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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 
              INTEGRATING PRESCRIPTION DRUGS INTO MEDICARE
=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

                             APRIL 17, 2002
                               __________

                           Serial No. 107-65
                               __________

         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT PRINTING OFFICE
79-762                       WASHINGTON : 2002
________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

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

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

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

                            C O N T E N T S

                               Page______
Advisories announcing the hearing................................  2, 4

                               WITNESSES

U.S. Department of Health and Human Services, Hon. Tommy G. 
  Thompson, Secretary............................................    13
U.S. General Accounting Office, Hon. David M. Walker, Comptroller 
  General........................................................    60

                                 ______

AARP, William D. Novelli.........................................    82
Biotechnology Industry Organization, and ImmunoGen, Inc., Mitchel 
  Sayare.........................................................    99
General Motors Corporation, Bruce E. Bradley.....................    75
Merck & Co., Inc., Raymond V. Gilmartin..........................    79
National Community Pharmacists Association, John M. Rector.......    91

                       SUBMISSIONS FOR THE RECORD

American College of Physicians--American Society of Internal 
  Medicine, statement............................................   116
Infectious Diseases Society of America, Alexandria, VA, statement   118
National Association of Chain Drug Stores, Alexandria, VA, 
  statement......................................................   120
Pingree, Hon. Chellie, Portland, ME, statement...................   113

              INTEGRATING PRESCRIPTION DRUGS INTO MEDICARE

                              ----------                              

                       WEDNESDAY, APRIL 17, 2002

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:46 a.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory and revised advisory announcing the hearing 
follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE

April 8, 2002

No. FC-18

               Thomas Announces a Hearing on Integrating

                    Prescription Drugs Into Medicare

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
integrating coverage of prescription drugs into the Medicare program. 
The hearing will take place on Wednesday, April 17, 2002, in the main 
Committee hearing room, 1100 Longworth Office Building, beginning at 
9:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include Bush Administration officials and 
representatives of affected parties. However, any individual or 
organization not scheduled for an oral appearance may submit a written 
statement for consideration by the Committee and for inclusion in the 
printed record of the hearing.
      
BACKGROUND:
      
    When Medicare was enacted in 1965, most health plans did not cover 
prescription drugs. Since that time, most health plans have fully 
integrated prescription drug coverage yet Medicare still does not cover 
most outpatient prescription drugs. Prescription drugs are now as 
important to health care as hospitals and physician services were 37 
years ago.
      
    Although seniors consume an escalating number of prescription 
drugs, they are more likely to be faced with high out-of-pocket costs 
and fewer options for private sector drug coverage. The average senior 
consumes 20 prescriptions a year and the Congressional Budget Office 
(CBO) projects that the average beneficiary will spend $2,440 for these 
prescriptions in 2003. Seniors comprise approximately 12 percent of the 
population; yet consume nearly 40 percent of all prescription drugs. 
While about 75 percent of Medicare beneficiaries have some type of 
prescription drug coverage, those without coverage are often paying the 
highest prices. Further, many employers through their company 
retirement benefit plans are paring back or dropping prescription drug 
coverage as costs continue to dramatically escalate.
      
    As a result of increased utilization, new market entries and price 
increases prescription drug costs rose more than 17 percent last year, 
according to the National Institute for Health Care Management. CBO 
projects double-digit annual prescription drug cost growth over the 
next decade.
      
    In the last Congress, the U.S. House of Representatives passed a 
Medicare prescription drug bill (H.R. 4680), but the Senate failed to 
act on the issue. The President included $190 billion over 10 years in 
the Fiscal Year 2003 budget, and last month the U.S. House of 
Representatives passed a budget resolution providing for $350 billion 
over 10 years for prescription drugs, Medicare modernization, and 
appropriate adjustments to provider payments.
      
    ``Nobody would create a seniors health care program today that 
excluded prescription drugs. Yet Medicare's lack of a prescription drug 
benefit epitomizes the most glaring reason why Medicare must be 
modernized. I am committed to enacting a prescription drug benefit this 
year as we update other parts of the program as well,'' stated Chairman 
Thomas.
      
FOCUS OF THE HEARING:
      
    This hearing continues the Committee's consideration of the many 
issues surrounding the development of an outpatient prescription drug 
benefit within the Medicare program.
      
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
      
    Please note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, by the close of business, Wednesday, May 1, 2002. Those 
filing written statements who wish to have their statements distributed 
to the press and interested public at the hearing should deliver their 
200 copies to the full Committee in room 1102 Longworth House Office 
Building, in an open and searchable package 48 hours before the 
hearing. The U.S. Capitol Police will refuse sealed-packaged deliveries 
to all House Office Buildings.
      
FORMATTING REQUIREMENTS:
      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                

                      ***NOTICE--CHANGE IN TIME***

ADVISORY

               FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE

April 9, 2002

No. FC-18-Revised

                     Change in Time for Hearing on

              Integrating Prescription Drugs Into Medicare

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
integrating coverage of prescription drugs into the Medicare program. 
The hearing, scheduled for Wednesday, April 17, 2002, in the main 
Committee hearing room, 1100 Longworth Office Building, beginning at 
9:00 a.m., will now be held at 10:30 a.m.
      
    All other details for the hearing remain the same. (See Committee 
Advisory No. FC-18, dated April 8, 2002.)

                                

    Chairman Thomas. I want to thank you all for coming. As we 
consider ways to modernize Medicare, it is important that we 
not lose sight of how Medicare has improved the lives of 
millions of our Nation's seniors. Yet, obviously, to carry 
Medicare's promise to its fulfillment, we simply can't sit on 
Medicare as we know it. One of the biggest issues we face is 
prescription drugs, and we know that, just as important to 
health care today as when Medicare started, is the examination 
of hospital and physician services.
    The typical senior now takes more than 20 prescriptions a 
year, and we are told by the year 2005 we will spend more than 
$2,400 on prescription drugs. Unfortunately, seniors are, to a 
very great extent, the last bastion of retail drug purchasers. 
They pay high prices. They lack negotiating power.
    Medicare has not kept pace with changes in the medicine 
marketplace, and, frankly, the lack of a comprehensive 
prescription drug benefit epitomizes just one very important 
way in which today's Medicare falls short.
    This Congress and this Committee has held 16 different 
hearings examining areas where Medicare can be strengthened and 
improved. We have covered an awful lot of ground. We have 
looked at reducing Medicare's regulatory burdens, improving 
rural health care, securing Medicare's solvency in the long 
term, reforming antiquated cost sharing and Medigap programs, 
integrating disease management, reducing medical errors, 
rationalizing payments to physicians, and looking at the 
Medicare+Choice program.
    While integrating prescription drugs is the most high-
profile topic Congress faces, a comprehensive bill to 
strengthen Medicare and modernize it should at least address 
all of the issues that I just mentioned. And when we begin 
focusing on a prescription drug benefit, I do want to thank the 
Chairwoman of the Health Subcommittee, Mrs. Johnson, and the 
Health Subcommittee for working on guidelines as we move 
forward.
    Clearly, the specifics of the program are important, but 
the structure by which you examine options is equally 
important. For example, we believe strongly that you can't 
simply add a new prescription drug benefit to Medicare. The 
issues identified in those 16 hearings that I outlined, while 
perhaps not as politically headline-grabbing as prescription 
drugs, are serious, cannot be left for later, and need to be 
done.
    Second, we really should rely on the private sector 
innovation in delivering the drug benefits. A strong government 
guarantee to all Medicare beneficiaries is absolutely 
essential, but what we found interesting was that the 
Congressional Budget Office (CBO) has certified that the 
private sector approach on controlling drug prices really 
delivers the most savings per prescription. We do have to 
remember that taxpayers finance the structure by which the 
seniors primarily receive their medicine. There is a modest 
amount of money out-of-pocket, but most of it is taxpayer-
financed.
    Third, beneficiaries really should have a choice. Competing 
prescription drug plans ought to be able to select actuarially 
equivalent coverage. A government-run, one-size-fits-some 
program is just not workable.
    We also believe strongly that all low-income beneficiaries 
deserve extra help. And, frankly, it ought to be a uniform 
national health that low-income seniors receive. When Congress 
embarked on the Medicare Program, it was for seniors, not high-
income seniors or moderate-income seniors. Seniors ought to be 
seniors first and low-income second. The program ought to be a 
national one and not rely on the various States and their 
willingness or ability to respond to low-income needs of 
seniors.
    Fifth, the benefit should be affordable both to the seniors 
but also to the taxpayers. In the last Congress, the House 
passed a comprehensive prescription drug benefit. 
Unfortunately, the Senate failed to act. Last month, the House 
passed a budget resolution which provided, we believe, 
reasonable resources, some $350 billion over 10 years, to 
modernize Medicare and add a prescription drug benefit. We have 
the opportunity this spring to pass legislation to strengthen 
Medicare and integrate a prescription drug program.
    The Speaker has asked us to have a bill on the floor before 
Memorial Day so that we can move it to the Senate with 
sufficient time for the Senate to respond. Today, this hearing 
is going to hear from the Bush Administration, the U.S. General 
Accounting Office (GAO), and a panel composed of industry 
groups, AARP and others, about what they believe should be done 
in integrating prescription drugs.
    It is a pleasure to hear these people. We are all 
interested in the same result. Perhaps the manner by which we 
get there may differ. If we can keep that in mind, that 
providing seniors with a responsible prescription drug program 
is the goal, those differences ought to be able to be overcome. 
And prior to welcoming the Secretary to the Committee, I would 
recognize the gentleman from New York, the Ranking Member, Mr. 
Rangel, for any comments he may wish to make.
    [The opening statement of Chairman Thomas follows:]
Opening Statement of the Hon. Bill Thomas, a Representative in Congress 
from the State of California, and Chairman, Committee on Ways and Means
    Good morning. As we consider ways to modernize Medicare, it's 
important that we not lose sight of how Medicare has improved the lives 
of millions of our nation's seniors. Yet to fulfill Medicare's true 
promise, we cannot be satisfied with the status quo. Prescription drugs 
are just as important to modern health care as hospital and physician 
services were when Medicare was enacted in 1965.
    The typical senior now takes more than 20 prescriptions a year, and 
in 2005 will spend more than $2,400 on prescription drugs. They are 
often paying the higher prices because they lack negotiating power. 
Medicare has not kept pace with modern medicine, and the lack of a 
comprehensive prescription drug benefit epitomizes just one way it 
falls short.
    This Congress, the Committee has held 20 different hearings 
examining areas where Medicare can be strengthened and improved. We 
have covered a lot of ground: Reducing Medicare's regulatory burdens, 
improving rural health care, securing Medicare's solvency in the long-
term, reforming antiquated cost-sharing and Medigap, integrating 
disease management, reducing medical errors, and rationalizing payments 
to physicians and Medicare+Choice. While integrating prescription drugs 
is the most high-profile topic Congress faces, a comprehensive bill to 
strengthen Medicare should address all of these issues.
    Our guidelines for adding a prescription drug benefit:
          1. We cannot simply add a new prescription drug benefit. The 
        issues identified in our 20 hearings, while not as politically 
        ``sexy,'' are serious and cannot be left to fester.
          2. We should rely on private sector innovation in delivering 
        the drug benefit with a strong government guarantee to all 
        Medicare beneficiaries. CBO has certified that the private 
        sector approach delivers the most savings per prescription.
          3. Beneficiaries should have a choice of competing 
        prescription drug plans and be able to select actuarially 
        equivalent coverage. A government-run ``one-size-fits-some'' 
        program is unacceptable.
          4. All low-income beneficiaries deserve extra help and it 
        should be provided across the country uniformly rather than 
        forcing them to rely on a patchwork of varying state programs.
          5. The benefit should be affordable to both the taxpayers 
        paying the bills and the beneficiaries paying the premiums.
    In the last Congress, the House passed a comprehensive prescription 
drug benefit. Unfortunately, the Senate failed to act. Last month, the 
House passed a Budget Resolution, which provides ample resources--$350 
billion over 10 years--to strengthen Medicare and add a prescription 
drug benefit. We have the opportunity this spring to pass legislation 
to strengthen Medicare and integrate prescription drugs. The Speaker 
has asked us to have a bill on the floor before Memorial Day in order 
to give the Senate sufficient time to respond and to maximize our 
chances for enactment.
    Today we will hear from the Bush Administration, the General 
Accounting Office, AARP and industry groups about their thoughts for 
integrating prescription drugs into Medicare. Welcome to the Committee. 
I would now like to recognize the Ranking Member, Mr. Rangel.

                                

    Mr. Rangel. Thank you, Mr. Chairman. Let me join in 
welcoming the Secretary once again to this Committee. Your 
visits are not just important because of who you are and what 
you do in shaping national policy, but once we see you, we 
don't think we have got to see hardly anyone else as it relates 
to health policy or welfare policy, because it is not 
surprising that these bills end up on the suspension calendar 
and this will be our only opportunity at least to have you to 
share the Administration's views.
    I say that because you were so persuasive as a Governor in 
believing that the States should have the opportunity to 
formulate their own policies within a national framework. And, 
of course, I differed with that, but I had to admit that, as 
Governor and as it relates to welfare, you had done a 
remarkable job in your State. And other Governors have proven 
that they could handle it probably much better than the Federal 
Government.
    Having said that, it just surprised me to see that the 
Congress would start putting restrictions on Governors and 
having the Governors to believe that we are now mandating that 
they do things, which was exactly what you said you didn't 
want. Well, that is welfare, and we won't be able to talk with 
anyone else except the Governors, who now oppose the new bill.
    Now, here we are with Medicare, and my friends on the other 
side are going to say that this is political or that we are 
motivated on issues concerning the election. I don't see how it 
cannot be political when you are dealing with old folks that 
can't afford to pay for their prescriptions, and we all are 
looking for a solution to the problem.
    Now, the Chairman has indicated that this is so important 
that it can't be considered a loan. Well, I know he will get 
back and explain why it can't, but he has got to give us a 
package sooner or later that is going to be very, very 
politically difficult to oppose. He wants to have Medicare 
modernization. I think he means vouchers and credits, but, you 
know, who knows? He wants to include provider givebacks, which 
means hospitals are not going to get nearly back what they have 
been promised, but what a good time to stick it to them in an 
omnibus bill. And he wants to involve other potential expenses 
in a package.
    Well, thank God the Republicans are as honest as they are, 
because while my Chairman wants to do all of these things for 
the future, this week they are going to want to make permanent 
the tax cuts that they have had a couple of years ago. Which 
means what? It means that the fact that they never made it 
permanent in the budget--was for what reason, Governor/
Secretary? It was because it didn't fit within the budget.
    Now, you are here testifying not about how we are going to 
take care of senior citizens tomorrow or next month or next 
year. You are concerned about your legacy and what will the 
policies be as established by your Secretaryship after you are 
gone and after I am gone.
    Now, you just tell me how it is going to work out that we 
are going to have expanded prescription benefits, Medicare 
modernization, provide for the givebacks, and have Americans 
believe that we are concerned about them, and at the same time, 
even though it is not in the budget, we are saying that we want 
to make permanent the exciting tax cuts that the President has 
suggested, which is, of course, the $4 trillion in the next 
decade, at the same time your constituents--assuming Medicare 
is something that you are concerned about in the future--and 
Social Security beneficiaries are going to be coming into 
massive dependency because of the Baby Boomers.
    To me, it is a political shell game and that we are going 
through the motions here, and we had some witnesses to kind of 
share our view. But the new method is that the Democrat 
minority, we cannot have witnesses unless they are approved by 
the Chair. I just got back from Cuba, so I am beginning to 
understand that a lot better than before.
    And we had a witness that was checked out by the Chair, and 
it found out that this lady is not only a Democrat, pardon the 
expression, but a candidate for the U.S. Senate. So, therefore, 
she was denied the opportunity to express herself on this 
sensitive subject.
    I don't mean to make life awkward for you, but these are 
the people you are working with, and I just want you to know 
that your office has been far more cooperative with us on this 
and every other subject that you have jurisdiction of in terms 
of sharing ideas than the majority ever has. And I want to 
thank you for that. I hope something can come out of it, but I 
thank you for keeping that door open.
    I yield to Mr. Stark.
    [The opening statements of Messrs. Rangel, Ramstad, Nussle, 
and Foley follow:]
 Opening Statement of the Hon. Charles B. Rangel, a Representative in 
                  Congress from the State of New York
    I thank the Chairman for bringing us together to discuss this 
important topic. There is no question that there is a great need to 
integrate prescription drug coverage into Medicare. The only question 
is whether Congress is serious about doing it.
    Sadly, the evidence before us indicates that the Chairman and his 
Republican colleagues are not serious. In order to be serious, you 
would have to budget sufficient resources so that premiums would be low 
enough and benefits would be high enough so that all seniors could 
benefit.
    Unfortunately, the Republicans' so-called budget proposal did not 
set aside any money specifically for a prescription drug benefit. The 
money to fund any proposal sponsored by Chairman Thomas would be paid 
for out of a $350 billion over ten year so-called ``reserve fund'' that 
is supposed to cover not just prescription drug benefits but so-called 
Medicare modernization, provider give-backs, and many other potential 
expenses that the Republicans have not made room for elsewhere in their 
budget.
    At the same time, the House Republican leadership is doing its best 
to make sure that any resources that might be there over the next ten 
years, will not be there beyond that by passing a bill to extend last 
year's tax cuts in such a way that revenues will decrease by $4 
trillion in the same decade that the baby boom generation is retiring 
and eligible for any Medicare prescription drug benefit that Congress 
may enact.
    The Republicans not only do not want to assist seniors with their 
prescription drug needs, they want to prevent us from being able to 
provide such assistance for the foreseeable future. At a time when, as 
the GAO will tell us today, the Medicare program needs to prepare for 
the Baby Boom generation, the Republicans' fiscal plan has made such 
preparation impossible.
    It's pretty clear that this hearing is not real, but purely 
political. In fact, you have even denied a place at the witness table 
for the expert, former Maine Senate Majority Leader Chellie Pingree 
(SHELL-ee PIN-gree), that we Democrats tried to invite to testify on 
her plan to provide prescription drugs to seniors in Maine.
    Although we had told you the name of this nationally-known expert 
last week, you decided yesterday that the Committee had a new policy 
and that because Ms. Pingree was a candidate for U.S. Senate, you would 
disqualify her from testifying. Although we have allowed countless 
members of Congress--who are candidates for re-election or sometimes 
election to other offices--to testify, Ms. Pingree is not allowed to 
offer her substantive statement because the Republican Senate Campaign 
Committee is worried she might make sense.
    Of course, you do not really care about Ms. Pingree's success in 
Maine because you have no intention of actually putting together a bill 
that could pass the House and the Senate and be signed by the 
President, because you would rather use all of the money for additional 
tax cuts.
    However, Republicans have enough polling data to know that 
Americans of all generations want prescription drug coverage to be 
provided under Medicare so here we are today pretending that you're 
serious.
    Of course, I understand that the Chairman plans to bring a Medicare 
bill to the floor within a month or so. But, so far, the Chairman has 
made no attempt to work with members on this side of the aisle in 
crafting that bill. The Chairman has not even indicated whether this 
Committee will have an opportunity to mark up the legislation.
    Working with Committee Democrats on a truly bipartisan bill would 
run the risk of coming up with something that actually could pass the 
Senate and become law.
    We should not be surprised that this is not a serious effort to 
address the vitally important issue of extending prescription drug 
coverage to America's seniors. Adding a prescription benefit would only 
strengthen a program that Republicans have been fighting against for 
decades.
    Republican leaders have never liked Medicare. In 1995, Dick Armey 
said he ``deeply resents the fact that when I'm 65 I must enroll in 
Medicare.'' Newt Gingrich said he wanted it ``to wither on the vine.'' 
And Tom Delay said in 1999 that a prescription drug benefit and 
strengthening Medicare ``don't matter to the American people.''
    So, I thank the witnesses for your time. I am sorry that nothing 
serious will happen in this Committee this year to improve Medicare or 
provide a real prescription drug benefit that will become law. And if 
Democrats were in charge, this would not just be something that we talk 
about, but something that we would actually do for all American 
seniors.

                                

Opening Statement of the Hon. Jim Ramstad, a Representative in Congress 
                      from the State of Minnesota
    Thank you, Mr. Chairman, for holding this important hearing today.
    Prescription drug coverage is one of the most critical issues 
facing this nation. This issue has moral, medical and economic 
implications for every American, not only current Medicare 
beneficiaries.
    This is an issue that affects all of us, as most of us use 
prescription drugs at some point in our lives and all of us realize 
that prescription drugs will play a greater role in helping us lead 
active, healthy lives as we age.
    The problem is that when the majority of people need prescription 
drugs most, in the later years of life, the largest insurer of the 
elderly does not provide prescription drug coverage. As a result, many 
seniors go without the drugs they need, dilute their prescriptions or 
forego other basic necessities in order to purchase vital prescription 
drugs. This is wrong.
    Medicare must provide an outpatient drug benefit. Health care has 
changed and we need a system that reflects the advancements in medicine 
that have occurred in the past 37 years since the inception of the 
Medicare program in 1965. We know that seniors need prescription drug 
coverage and we know that the Medicare program is not meeting the needs 
of most seniors. It is time to modernize the Medicare program.
    The Ways and Means Committee is crafting a meaningful prescription 
drug benefit for our nation's seniors. I look forward to hearing from 
our witnesses today on the best way to provide a meaning drug benefit 
for our nation's seniors.
    Thanks again for taking up this very important issue.

                                

Opening Statement of the Hon. Jim Nussle, a Representative in Congress 
                         from the State of Iowa
    Earlier this year, I visited the senior center in Independence, 
Iowa. At the center the very first question asked of me was about 
prescription drug coverage. I was not surprised in the least. Whether 
it's the lack of prescription drug coverage or the shortfalls in rural 
reimbursement rates, I receive numerous letters, phone calls, and e-
mails from seniors and health care providers about Medicare problems 
every single day.
    Because Iowa has the fifth highest population of people age 65 and 
over, Medicare is clearly one of the most important benefits that Iowa 
seniors rely upon. Unfortunately, the Medicare program has not been 
significantly modernized since its inception in 1965 and is not meeting 
the needs of Iowa seniors. Prescription drugs still cost too much for 
too many Iowa seniors and no senior should be forced to choose between 
getting a prescription filled and buying food or other basic 
necessities of life. If we could go back to 1965, we would have surely 
crafted a comprehensive drug benefit that is affordable, accessible, 
and completely voluntary.
    While inclusion of a drug benefit is indeed important, Iowans 
recognize that the inequities in today's current Medicare program must 
be addressed before new programs are added to the system. As Chairman 
of the House Budget Committee I chose to include $350 billion over the 
next ten years to modernize the Medicare program overall; otherwise, 
the budget would have simply included the $190 billion requested by the 
Administration for prescription drug coverage. If health care providers 
leave the rural areas, who will write prescriptions under the new drug 
benefit? Who will provide the care that cannot be provided by drugs 
alone?
    I understand that many of these problems have compounded since 
1965, but rural health is on the verge of a crisis and the disparities 
that exist between rural and urban providers need to be resolved. I am 
hopeful that I can work with Secretary Thompson, Chairman Thomas, and 
other members of the committee to produce a comprehensive Medicare bill 
that not only provides comprehensive drug coverage for seniors, but 
ends many of the antiquated reimbursement policies that exist in the 
current system. I urge that the House complete consideration of 
comprehensive Medicare reform legislation prior to Memorial Day as it 
is critical to my Iowa constituents.

                                

Opening Statement of the Hon. Mark Foley, a Representative in Congress 
                       from the State of Florida
    I want to thank you, Mr. Chairman, for holding this very important 
hearing.
    For years, thousands of seniors have gone without any form of 
prescription drug benefit. In some cases, it can cost up to $10,000 per 
month for the numerous types of drugs that a beneficiary may take. For 
those on a fixed income, this amount can mean the difference between 
medicine and food.
    When Medicare was developed in 1965 it was designed to help seniors 
who were without health insurance. At the time, there were far fewer 
prescription drugs on the market and therefore there was not a need for 
a prescription drug benefit. However, times have changed and there are 
dozens of new prescription drugs being developed every year.
    I strongly believe that, as part of our efforts to help the 
millions of Medicare beneficiaries who are currently suffering, we must 
implement a Medicare prescription drug discount card bill as soon as 
possible. This program, which will lead to a larger drug benefit, can 
be implemented more quickly than the full benefit and in the interim 
save seniors between 15 to 40 percent on drugs.
    Again, Mr. Chairman, I commend you and Chairman Johnson for your 
outstanding work on this issue and I look forward to working with you 
to provide long overdue and critically needed help to our seniors.

                                

    Mr. Stark. I thank the gentleman for yielding, and I just 
wanted to follow up because there have been women throughout 
history who have been silenced because people in power didn't 
want them to be heard.
    Ida Wells, an African American writer in the 1800s, wrote 
articles decrying lynching. She so intimidated those in town 
that they threatened to kill her and run her out of town.
    Not so long ago, Karen Silkwood rallied against the 
chemical safety problems in her plant. Her campaign for safety 
was cut short by a tragic accident.
    Today, our Chairman decided to silence the voice of another 
prominent woman because he doesn't want her message to reach 
the public. Chellie Pingree, a nationally renowned expert, an 
advocate for a Medicare prescription drug benefit, was denied 
at the very last minute the opportunity to testify today. Her 
work in the State of Maine for a prescription drug benefit 
could provide us with insight into such a program. But the 
Republicans apparently are afraid to hear alternatives. The 
Portland Press Herald News today calls Ms. Pingree's work on 
the Maine drug benefit ``ground breaking.'' And she challenges 
us, Mr. Secretary, to say we need Federal legislation that will 
do one of two things: either provide a drug benefit understand 
Medicare, passing on negotiated discounts to seniors, or free 
up the States to use innovative programs like the Maine 
prescription drug benefit.
    This is as political as her testimony--which I would ask 
unanimous consent to put in the record in printed form. It says 
nothing about any campaign, or I don't even think it mentions 
her political affiliation. But it is a sad day when we can't 
work with our Republican colleagues to fashion a bill. It is 
even sadder when they are so afraid of hearing opinions that 
they will deny us the chance to have one witness on the grounds 
that they were a political candidate.
    I yield back.
    Chairman Thomas. The gentleman's time has expired.
    Mr. McDermott. Mr. Chairman, a point of information?
    Chairman Thomas. The gentleman from Washington is 
recognized.
    Mr. McDermott. In the light of the decision on Ms. Pingree, 
if somebody has a poll in the field in their home State about 
the candidacy for Governor, would that preclude them from 
witnessing before this organization?
    Chairman Thomas. The Chair was going to respond to the 
statements because some people perhaps didn't fully understand 
what has transpired, and the Chair was going to outline a 
policy that I believe has been fairly longstanding, and 
clearly, as long as this Chairman remains Chairman, we are 
going to attempt to follow; and, that is, the witness was not 
denied the right to speak because she was a female. That is 
absurd on its face.
    What we found out was, of all of the people in the United 
States who the Democrats could have chosen to be a responsible 
witness on a factual panel on prescription drugs, Friday at 
5:00 p.m., we were told that the one that the Democrats chose 
just happens to be the winner of the Democratic primary in the 
State of Maine for the U.S. Senate.
    Just as the gentleman from New York indicated that some of 
these activities are liable to be political, the Chair, to the 
best of his ability, will not allow hearings in front of this 
Committee to be used for political purposes.
    The way in which this witness was not going to be political 
was couched in the most political terminology you could get. 
The Chair will not allow candidates for political office to be 
factual witnesses, whether they be Democrats, Republicans, men, 
women, Libertarians, Green, or others.
    It may be that you are somewhat circumscribed in terms of 
the choices of witnesses available to us, but I believe that is 
a reasonable and appropriate rule, and it ought to govern. It 
is as difficult as it is in the current context to reach 
agreement. We ought to minimize the opportunity for continuing 
to bite at each other from a political perspective. And the 
Chair would briefly recognize the Chairwoman of the Health 
Subcommittee, the gentlewoman from Connecticut, Mrs. Johnson.
    Mr. McDermott. Mr. Chairman, you didn't answer my question, 
though. That was: At what point is someone a candidate or using 
the podium for a political purpose? Do they have to be a 
declared candidate, or can they be exploring through a poll? 
Or----
    Mr. Rangel. If the gentleman would yield, the Chairman 
answered that. It is when----
    Chairman Thomas. Based upon----
    Mr. Rangel. He feels that it is a candidate. He answered it 
clearly.
    Chairman Thomas. Based upon the denial of this candidate, 
it is fairly clear that when the individual is on the ballot as 
a qualified candidate, having won the primary, that that is a 
clear rule. If the gentleman wishes to pursue how far back it 
can go, we can carry on a reasonable discussion, or the 
minority can continue to try to get witnesses on with more or 
less a shade of political leaning.
    Mr. Lewis OF GEORGIA. Mr. Chairman.
    Chairman Thomas. And we will try to make those decisions in 
a real-time basis.
    Mr. Lewis OF GEORGIA. Mr. Chairman.
    Chairman Thomas. And the Chair is open to either of those 
options.
    Mr. Lewis OF GEORGIA. Mr. Chairman, a point of information.
    Chairman Thomas. The gentleman from Georgia.
    Mr. Lewis OF GEORGIA. Would that include sitting Members of 
Congress?
    Chairman Thomas. Obviously not.
    Mr. Lewis OF GEORGIA. Well, we are----
    Mrs. Johnson OD CONNECTICUT. Mr. Chairman.
    Mr. Lewis OF KENTUCKY. When we are--there's primaries and 
we are qualified, we----
    Chairman Thomas. I understand that.
    Mr. Lewis OF KENTUCKY. Are filing to run----
    Chairman Thomas. But you have already won, and you are 
participating as an incumbent, not as a challenger. And we 
allow Members to come up and discuss their positions, but we 
don't normally include Members as part of a multi-Member 
factual panel in discussions.
    The gentlewoman from Connecticut is recognized.
    Mrs. Johnson OF CONNECTICUT. Thank you, Mr. Chairman. And I 
applaud you for your policy in regard to our hearings. The 
factual information that is out there, the number of experts 
whose opinions and whose experience we can call on are really 
so numerous that we cannot reach them all.
    The issues confronting us in providing prescription drugs 
to seniors are very complicated and important issues, and 
through seminars, through our individual readings, through 
working with the Administration, through working with 
Professors, and others throughout the Nation, we are bringing a 
lot of that information to the table. To imagine that there 
wasn't an expert that could have been called to the table on 
the other party's side and made points of interest to them is 
simply ludicrous.
    And then, second, I would say--and every one of us knows 
this to be true--no matter how much of an expert you are at the 
State level, making national policy is a very different 
challenge. And I would much prefer that the Democrats would 
have brought someone to the table that had national experience 
in policymaking, and particularly in the complexity of the 
structural delivery issues that are going to be so important to 
our succeeding in actually delivering to every senior across 
America in every little city and town a prescription drug 
subsidy in the years to come.
    So I believe that their calling someone who is now an 
affirmed candidate, having won a primary, but who also is 
clearly not as well prepared as many other people they could 
have called is very concerning to me. The challenge of writing 
a prescription drug bill that can actually implement a policy 
that is sustainable, affordable and effective for our seniors 
is a tremendous challenge that crosses party lines, that 
crosses disciplines, and we all need to be extremely serious 
about that challenge.
    So I welcome this hearing and the quality of the experts 
that will testify today, and it is a special pleasure to 
welcome the Honorable Tommy Thompson, who has been a real 
leader in bringing his agency to the table with practical, 
factual, substantive material, but also trying to reform the 
bureaucracy so it, too, can be more effective, practical, 
intelligible to the provider community and a better servant in 
the goal of providing a strong Medicare Program to the seniors 
across America.
    Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentlewoman.
    The Chair wants to clarify that the decision the Chair made 
was one based upon objective information, not a subjective one 
based upon the direction of the testimony. And the Chair would 
not exercise a subjective decision. The individual that the 
Democrats wished to offer would be able to present their 
position as how they wanted to, but that the decision was made 
upon the very objective criteria of an active candidate.
    And, with that, it is my pleasure to welcome once again to 
the Committee on Ways and Means, as Mr. Rangel said, the 
Governor/Secretary. Mr. Thompson, your testimony will be made a 
part of the record that is written, and you can address us in 
any way you see fit in the time you have.

