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# Medicare Prescription Drug Benefits and Employer-

#  Sponsored Retiree Medical Coverage

### Statement of

Helen Darling

##### President

Washington Business Group on Health

**Prepared for the**

**Committee on Government Reform**

#### Subcommittee on Human Rights and Wellness

**United States House of Representatives**

**July 17, 2003**

**Washington, DC**

**Washington Business Group on Health 50 F Street, NW Suite 600
Washington, DC 20001**

**Telephone: 202.628.9320 Fax: 202.628.9244 email:** <wbgh@wbgh.com>

Mr. Chairman and members of the subcommittee, thank you for inviting me
to appear before you this afternoon. I am Helen Darling, President of
the Washington Business Group on Health (WBGH). Founded in 1974, WBGH is
a national organization of 175 large employers dedicated to finding
innovative and forward-thinking solutions to the nation's most important
health care and health benefits issues. Our membership provides health
care coverage for more than 40 million U.S. workers, retirees, and their
families.

WBGH commends the Subcommittee for holding a hearing at this critical
juncture as Congress has taken the first step toward providing
outpatient prescription drug coverage for the Medicare population and is
soon to convene the House -- Senate conference on compromise
legislation. [WBGH believes that a Medicare prescription drug benefit is
certainly long overdue and vitally important for seniors given the
dramatic changes in medicine and health benefits in the private sector
since 1965.]{.underline} Medicare beneficiaries deserve access to the
same type of health care coverage options and benefits as other
Americans. Comprehensive reform of the overall program is also necessary
for the long-term financial survival of the Medicare program. Since
employers and employees pay for Medicare through the payroll tax and
other taxes, employers and today's active employees have a significant
interest in the fiscal health and long term viability of the Medicare
program. WBGH and employers support comprehensive reform of the Medicare
program to stabilize its financial condition and modernize its benefit
and plan design. We owe all Americans a sense of security that they will
have good health coverage during their later years and that their
children and grandchildren won't be overburdened with taxes and benefit
limitations because we didn't face these complex problems now. As part
of Medicare reform, an outpatient prescription drug benefit should be
included. It makes no sense that people who have the greatest need for
prescription drugs have no coverage under Medicare. But, for this to be
affordable now and in the long term, the Medicare program must promote
and pay for appropriate use of health care services, including
medications, that are proven to be cost-effective and enhance the
quality and safety for Medicare beneficiaries. We will only find
budgetary room for all of the new care that everyone hopes to have if we
weed out unnecessary and less than appropriate medical treatments and
prescription drugs.

Today, employers voluntarily provide prescription drug benefits to 12
million of the nation's Medicare beneficiaries. Employers are pleased
that the framework for the new prescription drug benefit that Congress
is considering would provide added flexibility for employers to
coordinate with the Medicare program and allow employers to continue to
use many of the private sector tools for innovation, patient safety and
quality improvement.

My testimony today focuses on the following issues related to the
Medicare changes that Congress is contemplating:

-   The current state of employer-sponsored retiree health benefits,

-   The effect of a Medicare prescription drug benefit on employers, and

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-   Employer views on Medicare reform

It is my hope that this testimony will help to clarify the facts, answer
some questions, and dispel misconceptions surrounding employer-sponsored
retiree medical benefits as you consider historic changes to the
Medicare program in the coming weeks.

**EMPLOYER- SPONSORED RETIREE-HEALTH BENEFITS**

Employers provide health coverage, whether for active employees and
their dependents or for retirees, on a voluntary basis either directly
through self-insured plans or by purchasing coverage through a health
plan or insurance company. The decision to provide health coverage, the
level and scope of benefits, and the amount of funds that employers
contribute to their health plans depend on a number of factors including
the needs of employers' active and retired workforce, employers' needs
to attract and retain the best talent, labor market conditions, economic
conditions, company growth and profitability, and the costs of health
and other benefits. Furthermore, changes in the way accounting rules
treat the long-term costs of providing retiree health benefits have been
a major factor in the employer decisions about retiree health coverage.
For early retirees, those who are below age 65, some employer plans
provide access to group health insurance that retirees often have
difficulty obtaining on their own. Retiree health insurance bridges the
gap in coverage until Medicare eligibility. Employer plans assist one in
three retirees age 65 and over by helping pay for benefits not covered
by Medicare, such as prescription drugs. Nearly all employers that
provide health benefits to age 65+ retirees --a shrinking group of
employers\--cover prescription drugs.

