U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

71–491CC 2001

MEDICARE REFORM: PROVIDING PRESCRIPTION

DRUG COVERAGE FOR SENIORS

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

FEBRUARY 15, 2001

Serial No. 107–1

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

CHARLES F. BASS, New Hampshire

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

DAVID V. MARVENTANO, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON HEALTH

MICHAEL BILIRAKIS, Florida, Chairman

JOE BARTON, Texas

FRED UPTON, Michigan

JAMES C. GREENWOOD, Pennsylvania

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

Vice Chairman

BARBARA CUBIN, Wyoming

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

JOSEPH R. PITTS, Pennsylvania

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

SHERROD BROWN, Ohio

HENRY A. WAXMAN, California

TED STRICKLAND, Ohio

THOMAS M. BARRETT, Wisconsin

LOIS CAPPS, California

RALPH M. HALL, Texas

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

PETER DEUTSCH, Florida

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

2

C O N T E N T S

Page

Testimony of:

Buckley, Barbara E., Assemblywoman, State of Nevada .............................. 55

Jones, John, Vice President, Legal and Regulatory Affairs, Pacificare

Health Systems ............................................................................................. 22

Kessler, Sylvia, on behalf of the National Committee to Preserve Social

Security and Medicare .................................................................................. 20

Moroni, Robert D., Assistant Director, Health Care Plans, General Motors

Corporation .................................................................................................... 29

Rowland, Diane, Kaiser Family Foundation .................................................. 32

Smith, James F., Senior Vice President, Health Care Services, CVS Corporation, on behalf of National Association of Chain Drug Stores ........... 60

Weller, William, Assistant Vice President and Chief Actuary, Health

Insurance Association of America ................................................................ 47

Material submitted for the record by:

Jones, John, Vice President, Legal and Regulatory Affairs, Pacificare

Health Systems, letter dated March 23, 2001, enclosing response for

the record ....................................................................................................... 93

Rowland, Diane, Kaiser Family Foundation, letter dated March 19, 2001,

enclosing response for the record ................................................................ 92

(III)

(1)

MEDICARE REFORM: PROVIDING PRESCRIPTION DRUG COVERAGE FOR SENIORS

THURSDAY, FEBRUARY 15, 2001

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON HEALTH,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2123, Rayburn House Office Building, Hon. Michael Bilirakis

(chairman) presiding.

Members present: Representatives Bilirakis, Upton, Greenwood,

Burr, Ganske, Norwood, Shadegg, Pickering, Bryant, Buyer, Tauzin

(ex officio), Brown, Waxman, Strickland, Barrett, Deutsch, Stupak,

Engel, Wynn, Green, and Dingell (ex officio).

Staff present: Anne Esposito, professional staff member; Tom

Giles, majority counsel; Kristi Gillis, legislative clerk; Bridgett Taylor, minority professional staff member; and Amy Droskoski, minority professional staff member.

Mr. BILIRAKIS. The committee will come to order.

As per committee rules, the chairman and ranking member will

have 5 minutes for an opening statement. Other members of the

subcommittee will be limited to 3 minutes; a solid 3, I might add.

I now call to order this first hearing of the Health Subcommittee

in this, the 107th Congress. I would like to start by welcoming our

witnesses and all of the subcommittee members, particularly our

new members, none of whom are here, I believe. Mr. Buyer is here.

I guess this is an appropriate time for me to say that since there

are no votes on the House floor today, I thank my subcommittee

colleagues for staying in town today to participate in this important

hearing. Although when we take a look around, we don’t see that

too many have so far.

I am pleased to be working again with my good friend Congressman Sherrod Brown as the ranking member, and he should hear

that. I also want to take this opportunity to recognize the vice

chairman of the subcommittee, Congressman Charlie Norwood,

whose help and support I greatly appreciate.

I am excited by the challenges before us in the current session.

This subcommittee’s jurisdiction includes a broad range of health

concerns, as we know, including Medicare, Medicaid, health insurance, public health, food safety, and pharmaceuticals. Under the

leadership of Chairman Tauzin, I am confident that the Energy

and Commerce Committee and this subcommittee in particular will

play a leading role in the health care debate. We have a busy year

2

before us. By working together, and I emphasize that, we can significantly improve the quality of health care for all Americans.

The topic of today’s hearing is Medicare Reform: Providing Prescription Drug Coverage to Seniors. The title underscores a critical

point; namely, that there is a clear and necessary connection between adding a prescription drug benefit to the Medicare program

and broader reforms to protect and strengthen Medicare for the future.

Before we expand Medicare to provide a costly new benefit, a

necessary new benefit, in my opinion, we must ensure the program

is standing on solid fiscal ground. A benefit promised but not delivered, of course, is no benefit at all. I am determined to protect the

long-term solvency of this very vital program.

In the last Congress, I proposed a State-based prescription drug

plan to help seniors in greatest need. I remain determined that we

help the poorest and sickest beneficiaries obtain the medicines they

need, should broader reform efforts be delayed. But I am hopeful

that there will not be delays, that the present Congress can reach

agreement on a plan to reform Medicare and establish a voluntary

prescription drug benefit for all Medicare beneficiaries. This hearing is the first in a series designed to lead us toward accomplishing

that goal.

This is meant to be an educational hearing for members of the

subcommittee and the public. We have all heard the numbers.

Roughly 65 percent of Medicare beneficiaries have access to some

form of prescription drug coverage.Today we will hear more about

the ways in which beneficiaries are currently obtaining prescription

drugs outside of the Medicare program.

Our panel will begin with Mrs. Sylvia Kessler, who has traveled

from my home State of Florida to be here today. Thank you so

much for joining us, Mrs. Kessler, and I wish we could welcome

you and the others with better weather—although it is not as bad

as it was yesterday. The panel will also include representatives

from a Medicare+Choice plan, the Medigap plans, a chain drug

store, an employer-sponsored plan, a State prescription drug assistance program, and the Kaiser Family Foundation. I would like to

again offer a warm welcome to all of our panelists.

I look forward to a productive hearing which can shed light on

how various coverage programs are structured and how they operate. By reviewing ways in which current prescription drug delivery

systems are modeled, we can learn from their successes and their

difficulties. However, we are not focusing, and I want to emphasize

that, we are not focusing today on specific legislative proposals.

As Members know, this subcommittee has a strong record of

working on a bipartisan basis to tackle difficult legislative issues,

and I am hopeful that we can advance a bipartisan plan to improve

prescription drug coverage for Medicare beneficiaries. By reaching

agreement on an answer to this very difficult question, we can also

help advance broader efforts to preserve and strengthen Medicare

for the future.

In closing, I want to again thank our witnesses for their time

and effort in joining us today.

I now recognize the ranking member Mr. Brown.

3

Mr. BROWN. Thank you, Mr. Chairman. It is a pleasure to again

serve with you as Chair in this 107th Congress. I am glad you are

back as the chairman of the newly reconfigured Health Subcommittee. I would like to thank Diane Rowland and other distinguished witnesses for joining us today.

Access to prescription drugs is fresh on my mind because I just

received a letter from a Medicare beneficiary who needs medicine

for his prostate cancer. His Medicare+Choice plan made two

changes effective January 1 of this year. Premiums went up $350

per year, and brand name drugs are no longer covered, period.

There is no generic version of the drug that my constituent needs.

I received another letter from the frantic daughter of a woman

whose Medicare+Choice plan dropped prescription drug coverage

altogether. Her mother’s prescriptions cost more than $300 per

month. Neither mother nor daughter can afford that.

I received a letter from a woman whose employer-sponsored retiree coverage dropped its prescription drug plan. My constituent

didn’t know she lost her drug coverage until she tried to fill the

prescription. That prescription is still unfilled.

I have heard from seniors who had to give up their Medigap coverage when premiums spiked upward, from seniors who joined the

Plus Choice plan explicitly for the drug coverage, only to have that

coverage ratcheted down or eliminated altogether; from seniors

whose drug coverage is so skeletal they would be better served putting the associated premiums in a savings account.

These stories, which resonate with my colleagues on both sides

of the aisle, are not an indictment of Medigap or of Plus Choice

plans or employers or any other source of drug coverage, but they

are an indictment of partial solutions. The status quo is a mishmash of partial solutions. More than a third of Medicare beneficiaries, as all of us know, have no prescription drug coverage, and

even more than that, of the two-thirds that have it, more than that

have coverage that simply isn’t dependable and is being oftentimes

scaled back.

The President’s immediate Helping Hand proposal is another

partial solution, and it would leave out nearly half of those who

now lack prescription drug coverage.

The stories our constituents share with us are an indictment of

this Congress’s, of our continued failure to add prescription drug

coverage to the basic Medicare benefit. Medicare is reliable, Medicare is universal, Medicare is a large enough insurance pool to accommodate the risk and manage the costs associated with prescription drug coverage.

Medicare came into being because half of all seniors in 1965 were

uninsured. Now, more than a third of all seniors are uninsured,

and many more underinsured for prescription drugs. Medicare prescription drug coverage as opposed to State assistance programs or

private coverage for prescription drugs means stable benefits over

time and means coverage that does not leave any senior worse off

than that senior’s neighbor in a different county or a different

State or a different income bracket or a different health status.

Medicare prescription drug coverage has been demonized by

many in this institution and others outside the institution as a onesize-fits-all program. This argument is spurious. The people that

4

make this argument, that make this assertion know that it is spurious. The kind of choice that is important when it comes to prescription drug coverage is choice of pharmacy, choice of prescription

drug, choice between brand name and generic drugs, access to the

right drugs, even if it is not part of the standard formulary. That

is the kind of choice a Medicare drug benefit can provide to every

senior, not just those lucky enough to afford a Cadillac private insurance plan.

I am confident, Mr. Chairman, that today’s hearing will be informative and helpful. I am equally confident that what we hear

today will reinforce the argument for a universally available Medicare drug benefit. Those of you who have observed this committee

and know me probably are surprised that I haven’t raised the issue

of prescription drug prices or the related issues of direct-to-consumer advertising and patent extension, or tax cuts which put us

in a straightjacket which makes it difficult to afford the kind of

coverage that Americans deserve. In the interest of time, I will get

to these issues when it is time to ask questions of the witnesses.

Thank you, Mr. Chairman.

Mr. BILIRAKIS. And the Chair appreciates that.

I now yield to Mr. Norwood, the vice chairman of the subcommittee.

Mr. NORWOOD. Thank you very much, Mr. Chairman, and congratulations to you, as we are all pleased to follow your leadership

on this very important subject. As a present to you today, I want

you to know that I am here to listen and not talk, so I am going

to be very brief. I know that is different, but I am grateful to all

of you for coming so far, many of you, and I think that is exactly

what we need to do. I want you to know we do listen to you, and

what you say today will be carefully noted and help, as this is

the—probably the opening salvo of the great Energy and Commerce

Committee as we try to work out a prescription drug plan and help

the President fulfill his campaign promises. I have great faith that

this is the year we are going to get it done.

So I thank all of you for being here and give it to us, because

that is what we are here to do today.

Thank you, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Dingell for an opening statement.

Mr. DINGELL. Mr. Chairman, thank you, and I commend you and

Chairman Tauzin for beginning this Congress looking at one of the

most pressing problems facing the people of the country. Millions

of our seniors and disabled who depend on Medicare for their

health coverage lack affordable coverage for prescription medications. The situation facing Medicare beneficiaries with respect to

prescription drugs today is not unlike the situation they faced with

respect to insurance coverage in 1965. Indeed, this is the one crucial reform in the Medicare program which we need to pursue.

Currently, there are a patchwork of stopgap measures available,

from retiree coverage to Medigap to voluntary State assistance programs. But there is one thing clear about the whole business: None

of them adequately fills the void, and our senior citizens confront

a very serious and difficult problem as a result.

5

What we need is a uniform Medicare benefit that seniors and the

disabled can depend upon; no nonsense about how we are going to

give money to States, who might or might not give it to HMOs, who

then might or might not pass it through. This is a formula for

wasted money and loss of opportunity to help people who are in

desperate need.

So the question we must examine today is how can we best do

what must be done. I would like to suggest a few basic points to

guide our thinking. First, the system must be reliable. Competition

is a nice word, it is a buzzword, I use it, we all use it. Experience

with Medicare+Choice, however, has shown that it certainly does

not result in any dependable or stable product upon which seniors

may rely. So unless we are willing to dump billions of dollars of

overpayments into a system on an annual basis, that assuredly is

not going to reach most of the people in need. This kind of idea

must be rejected.

Second, the benefit has to be defined. The Congress needs to

know who is getting what, who is paying for it, and what the level

of benefits might be. Seniors need to know exactly what they can

count on. Employers and others who provide supplemental coverage need to know exactly what they are supplementing. I will

point out to all that Medicare is an intricate, involved, and essential part today of industrial retirement plans and industrial retirement health plans. It is even a part of our Civil Service retirement.

States and almost every unit of government that has a retirement

system includes this as a part of a wraparound program in which

benefits are provided, dependent in heavy part upon Medicare.

We do not need to return to the old days of Medigap scandals

when seniors were being sold a pig in a poke and when all kinds

of scoundrels profited mightily at the expense of senior citizens and

at the expense of the Federal Government, which was regarded as

a generous giver who did not supervise.

Third, the benefit must be affordable for seniors and the disabled. That has to include premiums and cost-sharing. A benefit

that no one can afford is no benefit at all. I would note also a benefit that doesn’t cover adequately is also no benefit at all.

Mr. Moroni, who is assistant director of General Motors Health

Plans, will tell us how GM works to ensure that a benefit is affordable to their members. Other companies in the auto industry and

in the American industrial community are doing similar things,

and they deserve commendations for their efforts in this matter,

but they also need us to help them fill out a plan which will better

not only those retirement plans, but the beneficiaries of those retirement plans.

Finally, we need to remember why we are in this business. Congress is now discussing a Medicare prescription medication benefit

because there is a pressing, urgent need amongst our elderly and

disabled.

It should be noted that today we regard ourselves as much more

heavily dependent upon medication and prescription pharmaceuticals than we do upon medical treatment. That was unfortunately not the case in 1965 when we passed Medicare. The result

was that we largely ignored that kind of benefit. In consequence,

6

today our senior citizens miss what is a major and essential part

of good health care for them.

Any solution that this Nation devises and that this Congress designs must focus on the needs of seniors. We need to make good

on the commitment that Congress made to seniors and the disabled

in 1965 to provide their health care needs where the private market fell short. I am pleased that Mrs. Kessler has traveled all the

way from Florida to share her experience with us as a Medicare

beneficiary who lacks affordable prescription drug coverage, and we

want to thank you for being here, Mrs. Kessler.

I look forward to working with you, Mr. Chairman, and with

Chairman Tauzin to expeditiously address these problems this

year. I hope that we won’t try to swallow any snake oil of the kind

I see marketed about how we are going to trust the States or the

HMOs to do this. We have trusted them overlong. They have been

deficient in their responsibilities, and they are now trying to perpetrate the fraud.

Thank you, Mr. Chairman.

[The prepared statement of Hon. John D. Dingell follows:]

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

I am pleased to see that Chairmen Tauzin and Bilirakis are beginning this Congress looking at one of the most pressing problems facing this country. Millions of

seniors and disabled who depend on Medicare for their health coverage lack affordable coverage for prescription medications. The situation facing Medicare beneficiaries with respect to prescription drugs today is not unlike the situation they

faced with respect to insurance coverage in 1965. In my mind, this is the one critical

‘‘reform’’ in the program that we need to pursue.

Currently, there is a patchwork of stopgap measures available, from retiree coverage to Medigap to voluntary state assistance plans. But none of them adequately

fills the void. What we need is a uniform Medicare benefit that seniors and the disabled can depend on. The question we will examine today is how best to do it.

I suggest a few basic points to guide our thinking. First, the system has to be reliable. While ‘‘competition’’ might be a good buzz word these days, experience with

the Medicare+Choice program has shown that it certainly does not result in a stable

and dependable product that seniors can rely on, unless we are willing to dump billions of overpayments into the system on an annual basis.

Second, the benefit must be defined. Seniors need to know exactly what they can

count on. Employers and others who provide supplemental coverage need to know

what they are supplementing. We do not need to return to the days of the Medigap

scandals where seniors were being sold a ‘‘pig in a poke.’’ Third, the benefit itself must be affordable for seniors and the disabled, including

premiums and cost-sharing. A benefit that no one can afford is no benefit at all. Mr.

Moroni, Assistant Director of General Motors health care plans, will tell us about

how GM works to ensure that a benefit is affordable for their members.

Finally, we need to remember why we are in this business. Congress is discussing

a Medicare prescription medication benefit because there is a pressing, urgent need

among our elderly and disabled. Any solution that we design should focus on them.

We need to make good on the commitment Congress made to seniors and the disabled in 1965 to provide for their health care needs where the private market fell

short. I am pleased that Mrs. Kessler has traveled all the way from Florida to share

her experience as a Medicare beneficiary who lacks affordable prescription drug coverage.

We look forward to working with Chairmen Tauzin and Bilirakis to move forward

expeditiously and address this problem this year.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Buyer for an opening statement.

Mr. BUYER. Thank you, Mr. Chairman.

I am pleased to be a member of this subcommittee and to work

with you and Mr. Brown. I come to the committee as a strong beVerDate 11-MAY-2000 09:49 Oct 03, 2001 Jkt 072927 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HEARINGS\71491 pfrm09 PsN: 71491
7

liever in the private system, but we really don’t have that in this

country. It is sort of a quasisystem. You and I have worked together during the last 8 years with regard to the VA and its health

system. I have worked for 8 years with the military health delivery

system, as I chaired that Personnel Subcommittee panel, and with

pride, saying I am the only Member of Congress to author and pass

a prescription drug benefit that was done in the last Congress. The

reason that occurred and that it received the support of the pharmaceutical manufacturers was that I insured that there was a retail out-of-network pharmacy benefit.

So I will also share a word from Mr. Dingell. I will also be very

careful and I will beware of the snake oil of those who will try to

operate or create systems that will take us on a path to universal

health care. I don’t agree with universal health care run by the

government.

So what we have here, and what I recognize in Congress, are individuals of both parties who want to bring a benefit to people and

help the disabled and the needy, most needy in our country, but

we do have two distinct, different paths to get us there. One is

make sure that we make improvements in our quasi health delivery system we have for our country and, at the same time, continue

to press the bounds of the frontier of medicine and science and

health. The other is that path toward incremental steps toward

universal health care run by the government. So I will also be as

watchful for the snake oil.

I yield back my time .

Mr. BILIRAKIS. Mr. Deutsch for an opening statement.

Mr. DEUTSCH. Thank you, Mr. Chairman. I want to add my

words of thanks to the chairman for having this hearing and also

the honor and the really pleasure as well of working with him during the last 6 years, and I look forward to this Congress. I know

his commitment toward this issue is absolutely genuine, and hopefully this is a year we will see something happen.

As opposed to my colleague who just spoke, I would say that I

would like to see America have universal health care. I think it is

the wealthiest society in the history of the world, and we have citizens without health care, and we have a system which has incentives—disincentives for employees to have insurance. That is a goal

that we should be talking about.

I think really the focus of where we are going is really about the

universality of the prescription drug coverage. I think the benefits

have to be universal. Attempts to address only low-income seniors

and ignore middle-class elderly who are having a difficult time purchasing prescription drugs—and I think Mrs. Kessler will be able

to directly bear witness to that case.

In Florida, there are 2.5 million seniors who rely upon Medicare.

That number will increase to 5.5 million by the year 2025. Over 50

percent of the seniors in Florida are middle income who would not

qualify for the low-income assistance program suggested by some

of my colleagues on the other side of the aisle. That is the real

issue that we are addressing here. Hopefully others and a majority

of the Congress, a majority of this committee, will see it along the

same lines.

8

I want to add quickly one other point that I know the chairman

and I are both concerned about, and it is relevant to this issue that

we are here today about, and that is on oncology drugs and

oncologists. Currently some of the drugs are being perhaps overreimbursed while the oncologists themselves are being underreimbursed, and I know the GAO is conducting a study under his

direction, and I look forward to the results of that.

Thank you, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Greenwood for an opening statement.

Mr. GREENWOOD. Thank you, Mr. Chairman.

It obviously goes without saying that every member of this committee wants to make sure that every elderly person in the country, every disabled person has access to an affordable prescription

drug plan. I think it should be the No. 1 priority for this Congress.

It is a subject of enormous frustration to me that we did pass legislation in the House last session and the Senate did not. Contrary

to speakers on the other side of the aisle, it was not a plan that

only provided a plan for prescriptions for low-income people, but

made it affordable for everyone, every Medicare recipient in the

country.

What is even more problematic is we are going in the wrong direction; that we have had this fall-away from the Medicare+Choice

plans because of our failure, HCFA’s failure, the previous President’s failure to adequately fund the Medicare+Choice plans that

we had, and 934,000 Medicare beneficiaries will lose access to

health care benefits and choices next year as a result of these underpayments and burdensome HCFA regulations.

In my district we have—I have seniors and the disabled who

were able to get into a Medicare+Choice plan, became somewhat

dependent upon the availability of prescription drugs, and then for

the reasons I have just cited, the premiums went up so steeply in

order to get those plans that many of my constituents can no

longer afford them and are in desperate, desperate straits as we

speak.

I have a fellow in my district who is 45 years old, a computer

guy, hit by a drunk driver, disabled, totally reliant on a painkiller,

is suicidal without the painkiller, and lost access to that drug as

of the first of the year. We have been desperately trying to help

him ever since, and that is just one instance that repeats itself all

over the country.

So I am looking forward to working with this committee and

other committees, and hopefully we can get this job done and get

it done soon.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Green for an opening statement.

Mr. GREEN. Thank you, Mr. Chairman.

Like all of my colleagues, I am glad you led off our first committee hearing this year with the prescription drug event public

hearing. I believe addressing the need for Medicare coverage and

prescription drugs is one of the most important issues that Congress will face.

Just last weekend I finished a series of town hall meetings in my

own district in Houston, and in every town hall meeting over the

9

last month, seniors asked me to do something to help them pay for

their prescription drugs. Seniors who had lost their HMO coverage

for lots of reasons, and to my colleague from Pennsylvania Mr.

Greenwood, BBA 97 passed this House by such an overwhelming

bipartisan vote in efforts to correct it, although I am concerned

that we do need to correct it, but there is lots of things that we

could do with Medicare reimbursements.

When Medicare was created 35 years ago, most of the prescription medications that save and improve lives weren’t even invented. Medicare, like most private insurance plans at that time,

didn’t cover outpatient prescription medications. Well, we know

now that things have changed, and over the last 20 years there has

been a surge in new drugs, more than 600 in all. Thanks to these

innovations, leading causes of death have been eliminated, and life

expectancy and quality of life and health has been dramatically improved. But that innovation and progress comes at a high price tag.

The cost of these drugs often leaves our most vulnerable citizens,

our seniors and those with disabilities, struggling to make ends

meet. While some seniors have access to prescription drug coverage

through private insurance, Medigap, Medicare, HMOs, or other

sources, coverage is insufficient, capped, and oftentimes expensive.

Fully one-third of our Medicare beneficiaries, more than 14 million

seniors, have no prescription drug coverage at all.

To make matters worse, study after study has found that American seniors who live on the most limited incomes and who depend

most heavily on prescription drugs are paying the highest prices for

the medication that keep them in good health. Because seniors

tend to have more long-term chronic conditions such as diabetes,

arthritis, high blood pressure and heart disease, they are more reliant on prescription drugs. This is evidenced by the fact that more

than 86 percent of Medicare’s 40 million beneficiaries use prescription drugs, 86 percent. The average older American uses 18.5 prescriptions annually.

While seniors make up only 12 percent of the U.S. population,

they use one-third of the prescription drugs, and this isn’t just a

problem for low-income seniors. Of those with incomes below 250

percent of poverty, almost 40 percent lack prescription drug coverage. An initial 5.4 million seniors who have incomes over 250

percent of the poverty level are without coverage. Hard-working

seniors who worked all of their lives, who have saved for their retirement, have moderate incomes, in other words much more than

Medicaid, find themselves excluded from State programs like Medicaid or other discount programs because they earn just a little too

much. Many of our seniors, like Mrs. Sylvia Kessler, are forced to

work so that they can afford to buy their prescriptions. Last Congress when we removed the——

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. GREEN. Thank you, Mr. Chairman. I will finish up.

Again, I appreciate this being the first hearing, and I look forward to continuing hearings. Thank you.

Mr. BILIRAKIS. As evidence of his interest in this subject, Chairman Tauzin has joined us today, and the Chair now recognizes him

for an opening statement.

Chairman TAUZIN. I thank the chairman.

10

Let me particularly thank Chairman Bilirakis for his agreement

again to serve as subcommittee chairman of this critical work of

the Energy and Commerce Committee. If there has been any doubt

about whether or not the new reenergized Energy and Commerce

Committee would be an active player in all of the health care

issues that face this Congress and the country, let there be no more

doubt about it.

This first hearing on prescription drugs is just a first. Recently

Mr. Bilirakis led a tour of Members to HCFA headquarters in Baltimore. We had a chance to see the operations there, and we will

begin very soon very extensive hearings, along with Jim Greenwood, our O&I chairman, on HCFA and how we might reorganize

that organization to better serve the needs of Americans in this

country with their health care problems.

Let me also congratulate Mr. Bilirakis on his and my good friend

the ranking minority member Mr. Dingell’s membership on the National Bipartisan Commission on Medicare Reform.

The talent on this committee, both of its Members on both sides

of the aisle and of the staffs have been accumulating a wealth of

knowledge and experience for years, is going to be brought to bear

on basic Medicare reform this year, and I want to thank them for

their commitment to that effort.

Let me also finally say that this is not about us providing some

kind of new services or better services for seniors out there. This

is about us take taking care of our own families. I want to disabuse

folks of a notion. When we declare national Mother’s Day, it is not

a Democratic mother’s day or a Republican Mother’s Day, it is

Mother’s Day. We, too, have mothers and fathers and grandparents

whom we love. We, too, have children we care about. And when

this Nation discusses health care issues and health care concerns,

we think about mothers like my own, who is a 3-time cancer survivor, who, without the health care coverage of Medicare and without the miracle of new drugs, would not be alive today. This amazing 82-year-old woman, who still wins gold and silver medals in the

Senior Olympics, get this, in discus and javelin, has survived

breast cancer in 1960, lung cancer in 1980, and recently uterine

cancer, and she apologized to me because she wouldn’t be able to

give me that little brother I always wanted. This amazing woman

is just one example of the millions of Americans who depend upon

this committee to get it right.

Mr. Bilirakis, I want to thank you for giving us this first, most

important hearing. We are going to hear from people who are in

the business of organizing and managing drug prescription plans,

and we are going to learn how we might organize this country’s efforts to make sure we get it right when we provide a drug prescription benefit for all of our mothers and fathers and grandparents

under this new benefit program. It is not a question of whether we

are going to do it. The issue is how to do it and how to do it right,

and you will help us learn how to do it right today, and we thank

you for that.

Mr. Bilirakis, bon voyage. You are on it, and your committee is

on it, and I wish you well, and I will be with you every step of the

way. This committee is going to help this Nation solve these problems this Congress.

11

Mr. Bilirakis, good luck to you and all of the committee members. You have my full support, sir.

[The prepared statement of Hon. W.J. ‘‘Billy’’ Tauzin follows:]

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

Mr. Chairman, thank you for holding a hearing on this topic of utmost importance—not just to the seniors in our country, but to all Americans.

The Medicare Program affects all of us. Whether we are eligible for the program

today, or have family members who are eligible, all of us have a strong interest in

ensuring that the Program will meet the health care needs of a growing senior population.

Over the past few years, it has become increasingly clear that Congress needs to

modernize Medicare and bring the Program into the 21st Century. Since the Program’s inception in 1965, much in health care has changed. Yet many of the Program’s features, as well as the design of Medicare’s basic benefit package, are stuck

in a 1960’s style approach to practicing medicine. Prescription drug coverage is still

not included in Medicare’s basic benefit package and there are no caps placed on

seniors’ out of pocket medical expenses. No one in this room today would model a

new system after Medicare’s current benefit package.

This Committee is committed to addressing the issue of Medicare reform this session. Today’s topic focuses on prescription drugs and the entities that currently provide a prescription drug benefit to seniors. We hope to learn how these entities administer a prescription drug benefit to seniors, as we in Congress wrestle with how

best to administer such a benefit at the Federal level.

We can all agree that the question is not whether to enact a prescription drug

benefit, but how. As we will hear from our witnesses, about two-thirds of our seniors

have some form of prescription drug coverage, but another one-third do not. It is

critical that we determine how best to improve access for all Medicare beneficiaries

yet focus our efforts on those who are sickest and neediest. Additionally, when

crafting a new benefit, we must be careful not to disrupt existing coverage. Our witnesses today will share with us how they provide a prescription drug benefit to

Medicare beneficiaries in a cost-effective way.

Providing an affordable prescription drug benefit to Medicare beneficiaries is Just

one aspect of Medicare Reform this Committee will be exploring this year. We will

also be examining the role of the Health Care Financing Administration in the management of Federal health care programs. Just two days ago, Members of this Subcommittee visited HCFA’s central office in Baltimore to see their operations first

hand. The Energy and Commerce Committee, through both the Health Subcommittee and the Oversight and Investigation Subcommittee, intends to hold a series of hearings on HCFA’s operations and their policies. We look forward to working with HCFA to remove any impediments it may face in administering health care

to tens of millions Americans. More importantly, we look forward to improving the

quality of health care delivered to patients through HCFA’s federally administered

programs.

This is an exciting time to be involved in health care and Medicare reform in particular. Our new President has expressed a strong interest in reforming Medicare.

Many in the Senate have expressed a desire to move a reform package. Here on this

Committee, we are honored to have two Members of the National Bipartisan Commission on Medicare Reform: Chairman Bilirakis, and my ranking counterpart on

the Committee, Mr. Dingell. With our wealth of talent on health care issues, our

Committee will be a strong leader in the Medicare reform debate.

Mr. Chairman, I thank you again for holding this important hearing. I look forward to listening to the testimony of our witnesses and beginning the hard work

of developing a solution to this complex issue.

Mr. BILIRAKIS. Thank you very much, Mr. Chairman.

Mr. Wynn is recognized for a 3-minute opening statement.

Mr. WYNN. Thank you very much, Mr. Chairman.

I certainly appreciate the fact that you have gotten the subcommittee off to a fair start dealing with this very important issue.

I don’t know how much bipartisanship exists in this Congress, but

I think there is consensus on the issue of Medicare reform, and

prescription drugs does have considerable consensus.

12

As a new member of the committee, I don’t have any extensive

comments. I am looking forward to working with you and our ranking member Mr. Brown and learning about these issues.

I would like to take a moment, though, to make an observation,

I guess. One of our colleagues mentioned in his opening statement

that he was opposed to universal health care. Now, I don’t subscribe to a Socialist model, but I actually do believe that we ought

to be pursuing a goal of universal health care, or certainly universal access, and the fact that we have failed to accomplish that

should cause us some concern. I don’t think we could be content to

say, well, we have failed to implement this, but at least we failed

using a market-driven approach. I think we need to be receptive to

all approaches that would help us achieve this objective, which is

to make sure that people don’t die needlessly, don’t suffer needlessly, or don’t have to endure economic hardship, making decisions

about their lot, because we as a governmental entity have failed to

implement a universal system or a universal access system.

So I am very excited about the committee’s work, and I look forward to hearing the witnesses who are before us today. Thank you.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Upton for an opening statement.

Mr. UPTON. Thank you, Mr. Chairman. I am going to ask unanimous consent to put a lengthy opening statement into the record.

