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24–803 PDF 2006

S. HRG. 109–261

SOUND POLICY, SMART SOLUTIONS: SAVING

MONEY IN MEDICAID

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

WASHINGTON, DC

JULY 20, 2005

Serial No. 109–12

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING 

GORDON SMITH, Oregon, Chairman 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

JAMES M. TALENT, Missouri 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

LARRY E. CRAIG, Idaho 

RICK SANTORUM, Pennsylvania 

CONRAD BURNS, Montana 

LAMAR ALEXANDER, Tennessee 

JIM DEMINT, South Carolina 

HERB KOHL, Wisconsin 

JAMES M. JEFFORDS, Vermont 

RUSSELL D. FEINGOLD, Wisconsin 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

BILL NELSON, Florida 

HILLARY RODHAM CLINTON, New York 

CATHERINE FINLEY, Staff Director 

JULIE COHEN, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening Statement of Senator Gordon Smith ....................................................... 1

Opening Statement of Senator Herb Kohl ............................................................. 2

Opening Statement of Senator Blanche Lincoln ................................................... 3

PANEL OF WITNESSES

Douglas Holtz-Eakin-director, Congressional Budget Office, Washington, DC .. 4

Julie Stone-Axelrad, analyst in Social Legislation, Domestic Social Policy 

Division, Congressional Research Service, Washington, DC ............................ 21

Vincent J. Russo, Vincent J. Russo & Associates, PC, Westbury, NY, and 

past president, National Academy of Elder Law Attorneys, Tucson, AZ ........ 34

Mark Gibson, deputy director, Center for Evidence-based Policy, Department 

of Public Health and Preventive Medicine, Oregon Health and Science 

University, Portland, OR ..................................................................................... 65

Margaret A. Murray, executive director, Association for Community Affiliated 

Plans, Washington, DC ........................................................................................ 94

APPENDIX 

Prepared Statment of Senator Susan Collins ........................................................ 117

Written Statement of Hal Daub, president & CEO of the American Health 

Care Association (AHCA) & The National Center for Assisted Living 

(NCAL) .................................................................................................................. 118

(III) 

(1)

SOUND POLICY, SMART SOLUTIONS: SAVING 

MONEY IN MEDICAID 

WEDNESDAY, JULY 20, 2005

U.S. SENATE, SPECIAL COMMITTEE ON AGING, Washington, D.C. 

The committee met, pursuant to notice, at 2:32 p.m., in room 

SD–106, Dirksen Senate Office Building, Hon. Gordon H. Smith 

(chairman of the committee) presiding. 

Present: Senators Smith, Kohl, and Lincoln. 

OPENING STATEMENT OF SENATOR GORDON H. SMITH, 

CHAIRMAN 

The CHAIRMAN. Thank you all for coming to today’s hearing. It 

is a pleasure to welcome you to the Aging Committee for its second 

in a series of hearings on the Medicaid program. 

I told some of our witnesses that there are two scheduled votes 

probably in the next 10 to 15 minutes. I think what we will do is 

proceed with our opening statements, perhaps even get into the 

statement of our first witness, and then perhaps take a brief recess, and then we will continue this very important hearing. Unfortunately, the Leader checks with neither Senator Kohl nor myself 

when scheduling votes around the Aging Committee. 

But we are glad you are all here because there are few issues 

more important than this one as we look to the reconciliation process and making sure that the Finance Committee does with its authority what is prudent and what is careful. 

I am pleased that our distinguished witnesses are able to join us 

and share their insight into how this program works and where improvements can be made to make it more efficient and reduce fraud 

and abuse. As I have said many times, our goal as elected officials 

and, in fact, stewards of our community’s most vulnerable should 

be to improve Medicaid, not undermine it or take steps that are 

penny-wise and pound-foolish. 

Therefore, this hearing will focus on sound policy and smart solutions. We will hear from both Government and outside experts who 

will help us understand two key components of the program: how 

Medicaid pays for prescription drugs and how the so-called spenddown process works. In doing so, we will discuss areas where policy 

changes are needed and that hopefully will result in budget savings. 

I disagree with those who claim the program is broken or should 

be dismantled, but, on the other hand, I do not believe Medicaid 

is perfect. I will continue to explore areas where changes can be 

2

made and savings can be found. As I mentioned, we will be reviewing how State governments pay for prescription drugs. Many Government entities have studied this process. Just last month, the Office of the Inspector General for the Department of Health and 

Human Services testified that the Medicaid program remains vulnerable to abuse and continues to pay too much for drugs. 

Therefore, a report by the General Accounting Office highlighted 

the need for better oversight of Medicaid best price system to ensure appropriate rebates are being made. These are all indications 

that Congress must take a close look at the system and determine 

if improvements should be made. 

Concerns also have been raised about the loopholes that exist in 

the Medicaid spend-down process that allow people to exploit the 

process by hiding assets so they can prematurely qualify for the 

program. We must closely review and consider these issues and develop responses that block intentional fraud while protecting people 

who truly qualify for care. It is a delicate balance but one that we 

must strive to achieve. 

I think all would agree that this has been an arduous process 

since February’s consideration of the budget, and it is one fraught 

with potential mistakes that could negatively impact our Nation’s 

oldest and most vulnerable. That is why it is so critical that we 

proceed cautiously and thoughtfully when considering Medicaid 

changes. 

While we have just 2 months before the Finance Committee is 

required to report its reconciliation bill to the Budget Committee, 

much work remains. To further this process and ensure that it can 

be a bipartisan effort, I am actively seeking out colleagues from 

both sides of the aisle who are interested in working together to 

craft a bipartisan solution for reconciliation. I am pleased with the 

responses I have received from my Democratic colleagues, but I 

know with them much work remains between people of good will 

on the committee. 

I look forward to working with my colleagues on the Aging Committee, and especially Herb Kohl, our ranking member, on this 

most critical issue. 

Senator Kohl, the mike is yours. 

OPENING STATEMENT OF SENATOR HERBERT H. KOHL 

Senator KOHL. I thank you very much, Mr. Chairman. 

Medicaid’s importance as a safety net cannot be overstated. 

Nearly 53 million low-income Americans, including children, pregnant women, individuals with disabilities, and the elderly, rely on 

Medicaid for their health care needs. Like you, Mr. Chairman, I am 

concerned about the budget resolution’s requirement to cut Medicaid by $10 billion over the next 5 years. One of the reasons I 

voted against the budget is because it is wrong to cripple Medicaid 

based on an arbitrary budget target. Any changes to the Medicaid 

program should be based on sound policy that will improve and 

preserve the program for the neediest among us. 

Certainly we have a responsibility to ensure Medicaid’s dollars 

are being spent appropriately. One promising area for finding cost 

savings is the prescription drugs Medicaid buys. Like individuals 

across the country, Medicaid is struggling to afford the soaring 

3

costs of prescription drugs, so we look forward to hearing from our 

experts today who will make recommendations on ways that we 

can keep Medicaid’s drug costs down. 

It is also important that Medicaid not become a program only for 

those who can hire clever estate planners in order to maneuver 

their assets to qualify for Medicaid. We are pleased that the elder 

law attorneys have joined us to discuss practical ways that we can 

remove loopholes that allow abuse, helping us to save Medicaid 

money and avoid harming the beneficiaries who truly need the 

services. 

One thing we must remember as we discuss these issues is that 

not all growth in Medicaid spending is the result of fraud or overpriced drugs. Medicaid spending has also grown for several legitimate reasons. First, enrollment is rising as more Americans lose 

their health insurance. Second, as America ages, Medicaid’s longterm care costs continue to rise. Most importantly, Medicaid costs 

are being driven by the same skyrocketing health care costs that 

every health insurance plan in our country faces today. 

So, clearly, we can still do better to ensure that Medicaid dollars 

are spent wisely. Tighter controls on estate planning and payments 

for prescription drugs are but two reforms that we need to consider. But we also need to think long term. We can reduce the 

number of working families who rely on Medicaid by helping small 

businesses provide health insurance. I am proud to cosponsor legislation with Senators Durbin and Lincoln, the Small Business Employee Health Plan bill, that would help in this effort. We can also 

change the way we pay for long-term care by making less expensive home and community care more available. 

Above all, we must proceed carefully and preserve Medicaid for 

the families who most need it. If we are required to find savings 

now, we need to do it in a way that will not harm the beneficiaries 

who rely on this program. 

I thank you, Mr. Chairman, and along with you I look forward 

to our witnesses today. 

The CHAIRMAN. Thank you, Senator Kohl. 

You might notice the lights, all of you, on the clock. It means 

there is probably about 5 minutes left in this first vote. With your 

indulgence, we will recess briefly. There are two votes. We will vote 

late and then vote early and be right back. 

We will stand in recess. [Recess.] 

Thank you, ladies and gentlemen, for your patience. We are reconvened, and we have been joined by Senator Lincoln. Do you 

have an opening statement? 

OPENING STATEMENT OF SENATOR BLANCHE L. LINCOLN 

Senator LINCOLN. Very briefly, Mr. Chairman. A special thanks 

to you and to our ranking member, Senator Kohl, as always. I 

thank the two of you all for your diligence in holding what I think 

are such timely hearings. 

Medicaid has really been called the work horse of the American 

health care system, and I think that is such an accurate description. Medicaid provides health care to people who would otherwise 

go without in most instances. 

4

I look forward to hearing about potential Medicaid savings that 

can be found in the prescription drug policies. However, I am also 

interested in making sure that any savings found does not disproportionately hit our pharmacists, especially that serve rural 

areas. We know that in many of our rural States the only line of 

defense in terms of health care left on the weekends is oftentimes 

our local pharmacist, and it is really critical that they do not be 

disproportionately hit. 

I am also interested in hearing about the evidence-based medicine because our State of Arkansas is one of the 14 States participating in this project. Although it is too soon to see if this will result in prescription drug savings for the State, I think it has a lot 

of potential for State savings and better treatment for Medicaid 

beneficiaries. 

So, Mr. Chairman, thanks to both of you. I very much appreciate 

all of your diligence and hard work in really tackling the difficult 

issues. 

Thank you. 

The CHAIRMAN. Thank you, Senator Lincoln. It is a privilege and 

a pleasure to have you on this committee, and the insights you 

bring, particularly of rural America, are of real value to us. 

Our first panel and our first witness is Douglas Holtz-Eakin. He 

is the director of the Congressional Budget Office. Thank you, 

Doug, for your patience, and the mike is yours. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC 

Mr. HOLTZ-EAKIN. Chairman Smith, Senator Kohl, Senator Lincoln, CBO is pleased to be here today to talk about the important 

question of the cost of the Medicaid system and, in particular, prescription drugs provided to Medicaid beneficiaries. The bulk of my 

remarks will focus on the current system for the procurement and 

payment for prescription drugs in Medicaid and will amount to 

walking through the diagram that we have displayed on the 

screens and hopefully is in front of you. 

