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IMPLEMENTING THE MEDICARE PRESCRIPTION

DRUG BENEFIT AND MEDICARE ADVANTAGE

PROGRAM: PERSPECTIVES ON THE PROPOSED

RULES

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

SEPTEMBER 14, 2004

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

DON NICKLES, Oklahoma

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

JOHN BREAUX, Louisiana

KENT CONRAD, North Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 3

ADMINISTRATION WITNESS

McClellan, Hon. Mark B., Administrator, Centers for Medicare and Medicaid

Services, Washington, DC ................................................................................... 6

PUBLIC WITNESSES

Ignani, Karen, president and CEO, America’s Health Insurance Plans, Washington, DC ............................................................................................................. 43

Merritt, Mark, president and CEO, Pharmaceutical Care Management Association, Washington, DC ...................................................................................... 44

Fitzpatrick, Michael J., M.S.W., executive director, National Alliance for the

Mentally Ill, Arlington, VA ................................................................................. 46

Shea, Gerald, assistant to the president for governmental affairs, AFL–CIO,

Washington, DC ................................................................................................... 49

Burton, Larry, executive director, Business Roundtable, Washington, DC ........ 50

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 3

Burton, Larry:

Testimony .......................................................................................................... 50

Prepared statement .......................................................................................... 59

Responses to questions from Senators Grassley and Baucus ....................... 64

Fitzpatrick, Michael J., M.S.W.:

Testimony .......................................................................................................... 46

Prepared statement .......................................................................................... 66

Responses to questions from Senators Grassley, Baucus, Bingaman, and

Hatch .............................................................................................................. 75

Frist, Hon. Bill:

Prepared statement w/letters dated September 30, 2003 and May 25,

2004 ................................................................................................................ 81

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 94

Ignani, Karen:

Testimony .......................................................................................................... 43

Prepared statement .......................................................................................... 96

Responses to questions from Senators Grassley, Baucus, and Rockefeller . 111

Page

IV

McClellan, Hon. Mark B., M.D., Ph.D.:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 116

Responses to questions from Senators:

Graham ...................................................................................................... 166

Bingaman ............................................................................................... 167, 183

Grassley ...................................................................................................... 168

Baucus ........................................................................................................ 170

Breaux ........................................................................................................ 188

Daschle ....................................................................................................... 192

Hatch .......................................................................................................... 198

Kyl .............................................................................................................. 201

Lincoln ........................................................................................................ 203

Rockefeller .................................................................................................. 207

Smith .......................................................................................................... 220

Snowe ......................................................................................................... 222

Merritt, Mark:

Testimony .......................................................................................................... 44

Prepared statement .......................................................................................... 228

Responses to questions from Senators Grassley, Baucus, and Hatch .......... 238

Rockefeller, Hon. John D., IV:

Prepared statement .......................................................................................... 245

Shea, Gerald:

Testimony .......................................................................................................... 49

Prepared statement .......................................................................................... 247

Responses to questions from Senators Grassley, Baucus, and Rockefeller . 251

COMMUNICATIONS

Anibal Acevedo-Vila, Puerto Rico-Resident Commissioner, U.S. House of Representatives w/attached letters ........................................................................... 257

Kidney Care Partners .............................................................................................. 271

National Psoriasis Foundation ............................................................................... 296

United Health Group ............................................................................................... 301

(1)

IMPLEMENTING THE MEDICARE PRESCRIPTION DRUG BENEFIT AND MEDICARE ADVANTAGE PROGRAM: PERSPECTIVES ON

THE PROPOSED RULES

TUESDAY, SEPTEMBER 14, 2004

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:05 a.m., in

room S–215, Dirksen Senate Office building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Also present: Senators Nickles, Thomas, Santorum, Frist, Smith,

Baucus, Breaux, Graham, Bingaman, and Lincoln.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY,

CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Good morning, everybody. We are back in business, I can tell, from the long lines out in the hall of people waiting

to come to hearings.

And, of course, this hearing is a very important one as well because we are looking at the proposed rules that were issued last

month by Centers for Medicare and Medicaid Services to implement the prescription drug benefit and the Medicare Advantage

program established by the Medicare Modernization Act.

Last year, members from both sides of the aisle devoted countless hours to make the prescription drug benefit, an improved program, reality, rather than the wishful thinking and political promises that it was for several years. And we did this for 40 million

Americans, seniors, and those who have disabilities, and all of

these people depending upon Medicare.

After years of promising to get it done, last year we finally did

get it done and everybody here present played a very important

role in accomplishing that, and doing it in a bipartisan way.

For the first time, Medicare will offer voluntary prescription drug

benefits to all seniors in the year 2006. Beneficiaries also will have

more coverage choices. If beneficiaries like the coverage that they

have, they can keep it.

A number of beneficiaries told me that they are completely satisfied with their Medicare that they have already had, or know that

they are going to get. They are telling me that they want to stay

in fee-for-service Medicare, and that is just exactly some of the

choices that we want people to be able to make.

2

In fact, Congress, in the Modernization Act, took steps to make

sure that beneficiaries across the Nation have good access to physician services in fee-for-service. We had been hearing, over the past

few years, that beneficiaries were finding it harder and harder to

find a doctor who would see Medicare people.

We canceled, for instance, a 4.5 percent physician payment cut

that would have taken effect next year. Both Republicans and

Democrats worked to prevent the payment cut, because if beneficiaries cannot find a doctor, then Medicare benefits would be

meaningless.

So we are here today because the Centers for Medicare and Medicaid Services have issued the proposed rules for implementing the

new drug benefit and the expanded Medicare coverage options.

These proposed rules bring the Nation’s Medicare beneficiaries an

important step closer to having a much-needed affordable prescription drug benefit and a new coverage choice.

Plain and simple, Medicare has crossed, then, a milestone, really

the first important one since it was adopted 38 years ago. Under

the proposed rule, about one-third of all Medicare beneficiaries will

be eligible for low-income assistance, meaning that they will have

drug benefits with no gap in coverage, and limited or no premium

deductibles or cost sharing. For these beneficiaries, the drug benefit will cover as much as 85 to 98 percent of their drug costs.

Now, one area that we will hear about today is the retiree drug

subsidy. Employers provide coverage on a voluntary basis, and it

is sorely evident that they are finding it harder and harder to continue.

From 1991, long before our bill’s enactment, the number of large

employers offering health coverage to their retirees dropped 25 percent, from about 80 percent to 61 percent of the companies in 2003.

Our new legislation sought to stem this alarming trend by providing $89 billion in direct subsidy and tax benefits to protect retiree health coverage. This funding makes it more likely, not less

likely, that the employer will continue retiree benefits.

At the same time, I want to ensure that the direct subsidy and

tax benefits provided are monitored closely. We must ensure that

we maintain the utmost level of integrity in the implementation of

this program.

Both the Department of Justice and the Department of Health

and Human Services Office of Inspector General have expressed

strong concern with regard to this provision. Therefore, ensuring

that only those employers who actually continue retiree health coverage receive the subsidy will be critical.

Another issue that I am sure we will hear about today is the region size of the Medicare Advantage regional preferred provider organizations. PPOs are among the most popular coverage options for

other Americans.

About half of the Americans with private insurance are enrolled

in PPOs. But private plan options are not widely available to Medicare beneficiaries. Where private plans are available, they are very

popular.

Iowa beneficiaries who have joined a plan have told me that they

like their plans. The Medicare Advantage regional plans will give

3

beneficiaries more coverage choices by requiring plans to serve both

urban and rural areas, the entire region.

Beneficiaries deserve choices between regular Medicare and

other options that can offer them better coordinated care and additional benefits, such as 24-hour consulting nurse services. These

services can be very valuable, particularly for beneficiaries with

chronic conditions.

Congress also included numerous beneficiaries protections in the

new drug benefit. Rules and requirements about prescription drug

formularies are among the most important protections because

beneficiaries must be assured that they can get the coverage for

the drugs that their doctors prescribe.

The U.S. Pharmacopoeia has developed draft model guidelines

for drug classes and categories to provide a framework for plan

drug formularies, and CMS has additional oversight authority to

make sure the plans do not use particular formulary designs to

game the system by discouraging sicker people from enrolling.

Again, I know that issues relating to formulary design have engendered very serious debate in the last couple of months, and I

am looking forward to hearing our witnesses’ perspective on the

Pharmacopoeia draft guidelines and the proposed rules.

And by the way, we have Dr. McClellan at the table. I want to

recognize you and your staff for your dedication and effort. CMS

faced an enormous task in developing these rules. You just really

took the helm of CMS just a few months ago, but under your leadership, CMS has tackled this enormous task with gusto.

And I compliment you for that, because you deserve credit for

getting these rules out just 8 months after the President signed the

bill, an incredible accomplishment.

Now, today I am looking forward to an informative and insightful

hearing. Of course, it is the political season and some may not be

able to pass up the opportunity to take some political pot-shots. It

is always much easier to tear something down than to build something up.

In the June drug card hearing, I quoted Bob Ball, former Commissioner of Social Security, who was involved in getting Medicare

up and running 38 years ago. He said, ‘‘To a remarkable degree,

opponents, as well as supporters of Medicare, tried hard to be helpful.’’ Those words that were so relevant 40 years ago are equally

relevant today.

I look forward to the hearing, and now I call on Senator Baucus.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA

Senator BAUCUS. Thank you very much, Mr. Chairman. This is

a very important hearing. We are trying to determine how well

CMS is doing its job in issuing regulations implementing the very

important law. I suspect there will be many other hearings in addition to this one, but this is important.

Before I begin, however, I would like, Mr. Chairman, to say that

Senator Rockefeller very much wishes he could be here. He, however, is very involved in the Porter Goss Intelligence Committee

confirmation hearing.

4

He has a lot of questions, as you might guess. He hopes that the

witnesses would answer all of those questions in a very timely

manner.

[The questions appear in the appendix.]

Senator BAUCUS. As we know—I think it is important to remind

us, though—that when Congress passes a law, it is up to the executive branch to write regulations and implement it, with the caveat

that it is according to Congressional intent.

Today we will hear about implementation of the 2003 Medicare

law and we will get a progress report on the 2,000 pages of proposed regulations for the new law. Somebody showed me the book,

Mr. Chairman. I think Title 1 is like this, and Title 2 is a little

smaller. But it is a huge volume, lots of pages, and I expect there

will be more. It is a lot of work. I applaud Dr. McClellan and CMS

for your hard work in producing this.

I must say, though, I think there are a lot of holes here. There

are a lot of gaps. I am disappointed with the lack of guidance, for

exmaple, in a lot of the regulations. I think guidance is very important for providers, for beneficiaries, for employers, for all involved,

and especially taxpayers. But there is not, in my judgment, adequate guidance in a lot of areas.

For example, what will CMS do to prevent large corporations

from getting an unjustified windfall by reducing retiree drug benefits? The Chairman mentioned it. I think most of us on the committee are very concerned about that, certainly those of us who

worked so hard to write this legislation and were involved in conference. It is a big issue. It is not an easy one to solve. There is

a lot of tension between employers, on the one hand, and beneficiaries on the other.

But there needs to be much more guidance to be fair to everyone

involved and not allow this windfall. As I said, I strongly support

incentives to prevent employers from dropping retiree coverage. I

think that is very important.

I think the employer subsidy was essential to getting the bill

passed, as you well know. But while employers should be encouraged to continue to do the right thing, they should not be rewarded

for cutting retiree drug benefits.

Even if you, Dr. McClellan, and CMS find an acceptable standard

for defining actuarial equivalence—I am not sure that it is there

yet—my question is, how will CMS ensure that employers meet

that standard?

There is another area where I would like to have seen more details and more guidance, and that is the criteria for turning down

a plan’s application to participate as a prescription drug plan or a

Medicare Advantage plan. I say that because, in implementing the

drug discount card, CMS appears to have accepted all comers.

In my State of Montana, for example, there are 41 different drug

cards, in other States, many more. I just think there are too many

choices. People are very confused. I think that is one reason why

the discount card has not enjoyed the success that we may have

hoped that it would.

I hope that CMS will exercise more discretion in reviewing applications for drug plans. There have to be tighter standards. I would

like to know more about what factors might influence a decision to

5

turn down a plan. The proposed rule does not provide much guidance in that area.

Finally, one of the biggest questions left unanswered is this.

What will the regions be for Medicare preferred provider organizations and prescription drug plans? How big will they be? The big

debate, as you well know, in the conference on this question, essentially Congress punted the problem to CMS.

But, still, Congress cannot write every detail, every jot and tittle.

Sometimes you have got to implement some of this to an agency,

and you are the agency that we gave the instructions to.

But, nevertheless, there is no guidance here. There is no real indication of what CMS will do and how it is going to implement that

decision as to the size of the regions. I know the health plans have

urged you to adopt the State-based regions. It is in their interests.

But last fall, I would remind you, the administration argued that

the best way to ensure that PPOs can serve rural areas, particularly in States like mine and that of the Chairman, would be to create large regions encompassing several States and to require these

plans to cover the entire region. The proposed regulations do not

indicate how you are going to deal with that.

Given all the extra money, and I might say, some might argue

wasteful amounts of money that Medicare will pay PPOs to come

to rural America, I, for one, would be more than a little bit disappointed if they do not.

These, and many other areas, are very important as you prepared to enroll millions of seniors in Medicare drug benefits starting in 2006. To that end, I should say that I hope that millions will

enroll. I hope that the recent disappointing experience with the

Medicare drug discount card does not portend seniors’ response to

the new drug benefit in 2006.

I have mentioned this, and I will say it again. Montana’s seniors

have reacted very coolly to the drug card. They are unimpressed

with the level of discounts. They are confused by the number of

choices. The vast majority of Montanan seniors have chosen not to

enroll in the drug card.

I hope that the drug card experience does not sour participation

in the actual Medicare drug benefit, and I hope that CMS has

learned a lot from the problems that have resulted in implementing

the drug discount card so that the drug benefit enjoys much better

success.

I voted for the new Medicare law. Although it is not perfect, I

think it holds the promise of providing a long overdue prescription

drug benefit to millions of elderly and disabled Americans, with

comprehensive coverage for those of modest means.

But if the law is not implemented fairly, I will not continue to

support it. A lot rides on how CMS carries out the law. I appreciate

the work that CMS has done to write the regulations and implement the new law, but if we want beneficiaries to participate in

this benefit we must convince them that the benefit will actually

help them. So far, I think most seniors remain unconvinced.

Before I close, though, I would like to comment on another, related topic. Mr. Chairman, as you know, it is very important that

this committee remain vigilant in its oversight of the new Medicare

6

law’s implementation—I commend you for holding this hearing—

and to make sure that CMS follows the law.

But in a few days, GAO will issue a report that I requested last

year about the PPO demonstration that CMS established in 2001

and 2002. In many respects, that demonstration was the precursor

to some of the private plan provisions that were ultimately enacted

in the new Medicare law.

I understand that GAO will find that CMS exceeded its legislative authority to encourage PPOs to participate in that demonstration. This is very troubling. Dr. McClellan, I know that CMS did

not implement this PPO demonstration under your watch, but this

committee must ensure that the agency follows the law in implementing this new and important legislation.

I look forward to discussing that report when it is made public.

Thank you, Mr. Chairman. I look forward to our witnesses’ testimony.

The CHAIRMAN. Yes. Thank you very much.

Since Dr. McClellan needs no introduction—I have already complimented you for the work that you have done on these regulations—we would hear your testimony and then go to questions.

STATEMENT OF HON. MARK B. McCLELLAN, M.D., Ph.D., ADMINISTRATOR, CENTERS FOR MEDICARE AND MEDICAID

SERVICES, WASHINGTON, DC

Dr. MCCLELLAN. Thank you, Mr. Chairman, Senator Baucus, and

distinguished members of this great committee. Thanks for inviting

me here today to discuss the most important enhancements of

Medicare since it was created in 1965.

I especially want to thank all of the committee members and

your staffs for your hard work on the Medicare Prescription Drug

Improvement and Modernization Act of 2003, and your support for

CMS as we work to implement this important new law as effectively as possible.

Thanks to your efforts, we are providing overdue benefits for the

Nation’s seniors and people with disabilities, including, for the first

time in Medicare, coverage for outpatient prescription drugs.

The MMA provides many other modernizations, ranging from

better preventive benefits, to new quality improvement programs,

and greater access to disease management services so the beneficiaries can lower their out-of-pocket costs and enjoy better health

at the same time.

Altogether, there are hundreds of distinct provisions. Of those

with effective dates prior to August 31 of this year, CMS has completed 91 percent, with the remaining few in progress.

Accomplishing so much in such a short time reflects the hard

work of the dedicated CMS staff, and many evenings and weekends. It also reflects new steps that we are taking to make sure

our agency has the structure, the tools, and the personnel needed

to meet our expanded mission.

We know we have got a lot more to do, both to implement the

benefits effectively, and to make sure our beneficiaries get the facts

and the help they need to get the most out of these new benefits.

Our analysis of the impact of these new benefits shows just how

important it is. For a typical Medicare beneficiary, the new volVerDate 11-MAY-2000 12:14 May 10, 2005 Jkt 095484 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 97083.000 SFINANC2 PsN: SFINANC2
7

untary Medicare drug benefit will cover 53 percent of drug costs.

For someone without coverage today, that means total spending on

drugs will fall by nearly $1,300.

The savings for the standard drug benefit come from two main

sources. First, beneficiaries who enroll in a Medicare drug plan will

get the best possible negotiated price discounts on the drugs they

purchase.

With clear information about drug prices and benefits, beneficiaries will be able to choose the plan that gives them the best

coverage for the drugs they need rather than a take-it-or-leave-it

formulary that may not meet their needs.