Mr. BILIRAKIS. Without objection, the opening statement of all

members of the subcommittee may be made a part of the record.

The gentleman may continue.

Mr. UPTON. I would just like to summarize it by saying this: Our

Nation leads the world in the development of new drugs that enable us to effectively treat diseases and conditions, but if our folks

can’t afford to buy those drugs, they are useless.

I am known as an optimist, as I still root for the Chicago Cubs,

and I had a gentleman at one of my town meetings last year who

said, Upton, I know you are an optimist, and he came with his little white prescription bag, and he said, I like the idea that you are

talking about dealing with a prescription drug bill. Can you get it

done before I have to refill this prescription? I said, I am an optimist, but I am not that optimistic.

This is the Congress, this is the year that we do need to work

on legislation. I commend the chairman for having this hearing,

and I look forward to watching legislation move through the House,

as well as the Senate, and get on the President’s desk. This is a

job that we need to get done, and I congratulate the chairman for

holding this hearing, and I yield back the balance of my time.

[The prepared statement of Hon. Fred Upton follows:]

PREPARED STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF MICHIGAN

Mr. Chairman, thank you for holding today’s hearing on how many seniors currently obtain prescription drug coverage. It will give us important background information that will be useful as we again set out to craft a federal benefit within the

Medicare program.

It was my pleasure to serve with you on the House Leadership’s Prescription

Drug Task Force in the last Congress and to see the plan we crafted approved by

the House of Representatives. I sought to serve on this task force because I strongly

believe that 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-savVerDate 11-MAY-2000 09:49 Oct 03, 2001 Jkt 072927 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 E:\HEARINGS\71491 pfrm09 PsN: 71491
13

ing medications. Our nation leads the world in the development of new drugs 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.

Let me just quote from a letter I received last year that is all too typical of many

I receive every week and of many stories that I hear at my town meetings:

‘‘I am among those who skip my meds every other day to make it through the

month. I am taking nine pills a day plus I’m a diabetic. My husband has glaucoma

and high blood pressure and eye drops are very expensive. We have no prescription

drug coverage, so it is a very trying ordeal for us.’’

Mr. Chairman, I am looking forward to working with you and my colleagues on

both sides of the aisle and with the new Administration to craft a plan that can

win the bipartisan support necessary to move quickly through Congress and be

signed into law by President Bush. I see today’s hearing as an important first step

toward ensuring that my constituent and the many seniors like her no longer have

to skip their meds or stretch their limited incomes to the breaking point paying for

basic necessities and the prescriptions they need. We cannot allow another Congress

go by without providing relief to the millions of seniors without prescription drug

coverage.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Stupak for an opening statement.

Mr. STUPAK. Thank you, Mr. Chairman.

Let me just summarize. I look forward to working with you again

in this Congress, and thanks for holding this hearing. Last Congress we had three main plans out there. The Democrats had their

plan which made prescription drugs part of Medicare; we had the

Republican plan, if you will, the insurance one where you buy a

voucher and try to buy some drugs; the Allen bill was out there

with the Federal Supply Service. None of them went very far. I

hope this year we can do something different.

As you know, Mr. Chairman, because you have heard me speak

of this before, back in 1998 we did a study up in my district from

Marquette to Hancock to Gladstone, and seniors pay 91 percent

more in northern Michigan for their drugs than large HMO and insurance plans.

I don’t support price controls or unfairly limiting the pharmaceutical companies on what they can charge for their important

lifesaving drugs, but I do believe that Medicare beneficiaries should

be allowed to participate in the market the same way GM employees or any other class of employees come together jointly to purchase a product. So hopefully this year we can move forward and

really put forward a true, true prescription drug plan that will help

out all people; not just seniors, but all people.

Someone mentioned Medicare Choice, or Medicare+Choice. We

don’t have that in northern Michigan. We don’t have much in the

way of HMOs. So the small rural districts really do need some

help. This is a really pressing problem. When I do my town hall

meetings next week back in my district during the work break,

that is going to be the No. 1 issue from the seniors and others who

show up at the town hall meetings, not just prescription drugs, but

health care reform in general.

So I look forward to working with you, Mr. Chairman. I am going

on my 7th year on this committee, and I enjoy this committee, and

that is why I grandfather in every year, and I look forward to

working with you on health care issues. Thank you.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Pickering for an opening statement.

14

Mr. PICKERING. Thank you, Mr. Chairman. Let me acknowledge

and commend you for the willingness and the commitment that you

have made to address this issue and move this legislation. I do believe we have a great opportunity working with the new administration for this Congress, and this committee, to get something

done.

Let me say, as we approach it, there are several fundamental

principles that I hope will be part of the equation. First, I support

a plan that provides full coverage for seniors facing serious illnesses and catastrophic out-of-pocket drug costs. Second, I favor an

approach that gives seniors choices and flexibility in choosing a

plan that fits their individual needs. And third, I would like to see

a plan that offers prescription drug protection for rural areas, including guaranteeing the availability of at least two drug plans and

allowing seniors to have the convenience of assessing medicine

through a main street pharmacy, the Internet, or mail order.

Again, I believe that this is the year that we can get it done. I

look forward to working with all of the members of the committee,

and I look forward to hearing the testimony of the panel today.

[The prepared statement of Hon. Chip Pickering follows:]

PREPARED STATEMENT OF HON. CHIP PICKERING, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MISSISSIPPI

Mr. Chairman, thank you for holding this hearing today about one of the most

important issues facing many people in our country, particularly seniors. As Congress begins a new year, we are in the process of shaping and focusing on our priorities. That is why today’s hearing on prescription drug coverage for seniors is timely

and necessary as we move forward on this issue.

Medicare is an essential health care component for America’s seniors. While it is

true that Medicare needs to be strengthened and modernized, there is also room

under the Medicare umbrella for a prescription drug benefit for seniors who need

help covering the costs of their medicines. While we will need to fund additional resources to Medicare to make it work, the fact remains that seniors should have access to affordable, voluntary prescription drug coverage that provides protection

against high out-of-pocket costs.

Last year, Congress passed a bipartisan bill ensuring that prescription drug coverage is affordable, available and voluntary for all senior citizens and disabled

Americans, regardless of income. Unfortunately, this legislation was not signed into

law by President Clinton so we must begin again to craft legislation to address this

issue. I supported this legislation last year that allowed seniors, including approximately 408,000 in my state of Mississippi, to choose from at least two competing

drug plans so each person could get the plan that worked best for them, or to keep

their existing coverage. The price of premiums were adjusted to reflect the income

of seniors and the type of coverage each person chose to receive. The plan was designed to protects seniors from high out-of-pocket drug costs, without government

price controls which would hurt research and development of new drugs and cures.

Last year, President Clinton proposed a plan that would have forced seniors into

a ‘‘one size fits all’’ government run program with no flexibility or choice. They

would pay a set monthly premium regardless of their prescription drug needs. I opposed President Clinton’s proposal because it would have given the federal government too heavy a hand in controlling drug benefits, denying some seniors the right

to select the coverage that best fits their needs.

This year, as we work on legislation to bring about a common sense plan to provide prescription drug coverage to seniors who need help, there are several fundamental principles I hope will be part of the equation. First, I support a plan that

provides full coverage for seniors facing serious illnesses and catastrophic out-ofpocket drug costs. Second, I favor an approach that gives seniors choices and flexibility in choosing a plan that fits their individual needs. Third, I would like to see

a plan that offers prescription drug protection for rural areas, including guaranteeing the availability of at least two drug plans and allowing seniors to have the

convenience of accessing medicine through a main street pharmacy, the Internet, or

mail order.

15

I am confident that working together with President Bush, Congress can develop

legislation to help seniors with the costs of prescription drugs through a voluntary,

affordable plan that brings lower costs and more peace of mind. I look forward to

working on this important issue with all of the members of the Health Subcommittee and the entire Energy and Commerce Committee. Thank you.

Mr. BILIRAKIS. I thank the gentleman.I think we are all pleased

with the fact that we have had such a good turnout considering

that it is a day that we have no votes at all or the balance of the

week.

Mr. Engel is recognized for an opening statement.

Mr. ENGEL. Thank you, Mr. Chairman.

When I was first elected to Congress more than 12 years ago, I

spoke with my mother, who, by the way, Mrs. Kessler, is a resident

of Tamarac, Florida, for the past 24 years, and said to her, Mom,

what is the one thing we can do to help seniors in the country? And

she said, prescription drugs, prescription drugs, prescription drugs.

And that hasn’t changed. We haven’t moved very fast, but that still

hasn’t changed. When she tells me stories about her friends, people

cutting down on their pills because they can’t afford to take the required medication, cutting pills in half and things like that, we

know that this is certainly something whose time has come.

I commend the chairman, and I am glad we are finally on the

right track. This is the Congress, this is the year that we have to

move with prescription drugs. The American people don’t want partisan bickering or fighting, they want production, they want us to

produce. We have an obligation to produce for them. Whether it is

the senior citizens in my district in New York, or whether it is people in Florida, California, all across the country, senior citizens

need the help now. We have to make sure that we cover all seniors;

the poorest elderly, of course, but there are many, many Medicare

beneficiaries without drug coverage, and more than half of them

have an income of only $15,000 to $17,000 a year, and they don’t

qualify for Medicaid or State-run drug plans as we have in New

York. So clearly today’s living standards render these seniors incapable of bearing the full burden of their prescription drug needs.

I have made this a priority of mine, and I have offered legislation

to establish a Medicare prescription drug benefit, and as I mentioned, we cannot wait any longer. We have to do it now.

Senior citizens are becoming more and more dependent on medication to maintain their health and quality of life. And just the way

the chairman spoke about his mother and how medication kept her

alive, the same thing with my mother, who has had two heart surgeries. So it is not a matter of luxury. Seniors need help with prescription drugs. As they are living longer, they need more and more

help.

So I am very delighted to be part of this subcommittee and very

delighted that we are finally tackling the issue so that we can help

seniors like Mrs. Kessler and my mother and millions of other people across the country who are really looking to Congress for leadership.

I thank you, Mr. Chairman. I will submit my full statement for

the Record.

[The prepared statement of Hon. Eliot L. Engel follows:]

16

PREPARED STATEMENT OF HON. ELIOT L. ENGEL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NEW YORK

Mr. Chairman, I want to thank you for having this hearing today. Providing seniors with affordable access to prescription drugs has been a priority of mine for several years, and I am pleased we are moving forward. I have authored legislation

to establish a Medicare prescription drug benefit and feel that we cannot wait any

longer to provide relief to seniors who today cannot purchase the medicine they

need.

The evidence is clear. The elderly are becoming more and more dependent on

medication to maintain their health and quality of life. Medication has taken the

place of hospital stays and surgery in many instances, and also provides a means

of treatment that did not exist in the past. In essence, advancements in medical and

drug technology have changed how health care is delivered. Medicare has not kept

pace. We in Congress must act now to give seniors access to these new medical benefits.

We have all heard stories about seniors sitting at their kitchen table cutting pills

in half to extend the life of a prescription or taking their medicine every other day

to cut costs. We cannot let seniors continue to suffer financially or medically because

they cannot afford the medicine they need. In many instances, not taking the proper

amount of medication results in little or no benefit, leaving many in an even more

precarious situation and costing Medicare more in hospital stays and acute care expenses. We must assist seniors in obtaining affordable drugs that allow them to receive the full benefit of today’s medicinal technology. However, the question remains, what form should this drug benefit take?

Designing a prescription drug benefit in the context of Medicare reform is no

small undertaking. There are infinite considerations and many different visions of

the size and scope of the benefit. Many feel that providing the poorest elderly with

a benefit is as far as we should go or that catastrophic coverage is sufficient. On

the contrary, while we must provide for our poorest and most catastrophic cases,

average, middle-income seniors are suffering as well and in dire need of assistance.

In fact, more than half of Medicare beneficiaries without drug coverage have an average income of $15,000 to $17,000 a year. Thus, they do not qualify for Medicaid

or state-run drug plans. Clearly, today’s living standards render these seniors incapable of bearing the full burden of their prescription drug needs.

A question many are asking is whether or not to move forward with a Medicare

prescription drug benefit now or wait to completely overhaul the Medicare program.

I believe that we must act now to help our seniors. Medicare reform is certainly

needed, but it is likely several years down the road. Any benefit designed today will

give us invaluable experience and expertise in any reform model. I am pleased we

are here today, and I await the testimony from the panel in hopes that it will set

the stage to move ahead with a Medicare prescription drug benefit that will assist

our seniors in meeting their health care needs.

Mr. BILIRAKIS. I appreciate that.

The longtime chairman of this subcommittee, a very active chairman in those days, Mr. Waxman for an opening statement.

Mr. WAXMAN. Thank you very much, Mr. Chairman. I plan to be

active these days as well.

I am pleased that the very first hearing that you have called of

this subcommittee is on the question of the need for prescription

drug coverage. I think the large majority of this committee and indeed of this Congress recognize that we cannot fail to enact legislation that will provide seniors and disabled persons with the coverage they desperately need. We are going to hear some interesting

testimony today.

We will hear again that seniors as a group are most dependent

on prescription drugs because they are older and sicker than the

population as a whole. We are going to hear again that many seniors lack coverage, and even those who are covered are finding that

their coverage is eroding, whether it is retiree coverage provided by

their employers, Medigap coverage which is increasingly

unaffordable, or coverage through Medicare Choice plans. We will

hear again that seniors without coverage end up paying the highest

17

prices for their drugs, simply because they do not have the advantage of group purchasing power. But even buying at discounted

rates continues to be costly and beyond the means of many seniors.

Finally, we will hear again that although Medicaid makes a significant contribution in terms of drug coverage for the poor, and

supplementary State-run programs to provide drugs have been

tried to extend that coverage to higher-income seniors, generally

those programs geared just to lower-income people have had only

very limited success in even reaching their target population. We

will hear again what we all know: All seniors and disabled beneficiaries need a drug benefit, and they need it to be an assured benefit, a defined benefit, and an accessible and affordable benefit.

This isn’t only a problem for low income, it isn’t just a problem

for people in some areas of the country, it isn’t a problem that will

solve itself if we do not take action. Every day we delay makes the

problem worse. This is the reform of Medicare that we all know we

must make, and we need to do it now.

I want to congratulate you, Mr. Chairman, for holding this hearing, the very first of our subcommittee, in putting this issue right

there on our agenda.

I yield back the balance of my time.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Barrett for an opening statement.

Mr. BARRETT. Thank you, Mr. Chairman.

I want to join with my colleagues on this side of the aisle to

thank you for holding this hearing. I think you are showing real

leadership on this issue, and I appreciate that very much. I think

leadership is something that is desperately needed on this issue,

because I believe that President Bush’s plan falls woefully short of

what is needed for seniors in this country. To suggest that seniors who make over $12,000 or couples over $15,000 are too well off to receive any type of assistance I think

really is an insult to the millions of senior Americans who are

struggling to get by, primarily on their Social Security checks, and

are seeing double-digit inflation as they pay for the products that

they need most desperately in their lives.

I also think, as I think probably every member of this panel recognizes, that this is a real world issue. I have held many, many

town hall meetings on this issue, and this is the one issue where

people truly are affected and really are crying out for action at the

Federal level. I think it is our obligation to respond.

I am concerned, and I have to voice my concerns, although I am

strongly in favor of adding a Medicare benefit for pharmacy products, I think we still have to deal with the market distortions, because I believe with the marketing structure and the pricing structure here in the United States, we are, in effect, subsidizing seniors

throughout the world and others who use pharmaceutical products

throughout the world because of the pricing structures that take

place in other countries.

So if we were merely to transfer the cost of prescription drugs

from seniors to taxpayers, we would not be dealing with that market problem, and taxpayers don’t want us to be taken for a ride either. So I think, again, we have to, as Mr. Stupak was saying, be

more aggressive in finding market ways to deal with this problem.

18

Finally, one of the problems that I have encountered in my town

hall meetings throughout my neck of the woods in Wisconsin, there

are currently programs that the pharmaceutical companies offer

that will allow individuals with very low incomes to get some sort

of pricing relief. The problem is that the companies for whatever

reason have not come together to develop a common procedure to

get this type of relief. In other words, if you have a senior who goes

into a physician and needs three or four different products, and

those products come from different manufacturers, there is paperwork, and sometimes significant paperwork, that will go along with

getting that free or discounted rate from each of those pharmaceutical companies. I think if there are antitrust problems developing, as we have been told, I think that this committee should at

a minimum do something quite quickly to come up with a common

forum so that seniors who need these products right now can get

them without having to spend hours filling out paperwork.

Mr. BILIRAKIS. The gentleman’s time has expired. Please finish

up, Tom.

Mr. BARRETT. That’s it.

Again, thank you for holding the hearing.

Mr. BILIRAKIS. Thank you, sir.

Mr. Strickland, to close the opening statements, I trust.

Mr. STRICKLAND. Thank you, Mr. Chairman. I think all of us appreciate your personal concern about this important issue.

As many of you know, I represent a rural area. The great majority of my Medicare beneficiaries have never had an opportunity to

get drug coverage through a Medicare+Choice HMO, because my

area is terribly unattractive to HMOs. A small minority of my constituents did sign up for an HMO that served the most populous

section of my district, but many of them have been dropped by that

HMO during the last 2 years.

Precious few of my constituents have incomes high enough to afford coverage through a Medigap policy. A slightly greater percentage depend on a retiree health plan. Based on my countless conversations with seniors in my district, I know that there are very

large numbers of seniors who lack any drug coverage at all, and

the lack of an affordable and meaningful prescription drug benefit

is the most serious issue facing seniors in my district.

Every day that we delay action on this issue, we deny lifesaving

medications to our constituents. For us it is very difficult to imagine the pain of having to choose between taking the medicine we

need and paying our rent or buying groceries, and I doubt that any

of us on this panel have ever had to make such a decision. However, that is what some of our constituents are doing every day,

and while we wait, they face these circumstances.

I believe this circumstance is intolerable. Seniors are most likely

to have chronic illnesses. They are most likely to need multiple prescriptions. They are among the group least likely to have adequate

prescription drug coverage. They are the group most likely to be on

fixed incomes, and they are the group that is paying the highest

price for prescription drugs in this country. This is a moral issue.

It will define whether or not we are a moral people.

I am encouraged to read in The New York Times comments by

Senator Grassley, and this gives me courage, because it appears

19

that if they do the right thing on the Senate side and we do the

right thing on this side, something good can happen. Senator

Grassley is quoted as saying, I plan to work with Finance Committee members on both sides of the aisle and with our President

to get something done before August. And then, drug benefits

should be part of Medicare, not a freestanding supplement, and

should be available and affordable to every older American, and I

would hope that Senator Grassley’s advice would be taken to heart

by all of us as we proceed to deal with this difficult issue.

Thank you, Mr. Chairman, and I yield back my time.

Mr. BILIRAKIS. I thank the gentleman.

[Additional statement submitted for the record follows:]

PREPARED STATEMENT OF HON. LOIS CAPPS, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF CALIFORNIA

Mr. Chairman, I would like to thank you for holding this hearing on one of the

most pressing healthcare issues facing our country today, prescription drug coverage.

When Medicare was created in 1965, seniors were more likely to undergo surgery

for major health problems than to use prescription drugs. Today, prescription drugs

are often the preferred, and sometimes the only, method of treatment for many illnesses and diseases.

In fact, 77% of all seniors take a prescription drug on a regular basis. And yet,

nearly 15 million Medicare beneficiaries have no insurance coverage for prescription

drugs whatsoever.

Most of us here 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

doesn’t include a drug benefit. I don’t think anyone here would voluntarily choose

a plan for their family that doesn’t provide such coverage. And Medigap policies designed to fill this need are 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.

And 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 six years in a row.

I have been working on this issue for more than two years, and I have been frustrated by the lack of progress. As we fall to develop effective solutions the problem

continues. Congress can no longer stand idly by.

As Congress considers different plans to tackle this problem, I believe that any

worthy proposal would provide certain key components.

A strong plan should be universal, voluntary, affordable, accessible to all, and

based on competition. It must also address the issue of catastrophic coverage.

In the last Congress, many worthy legislative proposals were raised. There was

the Allen bill, the Stark/Dingell bill, and the Pallone bill. Among others, I myself

cosponsored H.R. 4607, the Medicare Prescription Drug Act of 2000 introduced by

my colleague and good friend Representative Anna Eshoo.

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 included 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 used proven market-based approaches to promote competition and

drive down prices. OPM (Office of Personnel Management) would administer the

plan in coordination with HCFA. I hope she will introduce this bill again in this

Congress.

Mr. Chairman, Democrats have offered many different approaches to this problem, but have not seen a legitimate proposal from the other side. It would be my

hope that we could work together, in a bipartisan fashion as we craft the best benefit possible for older Americans.

As I think about the countless seniors on the Central Coast of California that

have shared their personal stories with me about crushingly high drug prices, I

know in my heart that prescription drug coverage is not a political issue. It is simVerDate 11-MAY-2000 09:49 Oct 03, 2001 Jkt 072927 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 E:\HEARINGS\71491 pfrm09 PsN: 71491
20

ply the right thing to do, as we seek to honor our seniors and care for them as they

move into the later phases of life.

I thank the 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. Let us go right into the panel now. I would like

to introduce the panel.

Mrs. Sylvia Kessler from Tamarac, Florida, is here on behalf of

the National Committee to Preserve Social Security and Medicare;

Mr. John Jones, the Vice President of Legal and Regulatory Affairs

of PacifiCare Health Systems; Mr. Robert Moroni, Assistant Director, Health Care Plans, General Motors Corporation; Diane Rowland, Kaiser Family Foundation; Bill Weller, Assistant Vice President and Chief Actuary, Health Insurance Association of America;

Barbara Buckley, Assemblywoman from the State of Nevada; and

James F. Smith, Senior Vice President of Health Care Services,

CVS Corporation, and he is here on behalf of the National Association of Chain Drug Stores.

Ladies and gentlemen, I will turn the clock on for 5 minutes. If

you are certainly in the middle of something, I am not going to stop

you, but hopefully you would try to stay within that. Your written

statements are a part of the record, as you may know, so hopefully

you will complement or supplement those written statements.

We will kick it off with Mrs. Kessler. Welcome, ma’am.

STATEMENTS OF SYLVIA KESSLER, ON BEHALF OF THE NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY AND

MEDICARE; JOHN JONES, VICE PRESIDENT, LEGAL AND

REGULATORY AFFAIRS, PACIFICARE HEALTH SYSTEMS;

ROBERT D. MORONI, ASSISTANT DIRECTOR, HEALTH CARE

PLANS, GENERAL MOTORS CORPORATION; DIANE ROWLAND, KAISER FAMILY FOUNDATION; WILLIAM WELLER, ASSISTANT VICE PRESIDENT AND CHIEF ACTUARY, HEALTH

INSURANCE ASSOCIATION OF AMERICA; BARBARA E. BUCKLEY, ASSEMBLYWOMAN, STATE OF NEVADA; AND JAMES F.

SMITH, SENIOR VICE PRESIDENT, HEALTH CARE SERVICES,

CVS CORPORATION, ON BEHALF OF NATIONAL ASSOCIATION OF CHAIN DRUG STORES

Mrs. KESSLER. Good morning, Mr. Chairman and the distinguished members of the committee. My name is Sylvia Kessler, and

I am a resident of Tamarac, Florida, and a member of the National

Committee to Preserve Social Security and Medicare. I am here

today to share my personal story with you. My hope is that you

will understand how important my daily prescription drugs are to

my health, and what a prescription drug plan under Medicare

would mean to someone like me.

I am an 81-year-old grandmother. I have worked very hard for

my entire life to make sure that I would not be a burden to my

children as I get older. The reason that I am not a burden to them

is because of the Medicare program, which is there to take care of

me when I get sick or have emergencies. For example, I recently

demolished my only car in a bad accident and suffered several

bruises and minor injuries. Thank God, with all of the cost involved

in the accident, Medicare paid for the emergency care that I needed. Without Medicare, there would have been real problems. There

21

is no way that I could have afforded the costs of treatment on my

own.

I believe that a large part of my health is due to the prescription

drugs that I take every day. I take nine pills every day for a variety of conditions, including heart disease and high cholesterol.

These drugs have allowed me to remain active and to contribute to

my community and share in the lives much my children and grandchildren.

However, it has become more and more difficult each month to

afford them. My prescription drugs cost almost $2,300 a year,

which is over 10 percent of my annual income. The only way that

I can make ends meet is to work two part-time jobs, one at a local

flea market and the other for my local board of elections. Without

these two part-time jobs and some financial help from my children,

thank God, I would have to choose between food and my medications, and I don’t think I could make it without either of them for

very long. I worry about what will happen when I can no longer

work.

So now what are my options? Well, I have tried Medicare managed care for a while, but I could not get the specialty care that

I needed. I now pay for a Medigap plan that pays for some of my

medical expenses, but it does not cover my prescription drugs.

Now, I know that some Medigap plans offer prescription drug coverage, but I can’t afford that type of coverage.

There just aren’t a lot of options for people like me. My daughter,

who is a nurse practitioner, she made me get off HMO and hopes

to open up a clinic in the hills of Georgia and Tennessee for poor

people who do not even know about Medicare and Medicaid prescriptions. They don’t know anything about it.

Please don’t think that I am asking for a handout. I have been

a hard-working American for my entire life, and now I am in need

of a little help. I am asking you, Mr. Chairman, and everybody

here today to please do everything that you can to make sure that

seniors can have access to their prescription drugs so that they can

have healthy lives and continue to work. I hope that you and all

of our elected officials from both parties can work together to provide access to prescription drugs for all seniors. I know it is the

right thing to do. Thank you for your time.

Mr. BILIRAKIS. Thank you very much for your time, Mrs. Kessler.

Mrs. KESSLER. Thank you for having me.

[The prepared statement of Sylvia Kessler follows:]

PREPARED STATEMENT OF SYLVIA KESSLER

Good Morning, Chairman Bilirakis and distinguished Members of the Committee.

My name is Sylvia Kessler and I am a resident of Tamarac, Florida and a member

of the National Committee to Preserve Social Security and Medicare. I’m here today

to share my personal story with you. My hope is that you will understand how important my daily prescription drugs are to my health... and what a prescription

drug plan under Medicare would mean to someone like me.

I am an 81-year-old grandmother. I have worked very hard for my entire life to

make sure that I would not be a burden to my children as I get older. The reason

that I am not a burden to them is because of the Medicare program, which is there

to take care of me when I get sick or have emergencies. For example, I recently demolished my only car in a bad accident and suffered several bruises and minor injuries. Thank God, with all of the cost involved in the accident, Medicare paid for the

emergency care that I needed. Without Medicare, there is no way that I could have

afforded the costs of treatment on my own.

22

I believe that a large part of my health is due to the prescription drugs that I

take every day. I take 9 pills every day for a variety of conditions, including heart

disease and high cholesterol. These drugs have allowed me to remain active, contribute to my community, and share in the lives of my children and grandchildren.

However, it has become more and more difficult each month to afford them. My prescription drugs cost almost $2,300 a year—which is over 10 percent of my annual

income. The only way that I can make ends meet is to work two part-time jobs— one in a local flea market and the other for my local Board of Elections. Without

these two part-time jobs and some financial help from my children, I would have

to choose between food and my medications. And I don’t think I could make it without either of them for very long. And I worry about what will happen when I can

no longer work.

So what are my options? Well, I have tried Medicare managed care for a while,

but I could not get the specialty care that I needed. I now pay for a Medigap plan

that pays for some of my medical expenses, but it does not cover any prescription

drugs. Now I know that some Medigap plans offer prescription drug coverage, but

I can’t afford that type of coverage. There just aren’t a lot of options for people like me.Please don’t think that I am asking for a handout. I have been a hard working

American for my entire life and now I am in need of a little help. I am asking you,

Mr. Chairman, and everybody here today to please do everything that you can to

make sure that seniors can have access to their prescription drugs so that they can

have healthy lives. I hope that you and all of our elected officials from both parties

can work together to provide access to prescription drugs for all seniors. I know it

is the right thing to do. Thank you for your time.

Mr. BILIRAKIS. Mr. Jones.

STATEMENT OF JOHN JONES

Mr. JONES. Mr. Chairman and members of the subcommittee,

thank you very much for the opportunity to comment on issues related to providing prescription drug coverage for Medicare beneficiaries.

I am John Jones, Vice President of Legal and Regulatory for Prescription Solutions. I am a pharmacist, and I have been in practice

for 25 years.

Prescription Solutions is a pharmacy benefit management company. It was founded in 1993 as a subsidiary of PacifiCare Health

Care Systems. We serve more than 5 million individuals, including

members of managed care organizations and union trusts, as well

as retirees, third-party administrators, and employer groups. We

fill over 2 million prescriptions per month for our Medicare beneficiaries. Our goal is to provide the highest quality drug coverage

in a cost-effective manner.

Our parent company, PacifiCare, is one of the Nation’s largest

health care services companies. Primary operations include managed products for employer groups and Medicare beneficiaries in

eight States and Guam, serving approximately 4 million members.

One million of these members are in our Medicare health plan, Secure Horizons.

Prescription coverage is one of the main reasons beneficiaries

support the Medicare+Choice program. We believe that the success

of a pharmacy benefit program rests on many methods to provide

quality and safety, along with cost management.

Now, let me tell you a few of the tools that we use. We employ

a quality improvement program. This is an integrated approach to

prevention or management of specific diseases that involves physicians, pharmacists and patients. These programs often encourage

the use of medication and can increase the initial cost of care, but

will decrease the cost of overall health care in the long term.

23

Our beta blocker effort is an example of such a program. National guidelines identify the importance of beta blockers in reducing the risk of a second heart attack.

Our program has succeeded in getting 85 to 90 percent of patients on beta blockers who need to be on them. The national average per use of beta blockers is only about 70 percent.

We use a strong clinically based formulary. The drug formulary,

of course, is a list of drugs that have been reviewed for safety and

efficacy. The list is maintained by our pharmacy and therapeutics

committee, which is comprised of physicians who use the formulary

to treat their own patients. Nonformulary drugs may be prescribed

and covered, but they do require preauthorization. However,

preauthorizations represent only 1 percent of the total paid prescriptions for Prescription Solutions.

Another tool is our on-line computer review. These reviews are

made to identify inappropriate prescribing and dispensing of prescription drugs.

Provider education is also important. We regularly educate physicians and pharmacists within the network to provide up-to-date

information on formulary changes and significant clinical developments in the pharmaceutical area. Keeping all providers well informed helps ensure positive outcomes for our members.

Prescription Solutions achieves its most significant savings from

effective contract negotiations with manufacturers. Aggressive contracting for classes of medications that have several me-too-type

drugs results in substantial discounts to the health plan. Pharmaceutical manufacturers are willing to discount drugs if the drug

benefit design and formulary management results in a larger market share and increased sales.

Our mail service pharmacy is another key cost control and quality component. The fully automated pharmacy has highly trained

pharmacists who oversee the system’s multiple quality checks to

identify and prevent errors. We employ a generic sampling program to encourage the use of generic drugs which offer exceptional

value and are considered first-line therapy for a variety of diseases.

With our program we supply the physician with samples of widely

used and well-tested generic medications that effectively treat

many diseases. The physician provides the patient with a prescription for the generic medication, along with the samples.

Finally, our real-time audit program is connected to our claims

system. We have developed proprietary software which incorporates filters to identify those claims that fall outside of normal

pharmacy practice. These claims pop up on our audit team’s computers for immediate action.Taking immediate action allows us to

follow through on claims flagged as possible errors and stop payment on those that are indeed erroneous so we don’t pay them at

all.