   STATEMENT OF THE HON. TOMMY G. THOMPSON, SECRETARY, U.S. 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. Thompson. Thank you very much, Mr. Chairman. I 
appreciate the opportunity to come once again in front of the 
Ways and Means Committee.
    Chairman Thomas. Mr. Secretary, is our microphone on?
    Mr. Thompson. Yes, it is.
    Chairman Thomas. Then you need to get close to it. It is 
very unidirectional, unfortunately.
    Mr. Thompson. Thank you, Mr. Chairman. Chairman Thomas, 
Representative Rangel, distinguished Committee Members, thank 
you for inviting me to discuss our proposal for strengthening 
and improving Medicare. Medicare has provided security to 
millions of American seniors since 1965. But at the dawn of the 
21st century, its promise is threatened by outdated and 
inadequate benefits, limited protection against rising medical 
costs, and a traditional government plan that often fails to 
deliver responsive services to recipients or ensure high 
quality care.
    President Bush and my Department are committed to 
modernizing the Medicare program and strengthening it for all 
seniors. At the hearing of this plan is a belief that we must 
provide better and more efficient delivery of services and 
evaluate Medicare in a deliberate and thorough manner.
    Medicare is in fiscal trouble, which will only deepen in 
coming decades unless we act now. While we all want to provide 
a drug benefit for seniors, it cannot be done in a vacuum. It 
must be accompanied by fundamental reforms that keep those 
benefits secure.
    The framework for bipartisan legislation that the President 
and I have proposed includes several important principles:
    First, all seniors should have the option of a subsidized 
prescription drug benefit as part of a modernized Medicare. 
Everyone benefits from new drugs that are being developed 
through the miracles of science. And Medicare beneficiaries 
should and must have greater access to life-saving therapies. 
But it is also clear that if we add a drug benefit without 
comprehensive modernization of the system we will only deepen 
the financial crisis Medicare faces in the coming years.
    Second, modernized Medicare could provide better coverage 
for preventive care and serious illnesses. By preventing 
disease and illness to begin with, we not only save substantial 
financial resources, but we also save and improve the quality 
of lives.
    Third, today's beneficiaries and those approaching 
retirement should have the option of keeping the traditional 
plan with no changes.
    Fourth, Medicare should provide greater insurance options, 
like those available to all Federal employees.
    And there are several other important principles, including 
strengthening the program's long-term financial security; 
improving the management of the government Medicare plan; 
updating and streamlining Medicare's regulations and 
administrative procedures; and encouraging high-quality health 
care for all seniors.
    These principles are vital to quality care, and should be 
available to everyone in Medicare. Period. In a nation as 
prosperous and as compassionate as ours, it is the least that 
we can do.
    The lack of drug coverage among America's seniors is among 
Medicare's most pressing challenges. Ten million Medicare 
beneficiaries have no prescription drug coverage at all. In 
fact, Medicare beneficiaries and the uninsured are really the 
only individuals in America today that commonly full price for 
prescription drugs. That is simply unacceptable. It must 
change.
    The President is also committed to a Medicare subsidized 
drug benefit that protects seniors against high catastrophic 
drug expenses. And we must also support the continuation of 
affordable prescription drug coverage now available to many 
seniors through retiree plans and private health insurance 
plans.
    Our budget also provides $8 billion through the year 2006 
to expand drug coverage to low-income Medicare recipients. This 
proposal is fully integrated with the President's Medicare 
modernization proposal, and will enable States to take 
advantage of existing structures so that seniors will be able 
to get help quickly. We have debated this issue long enough.
    Mr. Chairman, I want to work with you and all Members of 
this Committee in designing this vital drug assistance program. 
It is so important. And I look forward to your ideas and 
thoughts on better serving America's neediest seniors.
    We must also act now to stabilize the Medicare+Choice 
system, to ensure that current benefits and choices remain 
available to Medicare beneficiaries. We should not eliminate by 
inaction a program that millions of seniors enjoy.
    We must come together now to take the sound, the careful 
and deliberate steps needed to improve the Medicare Program for 
today's seniors, as well as tomorrow's. And we must start this 
process now. These issues have been debated on and off for 
years, and now it is time for action. I am here today to tell 
you that we stand ready and willing to work with you and the 
other Members of the Committee and all Members of Congress, to 
make that happen.
    I understand that the Administration and the House have 
sometimes differed in their numbers. While we feel that we can 
provide this benefit for less than the $350 billion which was 
proposed in the budget by this house, let me make it clear that 
we are committed as an administration to the principle of a 
prescription drug benefit, rather than to a specific figure.
    Three decades from now, the promise of a financially secure 
retirement should continue to be a reality for America's 
seniors. As we join together, we can make sure that it will 
happen. So thank you, Mr. Chairman, Congressman Rangel, and all 
Members of the Committee, for this opportunity to discuss this 
very important topic with you today. Now I look forward to 
answering your questions.
    [The prepared statement of Secretary Thompson follows:]
Statement of the Hon. Tommy G. Thompson, Secretary, U.S. Department of 
                       Health and Human Services
    Chairman Thomas, Representative Rangel, distinguished Committee 
members, thank you for inviting me to discuss our proposal for 
strengthening Medicare, including prescription drug coverage. This 
committee obviously played a key role in creating the Medicare program. 
When that legislation was enacted, President Johnson said: ``No longer 
will older Americans be denied the healing miracle of modern medicine. 
No longer will illness crush and destroy the savings that they have so 
carefully put away over a lifetime.'' Thirty-six years later, President 
Bush believes it is time for our Nation to come together and renew that 
commitment. I share the President's view that we have a moral 
obligation to fulfill Medicare's promise of health care security for 
America's seniors and people with disabilities.
    Medicare has provided this security to millions of Americans since 
1965. But its lack of prescription drug coverage demonstrates that 
Medicare is not keeping up with the rapid advances in medical care. 
Looking ahead, medical care holds the promise of improving and 
extending life through countless innovations. But as we enter the 21st 
century, Medicare's promise is threatened by: outdated benefits; 
limited financial protection against high medical costs; a system that 
has not delivered reliable health plan options; and a traditional 
government plan that often fails to deliver responsive services to 
beneficiaries or ensure high-quality care.
    The 77 million Americans who will be entitled to Medicare in 2030 
are counting on Medicare's promised benefits. Yet even Medicare's 
current benefits are not secure for the retirement of the Baby Boom 
generation. Medicare's fund for hospital insurance will face cash flow 
deficits beginning in about 15 years and is projected to become 
insolvent within 30 years. Medicare's fund for its other benefits will 
require nearly a doubling of beneficiary premiums and infusions of 
general revenues to remain solvent over the next 10 years. Medicare's 
accounting disguises the true fiscal health of Medicare and makes it 
difficult to plan ahead.
STRENGTHENING MEDICARE
    Recognizing these problems, President Bush has worked with members 
of Congress from both parties to develop a framework for a modernized 
Medicare program and for keeping Medicare's benefits secure. The 
President's framework includes the following eight principles:
    First, all seniors should have the option of a subsidized 
prescription drug benefit as part of modernized Medicare. More 
specifically, the President's framework made it clear that:
           Medicare's subsidized drug benefit should protect 
        seniors against high drug expenses and should give seniors with 
        limited means the additional assistance they need.
           The drug benefit should give all seniors the 
        opportunity to choose among plans that use some or all of the 
        tools widely used in private drug plans to lower drug costs and 
        improve quality of care.
           The drug benefit should support and encourage the 
        continuation of the effective prescription drug coverage now 
        available to many seniors through retiree plans and private 
        health insurance plans.
           The new drug benefit should also be available 
        through Medigap plans and as a stand-alone drug plan for 
        seniors who prefer these choices.
    Others may advocate a different approach, but we believe it is 
critical for seniors to have a choice of drug plans so that they can 
pick the one that is best for their needs--this is not a decision the 
government should make for them, just as we should not be picking their 
doctor or giving them a one-size-fits-all health plan. As the members 
of this Committee know, both the independent CMS actuaries and the non-
partisan Congressional Budget Office experts fully expect private drug 
plans to participate in this benefit. At this point in the legislative 
process, with the drug benefit still subject to intense debate, it 
would be surprising if companies were stepping forward to say they 
would offer it--since they might prefer not to have to compete. But as 
CBO has also confirmed, giving private plans the proper incentives is 
the way to get the best deal for Medicare beneficiaries and the 
program--yielding lower drug prices and lower monthly premiums through 
competition. Of course, the government has a proper role to play as 
well, particularly in making sure seniors can get the protection 
against catastrophic drug costs that they need--protection which is 
often lacking today--and taking the steps necessary to ensure that all 
eligible seniors and disabled individuals get the benefits to which 
they will be entitled.
    Second, modernized Medicare should provide better coverage for 
preventive care and serious illnesses. Medicare's current cost-sharing 
often imposes the highest costs on those who need the most care. 
Individuals who need hospital care currently face a payment of more 
than $800 for each spell--and they can have several spells in a year--
and Medicare's coverage for hospitalizations can eventually run out. 
And unlike most private insurance, Medicare does not provide ``stop-
loss'' protection to limit the financial obligations imposed on 
beneficiaries. At the same time, whether in Medicare itself--or in the 
Medigap plans that seniors buy to fill in Medicare's coverage gaps--
first-dollar often coverage drives up costs and premiums for 
beneficiaries without yielding noticeable improvements in health. Thus 
we believe Medicare's coverage should be improved so that it provides 
better protection when serious illnesses occur and better coverage to 
help prevent these illnesses in the first place--like having zero co-
payments on Medicare's preventive benefits while still encouraging 
prudent use of services and beneficiary involvement in health care 
decisions. Because they will encourage better use of preventive care 
and other services, better Medicare benefits will also help seniors and 
the Medicare program get the best value from the new drug benefit.
    Third, today's beneficiaries and those approaching retirement 
should have the option of keeping the traditional Medicare plan with no 
changes. For us this is obvious--no one should be forced to accept 
significant changes they do not like and are not prepared for. Although 
we believe that a modernized Medicare program will be attractive to 
many current beneficiaries, we believe the choice rightly rests with 
them on whether to move from the existing program to the modernized 
one.
    Fourth, Medicare should provide better health insurance options, 
like those available to all Federal employees and retirees. For too 
long, Medicare has been a ``one size fits all'' program, and we should 
offer options appropriate to the unique challenges various seniors 
face--including the kind of innovative disease management programs 
which this Committee has pushed for but which are threatened by chronic 
underpayments to private plans today. Private plans have been a 
critical source of drug coverage and other innovative benefits for 
seniors, and should remain so.
    Fifth, Medicare legislation should strengthen the program's long-
term financial security. In light of the recent Trustees' Report on 
Medicare one could conclude that our guiding principle should be 
``first, do not harm.'' But the President's budget recognized that 
strengthening Medicare would require substantial new resources--and 
proposed $190 billion for this important purpose. Of course we are more 
than willing to work with Congress this year to enact this long-overdue 
legislation, and we understand that there are a range of views 
regarding how much new spending needs to be allocated for this purpose. 
We believe an effective program for strengthening Medicare and 
including a prescription drug benefit can be accomplished within the 
amount the President has allocated in his Budget. Without strong 
measures to make the program more efficient being incorporated along 
with new benefits, all of Medicare's benefits will become less secure 
under some proposals.
    For example, some have proposed a drug benefit as large as $750 
billion, financed largely by surpluses generated by the Medicare Part A 
Trust Fund. But if the Part A surpluses literally were directed to 
augmenting prescription drug coverage, the consequences for Medicare's 
ability to provide benefits for the Baby Boom would be severe. 
According to the independent Actuaries, this transfer could cut the 
life of the Part A Trust Fund in half--causing its insolvency by 2016 
and requiring its balances to be drawn down starting in 2008. Some 
might want to exploit the accounting gimmicks that Medicare's 
bifurcated Trust Fund system encourages, by creating yet another fund 
for the drug benefit and leaving it to future generations to figure out 
how to pay for it. But no accounting gimmicks can hide the fact that 
such a drug benefit would increase the program's long-term financing 
challenges by 50 to 100 percent. What costs $750 billion in the first 
10 years would balloon to $2.4 trillion in the next ten, just when the 
Baby Boomers are counting on Medicare. Medicare spending (even after 
subtracting beneficiary premiums) is expected to grow from 2% of GDP 
today to 4% by 2030, and this drug benefit proposal would increase that 
share to almost 6%--which is like a tax increase on future Americans 
amounting to nearly 2% of our entire national product.
    Thus, while we want to work closely with Congress to enact a 
Medicare drug benefit this year, we also want to work closely with 
Congress to make sure that the benefits we promise today will be there 
for beneficiaries tomorrow. This is also why we support changes in 
Medicare's Trust Fund accounting to provide a clear picture of 
Medicare's financial outlook. We have all seen examples of how poor 
accounting practices can lead to poor planning, with devastating 
consequences for many Americans. It is critically important that we 
avoid such practices in a program that is so important to all 
Americans.
    In this context it is also important to consider the issue of 
provider payment reforms. Although certain provider payments may 
benefit from adjustment, we believe such adjustments can be 
accomplished without draining new funds that are even more urgently 
needed for improving Medicare benefits. In the context of moving 
forward on our shared goal of modernizing and strengthening Medicare, 
the Administration is willing to work with Congress to consider limited 
modifications to provider payment systems in order to address payment 
issues. In doing so, we must be systematic: all provider payment 
updates must be considered and any package must be budget neutral in 
the short and long term. Most importantly, as we all consider changes 
to payment systems, we need to focus on the adequacy of payment systems 
for providing access to care for beneficiaries, and recall that any 
increases in spending will be borne, in part, by beneficiaries and also 
have long-term implications for the security of Medicare's benefits.
    Sixth, the management of the government Medicare plan should be 
strengthened so that it can provide better care for seniors. That's 
what we're working to do now at CMS, but we need legislation to proceed 
with such steps as competitive bidding so that Medicare and its 
beneficiaries can get better, market-based prices for the items it buys 
while ensuring high quality.
    Seventh, Medicare's regulations and administrative procedures 
should be updated and streamlined, while the instances of fraud and 
abuse should be reduced. Here too we have moved aggressively but we 
need help from Congress and want to work with you to enact into law the 
kind of sensible improvements that this Committee led through the House 
of Representatives with unanimous bipartisan support. Regulatory 
reforms and simplifications are needed to reduce burdens on providers 
and on CMS at a time when we are implementing new benefits into the 
Medicare program.
    Eighth, Medicare should encourage high-quality health care for all 
seniors. Recent reports from the Institute of Medicine and others have 
made clear the widespread opportunities for improving patient care that 
exist--which are likely to benefit seniors more because they use more 
care. These studies have also shown that these problems are not the 
result of malfeasance, and made it clear that we need to change the 
environment for medical practice to one that encourages systematic and 
continuous improvements in care, not endless and costly litigation.
    Looking ahead, we can and surely will continue to have a healthy 
debate about how we should meet these principles. The key, however, is 
to take action this year, and we intend to continue to work closely 
with Congress to implement a prescription drug benefit that Republicans 
and Democrats can support, and that achieves the President's principles 
for Medicare legislation.
IMMEDIATE STEPS
    At the same time, the President's budget recognizes that--under all 
proposals--it will take several years to implement the comprehensive 
improvements that Medicare needs, including a prescription drug benefit 
and a more equitable payment system for private plans. Therefore the 
Budget also proposes urgently needed steps that should be incorporated 
into Medicare legislation: the transitional low-income drug benefit, 
new Medigap options, and immediate steps to help make sure that seniors 
who prefer private health insurance coverage in Medicare can continue 
to get it. We are also pushing ahead administratively with the 
Medicare-endorsed prescription drug card and the Pharmacy Plus waiver. 
These changes will both pave the way for a modernized Medicare program, 
and provide immediate relief including drug coverage for millions of 
Medicare beneficiaries before the full drug benefit can be implemented 
at least three years from now.
Prescription Drug Card
    About 9 million Medicare beneficiaries have no prescription drug 
coverage at all. About thirty-five percent of these beneficiaries had 
incomes below 150 percent of poverty, or an annual income of about 
$18,000 for a family of two. Medicare beneficiaries and the uninsured 
are the only people in America today that commonly have to pay full 
price for prescription drugs. That is simply unacceptable and we must 
do something to address it. Last year, the President took the first 
step when he proposed the creation of a new Medicare-endorsed drug card 
program. The drug card is not a drug benefit and it is not a substitute 
for one. It is, however, an important first step in helping seniors 
afford the drugs they need today.
    The President's proposal is pretty straightforward--it's a pooling 
mechanism modeled on private health insurance programs, where consumers 
routinely benefit from discounts of 10 to 35 percent. Private insurers, 
with their large numbers of customers, use their market power to secure 
significant rebates and discounts from manufacturers. In fact, I would 
venture to guess that all of us in this room, and certainly all federal 
employees, benefit from lower drug prices as a result of such pooling. 
Under the President's proposal, Medicare would endorse private drug 
cards that met minimum standards, allowing seniors to get the 
information they need to obtain manufacturer discounts and other 
valuable pharmacy services. These third-party plans will negotiate 
discounts and rebates directly from drug manufacturers and pass the 
savings on to Medicare beneficiaries who choose to participate.
    The drug card has another important aspect: CMS has to implement 
it, just as it will eventually have to implement a more comprehensive 
drug coverage benefit. CMS knows how to pay hospitals and doctors and 
nursing homes, but has little experience in working with PBMs, paying 
pharmacists, or negotiating with drug manufacturers to run a retail 
drug insurance program. The infrastructure created by the voluntary 
drug card program and the experience CMS will gain by administering 
this program will be a significant advantage as CMS moves to implement 
whatever comprehensive Medicare prescription drug benefit is enacted. 
In our extensive discussions with AARP, we have found that this may be 
the top reason for their solid support of this concept--the desire to 
build the infrastructure and develop the experience needed for an 
effective Medicare drug benefit.
Transitional Medicare Low-Income Drug Assistance Program
    We've been debating how to cover prescription drugs under Medicare 
for years. In the absence of a Medicare prescription drug benefit, many 
states have taken action to assist the neediest seniors. The lowest-
income seniors have received drug coverage under the Medicaid program. 
In addition, about three-fifths of the states have set up separate 
prescription drug assistance programs for seniors. Yet many lower-
income seniors still get no help. The President believes that Medicare 
legislation should take immediate advantage of existing state 
infrastructure, and support the integration of existing state low-
income programs into the new Medicare drug benefit, by helping states 
provide drug coverage for low-income seniors right away.
    The Administration has proposed to provide immediate support for 
comprehensive drug coverage for Medicare beneficiaries up to 150% of 
poverty--about $18,000 for a family of two. This proposal, called the 
Transitional Medicare Low-Income Drug Assistance Program, would use the 
existing administrative structure operated by the states to identify 
and assist low-income seniors, and would also encourage states to use 
the new Medicare drug card infrastructure or similar competitive 
approaches to provide expanded low-income assistance. For Medicare 
beneficiaries up to 100% of poverty, the program would pay for expanded 
drug coverage at current Medicaid matching rates. As an incentive for 
States to expand coverage up to 150% percent of poverty, Medicare would 
pay 90 percent of the States' cost of drug-only coverage expansion for 
above 100% of poverty, leaving states responsible for covering the 
remaining 10%. This policy is projected to eventually expand drug 
coverage for up to 3 million beneficiaries who currently do not have 
prescription drug assistance. It would be fully integrated with the 
Medicare drug benefit once the reform Medicare program is implemented, 
through a transitional mechanism as envisioned in all major Medicare 
drug benefit proposals.
    In addition, to make expanded drug coverage immediately available 
even before the enactment of the Transitional Low-Income Drug 
Assistance Program, states can immediately participate in a model drug 
waiver program called Pharmacy Plus that can cover Medicare 
beneficiaries up to 200% of poverty. In Illinois, for example, 368,000 
additional low-income Medicare beneficiaries, up to 200% of poverty, 
will receive drug coverage under the waiver we approved last month. 
These waivers must be budget neutral to the federal government. A 
principal mechanism that states can use to provide this expanded 
coverage in a budget-neutral way is the adoption of private-sector drug 
benefit management tools. The savings generated from these tools in 
states' existing populations can be used to finance additional drug 
coverage.
Reliable, Affordable Health Insurance Coverage Options In Medicare
    The President's framework for strengthening Medicare calls for a 
fair payment system for private plan options for Medicare 
beneficiaries, like the system that provides reliable health insurance 
options to all Federal employees in the Federal Employees Health 
Benefits program. Private plans have long been the preferred choice of 
millions of Medicare beneficiaries. This is not surprising, because the 
private plans allow beneficiaries to receive more up-to-date benefits 
than are available under traditional Medicare. The enhanced benefits 
can include prescription drugs, disease management programs, and better 
preventive care services--benefits widely available to the nonelderly 
and to Members of Congress and Administration officials and other 
Federal employees. Frequently, private plans have provided much lower 
cost sharing for required Medicare benefits as well.
    Action is needed now to ensure that these benefits remain available 
to Medicare beneficiaries, because the current Medicare+Choice system 
for paying private plans is not giving beneficiaries the options they 
deserve. Since the new payment system was implemented in 1998, hundreds 
of Medicare+Choice organizations have left the program or reduced their 
service areas, adversely affecting coverage for hundreds of thousands 
of beneficiaries--reversing what had been an upward trend in private 
plan availability and enrollment. In addition, the remaining plans are 
offering less generous drug benefits and other coverage.
    While the benefits offered by the plans that remain still provide a 
better deal for many seniors than fee-for-service Medicare plus an 
increasingly costly Medigap policy, millions of seniors who prefer 
private plans have been made worse off as a result of these recent 
changes. And without corrective legislation this situation will only 
get worse--just at the time when rapid advances in care will make it 
even more important for seniors to have these options. Indeed, based on 
the latest projections of the Congressional Budget Office, enrollment 
in Medicare+Choice will fall by more than a million over the next 10 
years as a result of inadequate payment updates. Moreover, open-network 
plans like Preferred Provider Organizations (PPOs) and point of service 
plans have become popular among privately covered individuals, yet only 
two PPOs participate in a few counties in the entire Medicare program.
    We seek to address these problems both through legislation and 
administrative action. For example, we just announced a demonstration 
project to expand health plan options in Medicare+Choice. Preferred 
Provider Organizations (PPOs) have been successful in non-Medicare 
markets and CMS is conducting the demonstration to test ways to provide 
more health plan options to people with Medicare. We hope to award 
demonstrations later this year in up to 12 geographic areas that will 
be available to enroll beneficiaries during the Fall open enrollment 
period and begin to serve enrollees next January. This demonstration 
program will test changes in methods of payment for Medicare services 
that may be more efficient and cost effective while improving the 
quality of services available to beneficiaries. The demonstration plans 
will be considered Medicare+Choice (M+C) plans and must offer all of 
Medicare's required benefits, but will also have the flexibility to 
offer greater access to drug benefits.
    The President's budget also proposes to take urgently needed 
legislative steps toward the equitable payment system for private plans 
proposed in the President's framework for strengthening Medicare. These 
proposals would modify the Medicare+Choice payment formula to better 
reflect actual healthcare cost increases, allocate additional resources 
in 2003 to counties that have received only minimum updates in 2002, 
and provide incentive payments for new types of plans to participate in 
Medicare+Choice, including PPOs. Together these augmented payments 
would address the problem of persistently low payment updates to most 
Medicare+Choice plans, making more plan choices available and improving 
benefits for millions of seniors. Because these proposals would allow 
many plans to provide or at least maintain drug coverage in their 
benefit package, they also provide another means of giving seniors 
prompt help with their drug costs.
New Medigap Options
    Because of the major gaps in the benefit package in the fee-for-
service program, supplemental coverage--often called Medigap--is an 
essential part of Medicare coverage for millions of our nation's 
elderly and disabled. The Administration shares the concerns some have 
expressed regarding the rapid increases in Medigap premiums in recent 
years: most seniors now pay much more for Medigap than they pay in 
Medicare premiums. We also agree with the leaders on this Committee 
that we can better design both Medicare and Medigap so that seniors and 
people with disabilities can get more affordable coverage, and get the 
most for the health care dollars they spend. Clearly the existing set 
of options, which require beneficiaries to purchase ``first-dollar'' 
coverage for hospitalizations and even basic services like doctor's 
visits before they can obtain any drug coverage, has become outdated.
    Yet giving seniors the option of a better benefit package, 
including prescription drugs, and more affordable Medigap plans to go 
along with it will take several years to implement. So we have also 
proposed that two new Medigap plans be added to improve beneficiaries' 
options quickly. Both of these options would be considerably more 
affordable that the current Medigap policies that cover drugs. They 
would substantially reduce cost-sharing for beneficiaries and provide 
much better protection against high costs. And they would increase the 
number of seniors with drug coverage. If we provide a one-time opt-in 
for current beneficiaries, we estimate that up to 1.5 million 
beneficiaries would choose these new policies once they are available--
and that nearly half of these enrollees would be beneficiaries who do 
not have drug coverage now. Moreover, we can achieve this significant 
increase in drug coverage among seniors right away, not several years 
down the road, while saving money for beneficiaries and the Medicare 
program. Of course, as the President has made clear, seniors should be 
able to keep their existing Medigap coverage with no changes if they 
prefer it.
CONCLUSION
    We are committed to working constructively with Congress to enact 
legislation consistent with the President's principles--so that we can 
put a prescription drug benefit into place this year. We all know that 
failing to act to meet these unavoidable challenges may lead to more 
extreme changes later, including government controls on prescription 
drugs and stricter coverage limits in Medicare. These changes would 
reduce access to needed treatments and slow the development of new 
technologies, such as promising new drugs for common cancers and other 
diseases. Instead, we must come together now to take the sound, 
careful, and deliberate steps needed to improve the Medicare program 
for today's seniors and tomorrow's. And we must take action now--these 
issues have been debated on and off for years, and seniors cannot 
afford to wait any longer. Thirty-six years from today, we should still 
have a Medicare program that fulfills President Johnson's promise of a 
secure and vibrant retirement. I thank you for the opportunity to 
discuss this very important topic with you today, and I look forward to 
answering your questions.

                                

    Chairman Thomas. Thank you, Mr. Secretary. I know a number 
of Members wish to inquire. And we always have a limited time, 
so the Chair will not conduct any questions, in deference to 
other Members. And I would urge the more senior Members, if 
they do not feel strongly compelled, that we allow others to 
participate in the questioning.
    And with that, I would recognize the gentleman from 
Illinois for questions.
    Mr. Crane. Thank you, Mr. Chairman. Mr. Secretary, some 
lawmakers believe the Medicare trustees' projection of an 
additional year of Medicare solvency--namely, to go from 2029 
to 2030--is a sign that we should not address fundamental 
reforms to the Medicare Program. They would rather focus on 
adding additional benefits to the existing program, like a 
prescription drug benefit.
    In your opinion, if the Congress were to simply add on a 
drug benefit to the existing program, how would that change the 
solvency outlook of Medicare?
    Mr. Thompson. It depends, really, on how that program is 
structured. It depends upon the total amount of the cost. If 
you used the $750 billion figure, then if you take $400 billion 
out of part A, you would reduce the solvency from 2030 to 2016. 
If you used it basically on payment of income taxes, at the 
present dollars, that would be a $2,100 tax per individual in 
America. So that is a comparison.
    If you take it out of the General Fund, the $190 billion, 
that the President has done, which has been reduced in other 
budgets, it will not in any way affect the solvency. So it 
depends upon how it is structured, and it depends upon how the 
dollars are used and where those dollars come from, 
Congressman.
    Mr. Crane. Let me ask you a question relating to drug 
therapies that Medicare does cover. I think it is safe to say 
that all Members of Congress, as well as the Bush 
Administration, want to ensure that we in Washington spend the 
taxpayers' dollars as prudently as possible. That is why, 
particularly in health care, we revisit our payment policies 
every year: to ensure that people have access to needed drugs 
and other therapies, but that we are not overpaying for 
services.
    I have been particularly involved in working on kidney 
disease related issues. And your report on developing a new 
composite rate index for renal dialysis services will be very 
helpful, as it will require legislative language. When can we 
expect to receive that report?
    Mr. Thompson. Congressman, I know that you are interested 
in this subject, and I compliment you first on your passion on 
it. It is a very important subject, and I appreciate your 
leadership.
    The Congress has requested that this report be given to 
Congress by July of this particular year. And I can advise you 
today, and all Members of the Committee, that report is in the 
process of being compiled, and will be ready on time to you and 
other Members of the Committee in July of this year, as ordered 
by Congress.
    Mr. Crane. Thank you. Is it an accurate assumption that you 
envision Epogen being folded into the composite rate? And if 
not, does the Administration recommend that we reduce payment 
consistent with the Office of the Inspector General's 
recommendations?
    Mr. Thompson. I didn't hear the first part of your 
question, Congressman.
    Mr. Crane. Is it an accurate assumption that you envision 
Epogen being folded into the composite rate? And if not, does 
the Administration recommend that we reduce payment consistent 
with the Office of the Inspector General's recommendation?
    Mr. Thompson. Congressman, all of those things that you 
have just mentioned are going to be details that are going to 
be outlined in the report that will be given in July.
    Mr. Crane. Very good. Thank you so much, Mr. Secretary.
    Mr. Thompson. Thank you.
    Mr. Crane. I yield back the balance of my time.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from New York wish to inquire?
    Mr. Rangel. Yes. Mr. Secretary, you are not under oath, but 
are you now or ever have you been a candidate for higher 
office?
    Mr. Thompson. I consider Governor a higher office, 
Congressman, and I have been a candidate in the past, candidate 
for Governor. I am currently not a candidate for Governor. I am 
very pleased to be Secretary of Health and Human Services, one 
of the largest Departments of the Federal Government, 
supporting President Bush.
    Mr. Rangel. And you participated in no activities that will 
allow us to believe that you could be considered a candidate?
    Mr. Thompson. I don't know what you are driving at, but if 
you think that somebody put out a poll in Wisconsin a week ago 
to see if I would come back, that poll was not commissioned by 
me, paid by me, and I didn't know anything about it until I 
read about it in the newspapers, the same way that you read 
about it and other people read about it.
    I am not a candidate for Governor; do not intend to be a 
candidate for Governor. I intend to finish my term as Secretary 
of this Department, Congressman.
    Mr. Rangel. Well, I didn't know about the poll but, like 
the Chairman, I make this up as I go along.
    Mr. McDermott. Mr. Rangel, did he say he would not run for 
Governor?
    Mr. Rangel. Yes.
    Mr. Thompson. I know that is going to please a lot of 
Democrats in Wisconsin. I wanted to make sure that you get that 
on the record. Is that correct, Congressman McDermott? Because 
it indicates I still could win.
    [Laughter.]
    Mr. Rangel. Well, thank you, Mr. Chairman, for opening up 
this new opportunity for us to explore our political agenda.
    You had indicated more than once that you are concerned 
about the long-term fiscal concern of the 40 million people 
that have Medicare. And you are aware that in 2030 the Baby 
Boomers will become eligible. Do you have any idea what impact 
this will have on the 40 million, or what number we expect will 
become eligible as a result of the Baby Boomers?
    Mr. Thompson. Congressman Rangel, our actuaries have put 
that into the report. I do not have that number at the tip of 
my fingers.
    Mr. Rangel. Some say 78 million, or double, close to 80 
million.
    Mr. Thompson. It could be. I know we included it in the 
report, Congressman.
    Mr. Rangel. Okay. Now, I don't know why in the budget for 
Medicare we did not include that area in our budget as it 
relates to the Tax Bill. It seems to me that the reason that we 
had the sunsetting of the Tax Bill was to make certain it fit 
within the budget. Now we understand that this week it is going 
to be recommended by the majority, as did the President, that 
we make the tax cuts that have been enacted permanent.
    Now, our people tell us that that will cost us $500 billion 
in this decade, and some $4 trillion in the next decade. I 
don't think these figures are being challenged. Have you 
considered this, as you project the Medicare obligations at 
2030? Or is that beyond your pay level?
    Mr. Thompson. I have not, Congressman. I do have the figure 
at 2030. There will be $70 million, that was the figure that 
was used. In regards to the tax policy, I have not considered 
that in our analysis of Medicare. We have based that upon the 
empirical data that we have within the Department and the 
Administration, but we have not factored in any of the tax 
policies. That is not in my Department, and we have not 
factored it in.
    Mr. Rangel. That is very helpful. So to restate your 
position, it is that as it relates to the future of Medicare, 
tax policy has not been a consideration of yours?
    Mr. Thompson. It has not.
    Mr. Rangel. Thank you.
    Chairman Thomas. I thank the gentleman. Just so everyone 
understands the circumstances in terms of the tax provisions, 
the House last year voted on a number of tax measures. Every 
time the House passed a tax measure, it was permanent. The only 
time the tax measures were not permanent was when the House 
voted on the conference report, including the Senate, because 
of the Senate's reconciliation rules. So the only reason we 
don't have permanent tax structures today is because of the 
rules of the Senate; not because of any decision that was made 
in the House.
    The Chair would recognize for inquiry the gentleman from 
Florida.
    Mr. Shaw. Thank you, Mr. Chairman. I will be brief, in 
carrying forth your stated policy of trying to get to the 
junior Members before Mr. Thompson has to leave.
    Mr. Secretary, in reading your written testimony, I was 
struck by a comment that you attributed to President Johnson, 
in which you said, and I quote, ``No longer will older 
Americans be denied the healing miracle of modern medicine. No 
longer will illness crush and destroy the savings that they 
have so carefully put away over a lifetime.''
    That is, I think, something that all of us should try to 
keep in mind. That is why we are here. That is why we are 
considering prescription drugs and how to modernize the 
Medicare Program.
    You then go on to say that 36 years later President Bush 
believes it is time for our Nation to come together and renew 
that commitment. I think that coming together is something that 
has been too rare these days. And we have seen so much of 
politicking, that it is ``my way, or the highway.'' And I think 
at this time that we in this Committee, and we in this 
Congress, come together, and we as two bodies of the 
Legislature come together. And I am hopeful that whatever 
product we will eventually come out with in this Congress, I 
hope that this time the Senate will move forward on our plan, 
or their plan, and get us into conference. Because it is the 
seniors who are losing ground.
    Over the last 36 years, since President Johnson made that 
comment, medical treatment has changed immensely. Seniors are 
living longer. Their quality of life is better. And much of 
that is due to the miracle of modern medicine and medication.
    I was at Eckert Drugs in south Florida the other day, in 
Fort Lauderdale. And I was waiting to pick up a prescription 
that I had dropped off, and saw this elderly woman in front of 
me gathering together her prescriptions, and then having to 
give half of them back to the druggist because she simply could 
not afford it. That is not acceptable. We can do a better job, 
as you very aptly set forth in your comments.
    I have no questions for you. I believe that your statement 
is comprehensive. It is complete. And I hope that all of the 
Members will carefully examine it, and try to govern ourselves 
in accordance with the framework that you set forth.
    I am delighted to have you where you are. I know the good 
work and commitment that you have had in every field that you 
have been in. Whereas I can feel that you are not running in 
Wisconsin is Wisconsin's loss; but it is certainly this 
country's gain to keep you exactly where you are during the 
period of time that we are in now, in going back and 
reauthorizing welfare reform, as well as these other very, very 
important programs for today's seniors. Thank you, Mr. 
Secretary.
    Mr. Thompson. Thank you, Mr. Shaw, for your comments. I 
appreciate them very much. And thank you for your leadership on 
welfare reform, as well as on this subject.
    Chairman Thomas. Does the gentlewoman from Connecticut, 
Chairman of the Health Subcommittee, wish to inquire?
    Mrs. Johnson of Connecticut. Thank you, Mr. Chairman.
    I also want to applaud your testimony, not only because it 
looks at modernizing Medicare by adding prescription drugs, but 
because it looks at better coverage of preventive health care, 
and will prepare the system to deal with the growing dramatic 
need for better ability to manage chronic illness. You are 
modernizing. Through your proposals, we have the opportunity to 
modernize Medicare as a health program, in addition to making 
it a far more efficient and cost effective program. I 
appreciate your testimony. I appreciate your work with us on 
making it a more errors-free program, so that there will be 
both less human suffering and less public cost for medical 
errors.
    I want to ask you just one question. One of the many issues 
we are working on is a response to the Inspector General's and 
the General Accounting Office's findings that we are paying 
much more for part B drugs and biologicals than we should. We 
are currently reimbursing them at 95 percent of the average 
wholesale price, and these prices are much higher than the 
price manufacturers charge other providers.
    As we look at how to fix this, we on this Committee are 
looking at a competitive bidding model. There are some other 
models out there. What is your opinion on the competitive 
bidding approach, versus other mechanisms to set prices in the 
part B area?
    Mr. Thompson. Well, first, let me thank you for your 
leadership on preventive health. This is absolutely a passion 
of mine. I think the way we deliver health care needs to be 
strengthened and improved. And one of the ways is certainly in 
preventative health. We wait until people get sick, and then we 
spend lots of dollars to get them well. And we could save a lot 
of money by getting people healthy, and keeping them healthy, 
at the beginning. So I applaud you for that.
    Competitive bidding is something that we support. We are 
somewhat concerned about if we have the sole responsibility of 
negotiating prescription drug prices with the drug companies, 
because Medicare uses up 50 percent of the drugs, and we would 
be the 900-pound gorilla in the market, and we would distort 
the market if we did that. But competitive bidding is 
absolutely vital. I fully and enthusiastically support it.
    Mrs. Johnson of Connecticut. Thank you. Mr. Chairman, I 
yield back my time.
    Chairman Thomas. Thank you. Does the gentleman from 
California, the Ranking Member on the Health Subcommittee, wish 
to inquire?
    Mr. Stark. Thank you, Mr. Chairman. And I would just like 
to correct the mistaken impression that the gentlewoman from 
Connecticut would have left when she said that State-level 
experts don't have experience to testify on national issues. In 
this particular issue, Ms. Chellie Pingree, who was first 
accepted by the minority and then just yesterday turned down, 
has testified before State legislatures in Texas, New York, 
Minnesota, Washington, and Arizona. She has testified before 
the American Association of Family Practitioners, the American 
Public Health Association, the American Medical Association, 
the AARP, the New England Regional Conference on Prescription 
Drugs, the Conference on Affordable Health Care, and the 
International Association of Machinists, if that is too 
political.
    None of the witnesses on the schedule today, with the 
possible exception of the Honorable Secretary, have had any 
experience in running a drug program. None of the Members of 
this Committee have any experience running a drug program. The 
one witness that we went to find who wrote a drug program for a 
State and saw it enacted was denied.
    Had the Republicans not been afraid of hearing some new 
ideas, they would have found that the Maine program establishes 
a program in which the State serves as the pharmaceutical 
benefits manager (PBM) for 325,000 Maine residents who don't 
have a prescription drug benefit.
    They would have heard that Ms. Pingree's program, which she 
wrote when she was in the Maine State Senate, prevents 
profiteering and prevents the pharmaceutical companies from 
hindering the sale of prescription drugs in Maine. It 
authorizes interstate cooperation for bulk purchasing and cost 
saving. It provided for emergency prescription drug prices if 
the negotiations don't produce prices comparable to the lowest 
prices paid in Maine. And the Maine legislation is 
comprehensive. It serves as a model for more than 20 other 
States across the country who have a program.
    And as I say, to put one's head in the sand and submit that 
people with this kind of expertise should not be heard before 
this Committee, is to prejudge in the worst kind of way what we 
will do to help the American public.
    Now, we have the Secretary here. And I want to commend him, 
because recently, Mr. Secretary, you were successful in 
negotiating lower prices for the drug Cipro. It was needed for 
a national emergency, and you were able to get the government a 
good deal.
    Would you support proposals to provide you with the power 
to negotiate with the pharmaceutical industry on behalf of 
Medicare beneficiaries to get them a better deal, given a free 
hand?
    Mr. Thompson. Congressman, I am not opposed to it, in 
regards to negotiating that. I want to caution, however, that 
the problem is that Medicare is such a huge purchaser of 
drugs--about 50 percent--that we would more than likely, if we 
did that, distort the market. But if Congress gives me the 
authority to do that, and passes the legislation, I certainly 
would do it.
    Mr. Stark. I, for one, Mr. Secretary, would feel very 
comfortable with you having that authority. You certainly 
wouldn't raise the drug prices and, used judiciously, it might 
help.
    Another specific concern that many of us have--and I wonder 
if you or the Administration have any policy on this--but it 
has been suggested that the tremendous amount of consumer 
advertising for specific prescription drugs, one, is driving up 
the utilization; it is driving up the costs. And there have 
been several proposals to address this concern, in either 
making more facts available, or limiting somehow the amount of 
advertising that is going out to the public for classified 
drugs and prescription drugs.
    Do you have any specific proposals or any specific concerns 
about this huge amount of consumer advertising for prescription 
drugs?
    Mr. Thompson. As you know, Congressman Stark, we have just 
negotiated a new Prescription Drug User Fee Act (PDUFA) bill. 
That is a prescription drug utilization proposal that is going 
through Congress, that does require the Food and Drug 
Administration (FDA) to supervise and to regulate some of the 
advertising put out by the pharmaceutical companies. That is 
the first step in that arena, and it has been agreed to by the 
FDA and by my Department and the negotiators for the 
pharmaceutical industry.
    Mr. Stark. Well, you are to be congratulated. And I look 
forward to seeing that, because I share a concern, that I am 
sure you had; and that is that we were just sending people off 
to their doctors to get pills because the pictures in four 
colors look pretty good. And thank you very much.
    Mr. Thompson. Thank you, Congressman.
    Mr. Stark. Thank you, Mr. Chairman.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from New York wish to inquire?
    Mr. Houghton. Thank you, Mr. Chairman.
    Mr. Secretary, good to have you here. I would like to get 
back to this competitive bidding issue. I basically believe in 
competitive bidding. I think it is the right thing. It is sort 
of endemic to our country. We work that way. However, there are 
certain areas that are not particularly good for competitive 
bidding. And I know that, in terms of various products such as 
oxygen and things like that, you have had some test cases and 
pilot programs; one of them being in Florida.
    And the question is, have you found out anything from those 
projects which makes competitive bidding better, or worse? Or 
what is your feeling on this?
    Mr. Thompson. We have always felt, Congressman Houghton, as 
you did in your business career, that competitive bids is the 
proper and best way to get the proper price, and you have the 
opportunity then to look at whether or not, not only price, but 
conditions, utilization, durability, all of these other things, 
are taken into consideration when you do that.
    In the area of oxygen, I know that you and some of your 
constituents have some concerns. I wish I would know about 
those specific concerns. I will follow up on them, and find 
out. But as a general policy, as the Congresswoman from 
Connecticut pointed out, we think competitive bidding is the 
proper way to go.
    [The information follows:]

                       U.S. Department of Health and Human Services
                                               Washington, DC 20201
    Q: Representative Houghton: What have you found from the 
competitive bidding projects?
    A: Competitive bidding is a useful tool for improving and 
strengthening Medicare by using market forces, rather than government 
fee schedules, to establish payment levels. We have found that 
competitive bidding has been successful in reducing costs for the 
Medicare program, while still ensuring beneficiaries have access to 
needed services. Competitive bidding saves money for both the program 
and for our beneficiaries, who save money in their copayments.
    The Balanced Budget Act 1997 gave CMS the authority to conduct 
bidding demonstrations for durable medical equipment, prosthetics, 
orthotics, and supplies (DMEPOS), which we implemented in Polk County, 
Florida, and San Antonio, Texas. These sites are good test sites since 
they have a reasonably large size, relatively large numbers of 
suppliers, and high average spending for durable medical equipment, 
prosthetics, orthotics, and supplies. Savings differed by demonstration 
site, but the savings averaged 20 percent in the latest bids at both 
sites.
    We also took several steps in order to meet our goal of maintaining 
high quality in the Medicare Program.
           We chose multiple suppliers in each category so that 
        competition is an incentive for high quality; We developed 
        specific quality standards for the demonstration that the 
        suppliers must meet including a bid package with ten pages of 
        quality standards for the product categories;
           We required winners of the bidding competition to 
        pass site inspections and reviews by an expert panel; and,
           We hired an ombudsman for each site to solve any 
        problems, including quality issues.
    We also took steps to ensure that small businesses could compete on 
a level playingfield with the large suppliers. A large portion of the 
durable medical equipment industry is made up of small businesses. By 
choosing multiple winners for each product category, we were able to 
choose many small suppliers rather than only the largest suppliers. For 
example, in San Antonio, the suppliers were not required to service the 
entire area, but could choose to bid only for one county. As a result, 
approximately 90 percent of the winning suppliers were small 
businesses.

                                