There are two parts to the diagram. Blue arrows indicate the 

flow of pharmaceuticals themselves, and that is the simple part of 

the story. They are manufactured by drug manufacturers, dispensed through a distribution system that includes wholesalers 

and pharmacies and ultimately come to Medicaid beneficiaries to 

meet their therapeutic needs. The more complicated part of the 

story is shown with the broken green arrows, which is the financing of this manufacture and distribution of prescription drugs in 

Medicaid. 

When a beneficiary fills a prescription, in some States they will 

be responsible for a small co-payment. That is shown flowing from 

the beneficiary to the pharmacy. That is a sidelight in the main 

story today. The bulk of the financing is in the triangle flowing between Medicaid, pharmacies, and drug manufacturers, and in each 

case those entities will have both monies flowing in and monies 

flowing out. Under current policies, this is the heart of the reimbursement system, and I would really focus my remarks on that. 

We can turn to any changes that one might be interested in making in the questions that would follow. 

5

We could start with the pharmacies, which in this case also include wholesalers. As you can see, they have both monies flowing 

in, reimbursements from Medicaid agencies—and I want to emphasize that this diagram is a stylized representation of what will be 

50 different State systems and it will fit no single system perfectly. 

But, by and large, pharmacies get reimbursed for their brand name 

and generic drugs. They receive a reimbursement that is roughly 

the average wholesale price, a sticker price for prescription drugs, 

minus 10 to 15 percent. They also typically receive a fee of $3 to 

$5 which covers costs of consultation, storage, and filling the prescription. 

This will also have some impacts depending on whether it is a 

payment for a generic drug or a brand name drug. For generics, 

there are limits set both by the Federal upper payment limit dictated by CMS, or some States have a maximum allowable cost that 

limits that reimbursement as well. But one set of flows come into 

pharmacies for reimbursement for those drugs they provided to 

beneficiaries. That is the money in. The money going out is dictated by the deal they can cut with drug manufacturers, and those 

payments out to manufacturers are a market price negotiated by 

the pharmacies and the wholesalers with the manufacturers themselves. 

Drug manufacturers, on the other hand, have monies flowing in 

to them on the basis of these same negotiations, some sort of market transaction, and then are obligated to provide some reimbursement to the Medicaid program as a whole in the form of rebates. 

The rebates take two different branches. There is a flat rebate of 

about 11 percent for generic drugs. For brand name drugs, there 

is a two-part rebate system. The basic rebate is 15.1 percent of the 

average manufacturing price of those drugs, or where it is larger, 

the difference between that manufacturing price and the best price 

provided to their customers. Then there is an additional rebate 

which is owed on those drugs whose price has gone up faster than 

overall inflation. So manufacturers are negotiating to the best of 

their ability with the pharmacists and earning their receipts that 

way. They are then obligated to repay the Medicaid program itself 

in the form of these rebates. The net cost to the system overall, 

Federal Medicaid plus the State Medicaid, comes from the interaction of these two forces: payments dictated by a formula to the 

pharmacist and the reimbursements that come back from the manufacturers that are dictated by market prices, what they negotiate. 

Now, the remainder of what I would like to show you are just 

some details of different parts of that triangle. The first is this 

wedge on the right side between what Medicaid sends out to pharmacists and what actually flows into drug manufacturers. That 

gap, if we go to the next slide, is what we have labeled markup, 

so you can look at the top one and see that for the year 2002, on 

average Medicaid’s payment to pharmacies for all drugs was 

$60.90. That consisted of two pieces: a piece which actually flowed 

into the manufacturers, $47.10, and the difference, the column labeled markup, that which would accrue to all pieces of the distribution chain—wholesalers, pharmacies—of $13.80. 

There are some striking differences in this table in the composition and levels of these overall payments. The two things that I 

6

would bring to your attention are first that brand name drugs, 

which constitute about 50 percent of all the prescriptions, total 

about 85 percent of all the dollars, and so they are where the bulk 

of the money is. The average total payment there is $97 compared 

to a bit under $20 for generic drugs. So it is cheaper to go to 

generics. However, if one looks at just the markup portion, the portion that arises due to pharmacies and wholesalers, you can see 

that the striking number that jumps out is the $32.10, which is the 

markup on newer generic drugs. 

This is really a good news/bad news story. The good news is that 

given the incentives of a pharmacist who can capture part of this 

markup, there is an incentive to provide these newer generic drugs, 

and they are cheaper to the program as a whole than are brand 

name drugs. So steering the business in that direction clearly provides benefit overall from the point of view of the cost of the program. 

On the other hand, it is likely the case that the structure of the 

reimbursement system, the fact that manufacturers have an incentive to put a high sticker price, a high AWP on their newer generic 

drugs, and then negotiate a very low actual transactions price, 

would lead to this large gap, reimbursements being made on the 

high sticker price, the acquisition being dictated by the market 

transaction. The residual is this bad news, which is the perhaps 

larger than necessary markup that shows up on these particular 

drugs. 

In going forward with any changes the committee might consider, one thing to keep in mind is the degree to which changes in 

that kind of a system would alter the incentives of all the players, 

not just the pharmacists but negotiations between pharmacists and 

manufacturers, and then the reimbursement by the system as a 

whole. 

Then, in closing, the last piece of detail is the detail in the transactions that go on between manufacturers and the Medicaid program as a whole. These rebates, as I said, take two forms. The 

basic rebate is a flat 15.1 percent rebate in those cases where that 

is larger than the gap between the market price and the best price, 

and the other instance of the rebates the difference, and then additional rebates which come to under 12 percent are for those drugs 

where the cost has gone up faster than overall inflation. You can 

see that as a result the Medicaid program as a whole has received 

substantial rebates, 30 percent off the average manufacturer prices 

for these brand name prescription drugs. 

So the system is an intricate reimbursement system with three 

important players: manufacturers, pharmacists, and the Medicaid 

program as a whole. In thinking about strategies to alter this system to save money, it is important to recognize the incentives that 

are in place for all three of the players, and as a result the net impact on savings that might come out of it. 

We thank you for the chance to be here today and look forward 

to answering your questions. 

The CHAIRMAN. Doug, one of the popular proposals for saving 

money in Medicaid is to increase the percentage of the average 

manufacturer’s price used to calculate rebates to States. Do you 

think that that is a good approach, a rational approach? 

7

Mr. HOLTZ-EAKIN. I think the key for thinking about strategies 

toward the reimbursements is to step back and make sure that the 

policies are targeted toward the problems. In the diagram, you can 

see there are a couple. The first is the rebate, as you mentioned. 

You could raise the 15.1 percent rebate to something like 20 percent, and we have done an estimate that suggests that the cost savings would be on the order of a bit above $3 billion over 5 years. 

On the other hand, to the extent that an observation jumps out 

of the current system, it is that there is this mismatch between the 

reimbursements to the pharmacists, which are based on a sticker 

price, and the rebates, which are based on this actual transaction 

price. Bringing the system into alignment, using the same prices 

for all pieces of the overall financing, is probably a sensible way to 

focus thoughts about future policy. 

The CHAIRMAN. As I recall this was one of the ideas that the 

President had in his proposal, but CBO did not score it as saving 

any money. Am I remembering that correctly? If that is right, why 

doesn’t it save money? 

Mr. HOLTZ-EAKIN. The President’s budget contained proposals 

that would have affected both the rebates collected from drug manufacturers and reimbursements to pharmacies. Concerning rebates, 

manufacturers currently pay a rebate on brand-name drug sales 

equal to the larger of either the flat rebate, currently 15.1 percent 

of the average manufacturer price (AMP), or a higher percentage 

of the AMP reflecting the ‘‘best price’’ received by any private 

buyer. The President’s budget proposed to eliminate the best-price 

requirement and increase the flat rebate, although no percentage 

was specified. The proposal was intended to be budget neutral, and 

CBO scored no savings for it. Note that the President’s proposal is 

distinct from the proposal in the contained in CBO’s latest Budget 

Options volume, which would increase the flat rebate from 15.1 

percent to 20 percent while keeping the best-price requirement. 

The President’s budget also contained a proposal that would 

limit reimbursements to pharmacies the average sales price (ASP) 

plus six percent. 

The CHAIRMAN. Right. 

Mr. HOLTZ-EAKIN. Each of those, the ASP and the 6 percent, 

merit some comment. 

On the 6 percent, using 6 percent as the reimbursement for the 

cost of filling a prescription makes it dependent on the value of the 

prescription drug. It gives you a clear incentive to fill with highcost drugs. That moves the wrong direction, and since the cost of 

filling a prescription probably does not depend on what is in the 

bottle, the fixed dollar cost, $3 to $5 per prescription, makes more 

sense. 

On the ASP side, ASPs are not probably the best indicator of the 

actual transactions costs between pharmacists and manufacturers. 

They are a well-defined entity for the Medicare program, but that 

is a different set of drugs with a different set of customers, and so 

it does not match up real well for the Medicaid needs. 

The CHAIRMAN. Still on the President’s proposals, he made a 

number of proposals for saving money in Medicaid, but the CBO 

did not score them as saving money. Can you explain to the comVerDate 0ct 09 2002 10:23 Feb 06, 2006 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 H:\DOCS\24803.TXT SAGING1 PsN: JOYCE
8

mittee how the CBO arrived at its decision regarding the IGT proposal? 

Mr. HOLTZ-EAKIN. At the time the President provided his budgetary proposals, the attempt to recapture the intergovernmental 

transfers was specified in concept, but there was not available to 

us the sort of detailed legislative language or even more detailed 

policy proposal that would have permitted us to score it. So our approach was rather than to say it is zero or a number is to say we 

are unable to score this in the absence of greater detail. CMS continued to work with us for some weeks after the President submitted his budget, but we have never received anything that looks 

like conclusive enough a proposal or language. 

The CHAIRMAN. You cannot tell one way or the other whether it 

will save money. It may save money, but you do not have enough 

of a bill to be able to calculate it. 

Mr. HOLTZ-EAKIN. Yes. 

The CHAIRMAN. Are there any other Medicaid proposals out there 

that you would urge us to look at that would save money without 

hurting people? 

Mr. HOLTZ-EAKIN. Well, I think that in the drug area, three 

things stand out. Two I have already mentioned: thinking about 

the different pieces correctly, so perhaps using something closer to 

a market price for reimbursements instead of a sticker price, using 

an AMP or something like that; making sure that reimbursements 

for filling prescriptions match the cost of filling prescriptions, based 

on values. The other that has been around for a while is to talk 

about the Medicaid best price provisions which provide clear incentives for everyone to level up to best price, instead of bringing costs 

down. Those are the three in the drug area that I think stand out 

at the moment. 