In conclusion, the tools I have described to you are just a few

that are responsible for the success of our pharmacy benefit program. They are critical to making a quality Medicare drug benefit

affordable.

Thank you, and I would be happy to answer any questions.

[The prepared statement of John Jones follows:]

24

PREPARED STATEMENT OF JOHN JONES, PRESCRIPTION SOLUTIONS

INTRODUCTION

Mr. Chairman and members of the subcommittee, thank you very much for the

opportunity to comment on issues related to providing prescription drug coverage

for Medicare beneficiaries. I am John Jones, Vice President of Legal and Regulatory

for Prescription Solutions, based in Costa Mesa, California.

BACKGROUND

Prescription Solutions, a pharmacy benefits management (PBM) company, was

founded in 1993 as a subsidiary of PacifiCare Health Systems, Inc. (PHS). As one

of the leading managed care PBMs in the U.S., Prescription Solutions serves more

than five million individuals, including members of managed care organizations and

union trusts, as well as retirees, third-party administrators, and employer groups.

Our goal is to provide the highest quality drug coverage in a cost-effective manner.

Access and affordability are the cornerstones of everything we do. Our company

manages over $2 billion of prescription drugs annually. With the opening of our

newest mail-service facility in Carlsbad, California, we anticipate our annual prescription fulfillment volume to increase from 17,000 to approximately 45,000 prescriptions a day.

Our parent company, PHS, is one of the nation’s largest health care services companies. Primary operations include managed products for employer groups and

Medicare beneficiaries in eight states and Guam serving approximately 4 million

members. One million of these members are in our Medicare health plan, Secure

Horizons. PHS and Prescription Solutions strive to provide a high quality, cost-effective pharmacy benefit for our commercial members and Medicare beneficiaries. (Attachment A outlines the structure of our Medicare+Choice drug benefit in eleven of

the markets we serve.)

Prescription benefits have been documented as one of the main reasons

Medicare+Choice is so positive for eligible beneficiaries. We believe that the success

of a pharmacy benefit program rests on a multitude of business functions. Today,

I would like to focus on areas that we believe are the most important factors in providing a pharmacy benefit: quality and safety, and cost management.

QUALITY & SAFETY

Our processes for quality and safety encompass several elements: an overarching

quality assurance program, formulary development, and various other techniques

such as on-line computer review, and provider education.

Quality Initiative (QI) improvement programs are an integral part of an effective

strategy for a PBM. The QI program is an integrated approach to prevention or

management of specific diseases that involves physicians, pharmacists, and patients.

We improve quality of care and quality of life, and at the same time reduce medical

and pharmacy costs. These programs often encourage the use of medication and can

sometimes increase the initial cost of care, but will decrease cost of overall health

care over the long term. Two recent programs have shown that QI programs are

making a difference. The use of beta-blockers after a first heart attack is strongly

supported by research to prevent a second heart attack. National guidelines are in

place that recognize the need for these medications. Our program has demonstrated

an 85-90% compliance with this standard. The national average for the use of beta

blockers is only about 70%. Another Prescription Solutions program designed to encourage the use of ACE inhibitors for patients with congestive heart failure has

shown equal success. We are able to exceed the national compliance rate by identifying patients with these conditions and communicate with their personal physicians on the use of the most efficacious drugs.

Prescription Solutions’ commitment to quality also is evidenced by voluntary compliance with standards set forth by the National Committee on Quality Assurance

(NCQA) and with Health Plan Employer Data and Information Set (HEDIS). Currently, PBM’s are not required to comply with either NCQA or HEDIS standards.

However, at Prescription Solutions, we adhere to the standards and criteria to

measure quality.

The use of formularies is one of our quality enhancement tools. By our definition,

a drug formulary or preferred drug list is a compilation of drugs that have been reviewed for safety and efficacy. Contrary to the popular belief that formularies exist

simply to control costs of an individual drug, there are many aspects to proper administration of a formulary that have more to do with quality and clinical effectiveness.

25

For example, in a recent case, a request for a non-formulary antibiotic medication,

Vancomycin oral, was received in the prior authorization department. The physician

had prescribed this drug for a serious knee infection. Due to the way this oral medication works, it could not get into the blood stream in a high enough concentration

to effectively treat the infection. Subsequently, our systems identified this as a care

issue, and we contacted the doctor to change the medication to an intravenous form.

Notwithstanding the fact that the intravenous drug was significantly more costly

than the oral medication, the latter would have had no benefit and potentially could

lead to a more serious problem, including the need for surgery.

Often times, formularies are misunderstood. Requests for non-formulary drugs

only represent one percent of total claims. Even then, Prescription Solutions employs prior authorization to determine approvals. In fact, of the one percent of requests for non-formulary drugs, 75 percent are approved.

With the recent advent of direct-to-consumer (DTC) advertising, demand for

‘‘newer and better’’ medications has dramatically increased the demand for drugs

new to the market. In many cases, the physicians reviewing these products for our

formulary have found that they are not always better than existing treatments.

Physicians are often approached by patients with specific requests for medications

they have seen on TV or in print media. The patient may indeed have a legitimate

need for a medication to treat an illness, but it is often preferable to use drugs that

have a proven track record with regard to safety and effectiveness. In order to keep

a patient happy, many physicians have reported that they are likely to prescribe a

requested drug, unless they believe that the drug may cause harm. In many cases,

the new drug is not significantly better than existing products that can be purchased at a fraction of the cost. For example, Celebrex is widely promoted for arthritis at a retail price of about $75 per month vs. generic ibuprofen or naproxen at

about $10 per month. In clinical studies, these drugs have shown equivalent response in the patients tested.

Another quality control we use at Prescription Solutions is on-line computer review, known as ‘‘edits,’’ to identify inappropriate prescribing or dispensing of prescription drugs. In many cases, on-line edits identify potential inappropriate drug

interactions or possible dosing discrepancies. For reasons that can vary, physicians

sometimes prescribe medications in a manner that varies from prescribing guidelines. For example, there are many drugs that are manufactured to be taken only

once a day. However, if a physician orders a twice-a-day dose, our edits will notify

the pharmacy of the correct dosage.

Frequent communication to physicians and pharmacists within the network provides up-to-date information on formulary changes and any significant clinical developments in the pharmaceutical arena. Warnings on new drugs, as well as drug

recalls, are communicated on a regular basis. Keeping all providers well-informed

helps ensure positive health outcomes for our members.

PRESCRIPTION DRUG COST MANAGEMENT

The key elements to prescription drug cost management are: formularies, provider

contracts, mail services, generic and over-the-counter drug promotions, and audits.

In addition to the quality controls referred to earlier, drug formularies are valuable tools to control costs. In today’s environment, formularies have proven to be

necessary to maintain affordable pharmacy benefits. On the cost management side,

a formulary is designed to leverage the collective buying power of large member organizations. The list is maintained by the Pharmacy and Therapeutics (P&T) Committee, comprised mostly of practicing physicians, along with medical directors from

the health plans. Decisions are made based upon the clinical expertise and experience of the physicians on the committee. This list is the basis for our pharmacy benefit and is made available to our members.

Most formularies have 1000 to 2000 medications available. The P&T Committee

meets every two months to decide to add or replace medications on the list. The majority of AIDS and cancer medications are automatically added without restriction

of use. New drugs are reviewed as requested by network physicians. Unique, breakthrough drugs tend to get higher priority review.

Prescription Solutions contracts with over 50,000 pharmacies nationwide. Although we provide fairly broad pharmacy access to our members, we command competitive discounts in each region where we have significant membership. However,

we achieve the most significant savings from effective contract negotiating with

manufacturers.

Strategic purchasing has contributed to lower drug costs and a drug benefit that

is affordable. Aggressive contracting for classes of medications that have several

‘‘me-too’’ type drugs results in substantial discounts to the health plan. PharmaVerDate 11-MAY-2000 09:49 Oct 03, 2001 Jkt 072927 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 E:\HEARINGS\71491 pfrm09 PsN: 71491
26

ceutical manufacturers are willing to discount drugs if the drug benefit design and

formulary management results in a larger market share and increased sales. Deep

discounts by the manufacturers are available only to those PBMs that demonstrate

a value to the manufacturers in achieving those goals.

The Prescription Solutions mail service pharmacy is another key cost control component. The fully automated pharmacy is staffed with highly trained pharmacy personnel who oversee the systems’ multiple checks to identify and prevent errors. Patients can order medications 24 hours a day, either by phone or on-line. With mailservice, members have the convenience of pharmacy refills delivered to their door,

eliminating trips to the pharmacy and waits for their prescriptions. Our members

also save money when using mail-service by paying lower co-payments. Additionally,

where appropriate, our mail service pharmacists work with the patient’s physician

to determine if one of the plans’ formulary drugs can be used if equivalent to the

member’s non-formulary drug. These services are especially important to our Medicare enrollees.

Pharmacists and technical personnel provide personal, high quality services in a

high tech/interactive environment. Automation allows for a high degree of accuracy

and efficiency. However, automation is not successful in the absence of direct member communication. Patients are provided with detailed, personalized instruction

about their medication, along with a toll-free number to a Prescriptions Solutions

pharmacist for a personal consultation. This service provides members a convenient

and easy way to refill their prescriptions. We field up to 12,000 calls per day on

our toll-free personal assistance line to help our members with their prescriptions.

This toll-free service is used by 25 percent of our Secure Horizons (Medicare)

members. Seventy-five percent of all prescriptions filled by our mail service are for

our Medicare members. Members that use the mail service pharmacy have stated

that they are pleased with the convenience and cost-savings. Members receive a 90-

day supply of medications for the price of a 60-day supply. The average Medicare

member uses on average two prescriptions per month; by using mail service, they

will save about eight copays per year and depending upon the market, approximately $70-100.

Generic drugs also offer exceptional benefits and are often considered first line

therapy for a variety of diseases. Prescription Solutions employs a generic sampling

program to encourage the use of these high value drugs as a balance to traditional

sampling programs. Currently, pharmaceutical companies give providers free samples of new, branded drug products that the pharmaceutical companies are anxious

to promote. In many cases, these drugs offer little or no advantage over current

tried and true medications. When samples of new drugs are available, physicians

are often tempted to grab a starter package for a patient to try, instead of writing

a prescription for a generic medication. With our program, we will supply the physician with starter supplies of widely-used and well-tested generic medications that

provide an appropriate starting point for many diseases.

Other generic or over-the-counter programs, such as our migraine management

program, encourage the use of non-prescription drugs for migraine. Studies have

shown that some non-prescription products are just as effective as their expensive

prescription counterparts for the majority of people who use them. Promotion of programs like these helps control the spiraling cost of pharmaceuticals without sacrificing quality of care.

Fighting fraud is an ongoing battle. Each year, billions of dollars are wasted for

fraudulent prescription claims. Roughly, three percent of all pharmacy claims are

fraudulent. At Prescription Solutions, an organized effort to combat fraud began two

years ago and recently resulted in the arrest of a pharmacist in California that may

have been involved in over $1 million of fraudulent claims. In order to stop fraud,

real time audits are necessary. Occasionally, incorrect claims are simply mistakes,

but many times, these are deliberate attempts to defraud the system. Real time audits allow us to stop payment on erroneous claims.

Our ‘‘real time’’ audit program is connected to our claims system. Prescription Solutions has developed proprietary software, which incorporates filters to identify

those claims that fall outside of normal pharmacy practice. These claims pop up on

our audit teams’ screens for immediate action. This does not hold up the payment

process for normal claims that pass through the system. Taking immediate action

allows us to follow-through on claims flagged as possible errors and stop payment

on those that are indeed erroneous.

SUMMARY

In conclusion, our success at managing pharmacy costs is due to an integrated approach. (This approach is illustrated in Attachment B.) We target pharmaceutical

27

companies, physicians, members, prescription plan design and retail pharmacies.

We are able to effectively forecast the cost of providing pharmacy benefits based on

our experience. When necessary, benefits are flexed in response to market issues.

Our strong clinical foundation means we emphasize appropriate drug utilization,

which drives cost-effective care. This unique combination of clinical expertise and

health plan experience is what qualifies us to effectively influence pharmacy costs

over the long-term. Our primary goal is to keep pharmacy benefits accessible and

affordable for all Americans well into the 21st century. We look forward to working

with Congress and the Administration in the design and implementation of a drug

benefit for all Medicare beneficiaries.

Attachment A

Secure Horizons (Medicare+Choice Plan)

2001 Drug Benefit Examples

Location Secure Horizons Coverage

Dallas, Texas ....................... $5 copay per generic drug and $25 copay per brand name drug. Coverage of generic and

brand name drugs is subject to a combined annual limit of $1000. Formulary applies.

Mail order available for $15 generic and $50 brand. Annual limit applies.

Denver, Colorado ................. $11 copay per generic drug, $30 per brand name drug, $60 per generic or brand non-formulary drug. Coverage of generic drugs is unlimited. Coverage of formulary brand and

non-formulary/generic drugs is subject to an annual limit of $1300.

Houston, Texas .................... $5 copay per generic drug and $20 copay per brand name drug. Coverage of generic and

brand name drugs is subject to a combined annual limit of $1200. Formulary applies.

Mail order available for $15 generic and $50 brand. Annual limit applies.

King County, Washington .... No supplemental drugs coverage.

Las Vegas, Nevada .............. $7 copay per generic drug and $15 copay per brand name drug. Coverage of generic drugs

is unlimited. Coverage of brand name drugs is subject to an annual limit of $1500. Formulary applies. Mail order available $14 generic and $30 brand. Annual limit applies.

Los Angeles, California ....... $7 copay per generic drug and $14 copay per brand name drug. Coverage of generic drugs

is unlimited. Coverage of brand name drugs is subject to an annual limit of $2000 per

year. Formulary applies. Mail order available for $14 generic and $30 brand. Annual limit

applies.

Oklahoma City, Oklahoma ... $10 per generic drug and $25 copay per brand name drug. Coverage of generic and brand

name drugs is subject to an annual limit of $1000. Formulary applies. Mail order available $20 generic and $50 brand. Annual limit applies.

Orange County, California ... $7 copay per generic drug and $14 copay per brand name drug. Coverage of generic and

brand name drugs is subject to a combined annual limit of $2000 per year. Formulary applies. Mail order available for $20 generic and $40 brand. Annual limit applies.

Portland, Oregon .................. No supplemental drugs coverage.

San Diego, California .......... $7 copay per generic drug and $14 copay per brand name drug. Coverage of generic and

brand name drugs is subject to a combined annual limit of $2000 per year. Formulary applies. Mail order available for $20 generic and $40 brand. Annual limit applies.

San Francisco, California .... $8 copay per generic drug and $16 copay per brand name drug. Coverage of generic and

brand name drugs is subject to a combined annual limit of $1200 per year. Formulary applies. Mail order available for $30 generic and $60 brand. Annual limit applies.

28

29

Mr. BILIRAKIS. Thank you, Mr. Jones. And we will have those

questions.

Mr. Moroni, please proceed, sir.

STATEMENT OF ROBERT D. MORONI

Mr. MORONI. Good morning. My name is Robert Moroni. I am the

Assistant Director of Health Care Plans for General Motors.

Mr. BILIRAKIS. Pull the mike closer, Mr. Moroni.

Mr. MORONI. Is that better?

General Motors is the largest private purchaser of health care in

the United States, offering enrollees a variety of health plan options including self-insured traditional and PPO options and insured HMOs. General Motors’ health plan covers 1.2 million salaried and hourly employees, retirees, surviving spouses and their

families. Of the total enrollment, 75 percent, which equates to

about 900,000 enrollees, are the self-insured traditional and PPO

options for which General Motors pays the prescription drug directly.

In 2000, GM spent nearly $4 billion to provide health care coverage to its total population. Of that amount nearly $900 million

was spent on just our self-insured prescription drug coverage. That

was a 19 percent increase over our prescription drug expense for

1999.

Approximately $700 million of the $900 million was for retirees’

surviving spouses and their families. Under our current design, retirees’ surviving spouses and their dependents pay the same copays

as their employee counterparts even though they account for proportionately more of the expense.

The current design of our prescription drug coverage is often referred to as a card program, with enrollees issued ID cards that

they present to local pharmacies to obtain covered prescription

drugs. The enrollee pays a copay at the time of dispensing, and the

balance is billed to General Motors through our pharmacy benefit

managers, also known as PBMs. GM uses two PBMs. We believe

these PBMs provide some level of quality control and cost containment through a managed network of retail pharmacies and a mail

order house. They have put a number of components in place to encourage medically appropriate, cost-effective prescribing and dispensing practices.

Among the tools our PBMs use are programs that encourage prescribed drugs that are safe when taken by the elderly; encourage

the use of formulary medications; profile physicians; detect in real

time severe drug-to-drug interactions, which are not that uncommon when patients see more than one physician; provide disease

management; optimize dosing; and deliver generic substitutions

when appropriate.

Although this is not an exhaustive list, it will give you a feel for

some important components of a well-managed pharmacy program.

But even with these comprehensive program components, we are

extremely concerned about our continuing ability to provide our

current level of prescription drug coverage. Prescription drugs are

the most inflationary component of our health care costs. Year-toyear increases for the past 3 years have averaged more than 19

30

percent, and future costs are projected to increase at even more

alarming rates.

Prescription drugs do not operate according to the traditional

free market model. Consumerism is limited. Patients are inundated

by direct-to-consumer advertising, yet they lack the full information to make fully informed decisions about the risks, benefits and

cost of a particular drug. We believe it is a challenge for providers,

payers and consumers to ensure that prescription decisions are

clinically appropriate and cost-effective.

Other concerns regarding escalating drug costs are—ongoing of

market exclusivity—pharmaceutical manufacturers’ pricing practices in the U.S. which produce higher prices than in Europe and

Japan and other countries in North America.

Breakthrough drug technology definitely offers the potential for

increased longevity and functionality. However, new and replacement therapies for existing drugs often result in cost increases that

are out of proportion with the benefits to the patient.

High drug costs have a negative impact on international competitiveness of U.S. firms that provide prescription drug coverage. It

should not come as a surprise that such firms would consider implementing increasingly stringent controls or discontinuing coverage altogether.

General Motors supports the addition of a prescription drug component to Medicare. We regard this coverage as necessary not only

for the treatment of illness and injury, but because in many cases

prescription drugs are the most clinically appropriate and cost-effective treatment option. We believe Medicare prescription drug

benefits should be universal and should employ quality control features to ensure that drugs being covered are necessary, appropriate

and effective. The Medicare program should have effective mechanisms that can maintain spending at a manageable level. It should

have broad-based equitable financing. And a program with less

than universal coverage would be unfair to enrollees and employers

who have paid into Medicare for many years, and providing coverage only for those who have no coverage through employers

would penalize responsible employers who have voluntarily provided prescription drug coverage in the past.

Thank you.

[The prepared statement of Robert D. Moroni follows:]

PREPARED STATEMENT OF ROBERT D. MORONI, ASSISTANT DIRECTOR, HEALTH CARE

PLANS, GENERAL MOTORS CORPORATION

Good morning. My name is Robert Moroni and I am the Assistant Director— Health Care Plans, for General Motors Corporation. In this capacity, I oversee the

GM self-insured health care plans including coverage for prescription drugs. I have

been employed by General Motors for almost twelve years, the last 6 of which have

been in our Health Care Activity. My professional background is as a certified public

accountant. I hold a Masters Degree in Health Services Administration from the

University of Michigan’s School of Public Health.

Background

By way of background, under our health care programs we offer enrollees a variety of health plan options, including self-insured ‘‘Traditional’’ and Preferred Provider Organization options and Health Maintenance Organizations (the latter being

insured). General Motors’ health plans cover over 1.2 million salaried and hourly

employees, retirees, surviving spouses and their families. Of the total enrollment,

75% (almost 900,000 enrollees) are in the self-insured Traditional and PPO plans,

for which GM pays prescription drug expenses directly. We require that the HMOs

31

offered to our people provide prescription drug coverage, but it varies in detail from

HMO to HMO. We estimate that our HMO premiums include $300 million in prescription drug costs. Since we offer over 130 HMOs nationwide, I think you can appreciate why my comments today will be limited to our self-insured coverage which,

after all, addresses the bulk of our program enrollees.

In calendar year 2000, GM spent approximately $3.9 billion to provide health care

coverage for its total population. Of that amount, nearly $900 million was for our

self-insured prescription drug coverage. That was a19% increase over our prescription drug expense for 1999. Approximately $700 million (or $1,289 per enrollee) of

the $900 million was for retirees, surviving spouses and their families.

General Motors has been providing prescription drug coverage for its retirees, surviving spouses and their families since 1971. As noted, this group accounts for the

vast majority of our prescription drug expense. Under the current design, retirees,

surviving spouses and their dependents pay the same co-pays as their employee

counterparts, even though they account for proportionately more of the expense.

Coverage Design

The current design of our prescription drug coverage is often referred to as a

‘‘Card Program’’, with enrollees issued ID cards that they present at local pharmacies to procure covered prescription drugs. The enrollee pays a co-pay at the time

of dispensing and the balance is billed to GM through our carriers or pharmacy benefit manager (PBM). We pay the ingredient costs, dispensing fees and administrative fees. There are both retail and mail order options, the latter option being of

particular benefit to those with long term ‘‘maintenance drug’’ needs and/or limited

access to a local pharmacy.

There are different co-pays for our hourly and salaried programs. Currently, hourly program ‘‘Traditional’’ and PPO option enrollees pay flat $5 or $3 retail co-pay

and enrollees of both options pay a $2 mail order co-pay for each prescription or

refill. The salaried program co-pay is 25% of the prescription cost at retail with a

$15 minimum and $25 maximum. If a generic drug is chosen the retail co-pay is

$5. The salaried mail-order co-pay is $20 for brand-name drugs and $10 for generics.

It should be noted that with mail order a 90-day supply is available, versus a 34-

day supply at retail. We have what I refer to as a ‘‘preferred formulary’’—actually

an open formulary where we do not restrict the choice of drug dispensed but we try

to influence physician prescribing behavior and/or patient selection, as I will describe shortly.

GM uses two PBMs, Merck-Medco and Blue Cross/Blue Shield of Michigan. We

believe these PBMs provide some level of quality control and cost containment

through a managed network of retail pharmacies and a mail order house. They have

put a number of components in place to encourage medically-appropriate and costeffective prescribing and dispensing practices. Many of these are ‘‘transparent’’ to

the enrollee and/or voluntary, and operate on a pharmacist-to-physician interaction.

Among the tools our PBMs use are:

• Partners for Healthy Aging—an enrollee/patient and physician education effort

which provides information on issues of pharmaceutical safety and use among

the elderly.

• Therapeutic Interchange—contacts with physicians to encourage use of formulary

medications

• Physician Profiling and Peer Rating—an expansion on the above which provides

feedback on quality and utilization performance.

• Severe Drug-Drug Interaction Edits—on-line, electronic feedback at the time of

dispensing that prevents dispensing drugs that could represent life-threatening

interactions. This situation often arises when an enrollee is seeing more than

one physician and the respective physicians are not aware of all of the drugs

the enrollee is taking. When one of these cases arises, the pharmacist contacts

the prescribing physician and reviews the facts of the case before dispensing the

potentially conflicting medication.

• Digestive Health Solutions—addressing unique concerns of patients with gastrointestinal disease. It provides educational materials to enrollees and encourages

appropriate prescribing practices by physicians.

• Dose Optimization—which simplifies the dosing regiment for patients and capitalizes on cost savings of taking one pill versus two.

• Generic Substitution Component—When an appropriate generic drug is available

it is dispensed unless the physician specifies ‘‘dispense as written’’ or the enrollee requests the brand drug. If the brand drug is dispensed at the enrollee

request, the enrollee pays the difference between the cost of the generic and

brand, in addition to the normal co-pay.

32

This is not an exhaustive list, but will give you a feel for some of what we feel

are important components of a well-managed pharmacy plan.

Cost Considerations

I would be remiss if I did not tell you that regardless of the efforts discussed

above, we are extremely concerned about our continuing ability to provide the kind

of prescription drug coverage that our people have come to expect. Prescription

drugs are the most inflationary component of our health care costs. Year-to-year increases for the last 3 years have averaged more than 19%. Future costs are projected to increase at even more alarming rates.

Prescription drugs do not operate according to the traditional free-market model.

Consumerism is limited. Patients are inundated by direct-to-consumer advertising

yet lack the information to make fully-informed decisions. Other practices that are

a concern include unwarranted patent extensions and pharmaceutical manufacturers’ pricing practices in the U.S., compared to their practices in Europe and Japan,

or even other countries in North America. These factors impose unnecessary costs

which, in turn, have a negative impact on competitiveness of U.S. firms which provide prescription drug coverage. It should not come as a surprise that such firms

would consider implementing increasingly stringent controls, or discontinuation of

the coverage altogether.

Potential Medicare Coverage of Prescription Drugs

General Motors supports the addition of a prescription drug component to Medicare. We regard the coverage as necessary—not only for the treatment of illness and

injury but because in many cases prescription drugs are the most clinically appropriate and cost-effective treatment option. We believe Medicare prescription drug

benefits should be universal so that access is available to all, and employ quality

assurance features to assure that the drugs being covered are necessary, appropriate and effective. The Medicare program should have effective program controls

or expenditure limits to ensure spending is controlled at a manageable level. It

should have broad-based equitable financing. To construct a program with less than

universal coverage would be unfair to enrollees and employers who paid into Medicare for many years. Further, to the extent it might provide coverage only for those

who have no coverage through employers, it would seem to penalize responsible employers who have voluntarily provided prescription drug coverage in the past.

Summary

In closing, I must reiterate that General Motors is very concerned about the economics of continuing to provide prescription drug coverage. Obviously we hope to

continue to provide prescription drug coverage for our employees, retirees and their

families. It is our hope that a fair and equitable Medicare Program will be implemented to help seniors bear the cost of prescription drugs. Such a program should

not put responsible employers, who have provided such coverage to date, at a disadvantage.

Mr. BILIRAKIS. Thank you, Moroni.

Ms. Rowland.

STATEMENT OF DIANE ROWLAND

Ms. ROWLAND. Thank you, Mr. Chairman and members of the

subcommittee. I am Diane Rowland, Executive Vice President of

the Henry J. Kaiser Family Foundation and Executive Director of

the Kaiser Commission on Medicaid and the Uninsured.

I am pleased to be here at this hearing today to talk about the

35 million seniors and 5 million disabled Americans on Medicare

who are in need of health care coverage, especially that of prescription drugs. Outpatient drug therapy has become an increasingly effective tool for managing many of the conditions faced by this population.

As Mrs. Kessler has shown you today, these needs are substantial. She represents about one-quarter of all Medicare beneficiaries

who have expenditures in excess of $2,000, but live on limited and

modest incomes. In fact, 40 percent of all Medicare beneficiaries

today live on an income of less than 16,500 for an individual or

33

22,000 for a couple, and as you well know, most rely on Social Security as their main source of income.

For these beneficiaries, the need for multiple medications to

manage and treat their acute and chronic illness often results in

substantial and rising financial burdens and means many leave

needed prescriptions unfilled. Today one-third of all Medicare beneficiaries go without any form of prescription drug coverage. About

half of those live below 175 percent of the poverty level.

Lack of drug coverage disproportionately affects beneficiaries living in rural areas and the oldest old. As you will hear from the

other witnesses, supplemental coverage does provide some assistance with prescription drugs to two-thirds of the elderly, but that

coverage varies widely by income, is often costly, and appears to

have a very unstable future.

For the lowest-income population, Medicaid has played a significant role over the years and covers today roughly 14 percent of all

Medicare beneficiaries. Yet to be eligible for the Medicaid program,

one must generally be eligible for cash assistance through the Supplemental Security Income program or be institutionalized in a

nursing home. Medicaid does, however, cover nearly half of Medicare beneficiaries with incomes below the poverty level and covers

40 percent of the nonelderly disabled Medicare population. This

population has a particularly important attachment to Medicaid because it is often—the disabled are often ineligible to obtain any

kind of private-based coverage. Those eligible for both Medicare

and Medicaid, the dual-eligible population, have poorer health care

status and greater health care needs than other Medicare beneficiaries.

In 1998, Medicaid spent $14.5 billion for prescription drugs, representing 8 percent of total Medicaid spending. However, without

the Medicaid drug rebate program, an additional $2.5 billion alone

would have been spent in 1998 on prescription drugs. Within the

Medicaid program, the elderly and disabled account for over 80 percent of all Medicaid spending for prescription drugs. So this is a

major item in all State budgets and in the Medicaid program.

Coverage of prescription drugs, however, under Medicaid varies

widely across the States. States are allowed to establish

formularies that limit coverage of specific drugs and are permitted

to require prior authorization before dispensing any drug. Almost

all States maintain a formulary. Most place limits on the number

of concurrent prescriptions, the amount of a given drug supplied at

one time, or the number of refills permitted. Thirty-two States require copayments for prescription drugs ranging from 50 cents to

$3 per prescription for beneficiaries with extremely low incomes.

However, many States are now struggling with the impact of

rapidly rising prescription drugs on their budgets. Rising costs

stem from both the increase in the average cost of drugs and from

the increased volumes of drugs prescribed. As a result, many

States are now looking to restrain rather than expand their coverage of prescription drugs in the future.

Building on Medicaid as well as some of the State-based pharmacy programs does provide a means to direct assistance for the

lowest-income Medicare beneficiaries. However, the variations

across States in existing coverage and the limited reach and scope

34

of both State pharmacy assistance programs as well as Medicaid

would perpetuate uneven coverage for low-income Medicare beneficiaries based on where they live.

In sum, today the likelihood of having drug coverage to supplement Medicare depends largely on where you worked and whether

you have retiree benefits, on where you live and whether managed

care plans are available in your area, on what your income is and

whether you are eligible for Medicaid or can afford to purchase coverage, and how sick you are, and whether plans are willing to enroll you if you have high drug costs. This is neither a fair nor rational way to provide health insurance coverage to our Nation’s 40

million Medicare beneficiaries.

Including the drugs under Medicare would provide Medicare

beneficiaries with needed coverage that is comparable to the benefits generally offered to the less—to the more healthy, nonelderly

insured population. It would both help to stabilize coverage by leveling the playing field between traditional Medicare and

Medicare+Choice plans, and it would serve to improve the quality

of care for the Nation’s Medicare population while shielding the

most vulnerable from rising, potentially unaffordable prescription

drug costs.

Thank you.

[The prepared statement of Diane Rowland follows:]

PREPARED STATEMENT OF DIANE ROWLAND, EXECUTIVE VICE PRESIDENT, THE HENRY

J. KAISER FAMILY FOUNDATION, AND EXECUTIVE DIRECTOR, KAISER COMMISSION

ON MEDICAID AND THE UNINSURED

Thank you, Mr. Chairman and members of the Subcommittee, for the opportunity

to provide an overview of the Medicare population’s access to prescription drug coverage. I am Diane Rowland, Executive Vice President of The Henry J. Kaiser Family

Foundation and Executive Director of The Kaiser Commission on Medicaid and the

Uninsured. I also serve as an Adjunct Associate Professor in the Department of

Health Policy and Management at The Johns Hopkins University School of Hygiene

and Public Health.

The Medicare population is, by definition, a population that is older, sicker and

more dependent on prescription drugs than those not enrolled in the program. While

the range and continuing proliferation of new drug treatments have made the management of the many health conditions suffered by this population possible, traditional, fee-for-service Medicare does not generally cover outpatient prescription drug

costs. My testimony today will review sources of prescription drug coverage for the

Medicare population, describe the scope and level of coverage offered by these various sources, and devote particular attention to Medicaid’s role in providing drug

coverage to Medicare’s lowest-income beneficiaries.