This transparency and choice is expected to reduce drug payments by an average of 15 percent initially, rising to 23 percent

within 5 years. That is even accounting for the fact that lower

prices, plus coverage, means that many beneficiaries will have access to drugs that they could not afford before, and will use more

as a result.

Our approach is expected to provide the best discounts on drugs,

discounts as good or better than could be achieved through direct

government negotiation. We expect prices that will be substantially

lower than Medicare’s prior experience with price regulation for the

drugs that it currently covers under Medicare Part B.

In fact, competition has lowered drug prices already in the Medicare prescription drug discount card program where numerous

independent studies have found real savings available right now,

with discounts of over 20 percent on brand-name drugs, according

to the Kaiser Foundation, and prices that are lower than Medi-Cal

prices, the Medicaid prices in California, according to Consumers

Union.

These price reductions are on very broad formularies of drugs

that beneficiaries commonly use, including many drugs not included in the formularies of government-run drug plans. We expect

to build on these savings for the drug benefit.

The second way that the drug benefit will offer savings to Medicare beneficiaries is through the new Medicare subsidy of 75 percent of costs of the coverage. We expect that, in 2006, Medicare will

pay about $105 per month for each enrolled beneficiary, and the

beneficiaries will pay a monthly premium of around $35 for standard drug coverage.

With this coverage in 2006, beneficiaries enrolling in the standard benefit will pay an annual deductible of $250, plus 25 percent

of their drug costs, up to an initial coverage limit of over $2,000,

between $2,000 and $250, to be exact.

After that, once the beneficiary reaches $3,600 in out-of-pocket

spending, the Federal Government, through Medicare, will pay,

and the plans will pay, about 95 percent of the beneficiary’s further

drug costs, and this coverage will never run out.

Medicare’s oversight of formulary classes and drug coverage and

payment tiers, utilization management, and other key features of

the drug benefit will assure that all beneficiaries have access to the

medicines that they need at an affordable price.

The subsidy Medicare provides for standard drug coverage can be

combined with other sources of assistance to provide even more

generous coverage. The State prescription assistance programs,

8

charitable organizations, and other individuals can contribute to

beneficiary out-of-pocket costs and have those contributions count

as true out-of-pocket expenditures that trigger the catastrophic coverage. Employers and unions, as Senator Baucus mentioned, will

obtain a subsidy for payments they make towards covering retirees.

The new drug benefit will lead to significantly greater support

for retiree coverage. We intend to maximize the improvements in

coverage for retirees by providing multiple ways for employers to

offer high-quality coverage at a lower cost. Employers can receive

a retiree drug subsidy for their own comprehensive coverage.

They can wrap around Part D drug coverage like they do for

other Medicare benefits to provide comprehensive coverage, and

they can offer coverage through a Medicare Advantage plan for

their retirees. In all of these approaches, there will not be any employer windfalls. All Medicare payments must go to the retiree coverage.

One of the major points I want to emphasize is the comprehensive prescription drug assistance available from Medicare to many

beneficiaries with limited means, beneficiaries who, until this law,

have struggled for too long between paying for drugs and paying

for other basic necessities like food and rent. Altogether, about a

third of our beneficiaries are eligible to get coverage that will take

care of 95 percent or more of their drug costs, on average.

In addition, because of the high value of this new drug benefit

and our unprecedented outreach efforts, in collaboration with the

Social Security Administration to get people enrolled, we expect to

attract more than a million beneficiaries with limited means who

are eligible for, but have not previously enrolled in, Medicaid, to

get more help, such as payment of their Medicare premiums in full.

The Medicare Modernization Act requires us to use an asset test

to target this comprehensive help to where it is most needed. I

want to be clear that this straightforward asset test does not count

items such as the family home or household goods, or personal effects such as a wedding ring, a vehicle, a burial plot, and many

other types of resources.

The straightforward asset test will count only liquid assets like

stocks and bonds and savings accounts, plus real estate holdings

other than the primary residence. We have also provided a method

for verifying income and resources that would eliminate the need

for extensive paper documentation.

While many of these Medicare improvements will not take effect

until January 1, 2006, beneficiaries will have new opportunities to

lower their medical costs in 2005. Medicare will provide the most

comprehensive set of preventive benefits ever, including screening

tests for heart disease and diabetes for the first time.

We will also start to provide chronic care improvement services

at a lower cost and improved quality for beneficiaries with chronic

illnesses, and the drug card will continue to provide savings on

drugs.

And we expect more beneficiaries to have access to better prevention benefits, disease management services, and even drug benefits

through Medicare Advantage plan expansions in 2005.

9

Greater access to better benefits and lower costs in Medicare Advantage is a direct result of the Medicare Modernization Act and

provisions that had strong bipartisan support.

For a typical beneficiary, this option means a lot of savings. On

average, beneficiaries in Medicare Advantage spend nearly $700

less than beneficiaries enrolled in fee-for-service Medicare out of

their own pockets. Beneficiaries in poor health who are enrolled in

a Medicare Advantage plan experience out-of-pocket savings of over

$1,600, compared to fee-for-service beneficiaries who have poor

health and Medigap coverage. That is a savings of nearly $140 a

month.

Much lower out-of-pocket costs are not the only benefit of being

enrolled in Medicare Advantage. Coordination of care, special disease management programs for people with chronic illnesses, enhanced benefit packages including drugs, eyeglasses, and other

services not covered by Medicare are available to more and will be

used by more beneficiaries in 2005 as a result of Medicare Advantage.

In 2006, we expect to make more affordable comprehensive care

options available to all Medicare beneficiaries through regional

PPO plans. This is the most popular type of health plan in the

country and our beneficiaries will finally be able to get it wherever

they live.

We are closer than ever to providing better benefits, including

drug coverage, in an up-to-date Medicare program. Right now, we

are seeking input to make sure we provide these benefits as effectively as possible, so we are taking steps like augmenting our normal public comment process with a series of public meetings for

discussion of many critical topics.

By working together and hearing from all perspectives, we intend

to do all we can to bring the best possible Medicare improvements

forward at the lowest possible cost.

I thank the committee for its time and I would welcome any

questions that you all may have.

[The prepared statement of Dr. McClellan appears in the appendix.]

Senator FRIST. Dr. McClellan, thank you very much. I apologize

for being a little bit late. I had just opened the U.S. Senate. But

I appreciate your comments.

This hearing is an important hearing and one that is going to be

instructive for all of us to get a current feel for where we are today,

and hopefully make recommendations, and through our questioning, express issues that are of concern to us and concern to our

constituencies.

A lot of the health care issues will inevitably be involved in the

political arena that is out there. I think one of our goals needs to

be to really stay on these very important issues and implementing

a program and a plan that is very important to the 45 million people who are benefitting, and will benefit increasingly, and also

those future generations.

A couple of issues I want to address right up front. They are both

issues that likely will come up again in other questions. One has

to do with the increase in the Part B premiums, and the other is

10

with the USA Today article that I would like to at least begin to

get your comments on as well.

First of all, the Part B premiums, as we all know, is a formula

that was passed in 1997 in terms of the formula itself. There have

been accusations that the President is responsible for this formula.

It is clear among us, because I believe everybody on this committee, except for Senator Lincoln because she was not here at the

time, voted for that 1997 bill that had the formula in it.

Essentially, as I understand it, and I am going to ask you to comment further on it, CMS calculates the cost of Medicare’s Part B

program for the following year. The formula itself that CMS uses

to determine the premium that seniors must pay for these Part B

benefits, including physician services, is driven by the formula.

The government pays for 75 percent of those costs and passes on

25 percent of the costs to the seniors in the form of premiums. If

the costs go up in this Part B program, that is, principally in physician services, premiums go up automatically.

My first question. I first will make the statement that we all

voted for it in 1997, and it is a formula that is there. The first

question is, is the description I gave essentially accurate, and

would you like to add anything to that?

Dr. MCCLELLAN. That description is exactly right, Dr. Frist. The

only thing I would like to add, is that the premium also makes sure

that we have a reserve in the Part B trust fund to make sure that

we have got adequate funds available to pay, and a little bit of the

funding goes into that as well.

But the main purpose of our statutory structure for Part B is to

make sure that beneficiaries get strong support from the Federal

Government, 75 percent support, for the costs of receiving their

benefits, and they are getting more benefits than ever in 2005.

Senator FRIST. And we are talking about physician services.

Drug benefits are in a separate category. I say this because people

are kind of throwing everything in together. So the second part of

that question is, the new Medicare prescription drug program will

be offered under Part C and Part D. Is that not true, the new drug

part?

Dr. MCCLELLAN. The new drug benefit is a completely voluntary,

separate benefit. You can sign up for it or not, if you want, in 2006.

The Part B premium, in Part B, is not connected to that at all. The

costs and the benefits provided in Part B, as you said, are for physician services, hospital outpatient services, other critical services,

but not prescription drugs.

Senator FRIST. So is it correct to say that the new drug benefit

did not affect these proposed Part B premium increases for 2005?

Dr. MCCLELLAN. That is correct.

Senator FRIST. The third issue is physicians, since we are talking

about physician services and payments. All of us have experiences

with the fact that physicians, if they are not adequately compensated, are just not going to be able to participate in the Medicare program.

Before we passed the Medicare Modernization Act, doctors faced

a 4.5 percent cut in Medicare payments, both in 2004 and 2005.

The bill that we passed did reverse those cuts and it gave doctors

a 1.5 percent increase for 2004 and 2005.

11

First of all, is that correct in terms of what we did for physicians

in this bill?

Dr. MCCLELLAN. That is correct. As you may recall, at the time

there were a lot of concerns from physicians around the country

and their patients about continued access to physician services.

I think that is why there was such strong bipartisan support for

increasing the payments to physicians rather than letting a 4.5

percent payment reduction in 2004, and then another 4.5 percent

payment reduction in 2005, go into effect.

Senator FRIST. And so we are talking about physician services.

We are talking about the bipartisan support for keeping physicians

adequately compensated so that they are able to deliver care to 45

million individuals with disabilities and seniors.

What I wanted to do, is make sure that people understand the

bipartisan support for those physician services. In fact, I would like

to place into the record two letters. The first, dated September 30,

2003, was signed by 18 of my Senate colleagues—and I should add,

including Senator Kerry—that asks that the final Medicare bill include ‘‘a meaningful increase’’ in funding for private Medicare

health plans in 2004 and 2005.

And the second letter is dated May 25, 2004, signed by 73 of our

Senate colleagues, including Senator Kerry, and it states support

for the provisions of the Medicare Modernization Act preventing

cuts in physician reimbursement.

[The letters appear in the appendix.]

Senator FRIST. I know we will probably end up coming back to

the premium increases, but I wanted to at least get the lay of the

land set up.

The second question, and I will be very brief, is from an article

that was brought up on the floor of the U.S. Senate a few minutes

ago, and therefore I know it is inevitable that it will come up

today.

An article in USA Today this morning claims that a ‘‘typical 65-

year-old can expect to spend 37 percent of his or her Social Security income on Medicare premiums, co-payments, and out-of-pocket

expenses in 2006. That share is projected to grow to almost 40 percent in 2011, and nearly 50 percent by 2021.’’

I am not sure if you have even seen the article, but since it came

up on the Senate floor, I would like for you to at least to comment.

Is that accurate? How do you respond to the report?

Dr. MCCLELLAN. Well, I have seen it. In fact, we gave Congressman Stark the information several months ago that was the basis

for this chart. I have also had a chance to discuss this with our

independent CMS actuaries.

What they note is that, while the Trustees’ report, which is what

this is based on, explains that the introduction of the prescription

drug benefit increases beneficiaries’ costs for covered services, it

also reduces their costs for previously uncovered services by substantially more.

That is why I think you saw Rick Foster, our chief actuary,

quoted in that USA Today story, saying that this was presenting

a misleading picture. It is misleading to say that beneficiaries are

worse off. That is not the case.

12

In fact, today, the biggest problem with Medicare for our beneficiaries, is there are so many services that it does not cover. Beneficiaries pay, on average, over $240 a month out of their own pockets for services that Medicare does not cover, things like preventive

benefits, disease management benefits, and, of course, prescription

drugs.

What the new benefit is doing is making those important uncovered services into covered services, so that beneficiaries may have

co-pays, but they are going to be a lot better off than paying completely on their own for these services.

The new drug benefit is going to cover half the cost for a typical

senior, and for low-income seniors, the ones who depend on their

Social Security benefit check only, it is going to cover 95 percent

of the costs. They are not going to face these kinds of out-of-pocket

payments for uncovered services any more.

So if you add it all up, well over a quarter of the Social Security

checks today have to go to services that Medicare does not cover.

We are taking those and turning them into covered services. We

are giving beneficiaries a lot of help with them, and that is why

their out-of-pocket costs overall are going down.

Senator FRIST. Good. Thank you.

Senator Baucus?

Senator BAUCUS. Thank you, Senator Frist.

Dr. McClellan, I just, kind of in passing, wanted to again mention the problem we are having with the regulations with respect

to employers keeping plans, and also the amount of subsidy given

to employers, and so forth. I am not going to spend a lot of time

on it, because I think others are going to raise it.

But the point is, under the law we said that the benefits employers provide have to be at least as generous as the Part D standard

benefit. Now, the regulations do not really address that. That is,

there is no definition of an actuarialy equivalent to a Part D benefit.

Rather, there are three options. The three options, it seems to

me, are not quite relevant to the charge in the Congress to come

up with a definition to make sure that the employers’ benefit does

meet, at least, the standard Part D benefit.

I am not going to spend time with you on this, but I would note

that, and I think others have noted it. It is a big hole. It is a big

gap. I have forgotten the dates here, but it is my understanding—

and you can correct me—that a lot of these proposed regulations

will become, I guess, final later on.

Many of the holes, the gaps that are not here, will supposedly

be filled in later and then made final. That is, they are not going

to be proposed regulations, they are going to be final regulations,

which is a little bit concerning because a lot of the gaps and a lot

of the holes covered very important issues.

The devil is in the details here. Some of us are concerned that

there is a lot that is left undone that is going to be filled in without

adequate public comment and participation, and so forth. I just

warn you to be fair.

Someone said, who was very wise, do whatever it is, do it now,

and do it right the first time. I would encourage you to do it right

the first time.

13

The question I want to ask, though, is about another big gap, another big hole, as I mentioned in my statement, and that is the failure of the regulations to give much guidance on the size of the regions. The administration has said many times that there have to

be large regions—maybe even a few, but large—so that PPOs could

cover the rural parts of the country. As you know better than I, a

lot of the plans say, oh, no, we want 50 different regions, State by

State, or something like that.

Congress punted to you. You have now punted. So, could you give

us some guidance as to how in the world you are going to decide

the size of regions?

Dr. MCCLELLAN. Definitely, Senator. We are not going to punt on

this decision. We are going to make all of the tough decisions needed to implement these regulations as effectively as possible.

What we have tried to do, is make sure we are getting public

input into that process. We had a number of options that we presented on the possible alternative definitions of regions, ranging

from a very small number of large multi-State regions, up to the

full 50 State approach, that were discussed at a major conference

in Chicago in the summer.

We have now gotten a lot of comments on those different proposals, on the discussion that we had. We are going to put those

public comments out in summary form to make sure we are not

missing something. The comments that we have received are pretty

much as you outlined.

There are a lot of State-based health insurance plans that would

like to continue business just as they are now. They are used to

contracting just within the State. They have got good networks set

up in the States. They are providing very good services in particular States, so would find it easiest to continue in that way.

On the other hand, we have heard from a number of large PPO

plans, plans that provide PPOs to people all over this country

today, including in more rural States, saying that they are supportive of multi-State regions. So it is not the case that we are

hearing only in support for single State regions. I have heard from

at least three, that support the multiple State approach.

Senator BAUCUS. You have got the point, namely, we want to

make sure that plans are able to participate.

Dr. MCCLELLAN. That is right. And I think by getting this public

comment——

Senator BAUCUS. And seniors will be able to enjoy the benefit of

the plans. Now, frankly, I thought that we paid too much money

to encourage PPOs to go these various places, but that is water

under the bridge and this has already happened, or over the dam,

whatever the phrase is.

But the point is, I am very concerned, and those of us in rural

parts of the country are very concerned, that there is a lot of

money, yet we have lots of other incentives going to these plans.

MEDPAC, as you know, thinks it is way too much compared with

fee-for-service payments.

We want to make sure that the rural areas are not discriminated

against, that rural areas do not get the short end of the stick, with

all these dollars going to urban areas where the plans are, but not

to rural areas, partly because of a size definition, and so forth.

14

Dr. MCCLELLAN. Right.

Senator BAUCUS. Mr. Chairman, you have an awfully quick clock.

Senator FRIST. Well, since I am not chair of this committee and

I do not have the——

Senator BAUCUS. No. The rule here has always been 5 minutes.

Senator FRIST. Take another minute.

Senator BAUCUS. I will stick with it. I will take advantage of

your new chairmanship.

Senator FRIST. I appreciate it. Thank you, sir. I am easy.

Senator BAUCUS. The question is on dual eligibles. How are you

going to make sure that they are treated fairly when they move

into Medicare, the transition? We have a lot of questions here that

are unanswered, namely, are they going to get, clearly, the same

benefits? Then there are the QMBS and the SLMBS. Are they

going to automatically get the same benefits, and so forth? It is

very unclear.

Obviously, for people who participate in Medicaid today, seniors

who are eligible for Medicaid, they get good benefits. There is a

good appeals process. It is unclear whether these folks, the dual eligibles, who are now all under Medicare only are going to have the

same appeal rights, the same benefits, and so forth.

Dr. MCCLELLAN. Well, as we made clear in the proposed regulations, all of the dual eligible Medicaid beneficiaries, people who are

getting Medicaid drug coverage now, are going to be automatically

enrolled in the new drug benefit, and they are going to have access

to comprehensive coverage.

Senator BAUCUS. How about the others?