The CHAIRMAN. Have you read these two stories in the last 2 

days in the New York Times about the massive amount of fraud 

in Medicaid in the State of New York? As I read them, it seemed 

apparent that it was really a product of lack of enforcement. Is 

there something I am missing? If enforcement is the issue, what 

does a State like New York, or any other, have to do? Do they need 

a big computer like Texas has that is very, very expensive but really does reduce fraud? 

Mr. HOLTZ-EAKIN. I did read the stories, and there was a horse 

race in my depression, first as CBO Director and seeing the money, 

and second as a long-term resident of Syracuse, recognizing that is 

my State. 

State programs differ greatly, so, you know, I would hesitate to 

make a blanket statement about what it would take to do things 

better. Enforcement in New York is particularly complicated because of the heavy role of the counties in the Medicaid system, relatively unusual. 

But certainly to the extent that low-cost enforcement—emphasis 

on ‘‘low cost’’—can readily bring actuality into line with the program intent, that is a place to look. It is not something that we 

came today with a lot of material on, but we would be happy to 

talk with you about that. 

The CHAIRMAN. Wouldn’t a State have enough incentive to close 

this hemorrhage? 

9

Mr. HOLTZ-EAKIN. Forty-four cents on the dollar—

The CHAIRMAN. I mean, that seems to me like New York with 

their budget problems ought to be all over this story and closing 

up this hemorrhaging that is happening through Medicaid, and not 

through serving people, just through fraudulent payments to doctors. 

Mr. HOLTZ-EAKIN. You know, I would have to say that having 44 

cents out of every dollar is a tremendous financial incentive, but 

New York State has faced lots of budget woes with which you are 

familiar. 

The CHAIRMAN. Is there something we need to do to help States 

to close that up? I mean, it is just appalling what I read. 

Mr. HOLTZ-EAKIN. I don’t think there is any direct Federal policy 

that interferes with better enforcement at the moment. 

The CHAIRMAN. Senator Kohl. 

Senator KOHL. Thank you, Mr. Chairman. 

Obviously the cost of prescription drugs accounts for much of 

Medicaid spending, and you and witnesses today will testify or 

have testified to changes that can be made in how Medicaid pays 

for prescription drugs in order to save money. Has your CBO analyzed how much these changes will save Medicaid, both over the 

next 5 years and in the longer term? 

Mr. HOLTZ-EAKIN. Which changes? I am sorry. 

Senator KOHL. Changes that we can make in how we pay for prescription drugs through Medicaid, how much money are we talking 

about in your judgment? 

Mr. HOLTZ-EAKIN. It depends on the extent of the proposal, quite 

frankly. Medicaid is 10 to 15 percent of drug spending. It is a very 

large fraction of the overall national drug bill. The reimbursements 

to pharmacies are a quarter of Medicaid spending, so there are 

substantial dollars in play both for the program as a whole and 

within it for different participants. 

As I said, if you take the reconciliation mark as the benchmark, 

changes in the rebate formula could get you 20 to 30 percent of the 

needed reconciliation savings in a very straightforward fashion, 

and other policies could probably contribute as well. 

Senator KOHL. All right. As the nation ages, the growing need for 

long-term care will strain our Medicaid budgets. A large share of 

Medicaid’s long-term care spending is for nursing home care, which 

we know is expensive and often not the care preferred by most people who wish to stay in their homes. Many States, like my State 

of Wisconsin, have expanded home and community-based care 

through Medicaid waivers, and they believe that they save Medicaid dollars by so doing. 

Has CBO been able to determine the long-term savings of home 

and community-based care? 

Mr. HOLTZ-EAKIN. We will happily look into any specific proposal. In the area of long-term care and Medicaid, two broad phenomena always arise. The first is the degree to which you can save 

in costs per person, whether it be in this case by using home-based 

care instead of being in a nursing home, and the second is whether 

you end up covering more people. There are at the moment a large 

number of individuals who receive only donated care as their primary form of long-term care assistance and have a clear preference 

10

to be in their home. Many of them are severely impaired and 

helped only by relatives. To the extent that you start picking up 

that population, covering them under a Medicaid program gets 

more expensive. To the extent that you move people who would 

have been in nursing home into a home-based care system that is 

cheaper per person, you save money. Almost all the proposals hinge 

on the balance of those competing incentives in expanding the use 

of home care. 

Senator KOHL. All right. You point out that Medicaid drug 

spending will drop next year as dual-eligible beneficiaries move 

from Medicaid to Medicare. But States are required to pay most of 

those savings back to the Federal Government through the clawback provision, as you know. Because the claw-back formula is in 

part based on spending growth for the Medicare drug benefits, 

States, therefore, have a direct interest in how the Medicare drug 

program is run. 

Has CBO done an analysis on how Medicare drug spending could 

affect State Medicaid spending and whether allowing HHS to negotiate lower drug prices could produce additional savings for State 

Medicaid programs as it relates to claw-back? 

Mr. HOLTZ-EAKIN. We have done nothing particular on HHS and 

claw-back, but certainly our estimates of the impact of the MMA 

on the Nation as a whole showed the impact over the long term of 

the claw-back, not State by State, but we do have the aggregates. 

In some years, the monies flowing back to the Federal Government 

modestly exceed that which would come from the Federal Government early on. But on balance it goes the other way. 

Drug spending has been going up very rapidly, 15 percent per 

year over the past 5 years, and we have looked fairly carefully at 

the design of the prescription drug benefit in Medicare and whether it would be possible for an enhanced negotiating authority by 

the Secretary of HHS to lower the costs of that drug insurance bill. 

Broadly the answer has been no. The key is whether the prescription drug plans in MMA have sufficient incentives—and they have 

tremendous financial incentives—and whether they have sufficient 

tools to pursue those incentives in order to negotiate the best possible deal on behalf of their beneficiaries. 

The structure of the MMA as passed by the Congress suggests 

that they have great incentives and tools to do that. It does not 

look that as a broad-brush matter any additional negotiating authority on the part of the Secretary of HHS would change the broad 

scope. 

Now, that does not mean for particular drugs and particular instances that would not be the case, but it does not look to us that 

based on the design so far there is tremendous latitude for a big 

change from that direction. 

Senator KOHL. Thank you. 

I thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Lincoln. 

Senator LINCOLN. Thank you, Mr. Chairman, and thank you, Mr. 

Holtz-Eakin, once again for coming to share your expertise with us. 

You probably know that one of the panelists that is going to be 

following you will be discussed evidence-based medicine, and they 

11

just called a vote and I am not sure if I will be able to stay for 

the entire hearing. But my State of Arkansas is one of the States 

implementing this as a way to cut down on prescription drug costs. 

I did not know if you had looked into or were aware of any savings 

that could be gained from evidence-based medicine. 

Mr. HOLTZ-EAKIN. We are essentially at the midpoint of beginning to understand this, and we look forward to seeing the results 

of these pilots in various places to get better evidence on the degree 

to which there really will be savings from evidence-based medicine 

and other new techniques that you might bring to both Medicare 

and Medicaid. 

Senator LINCOLN. So you are not really at a point to give us guidance in terms of which directions to go on that? 

Mr. HOLTZ-EAKIN. Certainly not in a position to make a definitive call one way or the other and certainly not to give you a sense 

of the magnitudes, how much money would be saved. 

Senator LINCOLN. Right. Well, I do not know if there is anything 

there, but you know as well as we all that generic drugs are significantly cheaper than brand name drugs. Are there any proposals on 

the Federal level to encourage the use of generic drugs that would 

really result in some savings? 

Mr. HOLTZ-EAKIN. There are a variety of ways to encourage the 

use. One could provide greater copays for brand name drugs, lower 

copays for generics, and steer beneficiaries that way. One could 

just change the maximum Federal reimbursement for drugs in 

order to steer people toward generics. There is the ability at the 

State level to have mandatory substitution to a generic where it is 

available. 

So there are a variety of potential mechanisms. Particular proposals in the context of reconciliation we will have to look at, but 

certainly there are elements of policies that would move the system 

in that direction. 

Senator LINCOLN. Well, I noticed in what you were showing us 

in your slides there, you said that the markup for the newer generic drugs was much higher than the markup for the older ones. 

Is there any explanation for why that is the case? 

Mr. HOLTZ-EAKIN. I think that is the straightforward result of 

the incentives in the current system. Manufacturers have an incentive to put a high sticker price on their new generic drug, and then 

cut an aggressive deal on the actual transaction, knowing that the 

pharmacist will be reimbursed on the sticker price and only have 

to pay the manufacturer the lower transaction prices. That gives 

pharmacists a clear incentive to take their generic drug and use it 

in filling prescriptions. So that markup comes out of the mismatch 

between reimbursement on stickers and actual transactions on a 

market. Fixing that would fix that incentive as well. 

Senator LINCOLN. Just I guess in closing as we move forward to 

what we have to what we have to do in Finance and budget reconciliation, can you describe how the Congressional Budget Office 

is going about in terms of scoring those potential savings in preparation for reconciliation? I guess specifically are you approaching 

the savings—how are you going to be approaching the savings that 

we on the Finance Committee have to find? 

12

Mr. HOLTZ-EAKIN. We are actively working with members of the 

Finance Committee on both sides of the aisle with their prototype 

proposals. To the extent that you have areas of interest, I would 

encourage you to have your staff in contact with the CBO early. 

The sooner we can see the scope of the proposals you are interested 

in, the more we can get the data in line to actually give you good 

estimates. As usual, knowing details, writing it down, is an important first step to making sure there is no mismatch between what 

you would like to accomplish and what is actually written into legislative language. 

That is an ongoing process that has been going on for a while in 

some cases, but which I would expect to heat up as time passes. 

Senator LINCOLN. Thank you. 

Thanks, Mr. Chairman. 

The CHAIRMAN. Thank you very much, Senator. 

Are there other questions anyone has? [No response.] 

Doug, we appreciate your time so very much. 

[The prepared statement of Mr. Holtz-Eakin follows:]

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The CHAIRMAN. There is another vote on, but what Senator Kohl 

and I will do is he will go now and I will go when he gets back. 

So our next panelist is Julie Stone-Axelrad, a specialist in social 

legislation of the Congressional Research Service. Welcome, Julie. 

Thank you for your patience and for your presence. 

STATEMENT OF JULIE STONE-AXELRAD, ANALYST IN SOCIAL 

LEGISLATION, DOMESTIC SOCIAL POLICY DIVISION, 

CONGRESSIONAL RESEARCH SERVICE, WASHINGTON, DC 

Ms. STONE-AXELRAD. Good afternoon, Senator Smith, Senator 

Kohl, and Senator Lincoln. My name is Julie Stone-Axelrad, and I 

am a health policy analyst at the Congressional Research Service. 