The Medicare Population

Any discussion of Medicare benefits must acknowledge the characteristics and

needs of the elderly and disabled population that Medicare serves. The Medicare

population, by definition, is older and less healthy than the general population.

Those who are covered by Medicare must be at least 65 years old or, if under-65,

totally and permanently disabled. Because health problems increase with age, those

who are covered by Medicare tend to have greater health needs than the non-elderly

population. (Exhibit 1). Nearly 7 in 10 Medicare beneficiaries living in the community (69 percent) have two or more chronic conditions; many report having serious

or disabling health problems, including arthritis (56 percent), hypertension (53 percent), and heart disease (36%). (Exhibit 2). Outpatient drug therapy has become an

increasingly effective tool for managing many of these conditions and for delaying

and even preventing the onset of more serious illnesses.

With health needs increasing with age, it is not surprising that prescription drugs

are a particularly important part of the therapeutic regimen for millions of elderly

and disabled Americans, and that drug use increases with age. Eight in ten Medicare beneficiaries utilize prescription drugs on an ongoing basis, filling an average

of 19.6 prescriptions in 1996. Outpatient drug therapy has come to substitute for

35

inpatient hospital care and to help manage chronic conditions. Many expect outpatient drug therapy to play an even greater role in medical care in the future

These prescription drugs often come at a substantial cost to the Medicare population—a population that generally lives on modest, and often fixed incomes. Over

40 percent of Medicare beneficiaries—14 million people—today have incomes below

200 percent of the federal poverty level, or below $16,500 for an individual and just

over $22,000 for a couple (Exhibit 3). Twelve percent of beneficiaries have incomes

below the poverty level.

Not only do many Medicare beneficiaries live on modest incomes, but most rely

on Social Security benefits as their main source of income. This is especially true

for the 20 million low- and moderate-income elderly beneficiaries with incomes

below $22,225 per year. They comprise 60 percent of Medicare beneficiaries and derive from 64 to 81 percent of their income from Social Security (Exhibit 4). Living

on fixed incomes with little potential for additional earnings leaves these beneficiaries with minimal cushion to absorb additional medical costs.

Why Is Drug Coverage Important?

For many Medicare beneficiaries, the need for multiple medications to manage

and treat their acute and chronic illnesses often results in a substantial and rising

financial burden. Between 1996 and 2001, average total per capita drug expenses

for the Medicare population increased from $798 to $1,402, while average out-ofpocket spending increased from $390 to $686 per year.

Having insurance coverage to supplement Medicare and help finance the cost of

prescriptions affects individuals’ financial burdens of care and use of medications.

Beneficiaries without any form of prescription drug coverage tend to have higher

out-of-pockets drug costs than those with some form of drug coverage (Exhibit 5).

Overall, those without coverage for prescription drugs spent more than those with

coverage in 1996 ($463 vs. $253 in 1996). Differences in health status do not explain

these differentials. Among those in poor health, the disparities in out-of-pocket

spending widened; those who lacked coverage had substantially higher out-of-pocket

costs than those with coverage ($423 vs. $749 in 1996).

Beneficiaries without drug coverage incur relatively high costs because they do

not have an insurer to share the cost of each filled prescription and because they

tend to pay the full retail price when they go to the pharmacy. By contrast, those

with prescription drug coverage are often shielded from the full effect of high and

rising drug costs as they often benefit from the pharmacy discounts negotiated by

their employer plan or HMO.

While lack of coverage means higher out-of-pocket costs faced by the elderly and

disabled on Medicare, these higher costs do not result from greater utilization. In

fact, those without prescription drug coverage fill fewer prescriptions than those

with coverage, even after adjusting for health status (Exhibit 6). Beneficiaries without drug coverage averaged five fewer prescriptions per year than those with coverage in 1996. Among those in poor health, those who lacked coverage averaged 11

fewer medications filled than their insured counterparts.

Lack of coverage poses particular concerns for those with chronic conditions. For

example, beneficiaries with hypertension who lacked drug coverage were 40 percent

less likely than those with drug coverage to purchase antihypertensive medications,

according to a recent study by Blustein. Systematic underutilization of prescribed

medications poses a threat to quality of care for individuals and potentially increases costs to the system in terms of avoidable emergency room and hospital admissions, physician visits, and nursing home stays.

Who Lacks Drug Coverage?

While two-thirds of the Medicare population receive some assistance with their

prescription drug expenses, nearly a third (12 million) were without any form of prescription drug coverage in 1996—the most recent year for which national data are

available. About half (6 million) of those without drug coverage had incomes below

175 percent of poverty, which was $14,600 for individuals in 2000 (Exhibit 7).

Lack of drug coverage disproportionately affects beneficiaries living in rural areas

and the oldest-old (Exhibit 8). Those in rural areas were substantially more likely

than others to be without drug coverage in 1996 (43 percent vs. 27 percent) in 1996.

Beneficiaries ages 85 and older were more likely to lack drug coverage than those

between the ages of 65 and 74 (38 percent vs. 29 percent).

The near poor are at high risk of being without drug coverage. Forty percent of

beneficiaries with incomes between 100 percent and 150 percent of the federal poverty level lacked coverage in 1996. By contrast, 24 percent of those with incomes

above 300 percent of poverty and 32 percent of those with incomes below 100 percent of poverty, where about half received drug coverage under Medicaid.

36

What Are the Sources of Prescription Drug Coverage?

Most beneficiaries have supplemental insurance to help fill the gaps in Medicare’s

benefit package, but the nature of that coverage varies widely by income (Exhibit

9). Those with higher incomes are more likely to have broader and more comprehensive retiree benefits, while those with low and modest incomes are more likely to

rely solely on Medicare for coverage. Medicaid fills in gaps for those with the lowest

incomes, but only assists slightly more than half of all poor Medicare beneficiaries.

The nature of supplemental coverage has a significant impact on the scope of prescription drug coverage and the level of out-of-pocket spending. Those with employer-sponsored retiree health benefits, for example, have substantially lower outof-pocket expenses than those with Medigap or no supplemental coverage at all (Exhibit 10).

Employer-sponsored plans, the leading source of drug coverage for seniors, assisted 31 percent of the Medicare population in 1996, generally those with higher

incomes. Half of those with incomes above 200 percent of poverty had employersponsored supplemental coverage compared to only a quarter of the near-poor and

8 percent of the poor. Benefits offered by employers to their former employees and

spouses tend to be more generous than drug benefits covered under Medigap policies

or Medicare+Choice plans.

Today’s workers, however, are less likely than current retirees to receive drug

benefits from their employer when they retire. The number of large employers offering health benefits to retirees 65 and older has declined from 80 percent in 1991

to 66 percent in 1999. Furthermore, among those employers that continue to offer

benefits to retirees, reductions in drug benefits appear to be on the horizon. Forty

percent of large employers report seriously considering cutting back on drug benefits

for their retirees in the next three to five years, according to a recent survey of large

employers conducted for the Kaiser Family Foundation by Hewitt Associates.

Medicare supplemental insurance, known as Medigap, is another potential source

of prescription drug coverage for the Medicare population. In 1996, Medigap provided prescription drug benefits to approximately 10 percent of all Medicare beneficiaries. These policies are individually purchased by Medicare beneficiaries to supplement Medicare, largely by paying cost-sharing and deductibles. Beneficiaries pay

premiums to have this coverage, with premiums ranging from about $1,400 per year

to as much as $4,700 per year, depending on where they live, the type of coverage

they obtain, and their age.

There are 10 standard Medigap policies (Plans A-J), three of which (Plans H-J)

cover some prescription drug costs. Plans H and I have a $250 deductible and cover

50 percent of drug costs up to $2,500; Plan J covers 50 percent of drug costs up

to $6,000. Premiums for Medigap policies that cover a portion of prescription drug

expenses have risen dramatically in recent years, by as much as 20 to 30 percent

in many markets across the nation. These high premiums appear to be making

Medigap drug coverage increasingly unaffordable for the large share of beneficiaries

who are living on modest incomes. In fact, only 537,000 of the 6 million beneficiaries

with standard Medigap policies had a plan that included prescription drug coverage

in 1999, according to a new study by Chollet and Kirk (Exhibit 11). Access to

Medigap drug coverage is further restricted by a provision of the law that permits

insurers to deny Medigap drug coverage to the under-65 disabled on Medicare, and

others who lose coverage when they disenroll from their HMO.

In addition to employer-sponsored and Medigap coverage, a growing number of

beneficiaries have turned to Medicare+Choice programs for assistance with their

drug costs. Medicare HMOs assisted 8 percent of all beneficiaries with their drug

costs in 1996 and as many as 12 percent in 2000. In recent years, many HMOs have

been able to offer supplemental benefits, such as drug coverage, because Medicare

requires plans with costs below the Medicare payment level to return savings to

beneficiaries in the form of additional benefits or lower cost-sharing.

While HMOs in many parts of the country have until very recently been able to

offer fairly generous drug benefits to enrollees, there is some uncertainty about the

future capacity of Medicare+Choice plans to provide this coverage. The number of

Medicare+Choice plans participating in the program has declined in recent years,

as has the share of plans offering prescription benefits to enrollees. At the same

time, Medicare+Choice plans that continue to offer prescription drug benefits are

moving in the direction of capping their benefits as part of a broader strategy to

reign in costs (Exhibit 12).

Medicaid and state operated pharmacy assistance programs also assist many lowand moderate-income beneficiaries with their drug costs. For the lowest income population, most notably Medicare beneficiaries receiving cash assistance and those

who are in nursing homes, Medicaid provides coverage to fill in Medicare’s gaps.

37

The Role of Medicaid

In 1997, 14 percent of Medicare beneficiaries (nearly 6 million people) depended

on Medicaid for supplemental insurance coverage, and most were eligible for the full

range of Medicaid benefits, including prescription drugs. Although coverage of prescription drugs is optional for states, all Medicaid programs currently provide prescription drug coverage for Medicaid enrollees. Medicare beneficiaries who receive

cash assistance through the Supplemental Security Income (SSI) program (known

as ‘‘dual eligibles’’) generally qualify for Medicaid prescription drug benefits.

Medicaid covers nearly half of Medicare beneficiaries with incomes below the poverty level and 40 percent of the non-elderly disabled Medicare population. Near-poor

Medicare beneficiaries with incomes between 100 and 200 percent of poverty receive

more limited assistance; their incomes or assets generally exceed the low levels required to qualify for full Medicaid benefits.

The Medicare-Medicaid dual-eligible population has poorer health status and

greater health care needs than other Medicare beneficiaries. Over half of all dual

eligibles report their health as fair or poor compared to a quarter of other beneficiaries. They are also more likely to have ongoing chronic illness and require longterm care assistance, leaving them particularly in need of assistance with medical

care and prescription drug expenses (Figure 13).

Prescription drug coverage is the second most widely utilized benefit in Medicaid,

largely due to the elderly and disabled population’s reliance on the program for prescription drug coverage. In 1998, Medicaid spent $14.5 billion for prescription drugs,

representing 8.2 percent of total Medicaid spending. Usage and costs vary considerably by enrollee eligibility category. The disabled and elderly accounted for 80 percent of all Medicaid spending for prescription drugs (Figure 14). In 1998, the disabled alone constituted less than a fifth of enrollees but accounted for over half of

Medicaid drug expenditures. By contrast, children represented over half of Medicaid

enrollees and accounted for only 12 percent of drug payments.

Prior to the Omnibus Budget Reconciliation Act of 1990 (OBRA 90), limited

formularies were the main strategy used by states trying to control Medicaid drug

costs. With OBRA 90, states were given a new tool—the drug rebate program, which

uses the government’s volume purchasing authority to get discounted prices. Under

this program, in order for a state to receive federal Medicaid matching funds for a

manufacturer’s prescription drugs, the manufacturer must agree to rebate a portion

of drug payments back to the government in return for Medicaid covering all prescription drug products manufactured by the company. More than 500 manufacturers, representing 55,000 drug products, currently have federal rebate agreements.

Some states also have separate rebate agreements with manufacturers.

The rebate program influences the acquisition cost for prescription drugs (purchase of the drug itself). Medicaid regulations limit payments for acquisition costs.

While payment limits are based on the cost of specific drugs, these limits only apply

to aggregate spending; states may set their own payment policies for individual prescription drugs as long as total expenditures for all drugs are at or below the

amount determined using the payment limits. Medicaid payments for outpatient

prescription drugs also include the dispensing fee, which pays pharmacists for filling

the prescription. Medicaid regulations only require that dispensing fees be ‘‘reasonable.’’

Coverage of prescription drugs under Medicaid varies across states. States are allowed to establish formularies that limit coverage of specific drugs and are permitted to require prior authorization before dispensing any drug. Almost all states

maintain a Medicaid formulary or list of approved products. Most states attempt to

control Medicaid drug costs by placing limits on the number of concurrent prescriptions (as few as three permitted in some states), the amount of a given drug supplied at one time, or the number of refills permitted. Thirty-two states require copayments for prescription drugs, ranging from 50 cents to 3 dollars per prescription

for certain beneficiaries.

As a quality control, states are also required to provide prospective and retrospective drug use review (DUR) for Medicaid enrollees who get drugs on an outpatient

basis. Prospective drug use review (PDUR), performed by the pharmacist or practitioner prior to dispensing a drug, is intended to reduce medication errors and adverse drug events, while retrospective drug use review (RDUR) involves the review

of provider drug prescribing history to identify safety and cost problem areas.

Medicaid is a crucial source of prescription drug coverage for a significant portion

of the Medicare population, but many states are now struggling with the impact of

rapidly rising prescription drug costs on state budgets. Rising costs stem not only

from the increased average cost of drugs, but also from the increased volume of

drugs prescribed. Medicaid payments for outpatient pharmaceuticals rose from an

38

estimated $4.8 billion in 1990 to $14.5 billion in 1998, an increase of almost 15 percent annually, largely due to rising costs for the disabled and elderly (Exhibit 15).

Because of Medicaid’s coverage for the elderly and disabled, including nursing

home residents, a greater share of the Medicaid dollar is devoted to prescription

drugs compared to total national health care spending. Medicaid prescription drug

expenditure growth consistently outpaces the total growth of prescription drug

spending. Recent reports indicate that states are now seeking larger discounts from

manufacturers, restricting access to expensive brand-name drugs, and proposing

that local pharmacies lower their prices. As a result, states are likely to be looking

to restrain—rather than expand—their coverage of prescription drugs in future

years.

At the same time, limits to Medicaid coverage and restrictive income and assets

test for eligibility, coupled with variations across states in both eligibility and coverage, leave millions of low-income Medicare beneficiaries without drug coverage.

Some states (26 as of January 2001) have enacted state-based pharmacy assistance

program to supplement Medicaid, and these programs now provide assistance to

about one million people. However, these programs are limited in their ability to fill

the gaps in prescription drug coverage and vary widely in terms of structure, eligibility, and benefits. While most provide a direct subsidy to low-income seniors, other

approaches include discount programs, tax credits, and private-insurance models.

Most are relatively new and not widely utilized.

Building on Medicaid and the state-based pharmacy assistance programs provides

a means to direct assistance toward the lowest income Medicare beneficiaries. However, the variations across states in existing coverage and the limited reach and

scope of most state pharmacy assistance programs perpetuates uneven coverage for

low-income Medicare beneficiaries based on where they live.

Conclusion

Prescription drug use and expenditures are not evenly distributed among the

Medicare population. Among Medicare’s 40 million beneficiaries, nearly a third

(30%) will incur drug expenses of less than $250 per year. In contrast, eight percent

of beneficiaries will experience drug costs of $4,000 or more this year and account

for over a third (36%) of the $50 billion in drug spending attributed to Medicare

beneficiaries (Exhibit 16). These striking variations in spending within the Medicaid

population underscore the importance of pooling the risk for coverage broadly.

Today the likelihood of having drug coverage to supplement Medicare depends

largely on where you worked and whether you have retiree benefits, where you live

and whether managed care plans are available in your area, what your income is

and whether you are eligible for Medicaid or can afford to purchase coverage, and

on how sick you are and whether plans are willing to enroll you if you have high

drug costs. This is neither a fair nor rationale way to provide health insurance coverage to our nation’s 40 million Medicare beneficiaries.

Use of prescription drugs to maintain functioning and promote well-being is an

integral part of medical treatment today and should be an integral part of the

health care coverage as well. Inclusion of prescription drugs into the Medicare benefit package would help to assure basic coverage for millions of our most vulnerable

citizens and help to stabilize their coverage in either the traditional Medicare program or managed care plans. Broadening Medicare to cover prescription drugs

would also help stabilize the current erosion of retiree health benefits and level the

playing field between managed care plans and the traditional program, thus helping

to both modernize Medicare and secure adequate future coverage.

Medicare has served the nation’s elderly and disabled population well for more

than 35 years. Much progress has been achieved through Medicare in alleviating

disparities in access to care and bringing life saving medical advances to our elderly

and disabled citizens regardless of income or residence. Our challenge now is to

build on the strengths of Medicare by addressing its gaps and securing its financial

viability.

I look forward to working with the Subcommittee to address this challenge. Thank

you.

39

40

41

42

43

44

45

46

47

Mr. BILIRAKIS. Thank you very much, Ms. Rowland.

Mr. Weller. Please proceed, sir.

STATEMENT OF WILLIAM WELLER

Mr. WELLER. Thank you, Mr. Chairman, members of the committee. I am Bill Weller, Assistant Vice President and Chief Actuary of the Health Insurance Association of America. I appreciate

the opportunity to testify on this important issue. I arrived at

HIAA just after OBRA’90 passed and have assisted the HIAA

members who offer Medigap products as well as Medicare+Choice

plans since then.

Our members, including national Medigap writers, have a strong

interest in meeting the needs of seniors. Medicare supplements are

very popular with seniors; 90 percent have some type of additional

coverage. HIAA is therefore concerned with any proposals to

change these products. Changes designed to be improvements, if all

the implications are not well understood, can create a worse situation for seniors, many of whom have no option other than Medigap.

In addition, as an actuary I have been involved with studies of

Medigap experience for the American Academy of Actuaries. The

academy’s reports can be a valuable resource to Congress. These

reports provide insight into the effects, positive and negative, of

various ideas. HIAA believes it is very important to take steps now

to help seniors better afford needed prescription drugs, yet changes

must be made carefully to avoid disrupting private coverage millions now rely on.

I would like to take most of my time this morning comparing the

principal factors I believe are needed for viable private drug coverage with the current rules and limitations of Medicare supplement, in particular the 10 Medigap standardized plans. But first,

let me note that all seniors when they become eligible for Medicare

have the right to purchase a Medigap plan which includes coverage

of prescription drugs, plan H, I or J. Medigap carriers cannot deny

coverage or charge these people an extra premium, for example,

based on their poor health. However, the vast majority do not purchase drug coverage. It is expensive, and most are still healthy at

that time.

The additional cost of Medigap plans H, I and J reflects both the

cost of the drugs and the higher use of medical services by these

people. The added cost from both appears to about equal the maximum amount of reimbursement for drug benefits alone within

those plans.

Surveys document a high level of satisfaction among seniors with

the Medigap coverage they maintain. Seniors recognize the value

of this coverage if they need significant medical care. This can

change if the Medigap policies that seniors buy quickly become

unaffordable. Viable plans, public or private, that cover prescription drugs need to adequately address the following factors. They

are discussed more fully in the written testimony.

Insurance costs. Successful private insurance plans, as you have

already heard, have adopted formularies, encouraged generic substitution and used PBMs as important tools to maintain quality

and control costs. Copayments in the past several years have been

48

changed to make insureds more aware of the substantial difference

in costs for different drugs.

On the other hand, Medigap is generally not allowed to use restrictive networks and cannot change copays after issues.

The loss ratio standards in OBRA’90 are unlikely to leave enough

margin for the cost of administering a modern drug benefit with

these necessary tools.

Future trends. Everyone is aware of the increases in cost of prescription drugs. Projections for the future are also worrisome. Managing an insurance program which includes drug coverage entails

updating formularies, adjusting copays, et cetera, not just increasing premiums. Even determining an insurance company or employer’s willingness to continue the coverage is an issue. However,

Medigap carriers, by law, cannot change anything except the premium. For example, in force policies could not be changed to require a higher copay for a brand name drug when there is a generic equivalent. And once a Medigap policy is issued, the carrier

must continue the coverage.

Sources of revenue. Subsidies are generally considered necessary

to generate high levels of participation in health plans. All the

major drug proposals from the last Congress, whether relying on

public or private insurance, included such a subsidy. A subsidy for

added drug benefits within a Medigap plan where other benefits

are not subsidized will have less perceived value. Thus, there is a

lower likelihood of achieving satisfactory levels of participation.

Finally, adverse selection. I suspect that you are weary of actuaries raising this concern. Unfortunately it is real, and it must be

controlled. Most employer-based groups control adverse selection by

requiring continuous coverage of retirees. If the retiree drops coverage, they can’t get it back. Medigap, because of expansions to

open enrollment, has become easy to get back into.

Open enrollment is causing increases in rates for Medigap plans

without drug coverage, and the effect would be even worse for new

Medigap plans with drug coverage.

In closing, I can state that HIAA shares the concerns of many

about the issue of drug coverage for seniors. We believe the ultimate solution will provide meaningful drug benefits as part of

changes to the underlying Medicare program. But if changes are

made before broad restructuring takes place, we need to move with

extreme caution. Changes to Medigap and Medicare+Choice without changes to Medicare itself could harm the private coverage seniors now rely on. It could also reduce the coverage choices for future seniors like me.

Thank you.

[The prepared statement of William Weller follows:]

PREPARED STATEMENT OF WILLIAM WELLER, ASSISTANT VICE PRESIDENT AND CHIEF

ACTUARY, HEALTH INSURANCE ASSOCIATION OF AMERICA

INTRODUCTION

Mr. Chairman, distinguished members of the Subcommittee, I am William Weller,

Assistant Vice President and Chief Actuary of the Health Insurance Association of

America (HIAA).

HIAA is the nation’s most prominent trade association representing the private

health care system. Its 290 members provide health, long-term care, dental, disability, and supplemental coverage to more than 123 million Americans.

49

During the past 10 years with HIAA, I have been involved in the actuarial aspects

of Medicare Supplement products starting with the implementation of the changes

required by Omnibus Budget Reconciliation Act of 1990 (OBRA’90). Prior to joining

HIAA in 1990, I worked in the insurance industry for 25 years. I received my fellowship in the Society of Actuaries in 1971 and became a member of the American

Academy of Actuaries in 1972. During the past several years, I have been a member

of the Academy’s Medicare Supplement Insurance Work Group, reviewing the

causes of premium increases on Medicare Supplement (or Medigap) plans. Their

final report (Medigap Report) was presented to the National Association of Insurance Commissioners in June 2000.

I am very pleased to be here today to speak with you about how the current

Medigap market works, special challenges relating to the three Medigap plans that

include prescription drug coverage, the impact of increasing costs and regulation on

the premiums that seniors now pay for Medigap coverage, and the higher costs they

would be asked to pay in the future if prescription drug coverage were to be expanded.

In the last section of my testimony, I will address the differences between

Medigap and other products that provide drug coverage, and the implications for actuarial models used to estimate the price of each such product.

It is worthwhile to note the importance of the broad spectrum of Medicare Supplement products and the key role of Medigap plans within that spectrum. Because

Medicare requires beneficiaries to pay deductibles and coinsurance amounts that

can add up to substantial annual out-of-pocket expenses and because it does not

cover the cost of care for truly catastrophic illnesses, 90 percent of seniors maintain

additional, supplemental coverage.

Approximately 20 million seniors have some Medicare Supplement coverage, either through an employer-sponsored plan for retirees (11 million beneficiaries) or

through an individually purchased Medigap plan (nine million beneficiaries). Many

other seniors have supplemental coverage through Medicare+Choice or Medicaid. It

is the nine million seniors who pay the total cost of supplemental coverage themselves by purchasing an individual Medigap plan who would have the biggest problem finding the resources to pay for new, mandated expanded coverage of prescription drugs.

Surveys conducted bi-annually by the Inspector General of the Department of

Health and Human Services continue to show a high level of satisfaction among seniors with Medigap and with their choices including options with and without outpatient prescription drug coverage. These surveys also note the importance seniors

attach to having these choices include a wide range of premium levels to allow affordable options. Even with this range, the most popular Medigap plans cover the

beneficiaries’ obligations under Parts A and B but do not include drug coverage.

SENIORS SHOULD HAVE EXPANDED ACCESS TO NEEDED PHARMACEUTICALS

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. As older Americans become an ever-increasing percentage of the

overall United States population, the need for more outpatient medicines, including

maintenance drugs for this sector of the population, is growing rapidly. 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.

These advances have not come without a price. Rapid cost increases for prescription drugs are a major concern of our nation’s seniors. We are using more drugs,

and the average price for the drugs are rising. As a result, 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 percent and 5 percent annually from 1995 through 1999, the Academy of

Actuaries’ Medigap Report showed Medigap claim costs growing at 11 percent annually (twice the rise in Medicare expenses) for the plans without drug coverage. The

Academy also reported an increase of 16.5 percent per year for a plan in one state

50

that included extensive coverage of drugs and more frequent guarantee issue options.

A study completed in 2000 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 had been predicting. The

University of Maryland researchers project that the nation’s expenditures for prescription drugs will increase at a rate of 15-18 percent per 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, Dr. C. Daniel Mullins,

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.

These statistics all demonstrate the increasing proportion of seniors’ overall medical costs, which are for outpatient prescription drugs. Probably as a result of this

fact, roughly two out of every three seniors have some type of insurance coverage

for pharmaceuticals—either through employer-sponsored retiree health plans, private Medicare+Choice plans, Medicaid or, in limited instances, individual Medigap

policies. Yet, HIAA recognizes the concerns for those without any coverage, as well

as those in fear of losing the coverage they currently have.

Whatever path Congress chooses to follow to bring expanded drug coverage to

Medicare beneficiaries, it is vitally important not to jeopardize the supplemental

coverage that seniors now have, whether or not it includes coverage for drugs. Seniors rely heavily on their supplemental plans since Medicare now pays just 50 percent of their medical costs. As already noted, seniors are highly satisfied with their

supplemental coverage and value the range of choices now available to them in supplemental plans.

DETAILS OF THE CURRENT MEDIGAP MARKET AND ISSUES WITH EXPANDING DRUG

COVERAGE

The existing Medigap market provides 10 standardized plans, three of which include some prescription drug coverage (plans H, I, and J). A ‘‘high deductible’’ option

is also available with two plans (plans F and J), but has not proved popular with

seniors. Except for the high deductible addition, these plans have not been changed

since developed immediately following OBRA’90. The attached chart showing the

benefits provided by the various Medigap standard plans is very familiar.

The Medigap market also includes the Medicare SELECT option that allows the

insurer to provide benefits through a network of health care providers who agree

to provide care at discounted rates in return for a higher volume of patients. Certain

Medigap benefits are not paid for out-of-network care. Medicare SELECT has grown

steadily since the program was first authorized and is now allowed in all states.

There are now a number of open enrollment opportunities for Medicare beneficiaries to purchase new or replace existing coverage with a Medigap plan. OBRA

‘‘90 established a six-month open enrollment period for Medigap coverage beginning

when a beneficiary is age 65 or older and enrolls in Part B. A beneficiary applying

for a Medigap plan during this period may not be denied coverage and cannot be

charged a higher premium because of poor health. All Medigap plans, including

those with prescription drug coverage, are available during this open enrollment period.

From 1991 through 1997, there was a small amount of expansion in open enrollment under laws enacted in a few states. Since then, federal legislation (BBA,

BBRA and BIPA) has expanded the open enrollment opportunities and states have

frequently gone beyond the federal open enrollment standards.

ISSUES WITH EXPANDING MEDIGAP DRUG COVERAGE

HIAA believes that Medigap is not a good starting point for legislative proposals

to expand drug coverage for seniors. In addition to a host of other problems with

this approach, which are discussed below, 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 be forced to pay an additional $600

or more a year (assuming a $250 deductible for expanded drug benefits), according

to HIAA estimates.

Revising the existing Medigap market to include expanded coverage of prescription drugs would need to address three key participants in the market—Insurance

Regulators, Medicare Beneficiaries and Medigap Writers.

Regulators—The National Association of Insurance Commissioners (NAIC)

would likely have to develop standards for new Medigap plans. State regulators

51

would have to approve new policy forms 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.

The requirement that Medigap policies must be ‘‘guaranteed renewable’’ (GR)

would exacerbate problems with creating insurance that reflects modern drug benefits. If the NAIC were to standardize a new set of GR plans with greater drug coverage, as some have proposed, it could impose unworkable limitations on the use

of pharmacy benefit managers (PBM) or formularies. Once coverage is issued, insurance carriers would be prevented by contract from increasing co-payments and

deductibles as drug costs continue to skyrocket. Effective cost management would

be extremely difficult. On the other hand, allowing needed flexibility, including

PBMs and formularies, would destroy the standardization of Medigap that Congress

and the NAIC have worked so hard to achieve during the past decade.

The states would also need to create a set of transition rules that are fair to both

beneficiaries and companies with existing policies and that do not run afoul of the

guaranteed renewability requirements for Medigap policies. Establishing and administering such rules would be a very difficult task.

Medicare Beneficiaries—Surveys show that there is considerable recognition of

the current plans among seniors. Thus, changes to the standard plans are likely to

create some confusion. In addition, open enrollment opportunities for viable products with expanded drug coverage would need to be limited to avoid severe adverse

selection. Finally, the level of initial premiums for Medigap plans and the size of

premium increases over time will both need to rise substantially if there is expanded drug coverage. Even if proposed premium increases were consistent with

state law parameters, seniors and state regulators would be likely to resist approving the magnitude of increases it will take to sustain an insurance policy as drug

prices grow rapidly.

Medigap Writers—Insurance carriers attempting to offer Medigap plans with expanded drug coverage for seniors would have to address difficult business decisions

and cost issues:

• costs of development, marketing and administration of the new plans;

• costs of new processes for drug benefits (e.g. PBM interface and formularies);

• increasing and volatile cost of drugs to be reimbursed;

• reflecting the value of any government subsidy to some or all seniors for their

drug coverage; and

• estimating the impact of adverse selection.

Premiums for the new Medigap form would have to reflect these costs. However,

one substantial barrier is that the expense margin limitations insurance carriers

must meet under OBRA ‘‘90 (which are a function of the dollars paid to Medigap

insured) are too small to support the expected administrative costs of expanded drug

coverage. Finally, premium increases for Medigap plans would become even larger,

generating further adverse selection with the potential that the product may not remain viable.

In our view, the combined weight of these problems would doom any attempt to

focus on private Medigap plans as a principle source of expanded drug coverage to

seniors.

PRIVATE INSURANCE OPTIONS WITH DRUG BENEFITS

As already noted, a significant number of Medicare beneficiaries already have insurance for their prescription drug expenses from the private market. In addition,

Medicaid as a public option provides insurance for many low-income beneficiaries.

The vast majority of the private options rest on four characteristics to maintain

a viable insurance product:

1. The full cost of the drug program is not expected to be paid by the individual.

2. The drug benefits are part of comprehensive, coordinated care management so

that the risk taker for the full set of benefits will receive any offset from lower

required use of other medical services.

3. The drug benefit is managed and, if necessary, modified to control growing costs,

by utilizing formularies, generic substitution, and other cost saving opportunities, consistent with good medical care.

4. The option is structured to avoid adverse selection by giving beneficiaries strong

incentives to maintain coverage even when their expected drug costs are low.

