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Copyright 2000 Federal News Service, Inc.  
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March 29, 2000, Wednesday


LENGTH: 4383 words


 Mr. Chairman and members of the committee, I am Marjorie Don', Chief Operating Officer for Anthem Blue Cross and Blue Shield of Connecticut. Prior to becoming COO of Anthem in 1998, I was the CEO, President and Director of Anthem Prescription Management, a Pharmacy Benefit Management Company.

Today, I am testifying on behalf of the Blue Cross and Blue Shield Association, which represents Anthem and 48 other independent Blue Cross and Blue Shield Plans nationwide that together provide health coverage to 74 million Americans. I appreciate the opportunity to testify today on the critical issue of providing Medicare beneficiaries access to prescription drugs. Blue Cross and Blue Shield Plans have extensive experience in providing prescription drug coverage to both working and retired Americans. BCBS Plans offer health coverage to working Americans through a variety of managed care and indemnity products, including health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point of services (POS) plans. Nearly all of these plans provide prescription drug benefits to their members. BCBS Plans underwrite and deliver the government-side Service Benefit Plan under the Federal Employee Health Benefits Program (FEHBP), providing coverage, including prescription drugs, to more than 3.7 million people.i- BCBS Plans collectively are a leader in providing coverage options for older Americans. They provide Medicare+Choice coverage to more than a million Medicare beneficiaries, making them the largest Medicare+Choice provider in the country. Most BCBS Plans provide outpatient prescription drug benefits in their Medicare+Choice package. BCBS Plans are also the largest provider of Medigap and Medicare SELECT coverage, which offer seniors varying levels of protection from Medicare's cost sharing requirements. Three of the ten standardized Medigap packages include outpatient prescription drug coverage.

The challenge facing Congress now is the same one BCBS Plans face every day: how to provide a meaningful level of coverage for prescription drug costs while keeping premiums as affordable as possible.

In my testimony today I will address four areas:

1. Background on the costs of providing prescription drug coverage;

2. Strategies used by BCBS Plans to manage prescription drug benefits;

3. BCBSA recommendations on providing Medicare beneficiaries access to prescription drugs; and,

4. Comments on proposals currently under consideration in the Congress.


Prescription drugs have significantly increased Americans' life span and contributed to their improved health status in the 20th century. Recognizing the potential for pharmaceuticals to prevent and treat disease, BCBS Plans offer pharmacy benefits to their members. However, the cost of drug benefits is high and accelerating at rates well above those of other benefit costs. As a result, drugs account for a growing share of BCBS Plans' total medical costs and our members' premium dollars. BCBSA expects these costs to continue to grow rapidly.

- From an annual increase of 8.7 percent in 1993, growth in total prescription drug spending has steadily accelerated to 15.4 percent in 1998. This makes prescription drug expenditures the fastest growing health care spending category over the past three years. Between 1993 and 1998 it is estimated that BCBS Plans' aggregate spending on outpatient drugs increased almost 60 percent, from $7.6 billion to $12 billion. Some Plans have experienced even more rapid growth in pharmacy costs. For example, payments made by one BCBS Plan rose by 26 percent just in 1997 and around 25 percent in 1998. For some Plans, payments for prescription drugs now exceed those for inpatient hospitalization. Other private insurers have experienced similar increases. In May 1999, the Employee Benefit Research Institute reported that private insurance payments for prescription drugs increased 17.7 percent in 1997, after growing 22.1 percent in 1995 and 18.7 percent in 1996. This growth in prescription drug payments compares with 4 percent or less annual growth in overall private payments for each of these three years. In the broader U.S.private insurance market, analysts estimate that prescription drugs now account for 11 to 14 percent of total medical expenses for most health plans, up from 7 percent just a few years ago. Prescription drug costs may be even higher for some health plans, especially those that provide drug benefits to older populations. For example, the Service Benefit Plan under FEHBP, which covers a large number of retired workers, has prescription drug costs that are approaching 30 percent of total benefit costs.