Dr. MCCLELLAN. Often it does not include limitations like on

number of prescriptions, and so forth.

Senator BAUCUS. How about for QMBS and SLMBS?

Dr. MCCLELLAN. For QMBS and SLMBS, we are going to have

an extensive outreach process. We have done what is called ‘‘deeming’’ them eligible already. We do want to make sure we get them

enrolled, and we are going to be working very closely with the

States and the Social Security Administration on this outreach effort.

For QMBS and SLMBS, we will be sending out letters in the

coming months to notify them about it. We will be engaging in extensive outreach with local groups to make sure that they hear

about the new benefits.

Senator BAUCUS. On the same subject, what about appeals

rights? I mean, there are solid rights under Medicaid. It does not

appear to be in these regulations.

Dr. MCCLELLAN. The law requires that beneficiaries get access to

the prescription drugs they need, and we are going to make sure

that happens. There is a full set of appeals oversights and drug

benefit oversights that we are providing. It is not just the appeals,

but our oversight of drug classification, of actual drugs included in

the formularies, of tiering systems, of all of these different features

of a drug benefit.

And we have put out some public guidance on that, and we have

some discussions that are in the regulations. We are going to do

a lot more. I agree with you completely that it is not just a matter

15

of making decisions on finalizing the regulations, but being very

clear——

Senator BAUCUS. But making sure that they are treated at least

as fairly as Medicaid in regard to that.

Dr. MCCLELLAN. That is right. Being very clear about the protections in place.

Senator BAUCUS. Yes. Thank you.

Senator FRIST. Good. Thank you.

Senator Breaux?

Senator BREAUX. I thank you, Leader. I appreciate Dr.

McClellan’s testimony.

I have got three points. First of all, I think Senator Frist went

into this. The USA Today article says that the contribution of seniors under Social Security is going to be $35. That is a huge increase. But it does not tell the other half of the story.

The other half of the story, as I think you responded to, if some- one is paying $200 a month for drugs now, they are going to pay

$35 for an insurance plan which is going to cover that.

Dr. MCCLELLAN. That is right.

Senator BREAUX. I mean, so, yes, Social Security is going to be

paying more. I mean, they are going to be paying more out of Social Security for the insurance, but the insurance is going to cover

substantially more than the premium does. Seventy-five percent of

that premium is going to be paid for by the Federal Government.

Dr. MCCLELLAN. That is right.

Senator BREAUX. And they will only be paying about 25 percent.

That story is one-sided and does not clearly spell out what they are

getting for the increase that they are going to be paying.

Dr. MCCLELLAN. That is right.

Senator BREAUX. They are paying $35 more, but they are going

to have their drug coverage paid for. The ratio is, the government

is going to pay 75 percent of the costs. So that, I think, cleared it

up and I am glad you brought that up.

The other thing is, I have heard so much about—and you have

addressed it in your statement—why in the world did Congress

prohibit the Federal Government from negotiating the drug prices?

That is unbelievable that you all did that.

Well, the fact is that almost every bill that has ever been introduced on this has had that same prohibition, whether it be a Democrat or a Republican introducing it.

In addition, our Federal Employees Health Benefit Plan that

every one of us here, and all of our employees have, does not have

the Federal Government negotiating our drug prices for our plans.

It is privately negotiated and it is a competitive market.

In your testimony, you talk about how you are carrying this out

in the regulations. So just tell the committee and everyone, why is

that in your statement correct when you say, well, you are going

to get a better deal if the government does not negotiate the price

and you leave it to private negotiators? I mean, that is the theory

behind it. That is what Congress did. You are implementing that

plan. Do you truly believe that, and if so, why?

Dr. MCCLELLAN. We do, Senator. There are strong provisions in

the bill to not only give power to negotiate for beneficiaries to get

lower prices to negotiate on their behalf, but to help beneficiaries

16

get the best deal, get the best prices, plus the drugs that they want

covered. The provisions include making sure that the prescription

drug plans can go out and negotiate on behalf of their beneficiaries.

As you said, this is exactly how it is done in the Federal employees’ plan. The reason that we think, and the Congressional Budget

Office thinks, this is the best way to negotiate lower prices, is because there are very strong incentives to get those prices down.

We are going to make this prescription drug market more transparent than ever before. We started doing that with the drug card,

where if you use a drug card you can get prices, the actual prices

that you pay on your medicines at your neighborhood pharmacy so

that you can easily find the best deal, much more easily than in

the past when it was very hard for beneficiaries to find out just

what a drug cost on their health insurance, or just what it would

cost at their local pharmacy.

Senator BREAUX. Let me interrupt you on that. The State governments negotiate for drug prices under the Medicare program and

the Federal Government negotiates on behalf of VA patients. Why

is that not the approach that you would prefer?

Dr. MCCLELLAN. Well, the State governments mostly, now, negotiate prices by relying on private benefit managers, just as we are

doing in this benefit. What they typically do, is put all of their

Medicaid beneficiaries in just one plan with just one formulary. We

have got enough power with all of our beneficiaries, and also

enough diversity in our beneficiaries. They have quite different

drug needs, quite different preferences about how they like to get

their prescriptions and where they like to get their prescriptions,

that we want to make sure they have got a drug benefit that not

only negotiates lower drug prices just as those State plans do or

just as the VA does, but then also make sure that it is for the

drugs that they want.

So, we are not going to force them into a one-size-fits-all formulary, like, the VA formulary may not cover Lipitor or Celebrex

or many other drugs that they use commonly. We are going to give

them good information so they know exactly what they are paying

for the drugs, and what is covered so they can get the best drug

benefit that meets their needs.

Senator BREAUX. So your economists in the department, and the

actuaries, and everyone else clearly tell you that the individual will

get a better deal through the negotiation process we have and that

you are writing the regulations for than if the government were to

do it?

Dr. MCCLELLAN. That is right. In our analysis, in the independent analysis done by the Congressional Budget Office, the conclusion is, the prices are going to be the same, similar or better,

than the prices that the government could negotiate and beneficiaries are going to have a better choice of drugs that is more responsive to their needs.

Senator BREAUX. All right. The law requires that at least two

drugs be offered in every category—we are talking about choice—

so that every senior will have a choice of which drug they want to

get. You have, apparently successfully, made everybody mad in the

proposed regulations, from the drug manufacturers to the pharmacy benefit managers.

17

The former people have said that what your proposal would do

would be to ‘‘set back treatment for diabetes, asthma, heart disease, depression, migraine, epilepsy, gastrointestinal disorders,’’

and that is not all, because apparently they feel that you do not

have enough categories being proposed.

On the other hand, the Pharmaceutical Care Management Association representing the pharmacy benefit managers, said that

‘‘back door efforts by the drug manufacturers and their front

groups to have 300 or more therapeutic classes of drugs covered in

the formulary would be a blank check for the drug manufacturers

and would eventually bankrupt Medicare.’’

So, you have got both sides thinking you have a disaster on your

hands of what you are recommending. Apparently you all have

about 146 categories. Is that about what we are talking about?

Dr. MCCLELLAN. You are talking about the proposal by the U.S.

Pharmacopoeia, which is an independent group.

Senator BREAUX. Which you contracted out to set this up.

Dr. MCCLELLAN. Right. That is right. And they have a model system for drug classes. I think it is important to emphasize that drug

classes are not everything that this drug benefit is about. We also

care about what drugs are actually included. Do the drugs reflect

modern medical practice? We also care about the actual prices that

beneficiaries would pay.

If you include drugs in a class system and they are all covered

at the third tier level, that is not really going to provide good access. We care about the other steps that the drug benefit might use

to influence how people get their medicines, whether they have utilization review or things like that. We are going to be reviewing all

of those factors. This is why we have this public comment process.

Senator BREAUX. You all have not made the recommendation on

the number of categories yet. You are still looking at the data.

Dr. MCCLELLAN. That is right. And USP will make a recommendation for a model classification system, but that is not the

only factor that determines whether or not a formulary is appropriate and whether it is providing access to the drugs that beneficiaries need at the lowest possible cost, and that is our goal.

We are going to have some comprehensive public guidance that

we will have out for public comment first to make sure that we are

taking account appropriately of all the factors that I mentioned

that influence whether or not people can get the drugs they need

at the best possible cost.

Senator BREAUX. So USP is going to be only one factor.

Dr. MCCLELLAN. USP is just one factor. That is right.

Senator FRIST. I think that is an important point. I think we will

probably end up coming back to that whole concept. A lot of this

is getting it on the table so we can come back and build on it.

I have one question, but I will wait.

Senator Smith?

Senator SMITH. Thank you, Senator Frist.

I want to also thank you for laying the predicate on this Part B

premium issue. I, for one, was very disheartened when this was announced, that somehow President Bush was to get the blame for

it, because I remember as a new Senator in 1997, as part of the

Balanced Budget Agreement, we did this with President Clinton

18

and we did it as Republicans and Democrats alike. We laid the

framework for Medicare’s fiscal security.

Frankly, we probably overdid it. So what we did, Republicans

and Democrats alike, with Senator Kerry included, we wanted to

increase payments to physicians and plans because we did not

want to have seniors have a low price, and nowhere to go to get

service.

So, I just want to say, even to this limited C–SPAN audience,

President Bush is not to blame for this. He is following the law,

a law that we—I, Senator Kerry, and others—voted for. I think, in

fairness, the American people ought to know that.

One of my concerns, Dr. McClellan, is on the issue of mental

health. You have testified that USP has recently released its draft

guidelines for listed categories and classes that will help drug

plans develop their formularies.

You have done this, as required by statute. The guidelines will

act as safe harbors, ensuring beneficiaries have appropriate and

adequate access to necessary treatments while protecting drug

plans from timely regulatory review by CMS.

It is my understanding that, while multiple classes were provided for anti-psychotic drugs, only one class was identified for a

wide range of anti-depressants. Given the great degree of differences and side effects to these kinds of drugs, the wide variation

in response rate from patient to patient and the overall effectiveness to each type of these drugs, I am somewhat troubled that USP

has put all types of anti-depressants into one class. I further fear

it will impact beneficiaries’ access to the most effective and the

most appropriate treatment.

So my question, Doctor, to you, is with respect to my fear that,

with regard to treatments for persons with mental illness, USP has

thus far failed in its undertaking to ensure that, in providing a safe

harbor for persons who suffer mental illness, that they will get the

right kind of drug that can be most helpful to them.

Can you elaborate on how protections will be given to ensure

that beneficiaries with mental illnesses have access to as wide a

range of drugs as possible when a new benefit is implemented in

2006?

Dr. MCCLELLAN. Absolutely, Senator Smith. I think the first part

of the answer goes to my response to Senator Breaux earlier, which

is that this USP model formulary is only one element that we are

going to consider in our review, in our oversight of making sure

that all of our beneficiaries have access to the drugs they need and

that the drug benefit is adequate to prevent any discriminatory

practices against beneficiaries that are suffering from any particular types of diseases.

We will have further guidance about coverage of drugs within

any system of classification, about the tiering and the payments for

those systems to make sure that they reflect current medical practice.

I am coming into this job from being in medical practice where

I had a lot of patients who benefitted from some of these newer

anti-depressants who did not respond to older medicines or did not

respond as effectively, and those medicines are clearly a part of

modern medical practice.

19

I have been reminded of that by our ongoing discussions and

input from advocates for patients with mental illness, including the

many patients in this country, the many Medicare beneficiaries

with depression who are not being treated today because they do

not know about the treatments available or they cannot afford the

treatments available. So, absolutely, this is going to be the top priority in implementing the benefit effectively.

Senator SMITH. Well, I would appreciate your special attention to

that issue, because I think sometimes mental health tends to get

overlooked as we talk about physical health, and I think it has a

real connection.

Dr. MCCLELLAN. I agree.

Senator SMITH. As you know, many members of this committee

worked very hard to secure passage of the provision that extended

Medicare coverage to a number of new oral anti-cancer and selfinjectable drugs.

I was pleased when the final agreement on the Medicare Modernization Act provided $500 million for the next 2 years to extend

coverage to these vital treatments in the absence of the comprehensive benefit.

However, it is my understanding that the guidelines for this temporary program are burdensome and the enrollment has, therefore,

been extremely limited.

Given that enrollment for this program has not been very vigorous, as Congress has expected, or CMS as well, what are you

doing to encourage enrollment, and is CMS reaching out to patients

and provide groups to make changes to the program requirements,

changing enrollment criteria or other things?

Dr. MCCLELLAN. Well, I think one of the biggest challenges with

this drug demonstration program, which is now providing many

thousands of dollars in help to beneficiaries who need potentially

life-saving medicines, from multiple sclerosis or many forms of cancer, some types of lung disease, and other illnesses, is making sure

that the beneficiaries who can most get help know about it.

This is a very narrow slice of our overall Medicare population.

These are critical drugs, but they are only for beneficiaries that

currently have coverage for drugs under Medicare Part B.

A lot of those patients are already in treatment and they are

doing all right. They have to go into their doctor’s office, and that

is less convenient, but they are in treatment now so they are not

going to suddenly switch. They are going to need to discuss that

with their doctors. A lot of patients do not know about this new

program yet. That is what we have found.

Fortunately, we have had a tremendous response from disease

advocacy groups, including the American Cancer Society and the

National Organization for Rare Disorders, and many other groups

to help make sure beneficiaries who can get the most out of this

program find out about it.

We are now seeing applications coming in at more than 1,000 a

week. We are up to, I think, around 7,000 completed applications

now, and many more phone calls. There was a notification about

this in Parade magazine this past weekend that generated a lot

more calls into the agency.

20

So, we need to make sure people know the facts, that by getting

the same benefits that will be available in Part D in 2006, they can

get drugs that they can take and administer themselves and save

literally thousands of dollars. The application itself—and this is

very important for people to know about—does not take very long

to fill out.

When you call up our toll-free number—and you can get all the

information if you call 1–800–MEDICARE—they will walk you

through the whole application. It takes less than 20 minutes. To

qualify for the full, comprehensive, low-income coverage, just a few

more questions about your income and assets beyond that. So this

does not take much time.

If you are struggling now in this country because you would like

to get drugs that you can administer yourself rather than having

to go to the doctor’s office for Part B covered drugs, you should give

us a call. There are slots available. It is not a hard process to sign

up, and we can start giving you help right away with your costs.

Senator SMITH. So are you doing a rolling enrollment to ensure that all the $500 million is used?

Dr. MCCLELLAN. We are going to have another major enrollment

period at the end of this month, so now is a good time to get the

applications in. We will have rolling enrollments after that, to the

extent slots remain available.

Senator SMITH. Thank you.

Senator FRIST. Thank you.

Senator Bingaman, then Senator Thomas.

Senator Bingaman?

Senator BINGAMAN. Thank you very much, Senator Frist.

Let me just clarify what I think the reality is here on this increase in the Medicare premium. There is a formula that has been

in the law now for several years, essentially saying that the

amount that people pay on their premium is based on the projected

cost to Medicare. That is the general, shorthand version for what

the law provides.

Dr. MCCLELLAN. Right.

Senator BINGAMAN. So the question is, why has the costs of

Medicare projected to go up so much that we have a 17 percent increase in the premium? One of the reasons that the cost of Medicare is projected to go up so much and that the Part B premium

is going up 17 percent, is because of these very large overpayments

to HMOs that are built into the bill that we passed last year.

It was a prescription drug bill, but it calls for a substantial increase in over-payments to HMOs to entice people to get their

health care through HMOs, and to entice HMOs to participate in

this process.

So I guess my question is, if in fact you have got a significant

portion of the 17 percent increase that is a result of the required

overpayments, or the provided overpayments to HMOs, why should

people, the 89 percent of seniors who have stayed in traditional

Medicare, have to pay that full 17 percent, the portion of it which

is going to subsidize the HMOs? They are not participating in

HMOs.

In many cases, they do not have access to HMOs. They have no

opportunity or they have chosen not to do it, whatever reason. Why

21

should they not be exempt from that part of the increase in the

premium?

Dr. MCCLELLAN. Well, Senator, this is a premium that is set up

by statute to cover 25 percent of the costs, as you said, and fourfifths of the increased benefit cost in Medicare Part B are going

into the traditional Medicare program.

Only about a fifth is related to this change in the payments of

the Medicare Advantage plans. The Medicare Advantage beneficiaries pay the same costs, even though a lot of the benefits in

Part B are going to people in traditional Medicare.

In fact, the way that the formula is set up now, when there is

an increase in traditional Medicare costs, which there was in this

case because the payment reductions that were scheduled for the

doctors were reversed, that causes a corresponding increase in payments for Medicare Advantage.

The traditional Medicare beneficiaries, for what they are paying

in, they are getting better benefits and better access to physicians

in Part B, better preventive benefits, and the like, and the Medicare Advantage beneficiaries are getting more than offsetting savings in their out-of-pocket costs.

We have done the analysis, and we saw this with the 2004 payment increases. They went into lowering out-of-pocket costs for premiums, for co-payments, for coverage of additional benefits like

drug coverage for people in Medicare Advantage.

So, they are saving money on out-of-pocket costs from this payment increase, and the people in traditional Medicare are getting

better benefits as well, and each of them are contributing just a

portion of this overall cost.

Senator BINGAMAN. But each beneficiary makes the judgment,

they want to be in traditional or they want to go into this new,

whiz-bang program which has come up, these HMOs. If they choose

to stay in the traditional Medicare, why should they have to pay

that extra one-fifth? You say it is one-fifth of the 17 percent that

is a result of the overpayments to HMOs. Why should they have

to pay for that if they choose not to participate?

Dr. MCCLELLAN. It is one premium for all beneficiaries, and most

of the increased premium costs are going into fee-for-service Medicare. So the Medicare Advantage beneficiaries who are paying

these premiums, a lot of that money is going into fee-for-service

Medicare.

