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

         LEGISLATION TO COVER PRESCRIPTION DRUGS UNDER MEDICARE

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 13, 2000

                               __________

                             Serial 106-113

                               __________

         Printed for the use of the Committee on Ways and Means

                    U.S. GOVERNMENT PRINTING OFFICE
71-459 DTP                  WASHINGTON : 2001
_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________

                                                                   Page

Advisory of June 6, 2000 announcing the hearing..................     2

                               WITNESSES

Health Care Financing Administration, Hon. Nancy-Ann DeParle, 
  Administrator, accompanied by Gary Claxton, Deputy Assistant 
  Secretary for Health Policy, U.S. Department of Health and 
  Human Services.................................................    71

                                 ______

Allen, Hon. Thomas H., a Representative in Congress from the 
  State of Maine.................................................    32
American Association of Health Plans, Karen Ignagni..............   107
Breaux, Hon. John, a United States Senator from the State of 
  Louisiana......................................................    20
Cardin, Hon. Benjamin L., a Representative in Congress from the 
  State of Maryland..............................................    12
Eshoo, Hon. Anna G., a Representative in Congress from the State 
  of California..................................................    29
Health Insurance Association of America, Charles N. Kahn III.....   137
Kennedy, Hon. Edward M., a United States Senator from the State 
  of Massachusetts...............................................    16
National Association of Chain Drug Stores, Craig L. Fuller.......   111
Older Women's League, Deborah Briceland-Betts....................   124
Peterson, Hon. Collin C., a Representative in Congress from the 
  State of Minnesota.............................................    26
Pharmaceutical Care Management Association, Patrick P. Donoho....   131
Pharmaceutical Research and Manufacturers of America, Judith H. 
  Bello..........................................................   115
Schondelmeyer, Stephen W., University of Minnesota...............   135
Thomas, Hon. William M., a Representative in Congress from the 
  State of California............................................    10

                       SUBMISSIONS FOR THE RECORD

60 Plus Association, Arlington, VA, James L. Martin, statement...   164
American Society of Health-System Pharmacists, Bethesda, MD, 
  statement......................................................   165
O'Dell, Mae, as presented by Betty J. Boucher, Reston, VA, 
  statement......................................................   167
Honeywell, Annette Guarisco, statement...........................   168
National Association of Health Underwriters, Arlington, VA, 
  statement......................................................   169
Wilkins, Tom A., Reston, VA, statement...........................   176

 
         LEGISLATION TO COVER PRESCRIPTION DRUGS UNDER MEDICARE

                              ----------                              

                         TUESDAY, JUNE 13, 2000

               Committee on Ways and Means,
                          House of Representatives,
                                            Washington, DC.
    The Committee met, pursuant to call, at 10:08 a.m. in room 
1100, Longworth House Office Building, Hon. Bill Archer 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE

June 6, 2000

No. FC-22

                      Archer Announces Hearing on

         Legislation to Cover Prescription Drugs Under Medicare

    Congressman Bill Archer (R-TX), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
legislation to cover prescription drugs under Medicare. The hearing 
will take place on Tuesday, June 13, 2000, in the main Committee 
hearing room, 1100 Longworth House Office Building, beginning at 10:00 
a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include Members of Congress, as well as other parties 
pertinent to the development of legislative proposals . However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Although Medicare currently offers a range of health care benefits, 
it differs significantly from other Federal health care programs and 
private sector health insurance in that it does not generally offer its 
enrollees coverage for outpatient prescription drugs. This is 
significant given that, on average, seniors currently spend in excess 
of $600 annually on prescription drugs. However, in the absence of 
Medicare prescription drug coverage, beneficiaries have come to rely 
upon several other sources of prescription drug benefits, such as 
employer-sponsored retiree health insurance, Medicaid or other State-
sponsored health programs, and managed care plans offered through the 
Medicare+Choice program. In total, recent data indicates that 
approximately two-thirds of beneficiaries have coverage through these 
alternate sources, thus leaving more than 10 million beneficiaries 
without coverage.
      
    Last year, the Clinton Administration introduced a proposal in his 
budget to provide a prescription drug benefit for Medicare 
beneficiaries. The proposal would require seniors to pay a monthly 
premium to receive the benefit, where the beneficiary would split 
prescription drug costs with the Federal Government up to a certain 
amount. The proposal did not address prescription drug costs higher 
than the benefit cap.
      
    Earlier this year, the concurrent resolution in the budget set 
aside $40 billion over the next five years to address Medicare 
prescription drug coverage. House Republicans have unveiled their 
blueprint to expand prescription drug access through the creation of a 
public-private partnership that subsidizes all Medicare beneficiaries, 
provides more choices for beneficiaries to get coverage, and protects 
beneficiaries from the full amount of extraordinary catastrophic drug 
costs. Congressional Democrats and President Clinton have announced 
principles that largely mirror the Administration's earlier 
prescription drug proposal, which was the subject of a Subcommittee on 
Health hearing in May (see Health press release, HL-14, dated May 4, 
2000). In addition, the Administration's proposal was modified by 
including a catastrophic drug benefit after beneficiary drug costs 
surpasses a certain amount.
      
    In announcing the hearing, Chairman Archer stated: ``We are 
committed to strengthening Medicare and adding a prescription drug 
benefit under Medicare this year. This hearing will give the Committee 
an opportunity to explore in greater detail the various plans being 
discussed, especially the House Republican plan. I look forward to 
working in a bipartisan fashion toward passing a bill in the House of 
Representatives that can be signed into law by the President--America's 
seniors and the disabled deserve action on this critical item this 
year.''
      
    Health Subcommittee Chairman Thomas stated: ``We have crafted a 
plan to lower drug prices for seniors who currently have no coverage by 
helping them purchase insurance under Medicare. I am pleased that the 
President has offered a plan that rejects price controls and that 
Congressional Democrats have offered a plan that rejects price controls 
and includes immediate protections from catastrophic drug costs. We 
stand ready to work with Members on both sides of the aisle and in both 
Houses of Congress to make a prescription drug benefit under Medicare a 
reality, and this hearing will move us one step closer toward moving 
legislation that will do that this year.''
      

FOCUS OF THE HEARING:

      
    The hearing will examine legislation proposed in recent months to 
improve access to prescription drug coverage for Medicare beneficiaries 
and the related effects on the financial outlook of the Medicare 
program.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Wednesday, 
June 14, 2000, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Committee office, room 1102 Longworth House Office 
Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or 
MS Word format, typed in single space and may not exceed a total of 10 
pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced andquoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http: waysandmeans.house.gov''.

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Archer. The Chair asks members, guests, staff--
take your seats, please. We will likely have a rather long day 
of hearings. Let's try to get started with the least amount of 
ambient noise.
    Today the Ways and Means Committee considers an extremely 
important subject to all Americans, but particularly those who 
have reached their senior years. Health problems are 
exceedingly important to seniors. They are to all of us, but 
when we are younger I guess we think we are invulnerable and 
then we get older and we find that we are not.
    I know that first-hand because at this moment my 96-year-
old mother is in the hospital, and is hopefully getting first-
class care. While our seniors are in the hospital, of course, 
they get coverage for prescription drugs under Medicare. But if 
they are outpatients where we have hopefully the opportunity to 
reduce the incidence of needed hospital care, then of course 
there is no coverage for prescription drugs. On a bipartisan 
basis, the Congress and the White House desired to find a way 
to have Medicare coverage on prescription drugs, although there 
may be differences in approaches.
    We have already had full hearings on the administration's 
proposal for prescription drugs. So hopefully we will not need 
to further explore that today. But we will be exploring other 
approaches that are being pushed by Members of Congress and by 
others who have given thought to this problem. It is important 
that we find a solution that is ultimately one that will let 
seniors, on an outpatient basis, have access to prescription 
drugs on an affordable basis.
    Less than 3 years ago, the health care program for our 
Nation's elderly and disabled was headed toward financial ruin 
by 2001. Next year, it was scheduled to demise. Yet in the face 
of severe opposition, we succeeded in saving Medicare for a 
generation and pushing Medicare's bankruptcy back an additional 
24 years to the year 2025. I think all of us can take great 
comfort in knowing we have done that. But with that extra time 
comes the added responsibility of modernizing and strengthening 
Medicare for this and future generations.
    Our seniors deserve more than partisan politics on an issue 
as important to them as prescription drugs. And I hope that we 
can find a bipartisan answer for this very important problem. 
The plan that will be presented by Mr. Thomas, on which a great 
deal of work has been done on a bipartisan basis with Democrat 
Members of the House, would over the next 5 years give 
Medicare's 40 million recipients real bargaining power to lower 
their prescription drug process and will invest up to $40 
billion.
    Unfortunately, there are defects in every plan. There are 
certainly defects in the President's plan because the benefits 
would tend to vanish over time as drug costs out-pace 
inflation. So I hope we will look as objectively as possible at 
all the various approaches and in the end come out with the one 
which is the most affordable, the most available, and also the 
one that is affordable to society as a whole in the way that 
the costs of Medicare will increase.
    [The opening statement of Chairman Archer follows:]

Statement of Hon. Bill Archer, a Representative in Congress from the 
State of Texas

    Good morning. Today, the Ways and Means Committee will 
examine one of the most important health care issues facing 
seniors not only today, but the 77 million baby boomers who 
will soon retire and be eligible for Medicare in the coming 
decades.
    Less than three years ago, the health care program for our 
nation's elderly and disabled was headed toward financial ruin 
by 2001. Yet in the face of severe opposition, we succeeded in 
saving Medicare for a generation--pushing back Medicare's 
imminent bankruptcy an additional 24 years to 2025.
    But with that extra time comes the added responsibility of 
modernizing and strengthening Medicare for this and future 
generations this year. Our nation's elderly and disabled have 
waited long enough for Medicare to catch up with the miracles 
that modern medicine provides today through prescription drugs.
    Our seniors deserve more than partisan politics on an issue 
as important to them as prescription drugs. That's why House 
Republicans and some Democrats have come together in a 
bipartisan spirit to craft a plan to lower drug prices for 
seniors and the disabled who currently have no drug coverage by 
helping them purchase insurance through Medicare. Our plan 
invests $40 billion over the next five years to give Medicare's 
40 million recipients real bargaining power to lower their 
prescription drug prices.
    Further, benefits under the President's plan vanish over 
time as drug costs outpace inflation. The non-partisan 
Congressional Budget Office recently said that, ``Assuming that 
the cost of prescription drugs continues to rise more rapidly 
than the CPI, the real value of the [President's] benefit cap 
would shrink, thereby eroding the benefit.'' But perhaps more 
importantly, our plan will not endanger existing drug coverage 
that seniors might already have through a former employer, 
which is a great concern I have with the Administration's plan.
    But despite these differences, working together, we can 
pass a bill and get it signed into law this year. Americans 
want us to work together to protect Medicare and modernize the 
program with prescription drug coverage, and that's exactly 
what we intend to do. We can help seniors and the disabled with 
the costs of prescription drugs. If we put progress before 
politics and ideas before ambition, we can and will be 
successful in ensuring Medicare for generations to come. Our 
seniors and elderly expect and deserve no less.

                                

    So having said that, I have now recognized Mr. Rangel for 
any statement he might like to make.
    Mr. Rangel. Thank you, Mr. Chairman.
    I appreciate your thoughts in this being a bipartisan 
effort. You wouldn't believe that at the Democrat's caucus 
yesterday there were rumors that we were going to have a 
hearing today on no bill, that we would have no witnesses, and 
that we were going to mark up the bill on Thursday. Thank God 
those rumors are not true and we had to withdraw our request to 
have a day's hearing for ourselves.
    I do hope we can break the tradition of this Committee of 
not reporting on any bill unless we are guaranteed a veto.
    Clearly, the only way we can have a bipartisan bill is for 
us to talk with each other. I understand my dear friend and 
chairman of the Health Subcommittee held a press conference 
this morning in connection with what will be discussed. Some of 
us did not make the press conference, but we hope to find out 
what it is that we hope we can get bipartisan support on.
    Clearly, the American people believe that in a time of 
prosperity and longer life they are entitled to have affordable 
drugs. Certainly, we don't want a bill that is just helping the 
pharmaceutical companies and the HMOs. We want something that 
older people can depend on.
    Pete Stark has worked very hard on this subject matter with 
Democrats on the Committee. I am depending on him and Mr. 
Thomas to work together and bring something to the Full 
Committee that we can, with a deep-seated pride, report on.
    I would like to yield to Mr. Stark.
    Mr. Stark. Thank you, Mr. Rangel.
    Mr. Chairman, I just wanted to join in a commitment to 
provide a drug benefit to the two-thirds of the seniors in this 
country who lack adequate, reliable, affordable pharmaceutical 
coverage. About 12 million have no coverage at all. And perhaps 
another 12 to 15 million have coverage that is in danger of 
being canceled, reduced, or the premium increased to the point 
where they can't afford it. We cannot tolerate that.
    I think that on behalf of all the Democrats--and I think 
most of the Republicans--we should have a plan that is 
absolutely voluntary and that promotes people keeping their 
current coverage, if they like it, that has catastrophic 
protection, that is simple, and is run by private contractors 
not bureaucrats, and uses the private market to negotiate 
prices and not government price control.
    There is one difference, I think, and that is the one-size-
fits-all--which doesn't trouble this Democrat. It defines 
Medicare, perhaps the most popular government program in the 
country. So that if we have a drug benefit for seniors, it 
should be for every senior, without regard to where they live, 
because the rural beneficiaries would be denied coverage in 
most rural areas under many plans I have heard described. We 
would strengthen Medicare by providing drug coverage to all 
seniors, both those in HMOs and those in fee-for-service. And 
if that is one-size-fits-all, let's stand up and proudly 
support that particular uniform coverage which we all want.
    I look forward to learning and seeing a Republican bill--if 
there is one--and being able to examine the details and see how 
it will work to meet those standards.
    Thank you for having this hearing this morning.
    [The opening statement of Mr. Rangel follows:]

Statement of Hon. Charles B. Rangel, a Representative in Congress from 
the State of New York

    Mr. Chairman:
    I am pleased that we are holding this hearing, and that we 
soon will be marking up a bill at long last to provide help to 
our Nation's seniors and disabled with the terrible burden of 
pharmaceutical costs. I appreciate, Chairman Archer, your 
accommodating a number of our requests for witnesses at this 
important hearing.
    Democrats have proposed a number of bills in this area, and 
have filed a discharge petition to get full House consideration 
of either a bill that I, Mr. Stark, Senator Kennedy, and many 
others have sponsored, or a bill by Rep. Tom Allen that ensures 
seniors the same discount on drug prices that other large 
purchasers get.
    Two-thirds of our Nation's seniors either have no 
prescription drug insurance or have inadequate and unreliable 
insurance. One-third of American seniors have no insurance 
coverage and they face the highest retail drug prices in the 
world. It just defies common sense that in this country, where 
we encourage pharmaceutical manufacturing and where the best 
drugs in the world are developed, that our seniors pay far more 
for their drugs than their peers in Canada, France, Japan, or 
any other nation. That's just not fair to our seniors and, as a 
result, they desperately need help.
    In this time of economic boom, it is unworthy of a great 
Nation to have millions of seniors rationing their 
prescriptions--cutting pills in half--to stretch their budgets. 
A good Medicare drug benefit is the single most important thing 
we can do to improve the health of our retirees and disabled. 
Acting now will save lives. It is immoral to do nothing.
    Yet, this Committee and this Congress have found the time 
to pass numerous tax cuts--and will be pursuing more this 
summer. These tax cuts explode in cost in the out-years, 
benefitting the very wealthiest in our society. If the Congress 
chose to hold back on those tax cuts, we easily could afford a 
prescription drug benefit far, far better than the one on which 
we will be voting.
    The early press reports on the Republican bill indicate it 
is a give-away to the drug manufacturers and to the HMOs which 
have been fighting the patient protection bill of rights.
    Mr. Chairman, I hope these reports are wrong, and that we 
can work together to pass a bill that our Nation's seniors need 
and which helps our retirees with the crushing burden of 
prescription drug costs. I look forward to working with you in 
the days ahead.

                                

    Chairman Archer. Without objection, all members may insert 
written statements in the record at this point.
    [The opening statements of Mr. Coyne, Ms. Dunn, Mr. 
Ramstad, and Mr. Foley follow:]

Statement of Hon. William J. Coyne, a Representative in Congress from 
the State of Pennsylvania

    Mr. Chairman, I am pleased that the Committee is holding 
hearings on the need for a Medicare prescription drug benefit. 
And I am pleased that the majority has finally shown some 
interest in providing America's seniors with such a benefit. 
But I am afraid that the legislation that the House Republicans 
introduced today may not do enough to help the senior citizens 
in my district who currently can't afford the prescription 
drugs that they need.
    There are a number of concerns that I have about the 
Republican plan, which was unveiled just this morning.
    First, the Republican plan might result in less health care 
choice for many senior citizens. This proposal purports to 
guarantee seniors the freedom to choose among plans. It is my 
understanding, however, that government-subsidized premiums 
would only cover enrollment in the lowest cost plan available. 
And that means that many low-income seniors would have to 
enroll in an HMO in order to get prescription drug coverage--
which, of course, would mean that they would no longer be able 
to consult with any physician they wanted--or in some cases to 
see their current doctor. The average household income for 
senior citizens in my district is a little over $13,000. Nearly 
half of the seniors in my district live on around $9,000 a 
year. I am afraid that they would have little real choice under 
the Republican plan. I believe that Congress should preserve 
the Medicare fee-for-service option as an affordable option for 
all seniors--and that a Medicare prescription drug benefit 
should be part of that option.
    Second, the proposal appears to do little or nothing to 
help the seniors with modest incomes--people with household 
incomes in the $20,000 to $30,000 range. Many of these people, 
while well-off compared to low-income seniors, are still 
confronted with hundreds or thousands of dollars in annual 
prescription drug costs that they often find hard to meet. It 
seems to me that Congress should enact a Medicare prescription 
drug benefit that helps all seniors.
    In addition, I am concerned about the subsidy that the plan 
provides to insurance companies. On the one hand, nothing in 
the bill would require the participating insurance companies to 
pass the federal subsidies that they would receive along to 
seniors through lower premiums; consequently, the proposal 
might prove to be a windfall for insurance companies that does 
little, really, to help seniors. On the other hand, there is 
the risk that the program might not work at all. So far, health 
insurance companies have said that they do not plan to offer 
prescription-drug only plans even with the subsidies in the 
Republican plan. If that is, in fact, the case, the Republican 
bill would not meet its state goal of reducing prescription 
drug costs for seniors.
    I am a cosponsor of H.R. 1495, the Access to Prescription 
Medications in Medicare Act. H.R. 1495 would provide all 
seniors with prescription drug coverage for costs of up to 
$1700 per year. H.R. 1495 would also cover all costs after the 
beneficiary pays $3000 in total drug bills in
    a given year. I believe that H.R. 1495 would be a better 
starting point for Medicare prescription drug benefit 
legislation that the bill drafted by the Committee Republicans.
    I would hope that the Committee would spend an adequate 
amount of time considering the pros and cons of each of these 
bills. I am concerned that the Committee might vote on the 
Republican bill this week--only two days after it was 
introduced. That, in my opinion, is far too precipitous a pace 
for legislation that will affect millions of seniors on fixed 
incomes. It seems to me that it would be better for America's 
seniors that we get it right the first time--rather than having 
to pass the Medicare Prescription Drug Benefit ``Refinement'' 
Act next year.
    I look forward to working with my colleagues in a 
bipartisan fashion to provide a decent, affordable Medicare 
prescription drug benefit to all of America's seniors.

                                

Statement of Hon. Jennifer Dunn, a Representative in Congress from the 
State of Washington

    Mr. Chairman, I would like to commend you, Chairman Thomas, 
andother Members of the committee who have worked so hard on 
this effortto provide prescription drug coverage to Medicare 
beneficiaries.
    We want to give seniors access to an affordable, 
voluntaryprescription drug benefit. Today, I want to highlight 
two importantchanges that we can make as part of this 
comprehensive effort toimprove Medicare for our seniors.
    First, we need to ensure access to innovation. Medicare 
currentlycovers intravenous drugs administered by a health care 
professional ina hospital or clinical setting, but it does not 
cover biotechnologyproducts that are self-injected by the 
patient. As a result, patients with chronic illnesses are being 
denied access to the latest technology that could help them 
regain the quality of life they deserve. We must provide access 
to self-injected biologics not only through a new prescription 
drug proposal, but also through Medicare Part B. This change 
makes sound policy, it helps seniors in rural communities, and 
it helps women who are disproportionately affected by chronic 
diseases such as rheumatoid arthritis.
    Second, we need to rectify payments to Medicare+Choice 
plans. Reimbursement rates for Medicare+Choice plans are based 
on the cost of services incurred in a county. However, costs 
incurred in military facilities are left out of this equation, 
resulting in lower overall Medicare+Choice reimbursement rates 
in areas with a significant military presence. To fix this 
situation, we must count the cost of services provided to 
military retirees over the age of 65 in military hospitals when 
calculating the reimbursement rates for Medicare+Choice plans. 
This is one reason why the reimbursement rates in Washington 
State are so low, and many health plans have stopped providing 
service in rural communities. I am concerned that many more 
health plans will follow in low-payment, urban areas like 
Western Washington.
    I am pleased that the Committee is moving to ensure that 
Medicare+Choice plans will soon receive adequate funding. In 
doing so, we will be able to provide greater access in rural 
communities and low-payment counties. The efforts of Chairmen 
Archer and Thomas will give the 200,000 seniors in Washington 
State who participate in Medicare+Choice the opportunity to 
select a health plan that provides quality care.
    I hope to work with the Chairman to address both these 
problems so that our seniors can continue to receive the care 
they need.

                                

Statement of Hon. Jim Ramstad, a Representative in Congress from the 
State of Minnesota

   Hearing on Legislation to Cover Prescription Drugs Under Medicare

    Mr. Chairman, thank you for calling this important hearing 
today to review legislation to expand access to prescription 
drug benefits for seniors.
    As founder and co-chair of the House Medical Technology 
Caucus, I am well aware of the incredible advances that the 
medical technology industry has made in recent years to treat 
and cure many illnesses, diseases and conditions. Similar 
discoveries and innovations have been made in the area of 
pharmaceuticals.
    Sadly, however, Medicare has not kept pace with the 
incredible strides of American medical ingenuity. I've authored 
legislation to ensure that seniors have access, through 
Medicare, to new technologies, and I look forward to similarly 
working on improving senior access to life-saving and life-
enhancing prescription drugs.
    I applaud the many proposals--from the Medicare Commission, 
the President and many of our colleagues in Congress--to 
address this important issue. Since anything worth doing is 
worth doing well, we must carefully review all proposals for 
their strengths and weaknesses, as well as intended and 
unintended consequences.
    At the same time we tackle this important issue, I strongly 
believe we must also address the issue of access to an 
affordable Medicare+Choice option under Medicare. These are 
inter-related issues, as a significant number of seniors 
currently access some form of prescription drug coverage 
through Medicare+Choice. And, since seniors in Minnesota, and a 
number of other efficient or rural areas, have had difficulties 
attracting and maintaining access to a Medicare+Choice option, 
we must address the problems that plague this program in 
certain areas of the country at the same time.
    Mr. Chairman, thanks again for holding this hearing. I look 
forward to learning more from today's witnesses on how we can 
best address these critical access and coverage issues.

                                

Statement of Hon. Mark Foley, a Representative in Congress from the 
State of Florida

    Thank you, Mr. Chairman, and let me commend you for holding 
this hearing today to talk about one of the most important 
issues facing this Congress.
    Our seniors face a crisis in health care today. When the 
Medicare system was begun it was designed as a ``sick care'' 
system. That is, when a person over 65 becomes sick, the 
Medicare program steps in at that point to treat, and hopefully 
rehabilitate, them. Since that time we have realized the need 
within the program to take a proactive approach to senior 
health care by turning it into a ``health care'' system--
instead of treating someone who is already sick, Medicare 
should put resources into healthy lifestyles and preventive 
medicine. Because of current advances in medical technology, we 
know that this type of system can make a difference. A large 
part of that system, and the developing technology that has led 
us to it, is pharmaceuticals.
    Implementing such a large change to a federal program, as 
we on this panel know all too well, does not come easily. Our 
senior population is diverse, as are their medical needs. One 
of the most important factors in this debate, and one which is 
often overlooked, is that some 65% of Medicare beneficiaries 
already have some type of public or private prescription 
coverage. If these people are in fact happy with their current 
coverage, they should not be forced into a government system.
    In realizing the federal government's role in providing 
this benefit we cannot underestimate the importance of allowing 
private providers the opportunity to participate in the plans. 
At the same time, there must be an incentive for participation. 
The recent problems within the Medicare + Choice program 
illustrate this problem perfectly. Congress created a new 
option for beneficiaries to provide a low-cost Medicare option, 
but, because of low reimbursement rates, many insurance 
companies have pulled out of the plan, leaving Seniors with no 
new option. We must ensure that the prescription drug coverage 
provided is in fact a viable option.
    Cost is another important and troublesome factor in this 
debate. Ensuring private providers have an incentive to 
participate is the first step. I have introduced H.R. 4236 
which would increase payments to HMOs that participate in 
Medicare and provide incentives to HMOs to include prescription 
drug coverage for their beneficiaries. This is one way to 
expand the current private drug coverage many seniors enjoy at 
a lesser cost to the government.
    This addresses part of the problem but is not a total 
solution. I have introduced H.R. 4235 to provide a safety net 
for low income seniors enrolled in Medicare. We can all agree 
this is an important component of any new proposal and much of 
the reason the Medicare program was created in the first place. 
I commend Chairman Thomas for his hard work in this area and 
want to impress upon him my willingness to work to see that a 
comprehensive plan is passed this year.
    Finally, to ensure that all seniors have options, we must 
include in any plan those seniors who may not fall in the 
``low--income,'' may not be fortunate enough to have private 
coverage, or may struggle to pay for their supplemental 
coverage. To help these people I have proposed H.R. 4234 to 
provide a tax credit for those who pay for their own drugs or 
who participate in a supplemental insurance plan. This is a 
simple step to help ensure all seniors have a viable option to 
help cover necessary but expensive drug costs. I hope the 
committee will consider each of these proposals as a part of an 
overall prescription drug plan.
    I feel confident we will hear quite a few viable ideas and 
proposals today and hope that this discussion will lead us down 
the path to passing an effective prescription drug plan for 
seniors this year. Let me simply take this opportunity to 
implore my colleagues on both sides of the isle to remember the 
importance of this issue to those it will benefit. Election 
year politics can often impede the path of such important 
proposals. Seniors in my district and throughout the country 
need prescription drug coverage now, not an election year 
issue. I am deeply concerned over reports that members who have 
reached across party lines to form a consensus on this bill may 
face political consequences. I renew my commitment to seeing a 
bipartisan prescription drug plan passed this year, and hope 
that I can count on my colleagues to put partisan politics 
aside and do what is right for our nations' seniors.

                                

    Chairman Archer. Our first witness this morning is one of 
our own, the chairman of our Health Subcommittee, Mr. Thomas. 
He is joined, as I understand it, on a bipartisan basis with 
the gentleman from Minnesota, Mr. Peterson. I understand the 
two of them have been working together on a plan.
    Mr. Thomas, we are pleased to receive your testimony this 
morning. How does it feel on the other side?

   STATEMENT OF HON. WILLIAM M. THOMAS, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Thomas. Thank you, Mr. Chairman. It is an impressive 
view from this side of the table.
    I am cognizant of a number of members who won't have the 
number of opportunities I will have to intervene over the next 
several days, so I have no written statement and I will make a 
very brief oral statement.
    I share in the vision of my colleague from California, Mr. 
Stark, with just a couple of exceptions. I think one of the 
concerns that we brought from the President's program wasn't 
that it was a one-size-fits-all, but that it was a one-size-
fits-some. That in fact seniors who are worried about their 
prescription drug costs are not worried about the first dollar 
but are worried about the last dollar. So rather than a prepaid 
plan of one-size-fits-some, what we are trying to move forward 
on a bipartisan basis is insurance for all seniors.
    As my friend and colleague, Mr. Rangel, said, we are going 
to move forward on a bipartisan basis. If you will recall, on 
the Balanced Budget Act, Medicare reforms passed this Committee 
34 to 1. My goal is always to better ourselves and my goal is 
to have a unanimous vote.
    I tell my friend from New York that at 9:30 we held a 
bipartisan press conference. The work product that will come 
that will come out of the bipartisan working sessions that have 
been going on for more than a year will have the imprint of a 
number of Democrats, but the number of Democrats who have had 
input and the number of Democrats who feel comfortable standing 
up at the beginning of the process is a decidedly different 
number.
    I do believe that when the bill goes to the floor and the 
final vote is recorded, that will be more than enough evidence 
that this plan is bipartisan.
    I am also pleased to have my colleague from the other side, 
the Senator from Louisiana, Senator Breaux, because we spent 
more than a year looking at various proposals in great detail 
with the best minds available to us, both intensively and 
extensively examining options. I think all of us are in 
agreement: This needs to be an addition to Medicare; it needs 
to be an entitlement; it needs to be voluntary; it needs to be 
available in every corner of the United States.
    One of the things of which we are becoming more and more 
aware is that there probably needs to be a structural change as 
well. As the Medicare Program has advanced, one of the things 
we did in 1997 was add choice to the Medicare Plus Choice 
Program. But, frankly, the administering of that program has 
not been what many of us would have thought appropriate. In 
fact, it is also true to others on this panel because they have 
examined the Health Care Financing Administration and said 
perhaps it is time that we look to a different entity to 
provide the nurturing of the benefits to seniors.
    And that is why in this bipartisan proposal we will include 
the creation of a new administrative entity called the Medicare 
Benefits Administrator under the health care structure of the 
Health and Human Services Department. It is not something 
radical or rogue. It is an entirely appropriate maturing of the 
administrative structure.
    But as we begin to get these details examined, I think you 
will find to a certain extent there is some commonality. As we 
did in 1997 with my colleague to my immediate left, it isn't 
stressing the differences that will get us a bill this year, it 
will be stressing the commonalities. That is why I was saddened 
a bit by the White House press conference yesterday--and I 
assume it will continue--and I hope some of my colleagues will 
take note of the fact that what we need to do is to take a look 
at the similarities in the proposal, work on the differences 
instead of emphasizing the differences because if we emphasize 
the differences it will be extremely difficult to come to 
agreement.
    I look forward to working with my colleagues to advancing 
Medicare to making sure that seniors--wherever they are and in 
whatever plan they have--have an opportunity to examine the new 
prescription drug program and make a choice. Is this program 
better than the one they have? Is it a program that now is a 
program where they don't have one? That choice American seniors 
deserve. It is overdue and we ought to do our job and move 
forward in a bipartisan way.
    Thank you very much, Mr. Chairman.
    Chairman Archer. Thank you, Mr. Thomas.
    Chairman Archer. Our next witness is also a member of our 
Committee, a very strong contributing member from the Minority 
side. Before I recognize you, the Chair would observe we have 
10 minutes left on this initial 15-minute vote. I am told there 
will be another 5-minute vote on the heels of that. The Chair 
would like to wait as long as we can toward the end of this 10 
minutes and then stay over for the two votes and come back 
immediately for the rest of this panel.
    Senators, I am sorry about this, but as you know, there is 
nothing we can do about it.
    I know they will want to stay for questions, too, so it is 
not just the presentation. Otherwise, I would say go ahead.
    Mr. Cardin?

   STATEMENT OF HON. BENJAMIN L. CARDIN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MARYLAND

    Mr. Cardin. Thank you, Mr. Chairman.
    Mr. Chairman, I agree with Mr. Thomas. I hope that we can 
work out and enact prescription drug benefits under Medicare 
this year. Each of us in our districts is hearing from our 
seniors on a very regular basis--and rightly so. Let me just 
tell you one example in my district of a person who was at a 
supermarket and went through the check-out line. She had some 
groceries and she had three or four prescription drugs. She 
took out some of her groceries and she took out some of her 
prescription drugs because she couldn't pay the full bill.
    This is a common story in all our districts. I have 
constituents who have out-of-pocket costs of $1,000, $2,000, or 
$3,000 a year. They just cannot afford it and they expect that 
Medicare would cover these costs.
    I was listening to Mr. Stark and was listening to Mr. 
Thomas about one-size-fits-all. That is not Medicare. Medicare 
has been probably the most successful program we have ever had, 
certainly in the insurance field, to cover our seniors. It is 
not one-size-fits-all. You can get your care provided under 
fee-for-service, under an HMO, your employer may provide 
benefits for you, you might be using a Medigap plan. But the 
key thing about Medicare is that we have core benefits of 
covered service that you know as a senior you will be entitled 
to get those benefits.
    I would hope that the standard that we would be using to 
judge the plans--I would hope where we would start is that 
prescription drugs should be no different than physician 
services. A senior should be guaranteed that it is a covered 
service. How the senior receives those services could well be 
through fee-for-service, through an HMO, or through some 
private insurance. That is fine. But let us make sure it is in 
the core plan.
    That is one reason why the bill that Senator Kennedy and my 
friend, Mr. Stark, will be speaking about complies with that 
requirement. I support that approach.
    Let me talk about a bill I filed last year, H.R. 1796, the 
Medicare Chronic Disease Prescription Drug Benefit Act. I was 
joined by Congressmen Coyne, Levin, Stark, and Thurman. That 
bill recognized the fact that we need to include prescription 
drugs in the core benefits of Medicare. However, that we could 
not do it all at one time, that it would be too expensive.
    But what we did there was to pick certain diseases that we 
knew would provide preventive health care for our seniors. If 
they take their prescription drugs, they will stay out of the 
hospital and stay healthier. We also know that these 
prescription drugs would be extremely expensive. So this bill 
has a catastrophic coverage aspect to it. It also includes 
drugs that people won't take unless they need to take them. You 
don't take drugs for hypertension unless you need to take those 
drugs. The diseases were hypertension, major depression, 
rheumatoid arthritis, heart disease, and diabetes.
    And we have a mechanism to add additional diseases that are 
truly for preventive care. There is cost-containment in our 
legislation through the use of a deductible, co-payment for 
brand name drugs and pharmacy benefit managers.
    Mr. Chairman, I will put my entire statement in the record 
and I will be very brief today because I have the privilege of 
serving on this Committee.
    The bill that I filed and the bill that Mr. Stark filed--
both expand Medicare's core benefits to include prescription 
drugs. I think if we start with that one principle, then I 
think we will have room in which we can reach agreement to be 
able to bring out prescription drug benefits for our seniors, 
this year.
    I thank the chairman for his time.
    [The prepared statement follows:]

Statement of Hon. Benjamin L. Cardin, a Representative in Congress from 
the State of Maryland

    Chairman Archer, Ranking Member Rangel, and fellow Members 
of the Ways and Means Committee, I appreciate the opportunity 
to share my views with you on one of the most pressing problems 
facing America's older and disabled citizens today-access to 
comprehensive medical care. Medicare, the federal health 
insurance program for the elderly and disabled, covers a wide 
range of medical services-inpatient hospitalization, physician 
services, physical and occupational therapy, skilled nursing 
facility, home health and hospice care are all covered. Yet, 
despite Medicare's success in eliminating illness as a major 
cause of financial ruin for elderly Americans, the burden of 
high prescription drug costs remains a source of hardship for 
many beneficiaries.
    When Congress created Medicare in 1965, prescription drugs 
were not a standard feature of most private insurance policies. 
But health care in the United States has evolved considerably 
in the last 35 years. Now most private health plans cover drugs 
because they are an essential component of modern health care. 
They are viewed as integral in the treatment and prevention of 
diseases. But Medicare, for all its achievements, has not kept 
pace with America's health care system. Regardless of our 
party, we can all agree that it is time to modernize Medicare 
to meet our beneficiaries' needs.
    Because Medicare does not cover prescription drugs, its 
beneficiaries, 80% of whom take a prescription drug every day, 
must either rely on Medicaid if they qualify, purchase private 
supplemental coverage, join a Medicare HMO that offers drug 
benefits, or pay for them out of their fixed incomes. Without 
coverage, these costs can be extraordinarily burdensome for the 
elderly, who already have the highest out-of-pocket costs of 
any age group and who take, on average, eighteen prescriptions 
each year.
    Medicaid does provide prescription drug coverage. But 
nearly 60% of Medicare beneficiaries with incomes below the 
federal poverty level were not enrolled in Medicaid as recently 
as 1997. And even Medicaid enrollees with drug benefits must 
forgo some of their medications. In fact, eleven state Medicaid 
programs have imposed caps on the number of prescriptions 
covered each month.
    The drug coverage available through Medigap leaves much to 
be desired. Only three of the ten standardized Medigap plans 
offer drug coverage, and these plans-H, I, and J--have limits 
on the benefits and high cost sharing. Two plans have caps of 
$1250, and the third has a cap of $3000. The high cost of these 
Medigap policies has put them out of reach for most low- to-
moderate income Medicare enrollees. In my home state of 
Maryland, a 70 year-old beneficiary must pay anywhere from 
$1100 to $3550 per year for such a plan.
    Some beneficiaries get drug benefits through retiree health 
plans. Although between 60 and 70 percent of large employers 
offered retiree benefits in the 1980s, fewer than 40 percent do 
so today. Of these employers, nearly one-third do not include 
drug benefits in the package.
    So that leaves Medicare HMOs, which are rapidly vanishing 
as an option for seniors. Nearly 1 million seniors are likely 
to lose their Medicare+Choice plan at the end of this year. In 
2001, none of Maryland's rural counties will have a 
Medicare+Choice option. This is the dismal situation in a state 
where only three years ago every senior had access to at least 
two HMOs, and some could choose from as many as eight. But 
access to drugs in a Medicare HMO is not only a rural problem. 
Next year, we will have just two plans available to our urban 
beneficiaries; both will impose a monthly premium, and at best, 
the drug benefit will be capped at $1000. Last year, 
Medicare+Choice enrollees from my district, which is centered 
in Baltimore, told me that they had to rely on pharmaceutical 
samples to get sufficient amounts of medications because of the 
caps imposed by their plans.
    The problem of HMO withdrawals is often cast as a payment 
issue. But the HMOs themselves say that other factors play an 
equal if not greater role in their decision to leave Medicare. 
Raising the payment floor to $475 or $500 in Maryland would not 
have prevented insurance companies from leaving Cecil Country, 
where the 1999 payment was $532, or Allegany County, where the 
1999 payment rate was $574. None of the seniors in these 
counties has any Medicare+Choice option now. Rather than 
spending money to selectively prop up private plans, Congress 
should add a drug benefit to the basic Medicare package. This 
would allow Medicare+Choice plans to compete on the basis of 
their ability to manage care rather than on how deftly they can 
move money from column A to column B to finance an ever-
shrinking drug benefit.
    Our examination of the current landscape has made us 
painfully aware of the gaping hole in Medicare's safety net. We 
can repair it now before more elderly and disabled citizens 
fall through. A comprehensive Medicare drug benefit is 
expensive, and we are limited in how broad a package we can 
create immediately.
    In the first session of this Congress, joined by four of my 
colleagues on this committee--Mr. Coyne, Mr. Levin, Mr. Stark 
and Mrs. Thurman, I introduced legislation that takes an 
important, incremental step. HR 1796, the Medicare Chronic 
Disease Prescription Drug Benefit Act, recognizes the 
importance of preventive care and provides coverage for drugs 
that have been determined to show progress in treating chronic 
diseases. Why chronic diseases? Because the average drug 
expenditures for elderly persons with just one chronic disease 
are more than twice as high than for those without any. And 
because we know from years of advanced medical research that 
treating these conditions will reduce costly inpatient 
hospitalizations and expensive follow-up care. This legislation 
has built-in catastrophic care. It provides medications for 
those beneficiaries with the greatest need for assistance: the 
GAO study of the Medicare+Choice program has shown us HMOs 
enrollees are younger and healthier than those in fee-for-
service Medicare. This tells us that it is the older, sicker 
seniors, precisely the ones who need more medications, who have 
reduced access to drug benefits because they are not in HMOs.
    HR 1796 addresses their needs. It begins with five chronic 
diseases--diabetes, hypertension, congestive heart disease, 
major depression, and rheumatoid arthritis--that have high 
prevalence among seniors and whose treatment will show 
improvement in beneficiaries' quality of life and reduce 
Medicare's overall expenditures.
    The Medicare costs associated with inpatient treatment of 
these diseases are exorbitant.
     Hypertension is a major risk factor for heart 
disease, stroke and kidney failure, affecting nearly 40% of all 
Medicare beneficiaries. It is responsible for 32,000 inpatient 
admissions each year.
     Major depression affects more than one million 
beneficiaries, more than any diagnosis except heart disease. 
Medicare spends $1.8 billion each year for 320,000 admissions 
to treat major depression. Treatment has been found to reduce 
overall health costs by 29%.
     Rheumatoid arthritis affects more than 1.75 
million beneficiaries. The annual rate of hospitalization (34%) 
is nearly twice the rate for all Medicare beneficiaries 
(18.7%).
     Heart diseaseis the largest single cause of death 
for the elderly. Drug therapy can reduce death rates for heart 
patients by 40%, but only half the people who could benefit 
from these drugs receive them. Medicare spends $7 billion 
annually for inpatient treatment of heart disease.
     Diabetes affects six million Americans over age 
65. This Committee recognized the importance of preventive care 
for diabetes in 1997, when we passed the Medicare preventive 
benefit amendments that for the first time paid for glucose 
monitors, test strips, and self-management training for 
diabetics. I will use this disease to further illustrate my 
point:
     Diabetes is the leading cause of end-stage renal 
disease.  People with diabetes are twice as likely to 
have heart disease and to suffer a stroke as people without 
diabetes.  The risk of leg amputation is up to 40 times 
greater for diabetes sufferers.  Each year, Medicare 
pays for 56,000 admissions for amputations, and spends $700 
million on inpatient costs.  Amputees are far more 
likely to require home health care and nursing home care. 
 Medicare spends an estimated $28.6 billion annually 
treating diabetics.  With proper treatment with 
insulin, diabetes can be managed and most of these costs can be 
avoided.
    HR 1796 provides coverage for drugs after an annual $250 
deductible is met, with no copayment for generics and a 20% 
copayment for brand-name drugs. QMBs and SLMBs will be exempt 
from deductibles and copays. Pharmacy Benefit Managers (PBM) 
under contract on a regional basis with the Health Care 
Financing Administration will negotiate with pharmaceutical 
companies to purchase these drugs and will administer the 
benefit.
    This bill covers five major chronic conditions, but we know 
that there are others that should be covered as well. Our bill 
provides a process for the Institute of Medicine to determine 
the effectiveness of this benefit and the Medicare savings it 
produces, and to recommend additional diagnoses and medications 
that should be considered for coverage.
    Mr. Chairman, modern medicine has the capability of doing 
extraordinary things, and the nation's pharmaceutical companies 
should be recognized for their contributions toward curing 
disease and improving the quality of life for many. But no 
medical breakthrough, no matter how remarkable, can benefit 
patients if they can't get access to it. My bill is a cost-
effective, economically sound approach to prescription drug 
coverage is a matter of common sense: if Medicare beneficiaries 
can secure the medications they need, they will be able to 
manage their conditions, and they will be much less likely to 
require extended and costly inpatient care. This legislation is 
a first step, and a major step, toward making this a reality.
    I also support the comprehensive drug benefit bill 
introduced by my colleague from California, Mr. Stark. Both of 
these approaches establish prescription drug coverage as a 
guaranteed benefit under the Medicare program. Both approaches 
recognize prescription drugs as an integral component of 
medical care. Both approaches ensure that seniors' access to 
drug coverage will no longer depend on where they live. Both 
approaches mean that our seniors will have coverage for 
prescription drugs, and they will not be dependent on an 
insurance company's business decision, which could reduce or 
eliminate their benefits. And finally, both approaches expand 
choice. For seniors who want to maintain traditional Medicare, 
they guarantee the availability of drug coverage. For seniors 
who choose private health plans, they reimburse these plans for 
the cost of drugs, thereby encouraging them to stay in the 
program. For seniors who have retiree health benefits, they 
support the ability of employers to fulfill the promise of 
retirement security they have made to their workers.
    Congress created Medicare in 1965 to provide health 
insurance coverage for vulnerable citizens when the private 
sector would not do so. We enacted a benefit that was 
guaranteed to all without regard to income or place of 
residence. We have convened today, because, again, the basic 
health care needs of our beneficiaries are not being met by the 
private sector. As we work to modernize Medicare, let us make 
certain that all enrollees have access to prescription drug 
coverage regardless of income, regardless of place residence, 
and always with the health of our beneficiaries as our primary 
objective.

                                

    Chairman Archer. Thank you, Mr. Cardin.
    Our next witness is a gentleman well known to the Congress 
and to the Nation and has been most active in health issues 
over the years. Senator Kennedy, we are pleased to have you 
here in the Ways and Means Committee and will be pleased to 
hear your testimony.

 STATEMENT OF HON. EDWARD M. KENNEDY, A UNITED STATES SENATOR 
                FROM THE STATE OF MASSACHUSETTS

    Senator Kennedy. Thank you very much, Mr. Chairman. It is a 
pleasure to be with my colleagues here on this panel, all who 
have given a great deal of thought and attention to this issue. 
I commend them and I thank you, Mr. Chairman, for your 
involvement. I also thank Congressman Thomas who works on this 
issue and our chairman, Mr. Rangel, and Congressman Stark as 
well.
    If I could, Mr. Chairman, just walk through these charts 
very quickly. We have high drug prices for seniors. 
Prescription drug coverage for seniors is going down. One-third 
of our senior citizens have no drug coverage. Employer-
sponsored coverage is going down rapidly every year. Medicare 
HMO deductibles are going up. The only group of seniors that 
really has any health care guarantees are those seniors on 
Medicaid.
    Second, Mr. Chairman, you see on this chart, Medicare HMOs 
are reducing their level of drug coverage. This year, 75 
percent will cover less than $1,000 in prescription drug costs 
and 32 percent will cover $500 or less. The major sources by 
which our seniors are getting their prescription drugs are in a 
state of collapse. If you add to that the increased cost of 
Medigap plans that provide drug coverage, that collapse is 
evident.
    On this chart we see the increase in drug costs. We have 
the costs of CPI versus the costs of prescription drugs. So we 
have the collapse of drug coverage at the same time we have an 
increase in cost.
    Next, most seniors do not have high incomes. The meidan 
income for a senior is less than $14,000. This is very 
important. People talk about middle-income senior citizens and 
high-income senior citizens. When you have 78 percent of our 
seniors with incomes below $25,000, you are talking about a 
very limited group. That is why universal coverage is so 
compelling. We are basically talking about people at the 
margin.
    We believe that there should be coverage for all seniors. 
It should be voluntary. You ought to have basic coverage, which 
is essential and some level of catastrophic coverage. You have 
been through the President's bill. I won't take the time to go 
through it. It does provide coverage for all, it is voluntary, 
it has a catastrophic provision, and it is affordable.
    Now let me just mention, Mr. Chairman, my concern about the 
Republican proposal. It is inadequate in terms of the 
government contributions. It leaves out too many seniors and is 
too costly for middle class seniors.
    The impact on Medicare beneficiaries of an inadequate 
government contribution is that you still leave many seniors 
with no coverage whatsoever. Under the administration's 
program, the President's program, the government contribution 
is 50%, so it will likely cover all 12 million seniors without 
drug coverage. Under the Republican proposal, the government 
contribution is only 25%, and is estimated to result in 
coverage for 6 million. So we have to ask ourselves, Is this 
really a program or a promise? Which 6 million seniors are we 
going to leave out? It seems to me, if we are really going to 
do the job, we can't afford to leave out half of those who are 
not going to have the coverage.
    Second, contrast the cost. Under the administration's 
program, when fully phased in premiums will be $575 annually 
versus $1,276 under the Republican plan. So you are talking 
about half the number of seniors that will be covered because 
the cost is more than double.
    Now, Mr. Chairman, looking at the blue chart one more time, 
you are going to have second-class coverage for low and middle 
income seniors. You are going to guarantee $500, or $700, or 
whatever it is, but it is going to be the cost for the lowest 
priced benefit package. When that happens in our health care 
system, it means an inadequate benefit. We are going to 
accelerate a two-tier system, I believe.
    The Republican plan does not have a defined benefits 
program, Mr. Chairman. I think it is absolutely essential that 
in any program that is going to be given its worth you provide 
a defined benefit. I believe that there is excessive reliance 
on the private insurance industry. I think this Committee made 
the wise decision at the time Medicare was enacted to recognize 
that the private insurance industry is not adequate to deal 
with the issue.
    These are the central concerns. I am concerned that this is 
a promise without the reality. It is not a real true Medicare 
benefit. It leaves out too many seniors. It is too costly for 
the middle class and there is no guarantee of defined benefits.
    I thank the Chair.
    [The prepared statement follows.]

Statement of Hon. Edward M. Kennedy, a United States Senator from the 
State of Massachusetts

    Thank you, Chairman Thomas and Congressman Stark, for the 
opportunity to testify on this very important issue. You have 
both been leaders on this issue, and I welcome the opportunity 
to share my views with the Committee. No issue is more 
important to senior citizens than prescription drug coverage 
under Medicare. There is no issue facing this Congress in which 
a bipartisan solution is more important.
    The need for action is as clear as it is urgent. Medicare 
is a specific contract between the people and their government. 
It says, ``Work hard, pay into the trust fund during your 
working years, and you will have health security in your 
retirement years.'' But that commitment is being broken today 
and every day, because Medicare does not cover prescription 
drugs.
    Too many elderly Americans today must choose between food 
on the table and the medicine they need to stay healthy or to 
treat their illnesses. Too many seniors take only half the 
pills their doctor prescribes, or don't even fill needed 
prescriptions at all--because they can't afford the high cost 
of prescription drugs. Too many seniors are paying twice as 
much as they should for the drugs they need, because they are 
forced to pay full price, while almost everyone with a private 
insurance policy benefits from negotiated discounts. Too many 
seniors are ending up hospitalized--at immense cost to 
Medicare--because they aren't receiving the drugs they need at 
all, or can't afford to take them correctly. Pharmaceutical 
products are increasingly the source of miracle cures for dread 
diseases, but senior citizens are being left out and left 
behind because Congress fails to act.
    Senior citizens are being hit by a one-two punch. Coverage 
is declining-and costs are soaring. 12 million senior citizens-
one third of the total-have no prescription drug coverage at 
all. Surveys indicate that only half of all senior citizens 
have prescription drug coverage throughout the year. Coverage 
through employer retirement plans is falling. Medicare HMOs are 
cutting back. Medigap plans are priced out of reach of most 
seniors. The sad fact is that the only senior citizens who have 
stable, reliable, affordable drug coverage today are the very 
poor on Medicaid.
    Prescription drug costs are escalating. Since 1996, costs 
have grown at double-digit rates every year. Last year, the 
increase was 16%, while the increase in the CPI was only 2.7%. 
No wonder access to affordable prescription drugs has become a 
crisis for so many elderly Americans.
    It is long past time for Congress to act. There are four 
basic principles that any prescription drug proposal should 
meet.
    It must cover all senior citizens.
    It should be voluntary.
    It must provide both basic coverage and catastrophic 
coverage.
    It must be affordable for senior citizens.
    Coverage for All
    Medicare and Social Security are the two most successful 
federal social programs ever enacted. One of the reasons that 
they are so popular and effective is that they cover all senior 
citizens. Everyone-rich and poor alike-contributes during their 
working years. Everyone benefits during their retirement years. 
That model must be preserved for a Medicare prescription drug 
benefit. Additional help can and should be provided for the low 
income elderly, but the benefit must be one in which government 
and senior citizens share in the cost at all income levels. 
Senior citizens want Medicare, not welfare.
    As a practical matter, a program targeted on the low income 
elderly won't meet the need. The vast majority of the elderly 
are of moderate means. A program restricted to the low income 
elderly will still leave millions of senior citizens unable to 
afford the prescription drugs they need. Fifty-seven percent of 
seniors have incomes below $15,000 a year, and 78% have incomes 
below $25,000. Only 7% have incomes above $50,000 a year. The 
older they are, the more likely they are to be in poor health-
and the more likely their limited income cannot meet their 
health needs.
    A key component of coverage for all is a fair sharing of 
costs between the government and the beneficiaries. Only if the 
government pays a substantial share of the premium-a minimum of 
50%-for every beneficiary can affordable coverage for all be 
guaranteed and the principle of social insurance be maintained.
    Voluntary coverage
    There is no need for a mandatory program. A program that is 
voluntary will gain the broadest possible public acceptance. If 
it is well-designed, it will assure that every senior citizen 
has adequate, affordable coverage from some source.
    Basic and Catastrophic Coverage
    It is clear that Medicare should cover both basic 
prescription drug expenses and catastrophic expenses. The basic 
coverage will meet the needs of senior citizens with moderate 
drug costs, and the catastrophic coverage will protect those 
who need very expensive drugs.
    A drug bill of $200 or $100 or even $50 a month is a heavy 
burden for most senior citizens. They deserve help in meeting 
these expenses. A program that asks them to pay premiums and 
receive no basic benefits is not defensible. That is why a 
basic benefit is essential.
    But a basic benefit alone will not help those who need 
drugs costing thousands of dollars a year. Increasingly, many 
of the miracle drugs that are coming on the market have price 
tags at those levels. Often, they save money for the system 
overall, by reducing the need for costly hospital and physician 
care. But senior citizens will not be able to afford these 
medications unless Medicare includes catastrophic protection.
    Affordability
    Premiums under the new program must be affordable for 
senior citizens. Special help needs to be provided for the low 
income elderly, but the government should share in the premium 
cost for all of the elderly.
    Affordability also has another meaning, however. Millions 
of Americans with private insurance coverage pay much less for 
prescription drugs today than senior citizens pay. Citizens of 
foreign countries often pay a small fraction of the American 
price. Government agencies like the Veterans Administration 
receive large discounts. Private purchasers who buy in bulk--
such as HMO's, insurance companies, and large corporations--all 
receive substantial discounts.
    Any Medicare prescription drug coverage should be set up to 
provide the benefits of bulk purchasing for senior citizens. 
Any program we are likely to enact will still leave senior 
citizens responsible for paying a significant proportion of the 
costs of the drugs they buy. They deserve to pay that 
proportion based on a fair price, and taxpayers deserve a fair 
price, too.
    The bill introduced by Senator Daschle, Senator Moynihan, 
myself, and the majority of the members of the Democratic 
caucus in the Senate embodies each of those principles. It 
effectively meets the need of every senior citizen for 
affordable coverage. It provides basic and catastrophic 
benefits at a price the elderly can afford--and I hope that, 
with the new surplus projections expected later this month, we 
will be able to improve it further. It assures that Medicare 
beneficiaries will receive drugs at the same discounted prices 
now available only to the biggest purchasers. And it supports 
and improves existing coverage through employer retirement 
plans and Medicare HMOs.
    As important as it is to pass Medicare prescription drug 
coverage that does the right thing for the elderly, it is 
equally important not to pass a program that pretends to do the 
job but does not. There are four specific pitfalls that we 
should avoid.
    First, a program that only subsidizes the very low income 
elderly and provides no government contribution or a very 
limited contribution to the vast majority of moderate income 
senior citizens will leave out too many in need and impose 
excessive premiums. Senior citizens at 150% of the poverty 
level have an income of only $12,000. If they have to pay the 
full premium of a plan similar to the President's, the cost 
would be approximately $1,300 a year, before a dime's worth of 
coverage was received. CBO has estimated that even with a 25% 
contribution, half of all the senior citizens who have no 
prescription drug coverage today would be left out. This result 
is clearly unacceptable.
    Second, the premium contribution should not be based on the 
cost of the lowest priced plan in an area, if multiple plans 
are offered. To do so would be an invitation to segregate those 
of low and moderate income into substandard programs.
    Third, the program should provide a defined and specific 
benefit-not one based on a concept of actuarial equivalence. 
The elderly deserve to know what they are getting. Insurance 
companies should not have the opportunity to manipulate 
benefits to attract the healthy and force the sick into the 
highest cost plans.
    Finally, there should not be excessive reliance on the 
private insurance market. Private insurance has a proven track 
record of failure in meeting the needs of the elderly. The cost 
of selling and administering individual insurance programs is 
unacceptably high, compared to Medicare. Benefits the elderly 
need and deserve should not be used to subsidize insurance 
company profits or excessive administrative costs.
    Few if any issues facing this Congress are more important 
than giving the nation's senior citizens the health security 
they have been promised. The promise of Medicare will not be 
fulfilled until Medicare protects senior citizens against the 
high cost of prescription drugs, in the same way that it 
protects them against the high cost of hospital and doctor 
care. I urge this Committee to act, and act promptly, to meet 
this pressing need.
    [Charts are being retained in the committee files.]

                                

    Chairman Archer. Thank you, Senator.
    Senator Kennedy. I am glad to clear the room. That happens 
to me all the time over in the Senate, too.
    [Laughter.]
    Chairman Archer. The Chair exhorts members to hurry over 
and vote, then we will do the second vote and come back. The 
Committee will stand in recess.
    [Recess.]
    Chairman Archer. We have a lot of witnesses, so the Chair 
encourages everybody to take their seats and cease ambient 
noise.
    Our next witness is another respected Senator, who has 
spent long hours toiling the financiers of Medicare and the co-
chairman of the Medicare reform commission last year. We are 
happy to have you before us today, Senator Breaux. We will be 
pleased to receive your testimony just as soon as the outside 
noise abates.

STATEMENT OF HON. JOHN BREAUX, A UNITED STATES SENATOR FROM THE 
                       STATE OF LOUISIANA

    Mr. Breaux. Thank you very much, Mr. Chairman and Members 
of the Ways and Means Committee.
    I don't know whether it was something Senator Kennedy said 
that cleared the room or the expectation of what I might say 
that cleared the room, but we are glad that you are back.
    It is really interesting that co-chairman Thomas and I had 
our last Medicare Commission meeting in this very Ways and 
Means Committee hearing room. We are glad to be back and 
hopefully this is not the last meeting of the Ways and Means 
Committee on this very important issue.
    Congratulations to you, Mr. Chairman, and to all the 
members, first of all for having this detailed hearing on the 
issue of prescription drugs followed by the very somewhat novel 
concept of actually scheduling a markup on the legislation, 
which I think is incredibly important if we are going to get 
anything done in the few remaining days we have in this 
Congress.
    Thank you for the schedule you have set out. I hope the 
Senate will be able to follow your leadership and actually move 
to a markup if we are going to get anything done other than 
have an issue to talk about. We can all have an issue about 
whose fault it is that prescription drugs are not passed in 
this Congress, but then we will be arguing about failure and 
whose fault it is. If we want to actually get something done 
for seniors, it is going to take some setting of schedules, 
scheduling markups, and working toward a bipartisan agreement.
    Otherwise, we are not going to get anything done other than 
create an issue for each party to argue about in the upcoming 
elections. That would be a real tragedy, and I know that we do 
not want that to happen.
    Let me make basically two points. The first point is that 
we should use the issue of creating a prescription drug plan 
for seniors as a means to also at least put a downpayment on 
Medicare reform. It is actually quite easy just to spend $40 
billion on prescription drugs. We could agree on how to do 
that. It is not that much of a problem. But if we can agree 
that we are going to have $40 billion for prescription drugs 
over 5 years, let us at least use that to get some minute 
degree of reform of the Medicare Program itself in order to 
package the two together.
    I think it would be a serious mistake just to add $40 
billion to the existing program without any reform at all. We 
all know the problems with Medicare. Medicare benefits only 
cover about 53 percent of the average senior's health costs and 
47 percent comes out of their pocket. It is not nearly as good 
as it should be. The average senior, according to AARP, spends 
over $2,400 out-of-pocket in the Medicare Program for things 
that are not covered by Medicare today, and that is not 
acceptable.
    General revenues are already paying 36 percent of the cost 
of Medicare, and I think that is not acceptable. You look at 
the 77 million baby boomers that are coming on to the program. 
The program, in its current state, is not acceptable. It does 
need major reform. And this should be the opportunity to add 
prescription drugs and at the same time do something on real 
reform. Senator Moynihan has said that prescription drugs and 
reform have to be linked together.
    The Breaux-Frist 2000 measure--which Dr. Frist and I have 
now presented--is an outgrowth of the Medicare Commission and 
is a version of S. 1895, which was the Breaux-Frist 
Comprehensive Medicare Reform With Prescription Drug bill that 
we introduced. Recognizing that we probably only have 30 days 
left before we are out of here and the elections are begun, we 
are not going to be able to do any major reform of Medicare 
plus prescription drugs.
    But what we have outlined in Breaux-Frist 2000 I think is a 
major step in the right direction that hopefully we can agree 
on. We create, as Congressman Thomas does, an outside-executive 
branch agency to run both Medicare+Choice as well as run the 
new prescription drug program. Medicare+Choice is not working, 
and for many it is an unmitigated disaster. It is overly 
regulated, reimbursements are too high in some areas and not 
high enough in others. So we would put Medicare+Choice under 
the new agency, allow them to run it based on competition, as 
well as running the prescription drug plan.
    Our prescription drug plan is subsidized across the board 
at 25 percent. It is income-related, which means it is means 
tested for upper-income seniors. For everybody under 135 
percent of poverty, it is 100 percent subsidized and is 
ratcheted down from 135 percent up to 150 percent on a scale 
declining to 25 percent.
    We think that it will work. We create a reinsurance pool 
much like Congressman Thomas does to pay for catastrophic 
costs. We also allow the insurance to provide coverage for the 
out-of-pocket expenses as well as for the prescription drugs. 
We also require that people have to sign up early, like they 
have to do for part B, to make sure they get into the new 
prescription drug program.
    The final point is--very quickly--don't set a deductible 
and a copayment in legislation. Our plan calls for a 
prescription drug plan of an $800 actuarial value. You could 
come up with all kinds of combinations under that. If you set 
the specific deductible and the specific copayment, every year 
Congress will be coming back trying to lower the copayment or 
increase the deductible or vice versa. That is not the way to 
do it. I would suggest an $800 actuarial value and let 
companies offer different variations and people pick the one 
that best suits them.
    Thank you, Mr. Chairman.
    [The prepared statement follows.]

Statement of Hon. John Breaux, a United States Senator from the State 
of Louisiana

    Mr. Chairman and Members of the Committee:
    Thank you for inviting me to testify today on an issue 
critically important to the health of our nation's seniors--
prescription drugs. As you know, last November, Senator Bill 
Frist and I introduced legislation, S. 1895, along with 
Senators Kerrey and Hagel, to strengthen and improve the 
Medicare program and provide a long-overdue outpatient 
prescription drug benefit. Much of what we proposed in S.1895 
reflects the policies supported by a bipartisan supermajority 
of the Medicare Commission which I had the privilege to co-
chair with the Chairman of the Ways and Means Health 
Subcommittee, Congressman Bill Thomas. However, given the 
limited number of legislative days remaining in this Congress 
and the difficulty of passing comprehensive Medicare reform 
this year, Senator Frist and I recently outlined an 
incremental, bipartisan Medicare proposal (Breaux-Frist 2000) 
that we believe represents an important down payment on 
Medicare reform and prescription drugs. The following is a 
comparison of S.1895 and the incremental Breaux-Frist 2000 
proposal.

