[Senate Hearing 109-261]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-261
 
        SOUND POLICY, SMART SOLUTIONS: SAVING MONEY IN MEDICAID

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JULY 20, 2005

                               __________

                           Serial No. 109-12

         Printed for the use of the Special Committee on Aging



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                       SPECIAL COMMITTEE ON AGING

                     GORDON SMITH, Oregon, Chairman
RICHARD SHELBY, Alabama              HERB KOHL, Wisconsin
SUSAN COLLINS, Maine                 JAMES M. JEFFORDS, Vermont
JAMES M. TALENT, Missouri            RUSSELL D. FEINGOLD, Wisconsin
ELIZABETH DOLE, North Carolina       RON WYDEN, Oregon
MEL MARTINEZ, Florida                BLANCHE L. LINCOLN, Arkansas
LARRY E. CRAIG, Idaho                EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
CONRAD BURNS, Montana                BILL NELSON, Florida
LAMAR ALEXANDER, Tennessee           HILLARY RODHAM CLINTON, New York
JIM DEMINT, South Carolina
                    Catherine Finley, Staff Director
               Julie Cohen, Ranking Member Staff Director

                                  (ii)

  


                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Gordon Smith........................     1
Opening Statement of Senator Herb Kohl...........................     2
Opening Statement of Senator Blanche Lincoln.....................     3

                           Panel of Witnesses

Douglas Holtz-Eakin-director, Congressional Budget Office, 
  Washington, DC.................................................     4
Julie Stone-Axelrad, analyst in Social Legislation, Domestic 
  Social Policy Division, Congressional Research Service, 
  Washington, DC.................................................    21
Vincent J. Russo, Vincent J. Russo & Associates, PC, Westbury, 
  NY, and past president, National Academy of Elder Law 
  Attorneys, Tucson, AZ..........................................    34
Mark Gibson, deputy director, Center for Evidence-based Policy, 
  Department of Public Health and Preventive Medicine, Oregon 
  Health and Science University, Portland, OR....................    65
Margaret A. Murray, executive director, Association for Community 
  Affiliated Plans, Washington, DC...............................    94

                                APPENDIX

Prepared Statment of Senator Susan Collins.......................   117
Written Statement of Hal Daub, president & CEO of the American 
  Health Care Association (AHCA) & The National Center for 
  Assisted Living (NCAL).........................................   118

                                 (iii)

  


        SOUND POLICY, SMART SOLUTIONS: SAVING MONEY IN MEDICAID

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



                        WEDNESDAY, JULY 20, 2005

                                       U.S. Senate,
                                Special Committee on Aging,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2:32 p.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Gordon H. 
Smith (chairman of the committee) presiding.
    Present: Senators Smith, Kohl, and Lincoln.

     OPENING STATEMENT OF SENATOR GORDON H. SMITH, CHAIRMAN

    The Chairman. Thank you all for coming to today's hearing. 
It is a pleasure to welcome you to the Aging Committee for its 
second in a series of hearings on the Medicaid program.
    I told some of our witnesses that there are two scheduled 
votes probably in the next 10 to 15 minutes. I think what we 
will do is proceed with our opening statements, perhaps even 
get into the statement of our first witness, and then perhaps 
take a brief recess, and then we will continue this very 
important hearing. Unfortunately, the Leader checks with 
neither Senator Kohl nor myself when scheduling votes around 
the Aging Committee.
    But we are glad you are all here because there are few 
issues more important than this one as we look to the 
reconciliation process and making sure that the Finance 
Committee does with its authority what is prudent and what is 
careful.
    I am pleased that our distinguished witnesses are able to 
join us and share their insight into how this program works and 
where improvements can be made to make it more efficient and 
reduce fraud and abuse. As I have said many times, our goal as 
elected officials and, in fact, stewards of our community's 
most vulnerable should be to improve Medicaid, not undermine it 
or take steps that are penny-wise and pound-foolish.
    Therefore, this hearing will focus on sound policy and 
smart solutions. We will hear from both Government and outside 
experts who will help us understand two key components of the 
program: how Medicaid pays for prescription drugs and how the 
so-called spend-down process works. In doing so, we will 
discuss areas where policy changes are needed and that 
hopefully will result in budget savings.
    I disagree with those who claim the program is broken or 
should be dismantled, but, on the other hand, I do not believe 
Medicaid is perfect. I will continue to explore areas where 
changes can be made and savings can be found. As I mentioned, 
we will be reviewing how State governments pay for prescription 
drugs. Many Government entities have studied this process. Just 
last month, the Office of the Inspector General for the 
Department of Health and Human Services testified that the 
Medicaid program remains vulnerable to abuse and continues to 
pay too much for drugs.
    Therefore, a report by the General Accounting Office 
highlighted the need for better oversight of Medicaid best 
price system to ensure appropriate rebates are being made. 
These are all indications that Congress must take a close look 
at the system and determine if improvements should be made.
    Concerns also have been raised about the loopholes that 
exist in the Medicaid spend-down process that allow people to 
exploit the process by hiding assets so they can prematurely 
qualify for the program. We must closely review and consider 
these issues and develop responses that block intentional fraud 
while protecting people who truly qualify for care. It is a 
delicate balance but one that we must strive to achieve.
    I think all would agree that this has been an arduous 
process since February's consideration of the budget, and it is 
one fraught with potential mistakes that could negatively 
impact our Nation's oldest and most vulnerable. That is why it 
is so critical that we proceed cautiously and thoughtfully when 
considering Medicaid changes.
    While we have just 2 months before the Finance Committee is 
required to report its reconciliation bill to the Budget 
Committee, much work remains. To further this process and 
ensure that it can be a bipartisan effort, I am actively 
seeking out colleagues from both sides of the aisle who are 
interested in working together to craft a bipartisan solution 
for reconciliation. I am pleased with the responses I have 
received from my Democratic colleagues, but I know with them 
much work remains between people of good will on the committee.
    I look forward to working with my colleagues on the Aging 
Committee, and especially Herb Kohl, our ranking member, on 
this most critical issue.
    Senator Kohl, the mike is yours.

          OPENING STATEMENT OF SENATOR HERBERT H. KOHL

    Senator Kohl. I thank you very much, Mr. Chairman.
    Medicaid's importance as a safety net cannot be overstated. 
Nearly 53 million low-income Americans, including children, 
pregnant women, individuals with disabilities, and the elderly, 
rely on Medicaid for their health care needs. Like you, Mr. 
Chairman, I am concerned about the budget resolution's 
requirement to cut Medicaid by $10 billion over the next 5 
years. One of the reasons I voted against the budget is because 
it is wrong to cripple Medicaid based on an arbitrary budget 
target. Any changes to the Medicaid program should be based on 
sound policy that will improve and preserve the program for the 
neediest among us.
    Certainly we have a responsibility to ensure Medicaid's 
dollars are being spent appropriately. One promising area for 
finding cost savings is the prescription drugs Medicaid buys. 
Like individuals across the country, Medicaid is struggling to 
afford the soaring costs of prescription drugs, so we look 
forward to hearing from our experts today who will make 
recommendations on ways that we can keep Medicaid's drug costs 
down.
    It is also important that Medicaid not become a program 
only for those who can hire clever estate planners in order to 
maneuver their assets to qualify for Medicaid. We are pleased 
that the elder law attorneys have joined us to discuss 
practical ways that we can remove loopholes that allow abuse, 
helping us to save Medicaid money and avoid harming the 
beneficiaries who truly need the services.
    One thing we must remember as we discuss these issues is 
that not all growth in Medicaid spending is the result of fraud 
or overpriced drugs. Medicaid spending has also grown for 
several legitimate reasons. First, enrollment is rising as more 
Americans lose their health insurance. Second, as America ages, 
Medicaid's long-term care costs continue to rise. Most 
importantly, Medicaid costs are being driven by the same 
skyrocketing health care costs that every health insurance plan 
in our country faces today.
    So, clearly, we can still do better to ensure that Medicaid 
dollars are spent wisely. Tighter controls on estate planning 
and payments for prescription drugs are but two reforms that we 
need to consider. But we also need to think long term. We can 
reduce the number of working families who rely on Medicaid by 
helping small businesses provide health insurance. I am proud 
to cosponsor legislation with Senators Durbin and Lincoln, the 
Small Business Employee Health Plan bill, that would help in 
this effort. We can also change the way we pay for long-term 
care by making less expensive home and community care more 
available.
    Above all, we must proceed carefully and preserve Medicaid 
for the families who most need it. If we are required to find 
savings now, we need to do it in a way that will not harm the 
beneficiaries who rely on this program.
    I thank you, Mr. Chairman, and along with you I look 
forward to our witnesses today.
    The Chairman. Thank you, Senator Kohl.
    You might notice the lights, all of you, on the clock. It 
means there is probably about 5 minutes left in this first 
vote. With your indulgence, we will recess briefly. There are 
two votes. We will vote late and then vote early and be right 
back.
    We will stand in recess. [Recess.]
    Thank you, ladies and gentlemen, for your patience. We are 
reconvened, and we have been joined by Senator Lincoln. Do you 
have an opening statement?

        OPENING STATEMENT OF SENATOR BLANCHE L. LINCOLN

    Senator Lincoln. Very briefly, Mr. Chairman. A special 
thanks to you and to our ranking member, Senator Kohl, as 
always. I thank the two of you all for your diligence in 
holding what I think are such timely hearings.
    Medicaid has really been called the work horse of the 
American health care system, and I think that is such an 
accurate description. Medicaid provides health care to people 
who would otherwise go without in most instances.
    I look forward to hearing about potential Medicaid savings 
that can be found in the prescription drug policies. However, I 
am also interested in making sure that any savings found does 
not disproportionately hit our pharmacists, especially that 
serve rural areas. We know that in many of our rural States the 
only line of defense in terms of health care left on the 
weekends is oftentimes our local pharmacist, and it is really 
critical that they do not be disproportionately hit.
    I am also interested in hearing about the evidence-based 
medicine because our State of Arkansas is one of the 14 States 
participating in this project. Although it is too soon to see 
if this will result in prescription drug savings for the State, 
I think it has a lot of potential for State savings and better 
treatment for Medicaid beneficiaries.
    So, Mr. Chairman, thanks to both of you. I very much 
appreciate all of your diligence and hard work in really 
tackling the difficult issues.
    Thank you.
    The Chairman. Thank you, Senator Lincoln. It is a privilege 
and a pleasure to have you on this committee, and the insights 
you bring, particularly of rural America, are of real value to 
us.
    Our first panel and our first witness is Douglas Holtz-
Eakin. He is the director of the Congressional Budget Office. 
Thank you, Doug, for your patience, and the mike is yours.

   STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL 
                 BUDGET OFFICE, WASHINGTON, DC

    Mr. Holtz-Eakin. Chairman Smith, Senator Kohl, Senator 
Lincoln, CBO is pleased to be here today to talk about the 
important question of the cost of the Medicaid system and, in 
particular, prescription drugs provided to Medicaid 
beneficiaries. The bulk of my remarks will focus on the current 
system for the procurement and payment for prescription drugs 
in Medicaid and will amount to walking through the diagram that 
we have displayed on the screens and hopefully is in front of 
you.
    There are two parts to the diagram. Blue arrows indicate 
the flow of pharmaceuticals themselves, and that is the simple 
part of the story. They are manufactured by drug manufacturers, 
dispensed through a distribution system that includes 
wholesalers and pharmacies and ultimately come to Medicaid 
beneficiaries to meet their therapeutic needs. The more 
complicated part of the story is shown with the broken green 
arrows, which is the financing of this manufacture and 
distribution of prescription drugs in Medicaid.
    When a beneficiary fills a prescription, in some States 
they will be responsible for a small co-payment. That is shown 
flowing from the beneficiary to the pharmacy. That is a 
sidelight in the main story today. The bulk of the financing is 
in the triangle flowing between Medicaid, pharmacies, and drug 
manufacturers, and in each case those entities will have both 
monies flowing in and monies flowing out. Under current 
policies, this is the heart of the reimbursement system, and I 
would really focus my remarks on that. We can turn to any 
changes that one might be interested in making in the questions 
that would follow.
    We could start with the pharmacies, which in this case also 
include wholesalers. As you can see, they have both monies 
flowing in, reimbursements from Medicaid agencies--and I want 
to emphasize that this diagram is a stylized representation of 
what will be 50 different State systems and it will fit no 
single system perfectly. But, by and large, pharmacies get 
reimbursed for their brand name and generic drugs. They receive 
a reimbursement that is roughly the average wholesale price, a 
sticker price for prescription drugs, minus 10 to 15 percent. 
They also typically receive a fee of $3 to $5 which covers 
costs of consultation, storage, and filling the prescription.
    This will also have some impacts depending on whether it is 
a payment for a generic drug or a brand name drug. For 
generics, there are limits set both by the Federal upper 
payment limit dictated by CMS, or some States have a maximum 
allowable cost that limits that reimbursement as well. But one 
set of flows come into pharmacies for reimbursement for those 
drugs they provided to beneficiaries. That is the money in. The 
money going out is dictated by the deal they can cut with drug 
manufacturers, and those payments out to manufacturers are a 
market price negotiated by the pharmacies and the wholesalers 
with the manufacturers themselves.
    Drug manufacturers, on the other hand, have monies flowing 
in to them on the basis of these same negotiations, some sort 
of market transaction, and then are obligated to provide some 
reimbursement to the Medicaid program as a whole in the form of 
rebates. The rebates take two different branches. There is a 
flat rebate of about 11 percent for generic drugs. For brand 
name drugs, there is a two-part rebate system. The basic rebate 
is 15.1 percent of the average manufacturing price of those 
drugs, or where it is larger, the difference between that 
manufacturing price and the best price provided to their 
customers. Then there is an additional rebate which is owed on 
those drugs whose price has gone up faster than overall 
inflation. So manufacturers are negotiating to the best of 
their ability with the pharmacists and earning their receipts 
that way. They are then obligated to repay the Medicaid program 
itself in the form of these rebates. The net cost to the system 
overall, Federal Medicaid plus the State Medicaid, comes from 
the interaction of these two forces: payments dictated by a 
formula to the pharmacist and the reimbursements that come back 
from the manufacturers that are dictated by market prices, what 
they negotiate.
    Now, the remainder of what I would like to show you are 
just some details of different parts of that triangle. The 
first is this wedge on the right side between what Medicaid 
sends out to pharmacists and what actually flows into drug 
manufacturers. That gap, if we go to the next slide, is what we 
have labeled markup, so you can look at the top one and see 
that for the year 2002, on average Medicaid's payment to 
pharmacies for all drugs was $60.90. That consisted of two 
pieces: a piece which actually flowed into the manufacturers, 
$47.10, and the difference, the column labeled markup, that 
which would accrue to all pieces of the distribution chain--
wholesalers, pharmacies--of $13.80.
    There are some striking differences in this table in the 
composition and levels of these overall payments. The two 
things that I would bring to your attention are first that 
brand name drugs, which constitute about 50 percent of all the 
prescriptions, total about 85 percent of all the dollars, and 
so they are where the bulk of the money is. The average total 
payment there is $97 compared to a bit under $20 for generic 
drugs. So it is cheaper to go to generics. However, if one 
looks at just the markup portion, the portion that arises due 
to pharmacies and wholesalers, you can see that the striking 
number that jumps out is the $32.10, which is the markup on 
newer generic drugs.
    This is really a good news/bad news story. The good news is 
that given the incentives of a pharmacist who can capture part 
of this markup, there is an incentive to provide these newer 
generic drugs, and they are cheaper to the program as a whole 
than are brand name drugs. So steering the business in that 
direction clearly provides benefit overall from the point of 
view of the cost of the program.
    On the other hand, it is likely the case that the structure 
of the reimbursement system, the fact that manufacturers have 
an incentive to put a high sticker price, a high AWP on their 
newer generic drugs, and then negotiate a very low actual 
transactions price, would lead to this large gap, 
reimbursements being made on the high sticker price, the 
acquisition being dictated by the market transaction. The 
residual is this bad news, which is the perhaps larger than 
necessary markup that shows up on these particular drugs.
    In going forward with any changes the committee might 
consider, one thing to keep in mind is the degree to which 
changes in that kind of a system would alter the incentives of 
all the players, not just the pharmacists but negotiations 
between pharmacists and manufacturers, and then the 
reimbursement by the system as a whole.
    Then, in closing, the last piece of detail is the detail in 
the transactions that go on between manufacturers and the 
Medicaid program as a whole. These rebates, as I said, take two 
forms. The basic rebate is a flat 15.1 percent rebate in those 
cases where that is larger than the gap between the market 
price and the best price, and the other instance of the rebates 
the difference, and then additional rebates which come to under 
12 percent are for those drugs where the cost has gone up 
faster than overall inflation. You can see that as a result the 
Medicaid program as a whole has received substantial rebates, 
30 percent off the average manufacturer prices for these brand 
name prescription drugs.
    So the system is an intricate reimbursement system with 
three important players: manufacturers, pharmacists, and the 
Medicaid program as a whole. In thinking about strategies to 
alter this system to save money, it is important to recognize 
the incentives that are in place for all three of the players, 
and as a result the net impact on savings that might come out 
of it.
    We thank you for the chance to be here today and look 
forward to answering your questions.
    The Chairman. Doug, one of the popular proposals for saving 
money in Medicaid is to increase the percentage of the average 
manufacturer's price used to calculate rebates to States. Do 
you think that that is a good approach, a rational approach?
    Mr. Holtz-Eakin. I think the key for thinking about 
strategies toward the reimbursements is to step back and make 
sure that the policies are targeted toward the problems. In the 
diagram, you can see there are a couple. The first is the 
rebate, as you mentioned. You could raise the 15.1 percent 
rebate to something like 20 percent, and we have done an 
estimate that suggests that the cost savings would be on the 
order of a bit above $3 billion over 5 years.
    On the other hand, to the extent that an observation jumps 
out of the current system, it is that there is this mismatch 
between the reimbursements to the pharmacists, which are based 
on a sticker price, and the rebates, which are based on this 
actual transaction price. Bringing the system into alignment, 
using the same prices for all pieces of the overall financing, 
is probably a sensible way to focus thoughts about future 
policy.
    The Chairman. As I recall this was one of the ideas that 
the President had in his proposal, but CBO did not score it as 
saving any money. Am I remembering that correctly? If that is 
right, why doesn't it save money?
    Mr. Holtz-Eakin. The President's budget contained proposals 
that would have affected both the rebates collected from drug 
manufacturers and reimbursements to pharmacies. Concerning 
rebates, manufacturers currently pay a rebate on brand-name 
drug sales equal to the larger of either the flat rebate, 
currently 15.1 percent of the average manufacturer price (AMP), 
or a higher percentage of the AMP reflecting the ``best price'' 
received by any private buyer. The President's budget proposed 
to eliminate the best-price requirement and increase the flat 
rebate, although no percentage was specified. The proposal was 
intended to be budget neutral, and CBO scored no savings for 
it. Note that the President's proposal is distinct from the 
proposal in the contained in CBO's latest Budget Options 
volume, which would increase the flat rebate from 15.1 percent 
to 20 percent while keeping the best-price requirement.
    The President's budget also contained a proposal that would 
limit reimbursements to pharmacies the average sales price 
(ASP) plus six percent.
    The Chairman. Right.
    Mr. Holtz-Eakin. Each of those, the ASP and the 6 percent, 
merit some comment.
    On the 6 percent, using 6 percent as the reimbursement for 
the cost of filling a prescription makes it dependent on the 
value of the prescription drug. It gives you a clear incentive 
to fill with high-cost drugs. That moves the wrong direction, 
and since the cost of filling a prescription probably does not 
depend on what is in the bottle, the fixed dollar cost, $3 to 
$5 per prescription, makes more sense.
    On the ASP side, ASPs are not probably the best indicator 
of the actual transactions costs between pharmacists and 
manufacturers. They are a well-defined entity for the Medicare 
program, but that is a different set of drugs with a different 
set of customers, and so it does not match up real well for the 
Medicaid needs.
    The Chairman. Still on the President's proposals, he made a 
number of proposals for saving money in Medicaid, but the CBO 
did not score them as saving money. Can you explain to the 
committee how the CBO arrived at its decision regarding the IGT 
proposal?
    Mr. Holtz-Eakin. At the time the President provided his 
budgetary proposals, the attempt to recapture the 
intergovernmental transfers was specified in concept, but there 
was not available to us the sort of detailed legislative 
language or even more detailed policy proposal that would have 
permitted us to score it. So our approach was rather than to 
say it is zero or a number is to say we are unable to score 
this in the absence of greater detail. CMS continued to work 
with us for some weeks after the President submitted his 
budget, but we have never received anything that looks like 
conclusive enough a proposal or language.
    The Chairman. You cannot tell one way or the other whether 
it will save money. It may save money, but you do not have 
enough of a bill to be able to calculate it.
    Mr. Holtz-Eakin. Yes.
    The Chairman. Are there any other Medicaid proposals out 