My testimony today deals with the issue of Medicaid estate planning, a means by which some elderly people divest their income 

and assets both to qualify for Medicaid sooner than they otherwise 

would and to protect their assets from estate recovery. 

As you know, the Medicaid program is means tested. It covers 

about 54 million people across the Nation. Although the program 

is targeted toward low-income individuals, not all of the poor are 

eligible, and not all of those covered are poor. Medicaid beneficiaries include children and families, people with disabilities, 

pregnant women, and the elderly. 

Today’s discussion about Medicaid estate planning focuses on a 

subset of Medicaid beneficiaries age 65 and over who need longterm care and have income greater than SSI’s cash benefit of $579 

a month. Medicaid law allows States to cover people whose income 

reaches, or is sometimes greater than, about 218 percent of the 

Federal poverty level, but only if they require the level of care that 

is offered in a nursing home. States may also extend coverage to 

people who have medical expenses that deplete their income to 

specified levels. Once eligible for Medicaid, beneficiaries are required to apply their income above certain amounts toward the cost 

of their care. 

In addition to income, individuals must also meet States’ asset 

standards. These standards usually follow SSI program rules and 

generally allow individuals to retain $2,000 in countable assets as 

well as certain types of noncountable or exempt assets, such as a 

home or care of unlimited value, and certain types of trusts. 

Other rules apply to married couples in which one person seeks 

Medicaid long-term care and the other does not. These rules are intended to prevent impoverishment of the spouse not seeking Medicaid by allowing him or her to retain higher amounts of income 

and assets than allowed for Medicaid beneficiaries. 

Not all Medicaid beneficiaries have engaged in estate planning. 

Some people meet Medicaid’s eligibility requirements because their 

initial income and assets are equal to or below a State’s specified 

levels. Some reach the thresholds after depleting their income and 

assets on the cost of their care, thus ‘‘spending down.’’ My testimony today is about a third category of people who divest their assets to qualify for Medicaid. We do not have sufficient data to assess the number of people in each of these three groups. 

To ensure that Medicaid applicants do not give away assets to 

gain eligibility, Congress established asset transfer rules that impose penalties on applicants who either give away or transfer their 

22

assets for less than the market price. Specifically, the rules require 

States to delay coverage of nursing home care and other long-term 

care services for certain individuals who apply for Medicaid after 

improperly disposing of assets on or after a look-back date. 

I mentioned earlier that beneficiaries are allowed to retain certain assets and still qualify for Medicaid. Medicaid’s estate recovery 

program is intended to enable States to recoup those private assets 

from the estate of a beneficiary upon the person’s death. Under 

Federal law, States are required to recover the amounts they spend 

on long-term care services from the beneficiary’s probate estate, 

which often includes the home, if there is one. If States choose, 

they may go beyond the probate estate to collect other assets as 

well, such as those that may have a designated beneficiary, like an 

annuity or trust. But not all States do this. 

Despite Congress’ efforts to discourage Medicaid estate planning 

through the design of eligibility, asset transfer, and State recovery 

provisions, current law does not preclude all available means people may use to protect assets. A variety of methods may still be 

used to avoid estate recovery or to obtain Medicaid coverage while 

using personal resources for other purposes, such as giving gifts to 

children or protecting assets for an inheritance. The following are 

some examples of techniques that people may use to divest assets: 

First, people may transfer assets to minimize the impact of the 

penalty period. Medicaid law specifies that penalties for improper 

transfers begin on the first day of the month in which assets are 

transferred. These penalties are periods of ineligibility, in months, 

for certain long-term care services. People could transfer a part of 

their assets while keeping enough to pay for their care during the 

ineligibility period. 

Second, people may transfer funds sufficiently in advance of the 

look-back period to avoid penalties. Any transfers made within 36 

months of application to Medicaid and 60 months for certain trusts 

are subject to penalties. Any transfers made prior to these lookback periods are not subject to penalties. 

Third, people may convert countable assets into noncountable assets or income, such as using money in a savings account to purchase an annuity for fair market value. 

Fourth, people may use assets above Medicaid thresholds for any 

purpose. For example, if individuals have $10,000 and the State’s 

asset threshold is $2,000, then to become eligible these people must 

deplete the excess $8,000. They can either spend that $8,000 on the 

cost of their care or on anything else they choose, such as home improvements or personal items. 

In addition to these techniques, promissory notes could be used, 

a life estate could be established, or a married couple could divorce 

and give all of their assets to the spouse not seeking Medicaid. 

Another option could be spousal abandonment in which a spouse 

simply refuses to provide financial support for the spouse seeking 

Medicaid. 

A number of these methods are probably unintended consequences of provisions in Medicaid law, designed to assist certain 

people who have low income or have high medical or long-term care 

expenses. The availability of these methods under current law also 

reflects a lack of consensus about the amount of assets that should 

23

be held by people who face high long-term care costs before qualifying for Medicaid. In addition, the law likely reflects the difficulty 

in writing legislative language to discourage all methods for transferring assets without inadvertently restricting access to Medicaid’s 

safety net. 

A variety of policy options have been proposed to discourage 

Medicaid estate planning and the improper transfer of assets. 

When evaluating which legislative options, if any, to adopt, there 

are some policy questions you may want to consider. 

First, tightening Medicaid laws regarding eligibility and asset 

transfers will likely deter people from deliberately manipulating 

the rules to qualify for Medicaid. Such changes, however, are likely 

to impose stricter penalties on people who made transfers without 

any intention of ever needing Medicaid’s assistance. You may want 

to consider how you want the law to treat people in this latter 

group. 

Second, who will actually pay for the care of elders when Medicaid will not? One possibility is that beneficiaries would pay for 

their own care during the penalty period by either recovering their 

transferred funds or liquidating any exempt assets they may have 

to pay for care. Another possibility is that providers, such as nursing homes, will assume more cases of uncompensated care, either 

reducing or eliminating the profits of proprietary homes, or relying 

more heavily on the charitable donations of not-for-profit homes. 

Others may rely on informal caregivers to provide the care they 

need, and still others may forego care altogether. 

Third, you may want to consider the high costs of long-term care services, often reaching over $60,000 a year for a private stay in 

a nursing home. If changes to current law result in further restricting access to Medicaid’s long-term care coverage, what, if anything, 

should be done to assist older people with these costs? 

Finally, it is unlikely that the adoption of just one or two of the 

policy options currently being discussed will lead to significant reductions in Medicaid estate planning. It is likely that narrow 

changes to current law will still allow people to find ways to divest 

assets. To achieve significant reductions in Medicaid estate planning, a package of changes is more likely needed. In designing such 

a package, you may consider measures to make transferring assets 

more difficult, measures to strengthen penalties for people who 

make inappropriate transfers, as well as measures that provide a 

safety net for applicants for whom the State determines that significant hardship could result without Medicaid’s assistance. 

At the request of the committee, I have prepared some comments 

on some of the legislative options that have been proposed. 

One option is changing the beginning of the penalty period from 

the time the Medicaid applicant made the transfer, which is how 

current law says it begins now, to the time the applicant is determined eligible for Medicaid. So changing the beginning of the penalty period. 

The proposal could increase the likelihood that people who improperly transfer assets would be penalized, possibly serving as a 

stronger deterrent to asset transfers. Strengthening the penalty period could either delay or even prevent Medicaid from paying for 

care of certain individuals, thus potentially incurring savings to the 

24

program. On the other hand, providers may end up paying for care 

not paid for by Medicaid, and some people might not be able to obtain the care they need. These implications may have unintended 

consequences on provider budgets and access to care. 

Extending the look-back period. Another options would be to extend the look-back period for transferred assets beyond the 3- to 5-

year period in current law. This would require people who want to 

divest assets and avoid the penalty period to plan even earlier than 

they must under current law, making it more difficult. A longer 

look-back period could lead States to identify more transfers and 

thus impose more penalties. Savings to Medicaid might be found. 

However, the farther into the past the transfer was made, the 

less likely the applicant may be to recover the transferred funds to 

pay for care during the penalty period. Extending the look-back period could also place an additional administrative burden on eligibility workers, slowing down the process as workers review and 

have difficulty obtaining past financial documents from applicants. 

Other legislative options include: placing a universal cap on the 

value of all exempt assets; counting assets not current counted; requiring applicants to apply a portion of their home equity to the 

cost of their care before Medicaid will pay; restricting sequential 

transfers; and requiring an applicant to make the State the beneficiary of any remaining funds of an exempt asset. 

Each of these proposals could reduce the total amount of assets 

that could be protected either at the point of application to Medicaid or at the point of estate recovery. However, there would still 

be no guarantee that funds above the protected amounts would be 

used to pay for the cost of care. 

Since each of these options would target a different method people might use to protect assets, together these proposals might represent a comprehensive approach to addressing Medicaid estate 

planning. On the other hand, without more information about 

which methods are most commonly used, we do not know which options would be most effective and which, if any, might have unintended implications on access to care. 

Finally, there are insufficient data available to accurately estimate the prevalence of asset transfers today and none that can reasonably predict whether and how much this incidence might grow 

in the future. We do know that a significant amount of anecdotal 

evidence exists about people engaging in Medicaid estate planning. 

We also know that an industry of elder lawyers specializing in 

Medicaid has developed across the Nation. Court cases at Federal 

and state levels also point to the prevalence of transfers. In addition, we know that States have expressed a strong interest in curbing Medicaid estate planning and have taken a number of measures to try to do so. 

Any protection of assets that results in Medicaid paying for care 

that would otherwise have been paid with private funds increases 

Medicaid’s program costs. Unfortunately, without better data we 

cannot accurately estimate how much Medicaid estate planning 

costs the program now and how much savings could be generated 

from further restricting transfers in the future. Changes to current 

law could deter people from transferring assets, strengthen penalties for doing so, and possibly increase the likelihood that private 

25

funds would be used to pay for care. At the same time, it is still 

unclear how such changes might impact access to care for older 

people with long-term care needs. 

The CHAIRMAN. Thank you. A very excellent report, Julie. I wonder if as you consider all of the proposals and the President’s plan 

on Medicaid, are there any that stand out to you as particularly effective in saving money that you can quantify that do not hurt people that really do have no recourse but Medicaid? 

Ms. STONE-AXELRAD. Well, first, I cannot quantify. CBO does 

that and I think they are going to have a hard time because we 

do not have good information about how much any of the practices 

cost the program now. There are certain things that might be technical changes to the way in which assets are counted that might 

be less likely to have implications on access to care. I think we 

could think about that a little bit more. I could—

The CHAIRMAN. Are there any States that come to mind that are 

doing a particularly good job in the asset transfer area? 

