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Testimony on Prescription Drug Coverage for Medicare Beneficiaries by Michael Hash
Deputy Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Chairman Bilirakis, Congressman Brown, distinguished Subcommittee members, thank you for inviting us to discuss prescription drug coverage for Medicare beneficiaries. In his comprehensive Medicare reform plan, the President has recognized the overwhelming need to ensure that all beneficiaries have access to a voluntary, affordable, and accessible prescription drug benefit. I believe all experts, and the public, agree that pharmaceuticals are as essential to modern medicine today as hospital care was when Medicare was created. Modernizing Medicare by adding a meaningful drug benefit is not an option -- it is an obligation.

Currently, about one third of beneficiaries have no drug coverage. They not only must pay for essential medicines out of their own pockets, but they also are forced to pay full retail prices because they do not get deep discounts offered to insurers and other large purchasers. Far too many must choose between buying groceries or filling prescriptions. But the lack of prescription drug coverage is not just a problem for the poor. More than half of beneficiaries without drug coverage have incomes above 150 percent of the federal poverty level (above $17,000 for an elderly couple).

For those who do have drug coverage, it is growing increasingly expensive and inadequate, and eroding with higher copayments, deductibles and premiums, or disappearing completely as former employers drop coverage for retirees and Medigap coverage becomes scarce.

The President=s comprehensive Medicare reform plan provides all beneficiaries with access to a voluntary and affordable, meaningful outpatient prescription drug benefit. The President=s proposal is built upon current practices in the private sector.

It is kept affordable through private sector competition and expressly does not include government price controls. Making it an optional Medicare benefit for all beneficiaries helps ensure an insurance product with a healthier risk pool and less adverse selection, which also is essential for maintaining affordability.

The drug benefit under the President=s plan also is completely voluntary, so individuals can keep other prescription drug coverage if they prefer. And it includes incentives for employers to continue providing such coverage to their retirees.

Importance of Prescription Drugs

Prescription drugs can prevent, treat, and cure more diseases than ever before, both prolonging and improving the quality of life. They can minimize hospital and nursing home stays. And in some cases they can help decrease the total cost of care.

The private sector, recognizing that prescription drugs are essential to modern medicine, now includes outpatient drug coverage as a standard benefit in almost all coverage policies. This is also true of all plans in the Federal Employees Health Benefits Program. No one would design Medicare today without including coverage for prescription drugs.

Prescription drugs are particularly important for seniors and disabled Americans, who often take several drugs to treat multiple conditions. All across the country there are Medicare beneficiaries suffering physical and financial harm because of the lack of coverage.

For example, there is the case of a 70-year-old Durham, North Carolina widow with emphysema, high blood pressure, and arthritis whose monthly bills for Prilosec, Norvase, two inhalers, and nitroglycerin patches forced her daughter to take out a second mortgage on her home.

There is the case of an 80-year-old Sauk Rapids, Minnesota breast cancer survivor who pays $384 every three months for a Medigap policy that does not cover the $89 she must spend each month for tamoxifen, $139 for Prilosec to control acid reflux, $43 for eye drops to treat glaucoma, and $20 for drugs to control high blood pressure.

And there is the case of a New York City man who stopped taking the Lisinopril that controlled his hypertension because he could not afford its $30 monthly cost, and then suffered a stroke that left him without speech or the use of his right arm, and left Medicare with a $10,000 hospital bill.

Current Coverage

Data on prescription drug coverage and spending are gathered each year in the Medicare Current Beneficiary Survey. These data from 1995, analyzed for the Department of Health and Human Services by the Actuarial Research Corporation and projected forward to 2000, show several disturbing trends in Medicare beneficiary drug coverage.

The majority of Medicare beneficiaries (56 percent) use prescription drugs costing $500 or more each year, with 38 percent requiring drugs costing $1000 or more. Each year 87 percent of Medicare beneficiaries need to fill at least one prescription.

One in three Medicare beneficiaries (34 percent) overall has no prescription drug coverage. About half of these beneficiaries have incomes above 150 percent of poverty, showing that this is not just a low-income problem. These beneficiaries are forced to pay excessively high costs because they do not get the deep discounts offered only to insurers and other large purchasers.

