Chairman Bilirakis, Congressman Brown, distinguished Subcommittee members, thank you
for inviting us to discuss prescription drug coverage for Medicare beneficiaries. In his
comprehensive Medicare reform plan, the President has recognized the overwhelming need to
ensure that all beneficiaries have access to a voluntary, affordable, and accessible
prescription drug benefit. I believe all experts, and the public, agree that
pharmaceuticals are as essential to modern medicine today as hospital care was when
Medicare was created. Modernizing Medicare by adding a meaningful drug benefit is not an
option -- it is an obligation.
Currently, about one third of beneficiaries have no drug coverage. They not only must
pay for essential medicines out of their own pockets, but they also are forced to pay full
retail prices because they do not get deep discounts offered to insurers and other large
purchasers. Far too many must choose between buying groceries or filling prescriptions.
But the lack of prescription drug coverage is not just a problem for the poor. More than
half of beneficiaries without drug coverage have incomes above 150 percent of the federal
poverty level (above $17,000 for an elderly couple).
For those who do have drug coverage, it is growing increasingly expensive and
inadequate, and eroding with higher copayments, deductibles and premiums, or disappearing
completely as former employers drop coverage for retirees and Medigap coverage becomes
The President=s comprehensive Medicare reform
plan provides all beneficiaries with access to a voluntary and affordable, meaningful
outpatient prescription drug benefit. The President=s
proposal is built upon current practices in the private sector.
It is kept affordable through private sector competition and expressly does not include
government price controls. Making it an optional Medicare benefit for all beneficiaries
helps ensure an insurance product with a healthier risk pool and less adverse selection,
which also is essential for maintaining affordability.
The drug benefit under the President=s plan
also is completely voluntary, so individuals can keep other prescription drug coverage if
they prefer. And it includes incentives for employers to continue providing such coverage
to their retirees.
Importance of Prescription Drugs
Prescription drugs can prevent, treat, and cure more diseases than ever before, both
prolonging and improving the quality of life. They can minimize hospital and nursing home
stays. And in some cases they can help decrease the total cost of care.
The private sector, recognizing that prescription drugs are essential to modern
medicine, now includes outpatient drug coverage as a standard benefit in almost all
coverage policies. This is also true of all plans in the Federal Employees Health Benefits
Program. No one would design Medicare today without including coverage for prescription
Prescription drugs are particularly important for seniors and disabled Americans, who
often take several drugs to treat multiple conditions. All across the country there are
Medicare beneficiaries suffering physical and financial harm because of the lack of
For example, there is the case of a 70-year-old Durham, North Carolina widow with
emphysema, high blood pressure, and arthritis whose monthly bills for Prilosec, Norvase,
two inhalers, and nitroglycerin patches forced her daughter to take out a second mortgage
on her home.
There is the case of an 80-year-old Sauk Rapids, Minnesota breast cancer survivor who
pays $384 every three months for a Medigap policy that does not cover the $89 she must
spend each month for tamoxifen, $139 for Prilosec to control acid reflux, $43 for eye
drops to treat glaucoma, and $20 for drugs to control high blood pressure.
And there is the case of a New York City man who stopped taking the Lisinopril that
controlled his hypertension because he could not afford its $30 monthly cost, and then
suffered a stroke that left him without speech or the use of his right arm, and left
Medicare with a $10,000 hospital bill.
Data on prescription drug coverage and spending are gathered each year in the Medicare
Current Beneficiary Survey. These data from 1995, analyzed for the Department of Health
and Human Services by the Actuarial Research Corporation and projected forward to 2000,
show several disturbing trends in Medicare beneficiary drug coverage.
The majority of Medicare beneficiaries (56 percent) use prescription drugs costing $500
or more each year, with 38 percent requiring drugs costing $1000 or more. Each year 87
percent of Medicare beneficiaries need to fill at least one prescription.
One in three Medicare beneficiaries (34 percent) overall has no prescription drug
coverage. About half of these beneficiaries have incomes above 150 percent of poverty,
showing that this is not just a low-income problem. These beneficiaries are forced to pay
excessively high costs because they do not get the deep discounts offered only to insurers
and other large purchasers.
The situation is worse in rural areas, where nearly half of all Medicare beneficiaries
have no drug coverage. They have less access to employer-based retiree health insurance
because of the job structure in rural areas. And three-quarters of rural beneficiaries do
not have access to Medicare+Choice plans and the drug coverage they provide.
