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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
     PRESCRIPTION DRUGS: MODERNIZING MEDICARE FOR THE 21ST CENTURY

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                         HEALTH AND ENVIRONMENT

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 14, 2000

                               __________

                           Serial No. 106-110

                               __________

            Printed for the use of the Committee on Commerce

                    ------------------------------  

                    U.S. GOVERNMENT PRINTING OFFICE
65-804CC                    WASHINGTON : 2000

                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Health and Environment

                  MICHAEL BILIRAKIS, Florida, Chairman

FRED UPTON, Michigan                 SHERROD BROWN, Ohio
CLIFF STEARNS, Florida               HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 PETER DEUTSCH, Florida
RICHARD BURR, North Carolina         BART STUPAK, Michigan
BRIAN P. BILBRAY, California         GENE GREEN, Texas
ED WHITFIELD, Kentucky               TED STRICKLAND, Ohio
GREG GANSKE, Iowa                    DIANA DeGETTE, Colorado
CHARLIE NORWOOD, Georgia             THOMAS M. BARRETT, Wisconsin
TOM A. COBURN, Oklahoma              LOIS CAPPS, California
  Vice Chairman                      RALPH M. HALL, Texas
RICK LAZIO, New York                 EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN B. SHADEGG, Arizona             JOHN D. DINGELL, Michigan,
CHARLES W. ``CHIP'' PICKERING,         (Ex Officio)
Mississippi
ED BRYANT, Tennessee
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Davenport-Ennis, Nancy, founding Executive Director, Patient 
      Advocate Foundation........................................   111
    DeParle, Hon. Nancy-Ann Min, Administrator, Health Care 
      Financing Administration...................................    26
    Donoho, Patrick B., Vice President of Government Affairs and 
      Public Policy, Pharmaceutical Care Management Association..    87
    Feder, Judith, Dean of Public Policy Studies, Georgetown 
      University.................................................    83
    Fuller, Craig L., President and Chief Executive Officer, 
      National Association of Chain Drug Stores..................    69
    Ignagni, Karen, President and Chief Executive Officer, 
      American Association of Health Plans.......................    65
    Kahn, Charles N., III, President, Health Insurance 
      Association of America.....................................    73
    Pollack, Ronald F., Executive Director, Families USA.........    90
Material submitted for the record by:
    Martin, James L., President, 60 Plus Association, prepared 
      statement of...............................................   154

                                 (iii)

     PRESCRIPTION DRUGS: MODERNIZING MEDICARE FOR THE 21ST CENTURY

                              ----------                              

                        WEDNESDAY, JUNE 14, 2000

                  House of Representatives,
                             Committee on Commerce,
                    Subcommittee on Health and Environment,
                                                    Washington, DC.
    The subcommittee met at 10:10 a.m. in room 2322, Rayburn 
House Office Building, Hon. Michael Bilirakis (chairman) 
presiding.
    Members present: Representatives Bilirakis, Upton, 
Greenwood, Deal, Burr, Bilbray, Whitfield, Ganske, Norwood, 
Coburn, Cubin, Shadegg, Bryant, Brown, Waxman, Pallone, 
Deutsch, Stupak, Green, Strickland, Barrett, Capps, Hall, 
Towns, and Eshoo.
    Staff present: Carrie Gavora, majority professional staff; 
Tom Giles, majority counsel; Kristi Gillis, legislative clerk; 
Bridgett Taylor, minority professional staff; Karen Folk, 
minority professional staff; and Amy Droskoski, minority 
professional staff.
    Mr. Bilirakis. The topic of today's hearing is Prescription 
Drugs. Modernizing Medicine for The 21st Century.
    I believe that this title is especially appropriate because 
we must examine broader reforms to preserve Medicare for the 
future as we consider adding a prescription drug benefit to 
this already financially troubled program.
    In three prior hearings we discussed both prescription drug 
plans which had been introduced at that time and more general 
concepts. Today we will hear more about the specific details of 
different coverage options.
    As most of you know, our committee colleagues, Congressmen 
Bliley, Burr and Hall yesterday announced a bipartisan plan 
called ``Medicare RX and Modernization 2000,'' a plan to help 
senior citizens by expanding access to prescription drugs in a 
context of Medicare modernization.
    As our panelists and members of this subcommittee are 
aware, in any effort to add a prescription drug benefit to 
Medicare the devil truly is in the details. The path to a 
sensible, salient plan is riddled with potential land mines and 
we must tread carefully and cautiously.
    Among the issues we will discuss today, this hearing will 
shed light on the possibilities for disease management 
services, the role of pharmacies, and the fate of 
Medicare+Choice.
    As July 1 approaches we are beginning to hear about more 
Medicare+Choice plans withdrawing from the program. An 
important part of the Medicare RX and Modernization Plan 2000 
would put the administration of the Medicare+Choice Program 
under the purview of the Medicare Benefits Administration, the 
same new agency that would administer the new prescription drug 
benefit.
    I look forward to hearing the view of the insurance 
industry represented by our witnesses, Karen Ignagni and Chip 
Kahn, about how this proposal could help stabilize the 
Medicare+Choice Program.
    As I have continued to examine the issue of prescription 
drug coverage under Medicare, the role of pharmacies and 
pharmacists is an issue we all have carefully considered:
    What is the appropriate role and function for pharmacists 
and organized pharmacies, and how can they help in the 
administration of prescription drug benefit?
    I hope that Craig Fuller from the National Association of 
Chain Drug Stores can shed some light on these questions.
    Today's hearing will again underscore the need for 
prescription drug coverage for Medicare beneficiaries. I am 
hopeful that it will also help us better understand all aspects 
of the new prescription drug benefit, including administration, 
pricing, choice, and costs. I would also like to welcome all of 
our panelists. Our first witness is Nancy-Ann Min DeParle, 
Administrator of the Health Care Financing Administration. It 
has been some time since she last appeared before a 
subcommittee, and I know that my colleagues join me in 
extending our congratulations on the birth of her child. I look 
forward to hearing from all of our witnesses, and I would like 
to thank them for their time and effort in joining us today.
    In the interests of time, after the opening statement of 
the Ranking Member Mr. Brown, I would encourage my fellow 
subcommittee members to limit their opening statements to 3 
minutes. I know that we all want to hear what our witnesses 
have to say and still have ample time for questions. Thank you.
    The Chair now yields to Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. I would first ask 
unanimous consent to enter into the record Mr. Dingell's 
statement and statements of any other Members.
    Mr. Bilirakis. Without objection, the statement of Mr. 
Dingell and all members of this subcommittee will be made a 
part of the record.
    Mr. Brown. Thank you, Mr. Chairman.
    I would like to thank Nancy-Ann and other distinguished 
witnesses for joining us today.
    Mr. Chairman, I am glad we have been given the opportunity 
to discuss the need for Medicare prescription drug coverage 
today. I am concerned, however, that the Republican proposal 
that prompted this hearing is being taken seriously when, 
frankly, it should not be.
    How can you try to convince seniors that you are helping 
them when the only thing you have promised to them is a low-
income subsidy. You are not helping seniors above 150 percent 
of poverty by subsidizing insurers; you are helping the 
insurers.
    Your plan guarantees nothing other than some assistance for 
the lowest-income seniors. In my district, prescription drugs 
are not just a low-income problem. Seniors who thought they 
were financially secure are watching their savings go straight 
into the pockets of drug makers.
    You are trying to tell seniors that there will be a choice 
of reliable, affordable private prescription drug insurance 
plans available to them. Based on what? Certainly not history.
    Even the insurance industry is balking at this idea. It 
should tell us all something that insurers do not sell 
prescription drug coverage on a stand-alone basis today even to 
young and healthy individuals. That is because it simply does 
not make sense.
    Medicare is reliable. It is a large enough insurance 
program to accommodate the risks associated with prescription 
drug coverage. Individual, stand-alone prescription drug 
policies are not.
    You are actually trying to convince seniors who stand 
firmly behind the Medicare program that expanding the current 
benefit package is less efficient and more onerous than 
manufacturing a new bureaucracy and conjuring up a new 
insurance market.
    Seniors are too smart for that.
    I do not want to ask seniors in my district and across the 
country to rely on a market that does not want the business, to 
provide a benefit not suited to stand-alone coverage to a 
population that, let's face it, has never been well served by 
the private insurance market.
    I do not want seniors in my district and across the country 
to be coerced into managed care plans in order to avoid dealing 
with three different insurance plans. Medicare, Medigap, and 
individual prescription drug coverage.
    I do not want seniors in my district or across the country 
to receive a letter from their employers telling them the 
retiree prescription drug coverage has been terminated on the 
premise that ``the government is offering private insurance 
now.''
    I do not want to forsake volume discounts and economies of 
scale by segmenting the largest purchasing pool in this country 
and then waste Trust Fund dollars on insurance company margins 
and on insurance company marketing expenses.
    And I do not think the individual health insurance market 
is a reasonable model for Medicare prescription drug benefits.
    In fact, as anyone who has had to purchase or sell coverage 
in that market will tell you, the individual health insurance 
market is not even a good model for individual health 
insurance. It is the poster child for selection problems, for 
rate spirals, and for insurance scams.
    The very fact that the drug industry backed Citizens For A 
Better Medicare supports the private-plan approach is a giant 
strike against it. The drug industry and their puppet 
organization clearly feel that undercutting seniors' collective 
purchasing power, relegating seniors to private, stand-alone, 
you're-on-your-own prescription drug plans is the key to 
preserving discriminatory, outrageously high prices.
    My office has been deluged by FAXes and postcards, as we 
all have, from Citizens For A Better Medicare warning us, ``not 
to force seniors into a Federal Government run one-size-fits-
all prescription drug plan.'' But Medicare itself can be 
characterized as a Federal Government run one-size-fits-all 
insurance program. It is also the most popular and successful 
public program in our Nation's history.
    Medicare came into being because half of all seniors were 
uninsured--not by their choice. Medicare, a nationwide plan 
with a risk pool over 30 million strong, is a stable, reliable 
way of insuring coverage for our seniors.
    Medicare works because it guarantees the same basic 
benefits to all beneficiaries regardless of where they live, 
regardless of their income, regardless of their health status. 
Simply put. It is equitable.
    The Republican proposal leaving seniors to search for 
private coverage means varying premiums and varying levels of 
restrictiveness on access to prescription drugs.
    One other thing, Mr. Chairman. The subsidy to insurers 
means completely unpredictable liability for the Federal 
Government. The single most important objective we can fulfill 
this year is to secure a meaningful prescription drug benefit 
for Medicare beneficiaries.
    Let us not make a mockery of that objective by focusing on 
an option that is neither responsible nor realistic.
    I thank the chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Deal for an opening statement.
    Mr. Deal. Mr. Chairman, I will yield my time in an effort 
to expedite the testimony of the witnesses.
    Mr. Bilirakis. I appreciate that.
    Mr. Waxman for an opening statement.
    Mr. Waxman. Thank you very much, Mr. Chairman.
    I welcome this hearing. I think a drug benefit for seniors 
under Medicare is long overdue, but I am disturbed by the 
evident intention of this subcommittee to use this hearing to 
justify moving through our committee and taking to the House 
floor a Republican bill that has not yet been made available to 
the public, that our witnesses have not even seen, that has 
been explained only in vague and contradictory terms, and that 
apparently fails to meet critical conditions for effective, 
available, and affordable prescription drug coverage.
    In my view we can only meet our obligations to Medicare 
beneficiaries if we make coverage of prescription drugs a 
benefit that all Medicare recipients are entitled to, a benefit 
that covers all medically necessary drugs, a benefit that is 
available in every part of this country, a benefit that is 
accessible and affordable to seniors in fee-for-service 
Medicare as well as Medicare+Choice plans, and a benefit that 
assures Medicare beneficiaries will no longer face the 
discrimination in drug prices which has resulted in their 
paying the highest prices out of their own pockets. But that is 
not the approach of the Republican bill.
    It tells seniors that they can purchase a private insurance 
drug policy patterned on Medigap policies which already fail to 
deliver an affordable drug benefit. That is a cruel hoax.
    Except for the poor, the Republican bill does not help 
seniors pay their premiums. It subsidizes private insurance 
companies and tries to claim that that will help seniors. What 
that really does is mislead and confuse people about the help 
that is available.
    The Republican bill shifts the responsibility to insurers 
to try to provide a benefit when they know there is going to be 
an adverse selection that almost certainly will make their 
product unaffordable and unavailable. That is not a responsible 
choice.
    The drug companies might like it. It will pay what the drug 
companies want to continue to be paid. But seniors will not 
like this plan.
    I know that the Republicans have a public relations 
consultant, and we have a document that came out of their 
consultant's distribution to the Republican Members. They 
suggested to the Republicans that they tell the American people 
that:
    I care. It's easier to say I care.
    And then the consultant told Republican Members. It is more 
important to communicate that you have a plan as it is to 
communicate what is in the plan.
    Well that approach results in a bill that tells seniors 
they can purchase this policy, but it is not going to really be 
available to them. The Republican bill does not help seniors 
pay their premiums. It subsidizes private insurance companies, 
and then tries to claim that seniors will have a benefit.
    The drug companies might like this bill. It is rhetoric but 
it is not reality. I think the cynicism is breath taking.
    Seniors do not need us playing politics with their health 
care. Seniors need real coverage for prescription drugs. They 
cannot afford the high price of drugs, and they cannot afford 
to pay twice what the big buyers pay. They do not need another 
Medigap. They need a Medicare drug benefit.
    Let's join together in a bipartisan way and in a 
responsible way to do exactly that.
    I yield back the balance of my time.
    Mr. Bilirakis. Dr. Norwood for an opening statement. Three 
minutes, please, for members other than the chairman and the 
ranking member.
    Mr. Norwood. Thank you, Mr. Chairman.
    I want to begin by thanking you very much for holding this 
hearing. As we move forward on this issue, it is important to 
express our gratitude to you for the series of hearings which 
you have held which I believe makes us far better equipped to 
address a drug benefit for seniors.
    Now from my perspective I believe there are many critical 
issues that we must address in any bill we consider, but I will 
mention just two.
    If there is one thing we can be absolutely certain of it is 
that a 3-week stay in the hospital typically is far more 
expensive than taking medications that have been prescribed for 
you.
    When seniors are forced to ration drugs, or stop taking 
drugs because of the expense, they incur the likelihood that 
they will end up in the hospital, which in the long run draws 
down on the Medicare Trust Fund.
    Any drug benefit proposal we consider must be targeted to 
help those seniors who can least afford expensive medications. 
Ultimately we know those seniors are most at risk to face the 
consequences of not taking their medication.
    As I have discussed these issues with seniors in my 
district, I have heard again and again and again that seniors 
are most concerned about the seemingly endless cost of 
prescription drugs.
    The one thing we can do to help all seniors most I believe 
is to provide a drug benefit that gives them some peace of 
mind; that makes clear that there is only so much a senior will 
have to pay out of pocket.
    Providing seniors with stop-loss coverage for their 
prescription drugs will frankly ease that concern.
    Mr. Chairman, I am very pleased to read that my colleagues 
have addressed these two key issues in Medicare Treatment 2000. 
I am actually looking forward to reading the bill.
    It would certainly make a real difference in the concerns 
expressed by my constituents, and I appreciate the attendance 
today, Mr. Chairman, of our witnesses and look forward to their 
testimony.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Pallone for a 3 minute opening statement.
    Mr. Pallone. Thank you, Mr. Chairman.
    Mr. Chairman, I cannot help but express my frustration this 
morning over the fact that the Republicans apparently have put 
together some sort of proposal on prescription drugs which we 
have not really had a copy of, which is not in legislative form 
but the points have been put out there and, frankly, from what 
I can see this Republican proposal is just an imaginary drug 
benefit that does nothing for seniors and is just political 
cover and empty promises.
    As Mr. Waxman has pointed out, the House Republican 
Conference put out a presentation by Glen Bolger on June 8 that 
basically talks about this from a communications point of view.
    I have to say that that is all this is. There is nothing 
here. It is just an effort to try to pretend that they are 
doing something which will never pass, will never go any place, 
but will be used to try to show that somehow they are trying to 
address this issue for the next campaign in November.
    From what I can see, the Republican proposal is not a 
defined benefit. It is a premium support bill. It gives people 
whatever the insurance companies can provide. You know, we do 
not know what the insurance companies will give them, and they 
leave it up to the insurance companies to decide what kind of 
benefit it is going to be.
    It is very cumbersome. It is ineffective. It is almost 
nutty, I would say. What this should be--and the Democrats have 
proposed--is this should be a benefit plan.
    I do not understand the whole concept of saying that 
somehow we are going to have drug-insurance-only policies 
because we know that insurance is risk-oriented. This is 
something that everybody is going to take advantage of.
    Everybody is going to need prescription drugs at some 
point. So it should not be used in the insurance model; it 
should be a benefit program under Medicare. It should not vary 
from State to State or from region to region; it should be 
defined.
    Also, from what I can see about the Republican proposal it 
does nothing to put any pressure on price. Price discrimination 
is the main thing that most of the seniors talk about today.
    Now rather than proposing a prescription drug benefit that 
is part of the Medicare Program itself, the Republicans want to 
force the insurance industry to offer prescription drug-only 
policies outside of Medicare's umbrella that the insurance 
itself says will not get the job done.
    Indeed, just yesterday Chip Kahn, the head of the Health 
Insurance Association of America, told the Ways and Means 
Committee that the likelihood is that the people most likely to 
purchase this coverage will be the people anticipating the 
highest drug claims and would make drug-only coverage virtually 
impossible for insurers to offer to seniors at an affordable 
premium.
    The insurance industry's opposition to a Republican plan 
that proposes to pump billions of Federal dollars into its own 
coffers is very telling.
    This is in my view a clear reason why the Majority once 
again seems poised to offer a proposal on a pressing health 
issue that it knows has no chance of going anywhere. And, Mr. 
Chairman, I have to say it is just like the Patient's Bill of 
Rights.
    We know the Conference got bogged down. The Republicans 
have no intention of passing a Patient's Bill of Rights, or 
addressing HMO reform, just like they have no intention today 
or any time between now and the end of the year of addressing 
Medicare prescription drugs.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Pallone. I thank the chairman.
    Mr. Bilirakis. Thank you.
    Mr. Whitfield for an opening statement.
    Mr. Whitfield. Mr. Chairman, thank you very much.
    I am glad we are having this hearing. I find it interesting 
that our friends on the other side complained about not seeing 
the bill and then yet are very specific in their criticism of 
the bill.
    Most of us on this side have not seen it either, but the 
importance of this hearing is simply to start addressing this 
issue. It is complex and we look forward to hearing the 
testimony of our witnesses as we work to fashion an effective 
prescription drug benefit plan.
    Mr. Bilirakis. Mr. Towns for an opening statement.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me say, I think this is a very serious matter and we 
should not be playing games with it. I think that we have a 
third of our seniors out there who are without coverage of any 
sort. I think that we owe them more. I think they need to have 
coverage, and I think that this is an opportunity to do it.
    But to move forward with this kind of legislation that we 
have got ideas and going forward in the dark to me just does 
not make a lot of sense if we are serious about doing what is 
right on behalf of our seniors.
    Our seniors in many instances of course they have paid a 
tremendous debt, and of course to come to this time in their 
life and have to worry about whether or not they will be able 
to pay for their medication to me does not make a lot of sense.
    So I am hoping that we get very serious here and begin to 
look at this. Because when I look at New York City, or New York 
State I should say, New York as 2.3 million seniors who rely on 
Medicare. In about 2025 that number will rise approximately to 
3.3 million. Only 24 percent of New York firms offer retirees 
health insurance.
    The monthly premium for Medigap Insurance, including 
prescription drugs, average $159, which is out of reach for 
many seniors in New York. Medicare enrollment in New York in 
the coming years is increasing while at the same time access by 
retiree health insurance and Medicare managed care is 
decreasing or inadequate.
    This situation is not unique to New York. Other States also 
fall into this same pattern.
    The economy is doing well. With our budgetary surpluses, it 
is time we start addressing our seniors' concerns about 
affordable prescription drug coverage.
    I think we should do it. We should do it now.
    Mr. Chairman, on that note I yield back. And I say to you 
that we need to make certain that information is shared among 
all Members because this is a very serious issue and I am 
hoping that this is not being used for any kind of political 
maneuver.
    I yield back.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Ganske for an opening statement.
    Mr. Ganske. Thanks, Mr. Chairman, and thank you for having 
this hearing.
    I certainly think some seniors in particular need help with 
their pharmaceuticals. There is a group that do not qualify for 
Medicaid if they are in the QMBY or SLMBY groups, the groups 
that are just above the requirement for Medicaid, then they get 
help with their premiums and in some cases with their 
deductibles but they cannot get into the Title XIX, the 
Medicaid Drug Programs.
    And they definitely have a problem. I also think that all 
Americans are concerned about the high cost of the drug prices. 
I hear this from employers who are having to deal with 18 
percent increases, annual increases in their prescription drug 
costs, and from individual citizens.
    I hear from seniors that they are concerned, and from 
others, that they are concerned about the cost differential in 
drugs between Canada, Mexico, Europe, and the United States. 
And they do not think that it is fair.
    So I do want to say that I do have a plan, and I do have 
some ideas on how we can accomplish this.
    I sat through 8 hours yesterday of the Ways and Means 
testimony, and I took copious notes on this. Why did I have to 
do that? Why did I have to listen to questions to Chairman 
Thomas yesterday?
    It is because I have not seen a bill. I am told that there 
is a bill in Speaker Hastert's office. I am told that 
legislative counsel has a bill, and I am told that the CBO has 
a bill.
    I will not gainsay some of the Members who have worked hard 
on this, but this is way, way too important an issue to be 
making a decision on the biggest benefits expansion in Medicare 
history without fully vetting this process.
    I want to put a plea in. This is an issue that should go 
through Regular Order, hearings, more than one, a subcommittee 
markup, a full committee markup, both in the Commerce Committee 
and in Ways and Means.
    Why? Not for the benefit of the members of this committee 
but for the benefit of our colleagues so that this issue is 
fully vetted so that they understand fully what they are going 
to be voting on.
    It would be a tragedy to put a bill on the floor that most 
Members do not understand what the implications would be. I 
just cannot support a bill that goes through that kind of 
process.
    What did I learn from the chairman, Chairman Thomas, 
yesterday? I learned that there will be a SOP made to rural 
Members with some modest increase in the AAPCC to try to buy 
their vote.
    It will never be enough to get HMOs into those rural 
districts like mine which are composed of elderly citizens that 
the HMOs do not want to cover that have medical problems.
    I heard yesterday that there will be a whole new separate 
bureaucracy set up in the GOP plan. We need to think about 
that.
    But what is the big problem?
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Ganske. Mr. Speaker, could I ask unanimous consent for 
1 additional minute?
    Mr. Bilirakis. Well now if we start that, Greg, we are 
never going to get to the hearing.
    Mr. Ganske. I understand that, Mr. Chairman, but how big an 
issue are we going to face?
    Mr. Bilirakis. Well this is a big issue and we have spent a 
lot of time on it and we are going to continue to spend an 
awful lot of time on it. I would appreciate it if the gentleman 
would withdraw his request.
    Mr. Ganske. I can take up this issue in comments later and 
I will submit my statement.
    Mr. Bilirakis. Ms. Eshoo for an opening statement.
    Ms. Eshoo. Good morning to you, Mr. Chairman, and all the 
members of the committee, and certainly to the distinguished 
individuals who are going to testify at this important hearing 
today.
    I have of course a fuller statement for the record, but let 
me just try to summarize in a brief period of time. There are 
time limits around this. I know that that is important. We want 
to hear from the witnesses. But as the gentleman just stated, 
this is an issue that is not just large, it is a giant issue.
    We really have to be devoted to giving the kind of time to 
the scrutiny of the ideas and plans that are being placed 
before us here in the Congress. We know what the problem is. It 
is not an issue of whether we should do something about it, but 
rather how to.
    I am very proud to have introduced legislation that really 
builds upon the President's plan and moves beyond it by 
incorporating competition to bring down pricing. Seniors are 
paying too much for their prescription drugs. But I think that 
we also have to reduce the efficiencies that could be there 
relative to the administration of a new benefit.
    This legislation, the Medicare Prescription Drug Act of 
2000, H.R. 4607, I am very proud to say is originally co-
sponsored by many Democrats on this committee.
    Suffice it to say that at least in my view--and I think in 
many Members' views--this is a benefit that needs to be 
consistent for seniors.
    I do not believe that insurance companies hold a great deal 
of credibility today with seniors. They did not a couple of 
years ago with HMOs. Now it seems to me that there is a move to 
HMO/insurance prescription drug benefits.
    The insurance industry says that they do not want to insure 
this, or that they can't, and today in my district and I think 
districts around the country insurance companies are pulling 
out of the market.
    If there is anything that my mother wants it is some 
consistency in her life. You know? She has gone through the 
peaks and valleys of life, and there are some things that she 
and her peers really want to be able to rely upon.
    So I think that the Congress needs to move in the direction 
to make a benefit that can be counted on in Medicare, a full 
benefit. And if someone has a benefit through their previous 
employer as a retiree, so be it. If they want to count on it as 
a Medicare benefit, it should be there. But we should not be 
backdooring it through some kind of insurance plan.
    I too spent a great deal of time yesterday, along with my 
Republican colleague and many others at the Ways and Means 
Committee testifying on my bill----
    Mr. Bilirakis. The gentlelady's time has expired. Please 
finish up.
    Ms. Eshoo. I think that the direction at least that Mr. 
Thomas is taking is really not the most prudent one for 
seniors. So I look forward to hearing from our witnesses today, 
and I thank you, Mr. Chairman, for holding this hearing.
    [The prepared statement of Hon. Anna G. Eshoo follows.]
  Prepared Statement of Hon. Anna Eshoo, a Representative in Congress 
                      from the State of California
    When Medicare was created in 1965, seniors were more likely to 
undergo surgery than to use prescription drugs. Today, prescription 
drugs are often the preferred, and sometimes the only, method of 
treatment for many diseases. In fact, 77% of all seniors take a 
prescription drug on a regular basis.
    And yet, nearly 15 million Medicare beneficiaries don't have access 
to these lifesaving drugs because Medicare doesn't cover them. 
Countless others are forced to spend an enormous portion of their 
modest monthly incomes on prescription drugs. Right now, 18% of seniors 
spend over $100 a month on prescriptions. Seniors comprise only 12 
percent of the population, yet they account for one-third of all 
spending on prescription drugs.
    The question before Congress is not whether we should provide a 
Medicare drug benefit, but how to do it.
    Our Republican colleagues believe that we should turn the problem 
over to the private insurance market, but the private insurance market 
is pulling out from under seniors in the Medigap and Medicare+Choice 
markets. I receive letters and calls every day from seniors in my 
Congressional District who are frantic that their Medicare HMO has 
raised prices, scaled back benefits, or is pulling out of the market 
entirely. Why should seniors trust the private insurance industry if 
this is what is happening to them today? Chip Kahn of the Health 
Insurance Association of America (HIAA), the trade association that 
represents the health insurance industry, has stated publicly that 
health insurance companies won't offer Medicare drug-only plans because 
they can't make enough money. So, I don't believe that the private 
insurance model will work.
    Some believe that the federal government should limit how much drug 
companies can charge for their products. I disagree. Price controls are 
anti-competitive and can place patient access at risk. I have the 
largest concentration of biotechnology and pharmaceutical companies 
located in my Congressional District and I see every day the capital 
risk that is inherent in research and development. Start-up companies 
in my district won't get the capital necessary to develop that next 
breakthrough Alzheimer drug if the investors know that the federal 
government is going to cap how much they can charge for it.
    I've introduced legislation that builds upon the President's plan 
by incorporating open competition and reduced administrative 
inefficiency. My bill, The Medicare Prescription Drug Act of 2000 (H.R. 
4607), stays true to the hallmark of the Medicare program by providing 
a generous, defined benefit package that's easy for seniors to 
understand; yet we took a step into the future by introducing private-
sector competition. The result will be a more affordable drug benefit 
for both beneficiaries and the Federal government.
    The bill is simple. Available to all Medicare beneficiaries, the 
Federal government will pay half of an individual's drug costs up to 
$5,000 a year, when fully phased in. For seniors who exceed $5,000 in 
drug expenditures--or $2,500 in out-of-pocket costs--the Federal 
government picks up the whole tab.
    PBMs will deliver the benefit and seniors will choose among 
multiple options much like we do today in the Federal Employees Health 
Benefits Plan (FEHBP). By allowing multiple PBMs to use the same tools 
that have made them successful in reducing costs and promoting quality 
for employees in the private sector, my bill will, for the first time, 
introduce open competition into Medicare, reduce prices, and increase 
consumer choice.
    According to CBO, if only one PBM is allowed in each region and 
PBMs are not allowed to offer a selective formulary, there would be 
little incentive for reduced pharmaceutical costs. Simply purchasing a 
large quantity of drugs does not drive prices lower in the private 
sector. Pharmaceutical companies grant discounts when a PBM can show 
that it increases a company's market share.
    By contrast, allowing for multiple PBMs, and allowing the PBMs to 
be more selective about the drugs they offer will result in price 
competition among pharmaceutical companies. We would also allow PBMs to 
pass cost savings on to Medicare beneficiaries in the form of lower co-
payments. The result would be lower drug prices for beneficiaries and 
significant savings to Medicare. To ensure patient quality, when only 
one drug is available for a given disease or condition, the PBM would 
be required to carry it on the formulary.
    We've also removed sole administration of the program from HCFA. 
HCFA will continue to oversee beneficiary eligibility and enrollment 
but it can't, by itself, run this program. The healthcare system has 
evolved rapidly, and regrettably HCFA has not kept pace. HCFA lacks the 
expertise to run a benefit that relies on private sector competition to 
control costs.
    Fortunately, there is another agency that has expertise interacting 
with private sector health plans, and has proven that it can administer 
benefits effectively and efficiently with a minimum of bureaucracy. 
It's the Office of Personnel Management (OPM)--which runs the widely 
acclaimed FEHBP. OPM will define market areas, articulate quality and 
performance standards, and evaluate PBMs--just as it does currently for 
health plans. OPM will ensure that competition is harnessed to run an 
efficient benefit of the highest quality. Under OPM's leadership, I'm 
confident that an efficient and effective competitive benefit can be 
integrated successfully into the Medicare program.
    I'm proud of this legislation and proud of the support it has 
received to date. Original cosponsors of the bill include a large 
number of Commerce Committee members and a broad cross-section of the 
Democratic Caucus. We agree that the best way to get this done is to 
provide a generous, reliable Medicare drug benefit for seniors without 
price controls and without harming innovation.
    For our Nation's seniors, prescription drugs are not a luxury. 
During these times of historic prosperity and strength, there is 
absolutely no reason to be forcing seniors to decide between buying 
prescription drugs or other necessities of life. In the words of 
Franklin Delano, ``the test of our progress is not whether we add more 
to the abundance of those who have much; it is whether we provide 
enough for those who have too little.'' It's time that we stop wasting 
our budget surplus on tax cuts for the wealthy and use it to provide 
our Nation's seniors with a basic healthcare need--coverage of 
prescription drugs.

    Mr. Bilirakis. Mr. Bryant for an opening statement.
    Mr. Bryant. Thank you, Mr. Chairman. I too want to add my 
appreciation to both you for calling this hearing and the 
panel, the very distinguished panels we will have today.
    I think when I came to Washington about 6 years ago I was 
an optimist. I felt like we could come up here and work in the 
system and both sides wanted to get a solution that would help 
everybody.
    And over a period of time, that has somewhat eroded as I 
have seen partisanship not just on one side but certainly on 
both sides.
    You know we have a problem in this country on seniors 
having access to affordable prescription drugs and we all want 
to solve it, I think.
    And then I come in today and I hear something about we have 
got a public relations guy helping us. Gosh, that is a shock up 
here in Washington.
    Then I hear this term ``Republican bill'' and Republican 
bill, rather than a bipartisan bill. There are some Democrats 
on this.
    It kind of makes me believe what I read in one of the 
papers up here the other day that on the Senate side the 
Democrat Senator who is co-sponsoring one of the Republican 
bills is facing sanctions over there, punishment for doing that 
because he is not playing politics.
    Because everybody up here knows, and maybe it is unspoken, 
today that some people want this to be the issue in the 
election rather than trying to get down to business and solve 
the problem.
    I think we can do that. I think both sides, when you really 
look at it, really are not that far apart, particularly on 
dollars. I know our plan we have worked very hard on it. It is 
a universal plan. It is a voluntary plan. It is a choice out 
there to the citizens. It helps those in financial need. It 
helps on the high end to prevent people from having to sell 
their homes or use up their savings account if they have a 
catastrophic drug bill each year.
    It is a good bill. I guess I would like to reach down and 
bring back up some of that optimism and hope that we can work 
together and not have this as a campaign issue but work 
together to get a bill that will truly help our senior 
citizens.
    I would yield back my remaining time.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Stupak for an opening statement.
    Mr. Stupak. Thank you, Mr. Chairman----
    Mr. Bilirakis. And, Bart, our sincere sympathy, publicly.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Chairman, we have really not seen the bill, but the 
talking points we have seen reminds me of the old Golden Rule 
that seems to be followed in this bill. Do not hurt the 
pharmaceutical. Increase the insurance company profits, and 
make coverage as complex as possible.
    The GOP bill says. ``Trust private insurers.''
    Trust the pharmaceutical companies whose profits are $20 
billion, whose net operating profit is 28.7 after all the 
research, after all the advertising, it is 28.7 percent on 
pharmaceuticals when the rate of inflation is less than 3 
percent. It is price gouging.
    This is a study from my district in October 1998. Take any 
drug you want. Zocor for cholesterol. If you are the Federal 
Government you pay $42.95. If you are a major wholesaler, you 
pay $85.47. The average price is $106.84. If you are a chain 
market, it is $101.29. Independent pharmaceutical companies or 
stores pay $99.38. The average retail price is $100.33. The 
price differential is 134 percent. That is in my district in 
northern Michigan. That is price gouging. That is price 
discrimination.
    Those who can least afford it, who do not have the 
insurance coverage, pay 134 percent more.
    The GOP plan has more bureaucracy. There are no real 
protections. The GOP plan really says to the American people. 
Look, each senior, you go out and negotiate whoever you want 
with the private insurance companies, with the big HMO plans. 
We are not going to help you. You negotiate. We will then give 
you some money. Not to the American people but to the insurance 
companies and to the HMO. Your pharmaceutical company will reap 
the benefits. Government will give you nothing.
    This is the same GOP plan. Remember, they are the ones who 
want privatize Social Security? Now they want to privatize your 
prescription drug coverage. That is the same group that wants 
to let Social Security wither on the vine.
    If you take a look at it, we privatize Medicare--excuse me, 
Medicaid in Michigan. Two years ago, the State of Michigan ran 
it. The administrative cost was $28 million. Two years later, 
after it was privatized, the administrative cost is $141 
million. In 2 years, $141 million.
    It is unbelievable what you can do when you can privatize 
systems like we did in Michigan. Medicaid. Medicaid? 
Unbelievable. Look at those administrative costs, $28 million 
to $148 million. That is exactly what is going to happen to our 
prescription drug plans.
    Look it. The Democrats for 2 years had the Allen bill out 
there, the Stark bill. We had the President's plan. Give us 
some hearings on it. Universal coverage. That's what we need. 
Stop and think. We need universal coverage so that all seniors 
are covered.
    Stop the price gouging. If you do not, the profits will 
remain at 28.7 percent. No problem with profits. But if it is 
going to continue to price gouge, we will all be in trouble.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Stupak. Most Americans after this is over will not be 
able to afford any type of drug coverage.
    Mr. Bilirakis. Mrs. Cubin for an opening statement.
    Mrs. Cubin. Thank you, Mr. Chairman.
    I would like to begin by associating myself with the 
remarks of several of my colleagues, Mr. Bryant and Mr. Towns, 
stating that this issue is far too important to politicize.
    What we need to look out for are the best interests of our 
senior citizens. I do not think anyone here at all 
underestimates the value and the importance of drafting a 
prescription drug proposal program for our seniors.
    We all want the life-saving drugs to be available, and no 
one should go without food to get them. Our intentions are 
good, and our expectations are very high. That makes crafting a 
drug plan all that much harder.
    Seniors are looking to us to help make a difference in the 
quality of their life. They are not looking to us to 
politically attack one another and to try to find grounds to do 
that.
    Today we are going to be considering some very pointed 
aspects of the issue:
    How do we administer a prescription plan?
    Should it be voluntary?
    Should it be market based?
    Or should it be government run?
    What kind of benefits are to be offered?
    How much will the government subsidize?
    How does it affect Medicaid?
    I agree that all of these questions have to be adequately 
addressed for any plan to be successful, but I also think there 
is one critical component that is not getting the attention 
that it deserves. That is, how does any plan affect rural 
America?
    As most of you know, I represent the State of Wyoming which 
is the most rural State in the country. While you may be able 
to identify Jackson Hole and Yellow Stone National Park with 
Wyoming, I do not think that it is easy for some people to be 
aware and grasp the concept of the State's true size and the 
amount of vast open spaces.
    With approximately 480,000 people covering almost 100,000 
square miles, we sometimes have to drive hundreds of miles just 
to access medical care. Oftentimes that means going to another 
State.
    We have to rely almost exclusively on fee-for-service in 
Wyoming. And because of that, seniors in Wyoming have less 
access to drug coverage than seniors would in California, for 
example, where there are many Medicare HMOs.
    Programs within the present Medicare system, such as 
Medicare+Choice, have not been beneficial to rural areas as 
originally envisioned due to a lack of customer base in these 
areas.
    So as a result, options for rural populations of our 
country are often very limited, or many times nonexistent.
    Having said that, I worry that a similar problem may occur 
in any prescription drug plan benefit that does not adequately 
address the needs of rural Americans.
    I urge all of my colleagues on the committee to keep that 
in mind because there are a lot of people who live in rural 
America that could be very adversely affected by any program 
that does not take these elements into consideration.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Green for an opening statement.
    Mr. Green. Mr. Chairman, I thought Mr. Strickland was here 
earlier.
    Mr. Bilirakis. Well I don't know. I am taking you by order 
of seniority.
    Mr. Strickland. I am very generous. Go right ahead.
    Mr. Green. Okay. Thank you, Mr. Chairman.
    Mr. Bilirakis. That is unusual.
    Mr. Green. I will be glad to take my time from my colleague 
from Ohio.
    Mr. Chairman, I want to thank you for calling this hearing 
today. I appreciate the number of hearings we have had on the 
prescription drug initiative and hopefully we will have 
legislation to look at to actually mark up.
    Sadly, it appears, that what I see in the press is the 
effort is not as bipartisan as I would like it to be. We see a 
press release that gives some ideas but not actually 
legislation.
    Hopefully, by our committee working together, as is the 
tradition of the Commerce Committee, we can come up with a plan 
that a majority of Americans will support.
    A plan that actually puts money into the pockets of seniors 
for prescriptions and not necessarily insurance carriers. 
Working together we can put together a plan. Unfortunately, 
what I have seen up to this point we have not been able to, and 
I hope our subcommittee can do that.
    And again, all we are working from today is a press 
release, so that is what I will base my remarks on. Medicare 
was created in 1965 because private-sector insurance could not 
provide coverage for senior citizens.
    Everyone was a claimant. Everybody had a claim. So profit 
and loss would not work. We are having the same example today 
with prescriptions. Every senior citizen has prescriptions. In 
fact, sometimes half a dozen of them. That is why the private 
sector cannot work.
    Except in this press release we are using it shows that 
that is what it will do. The proposal is a new drug-benefit-
only policy that the experts say will be ineffective and 
inexpensive.
    The drug-only benefit will have adverse selection for 
seniors. Even worse, it allows the insurance companies to 
select what drugs they will cover and how much they will 
charge. There is no guaranteed standard benefit.
    Allowing insurance companies to set the benefit and price 
is like letting the wolf guard the chicken house. And any 
savings would not go to those seniors.
    Some in the insurance industry will be able to set the 
prices. I wonder why, instead of using taxpayer dollars wisely, 
the proposal we have is to create a new bureaucracy: the 
Medicare Benefits Administration, or MBA, which duplicates what 
HCFA and our committees already do.
    So we are going to take money straight out of the Medicare 
Trust Fund to pay for this new bureaucracy.
    Medicare has the most efficient administration. It is less 
than 1 percent, and I think that can be comparable to any other 
insurance plan.
    America's seniors need prescription drugs. They are sick 
and tired of the Medigap policies. The Medigap policies we have 
now, the costs are going up so substantially and this would add 
just another Medigap policy to seniors who are already having 
to pay upwards from $200 to $300 a month in some cases.
    So, Mr. Chairman, hopefully we will see a bill. And 
hopefully the press release I have seen and the guidelines is 
not what our committee is going to be looking at.
    Thank you.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Bilbray for an opening statement.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Mr. Chairman, I would really like to echo the words of my 
colleague from New York, Mr. Towns, and also my dear friend 
from Wyoming.
    The partisanship sounds great in Washington, and the 
bickering between Republicans and Democrats may play well to 
the afternoon news, but I think the American people are 
sophisticated enough to see that not only is this issue 
important enough to be able to ignore partisan lines, but they 
are sophisticated enough to know when people are trying to 
manipulate issues for political reasons on both sides.
    I think they will hold us both accountable if we approach 
this issue from a partisan point of view. I would just ask that 
my colleagues understand that as we snipe across the aisle we 
do not make the other person look bad, we make ourselves look 
bad.
    I would just ask us to consider the fact that there is a 
lot of common ground that we have here, not just political 
differences. We have parents that need to leave healthy. We 
have children that need not to be taxed to death to support 
their grandparents health care.
    We have the challenge of how we are going to administer the 
next level of service to our seniors in this country.
    Now there has been some sniping about the creation or the 
alternative way of administering this new benefit. The fact is 
that Democrats and Republicans agree in many instances that 
HCFA is not the agency to administer this program.
    I want to commend my colleagues on the other side of the 
aisle who have been brave enough to say we not only can do 
better than HCFA, we have to do better than HCFA.
    Now we may disagree with the President, and I think 
Democrats and Republicans can convert the President over to our 
way of thinking that there needs to be a better way than the 
traditional HCFA way.
    I want to thank my colleagues on the Democratic side for 
being brave enough to say that.
    I just ask us to really, let's listen to the facts. Let's 
not find reasons to snipe. Let's look at these issues where we 
have common ground. We can build on this common ground and 
build a foundation that not only makes us look good in the eyes 
of the voters but also is going to provide the service that is 
going to make us look good in the pages of history in the 
future.
    I would ask you to consider the fact that we are going to 
be making decisions that are not only going to affect us, they 
are going to affect our parents and they are going to affect 
our children and our grandchildren.
    I think that come November we are going to be judged by how 
well we work together, not how quickly we found excuses to 
fight.
    I yield back, Mr. Chairman.
    Mr. Bilirakis. The Chair thanks the gentleman.
    Mr. Strickland.
    Mr. Strickland. Thank you, Mr. Chairman.
    My colleague from Tennessee said a few moments ago that 
some would like for this to be an election issue. I do not know 
if that is true, but I do know that it is true that it is going 
to be an election issue.
    It is going to be an election issue because this issue is 
important to the American people. They are paying attention.
    When I hear my friend, Dr. Ganske, talk, I realize that it 
is not a totally Democrat/Republican controversy, but it 
involves political philosophy, and it involves each Member 
deciding who it is that we were sent here to represent.
    I think we will be held accountable district by district, 
Member by Member.
    This bill, as we have read about it, has nothing that I can 
see on the cost side. In my district, just as in Representative 
Stupak's district, my senior citizens are paying twice as much 
for these life-saving medications as are large HMOs or large 
insurance companies or the Federal Government.
    As far as I can tell, this bill does nothing about that 
problem. The American people are rightly outraged--outraged--
that American tax dollars are used to develop medications that 
are being sold in Canada, and Mexico, and everywhere else 
around the world for one-third to one-half of what the American 
senior citizen has to pay for that very same medication.
    They are outraged.
    They are not going to tolerate it anymore, and we have got 
to do something about that.
    For one, I am just tired of going to my district and seeing 
senior citizens stand in these public meetings with trembling 
voices, quivering hands, and talking about their problems.
    We are Representatives. Our response to this issue will 
decide who it is that we represent. Yesterday in the House of 
Representatives there was a vote. It was fairly simple. It said 
that if tax dollars are used by pharmaceutical companies to 
develop drugs, those drugs should be then sold to the American 
consumer at a reasonable rate. And it failed to pass.
    I think that says something about why we sometimes talk 
about this issue in partisan terms. It is not totally Democrat/
Republican. But as I said before, Mr. Chairman, it does reflect 
our political philosophies and our value systems.
    I yield back my time.
    Mr. Bilirakis. Ms. Capps for an opening statement.
    Ms. Capps. Good morning, Mr. Chairman, and thank you for 
holding this hearing on one of the most pressing health care 
issues facing our country today, which is prescription drug 
coverage.
    The creation of Medicare in 1965 found seniors more likely 
to undergo surgery for major health problems than to use 
prescription drugs. Today it is the opposite. Prescription 
drugs are often the only method of treatment for many illnesses 
and diseases.
    In fact, 77 percent of all seniors take a prescription drug 
on a regular basis and yet nearly 15 million Medicare 
beneficiaries have no insurance coverage at all for 
prescription drugs.
    Most of us today would agree that Medicare's most glaring 
problem is the lack of drug coverage. Clearly, no one would 
design a health insurance program for seniors today that does 
not include a drug benefit.
    I do not think anyone here would voluntarily choose a plan 
for their family that did not cover this. And Medigap policies, 
which were designed to fill this need, are too often expensive 
and inadequate.
    We hear again and again about seniors on modest fixed 
incomes choosing between food on the table and life-saving 
medication. At this time of prosperity and strength, we really 
can and should do better than that for older Americans.
    This problem is getting worse. According to Families USA 
the price of prescription drugs most often used by seniors has 
risen at double the rate of inflation for 6 years in a row.
    Congress can no longer sit idly by. As we consider 
different plans to tackle this problem, I believe that any 
worthy proposal will provide certain key elements.
    A strong plan would be universal, voluntary, affordable, 
accessible to all, and based on competition. It must also 
address the issue of catastrophic coverage.
    Many worthy legislative proposals have been raised. For 
example, the Allen bill, the Stark-Dingell bill, the Pallone 
bill. Most recently, I have co-sponsored H.R. 4607, Medicare 
Prescription Drug Act of 2000 introduced by our colleague, Anna 
Eshoo.
    Like the President's proposal, the Eshoo bill creates a new 
voluntary Part D prescription drug benefit in Medicare that is 
optional and available to all beneficiaries regardless of 
income.
    It includes a defined stop-loss benefit to prevent any 
individual beneficiary from being bankrupted by a single 
catastrophic event that causes unusually high drug costs, and 
it uses proven market-based approaches to promote competition 
and drive down prices.
    The Office of Personnel Management would administer the 
plan in coordination with HCFA.
    Mr. Chairman, Democrats have offered many different 
approaches to this problem, but I am disappointed that we do 
not yet have a finalized bill from the Majority. It would be my 
hope that we could work together in a bipartisan fashion as we 
craft the best possible legislation for older Americans.
    As I think about the countless seniors in the district I 
represent on the central coast of California that have shared 
their personal stories with me about crushingly high drug 
prices, I know in my heart the prescription drug coverage is 
not a political issue.
    It is simply the right thing to do as we seek to honor our 
seniors and care for them as they move into their golden years.
    And so I thank you, Mr. Chairman, for holding this hearing. 
I hope we can move legislation as soon as possible on this most 
pressing issue for our country.
    Mr. Bilirakis. I thank the gentlelady.
    Mr. Shadegg for an opening statement.
    Mr. Shadegg. Thank you, Mr. Chairman.
    I will be brief. With your consent, I will insert my entire 
opening statement in the record.
    Mr. Bilirakis. Without objection.
    Mr. Shadegg. I simply want to thank you, Mr. Chairman, for 
holding the hearing on this very, very important subject. I 
agree with many of the comments that my colleagues have made. 
Clearly no one in our society, and certainly not a Member of 
Congress representing a State like Arizona with many senior 
citizens, can not be concerned about the cost of prescription 
drugs for our seniors today.
    So I think it is important, and indeed essential, that this 
Congress look at the issue and address it and do so in a 
thoughtful and bipartisan fashion.
    I think it is clear, however, that as we proceed that we 
make sure that we do not do more harm than good. And I think 
that is one of the injunctions that we have to be aware of. Our 
efforts have to make sure that we do not unduly burden the 
current Medicare system; that we do not create for it a 
financial obligations that it cannot fulfill and burden its 
ability to do the other tasks that it has to pay for the other 
parts of health care.
    This is indeed I think one of the toughest challenges we 
face in this Congress. I think it is also important in focusing 
specifically on the drug issue that in what we do we do not 
cause the cost of drugs to go up.
    I compliment you, Mr. Chairman, and the other Members of 
this Congress on both this committee and others that are 
looking at the reasons behind the dramatic increase in drug 
prices and examining whether or not the drug industry is in 
fact abusing the American marketplace in some fashion, and if 
there are not other things that we need to be doing to ensure 
that drug prices are not going up in this country in an unfair 
fashion. So I think we have to keep those issues before us. I 
think we have to act thoughtfully. I think it is appropriate 
that we hold this hearing, and I am anxiously awaiting seeing 
the full proposal that will be before us I guess early next 
week, if not sooner.
    And again, Mr. Chairman, I compliment you for holding this 
hearing. I look forward to working with you, and I do urge all 
my colleagues that we look at whatever costs we incur and 
whatever obligation we place on future generations in what we 
do through this legislation.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. John Shadegg follows.]
 Prepared Statement of Hon. John Shadegg, a Representative in Congress 
                       from the State of Arizona
    Thank you Mr. Chairman for holding this important hearing. I share 
my colleagues' concerns about segments of our elderly population that 
are truly in need when it comes to the prescription drug issue. At the 
same time, I also realize the tremendous political pressure that has 
developed behind providing a Medicare prescription drug benefit. Before 
we discuss the positives and negatives of such proposals, I wanted to 
highlight concerns about the current solvency of the Medicare system.
    When I first came to Congress in 1995, the Medicare Part A Trust 
Fund was expected to be insolvent by 2002. As a result of Republican 
leadership and tough choices we made in the Balanced Budget Act of 
1997, the outlook for Medicare has improved significantly. In fact, the 
March 2000 report by the Social Security and Medicare Board of Trustees 
shows that we have pushed out the projected insolvency date for the 
Hospital Insurance Trust Fund to 2025. I do want to caution all of my 
colleagues, however, not to get lulled into a false sense of security. 
No matter what we do, we still cannot redirect the demographic freight 
train bearing down on Medicare. It bears repeating that when the baby 
boom generation begins to reach retirement age in 2010, there are 
expected to be 3.6 workers per Medicare beneficiary. This ratio shifts 
to 2.3 in 2030 as the last of the baby boomers reach age 65, and 
continues to decline thereafter. Based on the intermediate assumptions 
of the Medicare Board of Trustees, income in the Hospital Insurance 
Trust Fund is projected to exceed expenditures for the next 17 years, 
but is projected to fall short by steadily increasing amounts in 2017 
and later. Furthermore, Medicare spending will continue to grow by an 
average of nearly 7 percent over the next 10 years, doubling current 
Medicare spending of $200 billion to more than $400 billion in 2010.
    These are the sobering realities of Medicare's current fiscal 
health. And they do not take into account any new prescription drug 
benefit. Does this preclude us from considering a Medicare drug 
benefit? No, and in fact, I am glad to see that the House Bipartisan 
Prescription Drug plan takes a step in the right direction by involving 
the private sector. But, as we examine the prescription drug issue in 
Medicare, let us not lose sight of the overall Medicare picture. If we 
don't do it right, it could have disastrous consequences on our 
nation's and children's future.