Senator BINGAMAN. And that is the four-fifths.

Dr. MCCLELLAN. It is one program for everybody. That is the

four-fifths. That is right.

Senator BINGAMAN. I am talking about the one-fifth. You said

that one-fifth relates to HMO overpayments. Why should people

who do not want to get their health care through HMOs, or do not

have the opportunity to, why should they have to pay that extra

one-fifth?

You could bring that 17 percent down one-fifth just by, at least

for the people who are not participating in HMOs, by essentially

making provision, or Congress could. Maybe Congress has to

change the law. But it seems to me that it would be very fair for

the 84 percent of the people in my State, 84 percent of the MediVerDate 11-MAY-2000 12:14 May 10, 2005 Jkt 095484 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 97083.000 SFINANC2 PsN: SFINANC2
22

care beneficiaries in my State who have chosen not to participate

in HMOs.

Dr. MCCLELLAN. But then I think, to be completely fair, you

would have to not make people in Medicare Advantage pay for all

of those costs that are going into fee-for-service payments to physicians. Then I think it would definitely take a statutory change.

What that means, is that beneficiaries would be paying less than

a quarter of the costs.

So they are paying a quarter, they are getting out three times

as much in benefits, on average, but it is something that all beneficiaries are in together and the costs go, in this case, mainly in

the Medicare fee-for-service, but some go into Medicare Advantage,

and they are all contributing to those costs.

Senator BINGAMAN. I will have to wait for my next round, Mr.

Chairman.

Senator FRIST. All right. Thank you.

Senator Thomas?

Senator THOMAS. I wanted to talk a little bit about the distribution system in terms, particularly, of the pharmaceuticals. I come

from a State that is low population and, therefore, for medical services we traditionally have not had the volume to really encourage

insurance companies, and so on.

So in this matter of selecting the regions, are you going to try

and set it up so that there will be enough volume in each of these

regions to encourage bidding? It will be done by bidding. Is that

correct?

Dr. MCCLELLAN. That is right. That is why we are going through

this public comment process. We have actually gotten a lot of comments suggesting that the larger regions could be helpful in making sure that rural States like yours get good, broad access to the

new benefits, the PPO benefits and the prescription drug benefit.

That is why I am confident that we are going to find a way to get

these benefits into those locations. We are just trying to figure out

the exact best way to do that with a lot of public input.

Senator THOMAS. If Denver is included, however, as an example.

But there are different rules for urban areas than rural areas.

Could they exist within the same region, these differences?

Dr. MCCLELLAN. Well, one of the comments that we have gotten

is that some plans would like us to allow for differences in benefits,

differences in rules in one part of a region versus another.

The statute only gives us a limited amount of flexibility in accommodating that, though. It was written with an eye towards

making sure that benefits got extended to all Medicare beneficiaries, regardless of where the live.

So, we are looking at comments about whether there are any adjustments that we should allow within regions, but I think our

overall driving concern is, as the statute intended, that we make

sure there are good benefits available to all Medicare beneficiaries,

regardless of where they live.

Senator THOMAS. Good.

One of the things, of course, that people like and want, particularly in rural areas, are local pharmaceuticals, local drug stores, to

go to. Now, as these bids take place, will these PPOs provide it for

all participating drug stores or could they have some relationship

23

with a group of stores that are related to them in business and

only use certain ones? How is that going to work?

Dr. MCCLELLAN. The PPOs and the drug plans are allowed to establish networks of pharmacies, but there are some strict rules

that we will be enforcing to make sure that those pharmacy networks are very broad.

We have had some experience in this already with our drug card

program. As you may know, there are a lot of cards that are participating very broadly in rural States and providing very broad access to pharmacies.

Many of these cards, many of these programs, include almost all

of the nearly 60,000 pharmacies in the country, and we expect to

see the same kind of thing with the drug benefit, with a number

of options that are going to make sure that people have local access

to the pharmacies they want to use, and we are going to give them

good information to make sure they can find out how to continue

to get drugs at the local pharmacy that they prefer.

Senator THOMAS. If I am a PPO, however, will I be able to give

a better price to my choice of pharmacies as opposed to the others?

Dr. MCCLELLAN. Part of networking involves getting good volume

arrangements. If you can get more people to go to certain providers, then they can lower their costs per person. They can provide volume discounts. That is true for pharmacies as well. But because of the broad access requirements, I think a lot of those network pharmacies are going to include local rural pharmacies.

Again, that is what we are seeing right now with the drug card

program.

Senator THOMAS. Well, I hope so, because rural areas would have

trouble participating with the fair price.

Dr. MCCLELLAN. That is right.

Senator THOMAS. What about mail-order, again, trying to have

local places to acquire drugs? Are they going to support and give

better opportunities for mail or are you going to work through the

local pharmacy?

Dr. MCCLELLAN. Mail-order options are going to be allowed, and

in some cases they can provide significantly lower prices for beneficiaries who do not mind getting their drugs that way, who do not

mind not having face-to-face interactions and back and forth with

their pharmacist.

But what we have seen, and both in my talking to beneficiaries

around the country and all the work that we have done for this

drug benefit, is that most beneficiaries, most Medicare beneficiaries, prefer to get their drugs through local pharmacies

through face-to-face contacts.

Again, that is why we are going to have these very broad access

requirements for the pharmacies. We have been working very closely with pharmacy groups to make sure that we set up this drug

benefit in a way that will make it possible for people to get big savings at their local pharmacies.

Senator THOMAS. I hope so. I think there is a movement towards

involving local pharmacists more in the kinds of things you do, and

we have been encouraging, in fact, to get people to go to their pharmacists to talk about these cards, and so on. So, I hope we can

keep those folks in the process.

24

Dr. MCCLELLAN. We intend to.

Senator THOMAS. Thank you.

Senator FRIST. Good.

Next, we have Senator Nickles, followed by Senator Graham.

Senator NICKLES. Mr. Chairman, thank you very much. Dr.

McClellan, thank you. It is kind of interesting, participating in this

hearing. It brings me back to the many months that we spent putting together this bill. It is kind of interesting to hear your explanation. It will kind of refurbish our memories as well as to some

of the things that we did.

Let me just ask a couple of questions. There was a lot of negative

press on the percentage increase in the Part B premium, 17 percent, and people were shocked, how could this be. We started looking at it. Oh, well, it was because we made some actions to increase physician payments, outpatient hospitals. We had additional

services, and so on.

I would mention that there has been some discussion by some

members of Congress that, well, we should limit the increase to

whatever the cost of living increase is for Social Security. If that

was done, say, for this year, what would the increase have to be

for next year on Part B?

Senator, according to our actuaries, in addition to the budget

costs of doing that this year, a 1-year change in the law that was

not continued would cause an increase of almost 20 percent in premiums next year, which is much higher than what we are expecting.

Senator NICKLES. I appreciate that. I think it would be a mistake

to do that, and I expect that I would oppose it very strongly. I

think it would jeopardize the financial basis that we have with

Medicare, and it already has some big challenges, actually much

bigger than even Social Security.

Let me ask you a different question. How is the sign-up going for

the drug cards? How many people have actually signed up? What

percentage of eligible people have signed up?

Dr. MCCLELLAN. We, right now, have close to 4.4 million people

enrolled in the drug card program. Even during the slower month

of August, we were getting 10,000 people a day. Recently, as there

has been more attention to the fact that there are real discounts

available that people can save, and it is not hard to sign up, we

have seen a pick-up in the phone calls coming in.

I am especially interested in the fact that there is now a broad

group of nonpartisan organizations coming together through the

Access to Benefits Coalition to help enroll people in low-income assistance.

So the drug card is providing significant discounts to all Medicare beneficiaries who do not have good coverage now and who sign

up for the card, but for low-income beneficiaries they also get $600

this year, $600 next year, and now wrap-around discounts from a

large number of drug manufacturers, including on 6 out of the top

10 drugs, very commonly used drugs like Lipitor, for example, that

offer thousands of dollars in more help.

We have already got well over a million low-income beneficiaries

signed up for this program and we are going to be working with

some new ideas to get many more enrolled as well.

25

If you take a step back and look at the big picture, and we tried

to look carefully at this when we were setting up this new program, about how had other new Federal health benefit programs

gotten off the ground, and how do you overcome the barriers, it was

very clear that we needed to do a lot of local outreach, we needed

a lot of partnerships in health, in getting the true facts out about

the program, and we are trying our best to do that.

But it is also clear that it takes a little bit of time. For exmaple,

the Children’s Health Insurance Program, at the end of its first

year, had a little over a million people signed up, around 50 percent or so of the targeted enrollment. We are, right now, approaching 60 percent of the target enrollment in this program after just

a little bit over 3 months.

So I am hopeful that, by continuing this broad support for outreach, to get the facts out about the program, to let people know

they do not need to go on the Internet, they just call 1–800–MEDICARE, they can find out exactly how much they can start saving

right away. They can sign up for the card in less than a half hour.

I hope that many people now who are not yet taking advantage of

these important savings will soon start to do so.

Senator NICKLES. The people who would be the primary beneficiaries of this would be people who do not have access to drug coverage now as seniors?

Dr. MCCLELLAN. That is right. The people with drug coverage

now through an employer or other source are going to get help in

2006 with our new employer subsidies and with our new help to

States, but this is a short-term program intended for people who

are paying on their own for a lot of their drug costs, and in too

many cases are paying the highest prices in the world.

They do not need to do that any more, especially low-income

beneficiaries. They do not need to be choosing any more between

drugs and other basic necessities, or skipping doses, or not refilling

their prescriptions, because there is thousands of dollars worth of

help available right now with just a phone call to 1–800–MEDICARE.

Senator NICKLES. So if someone was not receiving assistance

from their employer, by joining this, signing up for the card—and

most of the cards, in this case, would cost $20 or $25, and for lowincome people, I think that is waived, is it not?

Dr. MCCLELLAN. It is free. Yes.

Senator NICKLES. And the low-income people would be eligible

for the $600, and possibly more.

Dr. MCCLELLAN. And more.

Senator NICKLES. And in addition to that, all people who would

sign up would be eligible for the discounts. The discounts are averaging about what percent?

Dr. MCCLELLAN. Well, independent studies, not ours, are showing 20 percent or more for brand-name drugs at local pharmacies,

and for generic drugs, 50 or 60 percent or more. Also, we will give

you information on how to find cheaper versions of your drug.

There are generic drugs available and so forth that can offer much

more savings on top of that. A new study by the Lewin Group, out

just a few weeks ago, found that for this program, for just 18

26

months, people can save, on average, over $1,200 in getting their

drug costs down.

Senator NICKLES. Thank you, Doctor. I appreciate the good work

that you and your staff are doing.

Dr. MCCLELLAN. Thank you.

Senator FRIST. Thank you.

Senator Graham?

Senator GRAHAM. Thank you, Senator Frist.

I would like to use the first four minutes to ask some questions,

and then the last to make a comment.

Dr. McClellan, you said that today the average Medicare beneficiary is spending $240 a month above their Medicare benefits on

health care.

Dr. MCCLELLAN. That is on uncovered services. They are spending more than that out of pocket because of the gaps in Medicare.

Senator GRAHAM. Could you outline how the new Medicare reform bill will reduce, and the quantity of the reduction of that

$240?

Dr. MCCLELLAN. Absolutely. The $240 in uncovered services,

until this law, included preventive benefits, like for cancer, heart

disease, diabetes.

Senator GRAHAM. What is your estimate, starting with your list,

of the dollar savings that will be accrued as a result of that?

Dr. MCCLELLAN. I do not have a specific dollar figure because it

varies for different types of beneficiaries. For the low-income beneficiaries, they are going to get 95 percent of their drug costs covered, on average. That is a benefit worth about $3,500, on average.

For typical Medicare beneficiaries, people who do not qualify for

the low-income assistance, a typical beneficiary will get half of

their costs covered. So, that is a savings of about $1,270, about half

of the cost of drugs today. So, those are substantial amounts of savings. We have these numbers in our proposed regulation for public

comment, too.

Senator GRAHAM. Could you submit for the record your estimate

of how components of the Medicare reform bill, by classes of beneficiaries, will affect their costs of uncovered services?

Dr. MCCLELLAN. We will do our best to work with your staff on

that, to make sure we get the numbers exactly right. But we would

like to do that. There are some real reductions in out-of-pocket

costs because many of these services, like drugs, and prevention,

and disease management, are moving from uncovered to covered

status, so beneficiaries are going to get a lot of help that they do

not get now.

Senator GRAHAM. It would be helpful to quantify that statement.

Dr. MCCLELLAN. Yes.

[The information appears in the appendix.]

Senator GRAHAM. An issue that I have raised before, both in

committee hearings and by correspondence, has been the coverage

through the PET program of medical evaluation for multiple

myeloma cancer. In a letter that you sent on the 16th of August,

you state that ‘‘we will announce shortly whether we will accept a

reconsideration of our current decision.’’ Could you give a date by

which time you think that might occur?

27

Dr. MCCLELLAN. Yes. As a result of your interest in this, and

also because it just is an important new technology, Positron Emission Tomography is now used in imaging for a number of diseases,

including possible benefits in multiple myeloma, we have been taking a close look at this.

We convened an expert panel, with help from the National Institute on Aging and the Alzheimer’s Association, for some other PET

applications, and we are looking into this, too.

I cannot give you an exact date, but we expect to have a major

announcement related to PET coverage in the coming days, like

within the next week or so, and we will be working promptly on

this aspect of PET coverage as part of that overall effort.

One of the other things that I announced earlier this year, is

that we are going to be funding the clinical cost of care in studies

related to PET use, so that where there are important, unanswered

questions—and that may be true in this myeloma case—we can get

them answered.

Senator GRAHAM. Would the answer to the question be, by the

end of September you would have an announcement?

Dr. MCCLELLAN. Certainly I will go back and try to make that

happen, Senator. I know how important this is to you.

Senator GRAHAM. Next, another subject that we discussed is the

issue of negotiation for pharmaceutical costs in a hospital setting.

Of course, Medicare has covered drugs in a hospital setting almost

since the beginning of the program, if not from the beginning of the

program.

It would seem to me that, given the shaky status of the Part A

trust fund, that if we could reduce a hospital cost by a program

which would make pharmaceuticals more accessible and affordable,

that would be a benefit to the Part A program.

What is the status of CMS negotiating on behalf of hospitals?

Dr. MCCLELLAN. Well, we are, as you know, taking steps for Part

B drugs that are used in hospital outpatient departments to get the

prices down and more accurate, and that is a source of savings this

year in Part B.

Senator GRAHAM. I am talking, in the Part A program.

Dr. MCCLELLAN. In Part A, hospitals, right now, negotiate

through purchasing groups to get lower prices on their drugs, and

we can look into that more closely. I think many of them are getting pretty good prices now, but we would certainly be interested

in steps to help get those drug prices down for the most effective

negotiations means possible.

Senator GRAHAM. I would like you to evaluate what those savings by individual hospital negotiations are in comparison to what

the VA secures by the mass negotiation that it does for all of its

109 hospitals.

Dr. MCCLELLAN. We will look into that. As you know, the VA is

a little bit different in that it owns the hospitals. In this country,

most of the hospitals, as you well know, are private. They are nonprofit, mainly. They make their own decisions.

They are not subject to the direct government determination of

exactly which drugs they provide their patients and how they provide services, in the same way that the VA oversees care in the VA

system. So, that is an important difference. But I do want to make

28

sure we are helping hospitals as much as possible get their costs

down.

Senator GRAHAM. This seems to me to be an area in which hospitals, the taxpayers, and the beneficiaries all have a common interest, is in restraining the cost of pharmaceuticals in a hospital

setting, and that your agency is the centerpiece in making that

happen.

Senator FRIST. Was that part of your statement?

Senator GRAHAM. I have used my time. I will hold for the next

round.

Senator FRIST. All right. Or if you would like to go ahead and

make it. We will turn to Senator Lincoln, then we will come back

through quickly. I know we have another panel following this, but

I want to make sure everybody does have the opportunity to question and interact. We will go ahead and go through a second round,

and then we will go to our second panel.

Senator Lincoln?

Senator LINCOLN. Thank you, Senator Frist.

Welcome, Dr. McClellan.

Dr. MCCLELLAN. It is good to see you again.

Senator LINCOLN. I am not trying to be intimidating, because you

all did beat us on Saturday.

Dr. MCCLELLAN. It was a close game.

Senator LINCOLN. It was.

I still remain very concerned about the drug discount card. The

last time we talked in June, you had said that CMS was working

with the States to basically determine how they could best automatically enroll seniors in the Medicare savings program in the

drug card.

I am convinced it is the best way to ensure that these seniors get

that $600 a year, and you have got three and a half months left.

I am really concerned that time is running out. So maybe you could

update me on the process, or whatever progress you have made in

those automatic enrollments.

Dr. MCCLELLAN. I would be glad to give you an update, and this

is for Senator Bingaman, too, because I know he feels very strongly

about us getting as many low-income people into the tremendous

help available through this program as possible.

When we talked last, we were exploring whether States could

use the same kind of approach as they use for enrolling their prescription drug assistance plan beneficiaries. These are people who

are in limited State drug benefits now which would qualify for the

help.

Senator LINCOLN. But you already automatically enrolled those.

We do not have that.

Dr. MCCLELLAN. That is right. We automatically enrolled them

through a process with State help, where the State acted as authorized representatives for these beneficiaries.

That approach, it turns out, is not going to work here because

the States generally do not have that authorized representative authority, and they have not passed, and do not seem willing to pass,

legislation to change that. So, we are working on a different approach.

29

We have been talking not only with your staffs, but with a lot

of these organizations that are very interested as well in getting

help to low-income groups, like the National Council on Aging,

AARP, and many other organizations that make up the Access to

Benefits Coalition, and we are making a lot of progress in coming

up with a new way to enroll these individuals. We have reviewed

our authority.

