TESTIMONY OF
THOMAS A. SCULLY
ADMINISTRATOR
CENTERS FOR MEDICARE AND MEDICAID SERVICES
ON
MEDICARE COVERAGE OF PRESCRIPTION
DRUGS
BEFORE THE
SENATE FINANCE COMMITTEE
MARCH 7, 2002
Chairman Baucus, Senator Grassley, distinguished Committee
members, thank you for inviting me to discuss our new
proposal for strengthening Medicare, including prescription
drug coverage. Joining me today, Mr. Chairman, is Assistant
Secretary for Planning and Evaluation, Bobby Jindal. Bobby
has spent a considerable amount of time looking into Medicare
reform. As many of you will recall, Bobby served as the
Executive Director of National Bipartisan Commission on
the Future of Medicare. Strengthening Medicare
with prescription drug coverage is one of President Bush�s
top legislative goals for the year. Since I took this
job last June, I have started almost every speech and
ended every speech by saying, "Don�t let anyone tell
you that the Medicare prescription drug benefit can�t
get through this year. And don�t let anyone tell you that
we can�t address health insurance access this year."
For the past twenty years, I have heard that almost every
year. I�ve heard that Medicare reform and prescription
drug coverage can�t be done � usually because it is an
election year and it is too dicey. But I know, and I�m
sure you�ll agree with me, that a Medicare prescription
drug benefit can and should be started this year. My first
job in the first Bush Administration in the spring of
1989 was (along with many on this committee) to try to
save catastrophic coverage (prescription drugs) for seniors.
Congress passed a provision that included drug coverage
in 1988, and then repealed it in 1989. And Congress has
been debating the need for prescription drug coverage
on and off ever since. The bottom line is that seniors,
particularly low-income seniors, need prescription drug
coverage now � it�s long overdue.
We can have a healthy debate about how much additional
funding is necessary over the next decade to modernize
Medicare � whether it�s the $190 billion proposed by the
Administration, the $300 billion that had strong bipartisan
support in last year�s budget resolution, or some other
figure. But the problem is that similar numbers have been
kicked around for the past 15 years with no action. We
believe that $190 billion is sufficient, as part of legislation
that brings other aspects of Medicare up to date � including
reliable, less costly health care coverage options, an
improved benefit package, and lower drug prices through
competition. These steps will help seniors not only through
a meaningful drug benefit, but also through allowing them
to spend their prescription drug dollars more effectively
and avoid unnecessary health care costs. We believe that
any new spending for Medicare should go toward helping
beneficiaries through prescription drugs and better health
care coverage options. We must also be cognizant of the
fact that most seniors have drug coverage today and many
are satisfied with the private coverage they have now
� we must avoid "crowding out" good employer
coverage. And finally, we must make sure that the prescription
drug benefit we implement will be there for seniors in
the Baby Boom. The key, however, is getting started,
and we intend to continue to work closely with Congress
to implement a prescription drug benefit that Republicans
and Democrats can support.
Senator Graham, Chairman Thomas and others have developed
a variety of Medicare reform proposals, but it will take
at least several years to get a comprehensive drug benefit
set up. But seniors need help now, and there are proposals,
like the drug card, and low-income subsidies, that we
can do to help seniors immediately as part of comprehensive
legislation. This Administration � without a doubt � is
committed to Medicare reform and committed to providing
a meaningful prescription drug benefit for America�s seniors
and people with disabilities, and to beginning to provide
assistance immediately.
The President, the Secretary, and I are determined to
get started now. The President�s FY 2003 budget demonstrates
the Administration�s commitment to modernizing Medicare
by dedicating $190 billion over ten years for comprehensive
Medicare modernization, including a subsidized prescription
drug benefit, better insurance protection, and better
private options for all beneficiaries, as well as targeted
improvements that begin providing relief immediately.
And it is our goal to work constructively with
Congress to achieve the President�s principles for Medicare
legislation, as he announced last July. To
that end, I want to discuss with you in greater detail
the new proposals to be included in legislation to modernize
Medicare, as set forth in the President�s budget: the
prescription drug card, the transitional low-income drug
benefit, and immediate steps to help make sure that seniors
who prefer private health insurance coverage in Medicare
can continue to get it. The Administration is committed
to working with Congress to implement these important
changes.
PRESCRIPTION DRUG CARD
The lack of drug coverage among American seniors is becoming
a social epidemic and is Medicare�s most pressing challenge.
Ten million Medicare beneficiaries have no prescription
drug coverage at all. About forty percent of these beneficiaries,
or 4 million, had incomes below 150 percent of poverty,
or an annual income of about $18,000 for a family of two.