there that you would urge us to look at that would save money 
without hurting people?
    Mr. Holtz-Eakin. Well, I think that in the drug area, three 
things stand out. Two I have already mentioned: thinking about 
the different pieces correctly, so perhaps using something 
closer to a market price for reimbursements instead of a 
sticker price, using an AMP or something like that; making sure 
that reimbursements for filling prescriptions match the cost of 
filling prescriptions, based on values. The other that has been 
around for a while is to talk about the Medicaid best price 
provisions which provide clear incentives for everyone to level 
up to best price, instead of bringing costs down. Those are the 
three in the drug area that I think stand out at the moment.
    The Chairman. Have you read these two stories in the last 2 
days in the New York Times about the massive amount of fraud in 
Medicaid in the State of New York? As I read them, it seemed 
apparent that it was really a product of lack of enforcement. 
Is there something I am missing? If enforcement is the issue, 
what does a State like New York, or any other, have to do? Do 
they need a big computer like Texas has that is very, very 
expensive but really does reduce fraud?
    Mr. Holtz-Eakin. I did read the stories, and there was a 
horse race in my depression, first as CBO Director and seeing 
the money, and second as a long-term resident of Syracuse, 
recognizing that is my State.
    State programs differ greatly, so, you know, I would 
hesitate to make a blanket statement about what it would take 
to do things better. Enforcement in New York is particularly 
complicated because of the heavy role of the counties in the 
Medicaid system, relatively unusual.
    But certainly to the extent that low-cost enforcement--
emphasis on ``low cost''--can readily bring actuality into line 
with the program intent, that is a place to look. It is not 
something that we came today with a lot of material on, but we 
would be happy to talk with you about that.
    The Chairman. Wouldn't a State have enough incentive to 
close this hemorrhage?
    Mr. Holtz-Eakin. Forty-four cents on the dollar--
    The Chairman. I mean, that seems to me like New York with 
their budget problems ought to be all over this story and 
closing up this hemorrhaging that is happening through 
Medicaid, and not through serving people, just through 
fraudulent payments to doctors.
    Mr. Holtz-Eakin. You know, I would have to say that having 
44 cents out of every dollar is a tremendous financial 
incentive, but New York State has faced lots of budget woes 
with which you are familiar.
    The Chairman. Is there something we need to do to help 
States to close that up? I mean, it is just appalling what I 
read.
    Mr. Holtz-Eakin. I don't think there is any direct Federal 
policy that interferes with better enforcement at the moment.
    The Chairman. Senator Kohl.
    Senator Kohl. Thank you, Mr. Chairman.
    Obviously the cost of prescription drugs accounts for much 
of Medicaid spending, and you and witnesses today will testify 
or have testified to changes that can be made in how Medicaid 
pays for prescription drugs in order to save money. Has your 
CBO analyzed how much these changes will save Medicaid, both 
over the next 5 years and in the longer term?
    Mr. Holtz-Eakin. Which changes? I am sorry.
    Senator Kohl. Changes that we can make in how we pay for 
prescription drugs through Medicaid, how much money are we 
talking about in your judgment?
    Mr. Holtz-Eakin. It depends on the extent of the proposal, 
quite frankly. Medicaid is 10 to 15 percent of drug spending. 
It is a very large fraction of the overall national drug bill. 
The reimbursements to pharmacies are a quarter of Medicaid 
spending, so there are substantial dollars in play both for the 
program as a whole and within it for different participants.
    As I said, if you take the reconciliation mark as the 
benchmark, changes in the rebate formula could get you 20 to 30 
percent of the needed reconciliation savings in a very 
straightforward fashion, and other policies could probably 
contribute as well.
    Senator Kohl. All right. As the nation ages, the growing 
need for long-term care will strain our Medicaid budgets. A 
large share of Medicaid's long-term care spending is for 
nursing home care, which we know is expensive and often not the 
care preferred by most people who wish to stay in their homes. 
Many States, like my State of Wisconsin, have expanded home and 
community-based care through Medicaid waivers, and they believe 
that they save Medicaid dollars by so doing.
    Has CBO been able to determine the long-term savings of 
home and community-based care?
    Mr. Holtz-Eakin. We will happily look into any specific 
proposal. In the area of long-term care and Medicaid, two broad 
phenomena always arise. The first is the degree to which you 
can save in costs per person, whether it be in this case by 
using home-based care instead of being in a nursing home, and 
the second is whether you end up covering more people. There 
are at the moment a large number of individuals who receive 
only donated care as their primary form of long-term care 
assistance and have a clear preference to be in their home. 
Many of them are severely impaired and helped only by 
relatives. To the extent that you start picking up that 
population, covering them under a Medicaid program gets more 
expensive. To the extent that you move people who would have 
been in nursing home into a home-based care system that is 
cheaper per person, you save money. Almost all the proposals 
hinge on the balance of those competing incentives in expanding 
the use of home care.
    Senator Kohl. All right. You point out that Medicaid drug 
spending will drop next year as dual-eligible beneficiaries 
move from Medicaid to Medicare. But States are required to pay 
most of those savings back to the Federal Government through 
the claw-back provision, as you know. Because the claw-back 
formula is in part based on spending growth for the Medicare 
drug benefits, States, therefore, have a direct interest in how 
the Medicare drug program is run.
    Has CBO done an analysis on how Medicare drug spending 
could affect State Medicaid spending and whether allowing HHS 
to negotiate lower drug prices could produce additional savings 
for State Medicaid programs as it relates to claw-back?
    Mr. Holtz-Eakin. We have done nothing particular on HHS and 
claw-back, but certainly our estimates of the impact of the MMA 
on the Nation as a whole showed the impact over the long term 
of the claw-back, not State by State, but we do have the 
aggregates. In some years, the monies flowing back to the 
Federal Government modestly exceed that which would come from 
the Federal Government early on. But on balance it goes the 
other way.
    Drug spending has been going up very rapidly, 15 percent 
per year over the past 5 years, and we have looked fairly 
carefully at the design of the prescription drug benefit in 
Medicare and whether it would be possible for an enhanced 
negotiating authority by the Secretary of HHS to lower the 
costs of that drug insurance bill. Broadly the answer has been 
no. The key is whether the prescription drug plans in MMA have 
sufficient incentives--and they have tremendous financial 
incentives--and whether they have sufficient tools to pursue 
those incentives in order to negotiate the best possible deal 
on behalf of their beneficiaries.
    The structure of the MMA as passed by the Congress suggests 
that they have great incentives and tools to do that. It does 
not look that as a broad-brush matter any additional 
negotiating authority on the part of the Secretary of HHS would 
change the broad scope.
    Now, that does not mean for particular drugs and particular 
instances that would not be the case, but it does not look to 
us that based on the design so far there is tremendous latitude 
for a big change from that direction.
    Senator Kohl. Thank you.
    I thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Lincoln.
    Senator Lincoln. Thank you, Mr. Chairman, and thank you, 
Mr. Holtz-Eakin, once again for coming to share your expertise 
with us.
    You probably know that one of the panelists that is going 
to be following you will be discussed evidence-based medicine, 
and they just called a vote and I am not sure if I will be able 
to stay for the entire hearing. But my State of Arkansas is one 
of the States implementing this as a way to cut down on 
prescription drug costs. I did not know if you had looked into 
or were aware of any savings that could be gained from 
evidence-based medicine.
    Mr. Holtz-Eakin. We are essentially at the midpoint of 
beginning to understand this, and we look forward to seeing the 
results of these pilots in various places to get better 
evidence on the degree to which there really will be savings 
from evidence-based medicine and other new techniques that you 
might bring to both Medicare and Medicaid.
    Senator Lincoln. So you are not really at a point to give 
us guidance in terms of which directions to go on that?
    Mr. Holtz-Eakin. Certainly not in a position to make a 
definitive call one way or the other and certainly not to give 
you a sense of the magnitudes, how much money would be saved.
    Senator Lincoln. Right. Well, I do not know if there is 
anything there, but you know as well as we all that generic 
drugs are significantly cheaper than brand name drugs. Are 
there any proposals on the Federal level to encourage the use 
of generic drugs that would really result in some savings?
    Mr. Holtz-Eakin. There are a variety of ways to encourage 
the use. One could provide greater copays for brand name drugs, 
lower copays for generics, and steer beneficiaries that way. 
One could just change the maximum Federal reimbursement for 
drugs in order to steer people toward generics. There is the 
ability at the State level to have mandatory substitution to a 
generic where it is available.
    So there are a variety of potential mechanisms. Particular 
proposals in the context of reconciliation we will have to look 
at, but certainly there are elements of policies that would 
move the system in that direction.
    Senator Lincoln. Well, I noticed in what you were showing 
us in your slides there, you said that the markup for the newer 
generic drugs was much higher than the markup for the older 
ones. Is there any explanation for why that is the case?
    Mr. Holtz-Eakin. I think that is the straightforward result 
of the incentives in the current system. Manufacturers have an 
incentive to put a high sticker price on their new generic 
drug, and then cut an aggressive deal on the actual 
transaction, knowing that the pharmacist will be reimbursed on 
the sticker price and only have to pay the manufacturer the 
lower transaction prices. That gives pharmacists a clear 
incentive to take their generic drug and use it in filling 
prescriptions. So that markup comes out of the mismatch between 
reimbursement on stickers and actual transactions on a market. 
Fixing that would fix that incentive as well.
    Senator Lincoln. Just I guess in closing as we move forward 
to what we have to what we have to do in Finance and budget 
reconciliation, can you describe how the Congressional Budget 
Office is going about in terms of scoring those potential 
savings in preparation for reconciliation? I guess specifically 
are you approaching the savings--how are you going to be 
approaching the savings that we on the Finance Committee have 
to find?
    Mr. Holtz-Eakin. We are actively working with members of 
the Finance Committee on both sides of the aisle with their 
prototype proposals. To the extent that you have areas of 
interest, I would encourage you to have your staff in contact 
with the CBO early. The sooner we can see the scope of the 
proposals you are interested in, the more we can get the data 
in line to actually give you good estimates. As usual, knowing 
details, writing it down, is an important first step to making 
sure there is no mismatch between what you would like to 
accomplish and what is actually written into legislative 
language.
    That is an ongoing process that has been going on for a 
while in some cases, but which I would expect to heat up as 
time passes.
    Senator Lincoln. Thank you.
    Thanks, Mr. Chairman.
    The Chairman. Thank you very much, Senator.
    Are there other questions anyone has? [No response.]
    Doug, we appreciate your time so very much.
    [The prepared statement of Mr. Holtz-Eakin follows:]