    Mr. Houghton. Very good. Thanks.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Pennsylvania wish to inquire?
    Mr. Coyne. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. I wonder if you could explain why 
the President budgeted the same amount for Medicare this year 
as he did last year, and including the new benefit that he is 
proposing? It just seems to me that every year that we wait to 
adopt a drug prescription program, the costs get higher, and 
you can't make ends meet when you budget the same amount as you 
did last year.
    Mr. Thompson. Congressman, first off, I think the President 
should be applauded by putting in this year after year, because 
he believes so passionately and strongly about refining and 
strengthening Medicare. That is point number one.
    The second point is, we base this upon what the actuarial 
individuals from the Centers for Medicare and Medicaid Services 
(CMS) gave the Department and Office of Management and Budget 
(OMB). It was based upon their assumptions that we put that 
amount in.
    And the third thing, in my testimony I also pointed out 
that the Administration is certainly willing to work with this 
Congress. We know Congress has put in the figure of $350 
billion. I have communicated that personally to the Chairman, 
as I have to the Committee this morning, to work with that 
figure. If that is the figure that Congress wants, I think we 
can develop a bipartisan package around that figure.
    Mr. Coyne. Well, by budgeting the same amount as last year, 
what you are saying is that doesn't mean that seniors can 
expect any less in the way of benefits; even though we are 
going to have the same budget as last year?
    Mr. Thompson. Congressman Coyne, we attempted to look at 
what the actuarial study gave us. We have put that information 
into the budget, and that was at $190 billion. Last year, we 
had $155 billion; raised to $190, but we started out at $155 
billion.
    Mr. Coyne. Thank you.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from California, Mr. Herger, wish to inquire?
    Mr. Herger. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for being here to testify on 
this very important issue. The district that I represent in far 
northeastern California is very rural, heavy agriculture, 11 
national forests. And we have a larger than normal percentage 
of seniors who live in our area. And of course, you know we 
even have added challenges, being in a rural area, having to do 
with health care.
    In this area of prescription drugs, more than two-thirds of 
seniors have prescription drug coverage. For the other one-
third with no coverage, seniors may face difficult choices 
between buying the prescriptions and other life essentials. One 
of the greatest challenges to these seniors is the high cost of 
these prescription drugs. And because seniors without coverage 
pay the highest price for drugs at the retail pharmacy, 
Congress has been examining ways to lower the costs of these 
pharmaceuticals.
    In this regard, Mr. Secretary, could you tell me, what does 
the Administration support to reduce the costs faced by these 
seniors?
    Mr. Thompson. Absolutely, Congressman, and I thank you for 
the question. There are several things this Administration is 
doing. The first thing we put in the budget is a proposal of 
$77 billion for transitional prescription drug coverage for low 
income beneficiaries. We figure that costs will be about $8 
billion in the first 3 years. We expect that a fully-integrated 
Medicare benefit will be adopted and implemented and effective 
after that time. This proposal would allow States, like 
California, which is close to 100 percent of poverty, to be 
able to use their Federal match under the Medicaid law, up to 
100 percent. And then beyond 100 percent, up to 150 percent of 
poverty, the Federal Government would come in with 90 percent.
    It is not a Medicaid, nor is it a Medicare Program. It 
would allow complete discretion. As Congressman Rangel has 
indicated, I am a big advocate of that, to give the States 
complete discretion to set up that program, how many drugs to 
be covered, and so on. That is an immediate step that, if 
Congress passes it, I am fairly comfortable and confident that 
Governors would enthusiastically endorse it and set up their 
programs.
    The second thing, my Department has set up a ``waiver,'' 
called ``Prescription Plus.'' And this is a waiver that would 
allow States to set up a program up to 200 percent of poverty. 
A lot of States are looking at it. The State of Illinois has 
already adopted it. It is budget neutral. And it would allow 
for preventative care. And it will allow for States to have 
that waiver.
    We have got a copy of that waiver right here that, 
hopefully, you would take into consideration and give to your 
California Governor, and maybe he would apply for it, as well.
    The third thing is, we have a prescription card, that the 
courts have stopped. But now that we have entered a new 
proposed rule, we think that that is going to receive more 
favorable approval from the pharmacists, as well as the 
pharmaceutical industry. And, hopefully, we can get that 
passed.
    So those three immediate steps; and then the final step, 
which is the most important one, is strengthening Medicare with 
a prescription drug benefit.
    Mr. Herger. Well, I thank you very much. That does sound 
like that would be very helpful.
    Mr. Thompson. Thank you, Congressman.
    Mr. Herger. And Mr. Chairman, I yield back the remainder of 
my time.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Michigan wish to inquire?
    Mr. Levin. Thank you very much. And welcome, Mr. Secretary. 
I just want to say, very briefly, how uncomfortable I am with 
the Chairman's decision about witnesses. I think really it is 
an unfortunate misuse of power. And I think it is indeed a 
slippery slope, as evidenced by Nancy Johnson's comments. I 
don't think we should be pre-censoring witnesses to come before 
this Committee.
    Secondly, I just want to point out what I think, Mr. 
Secretary, is a deep inconsistency. There is a claim there is 
money in this budget for a substantial prescription drug 
benefit. But when you make permanent the tax cuts, I think a 
good portion of that money is otherwise used. And you have in 
the administration proposal, or it has, a provision that the 
Balanced Budget Act budget cuts would go into effect, hospitals 
and others, home health care, et cetera. Those provisions are 
not realistic. And we are going to have to find the money. So 
that $350 billion is really more imaginary than anything else.
    And I just wanted to say to you, we like working with you. 
The problem is, Mr. Secretary, that that isn't the pattern that 
has been followed in this Committee. There has really been no 
bipartisan effort on welfare reform, and I guess there isn't 
going to be on this. There will be an effort to push through a 
proposal; send it to the Senate. Essentially, that withdraws 
from you your statement that you want to work with Members of 
the Committee.
    Let me say, fourthly, where the gentleman from California 
says two-thirds of the people have prescription drug benefits, 
as you know, at least half of that two-thirds have very 
inadequate coverage. So the picture is much more dire.
    So let me ask you, why not place prescription drugs within 
Medicare cleanly, like is true for hospital reimbursement and 
physician and other provider reimbursement? Why not just place 
it in there?
    Mr. Thompson. The problem, Congressman, is I don't think we 
would ever have a chance then to strengthen Medicare. I think 
that this Congress, if they pass the prescription drug coverage 
solely--there would be very little appetite to go back then and 
try and redo, try to fix, try to strengthen, try to make 
competitive, try to add a casualty loss benefit.
    I don't see that happening. I may be wrong, but I don't see 
it happening. And that is why the President and my Department 
and myself, personally, feel that we have this one opportunity, 
with the momentum for prescription drug coverage, to do 
something about really improving and strengthening Medicare. 
And I don't think we should lose that opportunity.
    In regards to bipartisan, I hope that we can work together 
on a bipartisan basis. I have mentioned that, Congressman, and 
I have mentioned that many times to you when we have discussed 
this.
    Mr. Levin. No, and we appreciate that, and we are willing 
to do it. The problem is that people on your side in the House 
won't do that.
    And let me just say, on your statement about prescription 
drugs and Medicare, essentially that means, first of all, I 
think it indicates a lack of trust in this Committee. And 
second, it holds prescription drugs hostage. If the reason not 
to place it in Medicare in a clean way is that you are afraid 
it takes the heat off other changes, you are holding it 
hostage. And this has been going on for years. And it sells us 
short. I mean, we have worked on all kinds of reforms of 
Medicare. We don't need to hold prescription drugs hostage. And 
let me just ask you quickly----
    Mr. Thompson. Could I respond to that, Congressman?
    Mr. Levin. Sure.
    Mr. Thompson. I don't think we are holding it hostage. You 
know, that is your terminology, and not mine. What I see this 
is as a golden opportunity. Being a trustee of Medicare, I see 
the future as being very bleak. In 2016, which is not that far 
in the future, we are going to see a leveling off and a decline 
of the surpluses. And by 2030, it is going to be broke. And I 
think it is time for us to address this. Every year that we 
wait, it is going to be more difficult to fix that particular 
problem.
    Mr. Levin. All right.
    Mr. Thompson. And you have good faith. And I appreciate 
that. I just think we should do it now, sir.
    Mr. Levin. The trouble is, this has been going on year 
after year after year. And so in essence, prescription drugs so 
badly needed are held hostage because of the failure to do 
something else. And that isn't a good excuse, when you look in 
the eye seniors who can't afford prescription drugs.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Iowa, Chairman of the Budget Committee, wish to inquire?
    Mr. Nussle. Thank you, Mr. Chairman.
    First, I guess, a couple of quick observations. The budget 
that everybody keeps referring to is the President's budget, 
and the budget that the House wrote and passed. I am glad 
everyone is referring to it, and appears willing to enforce it.
    I guess my further observation would be that we still have 
no budget from either the Democrats or the Senate. We have no 
Medicare plan from the Democrats or the Senate. We have no 
prescription drug plan from the Democrats or the Senate. But 
the House did pass a budget.
    Just for your information, Mr. Secretary, you had said 
earlier, and I just want to clarify this, if there was some 
confusion. It was not my intention when I wrote the budget, nor 
was it the House's intention when we passed the budget, to 
indicate that we wanted to out-bid you with regard to a 
prescription drug benefit.
    And I worked closely with the Chairman of the Committee on 
Ways and Means in crafting this budget proposal with regard to 
Medicare. Our intention was very clear. We did not feel that 
prescription drugs were the only issue that we needed to 
address. It is a vital issue. As the gentleman from Florida 
indicated, Mr. Shaw, we have all had that experience, where we 
have been in the drug store in our district, and we have 
watched it firsthand; or we have had constituents come to our 
meetings and talk about the choices that they are having to 
make.
    But let me just, if I could, amplify the choices that we 
are making in Iowa. We are eighth in the quality of health care 
delivery and health care services, eighth in quality. And yet, 
Mr. Secretary, we are 50th in reimbursement. If I bring a 
prescription drug benefit back to the constituents of Iowa, 
what will happen, if that is all I bring back, is that they 
will have this great new prescription drug benefit under 
Medicare. But my doctor will have to leave, because 
reimbursements are down. And we are already experiencing that. 
Doctors are leaving rural areas in Iowa. It is difficult to 
retain or to recruit new providers to our area.
    So what will happen is, the doctor leaves. And of course, 
if the doctor leaves, and the health care provider is not 
providing those services in the hospital, and the hospital 
can't pay its bills because their reimbursement system is 
broken, the hospital closes. Well, now all of a sudden, all of 
your health care professionals leave town: a little town like 
mine of Manchester, 5,000, with a small little hospital that 
has been thriving but is now struggling. All of those folks 
leave town, because the Medicare system is not providing the 
services that they need to for seniors.
    And so what happens? Now my seniors, that we have provided 
this prescription drug benefit to, have probably nowhere to go 
on Main Street to fill their prescriptions, because the 
pharmacist left town. Now they have to drive 50 miles down to 
Cedar Rapids to fill their prescription--assuming that Cedar 
Rapids has a hospital that is open and prescription drug 
benefits that can be utilized.
    What I am getting at here is that we need help in rural 
areas. I know I am singing to the choir, because of your 
experience in Wisconsin. I believe you are 48, which is not too 
far behind Iowa. What is the Administration prepared to do to 
eliminate the rural/urban disparities? That is my question.
    Mr. Thompson. Well, first off, Congressman, you made a 
statement at the beginning that I disagreed with you in regards 
to your figures. I do not disagree with you. In fact, I 
heartily endorse and agree with what you did in the budget. I 
think you did an excellent job, and I applaud you and commend 
you for that.
    In regards to rural reimbursements, you are talking to the 
choir. As Governor, I fought this fight many times out here, 
indicating to Congress that they have to change it. The truth 
of the matter is that the reimbursement formula is based upon a 
statutory formula. And we implement the statutory formula. And 
the only ones that can change it are, of course, Congress. And 
so we are looking for you to change it. And I wish that you 
would, and hope that you would.
    You have to take into consideration that 73 percent of the 
reimbursement formula is based upon wages, and that is how the 
reimbursement formula was set up. And so if you are going to 
change the formula, you have got to address the wage issue. 
Because the wages in New York are higher than they are in Cedar 
Rapids, Iowa, and higher than they are in Elroy, Wisconsin. But 
that comprises 73 percent of how the formula is structured.
    So if we are going to reimburse differently, we are going 
to have to change the formula and take in factors like the 
rural health incidence, like the declining populations, like 
the fact that health care providers are leaving rural areas--
rural Iowa and rural Wisconsin. Those kinds of factors should 
be built into a reimbursement formula to make it more 
equitable.
    And that is something that the Chairman, Chairman Thomas, 
is working on; on the provider payments. But the only way you 
are going to change it is to change the reimbursement formula, 
and that requires congressional action, not administrative 
action.
    Mr. Nussle. And will the Administration support action 
similar to that? I know you haven't seen the proposal yet, but 
you would be willing to support it?
    Mr. Thompson. I haven't seen the proposal, but it is 
something that I, personally, have been involved in for a long 
time. And I can't imagine that I could, in good faith, not 
support it.
    Mr. Nussle. Thank you.
    Mr. Chairman, just for the good of the order, there have 
been some comments, too, about somehow making tax cuts 
permanent not fitting within the budget. We have a budget. The 
CBO has scored the provisions to fit within the budget, and it 
does so.
    There was a gentleman who made a statement, something 
about, ``I think it makes it more difficult.'' Well, that is 
fine, but CBO and OMB have scored it, suggesting it does fit. 
So whether you think it fits or not, we have our score keepers 
telling us that in fact it does. Thank you, Mr. Chairman.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Maryland wish to inquire?
    Mr. Cardin. Thank you, Mr. Chairman, Mr. Secretary.
    Mr. Thompson. Thank you, sir.
    Mr. Cardin. I would hope that, in regards to reimbursement 
for needed preventive health care services and benefits, that 
we would not delay action because of other objectives that we 
are trying to achieve.
    I remember very well Chairman Thomas' help when he was 
Chairman of the Health Subcommittee, when we expanded Medicare 
to include a whole host of new preventive health care services. 
That was the right decision we made, when we included those 
services, and we didn't wait until everything could be done in 
everyone's definition of ``reform.'' And to me, prescription 
drugs falls into the same category.
    You and I both know that seniors need to take their 
medicines in order to stay healthy; that if they don't take 
their prescription medicines, they are more likely to have a 
stroke, or more likely to need an amputation, or more likely to 
be disabled and not even able to get around. And that is just 
going to add to health care costs. We shouldn't say, well, this 
is the sugar for making some of the other changes in Medicare 
that are needed. I would just hope that our inability to agree 
on an overhaul of Medicare does not prevent us from adding a 
benefit within the Medicare system that is desperately needed 
by our seniors and our disabled population.
    We should debate how to implement a prescription drug 
benefit. It is costly. It does cost the system money, certainly 
in the short term. But I must tell you, the actuaries have said 
that the Medicare trust fund is in its best shape since we have 
been making these projections. And the actuary actually said 
that he thinks that these figures are more reliable this year 
than they have been in any previous year. So I think we do have 
some elbow room to work with within the current Medicare 
system.
    Let me just point out four factors I hope we could agree 
on, and I would like to get your reaction to them: That a 
prescription drug plan, first, should be voluntary, because 
there are some seniors who have good health care benefits today 
that include prescription medicines, and they shouldn't be 
required to sign up for a program they don't need.
    Second, that it should be a benefit available to all 
seniors. It shouldn't be means tested. It should be available 
to all of our seniors. And I think the leadership on both sides 
of the aisle are committed to that point.
    Third, that the benefit needs to be a guaranteed amount. As 
Mr. Levin said, there shouldn't be any difference between a 
prescription drug benefit and the benefit for physicians 
services. Seniors should know that it is going to be covered. 
Now, if you get a better plan out in the private sector or in 
Medicare+Choice, fine. But at least you know that there is a 
guaranteed benefit level, by statute, that every senior is 
going to be able to receive.
    And then fourth, we have to put enough subsidy into the 
program that we don't have adverse risk selection. And I know 
the current Chairman of the Health Subcommittee has been very 
strong about that point.
    I would hope that, at least as a starting point, we could 
agree on those four principles. And I would appreciate your 
response.
    Mr. Thompson. Well, first, let me respond to your basic 
premise about the need to strengthen Medicare. I have been a 
trustee now for a little over a year. And all of the actuaries 
and all of the studies indicate that Medicare is going to go 
broke. Last year it was 2029, and it is extended this year to 
2030. But they still look at the underlying assumption that by 
the year 2016 the amount of money is going to be going down.
    Mr. Cardin. But Medicare has always been projected, ever 
since we have done these projections, to be going broke. So 
this is nothing new. We have never made a commitment to long-
term solvency.
    Mr. Thompson. But when you add a benefit like prescription 
drugs, which is going to be expensive, depending upon how you 
pay for it, it is going to more than likely be a drag on the 
longevity of that particular plan. Therefore, it seems prudent 
to look at the overall strengthening of Medicare now, when you 
put in the prescription drug benefit. That is what the 
President feels. That is what I feel. And that is what the 
Department feels.
    And we have this opportunity. And I am not questioning your 
good intentions. I am not questioning anybody's intentions. I 
am just looking at the overall opportunity to strengthen 
Medicare. I think it is now with prescription drugs. And I 
don't see that opportunity availing itself in the future. That 
is why I think we should do it now.
    In regards to the four principles, I have no difficulties 
with your four principles. But I also want you to know that you 
are going to have to look into the dollar amount--the dollar 
amount--that you come up with for prescription drugs, and how 
you pay for it. You have got about five indicators that you can 
ratchet up or down to meet that. And so you can't get locked in 
with a dollar amount at this particular point in time, but the 
principles are solid.
    Mr. Cardin. Let me just in conclusion point out that we 
wouldn't have colorectal screenings, or prostate cancer 
screenings, or osteoporosis bone density screenings today, if 
we would have required those improvements to wait until we got 
everything done. I hear your point, but these are important 
preventive health care services. You have been a leader on 
this. We have got to get it done. Thank you, Mr. Chairman.
    Mr. Thompson. Thank you, Congressman Cardin. Thank you for 
your leadership on welfare, as well.
    Chairman Thomas. I thank the gentleman, although perhaps 
our memories are becoming more selective the farther we are 
getting away from that period. Because I recall that the 
cooperative attempt between the gentleman and myself was called 
H.R. 15, which was clearly the nucleus, or the core, around 
which a number of significant changes to the Medicare Program 
were made which finally became the Medicare Reform Act in 1997. 
So there were a number of other items that were attached to it, 
as well. They didn't travel the lonely journey by themselves.
    Mr. Cardin. Just very quickly, Mr. Chairman, I agree with 
you. So we have already fixed the system. Now we can put the 
prescription drugs in.
    Chairman Thomas. The problem was, the fixes were forced 
under an Administration that was hostile to the competitive 
ideas. This Administration is receptive of the competitive 
ideas. And we are going to continue to build on the future 
successes the gentleman from Maryland has participated in. And 
I look forward to his enthusiastic participation in the latest 
round.
    Does the gentlewoman from Washington wish to inquire?
    Ms. Dunn. Thank you very much, Mr. Chairman.
    It is good to see you, Mr. Secretary. Thanks for coming 
before us this morning. I enjoyed your interchange with Mr. 
Nussle on the topic of the problems we have in rural America, 
because I have some of that type of territory in my home State 
of Washington. And it is terribly important for us to get some 
of these problems ironed out. Part of the thinking behind one 
of my proposed pieces of legislation has to do with making 
accessibility easier for people in rural areas.
    I wanted to make a brief statement, and then ask you a 
couple of quick questions. You are currently drafting a policy 
that will address the issue of Medicare coverage of drugs that 
are usually administered by a physician. My legislation, as you 
know, provides coverage for self-injected biologics that people 
can provide to themselves, in Medicare part B, so that patients 
can have equal access to these drugs; as well as to assist in 
encouraging choice and competition between infused and self-
injected drugs.
    So two questions: When do you plan to make a decision on 
the self-Administration policy, and how expansive, in terms of 
the drugs covered, will your policy be? I would like to know 
the answer to that.
    And second, I would like to get your thought on giving 
seniors access to self-injected biologics that would be covered 
under Medicare.
    Mr. Thompson. I am sorry, could you just mention the last 
question again?
    Ms. Dunn. The second question was, I would like to get your 
perspective, what your thoughts are, on Medicare's coverage of 
self-injected biologics.
    Mr. Thompson. First off, I thank you for your comments on 
rural Washington. It affects rural Iowa, rural Michigan, the 
rural Dakotas, and rural Wisconsin.
    In regards to the self-injection, as you know, my office 
has been in communication with you, Congresswoman. And that 
report is coming out relatively quickly. You will be receiving 
it. I will be talking to you about that in the future.
    In regards to the details, I am not at liberty to discuss 
those details right now. Those details will be coming forth to 
me. I will be briefed on it, I believe, week after next. And 
those details are still being worked on, so I cannot go into 
the finite details at this point in time.
    With the third thing, it depends upon the cost; it depends 
upon the drugs; it depends upon the equipment. All of these 
things have to be taken into consideration. But overall, my 
basic principle is to support you and the kind of legislation 
you have introduced.
    Chairman Thomas. Does the gentleman from Georgia wish to 
inquire?
    Mr. Collins. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. I appreciate the fact that you 
are here offering some proposals for the modernization of 
Medicare. I enjoy traveling throughout the Third District of 
Georgia, and I ask many times for the opportunity to speak with 
senior groups. I also like to inform them that there is a lot 
of rhetoric that comes out of Washington when it pertains to 
their health insurance. And it is in my opinion--and I ask if 
it is in yours--that Medicare is a health insurance program for 
seniors and disabled. It is an entitlement program that is 
incorporated in provisions of law. Is that not true?
    Mr. Thompson. That is correct. You are absolutely correct, 
Congressman.
    Mr. Collins. And Mr. Secretary, that health insurance 
program is funded with particular provisions of law that are 
non-discretionary to the Congress. Is that not true?
    Mr. Thompson. That is correct.
    Mr. Collins. So therefore, when you discuss any other 
provisions of law that bring revenue into the Federal Treasury, 
you are actually not directly referring to the health insurance 
for seniors and disabled, because there are specific provisions 
of law that require that those health insurance provisions and 
coverage be paid. Is that not true?
    Mr. Thompson. Yes.
    Mr. Collins. So what you are proposing actually is changes 
to policy that will directly affect the benefit structure of 
that health insurance.
    Mr. Thompson. Yes.
    Mr. Collins. You are not making any proposals that will 
directly or indirectly affect, or have an effect, on changes of 
tax policy.
    Mr. Thompson. That is correct.
    Mr. Collins. Because by law, it has to be paid, whatever 
policies that Congress accepts----
    Mr. Thompson. That is correct.
    Mr. Collins. And the President will sign. In your 
comments--and I hear it oftentimes--that the cash flow of 
Medicare, or a portion of that cash flow, is referred to as 
``surplus.'' But in essence, in your comments on the second 
page, you refer to it as I do.
    Mr. Thompson. As what?
    Mr. Collins. As I refer to it. And that is as a cash flow. 
Truthfully, there is no surplus.
    Mr. Thompson. There is no surplus.
    Mr. Collins. Because a surplus is when you have funds 
beyond your liability. In the long-term liability of this 
program, based on the policy, there is no surplus.
    Mr. Thompson. That is correct.
    Mr. Collins. It is all cash flow. Now, in consideration by 
the Congress of funding these non-discretionary provisions, we 
are the ones that will have to take into consideration at some 
point in time the policy that governs that cash flow, so that 
we effectively can have the funds available to pay for those 
provisions that are by law to cover the health insurance.
    Mr. Thompson. That is correct, and that certainly is 
something that the trustees are concerned about.
    Mr. Collins. So therefore, any consideration that we give 
to changes in policy with future liabilities, we must not only 
consider those who are being affected by that policy as far as 
a direct benefit, but as a Congress and as the Administration, 
the portion of the Administration who deals with tax policy, we 
must consider how it will affect those who actually are 
responsible for paying the tax--and that is the working people 
of this country--to cover that benefit structure; based on the 
fact that we are a pay-as-you-go system. Is that not true?
    Mr. Thompson. Yes.
    Mr. Collins. So I commend you for coming forth with, I 
think, reasonable ideas that you offer to the Congress that we 
can do and we can take into consideration and actually adopt, 
that will help the coverage for those who do need coverage.
    And as we move forward with accepting those proposals, I 
urge my colleagues to take into consideration those who 
actually will be paying for the benefit; and that is working 
America.
    It kind of reminds me of a song I heard the other day, you 
know, that there are certain people who get to dance, but it's 
always the working man who pays for the band. And that is what 
we are discussing here today. We are discussing those who 
actually will benefit from the program. But as a Congress, we 
must consider those who are actually paying for the benefit.
    Thank you for your consideration, your common sense 
approach, the fact that you are sticking with the proposals 
that deal with the policy and you will leave the long-term 
policies to the Congress that actually will effect the payment 
of those non-discretionary portions of law. Thank you, Mr. 
Secretary.
    Mr. Thompson. Thank you, Congressman Collins, for your 
questions, and thank you for your positions.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Wisconsin wish to inquire?
    Mr. Kleczka. Yes, Mr. Chairman. Thank you very much.
    I think my colleague, Pete Stark, resolved one of my 
dilemmas this morning, when he referred to the witness as 
``Governor/Secretary,'' because I always have a problem 
figuring out what to call you, Tommy. So I think we will use 
``Governor/Secretary.''
    Looking at your testimony today, you indicate to the 
Committee that there are five points that we should be, as a 
Congress and as the Administration, talking about when we 
address the Medicare Program. And the first, you start out with 
giving seniors the option of a subsidized prescription drug 
benefit. I think we for the most part agree with that. We have 
tried to do that in the past, and we haven't succeeded. 
Hopefully, with your help we can succeed this time.
    Second, you talk about better preventive care. Over the 
last few years, we have added one or two or three benefits to 
accomplish that goal. Clearly, there is more to be done. And so 
I agree with that second point, also.
    The third, you talk about providing that the beneficiaries 
have the option of keeping the traditional Medicare plan. None 
of the colleagues on my side of the aisle have any proposals 
that would change that, so I am sort of scratching my head as 
to why that is here. The Medicare Program, as it is incepted, 
is available to all seniors 65 or older, and so that one I have 
a little question about.
    Fourth, you talk about providing better health care 
options, similar to what is available for Federal employees. 
And this has come up time and time again, and it makes for a 
pretty good 30-second commercial. But I just don't really know 
if it is appropriate for what we are talking about, and that is 
a Medicare program for the seniors.
    If, in fact, we provide a guaranteed benefit of a health 
insurance program for the seniors, they don't need a potpourri 
of 20 plans to choose from. If it is a decent, affordable, 
comprehensive plan, like I think the Medicare Program has the 
structure to do, then they don't need 20 more choices. Okay?
    And then, the last option you talk about is the legislation 
should strengthen the program's long-term security. And that, 
we all agree to.
    Okay, with that being said, Mr. Secretary, what do you 
envision as far as a subsidized drug benefit, given the limited 
dollars that we have set aside for this expansion? Do you view 
that this additional benefit should be part of the Medicare 
program, like physicians' care and hospital care currently are?
    Mr. Thompson. Yes, I do. I would like to respond to items 
three and four in my statement.
    Mr. Kleczka. Sure.
    Mr. Thompson. Three and four actually go together. Your 
position is that you do not believe there should be 
competition, that there should not be the opportunity for a 
senior to be able to pick and choose which program is the best.
    Mr. Kleczka. Well, I make that statement because what we 
did a couple of years prior to you becoming Secretary, we tried 
this thing, which I will term an ``experiment,'' called 
``Medicare+Choice.''
    Mr. Thompson. That's right.
    Mr. Kleczka. And I think it has been a total failure, 
especially in the State that I happen to come from and the 
people that I have to represent. You indicated that millions of 
people have opted to take Choice. But the other side of the 
coin is, millions of people have already canceled it. All 
right? They have got out of it. Because once many benefits were 
proposed, the actual companies offering the policies canceled 
those benefits. And in fact, the recent situation in Milwaukee, 
Wisconsin and in southeastern Wisconsin was one of the 
Medicare+Choice plans which initiated their coverage at a zero 
deductible for hospital stays announced this year that it is 
going from $0 to $365 a day. Okay? And so my seniors don't need 
those types of bad choices.
    And the basic fee-for-service program works. Let's just 
make that better, instead of searching around for ways to 
complicate the lives of senior citizens who, like many other 
individuals in the country, are not very informed on life 
insurance, they are not very informed on health insurance and 
things of that nature. So let's make it simple, but make it 
good.
    Mr. Thompson. Let me respond, if I might, Congressman. 
Because I know full well of the Milwaukee case, because you 
contacted me. And you also contacted CMS, and we were able to 
reduce it.
    Mr. Kleczka. And through your intervention, that increase 
was somewhat decreased. And we thank you for that. Right.
    Mr. Thompson. Somewhat decreased, and they still pulled 
out. And that is a problem. The reimbursement formula for 
Medicare+Choice has been such that the companies have not been 
able to make a profit. They have pulled out. And a lot of 
people have been left without their coverage.
    But we also have done a survey, through CMS, Congressman 
Kleczka. And those individuals that still have Medicare+Choice 
like it, and would like to be able to maintain it and continue 
it. And that is why the President has put in an additional 6\1/
2\-percent increase for reimbursement, to stabilize 
Medicare+Choice.
    We also feel as an Administration that a senior--and we 
believe seniors are very intelligent, very good shoppers--would 
be able to choose, pick and choose the best program. And that 
is why we think the Federal health insurance program is a 
proper model to look at, and go back to that.
    We also in the Administration--and that is point number 
three of my statement--indicated that seniors should have the 
opportunity, if they so desire, to pick a new plan, or remain 
in the fee-for-service program that you are advocating; that 
every senior should have that right. And that was the principle 
number three.
    Chairman Thomas. The gentleman's time has expired.
    Mr. Kleczka. I would love to, but I don't have the time.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Ohio wish to inquire?
    Mr. Portman. Thank you, Mr. Chairman.
    A prescription benefit under Medicare is long overdue and, 
Mr. Secretary, we appreciate your personal commitment to this 
issue, and also your practical approach to actually getting it 
done. And even in a political year, an election year like this 
one, we hope we can move forward on a bipartisan basis to get 
that done.
    I have got a couple of questions for you. I think they are 
related. But the first one is with regard to costs of 
prescription drug coverage. Because of increased utilization, 
because of new market entries, because of just the cost of 
prescription drugs alone, we are told by the National Institute 
for Health Care Management that there was a 17-percent increase 
last year in prescription drug costs. The CBO I think is 
projecting double-digit inflation, sort of as far as the eye 
can see.
    My question would be to you, in your opinion, what impact 
can Medicare modernization and a prescription drug policy in 
Medicare have on these cost increases?
    Mr. Thompson. Congressman, we think several things. Number 
one, we think the competitive bidding that Congresswoman 
Johnson indicated is certainly going to lower and stabilize 
prescription prices.
    Second, we think the competitive opportunity--that 
individuals would be able to choose their plan and have the 
difference between just a Medicare fee-for-service or a more 
competitive kind of plan like the Federal employees have--is 
going to be the biggest one single factor in holding down the 
costs of prescription drugs in the future.
    And those two things are reasons, I believe, that this 
Congress should go ahead, streamline, strengthen Medicare, and 
put in a prescription drug benefit. I think we could do it on a 
competitive basis, and I think the free enterprise system would 
work to the advantage of the seniors, as well as to the 
taxpayers.
    Mr. Portman. Thank you. I assume you also believe that your 
prescription drug discount card would be effective; just the 
volume discount of that would result, and in how competition 
would work, in lower costs?
    Mr. Thompson. Those are the three immediate things we 
talked about earlier and that I answered to the previous 
question. One, we have the prescription drug card that we think 
is going to be beneficial to hold down prices.
    The second one is allowing States to set up their own 
individual prescription drug program, using the Federal match 
from Medicaid up to 100 percent, and then a 90/10 match from 
the Federal Government up to 150 percent of poverty. That is 
immediate. We think that would be very helpful.
    And the third one, of course, is the waiver that we are 
allowing through the Department of Health and Human Services, 
Prescription Plus. Several States are interested. The State of 
Illinois has already been the first State to set it up.
    Those three things are immediate, and they would also hold 
down on the costs of drugs across America.
    Mr. Portman. It is the responsible thing to do, as we offer 
this benefit, which we should have done a long time ago: to be 
sure that we are also addressing the cost issue. And I agree 
with you. I think we will.
    Another issue that is out there in the real world is the 
sort of abuse of prescription drugs, or complications that 
arise because of misuse of prescription drugs. Many seniors 
don't comply with the directions from their doctor, or the 
directions from a pharmacist, on how to use them. They 
sometimes forget to take a dosage. Sometimes they mix drugs. 
Sometimes they stockpile drugs, and then share them with 
friends and family, when it has expired or an inappropriate 
drug.
    I don't know what the costs are of this, but there are 
estimates out there that it is a huge cost driver; maybe $150 
to $200 billion a year. Certainly, by improving that compliance 
with prescription drugs and medication in general, we would be 
able to improve people's health; but we would also be able to 
get at some of the cost drivers.
    What steps do you think we can or should take to ensure 
that seniors are encouraged or incentivized to use prescription 
drugs more effectively? How can we incorporate best practices 
under the Medicare reforms?
    Mr. Thompson. I think through the information. I think CMS 
has got a program right now that we are advertising. We are 
going to have a $35 million program explaining in more details 
about Medicare. We are also putting out a very good prevention 
agenda by the Department, advising people on the proper use of 
drugs, and why they should be used properly.
    The third thing is that we are setting up ways in which we 
are communicating better, through CMS, to doctors, to 
hospitals, across America, advising them not only of this 
particular subject, but many other subjects about quality of 
health.
    We have also got the Agency for Healthcare Research and 
Quality, which is the research component of the Department of 
Health and Human Services, that is really looking at quality, 
issues on prescription drug uses, how to use it, and proper 
usage. FDA also has got a program set up in regards to this.
    All of these things coming together hopefully will be of 
some assistance in making sure that seniors use the proper 
dosage, and use the correct amount.
    Mr. Portman. I appreciate that, Mr. Secretary. I think that 
is extremely important. And as to compliance packaging, other 
more innovative ways to kind of let seniors see in very simple 
terms what the right dosage is, when they are supposed to take 
it, and so on, I think that would go a long way. And I hope we 
can address that issue as well as the cost issue while we 
provide this important benefit. Thank you, Mr. Chairman.
    Mr. Thompson. Thank you so very much for your questions and 
your comments, Congressman. You are always right on target.
    Mr. Portman. Thank you, sir.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Washington wish to inquire?
    Mr. McDermott. Thank you, Mr. Chairman.
    I was pleased to hear, Mr. Secretary, that you are going to 
be with us for the foreseeable future.
    Mr. Thompson. Thank you, Congressman, for your endorsement, 
my friend.
    Mr. McDermott. I don't want you to leave us just here in 
the lurch, because we're in problems.
    I hear you talking about strengthening Medicare, and doing 
a Medicare benefit for prescription drugs. And I keep wondering 
where the money comes from. Because even somebody like Gail 
Wilensky, who used to run what then was called ``HCFA,'' 
doesn't think there is an adequate amount of money available to 
give a real prescription benefit, which is probably going to be 
somewhere around $350 billion, and do what people call 
strengthening Medicare. There is an implied savings in this 
strengthening of Medicare. That is what it sounds like to me 
you are saying when you say we are going to strengthen 
Medicare.
    What I should hear is, we are going to save money by doing 
some kind of changes. Am I hearing wrongly, or do you have some 
other source of money beyond the $350 billion that was in the 
budget resolution which should go for an adequate drug benefit? 
Or do you think the drug benefit shouldn't be that much?
    Mr. Thompson. Well, as you know, Congressman, the 
Administration put in our budget $190 billion. Congress has 
seen fit to raise that to $350 billion. And I came here today 
to indicate to you that the Administration wants to work with 
that latter number, in order to come up with a comprehensive 
prescription drug coverage.
    Secondly, we also are looking into strengthening it, 
putting in a casualty loss for seniors that we think is 
important.
    We also think a preventive benefit is important, in order 
to hold down the costs. As you well know, Congressman--you and 
I have discussed this--we need to do more in the area of 
prevention. We think that that is going to be a cost saver. We 
think that we can save money if an individual goes in for a 
mammography, a colorectal examination, or any other kind of 
preventive health; that might save in the future more expensive 
health care. And we think that is important.
    Fourth, we think that the spend-down on prescription 
drugs--a lot of people are spending down their assets in order 
to get on Medicaid, in order to get the prescription drug 
coverage--we think if we have some preventive areas in here to 
strengthen it, that will prevent that.
    We think that the Medigap insurance, to allow for three new 
policies to add just prescription drugs and not first-dollar 
coverage, will allow that to take place.
    Mr. McDermott. All those could be done with----
    Mr. Thompson. And finally, we think competition----
    Mr. McDermott. No additional money?
    Mr. Thompson. We think that those things are cost savers, 
Congressman.
    Mr. McDermott. Okay.
    Mr. Thompson. And we think that the competition--If you as 
a senior have the opportunity to be able to choose between one 
fee-for-service plan versus 10 other plans, like a Federal 
employee is able to, we think that is going to be much more 
productive, much more cost-efficient.
    And finally, we think having the competitive bidding 
process put in, that we will hold down on the purchase price of 
drugs, like we did for Cipro; that we would be able to save 
some dollars.
    These are the cost savings that we think will be able to 
strengthen Medicare, improve Medicare, and at the same time 
allow for prescription drug coverage, Congressman.
    Mr. McDermott. So if I understand--And we are holding our 
breath, waiting for your plan to be rolled out up here. I 
remember when Mrs. Clinton was coming with her plan, and there 
was a lot of bated breath. Well, we have got bated breath up 
here for your plan.
    But we were not allowed to hear a witness who has a 
proposal in Maine, which I would like to hear you comment on. 
Because the Federal Government negotiates, the Veterans 
Administration negotiates with the drug companies, and this 
State Senator, Ms. Pingree, said, ``Why don't we have the State 
of Maine negotiate with the pharmaceutical companies to get 
good prices?'' That is her proposal.
    Now, would you be opposed to a program where Medicare, 
using its enormous financial power, would negotiate with the 
pharmaceutical companies for better prices? I mean, if the 
Veterans Administration can do it, and the State of Maine can 
do it, why would it not be a good idea for us to use the 30 
million people who are in Medicare as a buying power to drive 
down the price?
    Mr. Thompson. Congressman, three things: Number one, the 
State of Maine case is in litigation right now. The district 
court ruled one way; the court of appeals has ruled another 
way. It is now being petitioned for certiorari in front of the 
U.S. Supreme Court. Whether or not they are going to take 
jurisdiction, I can't tell you. But that case is being 
questioned in the legal system.
    In regards to that, we set up a model waiver, Congressman, 
called ``Pharmacy Plus.'' And I have got a copy of that waiver 
here. And Maine is interested in this particular program, as 
are approximately 13 to 15 other States. Illinois has already 
enacted this particular waiver, and we have approved that, to 
give them up to 200 percent of poverty, based upon their 
prescription drug coverage. It allows those States to negotiate 
directly with the particular pharmaceutical companies.
    That is in the model waiver. And we think the model waiver 
may be superior to the State of Maine. And this is a waiver 
that came up out of the Department of Health and Human 
Services, that we developed, that we would like to have you 
take a look at.
    Mr. McDermott. I don't know if everybody has a copy of it.
    Mr. Thompson. I just brought it, and it is there. A lot of 
States are doing it. And we think it is superior to the State 
of Maine. And I just would like to point out, it came from the 
Department, sir.
    And finally, in regards to negotiating, the only problem 
with Medicare is that we are such a huge purchaser of the thing 
in the market that we would more than likely distort the market 
if we negotiated directly with a pharmaceutical company on the 
purchase of drugs.
    Therefore, we think--and I mentioned that to Congressman 
Stark--that if Congress gives me the authority, I will do it. 
But I think a better approach is competitive bidding, which 
will accomplish pretty much the same thing, as well as the 
model waiver. And I think that is a better approach than having 
a way to distort the market, Congressman.
    Chairman Thomas. The gentleman's time has expired. However, 
the Chair would like to sympathize with the gentleman from 
Washington on the preventive care, as he well knows. Something 
as useful as the early detection, education, and treatment of 
diabetes, which would significantly reduce end-stage renal 
disease, was listed when we wanted to offer it as a program as 
a ``coster,'' rather than a money saver. And if the Department 
would help us in collecting statistics about early detection 
and prevention programs that we put in place, to show that they 
actually save money, we could do even more of that, by offering 
other programs out of the savings of the preventive programs 
that we have.
    But under our current budgetary structure and rules--which 
the Chair thinks are rather absurd--those wind up as 
``costers'' because we look at 5-year windows for cost, rather 
than over a 10-or a 20-year period in which we fundamentally 
are able to alter behavior. That is one of the problems that we 
live with, with the artificial budgeting structure that we 
have, including comments about tax cuts or any other provisions 
in the artificial world in which we live.
    Does the gentleman from Pennsylvania wish to inquire?
    Mr. English. I certainly do, Mr. Chairman. And for what it 
is worth, I will stick to 5 minutes.
    Mr. Secretary, I want to thank you for coming here and 
testifying today. And on behalf of those of us who think $350 
billion is serious money--perhaps naively--I want to 
congratulate you for also exploring ways of delivering the same 
package of Medicare services more efficiently, in a more modern 
way. And if that generates cost savings, I don't think you 
would need to apologize for it.
    My sense is that one of the most important things you have 
touched on in your testimony is the need for seniors to have a 
flexible package of benefits under whatever we do. And I wonder 
if you could elaborate, very briefly, on your testimony. The 
notion of flexibility has been characterized here, strangely, 
as complicating seniors' lives. Yet for many seniors, in very 
different circumstances, a different package of benefits would 
mean different things.
    And I wonder if you could elaborate on the importance to 
seniors of giving them at least a variety of options for how 
they might take a subsidy in supporting their prescription 
plans.
    Mr. Thompson. I think, first off, let me thank you for your 
pointing out the efficiencies. And I would like to thank you 
and the Committee for passing our contracting reforms. I know 
the House has passed it, and it is over in the Senate. 
Hopefully, the U.S. Senate will pass it. Because the 
contracting reforms are going to allow us to build in quality, 
efficiencies, and save money, and deliver a better product. And 
that is what you want, and it is what the taxpayers want. And 
we are hopeful that the Senate will pass it, so we can do that.
    In regards to choice, as we know, seniors like 
Medicare+Choice, because it gives them the opportunity to look 
at something else besides just fee-for-service. We think also 
of the Medigap plans; there is ``A'' through ``J.'' This 
Administration is asking for three more, three that do not 
require first-dollar coverage, and one that will allow only for 
prescription coverage. So that seniors will be able to pick and 
choose from Medigap programs to decide which one is the best 
suited for their particular needs.
    The third thing, and the most important one, is if we go 
with the change of strengthening it, allowing Medicare 
recipients to have the same choices as Federal employees, we 
are fairly confident that the seniors will embrace that 
enthusiastically and will be able to pick and choose which plan 
best suits them and their insurance needs.
    And that is why we think it will be a cost saver, because 
you will have competition; you will hold down on expenses; and 
you will allow seniors to have the same choices that you and I 
have when we pick our health insurance program. And we think 
that is good public policy.
    Mr. English. And I know you know from your experience as 
Governor that Wisconsin has not been the only source of policy 
innovation at the State level. And I know you are aware that 
Pennsylvania has a Program of All-Inclusive Care for the 
Elderly (PACE)----
    Mr. Thompson. That is correct.
    Mr. English. That has been in place for many years. It is 
perhaps the most comprehensive of the State programs 
available--perhaps of less interest at this hearing, because 
PACE doesn't afford one of the factions in Congress an 
opportunity to highlight one of their candidates. But it is 
certainly one of the most successful programs.
    In Pennsylvania seniors currently have access to a limited 
prescription plan under PACE. We would like to see a program 
that would fit into that existing benefit, if anything could be 
wrapped around it. Do you feel that that is an important 
priority, and that we should encourage the States that are 
doing things already in prescriptions to be able to continue to 
offer those benefits; and not, as the minority plan from the 
last Congress did, require seniors to choose one or the other?
    Mr. Thompson. Thank you, Congressman English, and thank you 
for your comments about our innovation in Wisconsin. And I 
appreciate that. I am not going to get into an argument with 
Governor Ridge which one of us was the most innovative, because 
Governor Engler would also like to have a dog in that hunt. But 
I thank you so very much. And I compliment the Governor and the 
legislature in Pennsylvania for coming up with the PACE 
program.
    And that is why the President came in with his immediate 
program to allow for States like Pennsylvania that have taken a 
lead to be able to use this new program, up to 100 percent of 
poverty, to get their Federal match, and then up to 150 percent 
of poverty, to get a 90/10 match. That would help Pennsylvania, 
probably more than any other program. And we are hoping that 
you will support that.
    In regards to that innovation of States, this is something 
that I believe very passionately about. That is why we set up 
this model waiver for States to use. And it is called 
``Pharmacy Plus,'' and allows States to take a look at this 
opportunity for themselves to set up their own individual drug 
program, one in which the States and the Federal Government 
would be in partnership. And we are hoping that States like 
Pennsylvania take the lead and do that.
    Mr. English. Thank you.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Illinois wish to inquire?
    Mr. Weller. Thank you, Mr. Chairman.
    And Mr. Secretary, it is good to have you here again.
    Mr. Thompson. It is always a pleasure, Mr. Weller.
    Mr. Weller. Particularly, someone from the neighboring 
State of Wisconsin.
    Mr. Thompson. Yes. And we love people from Illinois coming 
to visit Wisconsin.
    Mr. Weller. I know. A lot of my neighbors do. And again, I 
appreciate your time and your leadership, and particularly your 
leadership on modernizing Medicare for the 21st century with 
prescription drugs.
    And I also want to commend the President on his leadership 
in the war-time balanced budget he has offered the Congress, 
which was mirrored in what we passed out of the U.S. House of 
Representatives, that includes prescription drug coverage for 
seniors as part of Medicare.
    One thing I would note, in the House-passed war-time 
balanced budget we provide about $350 billion for the purpose 
of modernizing Medicare, including prescription drug coverage. 
And my hope is it will be legislation similar to what this 
House passed 2 years ago, which was voluntary and affordable 
for all seniors who qualify under Medicare. And thanks to the 
leadership of Chairman Thomas and Nancy Johnson and others, 
this House led. And unfortunately, the Senate failed to act. 
And we could have had prescription drug coverage for seniors 
today, had the Senate acted, rather than doing nothing.
    The question I have, Mr. Secretary, is, in your testimony 
you note that there are about 9 million Medicare beneficiaries 
that have no prescription drug coverage today. About one-third 
of those have incomes of $18,000 or less, lower-income seniors. 
And of course, they are the ones who struggle the most in 
meeting the cost of providing prescription drug coverage.
    There are two questions I have. One is that I find as I 
travel throughout the district that I represent, the south side 
of Chicago and the south suburbs, towns like Joliet and Park 
Forest and that, many seniors already have prescription drug 
coverage, about two-thirds do.
    Mr. Thompson. Seventy-three percent.
    Mr. Weller. Seventy-three percent. And I find across the 
board there is support for including prescription drug 
coverage. And they appreciate what the House majority has done, 
the leadership that has come out of the House.
    One concern they have, though, is they are concerned that 
if we provide prescription drug coverage under Medicare that it 
may jeopardize the coverage they already have, that as part of 
their retirement benefits they are provided what they feel is a 
pretty good program covering prescription drugs. And they have 
a fear that if the government were to provide it through 
Medicare that they would lose it as part of their retirement 
benefits.
    And I was wondering, Mr. Secretary, if you can just share 
your concerns, as we move the legislation through this 
Committee, on how we can best ensure that prescription drug 
coverage will not only be affordable, but voluntary. If you 
have better coverage available from another source that you 
prefer to have, there is no reason to jeopardize it.
    Mr. Thompson. I really think that we can take care of that 
in the overall proposal that this Committee will be marking up. 
I think that there is no question that 73 percent of seniors 
have their own prescription drug coverage. Some of it is not as 
adequate as it should be, and they will be certainly benefiting 
from a prescription drug coverage in Medicare.
    We think overall that the prescription drug coverage 
benefit for seniors under Medicare is important. But we do not 
want to crowd out. And that is something that some individuals 
are fearful of, some of your constituents, that if we put 
prescription drug coverages, employers say, ``Well, you've got 
it. As a senior you don't need it in the employer's proposal.'' 
And that is a big block, of those individuals that are covered 
by employer-owned policies.
    And so therefore, we want to make sure that we take that 
into consideration. But we think that it can be handled quite 
nicely.
    Mr. Weller. Yes. And building on that, the proposal that we 
passed out of the U.S. House of Representatives in the last 
Congress was a public-private partnership, and enlisted the 
private sector in helping provide Medicare prescription drug 
coverage, and legislation that obtained bipartisan support.
    My hope is that the legislation we move through this 
Committee will have bipartisan support as well, because both 
parties claim they are for prescription drug coverage. And we 
no longer want it to be a political issue. We actually want to 
provide a solution and get the job done.
    And I was wondering, from your perspective, there are kind 
of two schools of thought. One is that there should be no 
private sector involvement in providing Medicare prescription 
drug coverage; and the other is that we should enlist the 
private sector. And fundamentally, can you argue the merits of 
what the President has discussed, which is enlisting the 
private sector?
    Mr. Thompson. The President feels strongly that the seniors 
should have options. If they want to retain the current 
Medicare fee-for-service program, they should have that 
opportunity, and nobody should abrogate that opportunity.
    But at the same time, like we have for Medicare+Choice, 
like Medigap, there are many different programs out there that 
seniors like to be able to pick and choose. We think that is 
good public policy, for several reasons. It gives the senior a 
better opportunity to devise his or her best insurance 
coverage; whether it be prescription drug coverage, whether it 
be first-dollar coverage, whether it be a casualty loss 
coverage, whether it be preventative health. Allow the senior, 
with consultation with family Members, with their doctors, to 
pick the best health insurance program.
    That is why we think a mix is good, with the understanding 
that that senior should be able to pick or choose, if he or she 
wants to; but at the same time, if they want to maintain their 
existing plan, they should have that right, as well.
    Mr. Weller. Thank you. Thank you, Mr. Secretary.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Georgia wish to inquire?
    Mr. Lewis of Georgia. Thank you very much, Mr. Chairman. 
Welcome, Mr. Secretary. Mr. Chairman, I won't take my 5 
minutes, but I do want to say from the outset this reminds me 
of another period in our history about 40 years ago, in 1964, 
when another person was denied, an attempt was to deny a person 
for testifying. But this particular woman, by the name of 
Fannie Lou Hamer, was able to testify. And in testifying, she 
educated and sensitized the Nation; not about health care, but 
about voting rights. And she said, in that classic statement, 
``I am sick and tired of being sick and tired.''
    Since I am a candidate for reelection to Congress, and 
since our witness was denied the right to testify, I don't 
think I should inquire, Mr. Secretary. So I want to thank you 
for being here.
    Mr. Thompson. Do you want me to comment on that?
    Mr. Lewis of Georgia. If the spirit moves you to talk.
    Chairman Thomas. The Chair would observe we are well within 
the 5-minute period.
    Mr. Thompson. I don't know how I could comment.
    Mr. Lewis of Georgia. Well, you don't have to, Mr. 
Secretary. I just wanted to make a statement for the record, 
sir.
    Mr. Thompson. Thank you, Congressman Lewis.
    Chairman Thomas. Thank the gentleman very much. Does the 
gentleman from Florida wish to inquire?
    Mr. Foley. Thank you very much, Mr. Chairman. Let me just 
commend you on the rules of engagement on bringing witnesses 
forward. And we may disagree, but I could think of a number of 
reasons why I would like Elizabeth Dole here to talk about the 
Red Cross, or Mayor Norm Coleman to talk about some issue. But 
I think it is important that we talk to people who have direct-
line experience and are here today.
    Let me also comment for the record that I found the 
Democratic response to the savings possible under the retail 
pharmaceutical cards, if you will, 11.4 percent discounts, to 
be paltry, to be not worth the time and effort that we are 
endeavoring to create this legislation.
    So it begs the question of why Wal-Mart is the most popular 
consumer stop in America, why people spend $25, $35 to join 
Costco or Price Club, and why so many millions of Americans 
enjoy the benefits of an AARP card. Largely because they 
provide a discount in some form or fashion.
    Now, Chuck Hagel, Senator Hagel, and I have been working 
for quite some time on the discount card that has been 
enunciated by the President. And let me commend first the 
President for taking the leadership. And let me also suggest, 
during the prior testimony people were asking you specifically 
where we would find the money to initiate prescription drugs 
and a discount card mechanism.
    Let me underscore, yesterday in this very hearing room the 
Honorable Reuben King-Shaw, formerly of Florida, now a member 
of your Administration, was speaking specifically about areas 
that you have articulated and are talking about. Wellness 
models: Sander Levin and I are working on the wellness model, 
which in the long term will actually reduce costs to Medicare 
and allow us to transition a healthier society into providing 
the benefits for those most needed.
    My question is, Mr. Secretary, obviously, it is because of 
a lawsuit requiring Congress to act and give statutory 
authority to implement the prescription drug card program. How 
quickly do you believe you can get it up and running, if we can 
provide you, if you will, with the legislative authority?
    Mr. Thompson. Thirty to sixty days.
    Mr. Foley. In 30 to 60 days the seniors who live in Palm 
Beach County of the 16th Congressional District can actually 
access the kind of savings, potentially upwards of 11, maybe 
more, depending on the competition? But what we are saying 
today, right here, is that within 60 days seniors could have 
benefits of actual cash savings, rather than political 
rhetoric.
    Mr. Thompson. We have done a lot of the preliminary work 
already, Congressman. So we can move very rapidly.
    Mr. Foley. And isn't it correct that the Administration is 
not willing just to have a discount card; that they actually 
have an enunciated policy on providing pharmaceutical drugs to 
seniors 65 and over?
    Mr. Thompson. That is correct. You are absolutely correct.
    Mr. Foley. Let me also caution those that see Medicare as 
being the primary, if you will, place to have the 
pharmaceutical drug program, having had experience as a State 
legislator, I caution those that expect miracles out of an 
agency to be the one-size-fits-all, that when we tried to do 
that in Florida we actually had to create a formulary list. We 
had to deny a number of drugs, because of the cost of those 
drugs. That is why I applaud what you are doing. It is to 
provide, if you will, an opportunity to provide prescription 
drugs, but to keep a free market concept and principle in 
place.
    Mr. Thompson. We think it would be very effective. We think 
seniors, who are very intelligent, would be able to pick and 
choose the best insurance program for themselves, as well as 
prescription drug coverage for themselves and their families.
    And that is why we think it would be cost-effective, good 
public policy, and be able to be more efficient. And just like 
the Federal employees' insurance is right now, you have that 
option, I have that option. And I think we should allow the 
seniors to have the same option to develop their own insurance 
program.
    Mr. Foley. Your work in your home State is legendary. As 
Governor, you were able to squeeze savings out of programs by 
implementing, if you will, preventative care, whether it was in 
truancy, whether it was in juvenile detention. So you see that 
same opportunity federally now, as we are talking about 
Medicare and wellness, to do the same kind of cost savings 
through implementations of health models, if you will?
    Mr. Thompson. Absolutely. And that is why we think this 
``Pharmacy Plus'' waiver is a giant step forward, to allow 
States to set up their own innovative plans in partnership with 
the Federal Government.
    We also think the $8 billion that the President has put in 
his budget to allow States to develop their own insurance 
program, their own pharmaceutical plan, as well as with Federal 
tax credits to develop their own health insurance program using 
the pooling process, is going to save a lot of dollars and 
allow a lot of uninsured individuals to be covered. We expect 6 
to 8 million people could be covered by just the Federal tax 
credit program, if Congress passes it.
    Mr. Foley. Thank you. I yield back.
    Chairman Thomas. Thank you. Does the gentleman from 
California, Mr. Becerra, wish to inquire?
    Mr. Becerra. Thank you, Mr. Chairman.
    Mr. Secretary, thank you very much again for coming before 
us and providing testimony.
    Mr. Thompson. Good to see you, Congressman.
    Mr. Becerra. Good to see you, as well. I am a little 
disturbed by the fact that the President did not increase 
funding for his prescription drug plan and Medicare overall 
from his previous budget of last year; especially when you take 
into account that the Medicare prescription drug bill that was 
presented to this House by Chairman Thomas and the Republican 
majority in this House a year ago or so was projected by the 
Congressional Budget Office, or the non-partisan Accounting 
Office--it was budgeted to cost about $154 billion over 10 
years. That was an estimate last year.
    Today, the same CBO is telling us that that same bill--same 
bill, no changes--today is going to cost about $41 billion 
more, or about 25 percent more than their previous projection 
of last year for that same 10-year window.
    So given that we all know--and seniors know this better 
than we do--that the cost of health care, including 
prescription drugs, continues to rise, I am somewhat 
disturbed--in fact, very disturbed--that the President didn't 
include more money there. And I hope that, as some of my 
colleagues have mentioned previously, you will take that back 
to the President; that if we really want to do this in the 
right way, we can't do it on the cheap.
    Mr. Thompson. Could I respond, Congressman?
    Mr. Becerra. Certainly.
    Mr. Thompson. Okay. Thank you very much. First off, point 
number one is that the President did increase the budget, from 
$153 billion to $190 billion. That is point number one.
    Point number two is that we have our own actuaries out at 
the Department of Health and Human Services and Division of 
Centers for Medicare Services. They came up with the figures 
for OMB. The OMB put those figures and plugged them in.
    Third, in my testimony this morning, as well as in answer 
to several questions, I indicated that we are willing to work 
with the $350 billion figure that Congressman Thomas has 
indicated is necessary, and also which Congressman Nussle has 
put in the budget which was approved by the U.S. House of 
Representatives.
    Mr. Becerra. Secretary, thank you for that. And actually, 
before I turn to my next question, I do want to make sure that 
it is clear. The OMB is the President's arm that does its 
budget numbers, which has always been a little less accurate 
than the Congressional Budget Office.
    And second, the President may have increased the numbers he 
put in there for Medicare, but that does not take into account 
the fact that the prescription drug bill by itself would have 
increased by $41 billion. Your plan, the President's plan for 
Medicare talks about all sorts of things, not just prescription 
drugs.
    Mr. Thompson. That is correct.
    Mr. Becerra. So let's be sure we are talking apples and 
apples, and not apples and oranges, and not let seniors believe 
that because the President increased the entire amount, that it 
will be taken care of.
    Mr. Thompson. But I am also----
    Mr. Becerra. But he doesn't try to leave out the fact that 
just for prescription drugs it would be a lot more. Let me ask 
a question----
    Mr. Thompson. But I also understand, Congressman, that $350 
billion that is in the budget bill also is looking at 
streamlining and strengthening Medicare, as well.
    Mr. Becerra. Right.
    Mr. Thompson. So those are apples and apples.
    Mr. Becerra. Absolutely. And that is good. Let's just hope 
that the streamlining doesn't mean reduced benefits for seniors 
in the process.
    Mr. Thompson. Well, let's hope that we can come up with a 
very good, comprehensive, bipartisan plan. And I want to work 
with you to accomplish that, Congressman.
    Mr. Becerra. I am glad you are willing to work with us on a 
bipartisan plan, because the leadership in the House on the 
Republican side has not taken any time to sit down with us to 
talk about a bipartisan plan. So perhaps, working together, we 
can get the Republican majority to do that with us, as well.
    The point I wanted to make with regard to funding----
    Mr. Thompson. Yes, sir.
    Mr. Becerra. You mentioned in your testimony, and I will 
quote you, ``We have a moral obligation to fulfill Medicare's 
promise of health care security for American seniors and people 
with disabilities.'' I can't agree with you more.
    And to me, that means that, to fulfill that promise, you 
have got to have the money in hand, ensuring that the 
government dollars that we are collecting from those who are 
working, in their Medicare contributions, is available to them. 
It seems to me that the more we see an Administration proposed 
budget that not only spends money not in Medicare but in other 
areas, and specifically with regard to tax cuts that are going 
to benefit mostly the well-to-do in this country along with 
corporations, not Medicare beneficiaries. It seems to me that 
we are spending those Medicare trust fund dollars not on 
Medicare over the next 10 years, but on things that are 
unrelated to Medicare.
    And I know the General Accounting Office will present its 
testimony in just a moment, but there is a chart that the GAO 
provided us. And again, the General Accounting Office is the 
non-partisan watchdog for the Federal Government. And what they 
are telling us is that by the year 2050, the last bar, you can 
see the costs we will have.
    Spending, non-Medicare; Medicaid spending; and non-Social 
Security spending are the green portion of the bar. The red is 
Medicare-Medicaid; which, as you can see, has grown over the 
years, because we know the Baby Boomers will be retiring and 
using Medicare.
    Mr. Thompson. Sure.
    Mr. Becerra. And the cost of medicine is going up. Social 
Security in yellow. And then Net Interest in blue. The portion 
of the bar that has grown the most is the portion in blue, 
which means that the cost of paying the debt--just the interest 
on the debt, not the principle, just the interest on the 
national debt--is growing fastest.
    If we were to save the moneys that we have from the 
Medicare trust fund for Medicare by paying down the national 
debt, we could reduce the size of that blue portion of that bar 
so that we can, hopefully, in some point in the future not just 
meet the needs of our seniors with Medicare, but also try to 
meet the needs of all Americans, including our kids, to educate 
and to do the right thing.
    So I just fear that in having a budget from the President 
that spends all of the Medicare trust fund on things other than 
Medicare, that that is sending us down the wrong path. I thank 
you for being here.
    Mr. Thompson. Thank you, Congressman, for your questions 
and your comments. I appreciate that.
    Chairman Thomas. The gentleman's time has expired. Does the 
gentleman from Texas wish to inquire?
    Mr. Brady. Yes, Mr. Chairman.
    Thank you, Mr. Secretary, for your testimony today. I 
appreciate the increase the President has proposed for health 
care all across the board, and would note that only in 
Washington are major increases in spending often described as 
cuts, drastic cuts. The fact is, more money helps. We 
appreciate your and the President's support doing that.
    Listening to your testimony, I am thinking that there is 
one woman in Kingwood, Texas, who would be thrilled to hear 
your goal to make all seniors have access to affordable 
prescription drugs. I was at a townhall meeting the other day 
at the Rosemont Assisted Living Center in Kingwood. This 
woman--she called herself not a senior citizen, but an 
``experienced citizen''--has a monthly drug for one medicine, 
$1,204 a month for one prescription. She tried generic drugs. 
It didn't work. The pain returned. Thankfully, she has a 
husband who is able to go back to work, and she is able to 
afford it. But there are a lot of people like that in the 
country.
    And I think the fact of the matter, that you are working so 
hard to try to help the sickest and the poorest among us first, 
is really the responsible approach. As I see it, you have taken 
the approach: Let's create a short-term drug plan this year to 
help the sickest and the poorest of our seniors. And then, as 
we work together to modernize Medicare once and for all, then 
create a broader plan that is affordable and voluntary, and is 
paid for. And I think that is really key. Because I think in 
the past Washington has got itself in trouble by over-
promising----
    Mr. Thompson. That's right.
    Mr. Brady. And under-delivering; passing on the financial 
burden of programs; doing it for an election year, and then 
passing it down to future generations. Your plan rejects that 
type of old-fashioned thinking, thank goodness.
    And I think you are exactly right when you say the plan 
should strengthen the solvency of Medicare, rather than 
accelerate its bankruptcy. Putting in a huge plan we can't pay 
for right now would be like going on a spending spree when your 
credit cards are all maxed out. And fixing Medicare once and 
for all is really key.
    I guess my point to you is that I think the biggest 
challenge to modernizing Medicare isn't the numbers. I think it 
is partisan politics. It seems to me that the only way we are 
going to be able to get all this done is if both parties to 
work together. If we just put aside the interests of our 
election year ambitions, and put our seniors first.
    Mr. Thompson. That's right.
    Mr. Brady. It seems to me that we all have a real stake in 
helping our seniors. And I would just like you to comment on 
that as being a major obstacle.
    Mr. Thompson. Congressman Brady, I couldn't agree with you 
more. I think that is one of the most intelligent statements 
that I've heard, in regards to making sure that we take care of 
our seniors first.
    We have an opportunity this year on a bipartisan basis to 
strengthen Medicare, improve it, and at the same time add a 
prescription drug coverage, a casualty loss coverage, as well 
as more preventive care, which is a passion of mine. I think it 
is absolutely necessary to take a look at how we deliver 
medical services in the United States, and try and find ways in 
which we will be able to hold down on future costs by allowing 
seniors as well as other Americans to take care of their health 
up front, and use the money more propitiously in regards to 
that.
    In regards to your statements on a bipartisan basis, I hope 
that we can. I think it is the right time. And people say it is 
an election year, therefore it can't be done. I think it is 
just the opposite. I think the election year is going to drive 
a decision to be made on prescription drug coverage, therefore, 
we have an opportunity.
    I believe--and I am cautiously optimistic of that--that we 
can get a reformed, strengthened, and improved Medicare plan 
passed with prescription drugs this year through both Houses, 
signed by the President.
    Mr. Brady. Right. Thank you, Mr. Secretary and Mr. 
Chairman.
    Chairman Thomas. Thank the gentleman. Does the gentlewoman 
from Florida wish to inquire?
    Mrs. Thurman. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for being here. First of all, 
just a couple of comments on the question that Mr. Crane asked. 
As it has been noted in this hearing, it sounds like we may be 
moving our date up until Memorial Day. And if we could get any 
of that information, particularly on the bundling and the 
composite rate, before we go into this markup, that would be 
most appreciated. Because it doesn't do us any good after the 
bill has already gone.
    Mr. Thompson. I will see what I can do to expedite it, 
Congresswoman Thurman. And I think your point is well taken.
    Mrs. Thurman. Secondly, I just want to say, I know that Mr. 
Shaw is not here, but in his conversation about the woman, all 
of us see that in Florida all of the time. But I might add one 
of the things that concerns me and why some of us who would 
like to work in a bipartisan way do believe that all seniors 
should be included.
    Because in Florida, as you well know, we already have a 
medically needy program under Medicaid. So if what you say in 
your statement is that it gives seniors with limited means, I 
am not sure that we would be adding any more for the woman that 
Mr. Shaw was talking about. But I do want to go to something 
that----
    Mr. Thompson. No, no, I think you are misreading my 
statement.
    Mrs. Thurman. No, not yours.
    Mr. Thompson. Okay.
    Mrs. Thurman. Yours says, ``Medicare subsidized drug 
benefits should protect seniors against high drug expenses, and 
should give seniors with limited means the additional 
assistance they need.'' And so I was just pointing out that we 
do have a medically needy program, so I am not sure that this 
woman would still be taken care of. But let me go to a couple 
of other issues----
    Mr. Thompson. But I want to point out, I want it to cover 
all seniors.
    Mrs. Thurman. Okay.
    Mr. Thompson. But I think that we have to subsidize in 
certain cases low-income Americans, make sure that they get the 
adequate coverage.
    Mrs. Thurman. Well, I appreciate that clarification. The 
other issue, though, that does concern me--and I know you may 
not have had the opportunity to look at the AARP testimony----
    Mr. Thompson. No, I have not.
    Mrs. Thurman. But I do want to bring up some things. In 
your last statement, under the fourth, ``Medicare should 
provide better health insurance options, like those available 
to all Federal employees and retirees,'' it says the last is, 
``Private plans have been a critical source of drug coverage 
and other innovative benefits for seniors, and should remain 
so.''
    However, if you go and look at the AARP report, what they 
are showing is that there are choices; that they have been 
doing this, that the principal sources of coverage that offer 
prescription drug benefits--employer-based retiree coverage, 
private supplemental coverage, or Medicare health maintenance 
organizations (HMOs)--they are finding that they have been 
inadequate, they are limited, they are expensive and, more 
importantly I think, unstable, which is what we have found 
throughout the country, particularly with the Medicare HMOs.
    But let me go on to say that it also says that a study was 
released that reported that nearly 42 percent of the 
beneficiaries lacked drug coverage at some point in 1998. And a 
new study published by Health Affairs reports that nearly 40 
percent of Medicare beneficiaries had no drug coverage in the 
fall of 1999.
    So what they did is, they laid out and they illustrated for 
some middle-income people the difficulty that they are having 
in obtaining affordable and dependable drug coverage. And I am 
just going to read these very quickly:
    A retired couple has significantly saved for retirement, 
and has an income of $40,000 a year. Both take prescription 
drugs for heart disease and high cholesterol. The wife also 
needs medication for breast cancer and osteoporosis. They do 
not have access to retiree health benefits from a former 
employer. There are no Medicare+Choice plans available in their 
area. And a Medigap plan offering some drug coverage would cost 
each of them $260 a month. There is a private option for them. 
They can't afford it.
    A retired couple has an income of $30,000 a year, 
significantly above the threshold for Medicaid and most State 
and private pharmacy assistance programs. They have 
prescription drug coverage through a Medicare HMO. This year 
they have learned, however, that the HMO plans to terminate its 
contract with Medicare, effective December 31st. There are no 
other Medicare HMOs in the area. And while they can afford 
supplemental insurance and are guaranteed access to certain 
Medigap plans, ``A,'' ``B,'' ``C,'' and ``F,'' none of these 
plans would include their drug coverage.
    And then the last one is about a 75-year-old widow who is 
enrolled in a Medicare HMO that offers drug coverage. She 
currently has prescriptions for cholesterol-lowering 
medication, at $97.51 a month, and an allergy medication of 
$46.94 a month. While initially her drug coverage was quite 
generous--and we are finding this over and over--this year her 
drug benefit is capped at $300 a year. As a result, she 
basically will have no drug coverage for three-quarters of the 
year.
    So I know we don't have a lot of time to discuss this right 
now, but I would like to, one, have the opportunity to discuss 
some of these issues with you; but secondly, because of the 
lack of time that we have sometimes in this Committee, if we 
could get your staff to kind of respond to us as to how you 
think these private plans that are already in place--how you 
think you can better them through the modernization that you 
are talking about.
    Mr. Thompson. Thank you very much, Congresswoman. We will 
be more than happy to work with you on that particular subject, 
more than happy to get back to you with our staff.
    My only quick rejoinder is that the Federal system works 
very well. We have 10 plans, 10 to 12 plans, that Federal 
employees can pick and choose from. We think the same advantage 
could be given to seniors. They could maintain their current 
plan, if they so desire. But having the opportunity to pick and 
choose from other just as good, or sometimes better, plans 
would be better.
    In regards to Medigap, that is why we are adding three more 
plans. Because none of them really deal with prescription drug 
coverage very well, so we are adding three more. Hopefully, 
Congress will approve them, and get away with the first-dollar 
coverage which is a problem and an impediment for giving an 
expansive prescription drug coverage.
    So with three new Medigap plans, with 10 different Federal 
plans that seniors could pick and choose from, we think seniors 
would be better served. And that is why we believe it is good 
public policy.
    Chairman Thomas. Thank the gentlewoman. And also, the Chair 
will say that, in terms of the honest request to work in a 
bipartisan way, the Chair has a clear record of working with 
Members in a bipartisan way: the gentleman from Maryland, in 
health care and pension areas, the gentleman from Tennessee, 
the gentleman from Louisiana, and a number of others.
    To the degree the work product is approached in an 
atmosphere of accommodation and compromise, the Chair has no 
problem. To the degree ``bipartisan'' is defined as making non-
negotiable demands, and failure to succumb to those non-
negotiable demands, the Chair doesn't believe that is 
bipartisan. So the Chair will respond in the way in which the 
Members wish to enter into a working relationship.
    Does the gentleman from Texas, Mr. Doggett, wish to 
inquire?
    Mr. Doggett. Thank you, Mr. Chairman.
    Secretary Thompson, you have indicated that you are opposed 
to greater use of government to----
    Mr. Thompson. I am sorry, I didn't hear that.
    Mr. Doggett. You have indicated that you are opposed, as I 
understand it in response to two queries today, to greater use 
of government bargaining power to lower prices for Medicare 
recipients, because you say it will distort the market. Is that 
correct?
    Mr. Thompson. No, that is not what I said.
    Mr. Doggett. All right, then what----
    Mr. Thompson. I said that if Congress approved----
    Mr. Doggett. You would implement it. But you think that it 
is not----
    Mr. Thompson. But I cautioned you----
    Mr. Doggett. Yes.
    Mr. Thompson. About the possibility of distorting the 
market when you are such a huge purchaser of 50 percent of the 
drugs.
    Mr. Doggett. And so that is why I said you are opposed to 
the idea, because you think it will distort the market.
    Mr. Thompson. No, I cautioned you about that particular 
problem. I said I think a far superior one is competitive 
bidding, which I think would accomplish your objective, as well 
as not distort the market.
    Mr. Doggett. I guess some of the people that are faced with 
these soaring drug prices down in my neck of the woods think 
the market is already pretty distorted for them.
    You have also cited this model waiver agreement, which I 
hope you are going to leave with us today. The model waiver 
agreement does not add any new money to the States; does it?
    Mr. Thompson. No, it does not.
    Mr. Doggett. So if you have a State that cannot provide an 
adequate level of prescription drugs through its Medicaid 
program at present to those people that are serving it, the 
waiver is really worthless. If they can't cover the people they 
are covering now, it doesn't give them the resources to cover 
any additional people on their prescription drugs.
    Mr. Thompson. That is not true.
    Mr. Doggett. Why not?
    Mr. Thompson. Because it allows for the States, under the 
waiver, as long as they are budget-neutral, to use their 
Federal match to be able to set up this prescription drug 
coverage, which is a tremendous help to States.
    Mr. Doggett. Well, if they are using all of their Federal 
match, if a State is theoretically using all of its Federal 
match at present, and not able to meet the needs that it is 
currently covering, then getting a waiver to do more is not 
going to assure anyone any additional prescription drugs, is 
it?
    Mr. Thompson. Well, the truth of the matter is that States 
can use their Federal match in different ways, and become very 
innovative, and can allow this to be able to be used for 
prescription drug coverage. And that is why so many States are 
applying for it, looking at it, and seeing whether or not they 
could use it in their particular States. And I will be more 
than happy to leave a copy----
    Mr. Doggett. I appreciate it.
    Mr. Thompson. With any Member of the Committee.
    Mr. Doggett. I would like to get a copy. This model waiver 
agreement does not contemplate States negotiating with 
pharmaceutical manufacturers in any way similar to what Maine 
has done?
    Mr. Thompson. It certainly allows them to do that.
    Mr. Doggett. It doesn't prevent them, but it doesn't 
authorize them to do that in any way, or encourage them to do 
it, does it?
    Mr. Thompson. Well, there are certain States that are doing 
that right now, Congressman.
    Mr. Doggett. Right. And with reference to the States----
    Mr. Thompson. And there is nothing to prevent them. And 
States should be doing that.
    Mr. Doggett. Oh, I am glad to hear you say that, because I 
wanted to get a clarification on that. You are certainly 
correct that the Maine program is in litigation. The 
pharmaceutical manufacturers have done everything they could to 
prevent it from being implemented, and I am sure they will 
continue to do so until it reaches its final appeal. Does the 
Administration support programs like that that Maine has 
initiated?
    Mr. Thompson. That is why we set up the model waiver, that 
is why I instructed that it be adopted and implemented, because 
it gives States some guidance. We think it meets the guidelines 
and will not end up in litigation. We think it is something 
that States can do. And we think it is probably superior to 
Maine, in regards to the fact that it will not cause 
litigation.
    Mr. Doggett. But you are supportive of the kind of effort 
that Maine has made?
    Mr. Thompson. Absolutely. That is why I put forth the model 
waiver, Congressman.
    Mr. Doggett. With reference to the legislation that is 
contemplated that you are here today on, as well as the welfare 
reauthorization legislation that you made a quick appearance 
here on in the Subcommittee last week, does the Administration 
support imposing any unfunded mandates on the States?
    Mr. Thompson. Say that again?
    Mr. Doggett. With reference to either--the legislation you 
are here on today, or the welfare reauthorization--does the 
Administration support imposing any new, unfunded mandates on 
the States?
    Mr. Thompson. Well, Congressman, I have testified on both 
the welfare reform proposal many times in many different 
Committees of this Congress, as well as on Medicare.
    Mr. Doggett. Right.
    Mr. Thompson. And we believe very strongly that this is a 
partnership between the Federal and State Governments, on 
welfare reform, as well as on Medicare.
    Mr. Doggett. Yes, sir. I understand that. So are you 
opposed?
    Mr. Thompson. I mean as far as welfare. Medicare is a 
Federal program.
    Mr. Doggett. On both of these, you are opposed to any new 
unfunded mandates on the State, are you not?
    Mr. Thompson. It depends upon how you describe them, 
Congressman, because in certain things----
    Mr. Doggett. Well, we have got a law on it.
    Mr. Thompson. We set guidelines, we set certain goals which 
States have to meet as far as welfare reform. We think that's 
good public policy. I negotiated, when I was Governor and 
Chairman of the National Governors Organization in 1995 and 
1996, the first welfare bill with Congress. And I said at that 
time, ``You set the goals high; just give us the flexibility 
under those goals to meet those obligations.'' And we did it, 
across America. Governors did it, Republicans and Democrats.
    We feel the same thing, and the next welfare reform 
proposal will accomplish the same thing, by setting the goals 
high, but giving States the flexibility underneath there to do 
so. Now, if you want to say that those goals are unfunded 
mandates, then I will have a difference of terminology with 
you. But overall, we have given States extreme flexibility as 
far as welfare reform is concerned.
    Mr. Doggett. Thank you.
    Chairman Thomas. The gentleman's time has expired. Does the 
gentleman from Wisconsin wish to inquire?
    Mr. Ryan. I do.
    Governor, it is nice to see you again.
    Mr. Thompson. Thank you, Congressman.
    Mr. Ryan. Great to have you back. When we talk about 
improving and strengthening Medicare, which has been often 
questioned here, what we mean is right now Medicare isn't 
adequate to give seniors comprehensive benefits along the lines 
of the year 2000 medicine. And the hope is that 10 years from 
now we are not scratching our heads, thinking, ``Gosh, all the 
seniors get is year 2002 medicine, and we need to get them the 
year 2012 medicine.'' So we have to make sure that the law is 
modernized and that it is allowed to evolve with the changes in 
health care.
    And when we talk about strengthening Medicare, that means 
making it solvent for the Baby Boomer generation, so the 
promise of benefits can be met when this next new wave of 
retirees occurs.
    So in that vein, I, too, represent southeastern Wisconsin, 
which you know very well. And it has been said that, ``Fee-for-
service is working fine. Why add an alternative? Why give 
seniors other private-sector alternatives?'' In my experience, 
when we did have workable Medicare+Choice, people loved it. In 
1997 and 1998, when we had Primecare Gold and all of those 
other ones, it worked very well. People enjoyed it. They 
flooded to it.
    The problem that we experience--and you know this all too 
well--is the adjusted average per capita cost, AAPCC, 
reimbursement rate structure for Medicare+Choice was an abysmal 
failure. It didn't work well. And the last Administration did 
not do a good job of implementing Medicare+Choice.
    And in the new version of this, or in reforming this 
program, is it your intention to switch from that kind of 
reimbursement system to a bid structure reimbursement system 
like what we have with the premium support Federal employee 
health benefit plan?
    Mr. Thompson. That is what we want to do, because we think, 
Congressman, that it gives seniors the opportunity to pick the 
best program. And you are absolutely correct. When 
Medicare+Choice is in a particular area, seniors flock to it.
    Mr. Ryan. Yes.
    Mr. Thompson. But the reimbursement formula has got to be 
there so that the companies can make a profit, in order to stay 
in there and offer the services. We think, with competition 
with the Federal health employers system, that there are going 
to be many plans out there that seniors are going to be able to 
pick and choose. Some will want to stay with the current fee-
for-service, and rightly so. And they should have that right. 
But others will want to be able to pick and choose, like you 
do, like every one of us around this table does. Seniors should 
have the same opportunity.
    Mr. Ryan. I think that is right. Seniors who have employer-
sponsored Medigap plans are pretty satisfied, because their 
employers, by virtue of their past employment, provide that. 
But most seniors in our area don't have Plus Choice, don't have 
employer-sponsored Medigap, and are stuck with the bill. So 
when we hear these comparisons between fee-for-service and Plus 
Choice, when it works what you see left out in this debate is 
that Plus Choice gives you comprehensive benefits. You don't 
have to go out and buy a supplemental when you have a 
comprehensive Plus Choice plan. That is the benefit of moving 
to a choice-based system, which I think is lost here.
    One other thing that I think is being lost in this debate, 
that will be really helpful from your Administration, is the 
demonstration of the cost saving that occurs when competition 
occurs. The CMS and CBO have historically and repeatedly scored 
savings in the Medicare system when premium support is put into 
place. When competition and choice occur, quality goes up, 
costs go down, people are happier. And what ends up happening 
is, over the long run, the system saves money----
    Mr. Thompson. Radical ideas. Radical ideas.
    Mr. Ryan. These are radical ideas?
    Mr. Thompson. Costs go down, quality goes up.
    Mr. Ryan. And that is how we get to the issue of not just 
improving Medicare by giving people a comprehensive list of 
benefits so they don't have to go purchase these large 
supplementals, but we get to that issue of saving money in the 
long run in the system so that we can restore solvency to the 
system so that that promise of benefits, of evolved modern 
benefits, can be there for the next generation. And I think it 
would be helpful to have CMS share with us how those cost 
savings are achieved.
    One last quick question. The waiver: Did Wisconsin apply 
for the waiver or not, under your new waiver?
    Mr. Thompson. Wisconsin has applied.
    Mr. Ryan. OK. Thanks.
    Mr. Thompson. And first, let me just congratulate you and 
thank you for doing such a great job for Wisconsin, Congressman 
Ryan.
    Mr. Ryan. Thanks, Governor.
    Chairman Thomas. Mr. Secretary, I want to thank you very 
much. I know you have been overly generous, and you have had a 
helicopter waiting for you. But the Members are interested, and 
do want to inquire. And we appreciate your willingness to 
provide the time for full inquiry. It is difficult to do. We 
will try not to over-burden you.
    But we want to thank you very much for your presence, for 
your testimony, but most importantly, for your leadership, as 
we move forward in trying to make changes in this most 
sensitive but important area.
    Mr. Thompson. Thank you, Congressman Thomas. And let me 
congratulate you on your leadership of this Committee. And 
hopefully, we can come up with a proposal that is going to pass 
both Houses and be signed into law. It is badly needed, as you 
know. And I thank you for your leadership in this area.
    Chairman Thomas. Thank you. That is our goal, and I hope we 
succeed.
    Mr. Thompson. Thank you.
    Chairman Thomas. And to the other witnesses, we do want to 
thank you for your patience. It is kind of like that little 
sign in the store which says, ``If you are waiting, understand 
that when it is your turn we will provide you with the same 
opportunities.''
    It is now my pleasure to welcome once again to the 
Committee only the seventh Comptroller General of the United 
States. Mr. David Walker assumed the position in 1998. And it 
is one of those jobs that are absolutely critical because the 
General Accounting Office, for more than three-quarters of a 
century, has provided the kind of accountability, based upon 
requests and their own initiation, that allows us to do the 
kinds of things to make sure that the taxpayers are getting a 
return on their investment. It isn't always pleasant, but it is 
always necessary.
    And so, thank you once again for appearing before us. Your 
written testimony will be made a part of the record, and you 
can address us in any way you see fit.