Ms. STONE-AXELRAD. There are a lot of States that have tried to 

make changes, and Oregon is a classic example of a State that has 

been more aggressive in trying to discourage asset transfers. But 

there are limitations to what States can do because of the current 

law. For example, with annuities the law gives the Secretary discretion—or authority to define annuities either as trusts or not. 

The guidance that the Secretary is able to give is limited because 

of the way current law is designed, and so States have dealt with 

annuities in different ways. Some States deal with them as trusts, 

and this makes them subject to the—

The CHAIRMAN. Has my State done a good job, in your view, or 

a poor job in asset transfer issues? 

Ms. STONE-AXELRAD. They are one of the leaders in discouraging 

asset transfers. 

The CHAIRMAN. So they are doing a good job. 

Ms. STONE-AXELRAD. They are discouraging, probably so, if you 

look at it—

The CHAIRMAN. I guess if you are being discouraged, you think 

they are doing a bad job. 

Ms. STONE-AXELRAD. It depends. You know, I think the issue to 

consider is people who are faced with very high long-term care 

costs have a fear about losing their savings, losing their home. So 

Oregon is a State that has been more aggressive in trying to recoup 

the assets of those elderly individuals. So it depends on how you 

look at it. 

The CHAIRMAN. Sure. I am going to go vote, and Senator Kohl 

is in charge. 

Ms. STONE-AXELRAD. Thank you. 

Senator KOHL [presiding]. Thank you, Mr. Chairman. 

We could all agree that it is important to prevent people from 

gaming the estate planning system, but I am concerned that when 

researchers at the Georgetown University Long-Term Care Financing Project looked at this issue, they found no empirical evidence 

to prove that ‘‘the elderly are planning their estates for the purpose 

of gaining easy access to Medicaid.’’ Instead, the research found 

that today’s seniors simply lack the necessary liquid assets to pay 

for expensive long-term care services. 

26

Is this assessment consistent with the data that you have looked 

at? 

Ms. STONE-AXELRAD. There is not good comprehensive data that 

looks at the amount of assets that have been transferred or the 

number of people who have transferred assets. So Georgetown was 

looking at some data that is a little bit old, and not their fault. It 

is limited because the surveys that are available—there are just 

not current surveys available that look at what is going on right 

now. 

I do not know if I am answering your question. 

Senator KOHL. I would guess you say that is somewhat inconclusive, you are not sure what—

Ms. STONE-AXELRAD. Well, I think what we know is that the 

amount of assets and income of the elderly for the most part is limited. Most of the asset value is in the home. There I think the majority of the elderly have a limited amount that could potentially 

even be transferred, a limited amount that they could spend on 

nursing home care. So probably, you know, for the bulk of the population, the elderly population do not have much to transfer. 

Senator KOHL. Right. 

Ms. STONE-AXELRAD. But, you know, the home is always a question. The amount that it is worth really varies by geographic region 

and many other factors. 

Senator KOHL. I was only, again, making the point that some 

people say the elderly plan their estates for the purpose of gaining 

easy access to Medicaid. Perhaps it would be somewhat more accurate to say there may be some, but there is no evidence to indicate 

that this is widespread. Would you be inclined to agree with that? 

Ms. STONE-AXELRAD. I think there is a strong indicator—States’ 

interest in this issue is a strong indicator that, at least in certain 

States, they probably have reason to want to curb this practice. 

But, no, there is no data on a national level that says how many 

people are doing this and how much they are transferring. 

I said in the testimony there are certain indicators like the fact 

that there are Medicaid—there are elder lawyers who specialize in 

Medicaid, and they are across the country. There may be certain 

States that have more of an issue with this than others. But I cannot say that there is any evidence to suggest that this is very expensive. I cannot say that there is evidence that suggests that it 

is not. 

Senator KOHL. OK. 

Ms. STONE-AXELRAD. I am sorry I cannot answer that. 

Senator KOHL. We understand that extending the look-back period for asset transfers which the President has proposed would 

provide $1 to $2 billion in savings over the next 5 years. But if we 

do not know what the evidence is to tell us how many people are 

actually gaming the system, then how can we know that this will 

work to save Medicaid all that money over the long term? Isn’t that 

true? 

Ms. STONE-AXELRAD. Well, I think a simple change—it is not a 

simple change. I am sorry. A change to the law that extends the 

look-back period logically means that when States go over people’s 

records, their financial records, they are going to find more transfers because that just simply makes sense, I think. 

27

Now, the question is: Will there be cost shifting, and at the end 

what will happen to those people who experience penalties? Could 

that potentially increase costs to Medicaid or to Medicare? Or could 

there be increased hospital costs? Those are the kinds of things 

that we do not know. 

But if you just extend the look-back period, then it seems logical 

that you review more financial records, you are going to find more 

transfers and impose more penalties. 

Senator KOHL. I thank you, and I thank you very much for appearing here today. 

[The prepared statement of Ms. Stone-Axelrad follows:]

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Senator KOHL. At this time we will take testimony from our third 

panel. We have with us today Mr. Vincent Russo, who is former 

President of the National Academy of Elder Law Attorneys. Mr. 

Russo is from Westbury, NY. 

We have with us today Mark Gibson, deputy director, Center for 

Evidence-based Policy, Department of Public Health and Preventive Medicine of the Oregon Health and Science University out in 

Portland, OR. 

We have with us Meg Murray, who is the executive director of 

the Association for Community Affiliated Plans, located here in 

Washington, DC. 

Mr. Russo, we will take your testimony first, then Mr. Gibson, 

and then Ms. Murray. 

STATEMENT OF VINCENT J. RUSSO, VINCENT J. RUSSO & 

ASSOCIATES, PC, WESTBURY, NY, AND PAST PRESIDENT, NATIONAL ACADEMY OF ELDER LAW ATTORNEYS, TUCSON, AZ 

Mr. RUSSO. Good afternoon, Senator Kohl. My name is Vincent 

J. Russo. I have an elder law practice in New York and am a 

founding member and past president of the National Academy of 

Elder Law Attorneys. Today I welcome the opportunity to talk with 

you about ways Congress can achieve savings by eliminating aggressive Medicaid planning and loopholes in the rules. First, however, it is essential to respond to two ill-advised proposals that will 

harm countless number of older Americans who have worked all 

their lives, paid taxes, and have never been on public assistance. 

One flawed proposal to make penalties harsher calls for changing 

the start of the penalty period from the date of transfers to the 

date one applies for Medicaid. The other proposal would increase 

the look-back period from 3 years to 5 years. 

Senator Kohl, recognizing the harmful impact of these proposals 

on seniors and their families, aging advocacy organizations representing tens of millions of Americans, such as AARP, Alzheimer’s 

Association, National Council on Aging, and the retired Officers Association, have consistently strongly opposed them. In fact, in the 

aftermath of opposition to these very changes, Governor Rell of 

Connecticut has since withdrawn the State’s request to implement 

these ill-conceived policies. 

To illustrate why those representing older Americans have rejected these policies, I would like to share three representative profiles of real clients whose stories are depicted on the charts to your 

left. The profiles are depicted on Chart 1. 

We are using today the vertical line at July 20, 2005, as the date 

of Medicaid application. You will note that the line at July 20, 

2002, represents the current look-back period, and the line at 

July 20, 2000, represents the proposed look-back period. 

First, at the left of the chart, the story of Mary Richards, who 

has cared for her granddaughter since her daughter passed away. 

As noted on the chart, in July 2004, she pays her granddaughter’s 

college tuition, $15,000. A year later, she suffers a stroke and requires nursing home care. Under the current law, since Mrs. Richards has spent down monies, she will be Medicaid eligible because 

the transfer penalty period has expired. Under the ill-conceived 

proposal to change the penalty start date, Mrs. Richard would be 

35

denied Medicaid nursing home care because she helped her granddaughter. She will have no place to go. The hospital will want to 

discharge her, and the local nursing homes will be reluctant to take 

her. If she returns home, how will she be properly cared for? 

Now let’s turn to John Greer, who is a farmer in the Midwest. 

His farm has been in the Greer family for over 100 years. Mr. 

Greer transfers the farm worth $100,000 to his son, as noted on the 

chart. Unfortunately, 3 years later, he fractures his hip and requires nursing home care. Under today’s law, Mr. Greer is eligible 

for Medicaid nursing home care, but under the proposal he would 

be denied care because he passed the family farm on to his son. 

What will happen to the Greer family and their farm? 

My last story is about the Anderson family. In 2001, Steve 

Anderson, who controlled the family finances, made a series of 

withdrawals before he passed away from cancer. Mrs. Anderson 

had cared for him every step of the way. Since that time, Mrs. Anderson’s health has declined. She has Alzheimer’s and she needs 

nursing home care. As you can see on the chart, under the current 

law Mrs. Anderson can obtain Medicaid. If the look-back period 

were extended to 5 years, she will have to account for her husband’s withdrawals, which were made over 4 years ago. She knows 

some money was spent on donations to the church and some on repairs to the house, but no records can be found. Under these proposals Mrs. Anderson would be denied Medicaid. 

The combination of extending the look-back period and changing 

the penalty start date would create the harshest penalty of all on 

people like Mrs. Anderson, the most vulnerable members of our society. 

Chart 2 represents additional common family situations where 

people will be hurt by the proposed changes. Senator Kohl, under 

these harmful proposals no one will be able to act with certainty 

because no one can predict the future. This will place an unfair 

burden on seniors. 

Now I will focus on how we can eliminate aggressive Medicaid 

planning and loopholes in the rules. Over the last 6 months, I have 

been working with a group of Medicaid experts to develop proposals 

that would both close loopholes and achieve Federal and State 

Medicaid savings. I will now explain three of six solutions that we 

are proposing. The other three are in my written testimony for 

your full consideration. 

First, balloon annuities should no longer be allowed as part of 

Medicaid planning. While annuities can be very helpful to some 

seniors, unfortunately they have been manipulated to be a Medicaid planning tool. Balloon annuities are structured with very 

small payments over the senior’s lifetime which allows the senior 

to pass on the lion’s share of the annuity to family while accessing 

Medicaid for nursing home care. The solution is to have balloon annuities treated as a transfer subject to the transfer penalty rules. 

Second, self-canceling installment notes, referred to as ‘‘SCINs,’’ 

should also be outlawed as a Medicaid planning tool and treated 

as an available asset to pay for long-term care. 

Third, eliminate rounding down. Under current law in a rounding down State, each month one could transfer slightly less than 

two months of nursing home cost with only one month of penalty. 

36

This allows people to transfer twice as much as is intended under 

the current Medicaid transfer penalty rules. By eliminating rounding down, transfers would result in partial month penalties and no 

doubling up of transfer amounts. 