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    The Chairman. There is another vote on, but what Senator 
Kohl and I will do is he will go now and I will go when he gets 
back. So our next panelist is Julie Stone-Axelrad, a specialist 
in social legislation of the Congressional Research Service. 
Welcome, Julie. Thank you for your patience and for your 
presence.

      STATEMENT OF JULIE STONE-AXELRAD, ANALYST IN SOCIAL 
  LEGISLATION, DOMESTIC SOCIAL POLICY DIVISION, CONGRESSIONAL 
                RESEARCH SERVICE, WASHINGTON, DC

    Ms. Stone-Axelrad. Good afternoon, Senator Smith, Senator 
Kohl, and Senator Lincoln. My name is Julie Stone-Axelrad, and 
I am a health policy analyst at the Congressional Research 
Service. My testimony today deals with the issue of Medicaid 
estate planning, a means by which some elderly people divest 
their income and assets both to qualify for Medicaid sooner 
than they otherwise would and to protect their assets from 
estate recovery.
    As you know, the Medicaid program is means tested. It 
covers about 54 million people across the Nation. Although the 
program is targeted toward low-income individuals, not all of 
the poor are eligible, and not all of those covered are poor. 
Medicaid beneficiaries include children and families, people 
with disabilities, pregnant women, and the elderly.
    Today's discussion about Medicaid estate planning focuses 
on a subset of Medicaid beneficiaries age 65 and over who need 
long-term care and have income greater than SSI's cash benefit 
of $579 a month. Medicaid law allows States to cover people 
whose income reaches, or is sometimes greater than, about 218 
percent of the Federal poverty level, but only if they require 
the level of care that is offered in a nursing home. States may 
also extend coverage to people who have medical expenses that 
deplete their income to specified levels. Once eligible for 
Medicaid, beneficiaries are required to apply their income 
above certain amounts toward the cost of their care.
    In addition to income, individuals must also meet States' 
asset standards. These standards usually follow SSI program 
rules and generally allow individuals to retain $2,000 in 
countable assets as well as certain types of noncountable or 
exempt assets, such as a home or care of unlimited value, and 
certain types of trusts.
    Other rules apply to married couples in which one person 
seeks Medicaid long-term care and the other does not. These 
rules are intended to prevent impoverishment of the spouse not 
seeking Medicaid by allowing him or her to retain higher 
amounts of income and assets than allowed for Medicaid 
beneficiaries.
    Not all Medicaid beneficiaries have engaged in estate 
planning. Some people meet Medicaid's eligibility requirements 
because their initial income and assets are equal to or below a 
State's specified levels. Some reach the thresholds after 
depleting their income and assets on the cost of their care, 
thus ``spending down.'' My testimony today is about a third 
category of people who divest their assets to qualify for 
Medicaid. We do not have sufficient data to assess the number 
of people in each of these three groups.
    To ensure that Medicaid applicants do not give away assets 
to gain eligibility, Congress established asset transfer rules 
that impose penalties on applicants who either give away or 
transfer their assets for less than the market price. 
Specifically, the rules require States to delay coverage of 
nursing home care and other long-term care services for certain 
individuals who apply for Medicaid after improperly disposing 
of assets on or after a look-back date.
    I mentioned earlier that beneficiaries are allowed to 
retain certain assets and still qualify for Medicaid. 
Medicaid's estate recovery program is intended to enable States 
to recoup those private assets from the estate of a beneficiary 
upon the person's death. Under Federal law, States are required 
to recover the amounts they spend on long-term care services 
from the beneficiary's probate estate, which often includes the 
home, if there is one. If States choose, they may go beyond the 
probate estate to collect other assets as well, such as those 
that may have a designated beneficiary, like an annuity or 
trust. But not all States do this.
    Despite Congress' efforts to discourage Medicaid estate 
planning through the design of eligibility, asset transfer, and 
State recovery provisions, current law does not preclude all 
available means people may use to protect assets. A variety of 
methods may still be used to avoid estate recovery or to obtain 
Medicaid coverage while using personal resources for other 
purposes, such as giving gifts to children or protecting assets 
for an inheritance. The following are some examples of 
techniques that people may use to divest assets:
    First, people may transfer assets to minimize the impact of 
the penalty period. Medicaid law specifies that penalties for 
improper transfers begin on the first day of the month in which 
assets are transferred. These penalties are periods of 
ineligibility, in months, for certain long-term care services. 
People could transfer a part of their assets while keeping 
enough to pay for their care during the ineligibility period.
    Second, people may transfer funds sufficiently in advance 
of the look-back period to avoid penalties. Any transfers made 
within 36 months of application to Medicaid and 60 months for 
certain trusts are subject to penalties. Any transfers made 
prior to these look-back periods are not subject to penalties.
    Third, people may convert countable assets into 
noncountable assets or income, such as using money in a savings 
account to purchase an annuity for fair market value.
    Fourth, people may use assets above Medicaid thresholds for 
any purpose. For example, if individuals have $10,000 and the 
State's asset threshold is $2,000, then to become eligible 
these people must deplete the excess $8,000. They can either 
spend that $8,000 on the cost of their care or on anything else 
they choose, such as home improvements or personal items.
    In addition to these techniques, promissory notes could be 
used, a life estate could be established, or a married couple 
could divorce and give all of their assets to the spouse not 
seeking Medicaid.
    Another option could be spousal abandonment in which a 
spouse simply refuses to provide financial support for the 
spouse seeking Medicaid.
    A number of these methods are probably unintended 
consequences of provisions in Medicaid law, designed to assist 
certain people who have low income or have high medical or 
long-term care expenses. The availability of these methods 
under current law also reflects a lack of consensus about the 
amount of assets that should be held by people who face high 
long-term care costs before qualifying for Medicaid. In 
addition, the law likely reflects the difficulty in writing 
legislative language to discourage all methods for transferring 
assets without inadvertently restricting access to Medicaid's 
safety net.
    A variety of policy options have been proposed to 
discourage Medicaid estate planning and the improper transfer 
of assets. When evaluating which legislative options, if any, 
to adopt, there are some policy questions you may want to 
consider.
    First, tightening Medicaid laws regarding eligibility and 
asset transfers will likely deter people from deliberately 
manipulating the rules to qualify for Medicaid. Such changes, 
however, are likely to impose stricter penalties on people who 
made transfers without any intention of ever needing Medicaid's 
assistance. You may want to consider how you want the law to 
treat people in this latter group.
    Second, who will actually pay for the care of elders when 
Medicaid will not? One possibility is that beneficiaries would 
pay for their own care during the penalty period by either 
recovering their transferred funds or liquidating any exempt 
assets they may have to pay for care. Another possibility is 
that providers, such as nursing homes, will assume more cases 
of uncompensated care, either reducing or eliminating the 
profits of proprietary homes, or relying more heavily on the 
charitable donations of not-for-profit homes. Others may rely 
on informal caregivers to provide the care they need, and still 
others may forego care altogether.
    Third, you may want to consider the high costs of long-term 
care services, often reaching over $60,000 a year for a private 
stay in a nursing home. If changes to current law result in 
further restricting access to Medicaid's long-term care 
coverage, what, if anything, should be done to assist older 
people with these costs?
    Finally, it is unlikely that the adoption of just one or 
two of the policy options currently being discussed will lead 
to significant reductions in Medicaid estate planning. It is 
likely that narrow changes to current law will still allow 
people to find ways to divest assets. To achieve significant 
reductions in Medicaid estate planning, a package of changes is 
more likely needed. In designing such a package, you may 
consider measures to make transferring assets more difficult, 
measures to strengthen penalties for people who make 
inappropriate transfers, as well as measures that provide a 
safety net for applicants for whom the State determines that 
significant hardship could result without Medicaid's 
assistance.
    At the request of the committee, I have prepared some 
comments on some of the legislative options that have been 
proposed.
    One option is changing the beginning of the penalty period 
from the time the Medicaid applicant made the transfer, which 
is how current law says it begins now, to the time the 
applicant is determined eligible for Medicaid. So changing the 
beginning of the penalty period.
    The proposal could increase the likelihood that people who 
improperly transfer assets would be penalized, possibly serving 
as a stronger deterrent to asset transfers. Strengthening the 
penalty period could either delay or even prevent Medicaid from 
paying for care of certain individuals, thus potentially 
incurring savings to the program. On the other hand, providers 
may end up paying for care not paid for by Medicaid, and some 
people might not be able to obtain the care they need. These 
implications may have unintended consequences on provider 
budgets and access to care.
    Extending the look-back period. Another options would be to 
extend the look-back period for transferred assets beyond the 
3- to 5-year period in current law. This would require people 
who want to divest assets and avoid the penalty period to plan 
even earlier than they must under current law, making it more 
difficult. A longer look-back period could lead States to 
identify more transfers and thus impose more penalties. Savings 
to Medicaid might be found.
    However, the farther into the past the transfer was made, 
the less likely the applicant may be to recover the transferred 
funds to pay for care during the penalty period. Extending the 
look-back period could also place an additional administrative 
burden on eligibility workers, slowing down the process as 
workers review and have difficulty obtaining past financial 
documents from applicants.
    Other legislative options include: placing a universal cap 
on the value of all exempt assets; counting assets not current 
counted; requiring applicants to apply a portion of their home 
equity to the cost of their care before Medicaid will pay; 
restricting sequential transfers; and requiring an applicant to 
make the State the beneficiary of any remaining funds of an 
exempt asset.
    Each of these proposals could reduce the total amount of 
assets that could be protected either at the point of 
application to Medicaid or at the point of estate recovery. 
However, there would still be no guarantee that funds above the 
protected amounts would be used to pay for the cost of care.
    Since each of these options would target a different method 
people might use to protect assets, together these proposals 
might represent a comprehensive approach to addressing Medicaid 
estate planning. On the other hand, without more information 
about which methods are most commonly used, we do not know 
which options would be most effective and which, if any, might 
have unintended implications on access to care.
    Finally, there are insufficient data available to 
accurately estimate the prevalence of asset transfers today and 
none that can reasonably predict whether and how much this 
incidence might grow in the future. We do know that a 
significant amount of anecdotal evidence exists about people 
engaging in Medicaid estate planning. We also know that an 
industry of elder lawyers specializing in Medicaid has 
developed across the Nation. Court cases at Federal and state 
levels also point to the prevalence of transfers. In addition, 
we know that States have expressed a strong interest in curbing 
Medicaid estate planning and have taken a number of measures to 
try to do so.
    Any protection of assets that results in Medicaid paying 
for care that would otherwise have been paid with private funds 
increases Medicaid's program costs. Unfortunately, without 
better data we cannot accurately estimate how much Medicaid 
estate planning costs the program now and how much savings 
could be generated from further restricting transfers in the 
future. Changes to current law could deter people from 
transferring assets, strengthen penalties for doing so, and 
possibly increase the likelihood that private funds would be 
used to pay for care. At the same time, it is still unclear how 
such changes might impact access to care for older people with 
long-term care needs.
    The Chairman. Thank you. A very excellent report, Julie. I 
wonder if as you consider all of the proposals and the 
President's plan on Medicaid, are there any that stand out to 
you as particularly effective in saving money that you can 
quantify that do not hurt people that really do have no 
recourse but Medicaid?
    Ms. Stone-Axelrad. Well, first, I cannot quantify. CBO does 
that and I think they are going to have a hard time because we 
do not have good information about how much any of the 
practices cost the program now. There are certain things that 
might be technical changes to the way in which assets are 
counted that might be less likely to have implications on 
access to care. I think we could think about that a little bit 
more. I could--
    The Chairman. Are there any States that come to mind that 
are doing a particularly good job in the asset transfer area?
    Ms. Stone-Axelrad. There are a lot of States that have 
tried to make changes, and Oregon is a classic example of a 
State that has been more aggressive in trying to discourage 
asset transfers. But there are limitations to what States can 
do because of the current law. For example, with annuities the 
law gives the Secretary discretion--or authority to define 
annuities either as trusts or not. The guidance that the 
Secretary is able to give is limited because of the way current 
law is designed, and so States have dealt with annuities in 
different ways. Some States deal with them as trusts, and this 
makes them subject to the--
    The Chairman. Has my State done a good job, in your view, 
or a poor job in asset transfer issues?
    Ms. Stone-Axelrad. They are one of the leaders in 
discouraging asset transfers.
    The Chairman. So they are doing a good job.
    Ms. Stone-Axelrad. They are discouraging, probably so, if 
you look at it--
    The Chairman. I guess if you are being discouraged, you 
think they are doing a bad job.
    Ms. Stone-Axelrad. It depends. You know, I think the issue 
to consider is people who are faced with very high long-term 
care costs have a fear about losing their savings, losing their 
home. So Oregon is a State that has been more aggressive in 
trying to recoup the assets of those elderly individuals. So it 
depends on how you look at it.
    The Chairman. Sure. I am going to go vote, and Senator Kohl 
is in charge.
    Ms. Stone-Axelrad. Thank you.
    Senator Kohl [presiding]. Thank you, Mr. Chairman.
    We could all agree that it is important to prevent people 
from gaming the estate planning system, but I am concerned that 
when researchers at the Georgetown University Long-Term Care 
Financing Project looked at this issue, they found no empirical 
evidence to prove that ``the elderly are planning their estates 
for the purpose of gaining easy access to Medicaid.'' Instead, 
the research found that today's seniors simply lack the 
necessary liquid assets to pay for expensive long-term care 
services.
    Is this assessment consistent with the data that you have 
looked at?
    Ms. Stone-Axelrad. There is not good comprehensive data 
that looks at the amount of assets that have been transferred 
or the number of people who have transferred assets. So 
Georgetown was looking at some data that is a little bit old, 
and not their fault. It is limited because the surveys that are 
available--there are just not current surveys available that 
look at what is going on right now.
    I do not know if I am answering your question.
    Senator Kohl. I would guess you say that is somewhat 
inconclusive, you are not sure what--
    Ms. Stone-Axelrad. Well, I think what we know is that the 
amount of assets and income of the elderly for the most part is 
limited. Most of the asset value is in the home. There I think 
the majority of the elderly have a limited amount that could 
potentially even be transferred, a limited amount that they 
could spend on nursing home care. So probably, you know, for 
the bulk of the population, the elderly population do not have 
much to transfer.
    Senator Kohl. Right.
    Ms. Stone-Axelrad. But, you know, the home is always a 
question. The amount that it is worth really varies by 
geographic region and many other factors.
    Senator Kohl. I was only, again, making the point that some 
people say the elderly plan their estates for the purpose of 
gaining easy access to Medicaid. Perhaps it would be somewhat 
more accurate to say there may be some, but there is no 
evidence to indicate that this is widespread. Would you be 
inclined to agree with that?
    Ms. Stone-Axelrad. I think there is a strong indicator--
States' interest in this issue is a strong indicator that, at 
least in certain States, they probably have reason to want to 
curb this practice. But, no, there is no data on a national 
level that says how many people are doing this and how much 
they are transferring.
    I said in the testimony there are certain indicators like 
the fact that there are Medicaid--there are elder lawyers who 
specialize in Medicaid, and they are across the country. There 
may be certain States that have more of an issue with this than 
others. But I cannot say that there is any evidence to suggest 
that this is very expensive. I cannot say that there is 
evidence that suggests that it is not.
    Senator Kohl. OK.
    Ms. Stone-Axelrad. I am sorry I cannot answer that.
    Senator Kohl. We understand that extending the look-back 
period for asset transfers which the President has proposed 
would provide $1 to $2 billion in savings over the next 5 
years. But if we do not know what the evidence is to tell us 
how many people are actually gaming the system, then how can we 
know that this will work to save Medicaid all that money over 
the long term? Isn't that true?
    Ms. Stone-Axelrad. Well, I think a simple change--it is not 
a simple change. I am sorry. A change to the law that extends 
the look-back period logically means that when States go over 
people's records, their financial records, they are going to 
find more transfers because that just simply makes sense, I 
think.
    Now, the question is: Will there be cost shifting, and at 
the end what will happen to those people who experience 
penalties? Could that potentially increase costs to Medicaid or 
to Medicare? Or could there be increased hospital costs? Those 
are the kinds of things that we do not know.
    But if you just extend the look-back period, then it seems 
logical that you review more financial records, you are going 
to find more transfers and impose more penalties.
    Senator Kohl. I thank you, and I thank you very much for 
appearing here today.
    [The prepared statement of Ms. Stone-Axelrad follows:]