    Mr. Bilirakis. I thank the gentleman.
    Mr. Barrett.
    Mr. Barrett. Thank you very much, Mr. Chairman. And thank 
you for holding this hearing. I appreciate the work that you 
have done on this issue.
    I sense from the comments of some of my colleagues on the 
other side of the aisle that there is a frustration or a 
feeling that this has become a partisan issue.
    I would simply ask them, and those who are listening, to 
re-examine this and understand the frustration felt by the 
Members on this side of the aisle because over 2 years now, 
sometimes as long as 4 years, we have been talking about this 
issue, introducing bills, trying to get hearings, trying to get 
this Congress and this Republican Party to focus on this issue.
    We have been met time and time again with nothing but 
roadblocks. I am extremely pleased that finally this logjam has 
broken and we are able to move forward.
    I do think, and I think probably most of us recognize, part 
of the reason for that is every single person at this panel 
knows that this issue is literally off the charts when it comes 
to seniors in this country.
    This is a real-world issue. And I would bet anybody on this 
panel who has held a town hall meeting in the last 6 months has 
heard about how serious a problem this is for real people in 
our districts.
    It is democracy working at its best when we respond to it. 
So I am delighted to have the conversion--the pre-July 4 recess 
conversion--that we are seeing here that is allowing us to at 
least consider the merits of a bill.
    I think, having said that, we can move to the next level. 
And the next level is. Where do we go?
    Here I think we can have a legitimate debate over what the 
best course of action is. I do not buy into the notion that 
somehow we are going to create a new insurance industry for 
prescription drugs.
    I think that if there were a market for prescription drugs 
that could be handled by the insurance companies that would 
have occurred long ago. I compare it, coming from Wisconsin, to 
saying well let's create a market for snow insurance. Anybody 
who doesn't want to get snowed upon can buy snow insurance.
    Well nobody wants to get snowed on, but everybody is going 
to get snowed on. In the same vein, nobody wants to buy 
prescription drugs but everybody needs prescription drugs, 
especially when you are elderly. So no one in Wisconsin is 
going to sell snow insurance, and my guess is no insurance 
company voluntarily is going to come and say, oh, sure, we will 
start selling prescription drugs knowing every single person 
who buys this policy is going to make a claim. It is just not 
realistic.
    So we have to focus on the benefit. And I think that the 
plan that the Democrats have developed is one that rightfully 
recognizes that this is a benefit program and of course we are 
going to pay for it. Of course, we have to pay for it. But to 
somehow suggest that the laws of economics which for decades 
have prevented the creation of this industry will somehow be 
translated shortly before an election because we pass a piece 
of legislation I think defies economic logic.
    It is just not going to happen. And I think we are trying 
to sell people a pig in a poke if we are telling them that that 
is what we are going to do.
    So again I look forward to the debate on the merits. I 
think the American people deserve this benefit. I think the 
American people need this benefit. And I think it is our 
obligation to provide it to them.
    And I would yield back the balance of my time.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Deutsch for an opening statement.
    Mr. Deutsch. Thank you, Mr. Chairman.
    You know I think Congressman Barrett made some points that 
I think are really worthy of a follow-up.
    I believe most of us have probably had town meetings within 
the last 6 months, and for any of my colleagues who have not 
they should. Because this is an issue, if you are having a town 
meeting and you are opening up the floor, people are going to 
talk about.
    If you are in your office and you are looking at your mail, 
it is the thing you are going to hear about.
    We did a town meeting, an electronic town meeting, where we 
sent follow-up letters where we had 9000 people in my district 
send specific proposals, specific incidences of problems that 
they have had in terms of Medicare coverage for prescription 
drugs.
    That is off the charts in terms of any response that we 
have had on any other issue. We had another electronic town 
meeting recently with the same type of overwhelming, real 
response we have had physical town meetings with people, and 
the stories that you hear are what our job is about.
    The personal suffering, the personal tragedies, the things 
that are disheartening because each of us on this committee 
know that we can do something about it. And we can do something 
about it within a policy context with only doing good.
    The tradeoffs that exist are really not there. It is a 
question of the political will to make this happen. Several 
colleagues, and my colleague Ms. Capps, pointed this out, and I 
think this is also something that we need to really focus on, 
if we were sitting here in 1965 and creating Medicare there is 
no chance we would not have included prescription drug coverage 
like we as Democrats and the President are proposing.
    The whole concept of Medicare as a national insurance 
program for seniors is illogical in a sense without 
prescription drug coverage. And that is what we are proposing.
    I think it is important to understand that there is a 
fundamental distinction between at least the drafts and the 
press accounts of what the Republicans are proposing.
    The Republicans are, at least by press accounts, are in 
fact proposing a fundamental change in the concept of Medicare. 
One of the reasons why Medicare has existed so well, and I 
think that sometimes we need to pinch ourselves to remind 
ourselves that at one point in time Medicare did not exist, and 
it does not exist by an Act of God; it exists because of an act 
of people in the U.S. Congress in passing legislation, but 
the----
    Mr. Bilirakis. The gentleman's time has expired. Please 
finish up.
    Mr. Deutsch. Thank you, Mr. Chairman.
    I will just close by saying that the Republicans--in at 
least the proposals we've been able to read about--are changing 
the fundamental concept of universality within Medicare. It is 
an attempt to really change Medicare in an incredibly and I 
think long-term negative way, and----
    Mr. Bilirakis. The gentleman's time has expired----
    Mr. Deutsch. [continuing] I urge debate to continue to 
openly we will vote on the floor on a proposal that----
    Mr. Bilirakis. Dr. Coburn for an opening statement.
    Mr. Coburn. I thank you, Mr. Chairman.
    Mr. Chairman, I find myself in the peculiar position of 
being opposed to any Medicare drug benefit simply because we 
are fixing the wrong problem.
    We have this tremendous rise in drug prices and we need to 
ask ourselves why that price rise is there. And I honestly 
believe that it is there because there is a lack of competition 
in the drug industry, and I plan on demonstrating that on 
prices that have been surveyed throughout this country on 
competing drugs that have been introduced in the last years.
    And if there is no competition, there certainly is 
collusion among the drug industry as they introduce new 
products.
    So I find it ironic that no matter whose program we put 
forward, the Republicans or the Democrats, we are putting 
forward a program that is going to spend too much for existing 
drugs because there is way too much collusion within the 
industry.
    I hope in the next 6 weeks to prove that to the American 
people.
    I think the other thing is that Medicare is actuarialy 
unsound. There has never been a time where this government has 
correctly estimated the costs of any new benefit to Medicare.
    As a matter of fact, the closest they have come that my 
staff can find is they have missed it 700 percent. So if you 
take the conservative estimates of both the Democrats and the 
Republicans you are talking about $280 billion over 5 years 
added to Medicare.
    That is something that will sink it within about 6 years. 
We must not forget that once we add a benefit we are not going 
to be taking it away, as what we saw in the last 1989-1990.
    The other thing that is important is the distribution by 
MedPak of the total prescription drug expenditures in this 
country. Six percent of the Medicare patients spend over $3000, 
14, $1500 to $2999.
    Fourteen percent do not spend any money on drugs. So 
whatever plan we devise, what we have to do is to make sure 
that the price that is paid for the drug is based on a 
competitive model that most properly allocates the scarce 
resource in this country.
    It is my contention that that does not exist in this time, 
and no matter what we do in terms of Medicare benefit we are 
not doing a good job for the public until we have assured 
ourselves that there is in fact competition in the drug 
industry.
    With that I would yield back.
    Mr. Bilirakis. Mr. Burr for an opening statement.
    Mr. Burr. Thank you, Mr. Chairman.
    It is difficult to listen to just the opening statements of 
members of this subcommittee, and probably Members from the 
House of Representatives at large, and not get a feel for how 
difficult this task is.
    This is the most difficult thing I have ever worked on 
since I came to this institution. Mr. Deutsch hit on a very 
good thing, but there is--we ought to look at people that have 
looked at the entire situation and look at the advice they gave 
us.
    Gosh, as it relates to Medicare, I think it is the Medicare 
Commission who spent over a year looking at every aspect and 
said. not only should there be drugs, there should be 
comprehensive modernization of the Medicare system. Our seniors 
deserve the best.
    Well, politically we all know that the reality is we cannot 
do it. In the absence of that, we try an approach that 
addresses the most severe need of 38 million seniors and 
disabled who qualify for Medicare, to make sure that a benefit, 
a benefit designed within the limits of the financial tools 
that we have got available, exists.
    Now we have a fundamental difference between those on the 
left side of the dais and those on the right side. It is an 
argument over whether government controls this new benefit or 
whether in fact we use the competition of the private sector to 
monitor and to hopefully make it successful and cost effective.
    That is a huge difference. It is a huge difference, and it 
may in the end defeat this effort. But I am confident that if 
we can put words aside like ``nutty,'' ``cruel hoaxes,'' if we 
can take consultants out of it at a time that we are out-
purchasing $25 million worth of TV ads for the fall to hit on 
this issue, that we can take politics out of the debate on the 
Medicare drug benefit; that we can work with Democrats, 
insurance companies, PBMs that Mr. Pallone's impression of 
insurance companies will be the same as the day he introduced 
his bill which was insurance based and not today where 
insurance companies are bad. But we have got to get past this.
    Mr. Chairman, I am hopeful that we will get on the words 
``accessible,'' ``affordable,'' ``voluntary,'' but that also 
every Member will get in their vocabulary ``security.'' That 
without a stop-loss we have done nothing for seniors.
    Without the ability to say to a senior here is a dollar 
amount that you will not be responsible for one penny after 
that point, that we have fallen short of the predictability 
they need to plan in a time of their life where their incomes 
are limited we can help to make their futures predictable.
    I am hopeful that this hearing today, which is not about 
our bill, Ms. Eshoo's bill, Mr. Pallone's bill, Mr. Allen's 
bill, or the President's bill; it is here to educate us as to 
what should be part of a bill for seniors and disabled in 
America.
    I hope that we can move forward not only today but before 
the end of this session of Congress. I yield back.
    Mr. Bilirakis. I thank the gentleman.
    [Additional statements submitted for the record follow:]
  Prepared Statement of Hon. Fred Upton, a Representative in Congress 
                       from the State of Michigan
    Mr. Chairman, thank you for holding today's hearing to examine 
alternatives for crafting a prescription drug benefit for Medicare 
beneficiaries. I am deeply concerned about the burden borne by many 
individuals who do not have insurance coverage for prescriptions. No 
senior citizen should be forced to forego needed medication, take less 
than the prescribed dose, or go without other necessities in order to 
afford life-saving medications.
    I read and sign all of my mail, and I have seen a dramatic increase 
over the past several years in the number of Medicare beneficiaries 
writing to me about the struggle they are having with rising 
prescription drug costs. These are not form letters I am referring to. 
They are hand written letters--often with their bills enclosed. We are 
fortunate in Michigan to have a state prescription drug program, but 
this covers only low-income individuals with high monthly drug costs. 
Further, we have no Medicare managed care plans in our district because 
Medicare's payment rates are too low to attract plans. Thus, my 
constituents are denied access to coverage through this route. Yet they 
have paid the same Medicare payroll taxes into the system over the 
years and pay the same monthly premiums as beneficiaries who do have 
this choice. This is a matter of fairness, as well, for my 
constituents.
    Because of my keen interest in addressing this issue, I am very 
glad to be serving with you the House Leadership's prescription drug 
task force led by our Chairman. Our nation leads the world in the 
development of new drugs and medical devices that enable us to 
effectively treat diseases and conditions. But if people cannot afford 
to buy these drugs, their benefits are lost to many in our population.
    I share the task force's goal of and commitment to ensuring that 
every Medicare beneficiary has access to affordable coverage and has 
protection from unusually high out-of-pocket costs. I am committed to 
crafting a plan that is senior friendly-one which avoids the often 
complex, complicated bureaucracy of the current Medicare program.
    Our goal in crafting this plan must also be one of ensuring that 
our nation continues to lead the world in the development of life-
saving new drugs. Over the past decade, we have seen so many 
breakthroughs in drug therapy, from a new, much more highly effective 
treatment and perhaps preventive for breast cancer, to anti-virals for 
AIDS and other diseases, to treatments for cystic fibrosis. As we 
continue to map the gene and understand more fully the link between 
genes and disease, think of the possibilities. We are perhaps within 
reach of preventing or curing diabetes, Parkinson's, Alzheimer's, and 
other debilitating and terrible afflictions. As our population ages, we 
need to encourage further breakthroughs in the prevention, treatment, 
and management of chronic, debilitating conditions such as arthritis 
and osteoporosis, for that is the only real hope of controlling health 
care costs. Crippling the incentives and resources needed for new drug 
discovery and development would dash these hopes, leave these promises 
unfulfilled, and condemn many to suffering and premature death.
    The task before us is daunting. It will take all of us, Republicans 
and Democrats, Ways and Means and Commerce, House and Senate and 
Administration, working together to pull this off and plug a huge hole 
in the Medicare program with a common-sense, workable, comprehensive 
drug benefit. We need to put aside partisanship and short-term 
political considerations and do what is right for our constituents and 
for the future of health care in America.
                                 ______
                                 
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    I'm pleased that the Subcommittee is holding this hearing today. 
This is the fourth hearing this Committee has held on the topic of 
senior citizens access to prescription drugs.
    I've been studying this issue closely for a long time now and it is 
a tough one. It is clear that too many seniors have trouble affording 
their medications. It is equally clear that many seniors have drug 
coverage today that they like and don't want threatened by anything we 
do in Congress.
    Americans have the best health care in the world. My first goal in 
helping seniors afford medicine is to preserve what is good about our 
health system today. We are on the edge of remarkable breakthroughs in 
new drug therapies to treat and even cure diseases that just ten years 
ago were considered death sentences. We don't want to do anything to 
jeopardize this work.
    Yet, America's role as the world leader in drug research has its 
costs. Our challenge is to find ways to make sure seniors have access 
to needed medication without resorting to price controls or big-
government drug purchasing schemes.
    Many folks under 65 years old are fortunate to have health 
insurance to cover the costs of their prescription drugs. But Medicare 
does not pay for most drugs for seniors. In my view, Medicare does not 
reflect how modern medicine is practiced and delivered.
    This is why I truly want to explore a way to give seniors access to 
coverage options available to Americans under the age of 65. Every 
Member of Congress has coverage options. Let's give seniors the same.
    My colleagues and I have been working on legislation that provides 
all seniors access to affordable, private drug coverage. We will be 
introducing legislation soon. We have a good bill which can and will 
draw bipartisan support. I hope to work with our Democratic colleagues 
and the Administration on this proposal.
     We share many common goals--that all seniors get access to a 
voluntary benefit and that low-income seniors get extra assistance in 
purchasing their drugs. We want to get a level of security for those 
seniors with the highest costs, so no one has to choose between food or 
medicine. What's more, no senior should be locked into a one-size-fits-
all benefit.
    Again, I want to thank the Chair for holding this hearing and look 
forward to the witnesses testimony.
                                 ______
                                 
    Prepared Statement of Hon. Henry A. Waxman, a Representative in 
                 Congress from the State of California
    Mr. Chairman, I welcome this hearing on the critical issue of 
providing prescription drug coverage for Medicare beneficiaries. The 
time to enact legislation to provide this critical service is long 
overdue.
    I am disturbed, however, by the evident intention of this 
Subcommittee to use this hearing to justify moving out of Committee and 
to the House floor next week a Republican bill that has not been made 
available to the public, that our witnesses haven't seen, that has been 
explained only in vague and contradictory terms, and that apparently 
fails to meet critical conditions for effective, available and 
affordable prescription drug coverage.
    In my view, we can only meet our obligations to Medicare 
beneficiaries if we make coverage of prescription drugs
--a benefit that all beneficiaries are entitled to,
--a benefit that covers all medically necessary drugs,
--a benefit that is available in all parts of the country,
--a benefit that is accessible and affordable for seniors in fee-for-
        service Medicare as well as Medicare+Choice plans, and
--a benefit that assures Medicare beneficiaries will no longer face the 
        discrimination in drug prices which result in them paying the 
        highest prices out of their own pockets.
    But that's not the approach of the Republican bill. It tells 
seniors that they can purchase a private insurance drug policy, 
patterned on MediGap policies which already fail to deliver an 
affordable drug benefit. That is a cruel hoax.
    Except for the poor, the Republican bill doesn't help seniors pay 
their premiums. It subsidizes private insurance companies and tries to 
claim that helps seniors. What that really does is mislead and confuse 
people about the help that's available.
    And the Republican bill shifts the responsibility to insurers to 
try to provide a benefit when they know adverse selection is almost 
certainly going to make their product unaffordable and unavailable. 
That is not a responsible approach.
    The drug companies might like it, but seniors will not.
    I know the public relations consultants have told our Republican 
colleagues that ``it is more important to communicate that you have a 
plan as it is to communicate what is in the plan.'' That sounds 
suspiciously like saying it's the rhetoric that's important, not the 
reality of putting a decent drug benefit in Medicare. The cynicism is 
breathtaking!
    Seniors don't need us playing politics with their health care. 
Seniors need real coverage of prescription drugs. They can't afford the 
high prices of drugs. They can't afford to pay twice what the big 
buyers pay. They don't need another MediGap, they need a Medicare drug 
benefit.
    Let's join together in a responsible way and do it right.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    I am delighted that the Commerce Committee is having another 
hearing on a Medicare prescription drug benefit. My delight that we are 
continuing to explore this issue in Committee is surpassed only by my 
delight that the House Republican Leadership is finally unveiling a 
proposal to provide prescription drug coverage for Medicare 
beneficiaries.
    We have not had the opportunity to review the details of the 
Republican plan, but we understand there are some key differences 
between it and the proposals put forward by the President and House and 
Senate Democrats. If, and as, we attempt to bridge those differences, 
we should try to respect certain principles.
    First, we should preserve choice of drugs and choice of pharmacies 
for seniors.
    Second, we should offer a defined, meaningful benefit for all.
    Third, we should minimize the ability of health plans to attract 
only the healthy and the wealthy and ensure an affordable benefit for 
all.
    Fourth, we should provide incentives to achieve price discounts and 
spend taxpayer dollars wisely. The skyrocketing cost of prescription 
drugs is a serious matter that is not properly addressed by giveaways 
to HMOs or drug companies.
    Fifth, the program should benefit the people who need it most and 
not the insurance industry who doesn't.
    Unfortunately, the majority's plan at this point seems to offer an 
illusory drug benefit that people can't afford. I am hopeful that we 
can address these shortcomings through the committee process, and I 
look forward to further exploration of this issue and a coming 
Committee mark up.

    Mr. Bilirakis. Well, waiting patiently is our first 
panelist, the Honorable Nancy-Ann Min DeParle, Administrator of 
the Health Care Financing Administration.
    Madam Administrator, welcome. As per usual, we will set the 
clock to 10 minutes for you, and you of course may take 
whatever time you feel you might need. Obviously, your written 
statement is a part of the record.
    If we can have order before the Administrator starts.

STATEMENT OF HON. NANCY-ANN MIN DePARLE, ADMINISTRATOR, HEALTH 
                 CARE FINANCING ADMINISTRATION

    Ms. DeParle. Thank you very much, Chairman Bilirakis and 
Congressman Brown, and other distinguished subcommittee 
members.
    I appreciate the opportunity to be here today to discuss 
prescription drug coverage for 39 million Medicare 
beneficiaries who need it.
    I am glad to be with you and, Mr. Chairman, I appreciate 
your kind words.
    Your subcommittee has been very interested in the topic of 
Medicare prescription drugs. I sit here and look at many 
Members who have themselves introduced bills to try to deal 
with this subject.
    The administration welcomes this opportunity to further our 
bipartisan dialog. As you indicated, I have submitted written 
testimony for the record that goes into much more detail about 
the President's proposal and why we hope this committee will 
view it favorably.
    But I want to say this morning that we are encouraged by 
the growing commitment embodied in the new proposal announced 
yesterday by Congressman Burr, Congressman Thomas, Congressman 
Peterson, and others to address this issue.
    We want to continue working with you to enact legislation 
that meets the key principles that President Clinton has laid 
out for a Medicare drug benefit.
    The drug benefit should be voluntary and it should be 
accessible to all beneficiaries.
    It must be affordable for beneficiaries and to the Medicare 
program.
    It should be competitive and it should have efficient and 
effective administration.
    It should ensure access to needed medications and encourage 
high-quality care.
    And it should be consistent with broader reform.
    We have said many times that we are flexible on the details 
of how a Medicare drug benefit is provided as long as the 
design ensures that we meet these key principles.
    The plan that was announced yesterday appears to mark some 
important progress toward those principles, but as you pointed 
out in beginning the hearing, Mr. Chairman, the devil is truly 
in the details.
    We need to see the details and then engage in a serious 
discussion and dialog about our differences as well as the 
places where there are similarities.
    Unfortunately, from what little we know about it so far the 
plan does not appear to meet the President's test of a 
meaningful prescription drug benefit that is affordable and 
accessible for all beneficiaries. And I want to talk about why.
    Key among our concerns is the plan's heavy reliance on 
participation by private insurers who have made clear that 
stand-alone drug policies are not feasible.
    Our concern is that even if some insurers do offer 
coverage, they would likely come in and out of the market. They 
would be likely to move to more profitable areas. And they 
would be likely to significantly modify benefit design from 
year to year based on the prior year's experience.
    We have seen this before and it is not a good thing for 
beneficiaries. We are concerned that it would result, this kind 
of structure would result in the same instability and the same 
pullouts and uncertainty that we see in managed care today.
    The new proposal's suggestion of a fallback mechanism 
whereby the government--and here I am speculating but 
presumably the traditional Medicare program would step in--
seems to acknowledge the difficulties inherent in trying to 
guarantee access through a drug-only program.
    The fallback mechanism also raises, I think from a health 
policy perspective, serious risk-selection issues. These are 
very, very difficult issues and we need to have a serious 
discussion once we have seen the details.
    We continue to believe that the new prescription drug 
benefit must be integrated into the Medicare Program, and that 
Medicare should provide drug coverage the same way that 
virtually all private insurers do, by contracting directly with 
pharmacy benefit managers in each region of the country.
    That is what our proposal does. And Mrs. Eshoo also has a 
proposal that is slightly different but also relies on pharmacy 
benefit managers.
    This will ensure that all beneficiaries have access and 
that Medicare gets the best prices through the pharmacy benefit 
managers who will negotiate the best prices on behalf of 
beneficiaries.
    Another critical concern that we have with what we have 
seen so far about the new plan that was announced yesterday is 
that it does not appear to provide direct premium subsidies to 
individuals with incomes above $12,600 a year.
    Instead, it relies on indirect subsidies to the private 
insurance plans to lower premiums. And I heard one person today 
refer to this as a sort of a form of premium support, and I 
thought that was interesting because I think it is sort of 
analogous to that.
    It is unclear whether that amount of subsidy would ensure 
that affordable coverage is available to all and would be 
equally affordable in all regions of the country, but I can 
tell you that we looked at this very closely, this idea of what 
level of subsidy is necessary, and I believe it would need to 
be substantially more than 25 or 30 percent to avoid risk 
selection problems.
    We have additional questions that are outlined in my 
written testimony and we look forward to discussing them with 
you.
    I also want to say that I think Congressman Burr is right. 
This is a terribly difficult issue, and it is important that we 
see the details. I do not want to be speculating about what is 
in their plan because it I believe has changed from the first 
version I saw and I want to provide you with the best answers I 
can about what we are talking about here.
    But I do think the most critical question of all--and I 
heard many of you raise this question but it bears repeating--
is how does this plan, the one that was announced yesterday, 
the President's plan, whatever the plan is, how does it really 
meet the needs of Medicare beneficiaries, the 39 million 
Americans who are depending on us to try to do something here?
    Is the plan really a defined benefit that is guaranteed?
    Can Medicare beneficiaries depend on it being affordable 
and accessible?
    Will the new plan really result in more efficient and 
effective administration of Medicare?
    These are important questions. They are difficult 
questions. While all of these critical concerns remain, I do 
think the good news is that we appear to have broad consensus 
that a Medicare drug benefit is needed.
    It is now time to get into the all-important deeper and 
very, very, very tough details of how to make sure the benefit 
can succeed; that it can succeed for the Medicare beneficiaries 
and that it can succeed for the Medicare Program.
    We look forward to getting the details of this new plan 
because it is obvious that a great deal of work remains, and it 
is time to sit down and get it done.
    I look forward to continuing to work with you as we enter 
the next phase on this critical issue.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Nancy-Ann Min DeParle 
follows:]
  Prepared Statement of Nancy-Ann DeParle, Administrator, Health Care 
                        Financing Administration
    Chairman Bilirakis, Congressman Brown, distinguished Committee 
members, thank you for inviting me to discuss Medicare prescription 
drug coverage. This Subcommittee's previous hearings on this issue have 
been highly constructive, and we are grateful for the opportunity this 
hearing provides to make further progress. We are encouraged by the 
growing commitment embodied in the new Medicare Rx 2000 proposal 
presented by Congressmen Thomas, Burr, Hall, and Peterson yesterday to 
address this issue. We want to continue working with you to enact 
legislation that meets the principles President Clinton laid out 
earlier this year.
Background
    As we know, pharmaceuticals are as essential to modern medicine 
today as hospital care was when Medicare was created. Lack of 
prescription drug coverage among senior citizens today is similar to 
the lack of hospital coverage among senior citizens when Medicare was 
created. Three out of five beneficiaries lack dependable coverage. Only 
half of beneficiaries have year-round coverage, and one third have no 
drug coverage at all.
    Those without coverage must pay for essential medicines fully out 
of their own pockets, and are forced to pay full retail prices because 
they do not get the generous discounts offered to insurers and other 
large purchasers. The result is that many go without the medicines they 
need to keep them healthy, out of the hospital, and living longer 
lives.
    Drug coverage is not just a problem for the poor. More than half of 
beneficiaries who lack coverage have incomes above 150 percent of the 
federal poverty level. Millions more have insurance that is expensive, 
insufficient, or highly unreliable. Even those with most types of 
coverage find it costs more and covers less. Copayments, deductibles, 
and premiums are up.
    And coverage is often disappearing altogether as former employers 
drop retiree coverage, Medigap is becoming less available and more 
expensive, and managed care plans have severely limited their benefits. 
Clearly all beneficiaries need access to an affordable prescription 
drug coverage option.
Key Principles
    The President has identified key principles that a Medicare drug 
benefit must meet, and we are willing to support proposals that meet 
these principles. It should be:

 Voluntary and accessible to all beneficiaries. Medicare 
        beneficiaries in both managed care and the traditional program 
        should be assured of an affordable drug option. Since access is 
        a problem for beneficiaries of all incomes, ages, and 
        geographic areas, we must not limit a Medicare benefit to a 
        targeted group. At the same time, those fortunate enough to 
        have good retiree drug benefits should have the option to keep 
        them.
 Affordable to beneficiaries and the program. We must ensure 
        that premiums are affordable enough so that all beneficiaries 
        participate. Otherwise, primarily those with high drug costs 
        would enroll and the benefit would become unstable and 
        unaffordable. And beneficiaries must have meaningful protection 
        against excessive out-of-pocket costs.
 Competitive and have efficient administration. Medicare should 
        adopt the best management approaches used by the private 
        sector. Beneficiaries should have the benefit of market-
        oriented negotiations.
 Ensuring access to needed medications and encouraging high-
        quality care. Beneficiaries should have a defined benefit that 
        assures access to all medically necessary prescription drugs. 
        They must have the assurance of minimum quality standards, 
        including protections against medication errors.
 Consistent with broader reform. The drug benefit should be 
        consistent with a larger plan to strengthen and modernize 
        Medicare.
The President's Plan
    The President has proposed a comprehensive Medicare reform plan 
that meets these principles. It includes a voluntary, affordable, 
accessible, competitive, efficient, quality drug benefit that will be 
available to all beneficiaries. The President's plan dedicates over 
half of the on-budget surplus to Medicare and extends the life of the 
Medicare Trust Fund to at least 2030. It also improves access to 
preventive benefits, enhances competition and use of private sector 
purchasing tools, helps the uninsured near retirement age buy into 
Medicare, and strengthens program management and accountability.
    The President's drug benefit proposal makes coverage available to 
all beneficiaries. The hallmark of the Medicare program since its 
inception has been its social insurance role. Everyone, regardless of 
income or health status, gets the same basic package of benefits. This 
is a significant factor in the unwavering support for the program from 
the American public and must be preserved. All workers pay taxes to 
support the Medicare program and therefore all beneficiaries should 
have access to a new drug benefit.
    A universal benefit also helps ensure that enrollment is not 
dominated by those with high drug costs (adverse selection), which 
would make the benefit unaffordable and unsustainable. And, as I 
described earlier, lack of drug coverage is not a low-income problem--
beneficiaries of all incomes face barriers.
    The benefit is completely voluntary. If beneficiaries have what 
they think is better coverage, they can keep it. And the President's 
plan includes assistance for employers offering retiree coverage that 
is at least as good as the Medicare benefit to encourage them to offer 
and maintain that coverage. This will help to minimize disruptions in 
parts of the market that are working effectively, and it is a good deal 
for beneficiaries, employers, and the Medicare program. We expect that 
most beneficiaries will choose this new drug option because of its 
attractiveness, affordability, and stability.
    For beneficiaries who choose to participate, Medicare will pay half 
of the monthly premium, with beneficiaries paying an estimated $26 per 
month for the base benefit in 2003. The independent HCFA Actuary has 
concluded that premium assistance below 50 percent would result in 
adverse selection and thus an unaffordable and unsustainable benefit.
    Premiums will be collected like Medicare Part B premiums, as a 
deduction from Social Security checks for most beneficiaries who choose 
to participate. Low-income beneficiaries would receive special 
assistance. States may elect to place those who now receive drug 
coverage through Medicaid into the Medicare drug program instead, with 
Medicaid paying premiums and cost sharing as for other Medicare 
benefits.
    We would expand Medicaid eligibility so that all beneficiaries with 
incomes up to 135 percent of poverty would receive full assistance for 
their drug premiums and cost sharing. Beneficiaries with incomes 
between 135 and 150 percent of poverty would pay reduced premiums on a 
sliding scale, based on their income. The Federal government will fully 
fund States' Medicaid costs for the beneficiaries between 100 and 150 
percent of poverty.
    Under the President's plan, Medicare will pay half the cost of each 
prescription, with no deductible. The benefit will cover up to $2,000 
of prescription drugs when coverage begins in 2003, and increase to 
$5,000 by 2009, with 50 percent beneficiary coinsurance. After that, 
the dollar amount of the benefit cap will increase each year to keep up 
with inflation. For beneficiaries with higher drug costs, they will 
continue to receive the discounted prices negotiated by the private 
benefit managers after they exceed the coverage cap. To help 
beneficiaries with the highest drug costs, we are setting aside a 
reserve of $35 billion over the next 10 years, with funding beginning 
in 2006.
    Benefit managers, such as pharmacy benefit manager firms and other 
eligible companies, will administer the prescription drug benefit for 
beneficiaries in the traditional Medicare program.
    These entities will bid competitively for regional contracts to 
provide the service, and we will review and periodically re-compete 
those contracts to ensure that there is healthy competition. The drug 
benefit managers--not the government--will negotiate discounted rates 
with drug manufacturers, similar to standard practice in the private 
sector.
    We want to give beneficiaries a fair price that the market can 
provide without taking any steps toward a statutory fee schedule or 
price controls. The drug benefit managers will have to meet access and 
quality standards, such as implementing aggressive drug utilization 
review and patient counseling programs. And their contracts with the 
government will include incentives to keep costs and utilization low 
while assuring a fairly negotiated contractual relationship with 
participating pharmacists.
    Similar to the best private health plans in the nation, virtually 
all therapeutic classes of drugs will be covered. Each drug benefit 
manager will be allowed to establish a formulary, or list of covered 
drugs. They will have to cover off-formulary drugs when a physician 
certifies that the specific drug is medically necessary. Coverage for 
the handful of drugs that are now covered by Medicare Part B will 
continue under current rules, but they also may be covered under the 
new drug benefit once the Part B coverage is exhausted.
    The President's plan also strengthens and stabilizes the 
Medicare+Choice program. Today, most Medicare+Choice plans offer 
prescription drug coverage using the excess from payments intended to 
cover basic Medicare benefits. Under the President's proposal, 
Medicare+Choice plans in all markets will be paid explicitly for 
providing a drug benefit--in addition to the payment they receive for 
current Medicare benefits. Plans will no longer have to depend on what 
the rate is in a given area to determine whether they can offer a 
benefit or how generous it can be. This will eliminate the extreme 
regional variation in Medicare+Choice drug coverage, in which only 23 
percent of rural beneficiaries with access to Medicare+Choice have 
access to prescription drug coverage, compared to 86 percent of urban 
beneficiaries.
    And beneficiaries will not lose their drug coverage if a plan 
withdraws from their area, or if they choose to leave a plan, because 
they will also be able to get drug coverage in the traditional Medicare 
program. We estimate that plans will receive $54 billion over 10 years 
to pay for the costs of drug coverage.
    Beneficiaries will have access to an optional drug benefit through 
either traditional Medicare or Medicare managed care plans. Those with 
retiree coverage can keep it and employers would be given new financial 
incentives to encourage the retention of these plans.
Meeting Key Principles
    We are flexible on the details of how a Medicare drug benefit is 
provided, but the design must ensure that we meet the President's key 
principles of a benefit that is voluntary, affordable, competitive and 
efficient. We believe the Medicare Rx 2000 plan marks important 
progress. However, we believe it does not meet the President's test of 
a meaningful benefit that is affordable and accessible for all 
beneficiaries. Key among our concerns are the apparent lack of an 
individual premium subsidy for all beneficiaries, an inadequate level 
of support, and reliance on insurers who are unlikely to participate.
    Will prescription drug coverage be available? The Medicare Rx 2000 
plan appears to rely extensively on participation by private insurers 
who have made clear that stand-alone drug policies are not feasible. 
Subsidizing private insurers instead of establishing a reliable 
Medicare benefit means that outpatient prescription drugs would not be 
part of the Medicare benefits package like doctor or hospital care. 
Beneficiary premiums would pay for expensive, private Medigap plans 
whose administrative costs are on average more than 10 times higher 
than Medicare's, according to National Association of Insurance 
Commissioners statistics, rather than an affordable Medicare option. 
Furthermore, Medigap plans have little experience negotiating with drug 
manufacturers and relying on numerous plans does not pool the 
purchasing power of seniors; both elements are needed to keep the 
benefit affordable.
    Building on the private Medigap insurance market would be 
especially difficult in sparsely populated rural areas, where risk 
pools are smaller and seniors are more likely to have higher costs, as 
a report released by the President today shows. There also is no 
certainty or stability in the drug coverage options in the Medicare Rx 
2000 proposal. Even if some insurers do offer coverage, they would 
likely come in and out of the market, move to profitable areas, and 
significantly modify benefit design from year to year based on prior 
year's experience. This would result in the same pull-outs and 
uncertainty we see in managed care today.
    The Medicare Rx 2000 proposal's reliance on a ``fall back'' 
mechanism, in which the government would ensure availability everywhere 
seems to acknowledge the weakness of the drug-only insurance plans. We 
continue to believe that Medicare should provide drug coverage the same 
way that virtually all private insurers do--by contracting directly 
with pharmacy benefit managers in each region of the country. This will 
ensure that all beneficiaries have access and that the pharmacy benefit 
managers can negotiate the best prices.
    Is drug coverage affordable to all beneficiaries? The Medicare Rx 
2000 plan does not provide direct premium subsidies to individuals with 
incomes above $12,600 a year. Instead, it relies on indirect subsidies 
of 25 to 30 percent to lower premiums. It is unclear that this amount 
will ensure that affordable coverage is available to all or would be 
equally affordable in all regions of the country.
    There are several additional areas where we have questions about 
the new Medicare Rx 2000 plan. These include:

 Is it a defined benefit? The Medicare Rx 2000 plan allows 
        insurers to offer an unspecified ``standard'' benefit, or an 
        actuarial equivalent benefit. Only the stop-loss amount is 
        specified, and insurers would set deductibles and copays. This 
        could lead to beneficiary confusion and benefit packages 
        designed for ``cherry-picking'' of low-cost, healthy enrollees, 
        with insurers offering no deductible, low copays, and a low 
        benefit cap that leaves a large gap before the stop-loss kicks 
        in. This would be a step backwards from the Medigap reforms of 
        the early 1990s that standardized benefits so plans compete on 
        price and quality rather than consumer confusion.
 Does the plan assure access to needed medications? The 
        Medicare Rx 2000 plan requires insurers to cover only all 
        ``major'' therapeutic classes of drugs. Depending on how that 
        is defined, and the degree to which each insurance company is 
        permitted to define it, some seniors could be left without the 
        medications they need. It also requires a beneficiary to go 
        through a formal appeals process to get coverage of off-
        formulary drugs the physician deems to be medically necessary, 
        which could limit access. Furthermore, the Medicare Rx 2000's 
        multi-insurer approach breaks up the pooled purchasing power of 
        seniors, forcing insurers to reduce costs through restrictive 
        formularies and limited pharmacy choice.
 Will the plan increase access to coverage for rural 
        beneficiaries? The Medicare Rx 2000 plan relies on additional 
        assistance for Medicare+Choice plans as a means of bringing 
        those plans into rural areas where, because of sparse health 
        care service delivery structures, managed care has often had 
        difficulty thriving. It is not clear this will work.
 Will the proposed approach to remove international drug 
        pricing disparities work? We agree that Americans, particularly 
        those who now lack prescription drug coverage, should not 
        disproportionately subsidize drug development. However, it is 
        not clear that having the U.S. Trade Representative negotiate 
        to address drug price controls in other nations will result in 
        fairer prices here at home. This proposal could simply result 
        in higher prices abroad without having an impact on the high 
        prices American consumers now pay.
 Will the plan result in more efficient Medicare 
        administration? The Medicare Rx 2000 plan would create a 
        Medicare Benefits Administration (MBA) to administer the drug 
        benefit and Medicare+Choice program. It appears to be adding a 
        new layer of bureaucracy since many MBA activities would 
        duplicate those that HCFA would also need to continue, such as 
        beneficiary education, resulting in duplication and ignoring 
        HCFA's expertise.
Conclusion
    We may be turning a corner in our efforts to secure the Medicare 
drug benefit that we all agree is needed. We are nearing a workable 
consensus on the broader outlines of how the benefit should be 
structured. Critical concerns about providing an affordable, 
accessible, meaningful benefit and relying on private insurers remain. 
But we are beginning to get into the all-important, deeper details of 
how to make sure the benefit can succeed. While a great deal of work 
remains, momentum is now with us. The challenges before us can be met 
if we continue the constructive approach that we have, together, taken 
to date. And I look forward to continuing to work with you as we enter 
the next phase on this critical issue.