----------------------------------------------------------------------------------------------------------------
                                        S.1895 (Medicare Preservation and
                                            Improvement Act of 1999)                  Breaux-Frist 2000
----------------------------------------------------------------------------------------------------------------
               Administration            Independent Medicare Board         New executive branch Medicare agency
                                                                            with advisory board (similar to SSA)
                  Competition         Premiums linked to national weighted  Premiums linked to fee-for-service
                                                            average
                 Drug Benefit         Drug benefit through high option      Drug benefit through existing M+C
                                      plans with minimum acturial value.    plans and private entities with
                                        Approved by Medicare Board.         minimum acturial value; reinsurance
                                                                            program to assist with high-cost
                                                                            cases; overseen by new Medicare
                                                                                                  agency.
                Drugu Subsidy         Full low-income subsidies up to                                Same
                                      135%; sliding subsidy 135-150%;
                                      universal 25% subsidy over 150%.
                     Solvency         Unified trust fund; general revenue   A and B Trust Funds remian separate;
                                      funcing limited to 40% of total       no trigger to general revenues; new
                                                     program costs.         measures to gauge Medicare solvency.
----------------------------------------------------------------------------------------------------------------

    I have said many times and I continue to believe that we 
must use the addition of a prescription drug to benefit to 
Medicare as an opportunity to make important structural changes 
to the program. To quote my wise friend and colleague Senator 
Moynihan: ``Medicare reform is the price we must pay for 
prescription drugs.''
    Adding a new drug benefit to Medicare by itself removes 
what little political incentive exists to do the heavy lifting 
needed to reform the underlying program. That is why it is so 
critically important that the issues of reform and prescription 
drugs be linked. We need to fix Medicare now so that we can 
keep the promises we've already made to seniors, before we make 
a new promise in the form of a prescription drug benefit.
    As we address the addition of a prescription drug benefit 
this year, we should not overlook the problems Medicare faces 
today. The facts bear repeating. Today, we know Medicare:
     Will continue to consume an increasing share of 
the federal budget, reaching 25% by 2030;
     Only covers 53% of seniors average health care 
expenses. According to AARP, Medicare beneficiaries spent 
approximately $2,430, or 19% of their income, out-of-pocket for 
health care in 1999.
     Will continue to grow by an average of 6.9% over 
the next 10 years, doubling spending from $208 billion today to 
more than $400 billion in 2010;
     Relies on general revenues to pay for 36% of total 
program expenditures and will continue to use an increasing 
share of general revenues, leaving fewer and fewer federal 
dollars available to support other federal programs;
     Faces a demographic tidal wave with 77 million 
baby boomers becoming eligible for Medicare beginning in 2010.

OVERVIEW OF BREAUX-FRIST 2000

                Real Competition to Fix Medicare+Choice

    Breaux-Frist 2000, which we plan to introduce later this 
month, lays the foundation for the kind of reform I believe 
will ultimately be necessary if Medicare is to be sustainable 
in the long-term. First, it takes steps to stabilize a 
Medicare+Choice program which is clearly on life support. 
Medicare+Choice is a take-it-or-leave-it system with 
reimbursements that are too high in some counties and too low 
in others. It is also a program regulated by an agency that 
knows little about private sector, market-based health care 
delivery.
    In Breaux-Frist 2000, we allow plans to set their premiums 
each year rather than waiting for government-administered 
reimbursements. But beneficiary premiums under Breaux-Frist 
2000 would be linked to the cost of the HCFA-run fee-for-
service plan so beneficiaries in fee-for-service won't pay a 
higher Part B premium than they otherwise would under current 
law.

New Medicare Agency

    Today, the Health Care Financing Administration (HCFA) runs 
the fee-for-service and Medicare+Choice programs, and controls 
the terms of competition between private plans and the HCFA-run 
fee-for-service plan. As illustrated in the attachment, Breaux-
Frist 2000 would establish a new executive branch agency 
outside of HCFA and the Department of Health and Human Services 
(HHS) to oversee Medicare+Choice and the new prescription drug 
benefit.
    Like the Social Security Independence and Program 
Improvements Act of 1994, which moved the Social Security 
Administration (SSA) outside of HHS, this new entity will be an 
executive branch agency, with a Commissioner appointed by the 
President and confirmed by the Senate. Our proposal would also 
create an advisory board within the new Medicare agency to 
advise and make recommendations on Medicare policy. HCFA would 
continue to run Medicaid, the State Children's Health Insurance 
Program (SCHIP), and the fee-for-service program in which 83% 
of seniors currently participate. The new Medicare agency, and 
a change in HCFA's role and mission, are the critical down 
payment Congress must make if it passes prescription drug 
legislation this year.

Universal Prescription Drug Benefit

    As I've said many times, prescription drugs are as 
important today as a hospital bed was 35 years ago when 
Medicare was first established. The growing importance and 
increased use of prescription drugs have had a disproportionate 
effect on the elderly, who account for 13% of the population, 
but more than one-third of the nation's total drug 
expenditures.
    I strongly believe that one of the reasons we don't have a 
prescription drug benefit in Medicare today is because of the 
rigid, government-administered pricing system, which is 
micromanaged by Congress and slow to adapt to changing health 
care needs and technologies. No government program can possibly 
keep up with the increasingly rapid rate at which new life-
saving and life-improving drugs and technologies are brought to 
the market. That is why I have serious reservations about 
giving HCFA any pricing, management or administrative role over 
a new prescription drug benefit in Medicare. Moreover, simply 
using private contractors like pharmacy benefit managers (PBMs) 
in a given region is no different than how HCFA currently 
contracts with fiscal intermediaries and carriers to deliver 
Part A and B benefits.
    Breaux-Frist 2000 provides affordable and accessible 
outpatient prescription drug coverage for all beneficiaries and 
ensures seniors have access to the latest pharmaceuticals. 
Under our proposal, all Medicare beneficiaries will have access 
to an outpatient prescription drug benefit meeting a minimum 
actuarial value. Beneficiaries enrolled in Medicare+Choice will 
be offered the prescription drug benefit through the plan in 
which they're enrolled. Beneficiaries in fee-for-service 
Medicare would select a drug benefit offered by new private 
supplemental plans. Subject to approval by the new Medicare 
Agency, these new private plans could also offer stop-loss 
protections and additional benefits such as dental, vision or 
long-term care.
    To help with catastrophic drug costs, Breaux-Frist 2000 
establishes a reinsurance pool, setting aside a specific dollar 
amount each year to help subsidize plans for their highest 
costs prescription drug cases. This in effect provides an 
additional reduction in drug premiums for all beneficiaries. 
This reinsurance concept is very similar to the one recently 
proposed by Chairman Thomas and other House members. In 
addition, seniors would be protected against catastrophic drug 
expenses through new stop-loss protections.
    Some have argued that public financing of private coverage 
won't work and that a one-size-fits-all HCFA-managed benefit is 
the only option. I disagree. Breaux-Frist 2000 contains several 
features I believe will make private coverage of prescription 
drugs work for seniors.
    First, strong government oversight and substantial public 
funding give seniors and plans a strong incentive to 
participate. Second, funding for reinsurance will help health 
plans with their highest cost drug cases and a one-time 
enrollment feature will help attract a diverse pool of 
enrollees. Finally, Breaux-Frist 2000 contains a fallback 
provision, as S.1895 did, that charges the Medicare Agency with 
guaranteeing all seniors have access to a prescription drug 
benefit in those areas where private sector participation does 
not materialize. Regardless, adverse selection or a lack of 
plan availability could not be worse under a reformed system 
than they are under current law, especially for seniors who 
need drug coverage.
    Under Breaux-Frist 2000, all beneficiaries will receive a 
subsidy toward the purchase of drug coverage. Low-income 
beneficiaries below 135% of the federal poverty level (FPL) 
will receive a full subsidy for the lowest cost comprehensive 
or supplemental plan; beneficiaries between 135%-150% FPL will 
receive a subsidy based on a sliding scale, phasing down from a 
50% subsidy at 136% FPL to a 25% subsidy at 150% FPL. Breaux-
Frist 2000 also provides a 25% universal subsidy toward 
coverage for all beneficiaries over 150% of poverty. These 
premium subsidies would be treated as taxable income, reducing 
their final value somewhat for more affluent seniors.

Coverage: The Key to Affordable Prescription Drugs

    The key to providing affordable prescription drugs to 
seniors without stifling innovation and competition is through 
coverage. Any time members of Congress or their staff need a 
prescription filled, they take their prescription to a pharmacy 
and, if they're in a managed care plan, they most likely pay 
only a $5 or $10 copayment. If they pay coinsurance for each 
drug, they will still pay less than retail as a result of lower 
prices negotiated by insurers which are passed along to 
consumers. Seniors and others without prescription drug 
coverage pay the full retail cost set by individual pharmacies. 
Since no insurer is negotiating discounts on their behalf, 
these Americans end up paying the most for prescription drugs. 
But, if they had coverage and an insurer or PBM to negotiate 
lower prices, they would reap the benefit of lower prices which 
other insured Americans enjoy.
    There has been much discussion regarding drug pricing and 
the availability of drugs at lower prices in other countries, 
such as Canada and Mexico. Some have advocated using Canadian 
cost containment policies as we design a prescription drug 
benefit for America's seniors. But any price controls, whether 
implicit or explicit, will have devastating, long-term 
consequences for the development of new medicines that allow us 
to lead longer, healthier, more productive lives. Price 
controls are not the answer-providing seniors coverage for 
prescription drugs is.

New Measures of Medicare Solvency

    Under Breaux-Frist 2000, the Part A and B Trust Funds would 
remain separate. New mechanisms will be established so 
Medicare's financial health is measured by looking at total 
spending and revenues for the entire program as opposed to only 
looking at the balance in the Part A Trust Fund. These measures 
would be used to sound an early warning and trigger debate as 
to policy decisions necessary to financially sustain Medicare.

Conclusion

    The overwhelming public support for an outpatient 
prescription drug benefit gives us a real opportunity to make 
Medicare better with bipartisan legislation. Seniors absolutely 
need prescription drug benefits, but adding prescription drugs 
without addressing the underlying program will only worsen 
Medicare's financial deficiencies and administrative 
inefficiencies.
    Medicare must be modernized and put on a sound financial 
footing to be able to provide seniors with a drug benefit that 
is an integral part of their health care plan. I believe we 
should use this opportunity to pass meaningful, bipartisan 
legislation and take an important first step toward an improved 
Medicare for all Americans. Thank you again for the invitation 
to appear before this committee and I'd be happy to answer any 
questions.
[GRAPHIC] [TIFF OMITTED] T1459.001

[GRAPHIC] [TIFF OMITTED] T1459.002

                                

    Chairman Archer. Thank you, Senator Breaux.
    Our next witness is a member from our own body, the 
gentleman from Minnesota, Mr. Peterson.

   STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MINNESOTA

    Mr. Peterson. Thank you.
    Good morning and thank you, Mr. Chairman and Ranking Member 
Rangel, for inviting me to testify today before you on this 
important issue.
    Medicare has delivered quality health care for over 30 
years, but most everyone agrees that it needs to be reformed 
for the future. I want to agree with my colleague here, Senator 
Breaux, that we ought not to add a drug benefit without getting 
some kind of reform in the system.
    I also want to associate myself with most of his remarks 
because basically where he is, is very close to where 
Congressman Thomas and I are, and that is as Congress and the 
public discuss Medicare reform--specifically the addition of a 
prescription drug benefit--the debate has predictably evolved 
into a highly politicized one, which I think is real 
unfortunate. I have been concerned for some time that it has 
become so politicized that Congress will fail to produce a 
proposal that has a real chance to become law. Unfortunately, 
the real losers in this political battle are the people who 
need the help the most.
    Today, I believe this debate has received an important 
second wind because this morning myself and a team of 
bipartisan colleagues--Congressman Thomas, Ralph Hall from 
Texas, Richard Burr from North Carolina--announced a plan that 
would offer a voluntary and universal prescription drug benefit 
to American seniors. This new entitlement would provide 
affordable prescription medicines to Medicare beneficiaries and 
provide much needed reforms to the Medicare+Choice Program.
    For the past few years, I have been working toward a 
solution that would not only provide a prescription drug 
benefit for all seniors, but also guarantee affordable and 
accessible medicine for rural seniors. While the 
Medicare+Choice Program conceived in 1997 has increased access 
in some regions, Rural America has been left behind.
    I believe the measure we announced today has the best shot 
we have in offering universal prescription drug coverage to all 
seniors, regardless of where they live. Our measure satisfies 
the principles, I believe, necessary for Medicare prescription 
drug benefit. As I stated, the plan provides a voluntary 
universal prescription drug benefit by making it available to 
everyone. No senior will fall through the cracks. And moreover, 
by making it voluntary, we protect seniors who are happy with 
their current coverage.
    Like the President's plan, the low-income folks are fully 
subsidized. All Medicare beneficiaries will receive a subsidy, 
which will help keep the cost of their benefits more 
affordable. And a stop-loss provision provides seniors with the 
peace of mind that Medicare won't abandon them when they are 
the most sick.
    Additionally, the measure provides safeguards for Rural 
America. Rural districts across the country, including my own 
in Northwestern Minnesota, suffer from acute deficiencies in 
health care and reimbursements. Any Medicare reform needs to 
recognize these problems and close the funding discrepancies in 
health care between the rural areas and some urban areas.
    To that end, our plan reforms Medicare+Choice and thereby 
increasing incentives for private plans to participate in the 
rural areas. While I am hopeful that the reforms of 
Medicare+Choice will accomplish the goal of expanding access to 
prescription drugs, quite frankly, I have been around long 
enough to remain concerned that these reforms could fall short, 
especially in Rural America, given what has happened in the 
past.
    Other aspects of our plan that will increase the likelihood 
that carriers will offer prescription drug coverage in new 
markets include subsidies for drug plans and Federal exemptions 
for State licensing requirements for companies who desire to 
expand their coverage area. If these incentives fail, and there 
are not at least two plans operating in any particular area, 
the new Medicare Benefits Administration--which is newly 
created that will operate within the Department of Health and 
Human Services--will be responsible for administering the 
benefit.
    This aspect of our plan should bring peace of mind to all 
seniors, especially seniors who are without quality and 
affordable prescription drug coverage because of where they 
live. Thus, if market forces do not prevail, Medicare 
beneficiaries in Rural America will not be left behind with 
this legislation.
    This legislation is consistent with my philosophy of a 
middle-of-the-road, common-sense solution to important policy 
questions. I believe it is truly the best approach and can be 
done without risking the financial health of the Medicare 
Program.
    Mr. Chairman, I look forward to working with all of you and 
thank you for the opportunity to testify before the Committee.
    [The prepared statement follows.]

Statement of Hon. Collin C. Peterson, a Representative in Congress from 
the State of Minnesota

    Good morning. Thank you Mr. Chairman and Ranking Member 
Rangel for inviting me to testify today on this very important 
issue.
    Medicare has delivered quality health care for over 30 
years, but everyone can agree that it needs to be reformed for 
the future. As Congress and the public discuss Medicare reform 
measures--specifically, the addition of a prescription drug 
benefit--the debate has predictably evolved into a highly 
politicized issue. I've been concerned for some time now that 
it has become so politicized that Congress will fail to produce 
a proposal that has a real chance to become law. Unfortunately, 
the real losers in this political battle are the people that 
need help the most.
    Today, I believe this debate has received an important 
second wind. This morning, myself and a team of bipartisan 
colleagues--including Congressman Bill Thomas, Congressman 
Ralph Hall, and Congressman Richard Burr--announced a plan that 
would offer a voluntary and universal prescription drug benefit 
to American seniors. This new entitlement would provide 
affordable prescription medicines to Medicare beneficiaries and 
provide much needed reforms to the Medicare+Choice program.
    Over the past few years, I have been working towards a 
solution that would not only provide a prescription drug 
benefit for all seniors, but also guarantee affordable and 
accessible prescription medicine for rural seniors. While the 
Medicare+Choice program conceived in 1997 has increased access 
in some regions, rural America has been left behind.
    I believe that the measure we announced today is the best 
shot we have in offering universal prescription drug coverage 
to all seniors regardless of where they live.
    Our measure satisfies the principles I believe necessary 
for a Medicare prescription drug benefit. As I stated, our plan 
provides a voluntary and universal prescription drug benefit. 
By making it available to everyone, no senior will fall through 
the cracks. Moreover, by making it voluntary, we protect 
seniors who are happy with their current coverage.
    Like the president's plan, the low-income are fully 
subsidized. All Medicare beneficiaries will receive a subsidy, 
which will help keep the cost of the benefit affordable. And a 
catastrophic benefit provides seniors with the piece of mind 
that Medicare won't abandon them when they are the most sick.
    Additionally, the measure provides safeguards for rural 
America. Rural districts across the country, including my own 
in Northwestern Minnesota, suffer from acute deficiencies in 
health care. Any Medicare reform needs to recognize these 
problems and close the discrepancies in health care between 
rural and urban areas.
    To that end, our plan reforms the Medicare+Choice program 
thereby increasing incentives for private plans to participate 
in rural areas. Increased participation in the Medicare+Choice 
program is an important step in increasing prescription drug 
accessibility for all Medicare beneficiaries.
    While I am hopeful that the reforms to Medicare+Choice will 
accomplish the goal of expanding access to prescription drugs, 
quite frankly, I've been around long enough to remain concerned 
that these reforms could fall short--especially in rural 
America.
    Other aspects of our plan that will increase the likelihood 
that carriers will offer prescription drug coverage in new 
markets include subsidies for drug plans and federal exemptions 
from state licensing requirements for companies who desire to 
expand their coverage area.
    If these incentives fail, and there are not at least 2 
plans operating in any particular area, the Medicare Benefits 
Administration--the newly created entity that will operate 
within the Dept. of Health and Human Services--will be 
responsible for administering the benefit. This aspect of our 
plan should bring piece of mind to all seniors--especially 
seniors who are without quality and affordable prescription 
drug coverage just because of where they live.
    Thus, if market forces do not prevail, Medicare 
beneficiaries in Rural American will not be left behind.
    This bipartisan legislation is consistent with my 
philosophy of middle of the road common sense solutions to 
important policy questions. I believe it is truly the best 
approach and can be done without risking the financial health 
of the Medicare program.
    Thank you again Mr. Chairman for inviting me to testify 
before the committee.

                                

    Chairman Archer. Thank you, Congressman Peterson.
    Our next witness is our colleague from California, the 
gentlelady Anna Eshoo. We are happy to have you before the 
Committee and you may proceed.

STATEMENT OF HON. ANNA ESHOO, A REPRESENTATIVE IN CONGRESS FROM 
                    THE STATE OF CALIFORNIA

    Ms. Eshoo. Thank you, Mr. Chairman. Good morning to you, to 
our Ranking Member, Mr. Rangel, and to all the distinguished 
Members of the Committee.
    You have my printed testimony, so I am going to summarize 
since you have listened to almost all of us with patience this 
morning on this most important issue of not whether we should 
provide prescription drug coverage for the seniors of our 
Nation, but rather how to.
    There are some in Congress who think we should turn the 
problem over to the private insurance industry. I am not one of 
those that belongs to that school of thought. I don't know what 
is happening in your congressional district, but daily I 
receive telephone calls and letters and e-mails from my 
constituents. They are frantic because the private insurance 
market is pulling out from under them.
    Others believe that the Federal Government should really 
limit how much drug companies can charge. I don't believe in 
price controls and the legislation that I have introduced does 
not mirror that thought. I really believe that if we don't have 
competition, or if we stifle it, patients will be at risk in 
terms of the access of what will be brought to market.
    Startup companies won't have an incentive to do what they 
do very well. I think just about everyone here has traipsed 
through my congressional district. It has the largest 
concentration of biotechnology companies, not only in 
California but in our country and in the world. So I think we 
have a responsibility to work with those that really possess so 
much of the intellectual property that is out there and what 
they are doing.
    My legislation really builds on the President's plan. It is 
the Medicare Prescription Drug Act of 2000, H.R. 4607. It stays 
true to the hallmark of the Medicare Program by providing a 
generous, defined benefit package that is easy for seniors to 
understand. Yet I think we took a step into the future by 
introducing private sector competition.
    It would be available to all Medicare beneficiaries and the 
Federal Government will pay half of an individual's drug costs 
up to $5,000 a year when fully phased in. For seniors whose 
out-of-pocket expenses exceed $2,500 in drug expenditures, the 
Federal Government will then stand next to them.
    PBMs will deliver the benefits and seniors will choose 
among multiple options, much like we do today in the Federal 
Employees' Health Benefit Plan. I have used models that already 
work. So I don't use a lot of theory in the legislation, but 
rather models that work.
    By allowing multiple PBMs to use the same tools that have 
made them successful in reducing costs and promoting quality 
for employees in the private sector, my bill will, for the 
first time, introduce open competition into Medicare, reduce 
prices, and increase consumer choice.
    I am going to bring my testimony to a conclusion. Let me 
just summarize that it is universal, it is voluntary, it will 
improve efficiencies. We don't create Federal bureaucracy, 
which has been described at the witness table, but rather place 
the responsibility not in HCFA for the administration of the 
plan, but in OPM.
    The Office of Personnel Management does a superb job in 
administering the plan that we are all a part of today. And it 
is the largest in the country, as you well know. There are 
pricing efficiencies by injecting competition, as I have 
described, through the PBMs. There is a stop-loss provision. 
The President's plan stops there. I think it is important to do 
that. And I think that it is very fair because we recognize in 
the legislation that there are those that simply cannot afford 
to pay anything. We will stand next to them.
    Those that earn less than 135 percent of poverty, do not 
pay any premiums or co-pays.
    In the words of FDR--and I think that they are important 
words to recall today because I consider today's hearing 
somewhat historic--``never before have we had so little time in 
which to do so much.'' It is up to the Congress to come 
together around a universal plan and stand next to seniors 
because we know that what is out there today, in many cases, is 
not working and that the majority of seniors do not have any 
coverage whatsoever.
    Thank you, Mr. Chairman and all the Members of this 
Committee. It really is a privilege to come before you and 
testify on an issue that I think in our day and time we can 
really do something about.
    [The prepared statement follows.]

Statement of Hon. Anna G. Eshoo, a Representative in Congress from the 
State of California

    Thank you, Mr. Chairman and Members of the Committee for 
the opportunity to testify before you today regarding the very 
important issue of how we create a Medicare prescription drug 
benefit.
    When Medicare was created in 1965, seniors were more likely 
to undergo surgery than to use prescription drugs. Today, 
prescription drugs are often the preferred, and sometimes the 
only, method of treatment for many diseases. In fact, 77% of 
all seniors take a prescription drug on a regular basis.
    And yet, nearly 15 million Medicare beneficiaries don't 
have access to these lifesaving drugs because Medicare doesn't 
cover them. Countless others are forced to spend an enormous 
portion of their modest monthly incomes on prescription drugs. 
Right now, 18% of seniors spend over $100 a month on 
prescriptions. Seniors comprise only 12 percent of the 
population, yet they account for one-third of all spending on 
prescription drugs.
    The question before Congress is not whether we should 
provide a Medicare drug benefit, but how to do it.
    There are some in Congress who think that the way to do 
this is to turn the problem over to the private insurance 
market, but the private insurance market is pulling out from 
under seniors in the Medigap and Medicare+Choice markets. I 
receive letters and calls every day from seniors in my 
Congressional District who are frantic that their Medicare HMO 
has raised prices, scaled back benefits, or is pulling out of 
the market entirely. Why should seniors trust the private 
insurance industry if this is what is happening to them today? 
Chip Kahn of the Health Insurance Association of America 
(HIAA), the trade association that represents the health 
insurance industry, has stated publicly that health insurance 
companies won't offer Medicare drug-only plans because they 
can't make enough money. So, I don't believe that the private 
insurance model will work.
    Others believe that the federal government should limit how 
much drug companies can charge for their products. I disagree. 
Price controls are anti-competitive and can place patient 
access at risk. I have the largest concentration of 
biotechnology and pharmaceutical companies located in my 
Congressional District and I see every day the capital risk 
that is inherent in research and development. Start-up 
companies in my district won't get the capital necessary to 
develop that next breakthrough Alzheimer drug if the investors 
know that the federal government is going to cap how much they 
can charge for it.
    I've introduced legislation that builds upon the 
President's plan by incorporating open competition and reduced 
administrative inefficiency. My bill, The Medicare Prescription 
Drug Act of 2000 (H.R. 4607), stays true to the hallmark of the 
Medicare program by providing a generous, defined benefit 
package that's easy for seniors to understand; yet we took a 
step into the future by introducing private-sector competition. 
The result will be a more affordable drug benefit for both 
beneficiaries and the Federal government.
    The bill is simple. Available to all Medicare 
beneficiaries, the Federal government will pay half of an 
individual's drug costs up to $5,000 a year, when fully phased 
in. For seniors who exceed $5,000 in drug expenditures--or 
$2,500 in out-of-pocket costs--the Federal government picks up 
the whole tab.
    PBMs will deliver the benefit and seniors will choose among 
multiple options much like we do today in the Federal Employees 
Health Benefits Plan (FEHBP). By allowing multiple PBMs to use 
the same tools that have made them successful in reducing costs 
and promoting quality for employees in the private sector, my 
bill will, for the first time, introduce open competition into 
Medicare, reduce prices, and increase consumer choice.
    According to CBO, if only one PBM is allowed in each region 
and PBMs are not allowed to offer a selective formulary, there 
would be little incentive for reduced pharmaceutical costs. 
Simply purchasing a large quantity of drugs does not drive 
prices lower in the private sector. Pharmaceutical companies 
grant discounts when a PBM can show that it increases a 
company's market share.
    By contrast, allowing for multiple PBMs, and allowing the 
PBMs to be more selective about the drugs they offer will 
result in price competition among pharmaceutical companies. We 
would also allow PBMs to pass cost savings on to Medicare 
beneficiaries in the form of lower co-payments. The result 
would be lower drug prices for beneficiaries and significant 
savings to Medicare. To ensure patient quality, when only one 
drug is available for a given disease or condition, the PBM 
would be required to carry it on the formulary.
    We've also removed sole administration of the program from 
HCFA. HCFA will continue to oversee beneficiary eligibility and 
enrollment but it can't, by itself, run this program. The 
healthcare system has evolved rapidly, and regrettably HCFA has 
not kept pace. HCFA lacks the expertise to run a benefit that 
relies on private sector competition to control costs.
    Fortunately, there is another agency that has expertise 
interacting with private sector health plans, and has proven 
that it can administer benefits effectively and efficiently 
with a minimum of bureaucracy. It's the Office of Personnel 
Management (OPM)--which runs the widely acclaimed FEHBP. OPM 
will define market areas, articulate quality and performance 
standards, and evaluate PBMs--just as it does currently for 
health plans. OPM will ensure that competition is harnessed to 
run an efficient benefit of the highest quality. Under OPM's 
leadership, I'm confident that an efficient and effective 
competitive benefit can be integrated successfully into the 
Medicare program.
    I'm proud of this legislation and proud of the support it 
has received to date. Original cosponsors of the bill include a 
large number of Commerce Committee members and a broad cross-
section of the Democratic Caucus--from New Democrats to Blue 
Dogs to traditional liberals. We agree that the best way to get 
this done is to provide a generous, reliable Medicare drug 
benefit for seniors without price controls and without harming 
innovation.
    Congress should enact a Medicare drug benefit. For our 
Nation's seniors, prescription drugs are not a luxury. During 
these times of historic prosperity and strength, there is 
absolutely no reason to be forcing seniors to decide between 
buying prescription drugs or other necessities of life. I 
appreciate the opportunity to testify before you today.

                                

    Chairman Archer. Thank you, Ms. Eshoo.
    Our last witness is another one of our colleagues, the 
gentleman from Maine, Mr. Thomas Allen. Welcome to the 
Committee. You may proceed.

STATEMENT OF HON. THOMAS H. ALLEN, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF MAINE

    Mr. Allen. Thank you very much, Mr. Chairman, Ranking 
Member Rangel, and all the distinguished Members of the 
Committee. I appreciate the chance to come before you today and 
discuss an issue that millions of Americans deal with on a 
daily basis when they try to make choices between their food 
and their medicine, between their rent and their medicine, 
between their other bills and their medicine. They are all 
following this hearing and this issue with personal interest.
    Over 2 years ago, I asked the Democratic staff on the 
government Reform Committee to do a study in my district and 
what we found was that on average seniors pay twice as much for 
their medications as the drug companies' best customers--the 
big HMOs, the hospitals, and the Federal Government itself 
buying through Medicare or the VA. In October 1998 we did 
another study which showed that Mainers pay 72 percent more 
than Canadians, 102 percent more than Mexicans for the same 
drugs in the same quantity from the same manufacturer.
    The pharmaceutical industry every year sits at the top of 
the Fortune Magazine ranking of profitable industries. This 
year, like last, they were number one in return on assets, 
number one in return on revenues, number one in return on 
equity. In short, the most profitable industry in the country 
is charging the highest prices in the world to people who can 
least afford it, including seniors on a Federal health care 
plan called Medicare.
    In September 1998 I first introduced what is now H.R. 664, 
the Prescription Drug Fairness for Seniors Act, to give some 
relief to seniors for this price discrimination. It would allow 
pharmacists to buy drugs for Medicare beneficiaries at the best 
price given to the Federal Government. No new bureaucracy, no 
significant cost to the Federal Government, and discounts of up 
to 40 percent for our seniors. It would give Medicare 
beneficiaries negotiated discounts, just as Aetna, Cigna, and 
the Blue Cross plans all negotiate lower prices for their 
beneficiaries.
    I am pleased that both the House and the Senate have taken 
steps to cover military retirees over 65 with just this kind of 
negotiated discount approach. Most of us voted for that in both 
the House and the Senate.
    In my State of Maine, with unanimous support in the State 
Senate and all but 11 votes in the House of Representatives, 
the State has enacted a bill that essentially allows Maine to 
be a pharmacy benefit manager for all those people in Maine who 
don't have prescription drug coverage, about 300,000 plus 
people. The State will negotiate lower prices for them.
    Seniors, however, need more than a discount. They need a 
Medicare prescription drug benefit that is affordable and 
meaningful. They need the assurance--and we as taxpayers need 
the assurance--that Medicare will get the best price possible 
in this market. So, therefore, the right approach is a discount 
and a benefit that are blended together in a structure that 
allows Medicare to get lower prices for itself and for our 
seniors.
    A prescription drug benefit must be universal and 
voluntary. It must, in my opinion, be administered under 
Medicare. It must cover all medically necessary drugs. It must 
end price discrimination. It must end geographic 
discrimination. And it is on these areas where I believe the 
Republican plan falls short.
    We have different views of what seniors need. I believe 
what they need--what they ask me every day when I am in my 
district--is stability and continuity and predictability and 
equity in their plan. Medicare gives them that; the private 
insurance market does not.
    I am not satisfied that there are effective cost-control 
mechanisms in the Republican plan. Mr. Chip Kahn, who has 
testified in the past, has said that the private insurance 
industry won't provide stand-alone prescription drug coverage 
for seniors because it is like ensuring against haircuts. Too 
many claimants make private insurance not an appealing market.
    People have talked about the need for reform. Let me 
conclude by saying this: We don't need more managed care, more 
for-profit managed care in Medicare. And that is where some of 
those who talk about reform want to go. In my State of Maine, 
managed care is in decline in terms of its appeal to providers 
and to patients. Last year, almost 400,000 people were simply 
dropped from Medicare managed care because the HMOs did not 
make enough money on them.
    As I said before, stability, continuity, predictability, 
equity--those ought to be the guiding principles that will lead 
us to a plan that will not be changing every year as a plan 
founded on private insurance would.
    Mr. Chairman, I thank you very much for your time and the 
attention of all the members.
    [The prepared statement follows.]

Statement of Hon. Thomas H. Allen, a Representative in Congress from 
the State of Maine

    Mr. Chairman, Ranking Member Rangel, distinguished 
Committee members, I appreciate the opportunity to testify 
before you today, and to address an issue that millions of 
American seniors confront whenever they try to make choices 
between food and medicine, the rent and medicine, their other 
bills and their medicine. They are watching this hearing with 
personal interest.
    More than two years ago I asked the Democratic staff of the 
Government Reform Committee to investigate the high prices paid 
by seniors in my district in Maine. We found that on average 
seniors without prescription drug coverage paid twice as much 
for their medications as the pharmaceutical companies' best 
customers: the HMOs, the big hospitals, and the federal 
government buying drugs for Medicaid or other agencies like the 
Defense Department.
    A later study, released in October 1998, found that seniors 
in Maine pay 72 percent more than Canadians and 102 percent 
more than Mexicans for the same drugs in the same quantities 
from the same manufacturers.
    These studies and others, replicated in congressional 
districts across the country, confirm that many seniors, 
covered by Medicare for hospital and physicians services, 
simply cannot afford the third aspect of their health needs: 
the drugs that their doctors tell them they have to take.
    The pharmaceutical industry, year after year, sits at the 
top of the Fortune Magazine list of most profitable industries 
in the country. The latest report covering 1999 showed the 
industry maintained top rankings from previous years: #1 in 
return on revenues, #1 in return on assets, #1 in return on 
equity. And the prices they charge to the uninsured in America 
remain the highest in the world.
    In short, the most profitable industry in the country is 
charging the highest prices in the world to people who can 
least afford it, including seniors on a federal health care 
program called Medicare.
    Long before this issue became front-page news, in September 
1998, I developed the Prescription Drug Fairness for Seniors 
Act, H.R. 664, to give seniors some relief from the price 
discrimination practiced by the pharmaceutical industry. We 
have 153 cosponsors. The bill is simple. It would allow 
pharmacists to buy drugs for Medicare beneficiaries at the best 
price available to the federal government, typically the 
Veterans Administration price or the Medicaid price. It creates 
no new bureaucracy. It incurs no significant cost to the 
federal government. It gives Medicare beneficiaries negotiated 
lower prices, just as customers of Aetna, Cigna and other 
private plans receive the benefit of negotiated lower prices.
    I was pleased that the House voted last month to give a 
segment of the Medicare population, military retirees over the 
age of 65, access to the DOD prescription drug program, which 
is administered by the federal government and uses negotiating 
power to give its beneficiaries drug prices equivalent to the 
best prices obtained by other federal agencies. My bill, H.R. 
664, would offer the same negotiated price discounts to all 
seniors that 353 House Members, including most on this 
Committee, voted to give to over-65 military retirees.
    Since the Senate defense bill includes a similar 
prescription drug provision, it is almost certain that 1.4 
million seniors (military retirees) will by the end of the year 
gain access to prescription drugs at negotiated prices that are 
24-70 percent cheaper than the average private sector price. I 
hope that this Committee will act to provide similar discounts 
on prescription medications for 15 million Medicare 
beneficiaries with no coverage, and avoid making Congress 
responsible for continuing price discrimination by offering 
some Medicare-eligible seniors drug price discounts unavailable 
to other Medicare-eligible seniors.
    The State of Maine just enacted legislation to make the 
State, in effect, a pharmacy benefit manager for all Mainers 
who don't have prescription drug coverage, seniors and others. 
Everyone without coverage will get a MaineRx card which will 
entitle them to pharmacy prices negotiated by the State with 
the manufacturers. The bill passed unanimously in the State 
Senate and with only 11 dissenting votes in the State House of 
Representatives. The concept is embodied in H.R. 664.
    Seniors not only need lower drug prices through negotiated 
discounts, they need a Medicare prescription drug benefit that 
is affordable and meaningful. Taxpayers need the assurance that 
Medicare gets the best price for its beneficiaries, so that the 
program remains cost-effective with the additional drug 
benefit. That is why blending the benefit and the discount in a 
process that assures Medicare will have some leverage over 
price is the right package. In order to be affordable and 
meaningful, a benefit must reflect the following principles:
     A prescription drug benefit must be universal and 
voluntary so that all Medicare-eligible seniors have access to 
the program and to avoid adverse risk selection.
     It must be administered under Medicare. For three 
decades, our nation's elderly have relied on Medicare as their 
health insurer. Medicare covers hospitalization and doctor 
visits and should be modernized to cover the fastest growing 
aspect in our health care system, prescription medications.
     It must cover all medically necessary drugs so 
that all beneficiary are guaranteed affordable access to any 
drug their doctor prescribes for them.
     It must end price discrimination by giving 
beneficiaries access to Medicare's volume purchasing power to 
negotiate and achieve the same drug price discounts that 
favored large purchasers obtain.
     It must end geographic discrimination by ensuring 
that beneficiaries in rural areas have access to all benefits 
and do not suffer when benefit providers change or leave their 
area.
    Seniors deserve a prescription drug benefit that offers 
stability, continuity, predictability and equity. A program 
that does not reflect these values will take seniors, and 
taxpayers, in the wrong direction. With al due respect, I am 
concerned that the plan proposed by the Chairman of the Health 
Subcommittee does not reflect these values.
    The Republican plan provides subsidies on a sliding scale 
to give seniors the chance to purchase private insurance to 
cover prescription drugs. The premium, co-pays and benefit can 
be changed by the company every year. There are no effective 
cost control mechanisms, so the taxpayers are not protected. 
Mr. Chip Kahn, the director of HIAA, has said that the 
insurance industry won't provide stand alone prescription drug 
coverage, because it would be like ``insuring against 
haircuts.'' Too many claimants make this an unappealing market, 
and 85 percent of seniors take some prescription medication.
    If Maine were a low-lying state, and 85 percent of our 
residents filed a claim for flood insurance every year, we 
would not be able to buy flood insurance at any price. The same 
applies to prescription drugs.
    We are all aware of the growing problems of the managed 
care industry in attempting to serve the Medicare population. 
Last year, almost 400,000 people were simply dropped from 
Medicare managed care plans because the HMOs did not make money 
serving them. Medicare HMOs are now charging copayments for 
drugs, and lowering the amounts of drugs covered.
    The Republican plan assumes you cannot trust Medicare and 
that seniors are better off getting coverage from HMOs and 
other insurance companies. I believe the plan is better for 
those companies than it is for seniors. As the Committee 
debates this plan, I urge Members to ask these questions:
     Can we guarantee that coverage will always be 
available to all beneficiaries under a private insurance model? 
Are prescription drugs an insurable product in this market?
     Does relying on Medicare managed care programs 
offer stability and predictability, given the recent track 
record of Medicare managed care dropping drug coverage and 
leaving markets?
     Will a private market prescription drug benefit 
offer continuity and equity? Are seniors well served when 
benefits vary widely from plan to plan, and change from year to 
year depending on the whims of the market and the changes in 
providers?
     Are there assurances that a private prescription 
drug policy would be affordable for seniors? Will millions of 
middle-income seniors who need help with their drug costs be 
able to get it?
     Does the plan create new bureaucracies and thus 
add inefficiency and expense?
     Does the plan ensure that seniors won't continue 
to suffer price discrimination, and provide sufficient 
negotiating leverage over price so that continued drug 
inflation (three to four times the overall rate of inflation) 
does not drain Medicare finances or make drug coverage a 
product that insurers cannot afford to provide?
     Will attempts to force other countries to raise 
the prices their consumers pay for prescription drugs 
necessarily mean that drug prices for American consumers go 
down, or will additional revenues overseas simply end up as 
increased profits for U.S. manufacturers? It is fair, moral or 
even legal to try to use trade law to dictate domestic health 
policies in other countries?
    Seniors need stability, equity, continuity and 
predictability in their health care plans. They don't get it 
from for-profit managed care as currently structured. They 
won't get it from private insurance policies with the premiums, 
co-pays, benefits or even coverage open to change every year.
    We need to keep it simple. Seniors need a universal 
prescription drug benefit under Medicare with negotiated price 
discounts that make the program affordable to beneficiaries and 
to taxpayers. The Democratic plan does this, and the 
alternatives do not.
    Again, I appreciate the opportunity to testify before the 
Committee and will be pleased to answer any questions.
    Prescription drugs can improve, and often extend the lives 
of people with serious illnesses and chronic disabilities. 
Recent pharmaceutical breakthroughs offer hope and relief to 
patients suffering from Alzheimer's, AIDS and other deadly 
disorders. But the explosion in prices for prescription drugs, 
coupled with widespread and growing lack of prescription drug 
insurance coverage, has left millions of Americans unable to 
afford the drugs their doctors tell them they have to take.
The Need for Affordable Prescription Drugs for Seniors

    Prescription drugs, no matter how innovative and effective, 
provide no benefit to people who cannot afford to take them. 
Who are the people left behind? Disproportionately, they are 
many of our nation's seniors.
    Congress did not include an outpatient drug benefit when 
Medicare was created 35 years ago because pharmaceuticals 
played a much smaller role in health care and were not a 
significant cost to consumers. But today, seniors, who comprise 
12 percent of the population, use one-third of all prescription 
drugs.
    It is estimated that at least one-third of Medicare 
beneficiaries have no drug coverage at all and must incur these 
expenditures out-of-pocket. Medicaid is available only to the 
poor, often driven into poverty by rising medical bills. About 
8 percent have Medigap drug coverage. But these plans are too 
expensive and inadequate for most beneficiaries.
    About 17 percent of Medicare beneficiaries have coverage 
through Medicare managed care. These plans are very unstable. 
Some are dropping prescription drug coverage. Some are dropping 
out of Medicare entirely. In 1999 almost 400,000 people have 
been dropped form Medicare managed care plans. According to a 
recent report all Medicare HMOs will begin charging copayments 
for drugs next year. Already 21 percent of Medicare plans limit 
drug coverage to $500 or less. By next year 32 percent of 
Medicare managed care plans are expected to have such limits. 
Seniors deserve more predictability, continuity, stability, and 
equity than is offered by medicare managed care.
    The National Economic Council and Domestic Policy Council 
report only about one quarter of Medicare beneficiaries have 
meaningful coverage provided by a retirement plan. Even these 
plans are even threatened by the high prices of prescription 
drugs. The proportion of firms offering retiree health coverage 
has declined by 25 percent in the last four years. Among the 
largest employers, over one-third have dropped coverage. A 
principal reason for dropping coverage is that employers cannot 
afford to pay for prescription drugs.
    What does this lack of adequate coverage mean? The General 
Accounting Office has estimated that the misuse of prescription 
drugs costs Medicare an estimated $20 billion per year in 
hospital and physician expenses. The National Economic Council 
reports that inappropriate use and underutilization of 
prescription drugs has been found to double the likelihood of 
low-income beneficiaries entering nursing homes. They report 
that drug-related hospitalizations accounted for 6.4 percent of 
all admissions of the over 65 population and that over three-
fourths of these admissions could have been avoided with proper 
use of medications.
    Perhaps most importantly, this lack of adequate coverage 
means that seniors are left to make choices that no one should 
have to make. Do they pay the rent or take their high blood 
pressure medication? Do they buy groceries this week or fill 
their prescription for an osteoporosis drug? We can do better 
by our nation's seniors.

Seniors are Paying the Highest Prices

    As prescription drugs have become an increasingly important 
component of health care, the pricing practices of drug 
manufacturers have become increasingly discriminatory toward 
those least able to afford their products, especially seniors 
without prescription drug coverage.
    Under the leadership of Representative Henry Waxman, who 
sits on this Subcommittee, the House Government Reform 
Committee minority staff have spent much of the past year and a 
half examining the drug prices charged to senior citizens and 
others who pay for their own drugs. They have conducted studies 
in over 80 Congressional Districts across the nation. The 
resulting studies confirmed a shocking pattern of price 
discrimination.
    Not only are seniors in this country paying high prices for 
their drugs, they are paying more than consumers in other 
countries. The Government Reform Committee conducted a cost 
survey of medications commonly used by seniors in the U.S., 
Canada and Mexico for the same drugs in the same amounts from 
the same manufacturer. In my district American seniors pay 72 
percent more than consumers in Canada, and 102 percent more 
than consumers in Mexico. Older Americans pay the highest 
prices in the world for their prescription drugs.

The Industry

    The pharmaceutical industry earns more in profits ($26.2 
billion in 1998) than it spends on research ($24 billion). 
Fortune magazine rates pharmaceuticals as the nation's most 
profitable industry: No. 1 in return on revenues (18.5 
percent), assets (16.6 percent) and equity (39.4 percent). The 
profits of other industries that rely heavily on research pale 
in comparison: telecommunications, 11.5 percent; computer and 
data services, 5 percent; and electronics, 3.6 percent.
    In short, the most profitable industry in the nation is 
charging the highest prices in the world to those who can least 
afford it, senior citizens without prescription drug coverage.

The Prescription Drug Fairness for Seniors Act

    To protect America's seniors from this drug price 
discrimination, over 130 other members of Congress have joined 
me to support H.R. 664, The Prescription Drug Fairness for 
Seniors Act. Senators Edward Kennedy and Tim Johnson introduced 
a companion bill, S. 731. Our legislation gives Medicare 
beneficiaries the same advantages that large HMOs and other 
bulk purchasers like the federal government receive. Currently, 
virtually all federal health care programs, including the 
Veterans Health Administration, the Public Health Service and 
the Indian Health Service, obtain prescription drugs for their 
beneficiaries at low prices. Our legislation takes the same 
common sense approach, which is to buy in bulk and save money.
    H.R. 664 would allow pharmacies to buy prescription drugs 
for Medicare beneficiaries at the ``best price'' given by the 
manufacturers to the federal government. The best price to the 
government typically the Medicaid or Veteran's Administration 
price and, according to GAO, is close to the best price given 
by the manufacturers to private sector customers. In practice, 
the federal government would negotiate lower prices for 
beneficiaries who are already on a federal health care plan 
called Medicare.
    I designed this bill to attract bipartisan support. This 
bill would not significantly increase federal spending. It 
creates no new federal bureaucracy. Yet it provides a price 
discount to seniors of up to 40 percent. While other plans for 
a prescription drug benefit under Medicare involve substantial 
expense, my plan involves no significant cost to the federal 
government or the taxpayers. I believe that H.R. 664 is a 
fiscally responsible approach relying on free market 
negotiation to ensure that Medicare beneficiaries get the 
prescription drugs they need.
    The Prescription Drug Fairness for Seniors Act does not 
impose price controls on the pharmaceutical industry, it ends 
price discrimination. The bill enables senior citizens to 
purchase prescription drugs at the same prices the drug 
manufacturers offer to their favored customers. Rather than 
imposing a top-down, arbitrary price, the bill leverages the 
market power of the federal government. Companies can set their 
best price at whatever level they want and the market will 
bear. Given our government's social contract with seniors, it 
is fair and appropriate to use this buying power for the 
benefit of Medicare recipients, just as we do for other 
government-sponsored health care beneficiaries.
    I understand the need for ongoing research and development 
in the drug industry. That is why I have supported efforts to 
extend the research and development tax credit as well as to 
increase funding for the National Institutes of Health. I am 
confident that if enacted, H.R. 664 will not force the 
pharmaceutical industry to reduce research expenditures. 
Competition within the pharmaceutical industry would assure 
continued investment.
    The historical evidence assures us of continued research 
and development in this industry. The 1984 Waxman-Hatch Act 
increased the availability of generic drugs and provided more 
competition for brand name drugs. Despite the dire predictions 
of the pharmaceutical industry, the legislation did not stifle 
or even reduce innovation in the pharmaceutical industry. In 
fact, pharmaceutical companies more than doubled their 
investment in research and development, from $4.1 billion to 
$8.4 billion over the five years following enactment of Waxman-
Hatch. Similarly, 1990 legislation that created a drug rebate, 
requiring drug companies to reduce their prices for drugs sold 
to the Medicaid program, did not reduce innovation in the 
pharmaceutical industry. Since 1990, pharmaceutical companies 
have almost tripled their spending on research and development, 
from $8.4 billion in 1990 to $24 billion in 1998.
    While H.R. 664 is designed to assist all Medicare 
beneficiaries, it will not solve the problem. Medicare 
beneficiaries don't just need lower prices for their 
medications, they need coverage. The President has proposed a 
benefit, and Representatives Stark, Dingell and Waxman have 
proposed a benefit. I strongly support these initiatives and 
believe that it is time to update the Medicare program for the 
21st Century and include a prescription drug benefit.
    That said, I believe that the Prescription Drug Fairness 
for Seniors Act complements a prescription drug benefit. We 
must work to ensure that drug prices are lowered, even in the 
context of a benefit. With questions about the future viability 
of our nation's health care program for seniors, this approach 
will assist seniors without increased burdens on taxpayers.

Conclusion

    Chairman Bilirakis, I again want to thank you for holding 
this hearing today. I realize that you, several of my 
colleagues on this panel, as well as many members of this 
subcommittee have proposals aimed at providing seniors with 
assistance in affording their prescription drugs. I look 
forward to working together toward a solution that makes 
prescription drugs affordable for all citizens in this country.

                                