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    Senator Kohl. At this time we will take testimony from our 
third panel. We have with us today Mr. Vincent Russo, who is 
former President of the National Academy of Elder Law 
Attorneys. Mr. Russo is from Westbury, NY.
    We have with us today Mark Gibson, deputy director, Center 
for Evidence-based Policy, Department of Public Health and 
Preventive Medicine of the Oregon Health and Science University 
out in Portland, OR.
    We have with us Meg Murray, who is the executive director 
of the Association for Community Affiliated Plans, located here 
in Washington, DC.
    Mr. Russo, we will take your testimony first, then Mr. 
Gibson, and then Ms. Murray.

 STATEMENT OF VINCENT J. RUSSO, VINCENT J. RUSSO & ASSOCIATES, 
PC, WESTBURY, NY, AND PAST PRESIDENT, NATIONAL ACADEMY OF ELDER 
                   LAW ATTORNEYS, TUCSON, AZ

    Mr. Russo. Good afternoon, Senator Kohl. My name is Vincent 
J. Russo. I have an elder law practice in New York and am a 
founding member and past president of the National Academy of 
Elder Law Attorneys. Today I welcome the opportunity to talk 
with you about ways Congress can achieve savings by eliminating 
aggressive Medicaid planning and loopholes in the rules. First, 
however, it is essential to respond to two ill-advised 
proposals that will harm countless number of older Americans 
who have worked all their lives, paid taxes, and have never 
been on public assistance.
    One flawed proposal to make penalties harsher calls for 
changing the start of the penalty period from the date of 
transfers to the date one applies for Medicaid. The other 
proposal would increase the look-back period from 3 years to 5 
years.
    Senator Kohl, recognizing the harmful impact of these 
proposals on seniors and their families, aging advocacy 
organizations representing tens of millions of Americans, such 
as AARP, Alzheimer's Association, National Council on Aging, 
and the retired Officers Association, have consistently 
strongly opposed them. In fact, in the aftermath of opposition 
to these very changes, Governor Rell of Connecticut has since 
withdrawn the State's request to implement these ill-conceived 
policies.
    To illustrate why those representing older Americans have 
rejected these policies, I would like to share three 
representative profiles of real clients whose stories are 
depicted on the charts to your left. The profiles are depicted 
on Chart 1.
    We are using today the vertical line at July 20, 2005, as 
the date of Medicaid application. You will note that the line 
at July 20, 2002, represents the current look-back period, and 
the line at July 20, 2000, represents the proposed look-back 
period.
    First, at the left of the chart, the story of Mary 
Richards, who has cared for her granddaughter since her 
daughter passed away. As noted on the chart, in July 2004, she 
pays her granddaughter's college tuition, $15,000. A year 
later, she suffers a stroke and requires nursing home care. 
Under the current law, since Mrs. Richards has spent down 
monies, she will be Medicaid eligible because the transfer 
penalty period has expired. Under the ill-conceived proposal to 
change the penalty start date, Mrs. Richard would be denied 
Medicaid nursing home care because she helped her 
granddaughter. She will have no place to go. The hospital will 
want to discharge her, and the local nursing homes will be 
reluctant to take her. If she returns home, how will she be 
properly cared for?
    Now let's turn to John Greer, who is a farmer in the 
Midwest. His farm has been in the Greer family for over 100 
years. Mr. Greer transfers the farm worth $100,000 to his son, 
as noted on the chart. Unfortunately, 3 years later, he 
fractures his hip and requires nursing home care. Under today's 
law, Mr. Greer is eligible for Medicaid nursing home care, but 
under the proposal he would be denied care because he passed 
the family farm on to his son. What will happen to the Greer 
family and their farm?
    My last story is about the Anderson family. In 2001, Steve 
Anderson, who controlled the family finances, made a series of 
withdrawals before he passed away from cancer. Mrs. Anderson 
had cared for him every step of the way. Since that time, Mrs. 
Anderson's health has declined. She has Alzheimer's and she 
needs nursing home care. As you can see on the chart, under the 
current law Mrs. Anderson can obtain Medicaid. If the look-back 
period were extended to 5 years, she will have to account for 
her husband's withdrawals, which were made over 4 years ago. 
She knows some money was spent on donations to the church and 
some on repairs to the house, but no records can be found. 
Under these proposals Mrs. Anderson would be denied Medicaid.
    The combination of extending the look-back period and 
changing the penalty start date would create the harshest 
penalty of all on people like Mrs. Anderson, the most 
vulnerable members of our society.
    Chart 2 represents additional common family situations 
where people will be hurt by the proposed changes. Senator 
Kohl, under these harmful proposals no one will be able to act 
with certainty because no one can predict the future. This will 
place an unfair burden on seniors.
    Now I will focus on how we can eliminate aggressive 
Medicaid planning and loopholes in the rules. Over the last 6 
months, I have been working with a group of Medicaid experts to 
develop proposals that would both close loopholes and achieve 
Federal and State Medicaid savings. I will now explain three of 
six solutions that we are proposing. The other three are in my 
written testimony for your full consideration.
    First, balloon annuities should no longer be allowed as 
part of Medicaid planning. While annuities can be very helpful 
to some seniors, unfortunately they have been manipulated to be 
a Medicaid planning tool. Balloon annuities are structured with 
very small payments over the senior's lifetime which allows the 
senior to pass on the lion's share of the annuity to family 
while accessing Medicaid for nursing home care. The solution is 
to have balloon annuities treated as a transfer subject to the 
transfer penalty rules.
    Second, self-canceling installment notes, referred to as 
``SCINs,'' should also be outlawed as a Medicaid planning tool 
and treated as an available asset to pay for long-term care.
    Third, eliminate rounding down. Under current law in a 
rounding down State, each month one could transfer slightly 
less than two months of nursing home cost with only one month 
of penalty. This allows people to transfer twice as much as is 
intended under the current Medicaid transfer penalty rules. By 
eliminating rounding down, transfers would result in partial 
month penalties and no doubling up of transfer amounts.
    We welcome the opportunity to sit down with your staff to 
discuss six solutions in greater detail. I thank you for this 
opportunity. Since savings must be found in the Medicaid 
program, we believe strongly that closing loopholes is a better 
solution than creating a punitive and unworkable transfer 
penalties for our seniors, who have contributed so much to this 
Nation and now face chronic illness and the need for long-term 
care.
    I would be happy to respond to any questions that you may 
have. It has been my privilege to testify before you.
    [The prepared statement of Mr. Russo follows:]

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    Senator Kohl. Thank you, Mr. Russo.
    Mr. Gibson.