    Mr. Bilirakis. Thank you, Madam Administrator.
    You are of course correct. The legislation in terms of its 
specificity is still not out there. But one thing that seems to 
be relatively specific is the establishment of the new entity 
to manage the program.
    And of course you state in your testimony that establishing 
a new entity to manage a direct benefit program would simply 
be, using your words, ``adding a new layer of bureaucracy.'' 
And I am not sure that anybody would disagree with that. Yes, 
it does add that.
    But clearly the Bipartisan Medicare RX 2000 Plan is not the 
only proposal, as you know, which suggests that the management 
of the drug benefit be administered by a separate entity 
outside of HCFA.
    Ms. Eshoo's plan proposes that OPM manage the benefit, as I 
understand it.
    Mr. Pallone's plan establishes a board outside of HCFA, as 
does the Breaux-Frist bipartisan proposal in the Senate.
    So I would ask you this question: Do you believe that all 
these bills seek to establish redundant beneficiaries? But more 
importantly, why don't you just respond to the fact that so 
many plans feel it should be managed outside of HCFA?
    Ms. DeParle. Well I think the one thing I believe I have 
heard this morning is that we all agree that a new prescription 
drug benefit, if it is added to Medicare, should be 
administered in an effective and efficient way.
    I think over the past 2 years that I have been at HCFA I 
have probably talked to every single member on this committee 
about concerns you have about Medicare's administration. Some 
of them are very specific about providers in your districts.
    Certainly we can do better, and I would like to have the 
opportunity at some point to show you all the things we have 
done to improve the way we are administering Medicare.
    One of the Members--I think it was Mr. Green--pointed out 
that we are very efficient in our administration, and that is 
true. Our administrative costs hover around 1.5 percent. I do 
not think there is any insurance company in the country that 
would attempt to run a program as complicated and as important 
as the one we are running with as many beneficiaries and more 
than $200 billion of taxpayer dollars with that kind of 
administrative expenses.
    In my view sometimes we are a little too efficient. I want 
to thank the committee because I have made this point with many 
of you and you have helped us in the past with our budget to 
make sure that we got the resources we need to do a better job.
    But I think we have to go back to the question that Dr. 
Coburn posed, which is we have to think carefully about what is 
the problem we are trying to fix here?
    I think what you want is an efficient and effective 
administration. I think it is possible to do that the way the 
President's plan proposes using private pharmacy benefit 
managers like private insurers do, and having us contract with 
them.
    What I would say to you is, we are eager to get into that 
discussion with you. If you give us the authority and the 
resources to do that job, I can promise you that we will do a 
good job of it.
    Mr. Bilirakis. Well I expect there will probably be others 
who will explore the area you mentioned about the private drug 
benefit managers and how its usage is intended under the 
President's plan, but I would go to an area that I think 
practically everybody's opening statements referred to. That 
is, the need to help those with real high drug costs with a 
stop-loss benefit, the catastrophic, if you will, a word that 
we do not like to use up here for obvious reasons.
    The President's plan did not provide for that. Afterwards 
of course, sometime afterward, he decided to set aside funds 
for patients with high out-of-pocket costs to begin in 2006. 
Not to begin now, or even close to now, but in 2006.
    So I guess I would ask you--and I think we all wonder 
because we have not seen anything in that regard--how would you 
propose those funds be spent? Has HCFA or the President come up 
with a plan that would use those funds in order to help those 
people with very, very high out-of-pocket cost?
    Ms. DeParle. Well, Mr. Chairman, we did not propose the 
stop-loss benefit, the catastrophic coverage, in our original 
proposal 2 years ago.
    The President did propose it in this year's budget, but he 
said we had set aside $35 billion to start in 2006 and we 
wanted to sit down and work with the Congress to talk about the 
details of that.
    We have been looking at various benefit designs. There are 
a number of proposals up here already looking at various 
benefit designs, and we are ready to sit down with the Congress 
whenever you all are ready to talk about how best to design 
such a program.
    Mr. Bilirakis. All right, my time is about to expire so I 
am just going to go ahead and yield to Mr. Brown at this point.
    Mr. Brown. Thank you, Mr. Chairman.
    In light of your comments about the devil being in the 
details, and Administrator DeParle echoing the same thing and 
going through a very dispassionate, well thought through 
analysis of some of the strengths and weaknesses of this 
legislation and other proposals, and Dr. Ganske's point of how 
serious a matter this is and how we do not have the legislation 
yet and need to learn more, I was shown a letter to Chairman 
Bliley from Speaker Hastert saying it is his intention to have 
legislation addressing prescription drugs on the House floor 
the week of June 19, I would just hope that we would be able 
to--I would hope we could go through the process on this 
subcommittee and this full committee with markup both places 
prior to that date, if possible, so we really do have a better 
understanding of this issue.
    We have not seen the bill yet. I mean Members on this side 
certainly have opinions and have seen outlines and have heard 
rumors and everything else. We know about the bill, or we think 
we know about the bill, but I think it is important that we 
have that opportunity, this subcommittee, on an issue that is 
so enormously complex as this and is so important for so many 
people in this country.
    I would like to talk about the PBMs that the chairman 
mentioned, Administrator DeParle. The President's plan proposes 
using these private entities as pharmaceutical benefit managers 
to provide the benefit to seniors.
    How do you ensure that these private-sector entities are 
actually providing the care that they promise?
    Ms. DeParle. Well we would have quality standards. It would 
not just be competitive bidding based on price, Congressman. 
And we would do a competitive bidding in various areas of the 
country.
    We have met with pharmacy benefit managers who currently 
provide this kind of service to other private insurers, and I 
believe they would be able to do a good job of doing it with 
Medicare.
    We would have to be very specific with them about what we 
wanted. We might want them to do some disease management. We 
might want them to do utilization review and provide us with 
data about that kind of thing. We would just have to be very 
specific in contracting with them and telling them what we 
expect.
    Then we would have to make sure they got it done.
    Mr. Brown. The Republican plan relies on the private sector 
to administer the Medicare drug benefit. In this proposal, 
private insurance companies would be in charge of running the 
program.
    How does that plan assure that these private-sector plans 
are providing the care that they promised to seniors?
    Ms. DeParle. Well I suppose the new Medicare Benefits 
Administration that is referred to in the document that I saw 
yesterday would be in charge of contracting with private 
insurers.
    It sounds to me almost like a Medigap model, although 
yesterday I did attend a hearing in Ways and Means and I heard 
some of the sponsors of the bill say that it is not supposed to 
be that, but it sounds like a Medigap model.
    In that model our oversight is quite limited. It is not 
clear how much ability the Medicare Benefits Administration 
would have to oversee the provision of prescription drugs by 
these plans.
    I would add another thing, too, which is that there is a 
real tension in here between what I heard yesterday from the 
sponsors who talk about wanting to provide seniors with as many 
different choices as possible.
    That is a philosophical view, and it is something I have 
talked to Congressman Burr and others about, that they would 
like to see lots of different kinds of plans out there I think.
    There is a tension between that and the thing that Mrs. 
Eshoo talked about earlier, and that I hear when I talk to 
seniors, which is their desire to have a reliable, guaranteed 
benefit and to know what their costs are going to be from year 
to year.
    That is something that is going to be a very difficult 
issue for this committee and for your colleagues to grapple 
with. How much do you go in the direction of choice? And what 
does that do in terms of risk selection?
    It enables plans then to ``cherry pick'' the healthier 
seniors. What sort of oversight would you need to have over 
that kind of thing? And what are the results of that?
    And one of the results would be much higher premiums for 
everyone, if the seniors are ``cherry picked'' into certain 
private plans. And then what happens in the areas where these 
plans do not go in.
    There are a lot of questions here, and it is unclear to me 
how we would ensure that the private insurers, if they exist 
and if they come into the market, are providing what they are 
supposed to be providing.
    There is not a defined benefit, as I understand it, in this 
plan.
    Mr. Brown. You mentioned Medigap. One of the major 
criticisms of Medigap is that it is simply not affordable to a 
large number of people.
    In a private plan model such as the Republicans have 
suggested, talk about the affordability for seniors there. 
Would they be affordable for most seniors?
    Ms. DeParle. Well again we have to see the details. As I 
understood it yesterday from Mr. Thomas, there would be an 
indirect premium subsidy to the plans. So that would indirectly 
subsidize individuals who chose those plans, if they were 
available.
    There are a lot of ``if's'' here. My concern is the level 
of the subsidy as he described it at around 25 or 30 percent, 
from my discussions with the independent actuaries who work for 
the Medicare Program and the Medicare Trustees, as well as with 
private insurance company executives, what they have suggested 
is that that level of subsidy will not be enough to attract 
most seniors to join.
    So then you would end up with the same problem Medigap has, 
which is the problem I guess that Congressman Barrett described 
where they are trying to provide health insurance for the 
sickest people, or drug insurance coverage for the sickest 
people who are going to use the most drugs.
    It starts a spiral that our actuaries call a death spiral 
in terms of the premium getting higher and higher and fewer 
people being able to afford it. This is a complicated issue 
that we really would have to spend time analyzing.
    Mr. Brown. I thank the chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Burr to inquire.
    Mr. Burr. Nancy-Ann, welcome.
    Ms. DeParle. Thank you.
    Mr. Burr. It is a long, difficult process but the one thing 
that we can feel confident in is that at some point we will get 
to the end of it. The question today is will we get it right?
    Let me ask you. From the plans that you have read, or read 
about, is there anybody that is not aspiring to the belief that 
every plan has to be voluntary?
    Ms. DeParle. No.
    Mr. Burr. So we can take one of those four things that we 
talked about and say everybody agrees that ``voluntary'' is an 
absolute necessity?
    Ms. DeParle. Yes, but--if I could----
    Mr. Burr. Sure.
    Ms. DeParle. The first principle is it should be a 
voluntary benefit accessible to all beneficiaries.
    Mr. Burr. So----
    Ms. DeParle. The voluntary part--Yes, sir.
    Mr. Burr. [continuing] But it has to be accessible?
    Ms. DeParle. Accessible, I'm not so sure about. Yes.
    Mr. Burr. You mentioned yesterday in the Ways and Means 
hearing that it had to be voluntary but we had to guarantee. 
Could you distinguish between the two? What do you mean?
    Ms. DeParle. When I talk about guarantee, I mean that, just 
like a Medicare beneficiary today knows they have physician 
coverage. They have coverage if they need to go to their 
doctor.
    And just like they know they have coverage if they need to 
go to the hospital, they need to know they really have drug 
coverage.
    I do not think it can be something that is contingent on 
whether a private insurance plan comes into their area.
    Mr. Burr. So as long as there is a provision in a bill that 
one would see in the absence of everything that could exist, 
nothing exist, here is the answer, as long as that exists, then 
the guarantee exists for all eligible?
    Ms. DeParle. Well I would have to see the language, but I 
believe, as I understood yesterday from the description, there 
has been a change, and that, yes, the plan that I heard 
described is attempting to say that there will be something 
provided for everyone; that a drug benefit will be available if 
there is not a private insurance plan. That is what I heard.
    Mr. Burr. Given the approach that you are familiar with to 
a large degree, to have more than one option, or more than one 
choice for seniors in a given market, whether it is a benefit 
manager or whether it is an insurance product or whether it is 
a new entity that we have not even discovered yet, is it 
beneficial to the eligible beneficiaries out there?
    Ms. DeParle. Well, you know, I would like to give you a 
``yes'' or ``no'' answer but I really cannot. It can be 
beneficial. The problem is, it also--every time you segment the 
market more you introduce more likelihood of risk selection.
    Mr. Burr. Why doesn't OPM only allow a small number of 
health plans for Federal employees, then? Why is the list in 
North Carolina some 30 people that I have to pick from? Does 
that help people negotiate?
    Ms. DeParle. I assume because the law--well, I think you 
would have to ask them. I think--so your contention is it helps 
them to negotiate better prices somehow?
    Mr. Burr. Yes.
    Ms. DeParle. The problem is, it may help you some on the 
negotiating side but it also hurts you some in that you segment 
the market. You introduce risk selection. So plans can----
    Mr. Burr. We spread the risk out.
    Ms. DeParle. Not as much as you do if you have only a 
couple of plans. If you had just--under the President's plan, 
for example, you can go to an HMO and we would reimburse them 
directly for providing prescription drugs which we don't today, 
because it would be a Medicare-guaranteed benefit, and then you 
could also be in the fee-for-service plan.
    When you go beyond that, you start introducing in more and 
more risk selection by segmenting the market. And you get--
plans will be smart enough to design benefit packages that 
could end up excluding some people and picking out the 
healthiest people.
    Now if your desire is to provide as much choice as 
possible, you may see that as an advantage. My concern is it 
raises the premium costs for beneficiaries.
    It can result in the people being left in a plan that is 
more expensive, and then as I said you start this sort of death 
spiral with the premiums.
    Mr. Burr. If I understand you correctly, the more people 
who might join a plan the cheaper the premium gets because of 
volume?
    Ms. DeParle. In general, yes, sir. In general, that is what 
insurance is. You spread the risk over as many people as 
possible because then you lower the chances that you are going 
to get just sick people who are going to need to really heavily 
use the benefit.
    Mr. Burr. Aren't we both----
    Ms. DeParle. So you have to weigh that against your desire 
to have choice. And as I said, you and I have discussed this, 
and I know why you like that.
    The other thing, though, I would raise is what Mrs. Eshoo 
raised about her mother and what she wanted. And when I talk to 
seniors--maybe we talk to different ones--some of them may like 
choice, but the main thing I hear is I need to know what my 
costs are going to be.
    Mr. Burr. It needs to be predictable, doesn't it?
    Ms. DeParle. Yes, sir, it does.
    Mr. Burr. That is an important aspect. Let me just----
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Burr. I thank the chairman.
    Mr. Bilirakis. Mr. Waxman.
    Mr. Waxman. Thank you, Mr. Chairman.
    What is so frustrating to me about this hearing is that we 
do not have a bill before us. We have some concepts on the 
piece of paper, really just a couple of pages, and we are 
asking very specific questions which you cannot answer because 
you cannot see the proposal.
    We are being told this proposal may be on the House floor 
next week, so you wonder what a committee is supposed to do and 
why we have witnesses here if we cannot get testimony about a 
specific proposal.
    But we have a Communications Document that the Republicans 
have put out. I want to ask you about what you understand that 
proposal in that document to mean.
    Is it correct to say that there is no defined benefit in 
the Republican plan? In other words, you do not know what you 
are actually going to get if you are in Medicare if you are 
able to buy an insurance policy for prescription drugs.
    Do we know, in any way, from their communications how much 
people are going to have to pay out of their pockets for these 
pharmaceuticals? Or even for their premiums?
    Ms. DeParle. Well I do not know it from the paper I saw 
yesterday. I did hear discussion at the Ways and Means 
Committee of I think the sponsors are still in active 
negotiations and deliberations with the Congressional Budget 
Office trying to get the premium numbers down.
    But I did not see a defined benefit in what I looked at 
yesterday.
    Now I will say, the President's bill has been up here since 
March. We spent a lot of time drafting it. So I would be happy 
to discuss that. And of course when the other bill does come 
out, if we can provide any technical assistance we will.
    Mr. Waxman. Well could it mean that if you are on Medicare 
and you need certain kinds of drugs you might not have an 
insurance policy to provide those drugs that you need?
    Ms. DeParle. It could mean that, if there is not a defined 
benefit.
    Mr. Waxman. And if all they are saying is you have a chance 
to buy some insurance, could it mean that there is no insurance 
really available for you to buy, or affordable for you to buy?
    Could it mean that you are only going to have a chance to 
have some drugs covered if you sign up at a managed care plan 
and that is it? Maybe you have a choice of two managed care 
plans?
    Ms. DeParle. If there is no defined benefit, there could be 
lots of variation about what is provided. It would be very 
important for people to know, I believe, what is in the plan, 
how much they are going to be expected to pay, and that cuts 
against some of the arguments about having lots of choices.
    Mr. Waxman. Well choices are great if everybody wants you 
to choose them. But when you are a real sick elderly person who 
is going to represent a huge cost to an insurance company, they 
are not anxious to have you sign up with them. They would like 
you to choose someone else.
    When we adopted the Medicare Program, we said that no 
matter how sick you are, no matter how wealthy or poor you 
might be, you are going to be guaranteed coverage for your 
doctor bills when it is medically necessary, your hospital 
bills when it is medically necessary, and a lot of other 
services.
    Shouldn't we say that you are going to be guaranteed 
coverage for prescription drugs? Isn't that what this is all 
about? Isn't that what the American people really want?
    Ms. DeParle. Well I believe that is what we should do. I 
believe that that is consistent with Medicare's principles.
    And I do believe it is different from the way the Federal 
Employees Health Benefit Program has been structured under the 
law. There, there are choices. And it is more a defined 
contribution program.
    Medicare has been a defined benefit. There is a discussion 
in the materials I saw yesterday about an actuarial equivalence 
in dollar terms, but it is not, as I understand it, a defined 
benefit as Medicare has traditionally had.
    Mr. Waxman. The most peculiar thing to me about this 
proposal is we do not give anybody anything. We just tell them, 
we are going to give you a chance to buy private insurance. But 
since private insurance companies do not now have affordable 
plans for drug coverage, we are going to give the money to the 
insurance companies--not to the beneficiaries--in hopes that 
they will lower their prices and make a plan available, and 
maybe some people can afford it.
    Is there any beef there? Where is the beef in all this? If 
a senior is watching this hearing, can they feel that if this 
plan is adopted they will know their drugs are going to be 
covered and they are going to be able to buy any policy 
wherever they may live in this country?
    Ms. DeParle. Well I do not know that yet. I think that, as 
I said, we have questions based on what we have seen about the 
affordability and accessibility of the plan that we are 
discussing today.
    We are eager to see the details. We heard from the sponsors 
that they intend to provide a fallback mechanism so that there 
will be something available. But we need to see the details on 
that.
    Mr. Waxman. Well I think you are right. We have to see the 
details. But this may be the only hearing this committee, which 
has jurisdiction over these issues, will ever have on this 
proposal. So when the details come out, we may just see them 
when the bill is already on the House floor and we are told you 
vote ``yes'' or ``no,'' and if you vote ``no'' there will be 
nothing. But if we vote ``yes,'' we may not have anything that 
is really worth it when all is said and done.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. the gentleman's time has expired.
    Mr. Whitfield.
    Mr. Whitfield. Thank you, Mr. Chairman.
    Mr. Burr was focusing on the importance of choice and using 
the Federal insurance plan for Federal employees as an example. 
Of course philosophically one of the reasons that any of us 
advocate a choice is we feel like the competition can keep 
prices in line.
    And as Dr. Coburn mentioned earlier, we know that in the 
long term there are some real financial difficulties facing the 
Medicare Program, its solvency.
    Do you agree that choice is a way to promote competition, 
and in doing that can maybe keep the costs down of a 
prescription drug benefit?
    Ms. DeParle. Well choice can be a way to promote 
competition. But what we have seen in the past is that the 
competition has really not been on price in the same way that 
you would expect.
    You referred to the Federal Employees Health Benefits 
Program. In our discussions with the Office of Personnel 
Management--and they actually testified with me in front of the 
Senate Finance Committee--they made the point that you have to 
take into consideration that the two programs and the 
populations they serve are really very different in that 
Medicare serves an elderly population with much more intense 
and predictable health care needs than the Federal employees 
program does.
    And again, when OPM negotiates with plans, under the 
statute it is pretty much open to any plan that meets a certain 
requirement. There is no defined benefit package, really. It is 
more of a defined contribution system.
    So I am not sure. I just don't think the incentives are the 
same. Now in our plan, we want seniors to get the best prices 
possible. We want Medicare to get the best prices possible for 
drugs and we want to do it in a way the private insurance 
companies do it, that some of these same insurance companies 
that participate in FEHBP use pharmacy benefit managers to 
negotiate with the drug companies to keep the prices lower.
    So we want to get the benefits of competition. I am just 
not convinced that competing among the plans with the senior 
population is the right way to go.
    Mr. Burr. Mr. Chairman, I think the microphone system has 
gone out.
    Mr. Whitfield. How legitimate is the----
    Mr. Bilirakis. I think it has gone out.
    Mr. Bilbray. The gentleman from Kentucky will rise to the 
occasion.
    Mr. Whitfield. How legitimate is the concern that for 
senior citizens the more choices you have in trying to 
understand the different plans the more it is difficult and 
confusing for them? Do you think that is a legitimate issue?
    Ms. DeParle. I am glad you asked about that issue because I 
would like to, at some point if the committee is interested, 
provide you with some more details about that.
    As a result of the National Medicare Education Program that 
we have been doing to provide seniors with information about 
Medicare and about their Medicare choices, we have done a lot 
of focus groups around the country about what do they 
understand.
    What we are told is, even the information about basic 
Medicare and the Medicare+Choice Plans that are available in 
some areas of the country, despite all of our efforts at 
getting that to be really understandable, it is still something 
that is difficult to convey to seniors.
    I am not saying it is impossible, but it is very difficult 
to do. And what we find is, they tell us things like--we want 
to provide them with quality information, and they tell us, 
gee, this is like homework. It is very difficult to get through 
all of this.
    So I do hope the committee will be sensitive to that in 
looking at how to structure this.
    Mr. Whitfield. Would you review for me, there were a few 
Republicans--and I was one of them--at the White House when the 
President revealed his plan back in March. Would you just go 
over quickly the cost structure and what he was proposing for 
costs for senior citizens?
    Ms. DeParle. Yes. Is my mike out, too? I will do the best I 
can.
    The President's proposal would provide a prescription drug 
benefit that in the first year would be worth around $2000 to 
beneficiaries. The government would share in 50 percent of the 
cost up to $2000. The beneficiary would pay a premium of about 
$26 a month, our actuaries estimate. Then they pay 50-50 up to 
the $2000.
    We would phase in our benefits so we would get up to $5000 
in about 2010, I believe. And at that point, the premium would 
be around $50 and the co-insurance would still be 50 percent.
    During that time, after that time, the cap, the $5000, 
would grow at the rate of inflation. So there would be some 
increase in it, and the President announced in March that he 
had set aside $35 billion to be used for stop-loss coverage for 
beneficiaries with usually high costs, and he has not laid out 
the details of that piece of the plan yet.
    We want to sit down and work with the Congress to come up 
with what would be a good proposal there for stop-loss 
coverage. But that is the basic parameters of the plan.
    Mr. Whitfield. So over----
    Mr. Bilirakis. We are well past the 5-minute time limit.
    Mr. Pallone.
    Mr. Pallone. The microphones are not working.
    Mr. Bilirakis. We will have to speak up a little bit.
    Mr. Pallone. Thank you, Mr. Chairman.
    I want to go back to what Mr. Waxman was mentioning about 
the difference, if you will, between the President's proposal 
and what we believe is the Republican Thomas proposal, I guess, 
is in terms of the lack of a defined benefit.
    The way I understand the President's proposal, we have 
access to medically necessary drugs in the language, and that 
seems to me basically a decision by a physician, or a 
pharmacist, or whoever, about what is medically necessary. So 
that is a defined benefit.
    On the other hand, under the Republican proposal we are 
getting language--again I am looking at what apparently Thomas 
described--the benefits have to equal an actuarial value of 
$740 or an actuarial equivalent to a certain dollar amount.
    I guess my concern is, I think the way the Thomas proposal 
is is essentially a voucher that limits a certain dollar amount 
because of the language about actuarialy equivalent.
    On the other hand, the President says ``medically necessary 
drugs.''
    Would you just comment on this distinction there? I know 
you have sort of gotten into this, but I think there is a big 
difference there. One seems to be targeted to a dollar amount, 
and one is to a specific description about what is medically 
necessary.
    Ms. DeParle. As I understood the plan yesterday, it offered 
an unspecified benefit. It does talk about an actuarial 
equivalent benefit. I think the $740 number you heard is what I 
heard as well, but as I understand it only the stop-loss amount 
is really specified.
    So insurers could then set deductibles and co-pays. That is 
the issue we have been discussing about whether we really think 
seniors want and need all of those different choices, or 
whether that structure would guarantee adverse selection and 
then difficulties with unaffordable premiums and access.
    I do want to add, though, that it mentioned something about 
covering major therapeutic classes of drugs. We are not sure 
how that is defined. It is different. The language is different 
than saying all medically necessary medications, but we do not 
know whether that is intended to signify a term of art, or 
whether some will be covered and others not, or whether someone 
put an adjective in that they really didn't mean.
    So I can't tell you at this point what exactly would be 
covered in terms of the drugs.
    Mr. Pallone. It varies from day to day and year to year. 
Theoretically there might be some selection that gives you some 
idea of what you get, but on the other hand what is to stop you 
from varying depending on what the costs are, because this 
leads to some kind of fixed dollar.
    Ms. DeParle. That would be a mistake. I would hope that the 
language would specify a definition for this and would say it 
is not up to each insurance plan to decide what is a 
therapeutic class of drugs. I imagine, frankly, that that will 
be necessary to get it scored.
    Mr. Greenwood. Would the gentleman yield for 5 seconds?
    Mr. Pallone. I will give you 5 seconds.
    Mr. Greenwood. It is true that in both cases there is a 
formulary? Is that not correct? There is a formulary in the 
President's plan? There is a formulary in the Republican plan 
and caps in each plan?
    Mr. Pallone. My understanding is you don't have the 
formulary.
    Mr. Greenwood. Caps in each plan.
    Mr. Pallone. I'm glad you raised that, because it is my 
understanding you do not have the formulary.
    Ms. DeParle. Well I do not think I am clear, Mr. 
Greenwood----
    Mr. Greenwood. PMBs would establish formularies in both 
instances.
    Ms. DeParle. They are permitted to, although in the 
President's plan if a physician says a drug is needed a 
beneficiary is allowed to get that drug.
    In the plan that I heard about yesterday, it does make 
mention of a formal appeals process that a beneficiary can go 
through to get off formulary drugs. So therefore I assume a 
formulary must be in there, but I have not seen the details 
about that.
    Mr. Pallone. I just want to take back my time.
    Mr. Bilirakis. You can use a mike now, I think.
    Mr. Pallone. The way the President defines this in terms of 
medically necessary I think is very important. There is a big 
difference there in terms of what the President's proposal says 
in saying it is medically necessary drugs.
    Ms. DeParle. The President says this has to be a defined 
benefit that ensures access to all medically necessary 
prescription drugs. And that means that if there is a drug that 
a beneficiary needs according to their physician, but it is not 
on a formulary that a PBM has, that the beneficiary can get 
that drug. The physician's medical judgment is what would rule.
    Mr. Pallone. Thank you.
    Is my time up?
    Mr. Bilirakis. Your time is up. Thank you.
    Mr. Pallone. Thank you, Mr. Chairman.
    Mr. Bilirakis. Let's see.
    Dr. Ganske.
    Mr. Ganske. Thank you, Mr. Chairman.
    I hope that our electrical problems this morning are not 
indicative of how the grid will work after electric 
deregulation.
    Well, Ms. DeParle, I want to first start out with a comment 
that is a follow-up of a question that Chairman Archer asked 
you yesterday. You have already alluded to it in some of your 
answers.
    I will be bipartisanly critical of both plans as I have 
seen them so far. I would point out that when we are talking 
about bipartisanship on these bills it will take more than 2 or 
3 members of the other side of the aisle, as much as I love 
Ralph Hall, to make a bipartisan bill and be able to move a big 
issue like this.
    But this is what I see as the big problem with both the 
President's proposal and what I am seeing coming out of the 
Republican plan. It relates back to 1988 when Congress passed a 
catastrophic bill that had prescription drugs in it.
    That applied to all senior citizens. It involved a premium 
increase. I want to read what Chairman Rostenkowski said 
recently about that experience. He said:
    We adopted a principle universally accepted in the private 
insurance industry. That is, that people pay premiums today for 
benefits they receive tomorrow. Apparently the voters did not 
agree with those market principles.
    So what has been the lesson in Washington on that 
experience? The lesson has been. Well, by George, we better 
make this voluntary. This has to be a voluntary benefit. But 
this is the problem. And we were able to get some of this 
information from the hearing yesterday.
    Chairman Thomas, when he testified, pointed out that the 
Republican bill will cost somewhere between $450 to $500 a year 
in premiums plus a 50 percent co-pay, and we know that the 
President's plan I think originally costed out at something 
like $25 per month, but that you are willing to talk about 
stop-loss so it will be higher than that.
    Congressman Burr in a previous hearing very aptly pointed 
out that under the President's plan for this to be a cost-
effective maneuver by a Medicare beneficiary they are going to 
have to have out-of-pocket expenses somewhere around $1200.
    It will probably be somewhat similar to that with the GOP 
plan. And this is the problem. If you look at the data for 
MedPak, they show that of current Medicare beneficiaries--this 
is 1999 data--14 percent of Medicare beneficiaries today spend 
nothing on prescription drugs; 36 percent spend from $1 to 
$500.
    So you have got 50 percent of Medicare beneficiaries today 
with less than $500 out-of-pocket expenses. Now if you are a 
senior citizen and you are looking at having to have expenses 
of greater than $1000 for either the GOP plan or the Democratic 
plan, to make signing up for this voluntary program cost 
effective for you, why on earth would you do that? Why on earth 
would 50 percent of people do that?
    The answer is. They won't.
    They won't.
    So that gets into the adverse risk selection of those who 
will. These are going to be the seniors, you know, that 6 
percent, or 14 percent, who have expenses of more than $1500.
    What do we know happens from the current program under that 
scenario? Well, we know what happens because there already are 
Medicare supplemental programs that provide that drug benefit. 
And the only people who sign up for them are those who have a 
lot of expenses.
    And what happens? The premiums are very high for those 
programs. So unless we take a huge amount of extra dollars from 
the General Fund to cushion that shock for those who will sign 
up for it, I think we are looking at significantly higher 
expenses.
    This is what I think the solution should be. And I think 
that is the fundamental problem with both. I happen to agree 
with Mr. Kahn on this. Here is what he said. He represents 
insurance:
    I am happy to say this because not always do I agree with 
the insurance industry. I've got Karen Ignani here, too. He 
said, private-drug-only coverage would have to clear 
insurmountable financial, regulatory, and administrative 
hurdles simply to get to the market.
    Assuming that it did, the pressures of ever-increasing drug 
costs, the predictability of drug expenses, and the likelihood 
that the people most likely to purchase this coverage will be 
the people anticipating the highest drug claims would make 
drug-only coverage virtually impossible for insurers to offer 
to seniors at an affordable premium.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Ganske. So I would just finish by saying, you know we 
have a big adverse risk problem in both of the plans that have 
been presented and I look forward to additional time. Thank 
you.
    Mr. Bilirakis. Well let's see here. Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman.
    You were asked some questions by Mr. Burr and Mr. Whitfield 
on choice and risk. In the Federal Employees Health Benefit 
Package, that basically reflects people like ourselves where 
prescription drug risk you are talking about would be people 
who are 65 and older, is it not?
    Ms. DeParle. I think that in talking to the people at OPM 
who run and manage the FEHBP program, they do believe that the 
two populations are very different.
    Mr. Stupak. And the risks are very different?
    Ms. DeParle. The risks are very different for an insurer 
facing those populations. And I think the insurance companies 
would tell you the same thing.
    Mr. Stupak. Okay. I understand that yesterday the President 
released a report prepared at the request of Senator Max Baucus 
that showed rural elderly are 60 percent more likely to fail to 
get needed prescription drugs because of the cost.
    Could you please discuss some of the conclusions of that 
report, since I have a large rural district myself?
    Ms. DeParle. Yes, and I have been to your district----
    Mr. Stupak. Yes, you have.
    Ms. DeParle. [continuing] and I do know that.
    It is the cost, as well as the fact that, if you look at 
the Medicare population, the people who are fortunate enough to 
have prescription drug coverage have it primarily because they 
worked for large employers which are less likely to be in rural 
areas. So as retirees they got that coverage from their former 
employer. They are less likely to have that.
    As well, they are less likely to have access to a Medicare 
HMO. In the past----
    Mr. Stupak. We do not have any up there.
    Ms. DeParle. You do not have any up in the Upper Peninsula. 
And in the past, in some areas of the country where those are 
available, then beneficiaries go to a Medicare HMO to get 
prescription drug coverage.
    Mr. Stupak. Well then----
    Ms. DeParle. So those two things combined with some of the 
factors that you raised in your opening statement about the 
price discrimination and the fact that it is harder to 
negotiate on behalf of large numbers of beneficiaries in a 
rural area means they have less access.
    Mr. Stupak. Well how would the President's plan then 
address prescription drug coverage in rural areas like mine?
    Ms. DeParle. Well under our plan we would have pharmacy 
benefit managers in different areas of the country that would 
cover a region and would negotiate on behalf of those 
beneficiaries who lived in that region to get the best drug 
prices possible for them under this defined benefit.
    Then when the beneficiary had gotten up to the cap, they 
would still get the benefit of those negotiated lower prices if 
they needed to go further than that.
    Mr. Stupak. From what we know of the Republican plan, and I 
understand you were at the hearing yesterday, what does the 
Republican plan do to help elderly in rural areas like mine?
    Ms. DeParle. Well what I know about that is what I heard 
discussed by the Members of Congress who were talking about 
their plan.
    Mr. Peterson, who is from Minnesota----
    Mr. Stupak. That is a rural area.
    Ms. DeParle. [continuing] said he believed it would help 
rural areas in I guess two ways. One is that he believes there 
will be a fallback mechanism whereby the government would stop 
in where plans are not available and provide prescription drug 
benefit.
    As I said, we have a lot of questions about whether that 
would really be affordable and accessible and what the premiums 
would be, but that is what he said would be there for rural 
beneficiaries.
    And also I believe the plan includes some additional 
payments for Medicare HMOs in rural areas. He thinks that will 
entice them to come into some rural areas and provide Medicare 
HMO coverage, which they have not in the past.
    Mr. Stupak. Okay. So if we do not have an HMO like up in my 
district there are no HMOs in my area, then the government 
would be the fallback here and negotiate those prices? Is that 
your understanding?
    Ms. DeParle. That is my understanding of what he said.
    Mr. Stupak. Well what would stop, then, the government 
being the fallback whether they are in a rural area or an urban 
area as insurance companies cherry pick only the healthy 
seniors to put in their plan?
    Ms. DeParle. That is my concern, is that the more you 
segment the market like that, the more it results in adverse 
selection and then higher premiums for the people who do not 
have other choices, and subsidies for people who do have other 
choices. I am just not sure that is the right direction to go 
in.
    Mr. Stupak. There has been some talk about Medigap policies 
and the administrative costs. In fact, I brought up the 
Medicare situation in Michigan where the State ran it for $28 
million. Now they have turned it over to these private 
companies, including private HMOs, and now the administrative 
cost is $141 million in Michigan per year.
    The Medigap, is that the administrative costs to run the 
plan and market it to individuals, is that high, the Medigap 
policy, is that low? For example, with Medicare you said you 
run it at about 1.5 to 2 percent?
    Ms. DeParle. Yes.
    Mr. Stupak. That's your overhead. Medigap plans, do you 
know what their administrative costs are?
    Ms. DeParle. Well on average their administrative costs are 
around ten times higher than Medicare's according to the 
National Association of Insurance Commissioners.
    Mr. Stupak. So that would be about 20 percent as their 
administrative cost?
    Ms. DeParle. Well, no, I guess it would be 10 or 11 
percent, if ours is 1.5 percent.
    Mr. Stupak. Right. Okay.
    Mr. Bilirakis. Mr. Norwood--Oh, I beg your pardon. Were you 
finished?
    Mr. Stupak. Just one more.
    Mr. Bilirakis. Very quickly.
    Mr. Stupak. If the administrative costs are higher than the 
20 to 15 percent, then the money that the seniors would be 
paying would not go necessarily for a drug benefit but more 
money would go for the administrative costs? Right?
    Ms. DeParle. Well both the seniors and the Federal 
Government would pay because this is a 50-50 proposition in the 
President's plan. But I assume some of this would be paid by 
the Federal Government in their plan as well. It is not clear.
    But, yes, we would be paying for higher administrative 
costs.
    Mr. Bilirakis. Dr. Norwood to inquire.
    Mr. Stupak. Thank you.
    Mr. Norwood. Thank you, Mr. Chairman.
    Nancy-Ann, how many people are on Medicare?
    Ms. DeParle. 39 million-plus, sir.
    Mr. Norwood. Could we examine your first sentence in your 
statement? You said that 39 million people need drug benefits? 
Are you saying that everybody on Medicare needs a government-
run drug benefit plan?
    Ms. DeParle. No, sir, I am not saying that because in our 
plan----
    Mr. Norwood. So it's not 39 million that need drug 
benefits?
    Ms. DeParle. If I can finish? In our plan, we have proposed 
to include some subsidies to encourage employers who are 
currently providing coverage to continue providing it, and we 
hope they will.
    Mr. Norwood. So just let's get to this answer----
    Ms. DeParle. But when I say they need it----
    Mr. Norwood. [continuing] Do 39 million people need drug 
benefits or don't they?
    Ms. DeParle. I believe they need a guaranteed Medicare 
prescription drug benefit. They don't have that----
    Mr. Norwood. All 39----
    Ms. DeParle. [continuing] now.
    Mr. Norwood. All 39 million?
    Ms. DeParle. Yes, sir, because they do not have security 
right now that they have a drug benefit. Some of them----
    Mr. Norwood. Even the 50 percent that Dr. Ganske referred 
to that are very happy with their supplemental drug plans 
paying zero or very little, they need it, too?
    Ms. DeParle. What I find when I talk to seniors--maybe the 
ones in your district are different--but when I talk to them, 
they are concerned about the rising costs of drugs and the fact 
that they do not have coverage.
    Some of them have retiree coverage but they are not sure it 
is still going to be there. So what I am talking about here 
is----
    Mr. Norwood. Well they are not sure Medicare is going to be 
there, either, the way we act. But the point is, you can't make 
the statement that 39 million Americans need or even want a 
government-run prescription drug plan. That is not a true 
statement.
    Ms. DeParle. I don't want to argue with you, Mr. Norwood, 
but what I am trying to say is----
    Mr. Norwood. You can't argue with me. I know them in my 
district who don't want it. So don't tell me everybody out 
there on Medicare wants the government to take over their 
medications. They don't. I just want you to be honest before 
this committee. You said----
    Ms. DeParle. I am being honest, sir.
    Mr. Norwood. [continuing] that all 39 million----
    Mr. Brown. Mr. Chairman, I----
    Mr. Norwood. You may not interrupt, sir.
    You said all 39 million Americans can't wait for 
government-run prescription drug----
    Ms. DeParle. Now that is not fair. That is not what I said.
    Mr. Norwood. That is what you said, 39 million people need 
a drug benefit.
    Mr. Bilirakis. The witness will respond as best as she can, 
and then let's just move on.
    Ms. DeParle. We obviously have a philosophical difference 
here. I believe----
    Mr. Norwood. Well, no. I am just trying to find out if you 
actually believe that every American wants to have a 
government-run medication plan. That's all. You obviously 
believe they do. I know they don't.
    Now let me go to the next question because my time will run 
out.
    Mr. Bilirakis. Right.
    Mr. Norwood. It seems to me that presently when you are 65 
years old you have to go into the government-run health care 
known as Medicare. You do not have any choice about that.
    If you are a patient over 65 years old and you wish to seek 
treatment from a physician for example who maybe does not take 
Medicare, or wish to seek--Regular Order--if you wish to seek, 
for example, a treatment that Medicare does not cover, we today 
as a Congress and as a government say you go to that physician 
and that physician treats you, we're going to give that 
physician a great deal of pain, whether it's putting them in 
jail, or fining them, or whatever. Now that's presently what we 
do in Medicare.
    If the President's plan were to be put into Medicare, would 
that then mean the same thing for seniors in terms of their 
prescription medication? Would that mean they would have no 
other choices but then to use the two options in the 
President's plan?
    Ms. DeParle. Well, no, sir. And I do not agree with your 
characterization of what happens now. If beneficiaries need or 
want treatments that are not covered by Medicare, that would 
not be the case.
    Mr. Norwood. It is not the case that they can leave then 
and go to the physician of their choice, and if the physician 
of their choice treats them that the Federal Government comes 
down on that physician to take their license or put them in 
jail or fine them?
    Ms. DeParle. That is not the case.
    Mr. Norwood. That's not true?
    Ms. DeParle. No, sir.
    Mr. Coburn. Will the gentleman yield?
    Mr. Norwood. I will yield.
    Mr. Coburn. Can I referee here a little bit? The physician 
if he gets a disclaimer notifying the Medicare patient that 
this is not a covered benefit, the government cannot touch him. 
The problem is if your nurse fails to get a disclaimer.
    Mr. Norwood. Or if it is a benefit that happens to be 
covered where you wish to go to a physician who does not take 
Medicare. That is what happens, whether you say it is or isn't, 
and that is what we do.
    I am asking you if we put the President's plan into 
Medicare, does that mean then the senior citizens, half of them 
who presently have supplemental plans that they seem to enjoy 
and like, would no longer be able to use those but have to 
simply use those two offered by the President's plan?
    Ms. DeParle. No, sir, it does not mean that.
    Mr. Norwood. I will yield back, or yield to Mr. Burr.
    Mr. Bilirakis. Well you only have 7 seconds left to yield 
to Mr. Burr.
    Mr. Burr. Clearly us Southerners cannot even ask one in 
that time.
    Mr. Bilirakis. Amen to that.
    Ms. DeParle. Nor can I answer in that amount of time.
    Mr. Bilirakis. Let's see. Mr. Strickland to inquire.
    Mr. Strickland. Thank you, Mr. Chairman.
    Mr. Chairman, I would like to correct the record on 
something I said in my opening statement. Although the 
amendment I referenced, Mr. Sanders amendment, did pass the 
House, it was opposed by well over 100 Members.
    I would like to give you a chance to explain, if you can, 
to my colleague what it is that you mean by that sentence that 
apparently is in question. If you would, I think you are an 
honest person and I do not think you are trying to mislead us, 
and so I would like to give you a chance to explain the 
difference of opinion that apparently exists between Dr. 
Norwood and yourself on that particular statement.
    As I read it, it says it includes a voluntary, affordable, 
accessible, competitive, efficient quality drug benefit that 
will be available to all beneficiaries.
    I do not interpret that as you saying that every Medicare-
eligible person would choose, and the fact that it is voluntary 
is in there, it seems to me to be rather clear that it is not 
something you are wanting to impose on all Medicare 
beneficiaries.
    Ms. DeParle. That is right. And in fact the President's 
plan, as I was trying to explain, includes some subsidies so 
that people who are fortunate enough to have coverage through 
their employer now as retirees would continue that coverage; 
that the employers would find it to be in their interest 
financially to continue providing coverage. I think the 
philosophical difference I have with Dr. Norwood--and I 
actually agree with him on a lot of things--but I think on this 
what I am saying is that I believe that beneficiaries need the 
same kind of assurance that they are going to have their 
physician visits covered, and that they are going to have their 
hospital visits covered, about prescription drugs.
    Right now, today, they do not have that. Some of them are 
fortunate enough to have prescription drug coverage. That is 
great. We want that to continue. But unfortunately there are 
many seniors who have unreliable coverage, who are losing 
coverage, who may have it 1 month and not another, whose 
Medicare HMO has left.
    So what we are talking about here partly is a philosophical 
issue about whether they need that security in insurance or 
whether they don't.
    Mr. Strickland. Thank you for that clarification.
    I have a document that is supposed to be an analysis of the 
Republican plan. On the covered drug section it says:
    ``The proposal will cover all outpatient prescription 
drugs, excluding those already covered by Medicare Part B.''
    And then it says:
    ``Individual plans may establish formularies, however, that 
may limit beneficiary access to certain drugs.''
    And then it goes ahead to say that if your physician feels 
like you need a drug that has not a part of the formulary, 
there can be an appeal process.
    Now one of the reasons many of us want a Patient's Bill of 
Rights is that we think decisions are made that are different 
than what a physician would choose.
    Do you see a problem with setting up a system where the 
physicians may have to once again advocate for something that 
they think is in the best interests of the patient when we are 
finding it very difficult to develop an appeals process even 
under a Patient's Bill of Rights?
    Is this a problem in your judgment in terms of drugs that 
would be available?
    Ms. DeParle. I think it is a problem any time we are not 
clear about what is covered and what is not covered. And I 
think that in working together to design this benefit, we 
should try to do everything we can to make sure that a 
physician's medical judgment about that is allowed to govern.
    Mr. Strickland. And last, I am troubled that under the 
President's plan the stopgap measure kicks in in 2006. That is 
a long way away. And could you briefly compare what it is you 
know about the Republican plan's stopgap measures versus the 
Democratic plan? Because quite frankly, I think the President's 
plan is very troublesome to me.
    Ms. DeParle. Well, as I said, the President's plan, really 
the only detail that he specified was that we had reserved $35 
billion, set aside that, to work with the Congress to design a 
stopgap plan. And his does start in 2006. And frankly, that is 
a question of the availability of the dollars that we think 
will be necessary to design such a benefit.
    The House Democrats announced the outline of a plan a few 
weeks ago that has a stop-loss that begins at $3,000 of out-of-
pocket spending for a beneficiary.
    And I believe it would start right away, or 2002, anyway, 
earlier than the President's plan had talked about. And the 
Medicare RX2000 Plan, just looking here, again I believe that 
it starts at the same time the House Democrats' plan does.
    Maybe I should ask Congressman Burr. And I think it starts 
at $6,000. Is that right?
    Mr. Burr. Yes.
    Ms. DeParle. So there are 2 or 3 ideas on the table. It is 
not clear. I think they said their premiums were going to be 
$35 to $40, and I guess that includes the catastrophic or stop-
loss protection. That is what we know so far.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Strickland. Thank you.
    Mr. Bilirakis. Ms. Cubin--Mr. Bryant is back. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. Welcome.
    I apologize for having to step out to attend a conflicting 
meeting here, and I missed--I did hear your statement and 
missed most of your examination. As I hear bells ringing, we 
may be leaving and have to go vote, but I wanted to pick up on 
my friend from Ohio's question, because they are important.
    I think one of the key things that makes our proposal 
attractive, because many of the bills that are offered today 
that are out there do rely on private sector insurance 
companies, and management of those outside HCFA. So this is not 
an idea unique to the particular bill that the Republicans are 
talking about.
    But one of the things that makes that bill particularly 
attractive is the stop-loss provision. And like I assume so 
many of us that buy regular health insurance that are healthy, 
we buy that insurance to protect us against that catastrophic 
and--apparently we do not like that word around here, I do not 
know--but those bad things that can happen to you.
    We would envision the same concept at the level of 
prescription drugs and senior citizens in this bill. Not every 
senior citizen uses prescription drugs, and obviously some use 
more than others. But it is that concept that is very 
important.
    And that is why I want to go back to Mr. Strickland's 
questions about the President's plan taking til 2006 and even 
then, in reviewing the language--and I hope I am not quibbling 
over semantics here, but as I read that particular language he 
does reserve that $35 billion from our surplus for either debt 
reduction or in the event that the President, he and Congress 
agree, whoever the President may be, on a policy that provides 
for protections against catastrophic drugs costs for Medicare 
beneficiaries or policies that otherwise strengthen the 
Medicare program.
    So I think there is some probably flexibility in his 
proposal that that $35 billion is not specifically dedicated to 
the stop-loss type program.
    And again I think that is one of the things in ours is. It 
is dedicated for that. I mean, it is a guarantee, as much as we 
can guarantee anything.
    So I would hope that as the administration looks at that 
very important piece of this modernization that there is more 
of a lock in and more of a guarantee to that rather than 
leaving that up to the administration and the Congress at that 
time.
    Do you follow that?
    Ms. DeParle. Yes. I do. And as I said to Chairman 
Bilirakis, we clearly need to sit down with all of you and 
discuss what the contours of a catastrophic or stop-loss 
protection should be.
    I think the good news is that everyone here agrees that 
that needs to be a component of this, with the possible 
exception--I did listen carefully to what Dr. Ganske said about 
some of the difficulties in designing this. But I think we 
ought to sit down and talk about it.
    Mr. Bryant. Well, you know, we have I think a very good 
benefit on this committee of having some doctors who really 
have first-hand experience and add so much to the committee in 
discussions like this. And I think many of us I think, if I 
understand on the other side now agree that it is a very 
important issue that we have to begin to sort of set partisan 
politics aside and continue to work toward solving this problem 
together.
    But I think any bill that comes up with the underlying 
principles that it is going to be universal, it is voluntary 
for people to be in or stay in the very good program they might 
be in already as far as drug costs, and they are going to have 
choices within that, and you have got this stop-loss provision. 
So I think as long as we all maintain those concepts that, 
again, I am becoming perhaps more of an optimist that we can 
work this out and solve a very important problem.
    Do you have any comment on that?
    Ms. DeParle. Well, I am optimistic too. Thank you.
    Mr. Bryant. Thank you. Yield back.
    Mr. Bilirakis. Ms. Eshoo to inquire. Anna?
    Ms. Eshoo. Yes. Thank you, Mr. Chairman. I am sorry I had 
to step out of this all important hearing, but there was an 
important bill on the floor on digital signatures. So while 
that may not seem so related to everything that is going on 
here, we have gone past pen and quill and ink and even wax 
imprints. Now in a new century we are going to be able to 
transact things in cyberspace. So that is being done on the 
floor.
    Thank you, Madam Administrator, for your opening statement. 
Let me just try to get some socks on this octopus. As I said in 
my opening statement, it is no longer a question of whether we 
should or should not do this. The reason why this hearing is so 
important is because we are trying to flesh out how to do this.
    It seems to me that at the heart of this debate of how to 
is the benefit package. I know that you touched on that in your 
opening statement. I have not had the benefit of some of the 
questions and your responses, but could you for the record just 
for a moment--because I want to come back in on the coverage 
part of this--say why in your view it is so important for 
beneficiaries to have a defined Medicare drug benefit?
    Ms. DeParle. Well, for several reasons.
    First and foremost really is the one that you mentioned in 
your opening statement, which is that the seniors I talk to 
want to know what they have, how much they have to expect in 
terms of their cost. They want it to be predictable, and they 
want to know what is covered. And that is one of the I think 
very positive things about Medicare today, is they know that 
they are covered to go to the doctor, they know that they are 
covered to go to the hospital, and they need to have that same 
level of assurance about their prescription drug coverage.
    I also think that if we do not have a defined benefit that 
we introduce a really scary element of additional risk 
selection into this. And several of the members on this 
committee have talked about that, and I can tell that everyone 
is trying to grapple with it. And that is, if you allow plans 
to design lots of different benefit packages, that promotes 
choice, which is a value that some members want to promote, but 
you have to be very careful not to introduce cherry picking of 
the healthiest seniors in risk selection and then also Mr. 
Whitfield raised the question of confusion for beneficiaries 
and the fact that it would be very difficult for them to 
navigate among the plans.
    Ms. Eshoo. Right.
    Ms. DeParle. All those things are things that we are really 
going to have to look at carefully.
    Ms. Eshoo. Because they are all warning signals in terms of 
how we should design this.
    Let me just cover two other points, and they both have 
placement and direct attention in the legislation that 
introduced.
    In one area, and there are different ideas out there on 
this and that is what we are talking about today, ideas. The 
idea of stop-loss--catastrophic insurance--and how it is 
designed and how it kicks in.
    Now there are different ideas about it. In the bill that I 
introduced, the out-of-pocket expenses of the beneficiary are 
$2,500; the government, Medicare, picking up the other half. So 
once you reach the ceiling of $5,000, then the stop-loss kicks 
in.
    There are other plans out there that do not work that way. 
There is a gap between what is covered, what the beneficiary 
pays out-of-pocket, and how long they have to wait until stop-
loss kicks in. And I put this out more as a red flag, because 
members are going to have to consider this, because their 
constituents will face it.
    The reason why I think it is important to have stop-loss is 
very obvious. I do not know how many of us would be able to 
afford some of these drugs even with our salaries and the 
insurance coverage that we have once it goes past the out-of-
pocket. So I say this to this subcommittee that is going to 
have something to do with that.
    The other thing is the administration of this. With great 
curiosity yesterday, I listened to Mr. Thomas talk about the 
bureaucracy that he is designing, which, I am assuming, is 
going to be in my Republican colleagues' bill. I am issuing a 
warning on that. I really do not think we need to do that.
    Now, in the bill that I have introduced along with 10 
Democrats on the Commerce Committee, I do not have, as you 
know, Madam Administrator, your agency administrating the 
program. Rather, I put it into OPM.
    Now I am the first to admit that many of the problems that 
HCFA has are congressionally inspired, but there are problems. 
I think that you are already----
    Mr. Bilirakis. The gentlelady's time has expired.
    Ms. Eshoo. Can I take just 30 seconds so that she can 
answer this?
    Mr. Bilirakis. Well, not 30 seconds, but a very brief 
answer.
    Ms. Eshoo. Okay.
    Mr. Bilirakis. But you have to briefly ask the question, 
too.
    Ms. Eshoo. I think that you are understaffed and 
overburdened. Do you have a problem with OPM administering 
this, or do you feel strongly that HCFA must administer it, 
or--maybe you could just answer that.
    Ms. DeParle. Well, I feel strongly that----
    Ms. Eshoo. I think it is a tough question, but I want to 
ask it.
    Ms. DeParle. I feel very strongly that this benefit needs 
to be integrated into the Medicare program. And I believe that 
HCFA can administer it the most efficiently, effectively, and I 
would like a chance to convince you of that.
    Ms. Eshoo. Thank you. Thank you, Mr. Chairman.
    Mr. Bilirakis. Ms. Cubin to inquire.
    Ms. Cubin. Mr. Chairman, I yield to Dr. Ganske.
    Mr. Ganske. I thank the gentlelady. I will get to a 
question.
    I think we need to look at will either the Republican plan 
or the President's plan work, how much will it really cost. I 
have already expressed some reservations about the first. I do 
not think we really know the second.
    I think we need to think about making sure that we continue 
drug research. Drug research companies--or the drug companies 
have had basically a flat line in R&D. They have increased 
their marketing a lot. But we have got a lot of antibiotic-
resistant bacteria out there that could cause some very, very 
significant problems to everyone who flies in an airplane and 
is worried about antibiotic-resistant tuberculosis, for 
instance.
    We need some real dollars going into that, so I do not want 
to hurt that.
    I think it is fair for me to criticize plans without 
offering a solution. So my question at the end of this is going 
to be, you know, will the administration think about this if 
this is the only way that we can get something done this year? 
And this is what I think a partial solution to this could be.
    I sat on the bipartisan Medicare Commission for a while. In 
the context of comprehensive care, we were looking at expanding 
basically the prescription drug benefit, because there is some 
prescription drug benefit for dual eligibles; i.e., Medicare 
beneficiaries who are so poor they qualify for Medicaid.
    There are two groups in Medicare that have enough assets 
that they are not quite in Medicaid, but they get some 
assistance on their premiums and some assistance on their 
copayments and deductibles. They are called qualified Medicare 
beneficiaries, QMBYs and SLMBYs. And it is that group, the poor 
widow who is existing on her Social Security, who has to make 
that choice between her rent, her food, and her prescription 
drugs, who is not quite so poor that she is in Medicaid, that I 
think we need to significantly look at helping, and sooner 
rather than later.
    So when we looked at this in the bipartisan Medicare 
Commission, we though we can expand the Medicaid prescription 
drug benefit to those people and the cost would be about $61 
billion over 10 years. And furthermore, to prevent a notch, you 
could create a spend-down group, so that if those people, 
Medicare beneficiaries who have some additional expenses, 
higher expenses, they could deduct that from their income and 
then they could get into that qualifying group. That helps the 
neediest.
    But we also have 40 million people in this country who have 
no insurance at all, and I think we need to look at how do we 
cover them. And we also have to think about the fact that in a 
few years we know that the Medicare program is not going to 
have sufficient funds for any of the benefits that it is 
offering.
    So my solution would be this. Do the QMBY SLMBY with a 
spend-down, address the issue of cost in some way for all 
Americans, whether you are looking at something like propose a 
modification or something proposed by Tom Allen or Gil Gutnick, 
or simply saying to the FDA and Customs, you can warn people 
who order their drugs from Geneva, Switzerland, but you cannot 
intercept an individual's drugs. So it is buyer beware.
    I mean, there are many ways that we could look at trying to 
get some competition into that market for everyone, not just 
looking at a senior citizen.
    My question to you, Ms. DeParle, is this. If it looks like 
this is just going to be a simply straight line Democratic vote 
on a Democratic bill, the President's bill that will go down, 
or a straight line partisan vote on a Republican bill that the 
President will veto, is the administration interested at 
looking at any compromise type of legislation?
    Ms. DeParle. Well, Dr. Ganske, you know that your 
suggestions are always thoughtful, and you know that I will 
listen to them. And I believe--I am from Tennessee like 
Congressman Bryant. I am an optimist. So I think we can work 
together to get something done.
    I would say, I hear you on the low income benefit, and I am 
concerned about those people, too, but when I look at our 
numbers, as you have done, I see that, you know, 60, 70 percent 
of our beneficiaries have less than $16,000 a year, something 
in that range. So while I hear you about the very, very low 
income, my concern is, if we have an opportunity here to do 
something that assures security on prescription drugs for all 
beneficiaries, I would like to do that. I do not want to give 
up on that.
    Mr. Ganske. But we should not forget----
    Mr. Bilirakis. The gentlelady's time has expired.
    Mr. Ganske. Thirty additional seconds?
    Mr. Bilirakis. Well, the gentlelady has the time, and it 
has long expired.
    Mr. Ganske. I will ask next round, Mr. Chairman. Thanks.
    Mr. Bilirakis. Ms. Capps.
    Ms. Capps. Thank you. And if you would like, Dr. Ganske, 
you can have 30 seconds of my time.
    Mr. Ganske. I thank the gentlelady. I think it is fair to 
point out, you know, that there are a significant number of 
Medicare beneficiaries who do have a drug benefit. They have it 
from their employers, and that helps keep their out-of-pocket 
expenses down. We have a significant number of Medicare 
beneficiaries who have a pretty low out-of-pocket expense. As I 
said, from MedPAC, 50 percent have less than a $500 out-of-
pocket expense.
    So if we are looking at trying to balance providing some 
health care assistance to those who do not even have anything, 
much less a prescription drug benefit, would not it be 
advisable to take some of--a little bit more global approach to 
where we are heading than to try to piecemeal this and have 
some unintended consequences for the later fiscal solvency of 
the program? Or for that matter, not being able to have 
sufficient funds to handle those who do not have any insurance 
at all?
    Ms. DeParle. Well, if understand your question, if by a 
global approach you are referring to covering the uninsured, I 
would love to sit down and talk to you about that. And I am 
listening to what you have to say.
    Mr. Ganske. Thank you.
    Ms. Capps. Thank you. And I am going to be brief. I want to 
ask you about two different things, and Administrator DeParle, 
I thank you for enlightening us and for being willing to go 
through this conversation. It is very helpful to me.
    I am sitting here as we have been discussing this thinking 
about me being, all of us on this subcommittee, being part of 
arguably one of the best benefit packages of any employee, the 
Federal Government. And there has been a lot of comparison 
between the Federal Government benefit plan and Medicare. And 
maybe you could articulate--and I know it is repetitive a 
little bit--so that we are clear.
    We are a very different kind of pool across this country of 
employees, working people, hopefully fairly healthy, compared 
with the population that Medicare serves. And this issue of the 
importance that some would say to giving seniors choices of 
their plan, I would like you to contrast that with what I hear 
frequently, seniors saying my doctor--I need to take this 
particular heart medicine to keep me alive, and my HMO will not 
cover it.
    Ms. DeParle. Well, you have raised some issues that we have 
been grappling with this morning. On the differences between 
Medicare and the FEHBP program, I think you are exactly right. 
And in speaking with the people who run FEHBP at OPM, they say 
the populations are very different, that the insurance 
companies who come in to participate in the FEHBP program say 
the populations are different, and that the risk that you are 
assuming is quite different among the two populations.
    Medicare beneficiaries tend to be poorer, sicker. They are 
not active employees. There are a lot of factors that lead to 
higher expenditures.
    Ms. Capps. Now could I raise one caution also about, as we 
are entertaining these various plans. I represent a rural 
district, one about 100 miles north of Los Angeles, where there 
is a great reimbursement rate from HCFA. Ours is about half of 
that. Our cost of living is not half of that in Los Angeles.
    This disparity that impacts service, whether through 
hospitals or providers, is so pervasive. There are no HMOs in a 
large part of my congressional district. Seniors have no choice 
there.
    And any kind of plan that is going to come in in discussion 
my district is going meet a jaundiced ear both about HMOs and 
people's disenchantment with that form of service for medicine 
and also with the pairing of that with delivery of a vital part 
of seniors' health care, which is prescription drugs.
    That is an enormous hurdle I believe that we have to get 
through in this discussion.
    Ms. DeParle. I agree that it is a hurdle. And as you know, 
the amount that we pay the managed care plans is based on 
historical costs under Medicare for fee-for-service, and we 
have some--well, one of our doctors left, but Dr. Ganske is 
still here, who can talk about why is it that it is so 
different in different areas of the country.
    But that is what those payment rates are based on. And let 
me say too that we are not reimbursing managed care plans right 
now to provide prescription drugs----
    Ms. Capps. I know.
    Ms. DeParle. [continuing] which they tell us they need to 
offer to seniors in order to get them to join. So one of the 
things we need to do is to reimburse HMOs to provide 
prescription drugs, and that is one of the things we want to 
do.
    Ms. Capps. I turn back the rest of my time. Thank you.
    Mr. Coburn [presiding]. Thank you. I am sitting in for 
Chairman Bilirakis, and I believe I am the next in order, so I 
will recognize myself for 5 minutes.
    I believe that is accurate. I wanted to ask you the most 
important question today, is how is your baby?
    Ms. DeParle. He is great.
    Mr. Coburn. Great.
    Ms. DeParle. Thank you for asking.
    Mr. Coburn. Great. You know, I made some statements in my--
some sentences and statements in my opening statement about the 
best way to allocate a scarce resource is vigorous competition. 
And I do not know if you are familiar with some of the FTC 
actions of late against several drug companies and four others 
that are pending on collusion that have cost American citizens 
a ton of money, several hundred million dollars in the last 
year.
    And I just wondered if you had a comment about that, 
because no matter what we do--and I am sure we are going to do 
something despite my no vote--whatever we do is going to cost 
more if we are not sure that there is competition there. And I 
just wondered what your thought was about that.
    Ms. DeParle. Well, I think you are right. There does need 
to be competition. The way we go about it, there are different 
ways of doing it. The way we go about it is have pharmacy 
benefit managers to negotiate to get the best prices. But it is 
a very difficult problem, and I am somewhat familiar with, just 
from what I read in the newspapers with what is going on over 
at the FTC, and it is a difficult problem to get your arms 
around.
    Mr. Coburn. Does it surprise you that retail pharmaceutical 
prices, not including new drugs, rose 8 percent last year when 
the cost increases were about 2 percent?
    Ms. DeParle. No. And I have talked to a lot of employers 
and managed care plan executives who tell me their costs, their 
spending is going up, you know, 17 and 18 percent.
    Mr. Coburn. Does the administration have a position as to 
allowing the decision made in 1997 for direct television 
advertising for prescription drugs?
    Ms. DeParle. I do not know, Mr. Chairman. I am aware of the 
decision, but I do not know about any position that we have on 
that.
    Mr. Coburn. Just for the record, it is $1.9 billion this 
last year, and that goes straight to the bottom. And I think 
Dr. Ganske made note of the fact that the expenditures on R&D, 
I think he was in error. The expenditures on R&D in the 
pharmaceutical industry are rising. They are not flat line. But 
the expenditures for advertising and promotion direct to the 
consumer have gone up significantly.
    Have you calculated from inside HCFA the increased 
utilization rate of Medicare based on television advertising 
the pharmaceuticals?
    Ms. DeParle. You know, we have not. But our actuaries have 
been looking at the kind of data that you and Dr. Ganske have 
been discussing in assessing what the cost of this would be, 
and I know CBO has been looking at it as well.
    I do not think we have looked at whether it has increased 
any Medicare utilization. I guess you would be suggesting----
    Mr. Coburn. I am suggesting that because of promotional 
advertising, demand pull through advertising by the drug 
companies, what we are seeing is increased utilization. I am 
seeing it in my practice. More people are coming in because the 
drug company told them they had to, because they could not get 
well without this wonderful drug.
    I would like unanimous consent to introduce into the record 
the FTC cite listing the consent decrees with two large 
pharmaceutical companies and make that a part of the record. No 
objection.
    There was some discussion made about the efficiency of HCFA 
in terms of its cost. I think it is important for the record 
for people to know that one of the reasons HCFA is efficient is 
the vast majority of the work has been transferred to the 
provider in terms of the paperwork and the clearance and 
everything else.
    So it is important, although the same amount of work is 
being done, a large amount of that work now is done in the 
provider's hospitals and the physician's offices across the 
country.
    And it is true. I believe you are very efficient for what 
you are asked to do. I do not like the system very well, but I 
think you do a great job.
    If we were to start all over--and this is the last 
question--and you could tell us, how can we go take care of 
those people who really are making a choice between necessities 
of life and their medicine in this now politicized kind of who 
is going to win the next election environment, would you have 
any advice for us to solve this problem to really meet the 
needs of people without ruining the drug industry, without, you 
know, ruining pharmacy benefit providers?
    Because I see the same thing happening on pharmacy benefit 
providers that happened to the clinical labs. I mean, that is 
what is going to happen.
    We are going to have 3 or 4 major clinical labs in the 
country--I mean, pharmacy benefit providers--and that is it.
    And so I just wondered, is there an advice that you could 
give us that if we were to start over on this that would take 
it out of the political to where we really went to solve the 
problems?
    Ms. DeParle. You always ask the easy questions. You know, 
Medicare is going to be 35 years old next month. So I have 
actually, just was watching recently the video of the signing 
of Medicare and the speeches that were given. And there is no 
question that there have been difficulties and challenges that 
Medicare has faced and continues to face, but I think it was a 
great thing to do.
    I think if you were looking at it today, you would put 
prescription drug coverage into Medicare. And I think we should 
figure out a way to do it, and I do believe it should be 
something that is universal and voluntary. It is going to be 
very tough. And I already heard you say that you think the 
problem is so tough and the challenges that Medicare faces are 
so great already that you would not go there.
    But I hope that we can have some conversations and I can 
convince you that for our generation and the generations to 
follow that it is the right thing to do, because I believe it 
is.
    Mr. Coburn. I thank you. I just would make one comment 
before I recognize Mr. Greenwood is--is Mr. Deutsch next? Is 
that we are adding a cost to a program that is technically 
bankrupt from an actuarial standpoint. And it is important that 
the American people know that. They may want us to do that, but 
there is no actuarial that would go out there and say you 
should add another cost to this program based on what the 
numbers looked like today.
    Mr. Deutsch, I would yield you 5 minutes.
    Mr. Deutsch. Thank you, Mr. Chairman. I want to give you a 
chance at least to respond, because I think to leave a 
statement like that open-ended would be a mistake; the system 
is not bankrupt. That it is an actuarial system that in the 8 
years I have been in Congress we have made changes which have 
increased the actuarial stability of the Medicare system.
    And a lot of the actuarial problems are high class 
problems. High class problems in that part of--the average life 
expectancy of Americans has gone up dramatically. I mean, one 
of the incredible statistics in that 1965 when Medicare was 
created, the average life expectancy of Americans was in fact 
65, and now we are talking about it being over 75 years old. So 
as a person who administers the Medicare program, if you can--I 
want to give you the opportunity to respond a little bit to the 
chairman's comments about the system being bankrupt.
    Ms. DeParle. Well, and you also highlighted the reasons why 
I say Medicare was a great thing and why--you know, I can 
remember what it was like when my grandmother did not have 
Medicare coverage, and then when it came into effect. And I 
know what a difference it has made in the lives of not just 
senior citizens but, frankly, our generation. That we have not 
had to worry as much about providing for them, and that we have 
been able therefore to concentrate on our educations and other 
things. So I do think it has been a great thing.
    I think what the chairman is talking about is the fact that 
while we have made some very tough decisions together up here, 
which have been, you know, extremely difficult for all of you 
and things that providers in your districts have been very 
unhappy about, that have extended the life of the trust fund 
through 2025. I think that was the right thing to do. I also 
think it was a very, very difficult thing to do. And frankly, I 
think it is one of the reasons why HCFA is not the most popular 
agency in town these days.
    He is right, though, that we face a huge demographic 
challenge as all of us in the next 20 years come into Medicare.
    Mr. Deutsch. Can I just, again, just to interject and 
highlight something you just said. There are two separate 
issues. Medicare is an insurance plan where there is an 
obligation for it to be actuarially sound. So what you have 
just stated is something people need to hear. Until the year 
2025 under the present projections, we are actuarially okay out 
to 2025, which is 25 years from now. Not to say that we should 
not do something about that on an actuarial basis today.
    But I think it really is somewhat disingenuous to say the 
system is bankrupt today. It is not bankrupt today. There is 
the baby boom issue, the demographic issue that we are going to 
have to deal with. But a reason not to do a complete Medicare 
prescription drug plan under the premise that the system is 
bankrupt is just not--it is not credible. The system is 
fundamentally sound to 2025.
    I wish we did it this year, hopefully we will do it this 
year, I doubt we are going to do it this year. We can do it 
next year in terms of dealing with the baby boom issue, which 
we can do. But that is not a reason not to do prescription 
drugs under a universal Medicare program today, which is really 
the essence of the final question, which is something also that 
you have talked about.
    I think--and I mentioned in my opening statement as well--
the fundamental difference between what the Republicans are 
proposing and what we are proposing is really that issue. I 
think what we are saying, what the President is saying is that 
we ought to extend Medicare to include prescription drugs, and 
what they are saying is, hey, you cannot do that. You ought to 
do it maybe just for people at 135 percent of poverty, or at 
poverty or a limitation.
    And I think if you can elaborate a little bit more about 
that fundamental difference and what type of impact that would 
have on Medicare in general or for that matter the stability 
that Medicare consisted, I strongly believe that one of the 
successes of Medicare is that it has been a universal system. 
That if it was funded at 135 percent of poverty when it was 
created, it probably would not exist today, because the 
political will to push the system, to make the hard choices 
that you talked about to change the actuarial dates that we 
have done in the last 8 years, I do not think you would have 
had the political will to do that if it was a system that only 
provided for coverage 135 percent of poverty.
    Ms. DeParle. I agree with you, Congressman. I think that 
one of the great strengths of Medicare is that it has been a 
program that is available for everyone, everyone pays into it, 
everyone participates in it, and I think that has been one of 
its strengths. And as I said, I believe there is a way to 
provide a prescription drug benefit for all beneficiaries, and 
I think that is the right way to do it.
    Mr. Deutsch. And I guess just because I think it really is 
the essence of the difference. I mean, if we are talking about 
the Republican proposal, even if it is 135 percent of poverty, 
we are really talking about prescription drugs from a welfare 
context. And I think, you know, just as a Congress which 
collectively and with the President we have eliminated welfare 
as we know it, which was a positive thing, I mean, that is 
really what they are proposing, effectively.
    And I just see, you know, we have just gone through this 
process of eliminating welfare as we know it to come back and 
sort of create welfare for Medicare beneficiaries.
    Mr. Coburn. The gentleman's time has expired. The gentleman 
from Pennsylvania is recognized for 5 minutes.
    Mr. Greenwood. Good morning--afternoon. You indicated 
earlier that you are optimistic that we can get this job done, 
and I am optimistic, too, and I think there are reasons for us 
to be optimistic. And the President clearly wants to do this. I 
think he wants this to be part of his legacy that he leaves 
office having accomplished a Medicare prescription drug 
benefit.
    Clearly, Republicans in the House and the Senate want to 
get this done. The Democrats in the House and the Senate want 
to get this done. I think we all want to do it this year, and 
whether it is the third of the Medicare beneficiaries that have 
no coverage, I mean, they certainly want us to do it; and 
whether it is the half that maybe have inadequate, either no or 
inadequate coverage, they certainly want us to do it. So there 
is a huge national consensus I think to get this thing done.
    The only thing that would make me pessimistic is the extent 
to which partisanship creeps in. Because obviously, you have a 
Republican Congress and a Democratic President, and if we do 
not--if everyone gets partisan about it, the job will not get 
done. The President's not going to sign a bill he does not 
like, and we are not going to send him a bill that we do not 
like. So it has to be bipartisan.
    It seems to me that there are two ways that partisanship 
creeps into this debate. The first one is the--and we have 
heard it here in the course of this hearing already today. The 
first is the what took you so long argument, what is taking you 
so long? You do not have a bill yet. Get on the mark and get 
this done.
    The reality is--and I do not want to sound partisan in 
this--but the fact of the matter is that the Democrats 
controlled the Congress for 40 years since the birth of 
Medicare and did not come up with a prescription drug benefit. 
The President's been in office 7\1/2\ years, and it took him 
that long to get one on the table, and it is taking us a little 
while, too, because it is hard.
    But the fact is that the reason it was not done sooner is 
because we were in deficit spending for most of that time. And 
now because of a lot of things that have gone on in this town 
the several years, we have a balanced budget, we have a 
surplus, we have taken Social Security off the budget, and now 
we have the ability fiscally to do this, and I think that we 
can do it.
    Another way partisanship creeps in is we accentuate the 
differences between the bills. We spend all our time saying, 
well, the President's bill does this and yours does not, or 
ours does this and the President's does not, and tha is what 
the people hate about what happens in this town, because we 
accentuate our differences instead of looking at how we can 
find commonalities.
    But there are more commonalities, it seems to me, than 
there are differences if you look at the two plans. The fact is 
that both plans are based on the reality that we have finite 
resources. We would all love to just say, everyone go get free 
drugs and Uncle Sam will pay for it, whatever it is, for 
however much money you have. But we do not have the resources 
to do that.
    We have limited resources, and that is why both of us are 
looking at premiums, both of us are looking at copays, both are 
looking at deductibles, both are looking at some kind of 
limitation or cap on the benefit, and that is because reality 
dictates that.
    Both the President and the Republican, or I should say the 
bipartisan bill actually that we will be introducing later this 
week, both want to make sure we do not disincentivize or create 
disincentives to the private sector continuing to produce the 
benefit. You are for that and we are for that. That is good.
    Neither of us wants adverse selection. We have to have a 
process that makes sure we do not have that problem. Both of us 
see the value of the private sector being involved, whether it 
is PBMs or whether it is insurers or both, the private sector 
has to be involved, it seems to me, because the pace of change 
in the prescription drug world is so fast that it would be 
impossible for a bureaucracy to keep adding this drug to the 
benefit and that drug to the benefit. You have to have the 
private sector out there being able to move at a much quicker 
pace so that seniors can benefit from these changes.
    Both of us see the need for a stop-loss. You have indicated 
today repeatedly that that is something that is not in the 
President's plan, but you see the value of it, it is in our 
plan, and we need to get there. Both of us agree that it needs 
to be voluntary.
    So my question is, if you were to sit down with Republican 
leaders who have been most familiar with this issue tomorrow, 
and you said let's get this compromise done. Let's get a hybrid 
bill here between what the President has put on the table and 
what Republicans and some Democrats who have joined with us 
have put on the table, what would be the areas, maybe 2, 3, 4 
areas where you think we would have to work the hardest? Where 
are the differences that we need to compromise in order to get 
to a plan that we can all happily feel good about?
    Ms. DeParle. Well, I would start with whether or not there 
is a defined benefit package. And we have had a lot of 
discussion about that today, and I think that is very 
important.
    Mr. Greenwood. And I would say I think that is very 
malleable to that kind of work. I think we are pretty much on 
the same page there, that we want medically necessary drugs to 
be available.
    Ms. DeParle. And then I would also want to look at whether 
the plan as I have heard it described that Congressman Burr and 
others are working on relies too heavily on private insurance 
plans.
    I believe this needs to be a guaranteed benefit, an 
entitlement. There are lots of views about that up here, too, 
but that is what I believe. So I would be looking to see, is 
this thing really affordable, is it really accessible? And the 
question I have there--and frankly, I think it is partly--it 
may be malleable, but it is partly governed by what is in the 
budget resolution. I am not sure that the subsidy in the way it 
is provided, the indirect subsidy, is enough to provide a 
benefit package that is attractive enough to attract most 
beneficiaries and therefore guarantee access and affordability.
    So I would want to spend a lot of time working with you on 
those issues.
    Mr. Greenwood. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Barrett.
    Mr. Barrett. Thank you very much, Mr. Chairman. I want to 
talk about the merits of the plan that is being proposed, but 
first I have to just address for a moment the comments of the 
previous speaker who I think tried or implied that somehow the 
Democrats, because we controlled Congress for 40 years did not 
address this problem.
    As you said in your statement, this was not an issue when 
Medicare was created. It was not an issue in 1965. And the 
reason it has become an issue in the last 5 years is because 
the price of prescription drugs has gone totally through the 
ceiling, and that is why people are mad about it, and that is 
why it has been an issue for the last 3 or 4 years and why we 
have had Democrats in Congress who have tried desperately to 
try to move this issue as a national issue.
    I thought perhaps one of the most telling indicators was 
just the vote we had yesterday, the vote that was the 
tripartisan amendment with Bernie Sanders and Republicans and 
Democrats, that called for some cooperation with pharmaceutical 
companies if they have benefited greatly from NIH grants. And 
when we had a vote on that 4 years ago, it garnered 180 votes. 
When we had the vote on it yesterday, there were over 300 votes 
in favor of the same amendment. You do not need a weatherman to 
tell which way the wind is blowing.
    And it is clear that the American people are sending a 
message through their elected representatives that this is a 
problem now, and it is a much more serious problem now than it 
was even 4 years ago.
    Mr. Ganske. Would the gentleman yield?
    Mr. Barrett. I would be happy to yield briefly.
    Mr. Ganske. I agree with the gentleman that because of the 
price of--the cost of drugs has gone up a lot and the volume, 
the usage has gone up a lot, that it is really on the radar 
screen. But I think it is also fair to say that, you know, if 
you look at the record, 1965, pharmaceutical benefit was 
discussed, and it has been discussed many times over the last 
30 years. The predominant problem has always been, as Chairman 
Rostenkowski has said, where is the money coming from for that?
    Mr. Barrett. And I agree, and I would reclaim my time. I 
want to get to that point now in terms of the plan that is 
being proposed. And specifically, as I understand the plan, and 
we have not seen the plan, is that this would rely primarily on 
private insurance companies.
    My question for you is, is there a market out there right 
now? Is there a number of private insurance companies that are 
offering prescription drug-only plans? Are companies interested 
in doing that? Where is this supply going to come from?
    Ms. DeParle. Well, the closest I guess experience that we 
have is with Medigap. There are some Medigap plans that are 
primarily there because they offer prescription drug benefits, 
and the experience there has not been great; partly because I 
think the benefit design is not rich enough to attract a lot of 
seniors to join it. And therefore--the premiums are very high 
and you do not get much for what you pay.
    So I do think, as I have said several times today, that 
there are some real difficulties inherent in trying to do a 
plan that relies so heavily on private insurance plans. Now, 
should there be Medicare HMOs offering a prescription drug 
benefit? Yes. And we intend under our plan to reimburse them 
for doing it. But a drug-only plan, I think the industry has 
suggested, is not an attractive risk for them to assume.
    Mr. Barrett. In your plan, one of the problems that some of 
us have is the Medicare reimbursement rate. And there are wide 
geographic disparities in this. How do you address that?
    Ms. DeParle. Do you mean the Medicare+Choice plan?
    Mr. Barrett. My good friend from Florida, Mr. Deutsch, who 
just left, represents what those of us in other parts of the 
country call the poster child of Medicare reimbursement rates, 
where their Medicare reimbursement rates are much higher in 
Florida than they are in Minnesota or Wisconsin.
    Mr. Bilirakis. Not in all of Florida, by the way, Tom, only 
South Florida.
    Ms. DeParle. That is true. It is not in Mr. Bilirakis's 
area. There is only, you know, I guess I was talking about 
Medicare turning 35 next month, and it is appropriate therefore 
to look at the history.
    The history of this is that from the beginning, Medicare 
reimbursement rates were supposed to be tied to what physicians 
were charging or hospitals were charging in a particular area. 
That is a heavy part of it. And therefore, the volume and 
intensity of what is provided by doctors and hospitals is 
reflected in the cost, and Medicare HMO payments under the 
statute are tied to those payments. So that is why you have 
such dramatic differences around the country in what the 
capitation payments are.
    Mr. Barrett. And I do think that at some point if the 
parties are interested in working something out that there will 
be some sort of compromise. But I think that what we are seeing 
is in some parts of the country, you can have a generous 
prescription drug benefit, and in others you can't.
    Ms. DeParle. Right. And that is what I do not think is 
fair. I think this is a national program, and all beneficiaries 
should have access to an affordable drug benefit.
    Mr. Barrett. Thank you. And I would yield back my time.
    Mr. Bilirakis. Thank you, Tom. Well, Madam Administrator, 
thanks so very much for your patience and for being here, and 
you have been very helpful. I do not know what the future 
holds, but obviously--I honestly feel that we all want a 
prescription drug plan, and hopefully, if we all work together 
and put partisanship aside, we will get it done. But we always 
say that and then it never really happens, does it? We will do 
our best. Thank you very much.
    Ms. DeParle. Well, I am optimistic, and I want to thank the 
committee for your serious commitment to helping beneficiaries.
    Mr. Bilirakis. Thank you. The second panel, if they will 
come forward, please, consists of Ms. Karen Ignagni, President 
and Chief Executive Officer of American Association of Health 
Plans; Mr. Craig Fuller, President and Chief Executive Officer 
of the National Association of Chain Drug Stores; Mr. Charles 
N. Kahn, President of the Health Insurance Association of 
America; Ms. Judy Feder, Dean of Public Policy Studies, 
Georgetown University; Mr. Patrick B. Donoho, Vice President of 
Government Affairs and Public Policy for the Pharmaceutical 
Care Management Association; Mr. Ron Pollack, Executive 
Director of Families USA; and Ms. Nancy Davenport-Ennis, 
Founding Executive Director, Patient Advocate Foundation of 
Newport News, Virginia.
    Ladies and gentlemen, your written statement as per usual 
is a part of the record, and we will set the clock at 5 minutes 
and ask that your oral testimony complement your written 
statement.
    We will start off with Ms. Ignagni.

