<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:72830.wais]
MEDICARE REFORM: PROVIDING PRESCRIPTION DRUG COVERAGE FOR SENIORS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MAY 16, 2001
__________
Serial No. 107-28
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia BILL LUTHER, Minnesota
ED BRYANT, Tennessee LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Health
MICHAEL BILIRAKIS, Florida, Chairman
JOE BARTON, Texas SHERROD BROWN, Ohio
FRED UPTON, Michigan HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania TED STRICKLAND, Ohio
NATHAN DEAL, Georgia THOMAS M. BARRETT, Wisconsin
RICHARD BURR, North Carolina LOIS CAPPS, California
ED WHITFIELD, Kentucky RALPH M. HALL, Texas
GREG GANSKE, Iowa EDOLPHUS TOWNS, New York
CHARLIE NORWOOD, Georgia FRANK PALLONE, Jr., New Jersey
Vice Chairman PETER DEUTSCH, Florida
BARBARA CUBIN, Wyoming ANNA G. ESHOO, California
HEATHER WILSON, New Mexico BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona ELIOT L. ENGEL, New York
CHARLES ``CHIP'' PICKERING, ALBERT R. WYNN, Maryland
Mississippi GENE GREEN, Texas
ED BRYANT, Tennessee JOHN D. DINGELL, Michigan,
ROBERT L. EHRLICH, Jr., Maryland (Ex Officio)
STEVE BUYER, Indiana
JOSEPH R. PITTS, Pennsylvania
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Braun, Beatrice, Member, Board of Directors, AARP............ 65
Chess, Robert, Chairman, Inhale Therapeutics Systems, on
behalf of the Biotechnology Industry Organization.......... 83
Crippen, Dan L., Director, Congressional Budget Office....... 18
Lambrew, Jeanne M., Associate Professor, Department of Health
Services Management and Policy, George Washington
University................................................. 73
Material submitted for the record by:
Pharmaceutical Research and Manufacturers Association of
America, prepared statement of............................. 98
(iii)
MEDICARE REFORM: PROVIDING PRESCRIPTION DRUG COVERAGE FOR SENIORS
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WEDNESDAY, MAY 16, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Health,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2322, Rayburn House Office Building, Hon. Michael
Bilirakis (chairman) presiding.
Members present: Representatives Bilirakis, Barton, Upton,
Greenwood, Deal, Burr, Whitfield, Ganske, Norwood, Shadegg,
Bryant, Ehrlich, Buyer, Pitts, Tauzin (ex officio), Brown,
Strickland, Barrett, Capps, Hall, Pallone, Deutsch, Eshoo,
Stupak, Engel, Wynn, and Green.
Staff present: Tom Giles, majority counsel; Anne Esposito,
health policy coordinator; Kristi Gillis, legislative clerk;
Amy Droskoski, minority professional staff; and Bridgett
Taylor, minority professional staff
Mr. Bilirakis. I am being reminded by Mr. Brown that we are
4 minutes late, so we had better get rolling. Good morning. I
now call to order this hearing on Medicare Reform.
In our first hearing of the year, this subcommittee
examined ways in which Medicare beneficiaries are currently
obtaining prescription drugs outside of the Medicare program.
Today, we will assess the various needs of Medicare
beneficiaries for prescription drug coverage.
The hearing series is built around a critical concept that
there is a clear and necessary connection between adding a
prescription drug benefit to the Medicare program and broader
reforms to protect and strengthen Medicare for the future. I
remain determined that this Congress and this Administration
can reach agreement on a plan to reform Medicare and establish
a voluntary prescription drug benefit for all Medicare
beneficiaries.
I would like to welcome all of our witnesses today. Our
first witness is Mr. Dan Crippen, with the Congressional Budget
Office. Many policy experts believe that any policy we advance
will be driven by the numbers. It is true that fiscal
responsibility is of the utmost importance in crafting this
benefit, however, it is also important that we fulfill the
needs of the Medicare beneficiaries to the greatest extent
possible, and this committee will rely heavily on the work of
the CBO to help us understand the fiscal impacts of the
policies we will create and, to that end, I know we all look
forward to hearing about the work that CBO has done so far in
this regard.
I would also like to welcome the witnesses from our second
panel, the Biotechnology Industry Organization, AARP, and Ms.
Jeanne Lambrew. These organizations will be able to best
explain the needs of Medicare beneficiaries. Ms. Braun, on
behalf of AARP, has come before the committee before to be a
voice of seniors who are the biggest and, in my opinion, the
most significant stakeholders in this debate.
Before we expand Medicare to provide a costly new benefit,
we must ensure that the program is standing on solid fiscal
ground. A benefit promised but not delivered is certainly no
benefit at all, and I am determined to protect the long-term
solvency of this vital program. I would like to think that the
entire committee is equally determined.
As members know, this subcommittee has a strong record of
working on a bipartisan basis to tackle difficult legislative
issues. I am hopeful that we can advance a bipartisan plan to
improve prescription drug coverage for Medicare beneficiaries.
By reaching agreement on an answer to this difficult question,
we can also help advance broader efforts to preserve and
strengthen Medicare for the future. In closing, I want to again
thank our witnesses for their time and effort in joining us
today, and now recognize our ranking member, Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman. I would like to thank
Mr. Crippen for joining us, and also Jeanne Lambrew and our
other distinguished witnesses for coming to this hearing and
sharing in their wisdom.
Today's hearing is about the structure of prescription drug
coverage, the access and cost implications of various coverage
options. It is important to be clear about what actually is and
isn't optional about prescription drug coverage for Medicare
beneficiaries. Affordable, meaningful prescription drug
coverage should be available to every Medicare beneficiary. In
conjunction with establishing a prescription drug benefit for
Medicare beneficiaries, the Federal Government must take action
to reduce prescription drug prices. If we truly want to act in
the best interest of Medicare and taxpayers, neither principle
is optional.
A fundamental principle of Medicare is universality, the
goal is and has been since its inception in 1965, to ensure
every senior access to appropriate medical care regardless of
health, regardless of income. The same principle should apply
to prescription drug coverage.
Medicare prescription drug coverage as opposed to State
assistance programs or private coverage for prescription drugs
means stable benefits over time that leaves no senior behind.
If we extend a helping hand to some subset of Medicare
beneficiaries based on their being the poorest of the poor or
the costliest of the costly, we are leaving seniors behind. If
we create a Welfare benefit for prescription drugs, we are
leaving seniors behind.
At last count, a third of all seniors lack prescription
drug coverage. That was before Medigap premiums spiked upwards
37 percent between 1998 and 2000. That was before 900,000
Medicare beneficiaries lost their coverage, their prescription
drug benefits usually with it and, by the way, these same HMOs
are tomorrow holding a rally to ask for a cut and a big share
of the $300 billion included in the budget resolution for
prescription drug coverage in unspecified Medicare reform.
HMOs are making this request, having this rally, even
though they know they received a third of the Medicare give-
back dollars last year even though they only served one-sixth
of the Medicare population, even though they know every penny
of the $300 billion is necessary for prescription drugs, even
though the managed care companies know how important drug
coverage is for seniors, and even though they know they stand
to receive additional funding if we establish any kind of
Medicare prescription drug coverage. And Medicare HMOs claim to
be operating in the best interest of our seniors.
But back to prescription drugs for a moment, if we can help
some of those in need of coverage now, when will we get around
to helping the growing number left out? Let us talk about
dollars for a moment. Mr. Crippen's written testimony discusses
the future financial viability of Medicare. Securing the long-
term solvency of Medicare as well as that of Social Security is
very, very important, as the chairman said. Securing the value
of these benefits that the programs deliver is equally
important. Prescription drug inflation, to be sure, is eroding
the value of Medicare and Social Security. Medicare covers
doctors visits, it does not cover outpatient prescription
drugs. If a Medicare beneficiary goes to a doctor but can't
afford to fill a prescription, how does that affect the value
of the doctor's visit?
Prescription drug spending increased 19 percent last year.
Seniors' monthly Social Security checks increased 2.4 percent
last year. Put yourself in the shoes of a retired individual
without prescription drug coverage. You live on an $844 a month
Social Security check. Your doctor prescribes Celebrex or Zocor
or Prilosec, maybe all three. Celebrex costs $80 a
prescription, Zocor costs $105 a prescription, Prilosec costs
$130 per prescription. All together, that is 40 percent of your
monthly Social Security income. All these medications are
important, no one disputes that.
Take Celebrex. It can help individuals with arthritis live
with less pain and disability. Let us give the drug companies
the benefit of the doubt and assume it costs, as they tell us,
$500 million to develop Celebrex. That is the per drug R&D
estimate the industry has never substantiated, we are supposed
to take it on faith. The makers of Celebrex earned $1.3 billion
in 1999, $2 billion in 2000. Even if there initial investment
were $500 million, they are raking in enormous profits on a
drug they know seniors will buy even if it bankrupts them.
Last year, the makers of Celebrex raised the price 11
percent. One more point about Celebrex. Recent studies suggest
that it and its rival, Vioxx, are no more effective in reducing
the pain and inflammation of arthritis than other anti-
inflammatory pain killers.
What is the biggest distinction between Celebrex and Vioxx
and their less expensive counterparts? Extraordinarily
aggressive direct-to-consumer advertising. What is the message
here? The U.S. Government must stop the prescription drug
industry from taking advantage of American consumers. We can't
afford to permit drug companies to charge Americans twice,
thrice, sometimes four times what consumers in other countries
pay for prescription drugs, even though American taxpayers
often paid for much of the research costs.
We can't afford to permit drug companies to block access to
less expensive but equally effective generic drugs. We can't
afford to permit drug companies to exploit direct-to-consumer
advertising, seducing us into clamoring for the newest drug
regardless of its true effectiveness, regardless of its price.
We need to join every other industrialized nation on this
planet and demand reasonable prices from drug companies. We can
reduce prices through competition by creating a system of
royalties that would permit generic into the market sooner.
That is the theory behind my compulsory licensing bill. We
could reduce prices by making use of the collective purchasing
power of 39 Medicare beneficiaries. That is the theory behind
the Allen bill. We could reduce prices by closing loopholes
that have enabled brand name drug companies to block access to
generic alternatives. That is the theory behind the McCain-
Schummer bill and the Emerson-Brown bill which we will
introduce later this week, bipartisanly.
We can reduce prices through information by making drug
purchasing decisions based on a drug's relative efficacy, not
its ad campaign. That is the theory behind New Zealand's
pricing reference--reference pricing system. There are many
things we can do, the question is, will we, in this
institution? Unfortunately, that is a matter of politics.
The Federal Government, Mr. Chairman, must find the
political courage to add prescription drug benefits to Medicare
without paying excessive prices for prescription drugs. It
would be irresponsible of us to pay anymore or to do any less.
I thank the chairman for his indulgence.
Mr. Bilirakis. There is a vote on the floor. Let us see if
we can get in as many opening statements as we can, but limit
them to 3 minutes, please. Under the rules, we can do that. Mr.
Upton.
Mr. Upton. Thank you, Mr. Chairman. I have a lengthy
statement for the record, and to save on time, I'd like to say
three things.
Mr. Bilirakis. Without objection, the opening statements of
all members of the panel will be made a part of the record.
Mr. Upton. First of all, welcome to my long-time friend,
Dan Crippen. We look forward to your testimony and interaction
with us not only today, but in the months ahead.
Second, prescription drugs is a big issue not only in my
district, but across the country. A letter I received not too
long ago from one of my constituents, and I quote: ``I am among
those who skip my meds every other day to make it through the
month. I am taking nine pills a day plus I am a diabetic. My
husband has glaucoma and high blood pressure and eyedrops are
very expensive. We have no prescription drug coverage, so it is
a very trying ordeal for us.''
That is a typical letter, and I myself have seen friends
and seniors literally cut their pills or dosages in half to
make them go twice as far because of the cost and the other
needs in the household.
I was pleased to be part of the House Republican Leader's
Task Force last year, I look forward to working with you, Mr.
Chairman, on developing a plan and moving it through the
Congress this summer, and I yield back the balance of my time.
Mr. Bilirakis. I thank the gentleman. Three minutes, Mr.
Pallone.
Mr. Pallone. Thank you, Mr. Chairman. The lack of an
affordable prescription drug benefit is, without question, the
biggest problem with the Medicare program today, and the
problem can't be corrected piecemeal by simply devising a plan
to cover the poor seniors. A comprehensive affordable drug
benefit should be available to all seniors regardless of
income. Fifty percent of Medicare beneficiaries without drug
coverage are middle-class seniors.
Instead of providing a meaningful benefit through Medicare,
it seems as though President Bush and the Republican leadership
are preparing to either provide drug coverage to only low-
income beneficiaries, or to provide drug coverage that relies
on private drug only insurance. Neither of these plans will
allow beneficiaries to receive a comprehensive affordable
guaranteed benefit and, in fact, these plans will nurture the
price discrimination beneficiaries face when purchasing
pharmaceuticals.
Price discrimination has been well documented by Democrats
and a number of consumer groups. Statistics have shown that
seniors pay nearly twice as much for their prescription drugs
than does the pharmaceutical industry's most favored customers.
Robert Pare's article in the New York Times from earlier this
month highlights the finding that a large increase in drug
spending was disproportionately attributable to only a few top
selling drugs marketed to seniors. Aggressive marketing by drug
companies has contributed to this growth in addition to rising
cost of drugs used most frequently by seniors.
I want to note, Mr. Chairman, however, that price
discrimination is only half the battle. The need for passing a
comprehensive prescription drug plan is just as important.
Twelve million Medicare beneficiaries, approximately a third,
lack coverage for prescription drugs. Another one-third have
unreliable coverage through Medigap or Medicare+Choice. Medigap
coverage is inadequate and too expensive and needs to be
reformed. As for Medicare+Choice, an increasing number of
enrollees have prescription that is not good and getting worse.
Most private health plans that provide services for seniors
have unimpressive records of covering prescription drugs, yet
the Republicans call for prescription drug plans that force
beneficiaries to rely on private health plans to receive
crucial coverage.
In closing, I would like to reiterate that Democrats would
like to see a voluntary prescription drug benefit through
Medicare that is affordable to all beneficiaries regardless of
income, accessible to all beneficiaries, and financed without
reducing the solvency of Medicare and is a guaranteed benefit
that is uniformly available across the country. Thank you
again, Mr. Chairman.
Mr. Bilirakis. And I thank the gentleman. Three minutes,
Mr. Burr, the vice chairman of the full committee.
Mr. Burr. Thank you, Mr. Chairman. Mr. Brown said the
question is ``will they.'' I say the question is ``did they.''
When they controlled the White House and the House of
Representatives and the U.S. Senate for a 2-year period, did
they introduce a plan? Did they even talk about the need for a
drug benefit? They didn't. And I think you heard from his
opening statement that bipartisanship on a drug bill is going
to be hard to find because, to them, this is about everything
but a drug benefit. It is about the companies. It is about
HMOs. It is about Medicare+Choice. It is not about the
constructive advice of how you craft a very delicate plan, a
plan that has to incorporate who is currently covered under
Medicaid because they are low income; a plan that takes into
account that some employers today still provide drug benefits
for their retirees, and they are willing to do it in the future
if there is a little bit of incentive in what we do.
Twenty-six States currently have expanded drug plans for
seniors that rate as high in Pennsylvania as 200 percent or
over of the poverty line. And how we write a plan that
integrates all these different approaches that they might have
into some type of uniform national prescription drug benefit,
one that is accessible to all, affordable for all and, most
importantly--and not mentioned up to this point--is voluntary,
one that seniors can choose whether they participate in.
Mr. Chairman, I am hopeful, I am confident that we can
reach a bipartisan bill this year, but we are going to have to
drop the political rhetoric of this being an issue about
everything but prescription drugs. We have got to work on
language. We have got to work on the specifics. We have got to
listen to Dan Crippen. We have got to understand that even
though Dan mentions in his opening statement, if we extended
the drug benefit to everybody under Part B and kept the current
subsidy of 75 percent, then I think he would tell us we can't
afford it under the current structure. I think we all know
that. But the reality, Mr. Chairman, is that this committee has
to do it this year, because next year CBO has to begin to score
the Baby Boomers that hit the system. In the next 10 years, we
will see the size of the senior population outnumber the amount
of votes that either candidate got in the Presidential
election. They will have a major voice in what the structure of
a plan looks like if we wait that long.
We have a unique opportunity on both sides of the aisle
this year to craft a plan that can withstand the test of the
increase in population and, consequently, the increase of cost
of a drug benefit in the future. I hope we won't miss this
opportunity. I yield back.
Mr. Bilirakis. I thank the gentleman. Mr. Deutsch, for 3
minutes.
Mr. Deutsch. Thank you, Mr. Chairman. I have mentioned two
statistics. Sometimes statistics can be very telling. I will
mention them again. In 1965 when Medicare was created, the
average life expectancy of Americans was 65 years old. Thirty-
six years later, it has increased almost 15 years. In 1965
before Medicare was created, the average senior in America
spent 11 percent of their income on health care costs. Today,
with Medicare paying effectively most hospital and doctor
costs, seniors in America spend 19 percent of their income on
health care costs. Prescription drugs is a great part of that
increase. It is sort of high-class problem, I think, accurately
described as a high-class problem, that people living are
living longer. It is a good thing, and prescription drugs in
America have fundamentally changed our world. Tens of millions
of Americans, let alone people throughout the world, in fact,
are alive today because of prescription drugs. But I think it
is inconceivable for any of us--and I think it is an important
acknowledgement on this subcommittee, on this committee, and in
this Congress, and in this country, to say that we can have a
health care system like Medicare without prescription drug
coverage. It is illogical, it wouldn't make sense. It is clear
that if we were creating that system today, we would provide
prescription drug coverage, period, without debate.
So, where are we now? We are trying to change the system
and make changes. My well-intentioned colleagues on the other
side of the aisle, as well as the President, have talked about
proposals to limit a prescription drug coverage only to low-
income seniors. I think it is unfair considering the majority
of seniors currently without coverage are significantly above
the poverty level. Let me point out, in Florida, 65 percent of
the seniors would not qualify for low-income prescription drug
coverage. Many of these seniors make as little as $15,000 per
year, yet they would be ineligible for many of the programs
debated last year.
I think what is imperative and I think what is critical,
and it is a philosophical divide, that I believe the American
people are on our side and not, unfortunately, on the other
side on this issue, which is that a prescription drug coverage
has to be for all Medicare beneficiaries. It cannot be limited
and it cannot be made income-eligible, that is a fundamental
mistake, it changes the nature of the Medicare system from an
insurance-based program to a need-based program and with all
sorts of, I think, tremendously detrimental policy
implications. Thank you, Mr. Chairman.
Mr. Bilirakis. Thank the gentleman. We are going to break
now for this vote, and as soon as I get back and Mr. Brown
returns, we are going to start up again. Forgive us, Mr.
Crippen.
[Brief recess.]
Mr. Bilirakis. Our hearing will be back in order. The Chair
recognizes the chairman, Mr. Tauzin, for an opening statement.
Chairman Tauzin. Thank you, Mr. Chairman. I want to thank
you, first of all, for holding this hearing today because it is
on a topic of utmost importance to all Americans. It is the
second hearing in a series looking at Medicare reform and the
lack of a prescription drug benefit today in traditional
Medicare program, and the witnesses we will be hearing from
today could be some of the most important that we hear from
this year.
The Medicare program affects every one of us, whether we
are eligible for the program today, or we have family members
like my own mother who is eligible. All of us have an interest
in ensuring that the program will meet the health care needs of
a growing senior population. We are all hopeful that we are
part of that population, if we are lucky.
Over the past few years, it has become increasingly clear
that the Congress needs to modernize Medicare and to bring the
program into the 21st Century. Since the program's inception in
1965, much in health care has changed. Yet many of the
program's features, as well as the design of Medicare's basic
benefit package, is still stuck in a 1960's style approach to
practicing medicine. Prescription drug coverage is still not
included in Medicare's basic benefit package, and there are no
caps placed on seniors' out-of-pocket medical expenses. No one
in the room today would model a new system after Medicare's
current benefit package.
A large part of the debate will no doubt focus on the cost
of adding an outpatient prescription drug benefit to Medicare,
and I am happy today that CBO is with us. CBO has estimated
that the aggregate Medicare spending for the next 10 years will
equal $1.5 trillion. That is a 32 percent increase over last
year's estimate alone. Given the new CBO estimates, adding a
prescription benefit to Medicare will prove even more
challenging, obviously, today than it was last year.
We are fortunate also to hear today from the AARP, and they
have a unique insight into the current outpatient drug needs of
seniors and the disabled, even though they were, I think, a bit
out-of-touch with the broadband argument we had last week.
I am constantly amazed at the almost daily breakthroughs in
science and technology. When I hear of treatments to combat
diseases such as AIDS and leukemia it all gets put in
perspective. If I can be helpful in my role as chairman of the
full committee to ensure that patients in need of life-saving
treatments have access to them, we will do all we can to make
that happen.
We don't have all the answers as to how the public-private
partnership should be structured, but our committee is
committed to finding that solution, and we intend to pass a
prescription drug benefit in this Congress.
I look forward to hearing from BIO, the industry
representing the companies who are on the cutting edge of
developing life-saving treatments. And I welcome Ms. Lambrew,
who will provide us insight into the cost issues we need to be
aware of as we structure the new prescription drug benefit to
be incorporated in the Medicare program, which has been
traditionally slow to adapt to a dynamic health care
marketplace.
And as we consider how to modernize the program, I would be
remiss if I didn't mention the issue raised by AARP and others
in their testimony. Preparing for the retirement of the Baby
Boom generation, according to the most recent Medicare
Trustee's report, there will be 77 million beneficiaries in the
year 2030. That is about double the beneficiaries of today.
Conversely, the number of workers paying for the Medicare
program will only increase by 15 percent. To the extent that we
analyze the Medicare program to modernize the benefits package,
we should not squander the opportunity to make the reforms
necessary to ensure the long-term sustainability of this
increasingly vital program to Americans.
It is a pretty exciting time to be involved in this debate.
Our new President has expressed a strong interest in reforming
Medicare. Many in the Senate have expressed a desire to move a
reform package. My own Senator John Breaux has been
instrumental in many of these recommendations, as has Bobby
Jindal, who is now the new Assistant Secretary at the
Department.
As I stated at our first hearing on the topic, the
committee is honored to have two members who participated in
the National Bipartisan Commission on Medicare Reform, Chairman
Bilirakis and my ranking counterpart on the committee, Mr.
Dingell. With our wealth of talent on health care issues, our
committee will be a strong leader in this debate.
Mr. Chairman, I thank you again for this important hearing
and, most importantly, for taking on this enormous challenge of
both reforming Medicare and making sure we not leave this
Congress without providing a prescription drug benefit within
that Medicare reform. Thank you, Mr. Chairman.
Mr. Bilirakis. I thank the gentleman for his remarks. The
gentleman from Texas, Mr. Green.
Mr. Green. Thank you, Mr. Chairman. I ask unanimous consent
that all members not only have time to provide statements, but
also to revise and extend their remarks.
Mr. Chairman, I will be brief and easily within the 3
minutes.
I would like to thank you for holding this second hearing
on the prescription drug benefit for our Nation's seniors, and
I echo the sentiments of my colleagues who say that such an
important and crucial issue for our constituents. Whether they
are eligible for Medicare or not, we all have elderly family
and friends who rely on prescription drugs to maintain their
health.
As our Chairman said, we wouldn't create Medicare today the
way it was created in 1965, and I would hope if we created it
today, we would provide a prescription drug benefit under
Medicare because prescription drugs are just as important as
your doctor, just as important as your hospital today as
compared to 1965. The rising cost of medications make it more
difficult for seniors to manage their prescription costs. In
fact, the recent study by the National Institute of Health Care
Management reported a dramatic increase in prescription drug
cost over the last decade. The report indicates that the cost
of prescription drug costs will continue to escalate, and I ask
unanimous consent, Mr. Chairman, to place into the record this
study by the National Institute of Health Care Management.
Mr. Bilirakis. Without objection, that will be the case.
Mr. Green. According to the study, from 1999 to 2000,
retail outpatient prescription cost rose by 19 percent in 1
year, and I am from Texas and we don't even have that high gas
prices. So, 19 percent in 1 year. The increases are highest
among our blockbuster drugs that most of our family and friends
take--Vioxx, Celebrex for arthritis, Lipitor for high
cholesterol, Glucopage for diabetes. Seniors have no choice but
to pay these high costs. To make ends meet, most seniors are
cutting their pills in half or not taking their dosage.
Mr. Chairman, I will yield back my time and ask my full
statement be included, but I appreciate the chance to try and
work on a bipartisan effort for prescription drug coverage.
Mr. Bilirakis. I thank the gentleman. Without objection,
the opening statements, as I have already said, of all members
of the panel will be made part of the record. Dr. Norwood, for
an opening statement, vice chairman of the committee.
Chairman Tauzin. Dr. Norwood, would you yield just
temporarily, please?
Mr. Norwood. Always.
Chairman Tauzin. I thank my friend. I want to admit an
error here. I must have been stuttering a while ago because I
didn't say this properly. I also didn't read today's report
from the Hill Briefs. AARP has asked to be removed from anti-
broadband spots so, obviously, I made a terrible mistake, and I
want to congratulate you for that new decision. Thank you, Mr.
Chairman.
Mr. Bilirakis. Quick work. The gentleman from Georgia.
Mr. Norwood. Thank you very much, Mr. Chairman, and I do
appreciate your calling this hearing and most certainly applaud
your efforts to a further review of Medicare and prescription
drug coverage for seniors.
We are here today because of the concern of those seniors
that are in need of prescription drugs but due to the
escalating cost are forced to choosing between purchasing the
prescribed medication and the basic necessities.
Mr. Chairman, I am deeply troubled by the potential cost of
adding a comprehensive drug benefit to Medicare. The
Congressional Budget Office has now projected that Medicare
expenditures will be approximately $237 billion for this fiscal
year. Last year, CBO estimated that adding a drug benefit would
cost $1.1 trillion over 10 years. CBO has now revised that
figure to an even more staggering $1.3 trillion, and if history
has shown us anything, Mr. Chairman, CBO estimates are rarely
under-estimates.
When considering a prescription drug benefit for seniors,
we must also realize that the population of our country is
aging rapidly, with the Baby Boomer generation soon becoming
eligible for Medicare benefits, prescription drug expenditures
for a new Medicare benefit are sure to rise exponentially.
So, today I am particularly interested in the testimony of
Dan Crippen. You are a critical player, Mr. Crippen, in this
process because CBO scoring, in essence, will guide our
process. We are depending on your estimates to be accurate and
your assumptions to be logical. It is my hope that you will be
able to provide further insights and explanations to raise our
comfort level that our confidence in CBO is warranted.
Again, Mr. Chairman, I commend you for calling these
hearings and leading the effort to ensure the America's seniors
are not left behind and, with that, I yield back the balance of
my time.
Mr. Bilirakis. I thank the gentleman. Ms. Capps, for an
opening statement.
Ms. Capps. Thank you, Chairman Bilirakis, for holding this
particular hearing. This subcommittee, of which I am proud to
be a member, will deal and has dealt with many important topics
in this session of Congress. Perhaps none is more important
than this issue before us today--ensuring that seniors have
access to quality health care.
Many statements have been made on both sides of the aisle
today, which I agree with. If we were designing Medicare today
as opposed to 30-plus years ago, we would do so with a
prescription drug benefit. And this benefit wouldn't be just
for low-income seniors, it would be the kind of health care
that each of us desires to have in our health coverage because
we know how critically important prescription medications are.
Yet look at who takes most of the medications in this country--
it is our senior population.
The stories that I hear each time I visit my district echo
those of my colleagues here as well. Seniors come to me and
say, ``I can't afford my medications, I have to take one every
other day,'' or the pharmacists who come out from behind the
counter if they see me in the drug store and say, ``It is so
troubling to have to advise seniors which of their five
prescriptions they essentially need to take and which can they
do without.'' This leads me to ask this basic question--what is
it costing us as a country not to cover prescription
medications?
As exorbitant as the prices are, this is probably the most
moderate form of health care that we can give. The cost of not
taking prescription medication that doctors prescribe--to save
lives, to add to quality of life, to allow for independence of
seniors--lands people into hospitals, and into a very expensive
form of Medicare coverage. And I would hope that we could get
some estimate of the cost that our country is bearing through
Medicare by the kind of health care that is being denied our
seniors. In other words, when the seniors don't take their
medications and their arthritis spirals out of control, or
their cholesterol level goes way up and they end up in
intensive care, what cost is that not only in their lives and
in their health, but to our economy? So, I look forward to this
discussion today, and yield back the balance of my time.
Mr. Bilirakis. I thank you so much. Dr. Ganske, for an
opening statement.
Mr. Ganske. Thank you, Mr. Chairman. While there are
several reasons why even in this time of budget surplus, it is
difficult to do a prescription drug benefit that is
comprehensive. First, we have made a bipartisan commitment not
to use Social Security surplus funds. Second, there are people
with no health insurance at all, much less prescription drug
coverage. Should we expand coverage for some while the totally
unprotected group grows? Third, Medicare is closer to
insolvency than it was back in 1988, the last time Congress
tried to do something on this. Shouldn't our first priority be
to protect the current Medicare program?
I want to address some comments by my friend from Florida,
Mr. Deutsch. There are senior citizens who are in Medicare that
already get a Medicaid benefit. They are low-income seniors.
Their incomes are below the poverty line.
As we look at the budgetary implications of a comprehensive
plan, we have to look at what is called the ``adverse risk
selection process.'' This is where, in a voluntary program,
seniors who do not have much for drug costs won't sign up for
the program. We know that this will happen because that is
currently the system. In this Medicare voluntary drug program,
the only seniors who generally sign up are those who have high
drug costs. Consequently, the premiums are high for this
program.
We could address this comprehensive plan by making if
mandatory. Which was tried back in 1988 and was later repealed
in 1989. I think that to say a mandatory program would not have
much support here on Capitol Hill would be an understatement.
We could try a risk adjustment program. We have tried that
in other cases but they are very difficult to do. A third way
of handling this would be to have a mandatory benefits package,
that would help a little.
And, finally, we could, as I say, make the program
mandatory, spread out the costs in insurance principal. Even
so, these 10-year estimates only go up to the year 2011. But,
in 2012, the Baby Boomers start to retire and then the cost
will skyrocket. We are potentially looking at a benefit that
could cost trillions of dollars.
Therefore, at least for the time being, I have introduced a
bill, H.R. 1387, which is a modest proposal to help those
senior citizens who need a benefit the most. For who aren't
below the poverty line now, but are having difficulty surviving
only on their Social Security benefit checks. Under my program
they could utilize the State Medicaid drug programs, paid for
through their Federal side so we don't ask for a match. This
plan would help about a third of the senior citizens, but the
ones who need it the most, in my estimate. And this plan would
probably cost pretty much all the money that we have budgeted
for a prescription drug benefit. Later, in the context of a
comprehensive Medicare reform bill, we could address the issue
of a more comprehensive plan. I think that is the feasible,
reasonable way to go about starting on a prescription drug
benefit, and I hope that this committee looks at that. Thank
you, Mr. Chairman.
Mr. Bilirakis. Thank the gentleman. Mr. Hall, for an
opening statement.
Mr. Hall. Mr. Chairman, I have not heard the other opening
statements. I subscribe to the things that I have heard so far,
and endorse them. I can say this, we need to do something now.
Mr. Bilirakis. I thank the gentleman. Mr. Whitfield.
Mr. Whitfield. Thank you, Mr. Chairman. I think it is quite
obvious that Congress could easily pass a universal
prescription drug benefit with very low deductible, or zero
deductible, and we would be all right for a few years but, in
the long-term, I think everyone recognizes that it would be
unfair to pay for that program. We need a balanced program that
will provide assistance to seniors who, in their twilight
years, need help in obtaining access to drugs that they need.
At the same time, we need to be aware and concerned about those
young couples who are paying their Social Security tax, the
payroll taxes, to provide the money for these programs, and
many of those families do not have any health coverage at all.
Their employer doesn't provide it, they can't afford it, and so
they are providing money to give someone else access to health
care.
So, I think we need to approach these hearings, and as we
design this plan, with a sense of openness because I am
genuinely convinced that there is a way to have a meaningful
plan that will take care of those people who need it most.
Thirteen percent of our seniors pay over $5,000 a year in
cost for prescription drugs, and 46 percent of them spend less
than $500 a year. So, I think we have a lot of room to work
here, and I am optimistic that we can come up with a plan. I
yield back the balance of my time.
Mr. Bilirakis. I thank the gentleman. Ms. Eshoo.
Ms. Eshoo. Thank you, Mr. Chairman, and good morning to
you, and thank you for holding the first hearing in the 107th
Congress on this all-important issue of providing prescription
drug coverage for seniors in our country.
I would like to start off by welcoming my constituent,
Robert Chess, who is the Chairman of Inhale Therapeutic Systems
from San Carlos, California and, of course, it is wonderful to
see Dan Crippen here, who I am looking forward to hearing from.
I want to associate myself with many of the comments that
have been made this morning. I don't think anyone needs to be
convinced that we need to do this, the question is ``how,'' and
that is where Congress seems to be on the ropes.