    Chairman Archer. Thank you, Mr. Allen.
    We now go into our questioning period. I am sure there will 
be many members who wish to inquire.
    I really hope we can proceed on this very, very important 
project without turning it into some sort of a political 
activity. The Chair is disappointed at the White House's 
comments yesterday, which really were clearly designed for 
political reasons, to make a statement about the Committee 
moving too fast without a bill. This was an unnecessary comment 
by the White House, instead of trying to work with us to try to 
create friction. We are going to have a bill and statutory 
language and there will be adequate time for the members to 
look at that before the Committee ever marks it up. The Chair 
is going to insist on that. Hopefully, the White House will 
work with us and not against us as we walk down this path.
    As Senator Breaux said so appropriately, we shouldn't be 
taking out our political cudgels. We should be taking out our 
efforts to work together to find an answer to this very 
important problem.
    With that, I recognize Mr. Crane for any inquiry he might 
like to make.
    Mr. Crane. Thank you, Mr. Chairman.
    I was reading an article--and the chairman is looking at 
it, too--that was in today's issue of Congress Daily. I would 
like to ask Mr. Thomas to respond to one paragraph in here.
    ``The report prepared by the White House at the request of 
Senator Max Baucus argues that rural Medicare beneficiaries are 
just the sort likely to be disadvantaged by the GOP plan.'' 
Could you respond to that?
    Mr. Thomas. Tell my friend from Illinois that the 
President's plan is just as likely unless they say Medicare is 
going to guarantee that rural Americans will receive this 
prescription drug benefit. You have heard it from me and you 
have heard it from my colleague, Mr. Peterson, that in fact the 
program we are going to talk about on a bipartisan basis in 
statutory language guarantees as the insurer of last resort 
that every American will also have it with government, if 
necessary.
    The key here is that the comments that are being made are 
an attempt to drive a wedge so that people won't be able to 
work together in these last few weeks. No one is going to 
sponsor a Medicare Program under Medicare that is not a 
benefit, that isn't an entitlement, and that doesn't make sure 
that every American anywhere has the opportunity to get the 
prescription drugs if they are a senior and need them. That is 
not going to be an issue. However, they are going to say it 
over and over again and the press will report it.
    Mr. Crane. Yet another question, and this is from the same 
article.
    ``The White House officials, while admitting that they 
hadn't seen the details of the GOP plan, nevertheless asserted 
that those seniors paying premiums would have lower costs under 
the President's plan than under the proposal to be outlined by 
the GOP.''
    Mr. Thomas. Well, I don't know about the GOP plan, but the 
bipartisan plan that we are going to present probably will cost 
a little more than the President's plan because, remember, the 
President's plan is not an insurance plan. It is a prepayment 
plan that leaves seniors 100 cents on the dollar obligated for 
anything over $2,000. You will recall that after the 
President's plan came out, they talked about adding a year 
later a catastrophic sometime in 2006. With no structures, 
Congressional Budget Office can't determine its costs.
    More recently, Democrats went to the White House and 
proposed adding a catastrophic to the President's current 
proposal. The only problem is that it is triggered by the 
Secretary of HHS, which means there are no details, which means 
it has no cost.
    What we did was to build an insurance plan with 
catastrophic from the very beginning under the $40 billion 
amount that has been provided by the Majority Leadership for 
Medicare modernization and prescription drug. Any of the 
proposals--the President's plan adding on in 2006 or the more 
recent plan adding to the President's plan today--double the 
cost of the program. Our program will be comprehensive, provide 
insurance at the affordable cost.
    If it costs a couple of dollars more to get full insurance 
and stop-loss, I think you will find out most seniors are not 
worried about the first dollar they are going to pay for 
prescription drug insurance, it is their worry about that last 
dollar. We provide comfort on that last dollar, the very 
expensive costs of prescription drugs, from day one.
    Mr. Crane. Thank you.
    Chairman Archer. The Chair is going to jump in momentarily 
to ask Senator Breaux, Where, if at any place, do you disagree 
with the presentation just made by Congressman Thomas?
    Mr. Breaux. I spent a year disagreeing with Thomas on the 
Commission, and then we came to a conclusion that was pretty 
much the same after a year of debate.
    I think we are very close in the sense that what he is 
attempting to do is the same as ours in trying to bring about 
some degree of reform to the program as well as establishing a 
prescription drug plan.
    For those who have a concern about the insurance aspect, I 
would remind all of us that everyone at this table, and 
everyone on the Ways and Means Committee, and everyone sitting 
behind every one of you get their prescription drugs through an 
insurance plan that is negotiated by the Federal Government 
Office of Personnel Management. And when you or I or any of our 
staffs walk to the drug store and the cost of the drug is $100, 
through our insurance we don't pay $100. We pay a copayment or 
a deductible. The copayment may be $10 or $15. And that is 
through a negotiated insurance plan which is available to 10 
million Federal employees.
    And what Congressman Thomas and what Senator Frist and I 
have proposed is the creation of a federally structured 
insurance plan which provides the same type of coverage to the 
Medicare beneficiaries. In that sense, we are the same.
    Chairman Archer. I am a little bit curious because we 
continue to hear this plan described as the Republican plan. 
Does that mean that we should welcome you into the Republican 
party?
    Mr. Breaux. No. I will tell you that I am very serious on 
this. If we look at this as Republicans and Democrats, we will 
end up at the end of this year with a debate about whose fault 
it is that we didn't do anything. Democrats will blame 
Republicans for not being willing to step forward, and 
Republicans will blame Democrats for not being able to work 
with them. And the end result is that the American public will 
be sick and tired of us fighting with each other instead of 
joining together to fight for them.
    That is the choice we have. Neither plan is going to be 
perfect, but our challenge is to work it out together, forget 
about the political arguments, and start arguing about success 
and who did it as opposed to arguing about failure and whose 
fault it is.
    Chairman Archer. Thank you very much.
    Mr. Rangel?
    Mr. Rangel. Thank you, Mr. Chairman.
    The reason we got stuck with this Republican plan label is 
because--unlike in past years where Mr. Thomas has worked so 
closely with Mr. Stark to surprise most people in the 
Congress--they came and they worked together and they produced 
their product. With all due respect, Mr. Chairman, to 
outstanding members in the other body and Democrats outside of 
this Committee, in the past this Committee used to pride itself 
with our ability to work on these complex issues and work 
together. I certainly would not think if the President picked 
up a Republican to support his initiative that we would reach 
out and call it a bipartisan effort.
    And also, you have to work hard at being bipartisan. It 
just doesn't happen. And the speed at which we are moving with 
no bill defies even partisanship. We couldn't get by with this 
on our side to ask for support when we don't even have the cost 
of the bill. It is hard to ask questions if you don't have a 
press release. I assume Mr. Thomas has issued that.
    It would seem to me that if the Health Subcommittee, 
instead of having these exchanges at the hearing, could get 
together and try to come up with something they can present to 
the Full Committee that that would be the way you move toward 
bipartisanship.
    But is it true, Mr. Thomas, that you were seriously 
thinking about marking this bill up on Thursday of this week?
    Mr. Thomas. I tell my friend from New York that a number of 
the pieces of the bill have not only been aired in front of the 
Subcommittee over the last year and a half, but a major portion 
of the reform is in fact a bill that the gentleman from 
California, Mr. Stark, and the gentleman from California, Mr. 
Thomas, are cosponsoring.
    So there are major components of the reform that are 
already in legislative form. We are picking up pieces of 
legislation that have been worked on bipartisanly to form a 
bipartisan structure.
    I am flattered by the Ranking Member's question of me, Do I 
schedule Ways and Means hearings and do I determine what 
appears at those hearings? I will tell you modestly, that is 
not one of my jobs. That is the chairman and the leadership. I 
will be pleased and ready at any time this Committee is willing 
to mark up bipartisan legislation to modernize Medicare and 
provide prescription drugs for seniors. The sooner the better.
    Mr. Rangel. So I would not be insulting you if I said that 
you haven't the slightest clue when this would appear before 
this Committee?
    Mr. Thomas. If the gentleman was to join us on Monday, I 
believe the schedule is that we will be marking up the bill on 
Monday.
    Mr. Rangel. Well, that is what I was asking, so you were 
able to get that.
    Mr. Thomas. I think I read it in the paper.
    [Laughter.]
    Mr. Rangel. Could you refer me to what column or item I 
could read more about your bill? Has that been reported this 
morning?
    Mr. Thomas. I can give you a number of outlines. I can give 
you specific structure. And I will be pleased, as soon as our 
friends at the Congressional Budget Office--and you and I have 
shared long hours of talking about what excellent work they do 
and how timely they do it--gives us a score. I would not want 
to begin a markup here--and we will not begin a markup here--
until we know the exact costs, according to the Congressional 
Budget Office.
    It is not an open-ended proposal, Mr. Rangel. It is an 
attempt to build a credible product of reforming Medicare and 
providing prescription drugs for the amount that has been 
provided in the budget, $40 billion.
    Mr. Rangel. So this search for bipartisanship--which the 
trip should end by Monday before the markup--is on a bill that 
you and Mr. Stark agree in part with, but the other parts we 
don't know. They are not locked into place. The costs of the 
bill we don't know. We don't know how to find out exactly where 
you end up, but between tomorrow and the rest of the week, we 
have the weekend to find this bonding and to come up on Monday 
with a bipartisan solution to this very complex----
    Mr. Thomas. I tell my friend that the price will not be 
more than $40 billion over 5 years. That was the budget amount. 
It will be under that. And there are a number of people who 
have contributed in a bipartisan way.
    I mentioned one section, just to let you know that the 
Chairman and the Ranking Member on the Subcommittee continue to 
work together and produce legislation where we are able--other 
members work together as well. We have been working in a 
bipartisan way for more than a year. Mr. Peterson and I have 
been working since 1993 together in working out Rural America's 
health care problems for our seniors.
    And a number of those who have a bipartisan stamp on this 
shows it takes the route of not standing with us at a press 
conference, and I fully understand why.
    Mr. Rangel. If the President vetoes the State tax bill, we 
will be saving approximately $50 billion a year. Would that 
have any impact on the cost of your proposal?
    Mr. Thomas. I will tell the gentleman that I am operating 
under the budget resolution which says that for Medicare 
modernization and prescription drugs there is $40 billion. If 
somebody wants to provide more money to write a better program 
in modernizing Medicare, making fundamental changes, you 
probably could spend more money, but I doubt if you will write 
a better program.
    Mr. Rangel. Thank you.
    Chairman Archer. Ms. Johnson?
    Mrs. Johnson. Thank you, Mr. Chairman.
    Thank you all for testifying. I think it is to noted how 
much solid thinking has been going on on both sides of the 
aisle and in both chambers on meeting this challenge. It really 
isn't a question of whether we should provide prescription drug 
coverage for Medicare, it is just a matter of how we do it 
because it just essential. Modern medicine without drugs is 
really not health care anymore.
    Let me just ask a couple of questions.
    This is an area where truly the devil is in the details. If 
you look at the commonalities in all the bills, they are very 
great. One of the differences that strikes me is that a number 
of the plans you have presented are based on actuarial 
equivalents. So whether they are insurers, pharmaceutical 
benefit managers coupled with reinsurers--whoever it is that 
wants to offer this pharmaceutical benefit--has a lot of 
latitude in how they do that. On the other hand, in Ms. Eshoo's 
plan and Mr. Allen's plan--although, Mr. Allen, you didn't 
really mention the details--it is a defined benefit. That is a 
very substantial difference.
    I would like you to comment, if you would, on that because 
it is not only a defined benefit, it is a very generous 
benefit. What is going to be the premium cost to cover 50/50 up 
to $5,000 with catastrophic covering above $5,000?
    And then any of the others of you who want to comment why 
you chose an actuarial equivalent versus a defined benefit, I 
would like to hear from you, too.
    Ms. Eshoo?
    Ms. Eshoo. Thank you. It is a very good question.
    The cost of the premium in my plan is approximately $44 a 
month. It is what the President's plan proposed and the amount 
of defined coverage that I have in my legislation is the same. 
Where we differ, of course, is with the stop-loss. The 
President's plan did not have that.
    But I think it is very important--as we are debating who, 
what, Democrats, Republican, bipartisan, whatever--we have to 
get into the depth of what these plans are and what kind of an 
effect they are going to have on people.
    In my colleague from California's plan, he relies on the 
private insurance industry to provide the benefit. In my plan, 
while we allow private sector competition through the multiple 
PBMs, the Federal Government is ultimately at risk. Again, I 
don't think seniors want to be reliant on the private insurance 
market.
    Mrs. Johnson. I would like to get to the nature of the 
insured product later because it is very different from yours, 
but just to get back to the cost of yours, yours is actually 
very different from the President's, which is 50/50 up to 
$2,000. Yours is 50/50 up to $5,000 with stop-loss above that.
    So looking at the estimates I have gotten from CBO on other 
issues----
    Ms. Eshoo. The President's is 50/50 up to $5,000 when fully 
phased in, and the cost of that is a monthly premium of $44.
    Mrs. Johnson. But that includes no stop-loss. I got 
separate stop-loss estimates from CBO and they are far higher, 
at least far higher than you estimate. I do have them here some 
place and maybe later on I can come back to that.
    Here they are. For $6,000, it would be $38 a month. So that 
would be on top of the $44 a month. So your premium would be 
quite significant.
    Ms. Eshoo. The risk beyond the monthly premium for stop-
loss I already stated in the bill provides for--it is the 
Federal Government that is at risk. I think----
    Mrs. Johnson. So is there going to be no premium?
    Ms. Eshoo. It depends on what kind of investment members 
want to make in this.
    Mrs. Johnson. I think it is very important to know what the 
cost will be if there is going to be no premium and if the 
government is going to pay the whole cost or what the 
government is going to pay.
    Ms. Eshoo. No, the government doesn't pick up the tab for 
the whole thing. As I said, up to $5,000, $2,500 out-of-pocket 
for the beneficiaries, when it is fully phased in, would be $44 
a month for that. The stop-loss is included in the $44 premium.
    Mrs. Johnson. Thank you.
    Ms. Eshoo. We do collectively in the system----
    Mrs. Johnson. Thank you.
    Ms. Eshoo.--just as we do in----
    Mrs. Johnson. Excuse me. I would like to give Senator 
Breaux a chance to talk about define benefit versus actuarial.
    Mr. Breaux. Thank you, Congresswoman Johnson.
    I think the question you have and we all have as well--in 
writing a prescription drug program, do you spell out in 
Congress the amount of the deductible and the amount of the 
coinsurance? Do you want to write that in the law of the 
country so that every year you come back and have to revisit it 
and say that it should be lower or higher?
    Or is it better to say that we are going to provide an 
actuarial value of whatever value you want? Then companies can 
come in and offer some plans with a high deductible, some with 
a low deductible, some with higher copays and some with lower. 
Then the beneficiary gets to pick the one that best suits their 
family.
    That is exactly what all of us have. When OPM asked the 
companies to provide prescription drugs, the only thing they 
put out in their call is a package of prescribed drugs. And we 
get all kinds of different options.
    I like what Bill Thomas has done because he set a number of 
deductibles and copayments, but you can vary from that. By 
setting the copayments, CBO can score that. It is very 
difficult for them to score just an $800 actuarial value. So if 
you do what he did and yet give them some flexibility in 
offering different combinations, I think that may possibly be a 
good way of doing it.
    Mrs. Johnson. Thank you very much.
    Mr. Thomas?
    Mr. Thomas. Just very briefly--because I don't want to be 
reported incorrectly--my friend from California, in indicating 
that our plan relies on private insurers only missed, I think, 
the point where we said that this is an entitlement and that 
the Federal Government--under Mr. Peterson's and my bill, and 
Richard Burr's and Ralph Hall's--will be the insurer of last 
resort. There is no reliance ultimately on the private plan. We 
shouldn't put seniors in that position. The government will be 
there if necessary. We shouldn't repeat ever again that our 
plan leaves seniors out in the cold if insurers don't 
participate. That is not the plan. No matter how often people 
repeat it, that is not the plan.
    We believe the private sector can do a great job, but we 
should never totally leave it to the private sector. We have 
the government as the insurer of last resort.
    Chairman Archer. Mr. McCrery?
    Mr. McCrery. Thank you, Mr. Chairman.
    As the law school alma mater of mine and Senator Breaux 
marches toward yet another college world series title, it is 
particularly appropriate for me to welcome him today to the 
Ways and Means Committee.
    Mr. Breaux. I have two alma maters in the world series.
    Mr. McCrery. I am aware of that, Senator.
    [Laughter.]
    Mr. McCrery. It is a pleasure to have my colleague from 
Louisiana with us at the Ways and Means Committee today. 
Senator Breaux is recognized as a leader in the field of health 
care in policy circles and here on Capitol Hill. It is kind of 
him to come over and share some of his valuable time with us in 
the Ways and Means Committee.
    Senator Kennedy had to leave--and that is unfortunate--but 
Mr. Stark is here and has worked with Senator Kennedy, I 
believe, on his plan so maybe he can clear up the confusion.
    Senator Kennedy presented some very colorful charts very 
quickly, but I was able to catch a couple of the figures he 
mentioned, as I am sure members of the press and media were, 
one of which was that the Kennedy plan covers everybody. Of the 
12 million people that are currently without any benefit, they 
will get coverage under the Kennedy plan. Whereas under the 
bipartisan or Republican or Thomas-Peterson or Breaux-Frist 
plan there will be 6 million of those 12 million that won't get 
any coverage.
    I would like to know where he got those numbers. Who came 
up with those numbers? He didn't cite any source for that. He 
just put them up there for everybody to see.
    Mr. Stark, do you know where he got those numbers?
    Mr. Stark. No, I don't, but I would presume that he was 
suggesting that the Republican plan would only cover lower 
income seniors. That may have changed. Not having a bill, it is 
a little difficult. But originally some of the early press 
releases suggested that. It may have been changed. But I 
believe if that was the case, it would have limited the 
coverage----
    Mr. McCrery. That may in fact be the case. But as I have 
been working on this plan that has now been a bipartisan plan 
for quite some time--I have been in a number of meetings with a 
number of Democrats putting together this plan--and as far as I 
know our plan was never intended to only cover low-income 
seniors. However, I will accept that as an explanation of the 
flawed numbers that were shown by Senator Kennedy in this 
hearing today.
    Mr. Allen?
    Mr. Allen. I am going to take a stab at answering----
    Mr. McCrery. That's OK. I think we have the answer to that.
    Let me talk about your ideas for just a second.
    There was a letter sent to the President and Members of 
Congress by 535 economists from every State in the country in 
which it was stated that in countries with price controls, 
health care services are severely rationed. Patients wait 
months and sometimes years for surgery, suffering significant 
harm to health and even death as a result.
    Government bureaucrats rather than doctors or patients 
select treatment. Pharmaceutical innovation languishes. Price 
controls do not reduce medical costs, nor do they call forth 
improved health care services. Instead, they produce lower 
quality medical care, reduced innovation, and costly new 
bureaucracies to monitor compliance, adding to the burdens of 
health care providers already entangled in red tape. Price 
controls harm consumers of medical services, especially those 
most in need of health care services.
    Then there is a book written by a Canadian doctor recently. 
His book won the Donner Prize for the best book on Canadian 
public policy. The author of that book said recently that price 
controls in Canada have effectively killed off research and 
development, adding that the nation relies heavily on the 
United States work in the pharmaceutical field. It would be 
very damaging, he said, ``in terms of a lack of development of 
prescription drugs, if the United States imposed price 
controls.'' He noted that the biggest medical advances of the 
past three decades have been in the area of pharmaceuticals.
    He said that although some brand name prescription drugs do 
cost more in Canada, many new drugs are not available in its 
pharmacies and the generic prescriptions are often more 
expensive than in the United States.
    If 535 economists and a Canadian doctor who has been 
awarded the Donner Prize say that price controls don't work, 
why would you want to pursue that course?
    Mr. Allen. Let me first quickly answer the question before 
in which I think the difference between the 12 million and the 
6 million I think has to do with whether the subsidy under the 
Republican plan is big enough to attract all the people who 
don't have insurance now to buy private health insurance. So 
let me lay that aside.
    Mr. McCrery. I don't think there has been a good answer to 
that question, but the fact is that unless you make it 
mandatory--and you and every other panelist, including Senator 
Kennedy, has said that this is not mandatory but voluntary--I 
don't think you can ensure that all 12 million under any plan 
will be ensured.
    Mr. Allen. My understanding is that if you provide 50 
percent subsidy, you get almost everyone to sign up.
    Price controls. Of course, there is great diversity of 
opinion in Canada as there is in this country about just what 
the right step is. But if you will look at the publications of 
Canadian PhRMA, what PhRMA is saying up in Canada, if you look 
at the last couple of years of their publications, what they 
say is that R&D in Canada is accelerating even faster than it 
is in the United States. And they must presumably have some 
basis for doing that.
    Second, with respect to my legislation, my legislation is 
not, in my opinion, a price control bill because what it 
provides is that the best price given to the Federal 
Government--either the VA price or the Medicaid price--the 
Medicaid price is a 24 percent statutory discount from 
something called the average manufacturer's price. The average 
manufacturer's price is a market price. How a statutory 
discount from a market price, over which the pharmaceutical 
industry has more control than anyone else, can be a price 
control is beyond me. It is not really a price control bill.
    Finally, I would say this: The pharmaceutical industry will 
tell you that half of all new drugs are developed here in the 
United States. What that means is that half of all new drugs 
are developed around the rest of the world. There is in fact a 
vibrant R&D industry going on in Europe and in other places. 
The real difference between the United States and other 
countries in terms of spending is not R&D--because you can't 
really figure that out looking at these multinational 
corporations' books--the real difference is marketing.
    The pharmaceutical industry spends hundreds of millions, if 
not billions, of dollars here in the United States to market 
their drugs and they are not allowed to do that to the same 
extent in other countries. The direct consumer advertising in 
the country, the ads you see on television, are one reason why 
the industry costs would be somewhat higher here in the United 
States than they are in other countries.
    But the industry is seeking to expand its sales in other 
countries. Don't worry. They are doing fine. They are making 
money. They are by far the most profitable industry in the 
country. And my bill, according to a Merrill Lynch study, would 
not hurt their revenues at all.
    Mr. McCrery. Mr. Chairman, we can disagree over whether Mr. 
Allen's bill is a price control bill, but many of us think that 
it is a direct price control by the government and would have 
serious negative consequences for the golden goose that is 
laying the eggs in the pharmaceutical industry for seniors in 
this country.
    Chairman Archer. The gentleman's time has expired.
    Mr. Stark?
    Mr. Stark. Thank you, Mr. Chairman.
    I guess I would like to see the bill. I have read the press 
releases on the bill you are working on, but maybe you could 
help me with a few parameters that you have established in your 
own mind.
    You said a few minutes ago that it was clearly going to be 
an entitlement. As I have read--and again, this is just what I 
have picked up in the press--the plan would not be dissimilar 
from HIJ in Medigap. It would have broad categories of benefits 
that would be provided and in each State various insurers could 
price it differently. In each community it might be priced 
differently. But it would be a plan where beneficiaries could 
compare plans, and then in any community where there were not 
two plans--either through an HMO or through an insurance 
company, Medigap-type plan--there would be a direct Medicare 
plan.
    Is that roughly what you have in mind?
    Mr. Thomas. That's roughly correct, except when you made 
the comparison to Medigap you mentioned HIJ--those are the last 
three of the ten plans.
    Mr. Stark. Yes.
    Mr. Thomas. One of the problems with that is that the first 
dollar by statute says that it has to go down to buy 
deductibles and copay. We are doing first dollar going to 
prescription coverage.
    Mr. Stark. This would obviously be a completely different 
plan, but it would be distributed and have regulations or 
definitions?
    Mr. Thomas. Correct.
    Mr. Stark. And it would be sold by private people who could 
charge different prices for it?
    Mr. Thomas. It would be similar in terms of the fee-for-
service program to the President or to the Democrats where you 
have PBMs or other entities offering it.
    The difference, of course, is the President has only one. I 
believe in competition we would have more than one.
    Mr. Stark. For the low-income people, they would be buying 
the same plan? They would get a direct subsidy and in a sense 
their premium would be paid directly by the government?
    Then for those that are above the various poverty 
categories, I assume there would be an indirect subsidy, 
depending on which plan the people pick. Again, as an 
entitlement, all these payments--the indirect and direct 
subsidies--would come out of the Medicare Trust Fund? Or would 
they come out of general revenues?
    Mr. Thomas. I will try to be very brief because I don't 
want to just use your time, but it does take a while to talk 
about.
    There is a subsidy to all seniors if they voluntarily join 
the plan. The subsidy is in the government and the private 
sector shared buy-down of the high-risk pool.
    Mr. Stark. That is the only subsidy that an insurance 
company would get for the non-poverty participants. Is that 
correct?
    Mr. Thomas. But that is a 30 to 35 percent subsidy that 
goes to everyone. Then we add on top of that, similar to the 
President's plan, low income.
    Mr. Stark. Where does that money come from?
    Mr. Thomas. That money comes from the money that has been 
saved over the last several years, the $40 billion.
    Mr. Stark. Out of the trust fund?
    Mr. Thomas. No. This is a part B benefit, so it is a 
general fund part B benefit. That is why there is another 
provision that talks about restructuring Medicare financing 
carried over from the Medicare Commission. The current 
structure really isn't very good.
    Mr. Stark. So it comes out of general revenues as Part B--
--
    Mr. Thomas. Surplus. The decision will be made in terms of 
cost coming forward.
    Mr. Stark. As an entitlement, it is guaranteed just as 
physician's payments are under Part B?
    Mr. Thomas. That is correct.
    Mr. Stark. You have further suggested that the premiums 
would be $35 to $40.
    Mr. Thomas. When I was asked at the press conference--and 
that is where that number came from--apparently it doesn't do 
any good to tell people it is a $740 actuarial value. They want 
to know what it looks like because they want to compare. 
Notwithstanding the fact we have a built-in insurance pool and 
the President doesn't, we still in the bill will create a model 
or standard benefit, as Senator Breaux said--and those of us 
who have lived with CBO in getting numbers out of them--they 
won't score it because they don't know what the actuarial 
benefit program would look like because it has an infinite 
number of options.
    So if the government is going to pay for the low-income, we 
provide a model or a standard benefit that would look something 
like the $35 to $40 premium, the $200 to $250 deductible, 50/50 
copay, with the catastrophic attachment. That allows CBO to 
score. That is representative of a $740 value.
    But it could be structured slightly differently. You could 
have a zero deductible as the President does.
    Mr. Stark. If the numbers are right, you are going to get a 
$740--wherever it comes--let's say it is a $740--they will pay 
$40 a month, they will pay $480. So you're getting $260 plus 
they're getting a quarter, approximately, of that $480 or $740 
in subsidy, so they'd be getting about $180, $185 on top of the 
$260----
    Mr. Thomas. I will tell the gentleman that the way he 
started with the math, it doesn't come out right. I will be 
more than willing to sit down and work with him----
    Mr. Stark. They're getting about $440----
    Mr. Thomas. No, they're getting about an $800 actuarial 
value, a $740 actuarial value.
    Mr. Stark. In exchange for their premium? Or do you add the 
premium to that?
    Mr. Thomas. No. When you go through and build the premium 
and the deductible--for example----
    Mr. Stark. If I pay the $40 a month, that is $480 a year.
    Mr. Thomas. I prefer $35. I am trying to get it to $35.
    Mr. Stark. All right.
    Then I am getting a $740 value for that. Is that on top of 
the $480?
    Mr. Thomas. No. For example, if you paid the $35 premium, 
you would then be in a--say you did the $250 deductible--you 
would be in the 50/50 copay up to about $2,200, so you would 
split that. So there is $1,100 of benefit in the copay area 
alone, and then you still get the catastrophic attached at the 
back end. And that is where the heavy 35 percent subsidy comes 
from in reducing the cost.
    All these numbers would be greater if you didn't have the 
shared insurance provision. People would not be able to afford 
it, even if they were healthy.
    Mr. Stark. Will the premiums be withheld from the Social 
Security payment as they are for part B premiums?
    Mr. Thomas. In creating the Medicare Benefits 
Administration, that decision is left to those who are now 
dealing directly for beneficiaries on the benefit. It is 
logical that you could then deduct from your Social Security, 
as you suggest, the part B premium of a 25 percent subsidy. You 
could simply attach that, if they so chose. That would be an 
easy way to deal with it.
    Mr. Stark. If somebody missed a premium, how could they get 
back into the system?
    Mr. Thomas. If they missed the premium, they would 
obviously be notified by their private insurer. The private 
sector has the periods of grace periods, penalties, and the 
rest. All of that would operate as it does in terms of when you 
miss your payment on your insurance, unless of course you have 
automatic deduction.
    Mr. Stark. Mine is withheld.
    But if it is canceled for non-payment because it is not 
withheld from Social Security--if they are paying it and 
something happens to them--can they get back in?
    Let's say they lose it because they have hard times and 
they can't pay their premium beyond where the insurance company 
will carry them.
    Mr. Thomas. I will tell the gentleman that we are way at 
sea in trying to write legislation if you are going to put down 
the specific remedy for someone who misses a payment because 
something happened to them beyond their control. That clearly 
is an area for the Medicare Benefits Administrator, who is now 
charged solely with managing the benefits, instead of trying to 
run it out of the back shop of the Health Care Financing 
Administration. And they will work in an administrative way to 
resolve all these problems.
    These are the areas where Congress shouldn't be involving 
itself. We should create a new entity under HHS dealing with 
benefits to deal with exactly those kinds of questions.
    Chairman Archer. The gentleman's time has long since 
expired and----
    Mr. Stark. I just want to suggest that my constituents' 
concern with managed care--which the Republicans have managed 
to frustrate us from reforming--will not be comfortable with 
that answer. They don't believe that the managed care or the 
private insurance industry is going to give them a benefit they 
can depend on. I think they will treat this much the same as 
they treat managed care now. They don't trust it. They just 
feel that for-profit managed care is there to deny the 
benefits----
    Mr. Thomas. I tell the gentleman we have a fee-for-service 
prescription drug program.
    Chairman Archer. The Chair is going to have to cut off this 
colloquy, as productive as it might be, and encourage the two 
gentleman who work together on the Subcommittee to continue 
their discussion about details privately or publicly after the 
conclusion of this hearing.
    The Chair now recognizes Mr. Camp.
    Mr. Camp. Thank you, Mr. Chairman. Thank you for holding 
this hearing.
    I want to thank all of you for testifying this morning. 
There has obviously been a lot of work and informed discussion 
here today.
    I just have a couple of questions.
    Ms. Eshoo, I noticed that in your proposal, in your written 
testimony, and in your statements here today that you don't 
force beneficiaries in a region into just one pharmaceutical 
benefit manager. And in your written statement you talk about 
options, helping reduce costs, and promote quality for 
employees.
    Can you tell me a little about why you made that decision?
    Ms. Eshoo. We all know that a major part of the problem 
that seniors are facing today is the cost, the high price of 
drugs. Setting aside any consideration of price controls, what 
we worked very hard on was to come up with legitimate 
competition to reduce prices for both the beneficiary and the 
Federal Government. But we also worked to allow for 
competition, which I think is really very important to the very 
small biotechnology companies that are coming up with life-
saving drugs.
    So it is competition, but it also forces the competition 
relative to market share.
    I think there is a misnomer today about volume buying and 
that if you buy in volume there are discounts. It really 
doesn't work that way with the Federal Government today. It 
just doesn't. But where you make them sharpen their pencils and 
offer the deepest discounts is by offering them at market 
share. I believe that is what would bring the pricing down.
    I think it is fair, but we also have on the other side of 
the package a generous benefit.
    I also think, most frankly, that the Congress is going to 
have to come to grips with how much they want to do. If we are 
going to be skin flints, we should just say so up front. I 
don't think $40 billion in a plan is going to buy and pay for 
the kind of package that we want to go home and tell our 
constituents about.
    Mr. Camp. I am interested, though--your plan and others--
Congressman Stark as well has the same model--and your concept 
of competition and bringing more choices to seniors--so I guess 
the converse would be true that if there were only one 
pharmaceutical benefit manager, then there would be a lack of 
choice and competition and the quality and reduced price that 
go along with that as well. I presume that is why you chose the 
model that you did.
    Ms. Eshoo. Well, we looked at it. We looked at how they 
work. As I said in my opening statement, I didn't base the 
legislation that is supported by a number of Democrats on the 
Commerce Committee--on theory. I went out to see how things 
work.
    I think that is a very important aspect of the plan. But I 
also think that Members of the Ways and Means Committee should 
know that nowhere in my legislation do we rely on the private 
insurance market for any kind of provision. I don't think that 
is working, seniors don't trust it, and I don't find that to be 
a place that we should be moving to because there is a failure 
out there in the market right now when it comes to private 
insurance.
    Mr. Camp. I also want to follow up with a question to 
Senator Breaux.
    Senator, your statement also indicates that a one-size 
HCFA-managed benefit is not really an option that you would 
support. What are some of the reasons behind that?
    Mr. Breaux. Medicare+Choice is a good example. 
Medicare+Choice is not working because it is being micromanaged 
and the reimbursements are based on HCFA policies that are 
based on fee-for-service fees. Some Medicare+Choice get paid 
quite handsomely in some areas. In some counties, they get paid 
far too low. As a result, they are closing up shop.
    So I think what you have to do is create a program that has 
the benefit of a government oversight, make sure it is run 
properly, but at the same time get providers to compete against 
each other and allow them to set their premiums based on what 
they can provide the services for. What we are suggesting I 
think accomplishes that.
    Mr. Camp. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Archer. Mr. Weller?
    Mr. Weller. Thank you, Mr. Speaker.
    Let me begin by commending you and Mr. Thomas and Mr. 
Breaux, and Mr. Peterson for working in a very, very bipartisan 
effort to solve a challenge that is before us. Over the last 
several years I have had a lot of town meetings, particularly 
with seniors, who talk about the rising costs of prescription 
drugs and the choices they have to make in setting their 
household budget priorities. I have heard some pretty heart-
rending stories from widows who tell me they have to choose 
between buying groceries and going to the drug store and buying 
their prescription drugs. A senior told me that four times a 
year he takes a shot and it costs him a total of $8,000 for 
those four shots.
    I have also had concerns expressed to me by retirees who 
are concerned that if we move forward on prescription drug 
coverage under Medicare they will lose the prescription drug 
coverage that is offered by their retirement plan, which they 
feel is better than anything the government can offer.
    Those are all concerns that I believe are being addressed 
in the bipartisan plan that is being offered by Mr. Thomas and 
Mr. Peterson, as well as Senator Breaux. I commend them for 
working in a bipartisan way. The prescription drug issue should 
not be a partisan issue. It should be an issue on which we are 
working together on affordability, choice, and retention of a 
better plan if it is offered as part of your retirement plan.
    I am just trying to understand how your proposal would 
affect those retirees who currently have a plan that they like, 
are happy with, and are satisfied.
    Senator Breaux, can you explain how the bipartisan proposal 
addresses those retirees who are happy with what they have?
    Mr. Breaux. That is a good question. It really deals with 
how much of a Federal subsidy you are going to have for the 
prescription drug plan. If you have a subsidy that is too 
generous, people will drop their private plans. About 33 
percent of Medicare-eligible people have their prescription 
drugs provided by their former employers. The three big auto--
General Motors, Ford, and so forth--all have very generous 
prescription drug plans.
    If you create a subsidy so high, companies will drop the 
plan and let the taxpayer and the Federal Government pay for 
it. If you have a 50 percent subsidy, you are getting pretty 
close to that. I think you have probably reached that mark.
    Ours is a 25 percent across the board subsidy, plus the 
reinsurance subsidy that Congressman Thomas has. So we are more 
generous than Thomas on that issue. We have the reinsurance 
subsidy plus a 25 percent across the board subsidy.
    I think that means that the private offerors will continue 
to offer those plans for retired workers, and yet they have 
another option to go into the government-type of sponsored 
subsidized program. So the two could coexist together.
    Mr. Weller. Senator, one of the concerns often raised about 
giving seniors a choice--the President proposes a zero-choice 
plan where you can only accept one thing, which is what the 
government offers, and your bipartisan plan offers a menu of 
options offered through private choices, such as 
Medicare+Choice. Some raised a concern where we have seen 
Medicare managed care plans have dropped out of Medicare. We 
have seen that in the Chicago area, which I represent.
    As I look at that issue--I know these past few weeks I have 
been meeting with my local hospitals who are concerned about 
Medicare reimbursements and the financial impact of how HCFA 
has interpreted the Balanced Budget Act and the financial 
squeeze they are under. Is the reason many of these managed 
care providers--is it a reimbursement issue? Do they have a 
hard time making ends meet because of----
    Mr. Breaux. We could spend a long time picking out what is 
wrong with Medicare+Choice. The central problem, I think, is 
that it is dysfunctional, it is being micromanaged, 
reimbursement rates in the regulations are based on fee-for-
service charges, which means that there are great inequities 
and some counties are getting more than they need and other 
counties are getting far less. They can't compete, they can't 
reduce their premiums, they can only add more benefits to their 
plans. Therefore, they find themselves getting into trouble.
    That is why our plan suggests that the Medicare+Choice, 
along with prescription drugs, be run through a new independent 
agency outside of HCFA, like we did with the Social Security 
Administration. Medicare+Choice cannot continue. I don't think 
anyone would argue that it can in the way it is being operated 
now.
    Mr. Weller. Thank you, Senator.
    Mr. Thomas, what is the bottom line for a senior? For the 
typical senior, what will be their potential out-of-pocket 
costs, on average, each month under the bipartisan proposal?
    Mr. Thomas. I would tell my friend that it is difficult to 
talk about the average senior. As we know, 28 percent of them 
get it from their employer. An additional 20 percent get it 
from Medigap, which is a $2,000 expenditure to get a very 
modest drug program. Then there are those who don't have any.
    So when you are putting a package together, you have to 
meet all those concerns. For someone who doesn't have any 
coverage at all, there is no reason in the world why a senior 
should have to pay retail price for drugs. If Congress can't 
come to a conclusion in this session, shame on us. They are the 
last group to pay retail prices. If we had a prescription drug 
program in place, they would have their costs cut by as much as 
40 percent, comparable to what they paying going to Canada now.
    But as you indicated with Senator Breaux, if they are 
getting it from their former employer, you wouldn't want to 
write a plan that is so rich that that 28 percent would bail 
over into the Medicare Program. The biggest concern is that 
high cost. What we do is say that we will bring in all seniors 
of Medicare age, including those that are on the private 
employer's plan, and we will let them share in the risk pool 
that we have. Relieving employers of the potential of an 
extremely high risk guarantees they are going to stay in the 
plan much longer than would otherwise be the case.
    When it comes to Medigap, Medigap is simply an out-of-date 
program that was structured for a different time. There are a 
number of insurance companies making enormous amounts of money 
insuring what is basically non-risk. They would love to have 
that program continue and not have a prescription drug added.
    Listen carefully to some of these people who are 
representing insurance associations and others saying that this 
plan won't work. Their real fear is that if this plan works, 
Medigap won't. They like insuring non-risk. They don't like 
participating in sharing in real risk. That is the 
responsibility. We will have the government back them up at the 
bottom end, but if they are not willing to share in riding 
product of pools risk, there are others who will.
    So it is not an average senior. It is a plan that meets all 
the needs of every senior.
    Chairman Archer. The gentleman's time has expired.
    Mr. Matsui?
    Mr. Matsui. Thank you, Mr. Chairman.
    Mr. Chairman, previous members when they were making 
comments or asking questions referred to the President because 
some in the administration expressed a great deal of skepticism 
of the Republican plan. All of a sudden now the President is 
being attacked for being partisan.
    I would like to suggest that because someone might disagree 
with the Republican plan doesn't necessarily mean that the 
person is being particularly partisan. And I would hope that we 
would make sure that when we use that word we use it with 
perhaps some degree of clarity in the future.
    I wasn't going to bring this up, but in view of that fact, 
I might just mention a few things myself. Apparently, the 
Republican conference held on June 8th, Glen Bolger, who is a 
member of a group known as the Public Opinion Strategies--in 
that Republican conference, it was stated, according to 
briefing papers, ``It is imperative that the Republicans hang 
together on this issue and pass a bill''--I guess they don't 
state what kind of bill--``and it is helpful if we can be 
bipartisan in our approach.''
    I might just suggest that when you hear the word 
bipartisan, think focus group because this is not a bipartisan 
bill. Particularly when you take a look at some of the 
documents here that was part of the handout at the Republican 
conference, ``The Democratic Plan Has Some Potentially Fatal 
Weaknesses,'' and then goes on to state how you can attack. But 
in the spirit of bipartisanship, I think I will ask Mr. 
Peterson some questions about the Thomas Republican bill.
    You are familiar with the fact that in the proposed 
document--and again, I only get this from press releases and 
also from news reports--that the USTR has a role in this 
particular----
    Mr. Peterson. No, they don't. That has been dropped out.
    Mr. Matsui. Is that correct, Mr. Thomas?
    Mr. Thomas. I would tell the gentleman I don't know what he 
has been reading, but I can assure you that when you see the 
bipartisan bill it will look different than the documents that 
have been given to you in a bipartisan fashion that describe 
some bill that is not the bill that the gentleman from 
Minnesota and I will be proposing along with the gentleman from 
North Carolina, Mr. Burr, and the gentleman from Texas, Mr. 
Hall.
    If you are characterizing a Republican bill, that isn't our 
bill.
    Mr. Matsui. Is the gentleman then saying that there will be 
no reference to the U.S. Trade Representative's Office in the 
proposed legislation when we mark it up on Monday?
    Mr. Thomas. Not in the bipartisan bill.
    Mr. Matsui. Not in your bill? Is that it?
    Mr. Thomas. Not in the bipartisan bill.
    Mr. Matsui. Mr. Peterson, you do understand that in the 
Medicare+Choice proposal that was instituted in the late 
nineties that there has been a decrease in enrollment? Are you 
familiar with that? I guess in 1997 there was a drop of about 
300,000 plus.
    Mr. Peterson. That doesn't surprise me. In my area, we have 
zero and we never will get anything under the current system.
    I think the only chance we have of getting any kind of 
progress in this area is, as the Senator said, get this out of 
HCFA, get it into some other kind of structure, and improve the 
payments to areas like mine. If we would take money out of your 
district and shift it to mine and equalize it, this would work. 
The problem is that you are getting $800 and we are getting 
$375. How can that work? And is it fair?
    That is the basic problem with this whole situation.
    Mr. Matsui. What is this new cooperation?
    Mr. Peterson. Well, we are going to be increasing on the 
AAPCC, we will be increasing the amount of money that goes into 
rural areas. So it is more likely that people will go out there 
and offer managed care plans.
    Mr. Matsui. How does that happen? I understand that that 
won't happen and that is why a lot of rural members express 
skepticism about this program.
    Mr. Peterson. I don't know who is listening to whom, but I 
have been in the room, working with Mr. Thomas, and I have been 
working on this. If we would have adopted the budget in 1995, 
we would have had the money to fix this. But because we screwed 
around, that 10.2 percent update that could have been used to 
fix this was given out----
    Mr. Matsui. Maybe you can talk about the current proposal.
    How does this actually help rural areas?
    Mr. Peterson. We are going to increase the amount of money 
that goes into rural areas in the AAPCC. And when we do the 
updates--I don't know how much I can say about this bill--but 
there is going to be a bigger update for areas that are getting 
less money and less money is going to go to areas that are 
getting more money. So we are going to start to narrow this 
gap. But the bottom line is that in a lot of parts of this 
country they are getting prescription drugs because they are 
getting these huge payments from Medicare. In my area, we don't 
even have the opportunity because we are down at these low 
levels because we have done a good job of holding down costs.
    How are we ever going to get this benefit? One of the ways 
is that in this bill--if this doesn't work and the extra money 
doesn't bring these managed care plans into my area--what it 
says in the bill is that we will provide that benefit through 
this new Medical Benefits Board.
    Mr. Matsui. My time has expired, but----
    Mr. Peterson.--we are not going to get it under----
    Mr. Matsui. The gentleman is taking a pretty big gamble 
about expecting HMOs to go into the rural areas.
    Mr. Peterson. But I will tell you that the current system 
is not going to work. It is evidenced by what is going on in my 
district.
    Chairman Archer. The Chair is concerned that this panel is 
going to run, the way we are going, until well after 1 . The 
Chair would like very much to conclude this panel by 12:30 so 
that we can take an hour for lunch and return at 1:30 for the 
next panel. That will require considerable cooperation on both 
sides of the podium.
    The Chair is going to suggest--and I don't have to ask 
unanimous consent, but I hope that it will meet with unanimous 
consent--that there be 10 minutes allocated on the Minority 
side and 10 minutes allocated on the Majority side in order to 
conclude this panel. There will be plenty of time to question 
the next two panels that are coming later today.
    Mr. Stark?
    Mr. Stark. Mr. Chairman, reserving the right for the 
purpose of inquiring of the Chair, it is my understanding that 
Ms. DeParle has to leave at 12:45. Would it be possible to 
extend the 10 minutes per side at least for an additional 10 
minutes for her to come in and present her testimony before we 
adjourn? Otherwise, she will not be able to return.
    I would ask if you could adjust your request to allow her 
time to present her testimony.
    Chairman Archer. Which witness was the gentleman referring 
to?
    Mr. Stark. The gentlelady who is the Administrator of HCFA. 
She has to leave at 12:45.
    Chairman Archer. The problem with that--and I would say to 
the gentleman--and I accept that as a constructive suggestion--
the problem is that if she is simply going to speak and then 
leave, it seems to me that is not a desirable situation, 
either.
    I would hope that maybe--we could take her later in the 
afternoon if she could come back at a later time and I will be 
happy to try to accommodate that. But I would want her to be 
here beyond just making a short presentation and then leaving.
    Could that be accommodated?
    Mr. Rangel. Reserving the right to object, Mr. Chairman----
    Chairman Archer. Well, if we can't have an agreement to try 
to conclude here--now we have spent a couple of minutes talking 
about this--by 12:30, we will just let this panel go on in 
normal order and continue to let everybody question.
    Mr. Rangel. But you want unanimous consent. Is that it?
    Chairman Archer. Actually, the Chair does not have to ask 
unanimous consent, but the Chair wants to be sure that 
everybody is accommodated.
    Mrs. Johnson. Mr. Chairman, could I just ask unanimous 
consent and ask the indulgence of my colleagues?
    I think it is really very important to hear the 
Administrator and have at least a little time to question her. 
I would like to ask--if I had known, I would have foregone 
questioning myself--but would members be willing to forego all 
questioning of this current panel since they are with us in our 
daily lives?
    Mr. Thomas. We would be happy to leave.
    [Laughter.]
    Chairman Archer. I thought that would accommodate the 
panelists, too, to a degree.
    But apparently we don't have any consensus, so we will just 
continue right straight on through and let every member have a 
chance to inquire and use their 5 minutes.
    At this point, the Chair recognizes Mr. Lewis.
    Mr. Lewis yields back his time.
    Mr. Ramstad?
    Mr. Ramstad. Mr. Chairman, I am not going to take my full 5 
minutes, but I do want to make a fundamental point.
    I want to thank the members of this distinguished panel for 
being here today and to those of you who are trying to work in 
a bipartisan, pragmatic, common sense way to craft a solution 
to what I deem Minnesota seniors' number one problem and 
certainly the number one problem of America's Medicare 
beneficiaries as well.
    I certainly agree with what my friend and colleague, Collin 
Peterson of Minnesota, said. It is unfortunate that the debate 
has become so politicized. I do note that the invited witnesses 
here--six Democrats and one Republican comprising this panel--I 
applaud our leadership's effort to depoliticize this issue. And 
I know Mr. Thomas and those of us on the Task Force have tried 
to be bipartisan. I appreciate certainly above all Senator 
Breaux and Collin Peterson and the rest of you trying to work 
in this collaborative fashion.
    This is really critical that we get something done this 
year. Forget the political issue. We need a solution. And I 
thank you, Collin, for putting the best interests of Minnesota 
seniors above politics. I know, not from you but from some of 
your colleagues on the other side of the aisle, how much heat 
you have taken for reaching out and trying to solve this 
problem. I appreciate that. I want you to know that.
    I also want to make the point that any plan we consider 
must stabilize the Medicare+Choice option for the reasons you 
stated, Collin. We know only too well in cost-efficient, low-
reimbursement States like Minnesota what is happening. 
Minnesota seniors and Minnesota providers are being cheated 
$450 in Hennepin County, which is a little bit better from the 
seventh district, which you represent. But as Durenberger used 
to say, there is no reason why you should be able to get two 
and a half Medicare surgeries at the Mayo Clinic in Rochester, 
Minnesota for every one in Miami, Florida. That is simply wrong 
and it has to change.
    Thank you for not only working on this, Mr. Thomas, Mr. 
Peterson, Senator Breaux, and the rest of you, but for 
realizing that we have to do it within the context of 
Medicare+Choice. These two must remain linked. They are 
interrelated issues, obviously.
    I appreciate the effort that has been forthcoming.
    I yield back the balance of my time, Mr. Chairman.
    Chairman Archer. Mr. Levin?
    Mr. Levin. Mr. Ramstad, to pick up your comment, I think 
the test of bipartisanship will be whether there can be an 
effort within this Committee between now and Monday to craft a 
bipartisan proposal, and whether on Monday there is one. That 
will be the test, not whether there are several Democrats out 
of 200 who join with the chairman of the Subcommittee. The 
test, so far, I don't think has worked out very well where you 
have the Ranking Member of the Health Subcommittee asking 
questions about what is in the proposal.
    So I would hope, if we are serious about bipartisanship and 
not having a political contest here, that there be some effort 
within this Committee between now and Monday beyond what has 
happened up to this day.
    Mr. Ramstad. Would the gentleman yield briefly on that 
point?
    Mr. Levin. Sure.
    Mr. Ramstad. As a member who tries and strives on a 
continuing basis to be bipartisan wherever I can, I agree with 
what you said to a point. However, I note on the bill the 
presence of two Republican sponsors and two Democrat sponsors. 
I think, if anything I think the message--and let's call a 
spade a spade--I think the message of bipartisanship should go 
back to your leadership, putting pressure on members not to 
work on this because some people here want to keep the issue 
rather than solve the problem.
    Mr. Levin. Mr. Ramstad, I take back my time. That is simply 
not true.
    Well, you are working on that assumption, and when you work 
on that assumption, you move headlong on a basis that doesn't 
involve cooperation within this Committee.
    I have never heard any word from our leadership telling us 
not to work in this Committee on a bipartisan basis on this 
issue.
    Mr. Thomas, I would like to ask you one question because 
there is so much confusion about what is in this bill because 
it is not in written form, yet.
    When would the last resort come into operation?
    Mr. Thomas. The last resort provision is where the Medicare 
Benefits Administrator attempts to create opportunities for 
plans in areas who don't have any. Obviously, if the 
Medicare+Choice plan in an area offers the prescription drug 
benefit and there is the fee-for-service program, then you 
would have the program. It is only in those areas that haven't 
been able to attract a program. The Administrator is then 
required to sit down and negotiate to provide the benefit.
    What that negotiation is--whether it is an enhancement, 
whether it is an assistance in a particular area--is the role 
that the Benefit Administrator specifically ought to carry out. 
Just as today in the Federal Employees Health Benefit Program, 
when you have an administration of a program that seeks to 
bring the product rather than restrict the product, you work 
with those people who are interested, if in fact it is worth 
their while to sit down and work.
    What that is and how it works would be up to the 
Administrator, so frankly it would be different in different 
places, Mr. Levin.
    Mr. Levin. So if there is in place in a particular area a 
private plan, then there would be no government fall-back plan 
available to the Medicare recipient?
    Mr. Thomas. In the legislation, if for instance the private 
plan means an HMO plan or a Medicare+Choice plan, there is a 
requirement in the legislation that seniors have two choices. 
So it would be incumbent, then, to bring the fee-for-service 
prescription drug program to the area as well.
    Mr. Levin. So if there is one or the other available, then 
there is no additional available plan.
    Mr. Thomas. No. If there is one or the other, there is a 
requirement that seniors have at least two choices. So there 
needs to be two choices, not one or the other.
    Mr. Levin. They have a choice between one and the other?
    Mr. Thomas. They ought to be able to have a choice, not a 
one-size-fits-some, but a choice.
    Mr. Levin. All right. Thank you.
    Mr. Thomas. Thank you.
    Chairman Archer. Mr. Collins?
    Mr. Collins. Thank you, Mr. Chairman.
    Mr. Chairman, on behalf of my bipartisan constituency, I am 
pleased that we are moving forward with a process that I hope 
will resolve a problem for many of my seniors at home who are 
having to choose between food and drugs. So I look forward to 
the continuation of this process, and hopefully we will have 
something in place very shortly.
    Thank you, Mr. Chairman.
    Chairman Archer. Mr. Watkins?
    Mr. Watkins. Mr. Chairman and members of the panel, 
Oklahoma is dead last in reimbursement of Medicare in rural 
areas, the small towns and rural communities. That is totally 
unacceptable. And I am so thankful there has been some 
discussion about the rural areas, depressed areas, the 
forgotten areas of this Nation. I hope--and maybe I can get 
some interpretation--there is some movement to change that.
    Now, we are moving into prescription drugs. Very much 
needed. My decision is going to be based on a plan that is 
going to make sure that we are not discriminated against in the 
small town rural areas again, that we are not second-class 
citizens, if you please.
    We talked about making the decision between having drugs or 
medication and maybe food or shelter. The fact is that many of 
them have to leave the small town rural areas in order to try 
to go get a doctor or get that care.
    Can someone give me some kind of assurance that Oklahoma is 
not going to be dead last again?
    Mr. Peterson. This moves us a long way in the right 
direction. It is not as far as I want to go and probably as you 
want to go, but I think it is our best chance of getting where 
we need to be. So what we are going to do is raise that floor, 
which is now at $375, up to $475, and then it is going to move 
on up from there.
    In addition, when you have the updates, if we are in those 
low-cost areas, we are going to get more in the updates than 
the areas that are higher than us. So it is going to narrow the 
gap and make it more likely that people are going to come in 
and offer these Medicare+Choice plans.
    Now the one thing I want to say that hasn't been talked 
about here today is that I don't think a lot of folks 
understand the dynamics in rural areas like yours and mine. The 
real problem that is going on is with our providers because 
they are limited to the fee-for-service. We spend more money 
than we care to in Medicare, so we cut down and every year we 
ratchet down the percentage that we reimburse.
    Many of these hospitals are 60 to 70 percent Medicare and 
Medicaid dependent. So they have no place to shift this. We 
keep screwing down the amount that we are going to reimburse 
the doctors and the hospitals to 55 percent--whatever it is--
same thing in Medicaid. There is no way that these guys can 
stay in business. And that is the bottom line problem here.
    So what we are trying to do is get another alternative to 
get the money out there so that these people can stay in 
business. And this is going to move us a long ways in the right 
direction.
    Mr. Watkins. Senator Breaux, can you share your feelings, 
and Mr. Thomas?
    Mr. Breaux. I think it is very clear that if you have a 
prescription drug program whereby you are subsidizing it as in 
our bill 25 percent across the board for all beneficiaries, 
plus you provide reinsurance funding for the companies for 
high-cost beneficiaries that they may have to cover, you are 
creating a package that is going to be very attractive in all 
parts of the country. As long as you have a backup so that when 
that doesn't work out you still have an agency that is going to 
do it, I think you have covered the problems of Rural America 
as well as urban areas.
    Mr. Watkins. In a lot of these, you only have one small 
drug store in the whole community. And sometimes the county. I 
don't know exactly how that is going to----
    Mr. Breaux. If you think about it, that small town with one 
drug store may have one or two Federal employees who benefit 
from the Federal Employees Health Benefit Insurance as well. 
They have insurance for drug coverage and they pay a copayment 
and they get their drugs at a very reasonable cost.
    Mr. Watkins. Good point.
    Mr. Thomas. I would tell the gentleman that if you go to 
the retail drug store and take a look at what you are paying 
there versus some of these mail-in drug provisions, you can 
actually wind up getting the same prescription at a much 
cheaper price and it arrives at your door. There is a 
revolution going on, both on the Internet--not everybody has 
computers to contact it--but certainly through mail-in 
provisions. People send their pictures away through the mail to 
get developed. There is no reason why you can't get 
prescriptions through the mail.
    It is not as desirable a program as you would have, say, in 
an urban area. The key is that it is a program and it will be 
available.
    The point that Collin Peterson made is a fundamental one. 
We have got to make sure that there is a cooperative effort in 
providing not just prescription drugs to rural areas, but basic 
health care. A hospital in an urban area that closes causes 
problems. A hospital that closes in a rural area collapses the 
core of the health care delivery structure.
    So we are talking about continuing to monitor all those 
areas that need adjustment while we are looking at 
modernizations and while we are providing prescription drugs.
    Just let me say that April 1 was a date we were promised to 
get a new funding mechanism for skilled nursing facilities. The 
Health Care Financing Administration missed that date. July 1 
is the date that we were promised we were going to get a new 
funding mechanism for outpatient hospital payments. The Health 
Care Financing Administration is going to fail that date. At 
some point, somebody has to realize that when agreements are 
made and new structures need to go into place, that you have to 
meet that deal. The beneficiaries are the ones who suffer.
    Mr. Watkins. I would like to make one other point.
    Chairman Archer. The gentleman's time has expired. He will 
have to make the point at a later time.
    The Chair will alert members that it is the Chair's 
intention to recess the Committee at the conclusion of Mr. 
McDermott's inquiry and return with this panel to conclude this 
panel 1 hour later. We will recess for 1 hour for lunch at the 
conclusion of Mr. McDermott's inquiry.
    Mr. McDermott. Thank you, Mr. Chairman.
    I appreciate you having this hearing. I wish we would have 
a hearing when we had a bill in front of us.
    As I listen to this debate today, we are asked to do two 
things at once. One is to deal with the drug benefit and the 
other is to reform Medicare. We are swallowing one pill in 
order to get the other pill.
    I want to talk a little bit about the whole Medicare reform 
issue. I detest partisanship, so I am going to ask my question 
of Mr. Breaux and Mr. Thomas.
    HMOs cost Medicare money because they enroll healthier than 
average people. The trustee's report for the year 2000 says 
that. You can quibble with them, but that is what it says. The 
OIG, the GAO, MedPAC, and HCFA all say that the HMO Program is 
not saving us money, but is losing Medicare money.
    The theory has been in the reform of Medicare that if we 
got everybody into HMOs that somehow the private sector would 
figure out how to save money. But what I see in this bill is 
more money going into HMOs when the OIG, the GAO, MedPAC, and 
HCFA all say they are getting too much already.
    Either those four Federal agencies don't know what they are 
doing, or mystically we are going to give this new Medicare 
Benefit Manager organization all the HMOs and the drug benefit 
and leave the fee-for-service system to wither on the vine in 
HCFA by separating them. Somehow that is going to make them 
better.
    I would like to know how you figure you are going to make 
this thing work when--Mr. Peterson lives in an area like I do. 
I live in the most fiscally deficient area of the country. 
Minnesota and Oregon are with us. Everybody talks about rural 
areas. Never mind rural areas. Group Health of Washington is 
going to pull out of this program in the urban areas if you 
don't give them more money in my area.
    What mechanism have you built into this that deals with the 
disparities across this country? Is it somehow the employees of 
this agency who are not going to be Civil Service employees--
you are going to hire them out of the insurance industry and 
pay them whatever you want--they will not be under Civil 
Service--how does that work to make it better?
    Mr. Thomas. I would tell the gentleman that the theory of 
getting them all into HMOs is only half the theory. The other 
half is that you then have competition between the HMOs, at the 
price at which they deliver the medical benefits.
    What happened was that you only got half of it happening. 
That is, you created an HMO Program, but then the funding of 
that HMO Program or Medicare+Choice is administered prices--
10,000 administered prices in 3,000 counties and where you have 
overpayment and over-utilization in some areas and 
underpayments in others. Or, for example, in your area, which 
is very efficient.
    But unfortunately, it also has a direct competitor in 
another Federal Government program called the Department of 
Defense, which then has a profile offering that isn't examined 
and pulled out and then priced accordingly, again, because of 
the administrative structure. So what we propose is that you 
begin what the other half of the agreement was that has never 
been reached: Require competition.
    Some of these plans are not going to like the other half of 
the solution. They like the idea that you give them more money 
where they need the money, especially in the lower area. This 
bill, on a bipartisan basis, also says to forget trying to get 
them to a demo on what a competitive model is. They are just 
going to be in a competitive environment. The Medicare Benefit 
Administration is going to negotiate prices, those below the 
national average.
    You and I might want to say, let's take everything we are 
paying for Medicare+Choice and begin to divvy it up. As you 
well know, those who are now over-compensated are certainly not 
going to agree to that. They are not going to be part of the 
arrangement. So whether we like it or not, we are going to have 
to put more money out there than we should to allow those 
programs that have a fixed price that eventually will no longer 
be a handsome price until the competitive model reaches them 
and then they will negotiate as well.
    We do provide negotiation and competition and assistance 
where you don't have the ability to negotiate and compromise. 
If one thing came out of the Medicare Commission, it was that 
the only way you are going to bend the growth curve 25 or 30 
years out is to produced a Medicare that provides reasonable 
competition. Even if you have to spend a little money up front 
to get it started, it is in the long run the only way we are 
going to save the money.
    Mr. McDermott. The only thing I would say is that the 
problem you face is the one you faced in 1997 when you made all 
the Balanced Budget amendments by yourself without having 
enough testimony. We wound up with the mess that we have today. 
You cannot do this again and ram it through here by Monday so 
that you can have a press release next Friday, which is what we 
are doing. There is no question about it.
    I rode on a plane from Seattle. I had 2,306 miles of 
hearing what is going on in the Senate where the same thing is 
being rammed through. I say to you----
    Mr. Breaux. Rammed through? When are we going to do that?
    [Laughter.]
    Mr. McDermott. You watch and see. It will be rammed out of 
the House and you guys will do it next.
    I don't want it to be partisan, but you need to take time 
to look at how this thing actually works and let us look at it 
and think about it. We are going to be out of here on Thursday 
night. We will not take a bill home to read, we will all come 
home on Father's Day on the planes to get back here on Monday 
not knowing whether or not we are going to have a piece of 
paper to look at.
    Mr. Thomas. No. My commitment to you will be that when you 
get on the plane on Thursday, if at all humanly possible--and I 
will say I will give it to you--you will have a bill to read. I 
will do that if at all humanly possible because I do want to 
meet that criticism. I think it is a legitimate one and I want 
to do it. I went to too many Majority Ways and Means meetings 
when the Democrats ran it where they passed paper out the day 
of the hearing. That is not what we are going to do. You will 
get it by Thursday when you get on the plane.
    Chairman Archer. The gentleman's time has expired and the 
Committee will stand in recess until 1:35.
    [Whereupon, at 12:37 p.m., the Committee was adjourned to 
reconvene at 1:42 p.m. the same day.]
    Chairman Archer. The Committee will come to order.
    The Chair invites any of the panelists who were part of the 
first panel who are present to have a seat at the witness 
table.
    I assume that the Senators will not be returning and the 
Chair would suggest that the three of you consolidate and take 
seats at the center so that you are closer together in this 
bipartisan effort.
    Congressman Thomas, why don't you sit in the middle and 
then we will put Congressman Allen on one side of you and 
Congresswoman Eshoo on the other.
    The Chair recognizes Mrs. Thurman for inquiry.
    Ms. Thurman. Thank you, Mr. Chairman.
    I am going to make a couple of statements, first based on 
some of the statements I have heard here today.
    First of all, we talked a little bit about why we needed to 
be careful with having coverage that is better than any other 
plan because we would have other retirees' health care plans 
being eliminated or dropped.
    I just want to say for the record we have already seen 
since 1994 a dramatic number of firms already dropping 
retirees' insurance, and people are still without a 
prescription drug benefit. In fact, about 25 percent fewer 
firms are now offering these plans.
    I would also say that in my office recently a well-known 
retail company came in and said that because of the cost of 
prescription drugs they actually were going to have to reduce 
their benefits to their employees and their retirees because of 
prescription drug costs.
    Mr. McCrery, one of the things that has concerned me and 
really deals with what Mr. Allen has brought fowward and I 
think needs to be reemphasized is that every Member of this 
Committee voted on the DOD authorization bill last week, which 
in fact does exactly what Mr. Allen's bill does. So if we say 
that we are for or not for price discrimination then we would 
have to suggest that we do that in every other program because 
we allow others to buy at the best price.
    So I think what we are saying here is that it is OK for 
veterans and Medicaid and everybody else, but not for seniors.
    To Mr. Peterson, one of the things that has really bothered 
me--we always talk about Miami, Florida--there is a lot more to 
Florida than just Miami. We have very similar situations as 
Minnesota and other places across the country. In fact, this 
past weekend, before this July 1st when Medicare+Choice 
programs have to let us know that they might be pulling out, we 
already have gotten the announcement that in two of my seven 
counties we are seeing them pull out.
    The reason I bring that up is that you mention in your bill 
that you want to do a ceiling of $475.
    Mr. Peterson. That's a floor.
    Ms. Thurman. All right. A floor.
    Well, let me just tell you about those counties where we 
have either lost or will potentially lose plans.
    In Citrus County, they get $489 today. And they pulled out 
2 years ago. Dixie County, $493. Hernando County--this will 
really be a shock--$543. Levy County, one that was below that 
floor, $466. Marion County, $459. Pasco County, $572. And 
Sumter County, $489.
    Only one of those counties where they have either pulled 
out or are already pulling out of now are below that floor. So 
I don't know where we believe they are going to come in because 
of higher reimbursements.
    And I quite frankly think that in the Medicare Program in 
general we have seen discrimination across this country. We 
already have, in the Medicare+Choice Program, a prescription 
drugs benefit. Right?
    Mr. Peterson. If you have enough money allocated to that 
county to be able to provide it.
    Ms. Thurman. No, because before that if you were in the 
Medicare+Choice before they pulled out, they had a prescription 
drug. That is why most enrollees went into it, correct?
    Mr. Peterson. Right. But in my area they didn't offer it at 
all.
    Ms. Thurman. So your folks have been discriminated against.
    Mr. Peterson. Right.
    Ms. Thurman. What I don't understand in the bill that you 
are talking about is, Why would we prop up Medicare+Choice, 
giving them more money, when they continually are pulling out 
of these counties, when they come to the point where they 
recognize they can't provide the services and exasperate the 
system that is already in place?
    I don't know why we are doing that.
    I will tell you, in talking to my seniors and what my 
seniors tell me, they want traditional Medicare. They don't 
want to be discriminated against. They don't want beneficiaries 
and HMOs to be given special treatment with more benefits than 
they get. This is already what happens with Medicare+Choice. 
They don't want a two-tier system. They don't want to get their 
prescription drug benefits from the Medigap plans. They want a 
prescription drug benefit in Medicare as a part of their basic 
Medicare benefit and they want all beneficiaries to be treated 
fairly with the same Medicare benefits for all Medicare 
beneficiaries.
    I don't see that happening under what you are proposing.
    Mr. Peterson. And I don't see it happening under the 
traditional system, either, because we only have so much money. 
And when the cost of Medicare goes up faster, what do we do? We 
reduce the fee-for-service reimbursement and then at my 
Medicare-and Medicaid-dependent hospitals, it doesn't work 
anymore. So the other system doesn't work, either.
    I would like to put more money into this, but for whatever 
reason they made this decision, there is going to be $40 
billion go into it. But I have more confidence that we are 
going to get there this way than we are going to get there in 
the all command and control HCFA----
    Ms. Thurman. But we have tried this system. That is what we 
have been under. That is what we have been doing.
    Mr. Peterson. Well, then, it is not working.
    Ms. Thurman. We had a two-tier system.
    That is because we give the money to Medicare+Choice and 
you want to give it more.
    Mr. Peterson. Let me just make one more point.
    Under this program, if they all pull out and if there are 
not two choices, then this new Medical Benefits Administration 
Board is going to have to, under this legislation, provide the 
drug benefit. So then they would get the traditional fee-for-
service, plus a drug benefit under this bill.
    Ms. Thurman. Then let me go to Mr. Allen's issue because I 
think this is an important point.
    Chairman Archer. The gentlelady will be accorded a small 
additional amount of time.
    Ms. Thurman. I appreciate that, Mr. Chairman.
    Mr. Allen, in saying what they have just said, wouldn't it 
make sense that the one thing we have to do is to look at the 
best cost that we can get for government to buy these drugs? Is 
that what your piece of legislation does?
    Mr. Allen. It is. And basically we want to do two things. 
We want a benefit that is affordable to seniors and a benefit 
that is affordable to the government, the taxpayer. That is why 
when we talk about any of these plans, we have to be focused on 
the cost containment, on getting some leverage over the 
pharmaceutical industry.
    It is my belief that the more consolidated--that is, if 
Health and Human Services does the negotiating by itself for 
all 39 million beneficiaries, you are going to get a lower 
price than if you divide into regions and have PBMs. If you 
have multiple PBMs, you have less market power than if you have 
single PBMs.
    So basically the fewer entities on the buying side, the 
more market power, which is why this debate--wherever you come 
out on it--the debate over the form of cost control is really 
very important.
    Chairman Archer. The gentlelady's time has expired.
    I think this has been a very productive discussion. It is 
not over yet because Mr. English and Mr. Doggett will still 
inquire. But I am constrained to interject at this time that it 
is not a zero sum game. You have many other countries that 
squeeze down the price of drugs so that if you want to sell 
them there, you have to sell them at a price that is less than 
they are sold in the United States.
    What does that do to the prices for the consumers in the 
United States? That drives them up. It drives them up because 
it all has to fit within the final ultimate net return.
    The more you drive down the price--even if it is domestic, 
it becomes comparable to the way that Canada and Switzerland 
and others have driven down the price of comparable drugs--and 
that forces up the price to everybody else. It doesn't come 
free of charge.
    That is what we need to understand in the overall scheme of 
things. This is going to be a very difficult process to work 
through and come out with the right solution.
    Mr. English?
    Mr. English. Thank you, Mr. Chairman.
    I wanted first to recognize Mr. Peterson. I appreciate very 
much your being here. In listening to the last line of 
questioning, I am not sure you had an opportunity to fully 
amplify on your views and fully answer those questions.
    Would you like time to do so now, sir?
    Mr. Peterson. Well, I think I pretty much got it answered. 
The problem is that--as I said briefly to the gentlelady from 
Florida--the fee-for-service system, the way we control costs 
and HCFA does it by setting these prices and continues to 
ratchet down--in my district, we have 70 to 80 percent Medicaid 
reimbursements in those hospitals. They are being put out of 
business.
    At one time, before we got the $375 floor put in there, the 
average in my district was $293. At the same time, it was 700-
some dollars in Miami. I can tell you that there isn't that 
much difference in what you pay doctors and what it costs. But 
the reality is that we are not going to take this money away 
from Miami or these other places, so we have to figure out some 
other way to get this thing equalized.
    This bill starts to move us in the right direction.
    Mr. English. And I would point out to the gentleman--and I 
see the chairman of the Health Subcommittee is shaking his 
head. He is very well aware that in my district we have a 
situation similar to yours where we have seen not pull-outs but 
dramatic reductions in benefits. A lot of that is directly 
attributable to the fact that HCFA has arbitrarily decided in 
places like Northwestern Pennsylvania to reimburse the same 
procedures at a dramatically lower rate than in even 
Southwestern Pennsylvania.
    So from county to county, I have an enormous disparity 
within my district and a significant difference in the 
availability of benefits under Medicare+Choice. That is not the 
fault of the insurance company--in this case, Blue Cross--as 
much as it is policy decisions being promulgated by bureaucrats 
right here in Washington.
    Would the chairman of the Health Subcommittee amplify on 
that, if he chooses to?
    Mr. Thomas. Thank you very much.
    I do think you heard a dramatic statement in the exchange 
between my friend from Maine and the gentlewoman from Florida: 
The concept that a government-controlled fixed price will 
ultimately produce a lower price than a competitive model.
    That is being rejected around the world repeatedly. As a 
matter of fact, my colleague on my left--not always on issues, 
I might say--believes that competition is a key to controlling 
prices.
    When you look at the government fixed price for Medicare, 
we have been told that if you could negotiate a lower price, 
you could actually get a cheaper price than the statutory 
price. But beyond that, it is not just the single price of the 
drug. The problem with many seniors is in taking the drug. It 
is the management of the drug. It is consulting with and 
appropriate delivery of the product. That is a package.
    There are professionals who do that now. All of that should 
be part of the negotiations. Even disease management is part of 
the prescription drug program now--a very technical area--and 
they are doing it at reduced costs with intensive management. 
That is what should be part of the negotiations to determine 
who delivers the service, not just the price.
    As most people know in the marketplace, the price isn't 
everything. It is the total package that is critical.
    Mr. English. A couple of quick questions for the chairman. 
Could you comment just very briefly on how his plan versus the 
President's plan would impact on PPS-exempt hospital and on the 
VA Prescription Program?
    Mr. Thomas. I would have to tell you that in those areas 
that we have worked at over the last several years, there is 
less than a dramatic impact because this is primarily for the 
modernizations in the prescription drugs. The area of the 
outpatient and the VA--although we are continuing to work--it 
seems as though that in the short run, even those who were 
pushing, for example, the Department of Defense Tri-Care 
Program to be advanced in terms of the drug ultimately see 
those Medicare-eligible senior as part of the overall program.
    So this is not year one and the last year of continuing 
changes in Medicare. When we began in 1997 a cooperative effort 
with the administration--the administration did sign that 
bill--we knew we were going to have to make changes and we were 
going to have to make midcourse adjustments. We made a 
midcourse adjustment last year.
    I will tell the gentleman, contained in the bipartisan 
legislation is a Medicare lock box to say that if CBO shows 
there are additional savings from Medicare in the general fund 
out of fiscal year 2000, all that money should be preserved for 
reinvestment back into Medicare. Those are areas we can focus 
on to assist areas we have talked about in terms of 
Pennsylvania hospitals in their ongoing concerns about 
delivering health care.
    Chairman Archer. The gentleman's time has expired.
    Mr. Doggett?
    Mr. Doggett. Thank you, Mr. Chairman.
    Mr. Allen, my questions really center on you. I know first 
of all that you must have been as happy as I was to learn that 
there is now an interesting bipartisanship in this Committee in 
addressing this issue. The only vote this Committee has ever 
taken on this issue previous to today was the vote that Ms. 
Thurman and I secured last September, in which we sought very 
much to have bipartisan support for addressing this problem of 
price discrimination against seniors that your proposal focuses 
on. Instead, we got a stonewall, a totally partisan opposition, 
a pretty straight vote that demonstrated Democrats wanted to 
end the price discrimination and Republicans did not want to 
act on that.
    With reference to this spirit of bipartisanship, I 
understand how it is going to work. Mr. Peterson says he is not 
necessarily free to disclose all the details of this new, as of 
yet, unveiled plan today. We have a press release. If we are 
really fortunate, when we get on the plane to go away for the 
weekend, we will get a copy of the bill and then we will be 
asked to vote on this new proposal and shape any amendments 
dealing with the issues you have raised or others on Monday, 
the first day we get back.
    So I guess that is a form of bipartisanship. It seems to 
focus principally on who can praise the proposal the most 
rather than who can focus on what impact, if any, it will have 
on our seniors.
    Even though you don't have the details of this new 
Republican plan, isn't true--whether it is the Thomas 
Republican plan or the various Democratic plans that have been 
offered by a wide range of people here and in the Senate--that 
your approach represents the most conservative approach in 
terms of tax dollars? Isn't it the one that will cost the 
taxpayer the least amount of money of any of the proposals, 
whether they are called Republican, Democrat, or bipartisan?
    Mr. Allen. That is certainly my opinion. I wouldn't expect 
everyone to come to the same conclusion. But it is certainly my 
opinion that basically when Mr. Thomas and others talk about 
the need for competition, I want to say, wait a minute. Let's 
talk about this in terms of market power. There are folks in 
this room who really understand what market power is all about. 
The pharmaceutical industry is by and large, when you look at 
different kinds of drugs, very much concentrated. What the 
industry wants is as many buyers as possible. That way any 
individual buyer will have the least amount of market power.
    Aetna, Cigna, United--all the health care plans--try to 
negotiate lower rates for their beneficiaries. In my opinion, 
Medicare should simply do the same for its beneficiaries. If we 
do that systematically, we will have the lowest possible prices 
around the country. And I can imagine doing that with 15 or so 
regions, but by and large the more different buyers you have, 
the less market power the buyers will have.
    Mr. Doggett. I think you have seen this morning's Congress 
Daily that has an advertisement from the pharmaceutical 
industry suggesting that with private insurance seniors cen get 
lower prices somewhere near 40 percent. Is there anything to 
prevent them from simply lowering their prices by 40 percent 
for uninsured seniors without any bill of any type?
    Mr. Allen. No, there is nothing. It is a fairly amazing 
advertisement because it basically says that private drug 
insurance lowers prices 39 percent and that 12 million senior 
Americans now have no prescription drug insurance coverage and 
therefore pay full price because they don't have the market 
clout that comes with a plan. That is part of what we are 
saying.
    Let me say one other thing that I think is important. 
Referring back to the chairman's point a while ago, this 
industry earns 18.6 percent return on revenues, according to 
the latest figures. As Merrill Lynch and other security 
analysts have shown, if you have either my plan or a benefit, 
they will sell many more drugs in this country. It is not a 
case of simply dropping prices in one country and forcing them 
up in another.
    By and large, this is a case where if they cut prices or 
you have a benefit, then their market will expand dramatically 
because so many seniors are not taking their prescription drugs 
right now.
    Mr. Doggett. As Mr. Matsui pointed out before our 
Republican colleagues convened this bipartisan hearing, they 
convened a focus group that warned that ``Republicans aren't 
doing anything to help seniors,'' and their number one message 
to attack Democrats seemed to have you in the bull's eye. It 
said that the way to attack Democrats is to say, ``It is 
politicians in Washington setting drug prices.''
    Isn't that what your plan does?
    Mr. Allen. My plan provides what we do for military 
retirees now, what we do through the Medicaid Agency, and for 
veterans. It simply allows the negotiation of negotiated lower 
prices and essentially what happens in the private sector.
    Mr. Doggett. The military retiree plan is the one you refer 
to in your testimony that the House just voted overwhelmingly 
to approve. It is a new plan that has not existed previously 
that is going to take the same approach that you want to 
provide for all uninsured seniors, and apply it to all military 
retirees.
    Mr. Allen. Over 65, that is correct.
    Chairman Archer. The gentleman's time has expired.
    Mr. Doggett. Thank you.
    Chairman Archer. The Chair is prepared to close out the 
inquiry of this panel in deference to them and their schedules 
as well as deference to Nancy Ann DeParle, who has waited a 
long time.
    The Chair will recognize Mr. Neal, who has not inquired, 
and the Chair will then recognize Mr. McDermott simply for one 
question, which he tells me will receive a yes or no answer. 
That remains to be seen.
    Mr. Neal?
    Mr. Neal. Thank you, Mr. Chairman.
    Just a quick question for Bill Thomas, and the other 
panelists may wish to comment as well. I followed some press 
accounts of how you intend to deal with the whole question of 
recovering some of the investment that we make on behalf of 
taxpayers on some of the miracle drugs. It is an issue that, 
while on the periphery, it is still out there. Maybe you could 
inform us as to your intentions.
    Mr. Thomas. I will tell the gentleman someone who is very 
interested in that is Senator Ron Wyden. He has legislation and 
others do as well.
    In working on this side with the Democrats over a year and 
a half, we examined a number of areas that we thought about 
adding to the bill. We came to the conclusion that as we put 
this together we are going to try to keep it a core Medicare 
modernization in prescription drugs.
    The difficulty with the number of areas mentioned--although 
it may in fact be a worthwhile pursuit--it opens up then, 
through the Commerce Committee jurisdiction, the entire Federal 
Drug Act and that is not a direction, given the rules of the 
House, that some folks wanted to go. I am talking with those 
people who have an interest in providing legislation, even as 
an amendment to this one that we can sit down and talk with the 
Rules Committee, where something like that could be made in 
order if someone--and the will of the House can be determined 
on that.
    The response I get back is that the taxpayers invest in a 
number of areas, such as defense and others, and they don't get 
a return on their investment there. I think maybe it is 
something we need to look, in a broad-based way, about. 
Although certainly government's job is to sponsor research and 
development in a broad number of science areas, and there is a 
societal benefit that accrues, but if an individual is going to 
receive significant personal benefit from it, then there might 
be a way for the government to piggy-back onto that and get our 
fair share back, but only if there is somebody who gets a 
single individual significant benefit out of the broad-based 
taxpayer dollars.
    So there is an area I think we can continue to work. But 
rather than to put it in this bill, which has to go through 
both Ways and Means and Commerce, opening up jurisdiction like 
the entire FDA was a sobering thought for a number of people, 
especially those on the Commerce Committee, who are part of the 
bipartisan coalition. They suggested that we not do it in the 
fundamental bill, but as an amendment it is something that 
could be looked at.
    Mr. Cardin. If I could respond, Mr. Neal, I think Medicare 
beneficiaries have overpaid for a lot of the costs--whether it 
be research, whether it be academic, health care costs, 
training of doctors--there has been an unwillingness to look at 
a more general way to cover these costs, and it has made it 
more difficult for us to move forward with benefits for our 
seniors.
    One of the key differences--this has been a very useful 
discussion, but I think one of the key differences that we have 
on the approach Mr. Thomas has taken and the approach Mr. Stark 
has taken, is that Mr. Stark's approach puts drug coverage as a 
defined benefit within the Medicare system itself. That means 
every senior will get it.
    Yes, we hope there will be choice, that private insurance 
will be involved. In 1997, we passed Medicare+Choice to give 
the seniors--we thought--more choice, but private insurance 
didn't want to take advantage of that.
    One of the dangers, if you don't put prescription drug 
coverage in the defined benefit package, is that the private 
market may or may not do what we think they will do. They may 
offer it in different ways. But if you have it as a defined 
benefit in the core benefit structure of Medicare, then you 
know the seniors will have at least the fall-back of fee-for-
service and competition will give other options to our seniors.
    So I think the point you raise about recouping the 
investment cost is a very important one, and we should make 
sure that our seniors aren't going to overpay for the benefits 
they are receiving, which would mean that they won't be able to 
receive other benefits or expanded benefits because of the 
costs we are providing for the Medicare system itself.
    Mr. Thomas. Perhaps this defined benefit argument may be 
more a semantical one than a substantive one. I want to sit 
down with Ben and go over it.
    When I was listening to what people are arguing as a 
defined benefit, it was the specific parameters of the dollar 
amounts of the program, and I really don't look at it that way. 
I look at it as the substance of what it is that is being 
offered, such as the preventive care and other aspects. It may 
in fact be a semantical one and we may have a defined benefit 
in this bill, once I understand exactly what the gentleman from 
Maryland means.
    Mr. Neal. I think we need to talk that out, but I think 
many of us want to start with the concept of putting it in the 
core benefit, the defined benefit, of Medicare and then make it 
available for big delivery through fee-for-service or private 
plans. You start with getting the private sector----
    Mr. Thomas. But I would only say that the core benefit are 
specific health care factors, not dollar amounts. You are not 
talking about prescription drugs as dollar amounts. That is not 
what I look at as a defined benefit. I look at it as the 
programmatic aspect, which is the way traditional Medicare is. 
That is why I think it may be more a semantic problem than a 
substantive one.
    Chairman Archer. The gentleman's time has expired.
    The Chair now recognizes Mr. McDermott for a short question 
that will receive a yes or no answer.
    Mr. McDermott?
    Mr. McDermott. Let me see if I can do it.
    Mr. Thomas----
    Mr. Thomas. Me? Yes or no?
    [Laughter.]
    Mr. McDermott. He said a short question for me, too.
    When you were designing this benefit, did you expect the 
same administrative cost in your benefit that is in a Medigap 
policy? And is that built into the cost of the premium?
    Chairman Archer. The gentleman is also free to answer ``I 
don't know.''
    Mr. Thomas. I do know. That is the problem. A yes or no is 
not a sufficient answer.
    This is so fundamentally different than Medigap. There are 
administrative costs and CBO is pricing it out, but it is 
nothing like Medigap in terms of the administrative costs 
because it covers an entirely different structure, in large 
part administered by newer entities that didn't really exist in 
the current form they exist when Medigap was put into law.
    But I am still going to try to get it to you on Thursday.
    Chairman Archer. Thank you.
    The Chair extends personal compliments to every member of 
this panel. It has been very, very helpful, I believe, to the 
consideration of this issue. We are very grateful to all of 
you.
    Thank you very much.
    Chairman Archer. The next panel will be Hon. Nancy Ann 
DeParle and Gary Claxton.
    Ms. DeParle, my apologies for your having to wait so long. 
It just seems to be a part of this process, that is, the U.S. 
House of Representatives. But we are very happy to have you 
before us today and we will be most pleased to receive your 
testimony.
    You may proceed.
    Ms. DeParle. Thank you, Mr. Chairman.
    Chairman Archer. I think everybody knows that you are the 
Administrator of HCFA, so I don't think you need to mention 
that again. Welcome.