Only one in four Medicare beneficiaries (24 percent) has private sector coverage
provided by former employers to retirees. This coverage, however, is eroding. The number
of firms offering retiree health coverage dropped by 25 percent from 1994 to 1998, from 40
percent in 1994 to 30 percent in 1998, according to the employee benefits research firm
Foster-Higgins. The true impact of this trend has not yet been felt; as current workers
retire, the population of Medicare beneficiaries with retiree coverage will drop even
About one in six Medicare beneficiaries (17 percent) has drug coverage from a
Medicare+Choice plan, (mostly HMOs). However, nearly one third of beneficiaries live in
areas where there are no Medicare+Choice offerings. And where plans do exist, they are
raising premiums and copayments, and lowering caps on coverage. In 2000, nearly one third
of plans will cap coverage at $500, even though the majority of Medicare beneficiaries use
prescription drugs costing $500 or more each year.
About one in eight Medicare beneficiaries (12 percent) has drug coverage through
Medicaid. However, eligibility for Medicaid is restricted to the poor, and the majority of
beneficiaries eligible for such coverage -- 60 percent -- are not enrolled in the program.
This persists despite increasing outreach efforts to enroll those who are eligible, and
may be due to the stigma associated with a program historically linked to welfare.
Less than one in ten Medicare beneficiaries (8 percent) has drug coverage from a
supplemental Medigap plan. Costs for these policies are rising rapidly, by 35 percent
between 1994 and 1998, according to Consumer Reports, in part because of sicker risk
pools. The General Accounting Office (GAO) found that almost half of all Medigap insurers
implemented substantial increases in 1996 and 1997, with AARP -- one of the largest
Medigap providers -- increasing rates by 8.5 percent in 1997, 10.9 percent in 1998, and
9.4 percent in 1999.
The GAO also found that Medigap premiums vary widely, both within and across States.
For example, premiums charged to a 65-year-old beneficiary for the standardized AI@ Medigap
plan range from $991 to $5,943 around the country. And the average premium for the
standardized AH@ Medigap plan ranges from $1,174 in Virginia to
$2,577 in Georgia. Furthermore, premiums for Medigap coverage can increase with age in
most States. In some parts of the country, beneficiaries over age 75 are paying more than
$100 per month for drug coverage, over and above the portion of the premiums they are
paying for other Medigap benefits.
A voluntary affordable drug benefit available to all beneficiaries is a key feature of
the President=s comprehensive Medicare reform
plan. The President=s plan also extends the life
of the Medicare Trust Fund by dedicating part of the on-budget surplus to the program,
improves preventive benefits, increases competition and use of private sector purchasing
tools, helps the growing number of uninsured near retirement age buy into Medicare, and
strengthens program management and accountability through increased flexibility and a
private advisory Committee.
Under the President=s proposal, the drug
benefit is available to all beneficiaries, regardless of their incomes. The hallmark of
the Medicare program since its inception has been its social insurance role -- everyone,
regardless of income, is entitled to the same basic package of benefits. This is a
significant factor in the unwavering support for the program from the American public and
should be preserved. All workers pay taxes to support the Medicare program and therefore
all beneficiaries should have access to a new drug benefit. A universal benefit also helps
ensure an insurance product with an adequate risk pool and less adverse selection.
The benefit also is completely voluntary. If beneficiaries have what they think is
better coverage, they can keep it. And the President=s
plan includes a subsidy for employers offering retiree coverage that is at least as good
as the Medicare benefit to encourage them to offer and maintain that coverage. This will
help to minimize disruptions in parts of the market that are working effectively, and it
is a good deal for employers, beneficiaries, and the Medicare program.
Still, we expect that most beneficiaries will choose this new drug option because of
its attractiveness, affordability, and stability. Because Medicare beneficiaries rely so
heavily on drugs, we project that about 31 million beneficiaries will benefit from this
coverage each year.
For beneficiaries who choose to participate, Medicare will pay half of the monthly
premium, which is estimated to be $24 in 2002 and $44 in 2008. Medicare also will pay half
the cost of each prescription they fill, with no deductible. The benefit will cover up to
$2,000 of prescription drugs when coverage begins in 2002, and increase to $5,000 by 2008,
with a 50 percent beneficiary coinsurance. After that, the dollar amount of the benefit
cap will increase each year by the increase in the Consumer Price Index.