We are going now on an approach that does not involve relying

on State authorities at all, and we are going to have more to say

about this very soon. I will make sure that your staff is among the

first to know. We have made a lot of progress on this, and I am

optimistic that we are going to be able to boost the enrollment of

low-income beneficiaries into this program.

Senator LINCOLN. Do you know how many low income you have

enrolled? What is the percentage?

Dr. MCCLELLAN. Yes. We have got over 1.1 million low-income

beneficiaries enrolled now. That is a significant part. It is not as

many as I would like.

Senator LINCOLN. Do you know the percentage?

Dr. MCCLELLAN. Well, we were expecting about close to 4 million

low-income beneficiaries to enroll in this program by the time it

concludes, and we have seen a pick-up in this enrollment recently

with help from the Access to Benefits Coalition.

Senator LINCOLN. Is that 4 million your goal?

Dr. MCCLELLAN. I am sorry. I have got a corrected number.

There are 1.8 million enrolled now.

Senator LINCOLN. And 4 million is your goal?

Dr. MCCLELLAN. That is what we expected would be the enrollment by the end of the program.

Senator LINCOLN. And do you know what percentage of the low

income that is?

Dr. MCCLELLAN. I think it is most of the low-income beneficiaries

who do not have drug coverage now through Medicaid or another

source.

Senator LINCOLN. That would qualify under the MSP program.

Dr. MCCLELLAN. Yes. Many of them would qualify under MSP.

As you know, MSP is another program, one of the Medicare savings

programs, where the enrollment is not as high as we would like.

A lot of the outreach that we are doing now with these outside

groups and with Medicare directly is also informing people about

the Medicare savings program, which can pay for their premiums

and provides other important benefits as well.

Senator LINCOLN. Right. Well, I mean, I guess, as you are doing

this in a dual situation, you are taking certain steps to ensure that

the low-income subsidy applicants for the drug card are also being

screened for the MSP.

Dr. MCCLELLAN. That is right. This is going to be an even bigger

issue as we prepare for the full drug benefit in 2006. As you know,

under the law, the law includes provisions to get States to help us

enroll people who are not eligible now, and we are also getting new

help from the Social Security Administration doing enrollment in

the drug benefit.

Senator LINCOLN. But just tell me, just so I understand, why is

it that you feel like you cannot automatically enroll these people?

30

I mean, you have got their data. You know who they are. You know

who these people are on these MSPs. It is in your data bank. You

know that they have already qualified, because they qualified for

the MSP program.

Dr. MCCLELLAN. The way the law works, is this is a voluntary

benefit. It was very important to members of Congress in both parties that the prescription drug coverage be voluntary.

Senator LINCOLN. So you cannot just sign them up. You have got

a rolling enrollment that they can change whatever program they

are in, but to go ahead and get them that $600, which they are

going to lose in the next 3 months.

Dr. MCCLELLAN. We do not want them to lose it. It is valuable

help that people who are struggling with drug costs need right

now. So, as I am saying, there is more that we can do to make it

even easier for people to get those benefits.

Senator LINCOLN. But you are just saying that, because it is supposedly a voluntary program, you cannot go ahead and automatically enroll them.

Dr. MCCLELLAN. Yes. It is a voluntary program.

Senator LINCOLN. But you could automatically enroll the managed care folks and the State groups because you went through

their managed care and you went through their State. Is that what

you did?

Dr. MCCLELLAN. The people who have signed up for Medicare

Advantage programs have, often, drug benefits and drug help included in that. So, there is already a statutory structure when they

voluntarily choose to enroll in Medicare Advantage, and in most

cases they do get help with prescription drugs already and the drug

card is added to that.

For the State programs, the State has acted as the authorized

representative of the beneficiary in making the decision on the

beneficiary’s behalf. So what we are trying to do here, is go through

a different approach without the State to make it as easy as possible for the low-income beneficiaries to start getting help.

Senator LINCOLN. Do you know where the auto enrollees are located? Do you have an indication of that?

Dr. MCCLELLAN. Well, they are located all over this country.

There are a lot of them in your home State of Arkansas.

Senator LINCOLN. Automatic enrollees? We do not have a State

plan and we do not have managed care.

Dr. MCCLELLAN. I am sorry. Low-income. Sorry. I did not mean

to say automatic enrollees. Sorry. The automatic enrollees are in

States that have this authorized representative status, States like

New Jersey, Pennsylvania, Connecticut, Maine, Michigan, New

York, North Carolina.

Senator LINCOLN. Not the ones with the bigger percentage of low

income proportionately, probably. Right?

Dr. MCCLELLAN. Well, some of them, States like North Carolina,

do have a large share of low-income beneficiaries. But we are very

interested in working with you on getting beneficiaries in other

States like Arkansas, where we do not have the straightforward

mechanism. The State does not have authorized representative status there, so we are trying to find this other way to get the most

help to those beneficiaries.

31

Senator LINCOLN. And, last, can you tell me how many Arkansans are enrolled in the drug card today? Do you all have that information for us?

Dr. MCCLELLAN. I do not think I have State-specific numbers, no.

Senator LINCOLN. So you do not have any State-by-State enrollment?

Dr. MCCLELLAN. No, I do not. We are going to try and make that

available as soon as we can.

Senator LINCOLN. All right. That would be great.

Thank you, Senator Frist.

Senator FRIST. Thank you, Senator Lincoln.

We do have a second panel. Do we want to go through and have

another round of questions? All right. Let me then kick off really

a follow-up from where my questioning was before.

Let me preface my question with an appreciation of what we

have done in this Medicare Modernization Act in terms of, from a

physician or doctor/patient relationship, the sort of very positive

things that we have done with prevention and chronic disease management, and the rich complexity of it, but the richness of it comes

out in hearings like this and will really come alive once this is implemented.

My questioning before was about the 17 percent increase in the

premiums which has been so much in the press. That comes back

to physician services. Then you say, well, what are driving those

physician service costs?

It is the expenses of a physician of operating their practice, in

large part. One of those major drivers that we all know, and a lot

of people are beginning to talk about today, is the skyrocketing

medical liability costs.

As a physician, people come up to me all the time, my colleagues,

and basically tell me today—and it is different than even 5 years

ago or 10 years ago where costs were going up—that now they are

becoming unbearable.

With 20 crisis States, however that is defined, if you go to New

York or Pennsylvania or Ohio, physicians are leaving the practice.

That is not an overstatement. Literally, they are stopping delivering babies because of $100,000 to $200,000 premiums that they

are having to pay. It comes back to frivolous lawsuits. Every time

we try to take it to the floor, it breaks down. At some point, we

have to address it on the floor and it is going to take bipartisan

work, and I recognize that.

But we have, with Dr. McClellan, before your current position,

you have been an academic. You have practiced medicine. You have

written extensively on defensive medicine.

And since we are talking about premium increases from our colleagues, and that is the discussion today, could you comment,

based on your sort of body of knowledge, your experience now, but

also what you have studied, this impact of skyrocketing medical

costs in terms of access, what it is doing in terms of defensive medicine, the waste that comes from people like you or me ordering

tests to protect ourselves from a frivolous lawsuit that we know is

out there?

Dr. MCCLELLAN. Well, there is a lot of evidence, both that doctors often have to practice defensive medicine because of the liabilVerDate 11-MAY-2000 12:14 May 10, 2005 Jkt 095484 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 97083.000 SFINANC2 PsN: SFINANC2
32

ity pressures that they are facing, that that can add to medical

costs through extra tests, extra services, and the like, and also that

reforms in medical liability laws significantly affect those costs and

we need to get them down without compromising quality of care.

In this era of rising health care costs, we need to be looking at

every way possible to reduce costs, but without compromising quality, not by cutting benefits, not by shifting costs to someone else,

but just by delivering our care in a better way.

According to the Congressional Budget Office, Medicare could get $11 billion in savings in reduced liability premiums that we pay

out through medical liability reform law, and that is not even

counting the potential savings from affecting defensive medicine,

getting more effective medical practice into play. So, there is a lot

of opportunity for savings there.

What I am most concerned about, again, coming from medical

practice, is that I am hearing from doctors in a lot of places in the

country, OBGYNs, emergency medicine specialists, trauma surgeons, and the like, that they are just leaving practice. So, in a

number of areas in the country there is a significant access problem that affects our program, so it affects us on the cost side. We

had some of the increase in costs in the Medicare payments to doctors in 2004 that was due to medical liability payment increases.

It affects us, most importantly, on the quality of care side where

beneficiaries are not getting errors avoided, they are not getting access to the services they need because medical liability gets in the

way.

And I know this is going to take legislation to fix, but as you

know, the Senate did pass a bill earlier this year to provide some

liability protections to allow doctors and health professionals to

talk about ways to avoid medical error, something that they are

afraid to do now because it could get discovered in court.

It will not directly reduce people’s ability to sue, but it will make

it easier for doctors to work together to prevent errors and the complications in the first place. Even that step could have a big impact

on costs and quality of care in Medicare.

Senator FRIST. I think this is the patient safety legislation which

the Senate has acted on, and which we encourage the House to act

on and the President to sign.

I just think this increase in premiums should force us to say, what is driving costs up for physicians? A $400,000 tax—I do not

know what you would call it—or premium for a neurosurgeon to

have the privilege to be able to take call at night in case we get

into an accident, that $400,000 is given to an individual.

How can society expect an individual who has dedicated his or

her life to taking care of people to say, for that privilege, I will pay

$400,000? You just cannot afford it. Nobody could afford it.

Ultimately, it has to get factored down to somewhere, and it gets

factored down to your practice expense, and the practice expense

ends up getting factored into things like the 17 percent, but much

broader than that, every premium that you pay has this additional

tax.

The statement that Dr. McClellan made that I think we all need

to do a better job of articulating, is we want to make sure everybody is taken care of who has been wrongly hurt, appropriately,

33

make sure physicians are punished, thrown out if they do something wrong, and we need to address those errors in there. But we

have to get rid of the frivolous lawsuits that drive the premiums

that we all pay, including this 17 percent increase that we are seeing today.

Mr. Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

Dr. McClellan, this is a hearing on implementation. It is supposed to be, anyway, of the regulations of the Medicare bill. I appreciate the comments that have been made today about people

who like or do not like the Medicare bill, but if we are going to get

confidence in government, it seems to me that we are going to have

to make sure that this committee performs its oversight roles as

well as we possibly can, and help ensure that the regulations are

the right regulations so that the Medicare law that I voted for, and

others voted for, is implemented fairly and correctly.

So to that end, and because I do not have much time, I have several questions. I will just state them so that you know what some

of my concerns are, and if there is time left, you can answer. I

doubt that there will be.

First, I am a little concerned about the process we are seeking

for the exceptions to formularies. I understand that, under the proposed rule, there is no uniform standard for plans regarding what

that process would be to seeking an exception to a formulary, and

the proposed rule basically just allows plans to set up their own

process, their own rules for allowing people, seniors, to seek exceptions of the formularies.

I, frankly, do not think that is right. I think we have a uniform

standard in the Medicare+Choice, but the proposed rule does not

seem to be as tight here.

Second, I understand that rules allow private prescription drug

plans to exclude nursing homes or Indian Health Service pharmacies from the networks. I wonder if that is really fair. A lot of

us come from States where there is a sizeable Indian population,

and it just seems to me that they should not be dealt out.

In addition, I am concerned that CMS has allowed contributions

from private entities to count toward out-of-pocket limits, but not

with respect to IHS, VA, or other programs such as State pharmacy plans. It just seems to me, if private contributions are allowed in some areas, they ought to be allowed across the board.

Next, I am very concerned about the lack of enthusiasm for the

drug discount card, and I wonder what CMS has learned from all

that. I, frankly, believe that there are too many choices in the drug

discount card. I think that too many choices, too many options, can

result in paralysis, not liberation.

There comes a point where there are just so many choices, people

are overwhelmed. I read an article months ago in the New York

Times, some op-ed piece, that made the point very clearly. Psychologists have documented this. When you have too many choices,

people do not choose. When you have fewer choices, they begin to

choose.

Next, I am concerned with criteria with respect to the fall-back

plans. I very much appreciate, however, the administration’s strong

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adherence to the fall-back plans. So, that is a very important part

of legislation.

However, it seems to me, under the rules, one of the criteria for

selecting the fall-back plan would be the fall-back plan’s ability to

negotiate discounts. That does not apply to PDPs, for example, applying to participate. It seems to me, if you are going to have discounts, if the criterion for fall-back is discounts, it ought to apply

also to PDPs.

Next, and finally, I am still concerned about the failure of CMS

to enact a budget-neutral risk adjustment. By budget neutral, I

mean risk adjustment for all Medicare beneficiaries, not just plan

HMOs’ and PPOs’ beneficiaries, but also fee-for-service beneficiaries.

As you know, MEDPAC strongly suggested a budget-neutral risk

adjustment, and CMS has not implemented that. It seems to me

it is only fair, so particular plans do not cherry-pick, so it is fair

to everybody and do not get over-paid, as some think that they are.

Those are my questions. Those are some points I have. You have

about 30 seconds.

Dr. MCCLELLAN. If I might, I will take just a few seconds. Those

are all good questions. I would like to start by thanking your staff

for working so closely and constructively with us on raising concerns and making sure that we address all of the key issues that

come up in this law. You put a lot of effort into getting this done,

and we are going to put a lot of effort into getting it implemented

correctly.

With respect to your question about the exceptions process for

formularies, we are going to be setting standards for how the plans

oversee their internal exceptions process, and there is an appeal

beyond that externally. We will be setting specific standards for

that. We are getting public comment on that right now.

On Indian Health Service and Indian country participation in the

drug benefit, our questions at this stage are just about the ways

to do this as effectively as possible.

We have had a lot of comments and discussions with leaders

from Indian country, with the IHS, about how to do that, and that

is going to be reflected when we make decisions in the final regulation.

We absolutely intend for American Indians who are in Indian

country to get the full benefits of this new legislation. We are

bringing the drug card there as well right now.

Senator BAUCUS. Hear, hear.

Dr. MCCLELLAN. On your question about choices in the drug card

program, that is something that we also want to make sure we address. One of the comments that we got back early on was that

people did not want to be overwhelmed with a lot of choices.

So when you call us up now at 1–800–MEDICARE, we ask you

just a few questions about where you live, your drugs—you can get

information off your pill bottles—and what pharmacy you like to go

to, and any other factors that you want to use in choosing a card,

if you have heard about one that you like, and then we will just

give you information on as many cards as you want to hear about.

So, it can be a program for you.

35

Even if there are 40 cards available for everyone, this program

for you can have just one, two, or three cards, however many you

want to take the time and trouble to look at.

The point is, people should look into this program because the

discounts are really there. They have been shown in many independent studies now.

I am pleased that we have got millions of people signed up, that

we are running ahead of enrollment rates in previous new Federal

programs. But there clearly are more people that can get help, and

we are going to keep taking steps to make it as simple as possible

for them to enroll.

You asked about fall-back plans negotiating discounts. That is

something that we are going to be overseeing carefully. I do not

think we are going to need to get to fall-back plans. I am encouraged by what I have heard from potential participants in all regions of the country.

We may need to limit risk in other ways, but we are going to

make the benefit available. One of the strengths of the way that

the prescription drug benefit is being available, is that it builds in

the strongest possible incentives to get drug prices down.

When the government is just paying an unlimited amount into

a benefit, there is not a strong incentive to lower prices. When

beneficiaries can choose a plan that gets them the best prices on

their drugs and it gets them the coverage they want, there is a

strong incentive.

But we will be making sure that we are implementing the drug

benefit in a way to get the lowest possible drug prices negotiated

for beneficiaries, whether they are getting it through a regular

drug benefit or if we need to go there through a fall-back plan.

On risk adjustment for the Medicare Advantage plans, you have

got a lot of good issues here. Most of the payments that are going

into Medicare Advantage this year, because we are increasing our

application of risk adjustment, is going to beneficiaries with chronic

illnesses.

And as I said, these plans are enabling many beneficiaries to

lower their out-of-pocket costs substantially, and that is particularly true for beneficiaries with chronic illnesses.

And as we keep moving forward, we are going to be keeping on

increasing the amount of payments that are risk adjusted, so most

of the new funding going into Medicare Advantage is going straight

to better benefits for people with chronic illnesses and high out-ofpocket costs otherwise. We need to give those beneficiaries that

help. We need to get these plans into Montana, and that is what

we intend to do with the PPO program in 2006.

Senator BAUCUS. I appreciate that. I want to work with you to

make sure this law is implemented fairly, and these are issues that

I am going to be watching.

Dr. MCCLELLAN. We will be working closely with you and your

staff on this.

Senator BAUCUS. Thank you. I think that is right.

Senator FRIST. Senator Breaux?

Senator BREAUX. Thank you very much.

Two questions. First, if a drug is not covered in a plan, the beneficiary has the right to appeal that drug not being covered.

36

Dr. MCCLELLAN. That is correct.

Senator BREAUX. It seems to me that the proposed regulations

are fairly flexible on how that appeals process is going to work. As

I understand it, it would allow each one of the plans to essentially

design an appeals process.

My concern, is a number of things. You could have a different appeals process depending on which plan you are in, so you could

have a whole number of different appeals processes that may be

different depending on which plan you are in.

I am concerned that plans may require a great deal of information from a senior on the merits and efficiency of the drugs that

they are saying should be covered and are not covered, which they

are not going to be able to handle.

It seems to me that, under the Medicaid appeals process when

a drug is not on a formulary, it works fairly quickly. So, I am really

concerned that the process is light on details as far as the appeals

process, and how is CMS going to be oversee it if each plan can

have their own appeals process? It seems like you would have one

universal appeals process that would say very clearly what has to

be provided.

Can you comment on that?