In fact, Medicare beneficiaries, and the uninsured, are
the only people in America today that commonly have to
pay full price for prescription drugs. That is simply
unacceptable and we must do something to address it. Last
year, the President took the first step when he proposed
the creation of a new Medicare-endorsed drug card program.
The drug card is not a drug benefit and it is not a substitute
for one. It is, however, an important first step in helping
seniors afford the drugs they need today.
The President's proposal is pretty straightforward �
it�s a pooling mechanism modeled on private health insurance
programs, where consumers routinely benefit from discounts
of 10 to 35 percent. Private insurers, with their large
numbers of customers, use their market power to secure
significant rebates and discounts from manufacturers.
In fact, I would venture to guess that all of us in this
room, and certainly all federal employees, benefit from
lower drug prices as a result of such pooling. Under the
President�s proposal, Medicare would endorse private drug
cards that met minimum standards, allowing seniors to
get the information they need to obtain manufacturer discounts
and other valuable pharmacy services. These third-party
plans will negotiate discounts and rebates directly from
drug manufacturers and pass the savings on to Medicare
beneficiaries who choose to participate.
One of the strongest arguments for the drug card is that
it is the building block for most Medicare prescription
drug benefit proposals. For example, both Senator Graham�s
proposal and Chairman Thomas� proposal both get a significant
portion of their savings from pooling seniors into PBMs.
Under the President�s drug card proposal, beginning later
this year, Medicare would annually endorse a number of
discount card options operated by private organizations
that meet certain qualifications, including financial
stability, accessibility, availability of discounts and
other customer service features. Each of the card programs
could use formularies, patient education, pharmacy networks,
and other commonly used tools to secure deeper discounts
for beneficiaries. Medicare beneficiaries could choose
the one card that best suits their prescription needs,
and at most they would pay an enrollment fee of no more
than $25. Beneficiaries would enroll with one particular
card for six months at a time, but as their prescription
needs change, they could switch cards as frequently as
every six months to ensure they are getting the best discounts
on their prescriptions and the best pharmacy services.
Card sponsors would negotiate discounts with drug manufacturers,
and endorsed cards would be required to provide comparable
information to beneficiaries about the discounts and other
services they offer. The Medicare program would encourage
competition among cards through better information, and
would simplify Medicare beneficiaries' decisionmaking,
by requiring that comparisons of the drug discounts available
through the different cards are published and available
to beneficiaries. Is this a new benefit? No. Is it perfect?
No. But it is a key component to getting on track
to implement a prescription drug benefit effectively.
The drug card has another important aspect: CMS has to
implement it, just as it will eventually have to implement
a more comprehensive drug coverage benefit. CMS knows
how to pay hospitals and doctors and nursing homes, but
CMS has no experience in working with PBMs, paying pharmacists,
or negotiating with drug manufacturers to run a retail
drug insurance program. The infrastructure created by
the voluntary drug card program and the experience CMS
will gain by administering such a program will be a significant
advantage when Congress passes a comprehensive Medicare
prescription drug benefit, and CMS has to administer it.
In our extensive discussions with AARP, I have found that
this may be the top reason for their solid support of
this concept �- the desire to build the infrastructure
and develop the experience needed for an effective Medicare
drug benefit.
TRANSITIONAL MEDICARE LOW-INCOME DRUG ASSISTANCE PROGRAM
We�ve been debating how to cover prescription drugs under
Medicare for years. In the absence of a Medicare prescription
drug benefit, many states have taken action to assist
the neediest seniors. The lowest-income seniors have received
prescription drug coverage under the Medicaid dual-eligible
program. In addition, 24 states have set up additional
prescription drug assistance programs for seniors. Yet
many lower-income seniors still get no help. The President
believes that comprehensive Medicare legislation should
take advantage of existing state infrastructure immediately,
and support the integration of existing state low-income
programs into the new Medicare drug benefit, by helping
states provide drug coverage for low-income seniors right
away.
The Administration has proposed to provide immediate
support for comprehensive drug coverage for Medicare beneficiaries
up to 150% of poverty � about $18,000 for a family of
two. This proposal, called the Transitional Medicare Low-Income
Drug Assistance Program, would begin by using the existing
administrative structure operated by the states (in cases
where states have already set up drug assistance programs)
and would also allow states to use the new Medicare drug
card infrastructure to provide low-income assistance.
For Medicare beneficiaries up to 100% of poverty, the
program would pay for expanded drug-only coverage at current
Medicaid matching rates, much like existing programs that
subsidize Medicare premiums and cost-sharing for low-income
Medicare beneficiaries. As an incentive for States to
expand coverage up to 150% percent of poverty, Medicare
would pay 90 percent of the States' cost of drug-only
coverage expansion for above 100% of poverty, leaving
states responsible for covering the remaining 10%. This
policy is projected to expand drug coverage for up to
3 million beneficiaries who currently do not have prescription
drug assistance. It would be fully integrated with the
Medicare drug benefit once the reform Medicare program
is implemented, through a transitional mechanism as envisioned
in all major Medicare drug benefit proposals. In addition,
to make expanded drug coverage immediately available even
before the enactment of the Transitional Low-Income Drug
Assistance Program, states can immediately participate
in a model drug waiver program called Pharmacy Plus that
can cover Medicare beneficiaries up to 200% of poverty.