Factors Contributing to Increased Prescription Drug Spending:

While BCBS Plans use a range of strategies to manage growing prescription drug costs on behalf of their subscribers, spending is being propelled by a number of market and structural forces over which private insurers have little control. Some of the most important forces are the following:

Demographic Trends

As the U.S. population ages, the number of people at risk for chronic and disabling diseases is rising dramatically. The single largest market for prescription drugs is the aging "baby boom" generation. The drugs used by the middle aged and elderly tend to be expensive and often treat chronic conditions, such as hypertension, high cholesterol, diabetes and arthritis, which require a steady regimen throughout the patient's life.

Rapid Flow of New Drugs to Market

Over the past decade, many new prescription drugs have come to market. One of the most robust measures of the flow of pharmaceutical technology is the annual number of new molecular entities (NMEs) approved by the Food and drug Administration (FDA). NMEs are compounds that have never before been marketed in this country.

Over the course of a generation -- from the early 1960s to the mid- 1990s -- the annual number of new molecular entities (NMEs) receiving FDA approval nearly doubled from an average of 13.7 in the 1960s to 25.6 in the first half of the 1990s. Just in the last decade the number has nearly doubled again.

Some of these new drugs are "breakthrough" products, which treat diseases and conditions that previously lacked effective therapies.

Others are differentiated from older drugs by having less prevalent or severe side effects, or easier dosing forms. Physicians tend to adopt such new technology rapidly, and they are often expensive.

The National Institute for Health Care Management (NIHCM), a non- profit research organization based in Washington, D.C., released a report in July 1999 on trends in pharmacy spending. This report, which was prepared by the Barents Group LLC, found that:- Over the five year period between 1993 and 1998, prescription drug spending rose by $42 billion; $27.6 billion, or 65 percent of this $42 billion increase, was associated with new prescription drugs: that is, those approved by the FDA after 1992. By 1998, total spending for new drugs accounted for $30 billion or 32 percent of retail drug expenditures even though they represented just 17 percent of all prescriptions. In some therapeutic categories, new drugs accounted for over half of spending. For example, an estimated 98 percent of the 1998 sales of antihistamines, 68 percent of anti-cholesterol agents, and 51 percent of antidepressants were derived from new drugs. In 1998, the average price per prescription of a new drug was $71.49 per prescription, compared with $30.47 for older drugs. For some new drugs, however, the average price per prescription was three to seven times that of the older drug it replaced.

This rapid increase in the number of new, expensive drugs on the market is expected to continue. Over the past two decades, the pharmaceutical industry and the federal government have made massive investments in research and development. And on the horizon, discoveries in genetics are expected to increase exponentially the number of targets for drug intervention in just a few years.Direct-to- Consumer Advertising of Prescription Drugs

Another factor in increased costs is the greater utilization due to the explosion in direct-to-consumer advertising (DTC). Over the past decade, direct-to-consumer (DTC) advertising expenditures have skyrocketed. In 1991 pharmaceutical companies spent $55 million to promote prescription products directly to consumers. By 1998, outlays on DTC advertising had multiplied over 20 fold to reach $1.3 billion.

Does the advertising work? According to the NIHCM study, the 10 most heavily promoted drugs in 1998 accounted for over a fifth (22 percent) of the total growth in prescription drug expenditures from 1993 to 1998. In total, these 10 drugs had 1998 sales of $11.2 billion about 12 percent of all retail drug spending.

DTC advertising can promote the public health by encouraging patients with undiagnosed and untreated conditions to discuss prescription drug issues with their doctor. However, it also promotes utilization and increases costs

Increases in Generic Drug Prices

Generic drugs are the chemical and therapeutic equivalent to brand name drugs. They are not inferior in quality or effectiveness, but are significantly less expensive. While generic drugs are typically used to lower health care spending, the price of generic drugs has begun to rise as a result of consolidation in the industry. In fact, 1999 was the first time since 1992 that there was an increase rather than a decrease in the cost of generic drugs.1 While not having as great an impact as the other trends we have highlighted (demographic trends, the flow of new drugs or DTC advertising), higher generic drug prices contribute to overall higher prescription drug costs.