Dr. MCCLELLAN. Well, yes. I mean, the process is not going to

be entirely up to the plans. Just as we do for appeals process in

the Medicare Advantage program now, we are going to have standards and we are going to have oversight to make sure that the

plans come up with an appeals or an exceptions process that is

based on good medical evidence and medical practice and that is

minimally burdensome for the doctors, for the pharmacists, and especially for the beneficiaries involved.

And you mentioned there are some good models of this in some—

not all, but some—State Medicaid programs where they pretty

much automated it, so the beneficiaries are not expected to go pull

the medical journals and come up with a very comprehensive review of the evidence in their particular case, but rather there is an

automated process that uses information technology to check off a

few specific issues related to prescription drugs.

So, some Medicaid programs, you would have prior authorization

and exceptions processes for Cox 2 inhibitors which can reduce inflammation and may have some benefits in some patients, but in

other patients a less expensive generic drug may work just as well.

Well, in some Medicaid programs there are now computerized

checklists that the beneficiary can go through very quickly to help

decide if this is something that they really need or if the other

medicine would work just as well. That is the kind of thing that

we are looking at right now to try to make this exceptions process

and the appeals process work efficiently.

Senator BREAUX. I would just caution you to make sure we have

some standards out there so we do not have a different appeals

process for every single plan, and make it so complicated that it is

not going to function. I think it is important.

I mean, there is a reason for formularies. I mean, there is a reason for them. I do not imply that anybody who wants a different

drug because they saw a new ad ought to be able to get it, but

37

there ought to be a process that is fairly standard, to the extent

that we can.

A final point. One of the more important things that I think we

did in the Medicare bill was to provide for a baseline physical for

new entrants into the program. I would have made them mandatory, had I had a chance to do that.

You do not buy health insurance in this country without having

a physical exam so that people know what type of customer they

are getting. Only Medicare says we will take you no matter what

your condition is, and we will not even ask you what it is.

So, I think that the baseline physical is good for everybody. It is

good for helping to reduce costs, for catching early illnesses that

are preventable or delayable. I would like to make it as mandatory

as we possibly can, but the law does not require that.

So the next step is to make sure that everybody knows that it

is available and encourage them to partake of something that their

government is going to pay for to give them a baseline physical to

tell them if they have diabetes or it is getting ready to occur, or

if they have cardiovascular disease which is getting ready to occur

so we can start doing more preventative medicine early on because

we know what type of problems they have.

So could you comment on how that section of the regulations is

going to work?

Dr. MCCLELLAN. Well, I think this is an absolutely critical section of the new Medicare benefits. With the passage of the Medicare Modernization Act, Medicare now provides coverage for most—

for just about all, in fact—of the preventive treatments that are

recommended now for America’s seniors and people with disabilities, screening for cancer, screening for heart disease, screening for

diabetes, and especially this new physical exam that you mentioned.

We have the opportunity to turn Medicare into a prevention-oriented program for the first time ever. Up until now, virtually all

of the money spent in the Medicare program has gone into dealing

with the costly complications of illnesses after they occur, probably

95 percent of our spending.

We are really going to try to change that with the new preventive benefits, and also with the new disease management and

chronic care improvement services so that we can both get

healthier beneficiaries and lower our costs by avoiding all these

costly complications.

This fall, we will be launching a major outreach effort to beneficiaries and to physicians to let them know that Medicare has a

new orientation to prevention, to let them know that there are

many benefits out there that they are not taking advantage of.

Only about half of our beneficiaries that are eligible for colon

cancer screening are taking full advantage of that benefit, with the

result that many are developing cancers that could have been

treated if they had just gotten the screening, but that now lead to

added costs for dealing with metastatic cancer, and shorter lives,

less healthy lives, for our beneficiaries.

The same thing is going to be true for this new preventive benefit. We would like to get our new beneficiaries, when they first

38

come into the program, to have a different look at Medicare. It is

no longer a program that only helps them out after they get sick.

There now is a comprehensive set of preventive benefits that

they can use up front to stay healthy, and even if they develop diseases, we are going to help them, for the first time, manage those

diseases and prevent their complications.

This is the best way forward to get more money for what we are

spending in Medicare and to avoid a lot of the added costs in the

program that right now go into pneumonias that could be prevented with vaccinations, to complicated cancers that could be prevented with early detection, to heart attacks that could be prevented by early screening for heart disease, to complications of diabetes like amputations and kidney failure that are extremely expensive that could be prevented by early management, prescription

drug use, and better outcomes for the patients involved. This is absolutely critical to the future of Medicare.

Senator BREAUX. I totally agree. Best of luck in getting them

done.

Dr. MCCLELLAN. Thank you.

Senator FRIST. Thank you.

Senator Bingaman?

Senator BINGAMAN. Thank you very much for all your testimony.

Let me just ask one other set of questions here. I have been trying to understand parts of this proposed rule. At one page in the

rule it states, the Federal Government transfer payments to health

plans over and above what would have been paid in the absence

of the law, as a result of the provisions of MMA, are expected to

total $23.4 billion. Now, that is for the period 2004 through 2009,

as I understand it.

On the next page, it says, ‘‘As a result of the MMA provisions,

we project that in this period, 2004–2009, Medicare beneficiaries

enrolling in MMA plans will see benefits beyond basic Medicare A

and B coverage, valued at $1.4 billion.’’

The way I am reading that, we are spending $23.4 billion to get

$1.4 billion in benefits to the beneficiaries. What am I missing

there? I mean, that does not seem to me a very good investment.

Dr. MCCLELLAN. I do not have that particular page of the regulations in front of me.

Senator BINGAMAN. I will tell you, I read it out of the Federal

Register here.

Dr. MCCLELLAN. What I can tell you is what we have seen with

out-of-pocket payments for beneficiaries in Medicare Advantage

plans in 2004, and what we are projecting going beyond that. For

the payment increases that went into Medicare Advantage in 2004,

we saw some substantial reductions in premiums. We saw substantial reductions in co-pays.

We saw new coverage which led to beneficiaries savings. And our

overall estimates, which are also included in the regulation, show

that Medicare beneficiaries who choose Medicare Advantage plans

can save more than $700 a year in enrollment in these plans.

Senator BINGAMAN. You talk about $1.4 billion in added benefits.

Then you are saying that does not include all of the other savings.

Is that what you are saying?

39

Dr. MCCLELLAN. I think that is right. There are some additional

benefits in terms of new covered services and the like, but there

also are reduced co-payments, reduced premiums, and other advantages in getting out-of-pocket costs down that are going to a much

larger number of Medicare Advantage beneficiaries because these

coordinated care plans are going to be more widely available.

Senator BINGAMAN. Could you get back to me, maybe, with a little better sort of analysis as to, if in fact we are investing $23.4

billion, or transferring that much to health plans in this period,

could you detail, what are the benefits that beneficiaries receive as

a result of that?

Dr. MCCLELLAN. Yes. Absolutely. This has been very important

to me because there have been some proposals about not wanting

to support Medicare Advantage plans that focus on looking just at

the costs of the government and not looking at the overall costs to

our health care system. The problem is, because Medicare Advantage plans offer more complete benefits, they allow beneficiaries to

get a lot of savings.

So, we can make a lot of progress towards getting total health

care costs down through greater access to coordinated care, better

prevention, better management of diseases and the like, and that

should be our real focus, not trying to save money in Medicare just

by shifting costs to Medicare beneficiaries. We need to have more

coordinated care to avoid that, to get more money for what we are

spending in Medicare, and Medicare Advantage is an important

part of that.

We absolutely want to implement the Medicare Advantage provisions in the law in a way that gives the most advantage to Medicare beneficiaries in reducing their out-of-pocket payments, so we

will definitely follow up with you on that.

Senator BINGAMAN. I would sure appreciate it. Thank you.

Senator FRIST. Senator Graham?

Senator GRAHAM. Thank you, Senator Frist.

I am now just down to one question before my comment, and it

follows up on what Senator Bingaman has been discussing. I think

the issue here is one of equity and fairness to both taxpayers and

Medicare beneficiaries. Let me make a series of statements of fact,

and tell me if I am right, that approximately 89 percent of Medicare beneficiaries currently are being served through a fee-for-service plan.

Dr. MCCLELLAN. Yes.

Senator GRAHAM. That is correct.

According to your own statistics in the Federal Registry, the average person in a Medicare Advantage will get 108.4 percent more

in their plan than the average fee-for-service person will receive

over an annual basis. Is that correct?

Dr. MCCLELLAN. I am not sure that is exactly correct. I think it

varies by area. It also depends on things like the beneficiary’s

health status.

Senator GRAHAM. That is the statistic that is in the Federal Registry. If it is not correct or if it misstates or fails to cover the——

Dr. MCCLELLAN. Well, I do not want to tell you wrong, so let us

go ahead.

40

Senator GRAHAM. Yes. In that 108.4 percent, is the $12 billion

that has been variously referred to as the ‘‘discretionary fund’’ or

the ‘‘slush fund,’’ is that amount included?

Dr. MCCLELLAN. The fund for making sure that Medicare Advantage plans, and PPOs in particular, go into under-served areas,

rural areas? That is not included in that amount.

Senator GRAHAM. I calculate that, if that had been included, instead of being 108.4 percent, it would have been approximately 112

percent above the amount that fee-for-service beneficiaries are receiving. Is that your calculation?

Dr. MCCLELLAN. I have not done the calculation, but I am sure

you have got some good math skills in your staff.

Senator GRAHAM. I have your numbers and a calculator. I mean,

it is hard to go back to the 89 percent of beneficiaries who have

elected to use fee-for-service, and most of them in regions of the

country such as mine where there is substantial access to HMOs.

It is not a matter that they elected fee-for-service because they

did not have any other choice. They had choices and they decided

that they wanted to be able to control who their own doctor was.

They wanted to have more personal control over their health

care. Eighty-nine percent have elected fee-for-service. How can you

justify paying the HMO plans 112 percent more than you are paying for the fee-for-service?

Dr. MCCLELLAN. Well, I do not think the different is 12 percent,

but we will go over that with your staff.What I want to do, is give

all beneficiaries access to affordable health care.

Even if there are some differences in payments to Medicare Advantage plans—I think the numbers are somewhat disputed—most

important is what is going on with our total health care costs. If

beneficiaries are paying more and more out of pocket, we need to

do something about it.

The big advantage of the Medicare Advantage plans is that they

get those out-of-pocket costs way down. They provide more comprehensive benefits. They coordinate care better. There are things

that Medicare’s fee-for-service cannot do.

We are putting more money and more effort into fee-for-service

through preventive benefits, through chronic care management programs, but the fact is, right now, the Medicare Advantage plans

are way ahead in delivering much more efficient health care overall, and that is what we want to help make sure beneficiaries have

access to.

Senator GRAHAM. Well, frankly, getting 12 percent more, which,

on a $6,000 per beneficiary base is, what, about $700 more per beneficiary per year, they ought to be providing better services.

The question is, why should the Federal Government be subsidizing these plans 12 percent more than fee-for-service in order

to deny what most Medicare beneficiaries want, which is a fee-forservice plan?

You know, when we set up these HMO plans, they were supposed to operate on 95 percent of the average of the fee-for-service

population within a catchment area, and now we are up to 112 percent. But I would like to use that as the launch to my comment.

I think what we have been talking about today, frankly, is interior decorating. The reality is that there are structural problems in

41

this program which this Congress, this committee, has refused to

deal with. What are those structural problems?

One wall is the integrity wall. Your predecessor is now under a

directive to repay the Federal Government a substantial amount of

his salary because he violated the law relative to intimidating a

Federal employee from telling the Congress what the real costs of

this program were going to be.

Another wall was the fiscal wall. We are dramatically overpaying

HMOs in terms of the services they are providing. We have a prohibition on using a VA-type negotiating system to get the cost of

pharmaceuticals down to a reasonable level, and we are adding

substantially to the structural weakness of the Medicare trust fund

by these enormous deficits that are being run which are being financed largely from the Social Security and Medicare trust fund.

The third, is the beneficiaries’ response. The fact that only 1.8

million Medicare beneficiaries have signed up for the discount card

is an indication of wariness as to its value. I would predict that

there would be significant wariness when we get to 2006 when

beneficiaries start to look at what they are going to get under this

prescription drug plan in comparison to what they are paying, and

when those who are currently getting a substantial amount of their

health care paid through their former employer and they begin to

see more and more of those employers begin to terminate or severely restrict their traditional benefits to their retirees.

Those are the questions that we ought to be talking about, not

whether the sofa and the lamp are in the right relationships. I

know we only have a short of time, Senator Frist, but many of us

have been calling for exactly those kind of looks at this program

before we go over the cliff in 2006 when it becomes fully operational.

I would hope that, in the days between now and when we conclude this 108th Congress, that we will have that kind of a hearing

and be able to look at the big structural problems that this program has and begin to give them some Congressional attention.

End of comment.

Senator FRIST. Thank you. I want to really draw this first panel

to a close. We will give Dr. McClellan a chance to response, then

we will move to our second panel immediately following his remarks, if he has any further comments.

Dr. McClellan, some further comments?

Dr. MCCLELLAN. I want to thank all of you for giving me time

to testify here today on these very important issues. We just heard

from Senator Graham. There are a lot of strong views on this

panel, a lot of different views about the best way forward.

But the most important thing about what we are doing now with

our implementation of the new Medicare drug benefit and the new

choices for less expensive, more comprehensive coverage in Medicare, is to make sure we are getting all these public comments in

so we can provide the most help possible, the most reductions in

out-of-pocket costs for beneficiaries, the most increase in support

for retiree drug coverage, the most increase in support for preventing illnesses and preventing their complications to get our total

health care costs down. We have got the best opportunities to do

42

this ever, and this has been a very helpful process for making that

happen.

I am going to make sure that we keep taking steps to lower outof-pocket costs, that we implement this effectively, and as part of

that we are being absolutely transparent with this Congress.

When we get requests for information we are sending them forward. That includes actuaries’ estimates about the impact of the

retiree drug subsidy to make sure we are getting the maximum increase possible.

It includes details about estimates of the premium cost, to make

sure people know exactly where the money is going in terms of

areas where there has been bipartisan support for better physician

services and bipartisan support for getting people access to the

Medicare Advantage plans that let them lower their out-of-pocket

costs substantially right now. I think this is the best way forward,

and I look forward to more discussions with this committee.

I look forward to doing as much as we can to give our beneficiaries the help that is overdue. They have been on their own too

long with out-of-pocket costs for drugs, prevention, and many other

services, and that is changing now and we want to give them the

full advantage of all of these new benefits.

Thank you all very much.

Senator FRIST. Good. Thank you, Dr. McClellan.

Senator GRAHAM. Chairman, if I could just make a concluding

comment. I am very pleased at what Dr. McClellan just said. I just

wish that the statements that you made were not all in the future

tense, that we have had the same transparency in the lead-up to

adopting this legislation.

Senator FRIST. Thank you.

I would ask the second panel to come forward and we will proceed with them directly. I do want to thank our panel for coming

today and testifying before us. The proposed rules are designed to

solicit input and comment. We are looking forward to hearing yours

this morning.

Our first witness, Karen Ignani, the president and CEO of American’s Health Insurance Plans, AHIP, provides through its members health care, long term care, dental, and disability benefits to

more than 200 million Americans. Many of their members serve

Medicare beneficiaries under the Medicare Advantage program.

Our second witness is Mark Merritt, president and CEO of the

Pharmaceutical Care Management Association, PCMA. PCMA

members administer pharmacy benefits for more than 200 million

Americans.

Next, we have Michael Fitzpatrick who is the executive director

of the National Alliance for the Mentally Ill, a nonprofit grassroots

organization working for equitable services and treatment for

Americans living with severe mental illnesses in their families.

Mr. Fitzpatrick has been with NAMI since the 1990’s, serving on

both the staff in Maine, and the national office. He also was a

member of the Maine legislature, chairing the House Health and

Human Services Committee.

Then we will have Gerald Shea, assistant to the president for

Government Affairs at the AFL–CIO. Before joining the AFL–CIO,

Mr. Shea was with the Service Employees International Union as

43

an organizer and local union official in Massachusetts, and was

also on the staff at the national union’s headquarters.

Our final witness, Larry Burton, is the executive director of the

Business Roundtable, an association of CEOs of leading U.S. corporations with a combined U.S. workforce of more than 10 million.

Prior to this appointment, Mr. Burton was the vice president of External Affairs for BP America.

We will proceed with the witnesses, then open for questioning.

Our first witness is Karen Ignani.

STATEMENT OF KAREN IGNANI, PRESIDENT AND CEO,

AMERICA’S HEALTH INSURANCE PLANS, WASHINGTON, DC

Ms. IGNANI. Thank you, Senator Frist, Senator Baucus. Our

members very much appreciate the opportunity to testify today. As

you stated earlier, we participate in the Medicare program, offering

services to Medicare beneficiaries in a variety of different ways,

from Medicare Advantage, covering almost 5 million beneficiaries,

as well as Medigap, covering almost 10 million beneficiaries.

Regardless of which product they offer, our members share the

common goal of making Medicare covered services more accessible

to Medicare beneficiaries. We do this by providing additional benefits, particularly including out-of-pocket protection, which acts as a

safety net for low-income beneficiaries who otherwise might find

Medicare’s cost containment requirements prohibitive. We stretch

beneficiaries’ dollars because of the tools we have developed, particularly in the area of prescription drugs.

We offer disease management services. We customize care plans

to beneficiaries to ensure continuity of care for the chronically ill,

and we have pioneered state-of-the-art techniques that will allow

beneficiaries to receive the greatest value from the Medicare prescription drug legislation. We have submitted written testimony on

a sample of the Medicare regulatory issues.