The prescription drug benefit for beneficiaries in the traditional Medicare program
will be administered by benefit managers, such as pharmacy benefit manager firms and other
These entities will bid competitively for regional contracts to provide the service,
and we will review those contracts to ensure that there is healthy competition. The drug
benefit managers -- not the government -- will negotiate discounted rates with drug
manufacturers, as they do now in the private sector. There will be no Medicare fee
schedule or price controls.
And, importantly, the small percentage of beneficiaries whose prescription needs exceed
the benefit cap will continue to receive the discounted rates negotiated by their drug
benefit manager even after they surpass the cap.
The drug benefit managers will have to meet access and quality standards, such as
implementing aggressive drug utilization review programs, as well as conducting
beneficiary education. And their contracts with the government will include incentives to
keep costs and utilization low.
In general, all therapeutic classes of drugs will be covered. Each drug benefit manager
will be allowed to establish a formulary, or list of covered drugs. They will have to
cover off-formulary drugs when a physician has reason to request the dispensing of a
specific drug that is not on the formulary. Coverage for the handful of drugs that are now
covered by Medicare will continue under current rules and will not be included as part of
the new drug benefit package.
Beneficiaries enrolled in Medicare+Choice plans will receive this optional coverage
through those plans, and the plans will use their existing management to negotiate prices
and formularies. In addition to offering the new Medicare drug benefit, Medicare+Choice
plans will be allowed to offer additional supplemental drug coverage not subsidized by
Medicare, as well.
It is important to stress that Medicare+Choice plans will be
explicitly paid for providing a drug benefit under the President=s plan, so they would no longer
have to depend on what the rate is in a given area to determine whether they can offer to
do so. We will no longer see the extreme regional variation in whether
Medicare+Choice plans provide drug coverage. Today, only 23 percent of rural beneficiaries
with access to Medicare+Choice have access to prescription drugs, compared to 86 percent
of urban beneficiaries. Under the President=s
plan, both rural and urban beneficiaries will have drug coverage available from all
Medicare+Choice plans in their area. And beneficiaries will not lose their drug coverage
if a plan withdraws from their area or if they choose to leave a private managed care
Financing will be handled through a combination of beneficiary premiums and general
revenue dollars. Premiums will be collected the same way Medicare Part B premiums are
collected, as a deduction from Social Security checks for most beneficiaries who choose to
Beneficiaries can sign up for this benefit in the first year the benefit is offered,
the first year in which a beneficiary is eligible for Medicare, the first year after
retirement if a beneficiary had continued working and kept employer-sponsored coverage
after becoming a Medicare beneficiary, in the first year after an employer-sponsored plan
drops drug coverage for all retirees, and certain other specific circumstances that would
not create potential for adverse selection.
For poor beneficiaries, State Medicaid programs will pay premiums and cost sharing as
they do for other Medicare benefits. Beneficiaries with incomes between 100 and 135
percent of poverty would receive full assistance for their drug premiums and cost sharing.
Beneficiaries with incomes between 135 and 150 percent of poverty would pay a partial,
sliding-scale premium based on their income. The Medicaid costs for both of these groups
would be matched by the Federal government at 100 percent.
The drug benefit=s cost to Medicare is paid
for primarily through program savings resulting from increased competition and efficiency,
and other provisions in the President=s plan.
Additional funding comes from a small portion of the budget surplus devoted to Medicare by
Chairman Bilirakis, I know you are particularly interested in ensuring that
beneficiaries with low incomes and high drug costs have drug coverage. So are we. But
access to affordable and meaningful prescription drug coverage is a growing problem for
Medicare beneficiaries across the income spectrum. Prescription drugs are a fundamental
component of modern medical treatment, and all beneficiaries need coverage for this
Medicare=s overwhelming success and
popularity are premised on the fact that all Americans pay in their fair share and that
all Americans have equal access to all the program=s
benefits. Given the essential nature of prescription drugs in modern medicine, we have an
obligation to ensure that comprehensive drug coverage is among the program=s benefits. We have an obligation to ensure that this
coverage is available to all beneficiaries. And we have both the opportunity and the
responsibility to make this essential change as part of a comprehensive and fiscally
responsible Medicare reform package, as has been proposed by the President.
I look forward to working with you on this. I thank you for holding this hearing, and I
am happy to answer your questions.