talking about health care costs, 
trying to compete with the rest of the world. And the folks in 
the auto industry used to say, ``We spend as much money for our 
health care costs as we spend for the steel that goes into our 
cars, trucks, and vans.'' And then it became, ``We spend more 
money for health care costs than we do for the steel that goes 
into our cars, trucks, and vans.'' Now our friends at GM tell 
us that they spend more money for health care costs than they 
spend on all the capital investment they make throughout the 
world, and they have to compete against companies that don't 
have health care costs even close to that.
    One of the things I suggested to him--I will say this and 
stop. But there is some interesting work being done at a 
consortium of high-tech companies. Sysco is one of them. I 
think Intel and Oracle are other ones. And I have drawn them to 
GM's attention and more recently to DaimlerChrysler. And what 
they have sought to do with that consortium of three high-tech 
companies is to find ways to use--in pricing and reimbursing 
health care costs, to provide us to do a better job, and who 
also use IT, have captured IT.
    And so there is--this glass is half-full, and I think maybe 
one of the things we can do with our Subcommittee, Mr. 
Chairman, is find ways to put a spotlight on the stuff that we 
are doing well, just like we are trying to do with Katrina, put 
a spotlight on the stuff that we are doing well, that actually 
holds down health care cost growth and provides some better 
outcomes.
    Thank you, and to our panel, thanks so much. I am going to 
go see my 17-year-old son inducted into the national--not the 
national--I started to say the national hall of fame--the 
National Honor Society at a charter school in Wilmington.
    Senator Coburn. Thank you, Senator, and thank you for 
making it back after the vote. I appreciate that.
    I just have a few other questions, and then I would like to 
have the opportunity to submit questions to each of you, if you 
would answer them in writing. There will be about three or 
four.
    Dr. Moon, you reference on page 5 of your testimony, 
``Medicare currently covers only 55 percent of the acute health 
care costs of its beneficiaries.'' Where does that number come 
from?
    Ms. Moon. That number is fairly consistently reported in a 
number of places, but the most recent numbers that I had were 
from the Administration, from CMS.
    Senator Coburn. Would you be kind enough to send us the 
reference for that number?
    Ms. Moon. Sure, I would be happy to.
    Senator Coburn. I have one other question I want to ask, 
and I am asking this as a provocative question because I can 
tell you, I am absolutely on the other side of it. And I 
believe the reason we are having problems today is only 53 
percent of our market, even though it is a non-visible, non-
transparent market, is private and 47 percent is public. Should 
we just go onto a single-payer system? What are your thoughts? 
And ration care? Because that is what everybody else in the 
world has done.
    Mr. Antos. As my mother used to say, just because the kid 
down the street does it, doesn't mean you can. She was right.
    All systems ration care. We basically have a choice to 
make, and we have not quite made the choice. You can either 
have a government entity or an expert decide what is--kind of 
make the value judgment, what is right for you. Or you can try 
the market system, which we are struggling with right now in 
this country. You can try the market system and, in the absence 
of market failures, you would have people more personally 
deciding what level of health care they need as patients, but I 
agree with Marilyn on the problems. I do not think anybody 
would disagree with Marilyn's initial statement that lack of 
information is a big factor. That is one of the market 
failures. We do not have a Consumer's Report for health care, 
or if we do in CMS, nobody can understand it.
    So we have a choice there. If we go the route of Europe, we 
will go the route of Europe economically as well. We will have 
a smaller economy. We will be able to consume less of 
everything else. But we are going to have to make a decision.
    Ultimately, there are scarce resources. Nothing is free, 
including health care, in spite of our institutions that lead 
many of us to believe that it is almost free.
    Mr. Gokhale. I agree with Joe's comments. I would add that 
there is a lack of information transparency right now. But we 
do not have a free market. We have a market in which the 
government intervenes considerably. The current system provides 
very little incentive for people to actually seek out health 
care options and information. They do not have the incentive 
because someone else pays for their health services. They do 
not have the incentive because their own resources are not at 
stake.
    One good feature of the current law that was introduced, 
Medicare Part D, was setting up Health Savings Accounts, which 
would encourage workers to put away some funds for their own 
future health care needs and they would get a tax break for it. 