We welcome the opportunity to sit down with your staff to discuss six solutions in greater detail. I thank you for this opportunity. Since savings must be found in the Medicaid program, we 

believe strongly that closing loopholes is a better solution than creating a punitive and unworkable transfer penalties for our seniors, 

who have contributed so much to this Nation and now face chronic 

illness and the need for long-term care. 

I would be happy to respond to any questions that you may have. 

It has been my privilege to testify before you. 

[The prepared statement of Mr. Russo follows:]

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Senator KOHL. Thank you, Mr. Russo. 

Mr. Gibson. 

STATEMENT OF MARK GIBSON, DEPUTY DIRECTOR, CENTER 

FOR EVIDENCE-BASED POLICY, DEPARTMENT OF PUBLIC 

HEALTH AND PREVENTIVE MEDICINE, OREGON HEALTH 

AND SCIENCE UNIVERSITY, PORTLAND, OR 

Mr. GIBSON. Thank you, Senator. It is a pleasure to be here. I 

will give you a short overview of what come to be known as the 

Drug Effectiveness Review Project. This project had its beginnings 

when Oregon was faced with a projected 60-percent increase in its 

Medicaid drug spend over a 2-year budget cycle. However, the 

State did not want to reduce drug spending only to increase suffering and spending elsewhere in the budget as a result of using 

inferior medications. To avoid those unintended outcomes, we developed clinical information that did not previously exist, and once 

we had the information, we used it to guide our purchasing decisions. 

This effort quickly grew into a collaboration among 14 States and 

two other organizations, pooling their resources to produce the best 

available evidence comparing drugs within classes. The research 

we perform is special because it consists of using what is called a 

systematic review of research evidence, and here is how it works. 

First, research questions are crafted with care and specificity. We 

start with a general template that asks three questions: First, what 

is the comparative effectiveness of the drugs in this class? Second, 

what is the comparative risk profile of the drugs in this class? 

Third, what does the evidence tell us about any differential impact 

on subpopulations, be that in age, race, or ethnicity? 

As the process proceeds, the questions are posted on our website 

and public comment is received and considered in preparing the 

final version. Once the questions are prepared, they are sent to all 

drug manufacturers in the U.S. and Canada with a request for any 

evidence that the manufacturers believe should be considered in 

the review. 

Next, our researchers, who are all employees of evidence-based 

practice centers, as designed by the U.S. Agency for Healthcare Research and Quality, begin their search of the global evidence available. They search all of the major medical data bases, including 

EMBASE, Medline, and the Cochrane Registries of Systematic Reviews and Clinical Trials. 

Studies that match the key questions are then read in detail, and 

the quality of the study is also evaluated. If the study is poorly designed or poorly executed, then it is removed from the ongoing 

analysis. 

Once the high-quality studies are identified, they are synthesized. This synthesis combines the results of the studies in a 

way that allows us to have a view of what the entire body of good 

research says about the drugs that we are looking at. It takes into 

consideration the differences among the studies such as size and 

design, and then provides a detailed analysis of the cumulative evidence on the drugs. 

Our work gives the highest grade to well-done, randomized, controlled trials that provide head-to-head comparisons of drugs withVerDate 0ct 09 2002 10:23 Feb 06, 2006 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6633 H:\DOCS\24803.TXT SAGING1 PsN: JOYCE
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in a class. When those trials do not exist, we look for the next best 

available evidence. When assessing potential harms from drugs, we 

also use observational studies, which, though less rigorous than 

randomized, controlled trials, have longer timeframes that allow a 

more accurate view of risk. 

When the synthesis is finished, a draft report is produced and 

sent to outside experts for peer review. In addition, we post a copy 

of the draft to our website and solicit comments on the draft from 

the public, from advocacy groups, and from the industry. 

When the comment and peer review periods are complete, the legitimate criticisms brought to us are addressed in the final version 

of our report. The final versions are then posted to our website in 

the public domain. 

In all, this process is more open and thorough than any other 

available to our knowledge. When a report is complete, one can 

identify every step that was taken, can review every report included or excluded, and know why that was done. We disclose on 

request public comments and the documents sent to us by the industry. 

Our members use the information in different ways, including as 

an educational tool for prescribers, as an independent and transparent check against work done by commercial contractors, such as 

pharmacy benefits managers, as the primary information for use in 

evaluating drugs for inclusion or exclusion from a PDL, preferred 

drug list. 

Depending on the methods used by our States, they report differing levels of savings. In general, States that have prior authorization processes realize greater savings than those who simply 

provide the information to prescribers or who have permissive exceptions processes. Some quick examples of savings realized by 

some of our States include one which shifted its use of the preferred drug in the opioids class—a pain-reliever class where there 

is no evidence of different effectiveness among the medications—

from 33 percent use of the preferred drug to 69 percent use of the 

preferred drug. The savings were significant because the monthly 

cost for the preferred agent averaged $77 per patient and the nonpreferred agent averaged $331 per month. 

The results of eight classes over a year, the results of using this 

process for eight classes over a year resulted in over $19 million 

in savings, and budget officials projected when the process was 

used on 16 classes, it would yield approximately $40 million in a 

year. 

Another State reported approximately 5-percent savings in their 

overall drug spending with the adoption of a soft prior authorization process on four classes of drugs only: nonsteroidal anti-inflammatory agents, opioid analgesics, statins for cholesterol, and proton 

pump inhibitors for gastric conditions. 

Our States also report that companies are now competing for 

market share based on price by offering States supplemental rebates so that their drug can be one of the lowest price in a class 

where the drugs are deemed to be equally effective. But the savings 

do not end there. As a result of our review of the nonsteroidal antiinflammatory class and the fact that in 2002 it highlighted the potential cardiac risks associated with the use of Vioxx, with few exVerDate 0ct 09 2002 10:23 Feb 06, 2006 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 H:\DOCS\24803.TXT SAGING1 PsN: JOYCE
67

ceptions our member States kept Vioxx off of their preferred drug 

lists and, arguably, not only prevented significant suffering and 

disability, but also saved the cost of treating cardiac problems that 

may have resulted from the widespread use of this medication by 

their Medicaid program. 

We believe that the Drug Effectiveness Review Project demonstrates how good scientific inquiry can be used to build confidence in the clinical credibility of these purchasing decisions. 

[The prepared statement of Mr. Gibson follows:]

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The CHAIRMAN. On that point, I am going to come back to questions, but, Mark, did you do the testing on it that revealed the 

problems with Vioxx ahead of time? Did you know that ahead of 

time before FDA revealed it? 

Mr. GIBSON. Chairman Smith, our report that was published in 

2002 highlighted the potential cardiac risk. 

The CHAIRMAN. Very interesting. 

Mr. GIBSON. It was in the evidence. We did no specific—we did 

not do trials, but we did find in the trials that existed clear indication that there was a hazard there. 

The CHAIRMAN. Very interesting. 

Meg Murray. 

STATEMENT OF MARGARET A. MURRAY, EXECUTIVE DIRECTOR, ASSOCIATION FOR COMMUNITY AFFILIATED PLANS, 

WASHINGTON, DC 

Ms. MURRAY. Thank you, Senator Smith, and welcome back. My 

name is Meg Murray, and I am the executive director of the Association for Community Affiliated Plans and a former Medicaid director in New Jersey. 

The Association for Community Affiliated Plans seeks to offer a 

positive contribution to the national discussion over Medicaid. We 

believe Medicaid is a critical component of the safety net. However, 

we agree with you that certain aspects of the 40-year-old program 

need modernizing, and for that reason we have brought today to 

you a simple proposal which would equalize access to the Medicaid 

drug rebate between fee-for-service and the capitated managed care 

program. This would provide the Federal Government with significant savings by lowering the prices paid for individual drugs by the 

health plans. This would lead then to lower capitation rates, which 

is how the Federal and State governments save money from the 

proposal. 

Just as background on who ACAP is, we are a national trade association of health plans focused primarily on Medicaid. Most of the 

plans are not-for-profit or owned by a not-for-profit, such as community health centers. We have 19 plans, including Care Oregon 

in Oregon, and we serve over 2 million Medicaid beneficiaries, and 

I am accompanied today by the Chairman of ACAP, Jim Hooley, 

who is the CEO of Neighborhood Health Plan in Massachusetts. 

Just to give you an overview, Medicaid plans currently pay less 

for drugs on a per member per month basis than the States. This 

is true despite the fact that plans pay a higher price for drugs because they do not have access to the Federal rebate, which guarantees that the States will get the best and lowest price. 

Plans offset this price disadvantage through more efficient use of 

utilization management techniques, which I will talk about in a 

few minutes. 

The Center for Health Care Strategies sponsored a study by the 

Lewin Group which found that Medicaid plans were paying on average $17.36 per member per month for TANF enrollees for their 

drug costs. States, on the other hand, were paying over $20 per 

member per month. In other words, States were paying about 18 

percent more for drugs than health plans. 

95

We believe that allowing plans to have access to the Federal drug 

rebate could further lower per member per month cost for drugs. 

This would save the Federal and State governments significant dollars through lower capitation rates to the plan. 

Plans have been excluded from the Federal drug rebate program 

since the program was enacted in 1990, and instead the plans receive rebates from the manufacturers on their own, typically 

through pharmacy benefits managers. States, on the other hand, 

receive a statutorily required rebate of at least 15 percent of average manufacturer’s price for brand name drugs and 11 percent of 

AMP for generic drugs, as was talked about in the first panel. 

Medicaid health plans, on the other hand, average only about 6-

percent rebate on brand drugs compared to at least 15 and more 

like 30 percent for the States, and they usually receive 0-percent 

rebate on generics; whereas, the States are getting about 11 percent. 

Because the fee-for-service program is required by law to get the 

best price, Medicaid plans serving the exact same clients end up 

paying a higher price for individual drugs. 

As I said before, although they pay a higher price for individual 

drugs, plans are able to offset the price disadvantage by more efficient use of utilization management tools. These tools both reduce 

the total cost of drugs and improve the quality of care to our Medicaid beneficiaries. 

The range of tools include things such as using drug data to 

identify pregnant women or people with HIV and diabetes, or beneficiaries who might be using drugs inappropriately, either too many 

or too few. 

Other tools, such as greater use of generics and greater use of 

lower-cost drugs, lead to the lower per member per month cost 

than in the State fee-for-service program. 

Equalizing the Federal drug rebate program by giving both plans 

and the States access to the higher Federal rebate would allow the 

plans to lower prices paid for individual drugs, thereby further decreasing the already lower per member per month payment. This 

savings in turn would be passed on to the States and the Federal 

Government through lower capitation rates. 

As you may know, several States have considered carving drugs 

out of the capitation to take advantage of the Federal rebate. The 

Lewin Group estimated that carving drugs out of the capitation in 

Arizona would actually cost the State $4 million because of the 

State’s inability to manage utilization as efficiently as the States 

have. 