But I think it is worth restating over and over and over
again, what some of the startling statistics are on this, and I
can't help but think that every single one of us here, at both
parts of the bench and across the aisle, we all have coverage
for prescriptions in our insurance policies. Those are private
sector policies, contracted for through the Federal Government,
through our Federal Health Employee plan, and yet the public
sector that we oversee is struggling with coming up with the
same benefit for older people in our country through the system
that was designed in 1965. As Lois Capps said, if it were being
designed today, we would never leave out prescription drugs,
and we know that in the beginning of this new century, how we
have leap-frogged over so much, as is going to be given
testimony to by Mr. Chess, in therapeutics, in all of the
biotechnology that is really, I think, saving so much money.
So, the question is, how are we going to do it? I think
that we need a competitive scheme, multiple PBMs--I had that in
my legislation last year. I think there needs to be a balance
between how we do it and how we make competition between the
drug companies work in all areas of the country. I believe that
it shouldn't be administered by HCFA because, in fact, one of
our more recent hearings--was it last week--was how to reform
HCFA and to do that.
So, I want to be part of putting out some of the best ideas
on this, but I also want to say to my colleagues that as we are
looking out 5 years, 10 years, 20 years, we kind of shy away
from what the implosion of tax cuts are going to be that far
out into the future. This is kind of like a pesky fly, and we
kind of push that gnat away from us, and yet, oh, when it comes
to Medicare and the prescription drug coverage, oh, my
goodness, we just get white knuckles and rub our hands over and
over again about what the costs are. Yes, the costs are
important, but it is up to us to figure that out and to do it.
I think the 107th Congress should be the Congress that
accomplishes this, and I look forward to working with my
colleagues on it, and I am, of course, interested to hear from
those that are going to testify. Thank you, Mr. Chairman.
Mr. Bilirakis. And I thank the gentlelady. Mr. Buyer.
Mr. Buyer. Thank you, Mr. Chairman. I feel like I want to
grab a machete here and just sort of work my way through the
rhetoric of the high weeds. If I carry this unfair or fairness
argument to a logical conclusion that I am hearing from the
other side, I suppose it would be that the authors of the
Medicare program, Democrats 40 years ago, that they were unfair
in their discrimination toward seniors in our society. That was
awful. The next step is, we apologize. The next step is, we
should do reparations to seniors for the discrimination over
the past. I mean, you see how the logic of the rhetoric just
leads you to absurdity?
I want to join with Mr. Burr who said it would be wonderful
if we could get away from the high weeds of the rhetoric. This
is Washington, you will never do that because of politics.
The key is, as the last individual who spoke was, about how
we structure this. That is why we welcome you to our panel
today, Mr. Crippen, because that is what we are struggling
with, is how we actually struggling with this--I am,
personally. One of the reasons I came to this committee--
several reasons--one was it took me 3 years to restructure the
pharmacy benefit for the military health delivery system and,
as we extended that benefit for the military retirees, I have a
lot of lessons learned. So, how we structure it is extremely
important.
And I do not believe we should give in to this ``we have
got to do it, we have got to do it now.'' I am not going to
give in to that because if there is one thing I have learned,
it is ``do not succumb to such temptations and make decisions
based on the emotion of the moment,'' especially in this town,
because how we structure is extremely important because it may
not be an issue that we may--we don't touch it for a very long
time.
So, the numbers that you are about to deliver to us, if it
mirrors my studies, it will be very sobering. Mr. Chairman,
when we had our meeting last week, when we started dealing with
the year 2075--I don't know--has anybody thought where you are
going to be in year 2075? Think about that.
Now, the seniors that I represent are going to say, ``I
don't care about year 2075, I care about my present problem
right now.'' Well, we have to be very careful in what we
structure because what I have learned in my 9 years here in
Washington is, what we do and deliver, there are many
unintended consequences. It is like when you take that pebble
and you throw it into the pond, you may see the ripples, but
what you don't see is that which goes out infinitum. So, we
have to be very careful in how we properly structure this
Medicare prescription drug benefit. I look forward to your
testimony and the testimony of the witnesses, and I yield back.
Mr. Ganske [presiding]. Mr. Wynn is recognized for 3
minutes.
Mr. Wynn. Thank you very much, Mr. Chairman. I will be
brief, but I do want to thank the chairman for bringing this
issue before the committee. It is certainly an issue on the
minds of a great many Americans. It was brought home to me just
this morning when my mother complained about a small bottle
eardrops that cost $80, and she was appalled. She could not
believe it. And that is just one of several medications she
takes.
It goes without saying that this is a critical issue. It
seems to me this is really a question of priorities and
political will. We have the money. We are in a very fortunate
situation of having immense surpluses. The problem is, we want
to give people a refund of their tax dollars. We want to oppose
increased government spending. And in that environment, to say
that we are really committed to a serious prescription drug
plan is probably not accurate. People characterize it as ``tall
weeds,'' and that is probably true, but the fact of the matter
is, this problem requires money. It requires government
spending. So, we cannot keep going down the road of ``no more
government spending, cut back government spending'' and, at the
same time, realistically expect to provide this kind of
benefit. What we end up doing is cutting back on the spending,
shaving the money, and saying, ``Well, gee, we can't really
provide the benefit.'' We can provide the benefit, it is just a
matter of setting the priority and finding the political will.
It is certainly a complex issue, it is not given to simplistic
solutions, but I think we do have to have a bit more candor
about the fact that the money exists and we just need to put it
behind this priority. I relinquish the balance of my time.
Mr. Ganske. Mr. Bryant is recognized for 3 minutes.
Mr. Bryant. Thank you, Mr. Chairman. In the interest of
saving 3 minutes, I am going to yield back my time.
Mr. Ganske. Mr. Barrett is recognized for 3 minutes.
Mr. Barrett. Thank you very much, Mr. Chairman. I
appreciate the fact that we are holding this hearing. I used to
think that Members of Congress, every Member of Congress was an
expert on election law because that was the one thing we all
had in common. I am finding more and more that this issue of
prescription drugs is an issue where we will all be experts as
well because it has such a humongous impact in every single
district in this country, and it should because it is really, I
think, wreaking havoc upon the lives of millions of Americans
who are unable to afford to purchase prescription drugs.
Just a couple of thoughts, and I want to hear from the
witnesses as well--and these may be considered somewhat
tangential to this hearing, but I think that they are important
for the Chair and others to hear. I spoke several weeks ago to
the head of a Health Maintenance Organization in the State of
Wisconsin, who told me that they had experienced some success
in controlling the cost of pharmaceutical drugs in their plan
by doing a simple thing, and that simple thing was prohibiting
the free dispensation of trips that were being offered by the
pharmaceutical companies, the dinners, all those freebies that
had been offered to their staff. They made a corporate decision
that no one on their staff could accept any of these perks
anymore.
What happened as a result of that is that a lot of these
prescription drugs that were being magically prescribed all of
a sudden after these trips, were not being prescribed as much
and they were able to control costs in their plan as a result
of that. And I would love to have that gentleman come before
this committee to tell his story because I think it will show
the impact that the industry's practice of providing trips and
other perks to health care providers has on increasing the
demand for drugs.
I also think we have to look at the impact of advertising
as well. I was watching one of these fancy commercials several
weeks ago with my wife, and I said, ``Oh, that is fantastic.
That is fantastic. I have got to get that drug.'' And she said,
``But you don't even have the disease.'' I said, ``I know I
don't have the disease, but look at those 80-year-old people,
they are having the time of their lives, and they look like
they are 35 years old.'' And I think what we are seeing is, we
are seeing a lot of increased demand as a result of the
advertising. I think that that is something that we have to
explore because it obviously has a ramification on what is
going on as well.
I also think that we have to look in-depth at the whole
debate over changing some of the drugs to over-the-counter
drugs, and obviously this has some ramifications. We are
reading about the fight right now between the insurance
companies who, all of a sudden, have decided that a lot of
these drugs should be sold over-the-counter. I think that some
of their motives are laudatory, some of them obviously are
financial self-interest because if they can switch them to
over-the-counter they don't have to cover the cost in their
plans. But we are also seeing a dramatic reduction in the cost
of some of these in other countries where they are sold over-
the-counter.
All of those, I think, are part of this huge jigsaw puzzle,
and like some of the previous speakers, I certainly think we
have to have this included within Medicare. But if we simply
take the existing system and move it into Medicare, we are
going to have the same problems, if not worse problems. And so
I think we have to look at the big picture.
I also have to say, listening to some of my colleagues
talking about the unintended consequences about what will
happen years out from now, I wish we were hearing those same
speeches about the tax cut that we are going to be voting on,
which is backloaded, which people who are pushing that through
don't seem to be as concerned about the consequences of that.
And with that, I would yield back the balance of my time.
Mr. Ganske. The gentleman from Pennsylvania, Mr. Greenwood,
is recognized for 3 minutes.
Mr. Greenwood. Pass, Mr. Chairman.
Mr. Ganske. The gentleman from Michigan, Mr. Stupak.
Mr. Stupak. Mr. Chairman, I will pass, thank you.
Mr. Ganske. And Mr. Deal.
Mr. Deal. Pass.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress
from the State of Wyoming
The bottom line on the issue of prescription drugs is seniors need
help with their drug costs. I want to help, and I think it's safe to
say all my colleagues want to help.
The monumental task we now face is trying to craft a prescription
drug benefit under Medicare, and there is no disputing the fact that it
is going to require some work.We not only have to reach some sort of
agreement on the size and scope of the ultimate benefit, but we have to
have a viable plan for getting there.
This hearing will hopefully bring us one step closer to that point.
The Medicare population is going to continue to grow, and we will
see new drugs and biologics being developed--likely at greater cost.
Pharmaceuticals are by nature less invasive than most procedures
and treatments, which in turn makes them more attractive and more
sought after by seniors--by everyone in fact.
All of these different factors continue to fluctuate, making it
hard to estimate the cost of any drug benefit. I am hopeful that
today's testimony by the Congressional Budget Office will provide us
with greater direction in that regard.
The question that continues to plague me is how do we bring
together innovation that knows no bounds--like miracle drugs and
technologies, and an outdated Medicare program that is totally
inflexible?
As I see it, the ultimate success of any prescription drug plan
under Medicare will depend on the strength, structure, and
sustainability of the Medicare program itself.
We can't build on unstable ground by adding a drug benefit to an
already struggling Medicare program.
I hope we keep that firmly in mind today as we discuss the present
and future needs of our seniors when it comes to drug therapies.
I look forward to hearing from our witnesses and yield back the
balance of my time.
______
Prepared Statement of Hon. Eliot L. Engel, a Representative in Congress
from the State of New York
Mr. Chairman, I want to thank you for having this hearing today. I
also want to thank our panelists for their testimony on this important
issue. Providing seniors with affordable access to prescription drugs
has been a priority of mine for several years. I have authored
legislation to establish a Medicare prescription drug benefit and feel
that we cannot wait any longer to provide relief to seniors who today
cannot purchase the medicine they need. But today, we may be giving up
this opportunity.
The evidence is clear. The elderly are becoming more and more
dependent on medication to maintain their health and quality of life.
Medication has taken the place of hospital stays and surgery in many
instances, and also provides a means of treatment that did not exist in
the past. In essence, advancements in medical and drug technology have
changed how health care is delivered. Medicare has not kept pace. We in
Congress must act now to give seniors access to these new medical
benefits.
We have all heard stories about seniors sitting at their kitchen
table cutting pills in half to extend the life of a prescription or
taking their medicine every other day to cut costs. We cannot let
seniors continue to suffer financially or medically because they cannot
afford the medicine they need. In many instances, not taking the proper
amount of medication results in little or no benefit, leaving many in
an even more precarious situation and costing Medicare more in hospital
stays and acute care expenses. We must assist seniors in obtaining
affordable drugs that allow them to receive the full benefit of today's
medicinal technology. However, the question remains, what form should
this drug benefit take?
Designing a prescription drug benefit is no small undertaking.
There are infinite considerations and many different visions of the
size and scope of the benefit. Many feel that providing the poorest
elderly with a benefit is as far as we should go or that catastrophic
coverage is sufficient. On the contrary, while we must provide for our
poorest and most catastrophic cases, average, middle-income seniors are
suffering as well and in dire need of assistance.
A question many are asking is whether or not to move forward with a
Medicare prescription drug benefit now or wait to completely overhaul
the Medicare program. I believe that we must act now to help our
seniors. Medicare reform is certainly needed, but it should not become
an obstacle to implementing a prescription drug benefit within
Medicare. Today, on the floor of the House we will be voting on a tax
reconciliation bill. I do support certain tax cuts. In fact, I voted
for the marriage penalty--but the package of tax cuts as a whole is too
big. Let's be clear on this. By cutting federal revenues so much, we
are eliminating our ability to fund a meaningful prescription drug
benefit for seniors.
Mr. Chairman, I do appreciate having this hearing today. But I wish
it were a mark-up and I wish it were happening before we vote on the
tax package.
______
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Chairman Bilirakis, I am pleased that the Subcommittee is
continuing its series of hearings on the need for a Medicare
prescription drug benefit. Although the Congressional Budget Office
will provide some new estimates on spending for prescription drugs,
much of the testimony will repeat what we already know. The witnesses
will state that seniors are spending an ever-increasing share of their
incomes on prescription drugs. Seniors with chronic diseases may fill a
dozen or more prescriptions a year, and many of these seniors have
insurance policies that cover only a fraction of their costs or provide
no drug coverage at all. Potential therapies that could yield cures for
Alzheimer's disease or slow the progress of arthritis are in the
pipeline, but without a Medicare drug benefit, many people will not be
able to afford these new treatments.
We may also hear that Medicare is facing a long-term financial
crisis and the program is unsustainable in its current form. We may be
told that it is too expensive to enact a prescription drug benefit for
all seniors until Congress reforms the Medicare program.
My question is this: if not now, when? As of this year, the non-
Social Security, non-Medicare surplus totals about $2.7 trillion
dollars over the next 10 years. The Medicare Part A Trust Fund is
expected to remain solvent until 2029--the longest period of projected
solvency in the history of the program.
The Budget Resolution approved by the House and Senate last week
provides for $300 billion over the next 10 years for a Medicare
prescription drug benefit and Medicare reform. That amount is more than
twice what the President wanted to allocate to the program, but it is
not enough. If Congress were to provide seniors with the same
prescription drug benefit that the Department of Defense provides for
military retirees, we would need to spend one trillion dollars.
If that amount seems staggering, let me compare it to another large
sum that our President is ready to spend. According to the Joint
Committee on Taxation, repealing the estate tax would cost $662 billion
over the next 10 years. Only 43,000 Americans, or less than 1% of all
taxpayers, would benefit from the estate tax repeal. However, that same
$662 billion could help 43 million seniors with a comprehensive,
universal benefit within the Medicare program.
I hope my colleagues in Congress will consider these points as we
work to create a Medicare prescription drug benefit.
Mr. Ganske. I guess we will go ahead and start with Mr.
Crippen's testimony.
STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE
Mr. Crippen. Mr. Chairman and members of the subcommittee,
thank you for inviting us to be here today. I have one primary
purpose, which is to try to explain to you some of our
thinking--share with you how we analyze this particular program
or benefit--and in turn elucidate a couple of the policy levers
that are obvious but, nonetheless, we can give you some sense
of their import and how they affect the estimates.
But before I do that, I would like, Mr. Chairman--as a
number of members of your subcommittee have done as well--to
kind of set the context for the larger and long-term cost of
these benefits.
The annual report released in March by the Medicare Board
of Trustees indicates that the Health Insurance Trust Fund
expenses will exceed dedicated noninterest revenues beginning
in 2016. We actually believe it is going to be sooner than
that, as early as 2011. And that, unfortunately, is in some
ways the good news.
The retirement of the baby boom, my generation and that of
many of you, between 2010 and 2030 will almost double
Medicare's enrollment, as I believe Chairman Tauzin said, but
the number of workers will increase by only 15 percent. The
cost per beneficiary in Medicare will also continue to grow
faster than the economy. As a result, Medicare will consume an
ever-increasing portion of GDP.
And as this first chart suggests, Medicare is only one of
the Federal programs that transfer resources from the working
population to those who are retired and disabled. Just these
three Federal programs will grow from 7 percent of GDP
currently to 15 percent of GDP by 2030, an amount equal to
nearly three-quarters of the current Federal budget. Adding a
pharmaceutical benefit will obviously exacerbate this outlook.
In recent years, growth in prescription drug spending has
far outpaced growth in spending for other types of health care.
Even without a Medicare drug benefit, CBO expects prescription
drug costs for the elderly to grow at an annual rate of 10.3
percent per person--nearly twice the pace of growth in the rest
of Medicare and much faster than the growth in the economy--
ultimately costing $1.5 trillion over the next 10 years.
In 1997, as many of you have stated today, about one-third
of the Medicare population had no prescription drug coverage,
but nearly 70 percent did. The next chart indicates the sources
of funding for prescription drugs for the elderly in 1997. The
single largest component, you will probably not be surprised to
know, is out-of-pocket spending, at about 45 percent of total
costs. However, that does compare relatively favorably with a
39 percent out-of-pocket share of the cost of providing drugs
for all the rest of the population.
The second largest source of funding currently is employer-
sponsored retiree health benefits, and the third is Medicaid. I
should note that State-based programs, which covered about 5
percent of total spending in 1997, have been growing rapidly in
both number and coverage and probably contribute a larger share
today.
But, Mr. Chairman, virtually any Medicare drug benefit will
move a significant share of this non-Federal, mostly private,
funding to the Federal budget, reducing and replacing State
funding, employer contributions, and other sources.
Before I turn to some examples, I want to attempt to
explain the operation of a low-income subsidy for the payments
otherwise made by beneficiaries--the cost sharing and premiums.
That assistance, of course, could be an expensive proposition
for taxpayers, given that nearly one-half of Medicare
beneficiaries have incomes under 200 percent of the Federal
poverty level. CBO estimates that those beneficiaries will
spend approximately $650 billion on prescription drugs over the
next 10 years.
Several decisions must be made to design a low-income
subsidy program for a Medicare drug proposal--who would be
eligible, the amount of the subsidy, how it would be applied,
who would administer the subsidy, and, if Medicaid did so, how
much of the costs of the subsidy would be paid by the Federal
Government versus the States. Overall, it may be obvious, but
nonetheless true, that a low-income subsidy would add to the
cost of any Medicare drug benefit--in some cases,
significantly. What is not quite so obvious is that because the
low-income subsidy usually covers the cost that the Medicare
benefit does not, the subsidy cost will be greater with a less
generous Medicare drug benefit.
Now, Mr. Chairman, I would like to introduce a few examples
of the comparative magnitudes of some of the parameters in a
drug benefit. For that purpose, we have constructed a
prototypical benefit--a straw man, if you like--as a basis for
comparison. I stress that this is a base case; it is not any of
the existing proposals and represents only numbers for 1 year,
assuming that the benefit is fully phased in. In designing a
drug benefit, policymakers must make four fundamental
decisions--who may participate, how the program cost will be
financed, how comprehensive coverage will be, and who will
administer the benefit under what conditions.
For our prototype--the one up on the board and the one you
have in the packet before you as the base case--we assume
everyone currently enrolled in Medicare Part B will enroll. We
assume 50 percent coinsurance up to the catastrophic cap. We
assume beneficiaries will pay 50 percent of the cost of the
stop-loss protection. We assume full Federal coverage of
premiums and cost sharing for anyone with income under 135
percent of the Federal poverty level, and some subsidy for
premiums for people with income up to 150 percent of poverty.
We assume the use of one pharmacy benefit manager, with some
restrictions on cost controls.
Members of the subcommittee, this poster, of which you have
copies, attempts to depict some of these moving parts in a way
we hope is helpful. The first is the base case I just
described. As depicted, a beneficiary pays 50 percent of the
cost of each prescription filled until his or her cost-sharing
expenses reach the stop-loss amount of $4,000. Note that this
cost sharing need not necessarily be paid directly by
beneficiaries; it could be paid by third parties.
Above the stop-loss, the costs of the benefit are split
between beneficiaries, who pay half the cost through premiums,
and Federal taxpayers. In addition, low-income beneficiaries
receive subsidies for the cost-sharing and premium expenses. In
this case, as the chart and the tables in front of you show,
the total cost to Federal taxpayers is approximately $32
billion--$26 billion for the Medicare benefit and $6 billion
for low-income subsidies. Beneficiaries would pay, or have paid
on their behalf, $44 billion in cost sharing from those who
purchased drugs and $26 billion in premiums from all enrollees,
whether or not they filled any prescriptions.
The first variation on the base case we have made--case A--
is the addition of a $250 deductible, which is common in many
of the proposals we have seen. As you would expect, that change
lowers the direct taxpayers' cost--in this case, by $2
billion--and raises beneficiaries' exposure by a similar
amount.
Case B takes the base case with no deductible and simply
raises the catastrophic ceiling from $4,000 to $6,000. The
taxpayer costs are reduced by about $1 billion relative to the
base case, and beneficiaries or their third-party payers pay a
similar amount more.
Case C again takes the base case and this time adds a
benefit cap of $2,500 in drug spending--well below the
catastrophic ceiling of $4,000--creating a hole in the benefit
design similar to many of last year's proposals with the so-
called ``donut.'' Again, the taxpayer share drops while the
beneficiary exposure increases.
Our final poster, Case D, depicts all of the previous
changes applied to our base case--a $250 deductible, a benefit
maximum of $2,500, and a $6,000 catastrophic cap. Not
surprisingly, the change produces a more dramatic shift of
costs from current taxpayers to beneficiaries. Perhaps more
important in this are the shifts within the two categories. The
Federal share includes more in low-income subsidies here and
much less in direct Medicare benefit costs. Further, the total
exposure of beneficiaries is not only increased in this case by
$7.5 billion but the relative contribution is shifted toward
cost sharing by those who use drugs and away from premiums paid
by all Medicare recipients. In fact, that shift is so strong
that this case has the lowest monthly premium of all four
cases.
Mr. Chairman, there are obviously many more variations on
these themes, and many of them are included in my written
submission. These themes cover only the basics. There are a
myriad of details that could have a significant impact on our
estimates and how the program would work.
Let me circle back, Mr. Chairman, to conclude where I
began. CBO estimates that the amount spent on outpatient
prescription drugs by the elderly, even without a Medicare drug
benefit, over the period from 2002 to 2011, will be about $1.5
trillion. Thus, a rough cut of a drug benefit that covered 50
percent of current drug spending would suggest a gross cost,
before any premiums or beneficiary contributions, of $728
billion for the next 10 years. If, instead, all costs above
$1,000 a year were covered for everyone, gross costs through
the next 10 years would total $1.1 trillion. If only costs
above $5,000 a year were covered, gross costs--that is, costs
without beneficiary contributions--through 2011 would be at
least $365 billion. It should be obvious that it will be costly
to provide a generous benefit to all beneficiaries. Either
enrollees' costs or taxpayers' costs will be high.
Mr. Chairman, just as we are currently paying for much of
the Medicare benefits for our parents and grandparents through
payroll and income taxes, our children and grandchildren will
pay for us after we retire. Adding a drug benefit would
significantly increase Medicare's costs, and, unless the cost
of the benefit was largely borne by enrollees, the burden on
our children would be even greater. Thank you, Mr. Chairman.
[The prepared statement of Dan L. Crippen follows:]
Prepared Statement of Dan L. Crippen, Director, CBO
Mr. Chairman and Members of the Committee, I am pleased to be here
today to discuss some of the major issues affecting the design of an
outpatient prescription drug benefit for Medicare beneficiaries. Those
design issues pose some difficult choices among desirable, but
potentially conflicting, objectives. Moreover, they need to be
considered in the context of the growing financial pressures facing the
Medicare program.
I will emphasize several points about the Medicare program and
proposals to establish a new prescription drug benefit for Medicare
beneficiaries:
<bullet> The Medicare program faces increasing costs, particularly
after 2010 as the baby boomers become eligible for benefits.
Medicare will become more and more dependent on general
revenues and, ultimately, will be unsustainable in its current
form.
<bullet> Medicare does not provide the protection offered by most
private insurance, since it lacks coverage for prescription
drugs and does not provide insurance protection against the
consequences of very costly episodes of illness.
<bullet> Most Medicare beneficiaries have supplemental insurance that
covers some of their out-of-pocket costs for medical services.
However, nearly a third of the Medicare population had no
prescription drug coverage in 1997.
<bullet> The cost of a Medicare drug benefit would depend primarily on
the comprehensiveness of the benefit and the generosity of
governmental subsidies. The way in which a drug benefit is
administered could also affect its cost.
<bullet> Stop-loss coverage would protect beneficiaries from extremely
high expenses for prescription drugs, but few people spend more
than the typical stop-loss amount. In contrast, most Medicare
beneficiaries have some drug spending during the year and would
receive some benefit from a program that offered coverage above
a nominal deductible amount.
<bullet> Subsidies would help make a Medicare drug benefit more
affordable for low-income beneficiaries. In general, a more
comprehensive benefit would reduce federal costs for a low-
income subsidy (including offsetting changes in Medicaid
spending) because Medicare would be paying for a larger portion
of drug spending. However, a more comprehensive benefit would
also raise total federal costs.
PROJECTIONS OF MEDICARE SPENDING UNDER CURRENT LAW
The growth of Medicare spending has been much slower in the past
few years than it has been historically. In fiscal years 1998 through
2001, the Congressional Budget Office (CBO) estimates that benefit
payments will grow at an average annual rate of 3.1 percent, compared
with 10.0 percent per year over the previous decade.<SUP>1</SUP>
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\1\ That statement reflects CBO's May 2001 projections of baseline
spending.
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CBO further estimates that Medicare will spend $237 billion on
benefits for 40 million elderly and disabled people in fiscal year
2001. Despite the recent slowdown in spending growth, that amount is
almost 25 percent more than Medicare spent five years ago. The program
now accounts for about 13 percent of estimated total federal spending,
or 2.3 percent of gross domestic product (GDP).
Moreover, CBO is projecting faster Medicare growth over the next
decade. We estimate that Medicare spending will more than double--
reaching $499 billion--by fiscal year 2011, reflecting an average
increase of 7.9 percent per year (see Figure 1). At that rate, Medicare
spending in 2011 will constitute 19 percent of the federal budget,
assuming that no change occurs in current tax and spending policies. In
fact, the program will account for 36 percent of the projected increase
in federal spending by the end of the decade.
LONG-TERM PROJECTIONS
Medicare spending occurs under two separate programs, the Hospital
Insurance (HI) program, or Part A, and the Supplementary Medical
Insurance (SMI) program, or Part B. HI spending will total an estimated
$138 billion in fiscal year 2001, paying for inpatient hospital care,
some stays in skilled nursing facilities, some home health care, and
hospice services. SMI spending this year is projected to reach almost
$100 billion, paying for services from physicians and outpatient care
facilities, as well as medical supplies and home health benefits.
The HI program is primarily financed by the Medicare payroll tax
and the portion of income taxes on Social Security benefits that is
earmarked for the HI trust fund. The SMI program is financed mainly
from general revenues that cover about 75 percent of SMI costs, with
the rest covered by monthly premiums paid by enrollees. It should be
noted that 87 percent of total Medicare revenues in 2001 come from
taxes paid by current workers; current Medicare beneficiaries pay the
other 13 percent through SMI premiums and income taxes on Social
Security benefits.
The latest report from the Medicare Board of Trustees indicates
that estimated total income to the HI trust fund will exceed estimated
outlays by $29.8 billion in fiscal year 2001. But $12.6 billion of that
amount comes from interest on the trust fund's assets and from other
miscellaneous sources. If just the tax revenues dedicated to the HI
trust fund were counted against the fund's outlays, its estimated
surplus this year would be only $17.2 billion.
The Medicare trustees also report that under their intermediate
assumptions, the HI trust fund's expenses will exceed its dedicated
revenues beginning in 2016. By 2030, the revenues dedicated to the HI
trust fund will equal only 66 percent of costs; by 2075, that ratio
will be only 32 percent.
Those data do not take into account Medicare's SMI program, which
is growing more rapidly than the HI program. As recently as 1997, HI
benefit payments constituted 66 percent of total Medicare benefit
payments. As of 2001, that proportion had declined to 58 percent, and
CBO projects that it will decline to 53 percent by fiscal year 2011.
Some of that change is due to the movement of home health care from HI
to SMI according to the provisions of the Balanced Budget Act of 1997;
that change increases the estimated balance in the HI trust fund in
fiscal year 2011 by about $240 billion. The shift further blurs an
already hazy distinction between the two programs.
The Medicare trustees' report projects that total Medicare spending
will increase from 2.3 percent of GDP in 2001 to 4.5 percent in 2030
and 8.5 percent in 2075. Those numbers reflect a change in the
trustees' assumptions from last year, following the recommendation of
their panel of experts that they raise their projection of long-term
growth in Medicare spending per beneficiary.<SUP>2</SUP>
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\2\ That change is consistent with the one that CBO applied in its
most recent report (October 2000) on The Long-Term Budget Outlook.
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The mounting financial pressure on the Medicare program is
highlighted by the large and growing difference between projected total
Medicare spending and the total amount of federal revenues specifically
dedicated to the program, including the Medicare payroll tax on current
workers, the portion of the income taxes on Social Security benefits
that are paid to the HI trust fund, and premiums paid by enrollees for
SMI. To fund total Medicare expenditures, the difference would be made
up of other taxes on current workers.
According to the Medicare trustees, the discrepancy between total
Medicare expenditures and dedicated revenues will be $64 billion in
2001, or 0.6 percent of GDP (see Figure 2). By 2011, that gap is
projected to rise to $139 billion, or 0.8 percent of GDP. That amount
would represent 30 percent of Medicare's gross outlays, up from 26
percent in 2001. By 2075, that gap is projected to grow to 6.0 percent
of GDP.
Beyond the next decade, use of Medicare-covered services is
expected to accelerate. Medicare enrollment, which has increased at a
rate of about 1 percent a year over the past 10 years and is expected
to grow somewhat faster over the next decade, will rise even more
rapidly as the baby-boom generation begins to retire in 2011. According
to the Medicare trustees, there will be 77 million beneficiaries in
2030--an increase of more than 90 percent over this year's enrollment.
In addition, as technology advances, more services will be available
for use by more patients, and those services will be more costly.
At the same time, the number of workers whose taxes provide the
bulk of Medicare's revenues will not keep pace with the growing number
of beneficiaries. While the number of beneficiaries in 2030 will be
more than 90 percent greater than it is now, the number of workers
paying into Medicare will be only about 15 percent greater. As a
result, the ratio of covered workers to Medicare beneficiaries is
expected to fall from 4.0 to 2.3. Correspondingly, Medicare HI spending
as a percentage of taxable payroll is expected to rise from 2.7 percent
in 2000 to 4.9 percent in 2030 and to 10.7 percent by 2075 (see Figure
3).
These financial pressures have focused policymakers' attention on
the issue of long-term reform of the Medicare program. Efforts to
reform Medicare have focused both on improving the efficiency and
financial viability of the program and on modernizing the benefit
package, specifically to include prescription drug coverage. Adding a
prescription drug benefit could close a significant gap in program
coverage but only at a sizable cost to the federal government or to
enrollees. Because of the long-term financing pressure facing Medicare,
careful consideration needs to be given to the benefit package, cost
sharing between the government and enrollees, and the design features
of any new benefit.
PROVIDING MEDICARE BENEFICIARIES WITH COVERAGE FOR PRESCRIPTION DRUGS
Prescription drug spending by Medicare enrollees has grown rapidly
in recent years and is likely to continue to do so. Although Medicare
does not now have a prescription drug benefit, most enrollees have some
drug coverage, but that coverage varies widely. The cost of a Medicare
drug benefit depends on the decisions made about the structure,
financing, and administration of the new benefit.
Baseline Projections of Beneficiaries' Spending on Prescription Drugs
In recent years, growth in prescription drug spending has far
outpaced growth in spending for other types of health care. Those
rising expenditures have had a significant impact not only on Medicare
beneficiaries but on employers who offer retiree health coverage and on
state governments as well.
Between 1990 and 2000, annual spending on prescription drugs in the
United States grew nearly twice as fast as that for total national
health expenditures, and it has maintained a double-digit pace since
the mid-1990s. For the U.S. population as a whole, three factors
explain most of that growth: the introduction of new and costlier drug
treatments, broader use of prescription drugs by a larger number of
people, and lower cost-sharing requirements by private health plans.
Within some therapeutic classes, new brand-name drugs tend to be much
costlier than older drug therapies, which has also contributed to
growth in spending. Use of prescription drugs has broadened as well,
because many new drugs provide better treatment or have fewer side
effects than older alternatives and more people are aware of new drug
therapies through the ``direct to consumer'' advertising campaigns of
pharmaceutical manufacturers.
Even without a Medicare drug benefit, CBO expects prescription drug
costs for Medicare enrollees to grow at a rapid pace over the next
decade (see Table 1). At an average annual rate of 10.3 percent per
beneficiary, drug costs are expected to rise at almost twice the pace
of combined costs for Medicare's HI and SMI programs, and much faster
than growth in the nation's economy. (CBO's estimates of rising drug
spending are based on the latest projections for prescription drug
costs within the national health accounts.)