  STATEMENTS OF KAREN IGNAGNI, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, AMERICAN ASSOCIATION OF HEALTH PLANS; CRAIG L. FULLER, 
PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF 
   CHAIN DRUG STORES; CHARLES N. KAHN III, PRESIDENT, HEALTH 
INSURANCE ASSOCIATION OF AMERICA; JUDITH FEDER, DEAN OF PUBLIC 
POLICY STUDIES, GEORGETOWN UNIVERSITY; PATRICK B. DONOHO, VICE 
      PRESIDENT OF GOVERNMENT AFFAIRS AND PUBLIC POLICY, 
PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION; RONALD F. POLLACK, 
 EXECUTIVE DIRECTOR, FAMILIES USA; AND NANCY DAVENPORT-ENNIS, 
    FOUNDING EXECUTIVE DIRECTOR, PATIENT ADVOCATE FOUNDATION

    Ms. Ignagni. Thank you, Mr. Chairman, members of the 
committee. I would like to make four points in speaking with 
you this afternoon.
    First, our members support creating a drug benefit for 
Medicare beneficiaries. It is a long overdue matter that this 
Congress can and should confront, in our view.
    Making prescription drug coverage available is an essential 
part of the effort to bring the 1965 program in sync with the 
benefits programs of today. In fact, a linchpin of effective 
disease management strategies is actually the presence of 
prescription drugs, and many physicians report around the 
country that they have barriers to prescribing the right and 
most appropriate procedures for beneficiaries because of the 
absence of prescription drugs in this population.
    No. 2, in our view, an essential part of ensuring that 
seniors have access to affordable prescriptions will be to 
build on what works. To that end, we have been encouraged both 
this morning, in the Ways and Means committee discussions 
yesterday, and indeed in the public dialog, that choice is a 
key principle within so many proposals.
    And second, there is a growing recognition about the need 
to preserve what exists as a building block for taking the next 
step.
    No. 3. Medicare+Choice is already providing drug coverage 
to millions of beneficiaries who otherwise would not have 
access. However, in a little over 3 weeks, our plans face a 
deadline to let HCFA know whether they are going to be able to 
continue to participate in the Medicare+Choice program. We have 
seen pullouts, we have seen plans being forced out because of 
the unintended consequences of the Balanced Budget Act, which 
this committee has spent a great deal of time on, as well as 
the sheer number of regulations and instability and 
unpredictability within the regulatory environment.
    Now to her credit, the Administrator DeParle has recognized 
many of these problems as well and has already embarked on a 
strategy designed to deal with some of the unpredictability, 
but more needs to be done.
    You have it in your power to stabilize this program, and we 
urge you to act now to preserve the program that has in fact 
served so many low- and moderate-income beneficiaries who have 
nowhere else to turn for protection from high out-of-pocket 
costs in the traditional Medicare benefit, catastrophic 
benefits, and prescription drugs.
    Also I would like to comment, Mr. Chairman. There's been 
some discussion this morning about rural areas and whether 
managed care is interested in being in rural areas, and I would 
suggest to the committee that plan decisions are very much 
influenced by the willingness of single hospital-based systems 
in rural areas that in fact contract with our plans.
    Finally, No. 4, in testimony we have offered principles for 
your consideration in designing prescription drug coverage. 
These principles are embedded in many of the proposals being 
discussed today, beginning with the concept of universality, 
which is that all beneficiaries should be eligible to 
participate in this benefit. We believe that that is common to 
both proposals as we have heard them discussed.
    Subsidies for low-income beneficiaries. That seems to be 
common to both proposals.
    Sustained funding is a challenge for all proposals in this 
area, as it would be for any new benefit, and options and 
flexibility. You are having a great deal of discussion about 
that. We commend you for that.
    And finally, a floor package of benefits, which we 
understand the concept of a floor is common to both.
    In conclusion, Mr. Chairman, we stand ready to work with 
you to contribute to the committee's efforts, and we support 
the objective which we know all of you share of providing this 
important benefit and this important population with affordable 
prescription drug coverage. Thank you.
    [The prepared statement of Karen Ignagni follows:]
   Prepared Statement of Karen Ignagni, President and CEO, American 
                      Association of Health Plans
                            i. introduction
    I am Karen Ignagni, President and Chief Executive Officer of the 
American Association of Health Plans (AAHP). On behalf of the more than 
1,000 HMO, PPO and other network-based health plans that are members of 
our association, I am pleased to testify this morning on the vitally 
important issue of extending prescription drug coverage to this 
nation's 38 million Medicare beneficiaries.
    It bears mentioning that our membership includes the majority of 
Medicare+Choice organizations, which collectively serve more than 75 
percent of those beneficiaries who have chosen Medicare managed care 
over the traditional fee-for-service option. As such, we are delighted 
that Congress is focusing so much attention on this urgent national 
priority that affects so many American seniors and their families.
      ii. prescription drug coverage critical to medicare program
    We believe that creating an affordable prescription drug benefit 
under Medicare is the single most important piece of unfinished 
business this Congress can and should confront. Not because the issue 
is important to those who will play a role in actually delivering a 
prescription drug benefit, but because it affects so profoundly the 
lives of Americans who have given so much to our nation and to the 
generations behind them.
    We owe it to these millions of Americans--the men and women that 
have so eloquently been called the ``Greatest Generation''--to ensure 
that no Medicare senior in this nation faces the cruel reality of 
having to decide between paying for drugs or the monthly food bill.
    Our great economic expansion--which has created so much prosperity 
for so many--must now be big enough to accommodate a simple 
proposition: that Medicare seniors deserve access to affordable 
prescription drugs. And that no one will be left behind.
    When established in 1965, Medicare reflected the state of the art 
in health care delivery and benefits design. At that time, few people 
with private health insurance had coverage for prescription drugs. 
Today, most commercially-insured individuals receive care through 
managed care plans, and prescription drug coverage is the norm, not the 
exception. Prescription drugs have transformed the treatment of 
innumerable illnesses and conditions and have improved the quality of 
life for millions of Americans. Access to prescription drugs is 
particularly crucial for Medicare beneficiaries. Although the elderly 
comprise 12 percent of the population, they account for 34 percent of 
total prescription drug costs (Mueller, 1997). It is estimated that 
individuals over the age of 65 use four times as many prescription 
items as those under 65. Prescription items are common treatment 
regimens for chronic conditions, which are highly prevalent among the 
elderly. Health plans and disease management companies have pioneered 
programs to help individuals with chronic conditions, such as 
congestive heart failure and cancer, among others, to maintain their 
health, and prescription drugs are a central component of these 
programs.
iii. medicare+choice program is critical to ensure a strong foundation 
                     for prescription drug coverage
    We believe that Congress can deliver a prescription drug benefit to 
America's seniors through a bipartisan effort, and that members can 
create a system that is faithful to Medicare seniors and indeed all 
Americans.
    The job won't be simple. And the choices won't be easy. But the 
first step is to listen closely to what seniors really want from their 
Medicare system, and to build upon what's already working in the 
marketplace.
    First and foremost, seniors are telling us that they want control 
over their health care to rest with them, not with Washington. That 
means preservation of choice--so that Medicare seniors can choose a 
prescription drug benefit that's right for their unique needs and 
wants, and that no one gets locked into a one-size-fits-all system.
    Second, we can't find common ground by, in essence, throwing out a 
coverage option that has proven to be effective. Managed health care 
has played a significant role in providing an affordable prescription 
drug benefit to most of the 6 million seniors who have chosen the 
Medicare+Choice option. The simple fact is that managed health care has 
already played a key role in expanding a prescription drug benefit 
under Medicare to millions of Americans who otherwise would not have 
had access to it.
    Building on that success--instead of allowing Medicare+Choice to 
remain in a state of crisis--is the first significant step we can make 
to answering the Medicare prescription drug challenge that has been 
laid before us.
    AAHP's member plans have had a longstanding commitment to Medicare 
and to the mission of providing beneficiaries high-quality, 
comprehensive services and lower out-of-pocket costs. Many of our 
member plans have served beneficiaries since the inception of the 
Medicare HMO program as a demonstration project. Recent studies 
highlight Medicare beneficiaries' high levels of satisfaction with 
their Medicare health plans. HCFA data show that, among beneficiaries 
who identified themselves as having strong preferences, HMOs have a 
larger proportion of very satisfied enrollees than fee-for-service 
Medicare. Beneficiaries' satisfaction with the program was further 
demonstrated last month, when more than one hundred beneficiaries who 
have chosen a Medicare+Choice plan over the fee-for-service delivery 
system came to Washington to talk about the importance of having a 
choice of coverage, having additional benefits, and having protection 
from higher out-of-pocket costs.
    Health plans participating in the Medicare+Choice program have long 
recognized the importance of prescription drugs in meeting their 
members' health care needs. In fact, almost 70 percent of plans and 
most of the more than 6 million beneficiaries enrolled in a 
Medicare+Choice plan have a prescription drug benefit. A recent AAHP 
analysis of HCFA data showed that many of these beneficiaries are 
``unsubsidized''--meaning they do not receive any third party 
assistance from, for example, a former employer or through Medicaid, in 
purchasing supplemental coverage for prescription drugs. Specifically, 
AAHP found that a majority of unsubsidized beneficiaries with coverage 
for prescription drugs were enrolled in health plans (see attachment: 
``Financially Vulnerable Medicare Beneficiaries Rely on HMOs for 
Prescription Drug Coverage''). Without this option, these financially 
vulnerable beneficiaries undoubtedly would be forced to forego 
medication therapies that would help maintain their health and improve 
their quality of life. This is why we believe it is critically 
important to assure that Medicare+Choice beneficiaries maintain the 
important benefits they currently receive through their Medicare+Choice 
plans.
    The promise made to beneficiaries in the 1997 Balanced Budget Act 
(BBA) of a stable Medicare program that offered a wide array of choices 
all over the country to allow beneficiaries to meet their health needs 
in the most effective way possible has yet to be fulfilled. Unintended 
consequences of the BBA have resulted in beneficiaries who chose to 
join a health plan losing benefits, facing sharp premium increases, 
and, in many instances, losing the option of even remaining in the plan 
of their choice. Since enactment of the BBA, nearly 700,000 
beneficiaries have had their Medicare+Choice coverage disrupted. 
Already, a number of plans have announced that they will be forced to 
exit the program effective January, 2001 because of inadequate funding 
and excessive regulatory burdens.
    Last year, this Congress, in passing the Balanced Budget Refinement 
Act of 1999 (BBRA), took the first steps to correct the BBA's 
unintended consequences. The phase-in of HCFA's risk adjuster was 
slowed in order to minimize its impact on Medicare+Choice enrollees. 
Among other changes, Congress expressed its intent that the risk 
adjuster be budget-neutral rather than used to reduce total payments on 
behalf of seniors and individuals with disabilities who choose a 
Medicare+Choice plan; and user fees for the beneficiary information 
campaign were fairly apportioned. We appreciate the work of members of 
this Committee in recognizing the importance of Medicare+Choice and in 
advancing proposals to further stabilize the program. We strongly urge 
you to take bold measures this year to preserve beneficiary choices and 
avoid any further disruptions in coverage. These efforts are crucial to 
ensuring a strong foundation for the effort to expand prescription drug 
coverage.
iv. aahp principles and issues for consideration in expanding access to 
                 affordable prescription drug coverage
    Again, AAHP member plans favor expanding access to prescription 
drug coverage. This topic was central among those discussed by our 
Board of Directors last winter. AAHP's Board believes that 
beneficiaries deserve a wide variety of coverage choices. Recognizing 
that all beneficiaries do not have the same needs and that many have 
already exercised their choice of coverage, our Board committed to 
conveying the importance of respecting choices currently available and 
minimizing any disruption of these choices. Our Board approved the 
following principles on prescription drug coverage:

 Enhance Coverage of and Financial Support for Prescription 
        Drugs: Any proposal to expand prescription drug coverage should 
        reflect Medicare's underlying philosophy of universality. All 
        beneficiaries should have equivalent financial support for 
        affordable prescription drug coverage. Additional financial 
        support should be made available for those with special needs.
 Sustainable and Actuarially Sound Funding that is Equivalent 
        Across All Funding Options: Expanding prescription drug 
        coverage will increase total Medicare spending. The additional 
        costs should be supported by a responsible and sustainable 
        financing mechanism, not on a discretionary basis. Any 
        sustainable initiative should be designed with the incentives 
        needed for a stable private sector delivery system. Federal 
        contributions should be equivalent across all coverage options. 
        New funds dedicated to prescription drug coverage should 
        include options that have previously provided prescription drug 
        coverage.
 Allow Beneficiaries a Range of Options So They Can Select 
        Coverage That Best Meets Their Needs: Any proposal should 
        recognize various existing coverage options and other potential 
        innovative solutions and should retain beneficiaries' ability 
        to select the option that best meets their coverage needs.
 Meet Beneficiaries' Needs through Flexibility in Benefit 
        Design and Effective Delivery Strategies: Flexibility in 
        benefit design and strategies that promote the effective use of 
        prescription drugs are critical features of effective drug 
        coverage. Should an initiative link financing to a minimum 
        benefit, entities that offer coverage should be allowed to 
        structure benefits that meet or exceed this minimum according 
        to an actuarial equivalence or similar standard. Likewise, 
        strategies--such as formularies, generic substitution, and 
        programs to prevent problems associated with use of multiple 
        prescriptions--are essential to high-quality coverage for 
        beneficiaries. Permitting flexibility in structuring coverage 
        will promote broader choices and better care for beneficiaries.
 Minimize Disruption of Benefits Among Beneficiaries Who 
        Currently Have Coverage By Ensuring Equity and Value in the 
        Government's Contribution: Recent reductions in government 
        funding have forced many Medicare+Choice plans to reduce the 
        scope of their prescription drug benefits or to increase 
        beneficiary cost-sharing. Stabilizing the Medicare+Choice 
        program is crucial to prevent the further erosion of benefits 
        and coverage choices. Although the Balanced Budget Refinement 
        Act of 1999 (BBRA) was a good first step toward this end, much 
        work remains to ensure that the promises made to beneficiaries 
        with the passage of the BBA will be fulfilled.
 Preserve Access to Integrated Health Care Benefits: Health 
        plans that offer prescription drug coverage have sought to 
        fully integrate this benefit into other coverage that Medicare 
        enrollees receive. For example, medication therapy is a central 
        component of health plans' disease management programs, which 
        coordinate the delivery of health care services to 
        beneficiaries with chronic conditions. Any proposal should 
        preserve health plans' abilities to incorporate prescription 
        drugs into an integrated benefits package.
    In addition, proposals to expand prescription drug coverage for 
Medicare beneficiaries must address the difficult issue of adverse 
selection. To be viable, a program must strongly encourage 
beneficiaries to begin purchasing coverage when they are using few 
prescription drugs, rather than when they need or anticipate the need 
to use many prescription drugs. Failure to address this issue could 
jeopardize the Committee's efforts by undermining every organization's 
long-term ability to offer affordable prescription drug coverage.
    To expand on the issue of flexibility in benefit design and 
management, we urge the Committee to consider the implications of state 
requirements governing prescription drug coverage. Simply stated, the 
application of state mandates or restrictions limits plans' abilities 
to design affordable prescription drug benefit packages that best meet 
beneficiaries' needs. Although the BBA preempts state benefits 
mandates, HCFA has interpreted the BBA preemption to exclude state cost 
sharing standards related to those mandates. The consequence is that a 
Medicare+Choice plan that offers benefits beyond the fee-for-service 
benefits package, such as prescription drug coverage, may be bound by 
the cost sharing requirement in state law. Another concern involves 
state requirements related to benefits management and administration. 
We support clarifying the preemption language so that state 
requirements do not prohibit health plans from managing benefits 
effectively and achieving the goal of maintaining the affordability of 
coverage over the long-term. A federal benefit will not remain 
affordable if state law requirements still restrict flexibility.
                             v. conclusion
    The American Association of Health Plans (AAHP) and its member 
plans stand ready to contribute as the Committee continues its 
deliberations on the best way to expand access to affordable 
prescription drug coverage. We have tried today to contribute to the 
Committee's dialogue and pledge any further assistance on the issues of 
expanding prescription drug coverage, broader Medicare reform, and the 
need to preserve the Medicare+Choice program as an important building 
block toward these objectives.
    As you move forward with specific legislative proposals, we urge 
you to allow beneficiaries a range of options so they can select 
coverage that best meets their unique needs and circumstances. At the 
same time, please assure that beneficiaries maintain control over their 
health care choices and do not lose any of the coverage options they 
currently enjoy. Any legislation Congress enacts this year should place 
a high priority on protecting the benefits and choices of Medicare 
beneficiaries who currently receive prescription drug coverage through 
Medicare+Choice plans.
    AAHP is pleased that Congress is addressing this critical issue of 
prescription drug coverage for Medicare. As described today, our health 
plans have significantly contributed to the ability of beneficiaries to 
access prescription drugs. We thank you for the opportunity to testify.

    Mr. Bilirakis. Thank you, Karen. Mr. Fuller. And nice to 
see you, sir.