 STATEMENT OF THE HON. DAVID M. WALKER, COMPTROLLER GENERAL OF 
       THE UNITED STATES, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Walker. Thank you, Mr. Chairman, Members of the 
Committee. Thank you for entering my statement into the record, 
and I will move now to summarize it.
    I am pleased to be here today to discuss options for 
increasing Medicare beneficiaries' access to prescription 
drugs. There are growing concerns about gaps in the Medicare 
Program, most notably the lack of outpatient prescription drug 
coverage, which may leave Medicare's most vulnerable 
beneficiaries with high out-of-pocket costs.
    At the same time, however, the short-term and long-term 
cost pressures facing the existing Medicare Program are 
considerable. Many of these same pressures are being 
experienced by other government and private sector employers. 
For example, earlier this week, CalPERS, the second largest 
purchaser in the Nation of health insurance behind the Federal 
Government, announced a record 25-percent increase in health 
insurance premiums for the year. This increase was fueled in 
large part by increased costs associated with prescription 
drugs.
    As I have noted previously, substantive financing and 
programmatic reforms are necessary in order to put Medicare on 
a sustainable fiscal footing for the future. In fact, Madam 
Chair, it was 10 years ago this year, when I was a trustee of 
Medicare, and along with Stan Ross, who was the other public 
trustee at the time, that we said publicly for the first time 
that the current Medicare program is unsustainable in its 
present form, and that has been repeated by every set of 
trustees since that point in time.
    Thus, any proposals to help seniors with the cost of 
prescription drugs should be carefully crafted to avoid further 
erosion of the current projected financial condition, which is 
already precarious for Medicare and it is already unsustainable 
in its present form. We are going to have a very difficult time 
delivering on promises that have already been made.
    We must also be mindful that fiscal pressures created by 
the retirement of the Baby Boom generation and rising health 
care costs are just over the horizon. As the first chart shows, 
Madam Chair, our Nation's fiscal flexibility has already 
decreased as spending for Social Security, Medicare, and 
Medicaid have absorbed an increasingly large share of the 
Federal budget. Reductions in defense spending have helped 
accommodate the growth in these entitlement programs. However, 
reductions in defense spending can no longer be used as a means 
to help fund other claims on the budget. Indeed, spending on 
defense and homeland security will grow as we seek to combat 
threats to our Nation.
    As you can see, between 1982 and 2002, the percentage of 
the Federal budget spent on Medicare and Medicaid doubled and 
those percentages are only going to go one way under our 
current system, even without prescription drug costs, and that 
is up.
    In recent years, Medicare's trustees have reinforced what 
Stan Ross and I said 10 years ago, that the Medicare Program is 
already unsustainable in its present form. The GAO's long-term 
budget simulations, which were referred to previously, show 
that the aging of the Baby Boom generation and rising per 
capita health care spending will, absent meaningful reform, 
lead to massive fiscal challenges in future years.
    Assuming, for example, that last year's tax reductions were 
made permanent and discretionary spending keeps pace with the 
economy, by mid-century, spending for the current Medicare 
Program without an addition of a drug benefit is projected to 
account for more than one-quarter of all Federal spending. In 
addition, absent fundamental reform of entitlement programs, 
the Nation is likely to face an unprecedented degree of tough 
fiscal choices in the years ahead, and this is the chart, Madam 
Chair, that was shown previously.
    The huge budgetary pressures that we are sure to face in 
the coming years require that we set priorities so that benefit 
expansions are in line with available resources. In this 
regard, the application of basic insurance principles to any 
proposed benefit could help moderate the cost for both 
beneficiaries as well as taxpayers. Under these principles, 
beneficiaries receive protections against the risk of 
catastrophic medical expenses while remaining conscious of the 
cost of care. At the same time, it is important that the 
benefit expansion proposals include targeting mechanisms to 
assure that Federal support is directed at the beneficiaries 
with the greatest financial need.
    Nevertheless, as I have said previously, no matter how well 
designed the new benefit may be, adding benefits without 
fundamentally reforming the existing program may merely hasten 
the exhaustion of Medicare's HI Trust Fund, hospital insurance 
trust fund and the further draining of Federal revenues 
associated with the supplemental medical insurance (SMI) 
program. As a result, any benefit expansion will also serve to 
make our long-range fiscal challenge even greater. Ideally, 
Medicare reforms should be designed to improve our long-range 
fiscal situation. At a minimum, it should be designed to not 
make our long-range fiscal situation worse.
    Madam Chair, I will be more than happy to answer any 
questions that you or other Members of the Ways and Means 
Committee may have. Thank you.
    [The prepared statement of Mr. Walker follows:]
   Statement of the Hon. David M. Walker, Comptroller General of the 
             United States, U.S. General Accounting Office
    Mr. Chairman and Members of the Committee:
    I am pleased to be here today as you discuss options for increasing 
Medicare beneficiaries' access to prescription drugs. There are growing 
concerns about gaps in the Medicare program, most notably the lack of 
outpatient prescription drug coverage, which may leave Medicare's most 
vulnerable beneficiaries with high out-of-pocket costs. Recent 
estimates suggest that, at any point in time, over a third of Medicare 
beneficiaries lack prescription drug coverage. The rest have at least 
some drug coverage through various sources--most commonly employer-
sponsored health plans--although recent evidence indicates that this 
coverage is beginning to erode.
    At the same time, however, the short-term and long-term cost 
pressures facing the existing Medicare program are considerable. After 
a brief slowdown in the late 1990s, Medicare spending growth has 
recently accelerated. In the last fiscal year, growth in program 
spending reached nearly 9 percent, with spending on certain services 
increasing much more rapidly. For example, spending for home health 
grew about 30 percent and spending for skilled nursing facility care 
grew slightly over 20 percent.
    As I have noted previously, substantive financing and programmatic 
reforms are necessary to put Medicare on a sustainable footing for the 
future. These fundamental reforms are vital to reducing the program's 
growth, which threatens to absorb ever-increasing shares of the 
nation's budgetary and economic resources. Thus, any proposals to help 
seniors with the costs of prescription drugs would need to be carefully 
crafted to avoid further erosion of the projected financial condition 
of the Medicare program, which is already unsustainable in its present 
form.
    We must also remain mindful that the fiscal pressures created by 
the retirement of the baby boom generation and rising health care costs 
are just over the horizon. Between now and 2035, the number of people 
who are 65 and older will double. Federal health and retirement 
spending are expected to surge as people live longer and spend more 
time in retirement. In addition, advances in medical technology are 
likely to keep pushing up the cost of providing health care. Moreover, 
the baby boomers will have left behind fewer workers to support them in 
retirement. Absent substantive reform of the entitlement programs, a 
rapid escalation of federal spending for Social Security, Medicare, and 
Medicaid beginning less than 10 years from now is virtually certain to 
overwhelm the rest of the federal budget.
    As figure 1 shows, fiscal flexibility has already decreased as 
spending for Social Security, Medicare, and Medicaid have absorbed an 
increasingly large share of the federal budget. Reductions in defense 
spending have helped accommodate the growth in these entitlement 
programs. However, reductions in defense spending can no longer be used 
as a means to help fund other claims on the budget; indeed, spending on 
defense and homeland security will grow as we seek to combat threats to 
our nation.

     FIGURE 1: COMPOSITION OF FEDERAL SPENDING BY BUDGET FUNCTION.
[GRAPHIC] [TIFF OMITTED] T9762A.001

    Note: 2002 data based on OMB current services estimate.
    Today my remarks will focus on (1) the access and affordability 
issues that underlie the interest in a Medicare prescription drug 
benefit, (2) the financial challenges Medicare faces to meet its 
current obligations, and (3) key considerations in light of the tension 
between benefit expansions and budgetary pressures.
    In summary, intentions to add prescription drug coverage to 
Medicare's benefits come during a period of rapid growth in national 
spending for pharmaceuticals. Between 1995 and 2000, spending for 
prescription drugs rose more than 2 \1/2\ times faster than spending 
for health care overall, and this dramatic growth is expected to 
continue in the coming years. In the absence of a drug benefit in the 
Medicare program, many beneficiaries obtain coverage from other 
sources, including health plans, public programs, and the Medigap 
insurance market. But the price, availability, and level of such 
coverage vary widely, leaving substantial gaps and exposure to high 
out-of-pocket costs for hundreds of thousands of beneficiaries.
    Despite the various pressures to adopt a prescription drug benefit, 
the rapidly escalating cost of meeting current obligations for present 
and future beneficiaries argues for careful deliberation and extreme 
caution in crafting any benefit expansion. Medicare's trustees have 
indicated in recent years that the Medicare program is already 
unsustainable in its present form. GAO's long-term budget simulations 
show that the aging of the baby boom generation and rising per capita 
health care spending will, absent meaningful reform, lead to massive 
fiscal challenges in future years. Assuming, for example, that last 
year's tax reductions are made permanent and discretionary spending 
keeps pace with the economy, by mid-century, spending for the current 
Medicare program--without the addition of a drug benefit--is projected 
to account for more than one-quarter of all federal revenues. In fact, 
federal revenues may only be adequate to pay Social Security and 
interest on the federal debt. As a result, massive spending, tax 
increases, or some combination of the two would be necessary to obtain 
balance. (See fig. 2.)

FIGURE 2: COMPOSITION OF SPENDING AS A SHARE OF GROSS DOMESTIC PRODUCT 
 (GDP) ASSUMING DISCRETIONARY SPENDING GROWS WITH GDP AND THE TAX CUTS 
                             DO NOT SUNSET.
[GRAPHIC] [TIFF OMITTED] T9762B.002

    The huge budgetary pressures that we are sure to face in the coming 
years require that we set priorities so that any benefit expansions are 
in line with available resources. In this regard, the application of 
basic health insurance principles to any proposed benefit could help 
moderate the cost for both beneficiaries and taxpayers. Under these 
principles, beneficiaries receive protections against the risk of 
catastrophic medical expenses while remaining conscious of the cost of 
care. At the same time, it is important that benefit expansion 
proposals include targeting mechanisms to ensure that federal support 
is directed at the beneficiaries with the greatest financial risk. 
Nevertheless, as I have stated previously, no matter how well designed 
a new benefit may be, adding benefits without fundamentally reforming 
the existing program will merely hasten the exhaustion of Medicare's 
Hospital Insurance (HI) trust fund and the draining of general 
revenues. Any benefit expansion will also serve to make our long-range 
fiscal challenge even greater. Ideally, Medicare reforms should be 
designed to improve our long-range fiscal situation. At a minimum, they 
should be designed so as not to make our long-range fiscal challenge 
worse.
Rising Drug Spending Elevates Beneficiary Access Concerns
    Extensive research and development have led to new and improved 
prescription drug therapies that, in some instances, have replaced 
other health care interventions. For example, new medications for the 
treatment of ulcers have virtually eliminated the need for some 
surgical treatments. As a result of these innovations, the importance 
of prescription drugs as part of health care has grown. However, not 
all new drug therapies serve to reduce the need for more invasive and 
expensive medical procedures. Some new drug therapies are substitutes 
for already existing, less expensive, ones and may not appreciably 
improve efficacy or reduce side effects. Others may be used more for 
making lifestyle enhancements than for extending life or treating a 
serious medical condition. Spending on the new drug therapies, along 
with the mass media advertising of prescription drugs, serves to 
significantly increase total drug spending as a component of health 
care costs.
    The Medicare benefit package, largely designed in 1965, provides 
virtually no outpatient drug coverage. Beneficiaries may fill this 
coverage gap in various ways. All beneficiaries have access to 
individually purchased supplemental policies--Medigap--when they first 
become eligible for Medicare at age 65. Those policies that include 
drug coverage tend to be expensive and provide only limited benefits. 
Some beneficiaries have access to coverage through employer-sponsored 
policies or Medicare health maintenance organizations (HMO). In recent 
years, coverage through these sources has become more expensive and 
less widely available. Beneficiaries whose income falls below certain 
thresholds may qualify for Medicaid or other public programs.
Prescription Drug Costs Continue to Rise Rapidly
    In recent years, prescription drug expenditures have grown 
substantially, both in total and as a share of all heath care outlays. 
Prescription drug spending grew an average of almost 15 percent per 
year from 1995 to 2000, well more than double the 5.6 percent average 
growth rate for health care expenditures overall. (See table 1.) As a 
result, prescription drugs account for a growing share of health care 
spending rising from 6.1 percent in 1995 to 9.4 percent in 2000. By 
2011, prescription drug expenditures are expected to account for almost 
15 percent of total health expenditures.

                Table 1: National Expenditures for Prescription Drugs and Health Care, 1995-2000.
----------------------------------------------------------------------------------------------------------------
                                                                             Annual growth in   Annual growth in
                                                         Prescription drug  prescription drug     health care
                          Year                           expenditures  (in  expenditures from  expenditures from
                                                             billions)        previous year      previous year
                                                                                (percent)          (percent)
----------------------------------------------------------------------------------------------------------------
2000...................................................             $121.8               17.3                6.9
1999...................................................              103.9               19.2                5.7
1998...................................................               87.2               15.1                5.4
1997...................................................               75.7               12.8                4.9
1996...................................................               67.2               10.5                5.0
1995...................................................               60.8               11.2                5.7
Average annual growth between 1995 and 2000............                                  14.9                5.6
----------------------------------------------------------------------------------------------------------------
Source: Centers for Medicare and Medicaid Services, Office of the Actuary.

    Total drug expenditures have been driven up by several factors. 
Drug coverage by private insurance has likely contributed to the rise 
in spending, because insured consumers are partially insulated from the 
costs. In the years from 1993 to 2000, the share of prescription drug 
expenditures paid by private health insurers rose from more than a 
fourth to almost a half. (See fig. 3.) The development of new, more 
expensive drug therapies--including new drugs that replace old drugs 
and new drugs that treat disease more effectively--also contributed to 
the growth in drug spending by boosting the volume of drugs used as 
well as the average price for drugs used. Similarly, biotechnology 
advances and a growing knowledge of the human immune system are 
significantly shaping the discovery, design, and production of drugs. 
Advertising pitched to consumers has also served to increase the demand 
for prescription drugs. A recent study found that, in 2000, the 50 
drugs most heavily advertised directly to consumers were responsible 
for nearly half of the roughly $21-billion increase in retail spending 
on prescription drugs from 1999 to 2000.\1\
---------------------------------------------------------------------------
    \1\ The National Institute for Health Care Management Research and 
Educational Foundation, Prescription Drugs and Mass Media Advertising, 
2000 (Washington, D.C.: Nov. 2001).
---------------------------------------------------------------------------

  FIGURE 3: SHARES OF NATIONAL OUTPATIENT DRUG EXPENDITURES BY PAYER 
                          TYPE, 1993 AND 2000.
[GRAPHIC] [TIFF OMITTED] T9762C.003

    Note: Out-of-pocket expenditures include direct spending by 
consumers for prescription drugs, such as coinsurance, 
deductibles, and any amounts not covered by insurance. Out-of-
pocket premiums paid by individuals are not counted here.
Drug Coverage for Medicare Beneficiaries Is Becoming More Expensive and 
        Less Available
    In 2001, CBO estimated that the average Medicare beneficiary would 
use $1,756 worth of prescription drugs. This is a substantial amount 
considering that some beneficiaries lack any drug coverage and others 
with coverage may have less than in previous years. Moreover, 
significant numbers of beneficiaries have drug expenses much higher 
than those of the average beneficiary. CBO also estimated that some 10 
percent of Medicare beneficiaries would have expenditures of $4,000 or 
more.\2\
---------------------------------------------------------------------------
    \2\ CBO estimates reported in Michael E. Gluck and Kristina W. 
Hanson, Medicare Chart Book (Menlo Park, Calif.: The Henry J. Kaiser 
Family Foundation, fall 2001).
---------------------------------------------------------------------------
    According to a recent survey, in the fall of 1999, nearly two-
thirds of Medicare beneficiaries had some form of drug coverage from a 
supplemental insurance policy, health plan, or public program. More 
than one-third reported that they lacked drug coverage altogether.\3\ 
(See fig. 4.)
---------------------------------------------------------------------------
    \3\ Mary A. Laschober and others, ``Trends in Medicare Supplemental 
Insurance and Prescription Drug Coverage, 1996 to 1999,'' Health 
Affairs, www.healthaffairs.org (Feb. 27, 2002).
---------------------------------------------------------------------------

  FIGURE 4: SOURCE OF DRUG COVERAGE FOR MEDICARE BENEFICIARIES, FALL 
                                 1999.
[GRAPHIC] [TIFF OMITTED] T9762D.004

    Employer-sponsored health plans provide drug coverage to the 
largest segment of the Medicare population with coverage. However, 
there are signs that this coverage is eroding. Fewer employers are 
offering health benefits to retirees eligible for Medicare, and those 
that continue to offer coverage are requiring retirees to pay a larger 
share of costs. The proportion of large employers offering health 
coverage to retirees eligible for Medicare declined from 31 percent in 
1997 to 23 percent in 2001. At the same time, the proportion of large 
employers requiring Medicare-eligible retirees to pay the full cost of 
their health coverage increased from 27 percent to 31 percent.\4\
---------------------------------------------------------------------------
    \4\ William M. Mercer, Incorporated, Mercer/Foster Higgins National 
Survey of Employer-Sponsored Health Plans, 1997 (New York, N.Y.: 1998) 
and Mercer/Foster Higgins National Survey of Employer-Sponsored Health 
Plans, 2001 (New York, N.Y.: 2002).
---------------------------------------------------------------------------
    In March 2001, 10 percent of Medicare beneficiaries obtained 
prescription drug coverage through a Medicare HMO, down from about 15 
percent in 1999. Medicare HMOs have found drug coverage to be an 
attractive benefit that beneficiaries consider when choosing to enroll. 
However, owing to rising drug expenditures and their effect on plan 
costs, fewer Medicare HMOs are offering a drug benefit. In 2002, 50 
percent of Medicare beneficiaries have access to a Medicare HMO with 
drug coverage, down from 65 percent in 1999. The drug benefits the 
plans do offer have become less generous, increasing enrollees' out-of-
pocket costs and limiting their total drug coverage.
    About 7 percent of beneficiaries purchase Medigap policies that 
provide drug coverage. These policies have shortcomings: they tend to 
be expensive, involve significant cost-sharing, and do not provide 
protection against catastrophic out-of-pocket expenses. In 1999, 
average premiums for standard Medigap policies that included drug 
coverage ranged from about $1,400 per year to $1,700 per year.\5\ 
Beneficiaries remained responsible for a $250 deductible for drugs and 
50-percent coinsurance. The drug benefit was capped at an annual limit 
of $1,250 or $3,000. Furthermore, Medigap premiums have been increasing 
in recent years. One recent study reported that, from 1999 to 2000, 
premiums for the Medigap plans offering prescription drug coverage rose 
the most--by 17 to 34 percent--compared to 4 to 10 percent increases 
for Medigap plans without prescription drug coverage.\6\
---------------------------------------------------------------------------
    \5\ U.S. General Accounting Office, Medigap: Current Policies 
Contain Coverage Gaps, Undermine Cost Control Incentives, GAO--02--533T 
(Washington, DC: Mar. 14, 2002).
    \6\ Weiss Ratings Inc., ``Prescription Drug Costs Boost Medigap 
Premiums Dramatically,'' http://
www.weissratings.com/NewsReleases/Ins__Medigap/20010326Medigap.htm 
(Palm Beach Gardens, Fla.: Mar. 26, 2001).
---------------------------------------------------------------------------
    All Medicare beneficiaries who qualify for full Medicaid benefits 
receive drug coverage that may include some limits, such as 
restrictions on the number of prescriptions that can be filled per 
month, depending on the state's Medicaid plan. Individuals with low 
incomes who are not eligible for full Medicaid benefits may have access 
to some drug coverage through a state pharmacy assistance program. As 
of April 2002, 26 states and the District of Columbia had such a 
program in operation.
    Access barriers to prescription drugs may be particularly acute for 
Medicare beneficiaries who lack drug coverage and have substantial 
health care needs. In 1998, among beneficiaries in poor health, those 
without drug coverage had drug expenditures that were $910 lower than 
those with drug coverage and they filled 14.5 fewer prescriptions. The 
difference in expenditures and use between the two groups suggests that 
the lack of drug coverage may impose barriers to health care.\7\
---------------------------------------------------------------------------
    \7\ John A. Poisal and Lauren Murray, ``Growing Differences Between 
Medicare Beneficiaries With and Without Drug Coverage,'' Health Affairs 
vol. 20, no. 2 (March/April 2001).
---------------------------------------------------------------------------
Expanding Benefits Needs to Be Considered in Light of Larger Medicare 
        Fiscal Concerns
    The current Medicare program, without improvements, is ill suited 
to serve future generations of seniors and eligible disabled Americans. 
Although the need to modernize Medicare's benefit package is 
compelling, the program is already fiscally unsustainable in its 
present form, and the disparity between program expenditures and 
program revenues is expected to widen dramatically in the coming years.
As Currently Structured, Medicare Is Fiscally Unsustainable
    On March 26, 2002, the trustees of the Medicare trust funds 
reported on the current and projected financial status of the program 
over the next 75 years. The report stated that, while the near-term 
financial condition has improved slightly since last year's report, 
Medicare continues to face substantial financial challenges in the not-
too-distant future that need to be addressed soon.
    Medicare's fiscal health is often gauged by the projected solvency 
of the HI trust fund, which pays for inpatient hospital stays, skilled 
nursing care, hospice, and certain home health services and is financed 
by payroll taxes. The gap between income and costs can best be 
expressed relative to taxable payroll (the HI trust fund's funding 
base). This year, under the trustees' 2002 intermediate estimates, the 
75-year actuarial deficit is projected to be 2.02 percent of taxable 
payroll--an increase from last year's projected deficit of 1.97 
percent. This means that to bring the HI trust fund into balance over 
the 75-year period, either program outlays would have to be immediately 
reduced by 38 percent or payroll tax income immediately increased by 
almost 70 percent, or some combination of the two.
    The trustees' report also projected that the trust fund for 
Medicare's HI component would remain solvent until 2030. However, the 
projection that the HI trust fund is not facing imminent insolvency 
does not mean that we can or should wait until 2030 to take action. 
Although HI revenues currently exceed HI outlays, the March 2002 
trustees' report projects that cash deficits will reemerge in 2016 and 
grow larger with each passing year. (See fig. 5.) Unlike private trust 
funds that can set aside money for the future by investing in financial 
assets, the Medicare HI trust fund is essentially an accounting device. 
It allows the government to track the extent to which earmarked payroll 
taxes cover Medicare's HI outlays. While the U.S. Treasury securities 
in the HI trust fund are backed by the full faith and credit of the 
U.S. government, they essentially represent an unfunded promise to pay, 
which will require tough fiscal choices in future years.