Employer-based coverage is the primary source of existing drug coverage for seniors. Most employer-sponsored plans incorporate the ‘‘viability’’ factors listed above

or are rapidly moving to incorporate them. Yet, even these plans are finding the priVerDate 11-MAY-2000 09:49 Oct 03, 2001 Jkt 072927 PO 00000 Frm 00055 Fmt 6633 Sfmt 6621 E:\HEARINGS\71491 pfrm09 PsN: 71491
52

vate option increasingly expensive. Recent surveys indicate that employers are contemplating several changes for 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).

Medicare+Choice plans, the second most utilized option for prescription drug coverage, have used the savings they have achieved through efficient total care management to offer drug benefits. Unrealistically low increases in government payments to Medicare+Choice plans, however, are having the effect of reducing drug

coverage for many seniors enrolled in these plans and threatening the very continuation of the Medicare+Choice program.

Medigap plans H, I, and J (which cover drugs) are subject to underwriting, except

during open enrollment. The ability to underwrite these plans is the only one of the

four ‘‘viability’’ factors currently available to insurers offering these plans. Even so,

studies have shown that these plans experience higher use of part A and B services.

As a result, costs of non-drug Medigap benefits for plans H, I, and J are higher than

the same benefits within Medigap plans A through G. These are major reasons why

the cost of plans H, I, and J is often prohibitive.

There is a growing use of ‘‘drug discount cards.’’ These non-insurance programs

provide access to discounted drug prices. However, drug discount card programs do

not spread the cost of prescription drugs as with insurance products. Instead, these

cards provide seniors with significant discounts to retail prices at designated pharmacies. The vast majority of Medigap writers offer such opportunities where not restricted by state regulation. Some of these drug discount cards are now being advertised on television, reflecting their growing attractiveness to seniors as a viable alternative to the increasingly expensive insurance options for drug coverage.

MODELING A PRESCRIPTION DRUG BENEFIT FOR SENIORS

Insurance products rest on actuarial models to estimate the future benefits, costs,

and revenues necessary to support the product. Modeling coverage of prescription

drug benefits involves:

• projecting costs for different subgroups of the insurable population (minus the

portion to be paid by the insured);

• adjusting these base year costs for periodic cost increases (trend) and shifting patterns of care;

• approximating government provided payments, if any;

• reflecting the expected willingness of these various subgroups of the population

to purchase the coverage; and

• allowing for the chance that new, higher premiums will cause healthier Medicare

beneficiaries to discontinue their coverage.

Costs for drug coverage for seniors, prior to any of the other adjustments, are projected to rise by 15 percent each year. A table in another Academy of Actuaries report, Medicare Reform: Providing Prescription Drug Coverage for Medicare Beneficiaries, shows the effect of various cost-sharing provisions on this base rate of increase. The table (Table 3 is attached) demonstrates that premium rates for universal coverage would need to increase more than 15 percent to keep pace with rising drug costs. For example, the impact of a deductible increases insurance costs

at a faster rate than the cost of the underlying benefits (e.g. a $500 deductible

would require an 18.8% increase to offset the effects of ‘‘deductible leveraging’’ when

all costs increase by 15%).

If the ‘‘benefit maximum’’ were changed to an ‘‘out-of-pocket maximum’’ to include

stop-loss or catastrophic coverage (part of many of the proposals from last year), this

feature, along with the others, could generate premium increases of 25 to 30 percent

per year for the first few years. Products that contractually cannot adjust benefits

(e.g. Medigap) can only increase premiums. Rate increases of this magnitude would

create additional problems.

Volatility in pharmaceutical cost trends also makes private drug coverage 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 the new prediction

was that prescription drug spending will reach $223 billion by 2007, which is a 30

percent increase over the previous estimate.

Several legislative proposals in the past have included some government contribution to eliminate the ‘‘individual pay-all’’ problems when using voluntary programs.

It was often stated that this subsidy would result in almost universal acceptance

53

of any offer to provide coverage. However, many actuaries do not believe 25 percent

or even 50 percent subsidies are sufficient to achieve 70 percent acceptance, much

less universal acceptance. These actuaries point to the increasing unwillingness by

some employees to pay the required employee contribution for employer-sponsored

coverage as evidence.

In addition, the ability of government contributions to maintain a consistent share

of the costs of a private option over 20 years is hard to imagine. Errors in cost assumptions, changes in patterns of including drugs in comprehensive medical care,

and other budgetary dictates could reduce the level of subsidy. The insurers’ obligations to Medicare beneficiaries are not likely to be reduced simply because of a

shortfall in the percentage of costs contributed by the government.

Appropriate oversight of the use of PBMs and/or formularies will likely be a part

of any successful legislation that includes a government subsidy for prescription

drug coverage. Actuaries will look to existing examples of this oversight to estimate

its likely effect and cost to be included in the price of the new coverage. The two

representative examples are the oversight of employer-plans and Medicare+Choice

Organizations. Medicare+Choice Organizations are subject to more restrictive controls, so there is a higher level of administrative cost to meet the control requirements. The employer-based market has lowed costs and flexibility to quickly adjust

to changing circumstances.

The most difficult factor to model, however, will be ‘‘adverse selection.’’ Adverse

selection, which tends to drive up premiums, 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 forego purchasing it. When people with low drug

costs choose not to enroll in coverage while those with high costs do enroll, insurance carriers are forced to charge higher premiums to all policyholders. The more

opportunities there are for enrollment, the greater the risk of adverse selection.

Adverse selection is and will be a very real problem for private insurers, particularly those selling coverage on an individual basis. Using cost estimates for the year

2000, one-third of seniors (even if all had coverage for outpatient prescription drugs)

would have drug costs under $250 per year, with the average cost estimated at $68

annually. These seniors are unlikely to purchase any type of private drug coverage

without almost a complete subsidy of the cost, given that the premium for such coverage 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 without a significant subsidy. Some may actually end up much worse

off: a person with $500 of drug expenses could have premium, deductible, and coinsurance costs of about $1,000 or twice the actual costs of drugs. Consequently, many

relatively healthy seniors are not likely to purchase the product, resulting in further

premium increases for those that do.

Employer plans control this type of adverse selection by limiting eligibility to employees and spouses at the time they retire. In addition, beneficiaries with coverage

must maintain the coverage continuously, even in years when their expected use of

the insurance coverage is low. Re-enrollment is not permitted.

Medicare+Choice Organizations cannot directly control adverse selection due to

the annual open enrollment requirement. This has caused Medicare+Choice Organizations to be very concerned that rich drug benefits would lead to disproportional

enrollment of those with high drug costs. Offsetting this risk to some extent has

been the ability of Medicare+Choice Organizations to manage the entire medical

and pharmacological risk. But the manner in which the Health Care Financing Administration is implementing risk adjustment sharply reduces the value of this offset since there is no risk adjustment factor attributed to drug benefits.

As previously noted, Medigap has seen considerable expansion of open enrollment

opportunities. Actuarial models would likely anticipate a similar expansion for drug

coverage even if the legislation only provided a single eligibility period initially.

The expansion of Medigap open enrollment opportunities is generally felt to be

one of the causes of above average increases in Medigap costs since 1996. The American Academy of Actuaries Medigap Report to the NAIC noted:

‘‘While it is too early to evaluate the quantitative effects of the 1997 Balanced

Budget Act requirements for the guaranteed issue of certain Medicare Supplement plans to individuals who lose Medicare+Choice health coverage, this requirement may provide opportunities for anti-selection. The level of anti-selection will be affected by individuals’ health status, by whether Medicare+Choice

alternatives exist, and the ease [for beneficiaries] to move in and out of plans

(e.g. in Massachusetts, there are virtually no limits on individuals moving in

and out of plans).

In the other Academy report on prescription drug coverage, they address this

issue as well:

54

‘‘Seniors (many of whom are on drug therapies for chronic medical conditions)

can more easily predict the level of their out-of-pocket drug costs than is the

case with their other health costs. They also frequently know the specific drugs

they will need. Accordingly, adverse selection presents a greater technical obstacle for programs with voluntary elements; for example, when there are different

choices in the levels of coverage (e.g., different deductibles or annual maximums) or in the particular drugs covered (e.g. formularies). Similarly, the overall level of both prescription and other expenditure required by beneficiaries

who use a specific drug is more predictable than the case with other acute

health care services’’ Illustrating the concern, Table 2 (attached) from this last report shows that seniors with at least an average of three prescriptions per month make up 40 percent

of seniors. Their costs are over 3.5 times the average costs of the other 60 percent.

In addition, the table notes that these more frequent users, reflecting greater incidence of maintenance drugs, have a lower rate of using generic drugs.

Adverse selection is considered within actuarial models when coverage must be

offered in open enrollment situations. It is also considered when insurers must increase premiums by 20-30 percent each year to cover rising costs. Policyholders will

compare the higher premiums to their current and expected costs. Those who expect

to receive relatively little in benefits (generally due to low actual use of drugs in

the prior year) are much more likely to lapse their existing coverage (citing

unaffordability as their reason) than those who recognize that their insured drug

costs have been more than the premiums they have been paying.

Drug discount card programs are not likely to suffer from adverse selection because, unlike insurance programs, there is no spreading of costs. At present, they

have no method to provide any subsidy beyond the discounts provided by the pharmacies in their network.

CONCLUSION

There is no question that seniors, especially seniors with low incomes, need help

with the cost of the prescription drugs vital to their health. However, the likely effects of any new policy 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. Actuarial models have significant

value in projecting the implications of proposals on the premium costs for various

groupings of likely insureds. More important, these models also address the impact

of potential ongoing changes—legislative, economic and insurance related.

HIAA shares the concerns of many public voices today calling for measures to

help seniors better afford prescription drugs. HIAA developed a proposal in 2000

which, we still believe, represents an immediate and workable step that will provide

meaningful relief for seniors before addressing needed changes in the underlying

Medicare program.

HIAA is extremely concerned with proposals that would require Medicare supplement 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. Mandating all Medigap policies to include a drug benefit would not be popular with seniors—who would experience diminished choice of policies, higher prices,

and in some cases, loss of coverage.

HIAA stands ready to work with the members of this Subcommittee, and all in

Congress and the Administration, to ensure that all seniors to have access to affordable prescription drugs.

ATTACHMENT A

Benefits Covered By Standard Medigap Plans

Covered Benefits

Standard Medigap Plans

A B C D E F** G H I J**

Core Benefits* ....................................................................... PPPPPPPPPP

Part A Deductible .................................................................. ..... PPPPPPPPP

SNF Coinsurance ................................................................... ..... ..... PPPPPPPP

Foreign Travel Emergency ..................................................... ..... ..... PPPPPPPP

At-Home Recovery ................................................................. ..... ..... ..... P ..... ..... P ..... ..... P

Part B Deductible .................................................................. ..... ..... P ..... ..... P ..... ..... ..... P

Part B Excess Charges ......................................................... ..... ..... ..... ..... ..... P 1 ..... P P

Prescription Drugs ................................................................. ..... ..... ..... ..... ..... ..... ..... 223

55

Benefits Covered By Standard Medigap Plans—Continued

Covered Benefits

Standard Medigap Plans

A B C D E F** G H I J**

Preventive Medical Care ....................................................... ..... ..... ..... ..... P ..... ..... ..... ..... P

* Core benefits include Part A co-payment for days 61-90 in the hospital, Part A co-payment for each lifetime reserve day in the hospital,

up to 365 additional days of hospital coverage after Medicare coverage is depleted, the first three pints of blood used under Part A or Part

B, and the 20-percent coinsurance for Part B services after the Part B deductible has been met.

** Plans F and J also have a high deductible option. The high deductible, which is adjusted for inflation, is $1,530 in 2000.

1Medigap policy pays 80 percent of balance billing charges.

2 After $250 deductible, policy covers 50 percent of prescription drug costs to a maximum of $1,250.

3 After $250 deductible, policy covers 50 percent of prescription drug costs to a maximum of $3,000.

Table 2—Distribution of Prescription Expenditures for Seniors

Scripts per Year

Percent of Relative to Population

Average

Generic Drugs

Members Scripts Costs Scripts Cost

% of

Scripts

% of

Cost

0 to 12 ............................................................. 21.9 4.4 2.1 0.20 0.10 69 41

12 to 24 ........................................................... 20.0 11.0 7.1 0.55 0.36 58 30

24 to 36 ........................................................... 18.2 16.2 12.6 0.89 0.69 54 27

36 to 54 ........................................................... 20.3 26.4 24.5 1.30 1.21 50 24

54 or more ....................................................... 19.5 42.0 53.6 2.15 2.74 47 21

Source: Data provided by a national Medicare+Choice Health Plan

Table 3—Annual Rates of Increases in Prescription Drug Insurance Plan Costs Per Capita

Assuming 15 Percent Per Year Increases in the Cost of Drugs

Cost Sharing Feature

Annual Rate of Increases

Through CY 2005Through CY 2020

A. Fixed Dollar Amounts

Co-payments ($10 Generic/$20 Brand) .......................................................................................... 18.5% 15.5%

50% Coinsurance with annual deductibles of:

$100 ............................................................................................................................................ 15.7% 15.0%

$500 ............................................................................................................................................ 18.8% 15.4%

$2,000 ......................................................................................................................................... 29.2% 16.9%

50% Coinsurance with benefit maximums of:

$2,500 ......................................................................................................................................... 10.9% 2.4%

$5,000 ......................................................................................................................................... 13.6% 4.3%

B. Amounts Adjusted for 2.5% annual increases in CPI

Co-payments ($10 Generic/$20 Brand) .......................................................................................... 17.9% 15.6%

50% Coinsurance with annual deductibles of:

$100 ............................................................................................................................................ 15.6% 15.0%

$500 ............................................................................................................................................ 18.2% 15.5%

$2,000 ......................................................................................................................................... 27.1% 17.3%

50% Coinsurance with benefit maximums of:

$2,500 ......................................................................................................................................... 11.9% 5.4%

$5,000 ......................................................................................................................................... 14.0% 7.6%

Note: Trend in per capita spending assumed to be 15 percent per year. Per capita expenditures trend comprised of prices (3 percent), mix

of drugs (8 percent) and volume (3.5%).

Mr. BILIRAKIS. That is a good way to finish.

Ms. Buckley to tell us about Nevada.

STATEMENT OF BARBARA E. BUCKLEY

Ms. BUCKLEY. Thank you, Mr. Chairman, members of the committee. For the record, my name is Barbara Buckley. I am serving

my fourth term as the assembly representative for district 8 in

Clark County, Nevada, which is Las Vegas. I also serve as the majority leader for the Nevada Assembly. I have served on the comVerDate 11-MAY-2000 09:49 Oct 03, 2001 Jkt 072927 PO 00000 Frm 00059 Fmt 6633 Sfmt 6602 E:\HEARINGS\71491 pfrm09 PsN: 71491
56

merce and labor committee for four terms, and on the health and

human services committee for three terms.

In my tenure in the Nevada Legislature, I have worked extensively on health care issues, sponsoring our Nevada patients’ bill

of rights in 1997 and expanding our work by creating an cabinet

level ombudsman for patients in 1999.

In 1999, I was also part of the assembly leadership team that

fought to ensure our tobacco dollars were earmarked for health

care, senior programs, and programs to prevent tobacco use in our

State. I am proud to say that those efforts were successful, and as

a result, 60 percent of our funds were earmarked for these purposes.

Like most legislation enacted in Nevada and indeed everywhere,

our tobacco legislation was a result of compromise between both

parties with divergent opinions on how best to achieve our goals.

We were committed to securing a portion of the funds to promote

independent living programs for seniors as well as establishing a

prescription drug plan.

When our Governor asked that we try an insurance-based prescription drug plan for seniors, many of us were skeptical about

whether such a plan could work, but agreed to try the plan to ensure that all of our goals for our tobacco legislation were met. And

so with the unanimous support of the 1999 Nevada Legislature, we

began our experiment with an insurance-based senior prescription

drug plan.

The statute sets forth the details of our plan. A senior is eligible

for a subsidy from our tobacco funds based on their income level.

Generally from zero to $12,000, they are eligible for a 90 percent

subsidy. It goes up to $21,500, and at that income level a senior

is eligible for 10 percent subsidy. The maximum amount of subsidy

that could be awarded to a senior is capped at $480 per year. $4.2

million was set aside to begin our program. It was estimated that

10,000 seniors could be served.

Implementation of our program was left to the Department of

Human Resources. They issued a request for proposal to hundreds

of insurance companies. Only one unlicensed insurance company

bid. The RFP was reworked, relet. At that time six insurance companies bid, and one was selected.

The successful bid resulted in our senior RX program. As you can

see from the testimony and the handouts, there are two programs

contained in this, a blue and a silver program. The premium for

a blue program is approximately $75 a month or $900 a year.

There is a $100 calendar year deductible. A managed formulary is

utilized. Generic drugs cost $10; preferred drugs cost $35 or 50 percent of the cost of the drug, whichever is greater. Nonpreferred

drugs are not covered, and there is a $5,000 maximum annual plan

benefit.

There is also a silver program which costs approximately $99 a

month. Generic drugs are $10; preferred brands are $25; nonpreferred brands are $40 or 40 percent of the cost of the drug. There

is also a $5,000 cap on that program as well.

As of January 26, 2001, 1,400 applications have been received,

and 124 seniors were enrolled. I learned from our Governor yesterday we have had 65 people enroll. Almost 700 people are eligible

57

for the subsidies, but have not yet chosen to sign up for the benefits or pay their share of the premiums.

Reviews of the program are decidedly mixed. I am pleased that

the Nevada Legislature and the Governor felt that establishing a

drug program was important for our State. I am also pleased that

our State chose to go forward instead of waiting for Congress to

act. No offense meant.

The program, though, has a number of shortcomings. First, the

program only covers 10- to 12,000 seniors who earn less than

$21,000. That means there are over 100,000 additional seniors

earning below 21,000 who are unable to take advantage of our program due to funding limitations. Seniors who earn 21,000 or more

are not eligible at all. These excluded seniors should not have to

choose between paying their power bill and affording prescription

drugs, a very real choice today.

For those that are offered coverage, the insurance model does not

result in an affordable prescription drug model for many. I have attached charts showing sample seniors. In one, a senior must pay

$35 a month in premiums and still $327 in copays. If her income

is $12,000 a year, she is still spending 34 percent of her income for

drugs.

It is also difficult for seniors to figure out how the program

works, and it also excludes all Medicaid beneficiaries who are not

seniors. In March of 2001, the Nevada Legislature is going to begin

hearings on a number of different alternatives that other States

are considering, and I have outlined those in my testimony, and I

am sure you are very familiar with them. I know this committee

has been studying this issue for some time and has great expertise.

In conclusion, I will offer a couple of observations from my vantage point some 3,000 miles away. A private insurance plan is not

successful in helping our seniors if it is unaffordable. At this point,

for many, our plan is unaffordable. And even if we had the lowestcost plan in the Nation, we would only cover 10,000 people when

hundreds of thousands need help.

I believe we need to add a prescription drug benefit to Medicare

so that everyone in need can be helped. Our State resources are

strapped in implementing new programs. A uniform program

passed by this Congress that would apply to all seniors would be

most effective in helping our Nevada seniors in need.

My experience with this insurance-based approach is that its elements are often confusing for seniors, and if the insurance companies find that they cannot make money, they withdraw from the

market, again leaving our seniors without help.

Thank you.

[The prepared statement of Barbara E. Buckley follows:]

PREPARED STATEMENT OF BARBARA E. BUCKLEY, ASSEMBLYWOMAN, STATE OF

NEVADA

Mr. Chairman, members of the Committee, for the record my name is Barbara

E. Buckley. I am serving my fourth term as the Assembly representative for District

8 in Clark County, Nevada. I also serve as the Majority Leader for the Nevada Assembly. I have served on the Commerce and Labor Committee for all four terms and

served on the Health & Human Services Committee for the previous three terms.

In my tenure in the Nevada Legislature, I have worked extensively on health care

issues, sponsoring the Nevada Patient’s Bill of Rights in 1997 and expanding on our

58

work by creating a cabinet level position of Ombudsman for Health Care Consumers

in 1999.

In 1999, I was part of the Assembly leadership team that fought to ensure our

tobacco dollars were earmarked for health care, senior programs, and programs to

prevent tobacco use in our state. I am proud to say that those efforts were successful

and that Nevada dedicated 50% of its tobacco dollars to these programs.

Like most legislation enacted in Nevada, and indeed all 50 states, our tobacco legislation was the result of compromise between elected officials of different parties

with divergent opinions on how to accomplish what is best. The Assembly leadership

was committed to securing a portion of the funds to promote independent living programs for senior citizens as well as establishing a prescription drug plan.

When our governor asked that we try an insurance-based senior prescription drug

plan, many of us were skeptical about whether such a plan could work but agreed

to try the plan so as to ensure our other goals in the legislation were met. And so,

with the unanimous support of the 1999 Nevada Legislature, we began our experiment with an insurance-based senior prescription drug plan.

The statute sets forth basic details of the insurance-based prescription drug plan.

A senior would be eligible for a subsidy depending on his or her income. The attached chart reflects the subsidy available:

Income Subsidy

$0-$12,700 ..................................................................................................................................................................... 90%

$12,700-14,800 .............................................................................................................................................................. 80%

$14,800-17,000 .............................................................................................................................................................. 50%

$17,000-19,100 .............................................................................................................................................................. 25%

$19,100-21,500 .............................................................................................................................................................. 10%

The maximum amount of subsidy that could be awarded to an individual was

capped at $480.00 per year. $4.2 million was set aside to begin the program; it was

estimated that approximately 10,000 seniors could be assisted.

Implementation of the program was left to the Nevada Department of Human Resources. The department decided to initiate a request for proposals to all insurers

for participation in the Senior RX program. They decided at the outset to set few,

if any, parameters on program design. For example, it did not require compliance

with any sort of affordability design for co-payments or deductibles; it did not require adherence to any sort of appeal process if the insurer were to use a formulary.

The administration wanted to ensure that it received as many bids as possible and

left program design to the insurance companies.

In March of 2000, Nevada released its first request for proposals. The results were

disappointing; only one insurance company applied and it was not licensed in the

State of Nevada. The request for proposals was redesigned and re-released. Five

companies submitted a bid and in the fall of 2000, Fidelity Security Life Insurance

Company was selected.

The successful bid resulted in the Senior Rx Program. Attached to my testimony

is its outline. As you can see, there are two programs—a blue and a silver.

The premium for blue program costs $74.76 a month or $897.12 a year. There is

a $100 calendar year deductible. A managed formulary is utilized. Generic drugs

cost $10.00; preferred drugs cost $35 or 50% of the cost of the drug, whichever is

greater. Non-preferred drugs are not covered. The maximum annual plan benefit is

$5,000.

The premium for the silver plan’s premium is $98.31 a month or $4,179.72 a year.

Generic drugs are $10.00; preferred brands are $25. Non-preferred brands are $40

or 40% of the cost of the drug, whichever is greater. The maximum annual plan benefit is also $5,000.

As of January 26, 2001, 1,457 applications for the program have been received;

124 are enrolled. Almost 700 people are eligible for the subsidies, but they have not

yet chosen to sign up for the benefits or pay their share of the premiums. They have

60 days to do so.

Reviews of the program are decidedly mixed. I am pleased that the Nevada Legislature and the Governor felt that establishing a prescription drug program is a high

priority for our state. I am pleased that our State chose to go forward instead of

waiting for Congress to act. However, our program has many serious shortcomings.

First, the program only covers 10,000-12,000 seniors who earn less than $21,500.

That means there are over 100,000 additional seniors earning below $21,500 who

are unable to take advantage of the program due to funding limitations. Seniors

who earn $21,501 and higher are not eligible at all. These excluded seniors should

59

not have to choose between paying their power bill and affording prescription

drugs—a very real choice right now.

For the few that are offered coverage, the insurance model approach does not result in an affordable prescription drug model for many. For example, if Mary Smith

earns $12,000, and needs two generic drugs, one preferred drug, and one non-preferred drug, (NAME THEM) and selects the Blue plan, she must pay the following:

$417.12 a year on premiums

$100 annual deductible

lllllllllllCO-pays

As you can see, the program penalizes Medicare beneficiaries who need brand

name drugs by charging unaffordable co-payments, even though there may not be

generic drugs that are medically appropriate for them.

On the other end of the user extreme, if John Doe uses lllll, lllll, and lllll, and he earns lll a year, he will be required to pay lll in

premiums, a $100 deductible and lll in co-payments. Purchasing the drugs without any insurance would cost only lllll. (CONTRAST WITH SENIOR USING

JUST ONE OR TWO GENERICS)

The prescription drug program also excludes Medicare beneficiaries with disabilities. These beneficiaries are likely to be poorer, sicker, and have less access to alternative sources of payment for drugs such as Medigap or Medicare HMOs.

In March, 2001, the Nevada Legislature will begin hearings on prescription drug

issues. I believe that the Governor and the Legislature is committed to making

whatever changes are necessary to improve our program for our seniors. The Task

Force for the Fund for a Healthy Nevada, chaired by myself and Assemblywoman

Vivian Freeman, requested bill drafts which will be considered at that time.

One bill will create a state-administered prescription drug plan similar to those

run by 26 other states with more affordable co-payments. Another makes improvements to the existing insurance based program, such as the right of a senior to pay

the lower price when a generic drug is not recommended by the their physician and

the right to appeal a denial of a certain drug.

On a broader level, we will also hear testimony on the price of prescription drugs

and approaches other states have taken in examining these price increases. We will

no doubt hear from individuals who go to Mexico to purchase drugs cheaper than

they are in the United States.

Finally, the Nevada Legislature will consider measures recently adopted by other

states—requiring pharmacies to honor Medicaid prices for prescription drugs needed

by individuals on Medicare (with a state established dispensing fee) and the use of

bulk purchasing to lower the price of drugs.

The Legislature will also examine a recent University of Boston study by Alan

Sager and Debbie Socolar entitled ‘‘A Prescription Drug Peace Treaty: Cutting

Prices to Make Prescription Drugs Affordable For All and to Protect Research: State

by State Savings’’. Sagar and Socolar argue that the marginal cost of production for

producing more pills once they have been developed is only 5% of retail price. They

argue that Wall Street analysists concur that drug companies could make up for

price cuts by selling more medications and suggest that if drug prices are set at the

Federal Supply Schedule price, government could subside all necessary drug costs

for people who cannot afford the discounted price. This study notes that there are

557,000 people in Nevada without any drug coverage at all. This includes 75,000

seniors without any drug coverage, 398,000 uninsured people, and 84,000 privately

insured people with no drug coverage. Our State ranks 4th highest among the states

in the percentage of people without drug coverage. This study indicated that Nevada

could have saved $186 million dollars this year alone by purchasing drugs at the

Federal Supply Schedule utilized by the Veterans Administration. Hearings will be

held on this study in Nevada.

I know that this Committee has been studying these issues for some time and has

great expertise in this area. I would offer a few observations from my vantage point

three thousand miles away in Nevada. A private-insurance plan is not successful in

helping our seniors if it is unaffordable. At this point in time, for many, our plan

is unaffordable. Even if we had the lowest cost plan in the nation, we would cover

only 10,000 people when 150,000 need help.

I believe we need a prescription drug benefit added to Medicare so everyone in

need can be helped efficiently and effectively. I believe that block-granting to the

states would be inefficient—it would require 50 different administrations to struggle

the way Nevada did while seniors wait for help. It also taxes a state’s already

strapped human resources.

For example, it has taken the Nevada Department of Human Resources three

years to increase the number of insured children in our Nevada Check-Up program—the CHIP program—from 1,400 to 16,000. Nevada’s Medicaid waiver proVerDate 11-MAY-2000 09:49 Oct 03, 2001 Jkt 072927 PO 00000 Frm 00063 Fmt 6633 Sfmt 6621 E:\HEARINGS\71491 pfrm09 PsN: 71491
60

gram for individuals with disabilities is still not off the ground even though it was

approved by the 1997 Legislature. This is not because they do not want to help children or people with disabilities—it is a resource issue. To add yet another program

to be implemented to the State’s taxed resources is not efficient when the Medicare

program exists and could be improved. It would also allow us to use our scarce state

resources and help other programs in need. One that immediately jumps to mind

is the need to help those on fixed incomes with assistance in paying their utility

bills—our electric bills alone will jump 60% by 2003 and gas rates have also

climbed.

Thank you for the opportunity to share a few thoughts on Nevada’s experience

and I would be happy to answer any questions.

Mr. BILIRAKIS. Thank you very much, Ms. Buckley, for sharing

with us the experience of Nevada in this area.

Mr. Smith.

STATEMENT OF JAMES F. SMITH

Mr. SMITH. Mr. Chairman and members of the subcommittee, I

am Jim Smith, senior vice president of health care services of CVS

Pharmacy. As the largest pharmacy provider in the Nation, CVS

operates 4,126 community pharmacies in 27 States. CVS operates

278 pharmacies in districts of this subcommittee’s members.

I am also here on behalf of the National Association of Chain

Drug Stores. NACDS represent about 170 chain pharmacy companies that operate about 33,000 retail pharmacies all across the

United States. We very much appreciate this opportunity to testify

before the subcommittee today.

We believe that Congress should develop a pharmacy benefit for

seniors, not just a prescription drug benefit. Because seniors take

so many more prescription medications than younger individuals,

they need ready access to community pharmacy-based education,

counseling, and medication therapy management so that they can

take their medications appropriately to achieve the intended medical outcomes.

Mr. Chairman, we especially applaud your leadership in recognizing the essential nature of these services by including a comprehensive medication therapy management benefit in your legislation, H.R. 5151. It is absolutely critical that any Medicare prescription drug benefit that Congress approves includes coverage for

these services.

About 69 percent of seniors have some form of prescription drug

coverage through a variety of sources. About 31 percent of the seniors do not have any form of prescription coverage and pay for their

prescriptions out of pocket. What can pharmacies do to help those

seniors without coverage who pay for their prescription drugs?

First, our pharmacists work with patients and their doctors to try

to maximize the use of lower-cost generics when they are available

on the marketplace. The savings for using generics are remarkable

and unmistakable. At CVS the average brand of prescription price

is about $65, while the average generic prescription price is about

$15, difference of 333 percent.

With billions in dollars in brand names drugs coming off patents

over the next few years, we believe it is critical that any Medicare

drug benefit includes incentives to encourage greater generic use.

We are concerned, however, about some of the tactics being used

by brand name companies that may delay the availability of many

61

of these lower-cost generics and thus increase costs for all prescription drug users.

Second, many of our pharmacies already offer discounts to seniors on prescription drug purchases. These discounts are usually

about 10 percent, but each pharmacy has its own policy on discounting their prices for seniors. We are a fiercely competitive industry as evidenced by our 2 percent net profit margins. If you

don’t like the price at one pharmacy, you can go to another. Many

pharmacies will match their competitor’s prices. And, yes, retail

pharmacy prices do vary from store to store, reflecting differences

in cost of doing business, loss leaders, and other factors. The fact

is, however, consumers can and should shop around for prices.

We believe that two good principles for the committee to keep in

mind when developing senior drug benefits are, first, don’t overpromise to the seniors; and second, make sure that you understand

how all the pieces fit together in the pharmacy marketplace.

Having said this, we are concerned about policy approaches that

would seek to control or target retail prescription prices as the solution to the high cost of prescription drugs for seniors. Here is

why: Almost 80 percent of the cost of the average retail prescription price represents the cost, the pharmacy’s cost, of acquiring the

drug product from the manufacturers, over which we have no control. The remaining 20 percent of the prescription price represents

our operating costs, such as heat, light, rent, salaries, computers,

counseling and overhead expenses. Currently our salary budgets

are experiencing significant upward pressure as a result of the critical pharmacy shortage.

We look forward to working with you this year, Mr. Chairman,

on alleviating this shortage and ensuring that an adequate supply

of pharmacists exists to serve all Americans.