                  STATEMENT OF CRAIG L. FULLER

    Mr. Fuller. Thank you, Mr. Chairman, and members of the 
committee. It is a pleasure to be here. I have submitted a 
statement which you have for the record, and maybe during the 
questioning we can address some of the issues there.
    I thought that I might reflect a little bit on some of the 
comments that were made by the members in their opening 
statements as well as some of the questions, because there was 
much that we agreed with and many very fine questions raised.
    I represent 150 chain pharmacy companies, 32,000 
pharmacies. And for many of the seniors that are without drug 
coverage today, I sense something of a train wreck coming. I 
fear that with thoughtful deliberation which you are having 
today and in other places of the Congress--most of us spent 8 
hours yesterday at Ways and Means. We are prepared to--and 
happily we would spend 8 hours with you today to advance this. 
Some of us would.
    Because it is--and it is a serious issue. But at the end of 
the day, if nothing passes this Congress, there are hundreds of 
thousands of Americans who will go into those 32,000 pharmacies 
today, they are going to continue for years to face the same 
problem.
    We worried about this some months ago. And as a result, we 
at the National Association of Chain Drug Stores considered an 
approach slightly different than what has been talked about 
during much of the day, but it relates to some of the issues 
that have been raised.
    Because if you take the 39 million people on Medicare and 
you take out the 70 percent that have some prescription drug 
coverage now and you look then, as we have done, at the 
individuals that are 200 percent of the poverty line and below, 
you could provide coverage for them through the States with a 
grant of $30 billion at the Federal level, supplemented by the 
States, or you can put $41 billion out there to the States and 
cover it all. You might have a copayment at the State level. 
You would not have a cap. You would not have a premium.
    You could put it into effect fairly quickly, because 
somewhere--Chip and I are close. We say 15 and he says 19. We 
are approaching 20 States that already offer benefits to 
seniors. And you could do it this year. And you could provide 
them with the coverage very quickly, so that with all the fine 
deliberation that is going on, you would give yourselves next 
year with the Congress and a new administration a chance to 
really tackle major Medicare reform, which we are all for, and 
I think we all believe should have prescription drug benefit.
    Mr. Bilirakis. So you would do that outside of the scope of 
Medicare?
    Mr. Fuller. Pardon me?
    Mr. Bilirakis. Your suggestion would be outside of the 
scope of Medicare?
    Mr. Fuller. It would be provided by the States outside of 
HCFA and--yes. Yes, sir. And in fact, it would be similar to a 
State-based approach, sir, that you have offered as H.R. 2925 
and----
    Mr. Bilirakis. That is just coincidental.
    Mr. Fuller. It is coincidental. But we find much to 
recommend it.
    My statement says, and we have really applied three tests 
to our plan and to others. We say, look, first of all, there 
needs to be a sense of urgency about this. I have addressed 
that. It needs to be enacted this year.
    Second, it needs to recognize and it ought to enhance 
patient care and patient outcomes. After all, at the end of the 
day what we want to make sure of is that seniors are getting 
the kind of care they need.
    You raised, Mr. Chairman, in your opening remarks the 
comments about the role of pharmacy. I have great respect for 
insurance companies. I have great respect for pharmacy benefit 
managers. But frankly, it is pharmacists that manage health 
care for patients, working with their doctors. And if we turn 
the program over or hope to turn some of these programs over to 
institutions that do not recognize the role of the pharmacist--
I am not suggesting insurance companies do not recognize it--
but if we do not recognize the role of pharmacists, clearly, 
the kind of problem that Mr. Stupak mentioned where a patient 
buys a prescription for $100, whether he agrees or disagrees 
with the price, for a drug that has to be used properly or it 
is not worth anything, we are going to see a further erosion of 
the quality of patient care.
    So part of our plan and part of our SeniorRx Gold plan, 
would specify the kind of pharmacy services that should be 
covered.
    And finally, and I will close with this third test--third 
question is, a fair return for community pharmacy. You know, 10 
years ago, 75 percent of people purchased their prescriptions 
at retail. Utilization is increased, the quality of 
pharmaceutical medication has dramatically increased. They are 
of tremendous benefits to people. Certainly the cost has 
increased. But so has the whole process by which--the process 
has evolved by which we pay for this medication. So that today 
most of the chains that I represent, 90 percent of the 
prescriptions are paid for by a third party plan, usually 
involving a PBM, which has driven down the price.
    A CBO study, which I can provide you with, shows most of 
the costs are driven out by attacking costs at the pharmacy 
level. But at pharmacy, the margin is about 2 percent or less. 
So you are not going to find much more savings there. And you 
are in fact making it more and more difficult for community 
pharmacy to provide the kinds of services they should be able 
to provide. Perhaps I can discuss that more in some of the 
questions.
    Thank you for the this opportunity.
    [The prepared statement of Craig L. Fuller follows:]
 Prepared Statement of Craig L. Fuller, President and Chief Executive 
           Officer, National Association of Chain Drug Stores
    Mr. Chairman and Members of the Committee. I am Craig Fuller, 
President and Chief Executive Officer of the National Association of 
Chain Drug Stores (NACDS). I appreciate the opportunity to appear 
before you today to discuss various legislative proposals to cover 
prescription drugs under Medicare, and their impact on Medicare 
beneficiaries and community retail pharmacies.
    NACDS represents more than 150 chain pharmacy companies that 
operate over 32,000 community retail pharmacies in the United States. 
The NACDS membership base fills about 62 percent of the approximately 3 
billion prescriptions that are dispensed each year in the United 
States. We employ approximately 94,000 pharmacists in our stores.
    First and for the record, let me say that NACDS and its members 
applaud the significant time and effort that you have contributed to 
the debate about the best way to expand prescription drug coverage to 
Medicare beneficiaries. We understand and appreciate the need to 
improve prescription drug coverage for seniors. Every day, we see the 
impact on people who too often must choose between the food they need 
to sustain them, and the medication they need to treat an illness.
    As many of you know, NACDS has been working for several months on a 
state-based plan that would fund a prescription benefit plan for needy 
seniors that we call SenioRx Gold. SenioRx Gold is supported by a 
coalition of groups, including the American Pharmaceutical Association, 
the American Society of Consultant Pharmacists, the Food Marketing 
Institute, and the National Consumers League.
    Mr. Chairman, you offered a similar state-based approach to 
providing prescription drug coverage to low-income seniors in H.R. 
2925, ``The Medicare Beneficiary Prescription Drug Assistance and Stop 
Loss Protection Act'', which has bipartisan support. We applaud your 
efforts in this regard, and believe that, at the end of the day, this 
approach makes the most sense this year.
    While the specifics of ``The Medicare Prescription Drug and 
Modernization Act'' are new to us, because of our work on SenioRx Gold, 
we have a pretty clear idea of the critical elements that must be 
considered if real prescription drug assistance is going to reach those 
who need it most. Indeed, we have attempted to apply three important 
tests that we believe should be applied to any proposal designed to 
enhance prescription drug coverage for seniors.
Sense of Urgency
    First, we need a national sense of urgency about reaching needy 
seniors across America this year with a program that allows them to 
receive the prescription medication they and their doctor agree they 
need. Frankly, the leadership in Congress has repeatedly stressed the 
importance of meeting this challenge, and with these hearings today, 
your committee is expressing an urgency, which we fully commend. 
However, as you are aware, the insurance industry has expressed 
concerns about the viability of private-market ``drugs only'' insurance 
proposals, calling them ``unworkable'' and raising serious questions 
about whether they would amount to nothing more than ``unfulfilled'' 
promises to needy seniors.
    We also know from experience that the Balanced Budget Act of 1997 
created various other types of health insurance and provider options 
for Medicare beneficiaries, which have not come to fruition. We are 
concerned that ``drugs only'' policies would meet the same fate.
Enhance Patient Safety/Improve Patient Outcomes
    Second, any successful plan must enhance patient safety and improve 
patient outcomes. We must not settle for an approach that fails to 
safely care for seniors, who generally have more intense prescription 
medication management needs than non-senior populations. We know that 
Members of Congress are truly concerned about structuring a benefit 
that provides medication management programs for seniors.
    The House leadership proposal would create ``drugs only'' insurance 
policies that Medicare beneficiaries could purchase in the private 
marketplace. These policies will likely be administered by 
pharmaceutical benefit managers--or PBMs. As you know, community retail 
pharmacy has a significant amount of experience in dealing with 
PBMs.1
---------------------------------------------------------------------------
    \1\ According to IMS Health, almost 75 percent of prescriptions 
filled in a community pharmacy were paid for with cash outside of a 
plan in 1990. Now, almost 85 percent of all prescriptions are paid for 
by plans--most with a prescription benefit manager involved.
---------------------------------------------------------------------------
    For the record, let me state that, with all due respect, insurance 
companies and PBMs do not manage care--pharmacists do. The role of the 
pharmacist in reducing the risk of conflicting medications and in 
assisting patients with proper dosage and usage requirements is a well 
established, critical element of healthcare delivery.
    But seniors need more intense care--medication management, disease 
management, refill reminders, and consistent monitoring. Will ``drugs 
only'' insurance plans be structured so that we are providing both 
prescription drugs and important medication therapy management programs 
to seniors?
    We believe that any new Medicare prescription drug plan should 
assure that these important programs are part of the standard benefit 
package--just like the prescription drug product--especially for those 
seniors most at risk for potential medication-related adverse events.
    We also believe that it is important that legislation assure that 
pharmacists have adequate time and proper incentives to deliver these 
important quality improvement services for Medicare beneficiaries.
Fair Return for Community Pharmacy
    Which leads me to my third point: any successful plan should assure 
that the highly-efficient community pharmacy infrastructure--which 
operates on 2 percent net profit margins--remains viable to serve the 
health care needs of all Americans.
    I'm not suggesting that the entire issue of pharmacy reimbursement 
for public health care programs be tackled by this committee (at least 
in this session), but I do want to point out that PBMs tend to focus 
most of their cost containment on pharmacy providers. This has resulted 
in a steady reduction of margin at the pharmacy level.
    While I want to point out that language currently in the proposal 
allows PBMs to aggressively negotiate discounts from pharmaceutical 
manufacturers, you should be aware that a 1998 CBO study said:
        ``Much of the savings that PBMs achieve appear to come from the 
        lower prices paid to pharmacies rather than from the rebates 
        offered by drug manufacturers.'' 2
---------------------------------------------------------------------------
    \2\ Congressional Budget Office, How Increased Competition from 
Generic Drugs Has Affected Prices and Returns in the Pharmaceutical 
Industry, July 1998, p. 8. The study found that 50 to 70 percent of the 
drop in the plans' spending on prescription drugs resulted from lower 
retail prescription prices. Only 2 to 21 percent of the savings 
resulted from manufacturer rebates that the PBMs shared with the health 
insurance plans.
---------------------------------------------------------------------------
    Moreover, the plan before us today would allow for ``price 
controls'' on retail pharmacies. That's right--the plan before us today 
would allow PBMs to mandate a certain price that pharmacies could 
charge Medicare beneficiaries for prescriptions after they have reached 
their coverage cap. We are unsure why Congress would impose price 
controls on a highly competitive industry that operates on a 2 percent 
net profit margin. We urge Congress to reject price controls on retail 
pharmacies.
Conclusion
    Mr. Chairman, I'd like to conclude by saying we recognize that 
these are serious and difficult issues and we appreciate your 
leadership and that of members of your committee for bringing this 
important legislative proposal forward for review and discussion. You, 
members of your committee and your staffs have encouraged us to be 
frank and candid during this entire process. We would be pleased to 
work with you in addressing some of the concerns I have outlined in my 
testimony. We think, as I suggested earlier, that there are several 
reasons we can provide an important perspective.
    Finally, I will end by saying that we also remain committed to the 
notion that if the Medicare Prescription Drug and Modernization Act 
cannot be advanced in the shortness of time, we hope given the sense of 
urgency you and others have shown for the millions of needy seniors and 
their families, that you would consider turning to the state-based 
program we call SenioRx Gold. It is not perfect and it is not the long-
term solution. However, it does, in our view, meet the three critical 
tests I outlined to you today and would provide meaningful benefits, 
effectively and safely to those seniors with the greatest need.
    This program is designed as an interim, or stopgap approach. By 
providing federal assistance to states that voluntarily elect to 
develop prescription assistance programs, SenioRx Gold builds upon the 
15 states that already have been successfully operating these programs. 
It gives the states the flexibility to meet the needs of 64 percent of 
those Medicare beneficiaries without prescription drug coverage. In 
fact, SenioRx Gold would provide a more comprehensive benefit than 
other proposals. With no premiums, no annual deductible and lower 
copays, needy seniors would not be deterred from participating.
    Whichever course you pursue, we thank you for the opportunity to 
share our views and remain committed to working with you to address 
this and other issues. Thank you very much.

    Mr. Bilirakis. Thank you, Mr. Fuller. Mr. Kahn.

                STATEMENT OF CHARLES N. KAHN III

    Ms. Kahn. Thank you, Mr. Chairman. As you know, Mr. 
Chairman, over a decade ago, I worked long and hard on the last 
attempt by the Congress to develop a drug benefit for seniors 
in Medicare Catastrophic. Later I staffed the members who led 
the effort to repeal that law also. So I have a deep and 
personal understanding of how truly difficult it is to develop 
a Federal policy to assist seniors in purchasing drugs.
    If nothing else, as has been pointed out today, I think it 
is critically important that seniors have full confidence from 
the get go in whatever policy you develop and that they 
understand there will be cost sharing and that cost sharing is 
bound to be acceptable to them before you enact anything.
    This and other lessons of that Medicare Catastrophic debate 
are important to draw upon as the committee examines this 
complex issue.
    I also assisted in the development of Medicare+Choice, and 
share the subcommittee's concerns about the future of that 
program. I believe that the future of market-oriented 
approaches to preserving Medicare depends on keeping 
Medicare+Choice viable.
    Mr. Chairman, I believe there is a consensus today that 
seniors need help with prescription drugs. Advances in drug 
therapies have vastly improved medical care, as well as the 
very health of millions of Americans. However, at the same 
time, these advances come at a tremendous cost.
    A study done for HIAA and the Blue Cross/Blue Shield 
Association by the University of Maryland projects that the 
Nation's spending for prescription drugs will increase by 15 to 
18 percent annually over the next 5 years. I repeat, over the 
next 5 years. This reflects more than doubling of annual drug 
costs to $212 billion by 2004. These growing drug costs are 
clearly putting a squeeze on our Nation's seniors.
    Mr. Chairman, we all agree on the goal of helping seniors 
with drugs. But as you and the subcommittee consider solutions, 
I urge you to weigh carefully the consequences of the policy 
alternatives. The lessons of unintended consequences were 
learned well in 1988 and 1989.
    I will be happy to comment specifically on the new 
bipartisan drug coverage plan when the legislative details are 
available. I can say, however, from my understanding of the 
proposal, it appears to provide a realistic approach to 
assuring seniors that coverage for drugs will be available to 
them since it has a fallback.
    However, HIAA continues to maintain its strong conviction 
that the much discussed private-drug-only insurance insurance 
option is unworkable and will not fulfill the expectations of 
seniors.
    In my written testimony I provided a detailed critique 
which elaborates on our member companies' concerns.
    Additionally, as you consider options, because of the 
expensive nature of drug coverage, we are equally concerned 
that simply mandating that Medicare HMOs or Medigap plans cover 
outpatient prescription drugs will not serve beneficiaries 
well.
    Next, the bipartisan proposal recognizes that 
Medicare+Choice plans are severely underpaid, and action is 
necessary now to save this important option that so many 
seniors depend on.
    Most Medicare HMO plans now offer prescription drugs 
coverage. However, sustaining this benefit will be difficult 
since payment inequities and regulatory burdens are major 
hurdles. Medicare+Choice cannot continue to offer even the 
basic Medicare benefits if the status quo remains.
    Therefore, for a seniors' drug program to be successful, 
Medicare must make a firm commitment to provide payments to 
Medicare HMOs that keep pace with escalating medical costs, 
including those for pharmaceuticals.
    Finally, the proposal for a new Medicare Board to replace 
HCFA has great potential. Our experience indicates that HCFA 
has had great difficulties implementing the Medicare+Choice 
program, and a fresh start is needed.
    Last week HIAA released a white paper by Bruce Fried, the 
former director of HCFA's HMO office. The paper well documents 
the problems that have caused many HMOs to throw up their hands 
and either exit all or part of the Medicare program. I urge you 
to review the Fried report and consider his recommendations.
    In conclusion, I would like to reiterate the point that if 
the Congress and the administration do not address the pressing 
problems facing Medicare HMOs, it will be difficult if not 
impossible to succeed at developing true, market-oriented 
approaches to reforming Medicare.
    Thank you very much, Mr. Chairman. I will be happy to 
answer any questions the subcommittee may have.
    [The prepared statement of Charles N. Kahn III follows:]
Prepared Statement of Charles N. Kahn III, President, Health Insurance 
                         Association of America
                              introduction
    Chairman Bilirakis, distinguished members of the Committee, I am 
Charles N. Kahn III, President of the Health Insurance Association of 
America (HIAA). Before joining HIAA, I devoted a significant portion of 
my professional life to working on Medicare policy as a staff member 
for both the United States Senate and the House of Representatives. I 
was involved in the last attempt to provide seniors with access to 
prescription drug coverage through the Medicare program through 
enactment of the Medicare Catastrophic Act over one decade ago. I also 
worked on the subsequent repeal of that legislation. As Staff Director 
to the Subcommittee on Health of the Committee on Ways and Means, I 
also played a major role in the development of the Balanced Budget Act 
of 1997 and the creation of the Medicare+Choice program.
    HIAA is the nation's most prominent trade association representing 
the private health care system. Its 294 members provide health, long-
term care, dental, disability, and supplemental coverage to more than 
123 million Americans. HIAA also is the nation's premier provider of 
self-study courses on health insurance and managed care. We represent 
companies offering a broad range of insurance products to our nation's 
seniors, including Medicare+Choice, long-term care insurance, Medicare 
Select, and Medicare Supplemental plans.
    I am very pleased to be here today to speak with you about how best 
to increase access to affordable prescription drugs for our nation's 
seniors.
     seniors should have expanded access to needed pharmaceuticals
    Clearly, pharmaceuticals have become a critical component of modern 
medicine. Prescription drugs play a crucial role in improving the lives 
and health of many patients, and new research breakthroughs in the 
coming years are likely to bring even greater improvements. With older 
Americans becoming an ever-increasing percentage of the overall United 
States population, the need for more medicines for this sector of the 
population is becoming equally urgent. There is continuing emphasis on 
new pharmaceuticals to treat diseases typically associated with aging. 
Over 600 new medicines to treat or prevent heart disease, stroke, 
cancer, and other debilitating diseases are currently under 
development. Medicines that already are available have played a central 
role in helping to cut death rates for chronic and acute conditions, 
allowing patients to lead longer, healthier lives. For example, over 
the past three decades, the death rate from atherosclerosis has 
declined 74 percent and deaths from ischemic heart disease have 
declined 62 percent, both due to the advent of beta blockers and ACE 
inhibitors. During this same period, death rates resulting from 
emphysema dropped 57 percent due to new treatments involving anti-
inflammatories and bronchodilators.
       prescription drug expenditures are rising at a rapid rate
    These advances have not come without their price. Rapid cost 
increases are putting prescription drugs out of reach for many of our 
nation's seniors. Because of both increased utilization and cost, 
prescription drug spending has outpaced all other major categories of 
health spending over the past few years. For example, while hospital 
and physician services expenditures increased between 3 and 5 percent 
annually from 1995 through 1999, prescription drug expenditures have 
increased at triple that rate, averaging between 10 and 14 percent. 
According to projections by the Health Care Financing Administration 
(HCFA), prescription drug spending will grow at about 11 percent a year 
until 2008, more than double the rate of spending on hospital and 
physician services.
    A study for HIAA and the Blue Cross and Blue Shield Association by 
the University of Maryland's School of Pharmacy found that drug 
spending will increase at an even faster pace than the government is 
predicting. University of Maryland researchers project that the 
nation's expenditures for prescription drugs will increase at a rate of 
15-18 percent a year over the next five years, more than doubling 
annual drug spending from $105 billion in 1999 to $212 billion by 2004. 
According to the lead author of the study, C. Daniel Mullins, Ph.D., 60 
percent of those expenditures will be caused by increases in the price 
and use of drugs already on the market today, while 40 percent will be 
attributable to the cost of drugs still under development--so-called 
``pipeline'' pharmaceuticals. I have attached a copy of the executive 
summary and slides from that study, and ask that it be made part of the 
record of this hearing.
  many seniors have some drug coverage, but benefits often are limited
    About two-thirds of seniors have some type of insurance coverage 
for pharmaceuticals--either through employer-sponsored retiree health 
plans, private Medicare+Choice plans, Medicaid, or individual Medicare 
Supplemental (Medigap) policies. But this coverage often provides 
limited benefits for prescription drugs, and it is likely to decline 
over time as cost pressures mount for employers, insurers, and 
individual consumers. For example, recent surveys indicate that 
employers are contemplating several changes to their retiree health 
care plans over the next several years, including increasing premiums 
and cost-sharing (81 percent of respondents to a 1999 Hewitt Associates 
survey sponsored by the Kaiser Family Foundation) and cutting back on 
prescription drug coverage (40 percent).
    Also, unrealistically low government payments to Medicare+Choice 
plans are having the effect of reducing drug coverage for many seniors 
enrolled in these plans. Increases in per capita payments on behalf of 
beneficiaries enrolled in Medicare+Choice plans from 1997 to 2003 are 
projected to be less than half of the expected increases during the 
same period for those individuals in the Medicare fee-for-service 
program. In fact, the President's Fiscal Year 2000 budget projected 
five-year medical cost increases of 27 percent for the original 
Medicare fee-for-service program and 50 percent increases for the 
Federal Employee Health Benefit Program, while Medicare+Choice payment 
increases during the same period will be held to less than 10 percent 
in many counties. The toll these lower payments are taking on drug 
benefits is already apparent--only three years into the new 
Medicare+Choice payment scheme. Some beneficiaries now face higher out-
of-pocket costs, lower maximum benefits, and higher co-payments on 
brand name drugs.
    Adding to the problems is the fact that most seniors live on fixed 
incomes and their purchasing power will continue to erode over time as 
drug expenditures increase more rapidly than their real income. In 
terms of current dollars, seniors' income has increased very little 
over the past ten years. From 1989 to 1998, the median income of 
households with a family head 65 years of age or older increased from 
$20,719 to $21, 589. This represents an increase in real income of less 
than 5 percent over the entire decade.
           hiaa has developed a solution to help all seniors
    It is important to recognize that we all share a common goal--to 
improve drug coverage for seniors. The fact that Members of Congress 
have chosen different routes to achieving this goal is a testament to 
the magnitude and complexity of the task.
    As this Committee begins to weigh options for expanding 
pharmaceutical coverage to seniors, we want to bring to your attention 
several important policy considerations that draw upon our member 
companies' considerable experience providing health insurance coverage 
in the private market and through government programs such as Medicare.
    In particular, we believe that the potential effects of any new 
proposal must be carefully examined to ensure that unintended 
consequences do not erode the private coverage options that 
beneficiaries rely on today to meet their health care needs. I want to 
emphasize that, although it has proven difficult to provide affordable 
prescription drug coverage through the private options available to 
seniors today (and I will discuss the reasons for that later in my 
testimony), the private coverage seniors rely on to supplement Medicare 
is extremely important to them. Medicare covers just one-half of 
beneficiaries' health care costs and provides no coverage for truly 
catastrophic illness. Supplemental insurance and Medicare+Choice 
coverage protect seniors from financial ruin and is highly valued by 
them for that reason.
    Before I outline some of the concerns we have about aspects of 
several drug coverage plans that have been proposed, let me first make 
clear that HIAA believes strongly that the status quo is unacceptable. 
Reforms clearly are needed to expand access to prescription drugs for 
the nation's seniors. My belief is that the most rational and 
responsible way to accomplish this is in the context of overall 
Medicare reform and restructuring. HIAA believes that broad reforms are 
necessary and that a sustainable long-term solution to providing 
affordable drug coverage for seniors is best accomplished in the 
context of securing Medicare for the baby boom generation--and beyond.
    However, we also recognize that significant steps can be taken in 
the short term to provide relief to seniors. Last year, HIAA's Board of 
Directors approved a three-pronged proposal developed by our member 
companies that would help seniors better afford prescription drugs. The 
HIAA program would: (1) help lower-income seniors through a federal 
block grant to expand state drug assistance programs; (2) provide a tax 
credit to help offset out-of-pocket drug costs for all other seniors; 
and (3) ensure fair payments to private Medicare+Choice plans that are 
struggling to provide prescription drug coverage for seniors despite 
unrealistically low government payments that will not keep pace with 
medical inflation and the projected increases in drug costs.
    Nineteen states already have drug coverage programs for low-income 
seniors; several more are considering such programs in the current 
legislative session. We believe a federal block grant, with no 
requirement for state matching funds, would give needy seniors 
additional support in these states and encourage other states to adopt 
such programs. Each state would receive a per-capita payment sufficient 
to cover the equivalent of drug coverage with a $1,500 annual maximum 
for eligible beneficiaries. States would have considerable flexibility 
under our approach, and could use the funds to expand existing drug 
assistance programs or create new ones. We estimate that about 10 
million lower-income seniors would be eligible for this subsidy.
    The HIAA program also would provide a tax credit to offset out-of-
pocket prescription drug expenses for those seniors who file tax 
returns. A single Medicare beneficiary with income above about 200 
percent of poverty (about $16,300) would have been eligible for a tax 
credit worth up to $1,000 a year, after incurring $500 in out-of-pocket 
expenses. A couple with an income above approximately 250 percent of 
poverty (about $28,000) could access a tax credit worth up to $1,500 
per year after they jointly paid $500 in out-of-pocket drug expenses. 
The value of this credit would grow over time to keep pace with 
inflation. We estimate that nearly 22 million beneficiaries would be 
eligible for this federal tax credit.
    Finally, the HIAA proposal includes a number of measures to assure 
that seniors choosing to enroll in Medicare+Choice plans are not 
disadvantaged by unrealistically low government reimbursements. As 
members of this Committee know, the vast majority of Medicare+Choice 
plans provide some coverage for prescription drugs and this has proven 
to be a very popular benefit for seniors. However, inequitable 
government payments are undermining the Medicare+Choice program and 
harming seniors who depend on these plans for their health coverage. In 
effect, the growing disparity between payments to Medicare+Choice plans 
and per-capita payments for seniors enrolled in traditional Medicare 
fee-for-service disadvantages the former, forcing them to shoulder an 
increasing out-of-pocket burden for prescription drugs.
    The Balanced Budget Act of 1997 (BBA) reduced payments to 
Medicare+Choice plans by $22 billion over five years and HCFA plans to 
reduce payments by another $9.9 billion through ``risk adjustment.'' 
The Balanced Budget Refinement Act of 1999 restored less than $1 
billion of the cuts made through the BBA. Clearly, additional steps are 
needed: (1) HCFA should be required to implement risk adjustment in a 
budget neutral manner and the current phase-in should be halted at its 
current 10 percent level; (2) HCFA should not expand encounter data 
collection beyond the hospital inpatient setting and should replace the 
planned universal encounter data-based risk adjustment scheme with a 
less burdensome approach; and (3) Medicare+Choice payments should be 
linked more closely to local medical inflation trends.
    The HIAA proposal represents an immediate and workable step that 
will provide meaningful relief for seniors, while avoiding the 
disruption and confusion for beneficiaries that surely would result 
were Congress to make changes in seniors' private benefit options 
before addressing needed changes in the underlying Medicare program. 
Equally important, it would not foreclose the integration of drug 
coverage into broader Medicare reform.
 concerns about private drug-only insurance and private sector mandates
    As you work to develop a solution to this very difficult issue, we 
hope that you will draw upon the HIAA proposal. We recognize, however, 
that Congress is weighing various Medicare drug coverage initiatives 
that do not involve block grants or tax credits.
    Some of the proposals we have examined that rely on ``stand-alone'' 
drug-only insurance policies simply would not work in practice. 
Designing a theoretical drug coverage model through legislative 
language does not guarantee that private insurers will develop that 
product in the market.
    Other proposals seek to assure seniors drug coverage by mandating 
that private health plans--either Medigap or Medicare+Choice, or both--
provide enhanced coverage for pharmaceuticals. While this option has 
the perception of being virtually cost-free from a federal budgetary 
standpoint, it would be far from inexpensive for seniors who, according 
to our estimates, would experience premium increases for Medigap 
products of between 50 and 100 percent. It also would result in many 
seniors dropping the supplemental coverage they depend upon, possibly 
creating new public policy challenges. Seniors in rural areas, in 
particular, rely heavily on Medigap coverage to help them meet their 
health care needs. If coverage that consumers cannot afford is 
mandated, the result will be unsustainable premium increases, limited 
choice, and reduced coverage.
      why a ``drug-only'' benefit is unlikely to meet the goal of 
                              universality
    Some have proposed that seniors' drug coverage needs could be met 
through new private insurance coverage options. Theoretically, these 
``drug-only'' policies would be offered either as stand-alone policies, 
or sold in conjunction with existing Medigap coverage. However, the 
evidence suggests that it would be extremely difficult to ensure the 
universal availability of drug coverage to seniors through this type of 
proposal.
    Creating a new form of insurance is not easy. As with any new 
product, start-up efforts are costly and time-consuming. Adding to the 
difficulty is that such insurance policies would have to meet existing 
(and possibly new) dual state and federal requirements before they 
could be sold. Thus, before making its entry into the marketplace, a 
``drug-only'' policy would have to clear a multitude of economic and 
regulatory hurdles. Our members have told us these hurdles are likely 
insurmountable.
Economic Barriers and Adverse Selection Problems
    Insurance carriers attempting to bring this type of product to 
market would face many barriers, including the costs of development, 
marketing, and administration. Premiums for the policy would have to 
reflect these costs. Adding to these administrative expenses is the 
inherent difficulty of developing a sustainable premium structure for a 
benefit that is so widely used and for which costs are rising so 
dramatically.
    Volatility in pharmaceutical cost trends also will make a stand-
alone ``drug-only'' policy difficult to price. While there has been 
relative stability in the rate of increase of hospital and physician 
costs during the past two decades, pharmaceutical costs have been more 
difficult to predict. In March 1999, for example, HCFA estimated that 
prescription drug expenditures would reach $171 billion by 2007. Just 
six months later, in September, HCFA was forced to revise these 
projections and now predicts that prescription drug spending will reach 
$223 billion by 2007, a 30 percent increase over the previous estimate. 
Since the Administration first offered its Medicare drug benefit 
proposal just last year, it has had to revise cost estimates for the 
program upward by more than 30 percent due largely to greater-than-
expected increases in the costs of prescription drugs.
    For many reasons, ``drug-only'' policies would be very expensive to 
administer. Adding to the economic liabilities of these policies are 
the expense margin limitations insurance carriers must meet under 
Omnibus Budget Reconciliation Act of 1990 (OBRA), which are likely to 
be too small to support separate administration of drug benefits.
    The most difficult factor driving up premiums, however, will be 
``adverse selection.'' Adverse selection occurs because those who 
expect to receive the most in benefits from the policy will purchase it 
immediately, while those who expect to have few claims will hold off 
purchasing coverage until they believe it is needed. When people with 
low drug expenses choose not to enroll in coverage while those with 
high costs do enroll, insurance carriers are forced to charge higher 
premiums to all policyholders. Higher premiums over time will price 
many seniors out of the supplemental market. As beneficiaries drop 
their coverage, premiums invariably will rise yet again--creating what 
insurers call a rate ``death spiral.'' Moreover, the more opportunities 
there are for enrollment, the greater the risk of adverse selection.
    Adverse selection would be a very real problem for this type of 
product. Projections indicate that one-third of seniors (even if all 
had coverage for outpatient prescription drugs) will have drug costs 
under $250 in the year 2000, with the average cost estimated at $68. 
These seniors are unlikely to purchase any type of private drug 
coverage, given that the additional premium for such a policy would be 
at least 10 times higher than their average annual drug costs. Of the 
two-thirds who might buy the coverage, many would be doing little more 
than dollar trading. Some may actually end up much worse off: a person 
with $500 of drug expenses could have premium, deductible, and 
coinsurance costs equal to over 200 percent of the actual costs of 
drugs. Consequently, many seniors are not likely to purchase the 
product, resulting in further premium increases for those that do.
    Limiting the sale of these policies to the first six months of 
Medicare eligibility would help in theory only, given legislators' 
demonstrated proclivity to expand on ``guaranteed issue.'' The Clinton 
Administration's Medicare drug coverage proposal seeks to avoid adverse 
selection by limiting enrollment in a government-provided drug coverage 
plan to the first six months when beneficiaries initially become 
eligible for Medicare. While this type of rule theoretically helps, the 
concept seldom works in practice because legislators and regulators 
expand guaranteed issue opportunities over time in response to 
political pressure. For example, the ``first time'' guaranteed issue 
rule originally in place for Medigap policies has been greatly expanded 
over time--both through new federal rules in the Balanced Budget Act of 
1997 (BBA) and through state law expansions.
Regulatory Hurdles
    Even if such insurance policies were economically feasible, they 
would face significant regulatory barriers. The National Association of 
Insurance Commissioners (NAIC) would likely have to develop standards 
for the new policies; state regulators would have to approve the 
products before they could be sold, as well as scrutinize their initial 
rates and any proposed rate increases. Even relatively straightforward 
product changes based on proven design formulas can take several years 
to progress from the design stage through the regulatory approval 
process and, finally, to market.
    Because insurers would be required to renew coverage for all 
policyholders (as they are required to do with Medigap products), 
policies could not be cancelled if new alternatives were authorized by 
subsequent legislation or regulations. This would exacerbate adverse 
selection problems for these plans, since people with the greatest drug 
needs would retain them while others may seek out less costly 
alternatives. It also would dampen interest in offering the product in 
the first place, as insurers would be locked into offering these 
policies once they were issued.
    Guaranteed renewability also would exacerbate pricing problems for 
these ``drug-only'' products. While many in Congress have said that 
they oppose government price controls for pharmaceuticals, private 
insurers offering ``drug-only'' coverage are sure to face premium price 
restrictions on their products at the state level (all states have 
adopted either rate bands, modified community rating, or full community 
rating for Medigap as well as medical insurance coverage options 
available to non-seniors). Even when proposed premium increases are 
consistent with state law parameters, state regulators are likely to be 
resistant to the magnitude of increase it would likely take to sustain 
a ``drug-only'' insurance policy as drug prices grow over time.
    If the NAIC did standardize these policies, as some have proposed, 
it could impose unworkable limitations on insurers. If insurance 
carriers were prevented from adjusting co-payments and deductibles as 
drug costs continue to skyrocket, effective cost management would not 
be possible without significant premium increases over time. On the 
other hand, allowing needed flexibility would destroy the 
standardization of Medigap that Congress and the NAIC have worked so 
hard to achieve during the past decade.
High-Deductible Options Introduce Additional Practical Limitations
    Various suggestions have been made to render these policies 
economically viable. One suggestion that flies in the face of 
historical reality is to design the policies with very high 
deductibles--a feature that has never been popular with seniors. 
Comprehensive high-deductible Medicare+Choice medical savings account 
plans authorized under the Balanced Budget Act of 1997 (BBA) are not 
available because no company believes it can develop sufficient market 
size to make offering such a product worth the effort. It is also 
notable that the high-deductible Medigap policies with drug coverage 
authorized under the BBA 97 have not gained market acceptance, largely 
out of the knowledge that this product would not be attractive to a 
large enough block of seniors to make it viable. Primary carriers have 
not entered this market and, as far as we are able to determine, only a 
handful of these policies, if any, have been sold. The most common 
reasons for this cited by insurers are: (1) lack of consumer demand; 
(2) consumer confusion; and (3) unworkable systems change requirements 
and regulatory barriers (e.g., states will not approve policy forms for 
2000 or 2001 because of the federal government's delay in publishing 
allowable deductible levels). The $1,500 deductible in those BBA 
Medigap policies is considerably lower than some of the deductible 
levels proposed by advocates of the new drug-only policies.
Government-Funded ``Stop-Loss'' Coverage Is Unlikely to Make Such 
        Policies Affordable
    Some have discussed providing government-funded ``stop-loss'' 
coverage as a way to help those beneficiaries with catastrophic annual 
drug costs and reduce the cost of private drug-only insurance. While 
this proposal would no doubt help seniors with extremely large annual 
drug expenses, it would do little to make drug-only insurance 
affordable. Nearly nine out of 10 Medicare beneficiaries have annual 
drug costs under $2,000 (see Figure 1). Moreover, stop-loss coverage 
provided to beneficiaries with drug expenses in excess of $2,500 a year 
would cover just 16 percent of annual drug costs (see Figure 2). Stop-
loss protection would cover just 4 percent of annual drug costs if 
offered to beneficiaries with pharmaceutical expenses above $5,000 per 
year (see Figure 3).
                                Figure 1
 Nearly Nine Out of Ten Medicare Beneficiaries Have Annual Drug Costs 
                            Under $2,000 \1\

    Source: National Academy of Social Insurance, 1999; estimates of 
1999 expenditures by Actuarial Research Corporation based on data from 
the 1995 Current Beneficiary Survey. HIAA estimates for distribution 
above $2,000.
    \1\ Expenditures include out-of-pocket spending and third-party 
payments. Figures are for all non-institutionalized Medicare 
beneficiaries except those who enrolled in a Medicare+Choice plan at 
any point during the calendar year.
                                Figure 2
Stop-Loss for Expenses Above $2,500 Will Cover Just 16 Percent of Total 
           Annual Drug Spending by Medicare Beneficiaries \2\

    Source: National Academy of Social Insurance, 1999; estimates of 
1999 expenditures by Actuarial Research Corporation based on data from 
the 1995 Current Beneficiary Survey. HIAA estimates of amounts within 
each category.
    \2\ Expenditures include out-of-pocket spending and third-party 
payments. Figures are for all non-institutionalized Medicare 
beneficiaries except those who enrolled in a Medicare+Choice plan at 
any point during the calendar year.
                                Figure 3
Stop-Loss for Expenses Above $5,000 Will Cover Just 4 Percent of Total 
           Annual Drug Spending by Medicare Beneficiaries \3\

    Source: National Academy of Social Insurance, 1999; estimates of 
1999 expenditures by Actuarial Research Corporation based on data from 
the 1995 Current Beneficiary Survey. HIAA estimates of amounts within 
each category.
    \3\ Expenditures include out-of-pocket spending and third-party 
payments. Figures are for all non-institutionalized Medicare 
beneficiaries except those who enrolled in a Medicare+Choice plan at 
any point during the calendar year.

    In short, a ``drug-only'' policy is unlikely to meet the promise of 
guaranteeing all seniors access to expanded prescription drug coverage.
A Drug Mandate Is Also a Bad Idea
    Another bad idea is mandating drug coverage for Medicare+Choice 
plans or Medicare supplemental insurance. (More than 20 million 
Medicare beneficiaries have Medicare supplemental coverage, with about 
nine million policies purchased individually and 11 million through the 
group market.)
    HIAA is strongly opposed to proposals that would require Medicare 
supplemental insurance or Medicare+Choice plans to cover the costs of 
outpatient prescription drugs without the addition of prescription drug 
coverage as a Medicare covered benefit. The growing cost of 
pharmaceuticals would force plans with mandated drug coverage to raise 
premiums, increase enrollee cost-sharing, or reduce other benefits, all 
of which would be counterproductive as seniors dropped their 
supplemental or Medicare+Choice coverage. Mandated drug coverage could 
also lead to overly-restrictive government limitations on private 
plans, such as prohibitions on the use of formularies or mandating 
certain levels of coinsurance.
    Today's Medigap marketplace is convenient and flexible, offering 
many choices to seniors. Of the 10 standard Medigap policies (A through 
J) sold, three (H, I, and J) provide varying levels of coverage for 
outpatient prescription drugs. Largely because of the increased costs 
of the policies with drug coverage, only a relatively small number of 
seniors have chosen to enroll in them. Of the 9.5 million Medicare 
beneficiaries with individually purchased Medigap policies, HIAA 
estimates that only 1.3 million have drug coverage through the 
standardized H, I, or J plans.
    Several studies show that adding a drug benefit to Medigap plans 
that currently do not include such coverage would increase premiums 
dramatically. Seniors who today have chosen to purchase Medigap 
policies that do not provide a drug benefit would end up paying $600 
more a year (assuming a $250 deductible for the policy), according to 
HIAA estimates.
    If Congress were to require more comprehensive drug coverage, those 
premiums could double. According to a May 1999 study by HIAA and the 
Blue Cross Blue Shield Association, requiring all Medigap plans to 
include coverage for outpatient prescription drugs would raise Medigap 
premiums by roughly $1,200 per year, an increase of over 100 percent.
    Premium increases of 50 to 100 percent would result in many seniors 
dropping their Medigap coverage, leaving them without protection 
against the high out-of-pocket costs of the hospital and physician 
services not covered by Medicare. Moreover, increases of this magnitude 
would discourage employers (who are also purchasers of supplemental 
coverage) from offering such a benefit at all.
    It is doubtful, then, that requiring all Medigap policies to 
include a drug benefit would be popular with seniors--who would 
experience diminished choice of policies, higher prices, and in some 
cases, loss of coverage.
Initial Comments on House Republican Drug Plan Concept
    Mr. Chairman, while the press has reported over the past several 
days about aspects of the developing House Republican Medicare drug 
coverage proposal, HIAA has not had an opportunity to review the 
details of this proposal. We applaud those members of Congress that 
have worked hard to address this problem; however, we must reserve 
final judgment until we have had the opportunity to review the final 
legislative language.
    First, it appears that the proposal will not rely solely on private 
health plans to meet its goal of offering universal drug coverage to 
seniors. The ``fallback'' mechanism that has been reported in the press 
is a contribution to the debate that we expect to examine more fully in 
the days ahead.
    Second, there appears to be a recognition that Medicare+Choice 
plans are severely underpaid and that more needs to be done in the 
short run to save the important private health plan options that many 
seniors now enjoy.
    The vast majority of Medicare+Choice plans now offer coverage for 
prescription drugs and view this is an important benefit for seniors 
that they would like to continue offering. However, to the extent 
Medicare+Choice plans are required to cover prescription drugs, we need 
to ensure payments are adequate. Under the BBA payment rules, payments 
to Medicare+Choice plans serving the vast majority of beneficiaries 
have increased only 2 percent per year, while medical inflation is 
increasing at 8 percent or more. Medicare+Choice plans cannot continue 
to offer even the basic Medicare benefits if this underpayment is not 
addressed. And as you know, prescription drug costs are increasing at a 
much greater rate than overall medical spending. Therefore, for this 
program to be successful, the government must make a firm commitment to 
provide payments to private plans that will keep pace with escalating 
medical costs, including those for pharmaceuticals.
    Finally, we view the new Medicare board as a potentially positive 
development. It is clear from our experience that HCFA's implementation 
and management of the Medicare+Choice program has been difficult. The 
new Medicare board may allow for a fresh start.
    Last week, HIAA released a white paper by Bruce M. Fried, the 
former director of HCFA's office of health plans and providers, which 
oversaw the Medicare+Choice program. The paper finds that a combination 
of inadequate payments and the crushing cost of excessive government 
regulation are causing HMOs to withdraw from the Medicare program ``at 
an alarming rate.''
    This is an important point, Mr. Chairman and members of the 
Committee. In the short term, whether or not Congress is able to pass a 
Medicare prescription drug benefit this year, immediate steps need to 
be taken to resuscitate the Medicare+Choice program. Mr. Fried's paper 
suggests a course of action that includes:

 Congress must increase payments to Medicare HMOs to keep up 
        with medical inflation.
 HCFA should take immediate steps to reduce the administrative 
        burden and expense of prescriptive government regulation, and 
        Congress should exercise its oversight authority to ensure that 
        this occurs.
 Congress should require HCFA to implement risk adjustment in a 
        budget neutral manner and direct HCFA to explore more cost 
        effective--and less administratively burdensome--methods of 
        assessing health risk status. Until a less burdensome system is 
        developed, HCFA should (1) halt plans to collect multiple site 
        encounter data, and (2) freeze the phase-in approach so that no 
        more than 10 percent of an Medicare+Choice Organization's 
        capitated payment amount would be based on the current risk 
        adjustment method.
 Congress should engage in increased scrutiny of the level and 
        type of administrative burden imposed on Medicare+Choice 
        Organizations and the impact and cost of such burden.
 The Secretary of the Department of Health and Human Services 
        (HHS) should consolidate HCFA's responsibility for overseeing 
        the Medicare+Choice program in one division.
    We commend this paper to you, and we urge this Committee to take 
immediate action to rescue this troubled program. If Congress and the 
Administration ignore the pressing problems and developments in the 
Medicare+Choice program, the program will die a slow and painful death, 
and it will be difficult--if not impossible--to generate industry 
support for, and involvement in, future market-oriented approaches to 
delivering Medicare services.
Comments on the Democratic Drug Coverage Proposal
    The Democrats' plan to extend drug coverage to Medicare 
beneficiaries relies primarily on an expansion of the traditional 
Medicare fee-for-service program. While it avoids some of the problems 
that would be associated with the creation of private ``drug-only'' 
insurance policies, it would create a costly new benefit entitlement 
without substantive programmatic reforms that are so desperately needed 
to ensure that the program remains on solid footing for the baby boom 
generation and beyond.
    Moreover, it is far from clear whether payments to Medicare+Choice 
plans competing with the traditional fee-for-service program to provide 
prescription drug coverage would be adequate under the Democratic 
proposal to ensure the long-term survival of the Medicare+Choice 
program. If these payments indeed prove inadequate, seniors could lose 
the private health plan options that provide them with high quality 
coverage today.
Conclusion
    The plight of seniors who are struggling to make ends meet and are 
finding it difficult to pay for medicine is very real. But the 
immediacy of the problem should not lead to short-term fixes that would 
do much more harm than good. We believe Congress should step back and 
examine a broad range of proposals--such as financial support for low-
income seniors, tax credits, and fair payments to Medicare+Choice 
plans, most of which offer drug benefits. We believe there are workable 
solutions that can meet the needs of our seniors without undermining 
the coverage they currently rely upon. HIAA stands ready to work with 
the members of this Committee, and all in Congress and the 
Administration, to ensure that all seniors to have access to affordable 
prescription drugs.

     Mr. Bilirakis. Thank you, Chip. Dr. Feder, we have had the 
pleasure of having you here before, and it is good to see you 
again. Please proceed.

                    STATEMENT OF JUDITH FEDER

    Ms. Feder. Thank you, Mr. Chairman. Mr. Chairman, 
Congressman Brown, members of the committee, it is a pleasure 
to be with you this afternoon to discuss the design of a 
Medicare prescription drug benefit.
    In brief, it is my view first that a meaningful benefit is 
sorely needed. Prescription drugs have become a fundamental 
part of medical treatment. It is a travesty that prescription 
drug coverage has become a standard part of insurance coverage 
for the working-age population and is still not provided to the 
population over age 65, who most needs the protection.
    Second, it is my view that the way to provide the benefit 
is to build on the success of the Medicare program, not to 
pretend that a means-tested voucher or reliance on a private 
insurance market can be any substitute for the financial access 
and financial protection that is achieved by a universal public 
program.
    Let me elaborate first very briefly on the need. Despite 
the widely recognized importance of drug protection, the 
sources of that protection are deteriorating, not improving. In 
recent years we have seen a dramatic decline in the number of 
employers who are providing prescription drug coverage for 
their employees. Medicare+Choice plans have restricted the 
benefits they are providing, and Medigap plans have to charge 
so much for their limited coverage that it is hard anymore even 
to call that insurance.
    In short, the sources of protection are indeed drying up.
    Happily, we see less debate today than even a year ago that 
the limited availability of affordable coverage is a 
significant problem. But as shown this morning, we still see 
significant debate about how to address that problem.
    Some argue that public support is needed only by the low 
income population. That argument ignores lots of evidence and 
lots of experience. First it ignores that the problem of 
affordability does not stop at incomes of 133 or 150 percent of 
poverty. An individual with $15,000, $16,000 or $17,000 is no 
better able to afford insurance coverage than an individual at 
$12,000 or $13,000. And for people with these incomes, even 
relatively modest expenses on drugs can be catastrophic.
    Second, it ignores that means-tested programs, in the words 
of Congressman Waxman, tend to be mean programs. They tend to 
pose barriers to participation rather than promoting ready 
access. They are likely to offer lower quality care. Think for 
a minute whether Members of Congress would like to be in the 
lowest cost plan. And as compared with programs that bring 
together all people of all incomes as Medicare does, they are 
likely to be vulnerable to inadequate political and financial 
support.
    Some also argue that the appropriate vehicle for coverage 
is a private insurance market, again ignoring lots of evidence 
and experience. The Medigap and the Medicare+Choice markets 
show us that competition does not provide beneficiaries service 
and efficiency they can count on.
    On the contrary, competition creates tremendous uncertainty 
as to what plan or what benefits will be available to 
beneficiaries at any given time. And competition tends to 
divide the healthy from the sick and the modest income from the 
better off as plans compete to get good risks and avoid those 
in need of service.
    It is disconcerting at best that even when insurers 
themselves acknowledge that they are not the ones to count on 
for stable, affordable coverage, that some nevertheless 
continue to insist that they can do the job.
    Today's arguments about means testing and private insurance 
and even about the destruction of industry of the private 
sector are remarkably similar to the arguments that were made 
prior to enactment of Medicare in 1965. We rejected those 
arguments as a Nation in 1965. It is time to reject them again.
    Contrary to what some would have us believe, Medicare is an 
enormously successful program. It is time to incorporate 
prescription drug coverage that ought to be there within it 
according to Medicare's principles.
    In brief, the drug benefit must be designed to provide, not 
just claim, that it is a universal entitlement for all Medicare 
beneficiaries. That----
    Mr. Bilirakis. Please summarize, if you will, Doctor.
    Ms. Feder. Absolutely. It must be affordable for all 
beneficiaries, which means subsidies must grow across the 
income spectrum so that we have universal participation to 
match universal entitlement, and the benefit must be defined, 
specific, and uniform for everyone, because we cannot have an 
entitlement unless beneficiaries know what they are entitled 
to.
    In sum, the evidence and experience makes clear that the 
right thing to do is to incorporate a prescription drug 
coverage into Medicare, not to invent or create an alternative 
that is doomed to failure.
    Thank you, Mr. Chairman.
    [The prepared statement of Judith Feder follows:]
   Prepared Statement of Judith Feder, Professor and Dean of Policy 
                     Studies, Georgetown University
    Chairman Bilirakis, Congressman Brown, distinguished Subcommittee 
members, thank you for inviting me to discuss my views on the design 
for a long overdue Medicare drug benefit. While there seems to be 
increasing agreement in Congress about the need to provide a Medicare 
drug benefit, there is less consensus about the benefit design required 
to ensure access to needed medications by beneficiaries. I would like 
to take this opportunity to explain why a Medicare drug benefit is 
necessary and outline the principles that I believe are essential to 
keep in mind as the legislative process unfolds.
    Increasingly, advances in medical treatment take the form of new 
prescription drugs which improve health outcomes, replace surgical 
treatments and provide therapies for conditions that were once 
untreatable. Medicare beneficiaries use prescription drugs at a rate 
that far exceeds the non-Medicare population but they are much less apt 
to have drug coverage than the general insured population. More than 
one observer has noted the similarities between the current state of 
drug coverage for the Medicare population and the inadequate health 
insurance available to the elderly before the passage of the program. 
Thirty-five years ago, many of the elderly were denied the benefits of 
medical advances, represented then primarily through technological 
breakthroughs in hospital care, because of lack of insurance. While 
about one half of the population over the age of 65 had some form of 
hospital insurance, the rest either could not afford insurance or did 
not have access to it. Despite arguments against a government program 
supplanting the private market, a bipartisan majority in Congress 
recognized that private insurance could not ensure that all 
beneficiaries would have access to the advances of modern medicine.
    As was the case with hospital insurance in 1965, Medicare 
beneficiaries currently receive drug coverage through a patchwork of 
public and private programs. In the 1990s, many beneficiaries sought 
drug coverage through access to employer-sponsored retiree benefits, 
enrollment in Medicare managed care offered by private plans, and 
purchase of individual supplemental Medigap policies. Experience has 
shown that much of this coverage has been either unreliable, 
unavailable or unaffordable, and sometimes all three.