-   **The Percentage of Employers Offering Retiree Medical Coverage Has
    Been**

**Declining for Over 10 Years**

Annual increases in expenditures for health benefits, including
prescription drug expenses, have been growing much faster than inflation
for a number of years. Employers' costs for health care have increased
50% in the past five years and are expected to continue increasing by
double digits for the near future. In the face of rising health care
costs, large employers have been modifying retiree health plans to
maintain coverage, but it is not an easy task. As a consequence of this
and other factors, the percentage of large employers who offer retiree
medical coverage has been falling for over a decade and is not a new
phenomenon. According to data from Hewitt Associates,[^1] the percentage
of employers with more than 1000 employees offering health benefits to
early retirees declined from 88% in 1991 to 72% in 2003. Similarly, the
percentage of large employers with more than 1000 employees offering
health benefits to post-65 retirees dropped from 80% in 1991 to 61% in
2003. Smaller employers are even less likely to offer health benefits to
retirees. According to the Agency for Healthcare Research and Quality
(AHRQ), only 22% of all private employers (irrespective of size) offered
early retiree health benefits in 1997 and only 12% did so in 2000. The
comparable percentage for Medicare-eligible retirees was 20% in 1997 and
11% in 2000.

Because of their cost pressures in a tough economy, those employers who
continue to offer retiree health benefits are increasing the age and
service requirements for eligibility, asking retirees to pay more, and
reducing benefits.

-   **Retiree Medical Benefits for Younger Workers, New Hires, and
    Future**

**Hires Is Virtually Non-Existent**

Because of the rising cost of health benefits and other factors, a
natural evolution has occurred in the marketplace that has practically
eliminated retiree health benefits for future retirees. Outside of the
government sector, very few employers are currently offering retiree
health benefits to new hires and even fewer plan to offer such coverage
for future hires. Furthermore, active employees, particularly those more
recently hired are likely to have either no retiree health benefits or
substantially reduced retiree health benefits compared to older
employees and those who have been with their employer longer. While much
of the discussion and concern in Congress has focused on current seniors
in Medicare, 78% of them had some sort of supplemental coverage in 2000
according to CMS, the majority with prescription drug coverage.[^2] By
contrast, a Medicare prescription drug benefit is more likely to be the
[only]{.underline} source of prescription drug coverage for future
Medicare beneficiaries.

-   **Employers Providing Retiree Health Benefits Often Have Multiple
    Plans**

Because employers have modified retiree health benefits over the years
for different cohorts of retirees depending on when they retired, a
single employer may have multiple plans. A recent survey of large
employers conducted by PriceWaterhouse Coopers for The Business
Roundtable found that employers surveyed had, on average, seven
different retiree plans with a high of 140 plans within one company.[^3]
These plans vary by premium charged, cost sharing, benefit designs, and
geographic location.

-   **Medicare Is the Primary Insurer for Retirees Age 65+**

Since its inception in 1965, Medicare has served as the primary insurer
for people who qualify for Medicare upon reaching age 65, with employers
who offer retiree health benefits supplementing Medicare benefits for
eligible retirees. Medicare is only the secondary insurer to
employer-sponsored coverage for people age 65 and over who are still
working and for some people who are covered under a health care plan of
their working spouse or who qualify for Medicare because of disability.
This secondary coverage sponsored by employers is an enhanced benefit
"(wrap around)"to Medicare, usually covering cost sharing requirements
such as paying Medicare Part B premiums, and paying for benefits not
covered by Medicare, notably prescription drugs.

When Medicare adds benefits or when a person turns 65, the benefits
provided under a typical employer-sponsored retiree health plan are
treated as supplemental to Medicare, both to avoid duplicative coverage
and to provide the retiree with enhanced coverage beyond what is
available under Medicare. Before age 65, the employer-sponsored coverage
serves as the primary insurer for early retirees who are not Medicare
eligible because they are younger than 65. However, when retirees turn
65, Medicare becomes the primary insurer and the employer coverage
becomes secondary if the company offers it to Medicare eligibles.