STATEMENT OF HON. NANCY-ANN DEPARLE, ADMINISTRATOR, HEALTH CARE 
FINANCING ADMINISTRATION; ACCOMPANIED BY: GARY CLAXTON, DEPUTY 
   ASSISTANT SECRETARY FOR HEALTH POLICY, U.S. DEPARTMENT OF 
                   HEALTH AND HUMAN SERVICES

    Ms. DeParle. Thank you.
    I do think this morning has been constructive and I have 
learned a lot from listening to the dialog.
    We appreciate your holding this hearing to discuss the 
Medicare prescription drug coverage problem. The Health 
Subcommittee's hearing on this subject last month was very 
constructive and we welcome the opportunity your hearing 
provides today to further our bipartisan dialog.
    With me this afternoon is HHS Deputy Assistant Secretary 
Gary Claxton, who has worked extensively on analyzing and 
designing the President's prescription drug proposal and also 
analyzing the other proposals that are out there.
    The Administration is encouraged by the growing commitment 
to address this issue, the need of Medicare beneficiaries for a 
prescription drug benefit. We want to continue working with you 
to enact legislation that meets the key principles that 
President Clinton has laid out for a Medicare drug benefit.
    The drug benefit should be voluntary and accessible to all 
beneficiaries. It should be affordable to beneficiaries and to 
the Medicare Program. It should be a competitive benefit and it 
should have efficient and effective administration. It should 
ensure access to needed medications. It should encourage high-
quality care. And it should be consistent with broader reform.
    Mr. Chairman, we have said many times that we are flexible 
on the details of how a Medicare drug benefit is provided as 
long as the design meets these key principles.
    I was listening closely to the members of the panel who 
presented earlier. I listened especially closely to Mr. Thomas 
in talking about the plan he has been working on.
    I do see some commonalities. It does appear that he has 
tried to meet some of the President's principles and that he 
has made some changes at least from earlier versions of the 
plan that I have heard. But as I think everyone has emphasized 
this morning, I haven't seen the details yet--we haven't seen 
the details yet--so it is very difficult to say whether or not 
this plan meets the tests that I set out to make sure that this 
is really a guaranteed Medicare prescription drug benefit.
    We do have some concerns, based on what we have heard so 
far, about whether this benefit would really be affordable and 
accessible for all beneficiaries. Most of our comments and 
concerns really relate to this.
    We continue to be concerned about the extent to which the 
plan that Mr. Thomas described this morning relies on 
participation by private insurers who have made clear many 
times that stand-alone drug policies aren't feasible. Even if 
some insurers do offer coverage--I imagine some will--they 
would likely come in and out of the market, they would move to 
marketable areas, and I suspect they would significantly modify 
their benefit design from year to year based on the prior 
year's experience.
    We have seen this before and it has not been a good thing 
for beneficiaries. I should just mention here that there 
appears to be a lot of confusion about how exactly 
Medicare+Choice reimbursement rates are set, so I want to just 
take a minute to describe that for this Committee.
    This Committee set the rates in law in the Balanced Budget 
Act a couple of years ago. They are based on historical rates, 
the 1997 rates, which are based on historical fee-for-service 
volume and intensity, which is why you have such differences 
around the country. The practice of medicine has differed 
around the country in the Medicare Program, the number of 
procedures people get and the types of doctor visits, and so 
forth. The rate of increase was also set by statute. It is not 
something that bureaucrats or that I set at HCFA. It is set by 
statute and is the higher of three different rates, but there 
is a guaranteed annual increase of 2 percent in that rate.
    But as I said, what we have seen--and everyone here knows 
it, many of you are experiencing this first-hand--is pull-outs, 
a lot of movement by Medicare+Choice plans, a lot of 
uncertainty, and a lot of instability. We are concerned that a 
plan that relies heavily on private insurers would create the 
same kinds of concerns again in the Medicare prescription drug 
benefit.
    I heard Mr. Thomas say that the government will be there in 
every area if plans don't come in to provide a Medicare 
prescription drug benefit. I am eager to see the details of 
that and what that would really mean. My concern in hearing 
about it, from a health policy perspective, is, What exactly 
would that mean for risk selection? If the government is going 
to be left in some areas, does that mean that plans wouldn't 
come to many areas of the country, leaving the government 
there, which would have to charge higher premiums? That results 
in what my actuaries tell me is sort of a ``death spiral'' for 
such a program if it is a drug-only program.
    So I guess, Mr. Chairman, I would just say that this dialog 
has been helpful in learning some of the details, but there 
many, many more things we need to discuss. There are certain 
difficulties inherent in trying to base a program on drug-only 
insurance plans. I think you will hear more about that today.
    We continue to believe that the benefit must be integrated 
into the Medicare Program, that it should be like physicians. 
Physicians are covered under Medicare, hospital visits are 
covered. It should be just like that. We should provide drug 
coverage to Medicare beneficiaries the same way that virtually 
all private insurers do, by contracting directly with pharmacy 
benefit managers in each region of the country. This will 
ensure that all beneficiaries have access and that Medicare 
gets the best prices through benefit managers who will 
negotiate on behalf of beneficiaries.
    This raises another concern that we have with the plan Mr. 
Thomas discussed this morning, which is that, as he described 
it, it does not provide direct premium subsidies to individuals 
with incomes above $12,600 a year. As I understand it, it does 
provide a direct subsidy to very low income people. For 
everyone else, it relies on indirect subsidies to lower 
premiums. As I understand it, the subsidies are paid to the 
insurance companies and the proposition is that that will lower 
premiums for everyone.
    I think what is not clear is whether this amount of subsidy 
will really ensure that affordable coverage is available to 
all, or would be equally affordable in all regions of the 
country. I heard this morning a sincere debate about how to do 
that. I believe that everyone wants to do that. My question is 
whether this plan really does do that.
    We have other questions, Mr. Chairman, that are outlined in 
my written testimony. We look forward to discussing them with 
you. I think the most important question that we all have to 
keep in mind is, How well does this plan, does the President's 
plan--does whatever plan you have in front of you--really meet 
the needs of Medicare beneficiaries, the 39 million Americans 
who are depending on us to do something here? We have to keep 
that first and foremost.
    And while critical concerns remain, I hope that the time 
and energy and commitment I have seen here this morning means 
that we are turning a corner in our efforts to work together to 
enact a Medicare drug benefit. We all agree that it is 
desperately needed. I hope we are nearing a workable consensus 
on the broader outlines of how the benefit should be 
structured.
    Now, Mr. Chairman, we need to get into the important deeper 
details of how to make sure that the benefit can succeed. I 
think we can meet these challenges if we continue the 
constructive approach we have taken so far and I look forward 
to continuing to work with you as we enter the next phase in 
this critical debate.
    Thank you.
    [The prepared statement follows.]

Statement of Nancy-Ann DeParle, Administrator, Health Care Financing 
Administration

    Chairman Archer, Congressman Rangel, distinguished 
Committee members, thank you for holding this hearing to 
discuss Medicare prescription drug coverage. Your Health 
Subcommittee hearing on this issue last month was highly 
constructive, and we welcome the opportunity this hearing 
provides to further our bipartisan dialogue. We are encouraged 
by the growing commitment embodied in the new House Republican 
proposal to address this issue. We want to continue working 
with you to enact legislation that meets the principles 
President Clinton laid out earlier this year.
Background

    As we know, pharmaceuticals are as essential to modern 
medicine today as hospital care was when Medicare was created. 
Lack of prescription drug coverage among senior citizens today 
is similar to the lack of hospital coverage among senior 
citizens when Medicare was created. Three out of five 
beneficiaries lack dependable coverage. Only half of 
beneficiaries have year-round coverage, and one third have no 
drug coverage at all.
    Those without coverage must pay for essential medicines 
fully out of their own pockets, and are forced to pay full 
retail prices because they do not get the generous discounts 
offered to insurers and other large purchasers. The result is 
that many go without the medicines they need to keep them 
healthy, out of the hospital, and living longer lives.
    Drug coverage is not just a problem for the poor. More than 
half of beneficiaries who lack coverage have incomes above 150 
percent of the federal poverty level. Millions more have 
insurance that is expensive, insufficient, or highly 
unreliable. Even those with most types of coverage find it 
costs more and covers less. Copayments, deductibles, and 
premiums are up.
    And coverage is often disappearing altogether as former 
employers drop retiree coverage, Medigap is becoming less 
available and more expensive, and managed care plans have 
severely limited their benefits. Clearly all beneficiaries need 
access to an affordable prescription drug coverage option.

KEY PRINCIPLES

    The President has identified key principles that a Medicare 
drug benefit must meet, and we are willing to support proposals 
that meet these principles. It should be:
     Voluntary and accessible to all beneficiaries. 
Medicare beneficiaries in both managed care and the traditional 
program should be assured of an affordable drug option. Since 
access is a problem for beneficiaries of all incomes, ages, and 
geographic areas, we must not limit a Medicare benefit to a 
targeted group. At the same time, those fortunate enough to 
have good retiree drug benefits should have the option to keep 
them.
     Affordable to beneficiaries and the program. We 
must ensure that premiums are affordable enough so that all 
beneficiaries participate. Otherwise, primarily those with high 
drug costs would enroll and the benefit would become unstable 
and unaffordable. And beneficiaries must have meaningful 
protection against excessive out-of-pocket costs.
     Competitive and have efficient administration. 
Medicare should adopt the best management approaches used by 
the private sector. Beneficiaries should have the benefit of 
market-oriented negotiations.
     Ensuring access to needed medications and 
encouraging high-quality care. Beneficiaries should have a 
defined benefit that assures access to all medically necessary 
prescription drugs. They must have the assurance of minimum 
quality standards, including protections against medication 
errors.
     Consistent with broader reform. The drug benefit 
should be consistent with a larger plan to strengthen and 
modernize Medicare.

THE PRESIDENT'S PLAN

    The President has proposed a comprehensive Medicare reform 
plan that meets these principles. It includes a voluntary, 
affordable, accessible, competitive, efficient, quality drug 
benefit that will be available to all beneficiaries. The 
President's plan dedicates over half of the on-budget surplus 
to Medicare and extends the life of the Medicare Trust Fund to 
at least 2030. It also improves access to preventive benefits, 
enhances competition and use of private sector purchasing 
tools, helps the uninsured near retirement age buy into 
Medicare, and strengthens program management and 
accountability.
    The President's drug benefit proposal makes coverage 
available to all beneficiaries. The hallmark of the Medicare 
program since its inception has been its social insurance role. 
Everyone, regardless of income or health status, gets the same 
basic package of benefits. This is a significant factor in the 
unwavering support for the program from the American public and 
must be preserved. All workers pay taxes to support the 
Medicare program and therefore all beneficiaries should have 
access to a new drug benefit.
    A universal benefit also helps ensure that enrollment is 
not dominated by those with high drug costs (adverse 
selection), which would make the benefit unaffordable and 
unsustainable. And, as I described earlier, lack of drug 
coverage is not a low-income problem beneficiaries of all 
incomes face barriers.
    The benefit is completely voluntary. If beneficiaries have 
what they think is better coverage, they can keep it. And the 
President's plan includes assistance for employers offering 
retiree coverage that is at least as good as the Medicare 
benefit to encourage them to offer and maintain that coverage. 
This will help to minimize disruptions in parts of the market 
that are working effectively, and it is a good deal for 
beneficiaries, employers, and the Medicare program. We expect 
that most beneficiaries will choose this new drug option 
because of its attractiveness, affordability, and stability.
    For beneficiaries who choose to participate, Medicare will 
pay half of the monthly premium, with beneficiaries paying an 
estimated $26 per month for the base benefit in 2003. The 
independent HCFA Actuary has concluded that premium assistance 
below 50 percent would result in adverse selection and thus an 
unaffordable and unsustainable benefit.
    Premiums will be collected like Medicare Part B premiums, 
as a deduction from Social Security checks for most 
beneficiaries who choose to participate. Low-income 
beneficiaries would receive special assistance. States may 
elect to place those who now receive drug coverage through 
Medicaid into the Medicare drug program instead, with Medicaid 
paying premiums and cost sharing as for other Medicare 
benefits.
    We would expand Medicaid eligibility so that all 
beneficiaries with incomes up to 135 percent of poverty would 
receive full assistance for their drug premiums and cost 
sharing. Beneficiaries with incomes between 135 and 150 percent 
of poverty would pay reduced premiums on a sliding scale, based 
on their income. The Federal government will fully fund States' 
Medicaid costs for the beneficiaries between 100 and 150 
percent of poverty.
    Under the President's plan, Medicare will pay half the cost 
of each prescription, with no deductible. The benefit will 
cover up to $2,000 of prescription drugs when coverage begins 
in 2003, and increase to $5,000 by 2009, with 50 percent 
beneficiary coinsurance. After that, the dollar amount of the 
benefit cap will increase each year to keep up with inflation. 
For beneficiaries with higher drug costs, they will continue to 
receive the discounted prices negotiated by the private benefit 
managers after they exceed the coverage cap. To help 
beneficiaries with the highest drug costs, we are setting aside 
a reserve of $35 billion over the next 10 years, with funding 
beginning in 2006.
    Benefit managers, such as pharmacy benefit manager firms 
and other eligible companies, will administer the prescription 
drug benefit for beneficiaries in the traditional Medicare 
program.
    These entities will bid competitively for regional 
contracts to provide the service, and we will review and 
periodically re-compete those contracts to ensure that there is 
healthy competition. The drug benefit managers--not the 
government--will negotiate discounted rates with drug 
manufacturers, similar to standard practice in the private 
sector.
    We want to give beneficiaries a fair price that the market 
can provide without taking any steps toward a statutory fee 
schedule or price controls. The drug benefit managers will have 
to meet access and quality standards, such as implementing 
aggressive drug utilization review and patient counseling 
programs. And their contracts with the government will include 
incentives to keep costs and utilization low while assuring a 
fairly negotiated contractual relationship with participating 
pharmacists.
    Similar to the best private health plans in the nation, 
virtually all therapeutic classes of drugs will be covered. 
Each drug benefit manager will be allowed to establish a 
formulary, or list of covered drugs. They will have to cover 
off-formulary drugs when a physician certifies that the 
specific drug is medically necessary. Coverage for the handful 
of drugs that are now covered by Medicare Part B will continue 
under current rules, but they also may be covered under the new 
drug benefit once the Part B coverage is exhausted.
    The President's plan also strengthens and stabilizes the 
Medicare+Choice program. Today, most Medicare+Choice plans 
offer prescription drug coverage using the excess from payments 
intended to cover basic Medicare benefits. Under the 
President's proposal, Medicare+Choice plans in all markets will 
be paid explicitly for providing a drug benefit in addition to 
the payment they receive for current Medicare benefits. Plans 
will no longer have to depend on what the rate is in a given 
area to determine whether they can offer a benefit or how 
generous it can be. This will eliminate the extreme regional 
variation in Medicare+Choice drug coverage, in which only 23 
percent of rural beneficiaries with access to Medicare+Choice 
have access to prescription drug coverage, compared to 86 
percent of urban beneficiaries.
    And beneficiaries will not lose their drug coverage if a 
plan withdraws from their area, or if they choose to leave a 
plan, because they will also be able to get drug coverage in 
the traditional Medicare program. We estimate that plans will 
receive $54 billion over 10 years to pay for the costs of drug 
coverage.
    Beneficiaries will have access to an optional drug benefit 
through either traditional Medicare or Medicare managed care 
plans. Those with retiree coverage can keep it and employers 
would be given new financial incentives to encourage the 
retention of these plans.

MEETING KEY PRINCIPLES

    We are flexible on the details of how a Medicare drug 
benefit is provided, but the design must ensure that we meet 
the President's key principles of a benefit that is voluntary, 
affordable, competitive and efficient. We have reviewed draft 
descriptions of the plan, but we have not seen the details. 
Based on this review, we believe the new Republican plan marks 
important progress. However, we believe it does not meet the 
President's test of a meaningful benefit that is affordable and 
accessible for all beneficiaries. Key among our concerns are 
the apparent lack of an individual premium subsidy for all 
beneficiaries, an inadequate level of support, and reliance on 
insurers who are unlikely to participate.

Will prescription drug coverage be available?

    The Republican plan appears to rely extensively on 
participation by private insurers who have made clear that 
stand-alone drug policies are not feasible. Subsidizing private 
insurers instead of establishing a reliable Medicare benefit 
means that outpatient prescription drugs would not be part of 
the Medicare benefits package like doctor or hospital care. 
Beneficiary premiums would pay for expensive, private Medigap 
plans whose administrative costs are on average more than 10 
times higher than Medicare's, according to National Association 
of Insurance Commissioners statistics, rather than an 
affordable Medicare option. Furthermore, Medigap plans have 
little experience negotiating with drug manufacturers and 
relying on numerous plans does not pool the purchasing power of 
seniors; both elements are needed to keep the benefit 
affordable.
    Building on the private Medigap insurance market would be 
especially difficult in sparsely populated rural areas, where 
risk pools are smaller and seniors are more likely to have 
higher costs, as a report released by the President today 
shows. There also is no certainty or stability in the drug 
coverage options in the Republican proposal. Even if some 
insurers do offer coverage, they would likely come in and out 
of the market, move to profitable areas, and significantly 
modify benefit design from year to year based on prior year's 
experience. This would result in the same pull-outs and 
uncertainty we see in managed care today.
    The drafts of the new proposal suggest reliance on a ``fall 
back'' mechanism, in which the government would ensure 
availability everywhere. This seems to acknowledge the weakness 
of the drug-only insurance plans. We continue to believe that 
Medicare should provide drug coverage the same way that 
virtually all private insurers do--by contracting directly with 
pharmacy benefit managers in each region of the country. This 
will ensure that all beneficiaries have access and that the 
pharmacy benefit managers can negotiate the best prices.

Is drug coverage affordable to all beneficiaries?

    The Republican plan does not provide direct premium 
subsidies to individuals with incomes above $12,600 a year. 
Instead, it appears to rely on indirect subsidies of 25 to 30 
percent to lower premiums. It is unclear that this amount of 
subsidy will ensure that affordable coverage is available to 
all or would be equally affordable in all regions of the 
country.
    There are several additional areas where we have questions 
about the new Republican plan. These include:
     Is it a defined benefit? The Republican plan 
appears to allow insurers to offer an unspecified ``standard'' 
benefit, or an actuarial equivalent benefit. Only the stop-loss 
amount is specified, and insurers would set deductibles and 
copays.
    This could lead to beneficiary confusion and benefit 
packages designed for ``cherry-picking'' of low-cost, healthy 
enrollees, with insurers offering no deductible, low copays, 
and a low benefit cap that leaves a large gap before the stop-
loss kicks in. This would be a step backwards from the Medigap 
reforms of the early 1990s that standardized benefits so plans 
compete on price and quality rather than consumer confusion.
     Does the plan assure access to needed medications? 
The Republican plan appears to require insurers to cover only 
all ``major'' therapeutic classes of drugs. Depending on how 
that is defined, and the degree to which each insurance company 
is permitted to define it, some seniors could be left without 
the medications they need. It also appears to require a 
beneficiary to go through a formal appeals process to get 
coverage of off-formulary drugs the physician deems to be 
medically necessary, which could limit access. Furthermore, the 
Republican's multi-insurer approach breaks up the pooled 
purchasing power of seniors, forcing insurers to reduce costs 
through restrictive formularies and limited pharmacy choice.
     Will the plan increase access to coverage for 
rural beneficiaries? The Republican plan appears to rely on 
additional assistance for Medicare+Choice plans as a means of 
bringing those plans into rural areas where, because of sparse 
health care service delivery structures, managed care has often 
had difficulty thriving. It is not clear this will work.
     Will the proposed approach to remove international 
drug pricing disparities work? We agree that Americans, 
particularly those who now lack prescription drug coverage, 
should not disproportionately subsidize drug development. 
However, it is not clear that having the U.S. Trade 
Representative negotiate to address drug price controls in 
other nations will result in fairer prices here at home. This 
proposal could simply result in higher prices abroad without 
having an impact on the high prices American consumers now pay.
     Will the plan result in more efficient Medicare 
administration? We understand that the Republican plan would 
create a new Medicare Oversight and Management Administration 
(MOMA) to administer the drug benefit and the Medicare+Choice 
program. It appears to be adding a new layer of bureaucracy 
since many MOMA activities would duplicate those that HCFA 
would also need to continue, such as beneficiary education, 
resulting in duplication and ignoring HCFA's expertise.

CONCLUSION

    We may be turning a corner in our efforts to secure the 
Medicare drug benefit that we all agree is needed. We are 
nearing a workable consensus on the broader outlines of how the 
benefit should be structured. Critical concerns about providing 
an affordable, accessible, meaningful benefit and relying on 
private insurers remain. But we are beginning to get into the 
all-important, deeper details of how to make sure the benefit 
can succeed. While a great deal of work remains, momentum is 
now with us. The challenges before us can be met if we continue 
the constructive approach that we have, together, taken to 
date. And I look forward to continuing to work with you as we 
enter the next phase on this critical issue.

# # #

                                

    Chairman Archer. Thank you, Ms. DeParle. And again, thank 
you for your patience in waiting to present your testimony. We 
are delighted to receive it. Hopefully the spirit of 
cooperation will permeate the structure of our procedures as we 
move forward.
    If I may, I would like to ask you just a few questions.
    Have you prepared the President's program in statutory 
language so that we can be able to put it side by side with 
whatever other program we might be looking at?
    Ms. DeParle. Yes, sir, we have. I believe it was submitted 
in February or March.
    Mr. Claxton. March.
    Ms. DeParle. It was submitted to the Congress.
    Chairman Archer. Has it been in any way revised or changed 
since then? Or is it intact as it was submitted in March?
    Ms. DeParle. It hasn't been revised, sir, but we have said 
that we want to work with the Congress to add to our program a 
catastrophic benefit to protect beneficiaries who have really 
high drug expenditures. We intend to do that. That is an 
outline.
    Chairman Archer. That is the item that Ms. Eshoo mentioned 
in the stop-loss concept?
    Ms. DeParle. Yes, sir.
    Chairman Archer. Has there been a CBO analysis revenue 
assessment of the plan that you sent up in March?
    Ms. DeParle. I know that our actuaries have looked it. I 
haven't seen a CBO analysis. I will ask Mr. Claxton is he is 
aware.
    Mr. Claxton. I believe that they estimated the overall 
plan, but they didn't estimate the catastrophic component 
because----
    Chairman Archer. I understand. That is something that still 
needs to be worked out.
    Mr. Claxton. Right.
    Chairman Archer. Okay.
    Ms. DeParle. I am remembering now that at the last hearing 
in front of your Health Subcommittee CBO testified and they did 
say it was going to be around $159 billion over 10 years.
    Chairman Archer. Do you remember a 5-year number?
    Ms. DeParle. No, sir, I don't. I am sure I can supply that 
for the Committee.
    Mr. Claxton. It is $38 billion over 5 years.
    Chairman Archer. OK, $38 billion and $159 billion.
    I apologize. I was not present at that hearing, so some of 
my questions may be a tiny bit redundant, but I will try to 
keep it very brief.
    Chairman Thomas is talking about a $40 billion expenditure, 
so we are in the same ballpark as far as dollars are concerned 
to the taxpayer. Is that fair to say? Over a 5-year period.
    Ms. DeParle. I know that is what the Budget Resolution 
says, and I know that is what he is trying to design. I believe 
that ours would be more expensive with the catastrophic.
    Mr. Claxton. In the President's proposal, we propose a 
catastrophic plan to start in 2006, consistent with the amount 
of money that was available in the budget. If our catastrophic 
program started earlier, it would cost more than $38 billion.
    Chairman Archer. I see.
    Based on your own analysis, could you give us some idea of 
what the first 5 years would be if you put the catastrophic or 
stop-loss in effect at inception?
    Mr. Claxton. We can certainly provide that for the 
Committee. We don't have it right now.
    [The information follows:]

    Ms. DeParle: If we take the basic prescription drug 
benefit, as proposed by the President in his February budget, 
and move the effective date one year earlier, to 2002, and add 
an out-of-pocket limit of $4,000 indexed to growth in the drug 
component of the CPI, the net federal budget impact of the 
entire drug would be $79 billion for FY 2001-2005, and $253 
billion for FY 2001-2010. This policy and this estimate assume 
a beneficiary premium contribution for only the base benefit, 
so the out-of-pocket protection would be fully financed by the 
federal government.

