Statement by
Michael McMullan
Deputy Director, Centers for Medicare and Medicaid Services
Implementing the Medicare Prescription Drug Program
before the
Senate Committee on Governmental Affairs, Subcommittee on Oversight of Government Management, The Federal Workforce, and The District of Columbia

April 8, 2004

Chairman Voinovich, Senator Durbin, distinguished members of the Committee, thank you for inviting me here today to discuss implementation of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), enacted into law on December 8, 2003. The Centers for Medicare & Medicaid Services (CMS) is very proud to have a significant role in implementing this historic legislation, which constitutes the most extensive modifications to the Medicare program since its inception in 1965. CMS is working diligently to meet the numerous and aggressive deadlines outlined in the MMA. CMS’ goal is to implement all of the provisions of this legislation in a timely manner and in such a way that the new benefits are as easily understood and accessed by beneficiaries as quickly as possible.

The MMA represents a fundamental change in the Medicare program by offering our beneficiaries more choices in how they receive their care and by establishing a responsive relationship with the providers of that care. This will begin with the Medicare sponsored drug discount card, and will continue as the full prescription drug benefit is implemented in 2006, and represents a lasting change in how CMS and the Medicare program will operate. Whether it is in how we reduce Medicare overpayments or how we improve quality of care, our fundamental goal is to offer our beneficiaries choices of high quality health care, while being more responsive and flexible in how we interact with the health care providers who deliver the services.


The CMS accomplishes its mission by working with, and through, others. The Agency employs approximately 4,500 people in locations around the country. However, these employees are only a small portion of a large, complex network of people and groups that make our programs work successfully. Some of the many others CMS works with, and through, include:

  • physicians, other health care professionals, providers, and health plans;
  • states, territories, and Tribes;
  • CMS business partners, who process claims and carry out many of the other administrative functions of CMS programs (e.g., contractors);
  • health care groups and associations;
  • beneficiary and consumer organizations;
  • accrediting bodies;
  • other Federal agencies; and
  • researchers and others.

These business relationships leverage CMS’ resources and are critical to achieving our goals and objectives. For example, since 1965, we have entered into contracts with private companies to administer various functions under the Medicare program. Currently there are 34 companies that hold contracts to process Medicare fee-for-service (FFS) claims. Several of these companies process both Part A and Part B claims: thus 26 serve as fiscal intermediaries and 18 serve as carriers. During FY 2003, we estimate that these claims processing contractors provided claims processing services to about 33 million beneficiaries; worked with approximately 1.1 million health care providers; processed more than 1 billion Medicare claims; paid more than $236 billion for beneficiary services; and handled more than 7.3 million review requests and other kinds of appeals.

The attached chart gives an idea of the scope of how many individuals and organizations are partnered with CMS in carrying out its mission.


CMS’ MMA implementation challenges can be categorized into a number of broad categories including a prescription drug discount card and transitional assistance program; the new voluntary Medicare prescription drug benefit; modification of the existing Medicare+Choice program, now renamed Medicare Advantage; and contractor and regulatory reform. The MMA also modified numerous payment systems under Medicare and Medicaid, particularly those affecting rural providers; established new preventive benefits; established a number of demonstration projects; provided for administrative improvements and regulatory process changes; and numerous other provisions. The new law contains substantial and complex tasks for the Agency, the implementation of which requires the concerted effort of thousands of Federal employees and contractors. Given the nature of the work before the Agency and the need for effective, steady leadership, we appreciate the Senate’s swift confirmation of Dr. Mark McClellan as the new CMS Administrator.


Although new Medicare law creates major changes in the programs administered by CMS, the Agency has dealt with change in the past. Planning and prioritizing for implementation of the Balanced Budget Act of 1997, the Balanced Budget Refinement Act of 1999 and the Medicare, Medicaid and State Children’s Health Insurance Program Benefits Improvement and Protection Act of 2000, have all been carried out within the past six years. CMS has dealt with the challenges of Y2K and the destruction of our New York contractor’s office on September 11, 2001. We have recently implemented a series of quality measures for home health agencies, nursing homes, and hospitals. These last initiatives involved extensive consultation with industry; development of quality measures; systems changes for collection of data; and advertising campaigns to inform beneficiaries. In short, CMS has experience with prioritizing and planning multiple tasks similar to the work that will have to be done with MMA.