 While retiree health benefits typically provide a generous 
        drug benefit, access to this coverage depends upon whether the 
        individual's former employer chooses to provide retiree 
        coverage. Those who worked in small firms or live in rural 
        areas are less likely to receive these benefits. Further, all 
        recent surveys indicate that this coverage is eroding. For 
        example, the 1999 Kaiser Family Foundation and Health Research 
        and Educational Trust (HRET) survey recorded a decline in large 
        firms offering retiree benefits from 40 percent in 1993 to 28 
        percent in 1999.
 Medicare+Choice plans, which had been a source of increasing 
        coverage in the mid-1990s, have cut back on their drug benefits 
        in the past few years. For example, 70 percent of these plans 
        now cap drug benefits at $1000 or less. Here in the District, 
        one plan limits coverage for brand name drugs to $400 per year; 
        another in suburban Maryland sets a $300 cap on coverage for 
        all drugs. Depending upon the particular condition of the 
        beneficiary, that limit might cover the cost of only two 
        prescriptions for the entire year. Further, decisions by 
        private plans to pull out of the Medicare program in the last 
        few years have left beneficiaries uncertain of whether their 
        benefits will be there when they need them.
 Lastly, some beneficiaries obtain drug coverage through the 
        purchase of supplemental Medigap policies. Yet, Medigap 
        policies with drug coverage are expensive, unavailable, and 
        inadequate. In many cases, policies with drug benefits are 
        subject to medical underwriting and not available for all. In 
        other cases, premiums are far higher than the total value of 
        the drug benefit. The high cost of these policies has sharply 
        limited their appeal. A recent analysis of 1998 NAIC data shows 
        that fewer than 2 million beneficiaries have drug coverage 
        through standardized Medigap plans.
    There are many similarities between the current debate over a 
prescription drug benefit and the earlier debate over the enactment of 
the Medicare program itself. In 1965, some policymakers believed that 
gaps in insurance coverage could be filled by providing medical 
coverage to the low-income elderly. This argument is often heard today. 
Yet even with modest subsidies for individuals with incomes above 150 
percent of poverty (as low as $13,000), a beneficiary would be forced 
to pay substantial premiums for a private plan or do without coverage. 
Since it is unlikely that many low to middle income beneficiaries could 
afford unsubsidized premiums, they would be forced to do without 
coverage despite the existence of a nominal Medicare drug benefit. In 
addition, the type of coverage available in a means-tested program is 
likely to be both more vulnerable and of lower quality.
    We rejected a means-tested model in 1965 and we should reject it 
now.
    In 1965, Congress rejected the notion that the private insurance 
market could be counted upon to ensure health insurance coverage for 
the elderly. However, we continued to rely upon supplemental private 
coverage to fill in the gaps in benefits not covered by Medicare. Yet 
failures in the individual Medigap market make it clear that this is 
not a realistic expectation as far as drug coverage is concerned. 
Consumer Reports shows premiums for a 65 year old woman to purchase 
Plan I, which covers 50 percent of drug costs up to a cap of $1250 
after a $250 deductible, that range from $2049 to $4358 in Florida. In 
most states, premiums rise with age. Thus, for a 75-year old woman in 
Florida the premium rises as high as $4850. The cost of the premium 
ensures adverse selection as only those with a strong likelihood of 
high drug expenses will purchase these policies. An adverse selection 
cycle leads to a spiraling of premium costs. As a result, many firms do 
not offer Medigap policies with drug coverage at all. For example, 
MedPAC reports that in New York 14 carriers offer Plan A but only one 
offers Plan J, the policy with the most generous drug benefit. Even 
with a modest subsidy, these policies are unlikely to be made 
affordable. Given the problems of adverse selection and high premium 
costs, it is not surprising that HIAA reports little enthusiasm for a 
stand alone drug policy among its member companies. They were quoted 
again this week saying they were unaware of any members that would 
offer coverage in response to the anticipated Republican proposal.
    We recognized that private insurance could not fill the coverage 
gap in 1965 and we should reject that model now.
    I would argue that three principles must be maintained as a drug 
proposal goes through the legislative process.

 The drug benefit must be designed as a universal entitlement 
        for all Medicare beneficiaries. Since the program's inception, 
        all Medicare-covered benefits have been available to all 
        eligible beneficiaries, subject only to medical requirements. 
        This guarantee goes to the heart of the social insurance model 
        that has made Medicare one of the most successful and popular 
        programs in the history of this country. As a result of the 
        Congressional decision to create a universal entitlement, 
        seniors went from being among the least likely Americans to 
        have health insurance to the most insured segment of the 
        population with 97 percent of seniors covered by Medicare. Not 
        coincidentally, the average life expectancy for a 65 year old 
        woman has increased by almost 20 percent since 1960.
 The drug benefit must be affordable for all beneficiaries.  No 
        one would deny that low income beneficiaries are in great need 
        of help affording the cost of medications. However, both the 
        cost and critical importance of new breakthrough medications 
        has created a problem for all beneficiaries without access to 
        prescription drug coverage. More than half of all beneficiaries 
        without coverage have incomes about 150 percent of poverty and 
        one-fourth have incomes above 400 percent. It is entirely 
        unreasonable to assume that a widow with an income of $15,000 
        per year could afford to purchase private drug coverage even if 
        that coverage was offered to her. This problem would only 
        increase over time as premiums surged because of the same cycle 
        of adverse selection that currently affects the Medigap market.
 Beneficiaries in all areas of the country, rural and urban, 
        healthy and ill, must have secure access to a standard benefit. 
        As long as it is left to the private market to design 
        actuarially equivalent benefits, beneficiaries will be forced 
        to navigate their way through a confusing morass of differing 
        benefit limits, deductibles, copays, formularies, and pharmacy 
        networks. The potential for benefits designed to facilitate 
        cherry-picking of healthy beneficiaries will be great. Access 
        to coverage will continue to depend upon where an individual 
        lives and what her medical condition is. In addition, insurers 
        might offer low option coverage that would erect barriers to 
        beneficiaries receiving the innovative medical treatments that 
        they required. Paper drug coverage might turn out to be less 
        than adequate when an individual most needed it.
    Drugs are expensive no matter who buys them. Seniors cannot bear 
this cost alone. The increased use of prescription drugs by all of us 
but particularly seniors, and the rising cost of new therapies makes 
cost containment concerns inevitable. We must use the best tools 
available to us to control costs and recognize that we will learn more 
as we go along. In sum, Mr. Chairman, Medicare has been a successful 
program for 35 years. It is time that we built upon this system that we 
know works to fill the critical gap in coverage that still exists so 
that we, as a society, have ensured that the benefits of pharmaceutical 
advances are available to all who need them.

    Mr. Bilirakis. Thank you. Mr. Donoho.

                 STATEMENT OF PATRICK B. DONOHO

    Mr. Donoho. Mr. Chairman and Mr. Brown, members of the 
committee, my name is Patrick Donoho. I am Vice President of 
Government Affairs and Public Policy for the Pharmaceutical 
Care Management Association.
    PCMA represents managed care pharmacies and organizations 
who a substantial part of their business is managing pharmacy 
benefits. We are the PBM industry.
    I am pleased to provide you some of our outlooks on views 
on providing the prescription drug coverage under Medicare.
    Our members currently provide care for over 10 million 
Medicare beneficiaries through employee retirement plans and 
Medicare+Choice plans.
    Collectively they cover benefits for over 150 million 
Americans. We are pleased that many of the pending proposals 
recognize that it would be more efficient to use existing drug 
benefit managers in an expanded Medicare drug benefit program 
than to attempt to re-create these capabilities in HCFA.
    Let me give you our six basic principles that we think 
would make a successful program.
    First, the benefit should be delivered in a manner that 
enhances the health of seniors and the disabled. It is 
essential that the program not simply help pay for drug costs 
but also protect the health of seniors. Some drugs are 
inappropriate for use among the elderly; others are used at 
different dosing levels than are appropriate for younger 
populations.
    Seniors without prescription drug coverage do not currently 
benefit from the safety of drug interaction screening mandated 
by OBRA 1990 for Medicaid recipients and presently in virtually 
all third-party programs.
    Second, legislation should provide the benefit through the 
private sector. Competition among private sector PBMs delivers 
significant cost savings and has spurred innovation in the use 
of advanced technology for administering those benefits.
    A new drug benefit should embrace and promote competition 
among these entities and ensure the vitality of innovation 
through competition.
    We had a slight discussion yesterday in Ways and Means and 
repeated it here today about rural coverage. Many of the plans 
in the private sector today mandate that you have rural 
coverage, and I think there are 52,000 pharmacies in the United 
States, and we have to ensure that we have coverage for the 
people in the plans that we administer.
    Third, the legislations should retain flexibility and cost 
controls within the private sector. Prescription drug coverage 
for Medicare enrollees must permit pharmacy benefits managers 
to continue such programs as pharmacy network management, 
formulary development and management, mail service pharmacies, 
disease management, prescription compliance and adherence 
programs, utilization review, and provider profiling for 
adherence to best medical practices.
    Fourth, legislation should encourage the continuation of 
current prescription benefit plans. A prescription drug benefit 
plan for seniors should contain some incentives for employers 
to continue to provide prescription drug coverage to their 
current retirees.
    Fifth, a plan should be designed to protect beneficiaries 
against catastrophic liability.
    And sixth, the goal of an agency overseeing the 
administration of a prescription benefit should be to foster 
innovation and competition. The legislation should not freeze 
in time the management techniques used today by PBMs.
    In examining the various proposals that have been announced 
or introduced, we see much commonality. In particular, most 
proposals appropriately focus on PBMs, encouraging or mandating 
use of the latest tools to improve health outcomes and to 
eliminate medical and medication errors.
    Where proposals differ is on whether we as PBMs will have 
the flexibility to use our tools in the management of the 
benefit. Any legislation that does not empower us as PBMs to 
negotiate discounts in the pricing concessions from drug 
manufacturers and pharmacies, as we do today in private plans, 
will not be able to deliver on the anticipated cost savings.
    We share the concerns expressed by the Congressional Budget 
Office and the General Accounting Office that political 
pressures on policymakers and PBMs might limit the tools 
available to a PBM, making it more a transaction processor than 
a benefit manager.
    We also share the concerns of some of the authors of the 
proposals that HCFA is unlikely to favor competition over 
regulation. Therefore, we are pleased to see that some 
legislation envisions new structures for administering a 
Medicare drug benefit.
    I am willing to answer questions hereafter and am willing 
to help you craft a bill. Thank you.
    [The prepared statement of Patrick B. Donoho follows:]
Prepared Statement of Patrick B. Donoho, Pharmaceutical Care Management 
                              Association
    Mr. Chairman, Mr. Dingell, members of the Committee, my name is 
Patrick Donoho and I am Vice President of Government Affairs and Public 
Policy for the Pharmaceutical Care Management Association (PCMA). I am 
pleased to appear before you today to testify on behalf of the PCMA.
    PCMA represents managed care pharmacy and pharmacy benefit 
management companies (PBM). Members are organizations that, as a 
substantial portion of their business, manage pharmacy benefits. PCMA's 
member firms are an extremely diverse group, including both publicly 
traded companies and divisions or subsidiaries owned by other 
healthcare organizations. While many of our members serve broad 
national populations, some focus on the needs of specific communities 
such as patients with HIV/AIDS, organ transplants, or cancer.
    We are pleased to provide our association's views on providing 
coverage for prescription medicines for those individuals enrolled in 
the Medicare program. Our members have a deep interest in the subject 
of this hearing. Already today, our member companies provide quality, 
affordable pharmaceutical benefits to more than ten million current 
Medicare' beneficiaries who receive these benefits through their or 
their spouse's former employers or through Medicare+Choice plans. 
Collectively, PCMA's members administer prescription drug programs for 
more than 150 million Americans. All of the major legislative proposals 
for expanding prescription drug coverage propose using PBMs to deliver 
these benefits. We are pleased that all of these proposals recognize 
that it would be more efficient to use existing drug benefit managers 
in an expanded Medicare drug benefit program than to attempt to 
recreate those capabilities within HCFA.
    As an industry, we have been successful in not only managing the 
cost of these benefits but also in managing the quality. We know how 
important good pharmaceutical care is to the elderly and disabled. 
Therefore, PCMA supports legislative efforts to ensure that all seniors 
have access to prescription drug coverage. Any program to provide 
prescription drugs to seniors should rely on the demonstrated drug 
management experience of the private sector to operate an efficient and 
cost effective program.
PCMA's Principles
    As the Committee examines various proposals for expanding access to 
medicines for Medicare beneficiaries, we urge you to consider six 
principles that we have agreed to as an association of member companies 
to whom much responsibility will be placed by any legislation.
    First, the benefit should be delivered in a manner that enhances 
the health of seniors and the disabled. It is therefore essential that 
the program not simply help pay for the cost of drugs, but also include 
pharmacy benefit management services to ensure that seniors obtain, and 
remain compliant with, clinically appropriate and cost effective drug 
therapy.
    Many drugs are inappropriate for use with the elderly, others 
should be used at different dosing levels than are appropriate for 
younger populations. Seniors without prescription drug coverage do not 
currently benefit from the safety of drug interaction screening 
mandated by OBRA '90 for Medicaid recipients and present in virtually 
all third party programs.
    Second, legislation should provide the benefit through the private 
sector. Competition among private sector PBMs deliver significant cost 
savings and spurred innovation and the use of advanced technologies for 
administering drug benefits. PBMs develop and administer disease and 
wellness management programs specifically designed for elderly 
populations. A new benefit should embrace and promote competition 
between these entities and ensure the vitality of innovation through 
competition.
    Third, legislation should retain flexibility and cost controls 
within the private sector. Innovation and creativity in pharmaceutical 
care has resulted in a number of programs and services that have 
improved care and managed costs. Prescription drug coverage for 
Medicare enrollees must permit pharmacy benefits managers to continue 
this development and use such programs as pharmacy network management, 
formulary development and management, mail service pharmacy, disease 
management, prescription adherence programs, utilization review, 
provider profiling for adherence to best medical practices, and other 
such programs to manage the benefit.
    Fourth, legislation should encourage the continuation of current 
prescription benefit plans. In order to encourage employers to continue 
to provide prescription drug coverage to their retirees, a new 
prescription drug benefit for seniors should contain financial 
incentives to compensate employers for, and recognize the financial 
impact of, their efforts.
    Fifth, a plan should be designed to protect beneficiaries against 
catastrophic liability. Recognizing that many seniors have limited 
incomes and that major or chronic illnesses can impose significant drug 
costs in a single year, any new Medicare prescription drug benefit 
should endeavor to include an out-of-pocket expenditure cap.
    Sixth, the goal of any agency overseeing the administration of a 
prescription drug benefit should be to foster innovation and 
competition for improving pharmaceutical care and the provision of a 
cost-effective program. PBMs must be able to create financial 
incentives to encourage Medicare beneficiaries to help control the cost 
of the benefit. Moreover, the legislation should not freeze in time the 
management techniques used today by PBMs. To do so would cause the drug 
benefit to lose the opportunity for innovation and improvement, which 
has been the hallmark of the pharmacy benefits management industry.
Review of Current Proposals
    In examining the several proposals that have been announced or 
introduced as legislation, we see much commonality in meeting the goals 
we seek. In particular, most proposals appropriately focus on PBMs, 
encouraging or mandating use of the latest tools to improve health 
outcomes and eliminate medical and medication errors. Most proposals 
also seek to ensure that those Medicare beneficiaries who today have 
good private sector coverage can keep that coverage by rewarding, 
through financial incentives, employers that have served well the 
interests of their retirees by covering prescription drugs within their 
health benefits. And, importantly, most proposals would address the 
issue of providing protection against catastrophic costs.
    Where proposals differ is on whether we as PBMs will have the 
flexibility we need to control costs. Any legislation that does not 
empower us as PBMs to negotiate discounts and other pricing concessions 
from drug manufacturers and pharmacies--as we do today in private 
plans--will not be able to deliver the anticipated cost savings. Our 
members are strongly united on this point. Restrictions on the use of 
common, private-sector cost containment tools, as we see in some 
legislation, will deny our members the ability to do what we do best in 
terms of providing a cost effective benefit in the interests of 
patients and the taxpayers who will pay for this program.
    We share the concerns expressed by both the Congressional Budget 
Office and the General Accounting Office that political pressures on 
policy makers and PBMs might limit the tools available to a PBM, making 
it more a transaction processor than a robust benefit manager. Such 
tools as managed pharmacy networks and negotiated reimbursements, 
formulary development and management, and beneficiary cost sharing of 
areas which may be restricted by a program that is less private sector 
are examples oriented, and therefore less competitive.
    Proposals also differ on the administration of the program. We 
share the concerns of some of the authors of proposals that HCFA is 
unlikely to favor competition over regulation. Therefore, we are 
pleased to see that some legislation envisions new structures for 
administering a benefit.
    In conclusion Mr. Chairman, as an industry we are ready, willing 
and able to provide our expertise and experience in providing 
prescription drug benefits to all Medicare beneficiaries. Our support 
of the various proposals will be based on the authority and flexibility 
granted PBMs to implement all of their programs to effectively manage 
costs, foster innovation, and enhance the quality of pharmaceutical 
care for seniors. We will assess the probability of regulatory 
limitations, de jure or de facto, on the ability of PBMs to perform 
this role. We again appreciate your seeking PCMA's views and look 
forward to your questions.

    Mr. Bilirakis. Thank you for that, Mr. Donoho. Mr. Pollack.

                 STATEMENT OF RONALD F. POLLACK

    Mr. Pollack. Mr. Chairman, thank you very much for inviting 
us to lunch. I appreciate it.
    In my testimony, I focused on the need for a prescription 
drug benefit and for moderating prices. Here I would like to 
focus on the legislation that we have been talking about this 
morning, mainly because there appears to be a rush to mark up 
this legislation, and notwithstanding the fact that this is 
still a work in progress, I think we know enough to say there's 
reason for abundant caution.
    Clearly, the proposal looks much better from a distance 
than it does closer up. Let me suggest to you five areas that I 
would like to see us look more carefully at.
    First is the question about the reliance on the private 
insurance industry to provide this policy. We have had ample 
discussion about this this morning. We know that the industry, 
notwithstanding the fact that it has been offered very 
significant subsidies, has balked at offering this coverage 
through its own private plans.
    But we do not need merely the protestations of the industry 
to tell us that we have to look at this with abundant caution. 
We have experience with the Medigap program which for many 
years has been offering a prescription drug benefit. And I 
would suggest if I may, if you look on Appendix 2 that is 
appended to my testimony, one of the things we looked at were 
the differences in prices that people experienced for very 
comparable policies, one that provides prescription drug 
coverage, and another that does not.
    Now what we find first of all is that only 8 percent of 
America's seniors in the Medicare program have opted into a 
Medigap plan that provides prescription drug coverage. This is 
a mature product, and yet only 8 percent of America's seniors 
have opted into it.
    If you look at the comparison between Plan F and Plan J 
under Medigap, with J being the one that provides a 
prescription drug benefit, you will see on average the price 
differential is over $1,700. It gives you good reason why it is 
unlikely that the industry is going to be able to develop a 
plan that is going to be usable.
    And if I can accentuate one thing, it is the second point. 
That is, that I do not think that seniors are going to get good 
value for their premium dollar under this proposal. There are 
three reasons for that. One reason Mr. Ganske has already 
explained, and that relates to adverse selection. I would be 
happy to discuss what I think is a real comparison between the 
potential adverse selection problems in the administration's 
proposal and this one. I think there is a major difference. But 
obviously there is a significant adverse selection problem.
    But there are two other concerns. And that is that Medigap 
plans use about 35 percent of the premium dollar on items that 
have nothing to do with claims benefits, whether it includes 
agent's fees, advertising and marketing, profits and 
administration, it is considerably more expensive than it is 
under the Medicare program, and that means less value is 
provided.
    But perhaps the most important reason really goes to the 
question as to why the pharmaceutical industry, sight unseen, 
is giving us full-page advertisements telling us why they 
support legislation that has not even been crafted into 
language. And I think the reason is very obvious. The 
pharmaceutical industry knows that if we establish private 
insurance policies, we are not going to have the same kind of 
marketing power that exists in the Medicare program. We will 
have very vulcanized bargaining power when you have various 
insurance companies negotiating for seniors as opposed to the 
Medicare program that can really bring clout to the table. And 
frankly, that is the bottom line difference between this bill 
and the administration's bill.
    Under this bill, there would not be that bargaining power 
to rein in the prices, and as a result, senior citizens would 
not get the value that they would receive under Medicare.
    Third, it is really absurd to now pull at the thread of the 
genius of the Medicare program, which is a program that brings 
people together irrespective of their age, irrespective of 
their health condition, and irrespective of their income. And 
now we want to in effect provide a means-tested benefit.
    Now I do not want to take second seat to anyone in saying I 
support a special care for the poor. But as Judy Feder 
indicated, we are talking about a very miserly standard here. 
When we are talking about 150 percent of the Federal poverty 
level, we are talking about $12,525 a year in income for a 
widow.
    And if I may just refer you to Appendix 8 in the testimony, 
let's take a look at what the costs are for that widow and what 
a bite out of her income it will take when she has just minor 
health conditions.
    If she has a problem with diabetes, hypertension and 
cholesterol, she is going to take Glucophage, Procardia XL, and 
Lipitor 10, and that is going to cost her as much as $2,295 a 
year. That comprises over 18 percent of her income. One out of 
every $6 of her total income just for those three pills, and we 
are saying we are not going to provide benefits for people at 
that income level.
    Mr. Bilirakis. Mr. Pollack, your time has long expired. If 
you could summarize within just a few seconds, I would 
appreciate it. You know, you will probably have an opportunity 
to make these points, which are very good ones, during the 
inquiry section.
    Mr. Pollack. Well I guess the last point I would make, very 
shortly, is the question about this fallback. What is this 
fallback? Is this fallback in effect going to be a public 
program for those portions of the population that the industry 
does not wish to serve?
    If it does, we are going to have wonderful segmentation. We 
are in effect inviting the insurance industry to provide 
coverage for those people who are the easiest to cover. The 
least sick, the youngest, and those portions of the geography 
of our country that they think they can make a profit in. And 
of course then perhaps the Medicare program would wind up 
holding the bag for all the rest. I fear that years from now we 
are going to come back and look at such a scheme----
    Mr. Bilirakis. Mr. Pollack----
    Mr. Pollack. [continuing] and we are going to say the 
Medicare program does not function well.
    [The prepared statement of Ronald F. Pollack follows:]
 Prepared Statement of Ronald F. Pollack, Executive Director, Families 
                                  USA
    Mister Chairman and Members of the Committee: Thank you for 
inviting me to testify today. Families USA is a national non-profit 
organization dedicated to protecting and improving the health care of 
consumers. We have been engaged in analyzing the implications of 
changes in the Medicare program on Medicare beneficiaries for some 
time. Our most recent research efforts have focused on examining the 
prices of prescription drugs and what impact those rising prices have 
on prescription drug coverage for Medicare consumers. This testimony 
will describe what we have learned about drug prices. The bottom line 
is that seniors need help to buy the drugs they need. A sound public 
policy will ensure that seniors gain the benefit of two basic policy 
changes, Medicare coverage of prescription drugs and reasonable steps 
to ensure that drug costs are moderated.
    Medicare beneficiaries are the only insured population group 
without prescription drug coverage. At any point, approximately 35 
percent of all Medicare beneficiaries are without drug coverage. Over 
the course of the year, nearly half of all Medicare beneficiaries are 
without drug coverage for all or part of the year. (See Appendix 1.) 
Based on recent trends, it is likely that this situation will get 
worse. Among the primary sources of prescription drug coverage for 
those beneficiaries who have it--Medigap, Medicare+Choice, and 
employer-sponsored coverage--drug coverage is increasingly unaffordable 
and unreliable.
    Medigap: Individually purchased Medigap policies cover a relatively 
small number of Medicare beneficiaries, roughly 3.3 million 
beneficiaries (or about eight percent of all Medicare beneficiaries). 
Given the additional cost of a prescription drug policy, it is 
understandable why a senior living on a fixed income does not see this 
as an affordable option. Looking at the average cost of Medigap 
policies with and without prescription drug coverage, the cost 
differential clearly illustrates why few people purchase plans with 
drug coverage. Simply put, the costs of the plans with drugs are 
considerably more expensive--substantially as a result of adverse 
selection.
    If you compare premiums for two moderate policies (of the ten 
standardized plans)--plans letters E and H, where the only significant 
difference in coverage is that the latter covers drugs and the fomer 
does not--you will see an annual premium difference of approximately 
$600. Even so the drug plan is sparse. The drug benefit under plan H 
has a $250 deductible, a 50 percent copayment, and a cap of $1250--
coverage that still leads to significant out-of-pocket costs for 
beneficiaries. The premium differential is considerably larger for 
plans with more considerable health coverage. The difference between 
Plan F (without drug coverage) and Plan J (with drug coverage) is more 
than $1,700 per year. Clearly, for many, the premiums for Medigap drug 
plans are unaffordable (see Appendix 2).
    Medicare+Choice: Approximately 13 percent (5.2 million) Medicare 
beneficiaries had some prescription drug coverage through a 
Medicare+Choice plan. However, Medicare+Choice plans are an 
increasingly unreliable source of prescription drug coverage for 
seniors because plans covering prescription drugs are not offered 
consistently across the country and the benefits they offer are being 
reduced. In 2000, beneficiaries in four states (AR, IO, NE, and WV) 
have no access to plans offering drug coverage. In an additional four 
states (DE, LA, NM, and NC), beneficiary access to plans with drug 
coverage decreased significantly.
    Obviously, as health plans drop out of Medicare+Choice, the 
availability of prescription drug coverage is jeopardized. For those 
beneficiaries who do have access to plans with drug coverage, the value 
of the drug benefit is decreasing. Between 1999 and 2000, the 
proportion of plans with benefit caps of $500 increased by 50 percent. 
During the same period, the number of beneficiaries living in areas 
with copayments on brand name drugs averaging at least $25 more than 
tripled. Recent announcements from two major Medicare+Choice plans 
suggest beneficiaries will have fewer options in 2001. Cigna 
Corporation recently reported it will no longer serve Medicare markets 
in 11 states beginning January 2001. Aetna Inc., will also terminate 
its participation as a Medicare+Choice provider in a number of markets 
in January 2001.
    Employer-Sponsored Retiree Coverage: Employer-sponsored retiree 
coverage is declining, leaving more Medicare beneficiaries on their own 
to purchase coverage or to pay for drugs out-of-pocket. Among large 
firms of 1,000 or more, the percentage of large firms offering retiree 
coverage dropped from 80 percent in 1991 to 67 percent in 1998. The 
trend is the same across firms of all sizes. According to a recent 
Mercer Foster-Higgins survey, the percentage of firms offering retiree 
coverage dropped from 40 percent in 1994 to 28 percent in 1999. Thus, 
employer-sponsored retiree coverage--which has been the most 
significant pathway to drug coverage for seniors--is diminishing 
rapidly (see Appendix 3).
Rising Prices and the Impact on Seniors
    Seniors without drug coverage are most affected by rising 
prescription drug prices. In November 1999 Families USA released a 
report looking at prices of the 50 top-selling drugs for seniors. The 
report found that prices of these 50 top-selling drugs rose much faster 
than inflation. In April we released an updated version of that report, 
``Still Rising: Drug Price Increases for Seniors 1999-2000.'' Among the 
50 top-selling drugs for seniors, there was some good news and some bad 
news. The good news for the 1999-2000 period was that the prices of 12 
of the 50 drugs rose slower than inflation--with nine of those not 
increasing in price at all. The bad news was that 33 of the 50 drugs 
rose in price at least one and one-half times inflation. Half of the 
drugs rose at least twice as fast as inflation. Sixteen drugs rose at 
least three times inflation and one-fifth (11) rose at least four times 
the rate of inflation (see Appendix 4).
    Some drugs are rising at much faster rates. For example, the price 
for furosemide, a generic drug, rose 50 percent in this one year. Klor-
con 10, a brand name drug, rose 43.8 percent (see Appendix 5).
    The report also compared prices over the six-year period of 1994-
2000. Thirty-nine of the 50 drugs were on the market for the full six 
years. Of those 39 drugs, prices for 37 rose faster than inflation (see 
Appendix 6). Prices for three-fourths (30) rose at least 1.5 times 
inflation. Over half (22) rose at least twice as fast as inflation and 
over a quarter (11) rose at least three times the rate of inflation. 
Six drugs rose at least five times the rate of inflation. Examples of 
some of the faster growing drugs include lorazepam (which rose 409 
percent, or 27 times inflation) and furosimide (which rose 210 percent, 
or 14 times inflation). (See Appendix 7.)
    While these price increases may seem dramatic, the impact on 
seniors is clear when we look at two examples:
    For a widow or widower with a gastrointestinal problem, the drug 
most likely to be prescribed is Prilosec. Based on 1998 data from the 
Pennsylvania Pharmaceutical Assistance Contract for the Elderly (PACE) 
program (the largest outpatient prescription drug program for older 
Americans), Prilosec is the second highest of all the top-selling drugs 
prescribed for seniors. The annual cost for a senior with no drug 
coverage taking Prilosec (20 milligram, controlled release capsules) is 
$1,455. For a widow or widower subsisting at 150 percent of poverty 
($12,525 of income per year), the annual cost of Prilosec alone will 
consume more than one in nine dollars (11.6 percent) of that senior's 
total budget. Even at twice the poverty level ($16,700 per year), 
Prilosec will consume almost one out of eleven dollars (8.7 percent) of 
that widow's total income (see Appendix 8).
    The second example is a senior with no drug coverage who has 
diabetes, hypertension, and high cholesterol--three conditions that 
often occur in conjunction with one another. A widow with these three 
conditions is likely to be treated with Gluophage, Procardia XL, and 
Lipitor. Annual costs for Gluophage (500 milligram tablets) will be 
$708. Annual costs for Procardia XL will either be $521 or $901, 
depending on whether 30-milligram tablets or 60-milligram tablets are 
prescribed. The annual cost for Lipitor (10 milligram tablets) will be 
$686 (see Appendix 9).
    Thus, total annual spending for seniors with diabetes, 
hypertension, and high cholesterol--for these three drugs alone--will 
range from $1,915 to $2,295. For a widow subsisting at 150 percent of 
poverty, this expenditure will constitute as much as 18.3 percent of 
her annual income. Even at twice the poverty level, these costs will 
consume up to 13.7 percent of her annual income. These costs, 
therefore, are likely to cause significant economic hardships.
    Clearly, affordability of prescription drugs is a problem. Coverage 
for prescription drugs, for those people who have it, makes a 
difference as to whether or not seniors get the drugs they need. In 
1996, seniors with drug coverage obtained, on average, 21 
prescriptions, while those without drug coverage received only 16 
prescriptions (see Appendix 10).
Paying More For Prescription Drugs in the U.S. Than In Other Countries
    It is clear that drug prices are much higher in the United States 
than they are in other countries. Several months ago USA Today compared 
prices in the U.S., Canada, Great Britain, and Australia for the ten 
best-selling drugs. The comparison found that Prilosec was two to two-
and-one-half times as expensive in the U.S.; Prozac was two to two-and-
three-quarters as expensive; Lipitor was 50 to 92 percent more 
expensive; and Prevacid was two-and-one-third to four times more 
expensive. Only one drug was cheaper in the U.S. than in the other 
countries, Epogen. In the case of all other ten drugs, the U.S. price 
was highest, by far (see Appendix 11).
    Two General Accounting Office studies from 1992 and 1994 show 
similar results. Comparing prices for 121 drugs sold in the U.S. and 
Canada, prices for 98 were higher in the U.S., and almost half were 
more than 50 percent higher. Comparing 77 drugs sold in the U.S. and in 
the United Kingdom, 86 percent of the drugs were higher in the U.S. and 
more than 60 percent were more than twice as high in the U.S.
The R&D Defense is a Canard
    The pharmaceutical manufacturers argue that they need these higher 
prices so they can undertake research and development. They say that, 
if we reduce these prices, research and development will be curtailed. 
The drug industry's assertion in this respect is wildly exaggerated. 
Among the top pharmaceutical companies, more money goes for marketing, 
advertisement, and administration than for research and development. 
More money is received in profits than is spent on research and 
development. In 1999, among the five companies with the highest 
revenues, four spent at least double on marketing, advertising and 
administration than was spent on research and development. For example, 
Merck spent considerably more than twice as much on marketing, 
advertising, and administration than it did on research and 
development. Comparable comparisons apply to other large pharmaceutical 
companies. Indeed, for the ten companies with the highest revenues (for 
which data are available), only one reports spending more on research 
and development than on marketing, advertising, and administration. 
Merck's profits for that year were approximately three times its 
research and development budget (see Appendix 12).
    For the manufacturers of the top 50 drugs sold to seniors, profit 
margins are more than triple profit rates of other Fortune 500 
companies. These drug manufacturers are receiving an 18 percent profit 
rate of total revenues compared to approximately five percent for other 
Fortune 500 companies (see Appendix 13). Given their profit margins and 
advertising budgets, it is a wild and irresponsible exaggeration for 
pharmaceutical companies to suggest that, if prices were moderated, the 
first and only place they would cut is their research and development 
budget.
    The pharmaceutical manufacturers are quick to overstate the role 
they play in research and development and to understate the role the 
government plays in this area. According to a study conducted by MIT 
and cited in the New York Times, of the 14 most medically significant 
drugs developed over the past 25 years, 11 have roots in research 
funded by the government. In general, much of the basic research 
essential to the development of new drugs is conducted at NIH or funded 
by the government. Taxol and Xalatan are examples of drugs developed 
from basic research conducted by the government. These two drugs alone 
now earn their manufacturers, Bristol-Myers Squibb and Pharmacia, 
hundreds of millions of dollars annually (see Appendix 14).
    It is amusing to see how the pharmaceutical industry has a love-
love-love-love-hate relationship with the US government. On the one 
hand, the industry loves the advantages gained through NIH research, 
patent protections, and laws governing re-importation. In addition, the 
industry loves the multiple tax advantages it receives, including the 
research and development tax credit and tax breaks for manufacturing in 
Puerto Rico. On the other hand, they continue to object to any effort 
by the government to moderate prices for the population most in need of 
drugs, the seniors and persons with disabilities in Medicare.
    The rising prices of prescription drugs in the U.S. and the 
difference between what consumers pay in the U.S. compared to other 
countries raises real questions about equity and fairness of the drug 
industry's pricing practices. However, the best protection for 
consumers against high prices is to have guaranteed coverage that uses 
market clout to moderate drug prices and helps consumers pay for these 
drugs.
Recommendations for Affordable Drugs for Seniors
    A sound public policy will ensure that seniors gain the benefit of 
two basic policy changes, Medicare coverage of prescription drugs and 
reasonable steps to ensure that drug costs are moderated. The 
principles for those changes include:

 Coverage must be a defined benefit (both basic and 
        catastrophic) included in Medicare, not the promise of access 
        to a private insurance policy: Prescription drug coverage 
        should be added to the Medicare benefits package in such a way 
        that beneficiaries have the same guaranteed coverage for drugs 
        that they have today for hospital, physician and other Medicare 
        covered services. Public policy predicated on the availability 
        of private-sector drug-only insurance will be a mirage for most 
        seniors. Insurance companies are unlikely to provide such 
        coverage, and the premiums would quickly be unaffordable due to 
        adverse risk selection.
 Prescription drug costs must be contained: A Medicare drug 
        benefit will not be affordable if it does not include efforts 
        to contain prescription drug costs. There are a number of 
        mechanisms that Medicare can use to contain costs but Medicare 
        should use its size to leverage the lowest price possible.
 The Medicare benefit must be affordable to all seniors, with 
        special subsidies for low-income beneficiaries: The Medicare 
        benefit must offer coverage that is affordable, including 
        reasonable premiums and coinsurance requirements, and it should 
        include catastrophic protections. Poor and near-poor Medicare 
        beneficiaries should receive special assistance in paying for 
        their premiums and out-of-pocket expenses. Low-income 
        beneficiaries should have the premiums fully subsidized and 
        should also receive help with any coinsurance requirements.
 Administration of low-income protections should be improved: 
        The low-income assistance component of Medicare should 
        eventually be integrated into the Medicare program, including 
        full federal funding and federal administration of this 
        benefit. It makes little sense to foist responsibilities of 
        low-income protections on the states through Medicaid.
Concerns about ``Medicare Rx 2000''
    In response to the prescription drug plan unveiled by Congressman 
Bill Thomas, we have a number of concerns regarding the contents of 
this proposal. We believe this plan will not provide a real benefit for 
seniors and it does not meet the basic principles outlined above. More 
specifically, we raise the following concerns:

 Medicare Rx 2000, like previous versions of this plan, relies 
        on private insurance offering prescription drug coverage, 
        something the insurers have already emphatically stated they 
        will not do. In fact, the president of the Health Insurance 
        Association of America called this idea ``an empty promise to 
        America's seniors.''
 The plan apparently has a provision that requires the 
        government to step in when plans are not available. This means 
        that the government will try to negotiate with the plans to 
        make offering coverage more attractive to them. It does not 
        mean that the government will offer a plan. When the sponsor, 
        Cong. Thomas, testified that ``this is a guaranteed 
        entitlement,'' it remained unclear how seniors would get this 
        coverage and now much he proposes that the government should 
        pay insurance companies to induce their participation. There 
        appears to be no mechanism to ensure that Medicare 
        beneficiaries gain the benefit of the subsidies to insurance 
        companies.
 Under this plan, consumers with incomes over $12,525 a year 
        must pay 100 percent of the cost of the private plan, even if 
        the insurance companies can be persuaded to offer it. Under 
        this income level there is some help for the premium of the 
        lowest-cost plan. There is no help for co-payments or the 
        deductible. The lowest-cost plan could be a lower-quality plan. 
        This scheme potentially creates a two-tiered system with 
        lowest-income people segregated into lower-quality plans.
 Consumers don't know what they will to get in drug coverage. 
        The proposal leaves the actual benefit undefined. The plan has 
        an actuarial value of $740. The deductible, co-payments and 
        benefits will vary across the country. In some areas this 
        amount will buy more than in others. Administrative costs 
        (usually around 35% in Medigap plans as compared to 3% in 
        Medicare) will most likely come out of the actuarial amount.
 For oversight, the proposal--ironically--creates a new federal 
        bureaucracy with its own budget authority. It makes 
        recommendations directly to Congress and the President. The 
        term of office is not concurrent with the administration. The 
        ``new agency'' does not report to the secretary. This appears 
        to be a ``new agency'' that has office space within the 
        Department of HHS, but acts independently on all matters within 
        its charge.
    In conclusion, we hope to work with members of this committee and 
the rest of the Congress to make a prescription drug benefit in 
Medicare a reality.
    INSERT OFFSET FOLIOS 1 TO 14 HERE

    Mr. Bilirakis. Mr. Pollack, I am sorry to cut you off, but 
I have really got to move on.
    Ms. Davenport-Ennis, please proceed.

               STATEMENT OF NANCY DAVENPORT-ENNIS

    Ms. Davenport-Ennis. Thank you, Chairman Bilirakis and 
members of the committee for your invitation to be here this 
afternoon.
    I am Nancy Davenport-Ennis. I am the Executive Director of 
two national organizations, one of which is the National 
Patient Advocate Foundation. Our organization supports public 
policy that ensures patients timely access to cutting-edge 
therapies.
    Our affiliate, the Patient Advocate Foundation, provides 
oncology nurse case managers, coding and billing specialists, 
and attorneys to both consult and intervene on behalf of 
patients who have faced denial of access to care in the health 
care delivery system in this country.
    Based on the work of our organizations, we are pleased to 
share our ideas for the design and implementation of such a 
program.
    Our ultimate goal is a rational and balanced prescription 
drug program that will meet the needs of all seniors, including 
individuals with serious and life-threatening diseases.
    Because of our experience with cancer patients and perhaps 
because I am a twice survivor of cancer, I am the mother-in-law 
of a cancer survivor, I am the aunt of a now-deceased 34-year-
old niece who died after a 5-year battle with ovarian cancer, 
and perhaps because I have the opportunity to interface with 
case managers that served over 29,000 Americans last year who 
were facing denial of care, many of my recommendations will be 
specific to the issue of cancer protection.
    I would also like to cite for the record that because I 
have not had access to the bill that has been introduced, I am 
here to talk about Medicare modernization and not to address 
specific tenets of specific legislation.
    I would like to go back to the evolution of cancer care and 
cite that Medicare does pay for prescription drugs, as you 
know, that are provided incident to a physician's services.
    Because most current anti-cancer drugs are administered 
intravenously by physicians, they are already covered by 
Medicare.
    Cancer patients have come to expect, and in fact to prefer 
dramatically, care in the community setting. And I thank the 
Congress for their role in seeing that we have been able to 
maintain continuity of care in this particular area.
    With regard to the future of cancer care, Medicare 
currently pays only for those oral chemotherapy agents that are 
a replacement for intravenous chemotherapy agents. Oral 
chemotherapy drugs that are not a replacement for existing IV 
drugs will be a critical part of cancer care in the future. And 
cancer patients have expressed a strong desire to use these 
medications.
    Medicare reimbursement will play a key role in the 
acceptance and proper use of these drugs. It will not be 
sufficient for physicians to give a patient a prescription for 
these drugs and have no further responsibility for that 
patient's use of the drugs.
    The payment system must recognize that these drugs will 
need to be monitored more carefully than many other self-
administered drugs because of issues of side effects and 
compliance; therefore, physician reimbursement for supervision 
of this therapy must be adequate.
    In order to prevent financial disincentives against the use 
of these drugs, including the imposition of unreasonably large 
copayments or coverage caps, oral chemotherapy drugs should be 
incorporated in the existing Medicare drug coverage system.
    Our constituents--cancer patients and others with serious 
and life-threatening illnesses--will benefit from a new 
prescription drug benefit only if it is administered fairly and 
consistently.
    In administering any benefit, it is essential that a 
balance be achieved between the availability of the benefit and 
the preservation of funding for the benefit.
    At times it appears as though the balance struck by HCFA is 
weighted more toward preservation of financing than 
availability of benefits.
    I base that again on the fact that we have served so many 
Americans that have confronted problems with denial within the 
Medicare program.
    Last year alone, patients from 44 States contacted us for 
help with regard to denial of Medicare benefits.
    A series of agency actions, both recently and historically, 
confirm our concerns about HCFA's administrative approach.
    These actions include development of an outpatient 
prospective payment system that would have severely limited if 
not eliminated cancer care in the hospital outpatient 
department.
    The problems in this proposal were remedied legislatively 
after an outcry from patients and others.
    We are concerned about the policy for injectable drugs. And 
certainly the Congress has been successful in once again making 
certain that patients will continue to have access to physician 
point-of-service injectable drugs.
    The issue of average wholesale pricing has also been a 
concern. HCFA has repeatedly sought to reduce reimbursement for 
Medicare outpatient drugs, threatening a situation where 
oncologists would suffer a loss of drugs administered to 
Medicare patients.
    Cancer patient groups have made clear their objections to 
these changes unless the modifications are accompanied by 
appropriate and adequate adjustments in chemotherapy 
administration fees.
    With regard to clinical trials coverage, the cancer patient 
community celebrated a victory last Wednesday when the 
President announced a policy of Medicare coverage for routine 
patient care costs for those enrolled in clinical trials.
    We are now quite concerned to learn that HCFA has prepared 
a program memoranda implementing the President's directive that 
would in fact negate the President's announcement on this fact.
    Mr. Bilirakis. Please summarize, Ms. Davenport-Ennis.
    Ms. Davenport-Ennis. I will be happy to. I am here this 
afternoon to say to each of you, we are most willing to share 
with you data that we have as a result of our patient cases 
that may be beneficial to you as you design a new Medicare 
program that is going to work in the area of prescription drug 
benefits.
    We will be happy to share the specifics of what we feel 
would be important in that, and we are most happy to answer 
questions from members of the panel this afternoon.
    Mr. Bilirakis. Thank you, ma'am.
    [The prepared statement of Nancy Davenport-Ennis follows:]
Prepared Statement of Nancy Davenport-Ennis, National Patient Advocate 
                               Foundation
    Good morning and thank you for inviting me to testify today on the 
issue of modernizing Medicare drug coverage. I am Nancy Davenport-
Ennis, Executive Director of the National Patient Advocate Foundation, 
or NPAF. Our organization supports public policy that ensures patients 
timely access to cutting-edge therapies. Our affiliate, the Patient 
Advocate Foundation, provides caseworker services to individuals who 
have been denied coverage for their health care.
    Through our work at NPAF and the Patient Advocate Foundation, we 
have become quite familiar with the difficulties that Medicare 
beneficiaries experience in reliably securing reimbursement for 
potentially life-saving therapies under the current limited drug 
benefit. That experience has provided valuable insights into the 
appropriate structure and administration of an expanded Medicare 
prescription drug benefit, and we are pleased to share our ideas for 
the design and implementation of a prescription drug program.
    Many--although not all--of our direct services are provided to 
cancer patients, and our advocacy program focuses on cancer policy 
issues. Therefore, some of my remarks will refer specifically to cancer 
patients. However, our recommendations have relevance for all Medicare 
beneficiaries. Our ultimate goal is a rational and balanced 
prescription drug program that will meet the needs of all seniors, 
including individuals with serious and life-threatening diseases.
Evolution of Cancer Care
    As you know, Medicare pays for prescription drugs that are provided 
incident to a physician's services. Because most current anticancer 
drugs are administered intravenously by physicians, they are already 
covered by Medicare. This is a system that works well for cancer 
patients, and we would be concerned if any new Medicare drug benefit 
changed this situation.
    The gradual shift of chemotherapy from the inpatient setting to the 
physician's office has been aided by the introduction of certain 
supportive care products and by the availability of Medicare 
reimbursement. Cancer patients have come to expect, and in fact to 
prefer dramatically, that their chemotherapy be administered in the 
physician's office and that they recuperate from the effects of the 
therapy in their own homes with the support of family and friends.
    This shifting of practice from hospital to physician's office has 
been cost-effective for Medicare, and it has been a humane development 
for patients, who benefit not only from care in the outpatient setting, 
but also from limited copayment requirements and the absence of a 
benefit cap for their cancer chemotherapy. Continuity of care for 
cancer patients is very important, and changes to the current 
successful system of cancer care should be approached with caution.
The Future of Cancer Care
    Medicare currently pays only for those oral chemotherapy agents 
that are a replacement for intravenous chemotherapy agents. Oral 
chemotherapy drugs that are not a replacement for existing IV drugs 
will be a critical part of cancer care in the future, and cancer 
patients have expressed a strong desire to use these medications. 
Medicare reimbursement will play a key role in the acceptance and 
proper use of these drugs.
    It will not be sufficient for physicians to give a patient a 
prescription for these drugs and have no further responsibility for 
that patient's use of the drugs. The payment system must recognize that 
these drugs will need to be monitored more carefully than many other 
self-administered drugs because of issues of side effects and 
compliance; therefore, physician reimbursement for supervision of this 
therapy must be adequate. In order to prevent financial disincentives 
against the use of these drugs, including the imposition of 
unreasonably large copayments or coverage caps, oral chemotherapy drugs 
should be incorporated in the existing Medicare drug coverage system.
Role of HCFA in Administering an Expanded Drug Benefit
    Notwithstanding our desire to have a comprehensive program of 
cancer benefits administered under Part B, we have some concerns about 
the expansion of HCFA authority to administer a new program including 
all drugs. Our constituents--cancer patients and others with serious 
and life-threatening illnesses--will benefit from a new prescription 
drug benefit only if it is administered fairly and consistently. In 
administering any benefit, it is essential that a balance be achieved 
between the availability of the benefit and the preservation of funding 
for the benefit.
    At times, it appears as though the balance struck by HCFA is 
weighted more toward preservation of financing than availability of 
benefits. We are mindful of the need for HCFA to be a responsible 
guardian of Medicare funds, but we do not think that it should be the 
highest priority of the agency. Where the balance has not been 
appropriately struck, we have seen narrow coverage determinations, 
resistance to introduction of new technology, and unwarranted 
reimbursement denials.
    A series of agency actions, both recently and historically, confirm 
our concerns about HCFA's administrative approach.