I would like to emphasize that we are in the middle of a fullscale effort to understand the implications of the myriad technical

issues, and we are working with hundreds of operational leaders

around the country in our membership to provide CMS with our

best advice on all of these issues by October 4. As soon as we finalize our comments, we will be delighted to share them with the committee.

Today, I would like to share the results of our annual survey of

how our member plans will participate in the program next year.

There has been considerable discussion about that already.

After years of under funding diminishing the choices to seniors,

it is my pleasure to report that we have turned a corner, that the

legislation you passed is working, and the fundamentals are in

place to accomplish what Congress intended and seniors want.

For the first time since 1998, we are seeing strong projections of

increased participation in the opportunities created by the legislation passed last December to better serve beneficiaries.

This announcement comes at a time when millions of seniors and

disabled, as Dr. McClellan already indicated, have seen benefits

and access to needed prescription drugs, for example, improve this

year. In our testimony, we cite the specifics of that.

44

Looking ahead, Medicare Advantage plans are expanding their

offerings to hundreds of new counties in 2005 and anticipating continued growing enrollment thanks to the effects of the MMA.

This turnaround is in addition to the service area expansions already approved by CMS throughout 2004. Since the passage of

Medicare legislation, participating plans have expanded choices to

beneficiaries in 26 States, providing an additional 9 million beneficiaries with new options.

Another 35 applications are currently under review by CMS. Between February and August, this has resulted in increased enrollment in private sector health plans on a month-to-month basis for

the first time in 4 years.

We also know that for 2006 our plans have strong interest in the

new options created under the statute, as well as the prescription

drug program. Additionally, our survey showed significant interest

in the K and L plans for Medigap that were created by the MMA.

We also have an intensive effort under way to make recommendations to Congress from our membership about new ways

to provide additional options to beneficiaries under this product

that they will be interested in post-2006.

Senator Frist, I would like to thank you for this opportunity to

testify. I also would be remiss if I did not take the opportunity to

commend CMS on behalf of our entire community for undertaking

what is an unprecedented outreach effort to explore the implications of the many complicated operational issues addressed by this

legislation, and no community knows and understands that better

than ours.

They are doing it fast and they are doing it effectively, and we

appreciate the efforts of thousands of people at the agency to develop a workable administrative template that gives beneficiaries

the protections that Congress intended to provide them.

Thank you for this opportunity. We look forward to questions.

Senator FRIST. Thank you.

[The prepared statement of Ms. Ignani appears in the appendix.]

Senator FRIST. Mr. Merritt?

STATEMENT OF MARK MERRITT, PRESIDENT AND CEO, PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION, WASHINGTON, DC

Mr. MERRITT. Thank you, Senator Frist. My name is Mark Merritt. I am president and CEO of the PCMA, the Pharmaceutical

Care Management Association.

PCMA represents America’s pharmacy benefit managers, who

represent both independent and stand-alone PBMs and health

plans’ PBM subsidiaries. With as many as 60 PBMs operating nationally and regionally under a variety of business models, PBMs

offer purchasers a wide variety of choices to meet the needs of their

plan members.

Together, PCMA members’ administered prescription drug plans

provide access to safe, effective, and affordable drugs for more than

200 million Americans in private and public programs, including

an estimated 65 percent of seniors who have drug benefits through

employer- and union-sponsored retiree plans.

45

Because of the variations among PBMs, it is important that the

rules governing Medicare drug plans remain as flexible as possible

to encourage maximum participation by PBMs and offer a wide

range of choices to beneficiaries.

In a commercial marketplace, PBMs rely upon a broad range of

tools and techniques to expand access, promote quality, improve

outcomes, and drive down the costs of prescription drugs. PBMs

are best suited to manage the drug benefit needs for America’s

most vulnerable populations, as well.

PMB tools are making a difference. According to a new analysis

conducted by Price-Waterhouse Coopers, PBMs drive down the cost

of prescription drugs for their clients, on average, by 25 percent,

and in 2005 will save $937 per Medicare beneficiary with drug coverage. Other data from the GAO and the CBO have yielded similar

findings.

As the administration works together with stakeholders to structure a workable benefit, it is important to preserve PBMs’ proven

tools and techniques.

With that in mind, I want to touch on a few key issues that we

see challenging effective PBM participation in the new Medicare

drug benefit.

The first issue relates to formularies. While we believe that the

USP’s proposed model formulary structure is somewhat overly detailed, it can, nonetheless, serve as a starting point for formulary

development.

PCMA believes it is not necessary, however, to expand further

the number of categories and classes contained within the USP

proposal. For example, formularies in the commercial marketplace

with 80 to 90 categories of drugs can provide coverage for 500 or

more different drugs.

The second issue is closely related to formularies in regards to

pharmacies and therapeutics committees. In developing clinically

sound formularies, PBMs rely upon PNT committees to make formulary recommendations.

These committees are largely independent and include a variety

of specialist physicians, pharmacists, and others with specific clinical knowledge of drugs and drug therapies.

PCMA has concerns that CMS may consider investing PNT committees with more authority than they are used to managing beyond their areas of expertise, to include financial and administrative management functions.

The third issue we would like to address is e-prescribing. E-prescribing holds the promise of reducing drug-related medical errors

and improving safety through the application of enhanced technology. CMS must protect the PBM e-prescribing infrastructure

that is the most sophisticated in health care today.

The fourth issue relates to confidentiality of contracting information. Maintaining confidentiality in contracting, including the new

Medicare drug benefit, is essential to preserving PBMs’ ability to

negotiate discounts for consumers and purchasers alike.

Going forward, a clear distinction should be drawn between disclosure of proprietary contracting information and the cost of a prescription to the beneficiary.

46

Fifth, we need to assure appropriate program oversight and beneficiary protection, not micro-management. Given the extremely

short time frame for implementation of the new program, it is critical that the regulations not impose considerable new burdens or

require significant changes in the way PBMs currently conduct

their business in the commercial marketplace.

Lastly, I want to touch briefly on risk and the stand-alone benefit. PCMA is encouraged by recent comments by the administrator

of CMS, Mark McClellan, regarding predictability and encouraging

participation and competition in the stand-alone benefit. This, coupled with preserving PBM’s existing tools, is the key to maximizing

participation in a stand-alone benefit.

Over the next 18 months and beyond, we look forward to making

the Medicare prescription drug benefit work as Congress intended

and to build on the very best that the private sector has to offer

seniors and the disabled.

Senator Frist and Senator Baucus, thank you for the opportunity

to testify today. I would be happy to answer any questions you may

have.

Senator FRIST. Thank you, Mr. Merritt.

[The prepared statement of Mr. Merritt appears in the appendix.]

Senator FRIST. Mr. Fitzpatrick?

STATEMENT OF MICHAEL J. FITZPATRICK, M.S.W., EXECUTIVE

DIRECTOR, NATIONAL ALLIANCE FOR THE MENTALLY ILL,

ARLINGTON, VA

Mr. FITZPATRICK. Senator Frist, Senator Baucus, I am Michael

Fitzpatrick, executive director of the National Alliance for the Mentally Ill. I am here today on behalf of my organization and its

210,000 members, as well as a number of other organizations, some

of whom include the AIDS Institute, the ALS Association, the

American Autoimmune Related Disease Association, the Epilepsy

Foundation of America, Huntington’s Disease, the Latino Coalition,

the Lupus Foundation, the National Adult Day Services Association, the Grange, the National Association of Cancer Patients, and

Prevent Blindness America.

I want to thank you for convening this hearing and providing us

the opportunity to present to this committee the concerns we have

regarding patient protections under the new Medicare prescription

drug benefit.

The organization on whose behalf I am speaking today have long

supported the principal of Medicare reform to include prescription

drug coverage. We applaud the efforts in Congress to approve access to pharmaceuticals for our Nation’s most vulnerable.

We believe that, when fully implemented, this new benefit will

offer unprecedented and long overdue coverage of outpatient prescription drugs for our Nation’s seniors. Such coverage is critical to

all Medicare beneficiaries, especially those beneficiaries living with

disabilities and chronic illness.

In this regard, allow me to briefly highlight a few of our priority

issues going forward. Number one, formularies must be defined to

enable access to necessary treatments.

In treating Medicare beneficiaries, particularly vulnerable seniors and people with disabilities, physicians often must try many

47

different drugs of the same pharmacological class before finding

one that is the safest and most effective for a specific individual.

In this regard, we are very concerned that the recently issued

draft drug classifications developed by U.S. Pharmacopoeia, coupled with the language in the recently issued prescription drug

benefit proposed rule, may not provide adequate access to all necessary medications.

As noted earlier, the proposed rule only requires that two drugs

be covered in each class. Thus, the range of classes becomes a critical benchmark for the range of drugs that enrollees and their doctors will have access to.

We believe the classifications set forth in the draft USP guidelines may create confusion and could be used by prescription drug

plans to discourage enrollment of certain beneficiaries, such as the

Medicare beneficiaries with severe disabilities and chronic illnesses

with higher treatment costs.

Further, the 146 classes in the draft guidelines offer prescription

drug plans the option to exclude entire classes of medication that

are now commonly prescribed to seniors and people with disabilities, including the statins, anti-convulsants, and selective serotonin reuptake inhibitors, the SSRIs.

The SSRIs, for example, are collapsed into a single class with the

older tricyclic medications that are now widely recognized as being

outdated and antiquated treatment options.

Another potential problem faced by beneficiaries living with

chronic illnesses are provisions in the regulations that allow prescription drug plans to change their formularies in the middle of

the plan year. Such changes are allowed so long as the plans provide appropriate noticed, defined in the regulations, of 30 days.

We believe that this is insufficient notice and does not recognize

the real-world crucial nexus between drug plan choice and access

to vital medications for beneficiaries.

Medicare beneficiaries are locked into one plan for an entire year

and may have specifically chosen the plan based on its formulary.

We believe the agency should, at a minimum, require that the

plans grandfather coverage of product medications until the next

open enrollment period.

While this approach would still permit plans to use bait-andswitch marketing strategies involving popular medications, it

would provide the most vulnerable beneficiaries on established

medications the ability to continue their existing treatment regiment without having to pursue coverage through the plan’s appeal

process.

Number two. Pharmacy and therapeutic committee operations

should be transparent and reflect an independent assessment of all

coverage restrictions.

The statute outlines very basic standards for the development of

formularies by prescription drug plans’ pharmacies and therapeutic

committees for the composition of such committees, but grants

CMS considerable latitude to establishment guidelines to make the

process sensitive to the specific needs of beneficiaries.

To ensure that all coverage policies are based on objective clinical

rationale, CMS should implement rules to make explicit the PNT

committee’s responsibilities to restrictive coverage policies.

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We also recommend limiting the number of voting PNT committee members with conflicts so to avoid diluting the voices of

independent members.

Three, the regulation should incorporate patient protections for

therapeutic substitution. We believe that CMS should incorporate

in the final regulations patient protections of therapeutic substitution, and a particular requirement that the prescription drug

plans not engage in such practices without the express consent of

the prescribing physician.

The preamble supports such a requirement, but is not included

in the actual regulation. At a minimum, the regulation should require the plans to defer to State laws on therapeutic substitution.

Preserving the physician’s role in the prescribing process is an

important beneficiary protection, particularly for vulnerable Medicare populations who may be on multiple medications and living

with many co-morbidities.

Four, CMS should provide detailed guidelines for alternative

benefit designs that ensure the beneficiaries receive access to needed therapies. It is imperative that CMS vigorously enforce the requirement in the law that prescription drug plans not implement

alternate plan designs.

We are very concerned that the alternate schemes designed primarily to reduce costs could impede patient access to medically optimal medicines and could be used to cherry pick only the healthiest enrollees.

Vulnerable participants would be particularly at risk of plans engaged in such practices. The proposed rules allow for the review of

tiered cost sharing and categories and classes in the formulary, but

does not clarify what the review will be.

We urge CMS to closely scrutinize applications to provide alternative benefit packages and place reasonable limits on the cost

sharing requirements. A prescription drug plan could employ an alternate tiered co-payment benefit package. CMS should also require plans to maintain consistent cost sharing arrangements

across all therapeutic classes. Finally, we believe the regulations

should ensure access to off-label medications.

Five, CMS should implement special protections for dual eligibles. We also believe that the final regulation should address the

unique problems faced by beneficiaries who qualify for both Medicare and Medicaid, the so-called dual eligibles.

These individuals are vulnerable because of low incomes, specifically a large percentage of the dual eligibles; by some estimates, as

many as 40 percent are living with severe mental illness or other

disabilities.

To protect these, and all low-income individuals, CMS should enforce a continuity of care requirement to ensure access to the same

medications that are available under Medicaid. At a minimum,

dual eligibles should be allowed to continue on medications they

are currently taking and not be required to switch to another drug.

In addition, under existing Medicaid law, dual eligibles could not

be denied access to their medications if they are unable to pay

their co-payments.

Senator FRIST. Mr. Fitzpatrick?

Mr. FITZPATRICK. Yes?

49

Senator FRIST. Let me ask you to summarize the points, and

then we will ask questions when we come back. I want to make

sure that we get through the rest of the panel, then during questions we would be happy to come back. But if you could just summarize.

Mr. FITZPATRICK. Thank you.

Well, let me stop here. I can defer to the rest of the panel and

be open for questions.

Senator FRIST. Your complete statement, we have, and it will be

made a part of the record as well.

Mr. FITZPATRICK. Absolutely. Thank you.

[The prepared statement of Mr. Fitzpatrick appears in the appendix.]

Senator FRIST. Mr. Shea?

STATEMENT OF GERALD SHEA, ASSISTANT TO THE PRESIDENT FOR GOVERNMENTAL AFFAIRS, AFL–CIO, WASHINGTON, DC

Mr. SHEA. Thank you, Mr. Chairman. I also want to thank

Chairman Grassley and Senator Baucus for the invitation to

present to you today.

In my written submission, I touch on a number of issues, some

of which are the core structural issues that have risen in various

parts this morning. But in my oral presentation, I want to restrict

my comments to the implementation of the benefit as it affects employer-provided care.

Retirees. One in four Medicare beneficiaries gets employer-sponsored prescription drug benefits. It is the largest single source until

this point, with the introduction of the Medicare benefit itself. My

comments are based on the experience of our 60-some unions who

negotiate for 13 million active members and 3 million retirees, altogether well over 40 million covered lives.

It is no secret that high health costs and the resulting competitive issue among businesses has made this the number one problem in collective bargaining, and indeed a conflictual point in any

employment setting.

Despite a lot of hard work between employers and unions, and

not just a few strikes over this issue, in fact, we are seeing the

steady erosion of employment-based benefits.

The sharpest edge of that problem is retiree coverage. So, quite

apart from the basic point that Medicare needed to be updated in

the ways that Dr. McClellan and others said, with the addition of

this benefit, this is very important to the employment-based system.

How it gets implemented is very, very important, because a mistake in the implementation could potentially, as some people have

predicted, lead to an even more rapid loss of coverage.

Now, the complicated design of this benefit poses certain problems for writing regulations and for employers and unions in figuring out how to integrate this new benefit and the subsidy with

existing benefits. We appreciate CMS’s very aggressive outreach to

us and to employers, and Karen has mentioned this as well.

We are participating with them very actively in a dialogue about

this implementation. We are working with our National unions and

50

we will be providing very comprehensive comments before the October 4 deadline.

Overall, we fully support the department’s statement in the proposed regulation to: (1) provide flexibility for plan sponsors; (2) to

protect retiree benefits; and (3) to make sure there are no windfalls

that go to employers because of the substantial money involved.

But to actually reach these goals, we are going to need detailed

guidance in the final regulations. That is the first major substantive point I would make. We appreciate the opportunity for

input. We just hope that the final rule does provide very specific

guidance, because we fear without that there could be real implementation bumps, as we say.

Specifically, I wanted to make the following substantive points.

One, the actuarial test needs to be carefully chosen so as to make

sure that there is not the possibility that employers could get a

subsidy and not provide much of a benefit. Even in CMS’s own

words, the single prong test, so called, could create that, possibly,

and we think it is totally unacceptable.

Second, we think, to be consistent with the Congressional intent

as we read it, CMS must require employers to provide at least as

much financing for the health benefits as they get from the subsidy. But that is a question that is really not clear, at least in the

draft regulation, and we have discussed this with the CMS officials

a number of times.

Third, employers should demonstrate that the subsidy is actually

allocated to health benefits in a way that is transparent and accessible to retirees.

There are several other technical problems which I allude to in

my testimony. They are not insignificant, but I will not spend time

on them here because I want to finish with one final point, and

that is further on the transparency issue.

The regulation will rely on attestation, but it does not have access to the underlying actuarial assumptions on which the attestation will be based, nor does it have a provision at this point for retirees or their representatives being able to challenge that in some

way, or at least investigate it to see if what is being alleged is actually the case.

We think that kind of a protection for retirees would go a long

way towards ensuring that the intent of this legislation is actually

met.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Shea appears in the appendix.]

Senator FRIST. Thank you, Mr. Shea. I appreciate all the panelists. You are bringing up so many great ideas, and also the written

statements, which we will all be studying in real detail, I know are

much more specific. But we appreciate all of the comments.

Mr. Burton?

STATEMENT OF LARRY BURTON, EXECUTIVE DIRECTOR,

BUSINESS ROUNDTABLE, WASHINGTON, DC

Mr. BURTON. Thank you, Senator Frist, Chairman Grassley,

Ranking Member Baucus, and all members of the committee for

giving me the opportunity to testify on this important issue.

51

I am executive director of Business Roundtable, an association of

chief executive officers of leading corporations with a combined

workforce of more than 10 million employees in the United States,

with $4 trillion in annual revenues.

Our companies alone provide health care coverage to approximately 25 million people. Rapidly rising health care costs are a

challenge for families and individuals. These costs are creating a

major drag on economic growth for American companies and our

country.