STATEMENT OF MARK GIBSON, DEPUTY DIRECTOR, CENTER FOR EVIDENCE-
   BASED POLICY, DEPARTMENT OF PUBLIC HEALTH AND PREVENTIVE 
  MEDICINE, OREGON HEALTH AND SCIENCE UNIVERSITY, PORTLAND, OR

    Mr. Gibson. Thank you, Senator. It is a pleasure to be 
here. I will give you a short overview of what come to be known 
as the Drug Effectiveness Review Project. This project had its 
beginnings when Oregon was faced with a projected 60-percent 
increase in its Medicaid drug spend over a 2-year budget cycle. 
However, the State did not want to reduce drug spending only to 
increase suffering and spending elsewhere in the budget as a 
result of using inferior medications. To avoid those unintended 
outcomes, we developed clinical information that did not 
previously exist, and once we had the information, we used it 
to guide our purchasing decisions.
    This effort quickly grew into a collaboration among 14 
States and two other organizations, pooling their resources to 
produce the best available evidence comparing drugs within 
classes. The research we perform is special because it consists 
of using what is called a systematic review of research 
evidence, and here is how it works.
    First, research questions are crafted with care and 
specificity. We start with a general template that asks three 
questions: First, what is the comparative effectiveness of the 
drugs in this class? Second, what is the comparative risk 
profile of the drugs in this class? Third, what does the 
evidence tell us about any differential impact on 
subpopulations, be that in age, race, or ethnicity?
    As the process proceeds, the questions are posted on our 
website and public comment is received and considered in 
preparing the final version. Once the questions are prepared, 
they are sent to all drug manufacturers in the U.S. and Canada 
with a request for any evidence that the manufacturers believe 
should be considered in the review.
    Next, our researchers, who are all employees of evidence-
based practice centers, as designed by the U.S. Agency for 
Healthcare Research and Quality, begin their search of the 
global evidence available. They search all of the major medical 
data bases, including EMBASE, Medline, and the Cochrane 
Registries of Systematic Reviews and Clinical Trials.
    Studies that match the key questions are then read in 
detail, and the quality of the study is also evaluated. If the 
study is poorly designed or poorly executed, then it is removed 
from the ongoing analysis.
    Once the high-quality studies are identified, they are 
synthesized. This synthesis combines the results of the studies 
in a way that allows us to have a view of what the entire body 
of good research says about the drugs that we are looking at. 
It takes into consideration the differences among the studies 
such as size and design, and then provides a detailed analysis 
of the cumulative evidence on the drugs.
    Our work gives the highest grade to well-done, randomized, 
controlled trials that provide head-to-head comparisons of 
drugs within a class. When those trials do not exist, we look 
for the next best available evidence. When assessing potential 
harms from drugs, we also use observational studies, which, 
though less rigorous than randomized, controlled trials, have 
longer timeframes that allow a more accurate view of risk.
    When the synthesis is finished, a draft report is produced 
and sent to outside experts for peer review. In addition, we 
post a copy of the draft to our website and solicit comments on 
the draft from the public, from advocacy groups, and from the 
industry.
    When the comment and peer review periods are complete, the 
legitimate criticisms brought to us are addressed in the final 
version of our report. The final versions are then posted to 
our website in the public domain.
    In all, this process is more open and thorough than any 
other available to our knowledge. When a report is complete, 
one can identify every step that was taken, can review every 
report included or excluded, and know why that was done. We 
disclose on request public comments and the documents sent to 
us by the industry.
    Our members use the information in different ways, 
including as an educational tool for prescribers, as an 
independent and transparent check against work done by 
commercial contractors, such as pharmacy benefits managers, as 
the primary information for use in evaluating drugs for 
inclusion or exclusion from a PDL, preferred drug list.
    Depending on the methods used by our States, they report 
differing levels of savings. In general, States that have prior 
authorization processes realize greater savings than those who 
simply provide the information to prescribers or who have 
permissive exceptions processes. Some quick examples of savings 
realized by some of our States include one which shifted its 
use of the preferred drug in the opioids class--a pain-reliever 
class where there is no evidence of different effectiveness 
among the medications--from 33 percent use of the preferred 
drug to 69 percent use of the preferred drug. The savings were 
significant because the monthly cost for the preferred agent 
averaged $77 per patient and the non-preferred agent averaged 
$331 per month.
    The results of eight classes over a year, the results of 
using this process for eight classes over a year resulted in 
over $19 million in savings, and budget officials projected 
when the process was used on 16 classes, it would yield 
approximately $40 million in a year.
    Another State reported approximately 5-percent savings in 
their overall drug spending with the adoption of a soft prior 
authorization process on four classes of drugs only: 
nonsteroidal anti-inflammatory agents, opioid analgesics, 
statins for cholesterol, and proton pump inhibitors for gastric 
conditions.
    Our States also report that companies are now competing for 
market share based on price by offering States supplemental 
rebates so that their drug can be one of the lowest price in a 
class where the drugs are deemed to be equally effective. But 
the savings do not end there. As a result of our review of the 
nonsteroidal anti-inflammatory class and the fact that in 2002 
it highlighted the potential cardiac risks associated with the 
use of Vioxx, with few exceptions our member States kept Vioxx 
off of their preferred drug lists and, arguably, not only 
prevented significant suffering and disability, but also saved 
the cost of treating cardiac problems that may have resulted 
from the widespread use of this medication by their Medicaid 
program.
    We believe that the Drug Effectiveness Review Project 
demonstrates how good scientific inquiry can be used to build 
confidence in the clinical credibility of these purchasing 
decisions.
    [The prepared statement of Mr. Gibson follows:]

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    The Chairman. On that point, I am going to come back to 
questions, but, Mark, did you do the testing on it that 
revealed the problems with Vioxx ahead of time? Did you know 
that ahead of time before FDA revealed it?
    Mr. Gibson. Chairman Smith, our report that was published 
in 2002 highlighted the potential cardiac risk.
    The Chairman. Very interesting.
    Mr. Gibson. It was in the evidence. We did no specific--we 
did not do trials, but we did find in the trials that existed 
clear indication that there was a hazard there.
    The Chairman. Very interesting.
    Meg Murray.

     STATEMENT OF MARGARET A. MURRAY, EXECUTIVE DIRECTOR, 
   ASSOCIATION FOR COMMUNITY AFFILIATED PLANS, WASHINGTON, DC

    Ms. Murray. Thank you, Senator Smith, and welcome back. My 
name is Meg Murray, and I am the executive director of the 
Association for Community Affiliated Plans and a former 
Medicaid director in New Jersey.
    The Association for Community Affiliated Plans seeks to 
offer a positive contribution to the national discussion over 
Medicaid. We believe Medicaid is a critical component of the 
safety net. However, we agree with you that certain aspects of 
the 40-year-old program need modernizing, and for that reason 
we have brought today to you a simple proposal which would 
equalize access to the Medicaid drug rebate between fee-for-
service and the capitated managed care program. This would 
provide the Federal Government with significant savings by 
lowering the prices paid for individual drugs by the health 
plans. This would lead then to lower capitation rates, which is 
how the Federal and State governments save money from the 
proposal.
    Just as background on who ACAP is, we are a national trade 
association of health plans focused primarily on Medicaid. Most 
of the plans are not-for-profit or owned by a not-for-profit, 
such as community health centers. We have 19 plans, including 
Care Oregon in Oregon, and we serve over 2 million Medicaid 
beneficiaries, and I am accompanied today by the Chairman of 
ACAP, Jim Hooley, who is the CEO of Neighborhood Health Plan in 
Massachusetts.
    Just to give you an overview, Medicaid plans currently pay 
less for drugs on a per member per month basis than the States. 
This is true despite the fact that plans pay a higher price for 
drugs because they do not have access to the Federal rebate, 
which guarantees that the States will get the best and lowest 
price.
    Plans offset this price disadvantage through more efficient 
use of utilization management techniques, which I will talk 
about in a few minutes.
    The Center for Health Care Strategies sponsored a study by 
the Lewin Group which found that Medicaid plans were paying on 
average $17.36 per member per month for TANF enrollees for 
their drug costs. States, on the other hand, were paying over 
$20 per member per month. In other words, States were paying 
about 18 percent more for drugs than health plans.
    We believe that allowing plans to have access to the 
Federal drug rebate could further lower per member per month 
cost for drugs. This would save the Federal and State 
governments significant dollars through lower capitation rates 
to the plan.
    Plans have been excluded from the Federal drug rebate 
program since the program was enacted in 1990, and instead the 
plans receive rebates from the manufacturers on their own, 
typically through pharmacy benefits managers. States, on the 
other hand, receive a statutorily required rebate of at least 
15 percent of average manufacturer's price for brand name drugs 
and 11 percent of AMP for generic drugs, as was talked about in 
the first panel.
    Medicaid health plans, on the other hand, average only 
about 6-percent rebate on brand drugs compared to at least 15 
and more like 30 percent for the States, and they usually 
receive 0-percent rebate on generics; whereas, the States are 
getting about 11 percent.
    Because the fee-for-service program is required by law to 
get the best price, Medicaid plans serving the exact same 
clients end up paying a higher price for individual drugs.
    As I said before, although they pay a higher price for 
individual drugs, plans are able to offset the price 
disadvantage by more efficient use of utilization management 
tools. These tools both reduce the total cost of drugs and 
improve the quality of care to our Medicaid beneficiaries.
    The range of tools include things such as using drug data 
to identify pregnant women or people with HIV and diabetes, or 
beneficiaries who might be using drugs inappropriately, either 
too many or too few.
    Other tools, such as greater use of generics and greater 
use of lower-cost drugs, lead to the lower per member per month 
cost than in the State fee-for-service program.
    Equalizing the Federal drug rebate program by giving both 
plans and the States access to the higher Federal rebate would 
allow the plans to lower prices paid for individual drugs, 
thereby further decreasing the already lower per member per 
month payment. This savings in turn would be passed on to the 
States and the Federal Government through lower capitation 
rates.
    As you may know, several States have considered carving 
drugs out of the capitation to take advantage of the Federal 
rebate. The Lewin Group estimated that carving drugs out of the 
capitation in Arizona would actually cost the State $4 million 
because of the State's inability to manage utilization as 
efficiently as the States have.
    ACAP is suggesting that a better policy would be to instead 
equalize the plans' access to the Federal rebate. The Lewin 
Group has estimated that there are potential savings of over $2 
billion over 10 years.
    ACAP has been very active in discussing this proposal with 
other Medicaid stakeholders. It has recently been endorsed by 
the National Governors Association as well as the National 
Association of State Medicaid Directors, the Medicaid Health 
Plans of America, and the National Association of Community 
Health Centers.
    In conclusion, at a time when Congress must make tough 
decisions, we believe that equalizing the drug rebate makes 
sense. It will modernize the program, save billions of dollars, 
not reduce any benefits, or force any beneficiary off the 
rolls. We urge you to consider this provision in any Medicaid 
reform proposal produced by the Senate.
    Thank you.
    [The prepared statement of Ms. Murray follows:]