 Ambulatory Payment Classification System--HCFA's proposal for 
        an outpatient prospective payment system would have 
        dramatically underpaid for certain chemotherapy agents, failed 
        to pay for supportive therapies, and created disincentives for 
        the introduction of new therapies. Congress had to intercede 
        with revisions of the outpatient prospective payment proposal 
        because the original plan would have severely limited, if not 
        eliminated, cancer care in the hospital outpatient department. 
        Just as patients prefer care in the physician's 0ffice over 
        inpatient care, they also prefer care in the hospital 
        outpatient department to care as an inpatient.
 Policy for Injectable Drugs--Since the inception of the 
        Medicare program in 1 965, reimbursement has been available for 
        injectable drugs based on the usual method of their 
        administration. In the last two years, however, HCFA has 
        attempted to modify that policy and eliminate reimbursement for 
        many injectable drugs. The agency has challenged the 
        expectation of Medicare beneficiaries that injectable drugs 
        administered in the physician's office will be reimbursed. In 
        1999, Congress was forced to intervene and direct HCFA to 
        restore its historical reimbursement policy based on the usual 
        method of administration of injectable drugs. The 
        appropriations rider that mandated that coverage is in force 
        only until September 30, 2000, and HCFA has already indicated 
        an intention to revise its coverage policy.
 AWP--HCFA has repeatedly sought to reduce reimbursement for 
        Medicare outpatient drugs, threatening a situation where 
        oncologists would suffer a loss on drugs administered to 
        Medicare patients. This situation would not be sustainable, and 
        in the past Congress has directed HCFA to refrain from 
        implementing these reductions. Cancer patient groups have made 
        clear their objections to these changes, unless the 
        modifications are accompanied by appropriate and adequate 
        adjustments in chemotherapy administration fees. I have 
        attached the NPAF statement and copies of Cancer Leadership 
        Council letters on this topic.
 Clinical Trials Coverage--Although the cancer patient 
        community recently celebrated a victory when the President 
        announced a policy of Medicare coverage for routine patient 
        care costs for those enrolled in clinical trials, this 
        accomplishment came only after years of delay. Cancer advocates 
        suggested years ago that HCFA had the authority to cover 
        clinical trials and proposed specifically how that might be 
        accomplished. After years of resisting this change, HCFA made 
        the modification only because of a Presidential directive. We 
        are still awaiting the details of the coverage announcement.
 Coverage of Off-Label Drugs and New Medical Devices--Beyond 
        these recent issues, HCFA historically has expressed reluctance 
        to cover certain new or developing technologies even after they 
        have been fully incorporated into good medical practice. The 
        cancer community still chafes under the recollection of 
        Medicare policy during the 1980's and early 1990's, when the 
        program routinely denied coverage for medically accepted uses 
        of anticancer drugs that were different from the specific use 
        approved by the Food and Drug Administration. When supported by 
        sound clinical data, these so-called off-label uses of drugs 
        are standard therapy for many cancers. HCFA firmly resisted 
        efforts to reform its backward reimbursement policy in this 
        regard, until Congress finally felt compelled in the Omnibus 
        Budget Reconciliation Act of 1993 (OBRA '93) to take the 
        unusual step of mandating that HCFA follow the recommendations 
        of certain private review bodies with respect to the off-label 
        use of drugs for the treatment of cancer. In addition, Medicare 
        acceptance of new medical devices is notoriously slow, leaving 
        many approved devices unreimbursed by Medicare years after 
        their introduction in the private sector.
    Our organization recommends that Congress, when considering its 
options for administration of a Medicare prescription drug benefit, 
include among those choices market-based mechanisms for procurement of 
drugs for seniors.
Fundamental Principles of Prescription Drug Coverage
    As advocates for individuals with cancer, we believe the issues we 
have discussed above deserve serious consideration during debate on a 
prescription drug plan. I would also like to discuss briefly some 
additional issues of broad impact that should be weighed by Congress.
    We propose a number of fundamental principles of prescription drug 
coverage that are important to individuals with cancer and other 
serious and life-threatening illnesses:

--Formularies--We cannot foresee any venue where a restrictive 
        formulary would be appropriate. Decisions regarding medical 
        care should be made by the patient in consultation with his or 
        her physician and should not be limited by a formulary. 
        Differences in prescription drugs that are perceived by benefit 
        managers to be minor may be a matter of life and death for 
        cancer patients. It is not adequate to have an appeals process 
        for access to drugs not on the formulary, because delays during 
        appeal may be life-threatening for some individuals.
--Pharmaceutical benefit managers--For individuals with serious and 
        life-threatening illnesses, care by a comprehensive health care 
        team is important and the involvement of a pharmaceutical 
        benefit management company does not facilitate such care.
--Appeals of coverage denials--The new prescription drug plan should 
        include procedures for the timely review of denials of 
        coverage, including complaints by beneficiaries, providers, and 
        pharmacists.
--Information and education campaign--Implementation of a new benefit 
        will create confusion among Medicare beneficiaries. Therefore, 
        a substantial educational effort is a necessary component of 
        the new program. While patient and provider organizations can 
        play a pivotal role in beneficiary and provider education, the 
        agency responsible for program implementation must also have a 
        broad-based dissemination initiative and provide funds for 
        private sector educational efforts.
    We believe enactment of a prescription drug benefit is necessary to 
ensure Medicare beneficiaries access to life-saving therapies. However, 
the success of any new plan will depend significantly on a fair and 
balanced approach to program implementation. In light of our experience 
to date with HCFA implementation of the current benefit, we urge 
Congress to evaluate a range of administrative options, including 
market-based solutions, before you reach your decision.
    I would be glad to answer your questions.

    Mr. Bilirakis. You have been so patient sitting here all of 
these hours and sharing lunch with us so I really hesitate and 
hate to cutoff anyone. But you have got to have structure in 
order to be able to function. So I hope you will forgive me in 
that regard.
    Ms. Eshoo--I am glad to see that she is still here--coined 
a phrase earlier which probably said it better than any of us 
could when she talked about this problem being like putting 
socks on an octopus.
    It says it all I think. It is just so very, very difficult 
to do this right. Not just to do it, but trying to do it 
correctly.
    I have as much optimism as anyone and I like to think we 
will get the job done and get it done this year.
    We have to be practical. Will we be able to get it done 
this year? Politics certainly plays a very large part in all 
this. Partisanship will play a big role, as will the details of 
any proposal.
    So I guess I would raise the question, and Mr. Fuller 
touched on it. There are people out there who are hurting. And 
I know that a couple of you made comments about means testing. 
For the life of me I cannot understand why, when there are a 
limited amount of resources available, we cannot rightly focus 
those resources for those who are more in need than others.
    Mr. Fuller referred to State-based programs that are in 
place already--there are approximately 20 around the country. 
In fact, I understand that one of the top priorities at the 
National Governors' Conference was to install a prescription 
drug program in their States. Florida just recently completed 
it in their legislature, and they are putting a program into 
place.
    If we have these programs in place, what is wrong with 
complementing and supplementing those existing programs with 
Federal dollars until we get it right and make a prescription 
drug benefit a part of Medicare? I trust, if it is done 
correctly, that these programs could help even more people, 
maybe double the number of people, for example, than they take 
care of presently.
    And of course, if you add to that some help for those 
people who maybe do not qualify as being very poor, if you add 
to that the stop-loss concept for those who would not qualify 
for the subsidy but at the same time have prescription drug 
costs that would be out of the roof and really run them into a 
hole.
    So I raise that question. Very quickly. I do not have that 
much time. If each of you could take maybe just a few seconds 
to respond to that, I would appreciate it. Negative or 
positive, whatever.
    Mr. Kahn. Well, Mr. Chairman, HIAA believes that the issue 
you are raising is an important one, which is we ought to do 
now what can be done. And clearly, States are showing they can 
very rapidly implement these programs. I mean, it has grown 
from around 13 to about 19 in just a few short weeks actually.
    Mr. Bilirakis. Right.
    Mr. Kahn. And I think anyone at the table has got to admit 
that the current pricing of drugs is Byzantine and the 
complexity of adopting any kind of benefit, whether it is 
private sector or public sector, that is universal is such that 
it will take years.
    And so we believe firmly that the best to do now would be 
to help those most in need immediately. Because otherwise, it 
is going to be years.
    Mr. Fuller. I would just maybe supplement what I said by 
saying that in the months that we have been working on this, we 
have seen the American Pharmaceutical Association come on board 
supporting it. They represent the Nation's pharmacists.
    The American Society of Consultant Pharmacists, Food 
Marketing Institute, and the National Consumers League all 
signed on to the program. So we think there is growing 
attraction to the State-based approach.
    I would also add that we would recommend that the program 
be sunsetted, so that this does not continue forever; to sunset 
it in 5 years or whenever there is major Medicare reform so we 
keep the pressure on.
    Mr. Bilirakis. Right.
    Mr. Fuller. But it is the kind of pressure in which there 
can be constructive dialog.
    Mr. Bilirakis. That would be a concern. You have got to 
keep the pressure on, that is for sure.
    Ms. Ignagni. Mr. Chairman, I think that without a doubt if 
the choice is doing something or doing nothing, something is 
always better than nothing.
    Having said that, we have a time of tremendous prosperity 
in this country, probably like no other we have seen in a very 
long time.
    There are two issues that remain to be addressed in health 
care, and probably many, many others, but two large ones loom 
over us. One is the matter of prescription drugs to update this 
1965 benefit program; and the second is the matter of the 
uninsured, which looms large and will undoubtedly get larger as 
the economy slows.
    So we would say on the part of our members that we would 
like to sit with you, to sit with members of the minority, and 
work together to try at this juncture to address this unique 
opportunity to fulfill that promise that was made in 1965 to 
beneficiaries.
    Mr. Bilirakis. Dr. Feder.
    Ms. Feder. I actually agree with Karen Ignagni that the 
promise of Medicare of mainstream protection is no longer being 
fulfilled without the prescription drug protection.
    Mr. Bilirakis. Agreed. Agreed.
    Ms. Feder. Good. And the barrier really is political. Sure 
it is hard to do the specific design, and it takes effort, and 
there is contention around it. But we are capable of agreeing 
as policy analysts on a design.
    The greatest underlying problem that I see in reaching 
agreement is that rather than having a political consensus on 
the value of the Medicare program, the Medicare program, even 
its basic benefit, in addition to its administration, has been 
under siege for the last 5 years.
    And it seems to me that to go in a direction of very modest 
means-tested benefits which we know from the outset will be 
inadequate, is to walk away from what we need to do and have 
the resources to do, which is to strengthen and recognize and 
support the program that we know works.
    Mr. Bilirakis. But in the meantime, of course, an awful lot 
of needy people out there would not have----
    Ms. Feder. But that is because we are not willing to act. 
We can do it.
    Mr. Bilirakis. Mr. Donoho.
    Mr. Donoho. Mr. Chairman, I guess, you know, our 
association starts with the premise that Medicare needs to be 
reformed. We spent a year or more in the last couple of years 
studying this issue. What we are here today about is taking a 
piece of that study an enacting it for Medicare.
    From what I understand, and I guess the concern I would 
express, because our association has not taken a position on a 
State-based plan, is that once you give it to the States as a 
block grant or however you do that, how do you bring it back 
under a Medicare style program?
    I mean, it is just a question. And once you get a program 
operating similar to Title 19 Medicaid, how do we achieve 
reform and how do we come back to it in terms of Medicare 
itself?
    Mr. Bilirakis. Which is a question that would have to be 
answered.
    Mr. Pollack.
    Mr. Pollack. Mr. Chairman, let me tell you that we actually 
have worked with numerous States actually to establish some of 
these programs.
    Having said that, let me make clear what the impulse was on 
the part of the States and why I do not think it is the right 
direction to go in here.
    The States have done this because they have thrown their 
hands up, and they have said we are waiting for the Federal 
Government. We cannot do anything else. We are at a position 
today where we can do something much more significant.
    I have three fears.
    One fear is that if we move in this direction, we are not 
going to keep the same sense of urgency about the real reform 
that we need.
    Second, these low-income programs have very poor 
participation rates. If you look at things like the Qualified 
Medicare Beneficiary program, the SLMBY program as well, they 
have very low participation rates because they are treated very 
differently than when you have a universal program.
    And last, these programs do not have the opportunity of 
containing costs and containing prices. And so if we do not 
contain those costs and prices, that benefit quickly will be 
less meaningful.
    Mr. Bilirakis. Well, all right. Ms. Davenport-Ennis, very 
briefly, if you can, since you are last.
    Ms. Davenport-Ennis. Thank you. I would like to concur with 
the remarks that Karen Ignagni made in terms of the need to 
absolutely look at addressing prescription drug benefits while 
we have an economy that will allow us to do that.
    I think also from our experience, we must do something to 
deal with the uninsured population.
    I would also have to say that based on our experience in 
State legislation before moving to the Federal level in that 
activity, each time that we worked in a State to effect reform, 
what we found was that the process was usually a slow process. 
It was hit-or-miss process.
    We ended up with citizens in one group of States having one 
set of services and in other States having no services at all.
    With regard to the Block Grant Program, we would share the 
same concern that has previously been voiced, that if we get it 
started at the State level, how are we ever going to get it 
back?
    And, as you say, Chairman Bilirakis, there are so many 
people that are hurting, right now the one vehicle that we have 
available to them in all States is to try to get them into an 
indigent drug program either through their State or through a 
pharmaceutical manufacturer.
    And I can share with you, in great detail,----
    Mr. Bilirakis. Please don't, please don't today.
    Mr. Davenport-Ennis. No, I won't go into great detail, but 
I will share with you that it is very difficult to effect 
remedy for the at-risk populations that find themselves needing 
this help the very most.
    Mr. Bilirakis. Thanks. I asked for it and I got it.
    Mr. Brown? I appreciate the committee's indulgence.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Pollack, you held up a larger, but a black and white 
version of this. This was in Congress, I think in Congress 
Daily today. ``Private Drug Insurance Lowers Prices 30 Percent 
To 39 Percent: Shouldn't Seniors Have It?
    Your point was that it segments the market not using 
Medicare buying power, if you will. There is another underlying 
perhaps inadvertent message, I think, that says something else.
    That is, that in the background you hear the drug 
companies, over and over, talking about $500 million, it costs 
them $500 million to research a new drug, they have never 
really provided evidence of that $500 million but that is the 
number that even the media sometimes accept without really any 
documentation. It has almost become part of the rap in this 
town that it costs $500 million, no questions asked, even 
though almost 50 percent of prescription drug research and 
development is paid for by taxpayers. And that is rarely 
mentioned in all this.
    The drug companies go on and say, ``Any action by Congress 
to reduce prices in any way would make the drug companies 
unable to to this wonderful''--and it is wonderful--research 
that they do.
    But this ad says, ``If all seniors had access to private 
market discounts, the medicine they need on average would cost 
30 to 39 percent less, private prescription drug insurance is 
the cure. A hundred-and-fifty-million Americans don't pay full 
price for the medicines. Why should any senior?''
    Are they suggesting in your mind that if senior citizens 
could get a 30, 39 percent discount that they still would be 
able to do all this research?
    Mr. Pollack. I made that very point in testimony yesterday 
in the Senate with Alan Homer, the President of the 
Pharmaceutical Research and Manufacturers Association. In 
effect, they seem to be saying, come at us with 30 to 39 
percent discounts. It is not going to be harmful to us.
    You know, the point you are making I think is amplified in 
Appendix 12 to my testimony. If you look at the various 
companies, you will see that they are spending considerably 
more on marketing, advertising, and administration than they 
are spending on research and development.
    They take considerably larger amounts in profits than they 
spend on research and development. If I just might give you two 
illustrations:
    Merck spends 2\1/2\ times as much on marketing-related 
costs than it does on research and development. It receives 
profits that are three times as high as what the spend on 
research and development.
    Eli Lilly spends 1\1/2\ times as much on marketing and 
takes 1\1/2\ times as much of research and development for 
profits.
    Clearly, if we moderated prices, it would not hamper the 
ability to undertake research and development. And the industry 
seems to be admitting this with their advertisement.
    Mr. Brown. Dr. Feder, if I could switch gears. The 
Republicans claim that relying on the private sector would 
permit flexible benefits and avoid a one-size-fits-all approach 
that Medicare's traditionally successfully used.
    Give us the downsides of that in a prescription drug 
program.
    Ms. Feder. Sure. I think that the one-size-fits-all 
language is intended to be pejorative, and if we step back, No. 
1, we need to step back and look at what the one size that does 
fit all is being advocated, that being that we are saying that 
everybody is to be entitled, every senior ought to be entitled 
to a defined prescription drug benefit.
    That kind of protection everybody does indeed need. So the 
label itself is misleading. When they talk about flexibility, I 
think that they are implying that there ought to be a variation 
in benefits, a wide choice of plans, and we have heard a lot of 
problems in that argument discussed this morning.
    One is that the flexibility that is talked about in terms 
of relying on a private market is a flexibility to serve some 
areas and some people and not others.
    It is a flexibility and uncertainty that has plans coming 
and going from markets and changing their benefits because that 
is the way the market works.
    So we have heard a lot of discussion about the uncertainty 
that it creates for beneficiaries.
    In terms of the flexibility on benefits, it means, as we 
have heard many others say this morning, and many members of 
the panel say of the committee say that it creates concerns 
about what people can expect, as well as a competition in the 
marketplace that is designed to avoid risky patients, rather 
than to really provide care efficiently.
    So I would say, in all those respects and add to them the 
administrative costs and the marketing costs and the lack of 
knowledge that consumers will have going into a plan on what 
they are really getting with formularies, for example.
    That what is being called flexibility is really confusion 
and fragmentation.
    Mr. Bilirakis. The gentleman from Pennsylvania, Mr. 
Greenwood.
    Mr. Greenwood. Thank you, Mr. Chairman.
    In quick response to Mr. Brown's commentary, I would agree 
it would be a good idea for us to get documentation of what 
exactly it costs to produce a drug, because I know I use that 
$500 million per drug figure. And by virtue of this statement, 
I would hope the pharmaceutical industry would provide us with 
that substantiation.
    I would also like some substantiation of the gentleman from 
Ohio's statement that 50 percent of the profits of 
pharmaceutical companies come from, are taxpayer funded because 
that gets bandied around a bit too, and needs some 
substantiation. So I hope you can provide the committee with 
that.
    Mr. Pollack, in your testimony, you say that prescription 
drug coverage should be added to the Medicare benefits package 
in such a way that beneficiaries have the same guaranteed 
coverage for drugs that they have today for hospital physicians 
and other Medicare care coverage services.
    I want to understand what your proposal is. Would you 
assume that the beneficiaries pay a premium for that?
    Mr. Pollack. Yes, I do.
    Mr. Greenwood. And would you assume that there is a co-pay?
    Mr. Pollack. Probably, yes. With the probable, hopeful 
exception to those of lower income who would have that 
subsidized.
    Mr. Greenwood. You assume that there is a deductible?
    Mr. Pollack. Not necessarily. It might, might not.
    Mr. Greenwood. Would you assume that there is a stop loss. 
In other words, would you assume that there is a cap, I should 
say. Do beneficiaries have access to whatever the costs are, if 
it is $10,000, $20,000, $30,000,----
    Mr. Pollack. There should be a catastrophic benefit, yes.
    Mr. Greenwood. And what would that cost?
    Mr. Pollack. Well, it depends on how it was designed. I am 
not an actuary so I do not think I can give you that cost, and 
of course it will depend very much on a variety of factors, and 
so I do not know how I could give you an estimate of that 
without knowing the details.
    Mr. Greenwood. Well, in your testimony, you say we have 
been engaged in analyzing the implications of changes of the 
Medicare program and Medicare beneficiaries for some time. And 
you talk about the research you do. And you have come to the 
committee and made a very clear recommendation.
    And I am a little surprised if you have not any idea what 
your recommendation would cost because that is----
    Mr. Pollack. I did not say that we are coming in with a 
proposal. We said the approach should be to incorporate this 
into the Medicare program. There are many ways to do it, and 
those different ways are going to cost very different amounts 
of money.
    Mr. Ganske. Would the gentleman yield?
    Mr. Greenwood. Briefly, Mr. Ganske. People would yield to 
you before and lose their time.
    Mr. Ganske. One additional question to your series of 
questions. And that is, it sounds to me like Mr. Pollack is 
saying that there should be a standard part of Medicare.
    And that to me means that if it is like physician services 
or other services, that it is not voluntary.
    Mr. Pollack. Well, Part B is voluntary and----
    Mr. Greenwood. Is to further describe the gentleman's 
proposal. Would yours in fact be voluntary or would it be a 
requirement that everyone that participates in Medicare pay 
this premium whether they already have coverage from their 
employer or not?
    Mr. Pollack. I think the likelihood is that it would be 
voluntary. I do not think it is feasibly probably politically 
to enact a plan that was not voluntary.
    Mr. Greenwood. In all due respect, Mr. Pollack, you spend a 
lot more time criticizing the proposals that are on the table 
than you have proposing something yourself. And continued in 
all due respect, that is the easy part of this process.
    The easy part of this process is knocking other people's 
ideas; the hard part of the process is coming up with something 
that we can afford and that makes sense, and I have not seen 
that in your testimony.
    Do you believe that the pharmaceutical industry ought to be 
nationalized, or do you think it ought to remain in the private 
sector?
    Mr. Pollack. No, I think the pharmaceutical industry should 
be in the private sector.
    Mr. Greenwood. Okay, if you were running----
    Mr. Pollack. Even, even in the private sector----
    Mr. Greenwood. Okay, thank you for answering the question. 
Let me just get to where I want to go here.
    If you were running a private sector pharmaceutical 
company, would you forego marketing, advertising and 
administration and profits, or any of those?
    Mr. Pollack. Of course not, and I am not saying they 
should.
    I am saying, however, that when the industry keeps on 
asserting research and development is going to go down the 
tubes if we do something to moderate prices, I suggest to you 
that that is very misleading----
    Mr. Greenwood. Well let me----
    Mr. Pollack. [continuing] because there are much larger 
pots of money, including marketing, advertising, administration 
and profits that dwarf the amount of money that is spent on 
research and development.
    And to say that when we moderate prices, the only thing 
that is going to happen is that we are going to limit research 
and development is absurd.
    Mr. Greenwood. Well, the reality is that if you were 
running a company, whether you were making pharmaceuticals or 
whether you are making widgets, you cannot survive if you do 
not have marketing, and you cannot compete if your marketing 
isn't robust. You cannot survive if you do not have 
administration unless management's going to work for free. You 
cannot survive if you do not have profits because nobody is 
going to invest in your company.
    So research is the one thing that then becomes dispensable 
because that is the one thing that is not necessary to survive. 
You can survive into the future without research, but you 
cannot survive without those other costs.
    Mr. Pollack. Au contraire, I do not believe that for a 
moment.
    First, I am not suggesting at all that we should do away 
with marketing and do away with advertising, and I am not 
saying there should be x-amount spent on it or y-amount on 
profits. That is not the point I am making.
    But what I am saying is that when the industry tells us the 
only thing that is going to give is research and development, 
that is plain nonsense, and it is in the industry's interest to 
undertake research and development.
    It does not do this merely for altruism. The reason it 
undertakes research and development is it brings new products 
to market for which they can make a profit.
    Mr. Greenwood. Of course.
    Mr. Pollack. It is in the interest of any company to do 
research and development, but to say if we moderate prices, 
that the only thing that is going to be harmed is research and 
development, is a wild exaggeration.
    Mr. Greenwood. I would love to respond but my time has 
expired.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Pallone?
    Mr. Pallone. Thank you, Mr. Chairman.
    I wanted to ask Mr. Pollack a question but I, to me, I 
think you have been quite clear in basically suggesting that, 
you know, something like the President's proposal that is part 
of the Medicare program that is universal, that you know is 
affordable, that has some kind of effort to deal with the price 
discrimination issue is certainly, you know, one way to go. And 
that you have been concerned about, you know, this Thomas, I 
call it the Thomas proposal, the Republican proposal is not 
accomplishing those goals.
    And what I wanted to ask Mr. Pollack is that, you know, I 
try to get down to specifics and give an example if we could 
maybe contrast the Thomas proposal with the President's with an 
example.
    And I am going to give you an example of a widow living at 
150 percent of poverty who has diabetes, hypertension, high 
cholesterol, no supplemental drug coverage. Drug costs for 
medication to treat these illnesses consume over 18 percent of 
her income.
    What kind of prescription drug benefit does she need?
    And, you know, keep in mind the two options, the Thomas 
versus the President's.
    Mr. Pollack. Well clearly the proposal we have been talking 
about this morning does not provide a subsidy for that 
individual. The way the plan is structured, as I understand it, 
is that it provides a subsidy up to 133 percent of poverty, and 
then it phases down, and it phases completely out at 150 
percent.
    So this widow is provided with no subsidy whatsoever. And 
so she is going to have to bear the brunt of those costs.
    Under the administration's proposal, there would be a 
subsidy in effect for everybody and so this individual would 
get assistance. There would be a significant contrast.
    Mr. Pallone. I mean, I think that is the bottom line is how 
this is going to apply to individuals, but thank you.
    I wanted to ask Mr. Kahn, and I may have misunderstood what 
you said, but let me see if I can clarify it.
    You said that the private drug insurance option is 
essentially unworkable, and you said how you were pleased with 
Thomas having the possible fall back on a government program, 
and then you talked about how Medicare+Choice needs more 
dollars, particularly for drug coverage.
    Are you basically saying to us that, I mean, I do not know 
what this fall back is because that is been very unclear to me.
    But I mean you do not really want to see the private 
insurance with the fall back? Wouldn't it make more sense to 
have some kind of a, you know, Medicare program along the lines 
of what the President suggests to begin with rather than have 
this private insurance with the fall back?
    Mr. Kahn. The President's plan presumes that 
Medicare+Choice will continue on into the future. 
Medicare+Choice offers a comprehensive benefit. We are only 
talking about a piece of that benefit when we are talking about 
pharmaceuticals.
    So presumably whether it's the fall back or whether it's 
the President's plan, there will be money in there to subsidize 
the coverage in the Medicare+Choice plan for pharmaceuticals.
    Mr. Pallone. And there is in fact. But I guess what I am 
trying to pinpoint is, you know, I think you were saying 
clearly that the private drug insurance option is unworkable.
    I mean, it does not seem to me to make sense to say, okay, 
we will try that and if it does not happen, you know, we will 
fall back on the government.
    I mean, it would seem to me to make more sense if you 
really believe that the private insurance is unworkable, is 
simply do something like the President rather than hope that 
somehow, you know, we are going to fall back on something that 
is undefined at this point.
    Mr. Kahn. Well my member companies have not chosen to 
endorse any of the universal plans. That is one of the reasons, 
when the chairman asked the question, I answered positively 
about our member companies' feeling about helping the low 
income elderly through the block grant.
    But I guess my answer to you is that either the fall back 
or the President's plan, if it is universal, it answers your 
problem of making sure there is something for all Medicare 
beneficiaries, depending on how it is structured.
    Mr. Pallone. Well, let me just say this one more thing, 
because I think my time is up.
    In the Thomas plan, what we are told is that, you know, 
there is a subsidy of like 30 to 35 percent. Do you feel that 
if there was a larger subsidy that, you know, private drug 
insurance options would be workable?
    Is it just a question of the level of subsidy, or you just 
think the idea is unworkable?
    Mr. Kahn. I think the idea is unworkable. I mean, let's say 
in Part B right now, you have a 75 percent subsidy and you have 
98 percent compliance with a voluntary program. But it is a 
universal program and also the premiums are collected, and also 
the premiums are collected with your social security check.
    So there is a sort of big hammer there to make sure those 
premiums are collected.
    I guess we have our doubts, both on the administrative 
side, the risk selection side, and just the cost containment 
side of providing any kind of drug-only benefit in any form, 
drug-only. I need to stress that because Medicare+Choice and 
comprehensive benefits are fundamentally different than a drug-
only benefit.
    Mr. Pallone. Thank you.
    Mr. Bilirakis. Mr. Burr to inquire.
    Mr. Burr. Thank you, Mr. Chairman.
    Craig, let me say to you I hope you will be happy when this 
bill is finalized to read that we do understand the importance 
of pharmacists, but more importantly, we have written in 
language that will address the medication management/disease 
management function that many druggists around the country 
currently perform. And it is a very important part of the 
overall health care system today.
    It is going to be up to plans to determine some 
reimbursement, but hopefully there is a framework that has 
thought through everybody who plays a role in this.
    Mr. Pollack, let me go to you, because you were very 
specific on the 150 percent of poverty and that there not be a 
means test. And I do not think anybody's portrayed it as one.
    The President's plan cuts off at 150 percent of poverty. 
Does that make you objectionable to the President's plan?
    Mr. Pollack. No. What the President does----
    Mr. Burr. The President's cuts off----
    Mr. Pollack. No, no. No, no. What the President does is 
very different than this proposal. So let's be----
    Mr. Burr. Mr. Pollack, you have not read our plan.
    Mr. Pollack. I have read what you have issued. You do not 
have a bill.
    Mr. Burr. Well, then to make a statement that you just 
made,----
    Mr. Pollack. Sir, I can only go by what you have released 
so far.
    Mr. Burr. The President subsidizes everybody's premium, 
correct?
    Mr. Pollack. Correct.
    Mr. Burr. He has 150 percent cutoff of poverty on where 
additional subsidies go.
    Mr. Pollack. That is correct.
    Mr. Burr. And if Ms. DeParle is correct that we use, 
instead of a subsidy to the premium, we use our subsidy to buy 
down the high risk, and by her statement, our subsidy might be 
a little bit larger, but we go to the same 150 percent of 
poverty. We are just using the subsidy not for the premium but 
to buy down the high risk.
    Now where is the difference?
    Mr. Pollack. I think there is a significant difference.
    First of all, the subsidy that is provided in effect goes 
directly to the beneficiary, and so it in effect pays for 50 
percent of the cost of that benefit.
    Mr. Burr. Long term is more important?
    Mr. Pollack. Pardon me?
    Mr. Burr. Ms. DeParle said that predictability was one of 
the primary objectives, and I think Ms. Davenport, you know, 
she speaks for the groups that are out there, the human face 
behind this issue.
    Do these people want to know there is a point they could 
reach in an illness in a given year and not have any financial 
exposure?
    Ms. Davenport-Ennis. Yes. I am delighted to answer that 
question. Absolutely the patients that contact us will say 
often, is there a vehicle for insurance for me that is going to 
tell me how much I need to pay, how much will be my co-pay, 
where will my stop loss be, what happens to me if I have cancer 
or need a heart transplant and have a catastrophic event that I 
need coverage for, and what is it going to cost me when I am 
65, 70, and 75?
    I brought with me today two stories of two Americans. One 
is a woman in Nicholasville, Kentucky, 68 years old. Her total 
income per month is $830. She is a widow. She has throat 
cancer. She needs to take eight maintenance medications for 
this cancer to keep her in remission. The total cost of that 
medicine per month is $600 a month.
    She does not have $600. When she called us to help, she had 
been 8 months with buying two medicines a month, and each 
month, she would switch to another two medicines.
    And the reality was----
    Mr. Burr. And the reality is that Part B probably has gone 
up because of some medical need in the meantime.
    Ms. Davenport-Ennis. Absolutely. And then what we did was 
we assisted her in an application process to get her into what 
is referred to as SLMB program through Medicaid, which she is 
now paying a $45 a month premium for but she can get the 
medicine and she can have the care.
    Mr. Burr. Hopefully, she will have some options that might 
be less than $45.
    Ms. Davenport-Ennis. Absolutely.
    Mr. Burr. Let me go on to one last thing for you, and that 
is the issue of self-injectable drugs. I am sure that you have 
watched HCFA, who had drugs that they reimbursed on, and 
because technology now allowed those drugs to be self-
injectable, HCFA has determined they are no longer 
reimbursable.
    What comfort level would you have with that experience at 
HCFA, at putting them in charge of determining the coverage 
determinations of a new prescription drug benefit for 38 
million Americans?
    Ms. Davenport-Ennis. I think for our organization, and 
perhaps we are joined I know by other professional 
organizations in the country, the physicians and the nurses, we 
feel that the medical decision has to be made by the physician, 
by the treating physician. And if the treating physician 
determines that a medication can be self-administered, is 
appropriate for that patient, we still want to see a vehicle 
for reimbursement for that American consumer to have.
    Our experience with HCFA, as we have seen program memoranda 
that have changed from State-to-State and medical director-to-
medical director, is one of inconsistency. And inconsistency is 
a simple word for us to say today but it is not a simple 
process to reverse when it impacts an entire State at a time 
when you have to go through process to change it.
    So to answer your question summarily, we would be very 
troubled if we added another area of responsibility to an 
agency that at this point we feel has very good intentions is 
overburdened, is understaffed, and we feel the issue of 
administering a prescription drug benefit program is a 
complicated program that needs a fresh approach, high energy, 
and complete attention to the details that will be part of that 
process.
    Mr. Burr. I thank you.
    Mr. Chairman, let me also point out, for the purposes of 
the members because I know Ms. Eshoo and others, we have worked 
aggressively for a number of years to try to change a policy at 
HCFA relating to immunosuppressant drugs, drugs that are needed 
to be taken by every person who gets an organ transplant for 
their entire life.
    Medicare's policy still is that we pay for 3 years. Now we 
will pay for an additional organ transplant when they reject it 
because they cannot afford the continuation of the drugs. It is 
ludicrous for us to believe that we can have example after 
example after example and not consider a new entity to do 
nothing but----
    Ms. Eshoo. Would the gentleman just yield for a moment?
    Mr. Burr. I have no time.
    Mr. Bilirakis. The gentleman's time has expired and it is 
now the gentlelady's turn.
    Ms. Eshoo. It is now my time. Thank you, Mr. Chairman.
    The reason I was asking you to yield was to point out that 
Congress put what you just described in place as law on the 
books. And that is why we are trying, as Members of Congress, 
to change that. But that is not HCFA, okay?
    I mean, what is fair is fair.
    Mr. Burr. Regarding the injectable drugs, though, you would 
agree that it was HCFA?
    Ms. Eshoo. Exactly. Exactly.
    Thank you to every single one of the panelists. I think 
whether members agree or disagree with different parts of what 
you have said, I think you are just absolutely terrific.
    I think if all of the members of this subcommittee, both 
sides of aisle, and all of you could stay in this room for the 
next 48 or 60 hours, we would really come up with something 
because we have got the expertise here in front of us. So thank 
you very much.
    I want to go to something that I think has been touched on 
but perhaps members do not have the clearest of understanding 
about, and that is the whole issue of risk.
    Now there are different ideas, i.e., proposals. The Thomas 
proposal, although it is not in writing, again I spent a lot of 
time at Ways and Means yesterday listening, and what I believe 
is the case with the Thomas proposal which will be in 
legislation is that the risk is assigned to insurers.
    Now to Mr. Kahn, you were saying, and I think you have 
caused some people considerable heartburn, but nonetheless, you 
have said, look, we will not and cannot design a vehicle 
freestanding for drug-only insurance.
    But the Thomas plan assumes that the risk will be assumed 
at least partially by insurers.
    Can anyone tell me who these insurers are, and how you 
assign this risk?
    And I think that it is an important question. You are 
touching on some of it, and others have in different ways. 
Medicare, human beings, are called beneficiaries.
    So are they going to assume the risk, are we, as a Nation, 
through a system going to assume the risk, or is there a 
vehicle that is going to assume the risk?
    Who and what is this vehicle?
    So in designing a plan, members, especially of this 
subcommittee because we have a huge responsibility here, or 
maybe we do not, maybe it will be ripped out of the 
subcommittee and just be dragged to the floor, which has 
happened before too, but I mean I want to be respectful of 
this.
    Who can answer this question for us, not just for me, but 
for us?
    Does anyone want to take a stab at it? Maybe Mr. Kahn 
should start.
    Mr. Kahn. Well if there is a fallback, or if there is a 
government, a broad program, then the risk is spread and the 
taxpayers are paying part of it and the beneficiaries, through 
whatever premiums you charge, are paying the other part, and 
then they are paying whatever the copayment is, the cost 
sharing. So that is where the risk is being spread.
    Ms. Eshoo. I will just jump in. I mean, it is some 
advertising for my legislation. We encourage PBMs to bring the 
price down.
    Now, I believe in the Thomas approach, they are required to 
do that.
    Mr. Kahn. You really need to separate the role of the PBMs, 
they are the mediators.
    Ms. Eshoo. Right.
    Mr. Kahn. And they can contain the base cost and possibly 
the growth over time.
    Ms. Eshoo. Yes.
    Mr. Kahn. I do not want to speak for them but I do not 
think they are waiting here to accept 100 or even 50 percent of 
the risk.
    Ms. Eshoo. No, they are not. It is not the way they work. 
That is not why they work well, either.
    Mr. Kahn. But the dilemma here is that you have many people 
who use no drugs and many people who use drugs in a very 
predictable way because they have a chronic illness or because 
of their situation.
    Ms. Eshoo. Right.
    Mr. Kahn. And so those who have a predictable use will want 
to buy the coverage and those who do not will be less likely 
to.
    Ms. Eshoo. Um-hmm.
    Mr. Kahn. So the selection is obvious. So then you have got 
a product, one product, so you cannot manage across a whole 
comprehensive benefit package.
    Ms. Eshoo. But does everybody understand this answer, 
though? I do not know if the Members do. But again, what I am 
trying to do, as you are, each one of you, I guess, is to 
highlight the areas that we have to be really very concerned 
about.
    Well, there is a vinyl wrap around this thing, and we have 
got to know what the words mean. I would much rather be up 
front and say, as a Nation, we are going to assign the risk 
collectively to ourselves.
    And most frankly, Members, if you are not willing to assign 
dollars to this, then you are not for a prescription drug 
benefit because you cannot do this on the skinny. You cannot be 
skinflints and say we are for it. It will not work.
    So I do not know if anyone else wants to--Karen, do you 
want to take a stab at this risk business?
    Ms. Ignagni. Thank you, Ms. Eshoo. I appreciate the 
opportunity.
    I am not talking about a specific proposal now. We too are 
looking forward to seeing all the proposals and analyzing them. 
But just in terms of the issue of risk and how you go forth, 
one option that has been discussed by a number of members very 
well on the panel has been the issue of government program risk 
pooling.
    Another way that is often adopted in the private sector and 
sometimes it works well and sometimes it does not, quite 
frankly, but there are opportunities I think to build on it, 
which is the option of risk pooling.
    So to the extent you are taking catastrophic costs and 
aggregating them and trying to distribute those costs across a 
broad population and subsidizing from that, that is one 
strategy to think about.
    Ms. Eshoo. I know what pooling, and risk-pooling, and that 
is, but if we are going to design a benefit, I think the 
question that needs to be answered legislatively is: who takes 
on the risk?
    Ms. Ignagni. Well, and I think that is one of the issues 
that the committee is going to need to zero in on as you look 
at details of proposals.
    However, what we have seen is that there are ways to 
distribute risk other than one particular approach, and I think 
that that will be part of the art of crafting the right 
proposal.
    Ms. Eshoo. Or, you know, in cruder language, who is left 
holding the bag. And so, you know, we will have a revolution in 
this country if in fact there is something that is designed and 
marketed to be one thing, and then turns out to be something 
else. It's all going to come back on us.
    Mr. Bilirakis. It would not be the first time, though, 
would it?
    Ms. Eshoo. Mr. Chairman, I think probably my time is up----
    Mr. Bilirakis. Yes, it is.
    Ms. Eshoo. [continuing] but I would ask unanimous consent 
to insert these letters relative to this issue in the record.
    Mr. Bilirakis. Without objection, that is the case.
    Doctor Ganske to----
    Ms. Eshoo. Thank you very much. And thank you to all the 
panelists. I think you are terrific.
    [The letters follow:]
                                           ALZA Corporation
                                                       June 6, 2000
The Honorable Anna Eshoo
205 Cannon House Office Building
Washington, DC 20015
    Dear Anna: I was delighted to hear of your newly-introduced plan 
for a Medicare Drug Benefit. While some of your colleagues in the 
Congress have done little more than play politics by proposing all 
sorts of plans that simply can't pass and wrongly cast our industry as 
the ``bad guy,'' your plan directly addresses both the needs of the 
uninsured and the necessity to protect pharmaceutical research and 
development.
    We believe that your proposal, by relying on robust competition by 
pharmaceutical benefit managers, will allow Medicare to offer a 
generous and realistic drug benefit to American seniors without busting 
the budget. Your proposal to use the OPM to administer parts of the 
plan (rather than HCFA) takes due notice of the expertise developed by 
that agency in administering the PBM-based government employee health 
plans. Your innovative ``stop loss'' provision insures that seniors who 
require ofttimes expensive new biotech technologies will not be left 
without necessary treatments.
    Finally, your explicit exclusion of government-imposed price 
controls insures that our industry will continue to have the financial 
resources and investment necessary to bring new and innovative 
treatments to market in the future.
    As with your key roles in FDA reform and passage of the 
Biomaterials bill, you have once again shown an extraordinary 
commitment to help our industry save lives, cure disease and end pain. 
ALZA and the millions of patients we serve thank you.
            Sincerely,
                                              Ernest Mario,
                                 Chairman and CEO, ALZA Corporation
                                 ______
                                 
                                             Genetech, Inc.
                                                       June 7, 2000
The Honorable Anna Eshoo
U.S. House of Representatives
205 Cannon House Office Building
Washington, DC 20515
    Dear Representative Eshoo: On behalf of Genentech, Inc., I am 
pleased to write in support of your bill, the ``Medicare Prescription 
Drug Security Act of 2000,'' which guarantees seniors much needed 
coverage of outpatient prescription drugs. Genentech supports enactment 
of a Medicare prescription drug benefit this year, and your proposal 
creates a real opportunity for a bipartisan compromise to be reached on 
this critical issue.
    Specifically, we are encouraged by your proposal's competitive 
approach to delivering prescription drugs to seniors. By rejecting 
government price controls and relying instead on competing 
pharmaceutical benefit managers to negotiate on behalf of seniors, your 
plan most effectively ensures seniors access to affordable prescription 
drugs while also preserving and encouraging vital investment in 
biomedical research. In addition, placing administration of the new 
drug benefit to the Office of Personnel Management (OPM) is an 
important step forward in providing Medicare benefits to seniors 
through a more competitive approach, and away from the bureaucratic 
approach that has burdened seniors for decades. Finally, the stop-loss 
benefit included in your proposal is critical to addressing the needs 
of seniors who require treatments for often serious and life-
threatening illnesses.
    Your consistent commitment to policies that encourage innovation 
and the development of new lifesaving technologies has directly 
benefited the lives of countless patients. We appreciate your 
leadership and encourage you to continue in your effort to enacting a 
Medicare prescription drug benefit for seniors this Congress.
            Sincerely,
                                            Arthur Levinson
                               Chairman and Chief Executive Officer
                                 ______
                                 
                 Pharmaceutical Care Management Association
                                                       June 6, 2000
The Honorable Anna Eshoo
United States House of Representatives
205 Cannon House Office Building
Washington, DC 20515
    Dear Representative Eshoo: The Pharmaceutical Care Management 
Association (PCMA) recently adopted the enclosed Medicare Prescription 
Drug Policy Statement. PCMA and its members are committed to providing 
quality, cost effective pharmaceutical care to the Nation's elderly. 
Within the PCMA Policy Statement are the guiding principles which PCMA 
and its members believe will advance pharmaceutical care for Medicare 
beneficiaries, as they have for the over 150 million lives currently 
receiving prescription drug benefits through PCMA members.
    PCMA applauds your leadership in introducing the ``Medicare 
Prescription Drug Act of 2000.'' This bill represents a major step 
forward in the Congress' important deliberations on prescription drug 
benefit for Medicare beneficiaries.
    Your proposed bill creates a competitive system, through which drug 
costs would effectively be managed without unnecessary or burdensome 
regulation. This bill provides seniors with access to safe, affordable, 
prescription drugs and improved pharmaceutical care by relying on 
pharmacy' benefit managers (PBMs)--organizations whose proven expertise 
in managing pharmaceutical care allows seniors to obtain the most drug 
benefit for their money. It also promises a generous benefit that 
protects beneficiaries from large out-of-pocket expenditures.
    Enacting a prescription drug benefit that relies on competitive 
principles is in the best interests of Medicare beneficiaries, and 
should be the first order of business for this Congress. We look 
forward to working with you and your staff as well as other members who 
support the role of PBMs in competitive based models.
    If you have any questions, please do not hesitate to contact me at 
(703) 920-8480, ext. 110,
            Sincerely,
                                          Patrick B. Donoho
               Vice President, Government Affairs and Public Policy
Enclosure: PCMA Medicare Prescription Drug Coverage Policy Statement
    INSERT OFFSET FOLIOS 15 TO 17 HERE