    Ms. DeParle. If we take the basic prscription drug benefit, 
as proposed by the President in his February budget, and move 
the effective date one eyar earlier, to 2002, and add an out-
of-pocket limit of $4,000 indexed to growth in the drug 
component of the CPI, the net federal budget impact of the 
entire drug benefit would be $79 billion for FY 2001-2005, and 
$253 billion for FY 2001-2010. This policy and this estimate 
assume a beneficiary premium contribution for only the base 
benefit, so the out-of-pocket protection would be fully 
financed by the federal government.
    Chairman Archer. We still do not have the statutory 
language of the----
    Ms. DeParle. No, sir, I do not. I am sure I could supply 
that for the Committee.
    Mr. Claxton. It is $38 billion over 5 years.
    Chairman Archer. That was $38 billion. Okay, $38 billion 
and $159 billion. All right. I apologize, I was not present at 
that hearing, so some of my questions might be a tiny bit 
redundant. But I will try to keep it very brief.
    Chairman Thomas is talking about a $40 billion expenditure. 
So we are in the same ballpark as far as dollars to the 
taxpayers are concerned over a 5 year period. Is that fair to 
say?
    Ms. DeParle. Well, I know that is what the budget 
resolution says, and I know that is what he is trying to 
design. I believe actually that ours would be more expensive 
with the catastrophic.
    Mr. Claxton. In the President's proposal we propose a 
catastrophic plan to start in 2006, consistent with the amount 
of money that was available in the budget. If our catastrophic 
program started earlier, it would cost more than $38 billion.
    Chairman Archer. I see. All right.
    Could you, based on your own analysis, give us some idea of 
what the first 5 years would be if you put the catastrophic or 
stop loss in effect at inception?
    Mr. Claxton. We can certainly provide that for the 
Committee; we do not have that right now.
    [The information was not received at the time of printing.]
    Chairman Archer. OK. We still do not have the statutory 
language of the Thomas-Peterson bill. Hopefully, we will have 
it by either very late tonight or before the close of business 
tomorrow. Sometimes I have to add ``hopefully'' the way things 
work here, and sometimes the difficulty in scoring takes a 
longer period of time.
    In the end, the Committee needs to be concerned about the 
total dollar cost to the taxpayers as well as the total 
affordability to the individual beneficiary. Moving to the 
beneficiary side of it, what does your proposal require from 
the standpoint of the beneficiary who elects to go into this 
program? As I understand it, both would be a matter of choice; 
people could either elect it or not elect it. So can you tell 
me, Ms. Eshoo mentioned $44 a month, is that the figure that 
you also would ascribe to, without the stop loss or 
catastrophic?
    Ms. DeParle. The premium starts off in the first year, sir, 
at around $26 I think, and then it rises as the cap on the 
benefit goes up to $5,000. So the premium goes up to about $50 
four or 5 years out.
    Chairman Archer. All right. Is it fair to say that when 
fully implemented with the $5,000 coverage it would be $50 a 
month?
    Ms. DeParle. That is what our estimates are, yes, sir.
    Chairman Archer. OK.
    Ms. DeParle. And there is also coinsurance and we expect 
beneficiaries to pay 50 percent.
    Chairman Archer. Yes. Yes. Okay. So with the $26 premium in 
the first year, what coverage would that provide?
    Ms. DeParle. It would provide coverage up to $2,000 for 
drug spending from the first prescription that a beneficiary 
had covered, and then the beneficiaries would also get the 
benefit of the lower prices that the pharmacy benefit managers 
could negotiate if they had cost above the $2,000.
    Chairman Archer. OK. All right. So you would get, in 
effect, $1,000 of coverage for a $26 a month premium, as it 
were? Because there is a 50 percent copay and you have up to 
$2,000, $1,000 has got to be paid by the beneficiary?
    Ms. DeParle. Yes, sir.
    Chairman Archer. OK. As of this time, it is not possible to 
compare that to the Thomas-Peterson plan because we do not know 
precisely what those numbers are going to be. We will have 
those when we mark up next week.
    I think that defines to some degree what we are talking 
about. Do you have any view as to what participation would be 
required by the beneficiary for the catastrophic or stop loss 
benefit?
    Ms. DeParle. No, sir, we do not. That has been something 
that has been criticized quite a lot that we have not put a 
plan on the table. But we were really sincere in wanting to 
work with the Congress to look at the contours of that.
    Chairman Archer. No, that is fine.
    Ms. DeParle. There are a number of different ways to do it; 
there are three or four already out here. We are open to 
discussing it.
    Chairman Archer. Do you anticipate that there would be an 
additional premium for that stop loss coverage of some number, 
whatever it might be?
    Ms. DeParle. We have not made a decision about that yet. 
That is one way of doing it is to ask for an additional 
premium. Another way is to have a lower benefit but not ask for 
an additional premium. So we are still open to discussing it.
    Chairman Archer. All right. The various plans that are 
being proposed by different people have some differences 
between plans other than the Thomas-Peterson and the 
administration's proposal, but, apparently, all of them provide 
for choice and election rather than being a mandatory program 
that you would have to participate in if you were a Medicare 
beneficiary. Is there a concern that the Committee should have 
about adverse election?
    Ms. DeParle. Yes, sir. In any of these plans, that is 
something that you need to look at.
    Chairman Archer. And what would be the way that we could 
address that?
    Ms. DeParle. Well, an important way to address it is, 
according to the actuaries that we have consulted as well as, 
frankly, private insurance plans that provide these kinds of 
benefits, is we have to make sure that the subsidy that we 
offer to beneficiaries is adequate to encourage most of them to 
participate. Again, it is voluntary. But just as we have done 
with part B of Medicare, we want to have this subsidy be 
adequate to encourage them to participate. Why do we want to do 
that? Because if we do not do that, then the ones who 
participate are the ones who are really the sickest and that 
just creates a very difficult risk pool, you are familiar with 
those principles, and then adverse selection on top of that.
    So I think that is a key parameter to keep in mind as we 
evaluate the various plans.
    Chairman Archer. I am not surprised. I am always realizing 
that the ingenuity of the American people in this great land of 
the free is such that people are going to decide what is in 
their own best interests. And if I am a retired citizen and 
covered by Medicare, and I am one of the 20 percent that does 
not pay anything on drugs, I am basically healthy and I do not 
see that I am going to have a major drug obligation, I am not 
going to get into this. Whether the premium is $26 a month or 
whether it is $50 a month, I am going to say, gee, that is a 
lot of money for me over a year's time, why should I do that. 
And I am one of the very ones that you need to get in to get 
away from the adverse selection. So what do we do about that? I 
am not just identifying this as a problem for your program. I 
think it is potentially a problem for all of them.
    Ms. DeParle. I think we have to look at the experience of 
other programs. You could make the same argument for that with 
Medicare part B. There are people who have very low costs 
during the year. So what entices them to come in? I think what 
it is with this population, in particular, while they may not 
be sick right now, they know that there may be a time when they 
are sick and that they will need that. It is the whole 
principle of insurance. It seems to have worked OK with 
Medicare part B and I believe that it will work.
    I see your point, but I think that is why the actuaries and 
the private insurance experts that we have talked to say it is 
important to make sure that the government's contribution is 
substantial enough. Also, there are rules about when you can 
come in and you have to make an election at the beginning and 
that sort of thing.
    Chairman Archer. OK. Thank you very much.
    Mr. Rangel.
    Mr. Rangel. Thank you.
    There are some Republicans that make the accusation that 
the President and Democrats really do not want to resolve this 
problem but would prefer to have it as an election year issue. 
I do not know how they can think that since we do not have the 
slightest clue as to what finally the Republicans, with their 
newly found bipartisan Democrats, are going to come up with and 
say this is the solution. I, for one, really believe that older 
folks do not want a Democrat solution or a Clinton solution or 
a Republican solution, they want relief.
    It seems as though the so-called Democrat solution is to 
treat prescription drugs as we treat medical care and to say 
people are entitled to it and do it through the Medicare 
Program. Others believe that we can do away with Medicare and 
have HMOs take over this type of responsibility and subsidize 
the private institution. If we wanted to shatter this myth that 
this was some political conspiracy, has Mr. Thomas and his 
bipartisan group approached the administration to see whether 
or not they could come up with a bipartisan bill with the 
President's support?
    Ms. DeParle. I have not been approached, Mr. Rangel.
    Mr. Rangel. Would you know whether or not there has been an 
attempt by the Republican leadership to get the President on 
board this piece of legislation that Mr. Thomas is putting 
together?
    Ms. DeParle. I think I would. I have said, and I said this 
at the hearing that the Subcommittee had last month, we are 
open to sitting down and working with whatever group up here 
wants to work with us to try to enact a real Medicare 
prescription drug benefit. We are open to sitting down whenever 
and wherever they want to talk. But as far as I am aware, that 
has not happened yet.
    Mr. Rangel. Some Republicans think that they have to fight 
both Democrats on the Committee as well as the President. Is 
Mr. Stark's Subcommittee recommendations that far apart from 
the President's recommendations?
    Ms. DeParle. The Subcommittee recommendations being----
    Mr. Rangel. The Democratic Caucus.
    Ms. DeParle. From my understanding of it, the differences 
are fairly minor. They have to do with implementation dates and 
with things at the catastrophic----
    Mr. Rangel. So the Republicans would not have to worry that 
they are dealing with a two-headed monster. It would be a one-
headed monster, the differences, right? It is possible that the 
Democratic Caucus and the White House could find a meeting of 
the minds.
    Ms. DeParle. Yes, sir, I think it is.
    Mr. Rangel. You are talking a lot about bipartisanship, and 
the Republicans are talking a lot about markup. How do you 
think that is going to work?
    Ms. DeParle. Well, at some point we are all going to have 
to get together and put all of these issues on the table and 
work through each one of them. The devil, I think Ms. Johnson 
is the one who said it this morning, but the devil is in the 
details. There are a lot of commonalities but we have yet to 
really roll up our sleeves and do the hard work. Maybe the 
markup starts that.
    Mr. Rangel. I yield to Ms. Johnson to see how we are going 
to do all this rolling up the sleeves between now and Monday.
    Mrs. Johnson [Presiding]. Welcome, Administrator DeParle. 
It is my understanding that in the material that you gave us on 
the President's summary that your estimates of cost assume 95 
percent participation.
    Ms. DeParle. Yes, that is right. The actuaries believe that 
the levels we are talking about would ensure that level of 
participation.
    Mrs. Johnson. OK. I just wanted to clarify that. I agree 
with your earlier statement that to get participation the plan 
has to be rich enough to attract it. By my calculations, to pay 
the $24 monthly premium and the 50 percent copayment, you would 
have to pay $1,288 for a $1,000 benefit. In other words, you 
would have to need to spend $1,388 to get a $1,000 benefit. 
About 80 percent of the seniors have less than $1,388 
expenditures. So they would not be motivated under your plan to 
choose this plan if they were part of the 80 percent that did 
not have that benefit.
    Now the same criticism could be made of every other plan on 
the table. One of the reasons why the group that I worked with 
was so intent on catastrophic is because we thought the 
catastrophic benefit would give peace of mind to the people 
whose drug costs were only $500, $600, $700 but they were 
paying actually more than that between the copays and the 
premiums for the commensurate benefit.
    I asked the Congressional Budget Office, because I think 
this is very important to get on the record in this discussion, 
I asked the Congressional Budget Office what would be the cost 
of catastrophic if it were mandatory. So this is the lowest 
possible cost. Nobody is proposing mandatory anything. But I 
wanted to see if you spread the cost of catastrophic across 
every single senior in America what would it cost. And this is 
what it would cost: In the first year, for a $6,000 threshold, 
it would cost $21.60, and by 2010, it would cost $38.70, almost 
$40, almost as much as your 10 year premium would rise to $44. 
So, if we put catastrophic in there at $6,000, you would have a 
$44 premium and a $40 catastrophic premium.
    Now I understand you are expecting some government cost-
sharing. I just want to put on the table how really expensive 
this is.
    Mr. Stark. Would the gentlelady yield for just a moment on 
the numbers.
    Mrs. Johnson. Yes.
    Mr. Stark. The President's plan for $1,288 would give you 
$2,000 worth of benefits, not $1,000.
    Mrs. Johnson. Well, see, but $1,000 of that is your own 
money, and $1,000 is the government's money. So you spend 
$1,000 of your money on copayments, $288 on premiums, and for 
that you get a $1,000 benefit.
    We will have to discuss this later because I do not want to 
get stuck down in the conceptual----
    Mr. Stark. OK. But you are wrong.
    Mrs. Johnson. I think I am right. In other words, if you 
have to pay for first dollar, if your prescription is $50, you 
pay $25, they pay $25. So from the very beginning you are 
paying half over and above your premium. So before you benefit 
by $1,000 worth, you have spent $1,000. So that is why I say it 
that way.
    Ms. DeParle. If that is what your level of spending is.
    Mrs. Johnson. If it is lower, you spend less.
    Ms. DeParle. That is right.
    Mrs. Johnson. And I figured that out all along the 
continuum. The fact is that you do not get to the point where 
there is much of a pay-off for low drug users because of the 
premium and the copays. You see, the premiums offset the copays 
until you get up. Anyway, I do not want to spend too much time.
    Ms. DeParle. I think what we are arguing about, as you 
point out, this is an issue, an aspect that every single plan 
should be analyzed with respect to. And arguing about the 
principle of insurance, you being from Connecticut, I am sure 
you know better than most that----
    Mrs. Johnson. But remember, those of us who were here 
during catastrophic, and I voted against repeal, the concern of 
the seniors was that they had to pay something for something 
that they did not want to buy because they did not believe they 
needed it.
    In my estimation, the only real lure of this program is not 
going to be the 50-50 up to $2,000. It is going to be the 
catastrophic coverage. But you have to combine them, and all 
the plans do. I just want to put on the record that combining 
them is very expensive. And if you are not going to take it out 
of premium, you are going to have to take it out of general 
funds. At a certain point, we are going to have to engage in 
the fact that in 10 years I believe it is Medicare is going to 
be 25 percent of all Federal spending, and that is without 
Social Security or the other senior benefit programs including 
Medicaid and long-term care costs. So that is an important 
problem.
    Then I also wanted to ask you why you made the decision to 
have your plan adjust for inflation rather than for the drug 
inflation costs, rises in drugs. When you talk to seniors they 
will tell you right away Social Security adjusts for inflation, 
my rent goes up more; Social Security adjusts for inflation, 
Medicare goes up more. So if we do not adjust this program to 
begin with for drug costs, we will not give our seniors what we 
are telling them that we will give them. Now if we do that, of 
course it will be more expensive and the premiums will go up 
more rapidly. But I think we have to be honest about that. I 
think one of the problems we are going to have to tackle 
together is this issue of inflation versus drug costs. If you 
want to comment on that, you are welcome to do so.
    Ms. DeParle. I think you are asking a lot of very good 
questions. As I have said many times, we are open to sitting 
down and talking to you about details like the ones you are 
raising.
    I do think though a lot of what you have raised goes to the 
very heart of the principle of insurance and whether you 
believe that people want insurance or not. My understanding 
from all the actuaries and experts we have talked to is that a 
system like the one we have proposed can work. Maybe others can 
work as well, but ours can work.
    I disagree just a little bit with Mr. Thomas on that in the 
sense that when I go out and talk to our beneficiaries, yes, 
they do want catastrophic coverage, but they also think they 
really need help right now and they want help with covering the 
basic cost of drug coverage.
    Mrs. Johnson. I hear what you are saying about that. But a 
95 percent assumption behind your cost estimates is, to me, 
really misleading because there are so many people out there, 
every State employee has far better coverage than this. And the 
idea that they are going to give up their better coverage, and 
there is no chance they are going to lose it, that a lot of 
public employees will give up their better coverage to make 
that rate 95 percent, especially without catastrophic, is not 
common sense.
    Now if we add catastrophic, that may help. But we are never 
going to get that shift from the private sector to the public 
sector, nor do we want it. So cost estimates based on 95 
percent I think are really unrealistic. But these are the 
details we will have to consider.
    Ms. DeParle. And let me be clear, too, Ms. Johnson, we did 
not tell someone, the actuaries to assume 95 percent. What we 
asked them to do was to help us design something that would 
achieve almost universal participation by beneficiaries. They 
believe, based on the parameters of the plan that we have come 
up with, that it would do that.
    Mr. Thomas is talking to analysts from CBO. I am sure they 
have views of this. There are lots of experts out there who 
have views about this. That is one of the details that you 
alluded to that we have got to sit down and start talking 
about.
    Mrs. Johnson. I would really like to talk to your 
estimators about why they would estimate 95 percent when we 
know that two-thirds of seniors already have some kind of drug 
coverage and one-third have very good drug coverage. I think we 
need to have them come talk to the Committee about why they 
would do this.
    I do not want to take more time just because I have the 
Chair, but I do want to put on the record that I also strongly 
disagree, and I cannot emphasize this enough, and I want to 
emphasize it in public, I strongly disagree with your funding 
mechanisms. Personally, to assume that PBA extenders would 
provide $39 billion more over 10 years when, frankly, I am 
doing the best I can to defer most of the PBA requirements, 
because we are already saving more than was anticipated when we 
passed those provisions in PBA, so since we are saving more 
from Medicare than we anticipated, I certainly am not going to 
support a 15 percent cut in home health benefits, I certainly 
am not going to support a continued decline in uncompensated 
care for hospitals and some of the other factors.
    So not only do I think that your PBA extenders estimate is 
not going to materialize, but I think your estimate of $8 
billion over 10 years through a competitive bidding for 
Medicare+Choice when the choice plans are crumbling because 
they are so underfunded, and the same with $25 billion over 10 
years for reduced Medicare spending in a number of other areas, 
most of them competitive bidding and stuff, I cannot agree that 
the money you say is going to materialize is going to 
materialize. So I think both the cost of adding catastrophic 
coverage and the real funding have to be looked at because it 
is from those assumptions that you draw your $24 premium.
    Ms. DeParle. We will be happy to sit down with you and talk 
about the details.
    Mrs. Johnson. Thank you.
    Mr. Thomas.
    Mr. Thomas. Thank you, Madam Chairman. I apologize for 
running out and trying to get something to eat, but I was 
listening to the discussion that was going on.
    It is true, one of the more difficult parameters in trying 
to create a product is to not give too much away to get people 
to participate, but also give enough away to encourage people 
to participate. The Medicare part B, seventy-five cents on the 
dollar attracts 97 percent of the people. I guess we could go 
to ninety cents on the dollar and get that other 3 percent. It 
is a question of what you do in return.
    Partially I think, although I am somewhat concerned about 
the way their actuaries determined the 95 percent take-up rate 
on the President's plan, it is in part A function of how much 
you subsidize, and they subsidize fifty cents on the dollar up 
to $2,000. It is kind of like questionnaires today, it is how 
you ask the question. If you asked the question, would you like 
to have protection there when the costs exceed your ability to 
pay? They will say, yes. Do you want a program that covers your 
first dollar expense? They will say, yes. So as you get in, you 
have got to be very careful what you ask, how you ask it, and 
what you are looking for.
    But if, in fact, CBO scores, for example, the bipartisan 
proposal near 90 percent, we are in the ballpark of shaping a 
program that most people think is one that is worthy of 
participating in. I think we should set that aside temporarily.
    I do think that we should look at the record because the 
Medicare Commission built a program which was an insurance 
program. The President offered initially in his budget a 
program that really did not have catastrophic. It was brought 
to the catastrophic table by our argument that it should really 
be an insurance program. It did not kick in until 2006 and with 
not enough details for CBO to deal with. And then the 
Democrats, in adding to the President's program, in that recent 
Rose Garden ceremony, offered catastrophic today similar to 
ours, but did not have details and said the Secretary would 
trigger it. There was no cost associated with it. So it was not 
really a realistic plan.
    I just want to underscore that from the very beginning we 
started with the concept of building an insurance plan, not so 
much for what seniors even think they need today or over the 
next three to 5 years. It is going to take a major push on 
everybody's part to get this program in place and you are not 
going to be able to go in and fiddle with it periodically on 
fundamentals like whether or not it is an insurance program or 
a prepaid plan. We just thought, looking down the road over the 
next five to 10 years and the costs that seniors would be 
facing, it would be worth it to get in place a program which 
was a true insurance program.
    I also heard Mr. Rangel's question of you. I would ask you, 
Ms. DeParle, did you consult with the Chairman of the House 
Subcommittee when you were making up your Administration's 
budget that you were going to present to us?
    Ms. DeParle. No, sir.
    Mr. Thomas. You did not?
    Ms. DeParle. No.
    Mr. Thomas. So some of the things that are executive branch 
involvement I did not get to participate in, and some of the 
things that are Legislative Branch involvement you did not get 
to participate in. Frankly, down the road we both wind up 
participating. So the idea that in building this bipartisan 
plan we did not consult with you and, therefore, somehow it is 
tainted is once again an argument that is presented with 
absolutely no substance or usefulness in advancing the fact 
that the first panel had six Democrats and one Republican and 
five of the six Democrats sounded awfully similar in the idea 
that they wanted competition and that they wanted the 
administrative structure outside of HCFA. As a matter of fact, 
the gentleman from Maryland, as he indicated, was not so 
disturbed at what it was, but that it did not have a defined 
benefit. I actually think that is resolved as well, and we are 
going to sit down and work on it.
    The only way we are going to move forward is the way we 
moved forward in 1997, looking at what we have in common, 
stressing the commonalities, and building on that. To the 
degree that the questions continue to visit what somebody said 
behind closed doors, slipped to somebody in a leaked procedure, 
to the degree that you use pejorative terms, as you define them 
to be pejorative, to try to slow down the ability to come 
together in a relatively short time to resolve our mutual 
problem means you do not want it resolved, no matter how much 
you say you are for it.
    There is a bipartisan proposal. It will continue to build. 
Frankly, the judgement of the bipartisan proposal will not be 
the vote in this Committee. Everybody knows how people get 
along in this Committee. The proof of the bipartisanness of the 
measure will be the vote off the floor of the House. I think 
you will find that when this measure reaches the floor there 
will be an overwhelming bipartisan vote. My only hope is that 
it will be sufficiently bipartisan to be able to carry over to 
the Senate and wash those folks up on the beach of reality as 
well so that we can possibly move forward with the Senate 
proposal, get the conference, invite the administration to 
fully participate, as we did in 1997, and surprise everyone by 
doing something for seniors, and that is modernizing Medicare 
and passing prescription drugs before we go to the election. 
That would be a pleasant memory that I would love to provide 
the President of his Administration, and, frankly, we should 
not have beneficiaries wait 1 day longer than necessary to 
provide this very useful service.
    Thank you, Madam Chairman.
    Mrs. Johnson. I agree with that. And it would be a very 
pleasant memory.
    Ms. DeParle. It would be a nice memory for me, and I would 
like to work together with you on it.
    Mrs. Johnson. Mr. Stark.
    Mr. Stark. Thank you, Madam Chairman.
    I love this discussion on bipartisanship. We Democrats 
provided a couple hundred votes to help the Republicans carry 
the Patient Bill of Rights on the floor. That has done us 
precious little good in the Senate. We cannot get them to move 
to carry our bill at all. So we are getting tired of getting 
all these Democratic votes to help the Republicans carry their 
bill only to have it defeated in the Senate.
    A couple of other housekeeping things here. I would just 
like to go over--I took my shoes and socks off to do this math, 
Madam Chair, and I know we are not taking the standardized math 
test here--but as I understand the President's bill, and far be 
it from me to be defending the President, but if a person were 
to receive $2,000 worth of drugs from the pharmacy, they would 
pay $1,000 in cash as a copay and their premium, if we assume 
it is $24, would be $288. Thus, for an outlay of $1,288 of cash 
they would receive $2,000 in pharmaceuticals. If they go in and 
buy a $2,000 prescription, one prescription let's say, they 
would pay $1,000 copay, right, so they get $2,000 worth of 
drugs for $1,000 copay.
    Mr. Thomas. Would the gentleman yield because I think you 
are on to something. Would the gentleman yield briefly on that 
point because I want to agree with him. Would the gentleman 
yield just very briefly?
    Mr. Stark. OK. I know you do.
    Mr. Thomas. You do not want me to agree with you?
    Mr. Stark. I do. It is so obvious that----
    Mr. Thomas. If the partnership pays out $2,288, the 
government covers $722 of it----
    Mr. Stark. I would reclaim my time.
    Nancy, I have some questions about managed care and HMOs 
and that sort of thing and drugs. Not knowing what is going to 
happen, I heard Mr. ``Bipartisan'' Peterson this morning 
suggest that we are going to save managed care in his rural 
district, there are no HMOs in his district I believe, I know 
there are no HMOs in North Dakota, and can you estimate for me 
how much you would have to pay per person to get an HMO to go 
into Fargo or Oaks, North Dakota. Any idea?
    Ms. DeParle. I am trying to see if I can remember what 
the----
    Mr. Stark. The population of Oaks is 3,000.
    Ms. DeParle. Well, what the county payments would be in 
that area already. They are probably whatever the floor is.
    Mr. Stark. Maybe $300 or $400. Is there any amount of money 
under which an HMO could survive?
    Ms. DeParle. Well, it depends on a lot of factors. It 
depends on a network. It depends on whether there are people in 
those areas who want to go in. There is one statistic though 
that is at least chastening when you look at this, which is 
that around 26 million of the 39 million Medicare beneficiaries 
right now have access to a managed care plan.
    Mr. Stark. And do not join.
    Ms. DeParle. Well, around 7 million have. But that means 
there are others who have not, even though, in my estimation--
--
    Mr. Stark. Why would anybody in their right mind join a 
managed care plan, and HMO except to get a pharmaceutical 
benefit? You restrict your access to physicians, whereas under 
Medicare fee-for-service you can go to any physician you want. 
You restrict your access to hospitals. You are denied certain 
covered services if the managed care plan decides to withhold 
benefits from you. Why would you join a managed care plan 
except to get the drug benefit?
    Ms. DeParle. You might join one if you looked at the price 
of Medigap, which, as you referred to earlier this morning, is 
very expensive and the drug benefit you get is sometimes less 
than the amount you are paying. If your doctor is in the 
managed care plan and they offer prescription drugs which you 
cannot get through Medicare.
    Mr. Stark. I said if you did not get prescription drugs why 
would you do it. You can still go to that doctor, can't you?
    Ms. DeParle. Yes, sir. But in the past, some of the managed 
care plans have had lower coinsurance.
    Mr. Stark. Or none.
    Ms. DeParle. Or none. In fact, they have had quite generous 
premium arrangements. So there have in some cases been 
benefits. But I have been surprised actually that even where 
they are available many beneficiaries have not joined. I do not 
know what the reason is for that. But that is one of the things 
that makes me a little nervous about depending too heavily on 
that part of the marketplace.
    Mr. Stark. Then why would we give in managed care plans 
more money if we are already, as we suspect, overpaying them? 
In other words, we pay more to the managed care plans compared 
to paying for those same people in fee-for-service Medicare. So 
why would we give more money to managed care plans instead of 
just letting every Medicare beneficiary have a drug benefit, 
which would thereby save the managed care plans money, would it 
not? In other words, if we provide a drug benefit to every 
Medicare beneficiary, the managed care plans or the HMOs who 
now provide a drug benefit save money, do they not?
    Ms. DeParle. Well, they save money or they make money, 
depending on how you look at it. Under the President's plan, 
$54 billion of the $160 billion in our plan would be going to 
managed care plans to cover drug benefits. The problem right 
now is that they need to cover drug benefits, as you suggest, 
to be competitive. I have talked to a number of the chief 
executive officers of these plans and they tell me that to 
provide the kind of benefit that Medicare beneficiaries want 
they have to be able to provide prescription drugs and some of 
those other things. But under the Medicare+Choice law, we are 
not supposed to be reimbursing them to provide prescription 
drugs.
    The solution is we need a prescription drug benefit for all 
Medicare beneficiaries. I guess I would have to say, Mr. Stark, 
that I think there are some areas of the country where we may 
never have managed care plans. That may be OK as long as 
beneficiaries have access to a decent, affordable prescription 
drug benefit. And that is why I would like to work together 
with this Committee to get that done.
    Mr. Stark. Thank you.
    Mrs. Johnson. Mr. Levin.
    Mr. Levin. Let me just say for those of us who are left 
here in terms of bipartisanship, and Mr. Thomas, your comment, 
I think as I look back at the legislation that has been within 
the jurisdiction of our Committee, if there is not 
bipartisanship on the Committee, the legislation does not 
become law. So if there really is no effort to forge a 
bipartisan kind of package here, there may be some Democratic 
votes on the floor, a minority, but it will not become law. 
Essentially, what we will be doing is positioning ourselves and 
I think doing a lot of posturing.
    So I think the test is not the floor, whether there will be 
a minority, and probably a small minority, of Democratic votes, 
but whether between now and Monday there can be the kind of 
dialog among Democrats and Republicans here on the Committee 
and with the administration that we can proceed other than 
essentially on a partisan basis here in the Committee.
    Therefore, I want to ask you, Ms. DeParle, because we have 
gotten lost in a lot of speculative details, we do not have a 
bill in front of us, just to lay out so that everybody 
understands the challenge between now and Monday, there has 
been some reference to common ground, there us if you would in 
as simple terms as you can what you think are the basic 
differences on key items between what is being proposed by Mr. 
Thomas and is embodied in the President's proposal. In your 
testimony I think you lay these out in terms of whether it is a 
defined benefit, in terms of whether it will cover needed 
medications. But try to spell out the four or five major 
differences that you think need to be faced between now and 
Monday, or whenever we are going to get our heads together, if 
we do.
    Ms. DeParle. I will try. The President's plan makes a 
prescription drug benefit available to all Medicare 
beneficiaries. It is an integral part of the Medicare Program. 
Medicare beneficiaries would be entitled to coverage for 
prescription drugs just the way they are now for physician 
services or hospital services.
    Mr. Levin. A higher copay.
    Ms. DeParle. Yes.
    Mr. Levin. But it is otherwise basically the same as other 
services.
    Ms. DeParle. Yes, sir. They pay a separate premium for it, 
and there is a higher copay. There is a 50 percent copay. But 
it is part of the Medicare Program and it is an entitlement.
    We provide it through pharmacy benefit managers who would 
negotiate----
    Mr. Levin. But as you understand the Republican plan, it is 
not?
    Ms. DeParle. I think that we do not know, sir. I heard Mr. 
Thomas say this morning that it is an entitlement. From what I 
had seen earlier it was not clear to me that it was an 
entitlement, except perhaps for the low income beneficiaries. 
There is not a direct subsidy for all beneficiaries. I did not 
see the word ``entitlement.'' I think the word ``entitled'' is 
in there once. I have not seen the details. I do not know 
whether it is a guaranteed benefit or whether it is just 
available in certain areas of the country. I heard him say 
today that he intends to have Medicare, a government plan be a 
fall-back in every area. But I just do not know the details. So 
that is my question, is it really a benefit for all Medicare 
beneficiaries, or is it just in the areas where it is available 
through a private insurance plan.
    Mr. Levin. And whether it is affordable for everybody.
    Ms. DeParle. Yes, sir. That would be the second question. 
Again, I do not want to speculate because I saw a five or ten 
page summary a week ago. Some of the details are different than 
what I heard Mr. Thomas and Mr. Peterson say today. So I do not 
want to speculate on it. But we do have a question about 
whether it is affordable. Again, it may be affordable to people 
who have one of those private insurance plans available. Is it 
also affordable to people who do not have such a plan 
available? We want this to be universally affordable.
    There is also a question about the extent to which all of 
the details can vary among the plans. That goes to both 
accessibility and affordability and, to the stability of this 
marketplace. It sounds like what they are talking about would 
offer lots of different permutations of a Medicare plan, which 
might sound good in theory, but what I hear when I talk to 
beneficiaries is they want something that is stable. They want 
to know how much they will be paying, they want to know what 
their premiums are going to be from year to year. They do not 
want something that is going to be that uncertain. So that I 
think is another key difference between the plans.
    I also have a question about whether or not the 
administration of the new plan is going to ensure access to 
needed medications. Again, I do not want to speculate, but an 
earlier draft I saw of a plan did talk about requiring coverage 
only of major therapeutic classes of drugs. It is not clear 
what that means.
    Mr. Thomas. Will the gentleman yield briefly?
    Mr. Levin. Sure.
    Mr. Thomas. You keep referring to some five or ten page 
document. Who did it come from? Is it the Senate plan, Breaux-
Frist plan?
    Ms. DeParle. I was told it was the House Republican plan, 
which must be an earlier version because----
    Mr. Thomas. Who told you it was the House Republican plan?
    Ms. DeParle. It was called the Medicare Prescription Drug 
and Modernization Act. We got it from someone on the Hill.
    Mr. Thomas. The question I thought was to compare the one 
plan to the other plan. We just consumed 3 hours saying it is 
an entitlement, it is universal, it is going to be provided 
through a public-private arrangement, but if it is not that way 
then it is going to be provided by the public. So I appreciate 
the gentleman giving me the time. But I did not spend 3 hours 
reviewing the particulars not to hope somebody would not get 
the fact that the bipartisan bill is not a Republican bill. You 
keep referring to documents you say were given to you that is a 
Republican plan. The bipartisan plan that Mr. Peterson and I 
talked about today is not the Republican plan. And is there any 
surprise that, in fact, what you keep referring to is not in 
our plan.
    I thank the gentleman for the time.
    Mr. Levin. Let me just suggest, Mr. Thomas, and then I will 
finish, as I said earlier, I think a plan that comes before 
this Committee is a Republican plan if there is not a real 
effort to involve Democrats on the Ways and Means Committee.
    Ms. DeParle. And I am not trying to engage in any 
speculation, Mr. Thomas. But Chairman Archer said this morning 
that we had already had a hearing on the President's plan and 
he hoped we would not spend time on that. That is what I am 
most prepared to talk about. I am trying to do the best I can 
with the materials that have been provided. I apologize if they 
are not correct. And I have said many times that I listened 
very carefully to what you said and I heard you say that you 
intend this to be universal. I am not saying that it is not. I 
am not making that affirmative statement. I am saying that I do 
not know based on what I have seen.
    Mr. Levin. Thank you.
    Mrs. Johnson. Thank you.
    I would like to just bring this back to what are some of 
the most difficult issues. I think there is a lot of similarity 
in terms of entitlement and universality and copays and things 
like that. But I would like to bring it back to this issue of 
negotiated price and whether or not----
    Mr. McDermott. Madam Chair, when are the rest of us going 
to get a chance to ask questions?
    Mrs. Johnson. You will come next. I have had two Democrats, 
I am going to one Republican, then I will have two Democrats 
because my Republicans left.
    Mr. McDermott. So you are taking all the Republican shots.
    Mrs. Johnson. There are issues that we want to get on the 
record that we have not been able to get on the record.
    I want to understand better how using a single 
pharmaceutical benefit manager to negotiate price we would 
avoid price-setting. It seems to me it becomes then synonymous, 
that with only one negotiator, then that is effectively a 
private sector agent of the government setting the price. Then 
another aspect of that question is that price and formulary in 
the private world are usually very intimately related. In the 
President's plan, is the pharmaceutical manager allowed to use 
formularies, is he allowed to use utilization review, and so on 
and so forth to control costs? Or is it just negotiated price?
    Ms. DeParle. First of all, we are not using just one 
pharmacy benefit manager. We are proposing to use a number of 
different ones, as many as want to compete in this system, but 
we do it by regions. There will one per region. The reason for 
that is we want them to be able to negotiate the best price for 
a number of beneficiaries in a particular region. We do not 
want it to be different in Connecticut than it is the adjoining 
States.
    Mrs. Johnson. Is there any precedent for one in a region 
being able to get the best price if there is nobody to compete 
against them in that region?
    Ms. DeParle. I think they do that right now with a lot of 
private insurers. Most private insurers who use a PBM use one 
for different areas of the country. So, yes, I believe that 
there is.
    Second, your question was whether or not we would allow 
formularies. The answer to that is, yes. However, beneficiaries 
would have the ability, if the physician felt that a drug that 
was not on the formulary was what in his or her medical 
judgement was what the beneficiary needed, they would have the 
ability to get that drug.
    Mrs. Johnson. So the model is one pharmaceutical benefits 
manager and whatever formulary that pharmaceutical benefits 
manager had negotiated. I think one of the differences between 
the two plans is if there is more than one plan and more than 
one pharmaceutical benefit manager, there will be a variety of 
choices in terms of do you want to trade off a lower premium 
and higher benefits for more restrictive benefit manager. And 
having come from a part of the country where particularly 
psychiatric drugs have been managed for a while, I can tell you 
there is a big difference in managers, some I would not mind 
having and others I would mind an awful lot. So I do not 
necessarily want the government to negotiate with the lowest 
price person.
    Ms. DeParle. It would not just be on price, Ms. Johnson. We 
would look at quality and service as well. It would not just be 
who has the lowest price.
    But one concern I have is raised by your earlier question, 
actually. If you have pharmacy benefit managers competing the 
way you described, and this is I think something in Mr. Thomas' 
bill as well, where there are lots of different types of 
prescription drug benefit packages out there, that may sound 
good in the abstract, but you introduce a considerable risk 
selection into the process then with plans being able to 
cherry-pick and offer to the healthier beneficiaries. Then that 
starts a spiral again where you do not have insurance anymore 
at a certain point. What you have is something where the less 
well-off and the sicker beneficiaries will not be able to 
afford it.
    So somehow we have to strike a balance between offering the 
kind of choice that you are talking about and making sure that 
we have a plan that is stable and financially able to provide 
the benefits.
    Mrs. Johnson. I look forward to working on that with you. I 
do think also it would be a terrible error of public policy to 
put this kind of benefit out and not in any way incentivize 
people to participate in these disease management protocols 
that cut other costs of Medicare.
    Ms. DeParle. We have talked about that and I want to work 
with you on it.
    Mrs. Johnson. Mr. McDermott.
    Mr. McDermott. Thank you, Madam Chair.
    I always try to think about this as if I were a senior 
citizen, and I am finding it easier to think about that. I want 
to understand the President's plan. Would it be the 
anticipation if you were running the plan under HCFA that you 
would deduct the premium from my Social Security check?
    Ms. DeParle. Yes, sir.
    Mr. McDermott. So everybody would have paid into the plan, 
and then you would distribute the money out to whatever plan 
benefit manager my mother or any senior in that area, if they 
had x clients, they would get x number of dollars for giving 
that benefit. Is that right?
    Ms. DeParle. Yes, sir.
    Mr. McDermott. On an equal basis across the country? Or 
would it be like gasoline prices, where in the middle West they 
are at $2.20 a gallon and in Seattle it is $1.63 a gallon. How 
would you----
    Ms. DeParle. It would be an equal basis throughout the 
country. The pharmacy benefit managers are not at-risk in this, 
so they just would receive a payment for each beneficiary and 
they would manage on their behalf.
    Mr. McDermott. So Merck, Medico, or somebody like we have 
that is located in New Jersey or Massachusetts, wherever they 
are, they would get all the money to cover what was going on 
with Seattle, or Minneapolis, or Provo, Utah, right?
    Ms. DeParle. Right.
    Mr. Claxton. Yes, sir. They would make disbursements from 
Medicare for the benefits, yes.
    Mr. McDermott. Since we have to imagine what the Republican 
plan is all about, apparently they are going to set up another 
administration, and if I am a senior citizen and I decide to go 
into Medicare+Choice and I am in an HMO, also my drug money is 
going to go into that same new administration. You will not 
have any of it over at HCFA because they are going to 
administer the whole drug benefit from this new administration. 
Is that how you understand it?
    Ms. DeParle. In an earlier draft, there was the MAMA 
administration, yes.
    Mr. McDermott. What happens when they close my HMO, as they 
did last year for 700,000 people, and I now have to go over 
into the fee-for-service program over at HCFA? You, because you 
are now going to pay my bills. This administration is not going 
to pay them anymore. I am going to move over here. So now my 
money is split; some money goes to the benefit manager, some of 
it goes to HCFA. Is that right? Is that too simple-minded? I am 
trying to think like my mom thinks.
    Ms. DeParle. Well, I am not sure I followed the last 
movement. You said that your HMO pulled out.
    Mr. McDermott. Yes, it pulled out and so I have got to go 
to the fee-for-service plan.
    Ms. DeParle. Right.
    Mr. McDermott. So now I am covered under HCFA for my 
medical care. But my drug money stays over in managed----
    Ms. DeParle. Oh, I see what you are saying. I believe if 
you are in an HMO, under Mr. Thomas' plan, the HMO would get 
all the dollars including the prescription drug dollars. But 
the idea would be they would get the Medicare capitation 
payment which would include prescription drug money for you. If 
your plan pulls out, then you would go back to fee-for-service. 
I see what you are saying. I do not have enough details to know 
whether the prescription drug money for you would be 
administered by MAMA, or the Medicare benefits administration 
that he talked about today, or whether that would go back to 
HCFA.
    Mr. Claxton. There is not really enough detail. We have 
been told there will be a fall back Medicare plan in areas 
where there is not private plans available. But we do not know 
how it would be administered; whether we would charge a 
premium, whether the premium would vary by area, or any of 
those details. We have to wait for the plan I think.
    Mr. McDermott. It seems to me though that there is a third 
option. Unless you are going to require every HMO to provide 
pharmaceutical benefits, there will be some people over here at 
an HMO who are not covered for their pharmaceutical benefits 
under their HMO and will get it from your fall back position. 
Is that correct?
    Ms. DeParle. Under our plan, a prescription drug benefit 
would be part of the basic Medicare benefit package and all 
HMOs would be required to provide it. I have been assuming that 
Mr. Thomas' plan also made that part of the Medicare benefit 
package and that HMOs would be required to provide it. Maybe I 
am wrong about that.
    Mr. McDermott. So it is a question of whether or not under 
the HMO they are required to give a pharmaceutical benefit or 
not. Is that correct? That has to be written into the law.
    Ms. DeParle. Yes, I think that is an issue that I am not 
clear on.
    Mr. McDermott. So if I join an HMO, I am going to get 
pharmaceutical benefits from that HMO, even if they say it 
costs us too much, we cannot afford it.
    Ms. DeParle. It is not clear from this one page document we 
got today. It says Medicare beneficiaries will have access to 
subsidized prescription drug coverage offered by private 
insures and Medicare+Choice plans. But I cannot tell whether 
that means M+C plans will be required to offer it or not.
    Mr. McDermott. But in the President's plan no matter how I 
have my health care delivered, I will get my pharmaceutical 
benefit.
    Ms. DeParle. Yes, sir.
    Mr. McDermott. That is what I want to see. Thank you.
    Mrs. Johnson. Administrator DeParle, did you increase the 
reimbursements under your plan to the managed care choice plans 
to account for that?
    Ms. DeParle. Yes. It was $54 billion of our $160 billion 
would go to Medicare+Choice plans to provide prescription 
drugs.
    Mrs. Johnson. Mr. Kleczka.
    Mr. Kleczka. Thank you, Madam Chair.
    Does not the President's plan and the Democratic Caucus 
plan also provide some reimbursement to private health plans 
who currently cover a drug benefit so they are not carrying the 
cost of providing drug coverage themselves?
    Ms. DeParle. Yes. These are the Medicare HMOs that we have 
been talking about with Mr. McDermott. To employer plans, too, 
yes.
    Mr. Kleczka. That is what I am referring to the employer 
plans. So we covered those employers who are currently offering 
retiree benefits so we do not disadvantage them or provide an 
impetus to give up their current coverage for seniors.
    Ms. DeParle. Yes, sir.
    Mrs. Johnson. Would the gentleman yield?
    Mr. Kleczka. Sure.
    Mrs. Johnson. It seems to me that with a 95 percent take-up 
rate, since 44 percent of Medicare beneficiaries that have 
coverage are retirees, that they are assuming that current 
retirees who have prescription drugs through their place of 
employment will actually move into the public program, the 
public program will pick up those costs, and the employer will 
probably wrap around.
    Mr. Claxton. I think the 95 percent assumes that most 
people who are in employer plans continue to stay in them, and 
they would receive a subsidy from the Federal Government which 
is less than we would pay if the people had moved to Medicare 
but is an advantage to the employer who is offering a plan now. 
So it is an incentive payment to employers to help them 
maintain their plans over time.
    Mrs. Johnson. So you think they will not restructure. The 
subsidy will just encourage them to stay in?
    Mr. Claxton. It is possible. They can restructure now. But 
we think this will substantially discourage some to 
restructure, because as long as they offer a benefit that is at 
least as good as the Medicare benefit they are going to get 
much more than they get today in terms of a benefit under this 
program and they will have an incentive to keep it in place.
    Mrs. Johnson. Incentive to keep it, which I think is very 
important.
    Sorry, Mr. Kleczka. Thank you for yielding.
    Mr. Kleczka. Let me apologize Ms. DeParle because we are 
going to be asking questions on a bill she has not seen. We are 
asking about a bill this Committee is going to mark up probably 
as early as Monday, with the anticipation of having this 
legislation to the floor before the 4th of July break, and we 
are asking you, the person who is probably the most 
knowledgeable about Medicare and drug benefits, questions with 
no bill printed before you, or before us. You are shooting in 
the dark, as are the members of this Committee. I think when 
you are talking about a drug benefit program that is going to 
cost in excess of $40 billion, we should probably be more 
careful how we go about devising this plan. However, you and I 
cannot be held accountable for that because we are not in the 
driver's seat.
    I heard the authors' comments on a provision in their bill 
which creates a fall back position which will be a fee-for-
service entitlement benefit. You cannot describe what that 
provision looks like. I do not know what it is. I have looked 
through all the documents here and there is nothing that tells 
me what that is.
    But let me ask a couple of basic questions about private 
drug-only insurance because it is not part of the President's 
plan nor is it part of our plan. One of the mainstays of the 
Republican drug benefit plan is to have private insurers offer 
this coverage. If you are in an area, it is hoped that two 
insurers would offer the coverage.
    Now let's use my district of Milwaukee. Let us say that 
there are not two insurers around who want to do this. I have 
to assume that if it is that profitable a line of insurance 
they would be writing it now, but the fact of the matter is 
they are not. So if two insurers do not come into the Milwaukee 
area to write this, and we have seen managed care plans fall by 
the wayside in my city, two or three have already got out of 
the market because they are losing money, what is the benefit 
for my seniors in that scenario?
    Ms. DeParle. Well, if the only scenario is private plans, I 
do not believe there is a benefit for your seniors in Milwaukee 
because I am not convinced that they will be there.
    We both heard Mr. Thomas today describe that the bill is he 
working on with Mr. Peterson has a fall back so that the 
Medicare fee-for-service program I guess would provide a 
prescription drug benefit to seniors who were in an area where 
there was not a plan available. I am eager to see the details 
of that because that is where I will decide whether this is 
really in the beneficiaries' interest or not.
    Mr. Kleczka. One of the criticisms our proposal gets is 
that it is too confusing. Boy, I think their proposal takes the 
cake on the confusion scenario.
    They also criticize the Democrat's drug proposal as putting 
the Washington bureaucrats in control. It seems to the 
Republicans are are not giving any authority to your agency, 
which is already set up to do something similar to this. 
Instead they create a brand new bureaucracy which was called 
MAMA and now is called Medicare Benefits Administration. Based 
on your experience, do you know how big this agency would have 
to be to provide the services that are contemplated under this 
bill? Are we talking one or two Federal employees, or are we 
talking possibly 30, 40 people administering this to 40 billion 
people nationwide. Do you have any guess how big ``Big MAMA'' 
might be?
    Ms. DeParle. I do not know how big MAMA might be, but I can 
tell you that our----
    Mr. Kleczka. They are trading in Big Brother for Big MAMA. 
Nevertheless, big is still part of the equation.
    Ms. DeParle. I think the important thing here is not to 
look at the size of it but whether it will be efficient and 
effective.
    Mr. Kleczka. I think we have to look at both.
    Ms. DeParle. The Health Care Financing Administration has 
about 4,500 employees. I do not think we are big enough, 
frankly. We are trying to administer a program that is upward 
of $200 billion a year. Every single member and this Committee 
has been in touch with me over the past year on multiple 
occasions, maybe not Dr. McDermott, everybody else, about 
various things that you wish I were doing in your districts for 
your providers or beneficiaries. All of that is legitimate. But 
to run a prescription drug program will not be a two or three 
person initiative. Even if you are just contracting--we want to 
run this through the private sector with pharmacy benefit 
managers--but I believe you want us to negotiate with them and 
to get a good contract and to make sure they are doing their 
jobs. I do not think it will be a two to three person 
initiative.
    Mr. Kleczka. So you are saying Big MAMA is going to be 
pretty big to do the job right?
    Ms. DeParle. To do the job effectively, I think you would 
want it to be big.
    Mr. Kleczka. I have one more question. This is one that 
intrigues me and I have not heard much dialog here. This new 
agency, Big MAMA, and I have this information from the 
Republican analysis of the bill, can provide financial 
incentives to private plans to encourage the formulation of 
national and/or statewide plans. That says to me that we are 
going to subsidize insurance companies. Is that what you 
understand this to read? ``MBA can provide financial incentives 
to private plans.'' We have heard, and, again, there is nothing 
written, that the Federal Government is going to subsidize 
private insurance companies to provide this benefit. That is 
pretty important stuff. My constituents would love to know that 
we are subsidizing Aetna or some of the other insurance 
companies.
    Ms. DeParle. That is how I read it. I do not know whether 
this line on this piece of paper, I assume this is an attempt 
to respond to the concerns many have raised about the fact that 
you have a managed care plan in Milwaukee and you do not have 
one in Kenosha. So maybe the idea is to try to encourage plans 
to provide statewide plans. I have no idea what kind of 
financial incentives it would take to do that.
    Mr. Kleczka. I think in an effort to get two insurers into 
a community when the insurers say this is not going to be a 
profitable line, Big MAMA is going to come around and say we 
will help you and provide for a profitable line, here is a 
little subsidy.
    Ms. DeParle. That is what it sounds like.
    Mr. Kleczka. Madam Chair, thank you very much.
    Mrs. Johnson. Thank you.
    Mr. McInnis.
    Mr. McInnis. Thank you. I would note, Madam Chairman, that 
earlier there were comments, I think including the witness, 
about how we need to come together and make an effort to come 
out with something that is satisfactory. I just witnessed in my 
opinion probably the most partisan remarks I have heard so far. 
It is clear to me that when we have got someone who thinks 
cuteness should prevail probably over common sense, ``Big 
MAMA'' and things like that, you can understand why it is 
difficult for any of us to sit down and have much of a dialog.
    I should point out that the previous speaker was very 
ardent in his remarks about the private marketplace. Sitting 
here, one would think that the private marketplace is entirely 
encompassed by HMOs. I would urge the gentleman--who clearly is 
not paying attention, but if he gets around to the point that 
he might--I would urge that he refer to the President's plan. I 
am sure the witness has seen this. My understanding from your 
previous comments is that this plan has not been altered in any 
way. So, assuming that it has not been changed, I would urge 
the previous speaker to read it. On page 22 it says ``Medicare 
would not administer this benefit directly but would instead 
contract out with private sector entities.'' So the President's 
plan itself envisions a large----
    Mr. Kleczka. Would the gentleman explain what you are 
reading from?
    Mr. McInnis. Sure. Page 22 of the President's plan to 
modernize and strengthen Medicare for the 21st century.
    Mr. Kleczka. It is the President's plan.
    Mr. McInnis. That is what I referred to. So the President's 
plan encompasses a large involvement of the private sector. 
Isn't that perhaps because the private sector has some 
experience in the administration of a plan like this?
    Ms. DeParle. Yes. And what we are doing, sir, is we are 
contracting with pharmacy benefit managers who now often are 
the ones who provide this same service to private insurance 
plans. The difference I think between the two plans, as I 
understand them, is that Mr. Thomas' and Mr. Peterson's plan 
would depend on private insurance plans, although today he 
talked about a fall back of the government, to provide the 
entire benefit. I think that is what we are expressing some 
concern about.
    But, yes, you are right, we want to work with the private 
sector on this. That is what we put forward 2 years ago and 
that is where we are now.
    Mr. Kleczka. Would the gentleman yield?
    Mr. McInnis. I will yield.
    Mr. Kleczka. I might also point out that the current 
Medicare Program also contracts out the claims processing. We 
use private industry throughout the country and we just save 
millions and millions of dollars because of the claims 
processing costs are so low per claim. So it is not unheard of.
    Mr. McInnis. Which is exactly the point that I would like 
to make here. That is, there are a number of efficiencies out 
there in the private sector that should be realized by any of 
us up here who are coming up with this kind of a proposal. The 
difficulty that I see is that when the Committee itself, 
amongst our own members, begins to envision some horrible giant 
out there, i.e., the private marketplace. That somehow suggests 
it is evil to come up with a plan that is dependent on a 
marketplace that has served our country very well, given us 
pharmaceutical products that are second to none in the world. I 
just want to make it clear that both plans envision involvement 
of the private marketplace.
    With that, Madam Chairman, I yield back the balance of my 
time.
    Mrs. Johnson. Mr. Neal.
    Mr. Neal. Thank you very much.
    I just would say in reference to something that Mr. McInnis 
said when he talked about the success of pharmaceuticals, and 
there is no question about it, that those pharmaceuticals are 
successful with heavy government subsidies in terms of the 
research. The taxpayer pays for much of that research.
    Mr. McInnis. Would the gentleman yield?
    Mr. Neal. Yes, I would.
    Mr. McInnis. Absolutely. I agree. I think the 
pharmaceutical companies have historically gotten a terrific 
deal from the government using that research.
    Mr. Neal. Right.
    Mr. McInnis. I have no problem saying, just the same as we 
did with the Saturday morning cartoon shows that we created 
through our public broadcasting system, we ought to start 
sharing in that. You have noticed in the last 5 years or so 
that even our college universities are starting to realize the 
value of that research. You are absolutely right. I think they 
have received huge benefits from the government, and I think 
that the government ought to get something back for it. No 
question.
    Mr. Neal. Thank you.
    Let me ask you a question that Ms. Johnson touched upon 
earlier, and I think it is individually and collectively on the 
minds of the Members of this Committee and most of the Members 
of Congress. The hospitals in Massachusetts are really 
hemorrhaging. They are really hurting. They do not seem to get 
much satisfaction in the conversations that they have with 
HCFA. Some of the comments that I have even heard Secretary 
Shalala offer do not seem to me to indicate that there is any 
relief on the horizon. Are you looking for a legislative fix? 
Are you suggesting that your interpretation of the Balanced 
Budget Act is the only one that is correct? What can we expect 
in a place like Massachusetts for our hospitals?
    Ms. DeParle. Mr. Neal, I have met with hospital executives 
in Massachusetts as recently as last week and I have spent a 
lot of time talking to them, for that matter, from hospital 
executives from all over the country. And, yes, you are right, 
the hospitals believe that they need more money and that their 
profit margins are not what they should be.
    I am not aware of what comments of the Secretary you are 
referring to. But I do know that she has said to me----
    Mr. Neal. She has said in the past there is no problem.
    Ms. DeParle. I think what she said, at least what my 
discussions with her have been, is that she wants us to monitor 
the situation and let her know if there are problems with 
beneficiary access. That is the issue, are beneficiaries having 
trouble getting access to the hospital care they need. We have 
said all along we will be happy to work with the Congress if 
you believe there need to be changes. I am not aware of 
situations where the hospitals believe that we are not 
interpreting the law correctly. I think that they think we are.
    Mr. Neal. Mr. Thomas has argued that you are in a position 
to grant them immediate relief. I have heard Mr. Thomas make 
that argument.
    Ms. DeParle. I do not believe that is correct. I would love 
to know what that is.
    Mr. Neal. I guess it comes down to interpretation of what 
we did in the Balanced Budget Act, right?
    Ms. DeParle. Well, sir, the main----
    Mr. Neal. Most of us believe that we overshot the mark.
    Ms. DeParle. Spending has been lower in many areas than 
what the actuaries and the CBO analysts projected would occur. 
You cannot relate that to just one cause though, sir. It is a 
lot of different factors. I think even the hospitals would tell 
you that. There have been a lot of things that have happened 
over the last 2 years. The Balanced Budget Act is certainly a 
major factor but it is not the only one.
    I do not believe I have the ability to change the update 
for hospitals on my own. That is something that is written into 
the law. That was done for very explicit reasons, to achieve 
savings in order to extend the solvency of the Medicare Trust 
Fund, which it has done. So I am not aware of anything that I 
have the ability to change.
    Mr. Neal. When you met with the hospitals from 
Massachusetts last week what did they tell you?
    Ms. DeParle. They told me that they would like to get a 
full market basket update next year, which is not what is in 
the law. They told me that their profit margins are lower than 
they have been in the past. A couple of them told me that 
managed care is also killing them. In the past, Medicare rates 
were higher and they could negotiate lower rates with managed 
care plans, and now they do not feel they can do that anymore. 
It was consistent I am sure with what you have heard from them. 
They would like relief from the Federal Government. They would 
like Medicare to pay more.
    Mr. Neal. If you have a chance and you talk with Secretary 
Shalala, would you point out to her that there are Members of 
this Committee, or at least singularly there is a Member of the 
committee who was upset with the comments that she has made 
that there really is no problem with what happened with the 
Balanced Budget Act. Because most of us here feel earnestly 
that there is a very serious problem and that some relief has 
to be granted in the near future.
    Ms. DeParle. I will certainly pass that along. We have 
looked at all the information the hospitals from the various 
States have provided us. What we are looking at, again, is what 
is happening to Medicare beneficiaries. When you look at things 
like the profit margins, they are not as high as they have been 
in the past and I am sure that that is a concern when you have 
been expecting a certain profit margin. But what we see is that 
they are still generally around 10 percent. I hear you though, 
and I will certainly pass along your comments to the Secretary.
    Mr. Neal. Thank you.
    Thanks, Madam Chairman.
    Mrs. Johnson. Ms. Thurman.
    Ms. Thurman. Thank you, Madam Chairman.
    Let me say this to my colleague, Mr. Neal, and it relates 
to something that you may all want to look at. There was an 
amendment offered by Mr. Tanner last week when we were doing 
the budget issue that actually was going to take whatever 
Medicare savings dollars that was believed to have put us on 
this road to a balanced budget and put it back into the 
Medicare Trust Fund and that could be used to make up some of 
these dollars. So that might be something for you all to look 
at.
    Nancy, you were here this morning, but I am a little 
concerned that we have gone down a path on this Medicare choice 
issue that is going to lead us into an even more difficult 
problem if we do it with a pharmaceutical benefit. Just last 
week, as I have said, we have a health plan who has made the 
determination that they are pulling out of some of our 
counties. It basically says there are three major reasons for 
this decison--Government payments that are inadequate to meet 
the demand for health care services and medications; the 
uncontrolled and increasing financial demands of physicians, 
hospitals, and pharmacies, especially in counties where there 
is little competition; and significant losses in the three 
counties over the past 2 years which were the results of 
financial investments, while trying to make its Medicare plan 
work.
    I think the thing that concerns me right now in the 
conversation is that it seems like it is just our fault because 
the reimbursements are so low. And I would suggest, and if you 
can help me here, it is maybe the pharmaceutical costs which 
have gone up dramatically for these plans, about 18 percent or 
somewhere around there, not something that we had any 
jurisdiction over.
    The other thing, and maybe you can help me, is what I 
looked at what the numbers were in the areas that they are 
dropping out. One is Osceola County, which is not one of my 
counties, there was $548 for reimbursement; Hernando County was 
$543 reimbursement; Pasco County is $572. However, they say 
they are going to stay in Miami, Broward, Palm Beach. Now Palm 
Beach only gets $542; Hillsboro County, $460; I think Alachua 
County is $466. And they stay in these counties that are 
getting as little as $460. Now here we are talking about 
putting a pharmaceutical benefit through these same companies. 
That is not adding up to me. We have some counties that have 
less reimbursement and some counties that have more 
reimbursement, but they are all pulling out anyway. So that 
makes no sense.
    Last year when we did the budget issue, in order to try to 
bring some more money back into Medicare and into 
Medicare+Choice, we put an incentive program in there to 
provide 5 percent for any plan that would go back into a 
county, first come first serve. Have we had any takers on that?
    Ms. DeParle. I just checked on this a couple of weeks ago 
and I was told there were maybe a couple of plans that had come 
in. There is also a new private fee-for-service plan that has 
just come in. You also put some incentive payments in if they 
would go into areas where there were no other plans. They do 
not appear to have attracted many plans to come back in. I was 
told only a couple.
    Ms. Thurman. So if you have this fall back provision, or 
potentially a fall back provision when we get this legislation, 
we do not have any idea or belief that this would bring people 
back into the plans or into a Medicare+Choice plan or through 
private insurance. We are not seeing that now, are we?
    Ms. DeParle. No. It is too early yet to figure out what the 
trend is and the withdrawals. But it does seem, as you say, 
that they are staying in some counties that you would wonder 
why. But when I talk to the executives, what they tell me is it 
is not just the base payment amount, it is also whether they 
have a network in place, what their loss ratios have been, in 
some cases they stay in an area because it is adjacent to a 
county where they intend to make a commitment, and there are 
other things at work. But it is a business decision that they 
make on a yearly basis.
    My concern is I do not want to have the entire Medicare 
prescription drug benefit rest on that. I want this to be a 
guaranteed benefit.
    Ms. Thurman. I do not want a two-tier program. I do not 
want it in some areas where we have HMO and some where we do 
not have these services for Medicare. We actually are just 
breaking Medicare down under these conditions.
    I need to go to something that Ms. Johnson said, because 
this is what is happening in my counties on the prescription 
drug issue, at least this is what I have been told. Because of 
lower payment, my constituents would have to pay a $95 premium. 
It has gone from about $45 to $95. So they are paying about 
$1,140 a year. They are probably getting about an $800 of 
actually prescription coverage. That varies because they get a 
$5 copayment if they get a generic drug, they get a $10 
copayment if they go up a little higher, if they do not stay 
within the formulary then they have to pay 50 percent of the 
drug cost and on top of that, at the end of that cap part that 
they have, they would get used to the idea of paying 50 percent 
of what they have as their negotiated price. So I do not see 
where they are getting a great benefit under the programs that 
we seem to be trying to push everybody into.
    Mrs. Johnson. If you would answer very briefly, because we 
have two more questioners and another panel yet. So we are 
concerned about what we are doing to the other panelists' 
schedules.
    Ms. DeParle. I share your perplexity I guess about this. 
There are cases where it does not appear to be a very good deal 
for beneficiaries. But, unfortunately, in some of those cases, 
even though it is not a great deal, it might be slightly less 
expensive than buying Medigap policies in that area.
    Mrs. Johnson. Mr. Doggett.
    Mr. Doggett. Thank you very much.
    That, in fact, leads right into my line of inquiry. I read 
your written testimony which indicates that the administrative 
costs of Medigap insurance is about ten times as much as the 
administrative costs for Medicare. Is that correct?
    Ms. DeParle. Yes. That has been our experience.
    Mr. Doggett. And so if our goal is to have the most cost-
effective program to try to get prescriptions to our seniors 
need, relying on a Medigap-type system is going to be not the 
best choice.
    Ms. DeParle. That is one of our concerns. As Mrs. Johnson 
said earlier, the devil is in the details. We do not know where 
the administrative costs for these Medigap plans are going to 
be.
    Mr. Doggett. It would not appear to be in the taxpayers' 
interest to use a system that is ten times less efficient than 
the one we have now for Medicare.
    Ms. DeParle. I would be very concerned about that.
    Mr. Doggett. And then, as you know from my inquiries this 
morning, I am very concerned that we will simply shift the 
burden of outrageous prescription drug prices from seniors to 
the taxpayer. Let me ask you, as a preliminary question, and I 
know this is not what is contemplated, but is there any way 
that we could sustain a program where the government paid the 
same retail prices that uninsured seniors have to pay now for 
their prescriptions?
    Ms. DeParle. That would be terribly expensive.
    Mr. Doggett. Terribly expensive.
    Ms. DeParle. I would not propose to do that, no.
    Mr. Doggett. And we know now that some seniors just do not 
get the prescriptions they need because they cannot pay retail. 
And you would not reasonably propose that the taxpayer pay 
retail.
    Ms. DeParle. No, sir, I would not.
    Mr. Doggett. You have already had in your work some 
experience, in fact some fairly recent experience, with this 
so-called average wholesale price, have you not? What has been 
your experience with the way the pharmaceutical industry 
sometimes handles its prices for Medicare and Medicaid?
    Ms. DeParle. What we are trying to do is make sure that 
Medicare pays a fair price. We think that the law right now 
provides that Medicare pays for the drugs that it provides 
incident to a physician's services. It is supposed to pay 95 
percent of the average wholesale price. For that, we rely on 
some industry published data.
    Mr. Doggett. Is that the Red Book?
    Ms. DeParle. Yes, the Red Book and the Blue Book, which 
turns out to be wrong. It turns out to be not what is really 
the wholesale price. So what we have been trying to do is work 
with the Justice Department to find out what the actual prices 
are that are paid at the wholesale level so that we can make 
sure that Medicare gets the advantage of paying those lower 
prices. But it has been a terribly frustrating and difficult 
exercise.
    I also want to mention that the President has for the last 
four or 5 years now proposed a law to help us to be able to do 
this better, to make sure that we get the prices that 
physicians actually are paying. With that, we have said we 
would like to make sure that we are paying physicians 
appropriately for administration of those drugs. That is 
something that this Committee has raised. But we want to make 
sure Medicare pays a fair price.
    Mr. Doggett. What you are saying is that there have been, I 
believe, four occasions when the administration has come to the 
Republican Congress and said please give us the tools to ensure 
that the taxpayer is not being ripped off and that they are 
paying the actual wholesale price and not some contrived 
wholesale price. And you have been unable on each of those four 
occasions to get the tools that you need to protect the 
taxpayer and to get reasonably priced prescription drugs?
    Ms. DeParle. Unfortunately, yes, that is the case.
    Mr. Doggett. You mentioned the Justice Department. What is 
the status, at present, of your efforts to see that the 
taxpayer, even with the limited tools that you have, is not 
being ripped off by outrageous prescription drug prices?
    Ms. DeParle. Working with the Department of Justice and its 
investigations, we are compiling better information about what 
prices wholesalers are actually paying. We intend to get that 
out to our carriers, the private insurance companies that pay 
Medicare's bills, so that they can start using those prices and 
reimbursing at that rate. Then we would still love the 
opportunity to work with this Committee and with the Congress 
toward a proposal like the President's proposal that we think 
will do a better job of ensuring that Medicare pays 
appropriately instead of paying these inflated prices that are 
not the wholesale price.
    Mr. Doggett. Thank you so much.
    Mrs. Johnson. Mr. Cardin.
    Mr. Cardin. Thank you, Madam Chair.
    I do not know why we are making this so complicated, quite 
frankly. Medicare does a good job of holding down costs. I 
think all of the statistics we have seen show that Medicare 
costs have been certainly comparable to what is happening in 
the private sector as far as cost-containment. Of course, a lot 
of my providers think you are doing too aggressive a job on 
cost-containment.
    My first question is why would we want to treat 
prescription drugs differently than any other necessary medical 
service, whether it is a physician, whether it is equipment, or 
whether it is a hospital? Why would we want to discriminate 
against prescription drug coverage? Why would we not just make 
it a part of the basic benefit package and allow a fee-for-
service option and any other options that could come along?
    My one complaint about the administration's proposal is 
that I do not think you put enough money into the proposal. 
Quite frankly, the costs are a lot higher than you are willing 
to share, which means our seniors are going to have to incur a 
significant part of the cost of prescription drugs.
    But what I really want to lead you through and try to get 
your response to is this: I do not understand how Mr. Thomas' 
numbers add up. Maybe you can help me with this. You made a 
point earlier that I thought was very telling, and that is, the 
success of a program depends upon a significant number of 
people participating so you do not get adverse risk selection.
    Ms. DeParle. That is right.
    Mr. Cardin. It seems to me that Mr. Thomas' proposal may 
work just the opposite; that is, he is fitting his plan into 
the dollars that are available by having a lot of people not 
participate. We do not know, because it depends upon the 
voluntary selection. His subsidy will not be as high. The 
premium amount that the individual will have to pay appears to 
be a higher percentage than you have in your plan. His proposal 
it is going to be dependent upon private insurance so there is 
no guarantee that individual will be able to get a defined plan 
that is spelled out by statute if there are two private plans 
in their community. And we are not sure about the cross-
subsidies between the catastrophic proposal and the basic 
proposal, at least we do not know that yet.
    So it would seem to me that there is a high risk that part 
of the reason why his proposal fits into the $40 billion that 
is in the budget resolution is that there are going to be a 
significant number of seniors that will not be participating.
    And this really gets me back to one of Mr. McCrery's 
observations earlier about Senator Kennedy's numbers of 12 
million versus 6 million beneficiaries. It seems to me that one 
of the factors we should be considering is that this program 
will not be successful if we do not entice enough seniors to 
participate because we are going to be running the risk of 
adverse risk selection. That is why the lack interest of the 
private insurance industry in this area was raised earlier--
because of the concern about adverse risk selection.
    Mr. McCrery. Would the gentleman yield?
    Mr. Cardin. I would be glad to.
    Mr. McCrery. Since Mr. Thomas is not here to defend his 
plan, which is admittedly not quite public yet. I can assure 
the gentleman that all of his questions have been asked to CBO, 
to actuaries, and that CBO is taking into account all of those 
considerations in assessing the cost of the proposal. I think 
the gentleman will be pleased when he sees the results.
    Mr. Cardin. I hope so. If I understand, and maybe, Mr. 
McCrery, you would like to respond to this, if I understand it, 
you are going to have an actuarial equivalent amount of which 
part will be paid for by the premium and part of the actuarial 
equivalent will pay for a catastrophic benefit. So, therefore, 
the individual who is trying to decide to join the plan or not 
will be looking at a benefit package that is going to be an 
actuarial equivalent of $500 or $600 a year, and paying a 
premium of $35 or $40 a month for it. It seems to me that it 
will be very difficult to attract a large number of seniors 
into that type of program. I just do not think it is rich 
enough.
    Mr. McCrery. If the gentleman would yield one more time.
    Mr. Cardin. Sure.
    Mr. McCrery. The actuarial equivalent we expect to be 
considerably higher than $500 to $600.
    Mr. Cardin. I thought it was $750 or something like that.
    Mr. McCrery. Well that is higher than $500 or $600.
    Mr. Cardin. But part of that involves the catastrophic, 
does it not?
    Mr. McCrery. Sure.
    Mr. Cardin. Well the individual who is buying the plan, 
yes, will be looking at the catastrophic but will be making the 
judgement based upon the benefits that they are going to be 
getting on an ongoing basis, which will be a very small benefit 
or a very high premium.
    Mr. McCrery. Not necessarily. If you have a 30 percent 
subsidy, that is not a bad deal. If you are now having to pay 
the highest prices in the market for pharmaceuticals and you 
have no drug plan available to you, then it might look like a 
pretty good deal if you can get better prices for drugs and a 
30 percent subsidy.
    Mr. Cardin. Reclaiming my time, because it is almost over. 
It seems like you are rolling the dice on that. Unless you put 
it in, and we get back to the same point, unless you make it 
part of the defined benefit, core benefit of Medicare, we run a 
very, very heavy risk that the actions of private insurance 
companies will determine whether our seniors are going to have 
adequate coverage in their community.
    The one good thing about the fee-for-service program is 
that every senior any place in this country can get that fee-
for-service benefit at the same cost. The problem with 
Medicare+Choice is it varies around the nation, the private 
insurance varies around the nation. We are partially 
responsible for that. We all acknowledge that. It is clear that 
the approach that you are taking of providing incentives to the 
private insurance market will mean there will be different 
plans around the nation that have different cost factors 
depending on where beneficiaries live. So we are going to have 
the same problems we have today with Medicare+Choice.
    Mrs. Johnson. Will the gentleman yield?
    Mr. Cardin. I would be glad to.
    Mrs. Johnson. Actually, it turns out that the premium I 
think will shake out in the Thomas proposal to be almost 
exactly, maybe slightly under, a few dollars under, what the 
premium is in the President's plan plus what the CBO estimate 
is for a premium for catastrophic. So I think we are not going 
to be way off, frankly, when we begin to talk about premiums 
and what they are going to cover.
    As for there being national variation, there is going to be 
national variation when you negotiate with one regional 
pharmaceutical benefit manager in price and what you get.
    Mr. Cardin. Just very quickly, if I may. My concern is I 
just do not know how the Thomas proposal fits into the dollars 
that are available. The Administration is admitting openly that 
they cannot do it for $40 billion and include a catastrophic 
plan unless there are going to be high premiums for it. I just 
do not know how your bill will do it for the $40 billion.
    Mrs. Johnson. If you add their bill and the premiums in 
their bill plus what CBO estimates for a premium for 
catastrophic, you come out roughly where we are. That is what 
we are going to be looking at.
    I apologize, I do have to call the next panel. I would like 
to thank the Administrator for being here. I would mention that 
you will be getting a letter from some of us who are very 
concerned about your interpretation of the President's 
administrative action with regard to cancer clinical trials. 
That is that the routine patient costs are being interpreted, 
at least we believe they are being interpreted, more narrowly 
than they were in our legislation. So we look forward to 
working with you on that. Because if your regulation is not 
what the cancer community considers satisfactory and what is in 
our legislation, then we will have to proceed with estimates 
and changing the law.
    Ms. DeParle. I look forward to seeing your letter.
    Mrs. Johnson. Thank you.
    Ms. DeParle. Thank you. We wanted to include in the 
practice, the expenses and physician reimbursements of the cost 
of delivery of oncology drugs because if not, we are going to 
disadvantage particularly rural cancer victims in terms of 
treatment options.
    Mrs. Johnson. As a matter of fact, that relates to the 
issue Mr. Doggett raised with me and I said that I wanted to 
talk to the oncology community about what they think is 
necessary. I have done a lot of work in that area and I am 
anxious to be involved.
    Ms. DeParle. You raised this with me a couple of years ago.
    Mrs. Johnson. We are going to hear now from the seven 
speakers on our last panel: Karen Ignagni, President and chief 
executive officer, American Association of Health Plans; Craig 
L. Fuller, President and chief executive officer, National 
Association of Chain Drug Stores; Judith H. Bello, Executive 
Vice President, Policy and Strategic Affairs, Pharmaceutical 
Research and Manufacturers of America; Deborah Briceland-Betts, 
Executive Director, Older Women's League; Patrick B. Donoho, 
Vice President, government Affairs and Public Policy, 
Pharmaceutical Care Management Association; Stephen W. 
Schondelmeyer, Head, Department of Pharmaceutical Care and 
Health Systems, and Professor, Pharmaceutical Management and 
Economics, University of Minnesota; and Charles N. Kahn, III, 
President, Health Insurance Association of America.
    Karen, you may start.

   STATEMENT OF KAREN IGNAGNI, PRESIDENT AND CHIEF EXECUTIVE 
         OFFICER, AMERICAN ASSOCIATION OF HEALTH PLANS

    Ms. Ignagni. Thank you, Madam Chair.
    I would ask that my testimony be submitted for the record.
    Mrs. Johnson. All testimony will be included in the record.
    Ms. Ignagni. We appreciate this opportunity to testify. I 
am Karen Ignagni, President of the American Association of 
Health Plans. I would like to make several points.
    First, our members support creating drug benefits for 
Medicare beneficiaries. In our view, it is long overdue, and it 
is a matter this Congress can and should confront. Making 
prescription drug coverage available is an essential part of 
the effort to bring the 1965 program into synch with the 
benefits programs of today. Our sustained economic expansion 
and prosperity should allow us to ensure that Medicare 
beneficiaries have access to affordable prescriptions over time 
and put an end to the draconian challenges that individuals 
face in terms of food, fuel, prescriptions and other tradeoffs.
    An essential part of achieving this objective will be to 
build on what works. To that end, we are encouraged that choice 
is a key principle within so many proposals that have been 
submitted and discussed today and that there is a growing 
recognition about the need to preserve what exists as a 
building block for taking the next step. Many health plans that 
particpate in Medicare+Choice already provide drug coverage to 
millions of beneficiaries who otherwise wouldn't have access. 
However, in little over 3 weeks, our plans face the deadline by 
which they need to let HCFA know whether they are going to be 
forced out of more counties or be able to continue to 
particular in the program.
    Health plans are facing these difficult decisions for a 
number of reasons. One, because of unintended consequences 
associated with the Balanced Budget Act and two, the sheer 
number of regulations and instability and lack of 
predictability in the regulatory environment. To her credit, 
the Administrator has begun not only to recognize this 
situation but also to take some action toward that end in 
addressing it.
    We urge you to act now to preserve the Medicare+Choice 
program that provides so many low and moderate income 
beneficiaries who have few other affordable options with 
additional coverage. They receive protection from high, out of 
pocket costs; they receive catastrophic benefits and 
prescription drugs. Also, I would note that because there has 
been discussion this afternoon about rural areas, that the 
issue with respect to managed care participation in rural areas 
may have more to do with the unwillingness of certain single 
provider systems to contract with managed care organizations 
versus willingness of plans to participate themselves.
    In our testimony, we have offered principles for your 
consideration with respect to designing prescription drug 
programs. These principles are embedded in many of the 
proposals being discussed here today. In our view, they begin 
with the concept of universality that all beneficiaries should 
be eligible for the benefit, that there should be subsidies for 
low income individuals that there should be sustainable funding 
over time and that there should be options and flexibility.
    We stand ready to work with you to contribute to the 
Committee's efforts and support the objective which we know all 
of you share of providing affordable coverage for this 
beneficiary population.
    Thank you.
    [The prepared statement follows:]

Statement of Karen Ignagni, President and Chief Executive Officer, 
American Association of Health Plans

I. Introduction

    I am Karen Ignagni, President and Chief Executive Officer 
of the American Association of Health Plans (AAHP--. On behalf 
of the more than 1,000 HMO, PPO and other network-based health 
plans that are members of our association, I am pleased to 
testify this morning on the vitally important issue of 
extending prescription drug coverage to this nation's 38 
million Medicare beneficiaries.
    It bear mentioning that our membership includes the 
majority of Medicare+Choice organizations, which collectively 
serve more than 75 percent of those beneficiaries who have 
chosen Medicare managed care over the traditional fee-for-
service option. As such, we are delighted that Congress is 
focusing so much attention on this urgent priority that affects 
so many American seniors and their families.

II. Prescription Drug Coverage Critical to Medicare Program

    We believe that creating an affordable prescription drug 
benefit under Medicare is the single most important piece of 
unfinished business this Congress can and should confront. Not 
because the issue is important to those who will play a role in 
actually delivering a prescription drug benefit, but because it 
affects so profoundly the lives of Americans who have given so 
much to our nation and to the generations behind them.
    We owe it to these millions of Americans--the men and women 
that have a eloquently been called the ``Greater Generation''--
to ensure that no Medicare senior in this nation faces the 
cruel reality of having to decide between paying for drugs or 
the monthly food bill.
    Our great economic expansion--which has created so much 
prosperity for so many--must now be big enough to accommodate a 
simple proposition: that Medicare seniors deserve access to 
affordable prescription drugs. And that no one will be left 
behind.
    When established in 1965, Medicare reflected the state of 
the art in health care delivery and benefits design. At that 
time, few people with private health insurance had coverage for 
prescription drugs. Today, most commercially-insured 
individuals receive care through managed care plans, and 
prescription drug coverage is the norm, not the exception. 
Prescription drugs have transformed the treatment of 
innumerable illnesses and conditions and have improved the 
quality of life for millions of Americans. Access to 
prescription drugs is particularly crucial for Medicare 
beneficiaries. Although the elderly comprise 12 percent of the 
population, they account for 34 percent of total prescription 
drug costs (Mueller, 1997). It is estimated that individuals 
over the age of 65 use four times as many prescription items as 
those under 65. Prescription items are common treatment 
regimens for chronic conditions, which are highly prevalent 
among the elderly. Health plans and disease management 
companies have pioneered programs to help individuals with 
chronic conditions, such as congestive heart failure and 
cancer, among others, to maintain their health, and 
prescription drugs are a central component of these programs.

III. Medicare+Choice Programs Is Critical to Ensure a Strong 
Foundation for Prescription Drug Coverage

    We believe that Congress can deliver a prescription drug 
benefit to America's seniors through a bipartisan effort, and 
that members can create a system that is faithful to Medicare 
seniors and indeed all Americans.
    The job won't be simple. And the choices won't be easy. But 
the first step is to listen closely to what seniors really want 
from their Medicare system, and to build upon what's already 
working in the marketplace.
    First and foremost, seniors are telling us that they want 
control over their health care to rest with them, not with 
Washington. That means preservation of choice...so that 
Medicare seniors can choose a prescription drug benefit that's 
right for their unique needs and wants, and that no one gets 
locked into a one-size-fits-all system.
    Second, we can't find common ground by, in essence, 
throwing out a coverage option that has proven to be effective. 
Managed health care has played a significant role in providing 
an affordable prescription drug benefit to most of the 6 
million seniors who have chosen the Medicare+Choice option. The 
simple fact is that managed health care has already played a 
role in expanding a prescription drug benefit under Medicare to 
millions of Americans who otherwise would not have had access 
to it.
    Building on that success--instead of allowing 
Medicare+Choice to remain in a state of crisis--is the first 
significant step we can make to answering the Medicare 
prescription drug challenge that has been laid before us.
    AAHP's member plans have had a longstanding commitment to 
Medicare and to mission of providing beneficiaries high-
quality, comprehensive services and lower out-of-pocket costs. 
Many of our member plans have served beneficiaries since the 
inception of the Medicare HMO program as a demonstration 
project. Recent studies highlight Medicare beneficiaries' high 
levels of satisfaction with their Medicare health plans. HCFA 
data show that, among beneficiaries who identified themselves 
as having strong preferences, HMOs have a larger proportion of 
very satisfied enrollees than fee-for-service Medicare.
    Beneficiaries's satisfaction with the program was further 
demonstrated last month, when ore than one hundred 
beneficiaries who have chosen a Medicare+Choice plan over the 
fee-for-service delivery system came to Washington to talk 
about the importance of having a choice of coverage, having 
additional benefits, and having protection from higher out-of-
pocket costs.
    Health plans participating in the Medicare+Choice program 
have long recognized the importance of prescription drugs in 
meetings their members' health care needs. In fact, almost 70 
percent of plans and most of the more than 6 million 
beneficiaries enrolled in a Medicare+Choice plan have a 
prescription drug benefit. A recent AAHP analysis of HCFA data 
showed that many of these beneficiaries are ``unsubsidized''--
meaning they do not receive any third party assistance from, 
for example, a former employer or through Medicaid, in 
purchasing supplemental coverage for prescription drugs. 
Specifically, AAHP found that a majority of unsubsidized 
beneficiaries with coverage for prescription drugs were 
enrolled in health plans (see attachment: ``Financially 
Vulnerable Medicare Beneficiaries Rely on HMOs for Prescription 
Drug Coverage''). Without this option, these financially 
vulnerable beneficiaries undoubtedly would be forced to forego 
medication therapies that would help maintain their health and 
improve their quality of life. This is why we believe it is 
critically important to assure that Medicare+Choice 
beneficiaries maintain the important benefits they currently 
receive through their Medicare+Choice plans.
    The promise made to beneficiaries in the 1997 Balanced 
Budget Act (BBA) of a stable Medicare program that offered a 
wide array of choices all over the country to allow 
beneficiaries to meet their health needs in the most effective 
way possible has yet be fulfilled. Unintended consequences of 
the BBA have resulted in beneficiaries who chose to join a 
health plan losing benefits, facing sharp premium increases, 
and, in many instances, losing the option of even remaining in 
the plan of their choice. Since enactment of the BBA, nearly 
700,000 beneficiaries have had their Medicare+Choice coverage 
disrupted. Already, a number of plans have announced that they 
will be forced to exist the program effective January, 2001 
because of inadequate funding and excessive regulatory burdens.
    Last year, this Congress, in passing the Balanced Budget 
Refinement Act of 1999 (BBRA), took the first steps to correct 
the BBA's unintended consequences. The phase-in of HCFA's risk 
adjuster was slowed in order to minimize its impact on 
Medicare+Choice enrollees. Among other changes, Congress 
expressed its intend that the risk adjuster be budget-neutral 
rather than used to reduce total payments on behalf of seniors 
and individuals with disabilities who choose a Medicare+Choice 
plan; and user fees for the beneficiary information campaign 
were fairly apportioned. We appreciate the work of members of 
this Committee in recognizing the importance of Medicare+Choice 
and in advancing proposals to further stabilize the program. We 
strongly urge you to take bold measures this year to preserve 
beneficiary choices and avoid any further disruptions in 
coverage. These efforts are crucial to ensuring a strong 
foundation for the effort to expand prescription drug coverage.

IV. AAHP Principles and Issues for Consideration in Expanding 
Access to Affordable Prescription Drug Coverage

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

V. Conclusion

    The American Association of Health Plans (AAHP) and its 
member plans stand ready to contribute as the Committee 
continues its deliberations on the best way to expand access to 
affordable prescription drug coverage. We have tried today to 
contribute to the Committee's dialogue and pledge any further 
assistance on the issues of expanding prescription drug 
coverage, broader Medicare reform, and the need to preserve the 
Medicare+Choice program as an important building block toward 
these objectives.
    As you move forward with specific legislative proposals, we 
urge you to allow beneficiaries a range of options so they can 
select coverage that best meets their unique needs and 
circumstances. At the same time, please assure that 
beneficiaries maintain control over their health care choices 
and do not lose any of the coverage options they currently 
enjoy. Any legislation Congress enacts this year should place a 
high priority on protecting the benefits and choices of 
Medicare beneficiaries who currently receive prescription drug 
coverage through Medicare+Choice plans.
    AAHP is pleased that Congress is addressing this critical 
issue of prescription drug coverage for Medicare. As described 
today, our health plans have significantly contributed to the 
ability of beneficiaries to access prescription drugs. We thank 
you for the opportunity to testify.

                                

    Mr. McCrery [Presiding]. Thank you.
    Mr. Fuller?

  STATEMENT OF CRAIG L. FULLER, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, NATIONAL ASSOCIATION OF CHAIN DRUG STORES, ALEXANDRIA, 
                            VIRGINIA

    Mr. Fuller. Thank you, Mr. Chairman and Members of the 
Committee.
    My name is Craig Fuller. I represent the National 
Association of Chain Drug Stores. We have 150 retail chain 
members, approximately 32,000 chains, filling about two-thirds 
of the three billion prescriptions written every year. I have 
submitted a statement for the record and I would like to just 
hit a few of the highlights very briefly.
    We have been at work for several months on a plan we call 
Senior Rx Goal because we were concerned that in the time 
remaining, this Congress would not be able to come together on 
a plan to provide prescription benefits for needy seniors. Our 
plan is a State-based plan, forward-funded which would amount 
to a cost of about $41 billion over 5 years, $30 billion of 
which would be required from the Federal Government.
    We think it is a way to provide those seniors at 200 
percent of the poverty level and below who do not now have 
prescription coverage with coverage. It would sunset in 5 years 
and it would give the Congress the time and the administration 
time to sort out both major Medicare reform as well as the drug 
benefit.
    Having said that, we apply three important tests to our 
plan and other plans we look at. Perhaps we are at the same 
disadvantage as everyone else today which is working off a 
document that might be 36 hours old but I would like to make a 
few comments about the plan that we have seen.
    Our first test is that we really believe something has to 
happen this year for needy seniors. So the first test is really 
doing something with a sense of urgency that would produce 
results this year. The kinds of issues you have had discussed 
with you throughout the day are ones that concern us. Certainly 
the issue of insurance is one that concerns us and the 
availability of the kind of plan that is envisioned. That is 
for this Committee to debate.
    The second test is really very critical. It is that any 
successful plan, in our view, must enhance patient safety and 
improve patient outcomes. We must not settle for an approach 
that fails to safely care for seniors who generally have a more 
intense need for prescriptions as well as medication 
management. We know the Members of Congress are concerned about 
this. We think this needs to be an important consideration as 
you look at these plans.
    The proposal that has been outlined by Mr. Thomas today 
would involve a `drug only' insurance program that Medicare 
beneficiaries could purchase in the private marketplace. These 
policies would likely be administered by pharmaceutical benefit 
managers or PBMs as they have been discussed and described 
today.
    We have a high degree of respect for what PBMs do for their 
clients, but at the end of the day, it is not insurance 
companies and it is not PBMs that provide patient care. It is 
the community pharmacist, and a one-on-one relationship with 
that patient.
    We do think because seniors need more intense care, 
medication management, disease management, refill reminders and 
consistent monitoring, that they need the active involvement of 
a pharmacist in the community pharmacy setting. We are not sure 
that a drug only insurance plan would provide that, at least as 
it has been outlined to us at this date.
    We believe that any new Medicare prescription drug plan 
should assure that these important programs are a part of the 
standard benefit package, just like the prescription drug 
product, especially for seniors most at risk for potential 
medication-related, adverse events.
    We also believe it is important that legislation assure 
that pharmacists have adequate time and proper incentives to 
deliver these important quality improvement services for 
Medicare beneficiaries.
    This brings me to the third point and final test, which is 
that there is a fair return for pharmacy, and that any 
successful plan should assure that the highly efficient, 
community pharmacy infrastructure which operates on a 2 percent 
net profit margin today, remains viable to serve the health 
care needs of all Americans.
    I am not suggesting that the entire issue of pharmacy 
reimbursement for public health care programs can be tackled by 
this Committee, at least in this session, but I do want to 
point out that PBMs and the marketplace process that is in 
place today tends to focus most of the cost containment on 
pharmacy providers. This has resulted in a steady reduction of 
margin at the pharmacy level.
    I want to just touch upon a point, and I know we are 
working off an outline that may or may not be current, but 
there is an element in there that brings on price controls on 
pharmacies that I want to single out. The plan, as we have seen 
it, would allow PBMs to mandate a certain price that pharmacies 
could charge Medicare beneficiaries for prescriptions after 
their coverage has reached the cap. In other words, once that 
coverage is exhausted, the outline we have seen suggests that 
the pharmacy would still have to provide payments at this 
negotiated lower price.
    Again, we think that is an element of price control that 
would we would be concerned about. We would like to work with 
the Committee in an effort to resolve that particular issue.
    I will close by saying we commend this Committee for the 
work it is doing. This is a critical issue. We really would 
like to see a resolution that provides relief this year for 
needy seniors. We think with the press of time, a broader plan 
cannot pass; a State-based plan could be funded along the 
parameters that have been laid out by this Congress that would 
be made available and would give you the time to work on a 
broader, more comprehensive plan.
    Thank you.
    [The prepared statement follows:]

Statement of Craig L. Fuller, President and Chief Executive Officer, 
National Association of Chain Drug Stores, Alexandria, Virginia

    Mr. Chairman and Members of the Committee. I am Craig 
Fuller, President and Chief Executive Officer of the National 
Association of Chain Drug Stores (NACDS). I appreciate the 
opportunity to appear before you today to discuss various 
legislative proposals to cover prescription drugs under 
Medicare, and their impact on Medicare beneficiaries and 
community retail pharmacies.
    NACDS represents more than 150 chain pharmacy companies 
that operate over 32,000 community retail pharmacies in the 
United States. The NACDS membership base fills about 62 percent 
of the approximately 3 billion prescriptions that are dispensed 
each year in the United States. We employ approximately 94,000 
pharmacists in our stores.
    First and for the record, let me say that NACDS and its 
members applaud the significant time and effort that you have 
contributed to the debate about the best way to expand 
prescription drug coverage to Medicare beneficiaries. We 
understand and appreciate the need to improve prescription drug 
coverage for seniors. Every day, we see the impact on people 
who too often must choose between the food they need to sustain 
them, and the medication they need to treat an illness.
    As many of you know, NACDS has been working for several 
months on a state-based plan that would fund a prescription 
benefit plan for needy seniors that we call SenioRxGold. 
SenioRx Gold is supported by a coalition of groups, including 
the American Pharmaceutical Association, the American Society 
of Consultant Pharmacists, the Food Marketing Institute, and 
the National Consumers League.
    While the specifics of ``The Medicare Prescription Drug and 
Modernization Act'' are new to us, because of our work on 
SenioRx Gold, we have a pretty clear idea of the critical 
elements that must be considered if real prescription drug 
assistance is going to reach those who need it most. Indeed, we 
have attempted to apply three important tests that we believe 
should be applied to any proposal designed to enhance 
prescription drug coverage for seniors.

Sense of Urgency

    First, we need a national sense of urgency about reaching 
needy seniors across America this year with a program that 
allows them to receive the prescription medication they and 
their doctor agree they need. Frankly, the leadership in 
Congress has repeatedly stressed the importance of meeting this 
challenge, and with these hearings today, your committee is 
expressing an urgency, which we fully commend.
    However, as you are aware, the insurance industry has 
expressed concerns about the viability of private-market 
``drugs only'' insurance proposals, calling them ``unworkable'' 
and raising serious questions about whether they would amount 
to nothing more than ``unfulfilled'' promises to needy seniors.
    We also know from experience that the Balanced Budget Act 
of 1997 created various other types of health insurance and 
provider options for Medicare beneficiaries, which have not 
come to fruition. We are concerned that ``drugs only'' policies 
would meet the same fate.

Enhance Patient Safety/Improve Patient Outcomes

    Second, any successful plan must enhance patient safety and 
improve patient outcomes. We must not settle for an approach 
that fails to safely care for seniors, who generally have more 
intense prescription medication management needs than non-
senior populations. We know that Members of Congress are truly 
concerned about structuring a benefit that provides medication 
management programs for seniors.
    The House leadership proposal would create ``drugs only'' 
insurance policies that Medicare beneficiaries could purchase 
in the private marketplace. These policies will likely be 
administered by pharmaceutical benefit managers--or PBMs. As 
you know, community retail pharmacy has a significant amount of 
experience in dealing with PBMs.\1\
---------------------------------------------------------------------------
    \1\ According to IMS Health, almost 75 percent of prescriptions 
filled in a community pharmacy were paid for with cash outside of a 
plan in 1990. Now, almost 85 percent of all prescriptions are paid for 
by plans--most with a prescription benefit manager involved.
---------------------------------------------------------------------------
    For the record, let me state that, with all due respect, 
insurance companies and PBMs do not manage care--pharmacists 
do--and we have helped manage health care for years. The role 
of the pharmacist in reducing the risk of conflicting 
medications and in assisting patients with proper dosage and 
usage requirements is a well established, critical element of 
healthcare delivery.
    But seniors need more intense care--medication management, 
disease management, refill reminders, and consistent 
monitoring. Will ``drugs only'' insurance plans be structured 
so that we are providing both prescription drugs and important 
medication therapy management programs to seniors?
    We believe that any new Medicare prescription drug plan 
should assure that these important programs are part of the 
standard benefit package--just like the prescription drug 
product--especially for those seniors most at risk for 
potential medication-related adverse events.
    We also believe that it is important that legislation 
assure that pharmacists have adequate time and proper 
incentives to deliver these important quality improvement 
services for Medicare beneficiaries.