The situation is worse in rural areas, where nearly half of all Medicare beneficiaries have no drug coverage. They have less access to employer-based retiree health insurance because of the job structure in rural areas. And three-quarters of rural beneficiaries do not have access to Medicare+Choice plans and the drug coverage they provide.

Only one in four Medicare beneficiaries (24 percent) has private sector coverage provided by former employers to retirees. This coverage, however, is eroding. The number of firms offering retiree health coverage dropped by 25 percent from 1994 to 1998, from 40 percent in 1994 to 30 percent in 1998, according to the employee benefits research firm Foster-Higgins. The true impact of this trend has not yet been felt; as current workers retire, the population of Medicare beneficiaries with retiree coverage will drop even more.

About one in six Medicare beneficiaries (17 percent) has drug coverage from a Medicare+Choice plan, (mostly HMOs). However, nearly one third of beneficiaries live in areas where there are no Medicare+Choice offerings. And where plans do exist, they are raising premiums and copayments, and lowering caps on coverage. In 2000, nearly one third of plans will cap coverage at $500, even though the majority of Medicare beneficiaries use prescription drugs costing $500 or more each year.

About one in eight Medicare beneficiaries (12 percent) has drug coverage through Medicaid. However, eligibility for Medicaid is restricted to the poor, and the majority of beneficiaries eligible for such coverage -- 60 percent -- are not enrolled in the program. This persists despite increasing outreach efforts to enroll those who are eligible, and may be due to the stigma associated with a program historically linked to welfare.

Less than one in ten Medicare beneficiaries (8 percent) has drug coverage from a supplemental Medigap plan. Costs for these policies are rising rapidly, by 35 percent between 1994 and 1998, according to Consumer Reports, in part because of sicker risk pools. The General Accounting Office (GAO) found that almost half of all Medigap insurers implemented substantial increases in 1996 and 1997, with AARP -- one of the largest Medigap providers -- increasing rates by 8.5 percent in 1997, 10.9 percent in 1998, and 9.4 percent in 1999.

The GAO also found that Medigap premiums vary widely, both within and across States. For example, premiums charged to a 65-year-old beneficiary for the standardized AI@ Medigap plan range from $991 to $5,943 around the country. And the average premium for the standardized AH@ Medigap plan ranges from $1,174 in Virginia to $2,577 in Georgia. Furthermore, premiums for Medigap coverage can increase with age in most States. In some parts of the country, beneficiaries over age 75 are paying more than $100 per month for drug coverage, over and above the portion of the premiums they are paying for other Medigap benefits.

President=s Plan

A voluntary affordable drug benefit available to all beneficiaries is a key feature of the President=s comprehensive Medicare reform plan. The President=s plan also extends the life of the Medicare Trust Fund by dedicating part of the on-budget surplus to the program, improves preventive benefits, increases competition and use of private sector purchasing tools, helps the growing number of uninsured near retirement age buy into Medicare, and strengthens program management and accountability through increased flexibility and a private advisory Committee.

Under the President=s proposal, the drug benefit is available to all beneficiaries, regardless of their incomes. The hallmark of the Medicare program since its inception has been its social insurance role -- everyone, regardless of income, is entitled to the same basic package of benefits. This is a significant factor in the unwavering support for the program from the American public and should be preserved. All workers pay taxes to support the Medicare program and therefore all beneficiaries should have access to a new drug benefit. A universal benefit also helps ensure an insurance product with an adequate risk pool and less adverse selection.

The benefit also is completely voluntary. If beneficiaries have what they think is better coverage, they can keep it. And the President=s plan includes a subsidy for employers offering retiree coverage that is at least as good as the Medicare benefit to encourage them to offer and maintain that coverage. This will help to minimize disruptions in parts of the market that are working effectively, and it is a good deal for employers, beneficiaries, and the Medicare program.

Still, we expect that most beneficiaries will choose this new drug option because of its attractiveness, affordability, and stability. Because Medicare beneficiaries rely so heavily on drugs, we project that about 31 million beneficiaries will benefit from this coverage each year.

For beneficiaries who choose to participate, Medicare will pay half of the monthly premium, which is estimated to be $24 in 2002 and $44 in 2008. Medicare also will pay half the cost of each prescription they fill, with no deductible. The benefit will cover up to $2,000 of prescription drugs when coverage begins in 2002, and increase to $5,000 by 2008, with a 50 percent beneficiary coinsurance. After that, the dollar amount of the benefit cap will increase each year by the increase in the Consumer Price Index.