CBO's baseline estimate of prescription drug costs for Medicare
enrollees is up significantly over last year's because of higher
projections of the rate of growth in per capita drug costs. Last year's
analysis indicated that spending by Medicare enrollees on outpatient
drugs not covered by Medicare would total $1.1 trillion over the period
2001 through 2010 (see Table 2). This year, our projection for the same
period is $1.3 trillion, or about 18 percent higher.
Our estimate for 2002 through 2011, the current 10-year projection
period, is roughly $1.5 trillion--which is about 32 percent higher than
last year's projection for 2001 through 2010. The jump results from
assuming a higher growth rate and replacing an early low-cost year
(2001) with a late high-cost year (2011).
Those changes to CBO's baseline estimate--higher per capita drug
spending and the inclusion of a new high-cost year in the projection
window--imply that proposals for a prescription drug benefit will have
higher price tags than they did last year. But for any given proposal,
the exact magnitude of the difference between CBO's estimate for last
year and its estimate for this year will also depend on the bill's
specific features.
CBO projects that spending by or for Medicare beneficiaries on
prescription drugs will total $104 billion in calendar year 2004--the
first year in which Medicare could probably begin to implement a new
benefit (see Table 3). In that year, nearly 60 percent of Medicare
beneficiaries will spend $1,000 or more on prescription drugs. Enrollee
spending above $1,000 is projected to total $72 billion in 2004,
constituting about 70 percent of total drug spending by or for all
Medicare enrollees. Only 13 percent of enrollees spend $5,000 or more
on prescription drugs in a year. Spending at or above that threshold
would total about $18 billion in 2004.
Existing Coverage
While third-party coverage for prescription drugs has become more
generous over time for the population as a whole, that trend is less
clear for Medicare beneficiaries. In 1997, nearly one-third of the
Medicare population had no prescription drug coverage. On average,
Medicare beneficiaries paid about 45 percent of their drug expenditures
out of pocket (see Figure 4). By comparison, all people in the United
States paid an average of 39 percent of the cost of their
prescriptions. Because Medicare beneficiaries are elderly or disabled,
they are more likely to have chronic health conditions and to use more
prescription drugs: nearly 89 percent filled at least one prescription
in 1997. Medicare beneficiaries made up 14 percent of the population
that year, yet they accounted for about 40 percent of the $75 billion
spent on prescription drugs in the United States.
Those factors suggest that growth in drug spending has a larger
financial impact on the Medicare population than on other population
groups. However, aggregate statistics mask a wide variety of personal
circumstances. Nearly 70 percent of beneficiaries obtain drug coverage
as part of a plan that supplements Medicare's benefits, but those
supplemental plans vary significantly in their generosity.
Traditionally, more seniors have received prescription drug
coverage from retiree health plans than from any other source, and the
plans' benefits have been relatively generous. In 1997, about one-third
of Medicare beneficiaries had supplemental coverage through a current
or former employer, and most of those plans provided drug coverage (see
Table 4). Although specific benefits vary, it is common to find
relatively low deductibles and copayments in employer-sponsored drug
plans.
However, because prescription drug spending by elderly retirees has
become a significant cost to employers, many have begun to restructure
their benefits. For example, a 1997 Hewitt Associates' study for the
Kaiser Family Foundation found that among large employers, drug
spending for people age 65 or older made up 40 percent to 60 percent of
the total cost of their retiree health plans. Average utilization of
prescription drugs among elderly retirees was more than double that for
active workers. Although relatively few employers in the Hewitt survey
have dropped retiree coverage altogether, most have taken steps to
control costs, such as tightening eligibility standards, requiring
retirees to contribute more toward premiums, placing caps on the amount
of benefits that plans will cover, and encouraging elderly
beneficiaries to enroll in managed care plans.
Medicare+Choice (M+C) plans are another means by which the elderly
and disabled have obtained prescription drug coverage. In 2000, for
example, 64 percent of Medicare beneficiaries had access to M+C plans
that offered some drug coverage, although a significantly smaller
fraction of elderly people signed up for those plans. Many M+C plans
have scaled back their drug benefits in response to rising costs and
slower growth in Medicare's payment rates. Nearly all such plans have
annual caps on drug benefits for enrollees--many at a level of only
$500 per year--and a growing share of plans charge a premium for
supplemental benefits.
While 26 percent of the Medicare population relied on individually
purchased (often medigap) plans as their sole form of supplemental
coverage in 1997, less than half of that group had policies that
covered prescription drugs. Medigap plans with drug coverage tend to be
much less generous than retiree health plans; medigap plans have a
deductible of $250, 50 percent coinsurance, and annual benefit limits
of either $1,250 or $3,000. Premiums for plans that include drug
coverage also tend to be much higher than premiums for other medigap
plans, due in part to their tendency to attract enrollees who have
higher-than-average health expenses.
Certain low-income Medicare beneficiaries may also be eligible for
Medicaid coverage, which generally includes a prescription drug
benefit. All state Medicaid programs offer prescription drug coverage
(usually involving little or no cost sharing) to people whose income
and assets fall below certain thresholds. In addition, as of January
2001, 26 states had authorized (but had not necessarily yet
implemented) some type of pharmaceutical assistance program, most of
which would provide direct aid for purchases to low-income seniors who
did not meet the Medicaid requirements. About 64 percent of the
Medicare population lives in those states.
Thus, middle- and higher-income seniors can usually obtain coverage
through retiree or M+C plans, while seniors with the lowest income
generally have access to state-based drug benefit programs. However,
beneficiaries with income between one and two times the poverty level
are more likely to be caught in the middle, with incomes or assets that
are too large to qualify for state programs and less access than
higher-income enrollees to drug coverage through former employers. In
1997, more than a quarter of Medicare enrollees had income between one
and two times the poverty level, but more than 40 percent of them had
no drug coverage (see Table 5). Consequently, half of the drug spending
for people in that income group was paid out of pocket.
Design Choices for a Medicare Drug Benefit
A Medicare drug benefit might address a number of objectives. The
most fundamental would be to ensure that all beneficiaries had access
to reasonable coverage for outpatient prescription drug costs--but this
fundamental notion allows for considerable debate about what that would
mean. The various objectives that might be thought desirable in the
abstract are often mutually incompatible; as a result, difficult
choices must be made. For example, it is not possible to provide a
generous drug benefit to all Medicare beneficiaries at low cost--either
premiums paid by enrollees or subsidies paid by taxpayers would be
high. If most of the costs were paid by enrollees' premiums to keep
federal costs low, some Medicare beneficiaries would be unwilling or
unable to participate in the program. If costs were limited by covering
only catastrophic expenses, few enrollees would receive reimbursement
for drug costs in any given year, possibly reducing support for the
program. (Such coverage, however, would provide insurance protection to
those who enrolled.) If, instead, costs were limited by capping the
annual benefits paid to each enrollee, the program would fail to
protect participants from the impact of catastrophic expenses.
In designing a drug benefit, policymakers must make four
fundamental decisions:
<bullet> Who may participate?
<bullet> How will program costs be financed?
<bullet> How comprehensive will coverage be?
<bullet> Who will administer the benefit and under what conditions?
Participation. Although most Medicare enrollees use some
prescription drugs, the bulk of such spending is concentrated among a
much smaller group. In 1997, about 13 percent of enrollees had
expenditures of $2,000 or more, accounting for 45 percent of total drug
spending by the Medicare population. Forty-six percent had expenditures
of $500 or less, making up about 8 percent of total spending. Most
spending is associated with treatment of chronic conditions--such as
hypertension, cardiovascular disease, and diabetes. The skewed
distribution of spending and the need for people with chronic
conditions to stay on drug therapies over the long term makes stand-
alone drug coverage particularly susceptible to adverse selection, in
which enrollment is concentrated among those who expect to receive more
in benefits than they pay in premiums.
Because of the likelihood of adverse selection, a premium-financed
drug benefit offered as a voluntary option for Medicare enrollees must
restrict participation in some way. If Medicare beneficiaries were free
to enroll in or leave the program at will, only those who expected to
gain from the benefit would participate each year. That would drive
premiums up, which would further reduce enrollment as enrollees with
below-average drug costs dropped out.
Most of the drug benefit proposals developed in 2000 would have
provided a voluntary drug option, but they attempted to mitigate the
potential for adverse selection by one of two approaches: either they
gave enrollees only one opportunity to choose the drug benefit, at the
time enrollees first became eligible; or they imposed an actuarially
fair surcharge on premiums for those who delayed enrollment. Another
approach to avoiding the problem of adverse selection would be to
couple the drug benefit with Part B of Medicare so that enrollees could
choose either Part B plus a drug benefit or no Part B and no drug
benefit. In that case, even if the drug portion of the benefit was not
heavily subsidized, the current 75 percent subsidy of Part B benefits
would ensure nearly universal participation in the coupled benefit.
Financing. Program costs could be entirely financed by enrollees'
premiums, or some or all of the costs could be paid by federal
taxpayers. Given a one-time-only enrollment option, participation rates
would be reasonably high, even if the program was largely financed by
enrollees. If given only a one-time option to enroll, most
beneficiaries would do so because virtually all of them would benefit
from drug coverage at some time during their lives. The erosion now
occurring in the comprehensive coverage provided by private plans would
also spur participation. Further, employer-sponsored health plans would
probably require that retirees eligible for a new Medicare benefit
participate in it, just as they now effectively require that retirees
participate in Part B. And state Medicaid agencies, even if not
mandated to do so, would choose to enroll dual eligibles (people
eligible for both Medicare and Medicaid) in a new Medicare drug benefit
if their costs under the new program were less than the cost of the
drug benefits now provided under Medicaid. However, if a generous drug
benefit was fully financed by enrollees, premiums would be high, making
the benefit difficult to afford for lower-income beneficiaries
ineligible for Medicaid. The drug proposals developed last year would
all provide full subsidies to low-income people for both cost sharing
and premiums, in addition to partially subsidizing premiums for all
other enrollees.
Coverage. A Medicare drug benefit could be designed to look like
the benefit typically provided by employer-sponsored plans. If so, it
would be integrated with the rest of the Medicare benefit. Further, it
would have cost-sharing requirements that were low (ranging from 20
percent to 25 percent coinsurance or a copayment per prescription of
$10 to $25) and stop-loss protection--a dollar limit above which no
cost sharing would be required. Such comprehensive coverage would
provide good protection for enrollees, but it would be very costly. Not
only would it increase utilization among those who now have less-
generous coverage, but it would also transfer most of the costs of
drugs currently used by enrollees to the Medicare program.
One way to constrain costs and utilization is by limiting
coverage--covering only catastrophic costs, for example, or imposing a
cap on benefits paid per enrollee each year. If Medicare provided
coverage only for catastrophic costs, most enrollees would receive no
benefit payments in any given year. Nevertheless, it would be
inaccurate to say that those enrollees would receive no benefit, since
they would be protected against the possibility of catastrophic
expenses--the main function of insurance.
Alternatively, policymakers could take the other approach to
limiting costs: covering a portion of all drug costs but only up to a
benefit cap. However, because that approach would not protect those
enrollees who were most in need, most of last year's proposals included
stop-loss protection. The end result was a benefit unlike anything
available in the private sector--a hybrid that had a capped benefit,
then a ``hole'' with no drug coverage, and finally a stop-loss
provision, beyond which the program would pay all drug costs (see
Figure 5). The larger the range of spending encompassed by the hole,
the less costly the program would be--but also the less coverage the
benefit would provide.
An approach to limiting costs within the context of a more
traditional benefit would be to have a higher initial deductible
amount, relatively high cost-sharing require-ments, and a high stop-
loss threshold. Or the program could provide a more generous benefit
similar to those provided by employer-sponsored plans, with taxpayer
costs limited by financing most of the program's costs through
enrollees' premiums.
Administration. The way in which a drug benefit is administered can
also have a significant effect on how costly it is. All recent
proposals have envisioned adopting the now common private-sector
approach of using pharmacy benefit managers (PBMs) in each region.
Proposals have differed, however, in whether only one or several PBMs
would serve a region, in whether the responsible entities would assume
any insurance risk, and in the kind of restrictions that would be
placed on them.
Private health plans use PBMs to process claims and negotiate price
discounts with drug manufacturers and dispensing pharmacies. PBMs also
try to steer beneficiaries toward lower-cost drugs, such as generic,
preferred formulary, or mail-order drugs. In addition, because of their
centralized records for each enrollee's prescriptions, they can help
prevent adverse drug interactions. The likelihood that PBMs could
effectively constrain costs depends on their having both the authority
and the incentive to aggressively use the various cost-control
mechanisms at their disposal. In the private sector, PBMs often have
considerable leeway in the tools they can use, but they do not assume
any insurance risk for the drug benefit. At most, they may be subject
to a bonus or a penalty added to their administrative fee, based on how
well they meet prespecified goals for their performance.
Some of the proposals developed last year (such as the one
developed by the Clinton Administration) adopted the typical private-
sector model, with a single PBM selected periodically to serve each
region and with all insurance risk borne by Medicare, not the PBM.
There are two main concerns about that model: it might prove
politically difficult to allow the designated PBMs to use cost-control
tools aggressively if enrollees have no choice of provider in each
region, and non-risk-bearing PBMs might have too little incentive to
use strong tools, even if they were permitted.
Other proposals (such as the Breaux-Frist bills and the drug bill
passed by the House) adopted a different model, more akin to the risk-
based competitive model characteristic of Medicare+Choice plans. Those
proposals envisioned multiple risk-bearing entities (such as PBM/
insurer partners) that would compete to serve enrollees in each region.
Enrollees would have some choice among providers so that beneficiaries
who were willing to accept more-restrictive rules (such as a closed
formulary) in return for lower premium costs could do so, while others
could select a more expensive provider with fewer restrictions. If the
entities bore all of the insurance risk for the drug benefit, they
would have strong incentives to use whatever cost-control tools were
permitted. However, they would also have strong incentives to try to
achieve favorable selection by avoiding enrollees most in need of
coverage.
One of the concerns raised about this model was that no entities
might be willing to participate if they had to assume the full
insurance risk for a stand-alone drug benefit. To mitigate that
concern, the proposals included federally provided reinsurance for
high-cost enrollees. (Reinsurance means that the federal government,
and ultimately taxpayers, share part or all of the costs of high-cost
enrollees.) However, reinsurance would tend to weaken the plans'
incentives to control costs. Another concern was that differences among
plans in benefit structures or strategies for cost control could result
in some plans attracting low-cost enrollees and others attracting more
costly enrollees. The risk of that kind of selection would lead plans
to raise the cost of the benefit. Moreover, to avoid such risks, plans
would, over time, come to offer benefits that were very similar in
design.
The Cost of Covering Prescription Drugs for Medicare Enrollees
There are numerous design parameters that must be specified in
developing a Medicare prescription drug benefit, and decisions
concerning those parameters can greatly affect the benefit's cost to
the taxpayer and to the beneficiary. CBO has not finished updating its
estimates for several of the proposals developed in the last session of
the 106th Congress. We can, however, provide some examples that show
how costs would be affected by varying certain aspects of the benefit's
design.
The estimates that follow are approximate and subject to change;
the cost of a detailed proposal would vary depending on its precise
specifications. The estimates are for 2004 only.
Base Case. For purposes of this testimony, the base case is a
benefit that provides coverage for all of the outpatient drug costs of
Medicare enrollees (see Table 6). The enrollee would be responsible for
coinsurance equal to 50 percent of the cost of prescription drugs up to
$8,000 of total spending. The new benefit would cover the entire cost
of drugs above that amount. Thus, the enrollee would be liable for up
to $4,000 in out-of-pocket spending before reaching the stop-loss
amount.
To pay for this program, enrollees would be charged a monthly
premium designed to cover 50 percent of the cost of the benefit. The
federal government would pay for the other 50 percent. In conjunction
with several administrative features, we assume that a subsidy of that
size would be sufficient to ensure that all enrollees in Part B of
Medicare would participate in the prescription drug program.
Low-income enrollees would receive a subsidy to enable them to
participate in the Medicare drug program. Enrollees with income up to
135 percent of the federal poverty level would receive a full subsidy
of premiums and cost sharing. Those with income between 135 percent and
150 percent of the poverty level would receive a premium subsidy (on a
sliding scale that declined with income) but would be responsible for
any cost sharing. States and the federal government would share in
those subsidy costs for enrollees with income of less than 100 percent
of the poverty level and for those who were dually eligible for
Medicare and Medicaid. The federal government would cover 100 percent
of the cost for people who qualified for the drug benefit's low-income
subsidies but did not meet their state's eligibility criteria for
Medicaid benefits.
The base case also assumes that a single PBM would administer the
program in each region, with all insurance risk borne by Medicare. The
cases presented in this testimony do not consider another major
alternative for delivering a Medicare drug benefit: instead of a single
PBM, the program could be operated through multiple risk-bearing
entities who would compete for enrollees. Competing PBM/insurer
partners who bore insurance risk would have a strong incentive to use
such tools as restrictive formularies and three-tier copayment
structures to aggressively manage costs. However, they would also incur
certain ``load'' costs--such as marketing expenses to attract enrollees
and a premium for accepting insurance risk--that a single PBM would
not. The net impact on program costs would depend on the specific
details of the proposal.
The benefit design assumed for the base case would cost the federal
government about $31.6 billion in 2004. The Medicare benefit portion of
that total is $26.0 billion, and the low-income subsidy (and
interactions with the Medicaid program) account for the remaining $5.5
billion (see Table 7). As we will see in comparisons with other cases,
a less generous drug benefit would decrease Medicare costs but increase
the cost of the low-income subsidy.
In the aggregate, enrollees would pay a total of $26.0 billion in
premiums, reflecting a monthly premium of $55.50 that they would pay
under the base case plan. That total includes premiums that are paid on
behalf of low-income enrollees through the low-income subsidy. In
addition, enrollees would face about $44 billion in cost sharing for
the prescription drugs that they used. Again, that amount includes some
cost sharing that would be picked up by supplemental payers, including
employer-sponsored insurance and medigap plans. As we will demonstrate
below, a less generous benefit would lower premiums but raise the
amount of cost sharing paid by enrollees.
Federal costs could be reduced by imposing more cost sharing on
enrollees or by varying other aspects of the design. The following
discussion of alternative cases examines how the costs imposed on
taxpayers and beneficiaries would change if one or more features of the
program were varied.
Change Beneficiaries' Cost Sharing. The overall federal cost of a
prescription drug proposal would fall if beneficiaries were responsible
for a greater share of program costs. Higher cost sharing would, of
course, increase the cost of the low-income subsidy.
Case 1-A is identical to the base case except for a $250 annual
deductible. Nearly 89 percent of enrollees have some prescription drug
spending during the year and would thus be liable for at least part of
the deductible. Including a deductible would lower Medicare costs but
raise low-income costs compared with the base case. On balance, the
federal cost of the program would fall to $29.6 billion in 2004, and
monthly premiums would decline to $50.90. Beneficiaries who had more
than $250 in drug spending that year would face higher costs under this
option because the added cost of the deductible would be only partly
offset by the reduced premium.
An even higher deductible would further reduce program costs. Case
1-B imposes a $500 deductible on the base case, and the federal cost
drops to $28.0 billion in 2004. Doubling the deductible amount from
Case 1-A does not double savings from the base case, however, because
some enrollees who would pay the full $250 deductible would spend less
than $500 on drugs in a year and thus would not pay the full amount of
the higher deductible.
Lowering the coinsurance rate could alter program costs
dramatically. The base case assumes a 50 percent coinsurance rate,
while Case 1-C lowers that rate to 25 percent. That adjustment
increases the program's net federal cost by one-third, to $42.0 billion
in 2004. Medicare's cost would increase to $37.8 billion, while the
low-income subsidy would fall to $4.3 billion.
The lower coinsurance would drive premiums upward as program costs
rose. Premiums would increase by nearly half, to $80.70 monthly. In the
aggregate, beneficiaries would pay about $38 billion in premiums.
However, aggregate cost sharing would decline precipitously as well, to
roughly $24 billion. While all enrollees would face the higher
premiums, the lower coinsurance rate would primarily benefit enrollees
with significant drug costs.
Raise the Stop-Loss Amount. The net federal program cost also could
be reduced by raising the stop-loss amount, although the additional
financial exposure would increase the cost of the low-income subsidy.
Under the base case, the stop-loss amount is set at $4,000 paid out of
pocket; a beneficiary who had used $8,000 in covered prescription drugs
and paid 50 percent coinsurance would not be liable for any additional
costs incurred during the year. (Enrollees who spend more than $8,000
account for about 23 percent of total baseline spending in 2004.)
Case 2-A raises the stop-loss amount to $6,000 in out-of-pocket
spending. That higher level is equivalent to total spending by an
enrollee of $12,000, which will account for less than 10 percent of
total baseline spending in 2004. Under this option, the federal cost of
the program would fall to $30.7 billion, a reduction of 3 percent from
the base case. The low-income subsidy rises to $5.8 billion compared
with the base case. Total premiums fall to about $25 billion, and
aggregate cost sharing increases to over $46 billion.
Raising the stop-loss amount by an additional $2,000--to $8,000--
lowers program costs by less than the previous difference found in Case
2-A. The federal cost for Case 2-B is estimated to be $30.4 billion, or
4 percent lower than the base case.
Cap Benefits. A third approach would place a limit on drug costs
covered under the Medicare benefit. Case 3 would impose such a limit
when the enrollee reached $2,500 in total drug spending. That is, the
enrollee would receive up to $1,250 in reimbursement for drug expenses
before reaching the benefit cap. Such a cap could be absolute, with no
additional reimbursement for spending at any level above the cap.
However, Case 3 keeps the same stop-loss provision as in the base case
so that the beneficiary faces no cost sharing beyond $5,250 in total
charges. That structure leaves a ``hole'' in covered spending--a range
of prescription drug spending for which most enrollees must pay all of
their costs. (Individuals with income below 135 percent of the poverty
level, whose cost sharing is fully subsidized, would be unaffected by
this provision.)
Relative to the base case, the limit on coverage in Case 3 would
lower Medicare costs but increase the low-income subsidy. The net
federal cost would total approximately $28.1 billion in 2004. The
option's benefit cap would also lower premiums to about $22 billion and
raise aggregate cost sharing to over $51 billion. The lower premiums
simply reflect the less generous benefits under Case 3, compared with
the base case.
Combine Features. The above options were designed to show how
varying one parameter of a prescription drug benefit would affect
program costs. This section looks at alternatives that combine several
changes at the same time.
Case 4-A combines the base case with many of the features described
above: a $250 deductible, benefits capped at $1,125 (after the enrollee
reaches $2,500 in total drug spending), and stop-loss protection after
the beneficiary spends $6,000 out of pocket. The costs of enrollees
with income below 135 percent of the poverty level would be fully
subsidized inside the benefit ``hole.''
Such a benefit would be significantly less generous than the base
case, but the costs of financing it would be significantly lower as
well. In 2004, federal costs would be approximately $23.4 billion, or
about one-quarter less than the base case. Likewise, monthly premiums
would fall from $55.50 under the base case to $35.20 under Case 4-A.
That causes total premiums to drop to $16.5 billion, with a
corresponding increase in aggregate cost sharing to $61.5 billion.
Case 4-B is identical to Case 4-A except that low-income
individuals would not be subsidized inside the benefit ``hole.'' CBO
estimates that in 2004, federal costs would total $21.4 billion. Nearly
all of that savings comes from reductions in the cost of the low-income
subsidy. Premiums would drop negligibly compared with Case 4-A.
Case 4-C extends the low-income subsidy to individuals with higher
income than those in previous cases. Specifically, it includes all of
the features of Case 4-A but provides a full subsidy for premiums and
cost sharing to enrollees who have income at or below 150 percent of
the federal poverty level. Enrollees with income between 150 percent
and 175 percent of the poverty level would receive a premium subsidy on
a sliding scale. Medicare costs would remain roughly unchanged compared
with Case 4-A, but the low-income subsidy would increase to $7.9
billion in 2004.
Increasing the federal subsidy for beneficiary premiums would
substantially raise program costs. Case 4-D is identical to Case 4-A
except that the subsidy is raised to 75 percent of premiums. That
change increases Medicare costs by 50 percent compared with Case 4-A
but reduces the cost of the low-income subsidy somewhat. The net
federal cost would rise to over $30 billion in 2004. The sharp increase
in Medicare costs is mirrored by the sharp drop in premiums, which fall
from more than $16 billion in Case 4-A to about $8 billion in Case 4-D.
Because we have assumed throughout this discussion that the federal
subsidy would be at least 50 percent, the increase in Case 4-D does not
yield an increase in participation by Medicare enrollees. However, if
the federal subsidy declined below 50 percent, CBO assumes that
enrollment would also decline somewhat.
SUBSIDIES FOR LOW-INCOME ENROLLEES
Like the cases discussed above, all of the proposals put forward
recently in the Congress would require a substantial contribution by
enrollees--through both cost sharing and premiums. To make a new drug
benefit more affordable for low-income Medicare beneficiaries, the
proposals would at least partially subsidize those costs for eligible
enrollees.
Several decisions must be made in designing a low-income subsidy
program for a Medicare drug proposal. Rules must be established to
determine who would be eligible for a subsidy and the amount. Some low-
income Medicare beneficiaries currently receive assistance for some or
all of their medical costs through Medicaid and other state-run
programs. Most Medicare drug proposals have included prescription
assistance to low-income beneficiaries, keying it to the following
categories of Medicaid eligibility:
<bullet> So-called dual eligibles meet all state requirements for
Medicaid eligibility, either because they are below the limits
on income and assets set by the state or because they have
``spent down'' their resources to those limits as a result of
high medical costs (the medically needy). For the first group,
their Medicare cost sharing and premiums are paid by Medicaid.
They also receive all Medicaid benefits, including coverage for
prescription drugs. Most medically needy enrollees receive
those same benefits, although a few states do not cover their
expenses for drugs.
<bullet> Qualified Medicare beneficiaries (QMBs) have income below the
federal poverty level. About 75 percent of that group qualify
as dual eligibles; the other 25 percent are eligible for
benefits only as QMBs. For the latter group, Medicaid pays
their cost sharing and premiums under Medicare, but they are
not eligible for other Medicaid benefits and they do not have
Medicaid drug coverage.
<bullet> Specified low-income Medicare beneficiaries (SLMBs) have
income between 100 percent and 120 percent of the poverty
level. About a third of this group qualify as dual eligibles.
The other two-thirds qualify only as SLMBs, and the only
Medicaid benefit they get is coverage for Medicare premiums.
In addition to beneficiaries currently qualifying for Medicaid
coverage, other low-income Medicare enrollees would also receive
assistance under most recent Medicare drug proposals. Such plans would
provide subsidies to all enrollees with income below 135 percent of the
poverty level (and within certain asset limits) to cover cost sharing
and premiums; they would pay some or all of the premiums for
beneficiaries with income between 135 percent and 150 percent of the
poverty level. A few proposals would extend the subsidy to enrollees
with higher income.
A key design choice for low-income subsidies is how much of those
costs would be paid by the federal government and how much would be
shared by the states. Currently, the federal government pays 57 percent
of Medicaid costs on average, with the states paying the rest. Most of
the proposals for a Medicare drug benefit would maintain the current
federal contribution for dual eligibles and QMBs but allow full federal
funding for other low-income beneficiaries with income and assets at or
below the eligibility limits set specifically for the Medicare drug
subsidy. A proposal that increased the federal government's share of
the cost of low-income subsidies would reduce state costs.
The cost of low-income subsidies would also depend on how many
people participated in the program. Not all eligible beneficiaries
would choose to avail themselves of the subsidies even if they
participated in the drug benefit. Some beneficiaries would not want to
be associated with a government ``welfare'' program; others might not
believe that they were eligible or that they needed the subsidy.
Participation rates would vary according to the design of the proposal.
A further factor affecting participation is the entity designated
to administer the subsidy program. Most recent proposals would rely on
state Medicaid programs to determine eligibility and to enroll low-
income beneficiaries, but another option would be to have the Social
Security Administration (SSA) provide those administrative services.
Participation would be higher under the latter arrangement because
there is less stigma associated with SSA than with Medicaid.
Another factor is the size of the subsidy: a larger subsidy would
probably induce more people to participate in the program. That effect
would also depend on how the benefit was designed. High deductibles or
premiums might persuade eligible low-income beneficiaries to enroll in
the low-income subsidy portion of the program to cover those up-front
costs. That incentive to enroll would be stronger if the drug benefit's
coverage of expenses beyond the deductible was more generous.
Perhaps the most significant issue affecting participation by low-
income beneficiaries is whether asset standards currently in place for
Medicaid would be relaxed for the drug benefit. Less stringent asset
standards would expand the number of people eligible for subsidies.
With the introduction of a Medicare prescription drug benefit,
there would be offsetting changes in the federal government's Medicaid
spending. On balance, federal costs would increase when the effect of
the low-income subsidy was combined with those changes in Medicaid
spending. (Depending on how the subsidy was designed, states could also
see a net increase in their costs.) A Medicare drug benefit would
reduce Medicaid's costs for current dual eligibles because Medicare
would pick up part of their prescription drug costs, in effect
refinancing that portion of the current Medicaid drug benefit. However,
some people who are now eligible for assistance do not enroll in
Medicaid. A Medicare drug benefit would provide a new incentive for
those people to enroll in Medicaid, which under most proposals would
cover the drug benefit's cost sharing and premiums.
The magnitude of any increase in federal or state costs depends on
the interplay between the generosity of a Medicare drug benefit and its
provisions for low-income subsidies. In general, for a given set of
subsidy provisions, a less generous Medicare drug benefit would lead to
higher federal spending (the result of combining the low-income
subsidies and the effect on Medicaid).
CONCLUSION
While policymakers are well aware of Medicare's long-run financial
problems, they also know that its benefit package has deficiencies
relative to the benefits typically provided by private-sector insurance
plans. One such deficiency is that the program provides only very
limited coverage for outpatient prescription drugs--an increasingly
important component of modern medical care. But adding a drug benefit
without other reforms would significantly increase Medicare's costs,
and unless it was fully financed by enrollees' premiums, it would
greatly increase the already large burden on the next generation of
taxpayers.
TABLE 1. CBO'S BASELINE PROJECTIONS OF PRESCRIPTION DRUG SPENDING AND
MEDICARE BENEFITS PER ENROLLEE, CALENDAR YEARS 2002-2011
------------------------------------------------------------------------
Spending per Enrollee Average
(Dollars) Annual
-------------------------- Percentage
Change,
2002 2011 2002-2011
------------------------------------------------------------------------
Drug Spending \1\................ 1,989 4,818 10.3
Medicare Benefits \2\............ 6,841 11,268 5.7
Memorandum:
Gross Domestic Product per Capita 39,275 56,569 4.1
------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
\1\ Total spending per enrollee on outpatient prescription drugs not
currently covered under Medicare, regardless of payer. Based on CBO's
January 2001 baseline projections.
\2\ Medicare benefits per enrollee under the Hospital Insurance and
Supplementary Medical Insurance programs. Based on CBO's May 2001
baseline projections.
TABLE 2. COMPARING CBO'S JANUARY 2001 AND MARCH 2000 BASELINE
PROJECTIONS OF PRESCRIPTION DRUG SPENDING
(By calendar year, in billions of dollars)
------------------------------------------------------------------------
January
Year 2001 March 2000
Estimates Estimates
------------------------------------------------------------------------
2001.......................................... 71 66
2002.......................................... 81 74
2003.......................................... 92 82
2004.......................................... 104 91
2005.......................................... 117 101
2006.......................................... 131 112
2007.......................................... 148 124
2008.......................................... 165 137
2009.......................................... 185 152
2010.......................................... 205 167
2011.......................................... 228 n.a.
Total
2001-2010................................. 1,299 1,105
2002-2011................................. 1,456 n.a.
Memorandum:
Percentage increase in total spending, January 2001 17.6
estimates over March 2000 estimates, for 10 years ending
in 2010...................................................
Percentage increase in total spending, 10 years ending in 31.8
2011 (using January 2001 estimates) over 10 years ending
in 2010 (using March 2000 estimates)......................
------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTES: Numbers may not add up to totals because of rounding.
n.a. = not applicable.
TABLE 3. PROJECTED SPENDING ON PRESCRIPTION DRUGS BY OR FOR MEDICARE
ENROLLEES IN CALENDAR YEAR 2004
------------------------------------------------------------------------
Spending by Share of
All Enrollees Enrollees with Share of
Spending Level per Enrollee At or Above Spending Total
(Dollars) the Level Above the Drug
(Billions of Level Spending
dollars) (Percent) (Percent)
------------------------------------------------------------------------
0............................ 104.0 87.8 100.0
1,000........................ 72.4 59.3 69.7
2,000........................ 50.6 40.9 48.7
3,000........................ 35.5 28.1 34.2
4,000........................ 25.2 19.1 24.2
5,000........................ 18.1 13.4 17.4
6,000........................ 13.2 9.0 12.7
7,000........................ 9.9 6.5 9.5
8,000........................ 7.4 4.5 7.2
9,000........................ 5.7 3.4 5.5
10,000....................... 4.4 2.4 4.3
------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTES: Based on CBO's January 2001 baseline projections.
Total Medicare enrollment for 2004 is projected to be 41.8 million
people.