Fair Return for Community Pharmacy

    Which leads me to my third point: any successful plan 
should assure that the highly-efficient community pharmacy 
infrastructure--which operates on 2 percent net profit 
margins--remains viable to serve the health care needs of all 
Americans. I'm not suggesting that the entire issue of pharmacy 
reimbursement for public health care programs be tackled by 
this committee (at least in this session), but I do want to 
point out that PBMs tend to focus most of their cost 
containment on pharmacy providers. This has resulted in a 
steady reduction of margin at the pharmacy level. I want to 
point out that language currently in the proposal allows PBMs 
to aggressively negotiate discounts from pharmaceutical 
manufacturers, you should be aware that a 1998
    Much of the savings that PBMs achieve appear to come from 
the lower prices paid to pharmacies rather than from the 
rebates offered by drug manufacturers.\2\
---------------------------------------------------------------------------
    \2\ Congressional Budget Office, How Increased Competition from 
Generic Drugs Has Affected Prices and Returns in the Pharmaceutical 
Industry, July 1998, p. 8. The study found that 50 to 70 percent of the 
drop in the plans' spending on prescription drugs resulted from lower 
retail prescripton proices. Only 2 to 21 percent of the savings 
resulted from manufacturers debates that the PBMs shared with the 
health insurance plans.
---------------------------------------------------------------------------
    Moreover, the plan before us today would allow for ``price 
controls'' on retail pharmacies. That's right--the plan before 
us today would allow PBMs to mandate a certain price that 
pharmacies could charge Medicare beneficiaries for 
prescriptions after they have reached their coverage cap. We 
are unsure why Congress would impose price controls on a highly 
competitive industry that operates on a 2 percent net profit 
margin. We urge Congress to reject price controls on retail 
pharmacies.

Conclusion

    Mr. Chairman, I'd like to conclude by saying we recognize 
that these are serious and difficult issues and we appreciate 
your leadership and that of members of your committee for 
bringing this important legislative proposal forward for review 
and discussion. You, members of your committee and your staffs 
have encouraged us to be frank and candid during this entire 
process. We would be pleased to work with you in addressing 
some of the concerns I have outlined in my testimony. We think, 
as I suggested earlier, that there are several reasons we can 
provide an important perspective.
    Finally, I will end by saying that we also remain committed 
to the notion that if the Medicare Prescription Drug and 
Modernization Act cannot be advanced in the shortness of time, 
we hope given the sense of urgency you and others have shown 
for the millions of needy seniors and their families, that you 
would consider turning to the state-based program we call 
SenioRxGold. It is not perfect and it is not the long-term 
solution. However, it does, in our view, meet the three 
critical tests I outlined to you today and would provide 
meaningful benefits, effectively and safely to those seniors 
with the greatest need.
    This program is designed as an interim, or stopgap 
approach. By providing federal assistance to states that 
voluntarily elect to develop prescription assistance programs, 
SenioRx Gold builds upon the 15 states that already have been 
successfully operating these programs. It gives the states the 
flexibility to meet the needs of 64 percent of those Medicare 
beneficiaries without prescription drug coverage. In fact, 
SenioRx Gold would provide a more comprehensive benefit than 
other proposals. With no premiums, no annual deductible and 
lower copays, needy seniors would not be deterred from 
participating.
    Whichever course you pursue, we thank you for the 
opportunity to share our views and remain committed to working 
with you to address this and other issues.
            Thank you very much.
      

                                

    Mr. McCrery. Thank you, Mr. Fuller.
    Ms. Bello?

STATEMENT OF JUDITH H. BELLO, EXECUTIVE VICE PRESIDENT, POLICY 
      AND STRATEGIC AFFAIRS, PHARMACEUTICAL RESEARCH AND 
                    MANUFACTURERS OF AMERICA

    Ms. Bello. I am pleased to be here this afternoon on behalf 
of Americas innovative pharmaceutical industry to discuss an 
issue vitally important to all of us, prescription drug 
coverage for elderly and disabled Americans.
    In the nineties, we developed 370 new medicines for 
patients. Today, we have over 1,000 medicines in development to 
treat hundreds of serious illnesses such as Alzheimer's, 
Parkinson's, cancer, arthritis and depression. The 21st century 
hailed as the golden era of biology brings even greater 
promise. As the mapping of the human genome nears completion, 
our targets for drug innovation will be multiplied six to 
twenty times over from about 500 drug targets today to 3,000 to 
10,000 in the near future.
    We want to ensure that America's seniors have access to the 
medicines we have already developed without discouraging the 
discovery and development of many more medicines for all 
patients. I hope we all can agree on at least four points.
    First, expanded drug coverage for seniors will happen. If 
we work together, it can happen in this Congress.
    Second, expanded drug coverage for seniors will be a 
positive development. We all care so much about the subject of 
today's hearing because many prescription drugs increasingly 
are the most effective therapy for many patients and the most 
cost effective therapy for the Medicare Program in our society.
    For example, when a senior named Francis Wagner suffered a 
stroke, his doctor prescribed an innovative clot-busting 
medicine. Thanks to his medicine only 12 days later he was 
dancing with his wife on their 50th wedding anniversary 
celebration. An NIH study demonstrates that Medicare saved on 
average over $4,000 by treating Mr. Wagner with the medicine 
which reduced his hospital and rehabilitation bills and also 
avoided his admission to a nursing home.
    Third, as we expand drug coverage for seniors, we must 
sustain the industry's ability to develop new medicines for all 
patients and their families.
    Finally, we need to put the interest of patients first and 
to help both Medicare patients who need access today to 
medicines already developed and patients of all ages and their 
families who depend on the industry because they need new 
medicines and hopefully cures not yet developed.
    Since February 1999, we have strongly supported 
strengthening and modernizing Medicare, including expanded 
coverage of prescription drugs. We support the views expressed 
by Mr. Thomas and Senator Breaux amongst others this morning 
that the current program needs to be preserved and 
strengthened.
    As we also heard from both sides of the aisle, the Congress 
is now pursuing interim expansion of drug coverage through 
private insurance using choice and competition to ensure 
quality and contained costs. PhRMA can support an incremental 
approach if it would improve opportunities for future 
comprehensive reform and meet the following key principles: 
Give all beneficiaries the voluntary ability to enroll in a 
private insurance coverage plan of their choice among a range 
of operations; provide Federal subsidies for the low income 
beneficiaries so they can afford coverage; provide coverage for 
beneficiaries with high pharmaceutical expenditures; give 
beneficiaries access to all medicines; provide for oversight of 
plans by a new government entity; ensure that the new program 
would be consistent with needed comprehensive modernization of 
the Medicare Program; and offer coverage through competing, 
private insurance plans that rely on marketplace competition to 
improve quality and contain costs.
    Government price controls, in our view, are unacceptable 
because they would inevitably harm the industry's ability to 
develop new medicines for all patients.
    Finally, some skeptics voice concerns about adverse 
selection and claim that a private insurance program cannot 
work. We have consulted with experts, actuaries and also 
economic firms who have advised us that adverse selection is an 
important challenge in any private insurance product involving 
individual choice but that if a program is properly designed, 
it can work.
    They recommend the following tools to minimize the impact 
of adverse selection, including limiting election opportunities 
for enrollment, providing low income subsidies for premiums and 
deductibles, establishing a high risk pool for enrollees with 
very high expenditures, requiring up front cost sharing such as 
an annual deductible and also allowing insurers to negotiate 
with manufacturers and distribution networks to reduce costs.
    In conclusion, the industry supports expanded drug coverage 
for seniors and disabled Americans done the right way. The 
pharmaceutical industry remains committed to finding a 
bipartisan solution that will help seniors have access to the 
medicines they need while also allowing thousands of our 
dedicated scientists to continue the search for new medicines 
and hopefully cures to help all patients and their families.
    Thank you.
    [The prepared statement follows:]

Statement of Judith H. Bello, Executive Vice President, Policy and 
Strategic Affairs, Pharmaceutical Research and Manufacturers of America

                              INTRODUCTION

    Mr. Chairman and Members of the Committee, I'm pleased to 
be here on behalf of America's innovative pharmaceutical 
industry to discuss an issue that is vitally important to all 
of us--prescription drug coverage for seniors and disabled 
citizens. Across America, 40,000 scientists in our research 
labs work day and night in hopes of finding the next cure or 
the next treatment to allow individuals to live long, healthy, 
and productive lives (see Attachment 1). On average, it takes 
12 to 15 years and $500 million to develop a new drug and bring 
it to market.
    Today, industry has more than 1,000 new medicines in 
development to treat hundreds of serious illnesses including 
Alzheimer's and Parkinson's diseases, cancer, stroke, 
arthritis, and depression. We are confident that, in time, we 
will find the cures for these and other conditions that are so 
prevalent among our aging population (see Attachment 2).
    The 21st century brings even greater promise. As the human 
genome is mapped, many new targets for pharmaceutical 
innovation will be identified. Today's 500 or so targets for 
drug interventions are expected to increase to 3,000 to 10,000 
targets in the near future. When these treatments and hopefully 
cures are brought to market, we want to ensure that seniors 
have access to them--without discouraging the discovery and 
development of new medicines.
    In our discussions, I hope that we all can begin by 
agreeing on at least four key points:
    First, expanded drug coverage for seniors will happen. The 
question is not whether it will happen, but when, how, and with 
what effects on the quality of health care for seniors and 
disabled Americans and on drug discovery and development. If we 
work together, it could happen in this Congress. Most Medicare 
beneficiaries have prescription drug coverage through their (or 
their spouse's) current or former employer, a Medicare 
supplemental insurance (or Medigap) policy or a Medicare+Choice 
plan, or by qualifying for Medicaid or other governmental 
programs. But many of those who do not have the coverage they 
need require additional assistance. The pharmaceutical industry 
wants to be part of a sound, market-based solution that will 
help all patients today and into the future.
    Second, expanded drug coverage for seniors will be a 
positive development. Prescription drugs are increasingly the 
most effective and cost-effective therapy with which to treat 
diseases or conditions. Some Medicare beneficiaries are in need 
of prescription drug coverage and our medicines provide 
extraordinary value to them.
    Third, as we expand drug coverage for seniors, we must 
sustain the American pharmaceutical industry's worldwide 
leadership. The industry has developed new medicines that 
benefit all patients--young and old--and their families. We do 
not want to harm the environment in the U.S. that has allowed 
our industry to thrive. In the1990s alone, 370 prescription 
drugs, biologics, and vaccines developed by industry were 
approved for patients' use with a physician's prescription. 
Almost half of the globally important new medicines in the 
world are discovered by the U.S. industry (see Attachment 3). 
We are the world's leader in pharmaceutical research and 
development (see Attachment 4).
    As we work together to expand access to prescription drug 
coverage, we must remember that Medicare beneficiaries want 
access to new medicines because they were invented
    Finally, we need to always remember to put the interests of 
patients first. In an environment where we discuss 10-year 
forecasts, adverse selection, risk pools, and premium 
calculations, we must not forget that the real focus is on 
patients. Our goal should be to expand Medicare drug coverage 
in the way best for patients, their children, and their 
grandchildren--who need access today to medicines already 
developed, and who also depend on the pharmaceutical industry 
to continue to lead the way in developing new medicines and 
hopefully cures that exist today only in our dreams.S6631

    THE PHARMACEUTICAL INDUSTRY SUPPORTS EXPANDED PRESCRIPTION DRUG 
              COVERAGE FOR ELDERLY AND DISABLED AMERICANS

    Since February 1999, the pharmaceutical industry has 
strongly supported strengthening and modernizing Medicare, 
including expanding Medicare coverage of prescription medicines 
(see Attachment 5). We believe that the best way to expand 
prescription drug coverage for Medicare beneficiaries is 
through comprehensive Medicare reform. The current program is 
based on a 1960s-style, one-size-fits-all model that relies on 
centralized price controls and complex regulations. The result 
is a program that is confusing for patients and providers, 
difficult to administer, and inadequate to meet the health care 
needs of the 21st century.
    If the Congress decides to pursue instead interim expansion 
of drug coverage through private-sector insurance (using choice 
and competition to ensure quality and contain costs), PhRMA can 
be supportive so long as the interim measures would improve, 
rather than impede, opportunities for future comprehensive 
reform (see attachment 6).
    With respect to the delivery system for any proposal, law 
and policy makers need to ask:
     Should the drug benefit be delivered by the 
government or the private sector?
     Should the benefit be a single, one-size-fits-all 
program, or should seniors and disabled beneficiaries have a 
range of choices?
    We believe several principles are key components of any 
interim proposal. As Congress continues to grapple with this 
complex issue, we will support proposals consistent with these 
key principles:
     All beneficiaries would have the ability to enroll 
in a private insurance coverage plan of their choosing, ranging 
from private fee-for-service to HMOs and various private-sector 
options in between.
     Federal subsidies would help low-income 
beneficiaries afford coverage.
     Plans would provide coverage for beneficiaries 
with high pharmaceutical expenditures.
     Beneficiaries would have access to all medicines.
     Plans should be overseen by a new government 
entity.
     The new program would be consistent with, and a 
step toward, needed comprehensive modernization of the Medicare 
program.
     Coverage would be offered through competing, 
private insurance or health plans that rely on marketplace 
competition to control costs and improve quality.
    Government price controls are unacceptable because they 
would inevitably harm the industry's ability to develop new 
medicines for patients. We urge you to say ``no'' to price 
controls in any form, not direct price controls, not indirect 
price controls, not by design, not by accident, not by stealth, 
not by baby steps.

A PRIVATE INSURANCE INCREMENTAL APPROACH WILL BEST SERVE PATIENTS TODAY 
AND TOMORROW

    The pharmaceutical industry believes that if Congress 
decides to provide an incremental prescription drug benefit, 
the best approach would be to provide seniors access to private 
insurance products. This approach would fit easily into the 
current marketplace, since well over 150 million people get 
their drug coverage through private entities. In delivering 
drug coverage, these private entities would do more than simply 
pay the claims. They could provide disease management programs, 
drug utilization review, patient education, and help to reduce 
medical errors. We in the research-based pharmaceutical 
industry believe that seniors and disabled beneficiaries would 
benefit greatly by having access to these private insurance 
products, with the government providing subsidies for those in 
need.
    Skeptics point to complex issues, such as ``adverse 
selection,'' and claim that a private insurance program will 
not work. Adverse selection can occur because individuals 
purchase insurance only when it is in their best interest. If 
an individual could purchase insurance at any time, it would be 
perfectly rational for them to wait until they were sick. 
Consequently, insurers often place limits on when individuals 
can purchase insurance and under what conditions.
    Recognizing that adverse selection is an important issue, 
we asked the experts for assistance. We turned to leading 
actuarial and economic firms including Milliman and Robertson, 
Abt Associates, and Towers-Perrin and commissioned analyses 
(see Attachments 7, 8, and 9). These actuaries and economists 
note that a private prescription drug insurance program can 
work if designed properly. They also note that adverse 
selection is ``one of the most difficult issues in designing 
any insurance program involving individual choice.'' Actuaries 
and economists have several tools to minimize the impact on 
adverse selection. These include:
     Limiting election opportunities for enrollment;
     Providing low-income subsidies for premiums and 
deductibles;
     Establishing a high-risk pool for enrollees with 
very high expenditures;
     Requiring up-front cost sharing, such as an annual 
deductible; and
     Allowing insurers to negotiate with manufacturers 
and distribution networks to reduce costs.
    We believe that a properly designed prescription drug 
insurance benefit would attract many Medicare purchasers and 
many private market sellers. Why are we so confident? In the 
market today, there are private health insurance policies for 
cancer, sports accidents, emergency room visits, pregnancy 
complications, and campers. There are private insurance 
products for goats, carriage rides, and the weather on the day 
of your daughter's wedding (see Attachment 10). We believe that 
there are similar opportunities for private-market solutions to 
increase access to prescription drug coverage for the elderly 
and disabled Americans.

CONCLUSION

    In my testimony today, I've tried to highlight the 
pharmaceutical industry's support for expanded drug coverage 
for seniors and disabled Americans--done the correct way.
    Some say that this issue is life or death for the 
pharmaceutical industry, America's premier high-technology 
industry. After the debate is over and the dust settles, we 
will still have a pharmaceutical industry--but depending on 
what you do, the industry could be profoundly different, and 
the results for patients could be demonstrably less.
    As the debate unfolds, I hope you'll remember the millions 
of Americans and their families waiting impatiently for new 
treatments and hopefully cures. We can provide quality health 
care for seniors and the disabled, including better 
prescription drug coverage, but we need to do it the correct 
way. If we do it the wrong way, the industry and the patients 
we serve will undoubtedly suffer the consequences.

ATTACHMENT 1

     THE RESEARCH-BASED PHARMACEUTICAL INDUSTRY: FACTS AT A GLANCE

    A Strong Commitment to Research and Development
     This year, research-based pharmaceutical companies 
will invest $26.4 billion in research and development (R&D) on 
innovative new medicines. This represents an increase of 10.1 
percent over research spending in 1999. Since 1980, research-
based companies have multiplied their R&D investment 13-fold.
     Domestic R&D is expected to increase by nearly 12 
percent in 2000.
     R&D conducted abroad by U.S. based companies will 
grow only 1.2 percent--a clear sign that the American system 
nurtures innovation and discovery.
     Over the past two decades, the percentage of sales 
allocated to pharmaceutical R&D has increased from 11.9 percent 
in 1980 to approximately 20.3 percent in 2000, higher than 
virtually any other industry. The average for all U.S. 
industries is less than four percent.
     Approximately 36 percent of pharmaceutical R&D 
conducted by companies worldwide is performed in the United 
States, followed by Japan with 19 percent.
     This U.S. industry investment is very efficient. 
Of 152 major global drugs developed between 1975 and 1994, 45 
percent are of U.S. origin.
    Drug Discovery and Development Are High-Risk
     During the 1990s, the average time it took to 
discover, test and develop a single new drug increased to 
nearly 15 years. This was almost twice the development time in 
the 1960s.
     Of every 5,000-10,000 compounds tested, only five 
enter human clinical trials, and only one is approved by the 
FDA for sale in the U.S. Of every 10 medicines in the market, 
on average, only three generate revenues that meet or exceed 
average R&D costs.
     The Boston Consulting Group estimates that the 
pre-tax cost of developing a drug introduced in 1990 was $500 
million, including the cost of research failures, the 
opportunity cost of capital over the period of investment, and 
the increasing cost of clinical trials.
    Medicines in Development
     The research-based pharmaceutical industry 
currently has more than 1,000 new medicines in development to 
treat hundreds of serious diseases.
     There are currently 369 biotech medicines in the 
pipeline to combat over 200 diseases. Nearly half the medicines 
-175--are for cancer, the second leading killer of Americans. 
Biotechnology and new technological tools have revolutionized 
cancer research.
     Among these drugs and biologics in development are 
promising new treatments for cancer, heart disease, 
Alzheimer's, AIDS, diabetes, multiple sclerosis, Parkinson's, 
stroke, rheumatoid arthritis, and depression.
    The Value of Medicines
     The estimated life expectancy of an American born 
in 1920 was 54 years. By 1965, life expectancy had increased to 
70 years. The average American born today can expect to live 
more than 76 years, and life expectancy has risen dramatically 
for all age groups. Every five years since 1965, roughly one 
additional year has been added to life expectancy at birth. 
These improvements in life expectancy are due to advances in 
medicine and our improved ability to prevent and treat disease:
     Antibiotics and vaccines have virtually wiped out 
such diseases as diptheria, syphilis, whooping cough, measles 
and polio in the U.S.
     The influenza epidemic of 1918 killed more people 
than all the battles fought during the First World War. Since 
that time, medicines have helped reduce the combined U.S. death 
rate from influenza and pneumonia by 85 percent.
     Over the past 30 years, innovative medicines have 
helped reduce deaths from heart disease and stroke by half, 
enabling 4 million Americans to live longer, better lives.
     Since 1965, drugs have helped cut emphysema deaths 
by 57 percent and ulcer deaths by 72 percent.
     In a year-long disease-management program for 
about 1,100 patients with congestive heart failure run by 
Humana Hospitals, pharmacy costs increased by 60 percent, while 
hospital costs (the largest component of U.S. health care 
spending) declined 78 percent. The net savings were $9.3 
million.
     A National Institutes of Health (NIH) study showed 
that while it initially costs more to treat stroke patients 
with a clot-busting drug, the expense is more than offset by 
reduced hospital rehabilitation and nursing home costs. 
Treatment with the clot-buster costs an additional $1,700 per 
patient, but reduced hospital rehabilitation and nursing home 
costs result in net savings of more than $4,000 per patient.
     According to a study published in the New England 
Journal of Medicine, the use of ACE inhibitor drugs for 
patients with congestive heart failure reduced mortality by 16 
percent, avoiding $9,000 in hospital costs per patient over a 
three-year period. Considering the numbers of people at risk 
for congestive heart failure, additional use of ACE inhibitors 
could potentially save $2 billion annually.
     According to a study conducted at the University 
of Maryland Medical Center, patients treated with beta-blockers 
following a heart attack were up to 40 percent less likely to 
die in the two-year period following the heart attack than the 
patients that did not receive the drugs. According to another 
study, use of beta-blockers resulted in an annual cost savings 
of up to $3 billion in preventing second heart attacks and up 
to $237 million in treating angina.
     Unfortunately, a study published in the Journal of 
the American Medical Association found that only half the 
people who could be helped by these medicines are getting them.
     Estrogen-replacement therapy can help aging women 
avoid osteoporosis and crippling hip fractures, a major cause 
of nursing home admissions. Estrogen-replacement therapy costs 
approximately $3,000 for 15 years of treatment, while a hip 
fracture costs an estimated $41,000.
     The combination of two drugs, at a cost of about 
$140 can eradicate the bacterial cause of most ulcers. Ulcer 
surgery costs upward of $28,000.
[GRAPHIC] [TIFF OMITTED] T1459.003

[GRAPHIC] [TIFF OMITTED] T1459.004

[GRAPHIC] [TIFF OMITTED] T1459.005

[GRAPHIC] [TIFF OMITTED] T1459.006

PhRMA Medicare Prescription Drug Position

    The Pharmaceutical Research and Manufacturers of America 
(PhRMA) supports pharmaceutical coverage for Medicare 
beneficiaries. We believe that the best way to provide 
pharmaceutical coverage to Medicare beneficiaries is through 
comprehensive modernization of the Medicare program to provide 
beneficiaries a choice of health plans that would also provide 
drug coverage. If such modernization does not occur this year, 
PhRMA would support federal legislation that would provide all 
seniors with access to pharmaceutical insurance coverage, 
wherever they live and no matter how sick they are.
    Such a proposal would have the following elements:
    1.All beneficiaries would have the ability to enroll in any 
qualified pharmaceutical coverage plan of their choosing.
    2. Federal government subsidies would help low-income 
beneficiaries afford coverage.
    3. Each beneficiary would be offered a choice of multiple 
competing, private insurance plans that rely on marketplace 
competition to control costs and improve quality.
    4. Plans would provide coverage for beneficiaries with high 
pharmaceutical expenditures.
    5. Beneficiaries would have access to all medicines.
    6. Plans would be overseen by a new, independent government 
entity.
    7. This new program would be consistent with, and step 
toward, needed comprehensive modernization of the Medicare 
program.
    Several existing proposals embody these elements in whole 
or part. We offer our assistance and support in advancing the 
goal of enhanced pharmaceutical coverage this year. 
[GRAPHIC] [TIFF OMITTED] T1459.007

[GRAPHIC] [TIFF OMITTED] T1459.008

[GRAPHIC] [TIFF OMITTED] T1459.009

    [Attachments 5, 7, 8, and 9 are being retained in the Committee 
files.]
      

                                

    Mr. McCrery. Thank you, Ms. Bello.
    Ms. Briceland-Betts?

STATEMENT OF DEBORAH BRICELAND-BETTS, J.D., EXECUTIVE DIRECTOR, 
                      OLDER WOMEN'S LEAGUE

    Ms. Briceland-Betts. Thank you. I appreciate your 
invitation to testify today. I commend you and the Committee 
for engaging in the important discussion of updating and 
strengthening Medicare for the 21st century.
    I can assure you that our members care deeply about this 
issue. It is because women are quite literally the face of 
Medicare. They are the majority of beneficiaries at every age 
level and because of their longer lives, they have more chronic 
illness and take more prescription drugs.
    Women must purchase those medications from a retirement 
income that averages 40 percent of men's retirement income. I 
want to be clear here today access to prescription drugs is not 
simply a problem for the poor. After premium payments, 
prescription drugs account for the single largest component of 
out of pocket spending for noninstitutionalized Medicare 
beneficiaries aged 65 and older. Consequently, many seniors 
with moderate incomes are also finding the high cost of 
prescription drugs to be out of their reach. Many of them, as 
we have heard today, are sacrificing their future financial 
security and sadly, even playing a game of russian roulette 
with their health as a result.
    Stories abound of seniors trying to stretch their 
medications by not taking required dosages and in fact, some 
are just not taking their needed medications at all. OWL 
strongly believes that the prescription drug coverage for 
seniors is needed to modernize and strengthen Medicare. 
Further, such a program is best implemented through a defined 
benefit package that is voluntary, comprehensive and 
universally available to all Medicare beneficiaries.
    Co-payments, premiums and deductibles must be affordable 
and benefits should be indexed to inflation to ensure that 
coverage keeps pace with the cost of prescription drugs.
    Last, adequate stop loss protections and catastrophic 
coverage are critical components and measures must be taken to 
ensure that a new prescription drug benefit does not put 
current Medicare benefits at risk.
    Both President Clinton and the Republican leadership have 
put forward plans that address this critical public health 
issue, so allow me to make a few comments in that direction.
    While OWL does not endorse legislation, we can provide a 
unique age and gender analysis that I hope you will find 
helpful. OWL is pleased that the Republican leadership is 
taking an active interest in providing affordable prescription 
drugs for this Nation's seniors. We are glad to see the 100 
percent subsidy for beneficiaries with incomes under 135 
percent of poverty with an additional safety net in the form of 
a sliding fee scale for assistance to those between 135 and 150 
percent of poverty.
    Despite this bright spot, and in light of the principles I 
outlined earlier, I must admit that we have larger concerns 
about the proposed plans' ability to provide meaningful 
coverage for all older Americans. OWL was disappointed to see 
that the Republican plan or what we know of it does not 
represent a defined benefit added to the Medicare Program, but 
rather, a private insurance option.
    We are concerned that the Medigap type plans being proposed 
with insurers getting a subsidy to lower the premiums will not 
be affordable for most seniors even in the unlikely event that 
an insurer passed on every dollar and subsidy to the 
beneficiary.
    Further, the notion of permitting insurers to offer a 
standardized benefit or its actuarial equivalent may cause 
adverse selection problems and could further erode the benefit. 
Given that many insurers will probably not offer a standalone 
prescription drug policy in light of the relatively small 
subsidy, OWL was interested to note that the plan provides for 
a Medicare-run policy for areas where private options don't 
exist. I suspect this option will actually represent the bulk 
of the coverage if the plan were enacted. If so, why not just 
create a defined benefit within the Medicare Program right from 
the start?
    OWL is also extremely concerned that the private plans will 
be quite restrictive in their application of formularies. This 
would be especially troubling for the older women who more 
often require the higher end, cutting edge drugs to treat their 
chronic illnesses.
    OWL is also worried that the plan apparently only pays for 
50 percent of the beneficiary's drug costs after a deductible 
requirement is met. Given the financial constraints of many 
older women, 50 percent copayments could well be out of reach. 
Frankly, this is a concern that OWL has with both the 
Republican and Democratic plans. We must remember that the 
median income for women over 65, the majority of Medicare 
beneficiaries, is $14,820. This figure is above the magic 
bullet of 150 percent of poverty and is by no means a healthy 
income. A 50 percent copay is quite likely to be out of reach. 
Realistically, someone who cannot afford a $250 prescription 
will probably still struggle to afford a $125 prescription.
    Affordability also goes to premiums. We have been told that 
the Republican plan will average about $37 a month but it could 
vary widely by plan and region. Again, with the economic 
constraint of the majority of Medicare recipients, this becomes 
a critical factor.
    OWL would also like to see both plans firm up their 
catastrophic coverage.
    In conclusion, with the respective legislative plans aside, 
I must also say whatever prescription drug coverage is 
discussed, we must acknowledge that we are here today because 
America's seniors cannot afford the high cost of prescription 
drugs. We have yet to hear an adequate explanation as to why, 
for instance, from 1980 to 1998, the Consumer Price Index rose 
98 percent, prescription drugs rose 256 percent or why the 
pharmaceutical industry continues to lead the Fortune 500 in 
profits.
    OWL has been advocating for prescription drug coverage in 
Medicare for 20 years but we are not so anxious that we feel 
Congress should rush the process. We need a bipartisan plan 
that works for America's seniors, one that provides meaningful 
cover for people, not one that just provides political cover.
    We look forward to working with Congress and the 
administration to assure whatever measures are finally adopted, 
truly work for older people.
    Thank you.
    [The prepared statement follows:]

Statement of Deborah Briceland-Betts, J.D., Executive Director, Older 
Women's League

    Mr. Chairman and distinguished Members of the Committee:
    I appreciate your invitation to testify today on the timely 
issue of developing a prescription drug benefit for Medicare. 
OWL commends you and the Committee for engaging in the 
important discussion of updating and strengthening Medicare for 
the 21st century.
    As the Executive Director of OWL, the only national 
grassroots membership organization dedicated exclusively to the 
unique concerns of women as they age, I can assure you that our 
members are fired up about this issue. Many of the healthcare 
hurdles facing older women have not changed since OWL's 1999 
Mother's Day Report, The Face of Medicare is a Woman You Know, 
and its addendum Medicare: Why Women Care were published. And 
just last month, OWL released its first Mother's Day Report of 
the new millennium, Prescription for Change: Why Women Need a 
Medicare Drug Benefit. Based on this research and the longtime 
leadership of OWL on this issue, I am pleased to share with you 
some concrete suggestions that both would modernize Medicare 
and truly help those who use the Medicare program the most: 
older women.
    Women are quite literally the face of Medicare. Let me 
paint you a picture of the typical Medicare recipient:
     She is 58% of the Medicare population at age 65 
and 71% at age 85; as you know, the fastest growing portion of 
our population is age 85 plus;
     She is managing more than one chronic illness at a 
time. At age 65, 9 in 10 women have at least one chronic 
illness; 73% have two or more chronic illnesses;
     She has outlived her spouse, she's divorced or, 
increasingly, she's never been married; and because she's 
alone, she is five times more likely to be poor; older women 
are 75% of the elderly poor;
     and she is paying an average of 20% of her annual 
income for out-of-pocket health expenses such as prescription 
drugs and supplemental health insurance. This compares to 17% 
for male Medicare recipients.
    And though she may be living in her own home today, her 
poor health and the lack of help in managing her daily affairs 
will probably require her to seek long-term care--paid for by 
Medicaid--tomorrow.
    Because older women are more likely to be poor, they are 
more likely to face financial barriers to health care and thus 
spend a greater portion of their income on such costs. Except 
for those individuals enrolled in managed care programs, 
Medicare does not cover prescription drugs unless they are used 
in a hospital or other health care institution. Yet almost 
eight of ten women on Medicare--that's 17 million women--use 
prescription drugs regularly, and thus many pay for these 
medications out-of-pocket.\1\ All told, because of our greater 
longevity and tendency towards more chronic illnesses, women on 
Medicare spend 20% more on prescription drugs than their male 
counterparts.\2\
---------------------------------------------------------------------------
    \1\ Kaiser Family Foundation/Commonwealth Fund, Survey of Medicare 
Recipients.
    \2\ National Economic Council, Domestic Policy Council, Disturbing 
Truths and Dangerous Trends: The Facts About Medicare Beneficiaries and 
Prescription Drug Coverage, July 22, 1999.
---------------------------------------------------------------------------
    We must remember that this financial burden is being placed 
on women who are, at every age, at a greater risk for poverty 
than their male counterparts. These disparities are 
particularly pronounced in old age. Women's retirement income 
is almost less than half of men's. More than half of women age 
65 and over have personal incomes of less than $10,000 a year, 
and three out of four have incomes under $15,000.\3\ Research 
shows that beneficiaries with high or very high out-of-pocket 
drug costs are those with modest incomes. One recent study 
found that beneficiaries with the highest average out-of-pocket 
drug expenses are those with incomes between 135 and 200 
percent of poverty.\4\
---------------------------------------------------------------------------
    \3\ Stone and Griffith, Older Women: The Economics of Aging, 
Women's Research & Education Institute, 1998
    \4\ Gibson and Brangan, Out-of-Pocket Spending on Health Care by 
Women Age 65 and Over in Fee-for-Service Medicare: 1998 Projections, 
AARP Public Policy Institute, 1998.
---------------------------------------------------------------------------
    But I want to be clear here today. Access to prescriptions 
drugs is not simply a problem for the poor. While older 
Americans comprise only 13 percent of the U.S. population, they 
account for one-third of all prescription drug spending.\5\ In 
fact, after premium payments, prescription drugs account for 
the single largest component of out-of-pocket spending for non-
institutionalized Medicare beneficiaries' age 65 and older.\6\ 
Consequently, many seniors with moderate incomes are also 
finding the high cost of prescription drugs to be out of their 
reach; many of them are sacrificing their future financial 
security and, sadly, even playing a game of Russian roulette 
with their health as a result. Stories abound of seniors trying 
to stretch their medications by not taking the required 
dosages, and in fact some are not taking needed medicines at 
all.
---------------------------------------------------------------------------
    \5\ Statement of Beatrice Braun, M.D., Testimony Before the 
Subcommittee on Health of the House Committee on Ways and Means Hearing 
on Senior's Access to Prescription Drug Benefits, February 15, 2000.
    \6\ Statement of Beatrice Braun, M.D., Testimony Before the 
Subcommittee on Health of the House Committee on Ways and Means Hearing 
on Senior's Access to Prescription Drug Benefits, February 15, 2000.
---------------------------------------------------------------------------
    A new international health care survey of the elderly by 
the Commonwealth Fund reported 7% of adults ages 65 and over 
did not even fill a prescription.\7\ Why? Because they can't 
afford them, and there is no comprehensive benefit that 
provides the medicines they need at a reasonable cost. We even 
hear of how this financial burden is trickling down through the 
generations, with working families paying for parents' 
prescriptions and thus limiting what they can save for their 
children's education or their own retirement. So I must stress 
that these catch-22 decisions are not limited to the poor. 
Middle-income seniors are finding their retirement security 
undermined by the high cost of prescription drugs. The barriers 
are very real, and a simple Medicaid enhancement will therefore 
not solve the full scope of the problem.
---------------------------------------------------------------------------
    \7\ Commonwealth Fund
---------------------------------------------------------------------------
    In fact, limiting a Medicare drug benefit to only those 
with low incomes would exclude many of the people most in need 
of assistance, including those with modest incomes (135-200% of 
poverty). Research suggests that beneficiaries at all income 
levels experience high or very high drug spending and out-of-
pocket costs.\8\ Another study found that fully half of women 
on Medicare without any drug coverage at all have incomes above 
150 percent of poverty.\9\ A means tested program would also 
exclude those in poor and fair health, or with severe 
functional limitations, who have incomes or assets too high to 
qualify for Medicaid coverage. Clearly, then, this is as much 
an affordability issue as it is a coverage issue. That's why 
its important to design a program that provides all 
beneficiaries with access to an affordable prescription drug 
benefit.
---------------------------------------------------------------------------
    \8\ AARP, ``How Much are Medicare Beneficiaries Paying Out-of-
Pocket for Prescription Drugs?'' September 1999.
    \9\ Actuarial Research Corporation, unpublished data, 1999.
---------------------------------------------------------------------------
    Ironically, Americans who pay for all or part of their 
prescriptions out-of-pocket are charged far more than either 
insurance companies or HMOs. In fact, uninsured seniors often 
pay twice as much for their prescription drugs than more 
favored customers, such as those in big HMO plans or the 
federal government.\10\ And those costs are rising. From 1981 
to 1999, prescription drug prices increased by 306%, while the 
Consumer Price Index, on which Social Security's cost-of-
living-adjustments are based, rose 99%.\11\ Given this lopsided 
increase, we should not be surprised that the high cost of many 
prescription drugs are out of reach for many seniors, 
regardless of income.
---------------------------------------------------------------------------
    \10\ Prescription Drug Task Force, US House of Representatives, 
October 28, 1999.
    \11\ Bureau of Labor Statistics, 1999.
---------------------------------------------------------------------------
    This is a universal problem that requires a universal 
solution. Outpatient prescription drug coverage is one of the 
last major benefits still excluded form Medicare, and the 
elderly are the last major insured consumer group without 
access to prescription drugs as a standard benefit. With the 
technological revolution that is taking place in the 
development of safe and effective drug therapies, the absence 
of such a benefit is a critical barrier to providing 
comprehensive, effective treatment to our rapidly aging 
population. And, quite frankly, a prescription drug benefit is 
logical. Medicare was designed to cover the medical costs for 
seniors--and prescription drugs are the name of the game in 
21st century medicine.
    In some cases, prescription drugs can be a substitute for 
surgery; in others, it can postpone institutionalization. Yet 
one in eight seniors cannot afford the cost of prescription 
drugs.\12\ Those individuals not only put their health at risk, 
but also ultimately cost the Medicare system more in costs for 
additional treatments and hospitalizations that might have been 
avoided through proper medication.
---------------------------------------------------------------------------
    \12\ National Committee to Preserve Social Security and Medicare, 
``America's Quiet Crisis: Prescription Drug Costs for Seniors,'' 2000.
---------------------------------------------------------------------------
    It's also obvious that existing approaches to this issue 
are not enough. Medigap coverage is limited and spotty, HMO 
coverage is decreasing and often unreliable, and employer-
sponsored coverage is just plain declining. One in every three 
Americans over age 65 has no prescription drug insurance. 
Millions more have only limited coverage, which is slipping 
away as HMOs and company retirement plans cut back or drop 
altogether their drug benefits.\13\
---------------------------------------------------------------------------
    \13\ National Committee to Preserve Social Security and Medicare, 
``America's Quiet Crisis: Prescription Drug Costs for Seniors,'' 2000.
---------------------------------------------------------------------------
    Frankly, the existing coverage options are inadequate, 
limited, expensive, and unstable. For instance, a new study by 
the Commonwealth Fund reports that most Medicare beneficiaries 
do not have continuous prescription drug coverage. In 1996, 
just 53 percent of beneficiaries had prescription drug coverage 
throughout the year.\14\ Thus, while low-income Americans would 
certainly benefit from a prescription drug benefit, targeting 
only low-income beneficiaries would leave millions of seniors 
without affordable, dependable coverage. Now is the time for a 
Medicare prescription drug benefit--OWL strongly believes that 
we must work to fix this particular roof while the sunshine of 
the surplus warms the debate.
---------------------------------------------------------------------------
    \14\ Commonwealth Fund, January 2000.
---------------------------------------------------------------------------
    Keeping in mind these pictures I've painted for you--both 
of the typical recipient and the scope of the problem--OWL 
would like to put forth several suggestions for your 
consideration as you deliberate the prospects for a Medicare 
prescription drug benefit package.
    OWL strongly believes that prescription drug coverage for 
seniors is needed to modernize and strengthen Medicare. 
Further, such a program is best implemented through a defined 
benefit package that is voluntary, comprehensive, and 
universally available to all Medicare beneficiaries. Co-
payments, premiums and deductibles must be affordable, and 
benefits should be indexed to inflation to ensure that coverage 
keeps pace with the cost of prescription drugs. Lastly, 
adequate stop-loss protections and catastrophic coverage are 
critical components, and measures must be taken to ensure that 
a new prescription drug benefit does not put current Medicare 
benefits at risk.
    Let me briefly elaborate on each of these principles.
     The benefit should be part of the defined benefit 
package of a modernized Medicare program, and must be 
universally available to all Medicare beneficiaries, regardless 
of income. A means-tested program, or a simple expansion of 
Medicaid, will still leave millions of older Americans at risk.
     The benefit should be voluntary, allowing 
beneficiaries to keep their current coverage if they choose to 
do so. The plan should also consider incentives that will 
encourage those plans with retiree prescription coverage to 
maintain that benefit.
     The benefit needs to be affordable, with premiums, 
co-pays and deductibles that are within the reach of all 
seniors. This is an important element in avoiding the dangers 
of adverse risk selection. Also, the government contribution 
towards such a benefit must be sufficient to produce a premium 
and benefit design that is accessible to low income seniors.
     The benefit must assure access to medically 
appropriate drug therapies, including the high-end, cutting 
edge drugs that many older women need for common chronic 
illnesses. While we recognize that formularies are an important 
cost-cutting mechanism, alternatives must be in place to assure 
that beneficiaries have access to whatever prescription drugs 
most effectively treat their conditions.
     The benefit should be indexed to inflation to 
ensure that coverage keeps pace with the rising cost of 
prescription drugs. Further, drug purchasing strategies that 
enable the Medicare program to leverage of the purchasing power 
of the Medicare population should be explored.
    Proposals to increase cost-sharing and deductibles under 
Medicare would likely discourage many women, for whom out-of-
pocket health care expenses are already a hardship, from 
seeking the health care they need. Proposals to provide a set 
amount of money to purchase Medicare coverage--a voucher, if 
you will--would unfairly disadvantage women who could not 
afford the high cost of comprehensive coverage. Further, both 
approaches could lead to adverse risk selection within the 
plans, thereby inflating costs and endangering coverage. 
Frankly, if prescription drug coverage is available but not 
affordable, it just doesn't work. Medigap is an excellent 
example of this concept; it's available, but most people don't 
buy it because they can't pay the bill.
    Both President Clinton and the Republican Leadership have 
put forward a plans to address this critical public health 
issue, so allow me make a few comments in that direction. While 
OWL does not endorse legislation, we can provide a unique age 
and gender analysis that I hope the subcommittee with find 
helpful.
    OWL is pleased that the House Republican Leadership is 
taking an active interest in providing affordable prescription 
drugs for this nation's seniors. In looking at the Republican 
proposal, we are glad to see the 100% subsidy for beneficiaries 
with incomes under 135 percent of poverty, with an additional 
safety net in the form of a sliding fee scale for assistance to 
those between 135 and 150 percent of poverty. But despite this 
bright spot, and in light of the principles I outlined earlier, 
I must admit that we have larger concerns about the proposed 
plan's ability to provide meaningful coverage for all older 
Americans.
    Based on the relatively few details we have seen of the 
Republican proposal, OWL was disappointed to see that the 
Republican plan does not represent a defined benefit added to 
the Medicare program, but rather a private insurance option. We 
are concerned that the Medigap-type plans being proposed, with 
insurers getting a subsidy to lower the premiums, will not be 
affordable for most seniors--even in the unlikely event that an 
insurer passed on every dollar in subsidy to the beneficiary. 
Further, the notion of permitting insurers to offer a 
standardized benefit or its actuarial equivalent may cause 
adverse selection problems that could further erode the 
benefit.
    Given that many insurers will probably not offer a stand-
alone prescription drug policy, in light of the relatively 
small subsidy, OWL was interested to note that the plan 
provides for a Medicare-run policy for areas where private 
options don't exist. I suspect this option will actually 
represent the bulk of the coverage if the plan were enacted--if 
so, why not just create a defined benefit within the Medicare 
program right from the get go?
    OWL is also extremely concerned that private plans will be 
quite restrictive in their application of formularies. This 
could be especially troubling for older women, who more often 
require the high end, cutting edge drugs to treat their chronic 
conditions. Remember, women have more chronic conditions than 
men, and they live longer with those conditions.
    OWL is also worried that the plan apparently only pays for 
50 percent the beneficiaries' drug costs, after a deductible 
requirement is met. Given the financial constraints of many 
older women, 50 percent co-pays could well be out of reach. 
Frankly, this is concern that OWL has with both the Republican 
and Democratic plans. We must remember that the median income 
for women over 65--the majority of Medicare recipients--is 
$14,820.\15\ This figure is above the magic bullet of 150% of 
poverty, but it is by no means a healthy income. A 50 percent 
co-pay is quite likely going to be out of reach--realistically, 
someone who cannot currently afford a $250 prescription will 
probably still struggle to afford a $125 prescription.
---------------------------------------------------------------------------
    \15\ OWL, Prescription for Change: Why Women Need a Medicare Drug 
Benefit, May 2000.
---------------------------------------------------------------------------
    This affordability concern carries over into the areas of 
premiums. We have been told the Republican plan will average 
$37 per month--but it could vary widely by plan and region. 
Again, the economic constraints of the majority of Medicare 
recipients becomes a critical factor.
    We note again that this is yet another area where a defined 
benefit, as part of Medicare, would be most appropriate--
providing a consistency in premiums regardless of region, and 
stability in terms of coverage.
    OWL would also like to see both plans firm up their 
catastrophic coverage. While we understand that the size of and 
start date for such coverage is very much dependent on the 
budget, an out-of-pocket cap in the neighborhood of $3000 seems 
reasonable. This protection would go a long way to ensuring 
that the retirement security of our country's seniors is not 
undermined by the skyrocketing costs of prescription drugs.
    Let me illustrate OWL's concerns with the proposed plan by 
telling you the story of an OWL member. Diane Rudolph, 60, of 
Cleveland, OH, has worked hard to create a stable retirement 
for herself. She has an IRA, a small pension, and had arranged 
it so the mortgage on her home would be paid off when she 
retired at 65.
    Diane never planned on a permanent disability, but that is 
exactly what happened. Chronic conditions such as diabetes, 
high blood pressure, and degenerative disc disease have been 
compounded by severe arthritis. In many ways Diane is 
fortunate; her COBRA insurance covers her many prescriptions 
for a manageable co-payment, she has disability insurance, and 
has saved for her retirement. But Diane's COBRA insurance will 
run out in less than two years, at which point she will go on 
Medicare--and lose her prescription drug coverage.
    Diane currently takes 14 prescriptions, valued at almost 
$1,100 per month. Based on past inflation rates for 
prescription drugs, Diane's monthly prescription tab could 
climb to $1,400 per month in the next two years. Without 
adequate catastrophic coverage, Diane worries that her $33,000 
annual income will be cut in half by the time she pays her drug 
bills, undermining the retirement security she has worked her 
entire life to achieve. And, in Diane's case, a 50 percent co-
pay on top of premiums and deductibles could still result in 
her paying over a third of her income for prescription drugs--
under either plan.
    Given the principles I outlined, I would counter that the 
President's Plan represents the better starting point. 
President Clinton proposes to create a new benefit that is part 
of Medicare's defined benefit package, and would maintain the 
voluntary nature of the program--a Medicare Part D. There is no 
deductible and the monthly premiums are fairly affordable. OWL 
applauds the President's Plan for making appropriate use of 
pharmacy benefit managers (PBMs) as a cost containment measure. 
It is high time we applied the clout of a growing aging 
population to leverage better prescription drug prices for all 
seniors.
    OWL was also very pleased to see that the President plans 
to increase the maximum benefit limit from $1000 to $2500 over 
the 6-year phase-in period. This is a realistic estimate given 
that the price of prescription drugs continues to increase at 2 
and sometimes 3 times the rate of inflation. Starting in 2009, 
the President proposes to index this benefit to the cost of 
inflation. We respectfully submit that this element may need to 
be reevaluated at that time; if pharmaceutical prices continue 
their typical pattern, raising benefit limits to correspond 
with the Consumer Price Index will probably not be adequate, 
perhaps resulting in an erosion of the value of the benefit 
over time.
    OWL would also like to see more specific details for 
catastrophic and stop-loss coverage in the President's plan, 
but we are pleased to see the President has recognized the 
problem and has reserved funds to address the issue. All in 
all, President Clinton's plan is a healthy start, and OWL 
applauds him for developing a solid proposal that advances this 
important debate.
    The respective legislative plans aside; I must also say 
that whenever prescription drug coverage is discussed, there is 
always an 800-pound gorilla in the room--the issue of price 
controls. The American consumer is understandably upset that 
prescription drug costs in the United States are the highest in 
the world. It seems reasonable that, despite arguments about 
negatively impacting research and development as well as the 
potential profit losses for pharmaceutical companies, there is 
room to explore models that would insure that Americans paid 
only their fair share for these necessary and beneficial 
therapies.
    Truthfully, we all know that this cat is already out of the 
bag. As representatives of the American people, I know that 
Congress is struggling to give their constituents an answer to 
these simple questions: Why do Americans pay more? And, what 
can be done to reduce this disproportionate burden on American 
consumers? Any reform measures you adopt should also address 
these key public concerns.
    OWL looks forward to working with Congress and the 
Administration to ensure that whatever measures are finally 
adopted truly work for all older people, including those like 
Ms. Rudolph. In closing, I respectfully urge all of our policy 
makers to develop a program that reflects this simple fact: 
women are the face of Medicare. A Medicare prescription drug 
benefit may be the single most important improvement Congress 
can enact for America's retirement health. But if the 
prescription drug benefit you design doesn't work for women, it 
just doesn't work.

                                

    Mr. McCrery. Thank you.
    Mr. Donoho?

  STATEMENT OF PATRICK B. DONOHO, VICE PRESIDENT, GOVERNMENT 
    AFFAIRS & PUBLIC POLICY, PHARMACEUTICAL CARE MANAGEMENT 
                ASSOCIATION, ARLINGTON, VIRGINIA

    Mr. Donoho. Mr. Chairman, Mr. Rangel, Members of the 
Committee, my name is Patrick Donoho and I am Vice President of 
government Affairs and Public Policy for the Pharmaceutical 
Care Management Association. I am pleased to be here to 
represent their views before you today on this important issue.
    PCMA represents managed care pharmacy and organizations 
that as a substantial portion of their businessmanage pharmacy 
benefits. Our members are often referred to as PBMs. We are 
pleased to provide our association's view on providing coverage 
for prescription drugs for those individuals enrolled in the 
Medicare Program.
    Our members currently provide drug benefits to more than 10 
million Medicare beneficiaries through employer-sponsored, 
retiree plans or through Medicare-plus Choice plans. 
Collectively, PCMA members manage prescription drug programs 
for over 150 million Americans. We are pleased that many of the 
pending proposals recognize that it would be more efficient to 
use existing benefit managers in an expanded drug benefit 
program than to attempt to recreate these capabilities in HCFA.
    As the Committee examines various proposals for expanding 
access to medications for Medicare beneficiaries, we urge you 
to consider six principles that we believe to be critical to a 
successful program.
    First, the benefit should be delivered in a manner that 
enhances the health of seniors and the disabled. It is 
essential that the program not simply pay for the cost of 
drugs, but also protects the health of seniors. Some drugs are 
inappropriate for use with the elderly. Others should be used 
at different dosing levels than are appropriate for younger 
populations.
    Seniors without prescription drug coverage currently do not 
benefit from the safety of drug interaction screening mandated 
by OLGRA 90 for Medicaid recipients and present and virtually 
all third party programs.
    Second, legislation should provide the benefit to the 
private sector. Competition among private sector PBMs delivers 
significant cost savings and has spurred innovation in the use 
of advanced technologies for administering drug benefits. A new 
drug benefit should embrace and promote competition among these 
entities and ensure the vitality and innovation through 
competition.
    From prior testimony I have heard the concern about rural 
Americans. Through drug benefit managers today we contract with 
most the pharmacies throughout the United States in the mandate 
given to us by our clients.
    Third, legislation should retain flexibility and cost 
controls within the private sector. Prescription drug coverage 
for Medicare enrollees must permit pharmacy benefit managers to 
continue to use such programs as pharmacy network management, 
formulary development and management, mail service pharmacies, 
disease management, prescription adherence programs, 
utilization review and provider profiling for adherence to best 
medical practices.
    Fourth, legislation should encourage continuation of 
current prescription benefit plans. A new prescription drug 
benefit for seniors should contain incentives for employers to 
continue to provide prescription drug coverage to their 
retirees.
    Fifth, a plan should be designed to protect beneficiaries 
against catastrophic liability.
    Sixth, the goal of any agency overseeing the administration 
of a prescription drug benefit should be to foster innovation 
and competition. The legislation should not freeze in time the 
management techniques used today by PBMs.
    In examining the several proposals that have been announced 
or introduced as legislation, we see much commonality in 
meeting the goals we seek. In particular, most proposals 
appropriately focus on PBMs, encouraging or mandating the use 
of the latest tools to improve health outcomes and eliminating 
medical and medication errors.
    Where proposals differ is on whether we as PBMs will have 
the flexibility we need to control costs. Any legislation that 
does not empower us as PBMs to negotiate discounts and other 
pricing concessions from drug manufacturers and pharmacies as 
we do today in private drug plans will not deliver the 
anticipated cost savings. Our members are strongly united on 
this point.
    We share the concerns expressed by both the Congressional 
Budget Office and the General Accounting Office that the 
political pressures on policymakers and PBMs might limit the 
tools available to a PBM making it more a transaction processor 
than a benefit manager. We also share the concerns of some of 
the authors of proposals that HCFA is unlikely to favor 
competition over regulation.
    Therefore, we are pleased to see that some legislation 
envisions new structures for administering a Medicare drug 
benefit.
    In conclusion, Mr. Chairman, as an industry we are ready, 
willing and able to provide our expertise and experience in 
providing drug benefits to all Medicare beneficiaries.
    Thank you for the opportunity.
    [The prepared statement follows:]

Statement of Patrick B. Donoho, Vice President, Government Affairs & 
Public Policy, Pharmaceutical Care Management Association, Arlington, 
Virginia

    Mr. Chairman, Mr. Rangel, members of the Committee, my name 
is Patrick Donoho and I am Vice President of Government Affairs 
and Public Policy for the Pharmaceutical Care Management 
Association (PCMA). I am pleased to appear before you today to 
testify on behalf of the PCMA.
    PCMA represents managed care pharmacy and pharmacy benefit 
management companies (PBM). Members are organizations that, as 
a substantial portion of their business, manage pharmacy 
benefits. PCMA's member firms are an extremely diverse group, 
including both publicly traded companies and divisions or 
subsidiaries owned by other healthcare organizations. While 
many of our members serve broad national populations, some 
focus on the needs of specific communities such as patients 
with HIV/AIDS, organ transplants, or cancer.
    We are pleased to provide our association's views on 
providing coverage for prescription medicines for those 
individuals enrolled in the Medicare program. Our members have 
a deep interest in the subject of this hearing. Already today, 
our member companies provide quality, affordable pharmaceutical 
benefits to more than ten million current Medicare 
beneficiaries who receive these benefits through their or their 
spouse's former employers or through Medicare+Choice plans. 
Collectively, PCMA's members administer prescription drug 
programs for more than 150 million Americans. All of the major 
legislative proposals for expanding prescription drug coverage 
propose using PBMs to deliver these benefits. We are pleased 
that all of these proposals recognize that it would be more 
efficient to use existing drug benefit managers in an expanded 
Medicare drug benefit program than to attempt to recreate those 
capabilities within HCFA.
    As an industry, we have been successful in not only 
managing the cost of these benefits but also in managing the 
quality. We know how important good pharmaceutical care is to 
the elderly and disabled. Therefore, PCMA supports legislative 
efforts to ensure that all seniors have access to prescription 
drug coverage. Any program to provide prescription drugs to 
seniors should rely on the demonstrated drug management 
experience of the private sector to operate an efficient and 
cost effective program.

PCMA's Principles

    As the Committee examines various proposals for expanding 
access to medicines for Medicare beneficiaries, we urge you to 
consider six principles that we have agreed to as an 
association of member companies to whom much responsibility 
will be placed by any legislation.
    First, the benefit should be delivered in a manner that 
enhances the health of seniors and the disabled. It is 
therefore essential that the program not simply help pay for 
the cost of drugs, but also include pharmacy benefit management 
services to ensure that seniors obtain, and remain compliant 
with, clinically appropriate and cost effective drug therapy.
    Many drugs are inappropriate for use with the elderly, 
others should be used at different dosing levels than are 
appropriate for younger populations. Seniors without 
prescription drug coverage do not currently benefit from the 
safety of drug interaction screening mandated by OBRA'90 for 
Medicaid recipients and present in virtually all third party 
programs.
    Second, legislation should provide the benefit through the 
private sector. Competition among private sector PBMs deliver 
significant cost savings and spurred innovation and the use of 
advanced technologies for administering drug benefits. PBMs 
develop and administer disease and wellness management programs 
specifically designed for elderly populations. A new benefit 
should embrace and promote competition between these entities 
and ensure the vitality of innovation through competition.
    Third, legislation should retain flexibility and cost 
controls within the private sector. Innovation and creativity 
in pharmaceutical care has resulted in a number of programs and 
services that have improved care and managed costs. 
Prescription drug coverage for Medicare enrollees must permit 
pharmacy benefits managers to continue this development and use 
such programs as pharmacy network management, formulary 
development and management, mail service pharmacy, disease 
management, prescription adherence programs, utilization 
review, provider profiling for adherence to best medical 
practices, and other such programs to manage the benefit.
    Fourth, legislation should encourage the continuation of 
current prescription benefit plans. In order to encourage 
employers to continue to provide prescription drug coverage to 
their retirees, a new prescription drug benefit for seniors 
should contain financial incentives to compensate employers 
for, and recognize the financial impact of, their efforts.
    Fifth, a plan should be designed to protect beneficiaries 
against catastrophic liability. Recognizing that many seniors 
have limited incomes and that major or chronic illnesses can 
impose significant drug costs in a single year, any new 
Medicare prescription drug benefit should endeavor to include 
an out-of-pocket expenditure cap.
    Sixth, the goal of any agency overseeing the administration 
of a prescription drug benefit should be to foster innovation 
and competition for improving pharmaceutical care and the 
provision of a cost-effective program. PBMs must be able to 
create financial incentives to encourage Medicare beneficiaries 
to help control the cost of the benefit. Moreover, the 
legislation should not freeze in time the management techniques 
used today by PBMs. To do so would cause the drug benefit to 
lose the opportunity for innovation and improvement, which has 
been the hallmark of the pharmacy benefits management industry.

Review of Current Proposals

    In examining the several proposals that have been announced 
or introduced as legislation, we see much commonality in 
meeting the goals we seek. In particular, most proposals 
appropriately focus on PBMs, encouraging or mandating use of 
the latest tools to improve health outcomes and eliminate 
medical and medication errors. Most proposals also seek to 
ensure that those Medicare beneficiaries who today have good 
private sector coverage can keep that coverage by rewarding, 
through financial incentives, employers that have served well 
the interests of their retirees by covering prescription drugs 
within their health benefits. And, importantly, most proposals 
would address the issue of providing protection against 
catastrophic costs.
    Where proposals differ is on whether we as PBMs will have 
the flexibility we need to control costs. Any legislation that 
does not empower us as PBMs to negotiate discounts and other 
pricing concessions from drug manufacturers and pharmacies--as 
we do today in private plans--will not be able to deliver the 
anticipated cost savings. Our members are strongly united on 
this point. Restrictions on the use of common, private-sector 
cost containment tools, as we see in some legislation, will 
deny our members the ability to do what we do best in terms of 
providing a cost effective benefit in the interests of patients 
and the taxpayers who will pay for this program.
    We share the concerns expressed by both the Congressional 
Budget Office and the General Accounting Office that political 
pressures on policy makers and PBMs might limit the tools 
available to a PBM, making it more a transaction processor than 
a robust benefit manager. Such tools as managed pharmacy 
networks and negotiated reimbursements, formulary development 
and management, and beneficiary cost sharing are examples of 
areas which may be restricted by a program that is less private 
sector oriented, and therefore less competitive.
    Proposals also differ on the administration of the program. 
We share the concerns of some of the authors of proposals that 
HCFA is unlikely to favor competition over regulation. 
Therefore, we are pleased to see that some legislation 
envisions new structures for administering a benefit.
    In conclusion Mr. Chairman, as an industry we are ready, 
willing and able to provide our expertise and experience in 
providing prescription drug benefits to all Medicare 
beneficiaries. Our support of the various proposals will be 
based on the authority and flexibility granted PBMs to 
implement all of their programs to effectively manage costs, 
foster innovation, and enhance the quality of pharmaceutical 
care for seniors. We will assess the probability of regulatory 
limitations, de jure or de facto, on the ability of PBMs to 
perform this role. We again appreciate your seeking PCMA's 
views and look forward to your questions.

                                

    Mr. McCrery. Mr. Schondelmeyer?

  STATEMENT OF STEPHEN W. SCHONDELMEYER, HEAD, DEPARTMENT OF 
    PHARMACEUTICAL CARE AND HEALTH SYSTEMS, AND PROFESSOR, 
    PHARMACEUTICAL MANAGEMENT AND ECONOMICS, UNIVERSITY OF 
                           MINNESOTA

    Mr. Schondelmeyer. I am Stephen W. Schondelmeyer. I am a 
Professor of Pharmaceutical Economics from the University of 
Minnesota.
    I have studied this marketplace, the pharmaceutical 
marketplace and its structure and economics for about 25 or 30 
years. I had the privilege in 1988 to be appointed to the 
Prescription Drug Payment Review Commission when catastrophic 
was passed. I was on that 6-month long commission established 
by Congress and had the privilege of working with folks like 
Alice Rivlin and others who began attacking these issues.
    Also, I have had experience in working with the Health Care 
Financing Administration evaluating their Medicaid Rebate 
Program, I have worked with the Pennsylvania PACE Program, 
Senior Drug Program for the Elderly, probably the oldest and 
best program in the country.
    From that perspective, I bring you my experience and my 
comments on what I am aware of with respect to the plan that 
has been proposed at this point, although the details are still 
somewhat sketchy.
    I would comment that we need to be careful with using words 
like available to all and universal. Technically, all 
prescription drugs are universally available today if you can 
afford to pay for them. This document sort of opens that this 
plan will be available to all if you can afford to pay for the 
plan and if looks like a good deal for you. So we have to say 
what does it really mean to say that it is universally 
available and available to all. I mean that to be serious, what 
does it mean to call something universal, available to all?
    Second, I wish that adverse selection was not a problem but 
I do have concerns it will be with this particular plan. In my 
State of Minnesota, we happen to be one of the States where the 
managed care organizations get such a low payment from HCFA 
that they cannot afford to offer drug benefits for seniors. The 
seniors in the State of Minnesota have available to them the 
three Medigap defined benefit policies that are out there on 
the marketplace but in Minnesota something less than 10 and 
maybe less than 5 percent of the seniors ever sign up. The ones 
who do sign up are the ones who have extremely high drug needs. 
That sounds like adverse selection to me. So the insurance 
plans in the area are reluctant to offer those drug plans 
because it puts a heavy tax on them as well.
    With respect to the issue of affordable, I noted in the 
press release and information about this plan, there is a 
comment about a savings of 30 to 39 percent over something. It 
doesn't define what. To my knowledge, the Lewin study that is 
based on has not been released publicly or is available for 
others to evaluate.
    I would caution to say we must remember that currently no 
private plan in the country can get a better price than the 
Medicaid Rebate Plan by law. That is the law you as Congress 
established and no matter what we talk about in terms of 
competition in private plans, by law, there is no plan that 
gets a better price than the Medicare Rebate Program today.
    I think that is one marker we need to measure against and 
we need to ask how does that 30 to 39 percent compare with the 
Medicare Rebate Program and what is that 30 to 39 percent off 
of. To someone who knows the market, that number doesn't quite 
balance. We need to examine what is the real and realizable 
savings from that.
    I would comment that you have to deal in a very serious way 
with inflation adjustment, not just adjusting with the CPI all 
items of inflation, the one that goes up 2 to 3 percent a year. 
You have to realize we are talking about a prescription drug 
plan and prescription drugs have historically gone up faster 
than inflation, sometimes two or three times.
    Just this last year in 1999, prescription drug inflation as 
measured by the Consumer Price Index was 5.7 percent and it is 
on its way up. Actually, the December 1999 value compared to 
December the previous year was up 6.1 percent and the slope is 
going up right now rather than down.
    I think it is partly manufacturers having a sense that 
maybe something is going to pass with Medicare and we had 
better raise our prices while we can, much like we saw back 
with the Medicaid Rebate law. There was a flurry of price 
increases just before and just after the rebate law but then 
the market leveled out after that time.
    The point I would make there is if prescription drug prices 
continue to go up at 5 and 6 percent a year and your inflation 
adjuster goes up at 2 percent a year, that means the value of 
the benefit over time continually declines. That leads me to 
the next point.
    I am very concerned about the use of an actuarial value as 
the basis for offering this benefit. I think it would be 
confusing to the consumer. The task for a consumer with an 
actuarial value is basically it means the premium will be the 
same to everyone and then the consumer has to figure out of all 
these benefit designs and plans that are offered, which one 
looks like it is going to give me the most.
    From the plan's perspective, what a plan would do with an 
actuarial value is say, what can I do to attract people but 
deliver the least amount of benefit so I can still make a 
profit on this. So it is almost a perverse incentive for the 
plan to take the fixed amount of money, find ways to attract 
people to the plan but deliver the least amount of benefit so I 
can make a profit on it.
    I think it is much better to have a defined benefit. 
However, I am not telling you how to define the benefit at this 
point. I can pick defined benefit A, B, C or D and then my only 
choice is figuring out. There may be variations in those plans 
and you can allow some variation within defined benefit plans 
but then the consumer's choice is how much is the premium for 
Plan A from this company and this company and which one of 
those. It is much easier for a consumer to make a choice based 
on economic value than to try to figure out the structure of 
the benefit.
    I say that with great confidence because just last week I 
sat down with my mother-in-law whose husband passed away 
several months ago and she was faced with continuing her health 
and prescription drug insurance because of the COBRA 
legislation. She had to make a choice of going to a private 
insurance outside, continue with the plan my husband had, do I 
go to a Medigap policy. It was very confusing for her to sort 
out all of that.
    I would tell you I think you need to be very realistic and 
look at the actual cost structures. We need private health 
plans, we need PBMs, and they serve valuable roles for us. PBMs 
have not shown a great record of being able to produce any 
greater savings than the Medicaid Program. To my knowledge, 
most managed care benefits, most PBMs have also had 15 to 18-
percent increase in prescription drug expenditures in the last 
several years. I don't see much difference in their performance 
in the marketplace.
    We need PBMs, they are very important. They have the skills 
that are necessary to run these programs but I am not sure they 
have done a better job of running them.
    I would say if we honestly look at the Medicaid Program 
versus private plans and ask which is most restrictive, the 
Medicaid Program is probably the least restrictive compared to 
most private plans in the marketplace today. Every drug when it 
first comes on the market is covered by Medicaid. That is not 
true of most private plans. Private plans have closed 
formularies, Medicaid cannot do that. Private plans have more 
extensive prior authorization programs, Medicaid can have prior 
authorization but under very strict criteria.
    So when we ask which type of program really provides the 
most restrictive or limited benefit, it may be the private 
plans in today's market more so than a Medicaid type benefit.
    I am not telling you which way to go with that but do an 
honest evaluation of what types of restrictions you are willing 
to accept.
    I would close by saying to be honest and provide fair 
balance, to get any benefit whether from a government program 
or a private program, you are going to have to allow that 
program to implement restrictions because in this marketplace, 
you negotiate and get better prices on drugs not by volume but 
by restrictions and by limiting access in one way or another.
    Unless you are willing to delegate that authority either to 
a public or private agency, you won't get better prices by 
volume.
    Mr. McCrery. Thank you.
    Mr. Kahn?