FIGURE 5: NET CASH FLOW OF THE MEDICARE HOSPITAL INSURANCE TRUST FUND, 
                               2000-2040.
[GRAPHIC] [TIFF OMITTED] T9762E.005

    To finance its cash deficits, the HI trust fund will need to draw 
on the special-issue Treasury securities acquired during the years when 
the program generated cash surpluses. The negative cash flow will place 
increased pressure on the federal budget. In essence, for HI to 
``redeem'' its securities, the government will need to obtain cash 
through some combination of increased taxes, spending cuts, increased 
borrowing from the public (or correspondingly less debt reduction than 
would have been the case had cash flow remained positive).
    A focus on HI solvency alone, however, does not provide a complete 
picture of the Medicare program's expected future fiscal claims. The 
Supplementary Medical Insurance (SMI) portion of Medicare, which covers 
physician and outpatient hospital services, diagnostic tests, and 
certain other medical services, is not reflected in the HI solvency 
measure. SMI is largely funded through general revenues and its outlays 
are projected to grow even faster than HI outlays in the near future.
Bleak Outlook for Medicare's Long-Term Sustainability Increases Urgency 
        for Program Reform
    Without meaningful reform, the long-term financial outlook for 
Medicare is bleak. Together, Medicare's HI and SMI expenditures are 
expected to increase dramatically, rising from about 11 percent of 
federal revenues in 2001 to more than one-quarter by mid-century. Over 
the same time frame, Medicare's expenditures are expected to more than 
double as a share of the nation's economy, from 2.4 to 6.0 percent, as 
shown in figure 6. Moreover, relatively fewer potential workers will be 
available to shoulder Medicare's financial burden. In 2000 there were 
4.9 working-age persons (18 to 64 years) per elderly person, but by 
2030, this ratio is projected to decline to 2.8.\8\
---------------------------------------------------------------------------
    \8\ For the HI portion of Medicare, in 2001 there were 4 covered 
workers per HI beneficiary. Under their intermediate 2002 estimates, 
the trustees project that by 2030 there will be only 2.4 covered 
workers per HI beneficiary.
---------------------------------------------------------------------------

     FIGURE 6: MEDICARE SPENDING AS A PERCENTAGE OF GDP, 2000-2075
[GRAPHIC] [TIFF OMITTED] T9762F.006

    The progressive absorption of a greater share of the nation's 
resources for health care is in part a reflection of the rising share 
of the population that is elderly. Medicare's rolls are expanding and 
are projected to increase rapidly with the retirement of the baby 
boomers. Today's elderly make up about 12 percent of the total 
population; by 2030, they will comprise 20 percent. Medicare growth 
rates, however, reflect not only a rapidly increasing beneficiary 
population, but also the escalation of health care costs at rates well 
exceeding general rates of inflation.
    When viewed from the perspective of the entire budget and the 
economy, the growth in Medicare spending will become progressively 
unsustainable over the longer term. Our updated budget simulations show 
that to move into the future with no changes in federal health and 
retirement programs is to envision a very different role for the 
Federal Government. Assuming, for example, that last year's tax 
reductions are made permanent and discretionary spending keeps pace 
with the economy, spending for net interest, Social Security, Medicare, 
and Medicaid consumes nearly 50 percent of federal revenue by 2015 and 
more than three-quarters of federal revenue by 2030, leaving little 
room for other federal priorities including defense and education. (See 
fig. 2.) By 2050, total federal revenue is insufficient to fund 
entitlement spending and interest payments, resulting in deficits that 
are escalating out of control.
    Our long-term simulations illustrate the magnitude of the fiscal 
challenges associated with an aging society and the significance of the 
related challenges the government will be called upon to address. As I 
have stated previously, early action to reform Medicare and other 
programs would yield the highest fiscal dividends for the federal 
budget and would provide a longer period for prospective beneficiaries 
to make adjustments in their own planning.\9\ Waiting to build economic 
resources and reform future claims entails significant risks. First, we 
lose an important window during which today's relatively large 
workforce can increase savings and enhance productivity, two elements 
critical to growing the future economy. Second, we lose the opportunity 
to reduce the interest burden on the federal budget, thereby creating a 
legacy of higher debt. Third and most critically, we risk losing the 
opportunity to phase in changes gradually so that all affected parties 
can make the adjustments needed to adequately plan for the future.
---------------------------------------------------------------------------
    \9\ U.S. General Accounting Office, Budget Issues: Long-Term Fiscal 
Challenges, GAO-02-467T (Washington, D.C.: Feb. 27, 2002) and Medicare: 
New Spending Estimates Underscore Need for Reform, GAO-01-1010T (July 
25, 2001).
---------------------------------------------------------------------------
    Unfortunately, our long-range challenge has become more difficult, 
and the window of opportunity to address the entitlement challenge is 
narrowing. It remains more important than ever to return to these 
issues over the next several years. Ultimately, the critical question 
is not how much a trust fund has in assets, but whether the government 
as a whole can afford the promised benefits now and in the future and 
at what cost to other claims on scarce resources.
Private Health Insurance Principles Should Guide Reform Efforts
    Given the current federal fiscal environment, we cannot afford to 
ignore the difficult policy choices that must be made to keep the 
Medicare program on a sustainable footing. Adding prescription drug 
coverage to the Medicare benefit package would require balancing 
competing concerns about program sustainability, federal obligations, 
and the hardship faced by some beneficiaries. The addition of a benefit 
that has the potential to be massively expensive should be focused on 
meeting the needs deemed to be of the highest priority. This focus 
would entail targeting financial help to beneficiaries most in need 
and, to the extent possible, avoiding the substitution of public for 
private coverage. I continue to maintain, that, optimally, benefit 
expansions should be made in the context of overall program reforms 
that are designed to make the program more sustainable over the long 
term.
    Several basic principles of health insurance provide a framework 
for keeping any new prescription drug benefit more affordable for both 
beneficiaries and the taxpayers. First, as health insurance is intended 
to protect individuals against large, or catastrophic, expenses, a 
well-designed benefit should limit beneficiaries' liability for out-of-
pocket expenses. Second, a benefit should be designed to include 
reasonable cost-sharing to encourage the appropriate use of services. 
Third, the benefit should include features to avoid adverse selection, 
that is, avoid covering only beneficiaries who will use the benefit. 
Including the individuals who may not currently need the benefit--but 
may need it in the future--can spread the risk and help keep the cost 
down for everyone.
    Leading proposals to integrate prescription drug coverage into the 
Medicare program, to varying degrees, incorporate these principles. For 
example, the proposals commonly limit a beneficiary's financial 
liability for prescription drug costs. They seek to restrain 
inappropriate spending, in part by requiring cost-sharing in the form 
of a deductible and coinsurance. To make drug coverage attractive to a 
broader spectrum of beneficiaries, the proposals subsidize the 
beneficiary premium. To further encourage beneficiaries to sign up for 
prescription drug coverage when they are healthy, the proposals include 
provisions that discourage delayed enrollment. Finally, because even 
modest cost-sharing amounts might prove too burdensome for some 
individuals, the proposals include targeting mechanisms to help prevent 
low income from becoming a barrier to obtaining prescription drug 
coverage.
    Although the leading prescription drug coverage proposals share 
certain key design features, they differ in important details, such as 
the amount of required cost sharing and the limit on beneficiary out-
of-pocket costs. These differences reflect trade-offs in cost-control 
mechanisms, benefit generosity, and protections for beneficiaries with 
high needs. Careful debate about the different trade-offs is important, 
because both the overall design of a new benefit and the associated 
details determine the likely impact on both beneficiaries and 
taxpayers. Frankly, we know that incorporating a prescription drug 
benefit into the existing Medicare program will add hundreds of 
billions of dollars to program spending over the next 10 years. For 
this reason, I cannot overstate the importance of adopting meaningful 
financial reforms to ensure that Medicare remains viable for future 
generations.
Concluding Observations
    Updating the Medicare benefit package may be an important step in 
addressing an aging society's legitimate expectations for health care. 
Expanding access to prescription drugs could ease the significant 
financial burden some Medicare beneficiaries face because of outpatient 
drug costs. However, it is essential that we not take our eye off the 
ball. The most critical issue facing Medicare is the need to ensure the 
program's long-range financial integrity and sustainability. Care must 
be taken to ensure that any potential expansion of the program be 
balanced with other programmatic reforms so that we do not worsen 
Medicare's existing financial imbalances. The program needs to include 
adequate fiscal incentives to control costs and should be carefully 
targeted to meet genuine needs while remaining affordable.
    This generation has a stewardship responsibility to future 
generations to reduce the debt burden they will inherit, to provide a 
strong foundation for future economic growth, and to ensure that future 
commitments are both adequate and affordable. Changes need to be 
considered as part of a broader initiative to address Medicare's 
current fiscal imbalance and promote the program's longer-term 
sustainability. Balancing these competing concerns may require the best 
from government-run programs and private sector efforts to modernize 
Medicare for the future. Medicare reform and modernization are best 
done with considerable lead-time to phase in changes and take action 
before the changes that are needed become dramatic and disruptive.
    Mr. Chairman, this concludes my prepared statement. I will be happy 
to answer any questions you or other committee members may have.
Contacts and Acknowledgments
    For future contacts regarding this testimony, please call William 
J. Scanlon, Director, Health Care Issues, at (202) 512-7114 or Laura A. 
Dummit, Director, Health Care--Medicare Payment Issues, at (202) 512-
7119. Other individuals who made key contributions include Linda Baker, 
James Cosgrove, Hannah Fein, James McTigue, Jennifer Podulka, and Lisa 
Rogers.

                                

    Mrs. Johnson OF CONNECTICUT. [Presiding.] Thank you very 
much, Mr. Walker.
    I am going to turn first to Mr. McCrery, and we will get 
through as many questioners as possible before we have to go 
vote.
    Mr. McCrery. Thank you, Madam Chair.
    Mr. Walker, I thought your testimony was excellent, and it 
attempts to ring the bell that we need to pay attention. I have 
said several times in this Committee room that I think Congress 
is fiddling while the budget is burning. You try to underscore 
that in your testimony and I appreciate that.
    One thing you say, though, that I think may leave with some 
the wrong impression, you say that assuming the 2001 tax cut is 
made permanent, then by 2050, Medicare, Medicaid, Social 
Security, and interest on the debt will consume all Federal 
revenues. One might hear that and think, gee, this tax cut, if 
made permanent, will reduce revenue so much that we will not 
have enough to pay for everything, and in fact, if you look at 
the chart that you have up right now, there is a thin black 
line that is hard to see for the Members, but if they look 
closely, they can see a thin black line that goes across the 
chart and it is entitled, ``Revenues,'' and it is expressed as 
a percent of the gross domestic product (GDP). If you look 
closely, you can see that even if the tax cut is made 
permanent, that revenues as a percent of our National income 
remain steady. I cannot tell exactly, but it looks like it is 
somewhere around 18 to 19 percent of GDP, is that correct?
    Mr. Walker. About 19 percent, roughly, of GDP, that is 
correct.
    Mr. McCrery. And historically, Mr. Walker, what have 
revenues to the Federal Government been as a percent of GDP?
    Mr. Walker. The highest that it has ever been, I believe, 
Mr. McCrery, was just under 21 percent of GDP, and I think your 
point is excellent, and that is no matter what happens with 
regard to the tax system, whether or not the current tax 
changes are made permanent or not, our imbalance is so huge 
that we need to begin to reform the base. We need to not only 
look at entitlement programs. We also have to look at 
discretionary spending to find out what is working and what is 
not working because the numbers just do not add up and we are 
not going to be able to deliver on our promises unless we make 
some fundamental changes.
    Mr. McCrery. Exactly, but I wanted to underscore that your 
assuming the 2001 tax cut is made permanent is not a criticism 
of making the tax cut permanent and your conclusion is not that 
revenues will dip as a result of that. You are just trying to 
paint a scenario that you think is a realistic one, because 
most of those tax cuts eventually will be made permanent, we 
think, most people think.
    Mr. Walker. I did it this way for several reasons. One, I 
know that is how the House passed the bill.
    Mr. McCrery. Right.
    Mr. Walker. And secondly, by showing it this way, you can 
see that even if the tax cut is not extended, we still have a 
huge problem. So by doing it this way, you can see both ways, 
because otherwise what you would do, Mr. McCrery, as you 
properly pointed out, you would just extend that black line all 
the way across. It would not dip as it does between 2000 and 
2015. It would not dip. In any event it is still way out of 
balance.
    Mr. McCrery. Right. Twelve or thirteen years ago when I was 
on the Budget Committee, I asked Chairman Greenspan, who was 
appearing before the Budget Committee, if he was concerned that 
as we raised revenues to meet these obligations and we started 
to take in 23, 24 percent of GDP or higher for revenues, did 
that disturb him as an economist in terms of the nature of our 
economy, the nature of our society, and he responded yes, that 
it did. If we allow the Federal Government to take in too high 
a percent of what we produce as a country, that it could very 
well change the nature of our society.
    And I am concerned about that, too, but I think we have to 
start talking about these kinds of choices in an honest, 
straightforward way, and we have not done that, so I appreciate 
very much your pointing these things out.
    Mrs. Johnson OF CONNECTICUT. Mr. Walker, if I may, we only 
have 5 minutes before we must actually leave to vote. I am 
going to forego my questions, and I am very pleased that my 
colleagues here are going to try to fit their time in so that 
then you can leave, and we can convene the last panel as soon 
as the next three votes are over.
    Mr. Becerra?
    Mr. Becerra. I thank the gentlelady for yielding the time, 
and I will try to be brief in my remarks and hope my two 
colleagues have an opportunity, as well, to question.
    Mr. Walker, first, thank you very much for being here. I 
want to make sure we are clear on something here. As much as 
some people might want to portray this as a ``sky is falling'' 
situation for Medicare, in fact, Medicare has never found 
itself in a better position when it comes to surviving over the 
next several years, is that not correct?
    Mr. Walker. Yes, but I think we have to be very careful. 
Medicare has never been in a good financial condition.
    Mr. Becerra. We have never been at a point where we can say 
that we can see it extending for 75 years, but----
    Mr. Walker. Right.
    Mr. Becerra. Today, the projection is that we can see it at 
least going for the next 28 years, and we have never, over the 
history of Medicare, been able to say that we have been able to 
project that it would be able to survive 28 years with things 
as they are. I am not trying to imply that that is good. I am 
just trying to make sure it is clear that it is better than it 
has been before and we now have to address the fact that with 
the Baby Boom generation and the high cost of medical care, we 
do need to do something.
    Let me ask a question, because I know I want to be brief 
and give my colleagues some time. That chart, I think, is very 
telling that you provide to us, and over the next 40 to 50 
years, we can see, assuming these projections are correct, 
where we will be spending our Federal dollars. According to 
your chart, the biggest expenditure we are going to have within 
that bar, the four blocks that you show, Social Security, 
Medicare, Medicaid, and other domestic programs and interest on 
national debt, the largest is the interest on the national 
debt, in essence, moneys that will never benefit any particular 
person, will do nothing to improve a program, because it is 
just going to pay a debt, and not even the principal on that 
national debt but just the interest we owe on that debt.
    Now, in a previous chart, you show in the last 10 years, we 
have actually decreased the interest payments that we have been 
making on the national debt and that is because of the 
prosperity that we saw over the last 8 to 10 years before we 
hit this recession within the last couple of years. But let me 
ask you this. If I were to give you $400 billion right now and 
say, over the next 10 years, I can give you $400 billion and 
let us spend it on reducing the interest payments on the 
national debt, would the size of that blue block within that 
final bar for 2050 be as big?
    Mr. Walker. Well, it would go down, obviously. If you end 
up paying down debt held by the public, then obviously you are 
going to pay less interest, and over time, the power of 
compounding is very significant.
    Mr. Becerra. So if we could take the $400 billion that it 
is estimated we are going to take in within the Medicare trust 
fund in surplus money, in other words, money that the Medicare 
system does not need to use to pay out for benefits, if we were 
to take that surplus money in the Medicare trust fund and put 
it into paying down the national debt as opposed to what the 
President has proposed in his budget over the next 10 years, of 
spending it on things, including another tax cut, would we not 
be able to reduce the size of the national payment on interest?
    Mr. Walker. Well, you would, but you would have to cut the 
other spending that the money is associated with.
    Mr. Becerra. Absolutely. You would have to make some hard 
choices. Let me stop there and yield the remainder of my time.
    Mrs. Johnson OF CONNECTICUT. Let me recognize Congresswoman 
Thurman from Florida.
    Mrs. Thurman. Just very quickly, and probably to that 
point, because I think it was a very big concern for some of us 
when Secretary Thompson told us that the Federal tax policy is 
not taken into consideration when the Administration considers 
the Medicare prescription drug benefit, so I would ask you as 
the Comptroller General, is that wise fiscal policy, for us to 
ignore the financial impact of tax policy when planning for 
other Federal spending like Medicare?
    Mr. Walker. We look at the bottom line, and the bottom line 
is basically the difference between the revenues and the 
expenditures. What I am trying to do here is to not get in the 
debate about whether or not to extend the tax cut----
    Mrs. Thurman. But your bottom line would be based on 
spending?
    Mr. Walker. It would be a----
    Mrs. Johnson OF CONNECTICUT. If I may, we only have 2\1/2\ 
minutes left. Mr. Doggett, would you----
    Mr. Doggett. Thank you. Thank you for your service, 
particularly when some last year wanted to give a blank check 
to the airlines. I appreciate the role that your office played 
in looking at that problem.
    With reference to the predicament that you described here 
today and in trying to look toward the best policy answers, the 
one that has been discussed here today perhaps the most is 
Medicare+Choice. Has GAO not done some studies of 
Medicare+Choice that suggest that it is not a panacea?
    Mr. Walker. It is not a panacea, but part of the issue is 
the way Medicare+Choice was designed, the reimbursement rate 
was such that, in fact, it turned out not saving the Federal 
Government very much money. What ended up happening is that the 
providers wanted, in order to be able to attract individuals to 
their plans, to provide additional benefits as an incentive for 
them to be able to come into the plans, which they did. They 
also wanted to be able to make a profit margin, which is 
appropriate. But the problem is that the numbers did not add 
up. There is no question that choice can help to control cost 
and to improve quality, but it has to be designed carefully.
    Mr. Doggett. One of those GAO studies, for example, showed 
that the payment increases that we approved here in Congress 
have not led to increased benefits or availability for seniors, 
did it not?
    Mr. Walker. I would have to look at the detailed study.
    Mr. Doggett. And did not another one----
    Mrs. Johnson OF CONNECTICUT. Mr. Doggett, if I may, we have 
about 30 seconds left to vote.
    Mr. Doggett. Last question.
    Mrs. Johnson OF CONNECTICUT. They are going to hold it open 
a couple of minutes.
    Mr. Doggett. Did the GAO not also find that Medicare+Choice 
plans are generally overpaid compared to traditional Medicare?
    Mr. Walker. In some cases, yes, we did, and----
    Mrs. Johnson OF CONNECTICUT. I would just like to add on 
the record that the Medicare+Choice plans did not receive 
anywhere near the increases that the fee-for-service plan 
received, and also that these rosy estimates of how healthy 
Medicare is are based on incredibly faulty assumptions. They 
assume that we can cut physicians 5 percent several more years, 
an absolutely unsustainable assumption. We will have no doctors 
in the program if we do that.
    So we are talking big picture issues. I think the issues 
that have been raised here have been very legitimate, but do 
not for a minute think that there is anything rosy about the 
financial circumstances of Medicare, particularly as we face 
the need for prescription drugs amongst our seniors and better 
ability to manage chronic illness.
    Thank you very much, Mr. Walker.
    Mr. Walker. Thank you.
    Mrs. Johnson OF CONNECTICUT. We will return in about 15 
minutes for the last panel.
    Mr. Walker. Thank you, Madam Chair.
    [Recess.]
    Mrs. Johnson OF CONNECTICUT. If the panel will seat itself. 
Mr. Bruce Bradley, Director of Health Plan Strategy and Public 
Policy of General Motors; Ray Gilmartin, President and chief 
executive officer of Merck; William Novelli, the Executive 
Director and Chief Executive Officer of AARP; John Rector, the 
Vice President of government Affairs and General Counsel for 
the National Community Pharmacists Association; and Mitchel 
Sayare, President and Chief Executive Officer of ImmunoGen.
    Thank you for your patience today. My apologies for your 
having to wait so long to testify, but we do welcome you to 
this hearing and consider this a very important part of 
educating ourselves to write the quality policy that we need to 
provide prescription drugs to seniors.
    Mr. Bradley, if you will start, and we will move right 
across the panel.

 STATEMENT OF BRUCE E. BRADLEY, DIRECTOR, HEALTH PLAN STRATEGY 
    AND PUBLIC POLICY, GENERAL MOTORS CORPORATION, DETROIT, 
                            MICHIGAN

    Mr. Bradley. Madam Chairwoman. I am Bruce Bradley, Director 
of Health Plan Strategy and Public Policy at General Motors 
(GM). It is a real honor for me to testify before this historic 
Committee as you work to design and to pass a Medicare 
prescription drug benefit.
    As we have heard, there are few issues more important to 
seniors and other Medicare beneficiaries than filling the 
coverage gap represented by the absence of a Medicare drug 
benefit. But the enactment of a meaningful Medicare drug 
benefit is just as critical to employers, both public and 
private, who are struggling to provide retiree health coverage 
while facing double-digit increases in health insurance 
premiums and particularly pharmaceutical costs.
    We at GM commend the Ways and Means Committee for 
addressing this issue. My testimony will focus on the challenge 
GM faces in the delivery of our pharmaceutical benefit, how we 
manage it, and what our priorities would be for a Medicare drug 
benefit.
    The GM provides coverage to over 1.2 million workers, 
retirees, and their families. We are the largest private 
provider of health care coverage in the country. The GM spends 
over $1.3 billion a year on prescription drugs for these 
beneficiaries. Despite our aggressive management, the current 
15 to 20 percent annual growth rate is still more than 
quadruple the general inflation rate. Although GM's Medicare-
eligible population represents a third of our covered 
population, it accounts for nearly half of our drug costs, or 
$508 million a year.
    The current financing challenges posed by our Medicare-
eligible population will only grow worse as the Baby Boom 
generation starts to retire. Prescription drug costs literally 
threaten the ability of many U.S. companies to compete in a 
global marketplace.
    The GM's response to the multi-faceted challenge of rising 
drug costs is comprehensive, with a focus on assuring the best 
medical outcomes and value. We have a great deal of experience 
in administering a drug benefit and believe that our management 
techniques have made a positive difference in the quality and 
value of the benefit we offer.
    First, we have a full-time doctorate-level clinical 
pharmacist on our staff who oversees our team and the 
Pharmaceutical Benefits Manager, or PBM. We have utilized PBMs 
to help effectively purchase medications and have ensured that 
our beneficiaries and that the company receive the benefits of 
their negotiations through very explicit performance standards.
    Our contracts with the PBMs encourage medically appropriate 
and cost effective prescribing and dispensing practices. This 
includes consumer and health care professional education 
programs, incentives to utilize high quality, cost effective 
generic drugs, appropriate dosing, physician profiling, severe 
drug-to-drug interaction avoidance, and other safety processes. 
We are also engaged in many community-based prescription drug 
initiatives.
    Notwithstanding our concerns about drug costs, we believe 
that all Medicare beneficiaries should have access to an 
affordable, meaningful drug benefit. It is quite clear that in 
many cases, prescription drugs are the most clinically 
appropriate and cost effective treatment. We, therefore, 
believe that any Medicare drug benefit should include the 
following four components.
    First, the Medicare drug benefit should be universal in 
nature. All beneficiaries should have the choice of an 
affordable drug benefit. Virtually every private insurer for 
the under-65 population recognizes that this is an essential 
element to have a drug benefit for quality medical care today. 
Moreover, the distribution of seniors without prescription drug 
coverage is not limited to low-income populations. In fact, 
about half of those seniors without coverage have incomes of 
over 200 percent of the poverty level.
    Second, the drug benefit should be affordable to 
beneficiaries and taxpayers yet provide significant coverage. 
This will require a significant investment of Federal dollars. 
We well recognize, however, that Congress has to achieve a 
bipartisan consensus around what level of Federal dollars are 
available for such an investment, and clearly, resources are 
not infinite. These limited financial resources underscore the 
importance of a well managed, cost effective prescription drug 
benefit.
    Third, the design of the Medicare drug benefit must be 
oriented to achieve positive medical outcomes and value. To 
that end, the benefit should be designed to encourage 
appropriate use of high quality, cost effective generic 
medications, require cost sharing that guards against excessive 
and inappropriate utilization, and integrate state-of-the-art 
pharmacy management techniques.
    Finally, a drug benefit should provide incentives for 
employers who are already financing prescription drug coverage 
for Medicare-eligible individuals to continue to do so. We 
recognize that the Congress may not be able to afford the same 
level of benefits that many leading corporations now provide, 
but Medicare should offer a much-needed floor of protection. As 
such, it should ensure that employers and health plans 
currently providing drug coverage can design benefits to wrap 
around Medicare, or alternatively, Medicare should provide 
these entities with direct financial subsidies that are 
equivalent to the value of the underlying Medicare benefit. 
Such policies avoid penalizing employers who have voluntarily 
provided such coverage and slow the trend of companies 
withdrawing benefits for the Medicare population.
    In conclusion, GM well recognizes your design, financing, 
and other challenges. We hope that our experience as well as 
our support can help you develop and pass a long-overdue 
Medicare drug benefit. We look forward to working with you in 
the days and months to come. Thank you.
    [The prepared statement of Mr. Bradley follows:]
   Statement of Bruce E. Bradley, Director, Health Plan Strategy and 
      Public Policy, General Motors Corporation, Detroit, Michigan
    Mr. Chairman, Ranking Member Rangel, and distinguished Committee 
members, I am Bruce Bradley, Director of Health Plan Strategy and 
Public Policy at General Motors (GM). It is an honor to testify before 
this historic Committee as you work to design and to pass a Medicare 
prescription drug benefit.
    There are few issues more important to seniors, eligible people 
with disabilities, their families--and employers--as filling the 
coverage gap represented by the absence of a Medicare prescription drug 
benefit. Moreover, a meaningful prescription drug benefit is critically 
important to employers, who are struggling to provide retiree health 
coverage while facing double-digit increases in health insurance 
premiums and pharmaceutical costs.
    GM faces extraordinary financing and delivery challenges in the 
Administration of our prescription drug benefits, particularly as it 
relates to the benefits we provide to our retirees. We have a great 
deal of experience in administering drug benefits and well recognize 
the challenges you face in attempting to design a workable and 
meaningful drug benefit for the Medicare program.
    We commend the Ways and Means Committee for addressing this issue. 
My testimony will focus on the challenge GM faces in the delivery of 
our pharmaceutical benefit, how we manage it, and what our priorities 
would be for a Medicare prescription drug benefit. It is our hope that 
the lessons we've learned can be useful to this Committee as it takes 
critical steps towards achieving a bipartisan agreement on a meaningful 
and universal Medicare prescription drug benefit.
Prescriptions Drug Cost Challenges Facing GM
    GM insures 1.2 million workers, retirees and their families. We are 
the largest private provider of health care coverage. GM spends over 
$1.3 billion a year on prescription drugs for its current and retired 
workforce and their families. Despite our aggressive management of our 
prescription drug benefit and associated costs, the current 15-20 
percent annual growth rate still more than quadruples the general 
inflation rate, and clearly represents a troubling trend.
    From our perspective, these drug costs are driven by a multitude of 
factors, including increased utilization (both appropriate and 
inappropriate), and price. While we are attempting to manage these 
costs through a number of interventions that will be outlined later in 
this testimony, we do not see significant potential to reduce the trend 
without assistance from the federal government. More specifically, only 
the federal government can pass legislation to increase coverage by 
enacting a Medicare drug benefit.
    Although GM's Medicare-eligible population represents only 33 
percent of our covered population, it accounts for about nearly half of 
the prescription drug cost or $508 million. The current financing 
challenges that our Medicare-eligible population poses will only grow 
worse as the baby boom generation starts to retire less than ten years 
from today. The growing financial burden posed by prescription drug 
costs literally threatens the ability of many U.S. companies to be 
effective competitors within the world marketplace. If we do not get a 
handle on these costs in short order, companies will have to make 
undesirable choices that may limit access or shift costs to current and 
retired workforce. Faced with overwhelming retiree health cost 
challenges, many other companies have actually chosen to drop health 
benefits for this population. In fact, between 1994 and 2001, there was 
a 43 percent decline in firms offering retiree coverage.\1\
---------------------------------------------------------------------------
    \1\ William P. Mercer. Health Benefit Costs Up 11.2% in 2001--
Highest Jump in 10 Years. National Survey of Employer-Sponsored Health 
Plans 2001. New York: William P. Mercer, Inc.
---------------------------------------------------------------------------
GM Management of Drug Benefit Plans
    GM has responded to the multi-faceted challenge of rising 
prescription drug costs with a multi-faceted management response, with 
a mind to assuring the best medical outcomes and value. We have a great 
deal of experience in administering a drug benefit and believe that our 
management techniques have made a positive difference in the quality 
and value of the benefit we offer, and could be applied to the design 
of a Medicare drug benefit.
    We have utilized pharmacy benefit managers (PBMs) to help 
effectively purchase medications, and have ensured that the company 
receives the benefits of their negotiations through very explicit 
performance standards. Our contracts with PBMs encourage medically 
appropriate and cost-effective prescribing and dispensing practices. 
Among the tools our PBMs use are:

           Partners for Healthy Aging: An enrollee/patient and 
        physician education effort which provides information on issues 
        of pharmaceutical safety and use among the elderly
           Therapeutic Interchange: Contacts with physicians to 
        encourage use of formulary medications
           Physician Profiling and Peer Rating: An expansion on 
        the above which provides feedback on quality and utilization 
        performance
           Severe Drug-Drug Interaction Edits: On-line, 
        electronic feedback at the time of dispensing that prevents 
        dispensing drugs that could represent life-threatening 
        interactions. This situation often arises when an enrollee is 
        seeing more than one physician and the respective physicians 
        are not aware of all of the drugs the enrollee is taking. When 
        one of these cases arises, the pharmacist contacts the 
        prescribing physician and reviews the facts of the case before 
        dispensing the potentially conflicting medication.
           Digestive Health Solutions: Addresses unique 
        concerns of patients with gastro-intestinal disease. It 
        provides educational materials to enrollees and encourages 
        appropriate prescribing practices by physicians.
           Dose Optimization: Simplifies the dosing regimen for 
        patients and capitalizes on cost savings of taking one pill 
        versus two.
           Encourage High Quality, Cost-Effective Generic Drug 
        Use: When an appropriate generic drug is available, it is 
        dispensed unless the physician specifies ``dispense as 
        written'' or the enrollee requests the brand drug. If the brand 
        drug is dispensed at the enrollee request, the enrollee pays 
        the difference between the cost of the generic and brand, in 
        addition to the normal co-pay.
GM's Priorities for a Medicare Benefit
    GM believes that all Medicare beneficiaries--both seniors and 
eligible people with disabilities alike--should have access to an 
affordable, meaningful Medicare drug benefit. Notwithstanding our 
concerns about prescription drug costs, we regard such coverage as 
necessary because in many cases, prescription drugs are the most 
clinically appropriate and cost-effective treatment.
    We therefore believe that any Medicare drug benefit should include 
the following four components:
           First, a Medicare drug benefit should be universal 
        in nature. All Medicare beneficiaries should have the choice of 
        an affordable drug benefit. The Medicare program has largely 
        been a great success, representing the only population in this 
        nation with the benefit of universal coverage. Virtually every 
        private insurer for the under-65 population recognizes that it 
        is essential to have a prescription drug benefit for quality 
        medical care today.
           Moreover, the distribution of seniors without 
        prescription drug coverage is not limited to low-income 
        populations. In fact, fully half of those seniors without 
        coverage have incomes over 200 percent of the poverty level. 
        Further, of those seniors who do have coverage today, many have 
        extremely limited coverage or are at risk of losing their good 
        coverage because of cost. Addressing this problem effectively, 
        therefore, means designing a universal benefit.
           Second, a Medicare prescription drug benefit should 
        be meaningful and affordable to both beneficiaries and 
        taxpayers. To ensure a stable and accessible drug benefit that 
        is voluntarily chosen by all beneficiaries, it will be 
        necessary to design a substantive benefit that has an 
        affordable premium. This will require a significant investment 
        of federal dollars. We well recognize, however, that Congress 
        has to achieve a bipartisan consensus around what level of 
        federal dollars are available for such an investment, and 
        clearly resources are not infinite. This underscores the 
        importance of a well-managed, cost-effective prescription drug 
        benefit.
           Third, the design of the Medicare prescription drug 
        benefit must be oriented to achieve positive medical outcomes 
        and value. Just as important as designing an affordable, 
        meaningful, and universal drug benefit is managing it well. It 
        would be irresponsible for the Congress to pass a drug benefit 
        without significant attention towards ensuring that the benefit 
        is cost-effectively designed and managed. To that end, the 
        benefit should be designed to encourage appropriate use of 
        high-quality, cost-effective generic medications, require cost-
        sharing that guards against excessive and inappropriate 
        utilization, and integrates state-of-the-art pharmacy 
        management techniques that ensure the use of high-quality, 
        high-value pharmaceuticals.
           Lastly, a prescription drug benefit should provide 
        incentives for employers who are already financing prescription 
        drug coverage for Medicare-eligible individuals to continue to 
        do so. We recognize that the Congress may not be able to afford 
        the same level of benefits that many leading corporations 
        provide to their beneficiaries, but it should provide a much-
        needed floor of protection. As such, it should ensure that 
        employers and health plans currently providing drug coverage 
        can design benefits to wrap around Medicare. Or, alternatively, 
        Medicare should provide these entities with direct financial 
        subsidies that are equivalent to the value of the underlying 
        Medicare benefit. Such policies would appropriately avoid 
        penalizing firms who have generously and voluntarily provided 
        such coverage and slow the recent trend of companies 
        withdrawing their benefits for these populations.
Conclusion
    GM well recognizes the design, financing, and other challenges the 
Congress faces in constructing and passing a Medicare prescription drug 
benefit. There are few domestic policy issues that are more important 
to successfully address. We hope that our experience, as well as our 
support, can help you develop and pass a long-overdue Medicare drug 
benefit. We look forward to working with you in the days and months to 
come.

                                

    Mrs. Johnson OF CONNECTICUT. Thank you very much, Mr. 
Bradley. Mr. Gilmartin, it is a pleasure to see you.

  STATEMENT OF RAYMOND V. GILMARTIN, CHAIRMAN, PRESIDENT, AND 
CHIEF EXECUTIVE OFFICER, MERCK & CO., INC., WHITEHOUSE STATION, 
                           NEW JERSEY

    Mr. Gilmartin. Thank you, Madam Chairwoman and Members of 
the Committee. I am pleased to have this chance to appear today 
to discuss Medicare prescription drug coverage.
    At Merck, we believe it is not enough to just discover 
medicines, we have to make sure these medicines get to those 
who need them. Medicines change lives and increase lifespans. 
Medicines can now control common illnesses in later life that 
once meant certain death, such as diabetes and heart disease. 
Work in Merck laboratories today holds great promise for 
creating tomorrow's medicines, and these are medicines we need 
to prevent and treat Alzheimer's disease, HIV/AIDS, cancers, 
depression, and other illnesses that can rob us of our 
independence and prematurely take our loved ones from us.
    Sadly, for those seniors and disabled persons without good 
drug coverage who cannot afford the medicines they need, the 
promise of medicines is unfulfilled. These people also lack the 
coordination of care that comes with good coverage. 
Consequently, they may take medicines in dangerous combinations 
or dosages that actually jeopardize their health and quality of 
life.
    Our seniors deserve better, and that is why Merck is so 
strongly committed and supports action this year to add 
prescription drug coverage to Medicare, along with other 
changes to the Medicare Program to improve its Administration 
and competitiveness, as well as better coordinate care around 
the patient.
    All Medicare beneficiaries should have a choice of private 
sector comprehensive health plans that include drug coverage. 
Those choosing to remain in the traditional Medicare Program 
should be able to get drug coverage through competing private 
sector prescription drug plans.
    We understand that a critical question facing this 
Committee is how best to deliver a quality prescription drug 
benefit while containing its costs. As a pharmaceutical 
company, we hear the concerns of employers, governments, and 
ordinary citizens about the cost of medicine. As a provider of 
pharmaceutical benefits to more than 65 million Americans, 
including more than 8 million seniors through our subsidiary 
Merck-Medco, we also understand the challenges of cost 
containment.
    We believe that the answer to cost containment and that 
question has profound implications, not only for taxpayers and 
Medicare beneficiaries, but also for the future health of 
patients and America's research-based pharmaceutical industry.
    Merck supports allowing providers of Medicare prescription 
drug benefits to use a full range of clinically appropriate 
cost containment strategies. Specifically, Merck supports 
giving competing private prescription drug plans the ability to 
engage in tough price negotiations with pharmaceutical 
companies. Plans must have the ability to encourage the use of 
the most cost effective, appropriate medicine, whether that 
medicine is a brand or a generic.
    We also believe that prescription drug benefit providers 
who serve Medicare beneficiaries should have financial 
incentives that ensure that they fully use these cost 
containment strategies. The best way to accomplish this, first, 
is to have prescription plans compete with each other to enroll 
beneficiaries based on quality and premium cost, and second, to 
put these plans at some financial risk to contain costs. These 
strategies will subject our medicines to tough scrutiny and 
ensure that their price reflects their value in treating 
disease and improving health.
    We are encouraged that the major proposals under 
consideration for providing prescription drug coverage to 
Medicare beneficiaries have rejected the alternative path for 
cost containment, government price controls. Having government 
officials determine which medicines will be available and at 
what price through price setting, reference pricing, mandatory 
rebates, or other bureaucratic tools is a sure path to impeding 
pharmaceutical research. Throughout the world, price controls 
have proven ineffective in controlling overall costs or 
improving patient health.
    Madam Chairwoman, we hope that the Committee will look to 
the work of the bipartisan Medicare Commission as the best 
guide to needed Medicare modernization. We also support the 
ideas contained within the Breaux-Frist plan, this Committee's 
own H.R. 4680, and President Bush's Medicare proposals. These 
are strong building blocks for action.
    At Merck, we believe it is possible to craft a Medicare 
prescription drug benefit that meets the needs of our Nation's 
seniors and persons with disabilities while maintaining an 
environment that rewards success in new drug discovery. Such an 
environment will allow Merck and others to continue to lead the 
world in discovering the medicines that improve and save lives.
    Thank you again for this opportunity to present our views 
and I look forward to your questions.
    [The prepared statement of Mr. Gilmartin follows:]
   Statement of Raymond V. Gilmartin, Chairman, President, and Chief 
  Executive Officer, Merck & Co., Inc., Whitehouse Station, New Jersey
    Mr. Chairman, Mr. Rangel, members of the Committee, I am pleased to 
have this chance to appear today to discuss Medicare prescription drug 
coverage.
    At Merck, we believe that it is not enough to discover new 
medicines. We have to make sure that they get to those who need them.
    Medicines change lives and increase life spans. Medicines can now 
control common illnesses in later life that once meant certain death, 
such as diabetes and heart disease. Work in Merck laboratories today 
holds great promise for creating tomorrow's medicines. These are 
medicines we need to prevent and treat Alzheimer's disease, HIV/AIDS, 
cancers, depression, and other illnesses that can rob us of our 
independence and prematurely take our loved ones from us.
    Sadly, for those seniors and disabled persons without good drug 
coverage who cannot afford the medicines they need, the promise of 
medicines is unfulfilled. These people also lack the coordination of 
care that comes with good coverage. Consequently, they may take 
medicines in dangerous combinations or at dosages that actually 
jeopardize their health and quality of life.
    Our seniors deserve better. That is why Merck so strongly supports 
action this year to add prescription drug coverage to Medicare along 
with other changes to the Medicare program to improve its 
Administration and competitiveness as well as better coordinate care 
around the patient.
    All Medicare beneficiaries should have a choice of private-sector 
comprehensive health plans that include drug coverage. Those choosing 
to remain in the traditional Medicare program should be able to get 
drug coverage through competing, private-sector prescription drug 
plans.
    We understand that a critical question facing this Committee is how 
best to deliver a quality prescription drug benefit while containing 
its cost. As a pharmaceutical manufacturer, we hear the concerns of 
employers, governments, and ordinary citizens about the cost of 
medicines. As a provider of pharmaceutical benefits to more than 65 
million Americans, including more than eight million seniors, through 
our subsidiary Merck-Medco, we also understand the challenges of cost 
containment.
    We believe that the answer to the cost containment question has 
profound implications, not only for taxpayers and Medicare 
beneficiaries, but also for the future health of patients and America's 
research-based pharmaceutical industry.
    Merck supports allowing providers of Medicare prescription drug 
benefits to use a full range of clinically-appropriate, cost 
containment strategies. Specifically, Merck supports giving competing, 
private prescription drug plans the ability to engage in tough price 
negotiation with pharmaceutical companies. Plans must have the ability 
to encourage the use of the most cost-effective, appropriate medicine--
whether that medicine is a brand or a generic.
    We also believe that prescription drug benefit providers who serve 
Medicare beneficiaries should have financial incentives that ensure 
that they fully use these cost containment strategies. The best way to 
accomplish this is, first, to have prescription plans compete with each 
other to enroll beneficiaries based on quality and premium cost and, 
second, to put these plans at some financial risk to contain costs. 
These strategies will subject our medicines to tough scrutiny and 
ensure that their price reflects their value in treating disease and 
improving health.
    We are encouraged that the major proposals under consideration for 
providing prescription drug coverage to Medicare beneficiaries have 
rejected the alternative path for cost containment--government price 
controls. Having government officials determine which medicines will be 
available and at what price, through price setting, reference pricing, 
mandatory rebates or other bureaucratic tools, is a sure path to 
impeding pharmaceutical research. Throughout the world, price controls 
have proven ineffective in controlling overall costs or improving 
patient health.
    Mr. Chairman, we hope that the Committee will look to the work of 
the Bipartisan Medicare Commission as the best guide to needed Medicare 
modernization. We also support the ideas contained within the Breaux-
Frist plan, this Committee's own H.R. 4680, and President Bush's 
Medicare proposals. These are strong building blocks for action.
    At Merck we believe it is possible to craft a Medicare prescription 
drug benefit that meets the needs of our nation's seniors and persons 
with disabilities while maintaining an environment that rewards success 
in new drug discovery. Such an environment will allow Merck and others 
to continue to lead the world in inventing the medicines that improve 
and save lives.
    Thank you again for this opportunity to present our views and I 
look forward to your questions.