ACAP is suggesting that a better policy would be to instead 

equalize the plans’ access to the Federal rebate. The Lewin Group 

has estimated that there are potential savings of over $2 billion 

over 10 years. 

ACAP has been very active in discussing this proposal with other 

Medicaid stakeholders. It has recently been endorsed by the National Governors Association as well as the National Association of 

State Medicaid Directors, the Medicaid Health Plans of America, 

and the National Association of Community Health Centers. 

In conclusion, at a time when Congress must make tough decisions, we believe that equalizing the drug rebate makes sense. It 

96

will modernize the program, save billions of dollars, not reduce any 

benefits, or force any beneficiary off the rolls. We urge you to consider this provision in any Medicaid reform proposal produced by 

the Senate. 

Thank you. 

[The prepared statement of Ms. Murray follows:]

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The CHAIRMAN. Thank you very, very much. 

I apologize, Mr. Russo, that I was away during your testimony. 

I truly want to express to all of you how much I value your being 

here and your contribution to the Senate record. I hate being 

pulled away from these because I do gain much from it and you 

add much to it. So to all of you for your sacrifices in being here, 

we are very thankful. Because I missed yours, I may ask you questions you already answered in your testimony. But you have identified a number of loopholes in Medicaid that have allowed individuals to transfer assets to achieve premature Medicaid eligibility 

with limited risk of penalty. In your experience, how prevalent are 

these practices? 

Mr. RUSSO. Chairman, first I would like to say on this issue that 

elder law attorneys are charged with an ethical duty to advise clients in their best interests. In fact, it would be malpractice not to. 

Aggressive Medicaid planning occurs when one uses loopholes. In 

order to save money, these loopholes need to be closed. We have 

not had a chance to score the six solutions that we are proposing, 

but we are confident that they would result in savings that would 

be a much better approach than creating these much harsher 

changes that truly will harm seniors if we were to change the lookback period to 5 years or to change the penalty start date to the 

date of application. 

The CHAIRMAN. Your testimony had these six loophole closures in 

them? 

Mr. RUSSO. Yes, in the written testimony, Chairman, we have 

the six. I mentioned three in my oral testimony, which were balloon annuities, self-canceling installment notes, and changing down 

the rounding-down rule consistently throughout the United States. 

The CHAIRMAN. OK. What are the other three? 

Mr. RUSSO. The other three would deal with the State recoveries 

on annuities, would deal with changing the treatment of when a 

transfer penalty starts, so it would be from the first day of the following month rather than in the month in which the transfer were 

made, so that is right now a State option that is available. Let’s 

see, the sixth one—it will take a moment. 

The CHAIRMAN. That is OK. We will find it. But in your experience—I do not want you to rat on your colleagues, but do attorneys 

widely employ these loopholes that you think are—

Mr. RUSSO. Well, Chairman, I do not think it is ratting out other 

attorneys. Attorneys are good people who do good work. We serve 

our clients. We provide a holistic approach to planning. It is not 

simply about Medicaid. Most seniors, if not all seniors, who come 

into our offices—and I am speaking from my own practical experiences—come in out of fear, in crisis, concerned that they are going 

to lose their autonomy, their independence, that they are going to 

be pushed into a nursing home with no options, that there will be 

no one to care for them. They have loved ones that they care about. 

How will money be used for them if it is gone? How do we take 

care of a spouse or a child who is disabled? How do we get quality 

care? 

So people are coming in because we have pushed them into a corner where they have no choice but to look at this Medicaid program 

to help them get through this very difficult time in their lives. 

110

The CHAIRMAN. What is the loophole that is most commonly 

abused? 

Mr. RUSSO. Well, I think loopholes result in aggressive planning. 

‘‘Abuse’’ is a pretty strong word, but I appreciate that that is the 

term you are using. When we look at these balloon annuities and 

the self-canceling installment notes, they are simply inappropriate 

for seniors to be engaging in utilizing those planning tools. Annuities now are marketed as the answer to how to get onto Medicaid. 

That is really inappropriate. 

I think we can change some of the existing rules that allow for 

aggressive planning, like changing the rule on rounding down so 

we can round down a partial transfer, which is the current rule. 

For example, if someone transferred $9,999 in a State with a 

$5,000 regional rate or divisor, that results in a penalty period of 

1.99. In a State that rounds down, it becomes 1 month. So, in effect, you were able to double up how much you transferred with 

only 1 month of penalty. 

The penalty should stand at 1.99. It should not be rounded down. 

States have the option. I think the Federal Government should 

mandate that change. 

The CHAIRMAN. OK. 

Mr. RUSSO. We also look at—the sixth solution we suggested was 

to outlaw one from being able to purchase a life estate, the right 

to live in a house, for example. When someone purchases a life estate, a parent, let’s say, purchases a life estate in the child’s home 

but has no intention of living there, it makes the asset disappear, 

and that is not what was intended here. 

The CHAIRMAN. Right. 

Mr. RUSSO. We need to be fair to seniors in this program. We 

need to be clear about what the rules are. But we should not penalize them any further because right now we discriminate against 

them because they happen to have the wrong disease. 

The CHAIRMAN. I think you told me. Are you from New York? 

Mr. RUSSO. Yes, I am. 

The CHAIRMAN. My question has nothing to do with the New 

York Times article, but I assume you saw those. 

Mr. RUSSO. Yes. 

The CHAIRMAN. I hold up my own State as a great example on 

home and community care options that are much less expensive. 

Does New York have such a thing? 

Mr. RUSSO. Chairman, we have the best home care program in 

the country through a non-waiver program, which actually provides 

home care to thousands and thousands of seniors. We think it is 

a terrific idea. 

As we look at the Medicaid program as a whole, it would be terrific to start looking at alternatives that focus on keeping people 

at home. That is where they want to be. No one comes into my office and says, ‘‘I want to go to a nursing home.’’ Every person in 

a nursing home wants to get out of that nursing home. They really 

want to be home and in the community and independent. 

The CHAIRMAN. The next panel are the nursing home people, by 

the way. No, I am kidding. [Laughter.] 

Your point is very well taken. Are you familiar with reverse 

mortgages? What do you think of the impact of those? 

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Mr. RUSSO. Chairman, I think reverse mortgages can be very 

helpful in terms of allowing people to stay at home while tapping 

the equity in their home, using that money for care that they otherwise could not afford. But there is a concern, and the concern is 

that, No. 1, they are very expensive. To obtain a reverse mortgage, 

the costs are very high. Also, when you are no longer living in the 

home, the reverse mortgage is called in. So if an individual went 

to a nursing home, it would automatically force a sale of that home 

to pay back the reverse mortgage, and that is particularly upsetting to people because people feel, seniors feel that if they fracture 

a hip and they go to the hospital and then they enter a nursing 

home for rehab, their goal is to come home. 

The CHAIRMAN. Sure. 

Mr. RUSSO. Where are they going to go to if they have to sell 

their house when the reverse mortgage is called in? 

The CHAIRMAN. If they lose their house, they kind of lose hope, 

don’t they? 

Mr. RUSSO. Yes, they do. 

The CHAIRMAN. So that is not an option you would recommend 

that Congress consider? 

Mr. RUSSO. Absolutely not to mandate that. 

The CHAIRMAN. You have spoken critically now—and I am sure 

you did in your testimony; again, I apologize I was not here for it. 

But you think that the look-back provision is just unduly arbitrary 

and quite harsh? 

Mr. RUSSO. Yes, the example I would give there—and it was Mrs. 

Anderson in my example—she was in a situation where her husband controlled the finances and transferred $25,000 4 years before 

she later needed to apply for Medicaid. She cared for him. He 

passes away. She has Alzheimer’s. She knows that the money went 

to various causes, like paying for repairs on the house or a donation to the church capital campaign. But she has no records. She 

has no ability to know what exactly happened. She is going to be 

denied Medicaid if that look-back period is extended to 5 years. 

I challenge anyone in this room to come back tomorrow and report to you every transaction that they have made in the last 3 

years. It is difficult now for seniors. Five years is a burden that 

should not be placed on them. 

The CHAIRMAN. Can you speak to asset caps or did you speak to 

that in your testimony? 

Mr. RUSSO. The proposal by the National Governors Association? 

The CHAIRMAN. Yes, it is another option that would make all assets countable for purposes of determining Medicaid eligibility and 

would set a limit on the total value such that assets in excess of 

that amount must be liquidated and applied toward health care 

services. 

Mr. RUSSO. I think that any alternatives we can look at are helpful. I have real concerns here with this one because this is part of 

a bigger package; that proposal also deals with changing the penalty start date and also deals with extending the look-back period, 

which we oppose. So I am a little apprehensive about it. 

One size does not fit all around the country. Nursing homes in New York cost between $120,000 and $150,000 in the area where 

I practice. So—

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The CHAIRMAN. That is about double the rest of the country. 

Mr. RUSSO. Right. So we need to have a program that allows us 

to take into account the differences around the country in the cost 

of care and people’s situations. At this point the National Academy 

of Elder Law Attorneys has not had a chance to analyze it for me 

to be able to speak in more detail about it, but I am sure we will 

be doing that, and we welcome the opportunity to give you our 

thoughts. 

The CHAIRMAN. Fair enough. Thank you very, very much. 

Mark, thank you for coming. It is good to see you. I came in in 

the middle of your testimony, and a question I have—I was not in 

the legislature when Governor Kitzhaber passed this proposal on 

testing drugs and greater State control over their acquisition for 

Medicaid. But I understand subsequent to his administration that 

it was changed. Is that correct? If it was changed, did it improve 

care and did it reduce savings? 

Mr. GIBSON. Mr. Chairman, you are correct, it did change—before I go into that, just it is a pleasure to be here, and I appreciate 

the invitation. 

The CHAIRMAN. I only ask this for my own edification because I 

am interested from your perspective, and perhaps Governor 

Kitzhaber’s; what has been the result of that change? 

Mr. GIBSON. Right. The change was to repeal the State’s ability 

to have prior authorization for its preferred drug list. The prior authorization process the State ultimately adopted, which resulted in 

a significant increase in the savings realized, was when a physician 

wanted to prescribe a drug that was not the preferred drug in the 

class, they or a member of their staff simply had to call a number 

and listen to a message about the evidence relative to the drugs in 

that class. 

As a result of that simple intervention, Oregon was the State 

that I mentioned that experienced about a 5-percent drop over the 

period of time that that prior authorization was in place, about a 

5-percent drop in its overall drug spend, by just applying that prior 

authorization process to four drug classes. 

The CHAIRMAN. Just the education. 

Mr. GIBSON. Just the education and just the requirement that 

there be contact with that education. 