BCBS Plans use a range of programs to deliver pharmacy benefits and ensure that drugs are used in ways that are both clinically appropriate and cost effective. Some BCBS Plans contract with outside prescription benefit managers (PBMs) to perform claims processing, negotiate volume discounts on their behalf, monitor drug interactions and polypharmancy, and oversee the retail and/or mail distribution of drugs to their members. Others provide these management functions in- house, and a few have created their own PBMs. In any case, some of the most important strategies for managing drug benefits are the following:

Encouraging Use of Certain Drugs: BCBS and other health plans have recently increased the use of financial incentives to sensitize beneficiaries to the cost of drugs. As stated in earlier testimony to this committee, increases in cost-sharing have the behavioral effect of lowering the cost of the drug to the insurer and decreasing inappropriate use because of the greater consumer copayment.

Over the past year many plans have implemented tiered-copayment structures in which plan members share the cost of expensive drugs that have safe and effective, but less costly, alternatives. Three- tiered copayments, which classify drugs in three categories with differing levels of copayment, are now prevalent in the insurance industry. For example, one BCBS Plan recently established the copayment structure shown in Table 1.

Of course, while tiered cost-sharing helps control costs in situations where generic drugs or less expensive branded alternatives exist, they have little impact on the spending associated with breakthrough technology.

Table 1

An Example of Prescription Drug Tier Definitions and Copayments

Tier I Tier 2 Tier 3

All generic drugs Preferred brand drugs Non-preferred brand drugs

Brand name drugs that are Brand name drugs that have clinically effective, cost- a generic equivalent or a effective and meet the needs therapeutic alternative of of most patients. available in Tier 2.

Brand name drugs not usually used as the first line of treatment.

Lowest copayment Second lowest copayment Highest copayment

Promoting Use of Certain Drugs: Some health plans use selective formularies that give certain drugs preferential status. Typically, such status is given to breakthrough drugs and those lacking effective alternatives, and to safe and effective drugs that cost less than otherdrugs in the same therapeutic class. Drugs not on the preferred list are still covered when medically necessary and when safe and effective alternatives are not available.

Preferred Provider Arrangements with Retail Pharmacies: Health plans also may negotiate discounts by contracting with networks of retail pharmacies to become preferred providers in their geographic area. In general, network pharmacies will provide higher discounts and reduced dispensing fees in exchange for greater exclusivity (i.e., more volume). However, limiting coverage to participating pharmacies may limit beneficiaries' access to pharmacies. Hence, health plans must make a tradeoff between providing their members with convenient access to retail outlets and reducing costs. Some plans offer mail order pharmacies to obtain volume discounts and provide financial incentives (e.g., eliminating from-end deductibles for prescriptions filled by mail) to encourage their members to use them.

Negotiating Discounts: Many BCBS Plans contract with a network of retail pharmacies to provide discounts of 5 percent, 20 percent, or even higher on prescription drug purchases. BCBS Plans use their market share as leverage to receive a better price.

With surveys showing an expected trend of 13 to 17 percent increases in unmanaged pharmacy benefit costs, we hope these cost containment strategies will help to rein in drug costs. Ironically, some policymakers, at both the state and federal level, support proposals that would undermine these cost containment tools. For example, the "Patients' Bill of Rights" legislation that is now in conference contains a provision that could force health plans that have 3-tier co-pay structures to cover non-formulary drugs as preferred drugs. Thiswould absolutely undermine a critical cost containment strategy that offers members preferred co-pays for equally effective drugs with lower prices.

We urge Congress to reject this proposal that will limit the ability of health plans to promote utilization of drugs with the highest value to members.

The ability of insurers to manage the skyrocketing costs of prescription drug coverage may mean the difference between employers providing drug benefits to their retired employees or not.


The Blue Cross and Blue Shield Association believes that providing access to affordable prescription drug coverage for seniors is critical.

As a first step, we believe that Congress and the Administration should review all of their current and future policies on prescription drugs to assure they do not exacerbate the rapid rise in prescription drug costs - which hits older people hardest since they have the highest utilization of prescription drugs.