                                

    Mrs. Johnson OF CONNECTICUT. Thank you, Mr. Gilmartin.
    Mr. Novelli?

 STATEMENT OF WILLIAM D. NOVELLI, EXECUTIVE DIRECTOR AND CHIEF 
                    EXECUTIVE OFFICER, AARP

    Mr. Novelli. Thank you, and thank you for inviting AARP to 
address the need for a Medicare prescription drug benefit.
    Comprehensive prescription drug coverage in Medicare this 
year is an urgent priority for our 35 million Members and for 
virtually all Americans. Prescription drug coverage options are 
increasingly limited, expensive, unstable, or unavailable. Our 
Members and their families need a meaningful Medicare benefit 
that is affordable and available to all beneficiaries. Many 
beneficiaries must pay for all or some of their prescription 
drugs out of pocket, and those without coverage must pay top 
dollar for their drugs.
    The challenge of crafting a voluntary Medicare drug benefit 
is considerable. To succeed, it must be a workable program, and 
that is it needs to attract enough enrollees to spread risk and 
to be viable. It needs to ensure adequate protection for those 
with high drug costs, include assistance for low-income seniors 
and the disabled, and provide strong cost containment measures 
to help keep the program affordable and sustainable over time.
    We clearly recognize the budget constraints, and they are 
greater than last year, but a comprehensive drug benefit will 
require a major funding commitment. People are not looking for 
a free ride. They know they will have to pay their share. But a 
realistic drug benefit must be adequately funded. A program 
with meager benefits and high premiums will not succeed because 
not enough beneficiaries will voluntarily enroll. At this 
point, it is not clear what an affordable benefit will 
ultimately cost, but we do know that the proposals offered last 
year were not embraced by the public.
    As you are aware, it will be difficult to develop a 
workable package that fits within the House budget allocation, 
but we intend to look at what this Committee proposes as well 
as other proposals with an open mind. We will bring these 
proposed programs to our Members to get their reactions and 
responses. We will continue to listen carefully to their 
expectations. We will inform our members about what seems to be 
realistic and possible, and we will share their views with you.
    There are two additional components to our prescription 
drug position. First, we recognize that cost containment is an 
important part of Medicare drug coverage. For a benefit to be 
affordable and sustainable over time, there must be mechanisms 
in place to control the rapidly rising costs of prescription 
drugs.
    In order to contribute to cost containment, we are 
launching this week a national education program through our 
own publications, the general media, and at the community 
level, aimed at our Members and the public. This program will 
stress the wise and safe use of medications with an emphasis on 
generic drugs.
    I would like to call your attention to that print ad on the 
easel over there. I am sure you cannot read it from where you 
are sitting, but it says, ``Before you take your medicine, take 
this advice,'' and then as you go down, the top one says, 
``Important, take exactly as directed, but first, call around 
and compare drug prices.'' The one underneath that, ``Avoid 
paying too much for your prescriptions. Generics may work as 
well as brand names.'' And then, ``Tell your physician and 
pharmacist everything you are taking. Some medicines do not 
interact well.'' And finally, ``Do not let advertising sell you 
on drugs you do not need. Check up on your prescriptions.''
    In addition, we intend to become actively involved in 
litigation that can make lower-price generics more available 
and that can assist in other ways to contain costs.
    Our final point is that we are not in favor of funding for 
a provider giveback package before agreement is reached on a 
Medicare prescription drug benefit. We believe that providers 
should be paid fairly, but it is not appropriate to increase 
provider payments without first ensuring that older Americans 
get the drug coverage they need.
    We stand ready, and we pledge to provide assistance in 
every possible way that we can. We recognize that congressional 
support is needed from both sides of the aisle and from the 
Administration to achieve a meaningful Medicare drug benefit 
for all beneficiaries. The needs of older and disabled 
Americans who lack adequate drug coverage can no longer go 
unmet. We are asking Congress to act now. Thank you very much.
    [The prepared statement of Mr. Novelli follows:]
Statement of William D. Novelli, Executive Director and Chief Executive 
                             Officer, AARP
    Mr. Chairman and members of the Committee, I am Bill Novelli, 
Executive Director and CEO of AARP. On behalf of our organization and 
its 35 million members, I want to thank you for convening this hearing 
and for continuing your efforts to consider approaches for adding a 
much needed prescription drug benefit to the Medicare program.
    As AARP looks toward building retirement security for today's older 
Americans and the baby boom population, we believe no person is 
economically secure without adequate medical insurance. The structure 
of retirement security is no longer simply the ``three-legged stool'' 
of Social Security, private pensions, and personal savings, but rather 
four pillars consisting of: Social Security, pensions and savings, 
earnings, and, importantly, stable, affordable and adequate health 
insurance.
    Consequently, now more than ever, Americans of all ages are looking 
to Medicare's guarantee of affordable health care coverage as part of 
the foundation of their retirement planning. But there is a serious gap 
in Medicare's protection--the absence of reliable prescription drug 
coverage.
    While modern medicine increasingly relies on drug therapies, the 
benefits of these prescription drugs elude more Medicare beneficiaries 
every day. Drug costs continue to rise unabated. Employer-based retiree 
health coverage is eroding. Managed care plans in Medicare have scaled 
back their drug benefits. The cost of private coverage is increasingly 
unaffordable. State programs provide only a limited safety net. 
Therefore, the need for a Medicare drug benefit for all beneficiaries 
will only continue to grow.
    Given the prominence of drug therapies in the practice of medicine, 
if Medicare were being designed today--rather than in 1965--not 
including a prescription drug benefit would be as absurd as not 
covering doctor visits or hospital stays. That is one of the reasons 
why ensuring that prescription drug coverage is included in Medicare's 
defined benefit package is AARP's number one legislative priority this 
year. Our members and their families need and expect a meaningful 
benefit that is affordable and available to all beneficiaries. They 
expect us to be their champion on this issue, and we will be.
    We are pleased to be here today to discuss the need for a Medicare 
prescription drug benefit, some of our recommendations for moving 
forward, and some initial findings of the public's reaction to 
prescription drug proposals as well as comment on the President's 
prescription drug proposal.
The Need for a Medicare Prescription Drug Benefit
    Increasing need, high drug prices, and inadequate insurance 
coverage pose serious problems for today's Medicare beneficiaries. A 
chronic health problem necessitating new and expensive prescription 
drugs can quickly deplete a retiree's financial resources. Even a 
beneficiary who has planned well for his or her retirement may not be 
prepared for drug bills that exceed several hundred dollars a month. 
Further, it is important to note that support for making a prescription 
drug benefit part of Medicare is overwhelmingly high for all of our 
members. Americans of all ages recognize the value of prescription drug 
coverage. In recent polling conducted for AARP, eight in ten Americans 
age 45 and over favor making prescription drug coverage part of 
Medicare. Support was, in fact, greatest among the younger age 
brackets.
    The majority of Medicare beneficiaries--not just those with low 
incomes--need drug coverage. While AARP strongly supports additional 
financial assistance in Medicare for low-income individuals, low-income 
assistance is not a substitute for a prescription drug benefit in 
Medicare. It will not solve the problem for millions of people with 
Medicare who are unable to afford their medications. Further, because 
AARP opposes means-testing within the Medicare program, we could not 
support a low-income-only drug benefit unless it were outside of 
Medicare.
    Because of Medicare's current lack of prescription drug coverage, 
many beneficiaries must pay for all or some of their prescription drugs 
out-of-pocket. Although about two-thirds of Medicare beneficiaries have 
some type of coverage for prescription drugs, this figure can be very 
misleading. The principal sources of coverage that offer a prescription 
drug benefit--employer-based retiree coverage, private supplemental 
coverage, or Medicare HMOs--are often inadequate, limited, expensive, 
and unstable. Moreover, many Medicare beneficiaries do not have 
continuous prescription drug coverage. A Commonwealth study released 
earlier this year reported that nearly 42 percent of beneficiaries 
lacked drug coverage at some point in 1998. More recently, a new study 
published by Health Affairs reports that nearly 40 percent of Medicare 
beneficiaries had no drug coverage in the fall of 1999. It is also 
important to understand that those Medicare beneficiaries without 
coverage pay top dollar for their prescriptions because they do not 
benefit from discounts negotiated by third party payers. Most of those 
currently covered by insurance, including most workers, benefit from 
such discounted prices.
    Let me give you some illustrative examples of how middle income 
people have difficulty in obtaining access to affordable and dependable 
drug coverage:
           A retired couple has significantly saved for 
        retirement and has an income of $40,000 a year. Both take 
        prescription drugs for heart disease and high cholesterol and 
        the wife also needs medication for breast cancer and 
        osteoporosis. They do not have access to retiree health 
        benefits through a former employer, there are no 
        Medicare+Choice plans available in their area, and a Medigap 
        plan offering some drug coverage would cost them $260 a month 
        each.
           A retired couple has an income of $30,000 a year, 
        significantly above the threshold for Medicaid and most state 
        and private pharmacy assistance programs. They have 
        prescription drug coverage through a Medicare HMO. This year 
        they learn, however, that their HMO plans to terminate its 
        contract with Medicare, effective December 31. There are no 
        other Medicare HMOs in their area, and while they can afford 
        supplemental insurance and are guaranteed access to certain 
        Medigap plans (A, B, C, and F), none of these plans include 
        drug coverage.
           A 75-year old widow is enrolled in a Medicare HMO 
        that offers drug coverage. She currently has prescriptions for 
        a cholesterol-lowering medication at $97.51 a month and an 
        allergy medication at $46.94 a month. While initially her drug 
        coverage was quite generous, this year her drug benefit is 
        capped at $300 a year. As a result, she basically has no drug 
        coverage for three-quarters of the year.
    As the Committee moves forward with a prescription drug proposal, 
it will be critical to judge the proposal on not only whether it could 
improve the situation for people illustrated in the examples above, but 
also if it is both affordable and attractive enough to yield a broad 
risk pool and viable program.
What Older Americans Need 
    Affordable Drug Coverage--Older Americans need affordable drug 
coverage. A voluntary drug benefit needs to be affordable to assure 
enough participation to avoid the dangers of risk selection. The 
government contribution will need to be sufficient to yield a 
beneficiary premium that is affordable and a benefit design that is 
attractive to the majority of beneficiaries. If the benefit is not set 
at an affordable level, only those beneficiaries who have high risk 
will want to purchase it. This will lead to a risk pool composed only 
of those with high drug costs, and program costs will escalate rapidly 
into what is often referred to as an ``insurance death spiral.'' This 
is not simply a matter of what beneficiaries would like to pay, it is 
an issue of how to assure fiscal viability of the risk pool. Medicare 
Part B is a model in this regard.
    The Part B benefit is voluntary on its face, but Medicare's 
contribution toward the cost of the benefit elicits virtually universal 
participation. Actuarial work done for AARP last year by the William M. 
Mercer Company that we shared with the Committee identified the keys to 
success for a Medicare prescription drug benefit:
           develop a benefit design that will encourage 
        participation by a broad range of beneficiaries in order to 
        spread risk;
           ensure clear and concise communication to improve 
        participation;
           balance the breadth of coverage and beneficiary 
        premium;
           implement cost-containment techniques; and
           limit the enrollment period.
    Dependable Drug Coverage--Older Americans also need dependable drug 
coverage. Current prescription drug coverage options are not reliable. 
For example, beneficiaries who obtain prescription drug coverage from 
their former employer are finding that coverage to be unstable. Retiree 
health benefits that include prescription drug coverage are becoming 
more scarce. While an estimated 40 percent of employers with 500 or 
more employees offered retiree medical coverage in 1993, only 23 
percent did so in 2001. Of those employers who offered retiree medical 
benefits, 21 percent did not offer drug coverage to Medicare eligible 
retirees.
    In addition, beneficiaries who have drug coverage through Medicare 
HMOs cannot depend on having this coverage from year to year, as plans 
can change benefits on an annual basis or even terminate participation 
in Medicare. For example, this year many beneficiaries in 
Medicare+Choice plans are living through abrupt changes in their 
prescription drug coverage that they did not foresee when they 
enrolled. Some of the most visible of these changes include:
           Increasing premiums. Over the past few years, more 
        and more Medicare+Choice plans have been charging premiums for 
        their coverage, and those premiums are escalating. For example, 
        between 2001 and 2002, the percentage of Medicare HMO enrollees 
        with zero premiums declined from 47 to 39 percent. This year, 
        nearly one-third of Medicare HMO enrollees (32 percent) will 
        have basic premiums over $50 compared to 14 percent in 2001.
           Higher cost-sharing--Unlike the 1990s, all Medicare 
        HMOs that offer prescription drugs are charging copays for 
        prescription drugs and the average beneficiary copay has 
        increased significantly.
           Decreasing benefit--More plans are lowering the 
        annual cap on the typical Medicare+Choice drug benefit. While 
        in 1999 10.6 percent of Medicare HMOs had an annual cap of $500 
        or less on their drug benefit, 20.6 percent of plans had a $500 
        cap in 2000.
           Loss of benefit--Over the last few years, several 
        Medicare+Choice plans have dropped their prescription drug 
        benefit entirely. While 88 percent of Medicare HMOs offered 
        some drug coverage in 1999, that number declined to 63 percent 
        in 2001. Although Medicare+Choice has provided beneficiaries 
        with an opportunity for drug coverage, the volatility of the 
        Medicare+Choice market has made that coverage unpredictable and 
        unstable from year to year.
AARP Recommendations
    Adequate Funding--AARP knows that to craft the kind of prescription 
drug coverage that beneficiaries will find affordable and reliable--and 
will thus voluntarily choose to sign up for--will require a sizable 
commitment of federal dollars. We also recognize that budget 
constraints are greater than last year. But while the budget situation 
changes from year to year, the situation facing millions of older and 
disabled persons who cannot afford the drugs they need continues to 
worsen, and constitutes a health care and financial emergency that 
cannot continue to be ignored.
    We do not, at this point, have an estimate of what an adequate drug 
benefit will cost. We know the plans costing $300 billion offered last 
year did not find public acceptance. However, we believe the new CBO 
estimates for drug proposals that include beneficiary monthly premiums 
starting in the $50, $60, and $70 range will not yield an acceptable 
benefit. We believe Congress and this Committee should focus on the 
design of a sustainable benefit that will work for beneficiaries and 
remain flexible as to the projected cost.
    That is why in our budget recommendation we asked Congress to renew 
its commitment from last year, adjust it for inflation and another year 
of coverage, and earmark $350 billion for prescription drugs and 
reforms that strengthen the program. However, because we believe that 
even this level of funding is inadequate to pay for what our members 
would consider an adequate and affordable benefit, we also recommended 
that Congress create a reserve fund of about $400 billion, or an amount 
roughly equal to the amount of the 10-year surplus in the Medicare 
Hospital Insurance (HI) Trust Fund. A majority of the respondents to 
our recent poll favored borrowing from the Medicare surplus to pay for 
a prescription drug benefit. The range created by the $350 billion 
commitment based on last year, plus the roughly $400 billion reserve 
fund, will give the Congress the flexibility it needs to craft a 
prescription drug benefit that beneficiaries will perceive as having 
real value.
    Priority for drugs--In addition to our prescription drug 
recommendation, we also have said that it would be inappropriate to use 
Medicare or Social Security surplus dollars to increase provider 
payments without first ensuring that older Americans get the 
prescription drug coverage they need. Our members would not understand 
why Congress could find money to help providers but not to meet their 
increasing prescription drug needs. Further, every dollar for a 
``givebacks'' package means one less available dollar for a Medicare 
prescription drug benefit. And any giveback package that increases 
Medicare Part B spending will increase beneficiary premiums because 
monthly premiums represent 25 percent of Part B costs. We, therefore, 
would strongly oppose funding for a givebacks package before agreement 
is reached on a Medicare prescription drug benefit.
    Cost Containment--We recognize that strong and effective cost 
containment measures are a necessary part of a Medicare prescription 
drug benefit. In order for a drug benefit to be sustainable over the 
long run, mechanisms must be in place to control the rising costs of 
prescription drugs. AARP actively supports solid cost containment 
methods as long as patient safety and well-being is not compromised and 
access to needed prescription drugs is not impeded. Therefore, we 
support the use of formularies, such as a 3-tiered approach, as long as 
they are developed in a responsible manner and include an exceptions 
process.
    We also support the responsible promotion of generic drugs as one 
effective cost containment tool in a Medicare benefit. In fact, because 
we believe both the government and the consumer have an important role 
to play in helping to control costs, AARP is rolling out a national 
public education campaign, beginning this month, to educate our members 
and the public at large about the wise use of medications--including 
generic drugs. We will encourage our members to talk with their doctors 
and pharmacists to reduce unnecessary costs associated with use of 
medications.
    In addition to these cost containment methods, we also would like 
to work with the Congress in other efforts to control drug costs, 
including correcting the current AWP pricing structure and stopping 
abuse of current drug patent laws. AARP has already begun to pursue the 
need to correct abuse of drug patents through the courts. AARP intends 
to be involved in litigation against certain brand and generic 
companies that made agreements that delayed the entry of a generic drug 
into the market and in litigation against a brand name drug company 
that unfairly extended its patents to forestall its generic 
competition.
Initial Reactions to Drug Proposals
    We have asked our members and the general public what kind of 
benefit package would generate the kind of high level of participation 
necessary for a viable benefit, and we have learned the following thus 
far:
           Beneficiaries will generally perform what we call 
        the ``kitchen table test'' in determining whether they would 
        purchase a new voluntary drug benefit. That is, they will 
        likely calculate their current prescription drug costs, their 
        Medicare premium ($54 a month in 2002 and rising to $104.90 in 
        2012), any drug coverage they might have, and their present 
        financial situation, to determine whether a proposed benefit is 
        a real value for them.
           Medicare beneficiaries are willing to pay their fair 
        share for a solid prescription drug benefit, but the premium 
        and coinsurance must be reasonable. We know, for instance, that 
        beneficiaries would not be likely to enroll in a prescription 
        drug plan with a premium of $50 a month.
           While the amount of the beneficiary premium drives 
        the equation, our members also look at the program design 
        features in combination with one another. This means it is 
        difficult to simply assess a single component of a package. For 
        instance, some beneficiaries might look more favorably on a 
        higher level of coinsurance if the premium was lower, or vice 
        versa. In a recent poll conducted for AARP of 885 individuals 
        age 45 and over, only one-third of those 65 and over would be 
        likely to participate in a prescription drug plan that 
        included: a $35 monthly premium, 50% coinsurance, a $200 annual 
        deductible, and a $4,000 stop loss. Clearly, this low level of 
        voluntary participation is not enough to create a broad risk 
        pool and sustainable program.
           Most Medicare beneficiaries are concerned about the 
        unpredictability of health care costs and want to know what 
        they will be expected to pay out-of-pocket. This makes real 
        catastrophic stop-loss protection that limits out-of-pocket 
        costs an important component of any package. We know from past 
        experience that a $6,000 catastrophic stop-loss is viewed by 
        beneficiaries as too high, and even a $4,000 cap is not viewed 
        as providing meaningful benefit protection. For example, if 
        there were a $4,000 cap included in a benefit that also imposed 
        50 percent beneficiary co-insurance, a beneficiary would have 
        to incur $8,000 (and a couple $16,000) in prescription drug 
        costs before the stop-loss protection would kick in. With the 
        majority of beneficiaries earning less than $25,000 a year, 
        those figures are not seen as providing realistic protection.
    We realize that some on the Committee may believe that we are 
asking for a ``Cadillac plan,'' however, we emphasize we are bringing 
to you what our members are telling us they need and expect to join a 
voluntary drug benefit. We will continue to try to educate our members 
about what is realistic and seek the views of current and future 
members on specific design packages. We will be happy to work with the 
Committee as your proposals are developed to test our members' 
reactions.
    As for the President's FY 2003 budget request and proposal to 
modernize Medicare that was released at the start of the year, AARP is 
pleased that the President continues to make Medicare prescription drug 
coverage a priority for his Administration and has indicated his 
willingness to work with the Congress on this issue, but we believe 
that the dollar amount proposed is insufficient to provide an 
affordable and meaningful drug benefit for all Medicare beneficiaries. 
We also have raised several questions about how the various components 
of the proposal would help people with Medicare.
    In particular, we have raised questions about $77 billion earmarked 
for low-income drug coverage. The budget proposes an enhanced federal 
match to enable states to cover drug costs for Medicare beneficiaries 
between 100 and 150 percent of poverty.
    However, the Administration's proposal does not provide details on 
how the proposed targeted low-income assistance would be used (e.g., in 
Medicaid expansions or state pharmacy assistance programs), how this 
effort would improve the current patchwork of drug assistance 
available, and how many people would actually be helped. Further, the 
Administration's budget leaves open the question of whether states that 
could not raise their Medicaid thresholds would be eligible for the new 
enhanced federal match between 100 to 150 percent of poverty.
    The Administration's proposal also does not prevent ``dollar 
trading'' by the states that already have higher thresholds. The end 
result for $77 billion in federal funding could be little or no 
extension of prescription drug protections for more needy seniors than 
are being served now.
    The President's budget also includes the Administration's proposal 
to implement a Medicare drug discount card that would give 
beneficiaries immediate access to drug discounts and other pharmacy 
services.
    AARP is working with the Administration as it continues to refine 
its drug discount card proposal. There are several issues that we will 
try to clarify and some consumer protections we will try to add, 
including: defining what constitutes a ``substantial'' discount, 
obtaining firm details on how manufacturer discounts will be disclosed 
and passed on to consumers, assuring that consumers can compare drug 
card discount rates to actual retail prices, and making sure drug cards 
help consumers get generic drugs whenever they are medically 
appropriate and the least costly option.
    However, AARP is encouraged that--unlike current industry card 
proposals--the President's proposed discount card is designed to 
establish the drug card program as a building block for a full Medicare 
drug benefit. We emphasize, however, that neither the Administration's 
discount card nor the current industry cards are a substitute for a 
real drug benefit.
    We also believe that while the actual discounts would be relatively 
modest, the President's discount card program would provide at least 
some help to beneficiaries in buying the drugs they need. It could 
provide important safeguards to improve the appropriate use of 
prescription drugs, and this could help avoid unnecessary health care 
costs due to drug interactions, mis-medications, or poor compliance. It 
also, importantly, would help the federal government learn valuable 
lessons about the pharmacy benefit managers (PBMs) that run discount 
card programs and are included as the delivery system in virtually 
every drug benefit proposal before Congress. As a result, it will help 
the Medicare program become more familiar with how PBMs and drug 
benefit programs work.
    Finally, we are concerned that the limited amount of funding in the 
Administration budget for both drug coverage and other program changes 
is insufficient to add a meaningful drug benefit and strengthen the 
program for current and future beneficiaries.
    AARP supports efforts to modernize the Medicare program. Clearly, 
the creation of a prescription drug benefit that is available in all 
Medicare options is the most significant improvement, but other changes 
are also important and would serve beneficiaries and the program well. 
For instance, most private health insurance plans offer a cap on out-
of-pocket expenses, yet there is no such limit in the Medicare program. 
Creating an out-of-pocket cap for services currently covered by 
Medicare Parts A and B would not only bring Medicare more in line with 
what individuals under the age of 65 currently have, but would also 
make the program more affordable for beneficiaries.
    AARP also remains open to the possibility of combining the Part A 
and B deductible, provided it is structured to be affordable and does 
not produce beneficiary ``sticker shock.'' Since most beneficiaries 
meet the annual $100 Part B deductible but significantly less meet the 
Part A hospital deductible, a combined and increased deductible will 
affect the majority of beneficiaries. We are opposed, however, to 
merging the Part A and B Trust Funds. The new solvency measure included 
in the President's budget, and suggested in the recent Medicare 
Trustees' Report, appears to indicate that Medicare should be financed 
wholly from its Trust Funds. That is, its financing should come 
predominantly, if not exclusively, from payroll taxes and beneficiary 
contributions, with little or no contribution from general revenues. 
This would represent a radical shift in funding for the Medicare 
program. The impact of such a shift would be to significantly increase 
beneficiaries' costs for Medicare, reduce provider payments, or a 
combination of both.
Conclusion
    AARP is pleased that the Committee is examining the issue of a 
Medicare prescription drug benefit and is developing a proposal. The 
work you are embarking upon is extremely challenging; it is also 
immensely important to millions of Americans who take prescription 
medications. It is our hope that today's hearing will help focus 
attention on the need for an affordable and dependable Medicare 
prescription drug benefit for all beneficiaries.
    Our members believe that Congress should be able to work across 
party lines to enact and begin to implement an affordable Medicare drug 
benefit. We pledge to you that we will provide assistance in every way 
we can to work with members on both sides of the aisle and to promote a 
meaningful and broadly supported Medicare prescription drug benefit. We 
also know that our members will not accept failure or delay. The needs 
of older and disabled Americans who lack adequate drug coverage can no 
longer go unheeded. We call on Congress to act now. A prescription drug 
benefit in Medicare is an urgent priority for our members and for the 
American people.
  
                               __________
  

                                ADDENDUM

 Perceptions of a Medicare Rx Plan Among the Public Aged 45+ Selected 
                                Findings

           Eight in ten Americans aged 45 and over favor making 
        prescription drug coverage part of the Medicare system. 67% 
        strongly favor this benefit.
           Almost eight in ten Americans aged 45+ consider 
        providing a Medicare prescription drug benefit to be an 
        extremely or very important priority for the President and 
        Congress.
           A majority of Americans aged 18 to 64, and 48% of 
        Americans aged 65+, favor borrowing from the Medicare Trust 
        Fund surplus to finance a Medicare prescription drug benefit. 
        Lower percentages among all age groups favor borrowing from 
        Social Security Trust Fund surpluses to finance a Medicare 
        prescription drug benefit.
           Respondents aged 65 or older (22%) are less willing 
        than those between the ages of 45 to 64 (29%) to pay a $35 
        monthly premium for a Medicare prescription drug benefit that 
        has a $200 deductible, pays for 50% of the cost of 
        prescriptions, and has a catastrophic coverage cap of $4,000. 
        Overall, 27% of Americans aged 45+ are willing to pay a $35 
        monthly premium for this coverage.
           Of the 61% of Americans aged 65+ who identified a 
        premium amount less than $35, one-quarter (or 15% of all 
        respondents aged 65+) said they would pay the $35 premium when 
        asked directly if they would be willing to pay that amount for 
        coverage.
           While 41% of the public aged 45+ would be likely to 
        participate in the above Medicare prescription drug plan, only 
        33% of those aged 65+ would participate. Almost half (47%) of 
        those aged 45 to 54, and 41% of those 55 to 64, say they would 
        be likely to participate in this plan.
           Americans aged 65+ with prescription drug coverage 
        are less likely to participate in this plan than those without 
        coverage. However, the lack of prescription drug coverage may 
        not be a factor in whether or not a person would participate in 
        this plan since individuals aged 65+ with no coverage are split 
        as to whether they would participate--42% would be likely to 
        participate in this plan while 39% would not be likely to 
        participate.
           The role existing coverage plays in individuals' 
        decision to participate in this plan is complicated by the fact 
        that monthly out of pocket prescription drug expenses are also 
        related to whether or not individuals aged 65+ will accept the 
        plan. Majorities of people aged 65+ (54%) without prescription 
        drug coverage and with current monthly average out of pocket 
        drug expenses of $60 or more are likely to accept the plan.
           Among individuals aged 65+ who have prescription 
        coverage, out of pocket drug expenses are also a factor in 
        whether or not they will accept this plan. Almost four in ten 
        (38%) of those aged 65+ with drug coverage but with current 
        average monthly out of pocket expenses of $60 or more are 
        likely to accept this plan. Only 23% of the 65+ population with 
        drug coverage and monthly out of pocket expenses lower than $60 
        are likely to accept this plan.
Methodology
    Reed Haldy McIntosh collected the data contained in this survey for 
AARP through the Market Facts Telenation omnibus survey conducted March 
1 through March 3, 2002. All questions in the survey were asked of 
those aged 45 and over (n=885), with the exception of questions 10 and 
11 which were asked of all age groups (18+) in the omnibus (n=2,000). 
The margin of error for this survey is +/-3.5 percentage points.
  
                               __________
  
[GRAPHIC] [TIFF OMITTED] T9762G.007

                                

    Mrs. Johnson OF CONNECTICUT. Thank you, Mr. Novelli.
    Mr. Rector?

STATEMENT OF JOHN M. RECTOR, SENIOR VICE PRESIDENT, GOVERNMENT 
 AFFAIRS, AND GENERAL COUNSEL, NATIONAL COMMUNITY PHARMACISTS 
               ASSOCIATION, ALEXANDRIA, VIRGINIA

    Mr. Rector. We certainly appreciate the opportunity to 
present our views on comprehensive Medicare reform this 
morning, now this afternoon. We represent 25,000 independent 
pharmacies, not the publicly-held pharmacies, we provide about 
half the Nation's prescriptions.
    We hope that the benefit will include, in addition to 
coverage of the product, coverage of pharmacists' professional 
services. I would like to emphasize that only when the drugs 
are used properly do they have the value that has already been 
noted by several witnesses this morning.
    I would like to touch on several very specific aspects of 
the recent legislation you considered 2 years ago. First, we 
consider our businesses to be highly efficient. They have less 
than a 30-percent gross margin, less than a pre-tax 2-percent 
net profit, and we need to remind the Committee and others that 
we are also private sector.
    I know the debate that developed has substituted choice of 
plan for choice of provider, and, of course, that is the kind 
of approach that concerns the small businesses that we 
represent. We think the Committee should allow seniors to 
select the pharmacy of their choice and not allow the insurance 
industry or their PBMs to substitute your constituents' choice 
of pharmacy. I note that 24 Members of the Committee are in 
States that have laws that guarantee choice of pharmacy to 
consumers, including seniors, and we certainly urge that you 
not preempt those State statutes.
    Relatedly, so often in the dialog in the last several years 
we have seen reference to the fact that PBMs, insurance 
companies, and others negotiate with pharmacies. The literature 
is replete with this. I know testimony after testimony before 
the Committee stresses the value of maintaining the PBMs' 
ability to negotiate with pharmacies. I am here today to stress 
as emphatically as possible, that we do not have the ability to 
negotiate with these PBMs. That is a fiction. We are given 
``take it or leave it'' contracts with no choice whatsoever 
regarding the terms of those contracts.
    So, naturally, one of the things we would like the 
Committee to seriously consider is to include the ability, as 
several bills that have been introduced, at least in the 
Senate, have, to allow the pharmacies to actually negotiate 
their deal on behalf of themselves and their consumers with the 
PBMs and not just have us accept whatever it is that these 
intermediaries decide is best for our bottom line. It is 
usually best for their bottom line and not at all good for our 
bottom line.
    We would like the Committee to seriously consider not 
penalizing seniors when they want to continue to go to their 
local pharmacy and decline to utilize the mail order option. We 
have seen so frequently provisions that incentivize our 
competitors: the mail order pharmacists and pharmacies. If they 
have something to offer, fine, but we do not see a need to tilt 
the equation in favor of their businesses.
    Interestingly enough, those are very highly profitable 
businesses. Because of rebating and other factors, the PBMs 
make substantially more profit on the mail order prescriptions 
that they fill, usually through their own companies, or with 
other companies under contracts. They make more money on the 
mail order prescriptions they fill than they do in the insured 
prescriptions that are filled in a local pharmacy.
    We would urge the Committee to carefully assess precisely 
what it is that the PBMs do to provide the alleged savings that 
the debate so often has raised. We are fairly skeptical about 
the savings. We see them taking dollars from our pocket and 
putting it into theirs and do not necessarily see the employers 
or government, for that matter, benefiting from their 
activities.
    We think you should investigate the extent to which these 
entities are regulated under State law. Very likely, they are 
not. Georgia just this week was the first State to specifically 
regulate the PBMs.
    Lastly, we urge that you review very carefully the growing 
amount of litigation being brought by employers, by patients, 
by health plans, and by pharmacists against these PBMs for 
violations of their fiduciary responsibilities to each of those 
respective categories.
    In closing, I noted in the Secretary Thompson's testimony 
that he said that they had little experience with PBMs. 
Frankly, our Members would like to guarantee that continues to 
be the case. Thank you.
    [The prepared statement of Mr. Rector follows:]
Statement of John M. Rector, Senior Vice President, Government Affairs, 
   and General Counsel, National Community Pharmacists Association, 
                          Alexandria, Virginia
    Mr. Chairman, Members of the Committee:
    I am John M. Rector, I serve as Senior Vice President Government 
Affairs and General Counsel for the National Community Pharmacists 
Association.
    The National Community Pharmacists Association (NCPA) represents 
more than 25,000 independent pharmacies, where over 75,000 pharmacists 
dispense more than 50% of the nation's prescription drugs and related 
services. Independent pharmacists serve 18 million persons daily. NCPA 
has long been acknowledged as the sole advocate for this vital 
component of the free enterprise system. For decades NCPA has been the 
only national pharmacy association with universal state association 
membership, including those of the Committee's members.
    The National Association of Retail Druggists (NARD), founded in 
1898, has been the association representing the professional and 
proprietary interests of the nation's community pharmacists. To mark 
our centennial year, the NARD House of Delegates voted to change the 
Association's name to the National Community Pharmacists Association 
(NCPA).
    NCPA members are primarily family businesses. We have roots in 
America's communities. The neighborhood independent pharmacist typifies 
the reliability, stability, yet adventuresomeness that has made our 
country great.
    As owners, managers and staff pharmacist employees of independent 
pharmacies, our members are committed to legislative and regulatory 
initiatives designed to protect the public and to provide pharmacists a 
level playing field and a fair chance to compete. We appreciate the 
opportunity to assist the Committee in fashioning a new benefit for 
Medicare beneficiaries to include drug product coverage and related 
pharmacist professional services.
    Competition in retail pharmacies is alive and well. Competition is 
an incentive for efficiency and the price competition in retail 
pharmacy is typically greater than can be found among other providers 
of health services and products.
    The independent community pharmacist of today is simultaneously a 
health care professional and a small businessperson. NCPA and its 
members vigorously support the American free enterprise system, which 
provides the only meaningful climate under which a small business can 
economically survive, have the opportunity to succeed through personal 
efforts, and provide an important and essential service to the 
community.
    Community pharmacists are especially trained to assist you and your 
constituents with the proper use of medications. Medicines, only when 
used properly, can save lives and improve the quality of lives, and 
only when medicines are used properly can consumers, employers and 
governments enjoy actual systemic savings.
    The pharmacies and the 75,000 pharmacists that NCPA represents are 
interested in a wide range of health and business issues such as estate 
tax reform, ergonomics, small business tax relief, confidentiality of 
pharmacist-physician-patient communications and of pharmacy records, 
payment for pharmacists professional services and assuring that PBMs 
process claims but are not allowed to practice medicine or pharmacy, 
accountability for ``managed care,'' elimination of discrimination in 
favor of mail order, and internet sales tax collection.
    The small business independent health care professionals we 
represent are the preferred choice of American consumers, including 
your constituents. Our members function in the market in a variety of 
forms. They do business as single stores ranging from apothecaries to 
full line high volume pharmacies; as independent chains (e.g. 100 
pharmacies) and as franchises. Whatever the form of business entity, 
independent pharmacists are the decision makers for the diverse NCPA 
member companies.
    The most in-depth consumer pharmacy preference survey to date, was 
published by Consumer Reports, in October of 1999. They surveyed 18,000 
consumers and found that consumers, especially seniors, preferred 
independently owned pharmacies for several reasons:
           Independents provided more personal attention
           Independents provided more useful information about 
        both prescription and nonprescription drugs
           Independent druggists were seen as more 
        professional, more sensitive to families' needs, and easier to 
        talk to
           Independents kept consumers waiting less time for 
        drugs, had prescriptions ready for pickup more often, and 
        provided out-of-stock medicine faster
    The 1200 plus independently owned pharmacies in the Medicine 
Shoppes franchise were ranked second; the supermarket drugstores (7,800 
stores) were third, the mass merchandisers (5,300 stores) were fourth; 
and last were the big corporate run chains (19,300 stores). No 
preference was expressed for mail order.
    Numerous studies have documented the cost savings of comprehensive 
community pharmacy services. When properly utilized, community 
pharmacists services including compliance and persistence programs, for 
example, can save the health care system billions of dollars by 
reducing the need for much more costly medical services, including 
emergency room visits, hospitalization, and nursing home admissions.
    The failure by the insurers/PBMs to provide incentives for full 
pharmacist services has led to unnecessary and inappropriate 
prescriptions; to uncounseled prescription drug use; and to reduced 
patient compliance with appropriate drug regimens. In the long run, 
this devaluation of professional pharmacists services and the adoption 
by the insurance industry of a ``commodity only'' approach has 
increased total annual health care expenditures by billions. In 
summary, there is less payment for less care. Consequently, we believe 
that the Committee should be very skeptical of so called ``managed 
care'' which has declined to acknowledge or pay for professional 
community pharmacist services.
Consumer choice of provider is the life-blood of competition. Limits on 
        consumer choice inhibit competition. In our view Medicare 
        beneficiaries should be entitled to choice of plan, pharmacist 
        provider, and prescription products.
    Consumer choice means cost effective prescriptions. The average 
cash price in a community pharmacy for an Rx drug is $40.47; if insured 
$44.61; and if mail order $52.42. While NCPA members dispense 55% 
generic Rxs, the mail order generic rate is 28%.
    If pharmaceutical products and pharmacist services are to become a 
basic core benefit under Medicare, it is essential, as we stressed to 
the National Bipartisan Commission on Medicare Reform in September 
1998, that:
           Medicare beneficiaries have full access to community 
        pharmacy and community pharmacy has full access to the 
        marketplace.
           All pharmacies, irrespective of practice settings, 
        must be able to acquire prescription drugs at the same price, 
        subject only to economies of scale including volume.
           There be established a realistic professional 
        dispensing fee that recognizes the valuable patient care 
        services provided by the nation's community pharmacists.
           Community pharmacists are able to join together to 
        negotiate with Medicare and its intermediaries.
           Medicare beneficiaries are able to receive 
        prescriptions that are compounded by pharmacists to meet their 
        individualized needs.
           Payments be authorized to pharmacists for disease 
        state management on per-encounter basis for such services as 
        smoking cessation, diabetes, arthritis, asthma, lipids, 
        osteoporosis, cardiovascular and coagulation care management 
        when provided by credentialed pharmacists.
           Beneficiaries retain the right to contract with 
        health care providers including pharmacists for products and 
        services not covered by Medicare.
           Additionally, in conjunction with various national 
        pharmacy associations, we have adopted parallel core 
        recommendations for the establishment of an outpatient pharmacy 
        benefit for Medicare beneficiaries.
    (See Exhibit 1).
    It is important to understand that the pharmacy benefit managers 
(PBMs) not only dictate unilaterally what pharmacies will be paid, but 
PBMs directly compete with our small businesses through their mail 
order pharmacy subsidiaries or through contracts with other mail order 
companies.
    Today the marketplace for insured prescription coverage is 
dominated by so-called ``managed care'' companies (a.k.a. PBMs). The 
dominance of such companies has created additional barriers to 
competition, it has not enhanced competition. Those attempting to 
``manage'' our market seek to reduce the number of viable competitors 
and to steer unwilling consumers to a few select competitors often 
including, as noted, their own mail order companies.
    It is important to understand that your independent pharmacists are 
not engaging in idle speculation when they express concerns that 
unrestricted PBMs would shift consumers away from their local pharmacy 
to the PBM's own mail order companies with their characteristic high 
profits and under utilization of generic drugs. It is estimated by Wall 
Street PBM analysts that the PBM makes 2 to 4 times as much profit on 
an insured mail order prescription than on an insured prescription 
dispensed in a community pharmacy.
    For the past several years the major PBMs have aggressively 
attempted to switch patients to their mail order programs often 
switching them to a prescription drug not based on the patients health 
care needs but based on rebates from the highest bidder. Often the 
patient is switched to more expensive drugs and denied access to 
appropriate generics.
    The impact of their ``so-called'' care has been equally negative: 
reduced quality control and reduced quality of providers to which 
consumers have access, including providers unlicensed in the consumer's 
state. In fact, the trend for the past decade for insured prescriptions 
has seen PBMs focus exclusively on the prescription drug product and 
eliminating payment for traditional professional community pharmacist 
services. Among the consequences of this ``commodity only'' approach 
has been a significant increase in non-compliance with the drug regimen 
prescribed by physicians and as a consequence diminished quality of 
life for covered consumers and their families.
    NCPA members are forced to accept whatever payment the insurance 
industry and its PBMs dictate. Simultaneously the insurance industry 
and its' allies brazenly characterize such payments as discounts 
``negotiated'' by pharmacies.
    Experts on the insurance industry and their PBM's practices know 
that to characterize the payment for pharmacists fixed by the insurance 
industry and its PBM intermediaries in ``take-it-or-leave it'' 
contracts as negotiated by the pharmacists is akin to characterizing 
the victim of an armed robbery as having donated cash to the 
assailant's favorite charity.
    PBMs refuse to negotiate with independent pharmacies and it is 
unlawful for several independent pharmacies to collectively negotiate 
prescription drug contracts with PBMs. In the last Congress the House 
of Representatives voted 276 to 136 for H.R. 1304, the Quality Health 
Care Coalition Act, which would have authorized such small business 
contract negotiations. It is enlightening to recall that the PBMs, 
represented by Express Scripts, unsuccessfully urged the House 
Judiciary Committee to deny independent pharmacists and their 
consumers, including seniors, economies of scale regarding products and 
services achievable through fair negotiations.
    Rather than further erode the small business pharmacy 
infrastructure through the dictates of our ``managed care'' 
competitors, the Committee should guarantee Medicare beneficiaries 
protections similar to those provided by H.R.1304. Allowing pharmacists 
to negotiate would help put an end to the present ability of the 
insurance industry and its PBM intermediaries to unilaterally fix 
pharmacy payments and to reduce the quality of care. Negotiations would 
help to put an end to the tying of prescription insurance coverage to 
the mandatory or coercive use of mail order pharmacy, which denies 
consumers equal access to neighborhood pharmacies and the services of 
independent pharmacists. Incidentally, this bipartisan legislation has 
been reintroduced as H.R.3897, by Representative Bob Barr (R-GA) and 
John Conyers (D-MI).
    We also recommend that the Committee carefully review the growing 
number of lawsuits against PBMs brought by patients, health plans, 
employers, and others alleging PBM violations of their fiduciary 
duties. The PBMs have countered by claiming that they are not obligated 
to fulfill a fiduciary duty and are only obligated to lookout for their 
bottom line interests. Would this be the case with Medicare?
    Regarding the affordability of prescription drugs for all 
Americans, including Medicare eligible persons, we recommend two steps: 
First, the full implementation of the Medicine Equity and Drugs Safety 
Act (MEDS) P.L.106-387, which would allow the importation by 
pharmacists of FDA approved drugs from select countries, principally, 
Canada, United Kingdom, and the European Union. Secondly, the enactment 
of Representatives Cliff Stearns (R-FL)--H.R.1127, which would restore, 
for federal tax purposes, the first dollar deductibility of 
prescription drugs.
    On behalf of the members of the National Community Pharmacists 
Association, we thank the Committee for the opportunity to provide our 
views on Medicare reform.
                                 ______
                                 
                                        (Exhibit 1)

   Assuring a Quality, Cost-Effective Pharmacy Benefit for America's 
             Seniors A Unified Agenda for American Pharmacy

       Academy of Managed Care Pharmacy (AMCP) (Withdrew Support)

              American College of Clinical Pharmacy (ACCP)

               American Pharmaceutical Association (APhA)

           American Society of Consultant Pharmacists (ASCP)

         American Society of Health--System Pharmacists (ASHP)

           National Association of Chain Drug Stores (NACDS)

           National Community Pharmacists Association (NCPA)

    National Council of State Pharmaceutical Association Executives 
                                (NCSPAE)

    As policymakers discuss a comprehensive Medicare outpatient 
pharmacy benefit, we encourage Congress and the Administration to 
carefully consider the views of the nation's pharmacists--the third 
largest, most accessible, and consistently most trusted group of health 
professionals.
Who We Are
    Our organizations represent the entirety of the practicing 
pharmacist and corporate business communities that comprise American 
Pharmacy--independent and chain community pharmacists and pharmacies; 
hospital and health-system pharmacists; clinical pharmacists in 
academic health centers, medical group practices, and clinics; 
pharmacists practicing in managed care organizations; consultant 
pharmacists in long-term and senior care facilities; home health care 
pharmacists; and virtually every other type of pharmacist and setting 
where patient care and medication use occur. Our collective memberships 
span the breadth and depth of the entire profession of pharmacy. And we 
are unified in our core beliefs concerning an outpatient pharmacy 
benefit for Medicare beneficiaries.
What We Believe
Medicare Should Provide a ``Pharmacy Benefit''--Not a ``Drug Benefit''
    Medications are safe and effective only when they are used 
appropriately. Inappropriate medication use leads to hospitalizations 
and other unnecessary medical costs for which Medicare is already 
paying a substantial price. Seniors need and want pharmacists to help 
them understand how to take their medications appropriately so that 
medication--related adverse events are avoided or minimized. That's 
because the public recognizes that pharmacists are the most qualified 
health professional to provide this level of care and service to them. 
Consumers should have the choice of and access to the pharmacist and 
pharmacy that best meet their specific health care needs.
    For that reason, proposals to modernize Medicare need to provide 
for the addition of a ``pharmacy benefit,'' not simply a ``drug 
benefit.'' Pharmacists who work together with patients and their 
physicians are seniors' (and Medicare's) best ally for ensuring that 
the medications being used are as clinically appropriate, cost--
effective, and free from preventable side effects, drug interactions, 
and other medication--related problems as they possibly can be. Any 
``benefit'' from adding outpatient prescription drugs to Medicare will 
only be realized if we can assure their proper and effective use. That 
is the professional expertise, and value, that pharmacists bring to 
patient care and the health care system.