The prescription drug benefit for beneficiaries in the traditional Medicare program will be administered by benefit managers, such as pharmacy benefit manager firms and other eligible companies.

These entities will bid competitively for regional contracts to provide the service, and we will review those contracts to ensure that there is healthy competition. The drug benefit managers -- not the government -- will negotiate discounted rates with drug manufacturers, as they do now in the private sector. There will be no Medicare fee schedule or price controls.

And, importantly, the small percentage of beneficiaries whose prescription needs exceed the benefit cap will continue to receive the discounted rates negotiated by their drug benefit manager even after they surpass the cap.

The drug benefit managers will have to meet access and quality standards, such as implementing aggressive drug utilization review programs, as well as conducting beneficiary education. And their contracts with the government will include incentives to keep costs and utilization low.

In general, all therapeutic classes of drugs will be covered. Each drug benefit manager will be allowed to establish a formulary, or list of covered drugs. They will have to cover off-formulary drugs when a physician has reason to request the dispensing of a specific drug that is not on the formulary. Coverage for the handful of drugs that are now covered by Medicare will continue under current rules and will not be included as part of the new drug benefit package.

Beneficiaries enrolled in Medicare+Choice plans will receive this optional coverage through those plans, and the plans will use their existing management to negotiate prices and formularies. In addition to offering the new Medicare drug benefit, Medicare+Choice plans will be allowed to offer additional supplemental drug coverage not subsidized by Medicare, as well.

It is important to stress that Medicare+Choice plans will be explicitly paid for providing a drug benefit under the President=s plan, so they would no longer have to depend on what the rate is in a given area to determine whether they can offer to do so. We will no longer see the extreme regional variation in whether Medicare+Choice plans provide drug coverage. Today, only 23 percent of rural beneficiaries with access to Medicare+Choice have access to prescription drugs, compared to 86 percent of urban beneficiaries. Under the President=s plan, both rural and urban beneficiaries will have drug coverage available from all Medicare+Choice plans in their area. And beneficiaries will not lose their drug coverage if a plan withdraws from their area or if they choose to leave a private managed care plan.

Financing will be handled through a combination of beneficiary premiums and general revenue dollars. Premiums will be collected the same way Medicare Part B premiums are collected, as a deduction from Social Security checks for most beneficiaries who choose to participate.

Beneficiaries can sign up for this benefit in the first year the benefit is offered, the first year in which a beneficiary is eligible for Medicare, the first year after retirement if a beneficiary had continued working and kept employer-sponsored coverage after becoming a Medicare beneficiary, in the first year after an employer-sponsored plan drops drug coverage for all retirees, and certain other specific circumstances that would not create potential for adverse selection.

For poor beneficiaries, State Medicaid programs will pay premiums and cost sharing as they do for other Medicare benefits. Beneficiaries with incomes between 100 and 135 percent of poverty would receive full assistance for their drug premiums and cost sharing. Beneficiaries with incomes between 135 and 150 percent of poverty would pay a partial, sliding-scale premium based on their income. The Medicaid costs for both of these groups would be matched by the Federal government at 100 percent.

The drug benefit=s cost to Medicare is paid for primarily through program savings resulting from increased competition and efficiency, and other provisions in the President=s plan. Additional funding comes from a small portion of the budget surplus devoted to Medicare by the President.

Conclusion

Chairman Bilirakis, I know you are particularly interested in ensuring that beneficiaries with low incomes and high drug costs have drug coverage. So are we. But access to affordable and meaningful prescription drug coverage is a growing problem for Medicare beneficiaries across the income spectrum. Prescription drugs are a fundamental component of modern medical treatment, and all beneficiaries need coverage for this essential benefit.

Medicare=s overwhelming success and popularity are premised on the fact that all Americans pay in their fair share and that all Americans have equal access to all the program=s benefits. Given the essential nature of prescription drugs in modern medicine, we have an obligation to ensure that comprehensive drug coverage is among the program=s benefits. We have an obligation to ensure that this coverage is available to all beneficiaries. And we have both the opportunity and the responsibility to make this essential change as part of a comprehensive and fiscally responsible Medicare reform package, as has been proposed by the President.