As an example of what we have already done to implement MMA, on December 15, 2003 just one week after the law was signed, CMS published a regulation establishing a new prescription drug discount card program. We solicited applications from organizations interested in sponsoring such programs and on March 25, 2004 announced approved applications. On April 1, 2004 CMS announced the actual drug discount cards that the sponsors will offer. Approved sponsoring organizations have provided CMS with data on the enrollment fees they will charge and on April 29, we expect to post on our website specific pricing data for the drugs amd discounted prices available through these programs. Beneficiaries will be able to sign up for the cards in May and begin realizing the associated discounts on their drug purchases on June 1, 2004. In addition, qualifying low-income beneficiaries will receive a significant additional benefit of $600 annual credit applied toward their drug purchases.

Finally, a major educational campaign, using print and media avenues, has been established to help our beneficiaries understand how to access this new benefit. In particular, we worked with the Social Security Administration to mail a separate letter to Medicare beneficiaries with lower incomes, who are likely to be eligible for the $600 annual credit.

Our consumer website, www.medicare.gov, will house a critical new tool (“Price Compare”) for the drug card initiative that will enable users to search for drug discount cards; enter their specific prescription medication needs; and compare the expected discounted prices that each of the cards might offer.

We also organized a drug card conference held on April 7-8, 2004, to educate and train those at the local levels. Congressional staff were encouraged to attend. In addition, we are planning other training days for Congressional staff. Going through these processes will not only result in a viable drug discount card program, but has helped CMS by preparing it for carrying out similar tasks in implementing the drug benefit under Part D.


Establishing the drug discount card program, although a major effort, is not the only work that CMS has accomplished in the past few months when it comes to MMA implementation. We have made substantial progress on many provisions, including completing more than a hundred distinct tasks. The attachment to my testimony details the tasks that CMS has completed to date.

I would like to highlight the progress CMS has made over the last five months. These efforts include:

  • updating the physician fee schedule to provide for a positive 1.5 percent increase in payments during 2004 and 2005, as opposed to what would have been a decrease in payments;
  • revising payments for drugs currently paid using the average wholesale price, and the accompanying fees for drug administration. These changes in the approach to reimbursement will protect the program from excessive expenditures on drugs while simultaneously properly reimbursing physicians, notably oncologists, for their work in delivering these medications;
  • delineating hospital quality reporting requirements for a full market-basket update, which in turn relies on previous work with industry in establishing those quality measures, and previous modifications of IT systems to collect the data;
  • making wage index reclassification adjustments to allow qualifying hospitals to receive increased reimbursement;
  • increasing payments to rural providers;
  • updating payments to Medicare Advantage plans and approving plan enhancements that provide additional benefits or reduced cost-sharing for enrollees;
  • drafting, for publication this summer, proposed regulations for Medicare Advantage and the prescription drug benefit;
  • steps toward adding a range of preventative services to the Medicare benefits package, including a wellness visit, cardiovascular screening, and diabetes screening;
  • progress toward changing our process of contracting with carriers and fiscal intermediaries to incorporate more performance measures and competitive processes;
  • setting up demonstrations and pilot projects as required by MMA; and,
  • engaging in extensive beneficiary education, and reaching out to our traditional and non-traditional stakeholders, including physicians, hospitals, pharmacists and States, as well as PBMs, employers and third party administrators.

It is obvious from this list of accomplishments that CMS is making substantial progress in meeting the ambitious timelines within the MMA.


Effective dates for MMA provisions include several that are retroactive, many that were effective upon enactment and some that go as far out as October 2011. Implementation of these provisions will require publication of numerous proposed and final regulations, systems changes, letters to State Medicaid Directors, educational efforts for providers and beneficiaries, and studies and reports to Congress. CMS will have to hire sufficient employees with appropriate expertise and experience, establish and test major new IT systems, and work out contracting details with outside entities that CMS relies on for implementation of large new benefits. CMS must also work with States, SSA, and other Federal entities, as we implement benefits that will need to be coordinated with their existing programs. Finally, CMS must communicate these changes to beneficiaries in as clear, and effective a fashion as possible so that those who wish to take advantage of the new, voluntary, benefits may do so.

The MMA makes up to $1 billion available to CMS through September 30, 2005 for start-up implementation costs. These funds will be used on activities such as hiring additional personnel, upgrading and adding new information systems, and educating beneficiaries. CMS has already made important funding decisions related to the implementation of the drug card and hiring new employees. CMS continues to develop and implement the budget plan as it moves toward implementation of the remaining provisions.