Given these facts, any initiatives that seek to control and limit

our retail charges do nothing to affect our cost of buying the drugs.

For example, these so-called cash discount card programs essentially require pharmacies to provide a discount on the retail prescription price without lowering the cost of providing the product.

In other words, the pain doesn’t flow upstream.

We also believe that these prescription cash discount cards create

unfulfilled promises for seniors. If a senior cannot afford a drug at

$100, it is very unlikely that this senior can afford it at $90.

Second, some say you may be able to obtain better prescription

prices for the elderly by pooling their purchasing power so they can

get the same volume discounts obtained by other pharmaceutical

purchases. Be wary of this line of argument. The pharmaceutical

marketplace does not work that way.

Let me give you a case in point. If volume purchasing drove manufacturer discounts, then why do some of the largest pharmaceutical purchasers, such as CVS, other large drug chains, as well

as many independent pharmacies that belong to a large buying

group, pay higher prices for brand name drugs than smaller pharmaceutical purchasers who buy less volume? Insurance plans and

PBMs say that they can volume purchase and get lower prescription prices for seniors. All this really means is they require the

pharmacy to give a discount to the seniors without passing along

62

to the seniors any of the manufacturers’ discounts, rebates or other

financial incentives being given to the plan.

We also believe that the subcommittee should take a good hard

look at the use of competitive-based premium support models and

pharmaceutical benefit managers, also known as PBMs, in providing any new Medicare drug benefit. For example, how did PBMs

achieve most of their savings? In 1998, CBO said much of the savings that PBMs achieve appear to come from the lower drug prices

paid to pharmacies rather than rebates offered by drug manufacturers.

So then what works for seniors in terms of providing them a

meaningful pharmacy benefit? First let me say we support the establishment of a meaningful voluntary pharmacy benefit program

for all seniors that need and want it. For the short term we believe

that the best course that Congress can take is provide Federal

funds to States to help low-income seniors obtain this pharmacy

benefit. Many States already have these programs in place, like

New York, Pennsylvania, New Jersey, Illinois, and they work. Almost every State is now considering enacting or developing some

sort of prescription assistance program for seniors. For that reason

we believe that States are in good position right now to help those

most in need. For the long term we believe that any new drug——

Mr. BILIRAKIS. Would you finish up, please, Mr. Smith.

Mr. SMITH. I am summing up right now.

For the long term we believe that any new drug benefit for seniors should promote the utilization of generic drugs, provide seniors

with access—with meaningful access to community-based medication therapy management, give seniors access to the communitybased pharmacy provider of their choice; not economically coerce

seniors to using prescription delivery mechanisms such as mail

order, not include price controls on retail pharmacy prices including cash discount cards, and assure that the community pharmacies are adequately compensated and providing services to meet

the needs of our seniors.

We look forward to working with you and the committee on these

issues. Thank you.

[The prepared statement of James F. Smith follows:]

PREPARED STATEMENT OF JAMES F. SMITH, SENIOR VICE PRESIDENT, HEALTH CARE

SERVICES, CVS CORPORATION

INTRODUCTION

Mr. Chairman and Members of the Subcommittee. I am Jim Smith, Senior Vice

President of Health Care Services of CVS Corporation. As the largest pharmacy provider in the nation, CVS operates 4,126 community pharmacies in 27 states. In

2001, we will provide an estimated 320 million prescriptions. CVS operates 278

pharmacies in districts of this subcommittee’s members.

I am also here on behalf of the National Association of Chain Drug Stores

(NACDS). NACDS represents about 170 chain pharmacy companies that operate

about 33,000 retail pharmacies all across the United States. Chain pharmacy is the

single largest segment of pharmacy practice. We filled about 60 percent of the 3.1

billion prescriptions provided across the nation last year. NACDS operates 2,112

stores in the districts of this subcommittee’s members.

We very much appreciate this opportunity to testify before the subcommittee

today. We believe that our experience in delivering and managing pharmacy benefits can be of value to the subcommittee as you begin your important work this year

in determining what works, and doesn’t work, for seniors in helping them obtain

their vital prescription medication and pharmacy services.

63

1 Kaiser Family Foundation, ‘‘The Medicare Program’’, Issue Brief, October 2000.

DEVELOP A PHARMACY BENEFIT, NOT ONLY A ‘‘DRUG’’ BENEFIT

Today, when a patient arrives at their local community pharmacy, be it a chain

pharmacy or an independent, they come into contact with one of the most accessible

and trusted providers in the entire health care system. It is estimated that 95 percent of Americans live within five miles of a retail community pharmacy.

Thus, the vast majority of Americans are never far from a highly trained health

professional that can provide medications or advice on a wide range of health care

issues. Convenient access to community pharmacies makes us a critical part of society’s health care safety net.

Prescription medications are the most widely used and cost-effective health care

interventions used by patients today. Modern prescription drugs have extended and

improved the lives of millions of Americans and saved millions of dollars through

shortened length of illnesses, increased productivity, and reductions in hospitalization and medical procedures. Community pharmacy is proud of the role we have in

assuring the safe and effective use of these therapies.

That is why we believe that any new program to expand prescription drug coverage to seniors should be a pharmacy benefit, not just a prescription drug benefit.

Too often, we think of a prescription drug benefit as only providing a ‘‘drug product’’

to seniors. We believe that this is a serious mistake. Seniors take so many more

prescription medications than younger individuals. For that reason, seniors need

ready access to community-pharmacy-based education, counseling, and medication

therapy management, in addition to the drug product, so they can take their medications appropriately to achieve the intended medical outcomes.

We believe that insurers, payors, pharmaceutical manufacturers, and seniors

themselves can agree that these important community-based pharmacy services

help make better use of prescription products. To play off a popular catch-phrase,

‘‘pharmacy doesn’t make the drugs, but pharmacy does make the drugs work more

effectively.’’

We applaud forward thinking members of this House who supported inclusion of

medication therapy management services in various prescription drug proposals introduced last year. Mr. Chairman, we especially applaud your leadership for recognizing the essential nature of these services by including a comprehensive medication management benefit in your legislation, H.R.5151. It is absolutely critical that

any Medicare prescription drug benefit that Congress approves includes coverage for

these services.

EXISTING PRESCRIPTION COVERAGE SOURCES FOR SENIORS

Now let me turn to our perspectives on the various approaches being used to provide prescription drug benefits to seniors, and what pharmacies already do to help

uninsured seniors obtain their prescription medications. As the Committee knows,

about 69 percent of seniors have some form of prescription drug coverage through

a variety of sources.1

About 50 percent of seniors obtain their coverage through private sector sources,

such as employer-sponsored retiree plans, Medigap plans, and Medicare managed

care plans. The remaining seniors obtain their prescription coverage from public-sector sources, predominantly Medicaid and state-based pharmaceutical assistance programs.

About 31 percent of seniors do not have any form of prescription coverage and pay

for their prescriptions out of pocket. Clearly, we see first hand that many seniors

without prescription drug coverage, and even those with it, struggle to pay their

prescription drug bills.

What do pharmacies do to help these seniors obtain their prescription drugs?

First, our pharmacists work with patients and their doctors to try to maximize the

use of lower-cost generics when they are available on the market. The savings from

using generics are unmistakable. At CVS, the average brand name prescription

price is about $65, while the average generic prescription price is about $15, a difference of 333 percent.

Obviously, if a generic substitute is not available, we will try and work with the

doctor to see if the patient can, in fact, take a generic version of another drug. With

billions of dollars in brand name drugs coming off patent over the next few years,

we believe that it is critical that any new Medicare drug benefit have both patient

and pharmacy incentives in order to encourage greater generic use. We are concerned, however, about some of the tactics being used by brand name companies

64

that may delay the availability of many of these lower cost generics, and thus raise

costs for all prescription drug users.

Second, many of our pharmacies also offer discounts to senior citizens on their

prescription drug purchases. These discounts are usually about 10 percent, but each

pharmacy has its own policy on discounting their prices for seniors. Consumers already reap the benefits of the highly-competitive retail pharmacy marketplace. We

are a fiercely competitive industry, as evidenced by our 2 percent net profit margins.

If you don’t like the price at one pharmacy, you can go to another. Many pharmacies

will match their competitors’ prices. And yes, retail pharmacy prices do vary store

to store, reflecting differences in cost of doing business, loss leaders, and other factors. The fact is, however, consumers can and should shop around for prices.

Third, we can help the poorest seniors access the patient assistance programs that

pharmaceutical manufacturers have established. Clearly, these programs provide a

short-term benefit to some low income seniors, but they are not an adequate solution or appropriate substitute for meaningful, long-term prescription drug coverage.

DON’T OVER PROMISE SENIORS AND UNDERSTAND THE MARKET

Regardless of how seniors obtain for their prescription drugs, whether through

public or private prescription programs, or pay out of pocket, community retail pharmacies are in a good position to help evaluate for the Committee the effectiveness

of various options for prescription drug coverage. In other words, because we are

at the point of service where the ‘‘rubber meets the road’’, we can help determine

what works and what doesn’t.

When considering approaches to prescription drug coverage, we believe that two

good principles for the Committee to keep in mind are: first, don’t over promise seniors; and second, please make sure that you understand how all the pieces fit together in the pharmacy marketplace.

For example, many of you often receive mail from constituents asking the simple

question: ‘‘Why do my drugs costs so much?’’ Well, pharmacy economics 101 is not

that difficult to understand. Reimbursement for almost 85 to 90 percent of all our

prescriptions is set by third party plans, such as insurance companies, HMOs or

PBMs. Third party plans keep squeezing down reimbursement rates in order to control exploding costs, but these policies do little to control escalating expenditures.

Under these plans, most patients simply pay a copay for these prescriptions. Patient

copays have been increasing over the last few years also because of the escalating

costs of prescription benefit programs.

Having said this, we are concerned about policy approaches, both at the Federal

level and the state level, that would seek to target retail prescription prices as the

solution to the high cost of prescription drugs for seniors. Here’s why. The Committee should be aware that almost 80 percent of the cost of the average retail prescription price represents costs to the pharmacy over which we have absolutely no

control (See Attached). These are predominantly the cost of acquiring the drug product from the manufacturer, which is passed through to the consumer, and thus reflected in the retail price charged.

The remaining 20 percent of the prescription price represents our operating costs,

such as heat, light, rent, salaries, computers, counseling, and other overhead expenses. Currently, our salary budgets are experiencing significant upward pressures

as a result of the critical pharmacist shortage. We look forward to working with you

this year, Mr. Chairman, on alleviating this shortage and assuring an adequate supply of pharmacists exists to serve all Americans, including Medicare beneficiaries.

With this as background, let me now talk about some of our perspectives and cautions on other approaches that you may consider this year.

PRESCRIPTION DRUG ‘‘CASH DISCOUNT CARDS’’: UNFULFILLED PROMISE

We have no upward negotiating leverage with brand name drug manufacturers,

so any initiatives that seek to control or limit our retail charges do nothing to affect

our cost of buying the drug. For example, these so-called ‘‘cash discount’’ card programs essentially require pharmacies to provide a discount on the retail prescription

price, without lowering our cost of providing the product. In other words, the pain

doesn’t flow upstream.

We also believe that these prescription cash discount cards create unfulfilled

promises for seniors. If a senior cannot afford a drug at $100, it is very unlikely

that the senior can afford it at $90. In addition, as stated above, many of our pharmacies already give senior citizen discounts, which reduce the retail price essentially to the price that the senior would pay under the cash discount card. Finally,

many of these cash discount card programs also often use out-of-state mail order

65

2 Massachusetts Institute of Technology, The HOPE Plan and the Section 271 Discount Drug

Purchase Program for Massachusetts: An Economic Analysis. December 21, 2000. 3Price Discounting Practices for Pharmaceuticals in the U.S. The Lewin Group, April 2000.

as an incentive to steer patients to certain drugs that may be inappropriate for the

senior. Mail order also takes the senior out of the neighborhood pharmacy setting.

On this topic, we’d like to draw your attention to a recent report from the Massachusetts Institute of Technology that said, ‘‘the individuals who face the greatest

burden lack insurance coverage for prescription drugs are in relatively poor health

with severe chronic conditions, have relatively low income, and do not qualify for

existing state prescription drug coverage programs. These individuals need benefits

that far exceed the savings attainable from a pure discount card program.’’ 2

THE MYTH OF VOLUME PHARMACEUTICAL PURCHASING

Some may say that you can obtain better prescription prices for the elderly by

‘‘pooling their purchasing power’’ so that they can get the same volume discounts

obtained by other pharmaceutical purchasers. What I am here to tell you is be wary

of this line of argument—the pharmaceutical marketplace doesn’t work that way.

Volume purchasing does not drive pharmaceutical manufacturers to give discounts—you have to move a manufacturer’s ‘‘market share’’ to obtain these discounts.

Let me give you a case in point. If ‘‘volume purchasing’’ drove manufacturer discounts, then why do the largest pharmaceutical purchasers, such as CVS and other

large chain pharmacies, as well as many of the independent pharmacies that belong

to large buying groups, pay higher prices for brand name drugs than smaller pharmaceutical purchasers who buy less volume?

Here’s what the proponents of ‘‘volume purchasing’’ for seniors don’t and won’t tell

you. All this really amounts to is simply discounting the retail prescription price

that seniors pay at their pharmacy, without affecting our cost of buying the drug

or without requiring the insurance plan or PBM to ‘‘pass through’’ to the senior any

and all of the financial incentives that are given to them by the manufacturer. If

these plans were required to pass through all the discounts that they negotiate, both

pharmacy discounts and manufacturer discounts, the senior would truly benefit

from lower prescription drug prices. Without these other ‘‘pass throughs’’, the entire

burden of so-called ‘‘volume purchasing’’ falls squarely and unfairly on the shoulders

of community pharmacies.

We also believe that some of the estimates being made of the size of the discounts

that volume pharmaceutical purchasing would attain for seniors are unrealistic and

will create serious unfulfilled promises. For example, there were several numbers

floating around last year that indicated that private sector entities, or PBMs, would

be able to lower retail prescription prices paid by consumers by 25 percent, with

some estimates as high as 30 to 39 percent.3

We do not know where these numbers come from or how they are calculated. The

only remotely conceivable way that this discount size could be attained is if the

PBM is required to pass along to the consumer any and all financial incentives (e.g.

rebates or discounts) that they negotiate with pharmaceutical manufacturers. I am

here to tell you that this does not happen today in the marketplace and is creating

false and unrealistic expectations.

‘‘DRUGS ONLY’’ PLANS AND INSURANCE-BASED MODELS

We understand that there is support among Members for creating ‘‘drugs only’’

insurance-based models to provide prescription drug coverage to seniors. Recent experience in Nevada should tell us that, just because you ‘‘build it’’, doesn’t mean

that ‘‘seniors will come.’’ In a genuine effort to help seniors obtain prescription

drugs, Nevada embarked upon establishing an insurance-based model to provide

prescription drug coverage to seniors. After several attempts to finally find a company that wanted to administer the program, reports are that only a handful of seniors have signed up because of the high premiums and cost sharing in the program.

We are concerned about a similar fate if such an approach is tried at the Federal

level. In general, these programs are subject to significant ‘‘risk selection’’, and tend

only to attract those seniors that need protection against high prescription drug

bills. Many seniors will not see the benefit in obtaining this coverage because of the

significant deductibles and premiums that have to be paid before any benefit is derived from the coverage. Thus, because the cost will keep many seniors out of the

‘‘risk pool’’, premiums will keep increasing for those remaining in the pool, making

it less and less affordable for those that need the coverage.

66

4 Insurers Push Rates Higher for Medicare Supplement. Milt Freudenheim, New York Times,

February 8, 2001. 5 Congressional Budget Office, How Increased Competition from Generic Drugs Has Affected

Prices and Returns in the Pharmaceutical Industry, July 1998, p 8. 6 U.S. Office of Personnel Management, ‘‘Plan to Control Health Premiums for Federal Employees and Retirees announced with Release of Premium Increases for 2000. September 20,

1999. 7Kaiser Family Foundation. ‘‘The Medicare Program’’ Issue Brief, October 2000.

Moreover, the cost of these private-sector insurance plans can also be prohibitive,

as was reported last week in the New York Times. The premiums for Medigap plans

with prescription drug coverage, the model on which these insurance-based programs are based, will increase 31 percent in New York, 26 percent in Illinois, 24

percent in Wisconsin, 16 percent in Arizona, and 14 percent in Ohio.4

‘‘PREMIUM SUPPORT’’, CAPITATION AND PBMS

We also believe that the subcommittee should take a good, hard look at the use

of the competition-based ‘‘premium support’’ model and pharmaceutical benefit managers, also known as PBMs, in providing any new Medicare drug benefit. For example, how do PBMs achieve most of their savings? By focusing on squeezing pharmacy reimbursement or negotiating rebates and discounts from drug manufacturers?

The track record of PBMs in being able to manage pharmaceutical costs was

called into question by CBO in a 1998 study, which 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.’’ 5 The study found that 50 percent

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.

This study reflected the experience of the three largest PBMs that manage the

9-million member Federal Employees Health Benefits Program (FEHBP). Members

of Congress should be aware that this program, which is being talked about as the

basis for a future Medicare ‘‘premium support’’ model, has been experiencing doubledigit increases in prescription drug expenditures over the last several years, 22 percent for 1998 alone.

In announcing significant health premium increases for the 2000 FEHBP plan

year, a significant percentage of which was to account for escalating prescription

drug costs, Office of Personnel Management (OPM) Director Janice LaChance said

that ‘‘it is clear that competition in the marketplace has not effectively slowed the

growth in FEHBP premiums.’’ 6

We believe that the experience of FEHBP should be instructive to Members of

Congress as they consider the ‘‘premium support’’ model for Medicare. Please note

that these prescription drug cost increases are occurring in a population that is not

representative of the Medicare population. FEHBP generally serves a younger population that uses fewer prescription drugs than the Medicare population. More significant increases are likely to occur in an older, Medicare-based population.

Moreover, some of the proposed ‘‘premium support’’ models would pay a fixed, ‘‘capitated’’ rate to providers of the pharmacy benefit. Past experiences is using capitation models for pharmacy benefits have been unsuccessful. There is no reason to

believe that they would be any more successful today, given the impact that manufacturer direct-to-consumer advertising has had on fostering increased prescription

drug use. We are concerned with this model and the impact that it would likely

have on the health of Medicare beneficiaries and on the economic viability of community pharmacies.

SO ... WHAT WORKS FOR SENIORS?

What works for seniors in terms of providing them a meaningful pharmacy benefit? First, let me say that we support the establishment of a meaningful, voluntary

pharmacy benefit program for all seniors that need and want it.

For the short term, we believe that the best course that Congress can take is to

provide Federal funds to states to help low income seniors obtain this pharmacy

benefit. We know that there are many mixed feelings among Members of Congress

about this approach. However, given that almost every state is now considering enacting or developing some form of prescription assistance program for seniors, we

believe that states are in a good position, right now, to help those most in need.

And data indicate that 60 percent of those seniors without prescription drug coverage, or about 7.2 million seniors, have incomes of less than 200 percent of poverty.7 We see many of these seniors in our pharmacies every day, struggling to pay

67

their prescription bills. For them, they just want some help to get them their medications.

For the long term, we want to work with this Committee, the rest of the Congress,

and the Administration to achieve long term reform of the Medicare program to provide the type of quality pharmacy benefit that seniors need and deserve.

We believe that this benefit should:

• promote the utilization of generic drugs when appropriate;

• provide seniors with access to meaningful, community-based medication therapy

management services with appropriate compensation for pharmacies;

• give seniors access to the community-based pharmacy provider of their choice;

• not economically coerce seniors to use other prescription delivery mechanisms,

such as out-of-state mail order;

• not include price controls on retail pharmacy prices, including prescription cash

discount card programs; and,

• assure that community pharmacies are adequately compensated in providing services to meet the needs of our nation’s seniors.

We look forward to working with you and the Committee on these issues, and that

you for the opportunity to testify today.

Mr. BILIRAKIS. Thank you very much, Mr. Smith.

I will start the questioning. Mr. Smith, I will start with you.

In your testimony you state that it is important for Members of

Congress to understand how all of the pieces fit together in the

pharmacy marketplace. God knows, that certainly is true. And you

have touched on that, but not in very much detail. I wonder if you

could help me understand the chain that takes place as a prescription drug tablet journeys from the manufacturing plant to the medicine chest of a senior citizen. I appreciate the fact that you represent the chain drugstores, but take into consideration in addition

to the chain drugstore the little family drugstore, which there

aren’t many left out there. Could you do that for me?

Mr. SMITH. Sure. There are many parts to this, but in essence

the delivery—the distribution system, is that what you are interested in? It comes from the pharmaceutical——

Mr. BILIRAKIS. I am interested in the distribution system, but

also your opinion. And you touched on this in terms of the costs

of that particular tablet as it goes through the system.

Mr. SMITH. I will give it to you from the chain perspective. And

today most independents form buying groups, and they operate

very similar to a chain, so I think you can use that model for everyone.

Mr. BILIRAKIS. Do most——

Mr. SMITH. Most independents, and as you said there are fewer

of them today, but they are actually stabilizing out there and are

much stronger today than they were in previous years. So we do

have a very strong community-based system out there. But most of

them buy by either of two mechanisms. They buy directly from the

manufacturers where that is permitted, or they buy from a wholesaler.

Mr. BILIRAKIS. Who is that wholesaler?

Mr. SMITH. Wholesaler could be somebody like Cardinal Health

or McKesson or somebody like that, and they will have daily deliveries. The bulk of what we purchase in dollar volume is usually

purchased through a manufacturer directly. Now, we warehouse

that in certain warehouses across the Nation, or stores order that

medication and is delivered to the stores. But obviously you can’t

be in supply of every medication every day, so we use wholesalers

on a daily basis to supplement our inventories.

68

Mr. BILIRAKIS. Are these wholesalers, the warehouses that you

are referring to, are some of those CVS warehouses?

Mr. SMITH. Yes. We have CVS warehouses across the Nation

where our stores are located, which supplies not only on pharmacy

items, but also over-the-counter items. We also have wholesalers located geographically which we use a primary wholesaler and generally a backup wholesaler.

Mr. BILIRAKIS. Can you take the cost of that tablet—— Mr. SMITH. The cost of a tablet, and I will break it to the brand

side and generic side. If we go and we buy from pharma company

A, whatever the medication we are buying, whatever class it is, we

are going to pay on the brand side the exact same price as our competitor from Rite Aid, Walgreen’s, or Eckerd’s or the independent

buying group. On the brand side there is no volume purchasing.

Mr. BILIRAKIS. That is if you purchase it from the manufacturer?

Mr. SMITH. Manufacturer or wholesaler.

Mr. BILIRAKIS. All right then. Or wholesaler. So if it goes from

the manufacturer to, let’s say, one of your warehouses, then what

does your warehouse do? Does the warehouse purchase that tablet

from the manufacturer?

Mr. SMITH. The warehouse is just a holding point to distribute

the medications to the individual pharmacy stores.

Mr. BILIRAKIS. So it doesn’t really—it doesn’t purchase it and

then resell it?

Mr. SMITH. We purchase centrally from our home office in

Woonsocket, Rhode Island, and we have it delivered to our distribution centers, which then distribute it to the stores. We also use— the individual stores on an as-needed basis will order daily from

a wholesaler to get medications which they are out of stock on and

they have to get to the store. Those are preset prices on contracts

or arrangements. But as I said on the brand side, those prices are

relatively the same across the industry. There are some volume

purchase arrangements on the generic side. So the larger you are,

the better you can buy some of those products. So there is a little

bit of slight advantage on buying generics, although the bulk in

dollars of what we buy is obviously on the branded side.

Now, what we sell those—what we sell in medications is certainly dependent on the plan which we have. And CVS, 90 percent

of the business we do from pharmacy is through some type of thirdparty arrangement. And we negotiate with that third-party plan

whether it is a Medicaid or whether it is a private PBM or HMO.

Each one of those are different contractual arrangements based on

administrative costs.

Mr. BILIRAKIS. Did you say 90 percent?

Mr. SMITH. Ninety percent of CVS business, higher than most of

the industry. Most of the industry is somewhere in the 80’s. But

90 percent of our business is done through some type of third

party, and those arrangements are all separate. And once again,

the arrangements there are done from the HMO, PBM to the plan,

so they arrange on rebates or whatever else they do. So the financial gain there would be from the PBM or the insurance agency,

not to the retailer pharmacy.

Matter of fact, just the opposite really occurs at the retail because we are the ones who end up administering the care, adminVerDate 11-MAY-2000 09:49 Oct 03, 2001 Jkt 072927 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 E:\HEARINGS\71491 pfrm09 PsN: 71491
69

istering the formulary or whatever. So additional costs end up

being promoted at the retail setting because our pharmacists are

required to explain, try to explain to plan design why they can’t get

the medication they have been taking for 20 years.

As you all hold your town meetings next week and on a regular

basis in your district, I also visit our pharmacists in each of the locations, and we hold town meetings, and the one thing that they

tell me is, please take away the administrative burden of filling a

prescription. Give me the ability to do what I have gone to school

for 6 years for. Let me talk to my patients and my customers, explain to them the medications they are taking.

Right now as we try to——

Mr. BILIRAKIS. Well, my time has expired, Mr. Smith. I will tell

you, as we will announce when we finish up, there will be questions that will be submitted to all of you, and I plan to go into some

of the details regarding my questioning in more detail to you.

Mr. SMITH. I would love to do that.

Mr. BILIRAKIS. I appreciate that.

Mr. Brown.

Mr. BROWN. Thank you.

The chairman in his opening statement linked Medicare reform

and prescription drug coverage, that this Congress perhaps or

maybe likely will pursue them together. I think the more critical

link is between prescription drugs and the $1.6 trillion proposed

tax cut.

If you look at the cost of prescription drugs, one plan that we

considered last year was $80 billion over 5 years, which is—under

Medicare, which is adequate, but hardly as generous as many of us

would like. A plan with more of an 80/20 split that would be—

would really, I think, better meet the needs of Medicare beneficiaries would be at least half again as expensive as that.

Then you also consider in the years ahead, 30 years from now,

the projections of the Medicare population, today 40 million will

then be some 80 million beneficiaries, and the huge burgeoning of

costs that come with that.

Ms. Rowland, if you have done any analysis, if Kaiser has done

any analysis on this, or if you haven’t, if you would, just draw on

your knowledge and experience of how this all collides in the next

couple of decades if we pursue the $1.6 trillion tax cut and we pursue a good prescription drug benefit, at least the $80 billion over

5 years; understanding the increased costs will cost later and the

burgeoning numbers of Medicare beneficiaries in the next couple or

three decades, sort of where we go and what happens.

Ms. ROWLAND. Well, clearly as you look at the expanding Medicare population, as you look at the history that we have just laid

out today of the rising cost of prescription drugs, but also the increased need of the population for the use of prescription drugs, we

have no way to really anticipate what additional drugs will come

onto the market over the next 10 years. So I think we can really

look at this area as one that is going to grow, and the cost is going

to grow. Some estimate that a comprehensive drug benefit under

Medicare could cost as much as $300 billion over the next 10 years.

Obviously when you begin to use the surplus for prescription drugs,

70

it requires then a substantial commitment of that surplus. A substantial tax cut would really leave that fairly limited.

So I think you really need to look at the fact that if you are going

to do a meaningful drug benefit, it is probably going to be expensive. It is going to grow in cost over time, and you are either going

to have to commit what resources the surplus offers or additional

tax revenue.

Today the elderly pay about 20 percent out of pocket on drugs.

That is expected to rise to about 30 percent by 2025. So we are

kind of on a collision course here of increasing costs for a very

needed medication and the need to pay it down through either increased commitment of Federal revenues through the surplus or

whatever means.

Mr. BROWN. Ms. Rowland, let me go in a different direction for

a moment, too. Some are advocating—in Congress are advocating

a drug proposal to specifically target low-income individuals. What

is your research showing us about coverage, who doesn’t—about

who has coverage, who doesn’t, and where the real need is?

Ms. ROWLAND. Well, the very poorest of the population obviously

receive coverage through the Medicaid program. Those who are basically receiving cash assistance through Supplemental Security Income are also eligible for coverage under Medicaid, which today includes a prescription drug benefit. So it is really the near poor and

the modest income that have the greatest need for prescription

drug coverage, although the other thing that one needs to look at

is within the Medicare population, income and need for drugs are

not directly related. And so when we look at those with the highest

drug expenditures and those who don’t have coverage today, it

crosses all income spectrums. In fact, people, for example, in rural

areas have particular problems. They are less likely to have access

to HMOs, less likely to have worked in a situation giving them retiree benefits. So we really see that the need for prescription drug

assistance, I think, is fairly universal.

Mr. BROWN. So if someone is 200 or 250 percent of poverty, and

our program is targeted to those at 175 or below, we really are

missing out at helping a good number of people who won’t get help

otherwise and will face pretty——

Ms. ROWLAND. Right. Like a third of Medicare beneficiaries without prescription drug coverage today. About half of them have incomes below 175 percent of poverty, so you inevitably leave out 6

million people above that who today go without drug coverage.

Mr. BROWN. Mr. Chairman.

Mr. NORWOOD [presiding]. There are so many of us here, happily,

today that I am going to keep us on the 5-minute schedule, but

hopefully we will have time for another round because I am absolutely certain that everybody up here has lots of questions, and

that includes myself, who happily is next.

Mr. Weller, I would like to ask you some quick questions of

which I hope, you know, I can get fairly quick answers and then

go on to Mr. Moroni. Of the 9 million people who purchase individual Medigap coverage today, H, I and J, I believe, all of those

are the prescription drugs, how many of the 9 million actually purchase those Medigap policies?

71

Mr. WELLER. I believe that the 9 million includes both of the

prestandardized plans, many of which had some prescription drug

coverage, as well as the 10 standardized plans. Studies have shown

that less—less than—around 10 percent, I guess, of people purchase H, I or J, one of those three.

Mr. NORWOOD. Could you compare the price for me real quickly

as to what perhaps an H or I Medigap policy might cost with drug

prescription drug benefits versus one that doesn’t?

Mr. WELLER. It appears that those policies cost about $1,000

more, 1,000 to 1,200. It is very close to the amount of the maximum drug benefit in those plans, which is 1,250 and $250 deductible. As I noted, the difference in cost is because of the difference

in other—utilization of other services as well as the drugs.

Mr. NORWOOD. How many seniors in these plans actually hit

their caps? Can you give me some percentage of that?

Mr. WELLER. I have not seen any study that had a good distribution of that.

Mr. NORWOOD. You can get back to me.

Mr. WELLER. I will try.

Mr. NORWOOD. I was pretty startled to read that seniors electing

the drug coverage option, they actually have a higher A and B cost

than those seniors that are in non-drug plans. Is that true?

Mr. WELLER. Yes, that is true.

Mr. NORWOOD. Mr. Moroni, I particularly wanted to ask you a

couple of questions because I think GM is a pretty good model. You

guys do a lot of things right and have a lot of information in terms

of the numbers of people that you insure. My understanding from

what you said was that as you look at your coverage for your employees, you are finding that prescription drug costs are rising or

escalating. Is that still—that is a true statement?

Mr. MORONI. Yes, at approximately 19 percent annually.

Mr. NORWOOD. Do you believe that cost is because your seniors

are actually taking more medications because more are available,

or do you believe that cost is up there because there is an increase

in the price of the medications that you are buying?

Mr. MORONI. It is obviously a combination of both. I mean, we

do have an aging population, like all groups, so part of it is that

people are taking more drugs. However, you also see different factors there; not just more drugs, it is inflation, and it is trading up

of drugs. So it is really both. And I guess I would comment that

you want your seniors on the right drugs. You know, you want

them on hypertension, heart medication, whatever it is they need.