 STATEMENT OF CHARLES N. KAHN III, PRESIDENT, HEALTH INSURANCE 
                     ASSOCIATION OF AMERICA

    Mr. Kahn. I am Chip Kahn, President of Health Insurance 
Association of America.
    As you know, over a decade ago, I worked on the last 
attempt by this Committee to provide a drug benefit for seniors 
through the Medicare Catastrophic Act. Later, I staffed 
Chairman Archer in the repeal of that law. So I have a deep 
personal understanding of how truly difficult it is to make 
Federal policy to assist seniors in purchasing drugs.
    It is critical, I believe that you make sure seniors 
understand what they are getting if you legislate on this 
matter. This and other lessons of the debate are important to 
draw upon as the Committee examines this complex issue.
    I also worked closely with you as well as the other Members 
of the Committee in the development of Medicare Plus Choice and 
share your concerns about the future of this program. I believe 
the future of market oriented approaches to preserving Medicare 
depends on keeping Medicare Choice viable now.
    I believe there is a consensus today that seniors need help 
with purchasing prescription drugs. Advances in drug therapies 
have vastly improved medical care as well as the very health of 
millions of Americans. However, at the same time, these 
advances have come at a tremendous cost.
    A study done for HIAA and the Blue Cross Blue Shield 
Association by the University of Maryland projects that the 
Nation's spending for prescription drugs will increase by 15 to 
18 percent annually over the next 5 years. This will mean more 
than a doubling of annual drug costs to $212 billion by 2004. 
These growing drug costs are particularly a hard squeeze on our 
Nation's elderly.
    We all agree on the goal of helping seniors with drugs but 
as you and the Committee consider solutions, I urge you to 
carefully weigh the consequences of the policy alternatives. 
The lessons of unintended consequences were learned all too 
well in 1988 and 1989. I will be happy to comment specifically 
on the drug coverage plan to be marked up by the Committee when 
the legislative details are made available.
    I can say from what I understand of that proposal, it 
appears to provide a realistic approach to assuring seniors 
that coverage for drugs will be available to them since it has 
a fall back. However, HIAA maintains its strong conviction that 
a private drug only option is unworkable and will not fulfill 
the expectations of seniors. In my written testimony, I have 
provided a detailed critique of why our companies believe this 
and you can read it there.
    As you consider options, because of the expensive nature of 
drug coverage, we are equally concerned that simply mandating 
that private Medicare Plus Choice plans or Medigap plans cover 
outpatient prescription drugs will also not serve beneficiaries 
well.
    The proposal recognizes that Medicare Plus Choice plans are 
severely underpaid and action is needed now to save this 
important option that so many seniors depend on. Most Medicare 
HMOs now offer coverage for prescription drugs. However, 
sustaining this benefit will be difficult since payment 
inequities and regulatory burdens are major hurdles. Medicare 
Plus Choice plans cannot continue to offer even the basic 
Medicare benefits if the status quo remains.
    Therefore, for a seniors drug program to be successful, 
Medicare must make a firm commitment to provide payments to 
Medicare HMOs that keep pace with escalating medical costs 
including those for pharmaceuticals.
    The proposal for a new Medicare Board to replace HCFA has 
great potential. Our experience indicates that HCFA has had a 
difficult time implementing the program and that a fresh start 
is needed.
    Last week, HIAA released a white paper by Bruce Fried, the 
former director of HCFA's HMO Office. The paper well documents 
the problems that have caused many HMOs to throw up their hands 
and exit all or part of Medicare. I urge you to review the 
Fried report and consider his recommendations.
    I would like to reiterate if Congress and the 
administration do not address the pressing problems facing 
Medicare HMOs, it will be difficult if not impossible to 
succeed at developing true, market-oriented approaches to 
reforming Medicare.
    Thank you. I will be happy to answer any questions.
    [The prepared statement follows:]

Statement of Charles N. Kahn III, President, Health Insurance 
Association of America

Introduction

    Chairman Archer, distinguished members of the Committee, I 
am Charles N. Kahn III, President of the Health Insurance 
Association of America (HIAA). Before joining HIAA, I devoted a 
significant portion of my professional life to working on 
Medicare policy in service to this Committee. I was involved in 
the first real attempt to provide seniors with access to 
prescription drug coverage through the Medicare program through 
enactment of the Medicare Catastrophic Act over one decade ago. 
I also worked with you, Mr. Chairman, and other members of this 
Committee on its subsequent repeal. As Staff Director to the 
Subcommittee on Health, I also played a major role in the 
development of the Balanced Budget Act of 1997.
    HIAA is the nation's most prominent trade association 
representing the private health care system. Its 294 members 
provide health, long-term care, dental, disability, and 
supplemental coverage to more than 123 million Americans. HIAA 
also is the nation's premier provider of self-study courses on 
health insurance and managed care. We represent companies 
offering a broad range of insurance products to our nation's 
seniors, including Medicare+Choice, long-term care insurance, 
Medicare Select, and Medicare Supplemental plans.
    I am very pleased to be here today to speak with you about 
how best to increase access to affordable prescription drugs 
for our nation's seniors.

Seniors Should Have Expanded Access to Needed Pharmaceuticals

    Clearly, pharmaceuticals have become a critical component 
of modern medicine. Prescription drugs play a crucial role in 
improving the lives and health of many patients, and new 
research breakthroughs in the coming years are likely to bring 
even greater improvements. With older Americans becoming an 
ever-increasing percentage of the overall United States 
population, the need for more medicines for this sector of the 
population is becoming equally urgent. There is continuing 
emphasis on new pharmaceuticals to treat diseases typically 
associated with aging. Over 600 new medicines to treat or 
prevent heart disease, stroke, cancer, and other debilitating 
diseases are currently under development. Medicines that 
already are available have played a central role in helping to 
cut death rates for chronic and acute conditions, allowing 
patients to lead longer, healthier lives. For example, over the 
past three decades, the death rate from atherosclerosis has 
declined 74 percent and deaths from ischemic heart disease have 
declined 62 percent, both due to the advent of beta blockers 
and ACE inhibitors. During this same period, death rates 
resulting from emphysema dropped 57 percent due to new 
treatments involving anti-inflammatories and bronchodilators.

Prescription Drug Expenditures are Rising at a Rapid Rate

    These advances have not come without their price. Rapid 
cost increases are putting prescription drugs out of reach for 
many of our nation's seniors. Because of both increased 
utilization and cost, prescription drug spending has outpaced 
all other major categories of health spending over the past few 
years. For example, while hospital and physician services 
expenditures increased between 3 and 5 percent annually from 
1995 through 1999, prescription drug expenditures have 
increased at triple that rate, averaging between 10 and 14 
percent. According to projections by the Health Care Financing 
Administration (HCFA), prescription drug spending will grow at 
about 11 percent a year until 2008, more than double the rate 
of spending on hospital and physician services.
    A study for HIAA and the Blue Cross and Blue Shield 
Association by the University of Maryland's School of Pharmacy 
found that drug spending will increase at an even faster pace 
than the government is predicting. University of Maryland 
researchers project that the nation's expenditures for 
prescription drugs will increase at a rate of 15-18 percent a 
year over the next five years, more than doubling annual drug 
spending from $105 billion in 1999 to $212 billion by 2004. 
According to the lead author of the study, C. Daniel Mullins, 
Ph.D., 60 percent of those expenditures will be caused by 
increases in the price and use of drugs already on the market 
today, while 40 percent will be attributable to the cost of 
drugs still under development--so-called ``pipeline'' 
pharmaceuticals. I have attached a copy of the executive 
summary and slides from that study, and ask that it be made 
part of the record of this hearing.

Many Seniors Have Some Drug Coverage, But Benefits Often Are 
Limited

    About two-thirds of seniors have some type of insurance 
coverage for pharmaceuticals--either through employer-sponsored 
retiree health plans, private Medicare+Choice plans, Medicaid, 
or individual Medicare Supplemental (Medigap) policies. But 
this coverage often provides limited benefits for prescription 
drugs, and it is likely to decline over time as cost pressures 
mount for employers, insurers, and individual consumers. For 
example, recent surveys indicate that employers are 
contemplating several changes to their retiree health care 
plans over the next several years, including increasing 
premiums and cost-sharing (81 percent of respondents to a 1999 
Hewitt Associates survey sponsored by the Kaiser Family 
Foundation) and cutting back on prescription drug coverage (40 
percent).
    Also, unrealistically low government payments to 
Medicare+Choice plans are having the effect of reducing drug 
coverage for many seniors enrolled in these plans. Increases in 
per capita payments on behalf of beneficiaries enrolled in 
Medicare+Choice plans from 1997 to 2003 are projected to be 
less than half of the expected increases during the same period 
for those individuals in the Medicare fee-for-service program. 
In fact, the President's Fiscal Year 2000 budget projected 
five-year medical cost increases of 27 percent for the original 
Medicare fee-for-service program and 50-percent increases for 
the Federal Employee Health Benefit Program, while 
Medicare+Choice payment increases during the same period will 
be held to less than 10 percent in many counties. The toll 
these lower payments are taking on drug benefits is already 
apparent-only three years into the new Medicare+Choice payment 
scheme. Some beneficiaries now face higher out-of-pocket costs, 
lower maximum benefits, and higher co-payments on brand name 
drugs.
    Adding to the problems is the fact that most seniors live 
on fixed incomes and their purchasing power will continue to 
erode over time as drug expenditures increase more rapidly than 
their real income. In terms of current dollars, seniors' income 
has increased very little over the past ten years. From 1989 to 
1998, the median income of households with a family head 65 
years of age or older increased from $20,719 to $21, 589. This 
represents an increase in real income of less than 5 percent 
over the entire decade.

HIAA Has Developed a Solution to Help All Seniors

    It is important to recognize that we all share a common 
goal--to improve drug coverage for seniors. The fact that 
Members of Congress have chosen different routes to achieving 
this goal is a testament to the magnitude and complexity of the 
task.
    As this Committee begins to weigh options for expanding 
pharmaceutical coverage to seniors, we want to bring to your 
attention several important policy considerations that draw 
upon our member companies' considerable experience providing 
health insurance coverage in the private market and through 
government programs such as Medicare.
    In particular, we believe that the potential effects of any 
new proposal must be carefully examined to ensure that 
unintended consequences do not erode the private coverage 
options that beneficiaries rely on today to meet their health 
care needs. I want to emphasize that, although it has proven 
difficult to provide affordable prescription drug coverage 
through the private options available to seniors today (and I 
will discuss the reasons for that later in my testimony), the 
private coverage seniors rely on to supplement Medicare is 
extremely important to them. Medicare covers just one-half of 
beneficiaries' health care costs and provides no coverage for 
truly catastrophic illness. Supplemental insurance and 
Medicare+Choice coverage protect seniors from financial ruin 
and is highly valued by them for that reason.
    Before I outline some of the concerns we have about aspects 
of several drug coverage plans that have been proposed, let me 
first make clear that HIAA believes strongly that the status 
quo is unacceptable. Reforms clearly are needed to expand 
access to prescription drugs for the nation's seniors. My 
belief is that the most rational and responsible way to 
accomplish this is in the context of overall Medicare reform 
and restructuring. HIAA agrees with many Members of this 
Committee that broad reforms are necessary and that a 
sustainable long-term solution to providing affordable drug 
coverage for seniors is best accomplished in the context of 
securing Medicare for the baby boom generation--and beyond.
    However, we also recognize that significant steps can be 
taken in the short term to provide relief to seniors. Last 
year, HIAA's Board of Directors approved a three-pronged 
proposal developed by our member companies that would help 
seniors better afford prescription drugs. The HIAA program 
would: (1) help lower-income seniors through a federal block 
grant to expand drug assistance programs; (2) provide a tax 
credit to help offset out-of-pocket drug costs for all other 
seniors; and (3) ensure fair payments to private 
Medicare+Choice plans that are struggling to provide 
prescription drug coverage for seniors despite unrealistically 
low government payments that will not keep pace with medical 
inflation and the projected increases in drug costs.
    Nineteen states already have drug coverage programs for 
low-income seniors; several more are considering such programs 
in the current legislative session. We believe a federal block 
grant, with no requirement for state matching funds, would give 
needy seniors additional support in these states and encourage 
other states to adopt such programs. Each state would receive a 
per-capita payment sufficient to cover the equivalent of drug 
coverage with a $1,500 annual maximum for eligible 
beneficiaries. States would have considerable flexibility under 
our approach, and could use the funds to expand existing drug 
assistance programs or create new ones. We estimate that about 
10 million lower-income seniors would be eligible for this 
subsidy.
    The HIAA program also would provide a tax credit to offset 
out-of-pocket prescription drug expenses for those seniors who 
file tax returns. A single Medicare beneficiary with income 
above about 200 percent of poverty (about $16,300) would have 
been eligible for a tax credit worth up to $1,000 a year, after 
incurring $500 in out-of-pocket expenses. A couple with an 
income above approximately 250 percent of poverty (about 
$28,000) could access a tax credit worth up to $1,500 per year 
after they jointly paid $500 in out-of-pocket drug expenses. 
The value of this credit would grow over time to keep pace with 
inflation. We estimate that nearly 22 million beneficiaries 
would be eligible for this federal tax credit.
    Finally, the HIAA proposal includes a number of measures to 
assure that seniors choosing to enroll in Medicare+Choice plans 
are not disadvantaged by unrealistically low government 
reimbursements. As members of this Committee know, the vast 
majority of Medicare+Choice plans provide some coverage for 
prescription drugs and this has proven to be a very popular 
benefit for seniors. However, inequitable government payments 
are undermining the Medicare+Choice program and harming seniors 
who depend on these plans for their health coverage. In effect, 
the growing disparity between payments to Medicare+Choice plans 
and per-capita payments for seniors enrolled in traditional 
Medicare fee-for-service disadvantages the former, forcing them 
to shoulder an increasing out-of-pocket burden for prescription 
drugs.
    The Balanced Budget Act of 1997 (BBA) reduced payments to 
Medicare+Choice plans by $22 billion over five years and HCFA 
plans to reduce payments by another $9.9 billion through ``risk 
adjustment.'' The Balanced Budget Refinement Act of 1999 
restored less than $1 billion of the cuts made through the BBA. 
Clearly, additional steps are needed: (1) HCFA should be 
required to implement risk adjustment in a budget neutral 
manner and the current phase-in should be halted at its current 
10 percent level; (2) HCFA should not expand encounter data 
collection beyond the hospital inpatient setting and should 
replace the planned universal encounter data-based risk 
adjustment scheme with a less burdensome approach; and (3) 
Medicare+Choice payments should be linked more closely to local 
medical inflation trends.
    The HIAA proposal represents an immediate and workable step 
that will provide meaningful relief for seniors, while avoiding 
the disruption and confusion for beneficiaries that surely 
would result were Congress to make changes in seniors' private 
benefit options before addressing needed changes in the 
underlying Medicare program. Equally important, it would not 
foreclose the integration of drug coverage into broader 
Medicare reform.

Concerns About Private Drug-Only Insurance and Private Sector 
Mandates

    As you work to develop a solution to this very difficult 
issue, we hope that you will draw upon the HIAA proposal. We 
recognize, however, that Congress is weighing various Medicare 
drug coverage initiatives that do not involve block grants or 
tax credits.
    Some of the proposals we have examined that rely on 
``stand-alone'' drug-only insurance policies simply would not 
work in practice. Designing a theoretical drug coverage model 
through legislative language does not guarantee that private 
insurers will develop that product in the market.
    Other proposals seek to assure seniors drug coverage by 
mandating that private health plans--either Medigap or 
Medicare+Choice, or both--provide enhanced coverage for 
pharmaceuticals. While this option has the perception of being 
virtually cost-free from a federal budgetary standpoint, it 
would be far from inexpensive for seniors who, according to our 
estimates, would experience premium increases for Medigap 
products of between 50 and 100 percent. It also would result in 
many seniors dropping the supplemental coverage they depend 
upon, possibly creating new public policy challenges. Seniors 
in rural areas, in particular, rely heavily on Medigap coverage 
to help them meet their health care needs. If coverage that 
consumers cannot afford is mandated, the result will be 
unsustainable premium increases, limited choice, and reduced 
coverage.

Why a ``Drug-Only'' Benefit Is Unlikely to Meet the Goal of 
Universality

    Some have proposed that seniors' drug coverage needs could 
be met through new private insurance coverage options. 
Theoretically, these ``drug-only'' policies would be offered 
either as stand-alone policies, or sold in conjunction with 
existing Medigap coverage. However, the evidence suggests that 
it would be extremely difficult to ensure the universal 
availability of drug coverage to seniors through this type of 
proposal.
    Creating a new form of insurance is not easy. As with any 
new product, start-up efforts are costly and time-consuming. 
Adding to the difficulty is that such insurance policies would 
have to meet existing (and possibly new) dual state and federal 
requirements before they could be sold. Thus, before making its 
entry into the marketplace, a ``drug-only'' policy would have 
to clear a multitude of economic and regulatory hurdles. Our 
members have told us these hurdles are likely insurmountable.
    Economic Barriers and Adverse Selection Problems
    Insurance carriers attempting to bring this type of product 
to market would face many barriers, including the costs of 
development, marketing, and administration. Premiums for the 
policy would have to reflect these costs. Adding to these 
administrative expenses is the inherent difficulty of 
developing a sustainable premium structure for a benefit that 
is so widely used and for which costs are rising so 
dramatically.
    Volatility in pharmaceutical cost trends also will make a 
stand-alone ``drug-only'' policy difficult to price. While 
there has been relative stability in the rate of increase of 
hospital and physician costs during the past two decades, 
pharmaceutical costs have been more difficult to predict. In 
March 1999, for example, HCFA estimated that prescription drug 
expenditures would reach $171 billion by 2007. Just six months 
later, in September, HCFA was forced to revise these 
projections and now predicts that prescription drug spending 
will reach $223 billion by 2007, a 30 percent increase over the 
previous estimate. Since the Administration first offered its 
Medicare drug benefit proposal just last year, it has had to 
revise cost estimates for the program upward by more than 30 
percent due largely to greater-than-expected increases in the 
costs of prescription drugs.
    For many reasons, ``drug-only'' policies would be very 
expensive to administer. Adding to the economic liabilities of 
these policies are the expense margin limitations insurance 
carriers must meet under Omnibus Budget Reconciliation Act of 
1990 (OBRA), which are likely to be too small to support 
separate administration of drug benefits.
    The most difficult factor driving up premiums, however, 
will be ``adverse selection.'' Adverse selection occurs because 
those who expect to receive the most in benefits from the 
policy will purchase it immediately, while those who expect to 
have few claims will hold off purchasing coverage until they 
believe it is needed. When people with low drug expenses choose 
not to enroll in coverage while those with high costs do 
enroll, insurance carriers are forced to charge higher premiums 
to all policyholders. Higher premiums over time will price many 
seniors out of the supplemental market. As beneficiaries drop 
their coverage, premiums invariably will rise yet again--
creating what insurers call a rate ``death spiral.'' Moreover, 
the more opportunities there are for enrollment, the greater 
the risk of adverse selection.
    Adverse selection would be a very real problem for this 
type of product. Projections indicate that one-third of seniors 
(even if all had coverage for outpatient prescription drugs) 
will have drug costs under $250 in the year 2000, with the 
average cost estimated at $68. These seniors are unlikely to 
purchase any type of private drug coverage, given that the 
additional premium for such a policy would be at least 10 times 
higher than their average annual drug costs. Of the two-thirds 
who might buy the coverage, many would be doing little more 
than dollar trading. Some may actually end up much worse off: a 
person with $500 of drug expenses could have premium, 
deductible, and coinsurance costs equal to over 200 percent of 
the actual costs of drugs. Consequently, many seniors are not 
likely to purchase the product, resulting in further premium 
increases for those that do.
    Limiting the sale of these policies to the first six months 
of Medicare eligibility would help in theory only, given 
legislators' demonstrated proclivity to expand on ``guaranteed 
issue.'' The Clinton Administration's Medicare drug coverage 
proposal seeks to avoid adverse selection by limiting 
enrollment in a government-provided drug coverage plan to the 
first six months when beneficiaries initially become eligible 
for Medicare. While this type of rule theoretically helps, the 
concept seldom works in practice because legislators and 
regulators expand guaranteed issue opportunities over time in 
response to political pressure. For example, the ``first time'' 
guaranteed issue rule originally in place for Medigap policies 
has been greatly expanded over time--both through new federal 
rules in the Balanced Budget Act of 1997 (BBA) and through 
state law expansions.
    Regulatory Hurdles
    Even if such insurance policies were economically feasible, 
they would face significant regulatory barriers. The National 
Association of Insurance Commissioners (NAIC) would likely have 
to develop standards for the new policies; state regulators 
would have to approve the products before they could be sold, 
as well as scrutinize their initial rates and any proposed rate 
increases. Even relatively straightforward product changes 
based on proven design formulas can take several years to 
progress from the design stage through the regulatory approval 
process and, finally, to market.
    Because insurers would be required to renew coverage for 
all policyholders (as they are required to do with Medigap 
products), policies could not be cancelled if new alternatives 
were authorized by subsequent legislation or regulations. This 
would exacerbate adverse selection problems for these plans, 
since people with the greatest drug needs would retain them 
while others may seek out less costly alternatives. It also 
would dampen interest in offering the product in the first 
place, as insurers would be locked into offering these policies 
once they were issued.
    Guaranteed renewability also would exacerbate pricing 
problems for these ``drug-only'' products. While many in 
Congress have said that they oppose government price controls 
for pharmaceuticals, private insurers offering ``drug-only'' 
coverage are sure to face premium price restrictions on their 
products at the state level (all states have adopted either 
rate bands, modified community rating, or full community rating 
for Medigap as well as medical insurance coverage options 
available to non-seniors). Even when proposed premium increases 
are consistent with state law parameters, state regulators are 
likely to be resistant to the magnitude of increase it would 
likely take to sustain a ``drug-only'' insurance policy as drug 
prices grow over time.
    If the NAIC did standardize these policies, as some have 
proposed, it could impose unworkable limitations on insurers. 
If insurance carriers were prevented from adjusting co-payments 
and deductibles as drug costs continue to skyrocket, effective 
cost management would not be possible without significant 
premium increases over time. On the other hand, allowing needed 
flexibility would destroy the standardization of Medigap that 
Congress and the NAIC have worked so hard to achieve during the 
past decade.
    High-Deductible Options Introduce Additional Practical 
Limitations
    Various suggestions have been made to render these policies 
economically viable. One suggestion that flies in the face of 
historical reality is to design the policies with very high 
deductibles--a feature that has never been popular with 
seniors. Comprehensive high-deductible Medicare+Choice medical 
savings account plans authorized under the Balanced Budget Act 
of 1997 (BBA) are not available because no company believes it 
can develop sufficient market size to make offering such a 
product worth the effort. It is also notable that the high-
deductible Medigap policies with drug coverage authorized under 
the BBA 97 have not gained market acceptance, largely out of 
the knowledge that this product would not be attractive to a 
large enough block of seniors to make it viable. Primary 
carriers have not entered this market and, as far as we are 
able to determine, only a handful of these policies, if any, 
have been sold. The most common reasons for this cited by 
insurers are: (1) lack of consumer demand; (2) consumer 
confusion; and (3) unworkable systems change requirements and 
regulatory barriers (e.g., states will not approve policy forms 
for 2000 or 2001 because of the federal government's delay in 
publishing allowable deductible levels). The $1,500 deductible 
in those BBA Medigap policies is considerably lower than some 
of the deductible levels proposed by advocates of the new drug-
only policies.
    Government-Funded ``Stop-Loss'' Coverage Is Unlikely to 
Make Such Policies Affordable
    Some have discussed providing government-funded ``stop-
loss'' coverage as a way to help those beneficiaries with 
catastrophic annual drug costs and reduce the cost of private 
drug-only insurance. While this proposal would no doubt help 
seniors with extremely large annual drug expenses, it would do 
little to make drug-only insurance affordable. Nearly nine out 
of ten Medicare beneficiaries have annual drug costs under 
$2,000 (see Figure 1). Moreover, stop-loss coverage provided to 
beneficiaries with drug expenses in excess of $2,500 a year 
would cover just 16 percent of annual drug costs (see Figure 
2). Stop-loss protection would cover just four percent of 
annual drug costs if offered to beneficiaries with 
pharmaceutical expenses above $5,000 per year (see Figure 3).
[GRAPHIC] [TIFF OMITTED] T1459.010

    Source: National Academy of Social Insurance, 1999; 
estimates of 1999 expenditures by Actuarial Research 
Corporation based on data from the 1995 Current Beneficiary 
Survey. HIAA estimates for distribution above $2,000.
---------------------------------------------------------------------------
    \1\ Expenditures include out-of-pocket spending and third-party 
payments. Figures are for all non-institutionalized Medicare 
beneficiaries except those enrolled in Medicare+Choice plan at any 
point during the calendar year.
[GRAPHIC] [TIFF OMITTED] T1459.011

    Source: National Academy of Social Insurance, 1999; 
estimates of 1999 expenditures by Actuarial Research 
Corporation based on data from the 1995 Current Beneficiary 
Survey. HIAA estimates of amounts within each category.
---------------------------------------------------------------------------
    \2\ Expenditures include out-of-pocket spending and third-party 
payments. Figures are for all non-institutionalized Medicare 
beneficiaries except those enrolled in a Medicare+Choice plan at any 
point during the calendar year.
[GRAPHIC] [TIFF OMITTED] T1459.012

    Source: National Academy of Social Insurance, 1999; 
estimates of 1999 expenditures by Actuarial Research 
Corporation based on data from the 1995 Current Beneficiary 
Survey. HIAA estimates of amounts within each category.
---------------------------------------------------------------------------
    \3\ Expenditures include out-of-pocket spending and third-party 
payments. Figures are for all non-institutionalized Medicare 
beneficiaries except those enrolled in Medicare+Choice plan at any 
point during the calendar year.
---------------------------------------------------------------------------
    In short, a ``drug-only'' policy is unlikely to meet the 
promise of guaranteeing all seniors access to expanded 
prescription drug coverage.

A Drug Mandate Is Also a Bad Idea

    Another bad idea is mandating drug coverage for 
Medicare+Choice plans or Medicare supplemental insurance. (More 
than 20 million Medicare beneficiaries have Medicare 
supplemental coverage, with about 9 million policies purchased 
individually and 11 million through the group market.)
    HIAA is strongly opposed to proposals that would require 
Medicare supplemental insurance or Medicare+Choice plans to 
cover the costs of outpatient prescription drugs without the 
addition of prescription drug coverage as a Medicare covered 
benefit. The growing cost of pharmaceuticals would force plans 
with mandated drug coverage to raise premiums, increase 
enrollee cost-sharing, or reduce other benefits, all of which 
would be counterproductive as seniors dropped their 
supplemental or Medicare+Choice coverage. Mandated drug 
coverage could also lead to overly-restrictive government 
limitations on private plans, such as prohibitions on the use 
of formularies or mandating certain levels of coinsurance.
    Today's Medigap marketplace is convenient and flexible, 
offering many choices to seniors. Of the 10 standard Medigap 
policies (A through J) sold, three (H, I, and J) provide 
varying levels of coverage for outpatient prescription drugs. 
Largely because of the increased costs of the policies with 
drug coverage, only a relatively small number of seniors have 
chosen to enroll in them. Of the 9.5 million Medicare 
beneficiaries with individually purchased Medigap policies, 
HIAA estimates that only 1.3 million have drug coverage through 
the standardized H, I, or J plans.
    Several studies show that adding a drug benefit to Medigap 
plans that currently do not include such coverage would 
increase premiums dramatically. Seniors who today have chosen 
to purchase Medigap policies that do not provide a drug benefit 
would end up paying $600 more a year (assuming a $250 
deductible for the policy), according to HIAA estimates.
    If Congress were to require more comprehensive drug 
coverage, those premiums could double. According to a May 1999 
study by HIAA and the Blue Cross Blue Shield Association, 
requiring all Medigap plans to include coverage for outpatient 
prescription drugs would raise Medigap premiums by roughly 
$1,200 per year, an increase of over 100 percent.
    Premium increases of 50 to 100 percent would result in many 
seniors dropping their Medigap coverage, leaving them without 
protection against the high out-of-pocket costs of the hospital 
and physician services not covered by Medicare. Moreover, 
increases of this magnitude would discourage employers (who are 
also purchasers of supplemental coverage) from offering such a 
benefit at all.
    It is doubtful, then, that requiring all Medigap policies 
to include a drug benefit would be popular with seniors--who 
would experience diminished choice of policies, higher prices, 
and in some cases, loss of coverage.

Initial Comments on House Republican Drug Plan Concept

    Mr. Chairman, while the press has reported over the past 
several days about aspects of the developing House Republican 
Medicare drug coverage proposal, HIAA has not had an 
opportunity to review the details of this proposal. We applaud 
those members of Congress that have worked hard to address this 
problem; however, we must reserve final judgment until we have 
had the opportunity to review the final legislative language. 
Moreover, from what we do know, the House Republican plan 
continues to develop.
    First, it appears that the proposal will not rely solely on 
private health plans to meet its goal of offering universal 
drug coverage to seniors. The ``fallback'' mechanism that has 
been reported in the press is a contribution to the debate that 
we expect to examine more fully in the days ahead.
    Second, there appears to be a recognition that 
Medicare+Choice plans are severely underpaid and that more 
needs to be done in the short run to save the important private 
health plan options that many seniors now enjoy.
    The vast majority of Medicare+Choice plans now offer 
coverage for prescription drugs and view this is an important 
benefit for seniors that they would like to continue offering. 
However, to the extent Medicare+Choice plans are required to 
cover prescription drugs, we need to ensure payments are 
adequate. Under the BBA payment rules, payments to 
Medicare+Choice plans serving the vast majority of 
beneficiaries have increased only 2 percent per year, while 
medical inflation is increasing at 8 percent or more.
    Medicare+Choice plans cannot continue to offer even the 
basic Medicare benefits if this underpayment is not addressed. 
And as you know, prescription drug costs are increasing at a 
much greater rate than overall medical spending. Therefore, for 
this program to be successful, the government must make a firm 
commitment to provide payments to private plans that will keep 
pace with escalating medical costs, including those for 
pharmaceuticals.
    Finally, we view the new Medicare board as a potentially 
positive development. It is clear from our experience that 
HCFA's implementation and management of the Medicare+Choice 
program has been difficult. The new Medicare board may allow 
for a fresh start.
    Last week, HIAA released a white paper by Bruce M. Fried, 
the former director of HCFA's office of health plans and 
providers, which oversaw the Medicare+Choice program. The paper 
finds that a combination of inadequate payments and the 
crushing cost of excessive government regulation are causing 
HMOs to withdraw from the Medicare program ``at an alarming 
rate.''
    This is an important point, Mr. Chairman and members of the 
Committee. In the short term, whether or not Congress is able 
to pass a Medicare prescription drug benefit this year, 
immediate steps need to be taken to resuscitate the 
Medicare+Choice program. Mr. Fried's paper suggests a course of 
action that includes:
     Congress must increase payments to Medicare HMOs 
to keep up with medical inflation.
     HCFA should take immediate steps to reduce the 
administrative burden and expense of prescriptive government 
regulation, and Congress should exercise its oversight 
authority to ensure that this occurs.
     Congress should require HCFA to implement risk 
adjustment in a budget neutral manner and direct HCFA to 
explore more cost effective--and less administratively 
burdensome--methods of assessing health risk status. Until a 
less burdensome system is developed, HCFA should (1) halt plans 
to collect multiple site encounter data, and (2) freeze the 
phase-in approach so that no more than 10 percent of an 
Medicare+Choice Organization's capitated payment amount would 
be based on the current risk adjustment method.
     Congress should engage in increased scrutiny of 
the level and type of administrative burden imposed on 
Medicare+Choice Organizations and the impact and cost of such 
burden.
     The Secretary of the Department of Health and 
Human Services (HHS) should consolidate HCFA's responsibility 
for overseeing the Medicare+Choice program in one division.
    We commend this paper to you, and we urge this Committee to 
take immediate action to rescue this troubled program. If 
Congress and the Administration ignore the pressing problems 
and developments in the Medicare+Choice program, the program 
will die a slow and painful death, and it will be difficult--if 
not impossible--to generate industry support for, and 
involvement in, future market-oriented approaches to delivering 
Medicare services.

Comments on the Democratic Drug Coverage Proposal

    The Democrats' plan to extend drug coverage to Medicare 
beneficiaries relies primarily on an expansion of the 
traditional Medicare fee-for-service program. While it avoids 
some of the problems that would be associated with the creation 
of private ``drug-only'' insurance policies, it would create a 
costly new benefit entitlement without substantive programmatic 
reforms that are so desperately needed to ensure that the 
program remains on solid footing for the baby boom generation 
and beyond.
    Moreover, it is far from clear whether payments to 
Medicare+Choice plans competing with the traditional fee-for-
service program to provide prescription drug coverage would be 
adequate under the Democratic proposal to ensure the long-term 
survival of the Medicare+Choice program. If these payments 
indeed prove inadequate, seniors could lose the private health 
plan options that provide them with high quality coverage 
today.

Conclusion

    The plight of seniors who are struggling to make ends meet 
and are finding it difficult to pay for medicine is very real. 
But the immediacy of the problem should not lead to short-term 
fixes that would do much more harm than good. We believe 
Congress should step back and examine a broad range of 
proposals--such as financial support for low-income seniors, 
tax credits, and fair payments to Medicare+Choice plans, most 
of which offer drug benefits. We believe there are workable 
solutions that can meet the needs of our seniors without 
undermining the coverage they currently rely upon. HIAA stands 
ready to work with the members of this Committee, and all in 
Congress and the Administration, to ensure that all seniors to 
have access to affordable prescription drugs.
      

                                

    Mr. Thomas. Thank you very much.
    I think your last statement may have discovered somebody's 
motivation for the current structure.
    One prescription drug plan used the Consumer Price Index as 
its inflater multiplier. The other plan used inflation of drug 
costs as its inflater. From what I understood, the one using 
the drug costs would be the better plan in terms of staying 
with the increasing costs versus diminished benefits over time 
and perhaps being virtually worthless over a decade given 
difference between the CPI and drug costs. Is that accurate?
    Mr. Schondelmeyer. That is true in terms of how much 
benefit would be delivered and how much you increase the 
funding for that benefit.
    Mr. Thomas. Would you be surprised if I told you the 
President's plan uses CPI and the bipartisan plan uses the drug 
index inflater?
    Mr. Schondelmeyer. I hadn't seen what was in the bipartisan 
plan.
    Mr. Thomas. At least on that one comparison, it would be 
better?
    Mr. Schondelmeyer. Yes. The caveat I would have though is 
if you do use the CPI for Rx drugs, then it may diminish the 
incentive for some attempt to hold down price inflation of 
prescription drugs which I think is a concern also.
    Mr.  Thomas. One of the ways you could do that would be to 
use some of the tools that Mr. Donoho's folk have developed 
like formularies and tiered pricing and moving toward generic 
substitution in cooperation with doctors and the rest.
    Ms. Briceland-Betts, you indicated you had some fear of the 
bipartisan plan controlling formularies. How could you also say 
that one of the criticisms of the plan was that it was 
basically the private sector being allowed to structure the 
formularies versus then saying they were going to be somehow 
limited or restricted? You are either going to be given more 
freedom to do what you believe is necessary or less freedom but 
you probably wouldn't be given more freedom to structure and 
then your fear of not being able to offer a kind of formulary 
that makes sense.
    Ms. Briceland-Betts. I think the point we are trying to 
make is that there is give and take in every option. While we 
look at plans that restrict formularies, women have more 
chronic illness, there is a lot of research as my colleague 
from PhRMA pointed out on chronic illness which is bringing new 
and leading edge medications, they tend to be very expensive 
and she can't buy those out of pocket, she has to have a way 
within that plan. If the plan has a restrictive formulary to be 
able to go off the formulary and have access to those.
    Mr. Thomas. If the doctor were to recommend it, there is no 
plan that wouldn't allow it.
    On page four you say ``Adequate stop loss protections and 
catastrophic coverage are critical components in a prescription 
drug program.`` I can understand why you wouldn't be familiar 
with the bipartisan plan since frankly it hasn't yet been in 
print. What is the President's first year, 2003, catastrophic 
coverage in his plan?
    Ms. Briceland-Betts. I don't think I commented on that in 
my testimony.
    Mr. Thomas. On page four you said ``adequate stop loss 
protections and catastrophic coverage are critical 
components.''
    Ms. Briceland-Betts. They are of any plan.
    Mr. Thomas. What is the President's catastrophic plan in 
the first year of its implementation, 2003?
    Ms. Briceland-Betts. I don't know the answer to that.
    Mr. Thomas. The answer is there isn't a catastrophic plan 
in the President's proposal in 2003. What is his plan in 2004?
    Ms. Briceland-Betts. The point I was trying to make is that 
because women have lower incomes and higher out of pocket costs 
and take more prescription drugs, they have to have 
catastrophic coverage. It doesn't matter whose plan it is, sir.
    Mr. Thomas. I agree with you completely, but if you have 
one plan that doesn't have catastrophic coverage and the other 
does, wouldn't you say the plan that has it from day one is a 
better plan?
    Ms. Briceland-Betts. Since I have only seen one of the 
plans, I was doing my best, sir.
    Mr. Thomas. Which had you seen?
    Ms. Briceland-Betts. I have seen the more structure on the 
President's plan.
    Mr. Thomas. What is the President's catastrophic proposal 
for the year 2004?
    Ms. Briceland-Betts. Maybe not all of the details are in 
the President's plan but we have seen much more detail.
    Mr. Thomas. The answer is there is no catastrophic proposal 
in the President's plan. That is the point I am trying to make 
to you. There is none.
    Ms. Briceland-Betts. I know, sir, but the point I was 
trying to make is how important catastrophic coverage is.
    Mr. Thomas. I know the point you were trying to make. All I 
am saying is don't put in your testimony that catastrophic 
coverage is a critical component and not know that the 
President's plan doesn't have it.
    Ms. Briceland-Betts. I was talking about what older women 
need.
    Mr. Thomas. I agree, older women need catastrophic. That is 
why the bipartisan plan built in from day one of the proposal a 
catastrophic coverage, a stop loss for seniors who through no 
fault of their own have very high drug costs. That is critical 
to any plan. We put it in from day one. I just thought you 
might like to know the President's doesn't have it.
    Ms. Briceland-Betts. With all due respect, I think what we 
were trying to do here, and we were very clear, was provide 
leadership about what older women need as the majority of 
beneficiaries. Since we haven't had an opportunity to your 
plan, we were saying one of the things we hope you consider is 
the importance of catastrophic coverage.
    Mr. Thomas. I agree with you and have you delivered that 
message to the President since his plan doesn't have 
catastrophic coverage?
    Ms. Briceland-Betts. Yes, sir, we have.
    Mr. Thomas. What was their response? Are they going to do 
it in 2003?
    Ms. Briceland-Betts. They are still examining that, sir.
    Mr. Thomas. Does the gentleman from New York wish to 
inquire?
    Mr. Rangel. I am just glad you treat the witnesses the same 
way you treat the Democrats. I yield.
    Mr. Thomas. I can assure you that if a Republican answered 
the same way, they would get the same treatment. We are here to 
try to remove partisanship, to try to move a program forward 
and try to understand what seniors need. I agree, seniors need 
catastrophic coverage but when one plan doesn't offer it, I 
think you have to say you are right, it falls short, it doesn't 
offer it.
    Does the gentlelady from Connecticut wish to inquire?
    Mrs. Johnson. I have several questions. Mr. Schondelmeyer, 
having been here through catastrophic and seen the reaction, I 
am interested in your comments about Medicaid. I am not 
familiar with Medicaid reimbursement rates for pharmaceuticals 
but I know the real problem for all providers is 
catastrophically low Medicaid reimbursements for hospitals, 
doctors and every other provider. They are actually bringing 
down the system. That comes from a progressive State that does 
better than most. Are there reimbursements for drugs 
sufficient?
    Mr. Schondelmeyer. The reimbursements to pharmacies are not 
necessarily sufficient because those are ratcheted down over 
time and actually pharmacists get about one-fourth less today 
than they did 20 years ago under Medicaid.
    For the drug product component, for single source or 
innovator drugs, there has never been any price control or 
limitation on those. It is exactly what the manufacturer sets 
the price at.
    Mrs. Johnson. Presumably if we use the Medicaid system to 
distribute, we would end up distributing drugs at a very low 
price. I am concerned about the small pharmacist because in 
many of the rural towns I represent, they are it and there is 
one of them. We have done so much to put them under already, so 
this idea of a single pharmaceutical benefit manager that the 
government would contract with, do you think that will preserve 
the small pharmacist and do you think their price, if we did it 
through Medicaid, would be adequate?
    Mr. Schondelmeyer. Medicaid has been as good a payer as 
many of the private plans. In fact, some of the private plans 
have been more aggressive or more damaging to rural pharmacies 
than Medicaid has.
    Mr. Fuller. I would add the CBO report suggests a lot of 
the reductions as stated have come out of pharmacy. The margin 
in pharmacy is very, very small. You are right, the small, 
independent pharmacies for many years have been in decline, 
although that has leveled off some. A system that puts more 
pressure on community pharmacy is not only going to detract 
from the service they should be providing to the patient but is 
going to financially make it more difficult for them to 
survive.
    Mrs. Johnson. One of my concerns is I don't see any plan 
out there on the table that sufficiently recognizes that people 
with certain advanced diseases, advanced stages of heart 
disease or diabetes, not everyone but some portion of those 
groups will have much lower medical costs if they are in a 
disease management program that includes not only 
pharmaceuticals but other components.
    What would be the incentive for a pharmaceutical benefit 
manager to put people in those programs since the 
pharmaceutical benefit manager isn't going to get the cost 
savings that accrues to that and yet the public interest is 
that anyone getting those benefits should be in a disease 
management protocol.
    Mr. Donoho. I would respond to that by saying if you look 
at my statement when I said we need the tools, I think when you 
start looking at defining what kind of tools we have, that is 
one of our principal concerns.
    Mrs. Johnson. How would you answer my concern that you 
wouldn't be motivated to do that because you have to provide 
the same pharmaceuticals but unless you were a managed care 
choice plan, you wouldn't get the benefit of lower hospital 
costs, lower physician visits?
    Mr. Donoho. Because we do those kinds of programs today in 
the private sector, those are the kinds of programs that we 
have innovated, developed and we are developing. If you look 
into the future in terms of where this whole industry is going. 
Taking silos away is going to be very important in terms of how 
prescribing and dispensing practices occur. That is what our 
industry is evolving into. We are an evolutionary industry.
    It is in our best interest to take care of the patient. 
That is why in my statement I said we have to look beyond 
focusing on product cost and look at health care.
    Mr. Kennedy. A procedural question. We have less than 10 
minutes left on a vote and we have six votes on the House 
floor. Is it your intention since you are the only majority 
party member to recess the Committee so we can come back?
    Mrs. Johnson. I didn't realize I was the only one. Can we 
get it all in?
    Mr. Kennedy. In less than 10 minutes, I doubt it, not with 
six votes.
    Mrs. Johnson. How many of you can come back? Can the 
members come back too? We will just proceed.
    Mr. Fuller. The senior Rx goal proposal we have put forth 
would require payment for pharmacy services. We think there is 
plenty of research that indicates that these services improve 
the patient; health as well as reduce cost to the program.
    Mrs. Johnson. Do you think most pharmacists can participate 
in some kind of contract with an insurer or with a reinsurer? I 
don't want the small pharmacists to be closed out while a big 
pharmacist takes over through this contracting mechanism. How 
do we get the small pharmacists into it?
    Mr. Fuller. The APHA which represents all pharmacists 
supports our plan and, I think the kind of proposal we are 
putting forth they as being workable.
    Mrs. Johnson. Mr. Stark will inquire and we will recess for 
the vote.
    Mr. Stark. Are your members in California comfortable with 
the Medi-CAL Program for reimbursement which would be Medicaid 
in any other State?
    Mr. Fuller. I think we have some concerns because much of 
the burden of reducing costs falls on community pharmacy there.
    Mr. Stark. But if we didn't have it, none of those people 
would be able to buy any pharmaceuticals. In my discussions 
with the Longs and others, it has been my sense they would be 
more than happy to continue providing the drugs. They are happy 
to serve the Medi-CAL or Medicaid community.
    Mr. Fuller. It is certainly the desire of community 
pharmacy to serve that community.
    Mr. Stark. I haven't heard that they are complaining as 
loud as the physicians in terms of their reimbursement, that it 
is now the law that Medicare beneficiaries must get the same 
discount as Medicaid beneficiaries in California. I am not so 
sure that is saving a lot of money for the Medicare 
beneficiaries, but it seems to be moving all right in 
California. Do you know anything to the contrary?
    Mr. Fuller. I will share with you that the desire to serve 
the community is great. The ability to continue to do it with 
the kinds of pressures and low reimbursements they are seeing 
and the razor thin margins that exist at pharmacy put the 
future of this in some jeopardy. So proposals that further 
reduce margins and try to find more savings at the pharmacy 
level are ones that we have opposed as an organization.
    Mr. Stark. I would agree. I think Mr. Schondelmeyer, what 
you were suggesting is that the Medicaid regulations probably 
provide for the best purchase price for pharmaceuticals today, 
correct?
    Mr. Schondelmeyer. Right now, they do by law.
    Mr. Stark. So by law, we have established the best price 
anybody in the general public can get for pharmaceuticals. It 
could be that someone like Kaiser Permanente gets a better deal 
because they have bigger purchasing power.
    Ms. Briceland-Betts, we shouldn't be beating up on you for 
you not knowing plans that I haven't introduced yet.
    Mrs. Johnson. If the gentleman will yield, I would just 
announce that the members will return.
    Mr. Stark. In purchasing drugs under Medicaid, is there 
anything that we could do differently that would get us any 
better price. Is there anything inherently wrong with setting 
that rate? We have a government set rate and it gets all the 
Medicaid beneficiaries the pharmaceuticals they need, correct?
    Mr. Schondelmeyer. That is true. Medicaid represents about 
12 percent of the prescriptions in the country; Medicare, if it 
covered all elderly drugs, would represent somewhere between 35 
and 40 percent of the drugs in the country. There is every 
reason to think if you have an even larger volume being paid 
for by the government, you should get an even better price. So 
you may set a Medicaid type rebate as the floor and then tell 
the private plans you work with you are welcome to negotiate 
better prices and if you do, we will exempt it from Medicaid.
    Mr. Stark. Wouldn't it stand to reason that fewer larger 
pharmaceutical benefit managers could get a better discount?
    Mr. Schondelmeyer. In terms of getting better price, 
probably yes. In terms of implementing the plan and getting the 
benefit to meet the needs of populations in certain areas, most 
of our PBMs are nationwide in scope and can address national 
structures as well as they could regional.
    Mr. Stark. Roughly how many nationwide pharmaceutical 
benefit manufacturers are there, Mr. Donoho?
    Mr. Donoho. Nationwide PBMs, I would guess over a dozen. We 
have 36.
    Mr. Stark. How many wholesale distributors of 
pharmaceuticals are there roughly in the country?
    Mr. Donoho. That, I wouldn't know.
    Mr. Schondelmeyer. At least 100 actual companies and then 
they have far more.
    Mr. Stark. So we have a dozen nationwide benefit plans. 
They ought to be big enough to get a decent volume discount. If 
you start to deal with very small ones, they would be at a 
disadvantage, would they not, in getting a good price?
    Mr. Donoho. I think what you are getting at is the 
difference between a negotiation over class of trade or market 
versus setting a price. You as a Congress can set prices.
    Mr. Stark. I am. I am just saying wouldn't we be better off 
with a dozen, as opposed to a couple hundred plans 
administering these benefits, because the smaller number of 
large beneficiary plans would have a better bargaining power? 
Is that a fair assumption?
    Mr. Donoho. I guess it would be. It depends on the terms. 
If that is the sole criteria for cost savings. That is one.
    Mr. Stark. I guess my time is up.
    Thanks for your testimony.
    [Recess.]
    Mrs. Johnson. I apologize to my colleagues. There was a 
mixup as to who we thought was coming back, so I am sorry to 
have kept you waiting. I thought you were going on this time.
    Mr. McDermott, you are recognized, unless you want to--or 
you can let Mr. Kleczka go or Mrs. Thurman go.
    Mr. Kleczka. I don't have any questions at the moment, 
although I might have some after Mrs. Thurman is done.
    But the reason that I asked for the Committee to return was 
so that I could publicly apologize to Ms. Betts for the 
intemperate remarks of Mr. Thomas.
    I think at times some people on this Committee, and maybe 
in Congress, forget who the boss is, who pays their salary, and 
to ascertain more knowledge on issues that we're talking about, 
we ask the public to come here. And if we get to the point 
where we don't agree with what they say and publicly embarrass 
and chew them out, I think is wrong.
    And so, Ms. Betts, I would like to apologize not only on 
behalf of this Committee, but on behalf of the entire Congress. 
That conduct should not be condoned. That is not the way I want 
this Congress to be viewed, and I don't think it should act as 
a deterrent for you to say anything you damn well please, 
whether it be in opposition or in support of my proposal or 
anyone else's.
    So I do apologize on behalf of the Committee.
    Mrs. Johnson. Before I recognize Mrs. Thurman, I would like 
to say that I think Mr. Thomas was trying to make a very simple 
point----
    Mr. Kleczka. But you don't shout at a witness who comes 
here to try to enlighten this august body.
    Mrs. Johnson. Mr. Kleczka, I recognized you for your 
statement and now I'm going to make mine.
    I don't condone the tone of voice of Mr. Thomas, but he was 
trying to make a very simple statement and get a very simple 
answer. The fact is, the President's proposal never did have a 
catastrophic component to it. The Republican proposal has 
always had a catastrophic proposal to it. The later proposal 
that was generically laid out by Democrats also had a 
catastrophic proposal to it, and a catastrophic proposal is 
very, very important.
    Now, tempers do get high and voices do get harsh, and I am 
sorry about that. But frankly, Mr. Kleczka, I have seen--like 
the colleagues on the other side of the aisle on this very 
Committee, and I won't name any names--be extraordinarily rude 
to witnesses when they weren't even trying to make what I 
considered to be a legitimate point.
    So I apologize if anybody's feelings were hurt on the 
panel, but I certainly would not agree with my colleague, Mr. 
Kleczka, that somehow Mr. Thomas was way out of order. I have 
heard far more inappropriate language, tone of voice, and 
comments from colleagues when they also were not at their best, 
at least as I would claim it.
    But let's turn to Mrs. Thurman now.
    Mrs. Thurman. I would yield to Mr. McDermott.
    Mr. McDermott. I have the question that I wanted here.
    I don't know who it is on this panel that should talk about 
it, but as we said over and over again, we don't have the bill 
in front of us, but the concept that there would be one premium 
all the way across the country, everybody pay the same thing.
    Is it your belief, as a panel, that the insurance companies 
would charge the same premium everywhere in the United States, 
that the premium would be the same in Seattle as it would be in 
New York or New Hampshire? I raise that because in looking at 
the Medigap policies, you see tremendous variations--the H 
policy goes from $1,137 in Hawaii to $2,509 in Florida. And 
what I don't understand is how you're going to have this one 
premium that's going to cover the whole country.
    I would like to hear from those of you who think this idea 
will work, that it could be done through the private insurance 
industry.
    Mr. Kahn. I think there's a reason that rates vary, and 
that's because there is some experience that ultimately is used 
to calculate the rates by actuaries. So I think to the extent 
possible, insurers and health plans would want the flexibility, 
based on whatever regional basis was allowed under a law that 
was ultimately written, to vary their rates. I mean, there's a 
lot of complaint--I'll give you an example about the AAPCC as a 
payment mechanism. You know, I will get in line with the people 
who complain about it. But it does reflect the actual spending 
on a county-by-county basis on the fee-for-service side of 
Medicare of what is spent, and there is great variation. Now, 
some of that variation can be explained, and some of it is 
mystical. But the fact is that there is such variation, and if 
you're going to set a premium for an insurance policy, if you 
don't recognize that variation or if you don't have a pool that 
is so big that the variation won't affect the ultimate outcome, 
you're going to have problems with the rates.
    Mr. McDermott. Isn't that an argument, though, for having 
one plan, so that you get all the benefits of insurance pooling 
from the whole United States and put them in one bag, and then 
you can have one? But if you're going to have these regional 
benefit managers, it seems to me that once you go to regional 
benefit managers, you're going to have regional programs and 
you're going to have real problems in having the same premium.
    What I struggle with is--I can understand the AAPCC; that 
is, doctors' pay. Doctors charge $1,000 for an appendectomy in 
one place and $1,500 in another place. OK, so you've got a 
variation across the country. But the cost of Kumadin or the 
cost of antibiotics or anything else ought to be the same, 
shouldn't it?
    Mr. Kahn. You're talking about the price of a particular 
drug. But the use and the volume and the cost may vary from 
region to region based on things other than simply the price.
    Mr. McDermott. So the doctors in Florida give more Prozac 
than the doctors in New Jersey?
    Mr. Kahn. It's true with every other procedure; we know 
that from Wenberg's work.
    Mr. Schondelmeyer. And it's not just that. It could also be 
the types of consumers that enroll in the program and seniors 
that enroll in the program. If in one area, if in Minnesota you 
get this heavy adverse selection and you just get the people 
that have more than $3,000 worth of drug expenditures a year, 
you're going to have real high costs for the program. But if in 
Florida you get almost everybody to sign up, then the average 
cost is going to be much lower just because of the mix of 
people who signed up for the program.
    So there are things other than the cost of the drug that 
will cause variation in the cost of covering the population 
that is enrolled.
    Mr. McDermott. Cost control--doesn't that argue for having 
a mandatory program, everybody signs up, everybody's in, so 
that you get the benefit of pooling and get away from adverse 
selection?
    Mr. Schondelmeyer. There are definite benefits to pooling 
and avoiding the adverse selection.
    Mr. McDermott. But you wouldn't go the next step?
    Mr. Schondelmeyer. I don't know. It depends on how you do 
it. I mean, there are ways--and I don't know what's been 
proposed here--there are ways to do it, either a design way to 
attract more people in, or a mandatory way. There are 
variations on how you can get larger populations in, and that's 
a function of benefit design.
    Ms. Ignagni. Mr. McDermott, what I understand is that in 
Mr. Thomas' proposal--and we are looking forward to seeing the 
details--there would be a specific deductible coinsurance 
catastrophic set, so that any plan participating would have to 
meet that basic level. Then, depending upon how efficient the 
plan was at, for example, disease management, that could be one 
way that in that sense, by charging the same premium, you could 
still deliver more benefits. If you were very efficient at 
disease management and had all the infrastructure in place to 
do that, you might be able then to reduce the deductible. You 
might be able to improve on the cost-sharing, or do better on 
the catastrophic. As I understand it, that is what's being 
contemplated.
    Now, I am not familiar enough with the details of the 
President's program to know if that would be the case, but in 
Medicare+Choice, for example, across the board we're allowed to 
do that. You hit the basic benefits, and then if you're able to 
improve them because of your ability to coordinate care, and so 
forth., then you can do that, and that goes to the benefit of 
the beneficiary.
    So it may be common to both.
    Mr. McDermott. So you think it would not work if we 
mandated that there be a drug benefit of x for every plan, 
every HMO?
    Ms. Ignagni. Well, I think that what we're talking about--
and again, I may be misinformed--but what I understand is that 
there is a basic requirement. There would be a basic 
deductible, coinsurance, and catastrophic, and then if you are 
able to do better than that for the beneficiary, similar to the 
way we work in Medicare+Choice, then you would be allowed to do 
that. You would be allowed to reduce the deductible. You would 
be allowed to try--every incentive would be to make your 
offering as competitive as possible, to try to recruit the 
largest number of beneficiaries, as I understand it.
    Mr. McDermott. Thank you, Madam Chairwoman.
    Mrs. Johnson. Mrs. Thurman?
    Mrs. Thurman. Thank you, Madam Chairwoman.
    Chip, let me ask you a question, because I want to be sure 
to reiterate this because this is important; I think this is 
where the differences are. We've all talked about where we have 
similarities, but we do need to talk about the differences.
    In your testimony on page 10 you specifically mention that 
``Some of the proposals we have examined that rely on 'stand-
alone' drug-only insurance policies simply would not work in 
practice.'' And you stand by that statement?
    Mr. Kahn. Yes. The companies that I represent feel very 
strongly that this is not a type of insurance that would work 
if there is risk-bearing involved.
    Mrs. Thurman. OK.
    Karen, let me ask you a question as it deals with what you 
know of the plan that we don't have in front of us. And you've 
heard this kind of line of conversation with me today.
    Today you have Medicare Choice plans based on what they get 
as reimbursement. Today you have a situation where there are 
some Medicare Choice programs that in fact provide a 
prescription drug benefit, as well as other benefits, without 
any kind of premium. And then you go into----
    Ms. Ignagni. Very few left now.
    Mrs. Thurman. Right, Okay, Maybe very few now, but even so, 
even that premium differs from one region to another.
    Ms. Ignagni. That's right.
    Mrs. Thurman. So what we have then, if you would agree with 
me, is that we actually have a discrimination issue going on in 
the entire Medicare Program, because those who have the ability 
to have Medicare+Choice in their region might have a benefit; 
it might be a prescription drug benefit; it could be 
eyeglasses; it could be dental coverage. And then there are 
other Medicare recipients in this country who have no 
Medicare+Choice plan that provides them prescription drugs 
other than in-hospital coverage. Is that correct?
    Ms. Ignagni. That's right. And the philosophy of this 
program, Medicare+Choice, as you know, grew out of the Medicare 
Risk Program. A number of our plans, in fact, have been 
participating in it for more than 15 years.
    The idea was, in exchange for selecting a panel of 
providers and being in a coordinated care system, along with 
the ability of our plans to manage the traditional benefit 
better and more effectively then the exchange with 
beneficiaries--the ``compact,'' if you will--is that in fact 
the beneficiaries got more benefits.
    Mrs. Thurman. So the big issue for us right now is the two-
tier system. I mean, we basically have done that to the 
recipients of Medicare who have paid into the system, just like 
everybody else has in this country.
    Ms. Ignagni. I don't see it that way, and let me tell you 
why. We may disagree, but let me tell you why I don't see it 
that way.
    I think that what you have established--and it's long 
before the Balanced Budget Act of 1997--what you've established 
is a compact with beneficiaries. There is a basic benefit that 
the public sector guarantees. Then you say to private sector 
plans, ``If you can improve on that and deliver more benefits 
for beneficiaries, they will be the ones who will benefit from 
that,'' and that's a good thing in the system.
    So for the same resources, we can do more.
    Mrs. Thurman. Well, we don't have the same resources going 
into that.
    Let me go to you, Dr. Schondelmeyer. You made a comment--I 
believe this was your comment--that if we had a prescription 
drug benefit, that volume purchasing gives us our best price. 
Is that what you said?
    Mr. Schondelmeyer. No. Volume isn't what gives price. It's 
leverage in being willing to switch patients from drug A to 
drug B, or being able to move patients to a different drug, 
which essentially tells the drug company, ``If you give me a 
better price, I'll use yours; if you don't, I'll use the other 
one.''
    Mrs. Thurman. Okay. And you have some research that shows 
what PhRMA and others have been doing in trying to persuade 
patients in the marketplace, which has really created a problem 
out there for our programs, is that correct?
    Mr. Schondelmeyer. Are you referring to research related to 
direct-to-consumer advertising, things like that?
    Mrs. Thurman. Yes.
    Mr. Schondelmeyer. I think that is an issue that needs to 
be examined, because often direct-to-consumer advertising is 
for products that may not be on the formulary in a specific 
area, and so a drug company can target the ads to that market 
and create a whole lot of doctor visits in the HMO where those 
patients participate. Certainly it may bring some patients into 
the market who need the drug and didn't know about it.
    Mrs. Thurman. In this conversation can you also talk about 
what the difference is between the EEU and the United States 
and those dollars in trying to make that market there?
    Mr. Schondelmeyer. Well, I'll try.
    One aspect of this is, though, that you may get the patient 
who needs therapy and didn't know about it, but you may also 
get in the ``worried well'' or people who, ``Oh, I heard about 
this drug and I called the doctor''--actually, most of the 
folks I talk to in managed care, while they are concerned about 
the increased drug expenditure from direct-to-consumer 
advertising, they are even more concerned about the increased 
physician visits that these generate. And it is basically that 
these ads that had another purpose, that create increased costs 
to the managed care system that they have to cover and work 
through and pay for and straighten out their patients.
    Other countries--the EEU, for example, does not allow 
direct-to-consumer advertising, and in most of the European 
countries they regulate either price or profit; and in their 
regulation process, they determine an amount that they will 
allow for advertising expenses. The United Kingdom, I think, is 
in the range of 10 to 12 percent. France is around 15 to 16 
percent, although they're trying to squeeze that down to 10 
percent. But in the U.S., the amount spent on advertising, 
marketing, administrative fees, the same category, is much 
higher, maybe two or three times as much.
    Mrs. Thurman. And what about research and development?
    Mr. Schondelmeyer. About the same amount is spent on 
research and development as a percent of the dollar, but what 
you have to realize is that the product that costs $1.00 per 
tablet in the U.S., made by the same company, that product in 
the U.K. may only cost $0.65 per tablet. So if research and 
development is 20 percent of the dollar in the U.S., that would 
be $0.20 spent on R&D. The same tablet bought in the U.K., it 
would only be 20 percent of $0.65, so it would be about $0.125 
or $0.13 spent on R&D from the same product.
    Mrs. Johnson. I will recognize Mr. Doggett and then I will 
resume my questions.
    Mr. Doggett. Well, just continuing along that same line of 
questioning, in this country, we're paying, or rather, the 
uninsured are paying the highest prices for pharmaceuticals of 
anyplace in the world, aren't they?
    Mr. Schondelmeyer. As best I can tell.
    Mr. Doggett. And we also have the largest amount of 
resources devoted to direct advertising of pharmaceuticals of 
any country in the world?
    Mr. Schondelmeyer. Yes.
    Mr. Doggett. As well as a large amount devoted to issue 
advertising to convince us that paying more for drugs is good 
for us. And that's one of the things those high drug prices pay 
for, isn't it? For example, the issue ads put out by Citizens 
for Better Medicare, FLO, and the like are all paid for with 
our high drug prices, aren't they?
    Mr. Schondelmeyer. I presume so, yes.
    Mr. Doggett. If we were not paying the highest prices in 
the world for drugs, do you believe that we would have a 
substantial reduction in research and development?
    Mr. Schondelmeyer. Well, I don't think that's where a drug 
company would start. I think they would maybe cut their 
marketing and advertising budget first. I don't think you start 
by cutting the R&D because that's the ultimate lifeblood of the 
company, and you want to keep that producing new products, even 
when you're squeezed a little bit.
    So I think it would probably come more from marketing and 
advertising, and then maybe in other areas.
    Mr. Doggett. Why is it that consumers in Great Britain and 
some of the other EU countries and Canada--your neighbor there 
in Minnesota--pay significantly less for the very same quality 
of pharmaceuticals?
    Mr. Schondelmeyer. Well, you may need to ask that of other 
people on this panel. I don't know the exact reasons. What I 
know is that in the U.S., what we call a ``free market'' really 
isn't. While it is a ``free from regulation market,'' certainly 
pharmaceuticals are unique. They are essential. Often, when I 
go to meet with senior citizen groups, I will ask the question, 
``Is there anybody in this room who has never used a 
prescription drug in your life?'' And rarely does anybody raise 
their hand. Occasionally one or two might.
    But the point is, prescription drugs--there is universal 
demand for prescription drugs, and they affect the very life 
and health of the person, so they are essential. I would argue 
that prescription drugs are an essential good, or a public 
good, much like water or electricity or gas are essential goods 
to us; and while economics is a great science, and I've spent a 
lot of time studying it and working with it, what we find out 
is that the basic principles of economics work when all the 
assumptions are met. But most of the assumptions in normal 
economic models are violated in the pharmaceutical market 
because of the unique nature of the market. It's a life-and-
death drug. It's a monopoly situation. It's something you can't 
live without. If you find out Mrs. Thurman has epilepsy and you 
have diabetes, and her drug is cheaper, you can't start taking 
the epilepsy drug for your diabetes just because it's cheaper.
    So it's very unique. It's a very different market than any 
other market in our society.
    Mr. Doggett. Is there any reason to believe that if we use 
a Medicare benefit instead of whatever is in the secret 
Republican plan, that it will necessarily lead to less drug 
research than if we go with the secret plan?
    Mr. Schondelmeyer. That's hard to guess because I don't 
know all the secret plan.
    Mr. Doggett. I don't either. None of us do.
    Mr. Schondelmeyer. I don't think any approach--as a matter 
of fact, I think any meaningful coverage of prescription drugs 
for the elderly through Medicare will likely result in 
increased revenue to drug companies. And at this point, realize 
that when you cover prescription drugs, you have what's called 
this ``insurance effect'' or this induced demand that occurs. 
And most of that is necessary drugs that are used that people 
couldn't afford previously, so they begin using those drugs. 
And that will increase the volume of sales to the industry. 
Remember, they have already made their plans assuming--I don't 
think they're planning on a drug benefit this year, even though 
they're talking about it--they have made their plans, so 
everything that is additional sales because of this is marginal 
cost sales; that is, it is sales that they make a very high 
gross margin on. I think Merrill Lynch did a study that 
suggested that with the increased volume that they have, even 
if there was substantial pressure on prices, either from the 
private market or a Medicaid rebate-type program, that they 
would still be ahead in terms of both revenue and profit and be 
able to continue increasing R&D as they have, no matter which 
way you do it.
    Mr. Doggett. Thank you, and thanks to all of you for 
staying so long today.
    Mrs. Johnson. Dr. Schondelmeyer, what percentage of the 
drugs developed in the United States in the last 3 years are 
available in Canada?
    Mr. Schondelmeyer. I have not looked at that specifically. 
Some things go in the market quicker in Canada; some go in the 
market in the U.S. I haven't looked at it.
    Mrs. Johnson. Do you see any discrepancy between the rate 
at which our designer drugs move into Canada, versus the older 
types of drug developments?
    Mr. Schondelmeyer. Canada's system is probably a little bit 
slower at approving drugs. Probably a better way to say it is 
that the U.S. system has accelerated in the last two or 3 years 
and Canada's has kind of stayed where it was.
    Mrs. Johnson. Well, the reason I asked the question is 
this. A lot of the drugs that have been developed--and maybe 
it's not three, maybe it's five--are much more expensive than 
the drugs that we used to development because they are the 
development of whole new molecules, whatever. I'm not very good 
in this area, but I've seen it done. And one of the things that 
I have read is that those drugs, only about 50 percent of those 
drugs are going to Canada because the Canadian government will 
pay quite a lower price because they set their prices at the 
government level, and no company can afford to take that kind 
of loss on drugs. So the information I have is that, ``Well, 
drugs are cheaper in Canada, but many of them aren't 
available.''
    Now, would you have any comment on that? Or could you 
provide any research that would give me any indication----
    Mr. Schondelmeyer. I would be glad to evaluate research 
that you have seen or been provided.
    The comment I would make, though, is that prices are about 
the same or even less in Europe, and these same drugs end up on 
the market in the United Kingdom and in Germany----
    Mrs. Johnson. But, see, that's exactly--what I'm being told 
is that it is true, that drugs here are cheaper there. But what 
you're not seeing is the drugs that don't flow over there 
because a company can't take a loss--in a sense, a loss 
leader--in all of these. So I think we need to look at the 
whole market, and particularly in the area of the expensive 
pattern drugs.
    Mr. Schondelmeyer. I'm not aware of very many drugs that 
are on the market in the U.S. that aren't in the United Kingdom 
or Germany.
    Mrs. Johnson. OK. I was given some material that showed 50 
percent.
    Mr. Schondelmeyer. I would be glad to examine that, but I 
haven't seen it.
    Mrs. Johnson. Mr. Donoho, Mr. Kahn has said that the 
insurance industry wouldn't want to offer the kind of product 
that is envisioned in the Republican bill, the bipartisan 
bill--they are variations of the same thing. But I've had 
people in my office that are in your business who had 
reinsurers with them who were excited about offering this 
product. Would you have any comment on that? Do you believe 
that pharmaceutical benefit managers, allied with reinsurers, 
will jump into this market?
    Mr. Donoho. Well, let me be clear about this. We're not in 
the insurance business today. Most of our members are not 
insurance agents and don't belong to----
    Mrs. Johnson. Well, I appreciate that. But they brought a 
reinsurer along with them to testify to the fact that they were 
excited about working together on this.
    Mr. Donoho. Right. And I think there are a portion of 
them--without the correct details before us right now--there is 
a portion of them that are looking at this as a new way of 
doing business and they are excited about looking at a new 
business venture. There is another group of them that are very 
worried about entering into a new business venture, because it 
truly is a new business venture for them. But there is a group 
there looking at new business ventures.
    Mrs. Johnson. Then I would like to ask any of you who have 
had a chance to examine the President's plan, which of course 
has been out there for quite a long time now, he envisions one 
regional pharmaceutical benefits manager. So instead of 
insurers, he would set up now, in a sense, a different--in 
Medicare we have, in every region, someone who manages 
payments. And when we change people, when there is a 
competitive issue and we change people, or a service issue, it 
can be catastrophic to a region, absolutely catastrophic, and I 
can attest to that. Bills don't get paid. Things go screwy for 
years.
    Now, the President is envisioning only one pharmaceutical 
benefits manager in each region, and that they would negotiate 
with this pharmaceutical benefits manager. Now, given the fact 
that drug prices do vary and patterns of usage do vary, it 
seems logical to me that people will get different benefits in 
different parts of the country as a result of the negotiations. 
Am I wrong to think that? Or right to think that? What do you 
think, Mr. Kahn?
    Mr. Kahn. Well, I think that if we look back in history to 
the development of part B, we see there that books of 
regulations were written that set criteria, and then carriers 
interpreted those, and carriers on part B paid for very 
different things depending on their interpretation, and there 
was great latitude given by HCFA to carriers and intermediaries 
in some cases. So part of the variation in expenditure has come 
from the varying interpretation of HCFA's rulings, and I think 
that would happen in this case, too.
    Mrs. Johnson. I think it's fair to say that the regional 
variations in Medicare are real. They are not as great as the 
regional variations in Canada in the National Health Plan which 
are very great, both in what's covered and in the cost of 
coverage. Would you agree with that, Mr. Schondelmeyer?
    Mr. Schondelmeyer. Yes, because in Canada it's provincial 
plans. It would be like State-run plans.
    Mrs. Johnson. So there is going to be variation, whether 
you go with the President's plan or whether you go with our 
plan, because that's going to be the nature of the beast. So I 
think it is important to get that on the record.
    I do think we look back on a time when so much advertising 
wasn't a part of the pharmaceutical business, and I think there 
is some good reason to be thinking of whether or not the 
government should pay for advertising for prescription drugs 
since it isn't something that you have a choice about; it's 
something that your physician makes a determination about, 
related to your symptoms.
    So I am very sympathetic to that approach as one among many 
possible cost-containing efforts.
    But I do thank you for your extraordinary patience today. 
This is a very difficult area. It is fascinating to me to hear 
where the administration's thinking has bogged down, having 
been a part of the development of this bill and knowing sort of 
why you don't have the legislative language. I do hope that the 
legislative language will be out there a long time and that 
those who really want to work with us, whether they are Members 
from both sides of the aisle on this Committee or whether they 
are people in the private sector, will give us their best 
thoughts. There are so many elements in common from all the 
plans that it would really be a tragedy if we missed this 
opportunity. But there are also some terrible problems, and 
Chip Kahn, almost more than anyone sitting there at the table--
except maybe former Chairman Rostenkowski--knows the wrath that 
went with it.
    And I hope, Ms. Briceland-Betts, that you will be prepared 
to work with your organization, because half of all seniors 
have less than $200 in pharmaceutical costs. Every one of those 
people is going to pay more in premiums, and they're going to 
benefit from this program. Without a catastrophic benefit, they 
get nothing except more expense. With a catastrophic program, 
they won't pay $24 a month; they will pay at least $44 a month, 
or $37 a month, or something like that.
    But your organization is going to have to be prepared to be 
prepared to tell them that this is a good thing, because last 
time we lost the opportunity to have pharmaceutical benefits 
because the 50 percent of all seniors who have very few drug 
costs--and my mother just died at 101; all she had was 
diuretics and aspirin and stuff like that.
    So we have to remember that there are a lot of seniors on 
very limited income, and we have to be very careful what costs 
we impose on them, because they aren't going to benefit from 
this plan. So your organization has to be ready to step up to 
the plate and say, ``This is wonderful, but you're all going to 
pay more.''
    Ms. Briceland-Betts. Well, I understand the point you're 
trying to make, but women spend 22 percent of their income, on 
average, out-of-pocket.
    Mrs. Johnson. I appreciate that. But, see, that is on 
average, and on average, Medicare beneficiaries pay $974 a 
year. But you're talking about people who have $15,000 drug 
costs, and then when half pay less than $200, your organization 
had better have its heels firmly in the ground, its hands 
firmly on the reins, to get out there and say to people, ``We 
know this is going to cost a lot of you more, but we believe 
it's going to be good for you,'' because if you can't say that, 
then you have to think this through differently.
    But that's exactly why we came to the conclusion that 
without catastrophic benefits, there isn't enough in this for 
two-thirds. You take the half that are under $200, and then you 
take those that have better coverage through their employers, 
and you have to be very careful that you don't rob people of 
good plans and impose costs they can't afford for a very small 
slice of people who will benefit.
    Mrs. Thurman. Will the gentlewoman yield?
    To Ms. Betts, let me just say this. In talking to the 
constituents that I have who have had a variety of experiences 
over the last couple of years, and I can go back to the 
Medicare Choice stuff, but the fact of the matter is that 
they've been switched in and they've been switched out; they've 
done that. What they're saying to me is, ``You know what? We 
don't mind paying the extra cost because of the cost of drugs 
and how much they've gone up'' and how much they're paying, 
``but give us a plan. If it's going to cost us $24, if it's 
going to cost us $36, or $45, give us a plan under Medicare. We 
understand the program, we know the program, we're comfortable 
with the program, let us have it.'' And quite frankly, they 
want that; with all of the Medicare benefits that potentially 
they are paying for outside--with Medigap or whatever other 
plan they've got out there to cover other benefits, including 
catastrophic. They want an all-inclusive program. I have to 
tell you, I think that's the problem. If we go out there and 
shove this stuff at them, with so many different things going 
on, we're going to confuse them and they're going to be even 
madder at us than they were in 1986. I wasn't here, but I can 
tell you, I was in the State Senate and I got the phone calls, 
saying, ``What have you done to our health care system?''
    You've got to keep it simple. I mean, we heard these words 
back in 1992 on an economic plan, ``keep it simple, give us a 
benefit, make it something we can understand. We understand 
it's going to cost us, but by God, we're tired of paying at a 
retail price when everybody else is getting it at a preferred 
customer price.''
    Mrs. Johnson. Of course, as is always the case, simple is 
mandatory, and there are certain economies when you make it 
mandatory. But there isn't a lot of support out there, either 
among Members or seniors, for a mandatory program.
    Even with the Administrator's program, it's voluntary. And 
it could easily get into what you brought up earlier, that only 
those that had over $3,000 costs in drugs would choose it, and 
then the costs will be very different than the estimates.
    Thank you very much for your patience, as it is extremely 
difficult. I hope we can come out with something that not only 
helps seniors, but keeps all the small pharmacies in business. 
Thank you.
    The hearing is adjourned.
    [Whereupon, at 6:32 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of James L. Martin, President, 60 Plus Association, 
Arlington, VA