 Medicare Must Provide Appropriate Payment to Pharmacists and 
Pharmacies for their Services
    A Medicare pharmacy benefit must recognize that the nation's 
pharmacists and pharmacies are the individuals and entities that 
actually provide the drug products, professional services, and 
medication therapy management (MTM) programs that are essential to 
assure that medications are optimally used. Payment to pharmacists and 
pharmacies for providing these products and services must be reasonable 
and adequate to cover the professional, administrative, and business 
costs of providing these services and products--as well as a reasonable 
return on investment--in every type of pharmacy practice setting in 
which the care and services are provided.
Our Key Concern
    None of the legislative proposals introduced to date in the 107th 
Congress adequately address our two core beliefs: access to and 
coverage of both medications and pharmacists' medication therapy 
management services. In reviewing the bills currently being considered, 
one would conclude that Congress believes that it will have served 
Medicare beneficiaries well if it can simply find a way to help 
Medicare buy medications at the reduced prices currently being paid by 
other federal purchasers and then turn the administration, management, 
and delivery of services over to 91 private sector'' entities sometimes 
referred to as prescription benefits managers (PBM's).
    For example, under several existing proposals, PBM's are charged 
with ``managing care,'' ``developing drug formularies,'' ``increasing 
generic drug use,'' ``negotiating discounts with pharmaceutical 
manufacturers,'' ``placing price controls on community pharmacies,'' 
and ``providing medication therapy management programs to seniors.''
    While we believe that PBM's can and do have an important role in 
performing many of the administrative tasks associated with providing 
the pharmacy benefit to seniors, we have serious reservations about the 
nature and scope of ``patient care and cost management'' tasks that 
many of the current proposals would assign to PBM's. In fact, some 
evidence suggests that PBM's are not effective in performing these 
latter activities. Pharmacists and pharmacies are the real ``private 
sector' providers of care and service to patients. Pharmacists and 
pharmacies provide services and work with patients at their point of 
care to accomplish appropriate medication use and accurate dispensing. 
It is pharmacists and pharmacies, our members, upon whom senior 
citizens and the Medicare program will ultimately rely to achieve the 
outcomes we all seek for a successful Medicare pharmacy benefit.
What Should Be Done
    Our organizations are jointly committed, prepared, and able to work 
with the 107th Congress, the Bush Administration, the pharmaceutical 
industry, HCFA, physician organizations, senior advocacy groups, and 
other interested parties to help design a Medicare outpatient pharmacy 
benefit that improves medication use, helps control overall health care 
costs, and enhances the quality of seniors' lives. The pharmacy, 
medical, and health care literature all provide ample evidence that 
these goals are compatible, not mutually exclusive. But we have to work 
together to achieve them.
    We therefore encourage HHS Secretary Tommy Thompson to establish a 
national panel of all of these stakeholders to assist the Bush 
Administration and Congress in designing a Medicare pharmacy benefit 
framework that achieves these important objectives.
    A Medicare outpatient pharmacy benefit will be the single most 
substantial and important addition to the program since its inception 
35 years ago. We must not only do the right thing--but we must do it 
the right way. Beneficiaries, taxpayers, and the public at large 
deserve nothing less than our best effort.
                                 ______
                                 

                                ADDENDUM

    1. Examples of misrepresentation that our members negotiate with 
PBMs include:
          a) The PCMA testimony to the Committee on June 13, 2002 at 
        page 5, where they stated: ``Any legislation that does not 
        empower us as PBMs to negotiate discounts and other pricing 
        concessions from drug manufacturers and pharmacies--as we do 
        today in private plans--will not be able to deliver the 
        anticipated cost savings. Our members are strongly united on 
        this point.''
          b) The 3/22/00 GAO presentation to the Committee and to the 
        Senate Finance Committee entitled Prescription Drug Benefits: 
        Applying Private Sector Management Methods to Medicare at page 
        6: ``Similar to their negotiations with manufacturers, PBMs 
        negotiate with retail pharmacies to obtain prices that are well 
        below pharmacies' usual price for customers without drug 
        coverage.''
          c) The PhRMA 6/12/00 ad in National Journal's Congress Daily 
        AM at page 7, which states ``For 150,000 Americans with a 
        prescription drug insurance benefit, their private health plans 
        have had considerable success negotiating meaningful price 
        discounts on pharmaceuticals. However, 12 million senior 
        Americans now have no prescription drug insurance coverage. As 
        a result, most of them pay full price for their medicines. 
        That's because they don't have the market clout that comes with 
        a drug insurance benefit. If all seniors had access to private 
        market discounts, the medicines they need, on average, would 
        cost 30% to 39% less.''
    As noted in 2000, H.R. 1304, which would allow our members to 
negotiate with health plans and PBMs was approved on 6/29/00 by 276 to 
136. Committee members voted 19 to 37 (9 R's and 10 D's) for H.R. 1304.
    2. Regarding the PBM corporate strategy to shift patients to their 
highly profitable mail order businesses the following references are 
enlightening:
           FAC Equities--Division of the First Albany 
        Corporation--October 4, 2001 Research Report on Express 
        Scripts, Inc. recommending a Buy
          Page 3 of the report under Investment Merits states that 
        ``mail order sales are roughly 2 times to 3 times more 
        profitable on a per adjusted script basis than retail script.
           WR Hambrecht Company Report--March 22, 2001 on 
        CareMark Rx recommending a Buy
          Page 2 of the report notes ``PBM mail order script margins 
        are 4 times higher than retail scripts.
           CareMark Rx Inc. 10K--December 21, 2000
          Page 3 ``In 2002 the company, implemented a program designed 
        to encourage its' customers to refill prescription which were 
        originally filled in its' retail network through its automated 
        mail service pharmacy.'' The company also operates a network of 
        17 smaller mail service pharmacies.
    3. According to IMS Health (See enclosed bar graph), the PBMs under 
utilize generic drugs. We believe that the Committee should help assure 
that any new Medicare benefit provide seniors with no fewer than the 50 
to 55% level of generic prescriptions made available currently to 
seniors and others through independents community pharmacies.
    A related issue is the pricing of generic drugs. PBMs seem not only 
to under utilize generics but also reportedly charge significantly 
higher prices for generics. For example, earlier this year, a Merck-
Medco plan for Connecticut state retired teachers entitled 
``Prescription Drug Server'' mandated mail order coverage. One 
consequence of eliminating local pharmacies as a choice for retired 
teachers was prices for generic drugs three times greater than the 
change in independent community pharmacies in Connecticut. (For 
example, the charge for a community pharmacy of $34.23 and for Merck-
Medco mail a order charge of $100.38 for a 90 day supply of 300 tablets 
of the same generic drugs). Fortunately, on April 1, 2002, this Merck-
Medco mandatory mail order program for Connecticut retired teachers 
dropped its' mandatory mail order requirement in response to protests 
about the Merck-Medco generic drug overcharges. Unfortunately, the 
retired teachers plan still discourages the teachers from using their 
community pharmacy through discriminatory co-payments that favor Merck-
Medco's mail order business.
    Initially, the AARP mail order pharmacy business was synonymous 
with generic drugs. Since IMS Health data does not capture the 
marketing practices of our non-profit competitors, such as AARP, we can 
only speculate as to whether AARP may also under utilize generic drugs.
    4. Numerous studies, as noted, underscore the systemic value of 
coverage and payment for pharmacist care services. On such study is 
entitled ``The $76 Billion Dollar Question'' funded by our foundation; 
the National Institute for Pharmacist Care Outcomes; and Merck. 
Interestingly, the former director of health benefits at GM, Mr. Beach 
Hall in 1992 observed in this study, ``that pharmacist care is the most 
critical quality and cost controlled vehicle we have in the entire 
health care system.''
    As Committee member, Representative Portman observed rather than 
$76 billion, our health care system is now wasting $150 billion 
annually due to inappropriate prescription drug use and unnecessary 
hospitalizations and nursing home placements. In other words, a dollar 
wasted for every dollar spent annually on prescription drugs. 
Appropriate payment for pharmacist professional services could 
significantly reduce these unnecessary expenditures.
    It is important, in our view, that the Committee is aware of the 
joint statement on prescription drug benefit under Medicare announced 
by our group and Pfizer on 6/11/01. It stresses the value of pharmacist 
care services, including, persistency, patient compliance, and 
appropriate counseling.
    It is noteworthy that the 1988 Medicare catastrophic law 
established per prescription payment for a participating pharmacy as 
AWP + $4.50 indexed. In today's marketplace, fourteen years later, had 
the bipartisan law signed by President Ronald Reagan not been repealed, 
the payment would be $10.94.
    Representative Nussle raised a question regarding the ability to 
retain pharmacists in rural areas. Senate legislation, S.10 has an 
incentive provision for payment for independent pharmacists in rural 
areas. Importantly, H.R. 3626 by Representatives Emerson and Ross 
recognizes the value of pharmacist professional services for a new 
Medicare benefit.
    5. Regarding Representative Foley's expressed enthusiasm for the 
Administration's ``so-called'' discount card, the Committee should 
carefully review the 12/01 GAO report stating an average savings of 
approximately 11%. This percent did not reflect the monthly fees, (for 
example, $9.95 for an individual and $19.95 for a family) charged for 
the cards. Savings, if any, were somewhere between 1 and 5 percent.
    Regarding Mr. Foley's expressed intent to legislate the 
Administration' s proposed card, it is important to recall the Federal 
Judge Paul Friedman on 9/6/01 in NACDS/NCPA v. HHS enjoined the plan 
because HHS had no authority to undertake an endorsement plan and had 
proceeded unlawfully. The bottom line, however, was that the Court 
found that implementation of the plan would cause irreparable harm, 
especially to the small business pharmacies that we represent. Enacting 
legislation would only institutionalize the irreparable harm to small 
businesses.
    6. Mention was made that allowing Medicare to negotiate with drug 
makers could ``distort'' the marketplace. The independent pharmacy 
marketplace where pharmacists are not able to negotiate has been 
totally distorted by one sided contracts dictated by PBMs. Assuring 
pharmacists, the ability to negotiate would help ameliorate the 
distortion.
    Please see the enclosed 4/02 article in America's Pharmacist 
entitled ``The Tug of Wars with PBMs'', which highlights the various 
facets of PBM distortion of our marketplace.
    Once again, we especially appreciate the opportunity to assist the 
Committee and staff as you revisit the subject of Medicare pharmacy 
benefit.

                                

    Mrs. Johnson OF CONNECTICUT. Thank you, Mr. Rector.
    Dr. Sayare.

STATEMENT OF MITCHEL SAYARE, PH.D., PRESIDENT, CHIEF EXECUTIVE 
      OFFICER, AND CHAIRMAN, IMMUNOGEN, INC., CAMBRIDGE, 
    MASSACHUSETTS, ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY 
                          ORGANIZATION

    Dr. Sayare. Thank you, Madam Chairman and Members of the 
Committee. I am here today representing the Biotechnology 
Industry Organization (BIO). This Committee has been the 
driving force for Medicare drug coverage for many years. I am 
particularly honored to be here to describe BIO's views on 
Medicare drug coverage issues.
    ImmunoGen, the company I work for, is a publicly-traded 
biotech company established in 1981 that has several anti-
cancer drugs in various stages of clinical development, for 
colorectal cancer, small cell lung cancer, and other forms of 
solid tumors. We do not have any products currently in the 
market.
    The BIO represents over 1,000 biotech companies, academic 
institutions, State biotech centers, and related organizations 
in all 50 States. Ninety percent of our companies are involved 
in health care product development, and 90 percent of those 
companies do not have a single product on the market. Many of 
the others have only one product. Clearly, the vast majority of 
BIO's members do not have an array of health care products to 
absorb the costs of the research and development tax credit 
(R&D).
    Additionally, many biotech drugs are for small populations. 
Forty-five percent of FDA-approved biotech products have orphan 
drug status.
    Finally, existing tax incentives for research, the R&D tax 
credit and the deductibility of net operating loss carry-
forwards do not benefit these pre-profitable biotech companies.
    For many of BIO's members, the levels of investment in 
innovation is far from an academic concern, really more of a 
question of survival. Most BIO members are not Members of the 
Fortune 500. Rather, they are small companies funded by venture 
capital, companies that may, in fact, hold the key to 
potentially important therapies in the future. Anything that 
could upset this delicate balance that we live in could deprive 
patients of these breakthroughs in the future, because if 
investment by venture capitalists is reduced, most of the 
companies in this area are not going to survive. We urge you to 
take care when designing a Medicare drug coverage plan not to 
upset this delicate balance.
    The issue of Medicare modernization and the proposal to add 
prescription drug coverage to the program is of high interest 
to members of BIO and to the patients that we serve. Many 
biotech drugs in the pipeline target diseases that 
predominately affect seniors. We strongly believe that 
outpatient drug coverage should be established in the context 
of overall market-based reform of the Medicare program to do 
the following: Rely on the private market and competition, not 
price controls that deter innovation; include stop-loss 
protection and protection of those most in need first; expand 
beneficiary choices among private plans; improve patient care 
through innovations in biotechnology; maintain Medicare 
solvency; and do no harm to current coverage and reimbursement.
    Today, most biotech drugs are, in fact, covered by Medicare 
because they are administered in a hospital setting or in a 
physician's office. At the top of our current coverage concerns 
is the recent imposition of cuts to hospital outpatient pass-
through payments. As you recall, the Balanced Budget Refinement 
Act 1999 created this new transitional payment system to 
provide an incentive to hospital outpatient departments to use 
new technologies during the time that a prospective payment 
system was created. This payment system is truly a mess.
    Last year, before Congress finished its work, Chairman 
Thomas and Mr. Rangel, along with the chairmen and ranking 
Members of the Senate Finance Committee and House Energy and 
Commerce Committee, sent a letter to CMS urging a delay in the 
implementation of the pass-through payments for 2002 as well as 
recommending that the agency increase to an average of no less 
than 75 percent of the imputed values used to calculate 
reimbursement for sole source, multi-source, and generic drugs. 
Only half of your recommendations were executed by CMS, that 
is, the delay.
    Of course, creating an outpatient drug coverage program in 
Medicare is of critical importance, but the situation with 
current coverage will impact beneficiary access to the latest 
technologies, such as biotech drugs, today. I am requesting 
that the Committee revisit this issue soon. Specific 
recommendations relating to BIO's current coverage concerns 
were outlined in my written proposal.
    In closing, Madam Chairman, I would urge this Committee to 
continue to move expeditiously to pass drug coverage 
legislation this year. I want to commend you for holding this 
very important hearing and for your leadership on drug coverage 
and stop-loss coverage issues. I will be happy to attempt to 
answer any questions you have. Thanks.
    [The prepared statement of Dr. Sayare follows:]
Statement of Mitchel Sayare, Ph.D., President, Chief Executive Officer, 
 and Chairman, ImmunoGen, Inc., Cambridge, Massachusetts, on behalf of 
                the Biotechnology Industry Organization
    Good morning, Chairman Thomas, Congressman Rangel, members of the 
Committee. My name is Mitchel Sayare, Ph.D, and I am President, CEO and 
Chairman of ImmunoGen located in Cambridge, Massachusetts. I am here 
today representing the Biotechnology Industry Organization (BIO).
    This committee has been the driving force for Medicare drug 
coverage for many years. The Medicare drug coverage legislation this 
committee reported out in the 106th Congress represented a positive 
step from BIO's perspective, and the association is pleased that this 
committee is continuing to work to add drug coverage to Medicare. I am 
particularly honored to be here to describe BIO's views on Medicare 
drug coverage issues.
Background on ImmunoGen
    ImmunoGen, Inc. is a publicly-traded biotechnology company that has 
anti-cancer drugs in various stages of clinical development for 
colorectal, pancreatic, small-cell and non-small cell lung cancer. We 
were founded with venture capital in 1981 and had our initial public 
offering (IPO) in 1989. Since its inception, ImmunoGen has focused on 
achieving more effective, better tolerated therapies for the treatment 
of cancer. The company uses tumor-targeting monoclonal antibodies to 
deliver highly potent cell-killing (cytotoxic) agents specifically to 
cancer cells. Two products originated at ImmunoGen are currently in 
Phase I/II clinical trials under licensing agreements with other 
companies, but we have no products currently on the market. One product 
(huC242-DM1/SB-408075) currently being tested is for colorectal, 
pancreatic and certain non-small-cell lung cancers. The other (huN901-
DM1/BB-10901) is for small-cell lung cancer and other cancers of 
neuroendocrine origin.
    ImmunoGen's proprietary tumor-activated prodrug technology (TAP) 
combines extremely potent small-molecule drugs with monoclonal 
antibodies that recognize, bind directly to, and kill tumor cells. Our 
targeted delivery technology increases the potency and efficacy of 
these cancer-specific antibodies, which allows our drugs to kill cancer 
cells with minimal harm to healthy tissue.
    From inception through December 31, 2001, ImmunoGen has invested 
over $160 million in Research and Development (R&D). About 80% of the 
Company's expenses since it was founded have been R&D expenses.
    One example of our research demonstrates some of the risk faced by 
companies in the biotech industry. ImmunoGen invested over $120 million 
in the development of a product (Anti-B4-bR) that failed in Phase III 
clinical trials. We are only back on our feet, developing other 
products for the treatment of cancer, because the investing public was 
willing to give us another chance. We need to repay their confidence. I 
am here to urge this committee to keep the fragile state of companies 
like ImmunoGen in mind when making changes to Medicare. While we are 
very excited about some of the potentially lifesaving therapies we 
might discover, we can only do so if we have the ability to continue 
significant investments in R&D.
About BIO
    BIO represents 1,071 biotechnology companies, academic 
institutions, state biotechnology centers and related organizations in 
all 50 U.S. states. BIO members are involved in the research and 
development of health care, agricultural, industrial and environmental 
biotechnology products. Ninety percent of our companies are involved in 
health care product development and 90% of those companies do not have 
a single product on the market. Many more have only one product. 
Clearly, the vast majority of BIO's members do not have an array of 
health and/or other consumer products to absorb the cost of R&D; more 
importantly, many biotech drugs are for small populations. Forty-five 
percent of FDA-approved biotech products have orphan status.
    For many of BIO's members the level of investment in innovation is 
far from an academic concern and more a question of survival. Most BIO 
members aren't members of the Fortune 500; rather, they are small 
companies funded by venture capital, companies that may hold the key to 
many potentially lifesaving therapies. Anything that could upset the 
delicate balance these companies live in could deprive patients of 
these important breakthroughs--because if venture capital investment is 
reduced, many companies will be unable to survive. The President of 
NASDAQ recently wrote that a ``decrease in investor confidence [in the 
biotechnology industry] can only result in a decrease in investment 
dollars, thereby placing critical research at risk.'' When the Clinton 
health bill was being considered in the mid-1990s, the growth rate of 
R&D investment dropped markedly, potentially delaying new products on 
their way to American consumers. In addition, venture capitalists 
became less willing to invest in biotech companies, forcing 13 out of 
16 companies to withdraw their initial public offerings (IPOs) of stock 
and their efforts to go public.
    During this period, the situation for ImmunoGen was very grave. 
Investors continually asked me how ImmunoGen could offer a return on 
R&D investments under a regime of price controls. In order to survive, 
companies like mine must be able to generate a reasonable return on R&D 
investments. Imposing price controls could significantly hamper our 
ability to do so.
    Given the unique dependence of drug innovation on capital 
formation, rather than existing product sales, we, as the biotechnology 
industry, would be remiss to discuss Medicare prescription drug 
coverage without briefly addressing some issues related to the 
formation of that capital.
    Biotechnology companies are by definition R&D intensive, and 
approval processes are often time-consuming. As such, the product 
development timeframe is longer than in most other industries. In many 
cases, it takes upwards of 10 years before a product is developed and 
approved. When, as is usually the case in biotechnology, a company has 
no product in the market place--and therefore no taxable income--the 
major R&D tax incentives employed so effectively by other industries 
simply do not apply. Tax deductions are only theoretical when there is 
not yet income, and net operating losses cannot be carried forward long 
enough to apply to profits down the road.
    Paradoxically then, the R&D intensive nature of biotechnology makes 
today's R&D incentives more crucial to apply but less likely to do so. 
Fixing this ``mismatch'' would go a long way to improving the 
investment environment in our industry. Allowing us to continue 
developing the drugs and therapies that our Seniors rely on to improve 
and extend the quality of their lives.
    Legislation addressing problems in this area has already been 
drafted, and we look forward to working with this Committee as 
solutions are further developed.
    BIO urges Congress to ensure that any Medicare drug coverage 
proposal considered or enacted does not upset the delicate balance of 
the biotechnology industry. Price controls and other non-market 
solutions could be highly damaging to the industry, and therefore to 
the patients waiting for cutting edge new therapies.
    Over the past two decades, biotechnology has produced 133 drugs and 
vaccines, and there are 350 more in late stage development. The biotech 
products that have been approved by FDA are the work of only 71 of 
BIO's members, only 37 of which are profitable. The biotechnology 
industry invested nearly $14 billion in R&D in 2000--reinvesting, on 
average, more than 50% of its revenues into R&D. This is in an 
environment when most of BIO's members have no product revenues at 
all--those companies can be said to be investing more than 100% of 
revenues in R&D. Across all other industries, the average re-investment 
in R&D is just 4%. The biotech industry as a whole lost nearly $6 
billion in 2000.
    In addition to the hope of promising new therapies offered by 
biotechnology, I also want to point out that BIO's members are an 
important part of the U.S. economy. According to Ernst & Young Report, 
the biotechnology industry employs more than 170,000 people--this 
excludes companies that are mostly pharmaceutical in nature. We have 
employees in all 50 states and add more than $20 billion to the economy 
annually.
    Many biotechnology products are oriented toward treating, 
preventing and diagnosing diseases of the aging population and are 
targeted toward small segments of disease categories and thus small 
patient populations. Recombinant DNA technology has enabled us to 
target products at the genetic level. Increasingly, new therapies will 
be designed specifically for unique and small populations. While we 
expect this to allow for more effective treatments, many with fewer 
side effects, it will also mean smaller markets over which we can 
spread the cost of R&D investment.
    One example of this type of product is ImmunoGen's huMy9-6-DM1 for 
the treatment of Acute Myeloid Leukemia (AML). While only 10,000 new 
cases of AML are diagnosed each year, an estimated 7,200 patients die 
from AML each year. Most of these patients are older, as risk of having 
AML rises after age 40 and increases thereafter with each advancing 
decade.
    ImmunoGen expects to file an IND to begin clinical trials with 
huMy9-6-DM1 in 2003. Thus, we are still several years from the market. 
While we are optimistic about this product, there are no guarantees and 
significant risks remain.
    The bottom line is that the biotechnology industry, while being a 
vital part of the current economy and the source for many potential new 
cures, is still fragile. We would urge you to take care when designing 
a Medicare drug coverage plan not to upset the delicate balance of the 
industry.
BIO's Medicare Reform Principles
    The issue of Medicare modernization and the proposal to add 
outpatient prescription drug coverage to Medicare is of high interest 
to the members of the BIO and the patients we serve. Many of the 
products in biotech companies' pipelines target diseases that 
predominantly affect seniors.
    Accordingly, BIO believes that the Medicare program should include 
drug coverage for all Medicare beneficiaries. In recent years drugs and 
biologics have become an even more integral part of health care, while 
the drug coverage available to seniors has increasingly included lower 
coverage limits and higher premiums. BIO strongly believes that 
prescription drug coverage should be offered to beneficiaries in the 
context of an overall, market-based reform of the Medicare program, but 
we believe that seniors need drug coverage now--and comprehensive 
reform may take years to enact. Thus, we support efforts to enact a 
Medicare drug benefit in 2002, but we must also continue to work to 
make Medicare a program that reflects the best of the 21st Century 
marketplace. BIO stands ready to work with this committee & the 
Congress to pass Medicare prescription drug coverage legislation this 
year.
    BIO's priority in the debate is to ensure that any steps taken to 
increase seniors' access to drugs today are consistent with the 
incentives needed to develop breakthrough medicines to treat the 
seniors of tomorrow. Consequently, we will staunchly oppose any price 
controls or non-market solutions.
    The following are the full text of BIO's Medicare principles, as 
approved by our Board of Directors in 1999.
    BIO strongly believes that pharmaceutical benefit options should be 
offered to beneficiaries in the context of an overall, market-based 
reform of the Medicare program. If interim prescription drug proposals 
are considered, they should facilitate and not deter the adoption of 
comprehensive reforms to the Medicare program. As part of any Medicare 
modernization effort, prescription drug proposals must be designed to:
    1) Rely on the private marketplace and competition, not price 
controls that harm innovation--BIO believes that Medicare benefits--
including coverage for prescription drugs and biologics--should be 
delivered through a decentralized, pluralistic market structure that 
encourages meaningful competition in order to preserve patient choice, 
improve quality and encourage innovation. Government regulation should 
be limited and market-based delivery mechanisms should be utilized. 
Explicit or indirect price controls that stifle innovation must be 
avoided.
    2) Include stop loss protection and protection of those most in 
need first--Federal assistance for Medicare beneficiaries should be 
targeted to those with the greatest economic and medical need in order 
to focus limited funds where they can have the most impact. Inclusion 
of ``stop loss'' coverage in order to protect the financial security of 
the sickest and neediest Medicare beneficiaries must be a top priority 
of any Medicare drug proposal.
    3) Expand beneficiary choices among private plans--Medicare 
beneficiaries should have expanded choices of quality health plans and 
benefit packages that include prescription drug coverage to ensure that 
all of the elements of modern health care are provided in a system 
built on the advantages of our market-based economy
    4) Improve Patient care through innovations in biotechnology--The 
future of patient care and our ability to prevent, diagnose and treat 
illness is inextricably tied to innovation in health care. By promoting 
strong incentives for the discovery and development of innovative new 
prescription drugs and biologics, America can assure that the new tools 
of biotechnology are applied as quickly as possible to create medicines 
for our aging population. BIO believes that such innovation and 
discovery will generate real savings by reducing the need for hospital, 
long-term care, and other expensive services and procedures.
    5) Maintain Medicare solvency--In the context of over-all market-
based reform, we must ensure that drug coverage for Medicare 
beneficiaries does not jeopardize the financial security of the 
program. Medicare needs to be modernized in such a way as to assure 
that it is a fiscally responsible program for the coming generations of 
seniors.
    6) Do no harm to current coverage and reimbursement--A majority of 
Medicare beneficiaries have some form of drug coverage today. 
Additionally, Medicare does cover prescription drugs and biologics in 
certain circumstances. BIO believes strongly that any Congressional 
action on Medicare prescription drugs must avoid interfering with 
existing coverage and payment rules for the types of drugs and 
biologics currently covered by Medicare.
BIO's Recommendations
    Based on our principles, BIO has tended to be most supportive of 
drug coverage plans that focus beneficiaries with very high 
prescription drug costs, as well as those with low-incomes. We have 
been the strongest advocate of what many in Congress are calling ``stop 
loss'' or catastrophic coverage to cover all or a high percentage of 
prescription drug costs after a certain level of out of pocket 
spending. We are encouraged that most of the major drug coverage 
proposals--from both sides of the aisle--now include some sort of stop 
loss coverage. We believe that a well-crafted stop loss coverage plan 
may be an idea whose time has now come, despite the earlier experience 
of this committee.
Stop Loss Design Issues
    There have been a variety of different stop loss coverage plans 
introduced in various bills in the 106th and 107th Congresses. In our 
opinion, it is the presence of stop loss coverage that is important--
coverage that is important for a variety of reasons.
    We support stop loss coverage because we are quite concerned that 
the fruits of the most promising research that some of our members are 
conducting are likely to be costly--and we want to be sure the results 
of this research is widely available. Because of some of the dynamics 
of the biotech industry discussed earlier, the populations they treat 
are often small, sometimes very small. Moreover, biological products 
are often more expensive to produce than traditional pharmaceuticals 
because biotech products are generally made through recombinant 
techniques. The reagents and tools necessary to make a recombinant 
protein are generally more costly than traditional pharmaceutical 
products. As a result, we expect that some new biotechnology products 
may be too expensive for many seniors that lack outpatient prescription 
drug coverage.
    While most seniors will not make claims under stop loss coverage, 
the coverage will provide valuable protection and peace of mind for all 
by ensuring that high cost therapies are available to those who need 
them. Stop loss coverage is true insurance against the cost of 
debilitating, and potentially financially devastating disease. While 
few people ever have their houses burn down, we all believe that fire 
insurance is valuable. Senior citizens should have the same protection 
from the potentially devastating costs of disease.
Other Coverage Design Issues 
    BIO also believes that all beneficiaries should have Medicare drug 
coverage with greater subsidies targeted to those with low incomes. We 
believe that subsidies should be carefully crafted to emphasize the 
private market. Some low-income subsidies could have the effect of 
expanding Medicaid--with the corresponding government rebates and price 
controls the program entails. BIO believes that the private marketplace 
offers cost control mechanisms that will not threaten research and 
development investment. Private sector discount arrangements are made 
in exchange for movement of market share, while Medicaid rebates are 
unilateral government price controls.
    One issue that we at BIO have spent considerable time wrestling 
with is the gaps contained in some drug coverage proposals between the 
initial coverage limit and the attachment of stop loss coverage. Since 
some of these bills contain no subsidies during these gaps, we are 
particularly concerned about how the gaps will affect low-income 
beneficiaries.
Current Coverage Issues
    In addition to the Medicare drug benefit issues I have just 
discussed, I would like to spend a moment on some of the current 
coverage issues facing the biotechnology industry. Many of the 
treatments available for cancer, hemophilia and other life-threatening 
diseases are currently covered by the Medicare system because these 
products are administered in the hospital setting or in physicians' 
offices.
Medicare Hospital Outpatient Department Reimbursement
    A number of changes in reimbursement methodologies have emerged in 
recent years, and pending additional changes could create more 
uncertainty in the system. Products administered in the outpatient 
hospital department prospective payment system (OPPS) have been subject 
to reduced reimbursement due to the pro rata reduction under the 
``transitional pass-through'' rules. BIO is grateful for the work of 
the members of this committee in convincing CMS to delay the pro rata 
reduction until problems with the agency's data could be resolved. 
Unfortunately, the pro rata reduction implemented earlier this month is 
still based on inadequate data. This is particularly true for drugs and 
biologicals because the hospital acquisition costs used to determine 
the costs subject to reduction are based on faulty estimates. In 
December, members of this committee on both sides of the aisle urged 
CMS to resolve this problem in a letter calling for acquisition cost 
for drugs and biologics to be imputed at no less than 75% (across 
single source, multi-source and generic products). Unfortunately, CMS 
never responded to this portion of the committee's letter and 
implemented a pro rata reduction that we believe has caused inadequate 
reimbursement for many products.
    When addressing Medicare reimbursement concerns, BIO's foremost 
priority is to ensure that hospitals and providers are reimbursed 
adequately when using biotechnology products so that they do not have 
distorted incentives to user lower cost--but potentially less 
appropriate--means of care. While cost effectiveness must be taken into 
account, Medicare patients deserve high quality healthcare. BIO 
attempts to craft its reimbursement policies to ensure that providers 
receive sufficient payments so that their decisions are based primarily 
on the most appropriate care for patients and not merely on the cost of 
the therapies involved. It is with this in mind that we urge you to ask 
CMS to implement your December request and set imputed hospital 
acquisition costs at no less than an average of 75% across sole source, 
single source and multisource drugs covered in the outpatient hospital 
setting.
    BIO is also concerned about some of the decisions CMS must make 
between now and mid-summer when the methodology for ``folding in'' 
current pass-through products into the OPPS is proposed. At a recent 
town hall meeting, BIO suggested a possible approach to ensure that 
hospitals are adequately reimbursed for folded in products. We stand 
ready to work with members of this committee on this important issue. 
We are particularly concerned that products folded in to the OPPS are 
assigned to separate payment classification groups and reimbursed based 
on adequate data. We have called for a system of product-specific 
ambulatory payment classifications (APCs) with a delay in reimbursement 
changes until the Secretary can gather adequate data--not only for 
product acquisition costs, but also for handling and storage costs that 
are otherwise not reflected in the OPPS.
Physician Reimbursement for Products Medicare Currently Covers
    Products that are physician administered also need to have a stable 
reimbursement path so that companies can be sure that there is a market 
available for their products among Medicare beneficiaries before 
investing the hundreds of millions of dollars it takes to bring a new 
medicine to market. Changes to Average Wholesale Price (AWP) must be 
carefully crafted to ensure that patients continue to have access to 
biotech products and providers are adequately reimbursed for handling, 
storage and aqdministration costs. These administration costs are 
unique for biotech drugs in that most require refrigeration and other 
special handling requests.
Impact of Reimbursement Problems on Research
    I applaud recent increases to government funded biomedical 
research. It's been said many times before, but this research could 
help to find cures or treatments for many life-threatening illnesses, 
continuing a golden age of medicine. Government funding through the 
National Institutes of Health (NIH) and new biodefense funding will 
provide investment into the basic research that underpins new 
treatment, but applied research will be necessary to bring new 
medicines to market. It is companies like mine, and other BIO members 
that do the applied research needed to convert basic theories into 
useful new products. However, we will not have success doing this in an 
environment where government reimbursement policy removes the incentive 
for investors to fund new innovation. It would be ironic, to say the 
least, for government reimbursement decisions to cause the funding for 
applied research to dry up at the same time that new funding is being 
infused into basic biomedical research.
    I would urge this committee specifically to move carefully when 
making changes to current Medicare reimbursement formulas discussed 
above to ensure that payment to hospitals and providers accounts for 
the unique handling and storage costs that are associated with 
biotechnology products. In general, members of Congress should take 
care when trying to extract new budget savings from the biotech and 
pharmaceutical industries. Companies like mine may not survive if new 
government rebates and price controls hamper investment in new 
medicines. Investors must know that there are stable coverage and 
reimbursement rules at the end of the R&D pipeline in order to keep 
investing in discovery research.
Moving Forward on Medicare Drug Coverage This Year
    BIO believes that it is important to move forward this year with a 
new drug benefit for Medicare beneficiaries. Unfortunately, a BIO 
member made this same testimony last year, but this year it is even 
truer! The Medicare benefit package becomes more antiquated with each 
passing year, and we believe that the time is now to at least begin the 
process of bringing drug coverage to senior citizens and the disabled.
    We believe that the best plans will emphasize stop loss coverage 
and subsidies targeted to those most in need, as the best interim steps 
toward more comprehensive coverage for seniors and the disabled. Based 
on the numbers CBO has provided in the past, we believe that stop loss 
protection, and some level of subsidies could be affordable. Such a 
plan would also provide benefits to all Medicare beneficiaries, since 
all would benefit from the peace of mind that stop loss coverage would 
offer. Moreover, by taking over some of the risk of rising drug 
expenditures, government subsidies for stop loss coverage could make 
primary prescription drug coverage more affordable for seniors.
    BIO prefers comprehensive drug coverage in a fully modernized 
Medicare program. We still think it is important to take the first 
steps now so that a fully modernized Medicare program can be ready 
before the new influx of baby boom generation beneficiaries arrives.
Benefits of New Biotechnology Products
    Sixteen new biotechnology products were approved in 2000. Of the 
350 products currently in the pipeline, many are targeted toward 
Alzheimer's, Parkinson's, cancer, diabetes, osteoporosis and other 
diseases of aging. The products that make it through clinical trials 
will be on market before baby boomers retire. BIO's first priority 
after bringing these new therapies to market is to make sure that 
patients have access to these new medicines that may save lives and 
improve overall health and quality of life.
    These new products, by reducing hospitalizations and improving 
overall health could generate savings in the health care system. They 
will allow people to remain productive longer, with potentially 
corresponding economic benefits. While we understand that CBO may find 
these savings difficult to score, we are firmly convinced that they 
will represent a net benefit to patients in the United States and 
around the world.
Conclusion
    In closing, Mr. Chairman and members of the subcommittee, I invite 
you to think of a future without Alzheimer's Disease. Think of a future 
without Parkinson's Disease, without leukemia. Think of a future where 
cures are targeted to patients where treatments can be highly effective 
with very limited side effects. In the biotechnology industry, we 
firmly believe that these hopes will be realized. However, in order for 
these visions to become a reality, we must continue to invest heavily 
in the research and development of new and potentially lifesaving 
therapies. Moreover, in order for new treatments to have any benefits, 
the patients who need them must be able to obtain them. This is why BIO 
believes that coverage and stop loss protection are so important. Mr. 
Chairman, I want to commend you for holding this very important 
hearing, and for your leadership on drug coverage and stop loss 
coverage issues. I will be happy to attempt to answer any questions you 
may have.

                                