    Mr. Bilirakis. Dr. Ganske?
    Mr. Ganske. Thank you, Mr. Chairman.
    I am having a good time at this. It is much more fun to sit 
in front of you than behind you at the Ways and Means hearing, 
to actually face you.
    I also think that there is a likelihood that this will 
probably be the last time this committee looks at this issue. 
It is my understanding that in Ways and Means on Monday or 
sometime next week, this issue will be rammed through the 
committee. Republicans will march lock-step, vote for a bill, 
and it will come to the floor, and I think that that is 
unfortunate on this issue.
    Because there are a lot of issues in the details that we 
need to know about. There have been rumors, for instance, that 
there would be a provision in this bill that would allow 
private employers to opt out of their current promises on 
prescription drug benefits for retirees at some ``buyout.'' Who 
knows what that will be? Who knows how much the taxpayer will 
be taking on for that provision?
    When you talk about a government fall back program, if 
there are no private programs, would there be a government fall 
back program if, for instance, a Medicare beneficiary did not 
like either of the two private plans?
    What would that government program be?
    How do you compare apples to apples in terms of benefits. 
We are going over a whole bunch of issues today that need to be 
answered.
    Ms. Ignagni and Mr. Kahn, you will be happy to know that I 
am not going to ask you any questions about managed care today, 
patient protection, patient protection at all.
    I am not even going to ask you how much the Republican 
leadership had to lean on you to mute your criticism of the, 
``plans'' as has been reported in the press.
    I do however want to address the essential problem which 
many of you have addressed, and that is that when you look at 
the current program, and you look at those Medigap policies 
that do offer prescription drugs as has been so aptly described 
by Mr. Pollack, because only the beneficiaries that need it 
sign up for it, who have big expenses, then you end up with 
very high premiums and this gets to Mr. Kahn's and Ms. 
Ignagni's point about adverse risk selection.
    Now you can cure that by requiring all Medicare 
beneficiaries to be in the program. However, as Mr. Pollack 
aptly pointed out, that is very difficult politically.
    And we are really looking, I think, at a political logjam 
on this.
    So I want to go to then the other chart that Mr. Pollack 
pointed out and that was, you know, for that widow living on 
$12,500 a year, and my question ties in with the chairman's 
question.
    Now he proposes a block grant which would somehow go back 
to the State. I propose additional funding to go into expansion 
of QMBY SLMBY with a spend down.
    So for instance, you could go for some specified percentage 
above those programs so that if a person has additional 
pharmacy expenses, they deduct that from their income, and then 
they get into the programs.
    And I honestly think then that if you add a prescription 
drug benefit to those programs, that you will see a much 
increased participation because seniors will really like it, 
and that will take care of some of the objections that Mr. 
Pollack has.
    I think that, you know, where we are at this year, I do not 
see the QMBY program as welfare. I see this as assistance to 
people who are above the Medicaid program, assistance with 
their premiums and assistance with their copayments.
    Now you could say, well, maybe we should not do anything on 
that right now because that could take some steam out of a more 
comprehensive benefit later on. We see that argument frequently 
with bills on the Hill.
    Don't put a little benefit on there because it could 
prevent overall reform. I think we are going to be facing 
overall reform regardless.
    But I do see that for this widow here, that would be a 
significant help.
    My question to you is this. Okay?
    We have been talking about Medicare recipients a lot. This 
is a very informed group. I think we ought to be looking at the 
high cost of drugs for everyone.
    If you address that issue and you help the QMBY SLMBYs, 
then you are going to be helping those Medicare beneficiaries 
who are above them with their prescription drug prices just as 
you would be helping everyone else with their prescription drug 
prices.
    So my question is this:
    What else can we do on this prescription drug cost problem 
that would help not just Medicare beneficiaries but everyone?
    Do you have any suggestions for us on this?
    There are some proposals out there in Congress, as you know 
about. Maybe we could start with Ms. Ignagni.
    That is my question.
    Ms. Ignagni. Thank you, Dr. Ganske.
    I will be very quick because I am sure my colleagues want 
to interact on this question as well.
    I think that you have raised a very important point. 
Remember, and you know well that the increase in expenditures 
are, roughly, according to the researchers, one-third price, 
two-thirds use.
    What we have tried to do in our managed care programs is 
create formularies, create a range of strategies to in fact 
allocate resources as broadly as possible. And what we face in 
the context of patient protection discussion is a continuous 
chipping away and sometimes direct assault at many of the 
strategies that we have used.
    And by the way, as we look at the President's proposal, we 
know he is talking about similar kinds of strategies to get 
costs under control. So I think both our proposals contemplate 
that.
    We think we can build on that. But you really need to look 
both at the use side and whether or not there is pressure to go 
forward with me-too drugs when other drugs can substitute. How 
do we encourage generics and how do we get our hands around 
this issue without necessarily and unilaterally agreeing on one 
solution that is probably going to be limiting in what can 
ultimately come out of it.
    So I think you are right, that this carries over to patient 
protection and a number of the strategies that have been 
proposed would do a very good job of continuing to get costs 
under control, but it would be harder to do.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Ganske. Mr. Chairman, could we hear from the rest of 
the panel on that?
    Mr. Bilirakis. If the rest take that much time, we are, no, 
I do not think we ought to give the rest of the panel the 
opportunity.
    Mr. Ganske. Are we going to have another round, Mr. 
Chairman?
    Mr. Bilirakis. I am not contemplating another round. We 
have been here since 10 o'clock this morning.
    Mr. Ganske. Could I have a yes or question or answer on----
    Mr. Bilirakis. By all means if it is a yes or no question.
    Mr. Ganske. A Yes or no question? Okay, here is my 
question:
    Should we repeal the advertising portion of the FDA reform 
bill?
    Mr. Kahn. Yes.
    Mr. Ganske. Mr. Kahn says yes.
    Can we go down the line?
    Ms. Feder. Can't comment.
    Mr. Ganske. No answer.
    Mr. Donoho. Don't have a position.
    Mr. Pollack. Yes.
    Ms. Davenport-Ennis. I am not thoroughly versed on the 
issue so I cannot give you a good answer. I will be happy to 
get back to you with it.
    Mr. Ganske. Mr. Fuller, did I hear from you?
    Ms. Fuller. We have not taken a position.
    Mr. Ganske. Karen?
    Ms. Ignagni. Our members have not taken a position on this. 
I think that if you begin to do it in one sector, you are under 
pressure to do it in others, and the question is, is that the 
right strategy. But I do not want to preempt our members, they 
have not taken a position.
    Mr. Ganske. Thank you, Mr. Chairman.
    Mr. Bilirakis. That was a very good question, by the way.
    Mr. Ganske. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Stupak?
    Mr. Stupak. Thank you, Mr. Chairman.
    In my opening statement, I showed this chart from my 
district where we have different prices for the same drug with 
Zocore, whether you are the Federal Supply Service, major 
wholesaler, chain store independent, average retail, average 
wholesale price.
    Would any of the plans before Congress right now would stop 
this price discrimination?
    Karen?
    Ms. Ignagni. I do not know the answer to that.
    Mr. Stupak. Mr. Fuller?
    Ms. Fuller. I do not think so.
    Mr. Stupak. Mr. Kahn?
    Mr. Kahn. No, they would not stop it but they would get 
some people better prices.
    Mr. Stupak. Okay. Dr. Feder?
    Ms. Feder. They would provide--the President's plan, for 
example, would provide people for a specified premium, 
subsidized premium, drugs they could count on with known cost 
sharing. It would be very different from that situation.
    Mr. Stupak. Mr. Donoho?
    Mr. Donoho. I think my colleague, Chip Kahn, said it best; 
no, it will just change the market in terms of who is available 
to which price.
    Mr. Stupak. Mr. Pollack?
    Mr. Pollack. The administration's plan would do a great 
deal to reduce those disparities.
    Mr. Stupak. Ms. Davenport-Ennis?
    Ms. Davenport-Ennis. Yes. And because once again we have 
not had an opportunity to review all the plans, our 
constituents have not taken a position.
    Mr. Stupak. So the only way to get these prices down to get 
them somewhat reasonable so we do not have 134 percent 
difference is who has really the clout at the table, so to 
speak, when they negotiate on behalf of uninsured seniors? 
Right, basically?
    Ms. Davenport-Ennis. Yes.
    Mr. Stupak. Yes, yes?
    Ms. Davenport-Ennis. That is a very big factor.
    Mr. Stupak. Okay. Let me ask a more specific question then 
to Dr. Feder.
    AAHP testified that many seniors who would not otherwise 
have access to drug coverage, either because they do not have 
retiree coverage or drugs, they just cannot afford them, cannot 
buy them, so if they cannot afford a Medigap policy that covers 
drugs, are able to get drug benefits through their 
Medicare+Choice plan, couldn't we use that model as a way to 
get drug coverage to all seniors?
    There has been some instability in that Medicare+Choice 
market, but couldn't we provide extra funding so that more 
plans could get back to the market and provide drugs?
    Ms. Feder. I think we certainly can provide, through 
Medicare and through Medicare+Choice plans, we can provide 
prescription drug coverage. But the way to do that is to 
incorporate it into the core benefit of Medicare and then have 
the plans offer that benefit.
    The way we are doing it now, and if I am hearing you 
correctly, just put some extra money in the plans, it is 
available in some places and not available in others.
    Mr. Stupak. With that in mind. But it sounded like the----
    Ms. Feder. Correct. In some places----
    Mr. Stupak. [continuing] like it worked.
    Ms. Feder. [continuing] but it is a function of where the 
plans find that given a given level of payment, they can 
profitably offer that benefit.
    And as we have worked over the last several years to 
constrain Medicare costs and eliminate the deficit, we have 
constrained both fee-for-service and Medicare+Choice payments 
and we are finding that there is not as much room in this extra 
payment to offer this benefit.
    It is not the way to do it because it does not guarantee 
the availability of that benefit every place. It should not 
rest on whether a plan wants to be there, whether they find it 
profitable. That is not the way to do it.
    Mr. Stupak. Karen?
    Ms. Ignagni. I appreciate the question, and I believe we 
have a track record that can be built on and with additional 
resources, that is a major start at moving in this direction.
    But I do not want to mislead you about the need for 
additional resources now on the basic side before we get to 
additional. But it is a model that can be built on.
    Mr. Stupak. I do not totally reject the model, and if we 
had some more resources maybe we can get there, but how do you 
overcome what I see--and maybe I am using the wrong words--
instability in the private market insurance? I still see a 
cherry picking going on.
    In my district, they probably do not even offer it. I am 
sure if I was 70 years old and I started having a battle with 
cancer, I am sure I am going to be dropped because I get too 
expensive.
    Ms. Ignagni. Well actually, Mr. Stupak, as you know, one of 
the accomplishments of our programs actually is to do a better 
job managing chronic illness.
    The existence of prescription drugs in most of the 
Medicare+Choice programs has actually recruited in not only the 
lower income, and the HCFA data confirmed that absolutely, but 
the people with the highest health care costs, because of our 
ability to coordinate their care and offer them more and that 
is I think a model that can in fact be built on.
    And in the rural areas is one of the major barriers--our 
health plans would very much like to serve the rural 
community--has been the unwillingness of single health care 
systems who do not have any competition to actually contract 
with our plans. So we need to talk about that as we think about 
going forward.
    We would love to be participating in your area and other 
areas where we have not had the opportunity.
    Mr. Stupak. Did you want to add something further, Dr. 
Feder?
    Ms. Feder. Just that I think it is critical that if you do 
not define the benefit, you are leaving too much discretion to 
plans. What you need to do is define the benefit and then have 
a payment mechanism that plans can know what it is that they 
are supposed to bid on or offer and proceed that way.
    Ms. Ignagni. And we would agree with that. We agree with 
the defined benefit for purposes of bidding.
    Mr. Kahn. And it is also important to point out that the 
pharmaceutical benefits that are generally offered now by 
health plans under Medicare+Choice are not as generous as all 
these different plans anticipate. So there has got to be more 
funding to get those drugs at a level that these different 
bills anticipate.
    Mr. Stupak. So we have got to have someone with clout 
negotiating and we have got to have a defined plan, if that is 
what I am hearing you say.
    Mr. Kahn. The plans can do the negotiation or work through 
PBMs. The question is the money.
    Mr. Stupak. Okay.
    Ms. Feder. And the defined benefit, as you said.
    Mr. Stupak. Defined benefit, yes, you have got to have a 
defined benefit.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Bryant?
    Mr. Bryant. Thank you, Mr. Chairman, and panel, it has been 
a long day so far.
    Mr. Bilirakis. Amen.
    Mr. Bryant. Let me just take you back on a couple of 
questions my friend from Michigan led us into.
    Mr. Donoho, you have been quiet here for awhile. Let me ask 
you a question directly.
    In your statement, you indicate that the drug benefit 
should be administered through the private sector, and also 
that competition among private sector PBMs would deliver 
significant cost savings and spur innovation.
    In light of this issue of the cost that we have been 
talking about, the high cost of drugs, would you expand on your 
statement?
    Mr. Donoho. Well it has been our experience in the private 
sector anyway that the competition has spurred the cost 
savings. If you talk about decisions directly, let's take on 
drug costs, it is the competition within a PBM in terms of 
formulary development, after you have done your P&T analysis, 
you have looked at, you have covered all your classes of 
product and you find out that there are two competing products 
in the marketplace today, then you can go back and get a 
reduced reimbursement.
    The question I think in my opening statement was. has the 
Federal Government, our concern in terms of the Federal 
Government operating a program is the fact of do they have the 
will to put that kind of hard decision on the table?
    Because the hard decision on the table then is to say to 
somebody, listen, this product--if you have competing plans--
you can have choice. But if you have the hard decision of 
saying I am not going to cover this particular product, and 
then you have got no choice to seniors, then you have got a 
different kind of kettle of fish.
    And you have got to have a prior authorization like our 
plans do. But the question then becomes, and that is the way 
you get leverage to negotiate. It is not based on volume.
    Let me make sure that you understand that. It is based on 
market share. If you can move market share for drug 
manufacturers, they will negotiate on price. That has been our 
experience.
    Mr. Bryant. Okay, thank you.
    Let me jump to another issue very quickly in terms of those 
of us that, in this whole concept, are also concerned with 
consumer protections.
    The bipartisan bill that we are talking about today 
primarily, would indicate that in that for the first time we 
create an Office of Beneficiary Assistance within this MBA, 
this outside of HCFA agency that will administer this, it is an 
Office of Beneficiary Assistance. And its purpose is to provide 
educational materials to the beneficiaries about the entire 
Medicare program.
    And within the Office of Beneficiary Assistance, there will 
be a Medicare ombudsman whose sole purpose is to assist 
beneficiaries when they are having trouble with claims and 
appeals, getting access to care, and generally need help or 
answers to questions.
    Such a one-stop central Beneficiary Assistance-oriented 
office does not currently exist within the HCFA. And for those 
reasons, I think again, particularly the panelists on the end 
that are from citizens groups and family groups and so forth, 
that also should be of interest there.
    Ms. Ignagni, on the end, a question.
    I think we have talked about this a little bit, but let me 
clearly get your response to this in terms of the criticism of 
this bipartisan bill in building in flexibility that would 
allow health plans to provide a standard benefit or a benefit 
that has an actuarial equivalent.
    That criticism is that that would encourage health plans to 
develop proposals only to attract the healthy beneficiaries, 
cherry picking. How do you respond to that particular issue?
    Ms. Ignagni. Well first of all I think as I understand the 
proposal, and I appreciate the question, it is to have a floor 
benefit. There would be a clearly set out benefit.
    The concept of actuarial equivalence would then allow us to 
do better than the floor, which is what we do now in 
Medicare+Choice, as you know.
    We have a floor set of Medicare benefits. We meet that 
floor. But because we are more efficient at disease management, 
coordination of care, et cetera, we can, for the same dollar 
value, offer beneficiaries more, which is why it is such a 
travesty that 3 weeks before the date in which we have to 
notify HCFA of what plans will be forced out of this program 
who are serving 6.2 million people, that we are not moving to 
do something about that.
    And we have taken heart that this committee in fact has 
made that a major part of its agenda over the years. So the 
idea that actuarial equivalence would somehow mean that there 
would be no baseline benefit is not something that I understand 
this proposal before you--and we are all looking for the 
details--to be.
    So I think what we all are saying on this panel is that we 
agree with the concept of a floor. That is where you start. We 
in the health plan community can do better than that.
    For beneficiaries, we would like to be able to be given the 
opportunity to do better than that for beneficiaries.
    Mr. Bryant. Just following up on that, I am curious if you 
have an opinion about our move from the administration of this 
from HCFA over to an outside agency that we establish. Do you 
think this would help health plans participating in the 
Medicare+Choice----
    Ms. Ignagni. Two-and-a-half years ago----
    Mr. Bryant. [continuing] of this on Medicare+Choice, as you 
know.
    Ms. Ignagni. Two-and-a-half years ago there was a 
reorganization at HCFA which I believe, based on what we have 
seen from the Administrator recently, is an acknowledgment of 
what much of what our members have said for 2\1/2\ years, that 
that reorganization has not worked.
    The Administrator, herself, and to her credit, has begun to 
a] recognize it, and b] put in place some strategies to respond 
to that.
    The concept here is whether you set up a new agency within 
HHS or whether you aggregate the responsibilities of HCFA 
differently.
    We have to do things differently than the way we are doing 
it now. We have instability. We have no predictability with 
respect to the regulatory environment. We have 900 pages of 
regulatory compliance that we started with. But then virtually 
every 2 weeks there has been a policy letter with which we have 
to comply with.
    And I am pleased that the Administrator has recognized 
this. She is moving in a particular direction. I think there 
are many options. And for us the most important thing is to 
aggregate these responsibilities and somehow make progress on 
the conflict within HCFA which is purchaser/regulator /
competitor. How are we going to sort that out?
    There was a model that worked well in the past. We are 
beginning to go back to that model. I think that is a very big 
and important step forward.
    Mr. Bryant. I thank the panel and yield back.
    Mr. Bilirakis. Mr. Barrett, the current Ranking Member, to 
inquire.
    Mr. Barrett. Thank you, Mr. Chairman.
    Mr. Kahn, notwithstanding the red tinge in your beard, I do 
not think of you as a flaming radical.
    And it strikes me almost as counterintuitive that you are 
here today representing the insurance industry, and yet telling 
us that your industry feels that this approach that is being 
advanced has some problems to it.
    And it strikes me as, again, just odd, although I must 
admit that my feelings run the same way.
    Can you talk a little bit more, just about the adverse 
selection issue you see out there that I have got to believe 
you think is a fatal flaw to this proposal, or you would not be 
so up front about it.
    Mr. Kahn. Let me say that I believe that in the case of 
drug-only policies and the fact that 35 percent of Medicare 
beneficiaries have no coverage and another number have sort of 
mixed coverage, you would assume that if this was a good 
product, it would be there. And it is not.
    I mean there are not companies seeking to do it. And 
actually those companies that have supplemental policies, the 
HI&J, a lot of companies have left that and there are a few 
companies left in it, but they are not enthusiastic about that 
coverage because they end up paying actually there the highest 
prices just like the beneficiaries who have no coverage.
    But I think part of the adverse selection issue goes down 
to this--that you have got some people that do not use any 
drugs, a very large number that use between $500 and $2500 
worth of drugs which can be significant on somebody's budget, 
particularly if you are just living on Social Security or a 
little bit extra above Social Security, but at the same time 
that is not enough money to call it catastrophic.
    And the fact is only 4 percent of expenditures for drugs is 
over 4 percent.
    Actually, one of the interesting things here for the 
elderly is that drugs are different from all other kinds of 
health expenditures.
    In all the areas of health, when you look at the total, 
most of the spending is done by few people. The trouble with 
drugs is it is done by many people and it is frequently 
predictable, and that is why we do not think you could sell an 
affordable policy.
    At the same time, there is another factor, and I will just 
take--I wish I had copies of this chart to pass around--the 
HCFA actuaries projected drug costs in March 1999, and they 
thought that by 2007 they would grow to about $170 billion.
    Six months later they decided, no, they were wrong. Looking 
at the market, you know, seven or 8 years out, they would be at 
$223 billion.
    Now the point I make is that when an actuary looks at 
numbers like that, and that kind of volatility, you know, if he 
is stuck or she is stuck with the recommendation for a premium 
you know, on 399, and an insurance commissioner or whoever says 
that is the premium, then when they go back and say, well, wait 
a second, we miscalculated because there is a new report now 
that says, you know, 6 months later, that we were wrong, they 
are going to be stuck. And that is how the actuaries look at 
this.
    I mean, this is just not an individual benefit that we can 
provide insurance for.
    Mr. Barrett. Ms. Davenport-Ennis talked about your patients 
or your clients and say a person with cancer or a person with a 
disability, I am going to ask each of you just a yes or no 
question.
    Do you think that there is a private insurance company out 
there that would sell a drug-only policy to a person with 
cancer and that person say at 200 percent of poverty, could 
afford it?
    Ms. Ignagni?
    Ms. Ignagni. Our plans would do it in the context of 
Medicare+Choice.
    Mr. Barrett. No, that was not my question. My question was 
a drug-only policy.
    Ms. Ignagni. It depends what the rules are.
    Mr. Barrett. What do you mean it depends what the rules 
are?
    Ms. Ignagni. Well we have not seen the proposal. We are 
looking forward to seeing the proposal.
    Mr. Barrett. Okay, but I think we understand what we are 
talking about here. It would be a private company.
    Ms. Ignagni. Let me give you an example.
    Mr. Barrett. I do not want an example.
    Ms. Ignagni. Okay. Well, if you want to understand the 
answer, I need to give you an example.
    Mr. Barrett. I will go on to Mr. Fuller.
    Mr. Fuller?
    Ms. Fuller. I mean I really have to yield to the people of 
the insurance. I do not, I do not know.
    Mr. Barrett. Intuitively, what do you think? You are a 
businessman.
    Mr. Fuller. Doubtful.
    Mr. Barrett. Doubtful.
    Mr. Fuller. I cannot speak for all companies, but at least 
my own, I doubt the would offer the policy in the first place.
    Mr. Barrett. Dr. Feder?
    Ms. Feder. I would defer to Chip Kahn.
    Mr. Barrett. Okay. That is the last time we will ever see 
that.
    Mr. Kahn. I would not know how to answer that question. I 
do not know.
    Mr. Barrett. Well intuitively, as a businessman, would you 
sell this product? Do you think you could make money selling a 
drug-only insurance policy to a 68-year-old woman making 
$20,000 a year who has breast cancer?
    Mr. Kahn. Intuitively, maybe, but probably not.
    Mr. Barrett. Mr. Pollack?
    Mr. Pollack. It may be possible. I would not take the odds 
with me to Las Vegas.
    Ms. Davenport-Ennis. And I guess that as a 10-year survivor 
and one who does not have to take medications to deal with my 
former diagnosis, I would not be able to answer you as a 
specialist. I would only be able to say that if you bet the 
odds on me, you would have done all right in selling the 
policy. But I cannot answer the question for the community.
    Mr. Kahn. Mr. Barrett, excuse me, but I really think you 
asked the wrong question. Because the question is, are there 
enough people who are well but concerned that they might have a 
risk that would buy the policy so that you could sell it to the 
68-year-old who already has----
    Mr. Barrett. But why would I buy the policy if I were well?
    Ms. Ignagni. Because you are at risk.
    Mr. Kahn. Because in our society, people buy insurance 
every day for a lot of reasons. And my point is that if you 
could get enough people to buy insurance in this case, you 
could insure the risk. Our concern is that those people who are 
well now, because of the cost and the payoff year, are not 
likely to buy it.
    Mr. Ganske. Would the gentleman yield?
    Mr. Barrett. I know my time has run out, but let me follow 
up on that then. If this bill became law tomorrow, a 40-year-
old man, 40-year-old woman, would they buy this policy? Of 
course not. Of course not.
    Mr. Kahn. I would say a 65-year-old who was perfectly well 
would probably not buy it. And that is the problem.
    Mr. Ganske. Would the chairman entertain a question, the 
Acting Chairman?
    Mr. Burr [presiding]. The Chair would recognize the 
gentleman for 1 minute.
    Mr. Ganske. Thank you. Maybe the Chair could help us on 
this, because this is one of the details of the plan that we do 
not know about. And that is will everybody, when they turn 65, 
be given one chance to enter this, or will you have an annual 
chance to get into this program?
    Because most people, if they have an annual chance, and 
they have no prescription costs, will not but they may think 
well, maybe I will need some prescription drugs in September or 
August. I can just eat those costs until January 1 comes up, 
and then, since I need the drugs, then I will get into the 
plan.
    Can the Chair answer my question? Is there an annual up for 
this or is this a one-time offer----
    Mr. Burr. Well the Chair----
    Mr. Ganske. [continuing] or is this a detail being worked 
out?
    Mr. Burr. The Chair is not on today's panel but I would be 
happy to turn that over to Mr. Kahn.
    Mr. Kahn. I have not seen the bill. This is an important 
question. I mean----
    Mr. Burr. It is an important question, and the gentleman's 
time has expired.
    Mr. Barrett. Thank you, Mr. Chairman.
    Mr. Burr. The Chair would announce to the members that we 
are going to do a second round.
    Has the gentleman from Ohio gone yet?
    Mr. Strickland. No, I have not.
    Mr. Burr. Then the Chair would recognize Mr. Strickland for 
5 minutes. I apologize.
    Mr. Strickland. Thank you.
    This is a fascinating hearing. I am glad we are having it 
and I think if we have kept our eyes open and our ears open and 
listened, we have probably learned a lot.
    I would just like to say, Mr. Fuller, you make a statement 
in your testimony that you think the highly efficient community 
pharmacy infrastructure needs to be protected and I feel the 
same way.
    Are you familiar, sir, with Mr. Allen's bill? And if so, 
would you tell me what you think of that bill and why you 
either think it is a good idea or bad idea?
    Ms. Fuller. First, I thank you for sharing the concern 
about community pharmacy, and I also appreciate the comment 
that Mr. Burr made earlier that some of the provisions that we 
have talked about are in fact being incorporated into the--
excuse me, that the chairman made earlier--are in fact being 
incorporated into the legislation.
    I am familiar with the Allen bill. I probably am not going 
to satisfy you. We have not taken a position on it. Our 
companies have not taken a position on it. We are concerned 
about a number of elements in it.
    Any kind of price control mechanism philosophically is of 
concern to us, no matter who it applies to, because it at some 
point is going to trickle down to the pharmacy and be enforced. 
So we are concerned about that. We have not taken a position on 
it though.
    Mr. Strickland. Okay, thank you.
    I continuously hear comments from seniors who are concerned 
about the cost and I think the cost is something that we ought 
to be concerned about as well.
    And we know that, as Mr. Pollack has said in his testimony, 
that tax dollars are used to promote research, and that 
research leads to new pharmaceuticals, and those 
pharmaceuticals are sold to consumers, to American consumers 
and to foreign consumers.
    And I do not think there is any really debate about the 
fact that foreign consumers of pharmaceutical medications pay 
significantly less than American consumers.
    And you are here because you are experts, and I would just 
like your personal opinion. You do not have to even speak for 
the agency or association or university you are with, but I 
would like your personal opinion:
    Do you think the government should be concerned about that 
and should try to find some way to keep American consumers from 
experiencing this kind of price discrimination, given the fact 
that so many of these pharmaceuticals are developed with 
American tax dollars in part.
    Ms. Ignagni. I do, Mr. Strickland, and I think that there 
are other ways, however, in addition to price controls, that 
one can get at that issue.
    Mr. Strickland. Okay.
    Ms. Fuller. I think we have to be concerned about it, and 
certainly we are seeing seniors every day that are going across 
the border to get drugs. There's proposals to allow drugs to be 
purchased internationally and brought here. There are concerns 
there.
    So I think it is going to have to be examined pretty 
carefully. I would add that there are also very noticeable 
differences in the availability of certain drugs and medicines, 
both generic as well as branded drugs in these countries that 
control prices. And so there are some offsets here that you 
would also have to take into consideration when you look at the 
overall issue.
    Mr. Strickland. Okay. Mr. Kahn?
    Mr. Kahn. I think there needs to be a complete 
reevaluation--I am not an expert in trade law--but of our trade 
law because it would be good to put some pressure on the rest 
of the world. Because it does not make any sense for us to pay 
the basic price and everybody else to pay the price at the 
margin.
    Ms. Feder. I guess I would look at it from the opposite 
perspective. I think the reason it is this way is because 
everybody else in the world provides everybody in their country 
health insurance and decides what essentially they are willing 
to pay. And we do not do that in this country. There are many 
ways for us to consider beginning to lower what we are willing 
to pay and I think that is what we ought to be doing.
    Mr. Donoho. I think we have to be concerned about price 
controls and, being an American, I think I would turn around 
and say maybe we should look at designing a system to take 
better advantage of competition within the system.
    And if you look at what we have done in price controls to 
date, like in Title 19, Medicaid, what has the impact been on 
like our people's business, since you have a best price, can we 
negotiate down below best price without impact on the Medicaid 
program?
    I mean, we have got competition in the market. How do you 
design a system to take advantage of that competition, I think 
is the answer we would give.
    Mr. Pollack. Mr. Strickland, I would say that we need to do 
something not just because there are inequities from one 
country to another. This is an affordability crisis for a lot 
of people, and that is why we need to do something.
    I do not think we need price controls. I think we need to 
give the Medicare Program the same kind of leveraging authority 
that other institutions have. Hospitals, HMOs, others, they use 
their leveraging authority to get prices down. We should do the 
same thing for seniors through the Medicare program.
    Ms. Davenport-Ennis. And certainly I would agree that for 
our constituents there is not a patient that we deal with when 
we get into debt crisis resolution as a result of their 
diagnosis that the cost of all health care does not become 
problematic for them, including the costs of pharmaceutical 
agents.
    As we look at many discussions in which we talk about what 
the pharmaceutical agents are sold for abroad, what they are 
sold for in America, there are three conclusions that we come 
back to routinely.
    Why is that happening? What are the pressures that we can 
put in place in this country to look thoughtfully at why is 
there such a wide variation from this country to another 
country?
    And what can we do to empower the individual consumer in 
America, and particularly the senior consumer, to negotiate for 
the most attractive prices available to them in purchasing the 
agents that they need.
    We are not a part of the pricing structure for the 
pharmaceutical industry, therefore we do not have any concept 
of how those figures are originally introduced to the market. 
And I think, as a fair piece of the evaluation, that that would 
also have to be looked at as a Nation.
    Mr. Strickland. Mr. Chairman, can I make a concluding 
sentence?
    Mr. Burr. The gentleman may.
    Mr. Strickland. We hear about the world economy and the 
fact that we are a part of it, but as long as other nations 
have controls and our Nation does not have some control, it is 
inevitable, it seems to me, that the American consumer is going 
to subsidize the foreign consumer.
    Thank you.
    Mr. Burr. The gentleman's time has expired.
    The Chair would recognize the gentleman from Iowa, Dr. 
Ganske for 5 minutes.
    Mr. Ganske. Thank you, Mr. Chairman.
    I want to try to get a handle on the Medicare HMOs. So Ms. 
Ignagni, you can help me on this because there have been a lot 
of reports about the Medicare HMOs dropping out of the market 
because you have not received a large enough update increase.
    Are we seeing Medicare HMOs drop out of markets where their 
AAPCC is say above 450?
    Ms. Ignagni. We have. And we may, as July 1 approaches. And 
I think that one of the things that we are working very hard on 
and are looking forward to working with this committee on is 
trying to avoid that, stabilizing this program, and continuing 
to allow this to be a choice for people because they can 
receive so many benefits. These are people on very fixed 
incomes with limited means.
    Mr. Ganske. And this is even despite the fact that Medicare 
HMOs are increasing their deductibles and copayments for their 
prescription drug coverage?
    Ms. Ignagni. Yes, sir.
    Mr. Ganske. Now just so everyone is clear, a Medicare HMO 
is paid on a monthly basis per enrollee an amount determined by 
a formula called the AAPCC, adjusted per capita cost something. 
How much additional funds do you need for a prescription 
benefit, do you think, for your Medicare HMOs to continue to be 
able to offer prescription drug coverage?
    Ms. Ignagni. First of all, sir, I think the first thing we 
need is to stabilize the program before we get to additional 
benefits. There is a great deal of unfinished business to 
fulfill that promise that was made to people in 1997 that they 
would have a choice.
    One of the most effective strategies there is to impose a 
safety net so that the purchasing power of the Medicare+Choice 
capitation or reimbursement to the plan is actually keeping 
pace with what the costs of purchasing health care from the 
academic teaching centers, from the physicians in that 
community, et cetera, are.
    What we have is a major problem because we have lost that 
relationship.
    Mr. Ganske. So you would like to see an increase across the 
board?
    Ms. Ignagni. Across the board.
    Mr. Ganske. Across the board. So for instance, there are 
some counties where the payment for a senior citizen could be 
as much as $750. What you are saying is that in order to 
stabilize your drug benefit programs, even for those in those 
areas, they need a higher increase in their adjustment?
    Ms. Ignagni. Yes.
    Mr. Ganske. Is that right?
    Ms. Ignagni. Yes. Well yes and no.
    One, No. 1, we have to stabilize those programs across the 
country and there are a range of strategies to do that. We have 
to deal with the particular problems of the blend counties 
making sure that that is funded irrespective of what happens on 
budget neutrality, et cetera, No. 1.
    The floor issue, No. 2. We have to have a better risk 
adjustment system than we do now. The one we have on the table 
does not work, is not encouraging disease management or the 
kinds of strategies we have employed so well.
    Once you do that--and that can be done and it can be done 
this year----
    Mr. Ganske. But you are telling me----
    Ms. Ignagni. Once you do that, then you need to do 
something additional for the prescription drug question.
    Mr. Ganske. You are telling me though that you are seeing 
Medicare HMOs drop out of AAPCC areas that are significantly 
above $450.
    And we heard in Ways and Means yesterday that they are 
talking about raising the AAPCC to a floor of $475. Now that is 
only about $50 higher than what it currently is in Des Moines, 
Iowa where there really are not any plans being offered.
    How high would you have to get that AAPCC to see HMOs move 
into more rural areas where there have been lower AAPCCs, 
because we know in the rural areas we have a disproportionately 
number of very elderly that have a higher percentage of 
prescription drug costs----
    Ms. Ignagni. Yes. That's right.
    Mr. Ganske. [continuing] than in some of the more urban 
areas.
    I mean, do you have any ideas what levels we would be 
looking at?
    Ms. Ignagni. I do, actually. I think it has, in many cases, 
Dr. Ganske, and I know that you know this because we have had 
some discussions about it, that this issue about presence of 
Medicare+Choice in rural areas, in many cases has little to do 
with payment.
    It has much more to do with whether a provider system, 
often with no competition, is actually willing to negotiate 
with a health plan.
    In a number of situations, because there is not a 
competition in the market in the provider community, individual 
systems are unwilling to contract.
    Mr. Ganske. I understand there are other factors that enter 
into it.
    Ms. Ignagni. Yes.
    Mr. Ganske. But it would appear to me that on the face that 
one would have to significantly increase that floor above what 
I hear is currently being proposed. I think you are looking at 
something more in the range of $600 or $650.
    Ms. Ignagni. I think if we think that the way to solve the 
Medicare+Choice systemic challenge now is to only increase the 
payment in rural areas, then I think we are kidding ourselves. 
And I think we will let a number of beneficiaries down.
    There is more that needs to be done, and I would be happy 
to spend some time with you on some of the specifics because 
what I am excited about is people are beginning to talk very 
specifically about that.
    Mr. Ganske. Yesterday----
    Mr. Burr. The gentleman's----
    Mr. Ganske. One additional question?
    Mr. Burr. Very quickly.
    Mr. Ganske. Yesterday, Mr. McDermott asked Chairman Thomas 
a question about well, you know, if studies have shown that 
payments to Medicare HMOs have actually cost more than what 
they would have, and you are familiar with some of those 
studies, why is it that Republicans want to move all Medicare 
beneficiaries into HMOs?
    And Mr. Thomas said this, and I would like your response to 
this. He said:
    Well, that only tells half the story. In other words, he 
agreed with the initial premise, and then he said, we would 
like to see competitive HMOs.
    Is it your position that you would like to see the majority 
of Medicare beneficiaries in Medicare HMOs?
    Ms. Ignagni. I think that we offer opportunities for 
Medicare beneficiaries. Right now, in the here-and-now, and I 
could not responsibly answer any other way, we have to build 
capacity to accommodate all beneficiaries. So I do not want to 
mislead you about that, so I would not make that promise.
    But what I can actually tell you is the systems that we 
have have done a better job in managing the chronic care 
challenges of people who are over 65, and the literature is 
beginning now to support that.
    So we have coordinated care. We have early intervention. 
But what we have done is created a promise that has not been 
funded. So we need to do the second step, which is to fund the 
promise so that more and more seniors can take advantage.
    And there is no lack of interest. There is a great deal of 
interest. But now, because plans have been forced out, seniors 
in fact are faced with situations where, in many markets, there 
is not a plan or likely to be no plan in the future. And that 
is not what we promised in 1997, and that is not what people 
indicated they wanted.
    We have the highest degree of satisfaction in the Medicare 
population in our health plans because of the comprehensiveness 
and the breadth of the intervention here. And we want to be 
able to partner with the best physicians and best facilities 
around the country to continue to do this job.
    Mr. Ganske. You are an effective spokeswoman. I would point 
out that sometimes patients, when they get sick, decide to 
leave Medicare HMOs and then go into fee-for-service, and there 
may be some adverse risk selection.
    But I appreciate the Chair's indulgence.
    Mr. Burr. I thank the gentleman for his question.
    The Chair would recognize Mr. Deutsch.
    Mr. Deutsch. Thank you, Mr. Chairman.
    Ms. Ignagni, if I could follow up a little bit on some of 
the questions that Dr. Ganske was talking about, from your 
perspective why is it important to stabilize the 
Medicare+Choice program if we are going to eventually have a 
prescription drug coverage for all Medicare beneficiaries, even 
who are not in Medicare HMOs?
    Ms. Ignagni. Because I think we can build on this model and 
we can do better.
    So to the extent that you establish a floor benefit 
package, that however you construct the proposal, whether you 
look at the bipartisan proposal and where everyone's looking 
for the details, and we are looking for them as well and we 
will be looking to analyze them, or the President's proposal or 
the Democrat's proposal that we have seen thus far, I think 
there is a broad scale recognition that once you establish a 
floor, because of the nature of coordinated care systems, we 
can do more for seniors, and we are looking forward to doing 
that.
    But we cannot build on that track record unless we 
stabilize the existing program.
    Mr. Deutsch. You know, it is interesting. In my district, I 
have both an urban setting, a traditional health care urban 
setting, and as you are aware also, Monroe County, the Keys is 
actually technically a rural health system because Monroe Key 
West, the closest regional hospital, is over 100 miles away.
    The only HMO service in Monroe County has left. And so you 
have a phenomenon for 80,000 people in my district, 20,000 plus 
Medicare beneficiaries, who if they have high prescription 
drugs, have no choice, have no option.
    Where in the urban part of my district, even though some 
people have left the market, there is still a competitive HMO 
market.
    And in fact, one of the phenomenon is people using fake 
addresses to actually get prescription drug coverage because 
they cannot get HMO coverage. And the only way they can get the 
prescription drug coverage is by using a neighbor, a friend, a 
relative's address in a county that has an HMO that services--
which is illegal, and I do not know the enforcement side of it 
or now much enforcement is going on, but it sort of talks about 
the problem.
    In terms of just seeing how many people join HMOs because 
of that need, do you have any feel or any empirical data in 
terms of that marking tool, that coverage for prescription 
drugs, what does it mean?
    Ms. Ignagni. Yes. We know that a number of beneficiaries 
have joined our plans because of the existence of prescription 
drugs. So the tenor of your question is absolutely right.
    However, we also know, and I think the next point is not 
often recognized or not recognized enough, that people on fixed 
incomes value the cost containment protection, No. 1, the cost 
sharing protection, I am sorry.
    The second is that they value, an element of what we 
provide is this notion of catastrophic coverage which, as we 
have heard this morning, was embarked upon in the traditional 
Medicare program, and then ultimately that was repealed.
    We continue to offer not only cost-sharing protection, but 
catastrophic coverage and that is a very, very strong value for 
individuals on a limited income.
    Mr. Deutsch. Let me, I guess--because we had our 5 minutes 
on an introduction--really sort of follow up and it is really 
not a question, but it may be a rhetorical question--but I 
think one of the interesting things about prescription drug 
coverage, and it is really sort of fascinating talking to 
constituents, not just Medicare constituents but people whose 
parents are on Medicare, but also I think what is also really 
interesting is talking to physicians who are not participating 
in HMOs. How supportive they are of prescription drug coverage.
    Because I think physicians who I have talked to literally 
see people leaving their practice because of HMO coverage 
because they have someone who is a middle class senior who is 
spending $500 a month on prescriptions, and that person, even 
though they do not want to leave their cardiologist there, 
whoever, effectively do not have a choice and have to join an 
HMO to get the prescription drug coverage.
    And they know that if there was prescription drug coverage 
under Medicare, that is a person who they see, who they talk 
to, who they know is a patient who would not leave.
    And it is kind of a strange phenomena. You know, if 
anything, we keep trying to shift this pendulum where it is an 
even choice, where consumers really have a choice and it is 
level. And in some cases, maybe the incentive to join an HMO 
has gotten too high. The reimbursement might have been too 
high. The extra benefits, health care benefits, everything 
else, might be too much, and then we have leveled it, and maybe 
now it is the other way. So this can kind of level back.
    And one of the interesting things I guess that maybe you 
can share as well, and if anyone else on the panel, let me just 
open this up as well to anyone else who wants to respond, but 
one of the issues that we have talked about in prescription 
drugs is the actual potential cost savings of providing 
prescription drug coverage.
    Because avoiding adverse health consequences because people 
do not take it, from the HMO perspective, where you are 
basically indemnifying the person, do you have empirical 
evidence to sort of talk about your savings----
    Ms. Ignagni. Yes.
    Mr. Deutsch. [continuing] about people getting the drugs 
regardless of their costs which is effectively the way the HMOs 
can do that.
    Ms. Ignagni. Yes. Because the existence of prescription 
drugs allows us to do the early intervention to prevent the 
catastrophic illness down the road. There is no question about 
that.
    Mr. Deutsch. Does anyone else want to respond to that?
    Mr. Donoho. To give you a real life example, one of the 
issues with the elderly is hypertension. If you look at 
hypertension in a managed benefit, hypertension compliance is 
about--on noncompliance is about 49 percent.
    If you look at that, about a third of them--this is a study 
done by one of our members--if you look, a third of those 
require hospitalization. The average hospitalization is at 
$15,000 a year.
    So if you can increase compliance, if you can maintain 
people on hypertension, look at the money that you are saving. 
It is just one simple study.
    Mr. Kahn. I guess I think that we are looking at Medicare 
from the standpoint of drugs because of the discussion today. 
And I think that you tend to get a little bit perverted.
    I think from the standpoint of the beneficiary, you are 
describing how they join HMOs because in a sense they get a 
deal and that is why they give up fee-for-service.
    I think we have to--and I cannot say it is this year or 
next year--but there is a point in the future where in a sense 
Medicare+Choice is not the problem, fee-for-service Medicare is 
the problem. Because whether it is home health, skilled nursing 
facilities, out-patient hospital department, I spent 13 years 
working on payment policy and I can tell you, it is about over.
    The way HCFA applies the rules that Congress passed is such 
that it is going to be very hard for the infrastructure through 
this old fee-for-service system to be sustained.
    And I do not know what the crisis is in--you know, 
obviously in the skilled nursing facility area you can make the 
argument that there are a lot of people that came in and abused 
Medicare for years, a lot of providers, and, you know, you can 
see what the stock market is doing to them today. You know, 
half of them are in bankruptcy.
    But the point is that from an infrastructure standpoint to 
serve the beneficiary, I think that the fee-for-service system 
is extremely sick, and that if we let the managed care 
infrastructure fade, which it is about to do, I think we are 
going to have some real organizational problems in terms of 
getting services to beneficiaries.
    And this is a serious problem. There are a lot of 
physicians now that do not like to take fee-for-service 
Medicare because of the way Medicare pays.
    Ms. Feder. Mr. Deutsch, I cannot let that one stand. I 
deferred once to Chip. I cannot do it again.
    It seems to me that there is an on-going issue in managing 
the Medicare program which I think is intrinsic to managing a 
health insurance program which is trying to balance what we 
want to pay and the access to quality care that we desire.
    And it is true that in the last few years, we have adopted 
some new prospective payment systems that need work, and I 
think will continue to need work, but to say that the fee-for-
service system is sick when it continues to guarantee millions 
of Medicare beneficiaries access to care and has simultaneously 
been able to slow its cost growth so that we have extended the 
life of the trust fund to 2025, does not make any sense to me.
    I think, on the contrary, it really is that there were 
claims made for managed care and what it could deliver and I do 
not think we have seen delivery on those claims of performance.
    My view is that we should not have a situation, as I said 
before to Mr. Stupak, when you talk about having a level 
playing field, we need that core benefit, and we need to have 
people not moving in and out of fee-for-service and managed 
care because they can get extra benefits one place and not 
another.
    We need to have a core benefit, make it a reasonable price 
or a reasonable system of paying for that core benefit in fee-
for-service and outside, and then enable beneficiaries to 
choose.
    Mr. Burr. I thank the gentleman from Florida. He got 9 
minutes.
    I really did have a goal when I got in the seat to try to 
get these witnesses out by 3:30. You have had an extremely long 
day. I will not ask you questions, but I will summarize the 
questions that I would have asked with my own answers, if that 
is okay.
    We have got a huge challenge. I think that is evident by 
the varying degrees of answers, but more importantly the 
questions that still remain unanswered and that means that we 
have to go into new ground and to plow that ground.
    Illness is not predictable.
    Illness is not predictable if you are young.
    Illness is not predictable if you are old.
    It puts a unique challenge on us to provide not only the 
coverage for those who are at risk, whether it is because of 
the financial point in the sand that was set, or because of a 
current health problem, but we are also challenged to produce a 
product that really resembles more a life insurance product, a 
product that assures individuals who have the means to pay 
today for drug costs, that they are protected against the drug 
costs of tomorrow. But more importantly against the terminal 
illness that might strike and that the resources might not be 
there for an unpredictable outflow of money.
    So the challenge for us is to make that predictable, to 
bring some parameters to the process and to respond to not only 
those who choose between food and drugs, but to try to design a 
program that fits the needs of the long-term security and 
predictability that has been expressed by many of you.
    One of the other most difficult things is to integrate a 
new program into a system that has had a difficult time at 
making any new coverage decisions.
    I think every member of this subcommittee at some point in 
any given month has dealt with a manufacturer of a medical 
device of a pharmaceutical, a member of a patients' groups who 
seeks to try to accelerate the coverage decisions at HCFA.
    Because technology changes with such a fast pace today, 
HCFA, for whatever reason, is unable to make those coverage 
determinations in a fashion that we would all want for the 
quality of care of the patient.
    And I think that that is one thing that has contributed to 
many of us looking outside of HCFA, to create a new entity 
whose sole focus it is to administer the Medicare prescription 
drug benefit regardless of how it is configured.
    I would say that in the proposal that hopefully will be out 
next week, we would also create a new responsibility within the 
benefit administration, Medicare Benefit Administration, which 
would be a Medicare ombudsman.
    One place for everybody to go, whether it is for an appeals 
process, a coverage determination, somewhere that you can go 
that covers not only what HCFA's got responsibility for but 
hopefully the new drug entity and the administration of that.
    Somebody mentioned earlier stock prices or Wall Street. 
Believe it or not, that is a consideration in this plan too. We 
understand that our hopes at bringing down drug costs and 
meeting the challenges of a doubling of the population under 
Medicare in many cases can only be met through new 
technological breakthroughs and non-invasive medical devices 
and pharmaceuticals that actually do cure things that today we 
treat and maintain in a very expensive way.
    We are confident that we have to continue a commitment, not 
only a public commitment to the NIH for research, but we have 
to make sure that the incentive exists in the system for 
private sector companies to continue their research and 
development to find those breakthroughs.
    Without that, the future will be predictable. And I think, 
Chip, you alluded to a deterioration in one part of the system. 
That we are talking about is a deterioration of the entire 
system.
    I remember 3\1/2\ years ago when I landed in the Czech 
Republic and had an opportunity fresh into a new democracy to 
sit down with their minister of health. They had a hybrid 
Soviet system that they had continued over from their 
independence.
    I also had an opportunity to go back last year on the day 
that the minister of health was headed to the government to 
drop off their new health care plan. It very much resembled a 
hybrid of our managed care system, but the question was why.
    And they went through a very detailed statement about the 
lack of money. They cut reimbursements to try to save money. 
And when they cut reimbursements, doctors began to leave. And 
when doctors begin to leave, hospitals begin to close and all 
of a sudden they had a quality of care issue that they realized 
they created because they tried to treat it in the wrong way.
    We understand that we need our entire system to be 
strengthened. If I had my choice, it would be comprehensive 
reform. It would be something that mirrors more what the 
Medicare Commission, which I think put partisanship aside and 
addressed some very long-term needs of our health care system 
for seniors. Unfortunately, I do not believe that that is 
possible to reach this year, but I believe it will continue to 
be our goal to make sure that we reach it in the not-too-
distant future.
    I hope that the stand alone drug effort is a step in the 
right direction. It is not a solution to the problem, but I do 
not believe it is a step in the wrong direction.
    Clearly, we did not expect to find consensus today and 
clearly every member will leave with additional questions that 
I hope will find answers as we move through whatever markup 
process, whatever floor activity process we go through, but I 
am confident of one thing: that this subcommittee, both 
Republican and Democrat, is engaged in this issue and is 
willing to learn.
    For those who feel shorted from today's opportunity to 
testify, please take the opportunity to go see those Members 
and educate them further. It will contribute to a much more 
accurate debate as we move to House activities.
    Let me once again thank all of you for your willingness to 
be here today. This hearing is now adjourned.
    [Whereupon, at 3:37 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
 Prepared Statement of James L. Martin, President, 60 Plus Association
    Mr. Chairman, on behalf of the 60 Plus Association, I commend you 
and the Subcommittee on Health and Environment of the House Commerce 
Committee for holding this hearing on a topic very important for all 
seniors, a prescription drug benefit under Medicare.
    The 60 Plus Association is a national, nonpartisan senior citizens 
advocacy group with 500,000 members nationwide, an average of 1,000 per 
Congressional District. We are supported by the voluntary contributions 
of our members. We have never in the past nor presently receive federal 
grants or contracts and we have a policy that we do not seek or would 
we accept federal grants or contracts.
    As senior citizens are living longer and healthier lives, the issue 
of prescription drugs becomes a major issue for their health and their 
budget. Years ago seniors lived into their 60s and 70s; now we have 
seniors living beyond those years, with an increasing population in 
their 80s, 90s, and even 100 years and beyond. The rational TV weather 
forecaster, Willard Scott, has a growing number of individuals each 
year from whom to select to honor on their 100th birthday.
    I am not here to endorse any specific piece of legislation but 
mainly to highlight important principles, which should be included in 
any prescription drug plan.
    First of all, we are very concerned with the proposal pushed by 
President Bill Clinton. The president's plan is a big government, ``one 
size fits all'' proposal that will enlarge government, promises much 
but delivers little, places decision-making in the hands of federal 
bureaucrats, and will do little to meet the diverse needs of our senior 
citizens. The proposal may have great political appeal in this election 
year but little common sense appeal to those of us who have studied it. 
A closer study of the proposal demonstrates that it is a bad program 
for senior citizens and for the American taxpayer. If we believe we 
have problems with financing Social Security and Medicare, let us adopt 
this Clinton proposal and we will have an even bigger financial 
disaster down the road.
    We at the 60 Plus Association are pleased that a bipartisan group 
is working in the House and the Senate to put forward a proposal, which 
will really help seniors.
    We believe that the essential features of any successful proposal 
must be a rejection of a big government role and especially one that 
will lead to price-fixing or price controls by the federal government. 
Throughout history, price controls have led inexorably to rationing. 
That's the major reason the Canadian health system is considered by 80 
percent of seniors to be in a state of crisis. Rationing leads to long 
lines in emergency rooms and prompted the Canadian Minister of Health 
to travel to the United States a few years ago for treatment of his 
heart ailment.
    The United States has one of the greatest pharmaceutical industries 
in the world. Billions are being spent to develop new drugs, many of 
which help our seniors live a life with less pain, a higher quality, a 
longer life, and assist in avoiding surgery. Price controls, especially 
from an entity with the power of the federal government, could bring 
such research progress to screeching halt. We would be killing the 
goose that lays the golden egg. Seniors in order to receive a lower 
price on a drug today would be risking the opportunity for 
pharmaceuticals to develop other significant drugs which may help them 
not only in years ahead but other seniors in future years.
    Speaking of the American pharmaceutical industry, it is often used 
as a whipping boy. For those who participate in this approach, I would 
like to cite an article, which appeared in Parade magazine, September 
12, 1998 authored by former House and Senate member Paul Simon. He 
noted that a heart scan had revealed that he was headed for a heart 
attack or stroke, even though he had not the usual symptoms of a heart 
problem such as chest pain or shortness of breath. He underwent a six-
way heart bypass operation. He noted that the heart scan developed by 
research was responsible for him being alive today. He added 
``Pharmaceutical companies do an excellent job in research'' and noted 
that they had increased their spending from $2 billion in 1980 to $20 
billion in 1998. Senator Simon attributed his survival to the research 
performed by pharmaceuticals.
    Seniors are a diverse group. We believe assistance should be 
provided to those seniors, namely low-income seniors, who need such 
assistance. We oppose any program that will encourage companies or 
other health plans to drop their current prescription drug coverage for 
seniors, a clear and distinct possibility under the Clinton plan. We 
will be risking some of the great benefits in our current health system 
for a real shot in the dark by a very risky federal health initiative.
    And finally, we should consider the element of choice. We must give 
seniors this option, and not pass the entire decision-making and 
funding process on to federal bureaucrats. Seniors must be able to make 
their voices heard and their decisions known in the marketplace. 
Seniors will lose this voice if it stifled by a federal bureaucracy 
under the control of a plan, which has great political appeal (such as 
the president's) but dire consequences for the financial health of our 
country and the best interests of our senior citizens.
    I urge the House Commerce Committee to adopt a bipartisan plan, 
which will really help seniors, and not penalize them with new 
government entitlement programs of dubious benefits, costly mandates, 
and excessive regulations. Thank you.
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