You also want everything that they need to be appropriate and

nothing more.

Mr. NORWOOD. Tell me, do you see—I mean, as we are taking or

prescribing more medications, there are a couple of reasons that

may be true, but one of which is—I hope is that people are

healthier; in other words, it can be preventative in nature. Are you

seeing any decrease at all in your health care treatment costs as

you are seeing an increase in your prescription drug costs?

Mr. MORONI. That is a question we get asked often in various

forms, and we have seen no decrease in our—we call it hospital

surgical medical, everything other than the drug costs, as the drug

costs have increased. So——

72

Mr. NORWOOD. Is the medication a quality of life issue or extending life issue more than fewer costs in actual treatment? That is

an important question. I don’t mind you getting back to me either

if you want to. But that is—if you can know that, it would be helpful for us to know.

Now, you said in your statements that you support a universal

drug benefit with Medicare. Does your company then—if and when

we do some form of that, do you believe that your company would

then drop drug benefit coverage for your employees because then

they could use Medicare?

Mr. MORONI. I think what we would like to do is have the option

to see what Congress enacts and then decide how we may want to

wrap around or provide coverage, you know, within the coverage

that is enacted. Today we provide wraparound coverage for the

nondrug benefits to Medicare. So it is all dependent.

Mr. NORWOOD. Has there been any discussions with UAW about

that, any talk about, well, if Congress actually furnishes a Medicare coverage, then what General Motors might want to do with

their plan?

Mr. MORONI. Not that I am aware. I mean, that conversation just

hasn’t occurred that I am aware of.

Mr. NORWOOD. Is that a reasonable concern for people to believe

that if we go to a full Medicare coverage, that people such as yourself that are offering benefits might get out of that totally, particularly in view of the rising costs?

Mr. MORONI. I guess the way that I would—I think the best way

to answer that without seeing what might be enacted is that we

hope that it is a universal type of coverage, that——

Mr. NORWOOD. Well, you support universal. Let’s presume that

it is universal.

Mr. MORONI. You know, I think it would be our hope that such

coverage as universal coverage, it has good controls, and it might

help some of the employers, whoever they are, whether it is General Motors or other employers providing retiree benefits, continue

to maintain the benefits they are providing. I think it is a challenge today for people to do that.

Mr. NORWOOD. I will get back with that on the next round. I

have a minute or so left.

Mr. Smith, in your purchasing—time is up? Well, my time is up.

I will get back to you next time. I would like to give the time to

my good friend John Dingell all the way down at the end.

Mr. DINGELL. Mr. Chairman, I thank you for your courtesy.

Mr. Jones, welcome to the committee. What percent of the counties in the United States have HMOs within their borders?

Mr. JONES. I am not sure. That is not something I would know.

Mr. DINGELL. Is it all or part?

Mr. JONES. I would say it is not all. It is part.

Mr. DINGELL. Would you submit that for the record?

My information is that 38 million Medicare beneficiaries live in

areas where there are no HMOs, and that 68.1 percent of the beneficiaries live in a county with at least one HMO. Now, do you agree

with that?

Mr. JONES. Again, that is not my speciality.

73

Mr. DINGELL. What would the statement be with regard to

PacifiCare?

Mr. JONES. We operate in eight States.

Mr. DINGELL. Eight States. All right. Now—— Mr. JONES. And not all counties of those eight States. There are

some counties we don’t have HMO benefits in or health plan benefits.

Mr. DINGELL. Usually you don’t do business in rural counties because there aren’t enough people there, right?

Mr. JONES. It is hard to get physicians to—— Mr. DINGELL. So usually the HMOs stay out of the rural counties. Yes or no?

Mr. JONES. Rural counties are difficult, yes.

Mr. DINGELL. So you stay out of the rural counties.

Now, what criteria do you have at your HMO for going into a

particular county or staying out of it?

Mr. JONES. I am a pharmacist, and I don’t make those decisions.

I am not—— Mr. DINGELL. So you don’t know.

Mr. JONES. I don’t know.

Mr. DINGELL. But it would be fair to assume you go where you

make money, right?

Mr. JONES. I assume.

Mr. DINGELL. I assume.

Now, what did your HMO do with the money that was given to

the HMOs in the last Congress? What percentage of it went to

beneficiaries, and what percent went to profits, and what percent

went to dividends, and what percent went to the corporate officers

in salaries or bonus?

Mr. JONES. Seeing that I am not a financial officer of the

company—— Mr. DINGELL. The answer is you don’t know.

Mr. JONES. I don’t know.

Mr. DINGELL. So if I made the statement that you folks cut a fat

hog on that, and that the rest of the industry did, you would not

be able to deny it, would you?

Mr. JONES. I wouldn’t be able to comment.

Mr. DINGELL. Well, I am going to make the statement. You cut

a fat hog on it, and nobody but you and the HMOs got anything

out of this.

Now, having said that, what commitment did the HMOs make

with regard to the administration bill? This bill, as you note, gives

money to the States, who are then supposed to give it to the HMOs

in the somewhat dubious expectation that that money will then

flow forward and through to the HMO patients. Do the HMOs

make any commitment on this matter, or do you just intend to

pocket that fine generosity which flows through from the Federal

Government?

Mr. JONES. As I understand, and again, the pharmacy part of our

company, our parent company, does other things, but as I understand, the money flowed through to providers, paid providers.

Mr. DINGELL. Now, I note here that in some 66 counties the maximum benefit is $1,000 under most of the HMO prescription pharmaceutical benefits. I note that the copay is 50 percent, and I note

74

that in most instances the plan premium per month is somewhere

between $29 and $75 a month. Do those figures sound right to you?

Mr. JONES. We don’t have percentage copays for our—not at our

company.

Mr. DINGELL. As a matter of fact, this is interesting. My staff informs me that this is your company, and that you do have a copay.

Mr. JONES. We have copays, but not percentages. They are individual copay amounts.

Mr. DINGELL. It says brand mail order copay percentage 50 percent. And this is in Oklahoma: Creek County, Grady County, Lincoln County, Logan County, McClain County, Nowata County,

Okfuskee County, Oklahoma County, Osage, Pottawatomie, Rogers,

Tulsa, and so on. Is this a surprise to you?

Mr. JONES. I don’t know every single county and every single

State of our eight States; however, the vast majority of our business, in fact—— Mr. NORWOOD. Mr. Jones, go ahead and complete the answer,

and that will end the questioning for Mr. Dingell and yourself. We

will come back.

Mr. DINGELL. I feel sad about this because I know Mr. Jones has

been enjoying this questioning.

Mr. NORWOOD. I feel sad about it, too, but I was sad about my

5 minutes, too.

Mr. JONES. I would say that greater than 90 percent of our

copays are fixed. Again, I wasn’t aware—you may be entirely right.

Mr. DINGELL. I notice that you have a copay—— Mr. NORWOOD. Thank you very much, Mr. Dingell. I am sorry to

interrupt you.

Mr. Buyer, you are next.

Mr. BUYER. Mr. Weller, I want you to know that I agree with

your comments that you made that we should not add a prescription drug benefit without doing some structural reforms in Medicare, and I think that we should make it as part of a comprehensive plan would be my position, so I want to agree with your comments.

Second, to the gentleman from General Motors, I recall in the

early 1990’s when there was this euphoria over Clinton care, the

major automobile manufacturers supported a provision that permitted the government to assume the health care costs for your retiree population 55 and older. You wanted to trigger them on to the

taxpayers; is that correct?

Mr. MORONI. I can’t comment on that. I was not—but that would

not be my understanding of the triggering on to the taxpayers, no.

Mr. BUYER. Well, I don’t know who else was going to pay for it

if you wanted to trigger them into the universal Clinton government health care system. One of the biggest concerns that many

of us had was when the Big 3 came in, they negotiated a lot of different contracts, and then the escalating costs, they were very

eager to sort of dump retirees onto the government. Who is the government? It is the taxpayers.

So you got my attention here today and so has Ms. Rowland in

her testimony. I pick up her testimony and she says that ‘‘40 percent of large employers report seriously considering cutting back on

drug benefits for their retirees in the next 3 to 5 years, according

75

to a recent survey of large employers conducted for the Kaiser

Family Foundation by Hewitt Associates.’’ So I want to continue

with the questions of earlier.

You have some negotiated benefits with union employees. You

also now have retirees that are nonunion, whether they are administrative or white collar. My fear is that while the unions are going

to put up a really big fight if you think you are going to trigger

them into some type of plan, they are in a comfort zone; but you

have a lot of employees, independents, widows who may not have

that coverage or protection like the union retiree may have, and my

fear is you are going to trigger them into something different.

So will you please—what do you tell the retirees—I used to have

a GM facility, a lot of retirees in Kokomo, I have some in Marion.

What do you say to them? They are on fixed incomes right now.

Mr. MORONI. You know, I think the best way to look at this from

our perspective is the way to ensure that employers continue to

provide some sort of retirement benefit, the responsible employers

that there are right now; to make sure that Congress swiftly enacts

a type of broad-based universal prescription drug Medicare, either

program or supplement.

So I think it just has to be viewed that there are a lot of responsible employers out there right now that are still providing health

care coverage, drug coverage and whatever, that probably want to

continue to provide such coverage, and they are looking for different avenues to help them through the challenges of trends that

we are seeing. So I think the best way to make sure that that continues is by Congress swiftly moving toward some sort of universal

Medicare coverage. That is what will help in our opinion, that is

what will help the employers who are being responsible right now

to continue to be responsible.

Mr. BUYER. Do you have sort of an idea of what the cost of prescription drugs are added to the price of an automobile?

Mr. MORONI. You know, I should. That is not one figure I have

with me.

Mr. BUYER. Is the General Motors executive sort of looking at

this and saying that the dollar is fungible, that someone out there

in America is going to be paying for this, and if you have this 19

percent increase in cost, well, we can’t eat it, so we add it to the

price of automobiles and the consumers pay, or we wrap them into

some systems that we create here, and the general population

pays?

Mr. MORONI. I guess—could you redirect something more specific

to me, because I really think that what we are really trying to say

is that we are feeling very pressured by the type of trends that we

are seeing. We still want to be a responsible employer. We are looking for all avenues to be able to, you know, still provide comprehensive coverage. We are also seeing that there are gaps, and that a

universal type of plan by Medicare will help offer——

Mr. BUYER. Let me——

Mr. NORWOOD. I am sorry, Mr. Buyer. Your time is up.

Mr. Green, you are next.

Mr. GREEN. Thank you, Mr. Chairman. Again, hopefully we will

have a second round for those of us who can stay around.

76

Let me first start off by saying that in 1965, if we could have created Medicare without covering doctors or hospitals, we would have

thought it was crazy. And here we are in 2000 where we have seen

over the years our prescription costs, both for seniors, but for the

private sector has gone up, compared to—along with other costs,

but it is so much more a part of our health care dollar today than

it ever was. So I think if we recreated Medicare here today, we

would have prescription drugs as part of it.

I thought it was interesting, the adverse selection concern, Mr.

Weller, because that is why Medicare was created. Insurance is

there for adverse selection. You want—insurance companies have

to make a profit. They don’t want people—all their claimants—to

claim, so they can make that profit. They couldn’t make a profit in

1965, and so that is why Medicare was created, or really 20 years

before that, because that is when the bills were introduced.

So that is what troubles me about trying to have the private sector provide for a prescription drug benefit and make a profit on it

without a great deal of subsidization that we would have to do.

Mr. Jones, we work with PacifiCare a great deal in Houston, because after all, the other HMOs, Secure Horizon stayed in the

Houston market and I appreciate that, and I appreciate Secure Horizon working with my staff on individual constituent cases, and

really good to work with. NICARE, 65 withdrew from the Houston

market last year, along with about 60 percent of our seniors—they

covered 60 percent of our seniors, NICARE did, and they withdrew.

We do have two new companies that just announced coverage in

Houston, one a PPO and one an HMO. The HMO will not cover

prescription drugs, and the other one, the PPO will, but they are

charging $85 per month premiums in addition. National

Medicare+Choice plans are dropping their drug benefits, lowering

payment caps, imposing stiff premium surcharges, and the portion

of Medicare+Choice plans with a payment cap of $500 or lower has

increased by 50 percent in the last 2 years since 1998—3 years.

Nearly three-quarters of the Medicare+Choice plans have capped

benefits at $1,000. I know, I think Secure Horizon’s prescription

drug benefit in Houston, at least Harris County, is $1,200.

How can seniors rely on Medicare+Choice plans to provide coverage that they need when we see what is happening in the market?

Mr. JONES. It is a challenge for Medicare+Choice plans. We do

what we can to manage the pharmacy benefits to where people can

continue to afford them. Increasing costs are a continued challenge

for us and we have to come up with methods of dealing with the

increasing cost of drugs, increasing utilization. We do all of that,

and we do it in a fairly flexible manner. We try to change with the

changing times. But reimbursement is always an issue for us.

Mr. GREEN. How many—what percentage of Secure Horizon’s

customers do you think—has your company done any research—

joined your HMO because of prescription drug benefit?

Mr. JONES. I am sure there are figures, and I could certainly get

back to you on that.

Mr. GREEN. I would appreciate it, because just again, nonscientific in my own district, a huge percentage of our seniors joined

77

an HMO simply because they didn’t have any options, they needed

some type of prescription drug benefit.

Mr. JONES. I don’t doubt it.

Mr. GREEN. Mr. Moroni, you state in your testimony that prescription drug cost increases for GM have averaged 19 percent annually for the last 3 years.

Mr. MORONI. Correct.

Mr. GREEN. And you expect them to continue to rise, and you

also reference that 80 percent of the prescription drug costs for

your retirees are for your retirees, surviving spouses and their family. Eighty percent of the drug costs that GM pays for are for retirees, surviving spouses and their families?

Mr. MORONI. Correct.

Mr. GREEN. So only 20 percent is for current GM employees?

Mr. MORONI. Correct.

Mr. GREEN. That is an amazing percentage. I mean it shows that

the older you get, the more medicine we need, which is, again,

seems like it should be given.

Mr. NORWOOD. Thank you, Mr. Green. I am new at this. I forget

to turn the microphone on. Thank you very much, Mr. Green. You

have 5 seconds and I wanted to say you are getting into a long,

lengthy question.

Mr. GREEN. Let me just ask to Mr. Moroni, both—GM is trying

to curb costs and however you can answer it, if you have to get

back, but what is GM doing to solve the problem of adverse selection that we heard from other witnesses?

Mr. NORWOOD. Mr. Moroni, if you would submit that in writing,

please. I have to go to Mr. Greenwood, and now it is his turn.

Mr. GREENWOOD. Thank you, Mr. Chairman.

I would like to direct some questions to Mr. Jones and Mr.

Weller, and anyone else who would like to comment, it would be

helpful.

I want to focus on Medicare+Choice plans. It is sort of interesting

that we get two completely different perspectives, depending upon

who we are listening to, about how Medicare+Choice plans operate.

In listening to Mr. Dingell, it sounds like the Medicare+Choice plan

is some sort of carnivore that wanders into a region and gets fat

on profits and, after fattening up, gluttonly wanders off for some

strange reason, as if it doesn’t want to eat anymore. The way it

looks to me is that the Medicare+Choice plans go out there, and we

started feeding them well enough when we started out with 95 percent of the average area per capita cost, and they could provide a

nice, full plate of all of the regular Medicare benefits, plus, plus.

There was the plus. The prescription drugs and the dental and

hearing benefits and so forth. And then we stopped—we stopped

feeding them. We didn’t pay them enough to keep up with the

costs. So after they got down to skin and bones, they wandered out

and said, we are not going to starve to death.

That is a bit of an exaggeration, but it seems to me that those

are the prevailing perspectives on how Medicare+Choice plans are

operating. I wondered if you could comment on—I mean, to me, we

have, as I said in my opening statement, we have a lot of work to

do to try to provide a prescription drug benefit, but at least for a

while there, the Medicare+Choice program seemed to be a great opVerDate 11-MAY-2000 09:49 Oct 03, 2001 Jkt 072927 PO 00000 Frm 00081 Fmt 6633 Sfmt 6602 E:\HEARINGS\71491 pfrm09 PsN: 71491
78

tion. It certainly was for my mom and dad. They didn’t have to buy

Medigap anymore, they got their prescription drugs, they got good

health care, everything was going fine.

Now, in my district, what has happened is A, we didn’t keep up

paying these plans, the premiums that they needed; and B, we

have a screw-up, because in Philadelphia, which is not in my district but borders my district, there is a zero premium prescription

plan. But in my district, it is very expensive to get exactly the

same package.

I wonder if you could comment on what I have just said in terms

of really what has been driving the Medicare+Choice plans and

what their options have been, and these two perceptions.

Mr. JONES. I think that this industry has been fairly competitive

among the various players, and where there was fairly reasonable

reimbursement in a region, they would enrich their benefits to attract members into their plans. As the reimbursement levels were

reduced, so was the richness of the benefits that were offered. And

everyone needs to be able to break even or show a profit in order

to continue their business. It has been unfortunate for seniors because they did get used to companies competing for their attention

and trying to get them into their programs, which included very

reasonable benefits for a pharmacy. There were no caps in some

programs, the competition was such.

That has all changed. I certainly empathize that we have done

whatever we could to keep that benefit there, but there have been

caps put on it, higher copays, more cost-sharing by the seniors, and

it is a difficult situation we are all put in.

Mr. GREENWOOD. Is there a Medicare beneficiary in the country

that you wouldn’t cover with a very nice Medicare+Choice package,

including a nice prescription drug package, if you were paid by

HCFA an annual premium for that patient that—for that beneficiary that allowed you to, on average, actuarially cover your costs

and earn what—fill in the blank—and what percent profit?

Mr. JONES. Our profits last year were 2.3 percent. It is not a

large profit. But no, we took all comers.

Mr. GREENWOOD. So 2.3, 3 percent, that range of profit, just do

the math, the Federal Government pays your company and any

other Medicare+Choice company enough to cover the benefit, plus

prescription drug benefit and make 2 to 3 percent profit, you cover

everybody in the country, right?

Mr. JONES. I can’t speak for our parent company and its goals,

but that has been traditionally where we are.

Mr. NORWOOD. Thank you very much, Mr. Greenwood. Now we

go to Mr. Engel.

Mr. ENGEL. Thank you, Mr. Chairman.

Mrs. Kessler, since you are the only one on the panel that actually is a consumer and has experienced some of these programs, we

have people on the panel from a number of different groups that

provide prescription drugs for Medicare beneficiaries. You have

heard, Medicare Choice plans, Medigap plans, employee retirement

plans, a State program and a pharmacy program. I believe that

while these programs provide assistance for some seniors, not all

can benefit from them, and I am wondering—you alluded in your

79

testimony, and I am wondering if you could give us some more detail about your experiences with these types of programs?

Mrs. KESSLER. Well, I was on HMO and I was not very happy

with it. Of course, I have been well practically all of my life, and

then all of a sudden, it caught me. So my daughter, who is a nurse

practitioner, made me get off HMO, and I got on to AARP, and of

course, I pay for my drugs. I get a little percentage here and there,

but that is about it. And there are plenty of senior citizens like me

who really couldn’t afford all of these medicines that I take, that

they take. We save all of our money all of our lives and then all

of a sudden we get sick, and we are afraid that the money that we

have saved would have to go for the drugs, which scares the heck

out of us.

Mr. ENGEL. Well, it seems that now there is a patchwork of options, but what you are saying is none offer the safety and security

of a comprehensive Medicare benefit. So you are actually saying

that a uniform universal benefit for everyone in Medicare is really

the way we should go?

Mrs. KESSLER. Yes, definitely so.

Mr. ENGEL. Now, the Florida program that is similar to New

York covers seniors over age 65 who are duly eligible for both

Medicare and Medicaid with an income of under $11,000 per year.

So obviously a lot of seniors are left out of that. The State, I understand in Florida, has a discount program which allows a discount

on the cost of drugs at pharmacies, but you and others don’t qualify

for that because you have a program through AARP?

Mrs. KESSLER. Yes.

Mr. ENGEL. So many seniors actually get lost in the shuffle and

find that they don’t have the care that they need; is that an accurate statement?

Mrs. KESSLER. That is right. That is right.

Mr. ENGEL. Thank you very much.

I want to raise an issue that Charlie Norwood had mentioned before. I wonder if Ms. Rowland or Mr. Moroni could comment.

When you talk about the increasing cost of prescription drugs, it

would seem to me that on the other end of it, Medicare would save

money because of beneficiaries getting the proper medication at the

proper dosage as opposed to taking a half dose or going without

certain drugs due to cost. So I am wondering, Ms. Rowland, if you

could comment about—are there any real numbers that measure

potential savings due to proper drugs which will lead to decreased

hospital stays and fewer acute care conditions as a consequence of

a prescription drug benefit? And also, after that, if Mr. Moroni can

mention if you have noticed a decline in costs of other areas of care

as you initiated the prescription drug benefit?

Ms. ROWLAND. We don’t have any hard statistics on what happens when individuals cut their prescriptions in half and only take

half of what they need. We do know when we look at some experience in the Medicaid population, that when cost-sharing was imposed on some of the lowest-income Medicaid beneficiaries, they

went without their drugs and ended up more often in nursing

homes. So we in the State of New Hampshire, for example, the cost

of nursing home care increased when they imposed additional costsharing for prescription drugs.

80

There is a new study just out from Canada looking at the imposition of cost-sharing for low-income elderly and disabled people in

Canada, showing a greater use of emergency rooms as a result of

lack of taking proper medications.

So while we don’t have a lot of studies in the U.S., we do have

a lot of stories about people who don’t take their medications properly, and we know that for many of the medications that the elderly take today, lack of taking them on a regular basis can really lead

to complications.

Mr. ENGEL. And more expense.

Ms. ROWLAND. And more expense.

Mr. ENGEL. Thank you. Mr. Moroni.

Mr. MORONI. From our data, we have not seen a decrease in the

hospital-surgical-medical side of the expense due to the—or I

should just say in conjunction with the higher drug costs. So I

think you would have to think about although there may be certain

hospitalizations you avoid, with the trend of just your normal hospital-surgical-medical coverage, and then on top of that, you put on

something like as high a trend as 19 percent, and actually, in 1999,

it was actually 23 percent, it just averaged out.

Mr. ENGEL. Can you comment, Mr. Moroni, on PBMs to manage

the drug benefit? Some of the Medicare drug proposals would rely

on PBMs to provide a drug benefit. Could you talk about some of

the things they do for GM to manage the pharmacy benefit like reducing cost and providing quality assurance?

Mr. MORONI. Yes. Actually, we do think that our PBMs help kind

of optimize cost and quality. Most importantly, I would say our

PBMs look for drug-to-drug interactions on a real-time basis, which

you do fine. Especially, as I said, when people see multiple physicians. We also have programs like, you know, a preferred formulary

that our PBM has assigned to hopefully optimize some of the costs.

Their dosing authorization programs, generic substitution programs, disease management programs—all of which we think has

helped us save costs, and that was part of my testimony—that even

with the extensive programs we have in place, both on a quality

side and a cost side, our costs are still at 19 percent. Actually, safety is another major issue that I cannot really leave out of there,

because there are specific drugs actually cited in a GAO report that

our PBMs make sure that our elderly people are not on it, they are

safe for the elderly.

Mr. NORWOOD. Thank you, Mr. Moroni and Mr. Engel. Now, Mr.

Shadegg.

Mr. SHADEGG. Thank you, Mr. Chairman. I want to commend

you for holding this hearing today.

It is very obvious that in this country we need to be looking at

how we make sure seniors get the drugs they need to be able to

care for themselves. No one wants a Nation where people have to

make a decision between paying rent or buying groceries and taking the medicines they need.

By the same token, I have to say that I think to a certain degree,

a lot of the discussion and a lot of the focus on how we create the

right program to do this, in the context in which we are not looking

at the cost of doing this, the staggering cost of doing this is literally

whistling past the graveyard and missing a huge issue. I think, Mr.

81

Moroni, your testimony drives that point home pretty clearly. I can

imagine that General Motors would be in favor of a universal drug

benefit if General Motors for the past years has seen an average

of a 19 percent increase in its prescription drug program.

Now, I hope everyone in this panel and everyone in this Congress

understands that if we, in a well-intentioned fashion, create a universal drug benefit and we face the kind of escalating costs GM has

faced over the past 3 years of 19 percent per year, we are in deep

trouble. So I would like to focus on what foundation we need to be

looking at in terms of drug pricing and drug costs before we jump

into creating this program. Because I have not seen anything in

the discussion of the shape of the program or the structuring of the

program, whether you favor one over the other, that is going to address the issue of cost. And in looking at these facts, I want to

point out that the more things change, the more they stay the

same.

In 1959, the Senate Judiciary Subcommittee on Antitrust and

Monopoly, led by Estes Kefauver of Tennessee did a study, a 21⁄2

year study of drug pricing in America, and you will be surprised

to learn that they found almost exactly what we are finding today.

They found, for example, that Eli Lilly was selling 100 tablets of

an antibiotic called V-Cillin, and they are selling it in England for

$6.50, in Australia for $10.75, and in the United States for $18. So

the pricing in the United States was roughly three times the price

in England. For 100 capsules of Tetracycline, the production cost

for Bristol Myers was $1.67. Its price to druggists was $30.60, and

consumers paid $51.

You then come flash forward to today. Here is a study done by

Life Extension Network, on the most outrageously high-priced

drugs in America, one called Premarin. For 28 capsules of 6 milligrams, the U.S. price is $14.98; the European price is subsidized,

$4.25. For Coumadin, which is a blood thinner that my mother-inlaw takes, for 25 10-milligram capsules of Coumadin, the U.S. price

is $30.25, the European price is $18.50.

Another study done by USA Today in November 1999, I will just

pick a couple, there are many on here, and I would like to put both

of these in the record—for Prozac, the U.S. price, $2.27; in Canada,

less than half of that, $1.07; in Britain, $1.08; and in Australia, 82

cents. Zocor for high cholesterol, U.S. price $3.16; Canadian price

$1.47; British price $1.73; Australian, $1.75. Again, we are more

than twice. Claritin, everybody hears about Claritin; it is one that

is a demand pull drug, and I want to talk about demand pull in

a moment; U.S. price, $1.96; Canadian price a little closer, $1.11;

British price, 41 cents; Australian price, 48 cents.

[The information referred to follows:]

10 Best-Selling Prescription Drugs in the USA Cost less in Other Countries

(Retail Price of the most commonly prescribed dose of each drug, converted to U.S. dollars)

Rank Drug Condition U.S. Canada Britain Australia

1 ................................... Prilosec .................. Heartburn/Ulcer ..................... $3.31 $1.47 $1.67 $1.29

2 ................................... Prozac .................... Depression ............................. $2.27 $1.07 $1.08 $0.82

3 ................................... Lipitor .................... High colesterol ...................... $2.54 $1.34 $1.67 $1.32

4 ................................... Prevacid ................. Ulcer ...................................... $3.13 $1.34 $0.82 $0.83

5 ................................... Epogen ................... Anemia ................................... $23.40 $21.44 $27.48 $29.24

82

10 Best-Selling Prescription Drugs in the USA Cost less in Other Countries—Continued

(Retail Price of the most commonly prescribed dose of each drug, converted to U.S. dollars)

Rank Drug Condition U.S. Canada Britain Australia

6 ................................... Zocor ...................... High colesterol ...................... $3.16 $1.47 $1.73 $1.75

7 ................................... Zoloft ..................... Depression ............................. $1.98 $1.07 $0.95 $0.84

8 ................................... Zyprexa .................. Mood disorder ........................ $5.27 $3.39 $2.86 $2.63

9 ................................... Claritin .................. Allergies ................................. $1.96 $1.11 $0.41 $0.48

10 ................................. Paxil ....................... Depression ............................. $2.22 $1.13 $1.70 $0.82

Source: USA Today, November 10, 1999

Outrageously High Drug Prices

Drug (Quality/Potency) U.S. Price Euro. Price

Premarin .................................................................................................................................................. $14.98 $4.25

Synthroid .................................................................................................................................................. $13.84 $2.95

Coumadin ................................................................................................................................................. $30.25 $2.85

Prozac ...................................................................................................................................................... $36.12 $18.50

Prilosec .................................................................................................................................................... $109.00 $39.25

Claritin ..................................................................................................................................................... $44.00 $8.75

Augmentin ................................................................................................................................................ $49.50 $8.75

Zocor ........................................................................................................................................................ $96.99 $45.00

Prempro .................................................................................................................................................... $23.49 $4.75

Source: Life Extension Network.

Mr. SHADEGG. I would like to ask Mr. Moroni and Mr. Jones a

series of questions, and if others of you would like to comment, I

would be happy to do that.

Have any of you, since you buy large quantities of drugs, done

a study of your own to try to find out why drug prices in the U.S.

are so much higher than they are in other countries?

I don’t want to run out of time. Let me give you the other questions. Have you studied demand pull marketing? Because I saw

from your expressions you haven’t done the other. Demand pull

marketing is kind of a new phenomenon in the United States

where we are telling the American people hey, there is this prescription drug that will go out and solve every problem you have.

I would suggest to General Motors that part of the reason you are

facing a 19 percent increase in your drug prescription—prescription

drug program—is demand pull marketing, and I wonder if anybody

has looked at that.

I want people to get the drugs they need, but I am not certain

that—I talk to a lot of doctors back in Phoenix, Arizona who tell

me patients are watching television, coming in demanding the

drug. The doctor has to talk them out of that drug.

Mr. NORWOOD. Thank you very much, Mr. Shadegg, and remember the question, because the second round we need to have an answer for that.

Now I think it is Mr. Strickland’s turn.

Mr. STRICKLAND. Thank you, Mr. Chairman. To follow up on my

friend’s comments, I would like each of you to respond to these two

questions and I think you can do it in one or two words.

Do you think that the issue described by my colleague regarding

Americans being charged so much more than other citizens in other

countries is a serious problem in terms of the costs of prescription

drugs in this country? And I think you can do that with a yes or

no. And then I would like for you to say, hopefully with a yes or

83

no, if you think it would be appropriate for this Congress to consider some legislation to deal with this price inequity. Two questions. Would you mind beginning here and just going down the

table?

Mrs. Kessler, what is your opinion there?

Mrs. KESSLER. Yes, I would say that that would be a good idea,

that that should be a question about the drugs, why it is so high

here, definitely so. This should be one of the requirements to judge

so that we can get all of our prescriptions paid.

Mr. STRICKLAND. Thank you. Mr. Jones?

Mr. JONES. The differentials between our prices and those abroad

is a very complex issue which we have not taken a very—— Mr. STRICKLAND. Do you think it results in Americans being

charged more, regardless of the complexity of the reasons?

Mr. JONES. Drugs cost more here, there is no question about it.

Mr. STRICKLAND. Do you think drugs would cost less here if there

wasn’t this price disparity?

Mr. JONES. Again, therein lies the complexity of an international

market.

Mr. STRICKLAND. Okay. Second question. Do you think we should

address this disparity problem legislatively?

Mr. JONES. I think that it is one that will bedevil Congress. It

is one that will probably have to be looked at one way or the other.

As far as a poll marketing, we have a very aggressive physician

education campaign to counter some of that type of marketing, and

we understand that people are subject to it.

Mr. STRICKLAND. Okay. Could we go ahead?

Mr. MORONI. As I said in our testimony, we do believe that the

pricing practices are a concern and we do feel that they affect some

competitiveness of U.S. industry.