TABLE 4. PRESCRIPTION DRUG COVERAGE AMONG MEDICARE ENROLLEES, BY TYPE OF SUPPLEMENTAL COVERAGE, CALENDAR YEAR
1997
----------------------------------------------------------------------------------------------------------------
Number of Medicare Enrollees Percentage of All Enrollees
(Thousands) ------------------------------------
-------------------------------------
No Drug Drug No Drug Drug Total
Coverage Coverage Total Coverage Coverage
----------------------------------------------------------------------------------------------------------------
No Supplemental Coverage.............. 2,941 0 2,941 7.4 0 7.4
Any Medicaid Coverage \1\............. 1,448 5,449 6,897 3.6 13.7 17.4
Employer-Sponsored Plans.............. 1,671 11,163 12,834 4.2 28.1 32.3
Individually Purchased Policies....... 5,753 4,532 10,286 14.5 11.4 25.9
Other Public Coverage \2\............. 0 1,396 1,396 0 3.5 3.5
HMOs Not Elsewhere Classified \3\..... 678 4,696 5,374 1.7 11.813.5
-------------------------------------------------------------------------
Total............................... 12,491 27,236 39,728 31.4 68.6 100.0
----------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office based on data from the 1997 Medicare Current Beneficiary Survey.
NOTES: Some beneficiaries hold several types of coverage at once. The categories in this table are mutually
exclusive, and CBO assigned people to groups in the order shown above. The numbers in the table may not add up
to totals because of rounding.
HMO = health maintenance organization.
\1\ Comprises beneficiaries who received any Medicaid benefits during the year, including those eligible for a
state's full package of benefits as well as others who received assistance for Medicare premiums or cost
sharing through the Qualified Medicare Beneficiary, Specified Low-Income Medicare Beneficiary, and Qualifying
Individual programs.
\2\ Beneficiaries who received aid for their drug spending through state-sponsored pharmacy assistance programs
for low-income elderly make up 60 percent of this category. The remainder received prescription drug benefits
through the Veterans Administration.
\3\ Primarily HMOs under Medicare+Choice risk contracts.
TABLE 5. MEDICARE ENROLLEES AND THEIR PRESCRIPTION DRUG COVERAGE AND SPENDING, BY POVERTY STATUS IN 1997
----------------------------------------------------------------------------------------------------------------
Share
Within
Share of Poverty Total Drug Out-of-
Number of All Group That Spending Pocket Drug
Poverty Status \1\ Enrollees Enrollees Does Not (Billions Spending
(Millions) (Percent) Have Drug of (Billions
Coverage dollars) of dollars)
(Percent)
----------------------------------------------------------------------------------------------------------------
Less Than 100 Percent.......................... 6.3 15.9 28.0 5.9 1.7
100-200 Percent................................ 11.2 28.1 40.9 10.0 5.0
200-300 Percent................................ 8.4 21.2 30.7 7.8 3.8
300 Percent or More............................ 13.9 34.9 25.8 12.9 5.8
----------------------------------------------------------------
Total.......................................... 39.7 100.0 31.4 36.7 16.2
----------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office based on data from the 1997 Medicare Current Beneficiary Survey (MCBS).
NOTES: CBO adjusted each enrollee's level of drug spending by 25 percent to reflect underreporting in the
survey. Prescription drug spending for MCBS respondents who were in nursing homes was imputed from the
expenditures of noninstitutionalized respondents who have difficulties with the same number of activities of
daily living.
The numbers in the table may not add up to totals because of rounding.
\1\ Income relative to the federal poverty level.
TABLE 6. OPTIONS FOR A PRESCRIPTION DRUG BENEFIT THROUGH MEDICARE IN 2004
----------------------------------------------------------------------------------------------------------------
Federal
Cost Beneficiaries'
Case Description \1\ (Billions Monthly
of Premium
dollars) (Dollars)
----------------------------------------------------------------------------------------------------------------
Base............................................ Federal government pays 50 percent 31.6 55.50
of premiums; no deductible is
required; beneficiaries pay 50
percent coinsurance; stop-loss
protection is provided after
$4,000 in out-of-pocket spending.
Option 1: Change Beneficiaries' Cost Sharing
1-A............................................. Require a $250 deductible......... 29.6 50.90
1-B............................................. Require a $500 deductible......... 28.0 47.00
1-C............................................. Reduce beneficiaries' coinsurance 42.0 80.70
to 25 percent.
Option 2: Increase the Stop-Loss Amount
2-A............................................. Raise the stop-loss amount to 30.7 53.10
$6,000.
2-B............................................. Raise the stop-loss amount to 30.4 52.40
$8,000.
Option 3: Cap the Benefit
3............................................... Cap the benefit after $2,500 in 28.1 47.10
total drug spending; provide stop-
loss protection after $4,000 in
out-of-pocket spending; subsidize
low-income beneficiaries'
spending in the ``hole''.
Option 4: Combinations
4-A............................................. Require a $250 deductible; cap 23.4 35.20
benefits after $2,500 in total
drug spending; provide stop-loss
protection after $6,000 in out-of-
pocket spending; subsidize low-
income beneficiaries' spending in
the ``hole''.
4-B............................................. Require a $250 deductible; cap 21.4 35.00
benefits after $2,500 in total
drug spending; provide stop-loss
protection after $6,000 in out-of-
pocket spending; provide no
subsidies for low-income
beneficiaries' spending in the
``hole''.
4-C............................................. Require a $250 deductible; cap 24.4 35.20
benefits after $2,500 in total
drug spending; provide stop-loss
protection after $6,000 in out-of-
pocket spending; subsidize some
or all cost sharing in the
``hole'' for beneficiaries with
income at or below 175 percent of
the poverty level.
4-D............................................. Increase the share of premiums 30.3 17.60
paid by the federal government to
75 percent; require a $250
deductible; cap benefits after
$2,500 in total drug spending;
provide stop-loss protection
after $6,000 in out-of-pocket
spending; subsidize low-income
beneficiaries' spending in the
``hole''.
----------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
\1\ The options represent changes relative to the base case. The ``hole'' is the range of prescription drug
spending above the benefit cap and below the stop-loss amount. To ``subsidize low-income beneficiaries'
spending in the `hole,' '' the federal government and the states would provide aid in the following manner:
beneficiaries with income at or below 135 percent of the federal poverty level could receive some or all cost
sharing and premium assistance; and beneficiaries with income between 135 percent and 150 percent of the
poverty level could receive premium assistance on a sliding scale.
TABLE 7. APPROXIMATE COST OF ILLUSTRATIVE CASES IN CALENDAR YEAR 2004
(In billions of dollars)
----------------------------------------------------------------------------------------------------------------
Federal Cost to Taxpayers Payments by or for Participating
--------------------------------------- Beneficiaries
Low-Income --------------------------------------
Case \1\ Subsidies/ Medicare
Medicare Medicaid Total Medicare Cost Total
Interaction Premiums Sharing
----------------------------------------------------------------------------------------------------------------
Base.............................. 26.0 5.5 31.6 26.0 44.4 70.4
1-A............................... 23.8 5.8 29.6 23.8 48.1 71.9
1-B............................... 22.0 6.0 28.0 22.0 51.3 73.3
1-C............................... 37.8 4.3 42.0 37.8 24.5 62.3
2-A............................... 24.9 5.8 30.7 24.9 46.5 71.3
2-B............................... 24.5 5.9 30.4 24.5 47.1 71.6
3................................. 22.1 6.1 28.1 22.1 51.5 73.5
4-A............................... 16.5 7.0 23.4 16.5 61.5 77.9
4-B............................... 16.4 5.0 21.4 16.4 61.3 77.7
4-C............................... 16.5 7.9 24.4 16.5 61.6 78.1
4-D............................... 24.7 5.6 30.3 8.2 61.5 69.7
----------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTES: Based on CBO's January 2001 baseline projections.
Estimates assume that all costs are phased in fully by 2004. The numbers in the table may not add up to totals
because of rounding. The table differs from Table 5 in CBO's March 27, 2001, testimony before the House
Committee on Ways and Means, Subcommittee on Health, in that it reflects corrections to estimates of cost
sharing for participating beneficiaries. Otherwise, it is unchanged. The approximate level of total drug
spending by or for beneficiaries who participate in the new Medicare benefit is the sum of Medicare's federal
cost to taxpayers plus Medicare premiums plus cost sharing paid by or for the enrollees. Total drug spending
by or for all Medicare beneficiaries would also include spending by those who chose not to participate in the
new Medicare benefit (in this case, those who enrolled in Part A but not Part B of Medicare).
\1\ For descriptions of the illustrative cases, see Table 6.
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Mr. Bilirakis. I didn't expect you to finish up in 10
minutes.
Mr. Crippen. As I often say, I would rather hear what is on
your mind than what's on mine.
Mr. Bilirakis. Well, not only that, but I would imagine by
the time we are all finished inquiring here, you would have
been able to get your points across.
Let me ask you a general or generic question. Did you
consider the use of generic drugs in some capacity or another,
in the process of determining your figures?
Mr. Crippen. Yes, Mr. Chairman. In constructing our
baseline against which, of course, we measure all of this--the
baseline in which we have the $1.5 trillion over 10 years--we
try to account for not only the current use of generics but
also the fact that there are a number of fairly expensive drugs
used by the elderly that will be coming off-patent in the
middle of this 10-year period. So we have looked at what is in
the pipeline for new drugs--although that is harder, of course,
to estimate, both in terms of price and exact availability--as
well as drugs that will be coming off-patent and an assumption
about generics therefore kicking in. So, we have included
current generic use as well as what we think will be more use,
in some cases, for drugs over the 10 years.
Mr. Bilirakis. I see. Well, Mr. Crippen, referring now to
the $300 billion that was in the budget vehicle, some, of
course, have argued that it is not near enough. Have you
considered, in the process of doing this, any reforms to the
Medicare program that would generate savings. For example, the
thought of combining Parts A and B. Would you just expand upon
that?
Mr. Crippen. We have the luxury, Mr. Chairman, of reacting
to policy proposals and not creating them. And so, in that
sense, we are in the business of trying to estimate what you
all and the President and others propose. So, in that sense, we
don't have an independent policy proposal.
Combining Parts A and B, however, has been in a number of
proposals made over the last couple of years, and it would
clearly depend on what else happened. Just simply combining
Parts A and B is, if you will, an accounting change, of how one
would count the money going in and out. Without changing the
nature of the deductibles and the copayments and other aspects
of the program, it wouldn't change the fiscal outlook at all.
Mr. Bilirakis. So combining A and B would not change the
fiscal outlook at all.
Mr. Crippen. No, not unless you did some other
restructuring at the same time.
Mr. Bilirakis. Why is it that we seem to feel pretty good
about doing something like that?
Mr. Crippen. Well, it may make good, logical sense, as many
of you will remember, the history of how we created A and B was
one of grand compromise between the House and the Senate, but
the shades of the lines between the two have grown hazy over
time. You all have moved home health out of Part A to Part B--
what used to be a hospital benefit is now an outpatient or
physician benefit. So there is a real melding of services
anyway. It may make good, logical sense to combine the two. In
so doing, there have been proposals to combine the deductibles
and do some other things that could have some effects on costs,
but simply combining the two programs into one will change the
way we account for it but won't change the incentives for the
beneficiaries or the providers to change their behavior.
Mr. Bilirakis. I notice that in your written statement you
refer to that hazy line that is between the two. Well, there is
always and we should be concerned about the unintended
consequences of our actions. One of the unintended consequences
conceivably might be employers dropping their prescription drug
coverage in retiree health plans. Any opinion on that?
Mr. Crippen. Well, it is certainly possible. We have
assumed, for purposes of this exercise, that employers would
continue to provide coverage if they are covering now, but of
course, they would take advantage of whatever the Federal
benefit would allow. So that not unlike many of the employer
retirement schemes now that wrap around Medicare, whatever
Medicare doesn't pay, they may cover. And so in this case, if
there was a Medicare or pharmaceutical benefit, we would assume
the same kind of behavior from employers but not that they
would change or drop their benefit altogether. They would wrap
it around the Medicare benefit and therefore shift some of
their costs to the Federal budget, but not drop coverage or not
change coverage.
Mr. Bilirakis. I see. So you assume that.
Mr. Crippen. Yes, we do.
Mr. Bilirakis. On the other hand, is it reasonable to
expect that the dropping would take place?
Mr. Crippen. I don't know that it is reasonable, Mr.
Chairman. Certainly, employers have begun to scale back retiree
benefits for pharmaceuticals in some ways. I am sure there are
instances in which companies have dropped benefits. And so the
provision of a Medicare benefit by the Federal Government may
stop that erosion or help keep it from accelerating.
So, it is entirely possible that the employer system the
way we now know it, while taking advantage of whatever the
Medicare drug benefit would be, would not necessarily change
radically one way or the other. You might take that as one way
of saying that we don't know.
Mr. Bilirakis. My time has expired. Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman. Earlier, I found Mr.
Burr's comments--I am sorry he is not back here--but his
comments about saying that our talking on this side of the
aisle--I guess me, in particular--my talking about prescription
drug costs as a partisan issue to say that if we don't do
something about costs, this Congress and this President, who
are not talking about costs, real costs of prescription drugs,
that is a partisan statement.
I find it curious especially because, Mr. Crippen, in your
statement you said prescription drug costs will rise at an
average annual rate of 10.3 percent per beneficiary, twice the
combined--the pace of the combined costs for Medicare programs
and much faster than the Nation's economy.
My understanding is there is no accounting in the budget
blueprint, no accounting by all of you, for prescription drug
costs increase in Medicaid, correct?
Mr. Crippen. In our Medicaid baseline, there certainly is.
Over the next 10 years, we expect----
Mr. Brown. In the Medicaid budget, there is no increase, is
my understanding correct?
Mr. Crippen. I don't know about--maybe my colleagues do--
what is in the President's budget.
Mr. Brown. My understanding is there was a $13 billion
Medicaid cut.
Mr. Crippen. They remind me that without a change in law,
it is an entitlement, and so it doesn't take an annual
appropriation. So far, we include, obviously, increases in
pharmaceutical prices in the baseline spending.
Mr. Brown. In the budget that passed the House, there was a
$13 billion cut in Medicaid. Now, we have not Medicaid cut. We
have no addressing of the issue of Medicaid increased cost. The
$300 billion for Medicare prescription drugs and Medicare
privatization, reform, or whatever term my friends on the other
side of the aisle want to use, we do that and then we are
considering a $2 trillion, or $2.3 trillion, or $2.- whatever
trillion tax cut, most of the money goes to people making over
$2- or $300,000 a year, people who decidedly do not need, to
the same degree as the rest of the population, need that
prescription drug benefit.
My question then is, can we do these tax cuts, these tax
cuts especially that are loaded in the outyears--5, 6, through
10 years--can we do these tax cuts, cover a prescription drug
benefit that is at all adequate, without doing something on
either compulsory licensing or the Allen bill where Medicare
beneficiaries, as a group, are purchasers, in a sense, or
parallel importing things that every other country in the world
does, or what Canada does, where they use their 31 million
beneficiaries to negotiate prices as a big buying pool,
negotiate prices with the drug companies? Is there any way we
can do this huge tax cut, with all its uncertainty, not account
for Medicaid increases, do a prescription drug benefit that
probably is inadequate anyway with $300 billion, and not do
something strong or direct to control drug prices in some way--
not government price controls, but injecting competition in
through compulsory licensing--or to find other ways that every
other country in the world uses to keep drug prices down? Is
that possible to fit together?
Mr. Crippen. I don't know how many questions there are
there, but I think----
Mr. Brown. There is only one question. There is one
question. Could we do a tax cut without finding a way to keep
drug prices down? When I hear people in this institution say
we've got to give this big tax cut, and then say we've got to
do a prescription drug benefit, but then shy away, for whatever
reason--whether it is soft money that the drug companies spend
on campaigns, whether it is direct contributions to those of us
in Congress, whether it is phony front groups like Citizens for
Better Medicare--to keep this institution immobilized and
unwilling to take on the drug companies, is there any way to do
this, to do this tax cut, to provide a prescription drug
benefit, and not to do something pretty direct about prices?
Mr. Crippen. I answer any of this at my peril, of course.
The best example I can give you--and, of course, the answer is
going to be yes and no--the best example I can give you is a
budget resolution, as it is passed, because it does add up in
some sense with a tax cut and with $300 billion for a
prescription drug benefit in Medicare. Obviously, it depends
critically upon what kind of drug benefit you do and,
ultimately, how the tax cut plays out.
So, over the 10 years, with the way the budget resolution
was constructed and the Conference report passed, things do add
up. You can do all of the things you laid out without changing
the nature of the pharmaceutical market. But that doesn't mean
you are wrong; it simply means that there is a way to make it
add up, and the budget resolution does add up, but it obviously
depends very critically on what else you do and how the drug
benefit is structured. There are any number of ways you could
think about the benefit that would cost more than $300 billion
or less. There is so much between here and there that----
Mr. Brown. Too much uncertainty between here and there.
Mr. Crippen. Sure.
Mr. Brown. That is kind of our point, there is so much
uncertainty----
Mr. Bilirakis. The gentleman's time has expired.
Mr. Brown. Thank you, Mr. Chairman. I have just one
comment--there is so much uncertainty about what we do with the
tax cut while we promise this prescription drug benefit, while
we don't say anything with certainty about dealing with price.
Mr. Bilirakis. The gentleman from Michigan, Mr. Upton.
Mr. Upton. Thank you, Mr. Chairman. Mr. Crippen, again,
thank you for your testimony and the documentation that you
have provided for us. I look forward to the next number of days
of going through this in real earnest, and perhaps coming back
to it with some more questions as well.
Have you all done a re-estimate of what the House passed
last year with regard to our drug benefit bill?
Mr. Crippen. We haven't yet. We are in the midst of
updating all of the models after our baseline, and so we
anticipate reestimating that before long, but we haven't yet.
As you know, it hasn't been--what we do is analyze bills as
reported from committee first. That is the first priority.
Mr. Upton. So we have to do our work first.
Mr. Crippen. Yes, kind of.
Mr. Upton. So maybe come August----
Mr. Crippen. Well, we hope before then.
Mr. Upton. Do you have a sense of where we are going--the
budget resolution that we passed a couple weeks ago ended up
with a reserve, I believe, of about $300 billion for
prescription drug benefit. Do you think that if we pass
something very similar to what we did last year, that it will
fit within that same $300 billion window, or do you think it
will have to be scaled back?
Mr. Crippen. Well, we don't know. I mean, we haven't
rescored the bill, as you suggested, and given the new
baseline--there are two big changes, of course, in just our
baseline. The 32 percent increase that has been alluded to is a
combination of two things. One is an increase in drug pricing--
or drug costs, more correctly put--of about 15 percent, or
about 16 percent. The other half of the increase comes because
we have moved in the 10-year timeframe down the road 1 more
year, dropping 2001, which was relatively inexpensive, and
adding to 2011. So by moving the 10-year timeframe, we have
also added about 15 percent or so of costs. So we know that
just the base is going to be 30 percent greater; therefore, the
cost growth of any benefit would be in about that range, too.
But, again, we haven't finalized any of the estimates of last
year's proposals.
Mr. Upton. So if you take those assumptions in line, if you
looked even at a further point beyond 10 years, the number will
go up quite dramatically on a chart.
Mr. Crippen. Sure.
Mr. Upton. I notice in your testimony on page 2, you
indicated the growth of Medicare spending has been much slower
in the past few years than it has been historically. In 1998
through 2001, CBO estimated that the benefit payments will grow
at an annual average rate of 3.1 percent compared with 10
percent over the previous decade. How do you see that going in
the future, as well?
Mr. Crippen. Well, we think that the total program will
grow at about 7.9 percent over the next 10 years. The per
capita number is lower because we are also going to increase
the number of recipients somewhat in these next 10 years or
more anyway, growth is under 6 percent per capita but overall
about 8 percent.
In the back of the testimony, there is one page with a bar
chart of the three different time periods: prior to 1998; the 3
years of low growth, 1998 to 2001; and then what we foresee for
the future. So we certainly don't expect that those low-growth
rates over the last few years will give us--will produce the
same kinds of results in the future.
Mr. Upton. Thank you very much. I yield back.
Mr. Bilirakis. Mr. Pallone, to inquire.
Mr. Pallone. Thank you, Mr. Chairman. Mr. Crippen, I was
just following up on what Mr. Brown said. You know, I was
thinking last night, we were talking about the price of
gasoline, and the President basically is saying that you can
take your tax refund from the tax bill and pay for higher gas
prices. And I guess you could make the same argument here and
say that you could take your tax refund and pay for higher
prescription drug costs. But the problem is that, you know, the
middle-income seniors who pay out-of-pocket aren't going to get
enough of the tax refund to do that, in my opinion. And that is
my concern.
I notice that in your testimony, you talk about
beneficiaries with income between 1 and 2 times the poverty
level are most likely to be caught in the middle. These are the
people, you know, the sort of middle-income people that aren't
eligible for Medicaid but, at the same time, don't have any
benefit and are paying out-of-pocket, and that is what concerns
me. And I really had two questions.
One is, we have this $300 billion, I guess, over 10 years
in the budget for a prescription drug program, but from what I
can see, the budget also proposes twice that, $600 billion, to
pay for repealing the estate tax. So, if you repeal the estate
tax, you will benefit only 43,000 Americans, but if you use
that money, the $600, for a prescription drug benefit, you
would provide meaningful relief to 43 million Medicare
beneficiaries. And I really believe that it is the middle-
income person is suffering, we have to have a Medicare
prescription drug benefit that is universal and helps everyone
because these are the middle-income people that are suffering.
So, I just wanted to ask you, what kind of drug benefit
could we provide to all seniors, you know, to all Medicare
beneficiaries if we had $600 billion available, the same amount
that is available in the budget for estate tax repeal?
Mr. Crippen. We haven't--and you won't be surprised to know
this--reverse-engineered anything from the basis of a level of
spending. Most proposals we have seen don't cost that much. As
you can see from our examples here, it is more in the range of
$300 billion or so, but you could obviously change the
parameters here and make it entirely possible to give a benefit
totaling $600 billion.
I can give you some examples that I brought with me on
catastrophic coverage, for example, and how much you could
ensure coverage on a catastrophic basis, but that wouldn't be
probably the kind of benefit you have in mind.
Mr. Pallone. I mean, there is no question, with $600
billion you could provide some sort of universal benefit, you
know, that was fairly decent. I mean, you are going to have to
have some kind of premium contribution or whatever, but you
could provide a pretty decent coverage.
Mr. Crippen. Sure. That would cover, from our estimates,
over 40 percent, or two-fifths, I should say, of all elderly
drug care spending between now and 2011.
Mr. Pallone. Okay. Then my second question is, with
regard--I think the President is going to come up with a low-
income-only benefit, that is what I suspect he is going to do.
And the problem that I see with that is, again, in your
testimony you talk about how most States have some kind--well,
not most, but a lot of States, I think you said 26 or so--have
some kind of benefit for low-income.
My concern is that, again, we are not--a lot of those
people are already covered either through Medicaid or through
whatever the States are doing, and we are just not going to be
helping that many people who really need the coverage.
Also, my fear is that if you only do what the President has
proposed, the nature of it seems to be almost like a block
grant, and there would be some concern whether or not they
would just use it to pay for existing costs that they are
already putting out, rather than expand coverage at all.
But a third thing that comes to mind is the fact that in a
number of States that have these programs, there are many who
are eligible, who are not even enrolled. So, I wanted to ask,
does CBO assume that all eligible seniors would participate in
a low-income drug benefit that is administered by the States,
and what factors make it less likely that seniors would
participate in a low-income program? To what extent have you
factored in those who are not enrolled? To what extent is there
a danger that States would just use this money in some sort of
block grant and not really cover anybody in significant
numbers?
Mr. Crippen. Let me start with the last first. Obviously,
money is fungible, and once the States have it, it could
displace spending of other kinds. Congress has fairly
frequently included things like maintenance-of-effort
requirements so that you couldn't actually just simply displace
the money, but as rates of growth change, clearly, money is
fungible. And so there is always that possibility that States
could--with 26 States now planning or having some benefit in
place, there is some possibility that the Federal block grants
or grants to those States would have leakage into their
existing programs. But, again, there have been a number of
things that Congress routinely does to try and minimize that,
like maintenance-of-effort requirements.
Regarding who participates or not, in general, we assume
for these purposes, for these estimates up here, that even with
a low-income subsidy--which are in the base case and these
alternatives here--that everyone who is now in Part B will be
in this benefit because it is in their interest to be in it,
just as the HCFA actuaries assume.
If, however, there was a stand-alone program for low-income
beneficiaries only, we don't know for sure if the participation
would be quite that high. As we know, with the Medicaid program
now--whether it is for children or for people who are off
welfare because of the Temporary Assistance for Needy Families
program--some people who may be eligible for Medicaid but have
not taken advantage of it or signed up for it. Presumably that
could happen to this population as well.
Mr. Bilirakis. The gentleman's time has expired.
Mr. Pallone. Thank you.
Mr. Bilirakis. Mr. Deal, to inquire?
Mr. Deal. Thank you, Mr. Chairman. I, too, thank you for
being here today, and thank you for your very well prepared
information. I think that there is a lot that we all need to
know about how the current programs work.
Mr. Crippen. You can thank my colleagues for that, they do
most of the work.
Mr. Deal. As you know, the recent Conference agreement on
the concurrent resolution on the budget, I believe, provides
for about $300 billion over the next 10-year period. And I
understand from your previous answer that you have not actually
done a projection of that, but do you have a general sense of
how that dollar figure would work to provide a basic program
for pharmaceutical benefits?
Mr. Crippen. I could refer you, Mr. Deal, to some of our
examples up here. As you see, up and down the board here there
are some--and these are, obviously, just very rough
approximations--but you can pick one of these cases that was
about $30 billion a year, and over 10 years it would be $300
billion. Obviously, it depends on how soon you start and how it
ramps up, and on lots of other details that would lie behind
anything like this. But you could get a sense of what the kind
of benefits you could provide for that number would look like.
Mr. Deal. And, in fact, all of those scenarios fit within
that general guideline, do they not?
Mr. Crippen. Again, these are very rough numbers. We are
trying to just show what the basic policy levers are. The cost
depends a lot on how you structure the benefit, who administers
it, and lots of other things, but this gives you a sense at
least of the magnitude, and something like this--well, these
are very rough. My colleagues are pointing out that the growth
rates are quite dramatic, so that if you started at $30 billion
per year, you would end up by the end of the period at probably
over $60 billion. So these benefits are probably a little more
generous than you could provide for $300 billion.
Mr. Deal. In that regard, though, have you built into any
of your calculations the argument that some make that if we
provide pharmaceutical benefits, that that will then cut down
on the cost of both Medicare Part A and Medicare Part B because
the pharmaceuticals obviously would eliminate perhaps some of
the hospitalization, some of the doctor visits. Has that been
built in?
Mr. Crippen. No, but it is not because we haven't
considered it. We have looked at all of the research; of
course, you might not be surprised to know that we have been
offered much of that research by proponents. And, indeed, we
have looked at it quite carefully, and find it so far not
convincing. I mean, it is because this is a Medicare
population--an elderly, not a general population--and the
studies, many of them, haven't been constructed very well. And
so we have looked at them and not been convinced that there are
general savings from making pharmaceuticals available to
people.
In addition, there are going to be some additional costs
because of adverse drug events happening for people who don't
now get pharmaceuticals, and those are very expensive,
emergency room kinds of treatment as well. So there are some
costs. There may be some benefit. There is some evidence on
that based on particular conditions, some heart conditions,
that medication will save money. But, as a general matter, the
access to pharmaceuticals and expanding pharmaceutical coverage
on the one hand can cost money, and on the other can save
money, and at the moment we are agnostic. We don't include
anything in the baseline for that.
Mr. Deal. Once again, a very subjective subject that is
very difficult for you, as a number cruncher, I am sure, to
calculate is another subject of, do we generally anticipate
that our population, even though they are living longer as a
general rule, that those entering the Medicare population
figures are generally healthier than those who have preceded
them? Is that a general fact that is confirmed?
Mr. Crippen. Yes; not only are they younger but also, as
longevity increases, 65-year-olds are more robust than maybe
our parents were at 65.
Mr. Deal. I believe that is all, Mr. Chairman, thank you.
Mr. Bilirakis. Mr. Crippen, if the gentleman will yield
very briefly.
Mr. Deal. Yes, I will.
Mr. Bilirakis. Should you not have considered that the
availability of prescription drugs to all of the seniors would
probably result in less hospitalization and less current usage?
Mr. Crippen. As I told Mr. Deal, Mr. Chairman, we
considered that, but as of now have seen no evidence we find
convincing that access to pharmaceuticals among the population
of the elderly that don't now get them will save substantial
amounts of money.
Mr. Bilirakis. There is a reluctance on the part of CBO to
give any benefit to preventative care and that sort of thing, I
have found over the years.
Mr. Crippen. Sure; until we have fairly convincing
evidence, we don't incorporate those kinds of savings into our
baseline and, frankly, the studies are either quite weak or off
the point that we have seen, and until we see some convincing
evidence, we will not change that assumption.
Mr. Bilirakis. Ms. Eshoo, to inquire.
Ms. Eshoo. Thank you, Mr. Chairman. It is nice to see you,
Dan, and thank you for your testimony. In the last Congress,
President Clinton, as you know, introduced a plan to provide
Medicare drug benefits. How much did CBO score that plan at? I
remember it as $350 billion over 10 years, is that correct?
Mr. Crippen. It sounds about right.
Ms. Eshoo. Did CBO give any credit--is that your staff----
Mr. Crippen. They are working as well; it is not just you
and I.
Ms. Eshoo. Did CBO give any credit for cost-savings in that
plan, for the use of PBMs to deliver the benefit?
Mr. Crippen. I think not much, if any--in part, first,
because it was only required to be one PBM per region and,
second, there were restrictions on what the PBMs could do in
terms of management savings--they could not introduce a
restrictive formulary, for example. So, I think we did not give
much savings to--you are challenging my memory.
Ms. Eshoo. Well, when you say not much, but it scored at
$350 billion, I don't know what ``not that much'' is. I think
that you understand the point I am trying to make.
Mr. Crippen. I do.
Ms. Eshoo. I think it is very important that we have
competition in order to drive the price down. This is kind of
an All-American agreement in terms of how our system works. And
if anyone knows or realizes that we don't have a market, it's
Californians and Westerners today, when we are talking about
energy. So, we know that there needs to be competition in order
to bring the price down, and that is why I am pursuing this
thing about multiple PBMs. I think it is a very important
approach about how we get it done.
Didn't the actuary say that had President Clinton allowed
PBMs to engage in open competition rather than limiting them to
one PBM per region, they would have seen greater cost-savings?
Mr. Crippen. Yes, and so would we, because we assume that
multiple PBMs in competition----
Mr. Crippen. Why wouldn't CBO do an analysis of that,
though? I think that both sides of the aisle talk about the
cost-savings that can be realized by seniors being able to have
full access to prescription drugs, and that we encourage the
new technologies to break through because we know that that
drives that point home even more so, but it is only on our
lips. We don't have a thorough analysis of it. And I think if
CBO is going to really jump in with two feet, to be effective
with the Congress, is that you do an analysis in these areas
because that thorough analysis on a nonpartisan basis is going
to give us that much better ammunition to pursue these various
courses.
So, I understand that there are groups and organizations
that want you to accept their analysis. You need to do an
independent analysis so that the Congress can make use of it.
Can you tell us what you are prepared to do in this area?
Mr. Crippen. Sure. We would like to think we have, although
we can obviously always do more. Some of the proposals last
year--the President's, as you said--have one PBM, and others
have more than one; and so we did analyze the competitive
effectiveness and discounts that might be available, if you
will, or savings, but----
Ms. Eshoo. And what were they relative to the plan?
Mr. Crippen. Well, they range from 0 to 25 percent off
retail pricing, but that depends critically on the details. For
example, when you introduce----
Ms. Eshoo. Did you develop the details?
Mr. Crippen. We didn't. I mean, it depends on the details
of your proposals, of the congressional proposals. There are a
number of factors to be considered. Once you have competition,
we presume there are some marketing costs because the competing
plans are going to have to advertise for enrollees. If you make
them take risk, the PBMs--which you probably want to do to give
them incentives to save and manage--then there is going to be a
risk premium. On the other hand, there are savings available
through management of the drug benefit. But most of the
proposals last year also included restrictions on the PBMs, as
I suggested, like the President's. If they can't have
formularies, if they can't do the kinds of things they do now--
encourage generics, for example--then they are not going to be
able to realize the savings either. So there are some
additional costs, there are potential savings----
Ms. Eshoo. Well, we didn't have--we want them to take--to
compete, I think it is very important. I think if we had one
per region, then we are just back to square one. I mean, that
is an old paradigm, and I don't think that that is going to
work, myself. But, again, I think that--and the pharmaceutical
companies have to have some risk in this, too. That is part of
doing business. But they will have an awful lot of customers in
this country.
So, I hope that CBO will weigh in on these things and do
some really specific, hard-nosed analysis because if we keep on
the way we are going, it is going to be on our lips, there is
not going to be the kind of analysis, and we get into political
lockjaw. We just don't have the tools in the toolkit that we
can take out to the American people and say--I mean, I used CBO
as an example in my congressional district all the time.
Mr. Bilirakis. The gentlelady's time has expired.
Ms. Eshoo. At any rate, I hope that you will do this
because I think that it is really important for you to do in
this debate. Thank you.