**POTENTIAL EFFECT ON EMPLOYER-SPONSORED RETIREE HEALTH**

**BENEFITS**

It is difficult to evaluate the effect of a Medicare prescription drug
benefit on employers and Medicare-eligible retirees in employer plans
given that the legislation is not yet final. Furthermore, the House and
Senate versions differ, employer plans vary in design, employers operate
within different constraints and consider different factors when making
decisions about benefits, and they would likely evaluate their options
differently.

However, employers are generally very pleased with the flexibility that
both the House and Senate bills offer employer-sponsored plans, which
will make it easier to continue the voluntary offering of health
benefits to retirees. Under both bills, employers may offer actuarially
equivalent prescription benefits plus enhanced benefits beyond what
Medicare covers and receive a federal subsidy, pay the prescription drug
premium for retirees and provide enhanced benefits, elect Medicare
Advantage and provide enhanced benefits, or provide enhanced benefits
that wrap around the expanded Medicare benefit.

The following considerations are important to keep in mind when talking
about any estimates of how employers are likely to respond to the
availability of a Medicare prescription drug benefit and the continuing
challenge of rising prescription drug costs:

-   **Current Retirees with Employer Coverage Are Very Likely to Keep
    It**

The most common action taken by employers over the last decade has been
to maintain retiree health coverage for current retirees and
"grandfathered" future retirees but eliminate or reduce the future
availability of similar benefits for those who are currently active
employees and for new hires. It is likely that only a small percentage
of employers will terminate coverage for current retirees.

-   **The Percent of Employers Dropping Retiree Health Benefits Will Be
    No**

**Greater than in the Absence of a Medicare Prescription Drug Benefit**

As stated earlier, the decline in employers offering retiree health
benefits is an ongoing trend that will continue. However, we believe
that with the establishment of a Medicare prescription drug benefit,
this long term trend may be slower than it would have been in the
absence of legislation because of the flexibility and new coverage
options this legislation provides to employers that choose to assist
their retirees in paying for health care costs. A Hewitt Associates
survey of large employers for the Kaiser Family Foundation, estimated
that only 18% of those currently offering retiree health benefits are
likely to terminate coverage for future retirees if Congress enacts a
Medicare prescription drug benefit. Conversely, Hewitt Associates
estimated that 82% of large employers who currently offer retiree health
benefits are likely to maintain coverage, wrap around the expanded
Medicare benefit, or pay premiums for Medicare prescription drug
coverage on behalf of their retirees.

**MEDICARE REFORM**

The motivation for Medicare reform is, and should be, more than
financial. Medicare is modeled after indemnity insurance and the way
health care was organized and financed in the 1960s. One of the glaring
gaps is the absence of a prescription drug benefit. Employers believe
that America owes Medicare beneficiaries the financial and health
security that would be provided by an affordable, up-to-date Medicare
program that delivers high quality care, including outpatient
prescription drugs.

Yet clearly federal and societal resources are not infinite. As our
society ages and health care costs generally rise, the Medicare program
needs major structural reform to assure the financial soundness of the
program for future generations. Mr. Chairman, WBGH and our employer
members appreciate the very thoughtful leadership that you and many of
your colleagues have shown regarding concern for the long-term viability
of the Medicare program.

Employers are encouraged that both the House and the Senate bills would
take significant initial steps in this direction through the creation of
more competing private plan options through Medicare Advantage; other
efforts to enhance the array of quality health plan choices for Medicare
beneficiaries; and the addition of preventive services, disease
management and chronic care coordination to manage high cost cases.

Employers have a significant stake in the financial viability and
sustainability of the Medicare program. Employers and employees help pay
for the Medicare program through the payroll tax and other taxes. In
addition, Medicare competes not only with other spending priorities for
a share of the federal budget, but also with private sector spending for
a share of the national economy and thus impacts overall economic
conditions. In the future, as the Medicare population grows (because of
increased longevity and greater numbers of older Americans) and health
care utilization increases, Medicare spending and decisions affecting
Medicare will have a greater effect on the overall economy. Employers
therefore have an interest in the program's fiscal soundness and its
ability to cover program expenses without an increase in taxes and
without crowding out private sector investment dollars and consequently
raising the cost of borrowing through higher interest rates for
consumers and business.