Ms. ROWLAND. I think you should clearly look at the pricing policies, and I think in looking at this examination you might also

want to take a look at the current Medicaid program which has a

drug rebate provision that allows Medicaid to at least get a discounted price in some of the States for that.

Mr. WELLER. I would agree with Mr. Jones that it is a complex

issue, but as a straight question of does it cost more, clearly, yes.

What Congress should do, we believe that you need to restructure

and reform Medicare, the entire program; that has as part of that,

you need to deal with prescription drugs and you need to deal with

the cost of them to the Federal Government, to the beneficiaries.

Ms. BUCKLEY. Yes, there are clearly price inequities; yes, Congress should look at it and look at it in a comprehensive way to

ensure research and development is not hurt, and to look at ways

we can cover everyone, increase sales to pharmaceutical companies

so that they can lower costs.

Mr. SMITH. Eighty percent of the price of a prescription is bound

in product cost. If you can reduce that product cost, the price will

absolutely come down.

Second, I do believe Congress should look at those inequities and

try to find out why and try to alleviate those problems.

Mr. STRICKLAND. Thank you. The comment was made that we

should have the restructuring of Medicare, and the concern I have

there is because I think this may be a euphemistic way of saying

84

we should basically destroy Medicare as we know it and go to a

system that would be quite different than Medicare.

Ms. Rowland, I serve a rural area. You know, I think, that the

people who live in rural areas do not have the same opportunities

and access. Can you speak a little bit more about that and what

you think we can do as we try to plan a fix to this terrible situation

that we all know exists?

Ms. ROWLAND. We know that around a quarter of all Medicare

beneficiaries live in rural areas, but we also know that those in

rural areas are more likely to go without drug coverage. Roughly

40 percent are without drug coverage today.

That is largely due to the fact that many of the Medicare+Choice

plans aren’t out there in rural areas, and I think with the withdrawals, you are not likely to see a large increase in rural areas

in the near future.

Second, many of the people living in rural areas have not worked

for some of the large employers that offer the retiree benefits, so

they are the most likely to go without the more comprehensive retiree wrap-around benefits to Medicare that do include prescription

drugs, and they tend to have lower and more fixed incomes. So

even when a Medigap policy may be available, the ones that include prescription drugs are largely unaffordable. I think that is

one of the reasons why one needs to really look at providing a comprehensive benefit within Medicare so that people get the same

benefits under Medicare, whether they live in urban or rural areas,

just as they do with physicians’ services and hospital care today.

Mr. STRICKLAND. Thank you.

Mr. BILIRAKIS. The gentleman’s time has expired.

The vice chairman of the committee, Mr. Burr.

Mr. BURR. Thank you, Mr. Chairman.

Let me take this opportunity to thank all of our witnesses today.

I am not going to ask you any questions, so I will relieve you of

that burden. But I did want to thank you for the information that

you brought to the committee. I assure you that it will be extremely helpful as we proceed on.

This is a very talented committee. The members as well as the

staff have spent a tremendous amount of time understanding the

complexities that each of you brings with your testimony. They understand the scope of the population that is covered under the proposed benefit that we all seek. We understand the geographical

challenges that we have. We also understand that it is a population

that needs it today. I am convinced, more so than I was last year,

that because of the passion and the talents of this committee, we

can achieve a legislative proposal that benefits patients. And that

is ultimately where we have to keep our focus.

I would tell you that there are 3 major components: .

Access. Some do, some don’t today; all should. I think that every

member of this committee would agree with that statement.

Affordability. Affordability sometimes is a function of competition. We have certainly seen that in private sector areas. And I

would tell you that when you look at this population because of the

size, when you find a way to negotiate based upon the size of the

population, you find better pricing. It is what you referred to, Ms.

Rowland, as it related to Medicaid, even though that was a legislaVerDate 11-MAY-2000 09:49 Oct 03, 2001 Jkt 072927 PO 00000 Frm 00088 Fmt 6633 Sfmt 6602 E:\HEARINGS\71491 pfrm09 PsN: 71491
85

tive mandate. But clearly, we have seen the private sector markets

respond the same way relative to a population large enough that

you can negotiate on their behalf, brings you levels of pricing we

never dreamed of 10 years ago in health care. So we have to understand that component.

The third piece is voluntary. We can’t force anybody to participate, nor should we. We should not discourage employers from extending that benefit to retirees; we should find ways to support it

even greater than we do today. But the reality is, over time, as we

incorporate a benefit, if we don’t make a component of that the

ability for employers to fit into it, to piggyback onto it, to dovetail

into some section of it, we will allow them to remove that forever

as a benefit that they extend to retirees.

We need your help. We will need your continued help. No matter

who the new Administrator is at HCFA, I am convinced that if the

support of Congress dries up or the support of those individuals

who are really the brain trust of this issue is not there to support

them as well as the American people, they will not accomplish the

structural changes that I personally believe have to be made in

HCFA, nor will they accomplish a drug benefit that can withstand

the test of time and money that we all know it goes into.

Let me suggest that we are not here just considering this benefit

for today. Our focus should be for tomorrow. We have heard a number of examples of meds that were mentioned and prices and individuals who were covered and weren’t covered, and it was broken

down in whatever way it was advantageous to those that either

asked it or answered it. We have to get past that. We are headed

into an age, with the completion of the Human Genome Project,

where we will talk about medications that cure, for the first time,

diseases that we have maintained or treated up to this point. We

will have to go through a whole new cultural change of assessing

medications based upon not their value at the beginning, but their

cost-savings because they are now available.

Somewhere in that component, hopefully first on my mind, but

every member will have to make that up on their mind, will be the

quality of the patients. We will offer in many cases the ability to

relieve what is a constant chronic or terminal case for what is now

35-plus million Americans and 15 years from now will be 70 million

Americans: my parents, your parents, somebody’s grandparents.

This is an important thing. It is the most important thing for

this subcommittee today. I am confident that we can accomplish it,

Mr. Chairman, with our friends on the other side of the aisle, with

the support of the brain trust that is willing to come up and share

their information with us. It won’t be easy, but we can come up

with a plan.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. BURR. The gentleman is finished. Thank you, Mr. Chairman.

Mr. BILIRAKIS. Mr. Ganske.

Mr. GANSKE. Mr. Chairman, I am juggling simultaneous hearings on high energy costs and high prescription drug costs and unfortunately, we do have people in the country who are having to

make decisions on whether to pay their power bills or whether to

buy their medicines, and that is a problem.

86

Mr. Chairman, I need to speak briefly about an arcane item

called adverse risk selection. I have felt like a voice crying in the

wilderness in my floor speeches late at night on this issue, but in

my opinion, it is the single most important issue that we need to

face as we are talking about this additional benefit.

The designers of many Medicare prescription drug proposals recognize this problem. Some try to address it by saying that if a beneficiary doesn’t sign up for the drug insurance program on an initial registration for Medicare, then, thereafter, when he or she

wants to sign up for the drug insurance program the program

would be quote, ‘‘experienced-based,’’ and potentially more costly.

The theory is that the threat of higher premiums would act as an

inducement for seniors with no or low drug costs to sign up initially.

But, Mr. Chairman, if everyone had already acted with such prudence, we wouldn’t be here today, because the low participation in

the current voluntary Medigap programs indicates that unless seniors must sign up initially, a large number won’t. They will wait

until they need drugs and then they will complain vociferously to

Congress about their high premiums and we will be right back here

where we started. And since other seniors will have a prescription

drug benefit, there will be enormous pressure on legislators to further subsidize the seniors who are tardy in signing up for a drug

program. That, of course, will significantly increase the cost of the

program.

Now, another way to control adverse risk selection is to try to devise a risk adjustment system. This committee has been involved

in that many times. We will wait eagerly for the day to show that

we can actually devise that type of program in other parts of Medicare.

Now, another way would be a similar benefit package to help

control that. Consumers would then be able to select plans based

on price and quality rather than benefits, but if plans are allowed

wide variation in benefits, some plans, I guarantee you, will be

more likely to attract low-cost beneficiaries and we will again see

adverse risk selection.

Now, a sure way to avoid adverse risk selection would be to mandate enrollment, and that was the approach in 1988 with the Catastrophic Coverage Act, and we saw what happened to that law.

And to say, Mr. Chairman, that mandatory enrollment today has

little appeal to policymakers is an understatement, to say the least.

All they have to do is remember the Grey Panthers jumping up and

down on Dan Rostenkowski’s car.

Now, finally we could avoid adverse selection for a voluntary prescription drug benefit if we subsidized this benefit so much that

seniors won’t have much cost, and with that huge subsidy, the benefit would then become cost effective for the vast majority of seniors. But, Mr. Chairman, we are then likely facing a $400 billion

or $500 billion subsidy.

That reminds me of an article by Dan Rostenkowski in the Wall

Street Journal, who said, ‘‘The problem was, and still is, a lack of

money.’’ And yes, we have a surplus, but the 10-year cost of a more

highly subsidized drug coverage could, in my opinion, easily double

87

or triple the cost, and that is where I am in line with Congressman

Shadegg who just spoke about this.

So what do we do? Well, it is clear that there are seniors that

really need the help right now, and there are seniors who are getting the help in the State Medicaid drug programs. And those programs are in every State, and they are, as Ms. Rowland pointed

out, getting discounts from pharmaceuticals.

My proposal is that we build on that, that we try to get something done on this at a cost that we can absorb right now, and the

way to do that would be to add the qualified Medicare beneficiaries

and the select low-income beneficiaries up to 175 percent of poverty, give them their little Medicaid card, tell the Governors, we

are going to pay for it from the Federal side; and this provision can

be implemented immediately and it will help take care of the large

number of beneficiaries who need that help right now, and we can

move on to a comprehensive Medicare benefit in terms of prescription drugs in the context of a comprehensive Medicare bill.

Mr. BILIRAKIS. The gentleman is granted 2 additional minutes,

without objection.

Mr. GANSKE. Thank you, Mr. Chairman.

Mr. BILIRAKIS. And we will not have a second round, but we will

grant everyone an additional 2 minutes if they like.

Mr. GANSKE. I very much appreciate that, Mr. Chairman, because I wanted to get to your and my feelings on this, and that is

that you have advocated a similar approach in terms of block

grants to States who have in some cases set up programs to help

subsidize citizens in those States with prescription drugs.

I think that, Mr. Chairman, you and I are closer to each other

on this than we actually were to either the Democratic or the GOP

bill last year. I have some concerns with the block grant, because

I have some concerns about how you control fraud and abuse with

the block grant program and I have concerns that in some cases

they aren’t set up in any of the States; you have some variability,

and I believe for that reason that tying this in with Medicaid could

be accomplished immediately, and there are controls already built

in for fraud and abuse in those programs, and that this is something we should look at.

Mr. Chairman, as I pointed out, you and I are much closer together on this than we are far apart. And I just look forward to,

Mr. Chairman, working with you on this issue, because this is

something that we could do now and not have another 2 years go

by and have that widow who isn’t so poor that she is in Medicaid,

that she is a dual-eligible, but who is just above that margin who

is really scraping by on her energy bills and her prescription drug

bills, and we could give her help right now and it would be a simple thing to do. And that is what I think this Congress should look

at.

In addition, we ought to look at fixing the drug reimportation bill

that we passed last year to close some of the loopholes, particularly

on labeling, and that should be part of it too. I thank you, Mr.

Chairman.

Mr. BILIRAKIS. I thank the gentleman. Mr. Brown, for 2 additional minutes.

88

Mr. BROWN. Just a couple of comments rather than questions. I

very much appreciate the panel’s insight and I want to thank you

all for that. There was some talk earlier of the amount of—how we

have overfed and then starved or something—the metaphor—some

Medicare+Choice. There is a GAO report of August 2000, and I

want to enter one page into the Record, page 3, and I want to site

that paragraph real quick. ‘‘In addition, the combination of spending forecast areas built into plan payment rates and BBA payments

cause an additional $2 billion, or 8 percent, excess payments to

plans. Instead of paying less for health plan enrollees,’’ this is from

the GAO, ‘‘we estimate that aggregate payments to

Medicare+Choice plans in 1998 were about $5.2 billion, 21 percent,

or about $1,000 per enrollee more than if the plan’s enrollees had

received care in the traditional fee-for-service program.’’

[The information referred to follows:]

. . . In addition, the combination of spending forecast errors built into plan payment rates and BBA payment provisions caused an additional $2.0 billion, or 8 percent, in excess payments to plans. Instead of paying less for health plan enrollees

we estimate that aggregate payments to Medicare+Choice plans in 1998 were about

$5.2 billion (21 percent) or approximately $1,000 per enrollee, more than if the

plans’ enrollees had received care in the traditional FFS program....

Mr. BROWN. So I think that we—people in this institution have

sort of tried to convince others that we have overpaid—that we

have underpaid HMOs and that they have been starved, and there

really is no evidence for that.

Second, I appreciate the comments of Mr. Shadegg about the cost

of prescription drugs in the United States and overseas, and it begs

the question, obviously, of why, and the answer. And I appreciate

his siting.

I saw an article recently in the Post, I saw some of those numbers that were there that he had, but every other country in the

world has a legislature which has stood up to conservative politicians and prescription drug lobbyists and actually passed legislation that does something about the cost of prescription drugs.

I don’t know that Mr. Moroni, when he talks about the costs that

GM is almost buried by, and that all of you see with health plans

or whatever, that you understand that this is going to be awfully

difficult to afford any of these Medicare prescription drug plans unless we do something about cost, compulsory licensing. That article

talked about and was tried by Senator Kefauver, defeated in the

Senate again, because the hordes of prescription drug lobbyists

were all over the Capitol then as they are now. And until we do

something about compulsory licensing or reimporting, which country after country after country around the world has done, it injects

competition, not price controls, but competition in this whole morass of prescription drug price gouging, and it clearly is the way

to go to explore these kinds of alternatives.

Mr. Chairman, I am well beyond my 2 minutes.

Mr. BILIRAKIS. Mr. Shadegg, 2 minutes.

Mr. SHADEGG. Thank you, Mr. Chairman. Let me just say that

I am not going to ask you today to answer any further questions.

I am going to give you a little more information from the Kefauver

study and then ask, if you would, to answer two questions for us

in writing after we finish today.

89

First of all, let me make it clear, I do not favor drug price controls mandated by the government. What I want to look at is competition in the drug industry and make sure that the industry is,

in fact, competitive and that we are not suffering because it is not

competitive.

Interestingly, one of the findings of the Kefauver committee

study that went on in this industry said that of the 22 largest

pharmaceutical manufacturers, those firms were spending, on average, 24 cents out of every dollar on promotion. Now, interestingly,

that was before demand pull marketing of prescription drugs began

in America, because this was, remember, 1959, and I believe it was

also before the lavish marketing to doctors that goes on today. I

can tell you, you can read about them, and I have an article here

about the dinners that doctors are taken to, the gifts that they are

given, the golf outings that they are taken to.

I have been told by doctors in Phoenix, Arizona that they will be

taken for a night of entertainment out by a drug firm and they will

be taken first to a cigar shop where they can walk in and pick out

anything they want in the entire cigar shop. They are then taken

to a florist where they can pick out any flowers they want for their

spouses, no holds barred; then they are taken to a restaurant, the

highest end restaurant and fed a lavish dinner. And we have all

heard those stories.

So I am concerned and I am not an advocate of government regulation or government price controls, but I am concerned.

The three questions I would like you to answer are——

Mr. BILIRAKIS. Please ask the questions. I don’t think we will

have time for the responses now.

Mr. SHADEGG. No, no. That is why I say answer them in writing.

First, have you or your organization studied or analyzed the effect or the phenomenon of these very high U.S. drug prices versus

low foreign prices of drugs, prescription drugs? That is question

one.

Two, do you think the Congress should do that before it enacts

a comprehensive Medicare drug benefit?

Third, have you studied demand pull marketing and its effect on

drug prices in the United States? And if you have or haven’t, do

you think the Congress should do that before—and we will get you

these in writing, we will type them and send them to you—do you

think the Congress should do that before it enacts a comprehensive

drug benefit?

And then the third is, have you or your organization studied the

marketing practices of the drug, some of these parties, golf outings,

et cetera, to see the effect of those marketing strategies on drug

pricing in the United States? And if you have or haven’t, do you

think the Congress should study those again when it enacts a comprehensive Medicare drug benefit?

Mr. BILIRAKIS. As I indicated, there will be questions submitted

to you and this is among them. Sooner rather than later, it would

be very helpful.

Mr. SHADEGG. I appreciate your time.

Mr. BILIRAKIS. Mr. Green.

Mr. GREEN. Thank you, Mr. Chairman. I would like to follow up.

90

Mr. Moroni, if you could tell the committee or GM could tell the

committee of the concern of overutilization, today’s National Journal talks about our Republican Majority Leader saying that when

you have the coverage, you will use it more. And I know there is

a way that that can be dealt with, if you would get that to the committee.

Ms. Buckley, to follow up on my colleague’s questions, I know

Nevada is trying to put together a bipartisan collaboration. Do you

think—what do you think about every State having to take the responsibility, 50 different States, each coming up with some way to

address the issue of financing prescriptions for seniors? And also,

does the Nevada plan cover the disabled like Medicare does?

Ms. BUCKLEY. Thank you, Mr. Chairman. I do not think it would

be effective or efficient for seniors to have all 50 States struggle to

develop their own programs. It has taken us 2 years to develop our

program, and numerous RFPs, and so far benefits are still

unaffordable. I think it would create a patchwork of ineffective programs when Medicare can be utilized.

Mr. GREEN. The concern I have, Mr. Chairman, if we do the

block grant that is proposed, is that the fear of most seniors is that

there are some Members of Congress who fear that we would block

grant all of Medicare in a Medicare reform, and again we would

end up with 50 States trying to provide senior citizen coverage not

just for prescriptions, but for Medicare in general. And our example

with the Medicaid, the diversity of the benefits under Medicaid is

just outrageous. And I can talk about my own State of Texas. It

provides very little Medicaid coverage compared to other States. So

Medicare is a Federal program and we should coverage prescriptions under the Federal program.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. GREEN. Can I just get a—— Mr. BILIRAKIS. Yes or no. Who did you ask that of?

Mr. GREEN. Ms. Buckley.

Mr. BILIRAKIS. Ms. Buckley.

Ms. BUCKLEY. Yes, we would like Congress to act so that it is a

more uniform program. States don’t have the resources to provide

effective senior prescription drug programs for seniors. We would

like to take our senior prescription drug money and help seniors

with utility bills that they can’t afford.

Mr. BILIRAKIS. Mr. Engel may inquire for 2 minutes.

Mr. ENGEL. Thank you, Mr. Chairman. I want to thank the

whole panel, and again, Ms. Buckley, I couldn’t agree with you

more. I think that we cannot have a hodgepodge of different States

with different programs. We have the EPOC program in New York

which is a pretty good program, and yet there are literally hundreds of thousands of seniors that are not covered. I think Mrs.

Kessler is a perfect case in point. Someone who worked hard all of

her life, does not ask for a handout, a middle class person, and she

is just above the threshold for this and above the threshold for that

and gets very, very little help.

We have to help those seniors. I think it should come down in

this Congress. We should not wait for total Medicare reform. We

need to deal with the prescription drug problem now. I know that

the chairman—under his leadership, we are dealing with it now.

91

The bill that was passed in the Congress, the last Congress, I

think is woefully inadequate. Private industry doesn’t want it. Very

few seniors would be covered by it. I think, quite frankly, it is a

way of killing real reform in helping seniors with prescription

drugs, and I think that is not a path that we should go down in

this Congress again. I still maintain that if we provide prescription

drug coverage for seniors, ultimately health care costs in many

areas will go down because preventive care helps do that, and if

people are getting the medication that they need, they will be less

sick later on.

So again, thank you, Mr. Chairman. I look forward to dealing

with all of these issues, and again, I hope we can deal with this

in this Congress so that seniors like Mrs. Kessler and my mother

who reside in the same place, and millions and millions of seniors

all over this country, can get the health coverage they deserve.

Mr. BILIRAKIS. I thank the gentleman. I would just merely say

in closing that first of all, Mr. Barrett, I believe it was, said it well

when we were talking about the cost of drugs in some of these foreign countries versus the cost here. And he said something about

the Americans are subsidizing the cost of drugs there, and when

you stop to think about it, he said it well there. Now, what is the

solution to that is the difficult part.

But I would say, Mr. Engel brought up—I mean, there are an

awful lot of good arguments against doing something now. There

is concern, there is a fear that if you put some temporary fix in

place to help the needy and the sickest now, that that means that

prescription drugs as a part of Medicare is just something that is

not going to be addressed by this Congress, because the immediate

solution, so to speak, would be considered the final solution.

I don’t believe that. I think that Mrs. Kessler is hurting now and

I think that if we help Mrs. Kessler now—I mean there is no sin

in that—but at the same time, continue to work toward prescription drugs in Medicare. I feel very strongly that we have to have

prescription drugs in Medicare. I daresay there aren’t many Members of Congress who don’t feel that way. It is just a case again of

how you go about it all. And also it is the complexities of these

partnerships that enters the picture, turf fights enter the picture,

all sorts of things that can.

Can we do it in this Congress? God knows, we have to do it in

this Congress, but we may not; and that means another 2 years

plus for Mrs. Kessler to continue to have problems with her prescription drugs when, in fact, we could probably help Mrs. Kessler

and Mrs. Tauzin and Mrs. Engel and whatnot now and in the

meantime, so to speak.

So I don’t know. There are a lot of arguments certainly against

doing anything other than universal. I realize that. But common

sense dictates to me that our job is to help people now, not necessarily say we will help you 3 or 4 or 5 years from now.

Well, having said that, we have kept you here a long time and

I really appreciate your patience and your willingness to be here

and to help out, and you have helped. We will be submitting questions to you, and hopefully all of us working together, if we can toss

aside demagoguery and partisanship for a change, we can get the

job done. Thank you very much. The hearing is——

92

Mrs. KESSLER. May I say something? I want to thank all you

gentlemen. You have reaffirmed my faith in the U.S. Government.

Mr. BILIRAKIS. Isn’t that nice.

Mrs. KESSLER. And I know I am going to go back and tell this

to everybody. So I know I would like to see this happen before I

die.

Mr. BILIRAKIS. And this comes from a Floridian, I want you to

know, Mr. Brown. Thank you very much. The hearing is adjourned.

[Whereupon, at 1 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

KAISER FAMILY FOUNDATION

March 19, 2001

Hon. MICHAEL BILIRAKIS

Chairman

Subcommittee on Health

Committee on Energy and Commerce

United States House of Representatives

Room 2125, Rayburn House Office Building

Washington, DC 20515-6115

DEAR CHAIRMAN BILIRAKIS: Thank you again for the opportunity to testify before

the Subcommittee on Health on February 15, 2001 regarding ‘‘Medicare Reform:

Providing Prescription Drug Coverage for Seniors.’’ I received the follow-up questions and am submitting the following information for the record.

Pharmaceutical Company Marketing:

What effect does direct-to-consumer advertising have on utilization? What effect

does pharmaceutical company marketing have on health care providers? What is

your experience with pharmaceutical prices in other countries versus the United

States? If there is a difference, can you explain why?

Spending by drug manufacturers on direct-to-consumer (DTC) advertising has increased substantially in recent years, from $266 million in 1994 to $1.3 billion in

1998. However, I am unfortunately not aware of any systematic analysis of the effect of direct-to-consumer advertising on utilization. We are beginning such a study

in conjunction with researchers at Harvard University, and I would be happy to forward the results to you when they are completed.

Indications of the extent to which DTC advertising has reached consumers can be

found in a September 2000 survey we conducted with The Lehrer Newshour. The

survey found that 91% of Americans say they have seen or heard a drug advertisement in the past 12 months, and over a third of those who had been exposed to

an ad talked to their doctor about the drug that was advertised. I have enclosed

a copy of the toplines and the summary chartpack from that survey.

While there has been substantial public focus on the growth in DTC advertising

for prescription drugs, marketing targeted to physicians remains a much larger

share of pharmaceutical promotional activities—drug manufacturers spent an estimated $7 billion on professional promotion in 1998 compared to $1.3 billion for direct-to-consumer advertising. This difference is not surprising given the fact that

physicians must prescribe a medication in order for a consumer to have access to

it. We are in the process of conducting a survey of physicians that includes some

questions about drug advertising and would be happy to also forward those results

to you when they are available.

I have enclosed a copy of our Prescription Drug Trends chartbook for your reference. This publication provides information about the trends in prescription drug

coverage, spending, prices, use, and industry structure, and contains additional data

on pharmaceutical company marketing efforts. In addition, the office of the Assistant Secretary for Planning and Evaluation (ASPE) at the Department of Health and

Human Services is planning a conference to examine and develop research designs

to explore the impacts of direct-to-consumer pharmaceutical advertising on health

care costs and patient outcomes. The conference will be held on May 30, 2001 in

Washington, DC and is likely to produce additional information on this topic.

Finally, our research has focused primarily on domestic pharmaceutical issues, so

I am unfortunately unable to provide any information on drug prices in other countries. I would be happy to provide the Subcommittee with suggestions for other possible sources of information if that would be helpful.

93

Delivery of Prescription Drugs Under the Medicaid Program

Please explain the chain that takes place as a prescription drug tablet journeys

from the manufacturing plant to the medicine cabinet of a senior citizen who gets

prescription drug coverage from you.

Every state’s Medicaid program operates in a different way, and, even within a

state’s Medicaid program, delivery of prescription drugs may vary depending on

beneficiaries’ enrollment in a managed care plan. However, there are general rules

and processes that all states share in delivering prescription drugs to Medicaid

beneficiaries.

Each Medicaid program has a formulary consisting of drugs that are available to

all beneficiaries eligible for prescription drug coverage. The formularies are determined, in large part, by which manufacturers have agreed to participate in the federal Medicaid drug rebate program. Participating manufacturers agree to rebate a

set amount of payments for their products, and, in return, the Medicaid formulary

includes all participating manufacturers’ products. A few formulary exclusions are

permitted, such as for products with a high risk of abuse or products that the FDA

has determined to be ineffective. In addition, a state can require the prescriber to

seek prior authorization before a particular drug can be dispensed—a strategy often

used for more costly medications.

When a Medicaid beneficiary receives a prescription, he or she has it filled at a

participating pharmacy that gets its stock either directly from manufacturers or

through wholesalers. Many states have provisions that require or encourage the use

of generic substitutes when available. Medicaid beneficiaries can face limits to the

number of prescriptions they may fill, quantity of medication dispensed at any one

time, or dollar amounts on the cost of the prescription. Beneficiaries may also be

charged a nominal co-payment for their medications.

I hope that this information is useful to the Committee as it considers options for

extending prescription drug coverage among Medicare beneficiaries. Please do not

hesitate to contact me if you need any additional follow-up information. Thank you.

Sincerely,

DIANE ROWLAND, Executive Vice President,

The Henry J. Kaiser Family Foundation

Executive Director, The Kaiser Commission on Medicaid and the Uninsured

PRESCRIPTION SOLUTIONS

COSTA MESA, CA 92626

March 23, 2001

Questions for witnesses of February 15, 2001

Energy and Commerce Subcommittee on Health

Hearing on Medicare Prescription Drugs

Question 1. What effect does direct-to-consumer advertising have on utilization?

Direct-To-Consumer (DTC) advertising provides information about diseases and

drugs that treat those ailments. DTC advertising has been shown to increase utilization of specific drugs according to a report published in the Journal of Family

Practice, December 2000. Physicians admit to prescribing drugs that patients request even though there are other less expensive drugs that achieve comparable results. In the same article, Dr. Richard L. Kravitz, Director of the UC Davis Center

for Health Services Research in Primary Care, has stated ‘‘these ads are designed

to encourage patients to request the advertised drugs from physicians. In some

cases, the request may be appropriate, but the ads can also result in doctors prescribing drugs they don’t deem necessary.’’ For Prescription Solutions, utilization

(based on number of prescriptions/member/year) has increased 17% over the past 3

years.

Question 2. What is your experience with pharmaceutical prices in other countries

versus the United States? If there is a difference, can you explain?

There have been reports of pricing disparities regarding the cost of drugs in other

countries, but Prescription Solutions has no direct experience in the pricing of foreign drug products. This subject is complex since access to certain pharmaceuticals

and drug price controls vary by country and it is difficult to speak generally regarding the international markets.

Question 3. What effect does pharmaceutical marketing have on health care providers?

Physicians are susceptible to marketing pressures much as any other segment of

society. Pharmaceutical marketing to providers may take the form of advertising

and visits by sales representatives but is often in the form of drug samples. According to a New York Times article, November 15, 2000, some physicians that have reVerDate 11-MAY-2000 09:49 Oct 03, 2001 Jkt 072927 PO 00000 Frm 00097 Fmt 6633 Sfmt 6621 E:\HEARINGS\71491 pfrm09 PsN: 71491
94

sponsibility for pharmacy budgets believe that the ready availability of samples in

medical offices increases inappropriate drug utilization. In the article, Dr. John B.

Chessare, chief medical officer at Boston Medical Center, states that his hospital

was strongly discouraging its doctors from accepting free drug samples. Health care

administrators also assert that the samples are helping to inflate their drug costs.

Focus groups conducted by Prescription Solutions have demonstrated an interest

by physicians in generic drug sampling that would encourage use of appropriate and

cost effective therapies. A generic sampling program has been initiated to help physicians counteract the effect of pharmaceutical samples of new, branded drugs.

MEDICARE REFORM

Question 1. Please explain the chain that takes place as a prescription drug tablet

journeys from the manufacturing plant to the medicine cabinet of a senior citizen

who gets prescription drug coverage from you.

The diagram below shows the ‘‘high level’’ flow of a prescription drug from the

manufacturer to the patient. It doesn’t account for all areas of interaction, however.

There are negotiations with the manufacturer for discounts and rebates on formulary drugs selected. There are also computer systems that support the insurance

eligibility of the patient, check for drug interactions, and price the prescriptions so

the pharmacy can be paid. The patient also has a choice of pharmacies between either a retail pharmacy (patient picks up the prescription) or a mail service pharmacy (prescription is delivered to patient’s home).

A patient visits their doctor and may receive a prescription for a medicine, which

they will take to the pharmacy to be filled. If the drug is on the health plan formulary, it will be dispensed to the patient with instructions for proper use and storage of the medication. The patient pays a co-pay that is predetermined according

to their benefit and then takes the medication home for use. If the medication is

not on the formulary, the physician will be contacted. The physician will call in the

request or fax a form for the request of a nonformulary drug. Clinical guidelines

have been established for the use of nonformulary drugs. If the patient meets those

criteria, approval will be given, and the drug will be dispensed by the pharmacist.

If approval is denied, the physician will often be given formulary options to use that

will be therapeutically equivalent to the requested drug.

Non-formulary drugs are reviewed via a Prior Authorization process for medical

necessity. Guidelines have been established by the Pharmacy & Therapeutics Committee for the appropriate use of non-formulary drugs. Drugs are chosen for the formulary based on safety and efficacy. There are more than 1600 drugs on the formulary, and 24 million prescriptions filled annually for our Medicare members. Occasionally, medications are requested that are not on the formulary and must be

evaluated on an individual basis. About one percent of all prescriptions require prior

authorization before being filled, and of these cases, 75% of the prescriptions written

are approved without further action. Approximately one-fourth of one percent of all

prescriptions are denied.

Question 2. To the extent that you or the organization you work for, have experience with the purchase and supply of prescription drugs abroad, please identify any

differences you are aware of in the international systems.

We are a domestic company. Since we are subject to the drug importation laws,

we do not buy drugs from foreign countries.

Thank you for the opportunity to provide clarification on these questions.

Sincerely,

JOHN JONES, R.PH., J.D.

V.P. Legal and Regulatory