Mr. Bilirakis. Dr. Ganske, to inquire.
Mr. Ganske. Thank you, Mr. Chairman. Mr. Crippen, I have a
bill before Congress, H.R. 1387, which deals with high cost
prescription drugs in a couple ways, one of which would be to
raise the floor for the AAPCC payments for low-income rural
areas primarily. Another would be to close loopholes in the
drug reimportation bill that we passed last year, which would
help everyone, I think. But the main component of the bill is
basically to allow low-income seniors from the poverty line up
135 percent of poverty to have a full Medicaid drug benefit
through their State Medicaid drug programs, and then phase out
the premiums for those from 135% of poverty to 175%. In your
testimony you said you had made some estimates for something
like that, phasing it out to 150 percent, I think.
What I am interested in is this, can you give me an
estimate for what my provision would cost if it is totally
funded from the Federal side, taking into account that there
are a number of seniors who are currently Medicaid-eligible but
not in it, but probably would be if they had prescription drug
benefit.
Do you have an estimate for what that would be over 10
years?
Mr. Crippen. I don't know if we have an estimate with us.
If we don't, we will certainly get you one because it is
something we can do.
Mr. Ganske. Will you look at the provision in my bill on
that particular part, and see if you can give me an estimate.
Mr. Crippen. Sure.
Mr. Ganske. The way I look at it, it probably is going to
be somewhere in the $300 billion range, $200 to $300 billion in
additional costs. Some of it is already covered. But I
mentioned in my opening statement that there was this adverse
risk problem that Congress has been loathe to deal with. And
which we currently have in three Medigap policies which do
provide a prescription drug benefit, but, because of the
adverse risk problem, are expensive since only seniors who have
high drug costs tend to sign up for them.
Do you have any suggestions for how Congress should deal
with this problem?
Mr. Crippen. Well, let me start out by saying that from
what we are seeing on drug launch prices and on developments
that your next panel will know much more about than I do,
especially the BIO representative, there are going to be very
specific drugs for very specific conditions, which, because of
the smaller class of people that would need them, will probably
be quite expensive. The only way to cover that in the way you
are describing is to think of it as an insurance plan in which
you have to attract many people who might potentially be
eligible some day but who aren't currently--the classic
catastrophic insurance benefit.
How one does that on a voluntary basis is tricky.
Obviously, there are many ways you could have the appearance of
a voluntary program, but not a real one. If you made folks who
wanted Part B accept a drug benefit at the same time, make it
part of Part B, clearly most people would take it because of
the 75 percent subsidy in Part B. But having a true voluntary
benefit is always subject to adverse selection.
With the Medigap policies, of course, it is not only true
that there are three policies out of the ten prescribed by law
that have pharmaceutical benefits. They are also the three at
the bottom of the list, if you will, that have increasing
coverage for other things. And so they are the most expensive,
not only because they have pharmaceutical benefits but because
they have kind of the most generous coverage for other things.
Not that it is a good buy anyway, but you may want to think
about how you structure the Medigap market to make
pharmaceuticals closer to the top or a different kind of
benefit. Those policies--while I know that many people are
loathe to touch them--are prescribed in law, so they are an
artifact of what the Federal Government is already doing.
Mr. Ganske. When you make your estimate for prescription
drug costs at over a trillion dollars for the next 10 years,
how many multiples of that will it rise after the year 2012
when the Baby Boomers start to retire?
Mr. Crippen. We haven't done that--we have only a 10-year
baseline--so we can't tell you, but one has to assume, as you
say, that it is multiples, not only because you are doubling
the population but because a pharmaceutical benefit would add
to the utilization of prescription drugs. So we think it is
currently $1.5 trillion for the next 10 years, without a
pharmaceutical benefit. So, first, you have to double that for
the doubling of the population over the next 20 years. Also, we
believe drug costs are going to grow at about 10 percent per
year per Medicare beneficiary, so that goes on top.
So, as you suggest, it would be a multiple, certainly, of
the $1.5 trillion for----
Mr. Bilirakis. The gentleman's time has expired.
Mr. Ganske. Will we be going back for a second round?
Mr. Bilirakis. Well, I would prefer not, but I suppose we
could go back for another minute or 2. Without objection, the
gentleman's time is extended for an additional minute.
Mr. Ganske. Thank you, Mr. Chairman. See, Mr. Chairman, you
interrupted my line of thought.
Mr. Bilirakis. Well, that is my job.
Mr. Barton. The clock is ticking.
Mr. Ganske. I know it. I will tell you what, I will finish
it up later, Mr. Chairman. Thanks.
Mr. Bilirakis. The Chair apologizes.
Mr. Ganske. I was on a roll.
Mr. Bilirakis. Mr. Green, to inquire.
Mr. Green. Thank you, Mr. Chairman. Your question a few
minutes ago about not the ability of CBO to quantify the
preventions that would be used from taking your medication as a
cost-savings, I think that would be good for whether it is CBO
or someone else to do a real study to see if you can quantify
that because we have all sorts of things that talk about
immunizations prevention, we can save dollars on that, and it
seemed like you could do the same thing, and maybe, Mr.
Chairman, our committee ought to work on getting, whether it is
CBO or CRS or someone else, to see if we can't quantify that
for seniors on the medication cost. I think that is a good
idea, which leads me to my question about the cost, Mr.
Crippen.
CBO is increasing the amount that we would expect on the
baseline estimates for spending on prescription drugs over the
next decade by one-third. As a result of your new assumption,
CBO ought to be rising its estimates on whatever bills that are
introduced this session.
If CBO is increasing its baseline spending for prescription
drugs by one-third, what does that mean for the cost of senior
citizens without a prescription drug benefit for their cost. We
are assuming it will also go up one-third because the report we
put in the record, they went up 19 percent for those highest-
use drugs just in 1 year. So the out-of-pocket expenditures for
seniors will go up one-third, maybe even more. Could you just
respond?
Mr. Crippen. That is entirely possible. Certainly, when we
increase the baseline without a drug benefit, a Medicare drug
benefit, that means that spending for pharmaceuticals for the
elderly, absent a change in law, has gone up, we believe, over
this 10-year period, by 30 percent. That is half due to the
cost increase, and half due to just the 10-year period moving
up 1 year. But we don't know how the proportions change.
There is some anecdotal evidence that employers are
tightening their retiree benefit package, especially for
pharmaceuticals. If that is the case, then one would assume
that the elderly are either not going to get as many
pharmaceuticals or will pay more out of pocket. So it depends a
lot on the reaction of the third-party payers as well. It isn't
clear that it would just simply raise out-of-pocket spending by
a third; it could be more, it could be less.
Mr. Green. When we see what happened in that study that,
again, is part of the record, the 19 percent, and when you
factor that in with seniors, their retirement income, for
example, Social Security payments over the last 2 or 3 years
has fluctuated at an increase between 1.5 and 3.5, I guess for
the last 6 years.
So, if Social Security payments are only going up less than
3.5 percent yet on an annual basis for those five mostly used
drugs, at least a third, but maybe even substantially more for
the highest use drugs, I think that probably makes the case on
why Congress needs to do something because, whether it be the
Federal Government doing it, the taxpayers, the Medicare, or
through the seniors who are going to have to be paying it out-
of-pocket, the cost is going to be there, one way or the other.
Mr. Crippen. Of course, while you are right that the growth
rates are much different, certainly, than that of the Social
Security benefit, other income could be growing faster. But,
more important, it really depends on how much of their income
is dedicated to pharmaceutical benefits versus anything else.
As always, the rates of growth are important, but also the
relative size. If it is $10 out of $1,000, then the fact that
it grows faster than the $1,000 is less important. But,
clearly, pharmaceuticals are a growing proportion of what the
elderly are buying.
Mr. Green. The Democratic proposal last year on
prescription drug benefit offered a 50-percent premium subsidy
for seniors who participate in the program. The subsidy was
included in order to get enough seniors to enroll, so we would
limit the adverse selection problem. And, again, a voluntary
program, you want to make it--you want to sweeten it enough to
get more people to come into it, other than the people who just
have ten medications they have to take.
CBO stated that the premium subsidy necessary in order to
maximize participation and decrease that adverse selection.
What percentage government subsidy do you assume is necessary
and what percentage of government subsidy would result in
nearly universal participation, as is true with Medicare Part
B, for example.
Mr. Crippen. We have adopted the assumption that the HCFA
actuaries have been using, and that is that a 50 percent
subsidy will get you near-universal coverage--that is, anyone
who is currently in Part B would also enroll in the drug
benefit with a 50 percent subsidy.
Mr. Green. So, when we are crafting legislation, we
probably ought to look at that to make sure we don't create
adverse selection?
Mr. Crippen. Certainly, yes.
Mr. Green. Thank you, Mr. Chairman. I yield back.
Mr. Bilirakis. Thank the gentleman. Mr. Whitfield, to
inquire.
Mr. Whitfield. Thank you, Mr. Chairman. I think Mr. Ganske
has regained his thought process, so I am going to yield him 30
seconds.
Mr. Ganske. Mr. Crippen, when you made these calculations
for this comprehensive bill, did you take into account whether
private employers will then drop away from providing coverage?
Mr. Crippen. We assume, Mr. Ganske, that they will take
advantage of whatever the Federal benefit is, to the extent
they can--that is, like they do now, wrap around the existing
Medicare program if it is to their benefit--but we don't assume
they will drop coverage. In fact, we assume they will continue
coverage but take advantage of whatever the Federal program
will pay.
Mr. Ganske. And, finally, now much of an increase in the
baseline did you increase the cost from 6 months ago when you
gave us the estimates on the bills that were before Congress?
Mr. Crippen. It is a little over 30 percent.
Mr. Ganske. So, if we increase the baseline by 30 percent,
do we not disproportionately increase the cost of that
catastrophic part because it increases the coverage?
Mr. Crippen. We certainly could. It depends on where the
increases are--as I said, in which parts of the population, of
course--and on what is driving the price increases or the cost
increases. Let me back up 1 second. There are two pieces to the
baseline increases. One is just moving 1 year down the road
from 2001--dropping that year and adding 2011. That added about
15 percent because it is a higher-cost year out in the future.
So about half of the increase is due to that. The other is just
due to cost increases that we have seen in the recent past.
Whether it is prices or utilization, it is a cost increase. So
it depends on where those cost increases are taking place, and
I am not sure we have good assumptions about which part of the
distribution is seeing increases. For example, if the cost
increases all took place among people who were normally buying
$500 worth of drugs a year, that wouldn't change the
catastrophic threshold--that wouldn't change the catastrophic
cost. But what you are saying is not a bad assumption as a rule
of thumb.
Mr. Ganske. I thank the gentleman for yielding me the time,
and I just point out that in just 6 months we have had a 30-
percent increase in the baseline estimate.
Mr. Whitfield. Mr. Chairman, would you tell me how much
time Mr. Ganske took?
Mr. Bilirakis. Half of your time.
Mr. Whitfield. Give him an inch, he will take a mile.
Mr. Crippen, in your base case, you are assuming there
would be one PBM per area.
Mr. Crippen. Right.
Mr. Whitfield. Did your assumption also include that there
would be a reduction, overall reduction, in the cost of the
prescription drug because of the PBM's management?
Mr. Crippen. Yes, some.
Mr. Whitfield. And what was the percentage?
Mr. Crippen. I don't remember what the--12.5 percent. Think
of that as a discount from the retail price.
Mr. Whitfield. Okay. Now, under the base case, the total
cost to the Federal Government under that case would be the
$31.6 billion plus the $44 billion cost-sharing on the other
side?
Mr. Crippen. No, the cost sharing is what the beneficiaries
would pay, those beneficiaries that actually bought drugs.
Their half, their copayments, their cost share, would be $44
billion, so that the--that is part of what the beneficiaries
are paying in this base case, plus premiums.
Mr. Whitfield. So, in this base case, they would pay half,
up to $8,000, so they would pay $4,000 for an $8,000
expenditure, and anything past that the Federal Government
would pay all of that?
Mr. Crippen. Well, anything past that all Medicare
beneficiaries--not just those who had drug costs--would pay,
half of it through premiums. So the difference is that those
who used the benefit or bought prescription drugs would pay
$44.4 billion here, in this base case. Every Medicare
beneficiary, through premiums, would add up to $26 billion.
Mr. Whitfield. Now, you would expect a Medicare drug
benefit would hopefully reduce the cost of hospitalization. Did
you all consider that in any way?
Mr. Crippen. No, we haven't. We have considered it, but we
haven't included it because, as I told a couple of the other
gentlemen, we haven't seen convincing evidence that it
systematically saves money. There are certainly some particular
diseases in which it could; on the other hand, it will cause
some additional adverse drug reactions because more people will
be taking drugs. So at this point, we don't think it saves a
considerable amount of money in other parts of the benefit.
Now, we remain to be convinced, and can be convinced, but
we haven't seen any evidence so far.
Mr. Whitfield. Twenty-six States provide a prescription
drug benefit through the Medicaid program. Do you have any
concern that if we adopt a program at the Federal level, that
the States would start dropping their Medicaid prescription
drug benefit and those people would move over?
Mr. Crippen. It is certainly possible that States--
actually, most States now have a Medicaid drug benefit of some
kind, and 26 States are actually adding benefits above that to
other beneficiaries. And as we were discussing, they could
either fail to put more money in, those 26 States, if we had a
Federal benefit, or the States certainly could benefit from a
Medicare program in which those dual-eligibles that are now in
Medicare and Medicaid--those folks, of course, could save the
States money if Medicare were paying the pharmaceutical
benefit.
So it is entirely possible that Medicaid expenditures--of
both the Federal and State governments--could decrease,
depending upon how the benefit is structured.
Mr. Whitfield. Do you have any sense on whether--I see my
time has expired, Mr. Chairman.
Mr. Bilirakis. Very quickly, if you have something.
Mr. Whitfield. I would have to see.
Mr. Bilirakis. I appreciate that. Mr. Wynn, the gentleman
from Maryland, to inquire.
Mr. Wynn. Thank you, Mr. Chairman. Mr. Crippen, I also want
to thank you for your presentation, it has been an excellent
presentation. I have learned a great deal.
Question. If I understand correctly, the $300 billion that
has been itemized in the budget proposal by the Majority
identifies this is for Medicare reform, is that correct, that
is specifically for prescription drugs.
Mr. Crippen. My impression was, and this is more--maybe my
colleagues know, and I will refer this to them in just a
second. My impression was that it was to be used for Medicare
and be released by the Budget Committee Chairman, and I think
it is both for reform and pharmaceuticals. My colleagues tell
me that is about right.
Mr. Wynn. Now, I think what you have said, and correct me
if I am wrong, that this figure could fund baseline or within
the parameters of your examples, a prescription drug plan, but
that would absorb all of the $300 billion, leaving none for the
reforms. So my question is, what are the other reforms that are
contemplated, and how much do they cost?
Mr. Crippen. So far, we haven't seen any legislative
proposals for reforms, and you are probably not surprised
because most of the reforms that have been discussed have to do
with how one would save money, reducing costs in the future.
So, the peril, of course, of proposing that very specifically,
for us to estimate the savings, is obvious. We haven't seen any
reform legislation that would cost more either, so the answer
is, I don't know.
Mr. Wynn. So you would say that we could use all $300----
Mr. Crippen. You could use more or less than that for a
drug benefit, as you can see from some of our examples. We
aren't trying to propose this as a drug benefit; we are just
using this as an example to say, this is how it would change.
Mr. Wynn. I think you also said that at some point along
the 10-year spectrum, the $30 billion would be inadequate and
you would begin to move toward something more akin to $60
billion, is that correct?
Mr. Crippen. Correct.
Mr. Wynn. At what point does that begin to occur?
Mr. Crippen. My colleagues tell me that a $30 billion
first-year benefit would likely double in about 6 years.
Mr. Wynn. So----
Mr. Crippen. So if you started something in 2004, which is
probably the first year you could do it, by the end of 2010, or
2011, you would have doubled it to $60 billion.
Mr. Wynn. Which would mean we really would need about $600
billion to make it through the entire----
Mr. Crippen. Well, the average would be probably $45
billion yearly, if it had a----
Mr. Wynn. So we really need about $450 billion rather than
$300.
Mr. Crippen. Over the 10 years.
Mr. Wynn. Over 10, all right.
Now, you say there is a 50-percent subsidy, is that in
premium and co-pay?
Mr. Crippen. Yes.
Mr. Wynn. Your base example had a 250 deductible, is that
reduced participation?
Mr. Crippen. We assumed it did not, that anyone who was
eligible--or anyone who was currently in Part B of Medicare,
because there would be a 50-percent subsidy overall--would
enroll in this benefit.
Mr. Wynn. And not be deterred in any way by the deductible.
Mr. Crippen. Exactly.
Mr. Wynn. And so the absence of a deductible is not a
problem at all.
Mr. Crippen. We don't assume any change in participation--
which is not to say there couldn't be, but, certainly, for
purposes of this exercise, we don't assume any change in
participation because of the deductible.
Mr. Wynn. If you would indulge me, I know you covered this
with my colleague, Ms. Eshoo, but I wasn't exactly clear on it.
You are recommending only one PBM, is that fair?
Mr. Crippen. No, we are not recommending it; we use that in
this example because many of the proposals last year--like the
President's proposal--had one. We would--and I didn't get a
chance to go completely through it with her--we would say that
more than one PBM likely would save money over these estimates,
if you had two or more in competition. But there are other
factors that apply. Competition costs money as well: you have
to pay risk premiums and marketing costs. And depending upon
what restrictions you put on the PBMs or the managers, you
could have two or three, but if you didn't let them do anything
to save money, it wouldn't do you any good--for example,
disallowing them from having tight formularies or generic
promotion or other things. So, it depends----
Mr. Wynn. Let us assume you did those types of things,
would you claim a net gain or a net loss?
Mr. Crippen. Net gain. I mean, if you put restrictions on--
I'm sorry?
Mr. Wynn. If you put restrictions on----
Mr. Crippen. Probably a wash then, or a slight gain.
Mr. Wynn. Slight gain being an increase in cost?
Mr. Crippen. I'm sorry--slight decrease in cost.
Mr. Wynn. So you have a slight decrease in cost with
multiple PBMs even though you impose conditions?
Mr. Crippen. Yes. But, again, it would depend on what the
conditions weren't--some of the things they can do save more
money than not--and how much risk they were being asked to
take.
Mr. Wynn. One final question. There is a lot of talk, I
guess these high weeds again, about the outyear impacts of the
tax cut, particularly with respect to the rate adjustment and
also with respect to the estate tax.
What is the impact of those outyear costs increasing at the
same time that the outyear costs for the prescription drug plan
also begin to, in your words, double? I mean, do we in fact run
into a deficit situation, given the figures that have been laid
out for tax cuts and the figures that have been laid out for a
prescription drug plan?
Mr. Bilirakis. The gentleman's time has long expired.
Please answer, but keep it brief.
Mr. Crippen. In these next 10 years--which is all we have
from the Joint Committee on Taxation, I believe, but certainly
for spending--the things add up, as we suggested earlier. After
that, we don't know, and, fortunately, we don't do, in this
case, tax estimates. So the Joint Committee would have to
provide year 10 through year 30, or year 20, and I am not sure
they can do that, either. So over the next 10 years, the answer
to your question is, the budget resolution numbers do add up,
but how it gets implemented is critical, and we don't know what
happens after the 10 years.
Mr. Wynn. Mr. Chairman, could I ask for 5 seconds, and I
promise I will stay----
Mr. Bilirakis. You have already used the 5 seconds in your
request.
Mr. Wynn. Thank you, Mr. Chairman.
Mr. Bilirakis. Go ahead, please.
Mr. Wynn. Thank you, Mr. Chairman. Does that include your
projection that the cost will double beginning in year 6?
Mr. Crippen. No, because we don't have any--I mean, we
don't have a drug benefit in our projection. What we have is a
baseline, and then if you take those numbers minus $300
billion, the numbers can still add up in some sense, but we
don't have a particular drug proposal that we have priced. So
if you had a drug proposal that started at $10 billion and grew
to $20 billion, obviously, it would fit very well. If you had
one that started at $30 billion annually, however, and it grew
to $60 billion, the $300 billion wouldn't accommodate it. So it
depends on where you start.
Mr. Wynn. Thank you very much. Thank you, Mr. Chairman.
Mr. Bilirakis. Mr. Crippen, of course, will respond to
written questions.
Mr. Crippen. Absolutely.
Mr. Bilirakis. Dr. Norwood, to inquire.
Mr. Norwood. Mr. Crippen, I have a number of questions that
I would like for you to respond in writing. I can't get to them
all right this minute.
Mr. Crippen. Sure.
Mr. Norwood. Just a quick little history lesson. When did
CBO come into being?
Mr. Crippen. 1975.
Mr. Norwood. 1975. Who was around in 1965 that was able to
give an estimate to President Johnson for the cost of Medicare?
Mr. Crippen. I assume it was then the Department of Health,
Education, and Welfare.
Mr. Norwood. Is there any way to find out what that
estimate was? Is that----
Mr. Crippen. I think we actually have it. I am sure we
don't have it with us, but----
[The following was received for the record:]
[GRAPHIC] [TIFF OMITTED] T2830.009
[GRAPHIC] [TIFF OMITTED] T2830.010
Mr. Norwood. I would love to know.
Mr. Crippen. Again, I have seen it alluded to, but
obviously the estimates were ten times too low, or something
like that.
Mr. Norwood. I have heard some very interesting numbers,
and I would like to know exactly what they are. Now, what you
have given us today is not a formal CBO estimate, but I think
we are calling it a ballpark estimate, and one of the important
issues not addressed by the model is how CBO will adjust its
estimate to account for an increase in demand, which is going
to result from increase in drug coverage. Can you give us some
idea of how you are going to account for that? I mean, we know
that is going to happen, I think. Perhaps we don't have any
evidence, but we certainly can assume that it is going to
happen.
Mr. Crippen. There are two aspects that we have included
some of, I believe, in the models, and that is, first, there is
going to be a price increase because of the demand increase--
about 10 percent, as I recall, over the 10 years. And there
will be some increase in utilization as well. I don't remember
what our assumption is for sure there, but it is one of those
areas, as I think you are suggesting, if I understand you, that
we don't know very well how much more utilization there will
be. We have a fair number of people insured now--70 percent--so
that leaves 30 percent of beneficiaries. But it is important
for all of us to remember, too, that just because you are
insured doesn't mean you have adequate pharmaceutical coverage.
Likewise, just because you are uninsured doesn't mean you don't
have adequate coverage. The same study that was entered in the
record earlier today, I think, is the one that suggests that
those folks who are the insured elderly are filling
prescriptions at a rate of about 24 or 25 a year, and those who
are uninsured are filling about 15 prescriptions a year. So,
the elderly are getting----
Mr. Norwood. Are you going to be able to give us those,
perhaps not formal, but ballpark estimates of that?
Mr. Crippen. On utilization?
Mr. Norwood. Yes.
Mr. Crippen. Sure.
Mr. Norwood. I was very intrigued by some earlier questions
about the comment about employers dropping coverage should we
have universal prescription drug benefit, and you said that you
have made some assumptions that that probably is going to
happen.
Mr. Crippen. What we assume is that whatever the Federal
benefit would provide, employers would no longer provide. They
would wrap around that benefit, as they do now.
Mr. Norwood. That is a logical assumption. I would assume
the same thing.
Mr. Crippen. But if they now have benefits that are, say,
more generous than whatever the Medicare benefit was, they
might continue to add to the Medicare benefit. We don't assume
that they will drop coverage altogether.
Mr. Norwood. That leads me then to another part of this
question. I am a little amazed that you don't seem to find a
way to score prevention. And your answer about that was that
there is no evidence. But that is a very good place to make
some assumptions that can be fairly intelligent.
If a patient has, for example, a chronic bleeding ulcer,
and they need medication for that, Prilosec which is very
expensive--let us make a number, $100 a day--and we also know
for sure that hospital cost is going to be $3,000 a day, and if
the patient goes to see the doctor and the doctor prescribes
Prilosec and the patient can't afford to fill the prescription,
and 3 weeks later ends up in the hospital for 3 weeks, it is
not hard to figure out we have spent a lot of money, and we
could have preventively saved a lot of that money for the Trust
Fund.
I would like for you to go back again and make some
assumptions in that area, since you obviously don't have
evidence in that area, because it makes it very hard for me to
take numbers credible when you assume in one area but won't
assume in another area because of evidence. And I would like
for you to speak to that because it has got to be a savings if
we get people on their medications.
Mr. Crippen. There is certainly--in the kind of case you
just outlined, there would obviously be savings. As I said,
there is some anecdotal evidence that other conditions--for
some heart conditions, medications clearly save money. But,
overall, the studies we have looked at--which try to look at
all of the drugs for the Medicare population or try and make
some inferences about beneficiaries--don't apply, and it isn't
systematically evident that all available drugs would--or that
making drugs more available would have savings everywhere.
If, for example, the person who got the Prilosec had an
adverse drug reaction because they were on another drug, that
would cost money as well. I mean, we concede that there may
well be savings, but we don't have evidence for how much it
would be and where it would occur. We do know there would be
some costs as well. So, until we see that kind of systematic
evidence, again, we note the anecdotal cases, and, clearly, in
some cases drug coverage would save money.
Mr. Bilirakis. We really should finish up with Mr. Crippen
before we go over to vote because it is not fair otherwise. I
brought up that point before and I really feel that CBO has
been wrong over the years in not providing more attention to
preventative health care.
Mr. Norwood. Well, assumptions could be in order, Mr.
Chairman, not just necessarily just evidence. I mean, common
sense leads us to believe----
Mr. Bilirakis. And the entire thing is based on assumption,
let us face it. Well, Mr. Engel, if you can do it quickly, I
would appreciate it because we have Mr. Greenwood yet, and we
have to take those votes.
Mr. Engel. Yes, I will be quick, Mr. Chairman. First of
all, thank you, and I have a statement which I would like to
submit for the record.
Mr. Bilirakis. Without objection.
Mr. Engel. My beef is that I think there was a lot of talk
before the election about prescription drugs for seniors, and I
hear less talk about it now that the election is over. And I am
very concerned that the $350 billion is not going to be enough,
and that while we are saying that we are going to put money--
give money--have money for this program for poor seniors, in
reality, a lot of the seniors who really are poor are going to
be excluded because they are going to be deemed not poor
enough, and that is my big fear.
The one question I would like to ask is that many seniors
have large amounts of bills, but they have drug expenditures
that probably would not meet a catastrophic limit. So, what I
would like to ask you is, the President has proposed creating a
drug benefit for low-income seniors and a catastrophic benefit
that would help all seniors with very, very high drug costs.
And while it is true that a small number of seniors have very,
very high drug costs, the vast majority of seniors whose drug
costs are high enough, would not be helped by a catastrophic
plan. It is probably not uncommon for a senior without drug
coverage to spend $1,500 or $2,000 a year on prescription drug
costs, and it may not sound like a huge amount, but it is a
sizable chunk for a senior with an income of 175 percent of the
Federal poverty level, which is $15,000 a year for a single
person, and that person would not qualify for the President's
low-income assistance plan.
So, my question is, does CBO have an estimate as to what
percentage of seniors have drug costs in the $1,000 to $3,000
range, and what percentage of total drug spending for Medicare
beneficiaries falls within this range?
Mr. Crippen. We do. I don't know that I brought along the
number of people, but you wanted $1,500. Was that----
Mr. Engel. Well, $1,000.
Mr. Crippen. I could give you almost anything and will be
happy to, but----
Mr. Engel. The $1,000 to $3,000 range. What I am trying to
figure out is what percentage of seniors would really benefit
from this catastrophic plan because it seems to me that a lot
of seniors who should benefit, who need the help, wouldn't be
covered under this plan.
Mr. Crippen. At a $1,000 catastrophic limit, you would
cover $1.1 trillion of the $1.5 trillion in costs over the next
10 years. So you would get a lot--obviously, a lot of spending,
but you would cover a lot of people. I don't have the number of
folks that this would cover, but it would be a very large
percentage.
Mr. Engel. Could you get that to my office, I would
appreciate it.
Mr. Crippen. Sure. I am happy to give you other--I brought
this little table that has all these ranges; some of it is on
page 33 of my prepared statement.
Mr. Engel. I am just, again, very concerned that, you know,
I always get complaints, and rightfully so, from seniors who
say, ``You know, we really need help, and yet we are just a
little bit above so we don't qualify,'' and I am afraid that
the monies that we are putting forth and the President's plan
is going to perpetuate that, and there are a heck of a lot of
seniors out there that really need our help, and my fear is we
are not going to give it to them.
Mr. Crippen. We have included in the submitted testimony--
on page 33--Table 3, which has some--it may not have every
breakdown you want, but it has spending for all enrollees above
a given level and the share of enrollees that would be covered.
So the second part of your question, which is not on this
table, is included in the written testimony.
Mr. Engel. Okay. We will follow up, I would like that.
Thank you, and thank you, Mr. Chairman.
Mr. Bilirakis. I thank the gentleman. Mr. Crippen, thank
you so very much for being here, you have been an awful lot of
help. You are going to continue to be a lot of help, I trust,
in this process because in spite of what some of the people
have said here this morning, the No. 1 issue insofar as the
entire Congress is concerned, particularly the House, is
prescription drugs for seniors on a universal type of a basis.
Thank you very much. And, of course, you are available for any
written questions.
Mr. Crippen. Absolutely, or any other.
Mr. Bilirakis. We are going to recess. Hopefully the next
panel can then come forward, but we will recess for this vote,
and come back and go right into it. I don't think it is right
to take a break for lunch because you have been waiting here
for so very long. About 15 or 20 minutes, for however long it
takes 3 or 4 of us to get back.
[Brief recess.]
Mr. Bilirakis. The Chair apologizes to the witnesses. I
think at least a couple of you are experienced at this game,
and so you know what it is like. Hopefully, we will be able to
get finished up, before we get called again.
Panel 2 consists of Dr. Beatrice Braun, a Member of the
Board of Directors of AARP. She has appeared here before and
does a terrific job. Glad to see you back.
Dr. Jeanne Lambrew, Associate Professor of the Department
of Health Services Management and Policy, right here at G.W.
University, and Mr. Robert Chess, who is the Chairman of Inhale
Therapeutics Systems in San Carlos, California, here on behalf
of Biotech Industry Organization.
Welcome. We will set the clock at 5 minutes. Obviously,
your written statement is already a part of the record.
Hopefully you would complement it or supplement it, and we will
start off with Dr. Braun. Please proceed, ma'am.
STATEMENTS OF BEATRICE BRAUN, MEMBER, BOARD OF DIRECTORS, AARP;
JEANNE M. LAMBREW, ASSOCIATE PROFESSOR, DEPARTMENT OF HEALTH
SERVICES MANAGEMENT AND POLICY, GEORGE WASHINGTON UNIVERSITY;
AND ROBERT CHESS, CHAIRMAN, INHALE THERAPEUTICS SYSTEMS, ON
BEHALF OF THE BIOTECHNOLOGY INDUSTRY ORGANIZATION
Ms. Braun. Thank you, Mr. Chairman and members of the
committee. I am Beatrice Braun, from Springhill, Florida, just
about 5 miles from the chairman's district, and a member of the
AARP's Board of Directors. Thank you for the opportunity to
come before you today.
As a Medicare beneficiary, I would like to reiterate the
statement that many members made this morning, that Medicare is
the indispensable source of health benefits for older Americans
and those with disabilities, but over the last two decades, a
lack of a prescription drug coverage in Medicare has become a
critical gap as modern medicine has turned increasingly to drug
treatment.
A prescription drug benefit in Medicare would improve
quality of care, reduce unnecessary hospitalizations, and also
offers a potential to reduce the risk of drug interactions and
polypharmacy.
Private health benefit plans generally have kept pace with
advances in their benefits for workers, but not so for
retirees. In the 1980's, an estimated 60 to 70 percent of large
employers offered retiree health benefits. By 1993, that had
dropped to 40 percent, and in 2000 it had gone from 70 percent
down to 24 percent.
Other sources of drug coverage for Medicare beneficiaries
are also inadequate or undependable. Medigap plans provide
prescription drug coverage in only three of the standard ten
plans, and these plans are expensive and have limits on the
benefit.
Medicare+Choice plans are dropping out of Medicare, as I
know too well in my county, increasing premiums or reducing
benefits. One-third of Medicare beneficiaries do not have any
prescription drug coverage, but this figure obscures the
shortcomings of current coverage options, and the fact that
only 53 percent of beneficiaries have prescription drug
coverage all through the year.
AARP is committed to creating a prescription drug benefit
in Medicare, and has identified fundamental design features for
developing a prescription drug benefit. In the simplest terms,
the benefit under Medicare needs to be available and affordable
to all beneficiaries. A prescription drug benefit in Medicare
should also be voluntary so that beneficiaries who already have
coverage can keep it if they want to.
But designing a viable voluntary benefit is challenging.
Beneficiaries must want to buy into a voluntary benefit. It
must be attractive and affordable enough to draw a broad,
stable risk pool. What does this entail?
First, availability must be nationwide. Beneficiaries
living in rural, suburban, and urban areas must be assured that
the drug benefit is not only going to be part of
Medicare+Choice plans, but that it will always be available in
their community. In short, it must be available in the
traditional Medicare fee-for-service plan.