For example, Congress has legislation pending (S. 1772/H.R. 1598) that would provide patent extensions for certain drugs. Stephen Schondelmeyer, of the Pharmaceutical Research in Management and Economics (PRIME) Institute, authored a recent study on the incremental costs to consumers of providing patent extensions of up to 3 years to drugs affected by this legislation. The PRIME study estimated that granting Claritin a 3-year patent extension. would cost consumers up to $5.3 billion from 2002 to 2007. Americans could expect to pay as much as $11 billion in extra costs for a 3-year extension for all 7 drugs affected by this bill.

Second, the BCBSA supports comprehensive reform of the Medicare program to assure the program will remain financially stable and secure to serve both current and future beneficiaries. In the context of overall reform, the BCBSA believes Congress should provide prescription drug benefits as an integral part of Medicare coverage. When Medicare was created, it provided appropriate coverage for the time. But that was 35 years ago. BCBS Plans have not stayed the same - they have responded to the benefit needs of its customers, advances in medicine, and the increasing challenge to keep coverage affordable. It is time for Medicare to change and we applaud members of this committee for their tireless efforts to reform and improve Medicare.

However, we caution Congress to avoid adding prescription drug coverage to Medicare until the program is reformed so that all current benefits are adequately financed. As described earlier, prescription drug costs are skyrocketing. It simply is not prudent to add such an expensive benefit until Congress can pass comprehensive Medicare reform.

Given that it appears passage of comprehensive Medicare reform is not likely this year, the BCBSA believes Congress should take the following actions if policymakers wish to act in the interim:1. Target assistance to low-income seniors through federal block grants to states. Fourteen States already have implemented successful prescription drug assistance programs, and eighteen others have programs under consideration. By building on these programs, the goal of making prescription drugs more affordable to lower-income seniors can be attained without disrupting current coverage, bankrupting Medicare, or hindering future Medicare reform. It also can be done quickly, as most states already have the infrastructure and expertise necessary to implement an assistance program. To ensure all states participate in the program, it is vital that the federal government fully fund the program. The federal government has the primary responsibility for funding health care coverage to seniors. This responsibility should not be shifted to the states in the case of prescription drugs. Most importantly, this proposal would provide overdue assistance to the most vulnerable seniors. If the federal funds were available to help seniors with incomes below 200 percent of the federal poverty line, then 64 percent of all seniors who currently do not have prescription drug coverage would receive assistance. While this may not be the final solution, it is certainly an important step in the right direction, and it can be accomplished this year.

2. Improve the Medicare+Choice program. By enhancing and stabilizing funding and providing plans regulatory relief, more plans will likely stay in the program and continue to provide prescription drug coverage to seniors at an affordable price.- Payments to Medicare+Choice (M+C) plans must keep pace with changes in spending in the government-ran fee-for-service program. If payments to private health plans fall significantly below per person spending in the Medicare fee-for- service program as is currently projected - plans will have difficulty attracting sufficient numbers and types of providers to their networks and in providing the Medicare benefit package. Indeed, the extension of the 2 percent cap for one more year will undoubtedly force more plans to leave the program. While adequate payments to health plans are critical, stability and predictability in future year payments are just as important. Blue Cross Blue Shield Plans place a high priority not only on attracting new beneficiaries, but also on keeping them satisfied over the long term. One of the most important ways to retain members is to avoid large increases in premiums and instability in benefits. Therefore, it is essential that payments do not fluctuate unpredictably and significantly from one year to the next.

- Improving the Medicare+Choice program is critical because it is the foundation of any broader private sector based reform. Not only would a continued departure of plans from the program bode ill for reform, but continued turbulence in the Medicare+Choice program might mm many Medicare beneficiaries against any private-sector based reform.


In an effort to help seniors afford the high cost of prescription drugs, some in Congress are proposing to expand coverage of prescription drugs through Medigap: (1) some proposals would create a stand-alone Medigap prescription drug policy; (2) other proposals would mandate prescription drug coverage in all 10 Medigap packages.