In Illinois, for example, 368,000 additional low-income
Medicare beneficiaries, up to 200% of poverty, will receive
drug coverage under the waiver we approved last month.
REFORMED MEDICARE WITH PRESCRIPTION DRUG COVERAGE
Medicare � which will spend over $255 billion in 2003
on health care for about 40 million beneficiaries � was
established in 1965 to address the national problem of
health care for the elderly, and later, citizens with
disabilities. Yet, while the private health insurance
market has continued to make dramatic advancements to
update coverage and improve health outcomes over the past
four decades, Medicare has lagged behind. The President
believes very strongly that the largely 1965 model of
Medicare must be strengthened. I don�t think anyone in
this room � Democrat, Republican or Independent � if we
could start from scratch, would take $255 billion and
design the Medicare program we have today. We must work
together and finally take action to strengthen the Medicare
system and update its outdated benefits package. To this
end, the President last year proposed a framework for
modernizing and improving the Medicare program that builds
on many ideas developed in this Committee and by other
Members of Congress. That framework includes the following
eight principles:
- All seniors should have the option of a subsidized
prescription drug benefit as part of modernized Medicare.
- Modernized Medicare should provide better coverage
for preventive care and serious illness.
- Today�s beneficiaries and those approaching retirement
should have the option of keeping the traditional plan
with no changes.
- Medicare should make available better health insurance
options, like those available to all Federal employees.
- Medicare legislation should strengthen the program�s
long-term financial security.
- The management of the government Medicare plan should
be strengthened to improve care for seniors.
- Medicare�s regulations and administrative procedures
should be updated and streamlined, while instances of
fraud and abuse should be reduced
- Medicare should encourage high-quality health care
for all seniors.
We all know that when it comes to Medicare reform, even
the smallest, most incremental changes can be contentious.
But we must get started now, even if it is a gradual but
systematic, multi-year approach. Let me assure you that
the Administration remains committed to the principles
outlined in the framework introduced last year.
There are, of course, a number of things to consider.
For example, Congress will have to consider whether the
program will be run through private or public entities.
It could be administered through private sector risk-bearing
contractors (as Medicare+Choice is managed) or through
the government-run, fee-for-service Medicare program,
where the government bears the risk, not our contractors.
All of these questions are extremely difficult. The Administration
obviously has strong preferences toward the private sector
risk model. We want to work out a long-term solution for
seniors. Still, the Administration is determined not to
add a new drug benefit to Medicare without significant
reform of the program�s existing structure.
In this year�s budget, the President also made some specific
proposals that can be implemented along with this legislative
framework to provide immediate assistance to seniors.
RELIABLE, AFFORDABLE, HEALTH INSURANCE COVERAGE OPTIONS
IN MEDICARE
The President�s framework for strengthening
Medicare calls for a fair payment system for private plan
options for Medicare beneficiaries, like the system that
provides reliable health insurance options to all Federal
employees in the Federal Employees Health Benefits program.
Private plans have long been the preferred choice of 6
million Medicare beneficiaries. This is not surprising,
because the private plans allow beneficiaries to receive
more up-to-date benefits than are available under traditional
Medicare. The enhanced benefits can include prescription
drugs, disease management programs, and better preventive
care services � benefits widely available to the nonelderly
and to members of Congress. Frequently, private plans
have provided much lower cost sharing for required Medicare
benefits as well.
Action is needed now to ensure that
these benefits remain available to Medicare beneficiaries,
because the current Medicare+Choice system for paying
private plans is not giving beneficiaries the options
they deserve. Since the new payment system was implemented
in 1998, hundreds of Medicare+Choice organizations have
left the program or reduced their service areas, adversely
affecting coverage for hundreds of thousands of beneficiaries
� reversing what had been an upward trend in private plan
availability and enrollment. In addition, the remaining
plans are offering less generous drug benefits and other
coverage. Moreover, open-network plans like Preferred
Provider Organizations (PPOs) and point of service plans
have become popular among privately covered individuals,
yet only two PPOs participate in a few counties in the
entire Medicare program.