It must be affordable. This means the premiums and cost-
sharing must be reasonable in the eyes of middle-income and
healthy enrollees. Thus, the government contribution must be
adequate to ensure enrollment of a balanced risk pool. Without
a broadbased risk pool, a voluntary benefit will be left with a
disproportionate number of beneficiaries with high drug costs,
prompting a rapid rise in premiums.
A Medicare prescription drug plan should include a defined
benefit. A defined benefit package is easy for consumers to
understand, it is dependable, and it will improve the risk
pool.
Mechanisms to constrain cost must ensure that beneficiaries
and other taxpayers receive value for their premium and tax
dollars. And cost restraint cannot simply involve the shifting
of cost to beneficiaries.
Affordability also requires additional subsidies for
beneficiaries with low incomes. Improvements are needed in the
current low-income protection known to this committee as the
QMB and SLMB programs. These programs are funded through
Medicaid, but they are paid for by Medicare premiums,
deductibles and co-insurance of beneficiaries below certain
income thresholds.
It is essential that similar protections complement a
prescription drug benefit and continue to be funded through
Medicaid to help low-income beneficiaries pay for their
prescription drugs and other Medicare services.
Part of the debate over adding a prescription drug benefit
in Medicare is whether and to what extent additional changes to
Medicare are necessary. Some changes in Medicare are necessary.
Incremental, step-by-step improvements can begin to make a
difference in the program without being disruptive to current
and future beneficiaries.
Without attempting to be all-inclusive about possible
reforms, I would highlight the need to expand and adequately
fund beneficiary education and outreach, which is vital to
Medicare+Choice, and to build a modern, efficient information
technology system for the program.
In broader terms, Medicare's administrative structure must
guarantee seamless operation of traditional fee-for-service,
private plan options, and any prescription drug benefit, and
the agency that oversees Medicare must have the resources and
the flexibility it needs to continue to improve the program.
AARP is ready to continue to work with the committee, the
Congress and the Administration to help shape a benefit in
Medicare that will be affordable and meaningful and will make
room for the changing role of pharmaceuticals in medicine.
Thank you.
[The prepared statement of Beatrice Braun follows:]
Prepared Statement of Beatrice Braun, AARP Board Member
I am Beatrice Braun from Spring Hill, Florida and a member of
AARP's Board of Directors. Thank you for the opportunity to discuss
with you today the need for a prescription drug benefit in Medicare.
The Medicare program has been, is, and will likely remain the
nation's principal source of health benefits and a key source of
financial protection for older Americans and those with disabilities.
The program also provides financial protection for the families of
Medicare beneficiaries, and it further serves younger Americans with
its guarantee of future protection as they plan their retirements. In
addition, Medicare is a strong and stable underpinning of the financing
of our nation's health care system.
As we examine approaches to updating Medicare, it is essential that
we modernize the Medicare benefit package. In particular, it is time to
add an outpatient prescription drug benefit in recognition of the
changing health care technology that has made prescription drugs an
increasingly important--now central--component of modern medical care.
A prescription drug benefit in Medicare would improve the quality of
health care received by millions of older Americans. It could reduce
unnecessary hospitalizations and shorten nursing home stays. A well-
managed benefit also offers the potential to reduce the risks of drug
interactions and polypharmacy by helping to assure that beneficiaries
are taking the right medications in the correct dosages. It makes no
more sense to have a Medicare program today without prescription drug
coverage than it would to have a program that excludes inpatient
hospital or physician coverage.
Background
Medicare today--while the centerpiece of health benefits protection
for retirees and those with disabilities--covers only about half of the
health spending of older Americans. Further, Medicare beneficiaries
spend a significant share of their income on health care. In 2000, out-
of-pocket costs for older beneficiaries averaged $2,580 or 19 percent
of their income. While Social Security and Medicare have done a
wonderful job in assuring a floor of income support and financial
protection for older Americans, the fact remains that increasing health
costs for older individuals coupled with lower incomes in their
retirement years often makes the costs of uncovered benefits
unaffordable.
As illustrated in Charts 1 and 2, more than half of individuals age
65 and older live in households where the total income is less than
$25,000 per year. Looked at another way, more than half of individuals
over 65 have per capita income of less than $15,000 per year. Fewer
than 10 percent of individuals and fewer than 20 percent of households
had income over $50,000 in 1999.
The Need for a Prescription Drug Benefit in Medicare
Over the last two decades, the lack of prescription drug coverage
has become a critical gap in the Medicare program as modern medicine
has turned increasingly to drug treatments. Our nation's long-term
investment in biomedical research has yielded enormous scientific
progress--and the recent budgetary commitment to doubling the NIH
budget highlights our intent to continue that progress. Those
investments, coupled with the pharmaceutical industry's spending on
research and development, have yielded an array of medications that
could not have been even imagined when Medicare was enacted in 1965.
Private health benefit plans throughout the nation generally have
kept pace with these advances in their benefits for workers. Employers
have recognized the longer-term economic and health care value of
providing coverage for prescription drugs. Medicare should do the same.
According to a 2000 Mercer/Foster Higgins survey, 99 percent of
employer-sponsored health plans offered outpatient prescription drug
coverage to current workers. However, employers are finding it
increasingly difficult to offer health benefits to retirees to
supplement their Medicare protection. As a result, health care coverage
for retirees is plummeting. An estimated 60 to 70 percent of large
employers offered retiree health benefits in the 1980s. But by 1993
only 40 percent of employers with 500 or more employees offered health
benefits to future Medicare-eligible retirees, and by 2000 this number
had dropped even further to 24 percent [2000 Mercer/Foster Higgins
Survey (forthcoming)]. Of employers who do offer retiree benefits, 21
percent do not include prescription drug coverage for Medicare-eligible
retirees. Moreover, a recent Hewitt survey of large employers indicates
that 36 percent of those employers are considering cutting back on
prescription drug coverage for Medicare-eligible retirees over the next
three to five years.
Other major sources of prescription drug coverage for Medicare
beneficiaries are also proving inadequate or undependable. Medigap
plans provide prescription drug coverage in only three of the standard
ten plans, and these plans place limits on the benefit, including a 50
percent coinsurance and caps on the benefit at either $1,250 or $3,000
annually. Roughly 600,000 Medicare beneficiaries are enrolled in one of
the standardized Medigap plans (H, I, or J) that cover prescription
drugs. Another group of beneficiaries are enrolled in pre-standardized
Medigap plans that provide some prescription drug coverage, but those
plans generally have even more limited prescription drug coverage.
Medicare+Choice plans are another source of prescription drug
coverage. In the mid-1990s growing numbers of beneficiaries began
moving to Medicare HMOs, often to take advantage of the prescription
drug coverage they were offering. But today, many of these plans are
dropping out of Medicare, making such coverage very unstable for
beneficiaries. In 2001, 30 percent of Medicare+Choice plans do not
offer a drug benefit at all, meaning that only 3.8 million
Medicare+Choice enrollees have prescription drug coverage. In addition,
many Medicare+Choice plans that have remained in the program have
increased their premium charges or reduced benefits; most noticeably
for prescription drugs. In 1999, 78 percent of Medicare+Choice
enrollees were in basic plans that charged zero premiums and offered
some drug coverage; this has dropped to 35 percent in 2001. HCFA has
not yet released additional information that describes Medicare+Choice
prescription drug benefits in 2001, but we have no reason to believe
that there has been any expansion of the benefit.
Without Medicare coverage of prescription drugs, older Americans
must depend on supplemental sources of financing for their medications
or pay for them directly out-of-pocket. On average, an estimated one-
third of Medicare beneficiaries lack prescription drug coverage.
However, this figure obscures the variations in drug coverage among
certain subgroups of beneficiaries. For example, as shown in Chart 3, a
much smaller share of Medicare beneficiaries in rural areas have some
form of supplemental drug coverage than do beneficiaries in urban
areas.
Moreover, prescription drug coverage data--which focus on coverage
at one point in time--obscure the problem of obtaining continuous
coverage. While the data indicate roughly two-thirds of beneficiaries
have drug coverage at some point during a year, recent research
indicates that only 53 percent of beneficiaries have prescription drug
coverage for the entire year.
The rising cost of prescription drugs, their large and growing role
in good medical care, and the gaps in Medicare beneficiaries' current
coverage for medications reinforce the need for a prescription drug
benefit that extends to all Medicare beneficiaries. While there has
been some discussion of a benefit that would extend only to low-income
beneficiaries, this approach has been increasingly recognized as
inadequate since a large number of older and disabled Americans with
incomes above 175 percent of the federal poverty level lack drug
coverage. As Chart 4 illustrates, an estimated 8.2 million
beneficiaries above 175 percent of the federal poverty level ($14,600
for singles, $19,700 for couples in 2000) lacked any coverage for
prescription drugs in 2000.
The following table presents the 2001 poverty guidelines published
in the Federal Register, February 16, 2001, pages 10695-10697, for
singles and couples. Income measures for the near-poor and moderate
income are also included.
2001 Poverty Guidelines
------------------------------------------------------------------------
Single Couple
------------------------------------------------------------------------
48 States and DC.................................. $8,590 $11,610
Alaska............................................ $10,730 $14,510
Hawaii............................................ $9,890 $13,360
48 States and DC
100 Percent of Poverty............................ $8,590 $11,610
125 Percent of Poverty............................ $10,738 $14,513
135 Percent of Poverty............................ $11,597 $15,674
150 Percent of Poverty............................ $12,885 $17,415
175 Percent of Poverty............................ $15,033 $20,318
200 Percent of Poverty............................ $17,180 $23,220
250 Percent of Poverty............................ $21,475 $29,025
------------------------------------------------------------------------
AARP's Policy Approach to a Prescription Drug Benefit
The coverage gap in Medicare is clear. Medicare is the basic health
plan for the population that is most in need of these new tools of
modern medicine, but it does not cover prescription drugs. For current
and future Medicare beneficiaries a prescription drug benefit would
improve the quality of their health care and even their quality of
life. AARP is committed to creating a prescription drug benefit in
Medicare and has identified fundamental design features for developing
a prescription drug benefit.
In the simplest terms, a prescription drug benefit under Medicare
needs to be available and affordable to all beneficiaries.
To understand what this means, it is first necessary to recognize
the general consensus among most players that a prescription drug
benefit in Medicare should be a voluntary benefit. This conclusion is
based on the fact that some beneficiaries, as noted above, do have
alternative sources of coverage. Beneficiaries need to be able to keep
the benefits that they currently have if they choose to do so.
Designing a viable voluntary benefit, however, requires careful
attention to how to make the benefit widely available and affordable.
Availability must be nationwide. Beneficiaries all over the country--
living in rural, suburban, and urban areas--must be assured that the
drug benefit is not only going to be a part of Medicare+Choice plans
wherever feasible, but that it will also always be available in their
community to accompany the traditional Medicare fee-for-service plan.
The benefit must also be affordable, which means not only that
premiums and cost-sharing must be reasonable, but also that healthy as
well as sick beneficiaries see it as a ``good buy.'' Affordability is a
critical feature in assuring that this new benefit actually helps
beneficiaries gain access to their new coverage and benefit from the
prescriptions that their physicians determine are necessary for their
health. But the implications of affordability go far beyond that,
especially in the design of a viable voluntary program.
In any voluntary insurance arrangement, affordability for the
individual is essential to assure that a substantial portion--and broad
mix--of eligible individuals actually enroll. Making enrollment
attractive and affordable requires a careful balance of covered
benefits and government premium subsidies. The government contribution
for a drug benefit in Medicare, as in any well-designed employer plan,
must be adequate to assure enrollment of a balanced risk pool of
enrollees. Part B of Medicare--a voluntary program in which 95 percent
of Medicare beneficiaries participate--is a model in this regard.
Without a broad-based risk pool, a voluntary benefit will attract a
disproportionate number of beneficiaries with high prescription drug
costs, prompting a rapid rise in benefit premiums.
Medicare has always benefited from being a defined benefit plan,
and we believe that approach should apply to the implementation of a
prescription drug plan as well. A defined benefit package is readily
understood by beneficiaries and their families, and provides
dependability and certainty for beneficiaries planning for the future.
In addition, a defined benefit is an important element in lessening
selection problems and instability that result from plan design,
sometimes known as ``cherry picking.''
Affordability also requires that there be adequate mechanisms and
incentives to constrain the rate of increase in spending under the
program and to ensure that beneficiaries and other taxpayers receive
value for their premium and tax dollars. Cost constraint cannot simply
involve shifting of costs to beneficiaries, nor can it rely on
arbitrary underpayments to providers--in this case pharmacies and drug
manufacturers. It should feature drug-purchasing strategies that enable
beneficiaries and Medicare to take advantage of the purchasing power of
the program. Further, the program must make available reliable,
objective, and understandable information that allows providers and
beneficiaries to make the best choices among the treatments available
to them.
Affordability in any new prescription drug program also requires
additional subsidies for beneficiaries with low incomes, for whom the
traditional Medicare premium and cost-sharing would be simply
unaffordable. Improvements are needed in the current income protections
available to low-income beneficiaries. In particular, the income
thresholds for eligibility need to be increased and program
participation must grow. The current programs, known as the Qualified
Medicare Beneficiary (QMB) program and the Specified Low-Income
Medicare Beneficiary program (SLMB), are funded through the Medicaid
program and pay for the Medicare premiums, deductibles and coinsurance
of beneficiaries below certain income thresholds. It is essential that
similar protections complement a prescription drug benefit and continue
to be funded through Medicaid to help low-income beneficiaries pay for
their prescription drug and other Medicare services. While a
prescription drug benefit under Medicare must not be limited to
individuals with low incomes, nationwide availability for all
beneficiaries must be coupled with extra support for those who have low
incomes.
Finally, amidst all of the features of program design, we need to
keep attention focused on the reason for the prescription drug
benefit--access to medically appropriate drug therapies. The new
benefit design must include the right to a timely appeal and external
review of coverage denials, as well as quality improvement components
that reduce medication errors and mismedication--thereby improving
quality of care and reducing overall health costs.
Medicare Reform
Part of the debate over adding a prescription drug benefit in
Medicare is whether--and to what extent--additional changes to Medicare
are necessary. Proponents of completely restructuring Medicare argue
that the program is antiquated, unable to respond to the changing
health care marketplace, and in need of a major overhaul.
We agree that some changes in Medicare are necessary to modernize
the program, secure its long-term financial future, and ready it to
handle retirement of the ``baby boom'' generation. We believe that
incremental, step-by-step improvements can begin to make a significant
difference in the success of the program and would be far less
disruptive to current and future beneficiaries than an abrupt and
comprehensive overhaul. Under any scenario, however, Medicare's defined
benefit must be preserved.
To that end, this Committee is to be commended for convening the
task force that is assessing the oversight of the Medicare program.
Effective administration of Medicare is critical and changes that
enable the agency that oversees the program to better serve
beneficiaries and providers should be considered. We encourage the
Committee to give serious consideration to some of the recommendations
made last week by the four previous Administrators of the Health Care
Financing Administration (HCFA).
In particular, AARP believes strongly that beneficiary education
and outreach efforts must be expanded and adequately funded.
Beneficiaries must have good information in order to make the right
choices about their health care options. We also believe that a program
that serves 40 million Americans, processes roughly 1 billion claims a
year, and is responsible for overseeing beneficiaries' quality of
health care needs a modern, efficient information technology system. In
this regard, the current constraints on Medicare's administrative costs
should be reevaluated as part of any reform.
In broader terms, the administration of Medicare must be structured
in such a way as to prevent fragmentation of the program and to
guarantee seamless operation of traditional fee-for-service, private
plan options and any prescription drug benefit. The administering
agency must remain fully accountable to Members of Congress and to
beneficiaries. And, the agency that oversees Medicare must have the
tools and the flexibility it needs--such as the ability to modernize
fee-for-service so that it remains a viable option for beneficiaries--
to continue to improve the program.
Conclusion
In many respects it seems only a statement of the obvious to say
that Medicare beneficiaries need a prescription drug benefit in
Medicare. Americans age 65 and older account for over one-third of all
drug spending, but represent only about 12 percent of the population.
Our nation's health care system relies more and more on prescription
drugs to provide high quality care for acute and chronic conditions.
Prescription drugs make us well, and they keep us from getting sick.
Most private health benefit plans throughout the nation have kept pace
with these advances in their benefits for workers, but Medicare has
not. That must change.
It will not be an easy change, and it will involve trade-offs on
the part of all players. Nevertheless, it must be done so that all
older and disabled Americans can be assured that they will have the
option of enrolling in an affordable Medicare prescription drug
benefit.
AARP believes that there are important principles that must be
followed in the development of a drug benefit; we have outlined those
in this testimony. We are ready to continue to work with this
Committee, the Congress, and the Administration to help shape a benefit
in Medicare that will be affordable and viable, and will make room for
the changing role of pharmaceuticals in medicine.
[GRAPHIC] [TIFF OMITTED] T2830.015
[GRAPHIC] [TIFF OMITTED] T2830.011
Mr. Bilirakis. Were you finished, Dr. Braun, did you
complete?
Ms. Braun. Yes.
Mr. Bilirakis. Thank you very much.
Dr. Lambrew.
STATEMENT OF JEANNE M. LAMBREW
Ms. Lambrew. Chairman Bilirakis, Congressman Brown, and
distinguished subcommittee members, thank you for the
opportunity to offer my views on prescription drugs. I am an
Associate Professor at George Washington University, and worked
for the previous Administration coordinating its estimates on
prescription drugs for its Medicare Reform Plan. I will be
drawing on this experience for my testimony today.
Although extending Medicare to cover prescription drugs is
a major policy challenge, there appears to be the will and the
funding to do so. A consensus has emerged that a Medicare drug
benefit should be available and affordable to all
beneficiaries. There is also widespread support for a drug
benefit that has reasonable cost-sharing and protection against
catastrophic costs, and we have a budget surplus whose revenues
will be necessary to support a Medicare drug benefit, given its
costs.
My remarks today focus on the issue of cost. Last week,
Congress passed a budget resolution that allocates up to $300
billion over 10 years for Medicare reform and prescription
drugs, and it should be noted that that allocation was to
Medicare and not to Medicaid, so it is not clear how low-income
protections will be funded.
The committees of authorization will be expected to fit a
policy to this cost target. This raises three questions. First,
is $300 billion enough for a prescription drug benefit that is
meaningful and helps all uninsured beneficiaries?
Second, if $300 billion is not enough, is higher spending
affordable?
And, third, will decisions about the approach to Medicare
payment policy for a drug benefit affect its costs? I discuss
this third question in my written testimony, but to keep within
5 minutes I will not discuss it right now.
As Mr. Crippen has testified, CBO has not yet provided any
official estimates of prescription drug proposals this year.
However, it has provided to congressional staff a useful tool
to assess the effects of different premium subsidies and cost-
sharing policies. Using this ballpark estimator, it appears
that $300 billion could buy a policy with a $5 premium, but
such a policy would have a $500 deductible and no catastrophic
protection. This benefit is less generous than virtually all
previous congressional proposals, and is not significantly
better than Medigap.
Alternatively, $300 billion could provide for a decent
benefit with a $200 deductible and $4,000 stop-loss, but this
benefit would have a monthly premium of $65-70. This premium is
probably too high to encourage all seniors who lack drug
coverage to participate, and thus would leave millions
uninsured.
This raises a question: How much would an adequate
prescription drug benefit cost? As can be seen in the first
chart, if Medicare were to spend the same percent on
prescription drugs that private health insurance does, then
Medicare drug spending would be about $750 billion over 10
years. And if Medicare were to extend to all beneficiaries what
Congress enacted for military retirees last year, then Medicare
would spend $1 trillion from 2004 to 2011. This helps to
explain why organizations such as AARP and other senior groups
are concerned about the level of spending that is in the budget
resolution.
If, as it is likely to be the case, policy options under
consideration are estimated to cost more than $300 billion, a
second question gets raised. How much is too much? To be
conservative, this analysis assumed Medicare spending of $400
billion over 10 years. As can be seen in the second chart, a
prescription drug benefit of this size will comprise about 11
percent of total Medicare spending for the next 10 years. It
would only constitute about 5 percent of total public spending
on health services, and $400 billion is not much more than what
the drug industry is projected to spend solely on promoting
their products, as can be seen in the third chart.
Finally, Congress is considering a major tax cut bill. The
President's proposed reduction in taxes for the top 1 percent
of tax filers reduces revenue by $237 billion over 10 years.
The cost of a full immediate repeal of the estate tax will cost
about $652 billion over 10 years. Mr. Crippen's testimony
states that Medicare funding of a prescription drug benefit
would ``greatly increase the already large burden on the next
generation of taxpayers.'' I would argue the opposite, that
reducing the tax burden on this generation of taxpayers without
redirecting some of today's surplus toward the obligations of
Medicare is what will create problems for the next generation
of taxpayers.
In closing, how much a policy costs is clearly a critical
piece of information in the policy debate. However, these cost
estimates should be put into the proper perspective in the
policymaking process. We have the resources necessary to
provide for a basic drug benefit. We can assure taxpayers that
an investment of even $400 billion is not overspending relative
to private health benefits, relative to Medicare spending, and
relative to other priorities like tax cuts.
This gives you the opportunity to focus on what
prescription drug policy is best for the program and the
beneficiaries it serves. Thank you for the opportunity to share
my views.
[The prepared statement of Jeanne M. Lambrew follows:]
Prepared Statement of Jeanne M. Lambrew, Associate Professor, George
Washington University <SUP>1</SUP>
Chairman Bilirakis, Congressman Brown, and distinguished
Subcommittee Members, thank you for the opportunity to offer my views
on prescription drugs. By way of introduction, I worked for the
previous Administration as the Principal Associate Director for Health,
Personnel and Veterans at the Office of Management and Budget and as
the lead health policy analyst at the White House National Economic
Council. Part of my job was coordinating the analytic work for
President Clinton's Medicare reform plan. Today, I am an Associate
Professor at George Washington University.
Covering prescription drugs in Medicare is a top health care
priority. As AARP and BIO will testify, prescription drugs are
essential to the health of seniors and people with disabilities. Yet,
too many beneficiaries face financial barriers to needed medications
since Medicare does not cover them.<SUP>2</SUP> This problem will only
grow worse over time since there inevitably will be a greater reliance
on ever-improving pharmaceutical therapies at the same time that there
is a deterioration of private insurance coverage for prescription drug
coverage for the elderly.<SUP>3</SUP>
Although extending Medicare to cover prescription drugs is a major
policy challenge, this nation has never been better able to undertake
it. We have a budget surplus--in no small part created by recent
reductions in Federal health care spending.<SUP>4</SUP> Given the cost
of a Medicare drug benefit, revenues from this surplus will be
essential to funding a prescription drug benefit.
There appears to be bipartisan support for at least two basic
principles for a prescription drug benefit. First, most Members of
Congress agree with states, advocates of seniors and Americans with
disabilities, and policy experts that a prescription drug benefit
option should be offered through Medicare to all beneficiaries--not
just through states to the low-income. Low-income policies like the
President's Immediate Helping Hand not only exclude millions of middle-
class beneficiaries with incomes over $20,000 who lack insurance, but
are unlikely to help even those it targets (all states will not expand
coverage and, in states that do expand coverage, not all eligible
seniors will participate).<SUP>5</SUP> Instead, most Members are now
concluding that a Medicare drug benefit option should be available and
affordable to all beneficiaries. Second, there appears to be widespread
support for a drug benefit that is meaningful, defined as having
reasonable cost sharing and protection against catastrophic
prescription drug costs. Agreement on these principles, coupled with
the budget surplus and the urgency of the problem, may mean that this
Congress successfully accomplishes what others have failed to do, which
is to enact a bipartisan, meaningful Medicare prescription drug
benefit.
My remarks today focus on the issue of cost. Cost estimates for
prescription drug benefits--and, indeed, most public policies--have
taken on unparalleled importance in developing the policies themselves.
This is, in part, due to the budget process. The Budget Committees must
decide on how much to allocate for prescription drugs and other
policies often in the absence of a Congressional Budget Office (CBO)
cost estimates of specific policies. Last week, Congress passed a
budget resolution that allocates up to $300 billion from 2002-2011 for
Medicare reform and prescription drugs--without knowing what that would
buy. The Committees of authorization, thus, will be instructed to
retrofit policies, using CBO estimates, to hit these targets. So,
rather than beginning with policies, you and other Members of Congress
are expected to begin with the cost constraint and work
backwards.<SUP>6</SUP>
Given this expectation, I'd like to discuss three questions related
to the cost of a Medicare prescription drug benefit. First, is $300
billion enough for a drug benefit that is meaningful and helps all
uninsured beneficiaries? Second, if $300 billion is not enough, is
higher spending affordable? And, third, will decisions about the
approach to Medicare payment policy for prescription drugs affect
costs? The answers to these questions will help determine whether
bipartisan support can be translated into enactment of a bipartisan,
meaningful Medicare prescription drug benefit in this Congress.
Is $300 Billion Enough?
As Mr. Crippen has testified, CBO has not yet provided any official
estimates of prescription drug proposals this year. However, it has, in
the interim, provided to Congressional staff a useful tool to assess
the effects of different premium subsidies and cost sharing policies on
total costs and beneficiary premiums. This ``ballpark estimator'' tool
is used in the analysis that I have prepared for today's
testimony.<SUP>7</SUP> It is important to note that these are not CBO
estimates and that the ultimate CBO scoring may be quite different.
Using this tool, it appears that $300 billion will probably buy a
limited Medicare prescription drug benefit. Two illustrative policies
that could be affordable at this level include:
<bullet> No catastrophic protection and $500 deductible. One $300
billion option would maintain a 50 percent premium subsidy (the
lowest subsidy that would likely ensure that all currently
uninsured Medicare beneficiaries participate <SUP>8</SUP>) but
constrain Federal spending by increasing beneficiary cost
sharing. Such an option would have $45 to $50 monthly premium,
a $500 deductible, and 50 percent coinsurance for spending
above the deductible, with no catastrophic protection. This
deductible/copay structure is less generous than virtually all
previous Congressional proposals and is not significantly
better than Medigap.
<bullet> Catastrophic protection with high premium. A different
approach to spending $300 billion would be to make the
deductible/copay structure more comparable to private plans but
reduce the premium subsidy. This option would have a $200
deductible, 50 percent coinsurance, and $4,000 stop-loss--but a
$65 to $70 premium. This premium is about equivalent to the
premium that beneficiaries are expected to pay in 2004 for all
Part B services (e.g., physician and hospital outpatient
department care).<SUP>9</SUP> This premium is probably too high
to encourage all seniors who lack prescription drug coverage to
participate in a voluntary benefit and thus would leave
millions uninsured.
One could, with $300 billion, create a hybrid proposal that
includes a 50 percent premium subsidy and catastrophic benefit but has
a ``gap''--meaning that, Medicare pays 50 percent coinsurance up to a
fixed dollar limit, then the beneficiary is liable for 100 percent of
costs until out-of-pocket spending hit a particular stop-loss
threshold. However, such policies have come under criticism from
beneficiary groups and experts and, as Mr. Crippen testified in March,
it is ``unlike anything available in the private sector.''
<SUP>10</SUP>
Since the definition of what is ``adequate'' is relative, it is
useful to compare the type of benefit affordable at $300 billion with
other benchmarks that make sense for Medicare. One such benchmark is
private health insurance. For 2002-2010, the percent of private
insurance spending on prescription drugs is projected to be 19 percent,
according to the Administration's Office of the Actuary.<SUP>11</SUP>
If Medicare were to spend the same percent of total spending on
prescription drugs as does private insurance, then the cost of a
Medicare drug benefit would be about $750 billion over 10 years (see
chart 1).<SUP>12</SUP> Another benchmark is the prescription drug
benefit enacted last year for military retirees. This benefit, which
has no beneficiary premium and low copays would, if extended to the
entire Medicare population, cost about $1 trillion from 2004 through
2011 <SUP>13</SUP>--clearly much higher than any proposal under
consideration. This helps explain why organizations such as AARP
advocate for significantly higher spending on a prescription drug
benefit.
In summary, this analysis suggests that $300 billion is well below
the amount needed for a benefit equivalent to a standard private
insurance benefit, and is probably insufficient to extend a meaningful
prescription drug benefit to all Medicare beneficiaries.
Is $300 Billion--Or Even $400 Billion--Too Much?
If, in developing options for a prescription drug benefit, the
policies' cost estimates rise above the budget target, questions will
surface about whether this is too much to spend on a Medicare drug
benefit. Some still argue that $300 billion itself is excessive. One
way to evaluate this claim is to compare the proposed prescription drug
spending to other types of health spending and other budget priorities.
For illustration, this analysis assumes that $400 billion over the 10
years is being proposed for a prescription drug benefit, since this is
probably closer to cost estimates for proposals introduced in the 106th
Congress using this year's baseline.
The most immediate way to assess whether $400 billion is too large
is to compare it to projected Medicare and overall Federal health
services spending. A prescription drug benefit of this size would
comprise about 11 percent of total Medicare spending from 2002-2011.
Such an amount would be about equal to projected spending on Medicare's
long-term care benefits (hospice, home health and skilled nursing
facility care), even though many more beneficiaries would use a drug
benefit.<SUP>14</SUP> In addition, a new Medicare drug benefit that
costs $400 billion would comprise about 5 percent of the total national
public spending on health services (see chart 2).
It is also instructive to compare $400 billion to projected
spending on prescription drugs. CBO projects that prescription drug
spending by the Medicare population will total $1.5 trillion from 2002
through 2011. A bill whose cost estimate is $400 billion would cover
only about one-fourth of this spending (less if some of the $400
billion replaces existing spending or pays for administrative costs). A
different type of comparison looks at private pharmaceutical industry
spending. A rough estimate suggests that the pharmaceutical industry's
budget for activities to promote prescription drugs (e.g., marketing,
physician ``detailing'') will total about $300 billion from 2002-
2011.<SUP>15</SUP> This is as much or a large fraction of the amount
that Congress is contemplating spending on the entire prescription drug
benefit for 39 million beneficiaries (see chart 3).
A more conventional way to assess how much is too much is to
compare proposed prescription drug spending to other budget priorities.
The Joint Committee on Taxation recently estimated that, if the estate
tax repeal were fully implemented immediately, it would cost $662
billion over 10 years.<SUP>16</SUP> The President's proposed top tax
bracket change alone, which would help only about half a million
households, would cost $237 billion <SUP>17</SUP>--slightly less than
the budget resolution's allocation for Medicare, but helping tens of
millions fewer people.
These comparisons are not intended to imply that $300 billion is an
insignificant commitment. Indeed, such a dedication is a major step
forward. They are intended to help frame the discussion of the numbers,
and to illustrate that spending that is more commensurate with
proposals that provide a meaningful prescription drug benefit to all
beneficiaries is not necessarily ``excessive''.
Will Medicare payment policy for prescription drugs affect costs?
The third and final question is how will the structure of a
Medicare prescription drug benefit affect costs? As described
previously, most of the cost of a prescription drug benefit will result
from its benefit design: the level of premium subsidy, amount of cost
sharing, and level of catastrophic protection (if any). Last year, CBO
assumed that there was basically no difference in the overall cost of a
prescription drug benefit administered through the two major
approaches, all else held constant.<SUP>18</SUP> I'd like to make the
case that total costs should differ depending on how the prescription
drug benefit is structured, and that paying for drugs on a fully
capitated basis will be more costly than assumed--and could have
serious side effects.
To review, two major approaches have been proposed for paying for
and administering a Medicare prescription drug benefit. The first
relies on pharmaceutical benefit managers (PBMs) which would be
competitively chosen to negotiate price discounts and deliver
prescription drugs in a local area. The second relies on private, risk-
based insurers that compete directly for beneficiary enrollment to
deliver prescription drugs.<SUP>19</SUP> These approaches have some
common elements. Both give private organizations primary responsibility
for the management and delivery of the benefit. Both give these
organizations similar tools to reduce prescription drug prices (e.g.,
authority for prior authorization; incentives for generic
substitution). And both contract with private organizations to
negotiate prices for covered drugs. The major difference is that, under
the PBM approach, the government pays a percent of the negotiated
prices to PBMs selected by Medicare because they offer low prices.
Under the risk-based plan approach, the government pays a fixed,
capitation rate to risk plans selected by beneficiaries.
In 2000, CBO assumed that, relative to PBMs, risk-based plans would
achieve lower prescription drug spending per beneficiary, but that this
extra savings would be offset by their higher marketing costs and a
``risk premium'' (a contingency amount built into premiums to offset
risk). It is true that full capitation is a powerful incentive for
plans to contain costs. Plans paid this way are liable for all excess
costs. The key question is how will insurers respond to this incentive.
Will they reduce prices through more aggressive negotiation with drug
manufacturers, reduce use of and/or access to medications, or ``risk
select'' (seek out enrollees whose average cost falls below the
capitation rate).
To my knowledge, no major employer or insurer pays for prescription
drugs through full capitation. Thus, experience in the Medicare managed
care system may help answer this question. Studies have found that HMOs
have reacted to the pressure of capitation through risk
selection.<SUP>20</SUP> Avoiding sicker, more expensive beneficiaries
while enrolling those with low to no costs may be a more effective
strategy to managed fixed payments than reducing prices or utilization
of services. Prescription drug coverage is particularly susceptible to
risk selection since most seniors and people with disabilities use
prescription drugs, and much of the expense is predictable by plans.