The CHAIRMAN. So the change then really didn’t reduce much in 

terms of what the State has been saving on drugs. 

Mr. GIBSON. The change did reduce what the State has been saving because that is no longer—the State is no longer able to require 

the physician to call and get that information prior to receiving an 

exception from the preferred drug list. So we typically see about a 

30-percent use of preferred drug when there is not an intervention 

such as a prior authorization. 

The CHAIRMAN. The total drug savings from this program, what 

did you lose from the change? 

Mr. GIBSON. I have not seen exact figures on the reduction of 

savings from the change, although the internal research that the 

agency is doing and the folks that I had contact with there—I 

would be happy to put you in touch with them—have said that immediately upon suspension of the prior authorization, the trends 

113

began to go back the other way. I do not have a firm number at 

that point. 

The CHAIRMAN. So you would not recommend that change then 

to other States? 

Mr. GIBSON. I would not, no. 

The CHAIRMAN. OK. I was very intrigued by your comment, your 

answer to the Vioxx question, but what I think I heard you say is 

that you did not have to do any trials on it, you did not have to 

do any tests on it; you just read the material and it reflected the 

downstream difficulties in health and saved a whole lot of people 

a whole lot of grief. 

Mr. GIBSON. That is correct, Mr. Chairman. The study in question is called the VIGOR Trial, and within that there was an unexplained increase in adverse cardiac events among people who were 

taking Vioxx. 

Now, when we looked at this information, at this evidence, and 

we looked at the size of the trial, the design of the trial, and the 

results, it was a well-done, well-randomized, well-reported, doubleblind trial, and it came out with this unexplained increase in cardiac adverse events. As a result of highlighting that to our States, 

even though we did not—our process, our research process, does 

not recommend a drug, we did highlight this risk in the report, and 

most but not all of our States said that this is too much a risk for 

us, we are not going to include Vioxx as one of our preferred drugs. 

The CHAIRMAN. Mark, since, you know, Oregon has had such, 

frankly, a positive result with the Drug Effectiveness Review 

Project, do you think Congress should leave this up to the States, 

or as part of Medicaid reform, should we be mandating this kind 

of a thing? 

Mr. GIBSON. Mr. Chairman, I think that is a great question. I 

think that the States have done a terrific job of blazing a trail here. 

As we learn more about doing systematic reviews of drugs within 

classes, we recognize that there are ways to continually improve 

this work, which ultimately becomes a bit of a resource issue. 

Now, resource in terms of getting the right research done is modest compared to the expenditures. In our home State, we spend in 

the neighborhood of $480 million in Medicaid on drugs—or excuse 

me, in a biennium on drugs, and the entire cost of the Drug Effectiveness Review Project was $4.2 million over 3 years, and shared 

among 16 organizations that comes out to be a fairly nominal investment in getting good evidence. 

On the other hand, these organizations all faced their resource 

constraints. They are primarily Medicaid programs. So to continue 

to improve this and to continue to address some of the criticisms 

that come out of what we have done, I think there is a resource 

issue that the Federal Government could be helpful on. 

On the other hand, I would say that I think the States have done 

a terrific job, and, you know, some very close collaboration between 

the two that maintains the autonomy of the process could be very 

useful. 

The CHAIRMAN. How many States are in your program? 

Mr. GIBSON. There are currently 14 States. 

The CHAIRMAN. They have all enjoyed the same benefit that Oregon has seen? 

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Mr. GIBSON. Mr. Chairman, they use the information in different 

ways, so their benefits change from State to State. North Carolina, 

for example, uses the information to inform and educate their practitioners about the relative effectiveness and risk profile of drugs 

within these various classes. So they use it primarily as a prescriber education process. They couple that up with cost information so that their prescribers can then consider cost as they make 

these decisions. But they start out knowing what the relative or 

the comparative benefit is, too. Other States already had prior authorization processes run by commercial firms, but their concern 

was that they might not be getting the depth of analysis around 

these drugs that they really needed to ensure that they were not 

making a penny-wise, pound-foolish decision. So they have come 

into the project from the standpoint of saying let’s go to a more 

thorough, more transparent, and more open process, one that we 

can go to our medical community or we can take to our advocacy 

community and say here are the steps that we went through to 

analyze these drugs, this is what we are basing our determination 

of their effectiveness on, where you do not have that kind of transparency with commercial products. 

The CHAIRMAN. These are States outside of the 14 that are part 

of your group? 

Mr. GIBSON. Well, there are States outside of the 14 that are in 

the group that are using the information because it is in the public 

domain, and we have had several States come up and say, ‘‘Gosh, 

you guys are doing a great job, thanks a lot.’’

The CHAIRMAN. Are there any States outside your group who are 

doing anything different that is showing to be effective in savings 

and in efficiency? 

Mr. GIBSON. Yes, but they do not have the transparent clinical 

perspective that we are able to bring to it. 

The CHAIRMAN. Because they rely on commercial sources. 

Mr. GIBSON. Yes. 

The CHAIRMAN. OK. 

Mr. GIBSON. Mr. Chairman, I would just add, to clarify my comments, that if it is simply about money, then you do not need our 

product. If you really want clinical certainty, if you want the best 

analysis of the cumulative evidence around these drugs, then I 

think you should participate or at least utilize the information that 

the collaboration brings forward. 

The CHAIRMAN. Why do you think the FDA and CMS perhaps 

were so late on the Vioxx issue? 

Mr. GIBSON. Mr. Chairman, there is a lot of ground to cover 

there. 

The CHAIRMAN. I am getting you in trouble here, Mark. 

Mr. GIBSON. Yes, well, I would just say that I think one of the 

things that sets our process aside from others is that there is a real 

firewall between our researchers and the industry. That is not to 

say that we do not utilize the best evidence the industry can give 

us. We reach out to the industry. We solicit any evidence they believe pertains to the questions that we are researching. They provided us with hundreds of dossiers on these drugs and thousands 

of pages of research information that we analyzed, just as we do 

any information we find on our own. 

115

But we do not have an ongoing intimate dialog between the folks 

that are doing the research and the industry, and we do not receive 

support from the industry. I think there are a number of things 

that have happened over the years with the FDA that may have—

The CHAIRMAN. Makes them a little slower on the trigger? 

Mr. GIBSON. Yes, just—yes. 

The CHAIRMAN. I understand what you are saying. Thank you 

very much. 

Meg Murray, as I understand your testimony, you have spoken 

between Medicaid managed care plans and fee-for-service plans 

and that there are some savings in managed care that are not 

being realized in fee-for-service. Can you discuss some of the things 

that your health plans do to manage drug utilization compared to 

State fee-for-service plans? What would you have us take into this 

budget reconciliation when we focus on that area for savings? 

Ms. MURRAY. In many cases, what our plans are doing is just 

more aggressive use of what States can do under the drug rebate 

law. So our plans are much more aggressive on generic utilization. 

For instance, our plans have almost 60 percent of their prescriptions are generic, compared to only about 50 percent by the State 

programs. 

More specific examples are our plans do require—they promote 

first-line antibiotic use more often than the States do. They note 

through the data excessive use of inhaler medications for 

asthmatics instead of the controller medications. So a lot of what 

they are doing is what States can do, but just they are much more 

aggressive about it. 

The CHAIRMAN. Perhaps you heard that CBO expresses concern 

that health plans already have access to the drug rebate. Can you 

address that issue a little bit more? 

Ms. MURRAY. Sure. Our health plans do get a rebate. Many of 

them contract with pharmacy benefits managers who in turn contract with manufacturers to get a rebate. So, yes, our plans do have 

access to a drug rebate, but they do not have access to the Federal 

rebate, which, I was pointing out, is much more—almost three 

times better than what they can get on their own through private 

contracts with the manufacturers. 

The CHAIRMAN. Since managed care plans are already operating 

at a lower cost than fee-for-service programs, would access to the 

Medicaid drug rebate provide your plans with even greater savings, 

in your view? 

Ms. MURRAY. Yes. By increasing the rebate, that effectively lowers the price of individual drugs to our health plans, thereby further lowering the per member per month cost. This, as I said, will 

be passed on to the States through the lower capitation rates. 

The CHAIRMAN. Then that savings is what, 16 percent? 

Ms. MURRAY. The net savings would be the difference—well, in 

terms of gross dollars, it is potentially up to $2 billion over 10 

years. 

The CHAIRMAN. You are starting to talk real money. 

Ms. MURRAY. That would be split between the States and the 

Feds. 

The CHAIRMAN. The Fed. 

116

I think I have asked my questions. Meg and Mark and Vincent, 

thank you so very, very much. This has been a helpful hearing for 

me, and we are grateful for your time, and to our audience, we appreciate your patience with the Senate schedule. 

We are adjourned. 

[Whereupon, at 4:50 p.m., the committee was adjourned.] 

(117)

A P P E N D I X 

PREPARED STATEMENT OF SENATOR SUSAN COLLINS

Mr. Chairman, the FY 2006 budget resolution includes $10 billion in reconciliation instructions for the Finance Committee. I therefore want to thank you for 

holding this hearing to examine options for meeting those instructions, while still 

preserving the critical Medicaid safety net that keeps 54 million of the most vulnerable Americans from falling through the cracks of our nation’s health care system. 

Medicaid is the sole source of health insurance coverage for 40 percent of our nation’s poor, including one in four American children. It also finances the health and 

long-term care needs for about 20 percent of individuals with serious disabilities and 

helps pay for the care of 60 percent of our nation’s nursing home residents. Financed jointly by the federal and State governments, Medicaid is now the nation’s 

largest health care program, with annual costs exceeding $300 billion. 

Medicaid is costly because it serves those citizens with the most complex care 

needs and chronic problems requiring long-term care. Moreover, it is not just our 

most expensive health care program. It is also the most complex because it is structured and administered differently in each of the 50 states and the District of Columbia. In fact, there is an old saying among policymakers: ‘‘If you’ve seen one Medicaid program, you’ve seen one Medicaid program.’’

Medicaid is also one of our fastest growing programs, putting substantial pressure 

on both State and federal budgets. Moreover, with the aging of the baby boomers, 

those costs are certain to rise even more rapidly, threatening the long-term financial 

sustainability of the program. It is therefore important that we begin now to work 

to identify ways to stabilize and strengthen Medicaid. 

As part of that process, it is critical that we take the time to learn how the current Medicaid program works and to examine thoroughly the various options for reform. Today’s hearing gives us an opportunity to focus on two specific components 

of the program: how Medicaid pays for prescription drugs and considers assets in 

determining eligibility. 

Again, Mr. Chairman, thank you for calling this hearing, and I look forward to 

working with you on a plan to ensure that Medicaid can continue to fulfill its commitment to providing quality care to poor, elderly, and disabled Americans in a way 

that is financially sustainable.

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