    Mr. Chairman.
    On behalf of the 60 Plus Association, I commend you and the 
Ways and Means Committee for holding this hearing on a topic 
very important for all seniors, a prescription drug benefit 
under Medicare.
    The 60 Plus Association is a national, nonpartisan senior 
citizens advocacy group with 500,000 members nationwide, an 
average of 1,000 per Congressional District. We are supported 
by the voluntary contributions of our members. We have never in 
the past nor presently receive federal grants or contracts and 
we have a policy that we do not seek or would we accept federal 
grants or contracts.
    As senior citizens are living longer and healthier lives, 
the issue of prescription drugs becomes a major issue for their 
health and their budget. Years ago seniors lived into their 60s 
and 70s; now we have seniors living beyond those years, with an 
increasing population in their 80s, 90s, and even 100 years and 
beyond. The rational TV weather forecaster, Willard Scott, has 
a growing number of individuals each year from whom to select 
to honor on their 100th birthday.
    I am not here to endorse any specific piece of legislation 
but mainly to highlight important principles, which should be 
included in any prescription drug plan.
    First of all, we are very concerned with the proposal 
pushed by President Bill Clinton. The president's plan is a big 
government, ``one size fits all'' proposal that will enlarge 
government, promises much but delivers little, places decision-
making in the hands of federal bureaucrats, and will do little 
to meet the diverse needs of our senior citizens. The proposal 
may have great political appeal in this election year but 
little common sense appeal to those of us who have studied it. 
A closer study of the proposal demonstrates that it is a bad 
program for senior citizens and for the American taxpayer. If 
we believe we have problems with financing Social Security and 
Medicare, let us adopt this Clinton proposal and we will have 
an even bigger financial disaster down the road.
    We at the 60 Plus Association are pleased that a bipartisan 
group is working in the House and the Senate to put forward a 
proposal, which will really help seniors.
    We believe that the essential features of any successful 
proposal must be a rejection of a big government role and 
especially one that will lead to price-fixing or price controls 
by the federal government. Throughout history, price controls 
have led inexorably to rationing. That's the major reason the 
Canadian health system is considered by 80 percent of seniors 
to be in a state of crisis. Rationing leads to long lines in 
emergency rooms and prompted the Canadian Minister of Health to 
travel to the United States a few years ago for treatment of 
his heart ailment.
    The United States has one of the greatest pharmaceutical 
industries in the world. Billions are being spent to develop 
new drugs, many of which help our seniors live a life with less 
pain, a higher quality, a longer life, and assist in avoiding 
surgery. Price controls, especially from an entity with the 
power of the federal government, could bring such research 
progress to screeching halt. We would be killing the goose that 
lays the golden egg. Seniors in order to receive a lower price 
on a drug today would be risking the opportunity for 
pharmaceuticals to develop other significant drugs which may 
help them not only in years ahead but other seniors in future 
years.
    Speaking of the American pharmaceutical industry, it is 
often used as a whipping boy. For those who participate in this 
approach, I would like to cite an article that appeared in 
magazine, September 12, 1998 authored by former House and 
Senate member Paul Simon. He noted that a heart scan had 
revealed that he was headed for a heart attack or stroke, even 
though he had not the usual symptoms of a heart problem such as 
chest pain or shortness of breath. He underwent a six-way heart 
bypass operation. He noted that the heart scan developed by 
research was responsible for him being alive today. He added 
``Pharmaceutical companies do an excellent job in research'' 
and noted that they had increased their spending from $2 
billion in 1980 to $20 billion in 1998. Senator Simon 
attributed his survival to that research performed by 
pharmaceuticals.
    Seniors are a diverse group. We believe assistance should 
be provided to those seniors, namely low-income seniors, who 
need such assistance. We oppose any program that will encourage 
companies or other health plans to drop their current 
prescription drug coverage for seniors, a clear and distinct 
possibility under the Clinton plan. We will be risking some of 
the great benefits in our current health system for a real shot 
in the dark by a very risky federal health initiative.
    And finally, we should consider the element of choice. We 
must give seniors this option, and not pass the entire 
decision-making and funding process on to federal bureaucrats. 
Seniors must be able to make their voices heard and their 
decisions known in the marketplace. Seniors will lose this 
voice if it stifled by a federal bureaucracy under the control 
of a plan, which has great political appeal (such as the 
president's) but dire consequences for the financial health of 
our country and the best interests of our senior citizens.
    I urge the Ways and Means Committee to adopt a bipartisan 
plan, which will really help seniors, and not penalize them 
with new government entitlement programs of dubious benefits, 
costly mandates, and excessive regulations.
            Thank you.

                                

Statement of American Society of Health-System Pharmacists, Bethesda, 
MD

    The American Society of Health-System Pharmacists (ASHP) 
supports the work of the House Committee on Ways and Means, to 
construct a workable Medicare prescription drug benefit. ASHP 
is the 30,000-member national professional association that 
represents pharmacists who practice in hospitals, health 
maintenance organizations, long-term care facilities, home 
care, and other components of health care systems.
    ASHP has followed the debate surrounding the outpatient 
prescription drug benefit for many years, and applauds the 
Committee's initiative in working to ensure that this much 
needed benefit is achieved this year. ASHP believes, however, 
that a critical facet of the debate has not received the 
necessary attention to ensure that the expenditure provides for 
a high quality and cost-effective outpatient prescription drug 
benefit to meet the needs of Medicare beneficiaries. As the 
Committee moves forward in considering this benefit, ASHP asks 
that you remain cognizant of the critical role pharmacists play 
in ensuring safe and effective drug therapy management, and 
include provisions for compensating pharmacists for these vital 
professional patient care services.
    The pharmacists' professional patient care services require 
pharmacists to work in collaboration with physicians, nurses, 
and other health care professionals to ensure that medications 
are used appropriately to improve a patient's health status, 
improve the patient's quality of life, and contain health care 
costs. Such activities include, but are not limited to, 
services that result in the change, correction or elimination 
of a drug from a patient's drug regimen; initiating drug 
therapy; training and educating patients on the effective use 
of their drug therapies; and identifying, resolving, and 
preventing potential and actual drug-related problems. While 
other health care providers' services are recognized for 
compensation, the professional care services of pharmacists 
currently go unrecognized under Medicare.
    This restriction inhibits the pharmacist's unique ability 
to ensure the proper use of medication therapy. ASHP members 
understand that providing adequate compensation for these 
patient care services will save Medicare dollars by ensuring 
that beneficiaries properly comply with drug regimens, thus 
preventing adverse reactions and unnecessary readmissions to 
the hospital. Compensating pharmacists for patient care 
services ensures that money and resources expended on providing 
the outpatient drug coverage will yield maximum benefit to the 
patient and the Medicare program. As the pharmacists' role in 
the entire drug use process expands, the opportunities for cost 
control are increased. Significant costs are associated with 
inappropriate drug choice, adverse drug reactions, and sub-
therapeutic treatment. By working with the patients and other 
health professionals, pharmacists can influence the decision to 
use a drug. Pharmacists also influence drug selection and 
patient use throughout therapy duration, assess drug 
therapeutic effect, and adjust treatment regimen. This 
integrated approach can reduce the total cost of drug therapy.
    Recent studies have also recognized that the professional 
patient care services of pharmacists reduce costs. A July 1999 
article in the Journal of the American Medical Association 
presented the results of a study that concluded that the 
inclusion of a pharmacist on medical rounds in a hospital's 
intensive care unit contributes to a decreased number of 
adverse drug events (ADEs) caused by prescribing errors. 
Indeed, the study found that the rate of preventable ADEs in an 
intensive care unit decreased by 66 percent and projected 
$270,000 per year related to ADEs could be saved when 
pharmacists were included on patient rounds in large, urban 
teaching hospitals. In the ambulatory setting, a 1995 study in 
the Archives of Internal Medicine showed that drug-related 
morbidity and mortality among patients cost the U.S. economy 
approximately $76 billion annually in direct costs alone. The 
largest component of this cost was associated with drug related 
hospitalizations. Pharmacists' patient care services could 
reduce that cost significantly.
    In spite of the clearly positive role pharmacists' 
professional care services play in improving the quality and 
cost-effectiveness of drug therapy programs, Medicare law and 
current legislative initiatives do not allow for pharmacists to 
be compensated for these services. Efforts to expand on the 
Medicare program to include an outpatient prescription drug 
benefit must include a provision for compensating for 
pharmacists' professional care services. By utilizing the 
maximum value from the services of our nation's pharmacists, a 
high quality and cost-effective outpatient prescription drug 
benefit can be structured to serve the needs of Medicare 
beneficiaries.
    As has become well known since the publication of the 
Institute of Medicine's report, To Err is Human: Building a 
Safer Health System, medication-related problems are a primary 
source of medical errors in the United States. These errors 
result in an inordinate expense, both financially and in the 
quality of care provided, and result in dissatisfaction with 
the overall health care system. Seniors are particularly at 
risk for medication-related problems due to physiological 
changes associated with aging, as well as their greater 
consumption of prescription and over-the-counter medications. 
Adding a new Medicare prescription drug benefit without 
including a simple, cost-effective safeguard to minimize these 
medical errors would unnecessarily add to this problem. An 
effective prescription drug benefit, therefore, would not cover 
merely the cost of the prescription drug but also measures to 
enhance the quality and cost-effectiveness of medication 
therapy. Pharmacists, with their educational background and 
expertise in drug therapy management, play a critical role in 
providing essential patient care services that result in a 
decrease in medication-related problems.
    ASHP urges the House Committee on Ways and Means to advance 
legislation to extend an outpatient prescription drug benefit 
to Medicare beneficiaries that recognizes the vital patient 
care services provided by pharmacists.

                                

Statement of Mae O'Dell, as presented by Betty J. Boucher, Reston, VA

    I am Betty Boucher speaking for Mae O'Dell #518, 
Fibromyalgia Osteoarthritis Chronic Pain Syndrome, Multiple 
Chemical Sensitivity Syndrome
    She says Compounded medicine is not covered by Medicaid--If 
the doctor puts two medicines in the same prescription Medicaid 
will not pay for it. Alternative health care therapies have to 
be covered as regular and conventional medicines and methods 
are not working.
    Owes in prescriptions and alternative medicines not covered 
by Medicaid more than twice her annual income.
    She can't afford the monthly payments, she has to borrow, 
she says Nutritionists need to be covered--they balance our 
bodies' vitamins, minerals, and give intestinal and digestive 
help.
    These practices do work.
    This is only 1/10 of what is wrong as the problems she has 
cause more problems.
    Freda Weltman #524, Takes Calen SR--Blood Pressure, 
Premeran, Nitroglycerin Baby Aspirin--heart, desperately needs 
a doctor--any doctor--to prescribe something for her dizziness. 
This horrible problem has been going on for years. This is not 
right.
    Mrs. Weltman says Kaiser Permanente pays $1,000 a year for 
all medication and if you need more you have to pay for it.
    Another lady has Osteoporosis and Spinal Stinosis--
narrowing of the spinal column thus pinching the nerves--
sending continuous pain signals to the brain.
    Her bones are too fragile for an operation.
    She takes $2,000 a year for Oxycontin, Percocet Calcium 
Supplements Falsomax
    The very minimum she pays per year is $3,000--probably much 
more.
    No matter how much money she spends she cannot ever be pain 
free.
    These medications are eating up her resources.
    There is a need for research on the continuous pain 
problem.
    Valarie Marizita #513 A tiny, frail lady with terrible 
asthma, spent five weeks in HCR Manor Care, MCHS Arlington 527, 
550 S. Carlin Spring, Arlington, Virginia 22204 (703) 379-7200
    Mrs. Marizita stated the young girls from Africa were 
extremely rude to her. They would slap a towel on her bed and 
order her to get up and take a bath. They would wake her up in 
the middle of the night to weigh her. She said she had never 
been treated so rudely anywhere and has been in many hospitals 
before. She said she has tried to call their number many times 
and has never gotten anybody to answer.
    Mr. Nevyl Francis, Stroke victim, 11605 Vantage Hill Road, 
Reston Virginia 20190, was denied ambulance transportation to a 
hospital and when he did get there was only kept one day! 
Rationing Health Care! He later died. It was a tragedy!
    We need to elect people who will pass the ``Right to High-
Quality Health Care Act'' and fight for a New Bretton Woods 
financial system. For until we replace the present bankrupt 
system with a system oriented toward the general welfare (that 
includes everybody) we are going to be Hitler and have the same 
``inadequate provision of surgical and medical services'' that 
Hitler provided.
    The ``inadequate provision of surgical and medical 
services'' that has become a trademark of the HMOs in America, 
has been absolutely deliberate, as ``shareholder value'' was 
placed at a higher priority than human life!
    The 1940s to 1960s--Hill-Burton Principle--facilities and 
care were deliberately built up, with the goal of providing 
access to care for all citizens. 1946 Hospital Construction 
Act, 1954 chronic care facilities, 1956 Research against major 
diseases--Salk's polio vaccine, my own niece had polio, 1963, 
anti-measles vaccine developed.
    How paid for? If the economy was generally growing in the 
right was, both physical (industry, agriculture, 
infrastructure) social services (science, education, health 
care, culture) the tax base, real purchasing power of citizens, 
philanthropy, community efforts, etc.
    During the Nixon Administration (1968-74) a group in 1973 
connected with Wall Street and City of London financial circles 
made sweeping changes--D Senator Patrick Moynihan, R Elliot 
Richardson, and Henry Kissinger.
    In 1971 ``wage-price controls,'' ``workfare,'' welfare 1972 
Hospitals receiving Hill Burton funds for 20 years released 
from obligation to care for the indigent. In 1973 community 
assets, built for decades bought up for a nickel-on-the-dollar-
stripped down, and closed. Privatization in action. HMO Law 
deregulated hospital care, and opened it up for looting.
    All manner of ways to restrict and deny care were approved. 
The destruction of medical care was deliberate. The rhetoric 
was to ``contain costs,'' ration ``scarce resources'' and 
restrict care. The poor, elderly, and non-white were ``not to 
be cared for'' just like Hitler's ``useless eaters,'' and 
``lives not worthy to be lived.''
    1999 Medical errors are the leading cause of death and 
injury in America. Between 444,000 and 98,000 people die in 
hospitals every year due to preventable medical errors more 
than breast cancer, highway accidents, or AIDS between 1994-
1999.
    Almost 1,000 state laws are passed in 48 states to protect 
patients, doctors, hospitals from managed-care policies. 
Managed care plans denial, or delay or diagnostic care or 
treatment result in needless amputations, patient deaths, 
suicides, invasive cancers and infections.
    2000 New York hospitals are offered a ``choice'' take 
reimbursement rates that don't cover costs or drop out of the 
plan.
    \2/3\ of Massachusetts hospitals face 13th quarter in the 
red. HMOs refuse to pay for billions of dollars of services.
    4 out of 5 Pennsylvania hospitals surveyed cannot cover 
operating costs with patient revenues.
    10,000 Michigan hospital jobs have been lost in 18 months. 
With 7,000 jobs lost in related industries. Non-profit 
hospitals are forced to reduce/eliminate services and program; 
some are closed.
    AIDS is officially declared by the U.S. government a 
national security threat. It could easily been stopped.

                                

Statement of Annette Guarisco, Honeywell

                     Blister Drug Safety Packaging

    We appreciate the opportunity to present the views of 
Honeywell on the important issue of medical errors in the 
health care system.
    As policymakers consider ways to reduce medical and 
medication errors, such as adverse drug effects, modernize the 
Medicare system and promote safety for children and adults, the 
promotion of unit dose/unit of use (known as blister packs) 
should be considered:
     Blister packs are inherently child resistant
     Blister packs are tamper-resistant and tamper-
evident
     Drugs packaged in unit dose formats are protected 
against cross-contamination
     Efficacy of the drug is maintained for a longer 
period of time without being compromised when unit dose formats 
are used
     Special labeling, color coding, is available to 
designate when and if the drug has been taken when unit dose 
formats are used
     Blister packaging provides for greater individual 
product barrier protection against moisture, light and oxygen
     The rate of compliance with unit dose packaging is 
significantly higher, resulting in fewer and less serious 
adverse health consequences:
     Contraception--2% compliance rate, vs. 70% for 
anticoagulants, 82% for organ transplant rejections drugs, 60% 
for hypertension medication, 80% for asthma, 50-70% for 
epilepsy, 50-60% for diabetes and 53% for estrogen deficiency 
drugs
     It was estimated in 1990 that nearly 10% of 
hospital admissions were the result of pharmaceutical non-
compliance and up to 23% of nursing home admissions were 
primarily due to an inability to manage medications at home.
     When drug regimens are not taken as prescribed, 
taxpayer dollars are wasted on drugs paid by Medicare, 
Medicaid, and VA programs, and unnecessary and longer hospital 
and nursing home stays.
     Unit dose packaging takes less pharmacist time to 
prepare and reduces the chance for errors, leaving them more 
time to consult with patients on the proper use of medications.
    The recent Institute of Medicine Report, To Err is Human: 
Building a Safer Health System, called for implementing unit 
dosing:
    If medications are not packaged in single doses by the 
manufacturer, they should be prepared in unit doses by the 
central pharmacy. Unit dosing--the preparation of each dose of 
each medication by the pharmacy--reduces handling as well as 
the chance of calculation and mixing errors. Unit dosing can 
reduce errors by eliminating the need for calculation, 
measurement, preparation, and handling on the nursing unit and 
by providing a fully labeled package that stays with the 
medication up to its point of use.
    Unit dosing was a major systems change that significantly 
reduced dosing errors when it was introduced nearly 20 years 
ago. Unit dosing has been recommended by the American Society 
of Health-System Pharmacists, JCAHO, NPSF, and the MHA in their 
``Best Practices Recommendations.'' As a cost-cutting measure, 
unfortunately some hospitals have recently returned to bulk 
dosing, which means that an increase in dosing errors is bound 
to occur. Page 166-167.
    Honeywell urges the Committee to consider ways to encourage 
drug manufacturers, hospitals, nursing homes, and other 
inpatient facilities to utilize unit dose formats, and to 
promote unit dosing in the Medicare and Medicaid systems as 
well as in the federal employee health benefit system.
    We appreciate the Committee's consideration of these 
recommendations and applaud the Committee for deliberating on 
the important subject of reducing medical errors.
            Annette Guarisco

                                

Statement of National Association of Health Underwriters, Arlington, VA

    Mr. Chairman and members of the Committee, my name is 
Michael Matznick, and I am the President of the National 
Association of Health Underwriters (NAHU). I am grateful for 
this opportunity to present our views for your consideration 
regarding a Medicare prescription drug. NAHU represents more 
than 16,000 professional health insurance agents and brokers 
from around the country who service the needs of millions of 
Americans. NAHU is headquartered in Arlington, VA.
    Medicare beneficiaries make up 14 % of the population and 
are responsible for about one-third of total health care 
spending.\1\ The National Institute on Aging has found that, as 
a group, older people tend to have more long-term illnesses--
such as arthritis, diabetes, high blood pressure and heart 
disease--than do younger people,\2\ and the latest survey data 
indicate that 86% of Medicare beneficiaries are taking 
outpatient prescription drugs.\3\ The sheer volume of this 
market should render it a powerful force, yet many Medicare 
beneficiaries are forced daily to go without needed 
prescription drugs because their market presence has not 
provided them with any pricing advantage. The inability to pay 
for needed drugs, at a minimum, dramatically reduces quality of 
life, interfering with the ability to have a reasonable 
lifestyle, the ability to maintain a home, and in some 
instances means the difference between life and death.
---------------------------------------------------------------------------
    \1\ Senate Special Committee on Aging, Developments in Aging: 1996, 
105th Cong., 1st Sess. 35 (1994) (S.Rpt.403).
    \2\ National Institute on Aging (NIA), NIA Age Page (1997) (online 
at www.nih.gov/nia/health/pub/medicine.htm).
    \3\ AARP Public Policy Institute and the Lewin Group, Out of Pocket 
Health Spending by Medicare Beneficiaries Age 65 and Older: 1997 
Projections (Feb. 1997).
---------------------------------------------------------------------------
    Even though Medicare covers drugs provided while a person 
is in the hospital, it does not cover outpatient prescription 
drugs, and one-third of America's seniors either have no 
insurance coverage at all to assist with the cost,\4\ or their 
insurance plan does not cover outpatient prescription drugs. 
According to the Senate Special Committee on Aging, this group 
includes those who are not poor enough to receive Medicaid, do 
not have employer-based retiree prescription drug coverage, and 
cannot afford any other private prescription drug insurance 
plans. Because of this, many seniors must pay the ever-
increasing cost of outpatient prescription drugs entirely on 
their own, and some dangerously limit or eliminate their use of 
them in order to afford the cost.
---------------------------------------------------------------------------
    \4\ Health Care Financing Administration, Office of Strategic 
Planning, data from the Medicare Current Beneficiary Survey, cited in 
Margaret Davis, John Poisal, George Chulis, and others, ``Prescription 
Drug Coverage, Utilization, and Spending among Medicare 
Beneficiaries,'' Health Affairs, Vol. 18, No. 1 (January-February 1999) 
pp. 231-243, exhibit 1.
---------------------------------------------------------------------------
    Are there solutions to the problem? Some have suggested new 
government regulation of the pharmaceutical manufacturing 
industry, although over-regulation of any industry has a 
serious, harmful impact on access and affordability. The proper 
pathway to making outpatient drugs more affordable for 
America's seniors can better be achieved through the following:
     Coordinated educational initiatives
     Government assistance to low-income individuals
     Fair payments to Medicare+Choice plans
     Free-market initiatives to increase competition 
and lower prescription drug costs for all Medicare 
beneficiaries
     Industry self-regulation

IDENTIFYING ROADBLOCKS TO AFFORDABLE ACCESS

    Before offering recommendations for solutions, it is 
important to understand the current situation regarding 
prescription drug pricing and marketing.
    Drug Price Comparisons in Other Countries
    It is difficult for America's seniors to understand the 
huge price disparity for identical prescription drugs in 
neighboring countries such as Canada and Mexico where price 
controls and the ability to pay (based on average per capita 
income) determine retail costs.\5\ Most seniors are now aware 
of this fact, thus explaining the popularity of excursions 
across the border to take advantage of lower prices. To expand 
access to the favorable prescription drug pricing available in 
these and other countries, a number of senior advocates have 
called for legislation to allow reimportation of prescription 
drugs shipped under FDA safety guidelines to other countries. A 
number of logistical and safety questions about this process 
exist, and it again raises the question--why can't we have 
affordable prescription drugs for seniors here in the United 
States? Is there some way we can change the current lopsided 
arrangement where U.S. citizens bear the burden for the entire 
cost of research and development, while other countries pay 
only the cost of manufacturing, a small amount of profit, and 
little else? Do we really have to reimport our own products 
just to get a fair price at home?
---------------------------------------------------------------------------
    \5\ Congressional Research Service, Prescription Drug Price 
Comparisons: The United States, Canada, and Mexico (January 1998)

---------------------------------------------------------------------------
Drug Price Comparisons in Humans vs. Animals

    In addition, recent studies indicate that there is 
disparity, even within the United States, for identical drugs 
prescribed for humans vs. animals. In a recent study done on 
eight brand name drugs, same dosages by the same (or related) 
companies were on average 106-151% more when the drug was 
intended for human use than when the drug was intended for 
animal use. In dollar terms, the price differential is 
substantial. A popular arthritis medicine used in the same 
dosages by both humans and dogs, Lodine, is $108.90 for a one-
month supply when the drug is to be used by humans, but only 
$37.80 when the drug is to be used by dogs. Another drug with a 
large price difference is Vasotec, a high blood pressure 
medication that was the 14th most frequently prescribed human 
drug in the United States in 1998. Merck charges $78.55 for a 
one-month supply when the drug is to be used by humans, but 
only $51.30 when the drug is to be used by dogs. These and 
other identical drugs are on average twice as expensive when 
prescribed for humans than they are when prescribed for 
animals, a differential that cannot be adequately explained by 
quality differences or research costs.\6\
---------------------------------------------------------------------------
    \6\ Minority Staff, Special Investigations Division, Committee on 
Government Reform, U.S. House of Representatives, Prescription Drug 
Price Discrimination in the 7th Congressional District in Maryland: 
Drug Manufacturer Prices are Higher for Humans than for Animals, 
February 16, 2000.
---------------------------------------------------------------------------
    Drug Price Comparisons between Uninsured Consumers and 
Large Purchasers
    The Congressional Budget Office (CBO) has also confirmed 
that different buyers in the United States pay different prices 
for brand-name prescription drugs, and purchasers who have no 
insurance pay the highest prices.\7\ According to the Federal 
Trade Commission, a notable example of differential pricing is 
the ``two-tiered pricing structure'' under which pharmaceutical 
companies set lower prices to large buyers like hospitals, HMOs 
and pharmacy benefit managers, and charge higher prices to 
other buyers that include the uninsured and independent and 
chain retail pharmacies.\8\ Because preferred buyers buy in 
bulk, some difference between retail prices and ``favored 
customer'' prices would be expected. However, the differential 
for prescription drugs is much higher than for other consumer 
items purchased in bulk. A recent study showed that the average 
price differential for five commonly prescribed prescription 
drugs was 133%, while the price differential for other consumer 
items was only 22%.\9\ Compared to manufacturers of other 
retail items, it appears that manufacturers are taking full 
advantage of the ``life and death'' necessity of the items they 
manufacture and market, and are charging ``what the market will 
bear'' in each of the markets in which they operate. Therefore, 
in Canada and Mexico, they charge less because (a) some price 
controls exist and (b) the per capita income of citizens is 
such that they would be unable to pay higher prices. In the 
case of animals, what an individual can and will pay for 
treatment of a pet or other domestic animal may be far less 
than if the treatment were required for themselves or a family 
member. In the case of large purchasers, the high amount of 
competition among manufacturers for their drug to be included 
on the ``preferred list'' of large purchasers results in 
manufacturers offering large discounts to large purchasers in 
order to win their business.
---------------------------------------------------------------------------
    \7\ Congressional Budget Office, How Increased Competition from 
Generic Drugs Has Affected Prices and Returns in the Pharmaceutical 
Industry, xi (July 1998).
    \8\ Federal Trade Commission, The Pharmaceutical Industry: A 
Discussion of Competitive and Antitrust Issues in an Environment of 
Change, 75 (Mar. 1999).
    \9\ Minority Staff Report, Committee on Government Reform, U.S. 
House of Representatives, Prescription Drug Pricing in the 7th 
Congressional District in Maryland: Drug Companies Profit at the 
Expense of Older Americans, April 21, 1999
---------------------------------------------------------------------------
    Direct-to-Consumer Advertising
    As with other commodities, the law of supply and demand has 
a dramatic impact on price. When demand is influenced by 
outside factors, such as advertising directed to consumers for 
prescription drugs, patients demand that their physicians 
prescribe these medications. These consumers have additionally 
been led to believe that only the ``name brand'' medication 
will successfully treat their condition, thereby making generic 
drugs seem inferior and less effective. Physicians are 
reluctant not to prescribe the medication requested by their 
patient if they determine that it will do the patient no harm 
and may, in fact, help them. If demand is high enough, the 
volume of sales should result in greater profits for 
manufacturers and the ability to lower prices, although this 
rarely happens today. If demand is too high, the supply of some 
medications may be inadequate to meet demand, and, as in other 
markets, the cost of the prescription drug will increase. 
Direct-to-consumer advertising also increases overall 
prescription drug utilization. Many medications prescribed as a 
result of direct-to-consumer advertising are new prescriptions 
for the patient, as opposed to a replacement of an existing 
prescription, and are added to the medications a consumer may 
already be taking.\10\ This increase in overall utilization 
increases total out-of-pocket spending on prescription drugs 
for these seniors, many of whom live on fixed incomes. This is 
part of the reason that spending on outpatient prescription 
drugs has increased 11% per year for the past five years.\11\ 
Some would argue that these new prescriptions will replace more 
costly surgeries, but although the medication may delay the 
need for surgery, the surgery may ultimately be needed anyway 
as the prescription drug loses its efficacy over time. Although 
we would not argue that quality of life is improved in the 
interim, the fact is that, ultimately, insurers and consumers 
may have borne the cost of both the surgery and the medication.
---------------------------------------------------------------------------
    \10\ Direct to Consumer Prescription Drug Advertising: Trends, 
Impact, and Implications, Health Affairs, March/April 2000, Volume 19, 
Number 2
    \11\ Health Care Finance Administration, National Health 
Expenditures (1999) (online at www.hcfa.gov/stats/nhe-oact/tables/
t10.htm).
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    A further concern with direct-to-consumer advertising is 
lack of consumers' understanding of direct-to-consumer 
advertising regulation. Recent surveys indicate that fewhealth 
professionals and even fewer members of the general public 
understand the regulations surrounding drug promotions. Half of 
the respondents of the survey believed that ads had to be 
submitted to the government for prior approval, and 43% 
believed that only ``completely safe'' drugs could be 
advertised, even though advertising for prescription drugs is 
not subject to this type of federal oversight. Thus, a large 
number of consumers believe that prescription drug advertising 
directed to consumers carries the endorsement of the federal 
government.\12\
---------------------------------------------------------------------------
    \12\ Health Affairs, supra, note 10.
---------------------------------------------------------------------------

                            RECOMMENDATIONS

Coordinated Educational Initiatives

    The first step in this process needs to begin with the 
physician. A physician education process should be initiated by 
physicians' organizations, such as the American Medical 
Association and other physician specialty organizations, on 
drug efficacy, interaction and the differences and similarities 
between name-brand and generic drugs. Although physicians 
depend on drug manufacturers to help them stay abreast of the 
latest treatments, their dependence on drug manufacturers may 
also mean that physicians will have somewhat limited and biased 
information about prescription drugs. An educational campaign 
from their own professional association would be well-received 
by physicians and would provide the balance and continuing 
education they need to do what is best for their patients.
    Additionally, studies have shown that many physicians do 
not like direct-to-consumer advertising because it encourages 
demand for treatments that may not be medically indicated and 
boosts inappropriate requests for specific medications. The 
medical community would be well served to develop a systematic, 
ongoing medical literacy campaign of its own to inform 
consumers of the promotional nature of direct-to-consumer 
advertising, as well as the regulatory context in which it is 
designed. For example, clinic waiting areas, hospitals and 
other healthcare locations could be used to disseminate 
reminders to consumers that advertisements in the media are 
promotional and do not necessarily represent the most objective 
advice.\13\
---------------------------------------------------------------------------
    \13\ Health Affairs, supra note 10.
---------------------------------------------------------------------------
    A recent survey by Merck-Medco found that 76% of those 
surveyed would choose generic medications if their doctor 
assured them that the generic drug is a safe and effective 
alternative to the brand-name drug.\14\ Consumers should be 
educated about FDA requirements as to pharmaceutical and 
therapeutic equivalence and that buying and using a generic 
drug is much different than buying a generic can of peaches. In 
fact, according to Jane E. Henney, MD, commissioner of the Food 
and Drug Administration in JAMA, December 1, 1999:
---------------------------------------------------------------------------
    \14\ Merck-Medco, L.L.C. Survey of adults 18 years or older in 
order to determine their knowledge and opinions of and experience with 
generic prescription drugs. Survey performed by Bruskin & Goldring 
Research, March 1999.
---------------------------------------------------------------------------
    ``Questions have been raised recently about the ethics, 
safety and effectiveness of generic substitutes for brand-name 
products... practitioners and the public may be assured that if 
the FDA declares a generic drug to be therapeutically 
equivalent to an innovator drug, the two products will provide 
the same intended clinical effect.''
    To assist physicians with patient education, a special 
consumer-education campaign needs to be undertaken. The 
campaign should emphasize the cost components in prescription 
drugs, how formularies, mail order and drug discount plans 
work, and how consumers can bring down the cost of medications 
through the use of these programs and appropriate product 
selections, including selection of generic medications. 
Included in this campaign would be a special educational piece 
that physicians can give patients who request a specific name-
brand medication This piece, as well as other educational 
materials, would be available in different formats, including 
print, Internet, video and public service announcements in all 
mediums. Educational materials would be developed as a joint 
effort of provider organizations, consumer groups, insurance 
carriers, brand-name and generic drug manufacturers, health 
insurance agents and the government, and would be designed to 
place in the unique context of patient care why a prescription 
drug advertised on TV or in print may or may not be 
appropriate. Consumers would be provided with accurate 
information discussing the proper use of prescription drugs, 
and safe ways to lower their costs, including the proper use of 
generic medications, or when a name-brand drug might be the 
best treatment choice. This would not mean a recommendation 
that consumers always purchase generic drugs, but that they 
have balanced information to help them make wise purchasing 
decisions.
    Another way to provide consumer education would be through 
pharmacists. Merck-Medco's study indicated that consumers rely 
heavily on the advice of their pharmacist, and that two out of 
three adults indicate that they have purchased generics on the 
advice of their pharmacist. Current law requires pharmacists to 
offer consumers a choice between a name-brand drug and a 
generic medication when the physician has not restricted the 
prescription to the name-brand drug. NAHU would like to see 
this expanded to require that the pharmacist also verbally 
advise the patient of the cost difference between the two 
choices. If the pharmacist's question is ``Would you like the 
name brand or a generic?'' the implications of that choice are 
not as clear as if the question were ``Would you like the name 
brand for $200 or the generic for $68?'' This cost comparison 
is critical, and the majority of adults categorize this as a 
major reason for choosing a generic drug, if they are aware of 
the cost differential.
    Finally, the consumer-education campaign should also stress 
the importance of lifestyle changes such as a low-fat diet, 
exercise, stress management and allergen avoidance, rather than 
a reliance on a ``pill for every ill,'' contributing to 
medicalization of trivial ailments and an even more 
``overmedicated'' society.
Government Assistance to Low-Income Individuals

    NAHU recognizes that more efficient buying habits alone 
will not provide needed medications to everyone, and we 
strongly encourage Congress to address overall Medicare reform 
as quickly as possible to remove current inefficiencies and 
outmoded programs and practices to bring Medicare into the 21st 
century. Even before this is accomplished, however, we strongly 
recommend that the problem of outpatient prescription drug 
coverage for low-income Medicare beneficiaries who are not 
already eligible for Medicaid be addressed incorporating and 
using the cost-effective purchasing strategies and patient 
incentives described elsewhere in this paper. This could be 
accomplished in the following ways:
     Expand information on the subsidies already 
available at the state and federal level for low-income 
beneficiaries (QMB, SLMB, state programs).
     Provide additional federal subsidies through block 
grants to states to expand existing programs (non-Medicaid) for 
low-income beneficiaries or to begin new state programs for 
low-income Medicare beneficiaries. These federal subsidies 
would not require a state match as is required through the 
Medicaid and Children's Health programs and would allow 
flexibility to states to use the resources available in their 
own areas. If used in conjunction with pharmacy benefit 
managers using formularies, rebates, therapeutic substitution 
and incentive pricing to encourage the use of the most cost-
effective medications, coverage for prescription drugs could be 
extended to many low-income beneficiaries who have no 
assistance with these costs today.

Fair Payments to Medicare+Choice Plans

    One of the best ways to ensure that seniors have access to 
affordable prescription drugs is to increase Medicare+Choice 
plan reimbursement rates, so that all Medicare+Choice plans can 
provide pharmacy benefits, not just those in the higher 
reimbursement regions. There is a large disparity among regions 
of the country in the government's payments for seniors 
enrolled in Medicare+Choice plans. As a result, some concerns 
have been raised about the financial viability of 
Medicare+Choice plans. Many Medicare+Choice plans already 
provide some coverage for prescription drugs, and they have 
been able to use many of the cost-effective strategies 
described elsewhere in this paper. A growing trend in payment 
disparities, however, will cause seniors enrolled in private 
Medicare+Choice plans to be clearly disadvantaged due to 
underpayment to plans forcing them to reduce or eliminate their 
prescription drug coverage and, in some instances, withdraw 
from areas altogether. Prescription drug coverage is one of the 
most popular benefits offered by Medicare+Choice plans today. 
Adequate compensation and flexibility in plan design to meet 
market demand will enhance the accessibility of drug benefits 
for seniors.

Free-Market Initiatives to Increase Competition and Lower 
Prescription Drug Costs for All Medicare Beneficiaries

    Price negotiation for prescription drugs already occurs 
regularly in the marketplace through managed care arrangements 
such as HMO plans, PPO plans and pharmacy benefit managers, to 
name a few. Some people point to these negotiations as an 
indicator that price controls can work in the belief that if 
private industry can negotiate prices, the government can, too. 
On the contrary, these negotiations in the private sector are 
negotiations among equals. Price controls that attempt to 
replicate such discounts for everyone would undermine the 
incentive for negotiating the discounts in the first place. 
Price controls would actually undermine existing pricing 
competition by substituting federally mandated discounts for 
the play of market forces.
    While many other countries have passed laws limiting the 
cost of drugs, the United States has not. Since prescription 
drugs are significantly more expensive in the United States 
than in other countries, some have suggested that Congress 
should legislate price controls similar to those used in other 
nations to eliminate cost shifting to the United States. While 
this ``quick fix'' sounds tempting, this approach could 
seriously undermine the system that has worked in most other 
American markets--competition.
    The idea that price controls really ``control price'' is 
based on the theory that government can allocate resources 
better than consumers and providers in the marketplace. If 
prices are not free to go up and down according to market 
conditions, seniors could face shortages of some current and 
future medications due to insufficient research and development 
resources. In addition, price controls in health care are 
blatantly inconsistent with government strategies to spur 
competition in other industries, where the government has 
attempted to break down monopolies, deregulate price and foster 
healthy competition in a variety of ways by assuring a fair 
playing field.
    It is undisputed that the current development process of 
new drugs is an expensive, lengthy process. Only one in 10 new 
drugs successfully makes it to the market. The price consumers 
pay for successful products helps pay the cost of the many 
failures. Price controls could discourage the development of 
drugs and biotechnology products for older Americans. The 
development of new products for seniors, for example those 
afflicted with Alzheimer's, would be severely impacted by price 
controls and manufacturers would very likely respond by 
allocating funds for research and development to products 
designed to be used by other populations, to assure a more 
profitable return on their investments. Why should they focus 
on drugs for the elderly if they cannot recoup the cost of 
research?

Managed Prescription Drug Care

    Managing the cost of prescription drugs in health plans 
works the same way as managing care for doctors and hospitals. 
Consumers must give up some of the choice they would otherwise 
have, but in exchange, they are assured of getting the 
pharmaceutical care they need. To manage the cost of 
prescription drugs, most HMOs and many other managed care plans 
establish a formulary--a preferred list of drugs eligible for 
coverage under their plan for reasons of efficacy and cost. 
These drugs have the same therapeutic effect of other non-
formulary drugs, but by giving them preferential purchasing 
status, volume discounts can be negotiated.
    Virtually all health plans today that offer outpatient 
prescription drugs to their insureds through a ``prescription 
drug card'' use pharmacy benefit managers to help them 
negotiate discounts, even when they don't use a formulary. 
These pharmacy benefit managers are extremely successful in 
negotiating volume discounts, which decreases the cost of 
medications to the health plan.
    The group buying power that Medicare beneficiaries could 
have goes largely unused because it is too unorganized today to 
leverage its potential strength. Medicare beneficiaries often 
pay retail prices in spite of their large numbers, even though 
drug discounts for HMOs and hospitals can be as high as 40 
percent. Those who get discounts based on their age for other 
services, such as when they go to the movies or ride public 
transportation, are naturally upset at the disparity when it 
comes to buying prescription drugs. So, how can we implement a 
similar strategy for Medicare beneficiaries capitalizing on 
their private-market purchasing clout? Rather than imposing new 
government mandates that would require a certain level of 
discount for seniors, NAHU again suggests that we look to the 
successes of the private sector for a solution. Employers, 
business coalitions, unions and state and federal agencies all 
take advantage of group purchasing and many of these entities 
purchase through pharmacy benefit managers. These arrangements 
have produced savings, better quality, more education and 
enhanced benefits for their members, not through mandates, but 
through market forces in the private sectors.
    Some health plans, such as some Blue Cross organizations, 
have begun to extend the discounts they have negotiated through 
the pharmacy benefit managers, with whom they contract for 
their under-65 insureds, to their Medicare Supplement 
policyholders. This allows policyholders to purchase their 
outpatient prescription drugs at significantly discounted 
rates, even though outpatient drugs are not specifically 
covered by their Medicare supplement plan.
    Utilizing competing pharmacy benefit managers to negotiate 
discounts for Medicare beneficiaries would give them a choice 
among several pharmacy benefit managers in their area, making 
them eligible for a ``prescription drug card'' that would 
guarantee them the discount negotiated on their behalf. This 
could be done with little or no cost to the federal government 
and the free-market competition among competing PBMs would 
ensure the best possible discounts for seniors. This discount 
system would be available to all seniors, regardless of income, 
and could also be used in conjunction with state programs for 
low-income seniors. These entities would make full use of 
formularies and other incentive pricing programs to encourage 
seniors to use the most cost-effective medications. Rebates 
would be used to reduce the cost of drugs to seniors, ensuring 
seniors the best possible price. Since this would not be an 
``insured'' program, there would be no assignment of ``risk,'' 
and adverse selection would not be an issue. Seniors could 
select freely from the PBM offering them the best combination 
of convenience, cost and education on pharmaceutical issues and 
disease management. To ensure maximum patient safety and offer 
the maximum level of protection against medication errors, 
competing PBMs would have the ability to transfer patient 
records if a beneficiary moved or otherwise changed his choice 
of PBM.
    We also recommend that Congress move towards greater price 
equity in the cost consumers pay in the United States for 
prescription drugs vs. the prices paid in other countries. This 
can be done by simplifying the ability of consumers, health 
care coverage companies and others to buy legally prescribed 
drugs from other countries when they are identical to the same 
medication available in this country, and when they are 
manufactured, stored, and shipped according to Federal Drug 
Administration guidelines. Additionally, to promote greater 
equity among nations, and to provide the most affordable access 
to consumers, the Federal Drug Administration should consider 
converting to over-the-counter status any drug that the 
manufacturer is selling on an over-the-counter basis in at 
least five developed countries.
    Finally, we recommend that Congress consider the use of 
non-refundable tax credits for persons without prescription 
drug coverage through either Medicare+Choice or a Medicare 
supplement plan for middle income beneficiaries between 200% 
and 400% of poverty. This would provide assistance to 
individuals who pay taxes and file tax returns but still have 
difficulty in making their income stretch to cover outpatient 
prescription drugs in addition to housing, food and other 
necessities.
    As we have illustrated throughout this paper, price 
controls are not the answer to the current high cost of 
prescription drug coverage for America's seniors. The 
pharmaceutical industry must do its part in making prescription 
drugs more affordable for all consumers, including Medicare 
beneficiaries. For many years, physicians, hospitals and other 
healthcare providers have negotiated the prices they charge for 
their services based on volume purchasing by government, 
employer, union and other health plans. Drug manufacturers and 
pharmacy benefit managers have participated in these negotiated 
discounts resulting in reduced prescription drug costs for 
those covered by the plans. While this participation has been 
helpful, it has not benefited those not covered by these plans, 
many of whom are Medicare beneficiaries, and it has not 
produced low enough costs even for those covered by managed 
care plans, regardless of the population covered by the plan. 
With profit margins averaging 28.7 %, compared to 10.5 % for 
other successful industries, and consumer outcry at an 
unprecedented level, the pharmaceutical industry should wisely 
elect to self-regulate to avoid new government mandates. This 
self-regulation needs to include:
     implementation of clear cost reduction for name-
brand medications at the end of the patent period;
     development of consumer education that focuses on 
proper usage of both name-brand and generic drugs without 
focusing on one particular drug;
     initiation of voluntary reduction of prescription 
drug prices to state prescription drug programs for low-income 
individuals;
     re-allocation of dollars currently designated to 
physician entertainment to providing new technologies to 
physicians to assist them in prescribing accurately. An example 
of this, in states where it is allowed, would be a computer 
program or device based on the Physicians Desk Reference that 
would actually result in a legible printed prescription for the 
patient. This interactive program requires input of a diagnosis 
and would prevent prescribing errors as a result of confusion 
over similar drug names, dosage errors and the inability of a 
pharmacist to read the physician's handwriting. In states where 
actual electronic prescribing is prohibited, the educational 
components of this system could still be provided to the 
physician. An essential element of this system would be its 
universal nature, with information provided on products 
produced by all manufacturers, and clear disclosure of the 
names of generic equivalents and their availability;
     assurance that product package inserts are written 
at a level and type size appropriate for most readers;
     attention in product promotions as much to side 
effects as to treatment effects;
     less or no emphasis on technical graphs and charts 
or pseudoscientific jargon in product promotions, ensuring less 
confusion to the consumer;
     advertisements to consumers that are less centered 
on the medication and more on the disease or condition to be 
treated;
     advertising and promotional marketing to 
practicing physicians and medical students that is balanced and 
should include information on prevention of pharmaceutical 
errors.

                               CONCLUSION

    The problem of access to affordable prescription drugs for 
America's seniors is a serious and growing concern. It is critical that 
all Americans should have affordable access to the rapid advances being 
made in medicine, including pharmaceutical products. The best way for 
seniors to truly have this type of control over their health is:
     education on issues related to obtaining all types of 
health care, including the options available for prescription drugs;
     government purchasing assistance for the needy;
     market force buying power to obtain better outpatient 
prescription drug prices for all seniors to allow them to take 
advantage of their numbers for the drugs they need to maintain a strong 
and healthy lifestyle;
     responsible self-regulation by pharmaceutical 
manufacturers.
    A united and dynamic force that includes private industry, medical 
professionals and government can bring the gift of empowerment to our 
senior population rather than new and costly dependence on government 
programs.
    Thank you for considering our views. NAHU and its members look 
forward to working with Congress in addressing the pharmaceutical needs 
of America's rapidly expanding segment of Medicare beneficiaries.

                                

Statement of Tom A. Wilkins, Reston, VA

    Good morning Mr. Chair and members of the House Ways and 
Means Committee. My name is Tom Wilkins and I am a resident of 
Reston, Virginia. I appear before you this morning to share my 
views on the economic impact of the high cost of prescription 
drugs.
    Prescription drugs are not a luxury for me. They are a must 
and essential to me to stay alive. Admittedly, my quality of 
life is somewhat reduced due to my multiple chronic illnesses. 
I, like you and most people, wish to live a full and productive 
life--one that is free of undue emotional strain caused by an 
inability to purchase medications to treat my multiple 
illnesses.
    I am a disabled veteran and a former combat soldier. I was 
left with permanent physical injuries and resultant 
psychological and emotional scars. I am also a cancer survivor. 
Unfortunately, the list goes on. I contracted a rare, serious 
illness that completely changed my lifestyle to the point that 
I was placed on a daily regimen of powerful and potent 
prescription medication. The medication had devastating 
secondary effects on my body by creating other chronic 
illnesses. More specifically, medication designed to treat my 
diagnosis of acute ``polymyositis'' which had gone undiagnosed 
for six months, led to my contracting lupus, another life-
threatening illness. There is no known cure for either 
polymyositis or lupus. The cost of needed medication is almost 
prohibitive. Yet, I must take the medication to maintain some 
semblance of a quality of life, albeit a reduced quality of 
life.
    Superimposed on those dreadful illnesses were the secondary 
effects of the medication prescribed for those illnesses. The 
medication prescribed induced the onset of diabetes, high blood 
pressure and other associated illnesses. I merely mention my 
personal experiences to illustrate the need for affordable 
medications, especially for those of us who suffer from 
multiple illnesses and who find it virtually impossible to 
purchase needed medications.
    I find the cost of needed medications prohibitive even 
though I participate in the Medicare program and I also 
subscribe to a major health care plan. Even with both of these 
medical plans available to me, I find myself spending a high 
percentage of my disposable income to purchase prescription 
medication, just to stay alive. This ought not be the case.
    Something should be done to address this critical national 
problem. I commend you for your efforts in addressing this 
troubling economic matter to millions of fellow American 
citizens.
            Thank you

                                   -
```