While risk selection may reduce plans' costs, it will not reduce the
Federal government's costs since the government will ultimately have to
pay for those beneficiaries in some type of plan.
Even assuming no risk selection, risk-based plans may focus less on
price and more on utilization to reduce costs. Numerous private
insurers that compete for enrollment on an annual basis may have a
harder time negotiating price discounts with manufacturers than PBMs
(this is the experience in Medigap today). This may lead to aggressive
attempts to limit utilization. Recent experience in managed care and in
state pharmacy assistance programs suggests that increasingly popular
cost containment tools include limiting participating pharmacies and
tight appeals processes for medically necessary drugs. Congress can
legislatively draw the line between cost containment tools that ensure
appropriate utilization and those that limit access. If so, risk-based
plans may not be able to constrain costs better than PBMs. If not, then
the pressure of capitation may succeed in lowering costs--but at the
expense of access to needed prescription drugs. For all these reasons,
I would argue that CBO's assumption last year, that risk-based plans
result in overall, lower spending per beneficiary (offset by their
higher administrative costs), is overly optimistic.<SUP>21</SUP>
The alternative approach for administering a prescription drug
benefit is competitive contracting with PBMs. This approach has a
different incentive structure for achieving lower costs. PBMs that have
neither lower prices nor strong utilization control systems than their
competitors would lose the Medicare contract and thus be denied access
to Medicare beneficiaries. Since, once they have been competitively
selected, PBMs are paid on a claims rather than a fixed capitation
basis, they would not benefit from risk selection or access
restrictions. And PBMs may be better positioned to get better price
discounts since they are bidding for a local area with a known set of
enrollees. This approach may not have the same incentives to control
utilization but offers much lower administrative costs and fewer of the
potential problems for beneficiaries that risk-based plans do. This may
explain why virtually all private insurers and employers who offer
prescription drug benefits today competitively contract with PBMs for
prescription drugs.
Thus, I believe that these very different approaches to paying
private plans for prescription drug coverage will have different
effects on Medicare costs. I hope that CBO considers these issues
carefully before finalizing their estimates and would urge Members of
Congress to seriously weigh the policy implications of alternative
administrative structures.
Importance of Putting Cost Estimates into Perspective
The purpose of my testimony has been to discuss cost issues related
to Medicare prescription drug proposals. How much a policy costs is
clearly one of the most important pieces of information in a policy
debate. It is essential, however, that these cost estimates be put into
the proper perspective in the policy making process. As Members of this
Committee know, cost estimates are informed guesses, not actual costs.
Developing a prescription drug benefit by solving for total costs based
on cost estimates may result in flawed policy. This was what happened
in the Balanced Budget Act of 1997 when Medicare provider payment
policy was changed to meet somewhat arbitrary budget targets using cost
estimates that were, in retrospect, too pessimistic. We have been
paying for this mistake ever since, and it is important that we not
repeat it.
To that end, I would respectfully suggest that this Committee focus
on what prescription drug policy is best for the program and the
beneficiaries it serves. We now have the resources necessary to provide
for a basic benefit that can improve, extend, and literally save lives.
We can assure taxpayers that even an investment of $400 billion is not
overspending, relative to private insurance benefits and relative to
Medicare and Federal health spending. This creates the opportunity to
finally bring Medicare into the 21st century by adding a meaningful
prescription drug benefit for all its beneficiaries. Thank you for the
opportunity to share my views.
Notes:
<SUP>1</SUP> The views expressed in this paper do not represent
those of the University or Department of Health Services Management and
Policy.
<SUP>2</SUP> Poisal JA; Murray L. (2001). ``Growing Differences
Between Medicare Beneficiaries With and Without Drug Coverage.'' Health
Affairs 20(2): 74-85. Office of the Assistant Secretary for Planning
and Evaluation. (April 2000). Prescription Drug Coverage, Spending,
Utilization, and Prices: Report to the President. Washington, DC: U.S.
Department of Health and Human Services.
<SUP>3</SUP> For information on declines in retiree health
coverage: see Foster-Higgins, Kaiser Family Foundation/HRET Employer
Surveys. For information on increasing premiums in Medigap coverage:
see Weissratings.com, ``Prescription Drug Costs Boost Medigap Premiums
Dramatically,'' and for Medigap coverage declines see Chollet D. (April
24, 2001). ``Medigap Coverage for Prescription Drugs'', Testimony
before the Senate Finance Committee, Washington, DC: Mathematica Policy
Research.
<SUP>4</SUP> OMB analysis, for President Clinton's speech to the
National Governors' Association, July 10, 2000.
<SUP>5</SUP> See Scheppach R. (April 24, 2001). ``Finding the Right
Fit: Medicare, Prescription Drugs, and Current Coverage Options,''
Testimony before the Senate Finance Committee, Washington, DC: National
Governors' Association. Also, National Economic Council/Domestic Policy
Council (September 2000). Low-Income Prescription Drug Plans: An
Unworkable Prescription for America's Seniors. Washington, DC: The
White House.
<SUP>6</SUP> Note: The budget process for developing the
President's budget requires that cost estimates on major policies like
a Medicare prescription drug benefit be completed before decisions
about budget allocations.
<SUP>7</SUP> The estimator allows for input of two parameters:
premium subsidy and cost sharing. It then produces rough estimates of
total Medicare costs for 2004-2001 and monthly beneficiary premiums for
2004. It does not include: discounts, administrative costs, utilization
effects, Medicaid costs and is thus incomplete. For this analysis, the
Medicare costs were increased by 20 to 25 percent (depending on the
proposal's generosity) as a proxy for Medicaid costs, since virtually
all proposals provide extra assistance for low-income beneficiaries
through Medicaid (based on Medicaid estimates in CBO's March 27, 2001
testimony).
<SUP>8</SUP> CBO and the Administration's Office of the Actuary
have generally assumed that premiums for prescription drug benefits
that are voluntary need a 50 percent premium subsidy to encourage all
uninsured Medicare beneficiaries to participate.
<SUP>9</SUP> Health Care Financing Administration Office of the
Actuary (March 2001). 2001 Annual Report of the Board of Trustees of
the Federal Supplementary Medical Insurance Trust Fund. Washington, DC:
U.S. Department of Health and Human Services, Table III.C.1.
<SUP>10</SUP> Crippen DL. (March 27, 2001). ``Laying the Groundwork
for a Medicare Prescription Drug Benefit.'' Testimony before the
Committee on Ways and Means, Subcommittee on Health, U.S. House of
Representatives. Washington, DC: Congressional Budget Office.
<SUP>11</SUP> Health Care Financing Administration Office of the
Actuary (March 2001). National Health Expenditures Projections; Table
5: Personal Health Care Expenditures; and Table 11: Prescription Drug
Expenditures. Private health insurance spending for 2002-10.
<SUP>12</SUP> Based on CBO projected Medicare net expenditures for
2002-11 (about $3.2 trillion according to January 2001 baseline).
<SUP>13</SUP> Estimated by using the CBO ballpark estimator. See
note on Chart 1.
<SUP>14</SUP> Since CBO has not yet released the service-specific
projections for Medicare, this is estimated by taking the 2000 Medicare
baseline projected spending for FY 2001-2010 for skilled nursing
facilities, home health and hospice; dividing their total spending into
net outlays for this period; and applying this percent (14%) to the
January 2001 net outlays. This equals about $450 billion for FY 2002-
2011.
<SUP>15</SUP> According to IMS HEALTH, the pharmaceutical industry
spent $13.9 billion on promoting drugs in 1999 (see April 20, 2000
press release at: www.imshealth.com). If that investment were to grow
by the CBO projected average prescription drug baseline growth (10.3
percent) for 2002-2011, then it would equal $302 billion for this
period.
<SUP>16</SUP> Joint Committee on Taxation. (March 26, 2001).
Memorandum to John Buckley; Subject: Estate and Gift Tax Estimates.
Washington, DC: U.S. Congress.
<SUP>17</SUP> Joint Committee on Taxation as reported by Friedman
J; Greenstein R. (May 3, 2001). Reduction of Top Rate Cost $237 Billion
over Ten Years, Even Though Fewer than 1% of Filers Are in the Top
Bracket. Washington, DC: Center on Budget and Policy Priorities.
<SUP>18</SUP> Note: this is mostly based on informal communication.
A summary of the CBO approach to discounts and administrative costs is
included in a letter to Senator Daniel Patrick Moynihan from CBO
Director Crippen dated September 1, 2000.
<SUP>19</SUP> This testimony focuses on proposals like H.R. 4680
(House Republican bill) that pay private plans for prescription drugs
through full capitation and S. 2342 (President Clinton proposal) that
competitive contract with a single PBM to deliver prescription drug
benefit in local areas. A number of hybrid proposals have also emerged
(e.g, use of multiple PBMs, partial risk payments, etc).
<SUP>20</SUP> See, for example, General Accounting Office. (August
2000). Medicare+Choice: payments exceed cost of fee-for-service
benefits, adding billions to spending. HEHS-00-161. Washington, DC:
GAO.
<SUP>21</SUP> In addition to these doubts about their cost
effectiveness, other major policy issues are raised by risk-based
prescription drug proposals. Premiums under most of these proposals
would vary from place to place, as they do in Medicare managed care,
but would do so without having an underlying, nationwide traditional
Medicare option. Plans that enroll older or sicker beneficiaries might
charge them higher premiums or pull out of the system altogether--a
phenomenon in the Medicare+Choice system that has caused serious
disruption for seniors. And, although most risk-plan proposals have a
PBM-like ``fallback'' in areas where no plans operate, this, too,
presents problems. Beneficiaries' access to a stable, affordable plan
will depend on where they live and what risk-based plans decide to
participate there. This raises equity concerns, especially in light of
a significant Federal investment in a prescription drug benefit.
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[GRAPHIC] [TIFF OMITTED] T2830.014
Mr. Bilirakis. Thank you, Dr. Lambrew. Mr. Chess, please
proceed, sir.
STATEMENT OF ROBERT CHESS
Mr. Chess. Good afternoon, Chairman Bilirakis, Congressman
Brown, and members of the subcommittee. My name is Rob Chess,
Chairman of Inhale Therapeutic Systems. I am here today
representing the Biotechnology Industry Organization, BIO. I am
particularly honored to be here to describe BIO's views on
Medicare drug coverage issues.
Our company, Inhale Therapeutic Systems, is developing a
family of technologies to enable patients to inhale drugs for
diabetes, osteoporosis, multiple sclerosis, genetic emphysema,
and several other diseases that would otherwise have to be
given by injection. In essence, what we are doing is we are
taking drugs that have to be given by shot and making them so
you can breathe them in through this device right here.
Our most advanced product is inhaled insulin, which has
recently completed Phase III trials, and we believe our product
would encourage patients to take their insulin more frequently
and lead to a major improvement in the health care of diabetic
patients. We hope to make similar contributions to the
treatment of many other diseases.
Developing and testing this technology has been very time
consuming and very expensive. We started our company in 1991
and, since then, we have raised over $700 million in 13
financings. This year we expect to lose $75 million, and we
still do not have our first product on the market. My company
hopes to help many patients, but that will depend on whether or
not patients have coverage for our products. That is why I am
here today to testify in favor of extending drug coverage to
senior citizens and those in need.
A full description of BIO is included in my written
statement, but of the 950-plus members, 90 percent do not have
a single drug product on the market. Many more have only one
product. BIO members are clearly in the research and
development phase.
For many of the BIO members, the level of investment in
innovation is far from an academic concern, and more a question
of survival. Most BIO members aren't members of the Fortune
500, rather, they are small companies funded by venture
capital, companies that may hold the key to many potentially
life-saving therapies.
When the Clinton Health Care bill was being considered in
the mid-1990's, which had the effect of indirect price
controls, company financing was hurt. We at Inhale were one of
the lucky few at that time still able to raise about 60 percent
of what we sought in our IPO. We may have lost a year of
progress as a result of that, though.
BIO urges Congress to ensure that any Medicare drug
coverage proposal considered or enacted does not upset the
delicate balance of the biotechnology industry.
Over the past two decades, biotechnology has produced 110
drugs and vaccines, and there are 350 more in late-stage
development. The 110 products that have been approved by FDA
are the work of only 71 of BIO's members.
The biotechnology industry invested nearly $10 billion in
R&D in 1999, reinvesting, on average, up to 50 percent of its
revenues into R&D. This is an environment when most of BIO's
members have no product revenues at all, those companies can be
said to be investing more than 100 percent of revenues in R&D.
Across all other industries, the average re-investment in R&D
is just 4 percent. The biotechnology industry as a whole lost
approximately $5 billion last year.
Many biotechnology products are oriented toward treating,
preventing and diagnosing diseases of the aging and are
targeted toward small segments of disease categories and thus
small patient populations. One example of this sort of
treatment is Gleevec, a leukemia drug approved by the FDA just
last week. According to Dr. Richard Klausner of the National
Cancer Institute, Gleevec represents the first molecularly
targeted drug. The drug is specifically targeted to disrupt
cancer cells, unlike most cancer therapies that can harm even
healthy cells. This type of product is expected to become more
and more common in the coming years.
The issue of Medicare modernization and the proposal to add
a prescription drug benefit to the program is of high interest
to the members of the BIO and the patients we serve. Many of
the products in biotech companies' pipelines target diseases
that predominantly affect seniors. Accordingly, BIO believes
that all Medicare beneficiaries should have drug coverage.
In recent years, drugs and biologics have become an even
more integral part of health care, while the drug coverage
available to seniors has increasingly included lower coverage
limits and higher premiums. BIO strongly believes that
pharmaceutical benefit options should be offered to
beneficiaries in the context of an overall, market-based reform
of the Medicare program, but we believe that seniors need
coverage now. Thus, we support efforts to enact a Medicare drug
benefit in 2001, but we must also continue to work to make
Medicare a program that reflects the best of the 21st Century
marketplace. If interim prescription drug proposals must be
considered, they should facilitate and not deter the adoption
of comprehensive reforms to the Medicare program.
BIO's priority in the debate is to ensure that any steps
taken to increase seniors' access to drugs today is consistent
with the incentives needed to develop breakthrough medicines to
treat the seniors of tomorrow.
To guide our review of various proposals, we have adopted a
set of six principles, outlined in my written statement, but
let me reinforce three of them. We urge Congress to 1) rely on
the private marketplace and competition, not price controls
that harm innovation; 2) include stop-loss protection and
protection of those most in need first; and 3) do no harm to
current coverage and reimbursement.
Based on our principles, BIO has tended to be most
supportive of drug coverage plans that focus beneficiaries with
very high prescription drug costs, as well as those with low
incomes. We have been the strongest advocate of what many in
Congress are calling ``stop-loss'' or ``catastrophic coverage''
to cover all or a high percentage of prescription drug costs
after a certain level of out-of-pocket spending. We are
encouraged that most of the major drug coverage proposals, from
both sides of the aisle, now include some sort of catastrophic
coverage.
While most seniors will not make claims under stop-loss
coverage, the coverage will provide valuable protection and
peace of mind for all by ensuring that high-cost therapies are
available to those who need them.
These new products, by reducing hospitalizations and
improving overall health, could generate savings in the health
care system. They will allow people to remain productive
longer, with potentially corresponding economic benefits.
Mr. Bilirakis. Excuse me, Mr. Chess, would you please
summarize?
Mr. Chess. I am just about done. Thank you. While we
understand that CBO may find these savings difficult to score,
we are firmly convinced they will represent a net savings to
patients.
That concludes my formal testimony. Be delighted to take
any questions.
[The prepared statement of Robert Chess follows:]
Prepared Statement of Robert Chess, Chairman, Inhale Therapeutic
Systems
Introduction
Good morning, Chairman Bilirakis, Congressman Brown, members of the
subcommittee. My name is Robert Chess, Chairman of Inhale Therapeutic
Systems. I am here today representing the Biotechnology Industry
Organization (BIO). As you know, the Energy and Commerce Committee has
jurisdiction over many of the issues that my company, along with BIO,
is concerned about: it oversees the basic research done by the National
Institutes of Health (NIH), it regulates the applied research and
development (R&D) of the biotechnology industry and the drug approvals
that result from that R&D and it oversees the Medicare and Medicaid
coverage of those products. I am particularly honored to be here to
describe BIO's views on Medicare drug coverage issues.
Inhale Therapeutic Systems is developing a family of technologies
to enable patients to inhale drugs that would otherwise have to be
given by injection. We are developing inhaleable versions of drugs for
diabetes, osteoporosis, multiple sclerosis, genetic emphysema, and
several other diseases. Our most advanced product is inhaled insulin,
which recently completed Phase III trials. This product represents an
important advance since it would be far more convenient for diabetics
to take than the current injectable insulin. A nine-year, $150 million,
1,400 patient study funded by NIH found that if patients took their
insulin 3-6 times per day the complications from diabetes, such as
blindness, amputations, and kidney-failure, could be reduced by 35-60%.
Despite this striking result, most diabetics take insulin less than
twice a day, primarily because of their dislike of injections. We
believe our product would encourage patients to take their insulin more
frequently and lead to a major improvement in the health of diabetic
patients. We hope to make similar contributions to the treatment of
many other diseases.
Developing and testing this technology has been very time consuming
and expensive. We started our company in 1991, and since then have
raised over $700 million in 13 financings. This year we expect to lose
$75 million, and we still do not have our first product on the market.
I am excited about all the different ways that my company may be able
to help patients, but I know that our ability to do so will depend on
whether or not patients can gain coverage for our products. That is why
I am here today to testify in favor of extending drug coverage to
senior citizens and those in need.
About BIO
BIO represents more than 950 biotechnology companies, academic
institutions, state biotechnology centers and related organizations in
all 50 U.S. states and 33 other nations. BIO members are involved in
the research and development of health care, agricultural, industrial
and environmental biotechnology products. Ninety percent of our
companies are involved in health care product development and 90% of
those companies do not have a single product on the market. Many more
have only one product. Clearly, the vast majority of BIO's members do
not have an array of health and/or other consumer products to absorb
the cost of R&D, more importantly, many biotech drugs are for small
populations. Forty-five percent of FDA-approved biotech products have
orphan status.
For many of BIO's members the level of investment in innovation is
far from an academic concern and more a question of survival. Most BIO
members aren't members of the Fortune 500; rather, they are small
companies funded by venture capital, companies that may hold the key to
many potentially lifesaving therapies. Anything that could upset the
delicate balance these companies live in could deprive patients of
these important breakthroughs--because if venture capital investment is
reduced, many companies will be unable to survive. The President of
NASDAQ recently wrote that a ``decrease in investor confidence [in the
biotechnology industry] can only result in a decrease in investment
dollars, thereby placing critical research at risk.'' When the Clinton
Health bill was being considered in the mid-1990s, the growth rate of
R&D investment dropped markedly, potentially delaying new products on
their way to American consumers. In addition, venture capitalists
became less willing to invest in biotech companies, forcing 13 out of
16 companies to withdraw their initial public offerings (IPOs) of stock
and their efforts to go public.
While we at Inhale were one of the lucky few to go public during
consideration of the Clinton healthcare plan, we were only able to
raise about 60% of what we sought. We may have lost a year of progress
as a result. Clearly, many biotech companies are fragile and would be
devastated by a drop in investor confidence. BIO urges Congress to
ensure that any Medicare drug coverage proposal considered or enacted
does not upset the delicate balance of the biotechnology industry.
Over the past two decades, biotechnology has produced 110 drugs and
vaccines, and there are 350 more in late stage development. The 110
biotech products that have been approved by FDA are the work of only 71
of BIO's members. The biotechnology industry invested nearly $10
billion in R&D in 1999--reinvesting, on average, up to 50% of its
revenues into R&D.<SUP>1</SUP> This is in an environment when most of
BIO's members have no product revenues at all--those companies can be
said to be investing more than 100% of revenues in R&D. Across all
other industries, the average re-investment in R&D is just 4%. The
biotech industry as a whole lost approximately $5 billion last year.
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\1\ Ernst & Young LLP, Annual Biotechnology Industry Reports, 1999.
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In addition to the hope of promising new therapies offered by
biotechnology, I also want to point out that BIO's members are an
important part of the U.S. economy. According to Ernst & Young Report,
the biotechnology industry employs more than 150,000 people--this
excludes companies that are mostly pharmaceutical in
nature.<SUP>2</SUP> We have employees in all 50 states and add more
than $20 billion to the economy annually.
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\2\ 2000 E&Y LLP, The Economic Contributions of the Biotechnology
Industry to the U.S. Economy.
---------------------------------------------------------------------------
Many biotechnology products are oriented toward treating,
preventing and diagnosing diseases of the aging and are targeted toward
small segments of disease categories and thus small patient
populations. Recombinant DNA technology has enabled us to target
products at the genetic or cellular level. Increasingly, new therapies
will be designed specifically for unique and small populations. While
we expect this to allow for more effective treatments, many with fewer
side effects, it will also mean smaller markets in which we can spread
the cost of R&D investment. One example of this sort of treatment is
Gleevec, a leukemia drug approved by the FDA just last week. According to Dr. Richard Klausner of the National Cancer Institute, Gleevec represents the ``first molecularly targeted drug.'' The drug is specifically targeted to disrupt cancer cells--unlike most cancer therapies that can harm even healthy cells. While Novartis, the drug's maker, is hopeful that it will be approved
for more indications, it has currently been approved only for a
relatively rare type of leukemia. This type of product is expected to
become more and more common in the coming years.
The bottom line is that the biotechnology industry, while being a
vital part of the current economy and the source for many potential new
cures, is still fragile. We would urge you to take care when designing
a Medicare drug coverage plan not to upset the delicate balance of the
industry.
BIO's Medicare Reform Principles
The issue of Medicare modernization and the proposal to add a
prescription drug benefit to the program is of high interest to the
members of the BIO and the patients we serve. Many of the products in
biotech companies' pipelines target diseases that predominantly affect
seniors.
Accordingly, BIO believes that the Medicare program should include
drug coverage for all Medicare beneficiaries. In recent years drugs and
biologics have become an even more integral part of health care, while
the drug coverage available to seniors has increasingly included lower
coverage limits and higher premiums. BIO strongly believes that
pharmaceutical benefit options should be offered to beneficiaries in
the context of an overall, market-based reform of the Medicare program,
but we believe that seniors need drug coverage now--and comprehensive
reform may take years to enact. Thus, we support efforts to enact a
Medicare drug benefit in 2001, but we must also continue to work to
make Medicare a program that reflects the best of the 21st Century
marketplace. If interim prescription drug proposals must be considered,
they should facilitate and not deter the adoption of comprehensive
reforms to the Medicare program.
BIO's priority in the debate is to ensure that any steps taken to
increase seniors' access to drugs today is consistent with the
incentives needed to develop breakthrough medicines to treat the
seniors of tomorrow.
To guide our review of various proposals, we have adopted the
following principles:
1) Rely on the private marketplace and competition, not price
controls that harm innovation--BIO believes that Medicare benefits--
including coverage for prescription drugs and biologics--should be
delivered through a decentralized, pluralistic market structure that
encourages meaningful competition in order to preserve patient choice,
improve quality and encourage innovation. Government regulation should
be limited and market-based delivery mechanisms should be utilized.
Explicit or indirect price controls that stifle innovation must be
avoided.
2) Include stop loss protection and protection of those most in
need first--Federal assistance for Medicare beneficiaries should be
targeted to those with the greatest economic and medical need in order
to focus limited funds where they can have the most impact. Inclusion
of ``stop loss'' coverage in order to protect the financial security of
the sickest and neediest Medicare beneficiaries must be a top priority
of any Medicare drug proposal.
3) Expand beneficiary choices among private plans--Medicare
beneficiaries should have expanded choices of quality health plans and
benefit packages that include prescription drug coverage to ensure that
all of the elements of modern health care are provided in a system
built on the advantages of our market-based economy.
4) Improve patient care through innovations in biotechnology--The
future of patient care and our ability to prevent, diagnose and treat
illness is inextricably tied to innovation in health care. By promoting
strong incentives for the discovery and development of innovative new
prescription drugs and biologics, America can assure that the new tools
of biotechnology are applied as quickly as possible to create medicines
for our aging population. BIO believes that such innovation and
discovery will generate real savings by reducing the need for hospital,
long-term care, and other expensive services and procedures.
5) Maintain Medicare solvency--In the context of over-all market-
based reform, we must ensure that drug coverage for Medicare
beneficiaries does not jeopardize the financial security of the
program. Medicare needs to be modernized in such a way as to assure
that it is a fiscally responsible program for the coming generations of
seniors.
6) Do no harm to current coverage and reimbursement--A majority of
Medicare beneficiaries have some form of drug coverage today.
Additionally, Medicare does cover prescription drugs and biologics in
certain circumstances. BIO believes strongly that any Congressional
action on Medicare prescription drugs must avoid interfering with
existing coverage and payment rules for the types of drugs and
biologics currently covered by Medicare.
BIO's Recommendations
Based on our principles, BIO has tended to be most supportive of
drug coverage plans that focus beneficiaries with very high
prescription drug costs, as well as those with low-incomes. We have
been the strongest advocate of what many in Congress are calling ``stop
loss'' or catastrophic coverage to cover all or a high percentage of
prescription drug costs after a certain level of out of pocket
spending. We are encouraged that most of the major drug coverage
proposals--from both sides of the aisle--now include some sort of
catastrophic coverage.
Stop Loss Design Issues
There have been a variety of different stop loss coverage plans
introduced in various bills in the 106th and 107th Congresses. In our
opinion, it is the presence of stop loss coverage that is important--
coverage that is important for a variety of reasons.
We support stop loss coverage because we are quite concerned that
the fruits of the most promising research that some of our members are
conducting are likely to be quite expensive--and we want to be sure the
results of this research is widely available. Because of some of the
dynamics of the biotech industry discussed earlier, the populations
they treat are often small, sometimes very small. Moreover, biological
products are often more expensive to produce than traditional
pharmaceuticals because Biotech products are generally made through
recombinant techniques. The reagents and tools necessary to make a
recombinant protein are generally more costly than traditional
pharmaceutical products. As a result, we expect that some new
biotechnology products may be too expensive for many seniors that lack
prescription drug coverage.
While most seniors will not make claims under stop loss coverage,
the coverage will provide valuable protection and peace of mind for all
by ensuring that high cost therapies are available to those who need
them. Stop loss coverage is true insurance against the cost of
debilitating, and potentially financially devastating disease. While
few people ever have their houses burn down, we all believe that fire
insurance is valuable. Senior citizens should have the same protection
from the potentially devastating costs of disease.
Other Coverage Design Issues
BIO also believes that all beneficiaries should have Medicare drug
coverage with greater subsidies targeted to those with low incomes. We
believe that subsidies should be carefully crafted to emphasize the
private market. Some low-income subsidies could have the effect of
expanding Medicaid--with the corresponding government rebates and price
controls that program entails. BIO believes that the private
marketplace offers cost control mechanisms that will not threaten
research and development investment. Private sector discount
arrangements are made in exchange for movement of market share, while
Medicaid rebates are unilateral government price controls.
One issue that we at BIO have spent considerable time wrestling
with is the gaps contained in some drug coverage proposals between the
initial coverage limit and the attachment of stop loss coverage. Since
some of these bills contain no subsidies during these gaps, we are
particularly concerned about how the gaps will affect low-income
beneficiaries.
Moving Forward This Year
BIO believes that it is important to move forward this year. The
Medicare benefit package becomes more antiquated with each passing
year, and we believe that the time is now to at least begin the process
of bringing drug coverage to senior citizens and the disabled.
We believe that in this environment, the best plans will emphasize
stop loss coverage and subsidies targeted to those most in need, as the
best interim steps toward more comprehensive coverage for seniors and
the disabled. Based on the numbers CBO has provided, we believe that
stop loss protection, and some level of subsidies could be affordable.
Such a plan would also provide benefits to all Medicare beneficiaries,
since all would benefit from the peace of mind that stop loss coverage
would offer. Moreover, by taking over some of the risk of rising drug
expenditures, government subsidies for stop loss coverage could make
primary prescription drug coverage more affordable for seniors.
BIO prefers comprehensive drug coverage in a fully modernized
Medicare program. We still think it is important to take the first
steps now so that a fully modernized Medicare program can be ready
before the new influx of baby boom generation beneficiaries arrives.
Twenty new biotechnology products were approved in 2000. Of the 350
products currently in the pipeline, many are targeted toward
Alzheimer's, Parkinson's, cancer, diabetes, osteoporosis and other
diseases of aging. The products that make it through clinical trials
will be on market before baby boomers retire. BIO's first priority
after bringing these new therapies to market is to make sure that
patients have access to these new medicines that may save lives and
improve overall health and quality of life.
These new products, by reducing hospitalizations and improving
overall health could generate savings in the health care system. They
will allow people to remain productive longer, with potentially
corresponding economic benefits. While we understand that CBO may find
these savings difficult to score, we are firmly convinced that they
will represent a net benefit to patients in the United States and
around the world.
In closing, Mr. Chairman and members of the subcommittee, I invite
you to think of a future without Alzheimer's Disease. Think of a future
without Parkinson's Disease, without leukemia. Think of a future where
cures are targeted to patients where treatments can be highly effective
with very limited side effects. In the biotechnology industry, we
firmly believe that these hopes will be realized. However, in order for
these visions to become a reality, we must continue to invest heavily
in the research and development of new and potentially lifesaving
therapies. Moreover, in order for new treatments to have any benefits,
the patients who need them must be able to obtain them. This is why BIO
believes that coverage and stop loss protection are so important.
Mr. Chairman, I want to commend you for holding this very important
hearing, and for your leadership on drug coverage and stop loss
coverage issues. I will be happy to attempt to answer any questions you
may have.
Mr. Bilirakis. Thank you very much, Mr. Chess. The Chair
will yield to Mr. Brown now, and advise the members that after
his questioning, we will run over, cast our votes, and come
right on back and finish up. Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman. Mr. Chess, thank you
for what you are doing on the Hill, that is a terrific thing,
so thank you for that.
Dr. Lambrew, I am intrigued by your chart on Medicare, the
marketing versus Medicare prescription drug allocation. Is that
a projection of what they are spending on marketing based on
last year, or how did you do that?
Ms. Lambrew. Yes. IMS, which is a private consulting firm,
estimated that in 1999 the drug industry spent $13.9 billion on
prescription drug promotion. That includes marketing,
advertising, physician detailing--which means going and talking
to physicians, giving free samples.
If you take what Mr. Crippen said is a 10.3 percent growth
for prescription drugs, and you trend that $13.9 billion, that
is what sums up to $302 billion over 10 years.
Mr. Brown. And I have got to think that if you base it on
the 2000 figures, it would be significantly higher because I
have got to think that the 1999 to 2000 was much bigger
increase than that percent Mr. Crippen talked about for the
whole.
Mr. Crippen had said--and it was a difficult question to
answer, I understand--my question about if we do the tax cut,
considering the increase Medicaid costs that are not reflected
in the budget resolution, can we provide--with the $300 million
available, can we provide this prescription drug benefit
without major cost containment on prescription drug prices?
Ms. Lambrew. I think it is a good question, and I agree
with Mr. Crippen, that it is a hard question to answer. I will
say that, you know, irrespective of exactly the dollar amount
that a prescription drug benefit will cost, it is a significant
investment. Nothing that I have said is meant to say it is not
a significant investment. And to the extent that we can figure
out not just ways to insure beneficiaries, what this is about
and what these numbers are about is insuring them, but it is
also about how we contain the costs which are so rampant.
I think there are a lot of ideas on the table about how you
do that. There was some discussion about PBMs and multiple
PBMs, et cetera. There are also clearly proposals out there
that would help do this, but I do think that in light of
competing priorities for the Federal budget surplus, most
obviously, the tax cut and a prescription drug benefit, there
will be increasing attention drawn to this issue of how do we
keep the prices low so we can afford a better benefit.
Mr. Brown. Thank you. One of the sort of presumptions on
which this hearing is based is that Medicare fiscally is in big
trouble, that we have got to--this hearing isn't just on
prescription drugs, it is also on Medicare reform. The
President talks about them together. The Republican Majority
typically talks about them together.
Share with us your thoughts on the fiscal outlook for the
Medicare program--in particular, is it a problem that Medicare
needs general revenues to finance benefits?
Ms. Lambrew. I think it is an interesting point. This
Congress, or the past several Congresses I should say, have
really done a good job at looking at Medicare and trying to
restrain its cost growth when, in 1993, Medicare was projected
to be insolvent in 1999. Today, it has the longest prognosis
than it has had in its history. It is projected to be solvent
through 2028. Now, that doesn't mean that we don't have a
doubling of the Medicare population. Truly, there will be a
cost pressure as the retirement of the Baby Boom generation
takes place. But what are the responses to that?
One is cut provider payment rates, two is to cut benefits,
and three is to increase revenue dedicated to Medicare. Dr.
Crippen talked about a Medicare per capita cost growth rate of
5.3 percent projected. That is below what the private sector
health spending projections are going to be. So, I am not sure
how much room there is to address this doubling of the Medicare
population through provider payment cuts.