Annual increases in Medicare+Choice
funding have failed to reflect rising health care costs,
leading to unreliable options and reduced benefits for
seniors. Specifically, between 1998�2002, Medicare+Choice
rates increased at 2 or 3 percent per year, or only 11.5
percent overall, in counties where the majority of Medicare+Choice
enrollees live. This compares with increases in Medicare
fee-for-service (government) plan spending by over 21
percent and medical cost inflation of 9 to 10 percent
per year and the same time period. Because payments to
private plans do not reflect conditions in Medicare and
the health care marketplace, private health plans are
struggling to maintain benefit levels.
The President�s budget proposes
to take urgently needed steps toward the equitable payment
system for private plans proposed in the President�s framework
for strengthening Medicare. The proposal will modify the
Medicare+Choice payment formula to better reflect actual
health care cost increase and allocate additional resources
in 2003 to counties that have received only minimum updates
over the last few years. This would make it possible for
more private plans to remain in Medicare until the new
payment system is phased in. Proposals to help sustain
private plans in Medicare are supported by both Democrats
and Republicans.
Under the President�s proposal,
all plans will receive payment increases equivalent to
national fee-for-service cost growth minus 0.5 percent.
For 2003, plans in counties that have been receiving the
minimum updates (2 to 3 percent) will receive a 6.5 percent
increase in payments. The budget also proposes incentive
payments for new types of plans that enter Medicare+Choice
to encourage a variety of new managed care plans (e.g.,
PPOs) to participate in Medicare+Choice. The augmented
payments to improve beneficiaries� options would cost
$390 million between 2003-05 and would increase Medicare+Choice
enrollment by more than 7% by 2007.
As a further immediate step that can be implemented to
begin to improve benefits in comprehensive legislation,
the President�s budget expands on his proposal for improving
the Medicare benefit package and for making it more affordable
by proposing that two new Medigap plans be added to the
existing 10. The new Medigap plans would offer prescription
drug coverage, protect beneficiaries against catastrophic
illness and include modest beneficiary cost sharing at
a more affordable cost than the most popular current Medigap
plans.
Medigap reform is important to the overall Medicare reform
because two-thirds of seniors rely on individual or employer-sponsored
supplemental plans. Most covered seniors do not understand
the difference between their $54 monthly Medicare premium
and their monthly Medigap premium. The many non-poor seniors
who can afford a Medigap policy have no option under the
current Medigap structure that allows them to get the
protection they need from high costs while avoiding the
incentives for excess utilization resulting from first-dollar
wraparound coverage. Once they send in their Medigap premium,
costs are out of their hands.
Private health plans generally have better preventive
benefits and better stop-loss protection than Medicare�s
benefit package, and all also include some kind of cost-sharing
to encourage efficient care utilization. A key, then,
to funding a significant prescription drug benefit is
to include modest incentives for beneficiaries to utilize
the rest of the Medicare program more efficiently, while
allowing them to get the protection they need at a lower
cost, freeing existing Medicare beneficiary and program
dollars to help pay for prescription drugs. Therefore,
any new Medicare prescription drug benefit should be added
only in the context of improvements in the traditional
Medicare fee-for-service benefit package, as well as in
an improved Medicare+Choice model. Of course, as the President
has made clear, seniors should be able to keep their existing
Medicare coverage with no changes if they prefer it. Seniors
need a drug benefit, and good prescription drug coverage
requires an improved and modernized Medicare program.
CONCLUSION
Four years ago, Washington�s bipartisan efforts to reform
Medicare stalled out over a 10-6 logjam of the Medicare
Commission. Last year, there was a serious bipartisan
effort to improve Medicare with prescription drug coverage.
This included a budget resolution with strong bipartisan
support, to set aside substantial funding for a prescription
drug benefit and other overdue improvements in Medicare.
It also included detailed work and discussions in both
the House and the Senate to develop legislation for the
fall. But the extraordinary events of September 11th delayed
Congressional action on this top legislative priority.
President Bush is determined to work with Congress to
get that process moving again, and he has started the
process by reaffirming his commitment to devoting substantial
new resources to Medicare and to his framework for Medicare
legislation. He has also proposed a number of steps that
can be implemented with modernization legislation that
will provide immediate relief to seniors and help implement
the drug benefit and other coverage improvements more
effectively. This Administration understands that Members
of Congress have a lot of strong views regarding Medicare
reform, and we are open to any and all ideas as long as
they move the debate forward. The one option, however,
that is completely unacceptable to the Administration
is the status quo. The Administration is determined to
work with Congress to get a prescription drug benefit
enacted this year. In addition, we are determined to begin
to offer seniors some relief immediately through administrative
actions like the drug card and the Medicaid Pharmacy Plus
waiver program. Thank you for the opportunity to discuss
this very important topic with you today. I hope that
I have been able to express the Administration�s dedication
to strengthening Medicare, as well as our commitment to
work with you to do so. I look forward to answering your
questions.
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