Human Resources Issues

As noted above, CMS’ implementation of the MMA is well under way, but significant work remains. The MMA adds provisions that require new and additional expertise. Specifically, CMS will need to hire individuals with expertise in pharmacy benefits management, clinical personnel such as pharmacists and physicians, individuals experienced with disease management and prevention, and those who understand how employers structure their retiree benefit packages. CMS will need additional IT professionals experienced with the types of payment systems contemplated by the law. Finally, CMS will need to hire individuals experienced with government contracting, as much of the work under MMA, as with most other Medicare programs, will be contracted out. We have begun staffing a number of these new positions.

In addition to new government employees, CMS must contract with a number of outside entities, including pharmacy benefit programs and private health plans, in order to fulfill the mandates of MMA. This work involves establishing parameters for those contracts, issuing a solicitation, examining the resulting bids, and awarding contracts to appropriately qualified organizations. CMS employees overseeing the activities of outside entities also must possess the expertise to ensure that the prescription drug card sponsors and other contractors comply with the medical privacy provisions of the Health Insurance Portability and Accountability Act (HIPAA).

Program Integrity

The work of contractors must then be monitored and supervised to ensure program integrity and effectiveness. The main oversight work of CMS is to see that contractors and providers implement these new programs as established by the Agency and statute. CMS will need to monitor pricing of drugs and benefits provided by drug discount card, drug benefit plans, and Medicare Advantage plans, prior to implementation of MMA as well as afterward. Error rates in payments will need to be established and education made available to providers to help them avoid common pitfalls as they show up. CMS is aware of fraudulent activity involving individuals posing as Medicare officials offering bogus drug discount cards. We have taken steps to inform beneficiaries of this scheme and have worked with OIG, the FBI and DOJ to prevent fraud in this and other programs administered by CMS. When fraud or abuse occurs, the Agency will address it as appropriate, either through remedial education or punitive measures.

Systems Changes

New and revised payment systems require substantial IT changes within CMS. The Agency will need to be able to process beneficiary eligibility requests, enroll beneficiaries in new benefits, and track utilization of services. In addition, many of the changes made by MMA, particularly benefits being provided on a demonstration basis, are accompanied by a requirement that CMS study the effectiveness of the new programs. These studies involve tracking clinical outcomes and quality measures.

Revised and new IT systems will need to interact with those from other federal agencies, such as the Social Security Administration and the Internal Revenue Service, States, and the private insurers who contract to administer new benefits under MMA, and those offering established Medigap plans.

Beneficiary Education

CMS recognizes that opportunities for beneficiaries to choose new benefits and how those benefits will be delivered may be somewhat confusing. CMS, therefore, has a substantial educational task to help beneficiaries take advantage of these new voluntary programs. To address beneficiaries’ educational needs, a major educational campaign has been established to help them understand how to access new benefits under MMA. As you know, the Congress gave us clear direction to educate and inform beneficiaries about important new benefits in the MMA, particularly the drug benefit and the drug discount card. The education campaign uses a variety of means – print materials; community-based outreach; television, print, and radio advertising; the Internet; and, 1-800-MEDICARE – to reach beneficiaries.

We launched a nationwide advertising campaign at the beginning of February to alert beneficiaries to the new benefits that are available under the MMA. Also, at the end of February, CMS began mailing to all beneficiary households a fact sheet that explains these new benefits. In the coming months, we will be particularly focused on getting beneficiaries important information about the drug discount card and transitional assistance program. In early April, a detailed booklet about the drug card was made available at medicare.gov or by calling 1-800-MEDICARE. At the end of April, a shorter publication on the drug discount card will be mailed to every beneficiary household. We anticipate using the website extensively to educate beneficiaries concerning benefits that will be implemented in the future.

The annual publication, “Medicare and You” covers beneficiaries’ privacy rights under HIPAA with regard to their interaction with CMS and its contractors. In addition, entities offering the drug discount card and drug benefits are considered health plans for purposes of HIPAA and will be required to provide beneficiaries with a notice of their privacy practices.

In addition, our 1-800-MEDICARE call center is in the process of “ramping up” – training and adding new Customer Service Representatives to answer calls about new benefits. We expect to have about 1,400 representatives in six different call centers in the United States trained and available by the end of this month.

Even with all of these plans and tools, we understood early on that our education efforts could not be successful without solid and dependable community-based outreach. That is why we have also invested in building alliances with other organizations that serve Medicare consumers to help us in disseminating this information.


The timelines required under MMA for implementing these important new benefits are ambitious and will require prudent planning and wise use of resources. We at CMS believe that we will be able to meet the ambitious goals laid out in this new statute. I thank you for your invitation to testify this morning and I welcome any questions you may have.

Last Revised: April 8, 2004