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    The Chairman. Thank you very, very much.
    I apologize, Mr. Russo, that I was away during your 
testimony. I truly want to express to all of you how much I 
value your being here and your contribution to the Senate 
record. I hate being pulled away from these because I do gain 
much from it and you add much to it. So to all of you for your 
sacrifices in being here, we are very thankful. Because I 
missed yours, I may ask you questions you already answered in 
your testimony. But you have identified a number of loopholes 
in Medicaid that have allowed individuals to transfer assets to 
achieve premature Medicaid eligibility with limited risk of 
penalty. In your experience, how prevalent are these practices?
    Mr. Russo. Chairman, first I would like to say on this 
issue that elder law attorneys are charged with an ethical duty 
to advise clients in their best interests. In fact, it would be 
malpractice not to.
    Aggressive Medicaid planning occurs when one uses 
loopholes. In order to save money, these loopholes need to be 
closed. We have not had a chance to score the six solutions 
that we are proposing, but we are confident that they would 
result in savings that would be a much better approach than 
creating these much harsher changes that truly will harm 
seniors if we were to change the look-back period to 5 years or 
to change the penalty start date to the date of application.
    The Chairman. Your testimony had these six loophole 
closures in them?
    Mr. Russo. Yes, in the written testimony, Chairman, we have 
the six. I mentioned three in my oral testimony, which were 
balloon annuities, self-canceling installment notes, and 
changing down the rounding-down rule consistently throughout 
the United States.
    The Chairman. OK. What are the other three?
    Mr. Russo. The other three would deal with the State 
recoveries on annuities, would deal with changing the treatment 
of when a transfer penalty starts, so it would be from the 
first day of the following month rather than in the month in 
which the transfer were made, so that is right now a State 
option that is available. Let's see, the sixth one--it will 
take a moment.
    The Chairman. That is OK. We will find it. But in your 
experience--I do not want you to rat on your colleagues, but do 
attorneys widely employ these loopholes that you think are--
    Mr. Russo. Well, Chairman, I do not think it is ratting out 
other attorneys. Attorneys are good people who do good work. We 
serve our clients. We provide a holistic approach to planning. 
It is not simply about Medicaid. Most seniors, if not all 
seniors, who come into our offices--and I am speaking from my 
own practical experiences--come in out of fear, in crisis, 
concerned that they are going to lose their autonomy, their 
independence, that they are going to be pushed into a nursing 
home with no options, that there will be no one to care for 
them. They have loved ones that they care about. How will money 
be used for them if it is gone? How do we take care of a spouse 
or a child who is disabled? How do we get quality care?
    So people are coming in because we have pushed them into a 
corner where they have no choice but to look at this Medicaid 
program to help them get through this very difficult time in 
their lives.
    The Chairman. What is the loophole that is most commonly 
abused?
    Mr. Russo. Well, I think loopholes result in aggressive 
planning. ``Abuse'' is a pretty strong word, but I appreciate 
that that is the term you are using. When we look at these 
balloon annuities and the self-canceling installment notes, 
they are simply inappropriate for seniors to be engaging in 
utilizing those planning tools. Annuities now are marketed as 
the answer to how to get onto Medicaid. That is really 
inappropriate.
    I think we can change some of the existing rules that allow 
for aggressive planning, like changing the rule on rounding 
down so we can round down a partial transfer, which is the 
current rule. For example, if someone transferred $9,999 in a 
State with a $5,000 regional rate or divisor, that results in a 
penalty period of 1.99. In a State that rounds down, it becomes 
1 month. So, in effect, you were able to double up how much you 
transferred with only 1 month of penalty.
    The penalty should stand at 1.99. It should not be rounded 
down. States have the option. I think the Federal Government 
should mandate that change.
    The Chairman. OK.
    Mr. Russo. We also look at--the sixth solution we suggested 
was to outlaw one from being able to purchase a life estate, 
the right to live in a house, for example. When someone 
purchases a life estate, a parent, let's say, purchases a life 
estate in the child's home but has no intention of living 
there, it makes the asset disappear, and that is not what was 
intended here.
    The Chairman. Right.
    Mr. Russo. We need to be fair to seniors in this program. 
We need to be clear about what the rules are. But we should not 
penalize them any further because right now we discriminate 
against them because they happen to have the wrong disease.
    The Chairman. I think you told me. Are you from New York?
    Mr. Russo. Yes, I am.
    The Chairman. My question has nothing to do with the New 
York Times article, but I assume you saw those.
    Mr. Russo. Yes.
    The Chairman. I hold up my own State as a great example on 
home and community care options that are much less expensive. 
Does New York have such a thing?
    Mr. Russo. Chairman, we have the best home care program in 
the country through a non-waiver program, which actually 
provides home care to thousands and thousands of seniors. We 
think it is a terrific idea.
    As we look at the Medicaid program as a whole, it would be 
terrific to start looking at alternatives that focus on keeping 
people at home. That is where they want to be. No one comes 
into my office and says, ``I want to go to a nursing home.'' 
Every person in a nursing home wants to get out of that nursing 
home. They really want to be home and in the community and 
independent.
    The Chairman. The next panel are the nursing home people, 
by the way. No, I am kidding. [Laughter.]
    Your point is very well taken. Are you familiar with 
reverse mortgages? What do you think of the impact of those?
    Mr. Russo. Chairman, I think reverse mortgages can be very 
helpful in terms of allowing people to stay at home while 
tapping the equity in their home, using that money for care 
that they otherwise could not afford. But there is a concern, 
and the concern is that, No. 1, they are very expensive. To 
obtain a reverse mortgage, the costs are very high. Also, when 
you are no longer living in the home, the reverse mortgage is 
called in. So if an individual went to a nursing home, it would 
automatically force a sale of that home to pay back the reverse 
mortgage, and that is particularly upsetting to people because 
people feel, seniors feel that if they fracture a hip and they 
go to the hospital and then they enter a nursing home for 
rehab, their goal is to come home.
    The Chairman. Sure.
    Mr. Russo. Where are they going to go to if they have to 
sell their house when the reverse mortgage is called in?
    The Chairman. If they lose their house, they kind of lose 
hope, don't they?
    Mr. Russo. Yes, they do.
    The Chairman. So that is not an option you would recommend 
that Congress consider?
    Mr. Russo. Absolutely not to mandate that.
    The Chairman. You have spoken critically now--and I am sure 
you did in your testimony; again, I apologize I was not here 
for it. But you think that the look-back provision is just 
unduly arbitrary and quite harsh?
    Mr. Russo. Yes, the example I would give there--and it was 
Mrs. Anderson in my example--she was in a situation where her 
husband controlled the finances and transferred $25,000 4 years 
before she later needed to apply for Medicaid. She cared for 
him. He passes away. She has Alzheimer's. She knows that the 
money went to various causes, like paying for repairs on the 
house or a donation to the church capital campaign. But she has 
no records. She has no ability to know what exactly happened. 
She is going to be denied Medicaid if that look-back period is 
extended to 5 years.
    I challenge anyone in this room to come back tomorrow and 
report to you every transaction that they have made in the last 
3 years. It is difficult now for seniors. Five years is a 
burden that should not be placed on them.
    The Chairman. Can you speak to asset caps or did you speak 
to that in your testimony?
    Mr. Russo. The proposal by the National Governors 
Association?
    The Chairman. Yes, it is another option that would make all 
assets countable for purposes of determining Medicaid 
eligibility and would set a limit on the total value such that 
assets in excess of that amount must be liquidated and applied 
toward health care services.
    Mr. Russo. I think that any alternatives we can look at are 
helpful. I have real concerns here with this one because this 
is part of a bigger package; that proposal also deals with 
changing the penalty start date and also deals with extending 
the look-back period, which we oppose. So I am a little 
apprehensive about it.
    One size does not fit all around the country. Nursing homes 
in New York cost between $120,000 and $150,000 in the area 
where I practice. So--
    The Chairman. That is about double the rest of the country.
    Mr. Russo. Right. So we need to have a program that allows 
us to take into account the differences around the country in 
the cost of care and people's situations. At this point the 
National Academy of Elder Law Attorneys has not had a chance to 
analyze it for me to be able to speak in more detail about it, 
but I am sure we will be doing that, and we welcome the 
opportunity to give you our thoughts.
    The Chairman. Fair enough. Thank you very, very much.
    Mark, thank you for coming. It is good to see you. I came 
in in the middle of your testimony, and a question I have--I 
was not in the legislature when Governor Kitzhaber passed this 
proposal on testing drugs and greater State control over their 
acquisition for Medicaid. But I understand subsequent to his 
administration that it was changed. Is that correct? If it was 
changed, did it improve care and did it reduce savings?
    Mr. Gibson. Mr. Chairman, you are correct, it did change--
before I go into that, just it is a pleasure to be here, and I 
appreciate the invitation.
    The Chairman. I only ask this for my own edification 
because I am interested from your perspective, and perhaps 
Governor Kitzhaber's; what has been the result of that change?
    Mr. Gibson. Right. The change was to repeal the State's 
ability to have prior authorization for its preferred drug 
list. The prior authorization process the State ultimately 
adopted, which resulted in a significant increase in the 
savings realized, was when a physician wanted to prescribe a 
drug that was not the preferred drug in the class, they or a 
member of their staff simply had to call a number and listen to 
a message about the evidence relative to the drugs in that 
class.
    As a result of that simple intervention, Oregon was the 
State that I mentioned that experienced about a 5-percent drop 
over the period of time that that prior authorization was in 
place, about a 5-percent drop in its overall drug spend, by 
just applying that prior authorization process to four drug 
classes.
    The Chairman. Just the education.
    Mr. Gibson. Just the education and just the requirement 
that there be contact with that education.
    The Chairman. So the change then really didn't reduce much 
in terms of what the State has been saving on drugs.
    Mr. Gibson. The change did reduce what the State has been 
saving because that is no longer--the State is no longer able 
to require the physician to call and get that information prior 
to receiving an exception from the preferred drug list. So we 
typically see about a 30-percent use of preferred drug when 
there is not an intervention such as a prior authorization.
    The Chairman. The total drug savings from this program, 
what did you lose from the change?
    Mr. Gibson. I have not seen exact figures on the reduction 
of savings from the change, although the internal research that 
the agency is doing and the folks that I had contact with 
there--I would be happy to put you in touch with them--have 
said that immediately upon suspension of the prior 
authorization, the trends began to go back the other way. I do 
not have a firm number at that point.
    The Chairman. So you would not recommend that change then 
to other States?
    Mr. Gibson. I would not, no.
    The Chairman. OK. I was very intrigued by your comment, 
your answer to the Vioxx question, but what I think I heard you 
say is that you did not have to do any trials on it, you did 
not have to do any tests on it; you just read the material and 
it reflected the downstream difficulties in health and saved a 
whole lot of people a whole lot of grief.
    Mr. Gibson. That is correct, Mr. Chairman. The study in 
question is called the VIGOR Trial, and within that there was 
an unexplained increase in adverse cardiac events among people 
who were taking Vioxx.
    Now, when we looked at this information, at this evidence, 
and we looked at the size of the trial, the design of the 
trial, and the results, it was a well-done, well-randomized, 
well-reported, double-blind trial, and it came out with this 
unexplained increase in cardiac adverse events. As a result of 
highlighting that to our States, even though we did not--our 
process, our research process, does not recommend a drug, we 
did highlight this risk in the report, and most but not all of 
our States said that this is too much a risk for us, we are not 
going to include Vioxx as one of our preferred drugs.
    The Chairman. Mark, since, you know, Oregon has had such, 
frankly, a positive result with the Drug Effectiveness Review 
Project, do you think Congress should leave this up to the 
States, or as part of Medicaid reform, should we be mandating 
this kind of a thing?
    Mr. Gibson. Mr. Chairman, I think that is a great question. 
I think that the States have done a terrific job of blazing a 
trail here. As we learn more about doing systematic reviews of 
drugs within classes, we recognize that there are ways to 
continually improve this work, which ultimately becomes a bit 
of a resource issue.
    Now, resource in terms of getting the right research done 
is modest compared to the expenditures. In our home State, we 
spend in the neighborhood of $480 million in Medicaid on 
drugs--or excuse me, in a biennium on drugs, and the entire 
cost of the Drug Effectiveness Review Project was $4.2 million 
over 3 years, and shared among 16 organizations that comes out 
to be a fairly nominal investment in getting good evidence.
    On the other hand, these organizations all faced their 
resource constraints. They are primarily Medicaid programs. So 
to continue to improve this and to continue to address some of 
the criticisms that come out of what we have done, I think 
there is a resource issue that the Federal Government could be 
helpful on.
    On the other hand, I would say that I think the States have 
done a terrific job, and, you know, some very close 
collaboration between the two that maintains the autonomy of 
the process could be very useful.
    The Chairman. How many States are in your program?
    Mr. Gibson. There are currently 14 States.
    The Chairman. They have all enjoyed the same benefit that 
Oregon has seen?
    Mr. Gibson. Mr. Chairman, they use the information in 
different ways, so their benefits change from State to State. 
North Carolina, for example, uses the information to inform and 
educate their practitioners about the relative effectiveness 
and risk profile of drugs within these various classes. So they 
use it primarily as a prescriber education process. They couple 
that up with cost information so that their prescribers can 
then consider cost as they make these decisions. But they start 
out knowing what the relative or the comparative benefit is, 
too. Other States already had prior authorization processes run 
by commercial firms, but their concern was that they might not 
be getting the depth of analysis around these drugs that they 
really needed to ensure that they were not making a penny-wise, 
pound-foolish decision. So they have come into the project from 
the standpoint of saying let's go to a more thorough, more 
transparent, and more open process, one that we can go to our 
medical community or we can take to our advocacy community and 
say here are the steps that we went through to analyze these 
drugs, this is what we are basing our determination of their 
effectiveness on, where you do not have that kind of 
transparency with commercial products.
    The Chairman. These are States outside of the 14 that are 
part of your group?
    Mr. Gibson. Well, there are States outside of the 14 that 
are in the group that are using the information because it is 
in the public domain, and we have had several States come up 
and say, ``Gosh, you guys are doing a great job, thanks a 
lot.''
    The Chairman. Are there any States outside your group who 
are doing anything different that is showing to be effective in 
savings and in efficiency?
    Mr. Gibson. Yes, but they do not have the transparent 
clinical perspective that we are able to bring to it.
    The Chairman. Because they rely on commercial sources.
    Mr. Gibson. Yes.
    The Chairman. OK.
    Mr. Gibson. Mr. Chairman, I would just add, to clarify my 
comments, that if it is simply about money, then you do not 
need our product. If you really want clinical certainty, if you 
want the best analysis of the cumulative evidence around these 
drugs, then I think you should participate or at least utilize 
the information that the collaboration brings forward.
    The Chairman. Why do you think the FDA and CMS perhaps were 
so late on the Vioxx issue?
    Mr. Gibson. Mr. Chairman, there is a lot of ground to cover 
there.
    The Chairman. I am getting you in trouble here, Mark.
    Mr. Gibson. Yes, well, I would just say that I think one of 
the things that sets our process aside from others is that 
there is a real firewall between our researchers and the 
industry. That is not to say that we do not utilize the best 
evidence the industry can give us. We reach out to the 
industry. We solicit any evidence they believe pertains to the 
questions that we are researching. They provided us with 
hundreds of dossiers on these drugs and thousands of pages of 
research information that we analyzed, just as we do any 
information we find on our own.
    But we do not have an ongoing intimate dialog between the 
folks that are doing the research and the industry, and we do 
not receive support from the industry. I think there are a 
number of things that have happened over the years with the FDA 
that may have--
    The Chairman. Makes them a little slower on the trigger?
    Mr. Gibson. Yes, just--yes.
    The Chairman. I understand what you are saying. Thank you 
very much.
    Meg Murray, as I understand your testimony, you have spoken 
between Medicaid managed care plans and fee-for-service plans 
and that there are some savings in managed care that are not 
being realized in fee-for-service. Can you discuss some of the 
things that your health plans do to manage drug utilization 
compared to State fee-for-service plans? What would you have us 
take into this budget reconciliation when we focus on that area 
for savings?
    Ms. Murray. In many cases, what our plans are doing is just 
more aggressive use of what States can do under the drug rebate 
law. So our plans are much more aggressive on generic 
utilization. For instance, our plans have almost 60 percent of 
their prescriptions are generic, compared to only about 50 
percent by the State programs.
    More specific examples are our plans do require--they 
promote first-line antibiotic use more often than the States 
do. They note through the data excessive use of inhaler 
medications for asthmatics instead of the controller 
medications. So a lot of what they are doing is what States can 
do, but just they are much more aggressive about it.
    The Chairman. Perhaps you heard that CBO expresses concern 
that health plans already have access to the drug rebate. Can 
you address that issue a little bit more?
    Ms. Murray. Sure. Our health plans do get a rebate. Many of 
them contract with pharmacy benefits managers who in turn 
contract with manufacturers to get a rebate. So, yes, our plans 
do have access to a drug rebate, but they do not have access to 
the Federal rebate, which, I was pointing out, is much more--
almost three times better than what they can get on their own 
through private contracts with the manufacturers.
    The Chairman. Since managed care plans are already 
operating at a lower cost than fee-for-service programs, would 
access to the Medicaid drug rebate provide your plans with even 
greater savings, in your view?
    Ms. Murray. Yes. By increasing the rebate, that effectively 
lowers the price of individual drugs to our health plans, 
thereby further lowering the per member per month cost. This, 
as I said, will be passed on to the States through the lower 
capitation rates.
    The Chairman. Then that savings is what, 16 percent?
    Ms. Murray. The net savings would be the difference--well, 
in terms of gross dollars, it is potentially up to $2 billion 
over 10 years.
    The Chairman. You are starting to talk real money.
    Ms. Murray. That would be split between the States and the 
Feds.
    The Chairman. The Fed.
    I think I have asked my questions. Meg and Mark and 
Vincent, thank you so very, very much. This has been a helpful 
hearing for me, and we are grateful for your time, and to our 
audience, we appreciate your patience with the Senate schedule.
    We are adjourned.
    [Whereupon, at 4:50 p.m., the committee was adjourned.]


