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    Statement by
    Tommy G. Thompson
    Secretary, HHS
    Integrating Prescription Drugs into Medicare
    before the
    House Committee on Ways and Means

    April 17, 2002

    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 But as we enter the 21st century, Medicare's promise is threatened by: outdated benefits; limited financial protection against high medical costs; a system that has not delivered reliable health plan options; and a traditional government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.


    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.


    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.


    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.

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Last revised: April 30, 2002