In terms of cutting back on benefits, well, we already know
Medicare only covers 55 percent of the seniors' health care
costs. And if you look at some work done by Marilyn Moon, out-
of-pocket spending for beneficiaries will grow from 22 percent
today to 30 percent by 2025. So, I am not sure how much room
there is to cut benefits. That does leave a third question
about revenues.
As Mr. Crippen said, merging the Trust Funds does nothing
for the fiscal outlook of the program. The only way to really
add new revenues is to explicitly do that, either through some
sort of dedicated tax or through budget proposals like have
been proposed in the past, to dedicate part of the on-budget
surplus toward Medicare. But I think that the solutions for
reform are challenging, and I hope that people recognize that
the challenge of prescription drugs is immediate. I hope that
we don't hold our prescription drug benefit debate hostage to
trying to address these harder, long-term issues.
Mr. Brown. Thank you.
Mr. Bilirakis. Well, I think we are going to run out of
time as far as casting the vote is concerned, so with your
indulgence, we are going to have to break for another few
minutes and run right on back. If I am the only one here, we
are still going to go forward. Thank you.
[Brief recess.]
Mr. Bilirakis. The committee is back in session. I do want
to apologize to the witnesses not only for having to run back
and forth, but for the lack of people up here. It is quite an
existence up here. We all have so many commitments, and it is
very difficult.
Dr. Braun, we just got word--and I haven't gotten the
details yet--that BlueCross-BlueShield just pulled out of all
three of my counties as far as Medicare.
Ms. Braun. Oh, my goodness.
Mr. Bilirakis. Yes.
Ms. Braun. That is too bad.
Mr. Bilirakis. Well, I don't have any of the details yet.
Ms. Braun. Your county will suffer like ours, or your
counties.
Mr. Bilirakis. Isn't it interesting, Dr. Braun, that CBO
will not score the savings that you mentioned--for instance,
the fact that probably having more drugs available would be
beneficial insofar as less hospitalization and less current
usage. Do you have an opinion about that? You were in the
audience, I know, you were sitting over there. Do you have any
opinion about why they just won't take into consideration those
savings?
Ms. Braun. They are talking about there not being really
any evidence for it. I just happened to notice a National
Academy of Science report on the decrease in chronic disability
over the past few years, and that certainly is due to--I
wouldn't be sitting in front of you today if it weren't for--
the present-day medicine. I would have had another heart
attack, or I would have had a stroke----
Mr. Bilirakis. I read that article.
Ms. Braun. [continuing] and be chronically disabled.
Mr. Bilirakis. And that is evidence, it seems to me.
Ms. Braun. I think that is evidence of savings, but I think
it probably would be pretty difficult to score, and they like--
--
Mr. Bilirakis. They make it awfully difficult. A few years
ago, in a very bipartisan piece of legislation--we added the
preventative health benefits to Medicare--but we really had a
tough time. We thought that we probably wouldn't be able to
even get that through, because CBO would not be very helpful as
far as scoring was concerned.
Ms. Braun. I was thinking of the immunizations, too, and
how many fewer pneumonia cases we have among seniors now, with
the pneumonia vaccine and the flu vaccine.
Mr. Bilirakis. Mr. Chess, is there data to suggest that
paying for high-cost drugs, saves money through a reduction in
more expensive treatment?
Mr. Chess. The one area that I am pretty familiar with
there is in the diabetes field. There was a study done a few
years ago in a Minneapolis HMO with about 3,100 patients that
showed that if you were able to control diabetes better--for
each point of control that is better, sort of going from 10 to
7, you were able to reduce health care costs, not just the
health care costs of diabetes, but the overall health care
costs of the patient around anywhere from 30 to 40 percent. And
so at least in the diabetes field, there is a very direct
correlation between better control of the disease, which really
is taking the medicines and having access to them, and lower
health care costs, in addition to the most important health
care benefit, that the people live longer and better lives.
Mr. Bilirakis. Yes. What is the source of that information?
Mr. Chess. We can probably get you a copy of it.
Mr. Bilirakis. Would you get that to us as soon as you can?
Mr. Chess. Yes.
Mr. Bilirakis. Appreciate that. Dr. Lambrew, any comment on
that particular point?
Ms. Lambrew. I actually would like to make just one
comment, which is one demonstration that the last
Administration approved was a Medicare demonstration to ask
this very question--will covering prescription drugs have any
sort of effect on Part A and Part B service use? We just
approved that demonstration in January. It is going to be
conducted on United Mineworkers enrollees in West Virginia, and
we are hoping that we can use that demonstration in Medicare to
kind of collect this evidence that would, I think, prove this
is common sense.
Mr. Bilirakis. It is not going to help us for right now.
Ms. Lambrew. I am afraid not. I am afraid not.
Mr. Bilirakis. Yes, that is going to be taking place. Thank
you for your position on the idea of combining Parts A and B.
Again, I am not attacking CBO. If there is a representative
here, I don't want them to think that, we need them. We have
got to be friendly toward them.
But the gentleman, Mr. Crippen, indicated that he didn't
think there would be any savings in combining the two, so I
won't go into whether you all think there would be savings. But
let me ask Dr. Braun, what is the AARP position on that? Any
position on combining A and B?
Ms. Braun. I think we would have to look at just how you
were doing it. As you say, Mr. Crippen seemed to be thinking it
would be set up the same way that it is now and just combined.
I think there are many other possibilities that people are
looking at as to having one deductible and so forth. And there
certainly may be some value to doing that, but we would need to
know the particulars before we would know.
Mr. Bilirakis. That is a good, safe response. Any other
comments on that? Dr. Lambrew?
Ms. Lambrew. I would say very briefly, there basically are
sources and uses of spending for Medicare. The sources is
really what the Trust Funds are about. What you do is you pool
different sources of revenue to offset the Medicare costs.
I think that Mr. Crippen is right, that if you do nothing
else but just merge those two Trust Funds, it is the same
amount of money and it has no effect on spending.
Mr. Bilirakis. Depending on what the deductible is.
Ms. Lambrew. Well, that is actually a policy change. You
have to merge the Trust Funds to change the deductible. I mean,
I think they are two separable policies. I will say one thing
that does happen, or has to happen if you are merging the Trust
Funds is, you have to rethink how much general revenue will be
going toward Medicare.
Currently, what we do is we spend 75 percent of Part B
costs, those come from the general revenue funds. If you merge
the two Trust Funds, you have to answer the question, what now?
There is no longer a Part B spending, so what is the general
revenue contribution to Medicare? That will create, I think, a
big debate. How much is too much? How much should we put in
from general revenues to Medicare? And I think in the past, the
Medicare Commission had raised this very issue, and there were
concerns because capping it at, say, 40 percent of Medicare
spending will actually make Medicare insolvent earlier. It
doesn't mean you have done anything to change Medicare
spending, it just means you have limited the source of funding.
So, I think it raises a lot of questions that will encounter if
you go down this path.
Mr. Bilirakis. Well, I think Dr. Braun basically said the
same thing, that it depends on the details. And you all agree
that a stop-loss provision of some sort should be a part of
whatever we do.
Okay. Very quickly, I just want to say that everything we
get from the White House, and from the majority leadership is
that we should have universal coverage of prescription drugs as
a part of Medicare, and that it should be voluntary. I am not
sure really what the White House parameter is, but I believe
that is one of their principles.
I think we would kind of all agree. The only point that the
White House is making, is that this idea of the helping hand--
which is similar, Dr. Braun, to the legislation that we talked
about when you previously spoke here, but that was outside of
the scope of Medicare, was only going to be a temporary plan to
help needy people right now until we are able to get the whole
thing done. And I know that an awful lot of people on the other
side of the aisle were concerned that if we do something like
that, it takes the pressure off, and then we probably will
never do the universal coverage. I would like to think that
would not be the case, and I also like to think we won't have
to resort to the State-based plans or to the helping-hand type
of proposal, but that we will do what we say we are very
hopeful of doing.
We have been given a timeline from the leadership. It is a
tough timeline to meet, because of all the complexities
involved. The seriousness is really there to get the job done.
Having said that, the Chair now yields to Mr. Deutsch.
Mr. Deutsch. Thank you, Mr. Chairman. Actually, I
appreciate those comments as sort of a segue into the questions
I want to focus on. In my introduction when we were doing
opening statements, I talked about exactly what you are talking
about, that from a policy perspective, I think all of us would
want there to be universal Medicare drug coverage, and what we
have heard from members--in fact, Dr. Ganske specifically
talked to it--and my opening statement and his opening
statement about the cost issue. And the President specifically
has proposed drug costs for seniors with incomes under 135
percent of the Federal poverty limit, and just to mention those
numbers, that is an income of $11,600 a year for a single
person, $15,700 for a couple. The President's plan would offer
partial assistance for seniors who earn up to 175 percent of
poverty, $15,000 a year for a single, $20,300 for a couple.
Dr. Braun, specifically to you, I know the AARP has done
research that seems to point out that a low-income benefit
would miss a great many people. Specifically, who would be left
out if a target such as the President proposed would occur?
Ms. Braun. Certainly, the next group above those who would
be helped, would be left out, and that is a big concern because
when you are talking about couples income, if both of those
couples are on medication, they could be spending a very large
proportion of their income, even if the income is $20,000 or
$25,000, and then you are talking about a big half of your
Medicare beneficiaries. So, it would miss a great many people
who very much need help.
Mr. Deutsch. I think that is the thing to point out, that
the vast majority of seniors are not at, they are getting by,
and what could be $1,000 a month prescription drug bill could
obviously make a dramatic difference in their lives.
Could you specifically comment in terms of AARP's position
regarding the type of proposal that the President has
suggested, which is targeting a drug benefit just for low-
income seniors, or does AARP support drug benefit only for low-
income seniors? What is your sort of official position?
Ms. Braun. I think, in fact, I know AARP wants a universal
benefit in Medicare, defined benefit, and the low-income
benefit would not do that. I do think, though, that the
President is now speaking of universal coverage, as the
chairman just said, of universal coverage for all Medicare
beneficiaries, and he has also talked about that before. So,
one would hope that we would be able to do that this year, and
not just do low-income.
Mr. Deutsch. Well, you must know something we don't know
because, again, based on the comments of this committee, I
think they want in a very theoretical sense, but no one is
willing to talk about it in a practical sense. And, you know,
giving lip service to the theory when the legislation doesn't
do that, I really see that as a fundamental divide. Hopefully
they have come onboard because I think you are reflective of
what most seniors in America and what most Americans want.
Ms. Braun. Well, we hope to be able to help you out a
little bit, help the committee out a little bit next month,
because we have actuaries working on plan designs and what
would be acceptable for beneficiaries and so forth, which is a
question that committee members have asked frequently. So, I
hope we will be able to give you some help in another month or
so on that.
Mr. Bilirakis. Would the gentleman yield? You say next
month you are expecting that information?
Ms. Braun. I understand that we could have something.
Mr. Bilirakis. Could you get that to us? As I say, we are
on a fast-track. And we are always concerned about unintended
consequences and about haste making waste. The more help you
can be, the better. Thank you.
Mr. Deutsch. Again, in terms of any specifics that we have
seen, I have seen no proposals, and I would love that there
existed--and I know the chairman is well-intentioned in terms
of where he wants to see the policy ending up--but in terms of
specific proposals from any Republican for universal coverage,
as you defined, as an additional benefit for Medicare, I have
not seen that. And if there is a specific thing that exists, I
am happy and hope we can do it on a bipartisan basis, but I
think that really is a policy divide that exists at this point.
What the President has proposed is a catastrophic
protection coverage for all seniors with very high drug costs,
and although this level is not defined, it would mean a lot
more seniors would benefit, or would most seniors be left out
of that type of situation, if it is just a catastrophic
coverage in terms of drug costs.
Ms. Braun. Well, I think we have the same problem if it is
just catastrophic and low-income. I think we really need a
universal benefit in Medicare so that we pick up all of the
people.
Mr. Deutsch. Let me just give Dr. Lambrew or Mr. Chess, do
you want to respond, just in terms of the policies?
Mr. Chess. Well, I think the only thing I want to mention
there is in terms of BIO and our members--our focus, given the
resources available, has really been around low-income coverage
and stop-loss, and with stop-loss obviously--you know, there
are various proposals out there in Congress regarding what
appropriate levels are. We really don't speak for that. But we
view it very much as actually a benefit for all seniors
because, while every senior may not necessarily draw on drugs
up to the level of the stop-loss, all of them would benefit
from the peace of mind that it would give. It is very much like
I buy fire insurance at my house, and while I assume my house
isn't going to burn down next week, it does give a lot of peace
of mind and a lot of comfort knowing that we have that covered
and we have that situation that we don't need to worry about.
So, in some ways, we view it as a benefit for everyone, though
not necessarily every person, may necessarily be drawing on it
each year.
Ms. Lambrew. I would like to make two quick comments. One
is that I think that Mr. Crippen said that about $1 trillion of
the $1.5 trillion that is projected to be spent on Medicare
beneficiaries for prescription drugs is below some pretty low
threshold. I thought he said $1,000, but I would have to go
back and look. So, even though I agree that insurance is
important, we can't forget that the dollars are often for
people who don't have spending that high.
And, second, on the low-income benefits, as Dr. Braun said,
we do miss many, if not half, of the uninsured beneficiaries
who lack prescription drug coverage, but it is also important
to note that the policy itself will miss low-income
beneficiaries. First of all, we know that States are not that
interested in doing the type of policy. The National Governors'
Association testified to the Senate Finance Committee saying
this should be a Federal responsibility. It is not like the
Children's Health Insurance Program where all States were
supportive. So, it is not clear that all beneficiaries in all
States will have access to this.
And, second, within those States even that do expand, it is
not clear that all beneficiaries will participate. Mr. Crippen
said that he does think a stand-alone, State-only drug proposal
has lower participation than providing a Medicare benefit and
having States wraparound. Truly, the best way to help low-
income beneficiaries is to provide a Medicare benefit and have
States provide that extra assistance for low-income folks.
Mr. Bilirakis. The gentleman's time has expired. And the
Chair appreciates the gentleman from Tennessee and Mr. Deutsch
for having returned to the hearing.
Mr. Bryant. Thank you, Mr. Chairman. I have about 5
minutes, and an office full of songwriters waiting on me, so I
am going to be brief here.
Dr. Braun, I wanted to ask you, in your statement--and this
has to do with making sure that any plan we have does not
affect an existing plan in a way that would be detrimental or
even deter perhaps other people from providing this benefit--
you say making enrollment attractive and affordable requires a
careful balance of covered benefits and government premium
subsidies.
I am wondering, too, what AARP's position is on a mandatory
date, if we have a program of requiring an opt-in/opt-out, a
date to enter or not enter, one-time position. To me, that
would be encouraging, too, if you had to make a choice. Does
AARP have a position on that?
Ms. Braun. I don't think we have a specific position, but
we certainly realize that that is probably going to be the
route that we are going to have to go because, otherwise,
people will wait and you won't get the healthy people into the
pool because they are going to wait until their drug costs are
going up, and then you don't have an insurance program. What
you have then is just paying, like you do with Medicaid now,
just for drug costs. So, I think you are going to have to have
that sort of arrangement.
Mr. Bryant. I agree with you. I come from the insurance
business of defending companies, you know, we couldn't have
people having a car wreck and then coming in trying to get the
insurance after-the-fact. The pool doesn't work so well that
way.
Dr. Lambrew, on this chart, I am interested in that in
terms of spending of the drug industry roughly equivalent to
what our budget resolution would have in it. I have heard that
before in terms of criticism of the drug industry, and given
all the reasons they would advertise, like anybody else--I
mean, I suppose they have a right like anybody else in the
First Amendment and so forth--and, as well, they have a
relatively short period of time--I say relative--to recapture
their profits and their expenses on not only that drug, but
others that don't make any money for them under our patent
laws. Is there really any relevance to this? I mean, how and
why would we want to stop them from advertising?
Ms. Lambrew. I probably should make it clear, what this
chart is intended to do is not necessarily say this is wrong,
or this shouldn't be happening, or we should use some of the
savings for a Medicare drug benefit. Instead, the goal of this
chart is to say $300 billion is not that much. I think that we
have a situation where policymakers are focused on dollars, and
we have a process that forces you to be focused on these
dollars because the Budget Committee and the budget resolution
say this is how much you all should be spending in the
committees to do things like drug benefits.
So, this is just basically to say, look, put aside how much
is being spent on actual prescription drugs. If you just look
at drug promotional costs alone, it is about the same that
we're considering spending on all 39 million Medicare
beneficiaries. It is not intended to say, this is inaccurate or
wrong or something we should be looking into.
Mr. Bryant. I have been in and out, I didn't hear all of
the testimony. I do know there is that criticism from some in
Congress, and somehow trying to tie the two together, and I
don't know realistically how or why we would want to do that.
Mr. Chess, I don't know if you have any comments on that
issue, but recalling your testimony, I had a couple of
questions I wanted to ask you. I am trying to remember what my
question was. It is on your comment about do no harm to current
coverage and reimbursement. I think it is a similar one I asked
Dr. Braun. Any ideas there in terms of a mandatory day, or any
other ideas of how we could not--would not do any harm. And
also, I guess, any comment you might make on the related
question I asked Dr. Lambrew, coming from the industry and
talking about the numbers in the first part of your statement
about how expensive all this is, and how--I am shocked that
there are that many companies that far in debt. You have got
some great venture capitalists that will underwrite this, but
it is--and I don't think people on the outside understand,
appreciate it, because the drug companies are the whipping dog
right now, but how much is involved in researching and
developing and marketing a drug before you ever make the first
penny on it, and if we don't do that, and if we had price caps,
for instance, that is not going to happen, and we are not going
to have these new technologies and new drugs. Did I lead you
enough on that one?
Mr. Chess. I can certainly tell you enough in our
situation. I mean, I think I mentioned that we got started in
1991, and what we had to do was develop a whole family of
technologies--make this powder, also how to process the
powders, how to get them to be stable for years, how to make
this device. It took us several years to figure out that. Then
you need to go through several years of clinical testing, and
then on an individual drug, you know, things that enter
clinical testing--you probably know the statistics--about 1 in
8, 1 in 10, make it to the other side. And we have had, in the
history of our company, to go out--it is funny--13 times in 1
year. We do more than one financing a year, just to kind of
keep this alive. And the basis of it all is really around, you
know, when the product gets out there, we think it is going to
deliver a huge amount of value and be able to price it from a
value side.
One anecdote, if you don't mind me sharing, is when we
first went out on inhaled insulin, which is the product that we
are most known for, we talked to U.S. and European companies to
partner with them. And we found we couldn't get any interest
out of the European companies because they were unsure how
their pricing authorities would deal with the product. And if
we were a European-based company and only had companies that
were basically government entities or other types of entities
that were dealing with it, and you couldn't value price our
product--we never would have raised the money and we never
would have gotten our product as far as we have. And I don't
think that is uncommon in our industry.
In terms of your question, sort of on advertising, most of
us are in the same boat in our business. We haven't gotten to
the point where we have to worry about that yet, but I can
certainly say for a product like ours, making consumers aware
of it, I think, is actually a valuable service for them. Where
you are giving a more convenient therapy you want people to
know that they have choices out there. So I actually think
there is a component of it that is actually education in
addition to a component that may actually be product
advertising.
Mr. Bilirakis. The gentleman's time has expired. I wish the
ranking member, Mr. Brown, were here to hear the anecdote that
you shared with us.
We are finishing up. First of all, I hope that you accept
the fact that we are serious about doing something. We have got
to work together. Mr. Deutsch spoke about bipartisanship and
that sort of thing. Well, we ought to concentrate on what is at
hand, and what is at hand is trying to do something regarding
prescription drugs. If we get off onto too many issues which
are behind us, it doesn't do any good. Right now we are trying
to do something with prescription drugs, and if we are all
serious about doing it, we are going to get it done.
Mr. Chess, I understand you have had to pass up meetings
with the Speaker and with other leaders in order to be here all
day long, and we very much appreciate it, and appreciate, of
course, Dr. Braun and Dr. Lambrew being here.
Again, use us. We will have written questions, as we always
do. We expect that you would be willing to respond to those
but, at the same time, please take the initiative. Any ideas
you have, suggestions--Dr. Lambrew, you mentioned a number of
things--please share them with us because it is a tough job and
we have a short period of time to do it in, and you can only be
helpful. Thank you. Thank you so very much. The subcommittee is
adjourned.
[Whereupon, at 2:02 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of Pharmaceutical Research and Manufacturers
Association of America
America's innovative pharmaceutical industry welcomes the
opportunity to share its views at today's hearing about an issue that
is vitally important to all of us--prescription drug coverage for
seniors and disabled citizens. Across America, 40,000 scientists in our
research labs work day and night in hopes of finding the next cure or
the next treatment to allow individuals to live long, healthy, and
productive lives (see attachment). On average, it takes 12 to 15 years
and $500 million to develop a new drug and bring it to market.
Today, industry has more than 1,000 new medicines in development to
treat hundreds of serious illnesses including Alzheimer's and
Parkinson's diseases, cancer, stroke, arthritis, and depression. We are
confident that, in time, we will find the cures for these and other
conditions that are so prevalent among our aging population.
The 21st century brings even greater promise. As the human genome
is mapped, many new targets for pharmaceutical innovation will be
identified. Today's 500 or so targets for drug interventions are
expected to increase to 3,000 to 10,000 targets in the near future.
When these treatments and hopefully cures are brought to market, we
want to ensure that seniors have access to them--without discouraging
the discovery and development of new medicines.
We believe there is bipartisan consensus on four key points :
First, expanded drug coverage for seniors will happen. The question
is not whether it will happen, but when, how, and with what effects on
the quality of health care for seniors and disabled Americans and on
drug discovery and development. If we work together, it could happen in
this Congress. Most Medicare beneficiaries have prescription drug
coverage through their (or their spouse's) current or former employer,
a Medicare supplemental insurance (or Medigap) policy or a
Medicare+Choice plan, or by qualifying for Medicaid or other
governmental programs. But many of those who do not have the coverage
they need require additional assistance. The pharmaceutical industry
wants to be part of a sound, market-based solution that will help all
patients today and into the future.
Second, expanded drug coverage for seniors will be a positive
development. Prescription drugs are increasingly the most effective and
cost-effective therapy with which to treat diseases or conditions. Some
Medicare beneficiaries are in need of prescription drug coverage and
our medicines provide extraordinary value to them.
Third, as we expand drug coverage for seniors, we must sustain the
American pharmaceutical industry's worldwide leadership. The industry
has developed new medicines that benefit all patients--young and old--
and their families. We do not want to harm the environment in the U.S.
that has allowed our industry to thrive. In the1990s alone, 370
prescription drugs, biologics, and vaccines developed by industry were
approved for patients' use with a physician's prescription. Almost half
of the globally important new medicines in the world are discovered by
the U.S. industry. We are the world's leader in pharmaceutical research
and development.
As we work together to expand access to prescription drug coverage,
we must remember that Medicare beneficiaries want access to new
medicines because they were invented.
Finally, we need to always remember to put the interests of
patients first. In an environment where we discuss 10-year forecasts,
adverse selection, risk pools, and premium calculations, we must not
forget that the real focus is on patients. Our goal should be to expand
Medicare drug coverage in the way best for patients, their children,
and their grandchildren--who need access today to medicines already
developed, and who also depend on the pharmaceutical industry to
continue to lead the way in developing new medicines and hopefully
cures that exist today only in our dreams.
THE PHARMACEUTICAL INDUSTRY SUPPORTS EXPANDED PRESCRIPTION DRUG
COVERAGE FOR ELDERLY AND DISABLED AMERICANS
Since February 1999, the pharmaceutical industry has strongly
supported strengthening and modernizing Medicare, including expanding
Medicare coverage of prescription medicines. We believe that the best
way to expand prescription drug coverage for Medicare beneficiaries is
through comprehensive Medicare reform. The current program is based on
a 1960s-style, one-size-fits-all model that relies on centralized price
controls and complex regulations. The result is a program that is
confusing for patients and providers, difficult to administer, and
inadequate to meet the health care needs of the 21st century.
If the Congress decides to pursue instead interim expansion of drug
coverage through private-sector insurance (using choice and competition
to ensure quality and contain costs), PhRMA can be supportive so long
as the interim measures would improve, rather than impede,
opportunities for future comprehensive reform.
With respect to the delivery system for any proposal, law and
policy makers need to ask:
<bullet> Should the drug benefit be delivered by the government or the
private sector?
<bullet> Should the benefit be a single, one-size-fits-all program, or
should seniors and disabled beneficiaries have a range of
choices?
We believe several principles are key components of any interim
proposal. As Congress continues to grapple with this complex issue, we
will support proposals consistent with these key principles:
<bullet> All beneficiaries would have the ability to enroll in a
private insurance coverage plan of their choosing, ranging from
private fee-for-service to HMOs and various private-sector
options in between.
<bullet> Federal subsidies would help low-income beneficiaries afford
coverage.
<bullet> Plans would provide coverage for beneficiaries with high
pharmaceutical expenditures.
<bullet> Beneficiaries would have access to all medicines.
<bullet> Plans should be overseen by a new government entity.
<bullet> The new program would be consistent with, and a step toward,
needed comprehensive modernization of the Medicare program.
<bullet> Coverage would be offered through competing, private insurance
or health plans that rely on marketplace competition to control
costs and improve quality.
Government price controls are unacceptable because they would
inevitably harm the industry's ability to develop new medicines for
patients. We urge you to say ``no'' to price controls in any form, not
direct price controls, not indirect price controls, not by design, not
by accident, not by stealth, not by baby steps.
A PRIVATE INSURANCE INCREMENTAL APPROACH WILL BEST SERVE PATIENTS TODAY
AND TOMORROW
The pharmaceutical industry believes that if Congress decides to
provide an incremental prescription drug benefit, the best approach
would be to provide seniors access to private insurance products. This
approach would fit easily into the current marketplace, since well over
150 million people get their drug coverage through private entities. In
delivering drug coverage, these private entities would do more than
simply pay the claims. They could provide disease management programs,
drug utilization review, patient education, and help to reduce medical
errors. We in the research-based pharmaceutical industry believe that
seniors and disabled beneficiaries would benefit greatly by having
access to these private insurance products, with the government
providing subsidies for those in need.
Skeptics point to complex issues, such as ``adverse selection,''
and claim that a private insurance program will not work. Adverse
selection can occur because individuals purchase insurance only when it
is in their best interest. If an individual could purchase insurance at
any time, it would be perfectly rational for them to wait until they
were sick. Consequently, insurers often place limits on when
individuals can purchase insurance and under what conditions.
Recognizing that adverse selection is an important issue, we asked
the experts for assistance. We turned to leading actuarial and economic
firms, including Milliman and Robertson, Abt Associates, and Towers-
Perrin. These actuaries and economists note that a private prescription
drug insurance program can work if designed properly. They also note
that adverse selection is ``one of the most difficult issues in
designing any insurance program involving individual choice.''
Actuaries and economists have several tools to minimize the impact on
adverse selection. These include:
<bullet> Limiting election opportunities for enrollment;
<bullet> Providing low-income subsidies for premiums and deductibles;
<bullet> Establishing a high-risk pool for enrollees with very high
expenditures;
<bullet> Requiring up-front cost sharing, such as an annual deductible;
and
<bullet> Allowing insurers to negotiate with manufacturers and
distribution networks to reduce costs.
We believe that a properly designed prescription drug insurance
benefit would attract many Medicare purchasers and many private market
sellers. Why are we so confident? In the market today, there are
private health insurance policies for cancer, sports accidents,
emergency room visits, pregnancy complications, and campers. There are
private insurance products for goats, carriage rides, and the weather
on the day of your daughter's wedding. We believe that there are
similar opportunities for private-market solutions to increase access
to prescription drug coverage for the elderly and disabled Americans.
CONCLUSION
The pharmaceutical industry supports expanded drug coverage for
seniors and disabled Americans--done the correct way.
Some say that this issue is life or death for the pharmaceutical
industry, America's premier high-technology industry. After the debate
is over and the dust settles, we will still have a pharmaceutical
industry--but depending on what you do, the industry could be
profoundly different, and the results for patients could be
demonstrably less. As the debate unfolds, we hope you'll remember the
millions of Americans and their families waiting impatiently for new
treatments and hopefully cures. We can provide quality health care for
seniors and the disabled, including better prescription drug coverage,
but we need to do it the correct way. If we do it the wrong way, the
industry and the patients we serve will undoubtedly suffer the
consequences.
Attachment
the research-based pharmaceutical industry: facts at a glance
A Strong Commitment to Research and Development
<bullet> This year, research-based pharmaceutical companies will invest
$30.5 billion in research and development (R&D) on innovative
new medicines. This represents an increase of 12.5 percent over
research spending in 2000. Since 1980, research-based companies
have multiplied their R&D investment 13-fold.
<bullet> Domestic R&D is expected to increase by nearly 18.2 percent in
2001.
<bullet> R&D conducted abroad by U.S. based companies will grow only
1.02 percent--a clear sign that the American system nurtures
innovation and discovery.
<bullet> Over the past two decades, the percentage of sales allocated
to pharmaceutical R&D has increased from 11.9 percent in 1980
to approximately 20.3 percent in 2000, higher than virtually
any other industry. The average for all U.S. industries is less
than four percent.
<bullet> Approximately 36 percent of pharmaceutical R&D conducted by
companies worldwide is performed in the United States, followed
by Japan with 19 percent.
<bullet> This U.S. industry investment is very efficient. Of 152 major
global drugs developed between 1975 and 1994, 45 percent are of
U.S. origin.
Drug Discovery and Development Are High-Risk
<bullet> During the 1990s, the average time it took to discover, test
and develop a single new drug increased to nearly 15 years.
This was almost twice the development time in the 1960s.
<bullet> Of every 5,000-10,000 compounds tested, only five enter human
clinical trials, and only one is approved by the FDA for sale
in the U.S. Of every 10 medicines in the market, on average,
only three generate revenues that meet or exceed average R&D
costs.
<bullet> The Boston Consulting Group estimates that the pre-tax cost of
developing a drug introduced in 1990 was $500 million,
including the cost of research failures, the opportunity cost
of capital over the period of investment, and the increasing
cost of clinical trials.
Medicines in Development
<bullet> The research-based pharmaceutical industry currently has more
than 1,000 new medicines in development to treat hundreds of
serious diseases.
-- There are nearly 1000 biotech medicines in the pipeline to
combat scores of diseases. Almost half the medicines--402--
are for cancer, the second leading killer of Americans.
Biotechnology and new technological tools have
revolutionized cancer research.
-- Among these drugs and biologics in development are promising new
treatments for cancer, heart disease, Alzheimer's, AIDS,
diabetes, multiple sclerosis, Parkinson's, stroke,
rheumatoid arthritis, and depression. The
Value of Medicines
<bullet> The estimated life expectancy of an American born in 1920 was
54 years. By 1965, life expectancy had increased to 70 years.
The average American born today can expect to live more than 76
years, and life expectancy has risen dramatically for all age
groups. Every five years since 1965, roughly one additional
year has been added to life expectancy at birth. These
improvements in life expectancy are due to advances in medicine
and our improved ability to prevent and treat disease:
-- Antibiotics and vaccines have virtually wiped out such diseases
as diptheria, syphilis, whooping cough, measles and polio
in the U.S.
-- The influenza epidemic of 1918 killed more people than all the
battles fought during the First World War. Since that time,
medicines have helped reduce the combined U.S. death rate
from influenza and pneumonia by 85 percent.
-- Over the past 30 years, innovative medicines have helped reduce
deaths from heart disease and stroke by half, enabling 4
million Americans to live longer, better lives.
-- Since 1965, drugs have helped cut emphysema deaths by 57 percent
and ulcer deaths by 72 percent.
<bullet> In a year-long disease-management program for about 1,100
patients with congestive heart failure run by Humana Hospitals,
pharmacy costs increased by 60 percent, while hospital costs
(the largest component of U.S. health care spending) declined
78 percent. The net savings were $9.3 million.
<bullet> A National Institutes of Health (NIH) study showed that while
it initially costs more to treat stroke patients with a clot-
busting drug, the expense is more than offset by reduced
hospital rehabilitation and nursing home costs. Treatment with
the clot-buster costs an additional $1,700 per patient, but
reduced hospital rehabilitation and nursing home costs result
in net savings of more than $4000 per patient.
<bullet> According to a study published in the New England Journal of
Medicine, the use of ACE inhibitor drugs for patients with
congestive heart failure reduced mortality by 16 percent,
avoiding $9,000 in hospital costs per patient over a three-year
period. Considering the numbers of people at risk for
congestive heart failure, additional use of ACE inhibitors
could potentially save $2 billion annually.
<bullet> According to a study conducted at the University of Maryland
Medical Center, patients treated with beta-blockers following a
heart attack were up to 40 percent less likely to die in the
two-year period following the heart attack than the patients
that did not receive the drugs. According to another study, use
of beta-blockers resulted in an annual cost savings of up to $3
billion in preventing second heart attacks and up to $237
million in treating angina.
-- Unfortunately, a study published in the Journal of the American
Medical Association found that only half the people who
could be helped by these medicines are getting them.
<bullet> Estrogen-replacement therapy can help aging women avoid
osteoporosis and crippling hip fractures, a major cause of
nursing home admissions. Estrogen-replacement therapy costs
approximately $3,000 for 15 years of treatment, while a hip
fracture costs an estimated $41,000.