    Mrs. Johnson OF CONNECTICUT. Thank you. Just for your 
information, Dr. Sayare, we are in constant communication with 
the Administration on this issue of outpatient reimbursements 
and the coverage of drugs and hope to improve that situation in 
the near term.
    I am going to just put my concerns in the record. For each 
of us to have an opportunity means that we will each only have 
2 minutes, and that also means that your answers will have to 
be short. But if we can get through everybody, at least you 
will have a sense of the concerns of the Members and can get 
back to us.
    My concerns are twofold. I need to know what you think is 
the best way to manage costs. This morning, someone touted the 
Maine plan. The Maine plan manages costs by forcing the DoD 
plan on everyone. That is one alternative in every category, no 
way around it, and the pharmacist can substitute a generic for 
the prescription without even talking to the physician. This is 
not a plan that I would vote for for our seniors and not one I 
think they would tolerate. So this issue of how far you go down 
the formulary management tool track is very important.
    Second, how do we get the manufacturers' discount down to 
the pharmacists? That has to be better specified, although in 
our bill, by requiring bricks-and-mortar convenient access as 
defined by the government, not the PBM, we think that we will 
be at least at 95 percent of all pharmacists being in the 
program. So those are the kinds of concerns I have.
    I would say, Mr. Novelli, I am extremely, extremely 
disappointed in AARP's stand on a couple of things. First of 
all, if we do nothing about physician reimbursements and we let 
them fall another 5 percent and another 5 percent the year 
after that, what makes you think there will be any doctors out 
there that will take new Medicare patients? We already have 
overwhelming evidence of difficulty in our seniors finding a 
doctor. So I have seniors coming to me now and saying, listen, 
I have got a little drug coverage. I do want the doctor of my 
choice.
    So your adherence to $750 billion as workable after the 
kind of testimony we have had here today troubles me, and I am 
glad to hear that you will consider all proposals, and also 
your opposition to dealing with provider payments before we 
deal with prescription drugs. Frankly, both are equally 
important.
    I now would like to recognize Mr. McCrery.
    Mr. McCrery. Thank you, Madam Chair.
    Mr. Bradley, I was interested in your testimony for a 
number of reasons, not the least of which was you went through 
a number of steps that GM has taken to control costs and you 
named those. And then later in your testimony, you said any 
Medicare drug proposal ought to contain, and then you named 
essentially the same kinds of cost controls. But is it not true 
that GM's drug costs are rising at double-digit rates every 
year?
    Mr. Bradley. The answer is, yes, our costs are going up, 
but without all the initiatives that we have in place, the 
benefit design initiatives, the negotiations, to answer 
Congresswoman Johnson's questions, all those techniques that we 
are using to educate and so forth, without them, our drug costs 
would be much higher, seriously, and that is the----
    Mr. McCrery. I can believe that, but my point is, how can 
we in good conscience as policy makers create for the Medicare 
system a drug plan that is going to have 15- to 20-percent 
increases per year? That is unsustainable. You just cannot do 
it.
    So I guess my question to everybody is, how can we do this? 
How can we create a drug proposal that is affordable to the 
taxpayers, at least under the current system? And I do not want 
you to answer that, I want you to think about it and help us 
with that.
    Another thing that I want to ask about GM is how do you 
think we can create a program that will not replace the private 
dollars that you all and your beneficiaries are spending 
already?
    Mr. Bradley. I think it is important for Medicare to create 
the universal program, and then----
    Mrs. Johnson OF CONNECTICUT. The gentleman is out of time, 
so if you could delay your answer, weave it into something 
else, and let me recognize Mr. Cardin.
    Mr. Cardin. I would be glad to give you a moment of my time 
to respond to Mr. McCrery.
    Mr. Bradley. The idea would be for Medicare to create the 
underlying comprehensive universal program and that the private 
purchaser and the public purchaser that is already offering the 
additional benefit would offer it as a wrap-around above and 
beyond that, not unlike what we already have today with the 
current Medicare Program.
    Mr. Cardin. And also, in response to Mr. McCrery, I think 
that the cost containment you can put into a plan will give you 
initial savings, but the annual increases are going to be 
somewhat comparable to the overall health care increases for 
prescription drugs. I think it is unrealistic to expect that 
your plan will beat the market on the percentage increase, but 
you might be able to lower the base costs.
    Mr. Bradley. Yes.
    Mr. Cardin. Mr. Gilmartin, I want to talk a little bit 
about getting the cost down for seniors. It is very frustrating 
to hear seniors in my district say, look, we are paying the 
highest costs of any group prescription drugs because we do not 
have any insurance to cover them. We have no negotiating power, 
and we are not getting the discounts that others can because we 
have to work on our own.
    If the government comes in and provides reimbursement, 
however it is done, through a private company or however it is 
done, it seems to me that the government then is representing a 
large market share of your product, and the way the free market 
operates, as I understand it, the larger the market share, the 
better one is going to be able to do as far as price. Is that 
not basically correct? So if we come in with a comprehensive 
prescription drug plan within Medicare, will that not give the 
government the opportunity to bring down the actual cost that 
seniors are incurring on prescription drugs?
    Mr. Gilmartin. If Medicare is modernized to add a 
prescription drug benefit in a way that uses private sector 
health plans, comprehensive health plans as a way to accomplish 
that, our experience in the private sector is that these health 
plans are very tough negotiators. They drive a hard bargain on 
price. They demand value. Those benefits are passed along to 
companies such as General Motors and prices do come down.
    So one of the benefits to seniors of not only having 
prescription drug coverage through a modernized Medicare plan, 
particularly through competing health care plans, is that they 
will not only be able to gain access to the medicines that they 
are not utilizing sufficiently right now, but they will be at 
lower prices. So they will benefit from those discounts.
    Mr. Cardin. Thank you.
    Mrs. Johnson OF CONNECTICUT. Mr. McDermott.
    Mr. McDermott. Thank you, Madam Chair.
    To just follow up, Mr. Gilmartin, this morning, I do not 
know if you were here, but Secretary Thompson was here and we 
talked about negotiating prices, whether the U.S. government on 
the behalf of 40 million Medicare patients could negotiate with 
pharmaceutical companies. He said, well, that would distort the 
market because we have such a big market share.
    And then I was thinking about the fact that in my health 
care plan, I actually am part of Merck-Medco, and so I know 
that Merck-Medco, which I think is a part of your operation----
    Mr. Gilmartin. Right.
    Mr. McDermott. Negotiates on behalf of 65 million 
beneficiaries. Now, does that distort the market? I am not an 
economist, so I am here to have you explain to me how the 
government negotiating for 40 million seniors would distort the 
market if when Merck-Medco negotiates for 65 million you do not 
do the same thing.
    Mr. Gilmartin. Well, first of all, in terms of the, I think 
it is important to note that controlling or having cost 
containment for a particular drug spend goes far beyond getting 
a lower price. That can help initially. But the key to really 
controlling drug spend is to have a high quality pharmacy care 
delivered in a cost effective way, so that the quality features 
that are built in that were outlined by Mr. Bradley have to do 
with ensuring that the drug is utilized properly, that the 
drugs are--basically, there is no overlapping uses of drugs, 
that there are no dangerous drug interactions, and a whole 
series of quality measures that are built in to ensure that 
there is no waste and that there is no serious health 
consequences.
    The cost effective way has to do with the price 
negotiations, and we compete with Merck-Medco against other 
plans that are also negotiating with manufacturers and it is 
very much of a private market mechanism that does not lead to 
the kind of market distortions you would have where basically 
the government would not be negotiating but simply setting a 
price. So I do not think that they are comparable situations.
    Mrs. Johnson OF CONNECTICUT. Thank you, Mr. Gilmartin.
    Mr. McDermott. Your feeling is that there would not be 
negotiations, that just the government would set the price?
    Mr. Gilmartin. That is right. I mean, I think that is the 
experience. The government, it is not really negotiation. The 
government sets the price.
    Mrs. Johnson OF CONNECTICUT. Thank you, Mr. Gilmartin. Mr. 
Houghton.
    Mr. Houghton. Thank you very much.
    Mr. Gilmartin, I am going to pick on you again. One of the 
concerns that comes up in a rural area, and I live in a rural 
area, is if we create a drug benefit that promotes competition 
among the companies and employs so-called Pharmacy Benefit 
Managers to control costs, what is this going to do to access 
in the rural areas? Is it going to help or hinder some of the 
smaller communities?
    Mr. Gilmartin. Well, PBMs such as Merck-Medco and the other 
PBMs in the industry operate really in all areas of the 
country, so that they are available in rural areas as well as 
in urban areas. Because they really have pharmacy networks, 
retail pharmacies, independents as well as chain drug stores, 
they are able to supply a high quality pharmacy benefit even in 
remote regions of the country. So we are already there, in 
effect.
    Mr. Houghton. Okay. So you do not worry about it?
    Mr. Gilmartin. No. That is not a constraint.
    Mr. Houghton. Thank you.
    Mrs. Johnson OF CONNECTICUT. Mrs. Thurman.
    Mrs. Thurman. Thank you, Madam Chairman.
    Mr. Bradley, you have been kind of sitting over here and 
you said you put all these things in order. You have done the 
utilization. You have done all these safeguards that you think. 
Your prices are still going up, right? They are going up, $509 
million is what you are going to pay for how many people?
    Mr. Bradley. Yes, about 400,000.
    Mrs. Thurman. Mr. Gilmartin, in yours you say that you want 
to give us tough price negotiation with pharmaceutical 
companies. Well, if they are doing that and they are going at 
it and they are negotiating, prices are still going up. 
Something has got to give here.
    The fact of the matter is, we are not fooled anymore. I 
mean, we are looking at what is happening in Mexico. We look at 
what is happening in Canada. We look at what is happening in 
the United Kingdom. We are looking all over the place and 
everybody is getting their cost of their medicines differently.
    We are talking about a benefit through some discount card, 
and quite frankly, if medicines have gone up 17 to 30, 40, 50 
percent, and everybody I am hearing from, that is how much they 
are going up, I do not know what to do, and it is not because 
we do not have the negotiation tools. I mean, companies have. 
We are pushing them out of the ability to give their employees, 
our Medicare patients, our Medicaid patients the ability to get 
to those drugs that you say are so important to us. You have 
got to give us something better than just, oh, let us go 
negotiate, because it is not working.
    Mr. Gilmartin. Well, I think that it is fair to say that 
the utilization of drugs is going up very significantly----
    Mrs. Thurman. And that is because we are seeing advertising 
on the TV.
    Mr. Gilmartin. And the utilization of drugs is going up 
because they have become a much more valuable, important 
component of our health system. Our clients, if you will, plan 
sponsors for Merck-Medco basically want to make sure that their 
plan members, their employees have access to these valuable 
medicines, and so, therefore, their benefit designs are really 
geared toward getting their money's worth, which means getting 
the right price to the right patient and used in the right way.
    So experiences across health benefit plans vary all the way 
from single-digit increases to double-digit increases, but it 
really is an approach to get the value for those 
pharmaceuticals and make sure they are used properly, not to 
deny access to them.
    Mrs. Thurman. Madam Chairman, all I can say is I hope we 
have another hearing with these folks before us and others to 
talk about this issue because this is the most important issue 
to health care in this country and rising costs.
    Mrs. Johnson OF CONNECTICUT. Thank you. Mr. Becerra.
    Mr. Becerra. Thank you, Madam Chairperson, and to all of 
you gentlemen, thank you very much for your testimony. I would 
love to ask lots of questions, but no time, so let me just ask 
two questions of Mr. Novelli.
    First, if we had to make a decision on how we were going to 
spend some of our dollars from the Medicare and Social Security 
trust funds, would AARP take a position on whether those moneys 
should be spent on tax cuts or on Medicare and Social Security?
    Mr. Novelli. We are not taking a position on tax cuts. We 
are not taking a position on raising revenues. What we are 
taking a position on is the fact that, as I think you agree, 
everyone agrees, older people need pharmaceutical drugs in 
Medicare.
    Mr. Becerra. But if you saw that Congress were going to 
spend the trust fund monies going in for Medicare and Social 
Security, including those that are currently in surplus that we 
are not using to pay out benefits today for Social Security or 
Medicare, and if you saw that for the next 10 years we are 
going to spend those surplus dollars that are coming in, would 
you want them spent on Medicare and Social Security or would 
you mind if they were spent on tax cuts?
    Mr. Novelli. We tried to come up with a recommendation so 
that we could give Congress some flexibility, and I would like 
to say and to clarify with respect to what Congresswoman 
Johnson asked, we did not come in here with a $750 billion 
plan. We came in here and said it is going to be very difficult 
with the budget resolution that you have to do a drug program 
that people are going to enroll in. I think the challenge is 
going to be to try to deal with that and to do it in such a way 
that you are going to have a viable program.
    Mr. Becerra. One last question, if I may.
    Mr. Novelli. I am not taking a position on income tax cuts.
    Mr. Becerra. If I could just get to one last question, let 
me ask you one last question with regard to the survey that you 
make note of in your testimony where you say that 67 percent of 
seniors have said that if they were faced with a plan that 
provided them with a drug benefit that would cost them $35 a 
month as a premium with a $200 deductible and which paid for 50 
percent of the cost of prescriptions and that had an out-of-
pocket cost over the year of about $4,000, that they would not 
voluntarily purchase that.
    We have a plan, the only plan we have before us that we can 
refer to is the Thomas bill that was here before us 2 years ago 
that would have greater costs involved per senior to 
participate in that plan. Do you believe that the Thomas plan 
would be something that seniors, given your survey, would want 
to adopt?
    Mr. Novelli. We did not test the elements of the Thomas 
plan. We tested the plan that you just talked about.
    Mr. Becerra. Right, and the elements of the Thomas plan are 
even more severe in terms of costs on seniors than what you 
surveyed.
    Mr. Novelli. Precisely my point. It is going to be very 
difficult to come up with a plan that is going to be adequate, 
that is going to be viable, and as I said before, we are 
willing to look at anything. We are willing to help. We are 
willing to test any element, but you have a very tough job on 
your hands.
    Mr. Becerra. Thank you very much. Thank you, Mr. Chairman.
    Chairman Thomas.[Presiding.] I thank my colleagues. I 
apologize to the panel. Oftentimes, this place is a three-ring 
circus, and I was in the second and third rings for a little 
while.
    I do understand the line of questioning. However, I have 
found that at some point, people have to bump up against 
reality, and if, in fact, we pass a major prescription drug 
bill with modernizations in the $350 billion range, I think you 
will find that there will be a significant difference between 
what seniors ask as their druthers and what they are willing to 
do if, in fact, it is in front of them as a real, viable 
program. My assumption is the real, viable program would be 
adopted.
    However, because of all the other changes that we need to 
deal with, there are ways in which we can show them in a 
relative way that the dollar expended by the senior can be 
better spent tomorrow than it is today, and Mr. Novelli, in 
that regard, I know that you are involved in terms of the 
various activities of AARP in providing seniors with Medigap 
products. Do you have any rough idea of the percentage of your 
income that comes from the Medigap products?
    Mr. Novelli. It represents probably about 20 percent of our 
income.
    Chairman Thomas. So one-fifth of your income comes from 
Medigap programs, in which only the last dollar on some of the 
most expensive options go toward prescription drugs. The first 
dollar of every Medigap plan goes toward immunizing individuals 
against the cost effectiveness of various copays and other 
payment structures.
    Do you believe that if we could engage in a constructive 
dialog, we might be able to come up with a higher and better 
use of those precious dollars that seniors now spend on what is 
called Medigap insurance?
    Mr. Novelli. As you know, Mr. Chairman, we have talked 
about this before and my answer to that question is, yes, we 
should have such a dialog. Those Medigap programs are 
prescribed by law. If they should change, we will be happy to 
change with them. We also have a pharmaceutical service. What 
we want to do is do the best job we can for our members. We are 
perfectly happy to talk about these things and to make changes.
    Chairman Thomas. And oftentimes when we discuss out-of-
pocket costs, and it is difficult to do in a questionnaire, we 
do not remind the seniors how much they are currently paying 
out of pocket for what is, frankly, in many people's opinion, a 
kind of a lousy insurance product, and that if those dollars 
were redirected or combined in a more meaningful way, you could 
clearly get more bang for your buck.
    That is one of the areas that we will be exploring because 
it is not just additional government dollars that I think we 
should be dealing with. There are people who are paying out of 
pocket now and not receiving maximum value if we were to 
restructure the way in which Medicare and other programs 
interact.
    Second question, and I do appreciate your testimony, Mr. 
Novelli, because I read it carefully and I noticed differences 
from the first communication from AARP under the new 
leadership. One of the points that I really want to stress that 
I mentioned earlier, and I will repeat myself over and over 
again, in the Chairman's opinion, what we did when we created 
Medicare was to create a seniors', basically, acute care health 
program. We did not say it was just for wealthy seniors or 
those who joined a particular group or who had a sufficient 
corporate retirement plan to blend with Medicare. We did it for 
all seniors.
    The failure of previous Congresses to deal reasonably with 
the low-income issue does not negate that basic fact, in the 
Chair's opinion, and that our responsibility on Medicare is to 
all seniors to provide a uniform national program, and that if, 
in fact, we are going to assist low-income seniors as low-
income first and seniors second, we are not really doing what I 
thought Congress committed itself to do and that is provide a 
health care program for all seniors.
    Unfortunately, that is the way it has evolved, and if you 
are a senior but find yourself in the unfortunate position of 
being low-income, you are shuttled to a State structure under a 
Medicaid arrangement in which two seniors in different States 
find themselves treated significantly differently and the 
benefits available to them are significantly different and that 
is not, I do not think, what was intended when we talked about 
a seniors' acute health care program.
    I know there have been some statements by your organization 
and others. Just because we focus on low income as a needed 
assistance in a larger new program does not mean that that low-
income senior assistance has to come through what I consider to 
be the flawed traditional structures, and I hope we can 
continue a dialog in that area because my goal will be to 
create a program in which we have a modernized Medicare with 
prescription drugs available to all seniors wherever they may 
choose to live and not have a significant portion of it 
augmented by the State they happen to live in. I hope you would 
share that goal.
    Mr. Novelli. I think we are on the same page. We obviously 
agree with you that we do not want to means test Medicare. We 
also agree that there can be ways to work within Medicare on 
ability to pay and we would be very happy to have that dialog.
    Chairman Thomas. I would only tell you, do not assume I do 
not want to means test Medicare. I just do not believe that 
there is a practical way to do it in a real-time way, and I am 
still working on that, because at the same time we provided 
affordable health care for all seniors. I do not think it was 
in anyone's mind that what we wanted to do was to not provide 
for those in need because it would cost too much on an even-
handed way in which we were required to provide resources for 
those who were not in need, and that needs to be a discussion 
that we will save for a future day.
    Mr. Novelli. We appreciate the fact that you see the need 
for prescription drug coverage that is universal. I think it 
has been discussed this morning, certainly, but I would like to 
reiterate that this is a problem for the middle class of 
elderly people and not just for low-income people.
    Chairman Thomas. There is no question that that is the case 
and that what we are trying to do is create a structure in 
which everyone, regardless of their circumstances, has some 
reason to join because there is an advantage over the current 
structure. Fortunately, the current structure is so poor that 
we ought not to have that much difficulty in creating a better 
arrangement as far as prescription drugs are concerned.
    I would just briefly ask if any member of the panel wants 
to respond. My questions were directly to Mr. Novelli, but 
obviously in terms of low-income and a broad-based program and 
the willingness of seniors to adopt them, that is a kind of a 
broad-based question.
    [No response.]
    Chairman Thomas. With that, I want to thank you very much. 
Your testimony has been made a part of the record, has been 
read, and will be pondered over as we move forward. This is not 
the end of the process, it is, in essence, the official kicking 
off. We will be back working with you and with others as we try 
to build an affordable prescription drug program into a 
modernized Medicare structure.
    I would like to include in the record the statement 
submitted by Chellie Pingree.
    [The statement of Ms. Pingree follows:]
         Statement of the Hon. Chellie Pingree, Portland, Maine
    Chairman Thomas, members of the House Ways and Means Committee, 
thank you for the opportunity to testify here today. The high cost of 
prescription drugs in this country is a travesty and Maine is no 
different. I am here today to tell you about Maine's innovative 
approaches to securing affordable prescription drugs. I will focus on 
the landmark legislation that I sponsored in 2000, An Act to Establish 
Fairer Pricing for Prescription Drugs, more commonly known as ``Maine 
Rx.'' I also want to share the story of Maine's ongoing struggle for 
fair prescription drug prices and what we learned from our experiences.
    The story of Maine's most recent fight for affordable prescription 
drugs begins with seniors who were fed up with paying higher and higher 
prices and who knew that they could buy their prescriptions at nearly 
half the cost if they just crossed the border to Canada. In 2000, Maine 
people, led by seniors, came to me looking for affordable prescription 
drugs that they could purchase at their local pharmacy. This is not a 
new problem, and in Maine we've had prescription drug subsidy programs 
to help low-income seniors and families since 1975. We had already made 
substantial changes to these programs over the years, but there was 
great reluctance to further expand them. By the mid 1990s, prescription 
drug costs were growing so significantly that they put our seniors' 
health at risk. Hardworking Mainers were forced to choose between food 
and the drugs they needed to stay alive, and even during a time of 
economic prosperity in Maine the number of uninsured was growing and an 
increasing number of seniors were coming forward with very painful 
stories. By this point, most lawmakers knew another subsidy was not the 
answer when drug costs were rising faster than a runaway train. Maine 
could not keep bearing the costs for drug company executives whose 
profits seemed more important than people. I came to the conclusion 
that we needed to look at the problem differently. Every industrialized 
nation in the world negotiated with drug companies for lower costs 
EXCEPT the United States. I decided that Maine needed to have unified 
voice with which it could negotiate for lower prices on behalf of its 
citizens, and so I wrote the Maine Rx bill.
    As passed, the Maine Rx Program does the following:
           establishes the Maine Rx program in which the State 
        serves as a pharmaceutical benefits manager (PBM) for the 
        estimated 325,000 Maine residents who have no prescription drug 
        benefit;
           prevents profiteering and hindering the sale of 
        prescription drugs in Maine by drug manufacturers;
           authorizes interstate cooperation for bulk 
        purchasing and cost saving;
           provides for emergency prescription drug prices if 
        the negotiations do not produce prices comparable to the lowest 
        prices paid in Maine; and
           creates a Prescription Drug Advisory Commission 
        charged with reviewing access to prescription drugs in Maine, 
        advising the Commissioner of Human Services and reporting to 
        the Legislature and Governor. The commission is made up of a 
        diverse group of community members representing the medical 
        community, pharmacists and seniors.
    The Maine legislation is comprehensive and serves as model for more 
than twenty other states across the country.
    Currently, Maine has three prescription drug programs for its 
residents, and we are battling lawsuits against two of the programs, 
Healthy Maine Prescriptions and Maine Rx. In 2000, we were at the 
forefront with Vermont in securing a Federal Medicaid wavier to extend 
Medicaid prescription drug benefits to the uninsured, and since 1975, 
we have steadily increased both the individuals and the prescriptions 
covered in our subsidy program, the Low Cost Drug Program for the 
Elderly and Disabled.
    Through letters, public testimony and local community forums on 
prescription drugs, I learned that Maine people want to be able to 
purchase safe, high-quality prescription drugs at affordable prices at 
their local pharmacies. They want a system in which consumers, 
pharmacies, manufacturers and the State get a fair deal. They do not 
want prescription drugs to consume millions of dollars in State funds, 
and this is why in Maine we decided to negotiate for lower prices. It 
is equally important for the Federal Government to negotiate a lower 
price for Medicare and then offer a comprehensive benefit to seniors. 
We cannot pay retail for prescription drugs--we should negotiate our 
price, just like every other industrialized nation in the world, and 
just like we do with the prescriptions supplied to Veterans through the 
Veterans' Administration.
    In Maine, seniors have been traveling to Canada to buy affordable 
prescription drugs for years. On the most recent trip in March of this 
year, sponsored by the Alliance for Retired Americans, 24 people saved 
$11,000 on their prescription drugs. Many of the folks on this trip had 
never purchased prescription drugs from Canada before, and several said 
they had been searching for the bus and ways to buy affordable 
prescription drugs for some time. Many felt like going to Canada and 
saving that $500 or $1500 was really changing their lives. These are 
people with serious health problems, seventy-five year old women 
traveling alone on a bus to Canada to buy affordable prescriptions and 
couples traveling nervously, not really believing the position in which 
they've found themselves. Many of the Maine seniors I know are 
determined to go to Canada and save as much money as possible. However, 
most are acutely aware that they are leaving their country to take 
better care of themselves and as unfortunate as this is, that they are 
lucky to be able to travel to Canada.
    As this debate moves forward, I want to impress upon you the great 
need for Congressional action. State budgets can be very fragile, and 
for a state like Maine to spend the millions it does on prescription 
drugs is very difficult. Our state constitution demands a balanced 
budget, and the pressures of paying the ever-rising cost of 
prescription drugs stresses the entire state system. We need federal 
legislation that will do one of two things: either provide a 
prescription drug benefit under Medicare, passing on negotiated 
discounts to seniors, or free up the states to use innovative programs 
like Maine Rx while the debate in Congress continues.

                                

    Chairman Thomas. Thank you all for being here. Thank you 
for your patience.
    Mr. McDermott. Mr. Chairman, could you give us sort of an 
outline of--you said this was the beginning of the process. I 
kind of would appreciate it if you would give us some kind of 
outline of how we are going to get to the period before 
Memorial Day. What is your outline or your feeling about----
    Chairman Thomas. I am looking for the Chairwoman of the 
Health Subcommittee. What has been occurring, both at the 
subcommittee level and on an inter-subcommittee level between 
Ways and Means and Commerce are ongoing discussions of options, 
what they might look like. We need to shift into a more 
rigorous structure in which we begin to build packages and do 
spend-out arrangements, and again, doing it on both a 
subcommittee Ways and Means basis and then interacting with the 
Commerce Committee, since we have to work together. Our goal 
will be over the next 2 to 3 weeks to move fairly quickly in 
putting options together and then have the subcommittees begin 
to vote and move on those options.
    Mr. McDermott. Will there be hearing time for those options 
when they are put out?
    Chairman Thomas. It is the Chair's intention now to try to 
put together a package, get responses to the pieces of the 
package, pull it together, get responses to the package, and 
move it forward. As to whether that gets done completely at the 
subcommittee level and then moving up to the full Committee is 
not yet determined. In part, it will depend upon the ongoing, 
positive working relationship with Commerce.
    If the gentleman will recall, when he was a Member of the 
Health Subcommittee and I was the Chair of it, it was a 
slightly different environment than is currently the case. It 
is this Chair's opinion that the recent changes in chairs 
create an opportunity between Committees to create a much more 
cooperative working atmosphere between the Committees and the 
Chair hopes to capitalize on that.
    Mr. McDermott. When you say you are going to get responses, 
do you mean put it out to the parties involved or are you going 
to put it out in front of us and let us discuss and ask 
questions of witnesses and so forth?
    Chairman Thomas. All of the above, including any other 
ideas that we can come up with.
    Mr. McDermott. Thank you.
    Chairman Thomas. With that, the hearing stands adjourned. 
Thank you very much.
    [Whereupon, at 3:10 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
 Statement of the American College of Physicians--American Society of 
                           Internal Medicine
    The American College of Physicians-American Society of Internal 
Medicine (ACP-ASIM)--representing 115,000 physicians and medical 
students--is the largest medical specialty society and the second 
largest medical organization in the United States. Internists provide 
care for more Medicare patients than any other medical specialty. We 
congratulate the Committee on Ways and Means for holding this important 
hearing to address the need for a Medicare prescription drug benefit. 
ACP-ASIM thanks Congressman Bill Thomas, chair of the Committee, and 
other committee members for convening this important hearing.
Background
    Medicare suffers from an outdated benefits package that denies 
patients access to life-saving medications. Medicare beneficiaries are 
denied access to important life-saving medications because the existing 
plan of benefits, which remains fundamentally the same as that which 
was established when the program was created in 1965, excludes coverage 
for most prescription drugs. The Medicare program as a whole faces a 
difficult financial future, trying to find ways to adequately finance 
both the HI and SMI programs for beneficiaries. Clearly, comprehensive 
reform of the Medicare program is required to assure that needed health 
services are provided to beneficiaries and to maintain the financial 
solvency of the program. Greater costs could mean higher premiums for 
beneficiaries, reduced benefits, or a payroll increase for employers 
and employees. Adding an expensive Medicare prescription drug benefit 
to the existing program could exacerbate looming financial troubles and 
prove fatal to the Medicare program. However, by focusing on the 
neediest beneficiaries first and given an adequate budget outlay by 
Congress, policy makers could design a well-financed drug benefit that 
helps our most vulnerable seniors.
    Ideally, a prescription drug benefit should cover all Medicare 
beneficiaries equally. However, if a universal benefit carries too 
large a price tag, then coverage should be targeted to those most in 
need--low-income beneficiaries, those with high drug costs, and those 
with multiple chronic diseases. To ensure a high quality of life and to 
eliminate costly, unnecessary hospitalizations, our most vulnerable 
Medicare beneficiaries must have access to needed prescription 
medications. ACP-ASIM supports a number of mechanisms to control the 
costs of a prescription drug benefit, but emphasizes that patient 
safety and quality of care should be the primary focus. Congress should 
expand Medicare benefits to cover prescription drugs and institute 
measures to lower the costs of prescription drugs.
    Another idea introduced by the Administration, the Medicare-
Endorsed Prescription Drug Card Initiative, also offers a short-term 
solution to seniors' rising drug costs. While a prescription drug card 
plan would provide some assistance for needy seniors, it is not a 
substitution for long-term, comprehensive prescription drug coverage 
for Medicare beneficiaries. As Congress develops proposals to provide 
drug coverage, the Administration's proposal enables seniors to earn 
discounts on medications for the immediate future. Even a 10% discount 
on retail drug prices could help beneficiaries as they await action 
from Congress. ACP-ASIM supports a drug card plan that ensures minimal 
costs for seniors, up-front pricing information, and guaranteed savings 
for Medicare beneficiaries, not at the expense of local pharmacies.
ACP-ASIM Recommendations
    1. The highest priority should go toward providing voluntary 
prescription drug benefits for those most in need: low income 
beneficiaries who do not have access to drug coverage under other 
plans.
    2. If sustainable, predictable financing is available, ACP-ASIM 
supports providing an optional Medicare prescription drug benefit to 
all beneficiaries, regardless of income and health status.
    3. Drug benefit plans should be voluntary, and seniors should be 
able to opt out of the program and maintain their existing Medicare 
coverage.
    4. The benefit must be financed in such a way as to bring in 
sufficient revenue to support the costs of the program, both short and 
long-term, without further threatening the solvency of the Medicare 
program or requiring cuts in payments for other services or reduced 
benefits in other areas. ACP-ASIM recommends that Congress consider: 
(1) increasing general revenues or payroll taxes to support a Medicare 
prescription drug benefit, and (2) income-related premium 
contributions, co-payments, and deductibles to support the program.
    5. The maximum allowable Medicare reimbursement for prescription 
drugs should balance the need to restrain the cost of the benefit with 
the need to create financial incentives for manufacturers to continue 
to develop new products. Rigid price controls that will discourage 
innovation and threaten drug supply should be rejected.
    6. ACP-ASIM supports using prudent-purchasing tools in designing a 
Medicare prescription drug benefit. Like the VA, Medicare should 
investigate average wholesale drug prices and directly negotiate with 
manufacturers or wholesalers.
    7. Until the safety concerns issued by the FDA and HHS are 
resolved, ACP-ASIM opposes prescription drug re-importation as a means 
to reduce retail drug prices.
    8. If therapeutic safety and equivalency are established, then 
generic drugs should be used, as available, for beneficiaries of a 
Medicare prescription drug benefit. In order to eliminate delays for 
generic entry into the market and discourage financial arrangements 
between generic and name brand manufacturers, Congress should close 
loopholes in patent protection legislation.
    9. ACP-ASIM supports research into the use of evidence-based 
formularies with a tiered co-payment system and a national drug 
information system,\1\ as a means to safely and effectively reduce the 
cost of a Medicare prescription drug benefit, while assuring access to 
needed medications. Demonstration projects to test such methods should 
be established before a national program is introduced.
---------------------------------------------------------------------------
    \1\ A national effort to establish a uniform, evidence-based 
prescription drug system would provide physicians, insurers, PBMs, and 
patients with much-needed information about prescription drugs, 
including which are most beneficial and cost effective. This kind of 
analysis would require a great deal of expertise, time and money. It 
must be independent and unbiased, controlled by an independent body of 
physicians, patients, and pharmacists appointed by HHS to supply 
important drug information to all involved parties. Any national effort 
to design an evidence-based system must be non-restrictive for 
physicians and patients, in order to provide the best quality health 
care. An evidence-based formulary could be used in an advisory role, 
rather than as a mandate for prescribing.
---------------------------------------------------------------------------
    10. Medicare prescription drug formularies should not operate to 
the detriment of patients, such as those developed primarily to control 
costs. Decisions about which drugs are chosen for formulary inclusion 
should be based on effectiveness, safety, and ease of administration 
rather than solely based on cost. Formularies should be constructed so 
that physicians have the option of prescribing drugs that are not on 
the formulary (based on objective data to support a justifiable, 
medically-indicated cause) without cumbersome prior authorization 
requirements.
    11. Medicare prescription drug benefit should not limit coverage to 
certain therapeutic categories of drugs, or drugs for certain diseases.
    12. To counterbalance pharmaceutical manufacturers' direct-to-
consumer advertising, ACP-ASIM recommends that insurers, patients and 
physicians have access to unit price and course of treatment costs for 
medically equivalent prescription drugs.
    13. If pharmacy benefit managers (PBMs) are used to administer a 
Medicare prescription drug benefit, they should be subject to consumer 
protection standards of accountability, including:
           Disclosure to patients, physicians, and insurers of 
        the financial relationships between PBMs, pharmacists, and 
        pharmaceutical manufacturers;
           Requiring that PBM requests to alter medication 
        regimes occur only when such requests are based on objective 
        data supported by peer reviewed medical literature and after 
        having undergone review and approval by associated MCO/MBHO 
        Pharmacy and Therapeutics Committees,
           Requiring that, with a patient's consent, PBMs be 
        required to provide treating physicians with all available 
        information about the patient's medication history.
    14. ACP-ASIM believes that switching prescription medications to 
over-the-counter status should be based on clear clinical evidence that 
an OTC switch would not harm patient safety, through inaccurate self-
diagnosis and self-medication, or lead to reduced access to 
``switched'' drugs because they would no longer be covered under a 
prescription drug benefit. Manufacturers and other interested parties 
should be allowed to request such a reclassification.
    15. ACP-ASIM supports the creation of a Medicare prescription drug 
card program as a first step to providing seniors assistance with 
prescription drug costs, provided that:
           The program is not a substitute for comprehensive 
        Medicare prescription drug coverage.
           Pharmacy benefit managers (PBMs) are required to 
        pass on rebates from manufacturers to pharmacies, and 
        subsequently, beneficiaries.
           Program costs for beneficiaries are minimal or free.
           Card sponsors publish complete drug pricing 
        information, so that Medicare recipients can ``shop'' for the 
        best card.
Conclusion
    ACP-ASIM is pleased that the Committee is addressing the needs of 
Medicare beneficiaries to have access to affordable, life-saving 
medications. The College stands ready to assist the Committee and 
members of Congress to implement the recommendations identified in our 
statement. ACP-ASIM supports a number of cost-saving mechanisms 
described in our statement, but with the condition that patient safety 
and quality of care should be the primary focus. A benefit that 
incorporates consumer protections regarding pharmacy benefit managers 
and formulary use could be both cost-effective and responsive to 
seniors' prescription needs. In addition, higher-income beneficiaries 
should pay higher premiums to increase revenue to the program and allow 
for subsidies to lower-income recipients.
    Further research is needed to examine the effects of evidence-based 
formularies and the long-term effects of more popular methods of 
reducing costs, including PBMs, tiered formularies, and price controls. 
No matter what methods are used to administer a cost-effective Medicare 
prescription drug benefit, reducing costs should not result in 
diminished care or poor access to necessary medications. ACP-ASIM 
recognizes the needs of older Americans, and calls on policy makers to 
respond with a Medicare prescription drug benefit that addresses those 
needs as soon as possible.
    For more on ACP-ASIM's positions on Medicare reform and 
prescription drug coverage, please visit our web site http://
www.acponline.org/advocacy.

                                

 Statement of the Infectious Diseases Society of America, Alexandria, 
                                Virginia
    As the House Ways and Means Committee debates providing 
prescription drug coverage to one of the nation's most vulnerable 
populations--the elderly--under the Medicare program and develops 
legislation to implement this important change, the Infectious Diseases 
Society of America (IDSA) strongly urges Committee Members to include 
coverage for home-based outpatient intravenous (IV) antimicrobial 
therapy and the related physician case management services and supplies 
in this new benefit. IDSA represents nearly 7,000 physicians and 
scientists devoted to patient care, education, research, and community 
health planning in infectious diseases. As the physicians who 
coordinate care for patients with serious infections, our members are 
keenly aware of the how Medicare's failure to cover home-based 
outpatient IV antimicrobial therapy disadvantages both American 
taxpayers and the Medicare beneficiaries.
    Medicare policy prohibiting coverage of outpatient, self-
administered drugs has severely limited access of Medicare patients to 
ambulatory IV therapy, thus forcing them to rely on more costly and 
less-convenient inpatient hospital care. Covering home-based outpatient 
IV antimicrobial therapy and its related services and supplies under 
Medicare would greatly benefit American taxpayers as home-based therapy 
is a safe and much less-expensive alternative to providing it in the 
hospital. This is why most private insurers and many Medicare HMOs 
cover this service. The benefit to elderly patients receiving this 
therapy in their home is improved quality of life, convenience and 
time-saved.
    IDSA understands that Congressional leaders are considering adding 
a limited drug benefit that would cover cancer drugs to the Medicare 
program. We applaud and encourage the addition of this important new 
benefit, but strongly urge that such a benefit also include coverage of 
outpatient IV antimicrobial therapy. In addition to IDSA, the American 
Medical Association also has endorsed this approach. Their written 
policy states that AMA ``endorses the use of home injections and/or 
infusions . . . (including chemotherapy and/or antibiotic therapy) for 
appropriate patients under physician supervision, and encourages [CMS] 
and/or other insurers to provide adequate reimbursement for such 
treatment'' due to ``the benefits of such treatments in terms of cost 
savings, increased quality of life and decreased morbidity.'' [AMA 
policy H-55.986]
The Problem
    Unlike many private insurers and Medicare health maintenance 
organizations (HMOs), the Medicare fee-for-service program does not 
cover IV antimicrobial therapy provided in the home whether self-
administered or administered by a trained health professional. This 
means that patients must stay in a hospital, sometimes for several 
weeks, where they are at risk of exposure to hospital-acquired 
infections, or travel to their physician's office, sometimes twice a 
day to receive this treatment. Not only is home-based drug infusion 
therapy safe and effective, it also is much less expensive. Whereas 
hospital-based antimicrobial IV therapy typically costs $1,000 per day, 
home-based therapy costs less than $200 a day. One study estimates that 
Medicare can save approximately $5.3 billion in 10 years simply by 
covering home-based IV antimicrobial therapy.
    Medicare patients are often outraged when they discover that 
Medicare won't cover this essential therapy unless they are 
hospitalized for long periods of time or visit their doctor's office as 
often as seven days a week for weeks on end. For rural patients, this 
can mean traveling 150 miles a day to receive this 15-minute treatment 
that they could easily receive at home. Their frustration is 
exacerbated when they discover that patients who are privately insured 
or covered by Medicare HMOs are released from the hospital to continue 
drug therapy at home.
    Treating Medicare beneficiaries in their homes also would reduce 
their exposure to hospital-acquired, antimicrobial-resistant 
infections. Hospital-acquired infections affect over 5 percent of 
hospitalized patients and result in increased costs to the Medicare 
program. On average, hospital-acquired infections tend to add four days 
to a patient's hospital stay and cause more than 20,000 deaths a year.
When is IV Antimicrobial Therapy Necessary?
    Physicians routinely prescribe antimicrobial IV therapy for serious 
infections that cannot be treated with oral antimicrobial agents. When 
prescribed with a physician's oversight, IV antimicrobial therapy is a 
safe and effective way to treat a number of infections, including 
certain bone and skin infections, endocarditis (an infection of the 
heart valves), pneumonia, bronchitis, urinary tract infections and 
pelvic inflammatory disease. Osteomyelitis, a bone infection, 
frequently requires long courses of therapy with high concentrations of 
intravenously administered antimicrobials. Drug treatment for four or 
more weeks is common. Cellulitis, an infection of the skin and 
surrounding tissue, is another condition commonly treated in this 
manner. Serious fungal and viral infections often occur in people who 
have impaired immune systems, such as those with AIDS, diabetes or who 
have received an organ transplant. Moreover, antimicrobial infusion 
therapy can be tremendously beneficial for people predisposed to 
repeated infections, such as those with cystic fibrosis. Traditionally, 
these individuals must be admitted to hospitals frequently to treat 
recurring infections. They also are those at highest risk for catching 
new infections in a hospital.
    Osteomyelitis, cellulitis, endocarditis, and pneumonia account for 
over 80 percent of all cases requiring IV antimicrobial therapy. 
Together, these conditions account for nearly six percent of the 12 
million annual Medicare hospital discharges, at a cost of over $4 
billion annually.
Services and Supplies Necessary for Outpatient Drug Therapy
    In addition to antimicrobial drugs, other services and supplies are 
necessary for safe and effective outpatient IV antimicrobial therapy. 
First, physicians must prescribe and oversee the therapy. Physicians 
select the appropriate drug, dosage, and length of treatment; monitor 
the patient's progress; look for side effects of the therapy; and 
respond to any emergencies. Second, nurses usually educate patients and 
their caretakers about administering the infusion and caring for the 
infusion site. They also may monitor the patient's progress, coordinate 
care, and oversee the actual IV infusion. Third, pharmacists prepare 
and distribute the prescribed drugs and respond to patients' questions 
regarding the therapy and its side effects. Sometimes they monitor 
laboratory results and collaborate with physicians and nurses to adjust 
drug dosages. Finally, laboratory services are necessary to monitor the 
patient's status and response to therapy.
    Medicare currently does not reimburse physicians for their services 
unless they see the patient directly or the patient is enrolled in the 
home health or hospice program. Safe and effective home drug therapy, 
however, requires continuous, active oversight by a knowledgeable 
physician. Ongoing physician involvement is as important in the 
outpatient setting as it is in the hospital. Although physicians 
probably will need to meet with patients weekly while the outpatient IV 
antimicrobial therapy is underway, they also will need to spend a 
significant amount of time coordinating care with the patient and other 
health professionals, reviewing laboratory test results, and generally 
monitoring the patient's progress and any complications.
    As for equipment, two types are critical. First, there must be an 
access device to insert the drug into the body. Peripheral (IV) 
catheters, central catheters and subcutaneous ports are examples. Next, 
an infusion device controls the rate of drug flow. Infusion devices 
range from sophisticated pumps that allow for the infusion of multiple 
drugs at different rates to simple syringes and gravity drip systems. 
As opposed to narcotics and other pain medication, IV antimicrobial 
agents tend to use fairly simple and inexpensive access and control 
devices. Other equipment that may be needed include IV poles, tubing, 
and dressing supplies.
    Finally, it is not clear that physician dispensing of the drugs and 
pump used in outpatient antimicrobial therapy to patients in their 
homes is exempt from the Stark law's prohibition on self-referrals. 
Thus, we urge Congress to strongly consider a remedy to ensure that 
physicians be permitted to dispense these drug therapies and the 
necessary pumps.
    The expansion of Medicare coverage to include outpatient IV 
antimicrobial therapy is a cost-effective reform that will give 
Medicare beneficiaries access to the same therapies, safety and 
convenience as their private sector counterparts. Modernizing Medicare 
benefits to include coverage for this drug therapy makes good common 
sense and is essential to the good health of our nation's elderly 
people.

                                

Statement of the National Association of Chain Drug Stores, Alexandria, 
                                Virginia
    Mr. Chairman and Members of the Committee, The National Association 
of Chain Drug Stores (NACDS) is pleased to submit this statement for 
the record on ``Integrating Prescription Drugs into Medicare.'' NACDS 
represents about 200 chain pharmacy companies that operate about 34,000 
retail pharmacies all across the United States.
    Chain pharmacy is the single largest segment of pharmacy practice. 
Our members include the traditional chain pharmacies, the food/pharmacy 
combinations, and the mass merchandise pharmacy operations. We filled 
about 70 percent of the 3.1 billion prescriptions provided across the 
nation last year. We appreciate the opportunity to describe for you our 
ideas on both providing a comprehensive Medicare prescription drug 
benefit as well as our suggestions for interim steps that the Congress 
can take to help seniors obtain necessary medications.
Comprehensive Approaches to Pharmacy Coverage
    NACDS supports enactment of a comprehensive pharmacy benefit for 
seniors. In particular, we strongly support H.R. 3626, the Medicare 
Drug and Service Coverage Act of 2002, which has been introduced by 
Representatives Jo Ann Emerson and Mike Ross. This is the only 
comprehensive bipartisan prescription drug bill that has been 
introduced in the House, and contains the many elements that we think 
are important in a meaningful, quality drug benefit for seniors.
    This includes ensuring that seniors have access to the pharmacy of 
their choice, that they are provided with community-based pharmacy 
services with provisions for adequate payment for these services, and 
that the use of low-cost generic drugs is encouraged. We are grateful 
to these two members for their leadership on this issue, and we also 
appreciate the cosponsorship of the Members of Congress that support 
this bill. This bill is supported not only by NACDS, but the entire 
pharmacy community, including the independent pharmacies, hospital 
pharmacies, and nursing home pharmacies.
    In terms of the recent drug benefit proposal that passed the House 
in June 2000, HR 4680--the Medicare Rx Act--NACDS and all of organized 
pharmacy is concerned with the approach used in that bill. We believe 
we would have similar concerns with that type of bill if it were 
brought to the House floor again this year.
    In general, we have concerns with ``drugs-only'' insurance-based 
and PBM-based approaches to providing prescription drug benefits. We do 
not support the approaches used by these entities to contain costs, 
because they are primarily focused on reducing access to prescription 
medications, and reducing pharmacy reimbursement. Moreover, we also do 
not believe that the Medicare program needs to turn to these middlemen 
to obtain the savings on medications that Medicare should obtain, given 
its purchasing power in the market.
    We believe that the experience of the government's own FEHBP should 
be instructive to Members of Congress as they consider the true 
effectiveness of this approach to providing a prescription drug benefit 
for seniors. Our analysis indicates that escalating prescription drug 
spending in the FEHBP program--which is administered by the same PBMs 
that would be used for Medicare--has contributed significantly in 
recent years to the sharp premium increases seen in the program.
    For example, in 2001, 40 percent of the 10.5 percent increase in 
FEHBP premiums was attributable to drug spending increases. In 2002, 37 
percent of the 13.3 percent increase in FEHBP premiums was attributable 
to drug spending increases.
    Keep in mind that the FEHBP population is not typical of the 
traditional older Medicare population, which uses more drugs and has 
higher per capita expenditures than the much-younger FEHBP population. 
If the PBMs have not been able to manage prescription drug spending in 
the FEHBP program, why should we believe that they would be any more 
effective in the higher-cost Medicare population?
Interim Approaches to Pharmacy Coverage
    There are certain interim steps that we encourage Congress to take 
if a comprehensive drug benefit is not achievable this year. If 
Congress cannot come to agreement, or insufficient time exists to 
develop a voluntary benefit for all seniors, then we think we should 
start with making medications more accessible for the most vulnerable 
in society, and those with the highest medication bills.
    Consolidated Manufacturer Card Program with ``Stop Loss'' Coverage: 
NACDS supports an interim approach that would have two components. The 
first component would create the necessary Federal infrastructure for 
low-income seniors to more easily access the various drug manufacturer 
medication subsidy and discount programs that are being developed. The 
second component would provide a full pharmacy benefit for seniors who 
need ``stop loss'' coverage because they have high out of pocket drug 
costs.
    At last count, nine manufacturers have developed these programs 
over the past few months. Some of these programs provide discounts, 
while others provide subsidies, such as paying the full cost of the 
prescription other than a $12 or $15 co-pay.
    However, each program has been issuing its own ``card'' to seniors 
to access these discounts and subsidies at the pharmacy. Moreover, each 
program has different eligibility criteria and enrollment forms, and 
other requirements to access the program. While NACDS views these 
programs as very worthy, we are concerned that seniors will be confused 
by the multiple programs, and that they will create operational 
difficulties for pharmacies having to deal with multiple cards for 
seniors.
    As a result, NACDS announced last month that it was launching the 
Pharmacy Care Alliance, which represents a strong first step by retail 
pharmacy leaders to help seniors obtain needed prescription drugs. 
Among other activities, the Alliance will help educate seniors about 
these programs so that they can be used to the maximum extent possible.
    We have also created the PharmacyCareOneCard--a new concept that 
would allow low-income seniors to carry a single card for participating 
in a broad number of these manufacturers' discount and subsidy 
programs. We hope all pharmaceutical manufacturers that sponsor special 
programs for seniors--whether they maintain their own card program or 
not--will become partners in the Alliance and offer their programs to a 
national network of retail pharmacies through the PharmacyCareOneCard. 
We hope to build an open, flexible program that allows individual 
manufacturers and retailers to choose whether and how to participate.
    We already have seen results from our efforts to push for a 
consolidated approach. Over the last few days, several manufacturers 
have responded to our call for a ``one card'', and have joined forces 
to create the ``Together Rx'' program, which would allow seniors to 
access these manufacturers' discount programs through the use of one 
card. We are hopeful that this card program might eventually be joined 
with our program--as well as other manufacturer card programs that 
exist in the market--to offer these programs to seniors through the use 
of a true, single standard card.
    While the ``Together Rx'' card clearly moves in the right 
direction, we believe that legislation is needed to facilitate the 
evolution of the goal of creating one card, and making the program more 
permanent for seniors. We believe that Federal legislation should be 
enacted to create a single administrative structure that can be used by 
any manufacturer that wants to offer a discount or subsidy program. 
Seniors would be able to use one card at the pharmacy--rather than 
multiple cards--to obtain lower medication prices.
    Quality of care would also be enhanced, since a single electronic 
prescription processing system would allow the pharmacist to check for 
any potential adverse reactions in filling prescriptions for seniors. 
This could not be achievable without a Federal solution. Our hope is 
that all manufacturers with these programs would use this approach to 
offering their discounts and subsidies.
    Second, as part of our interim proposal, we would support full 
pharmacy ``stop loss'' coverage for seniors who incur more than a 
certain amount in unreimbursed drug expenses each year, such as $6,000. 
The same infrastructure that is used to administer the manufacturer 
subsidy and discount programs can be used to implement this ``stop 
loss'' coverage program.
    Offering this coverage will start us down the road to providing 
more comprehensive coverage for prescription drugs, beginning with the 
population that needs help the most. Over time, Congress can take steps 
to lower the ``stop loss'' amount so that more seniors become eligible 
for coverage. But, at least we've been able to take the first step this 
year.
    Medicare-Endorsed Discount Card: Before turning to comprehensive 
approaches to pharmacy coverage, we should share with you that we 
continue to oppose the Administration's efforts to establish a 
Medicare-endorsed prescription drug discount program.
    The Bush Administration does, however, deserve credit for starting 
last year a serious examination of innovative private approaches that 
can provide meaningful pharmacy benefits to low-income seniors. 
However, their program will not result in meaningful reductions in the 
price of prescription medicines for seniors. Moreover, any reductions 
will likely just come from reduced pharmacy prices, and not a reduction 
in the price of the medication from the drug manufacturer. This debate 
was moved forward in very productive ways with the result that many 
manufacturers are now offering meaningful price reductions on the cost 
of their medications.
    In addition, we don't think that HHS should be picking winners and 
losers in this market through their endorsement program, or that its 
appropriate to lend Medicare's time-trusted name to private-sector 
entities without strict standards. Finally, we do not believe that the 
Department has the legislative authority to develop this program, nor 
do we support Congress giving it to them as an interim measure.
    Mr. Chairman, NACDS wants to be constructive players in the debate 
on both comprehensive and interim solutions to pharmacy coverage for 
seniors. Our industry is an important player in this debate, because we 
are the primary method by which pharmacy services are actually 
delivered to the patient. We operate an efficient, low-margin, but 
highly effective primary health care delivery system that is accessible 
in many places 24-hours a day, 7-days a week. We look forward to 
working with you and members of the Committee in making this happen now 
and in the future. Thank you again for the opportunity to submit a 
statement for the record.

                                
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