                            A P P E N D I X

                              ----------                              


              Prepared Statement of Senator Susan Collins

    Mr. Chairman, the FY 2006 budget resolution includes $10 
billion in reconciliation instructions for the Finance 
Committee. I therefore want to thank you for holding this 
hearing to examine options for meeting those instructions, 
while still preserving the critical Medicaid safety net that 
keeps 54 million of the most vulnerable Americans from falling 
through the cracks of our nation's health care system.
    Medicaid is the sole source of health insurance coverage 
for 40 percent of our nation's poor, including one in four 
American children. It also finances the health and long-term 
care needs for about 20 percent of individuals with serious 
disabilities and helps pay for the care of 60 percent of our 
nation's nursing home residents. Financed jointly by the 
federal and State governments, Medicaid is now the nation's 
largest health care program, with annual costs exceeding $300 
billion.
    Medicaid is costly because it serves those citizens with 
the most complex care needs and chronic problems requiring 
long-term care. Moreover, it is not just our most expensive 
health care program. It is also the most complex because it is 
structured and administered differently in each of the 50 
states and the District of Columbia. In fact, there is an old 
saying among policymakers: ``If you've seen one Medicaid 
program, you've seen one Medicaid program.''
    Medicaid is also one of our fastest growing programs, 
putting substantial pressure on both State and federal budgets. 
Moreover, with the aging of the baby boomers, those costs are 
certain to rise even more rapidly, threatening the long-term 
financial sustainability of the program. It is therefore 
important that we begin now to work to identify ways to 
stabilize and strengthen Medicaid.
    As part of that process, it is critical that we take the 
time to learn how the current Medicaid program works and to 
examine thoroughly the various options for reform. Today's 
hearing gives us an opportunity to focus on two specific 
components of the program: how Medicaid pays for prescription 
drugs and considers assets in determining eligibility.
    Again, Mr. Chairman, thank you for calling this hearing, 
and I look forward to working with you on a plan to ensure that 
Medicaid can continue to fulfill its commitment to providing 
quality care to poor, elderly, and disabled Americans in a way 
that is financially sustainable.

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