That is a step in the right direction. I think that feature of 
the law should be expanded. And you would see, I think, that it 
will go a long way towards promoting greater transparency and 
market information.
    Although many think that the market is failing in the 
information and transparency area, it is mostly because we are 
not letting it operate properly.
    Senator Coburn. Dr. Moon.
    Ms. Moon. I believe that we could have a well-functioning 
universal single-payer system in the United States, but it 
would be difficult to do. It would be difficult to do with the 
kind of philosophy and culture of the United States where we 
value the ability to be very independent and to do things a 
little differently than other people. By its nature, it is very 
important in a universal system to have a lot of 
standardization and equality, and that is one thing that a lot 
of Americans do not want. They want to do things their own way. 
So I think our culture would make it difficult to do so.
    I don't think that it means that inherently a universal 
system is bad or inappropriate. In fact, I think it could be 
more efficient, but it is not something that Americans are 
willing to do.
    Other societies that do well with a universal system have 
much more of a communitarian viewpoint, and it does have its 
downsides as well. Thus, we are better situated to consider how 
much of a floor of care and coverage we want to have. This is 
the key issue to talk about now so that no one totally falls 
through the cracks.
    Senator Coburn. I agree with that. My own personal 
philosophy is that we cannot keep doing what we are doing, 
because I think we have cost drivers because of what we are 
doing, a pseudo-market that is really controlled and influenced 
by the Federal Government making people make poor economic 
decisions--not just patients. I am talking provider groups, the 
whole works throughout it. And so I don't think we can keep 
doing it. I think we either have to go to a single-payer system 
or we have to go to a real market. And I am inclined to want to 
create a market, a real market, what an economist would say is 
a real market, where there is an evaluation of value based on 
price transparency, quality transparency, and output 
transparency, with the purchaser of the health care with some 
skin in the game.
    And that does not forego the fact that you can have that 
floor, and I think we can afford the floor even more, I 
believe, if we go that way. And there are some good studies 
like on best practices. That is one of the things VA has done. 
But if you incentivize best practices, you cut costs. And we 
have seen that in two or three pilot projects now that are 
working. One is getting ready to start for Medicare, where you 
pay the doctors more if they follow the best practice 
parameters of the University of Vanderbilt and Duke and Utah 
and follow that. And what happens is you get less 
overutilization by the physicians, and you also incentivize the 
information RX coming back to the patient so they get a break. 
In other words, there is an incentive for the patient to do 
what the doctor says to do based on what the known best 
practice is in the country. And it also helps us on our 
liability because now you are not shooting into the dark to 
protect yourself. You have got the best in the country 
recommended at this time, here is the best way to do that. And 
so we can either mandate, like we do in the VA, here is the way 
you will do it, or we can incentivize it and see if we can get 
creativity.
    The only thing I would say if we go to a single-payer 
system, 80 percent of the world's innovation in health care 
will dry up because that occurs here. And the only reason it 
occurs here today is because there is still a pretty big market 
that is private, even though we don't call it a market. An 
economist would say it is not a very good market. There is 
still a way to follow what my economists taught me, which was 
greed conquers all technological difficulty. And my economists 
said, if you have that capability, then you will accomplish the 
technical things.
    So I would hope that if you have additional ideas in terms 
of health care, whether it be expanding the VA system--because 
there is not going to be one system that fits all, and there is 
not going to be a perfect market developed. I understand that. 
But there are ideas that are good out there that we can use, 
and we are going to have to do something because we cannot take 
$29.7 trillion and heap it on our kids. And that is just 
Medicare. That is not Part B of Medicare. That doesn't include 
Medicaid, and that doesn't include Social Security.
    So we are on an unsustainable path, and we need every good 
idea from every viewpoint to try to solve the problem.
    I appreciate your consideration and spending extra time 
with us today. I do apologize about the vote, and I am sorry 
that you are still here. I thank you for your testimony, and I 
look forward to your written responses.
    Thank you. The hearing is adjourned.
    [Whereupon, at 4:52 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

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