Health insurance premiums have increased at a double-digit pace

each of the past 3 years, and premiums for employer-sponsored

health coverage for families rose 11.2 percent in 2004, which is

about five times the rate of inflation.

Additionally, more than half of Roundtable member CEOs have

identified rising health care costs as the most significant cost pressure facing their companies. That is why a major priority for the

Roundtable is to promote policies that help reduce health care cost

burdens and strengthen the system of market-based health care

coverage for millions of American workers and their families.

This brings me to the three points I want to share today. First,

Business Roundtable believes that the Medicare Modernization Act

is a strong step toward addressing some of the challenges of our

health care system. We support the MMA because it encourages

employers to continue providing retiree health care coverage.

Second, implementation of the law is challenging for employers,

unions, health plans, and PBMs, so it is crucial that the rules are

finalized so that the marketplace develops in a quick fashion. This

will allow our employers to make the best and most informed decisions about how they may continue offering retiree coverage.

Finally, the Roundtable believes it is important to educate seniors and their families about the benefits of this complex law.

There is widespread misperception about what employer-sponsored

retiree coverage is. Companies that provide health coverage to their

retirees over the age of 65 offer benefits that exceed those offered

under the traditional Medicare program. The companies’ extra benefits wrap around the traditional Medicare benefit. In other words,

they supplement traditional Medicare coverage.

The flexibility of this new Medicare law allows employers to continue to coordinate their extra benefits with Medicare. My written

testimony goes into detail on implementation of the reform and

how important it is to get implementation done quickly. We urge

CMS to move swiftly and we support their efforts to make this new

system work.

Finally, I want to emphasize the importance of communicating

the benefits of the Medicare reform to retirees, their families, and

friends. Until retirees understand the law, they cannot make informed choices. This spring, the Roundtable commissioned a study

to determine the value of this benefit for seniors.

The study detailed the State-by-State value of the prescription

drug discount card and the drug benefit, revealing $24.1 billion in

valuable new drug benefits for seniors.

Because this benefit will only be realized if seniors take advantage of it, we then undertook an effort to communicate about the

Medicare benefit and reform.

52

Since May, Business Roundtable has been conducting a national

consumer education effort to inform American seniors of the benefits available to them.

In conjunction with this education campaign, the Roundtable also

produced several educational materials to help communicate the

benefits of this new Medicare plan. With your permission, I would

like to offer these materials for the record.

Senator FRIST. All right.

[The information appears in the appendix.]

Mr. BURTON. We want to continue improving health care coverage for America’s seniors and encouraging employers to continue

providing coverage.

We look forward to continuing to work with CMS to expedite the

implementation process and we support all efforts to communicate

its benefits to seniors. Business Roundtable will continue to work

with all stakeholders to ensure effective implementation.

Thank you very much for allowing me to be here today.

Senator FRIST. Thank you.

[The prepared statement of Mr. Burton appears in the appendix.]

Senator FRIST. I thank the entire panel, and their patience for

what I know has been a long hearing and lengthy testimony over

the course of the morning. Again, we look forward to both discussing and reviewing all of the materials provided to us in greater

detail.

I have a single question to Mr. Fitpatrick. Thank you for your

support of the MMA. In your testimony, you mentioned that given

the way that the USP draft model guidelines are structured, plans

will likely just cover cheaper drugs, older drugs, for example, the

selective serotonin reuptake inhibitors, the SSRIs.

In reading that and listening, I just want to ask you, are you

sure of that? It seems to me, just looking from afar, that a lot of

the newer drugs are covered in the commercial market today, in

which there are fewer requirements for formularies. This addresses

the whole issue which we are all interested in, in balancing access

and appropriate access with affordability.

Mr. FITZPATRICK. We were concerned, looking at the initial draft

guidelines, that they seemed to create a class within the anti-depressant group that would allow plans the option of only including

the older tricyclates, or perhaps a generic medication, not recognizing that there have been revolutions in the treatment of antidepressants, and certainly the SSRIs are more widely used simply

because of the issues around side effects and efficacy.

So what we are certainly advocating for is certainly more access,

and certainly allowing physicians to prescribe the full range of

medications. So, that was largely our concern.

Senator FRIST. All right. Thank you.

Senator Baucus?

Senator BAUCUS. Thank you. Thank you, Mr. Chairman.

Mr. Merritt, you have heard Dr. McClellan say that he does not

expect there to be a fall-back plan because all of these PDPs and

insurance companies, everybody is going to offer stand-alones, or

people are going to participate in the other plans, the MMAs, and

so forth.

53

Now, so far, it is my understanding that there has been no commitment by the private industry to commit to stand-alone plans.

What do you need to know? Have you seen the regulations now?

They have come out. Earlier, I think your organizations were waiting to see what the regulations would be. Now you have seen them.

Are you going to participate? Is Dr. McClellan correct, there will

be no fall-backs?

Mr. MERRITT. Well, we still need to see the final rule. First of

all, there are a varied number of companies in our industry. Some

are insurer-owned PBMs, some are stand-alone PBMs. All of them

will certainly be subcontractors in the stand-alone benefit. It is too

early for us to tell.

Senator BAUCUS. What do you need to know?

Mr. MERRITT. Well, I think we need to know a lot of stuff. We

have concerns about how USP and how the formularies are finally

going to end up. Are all of our tools going to be protected? What

is the prescribing going to look like?

Obviously risk is an issue, but there is a broader issue of, just

generally, are we going to be able to do the things that have made

us a success in the commercial marketplace. So, we need to look

at the final rule, which will be out in February.

Senator BAUCUS. Right. What do you see in the proposed that

you like, and what do you see that you do not like? I mean, without

taking too much time. And what questions would you like answered? You said you would like to see. Well, that does not help

us very much.

Mr. MERRITT. Sure. Yes.

Senator BAUCUS. But what questions would you like answers to?

Mr. MERRITT. Sure.

Senator BAUCUS. Precise questions.

Mr. MERRITT. All right. First of all, what we want, is you asked

about the things we like and do not like. The thing we like, is the

fact that this is centered around PBMs and around a competitive

marketplace. That is good for us, obviously. We have general issue

concerns.

Specifically, we want to know how formularies are going to be

managed, and we do not know that yet. We need to know how

grievances and appeals are going to be managed as well. Are we

going to have the same confidentiality standards that we have had

in the discount card and the funded benefit?

In the proposed CMS rule in the preamble, it talks about PNT

committees having broad authority. Yet, PNT committees have basically a clinical job, which they do very, very well for PBMs. What

is going to be their role exactly?

Are we going to be able to do the cost management side, as well

as the clinical side, the way that we really need to? E-prescribing

is on a different track, but that is not totally done yet and we need

to see how that works out.

Also, generally speaking, this is new for us. This is a very short

time frame for us to get all of this together and start making commitments.

Senator BAUCUS. Right.

Mr. MERRITT. I think we showed clean hands during the discount

card, that we did a lot in our companies to comply with that and

54

get on board very, very quickly, and it took a lot of work and a lot

of resources.

Senator BAUCUS. What is your best guess? Will there be fall-back

plans?

Mr. MERRITT. I do not know if what Administrator McClellan has

said is true, and it is very encouraging if it is, then I think you

are going to see participation to do the stand-alones and I am not

sure you are going to need a fall-back. But that is premature of me

to say as well.

Senator BAUCUS. When do you think you will know?

Mr. MERRITT. I am not sure, frankly, I am going to know before

this final rule is really done in January or February. We may hear

hints of it, but also, as somebody running a trade association, it is

a very competitive issue. These CEOs are not calling me and saying, I am going to play, I am not, because it has huge implications

for how they are perceived in the marketplace.

Senator BAUCUS. Ms. Ignani, your reaction to my basic question.

Will plans participate? Will PPOs?

Ms. IGNANI. We know that a number of our members are looking

very, very seriously at participating in all of the new products that

will be offered beginning in 2006.

To amplify what Mr. Merritt is saying in terms of what we do

not know now that we are going to be probing with CMS, and will

be in our recommendations and our final regulation submission on

October 4, are several areas that I think will be relevant, and have

been relevant to the previous discussion, Senator Baucus.

First, the issue of two drugs per class. There are namely two

drugs, as you know, so we have to sort through from the perspective exactly as you have suggested, balancing access, but at the

same time cost containment when we know that essentially there

are combinations that do essentially the same things where there

are generic substitutions and the doctor feels comfortable having

that used.

ow does that play out? How does it play out from the standpoint

of some of the new information coming forth on particular drugs.

So is that a barrier to actually achieving the proper balance and

putting the fulcrum in the right area from the perspective of the

beneficiary?

Senator BAUCUS. What is your best guess? How many PPOs are

really going to participate here?

Ms. IGNANI. I think, to try and answer your question very honestly, there are hundreds of operational issues. So are you asking

me the question about PPO participation or are you asking me

about PDP, prescription drugs?

Senator BAUCUS. I am asking about both, because you are involved with both.

Ms. IGNANI. All right. Well, let me separate the two.

Senator BAUCUS. Yes.

Ms. IGNANI. And I will not bore you with a lot of the technical

details with respect to the USP. But I do think Mr. Merritt is right

in suggesting that there are a number of things we do not know,

and ultimately we hope that the USP itself, and ultimately CMS,

will look at the recommendations in light of what is going on now

55

in coverage for prescription drugs for the under 65. I think that offers a number of lessons in terms of this balance.

In terms of participation, our members are very much interested

in providing services to beneficiaries all across the country. We

have stated that in our testimony.

How the regulations finally get developed in terms of the operational issues, we will be able to answer very specifically the question of who is participating, and when.

What we have been devoted to in talking with hundreds of people

around the country who are administering these programs on the

ground, is to try to get from them their best judgments about what

needs to happen in order to make the operational issues workable.

CMS has done an extraordinary job of outreach and we are working very, very hard to make sure not only are we providing information from Washington, but people in the trenches are offering

information.

Senator BAUCUS. How do you feel about all of this? Is there

enough time to do it reasonably well to sort out all these issues?

Ms. IGNANI. I must say, had you asked me this question back in

January, I would have been very, very surprised that CMS could

have gained the ground that it did.

In a short period of time, we are now, August, eight months after

the passage of the legislation, putting out 900 pages of regulation

that basically, I think everyone is saying, is an excellent starting

point to give us the opportunity now to dialogue with them on particular operational issues.

They have accomplished something monumental, and Dr. McClellan deserves a great deal of credit for that, but so do the thousands

of people who are in Baltimore and Washington and around the regions, because they have worked together and they have worked

very hard.

So, I think it is the beginning of a workable framework. We are

probing very, very specifically questions that will be very important

in terms of running these programs and doing what you expect.

Senator BAUCUS. Mr. Shea, do you think there is enough time to

do this right? Do you feel good about it, or not good? Just in general.

Mr. SHEA. We are very nervous. We think CMS has really put

a lot of effort into this. The outreach has been terrific. We really

are nervous and afraid, frankly, that if the rule comes out without

sufficient guidance, companies and unions are going to be lost trying to implement this.

Senator BAUCUS. Yes. That is a concern of mine, too, frankly.

Mr. SHEA. And the issue that is most directly our concern, is that

this is going to provide some momentum to further reduce retiree

coverage, exactly the opposite of what it was intended to do, shore

up retiree coverage, and simply because of the fact that there is a

Medicare benefit, employers who want to get rid of this coverage

because of the very high costs involved—I am not saying they do

not have legitimate concerns—want to turn this cost over to the

employees, and they are going to say, there is a Medicare benefit

out there.

Senator BAUCUS. What is the best way to ensure that the employees get a fair deal here?

56

Mr. SHEA. I think the suggestions I made are the ones that we

have now, and I am sure we will refine them over the next few

weeks, about requiring transparency in terms of what the benefit

is and how the subsidy is used, and making sure the subsidy is actually used on health benefits, and in demonstrating that to the

employees and their representatives.

Senator BAUCUS. Ms. Ignani, how many people, beneficiaries, are

needed geographically to make a plan work?

Ms. IGNANI. I do not think there is an ideal number, actually, but

I do think the indigenous rules are very, very important. How do

they work? Network adequacy, Senator Baucus, is one, for example

that we comment on in our testimony and we have had considerable dialogue with this committee about.

That is an area where, in many cases, we are not able to secure

contacts with facilities, hospitals, physician groups that have monopoly situations in many rural areas.

And so to the extent CMS can provide a little flexibility as we

meet the basic standards, but where we provide evidence that folks

are unwilling to contract, that is a very good example of something

that is standing in the way of participation because you cannot run

a health plan, you cannot offer services, if you do not have a provider network.

The flip side of that is, in many parts of the country, particularly

in rural areas, we have many facilities that are insisting on 140 to

180 percent of fee-for-service, payments in that arena. So, we have

a number of issues that relate to network adequacy.

So, how they draw those rules, for example, will depend very

definitely on how many plans can participate, because our plans

want to set up networks across the area, whatever the area boundaries will be.

Senator BAUCUS. So what is a fair number of geographic areas

or regions? What is a fair number of regions? It was 15 to 50.

Ms. IGNANI. We say in our testimony that this is probably one

of the most difficult issues because we have members, for exmaple,

who come from two perspectives. One, we have the perspective of

plans that are local-based plans, State-based plans.

Senator BAUCUS. I know it is difficult. So what is the answer?

Ms. IGNANI. I am coming to that. I am actually going to give you

an answer.

Senator BAUCUS. All right. All right.

Ms. IGNANI. I do not mean to prolong this unnecessarily.

Senator BAUCUS. Right.

Ms. IGNANI. And they have suggested the 50 State approach.

Others who work across the country are looking at the operational

issues inherent in doing more States rather than fewer.

I think that one of the ways to begin to approach this is to begin

with 50 States, with incentives for individuals to do more. We have

talked to CMS about that sort of approach. There are other ways

to do that. Dr. McClellan suggested some of the operational issues

in his testimony that had been flagged by plans that are interested

in providing services across more than one State.

Senator BAUCUS. Well, boy, I will tell you, you have partly answered my next question, but we have not had a good experience

57

in Montana. We had an HMO a while ago, and it left. We do not

have a lot of people in our State.

Ms. IGNANI. I think, as you know well, Senator Baucus, one of

the problems with the services that had been offered in Montana

was, in fact, the inability to sustain the provider network. That is

where a PPO is particularly desirable for hospitals that do not

have the experience accepting risk. They do not have the mechanism to do that. They are more interested in PPOs.

I have noticed that in 2004, I took a look at the pending applications and the newly approved applications, and we have a number

of managed fee-for-service products, particularly in rural areas

around the country, and hospitals are indicating they are more

comfortable, again, with that. They do not have to have the ability

to accept risk to enter into contractual relationships. So, we are

trying to do as much as we can with as many products as we can

to meet that Congressional expectation.

Senator BAUCUS. Well, I do not have any other questions.

Before we leave here, does anybody have anything to say? I

mean, has anybody said something that is so outrageous that it deserves an answer, or some point that you would like to rebut anybody here, generally? Anybody? Mr. Shea?

Mr. SHEA. I do not want to get into a back-and-forth, but I do

want to make note, referencing an earlier conversation when Dr.

McClellan was here.

There were at least two significant quality improvement steps

taken from our point of view in the MMA. One, the incentive for

hospitals to be reporting relative performance data in order to get

the full update, and the announcement was made from CMS last

week that 3,900 hospitals are now reporting the full 10 measures.

We cannot stop there. That is just the beginning of public reporting.

Senator BAUCUS. Right. I agree.

Mr. SHEA. The second thing is the very small provision, but a

significant one, is to begin the process of providing, whether it is

clinicians, consumers, or plan sponsors, with comparative effectiveness information.

This is critical to getting the decision making structure in place.

We cannot sustain the system in its current cost configuration. The

employers cannot pay for it. I do not think the Federal Government

can pay for it.

We have to, as many people have agreed, change the system in

terms of the key delivery process. A lot of people, from employers

to health plans—CMS, I would point out, is the leader in this—are

working on the solutions to this. One key, key step is getting data,

independent, reliable data, on comparative effectiveness among

prescription drugs.

Senator BAUCUS. I agree with that. Does anybody disagree? I

mean, if we are going to address the cost of health care we have

got to get comparative data and start addressing quality.

Ms. IGNANI. Senator, I think Mr. Shea has made one of the most

important points, because we know that 50 percent of what is done

in health care is not evidence-based. So, we need to have comparative data to understand what is going on.

58

Senator BAUCUS. Who is doing some of the best work, and how

do we get moving?

Ms. IGNANI. Jack Wenburg.

Senator BAUCUS. Good.

Ms. IGNANI. Elliot Fisher at Dartmouth.

Senator BAUCUS. Yes, he is good.

Ms. IGNANI. The IOM has done considerable work. The Health

Care Forum is trying to aggregate all this information. But this is

a very, very important point. People need to know not only what

is spent, but what we are spending on.

Senator BAUCUS. I would encourage all of you, and anybody else

who might be listening, to kind of take the bull by the horns here

and begin to develop ideas on how to address this, because the

sooner we get at this, the more likely it is that we are going to

start to have some honest, meaningful solutions to the increased

health care costs in this country. There is an opportunity for all of

us here. There is an opportunity for each of you, as well as these

other organizations.

Mr. SHEA. And passage of the patient safety legislation, which I

think has been 6 years in the works, was really a big, big step this

past summer. We certainly hope that the conference committee is

able to get this done and get it to the President’s desk.

Senator BAUCUS. All right. Well, thank you very much for your

participation and your patience.

Chairman Grassley would like for me to announce that the

record will remain open until the close of business Friday. I would

encourage everybody to follow that.

The hearing is adjourned. Thank you.

[Whereupon, at 12:55 p.m., the hearing was concluded.]

(59)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF LARRY BURTON

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(257)

COMMUNICATIONS

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Æ