In addition to enlistment of market forces and better management of
beneficiaries with high cost, chronic conditions, Medicare must identify
and deploy best practices in treatment and the use of technology in both
the delivery and administration of health benefits to meet the
challenges of rising health care costs. Many employers, including many
of WBGH's members, are increasingly using the tools listed below as they
make health plan purchasing decisions and manage health benefit programs
to channel health care dollars where they are most appropriate. The most
recent survey by WBGH and Watson Wyatt on employer health care trends
found that companies that are aggressive value purchasers had
significantly smaller increases in health care costs (e.g., 10% vs. 14%
trend) compared to other employers.[^4]

WBGH believes that it is critically important to assure that Medicare
funds are used to purchase the highest value, most cost-effective care
for beneficiaries and that the following tools should be adopted by the
entire Medicare program as soon as possible:

-   **Cover Only Safe, Appropriate Services and Treatments for
    Beneficiaries and**

**Their Conditions**

Health care services, including prescription drugs, should be limited to
the most cost-effective, medically and therapeutically appropriate
services for the treatment of a beneficiary's injury, illness, or
pregnancy. Medicare's framework should reflect a much higher standard
than "a prescription written is a prescription covered or a service
performed is a service covered."

By definition, cosmetic and discretionary prescriptions or those
prescribed for treatment not approved by the Federal Food and Drug
Administration should require substantial support for coverage approval.

-   **Promote Effective Use of Health Care Services to Improve Outcomes
    and Value**

Prescription drugs are just one tool for improving health. Thus, a
Medicare prescription drug benefit should be oriented toward
patient-specific, medically appropriate, cost-effective prescribing and
dispensing practices. Similarly, all health care services provided
should be oriented toward patient-specific, medically appropriate,
cost-effective treatment.

In the case of prescription drugs, Medicare should require the use of
state-of-the-art management techniques, such as but not limited to, an
electronic data infrastructure, beneficiary education and communication
on pharmaceutical safety, therapeutic interchange, formularies, generic
drug use where appropriate, drug interaction edits, accurate and
efficient filling of prescriptions, prior authorization, utilization
review, step therapy, health care management, physician education on
appropriate prescribing and evidence-based medicine, dose optimization,
mail order, pharmacy networks, and other steps to foster appropriate
use.

-   **Emphasize Quality Improvement and Patient Safety**

Medicare should utilize a consistent set of evidence-based, best
practice standards for coverage to drive improvement in quality, safety
and value. Coverage standards should encourage the use of care
appropriate to the beneficiary's medical condition. Physicians and other
health care providers and hospitals and other health care facilities who
can demonstrably show better risk-adjusted health outcomes should be
financially rewarded for their performance and beneficiaries should have
incentives to use these higher quality providers and facilities.

Medicare should also require medical error reduction initiatives and
safety process improvements for all health care services, including the
dispensing of medications in both the inpatient and outpatient settings.

-   **Share and Disclose Information to Promote Quality and Protect
    Patients**

Medicare should provide beneficiaries with access to user-friendly
health care performance information from hospitals, physicians, other
health care facilities and other health care professionals on safety,
effectiveness, efficiency, and consumer experience. Medicare should also
provide beneficiaries with information on and alternative therapies or
medications. This information will help beneficiaries, their caregivers
and their families make more informed decisions about their health care.

This concludes my testimony. I appreciate the opportunity to share the
Washington Business Group on Health's perspective on this important
issue, and I look forward to answering any questions that the
Subcommittee may have.

[^1]: Hewitt Associates SpecBook TM database of approximately 1000 large
    employers with more than 1000 employees.

[^2]: Medicare Current Beneficiary Survey, 2000, Office of Research,
    Development and Information, CMS

[^3]: PriceWaterhouse Coopers, Retiree Health Coverage Survey of
    Business Roundtable Member Companies, May 2003. Prepared for the
    Business Roundtable.

[^4]: Eighth Annual Washington Business Group on Health/Watson Wyatt
    Survey Report, Spring 2003.