Although appealing on the surface, these proposals would not help seniors, as they would make coverage more expensive and unaffordable for many seniors.

Stand-alone Prescription Drug Coverage

Proposals allowing seniors to purchase a stand-alone prescription drug policy create a false hope. Insurers would be called on to offer a policy that is expensive and has costs growing at 15 to 20 percent per year. Plus the need for drug coverage is much more predictable than general medical needs, as many seniors with high expenditures are on maintenance drugs.

Insurers know this is a recipe for an insurance policy that will fail. It would start out unaffordable for most, and rapidly lose enrollment as more disappointed seniors found it unaffordable each year.

Medigap companies would not put a product on the market unless it is for the long run. The way to assure a stable benefit that does not increase wildly from year to year is to: 1) makesure it is not a benefit only purchased by those who need it; and, 2) make sure the benefit is not one whose price is likely to increase dramatically year to year.

A stand-alone prescription drug benefit fails both tests. The high cost of prescription drugs would make a drug-only benefit package so expensive that only those who are in immediate need of benefits would initially buy a policy. After that, large annual price increases would result in the healthier people dropping their policy each year, which in turn would lead to even higher prices for those who remained. This spiral would leave many seniors without coverage, and very disillusioned.

Moreover, a stand-alone prescription drug policy actually could raise the cost of existing Medigap drug policies, and further erode existing coverage for prescription drugs. At least one congressional proposal to offer stand-alone prescription drug coverage would close the Medigap plans that currently offer Rx coverage (options H, I, and J) to new enrollment. However, with no new enrollees coming in, costs in the existing H, I and J plans would spiral ever higher. At the same time, existing subscribers would be unlikely to have an option to purchase an affordable stand-alone prescription drug plan, if indeed any is offered at all, given the adverse selection expected.

Mandatory Rx Coverage

Requiring prescription drug coverage in all 10 Medigap packages would raise average Medigap premiums by more than 50 percent for those policies that currently do not include drug benefits.

(This assumes that Congress requires the level of benefits currently available in Medigap options H and I: $250 deductible, 50 percent coinsurance up to a total benefit of $1,250.) An American Viewpoint study found that 70 percent of seniors who have Medigap policies would drop their coverage if premiums increased by 50 percent.

The key issue for seniors on prescription drugs is not access but cost. All seniors have the opportunity to purchase Medigap policies with drug coverage when they turn 65, regardless of their health status. However, of those Medicare beneficiaries who do not otherwise have drug coverage (i.e., through an employer-sponsored plan or through a government program such as Medicaid), fewer than 20 percent purchase Medigap policies H, I, or J, which provide drug coverage. Approximately 40 percent choose one of the other seven standard plans which are relatively affordable because they lack prescription drug coverage -- and the rest do not purchase any coverage. Forcing an increase in Medigap premiums by mandating drug coverage in all 10 packages would invariably force many Medicare beneficiaries to drop their Medigap coverage.

This would be unfortunate because most Medigap enrollees are pleased with their coverage. A July 1998 report from the Department of Health and Human Services Inspector General found that 88 percent of beneficiaries are satisfied with their Medigap policies. Beneficiarieslike Medigap because the core Medicare package is clearly inadequate compared to coverage in the private sector. Key shortfalls include a limited hospital benefit, no cap on out-of-pocket expenses, and high physician and outpatient co-insurance requirements. Seniors rely on Medigap policies to fill these shortfalls, and do not want to lose this coverage option.

Expanding prescription drug coverage to seniors is critical. But it must be done in a way that will actually achieve that goal and will not erode or eliminate the Medigap coverage on which so many seniors currently rely.


Making drug coverage affordable to our customers continues to be one of the most difficult challenges facing BCBS Plans. As the cost of prescription drugs continue to rise at 15-20 percent per year the Plans have developed and implemented a range of techniques to control costs and, thus, maintain the affordability of prescription drug coverage.

As Congress tackles the important issue of expanding prescription drug coverage to seniors, I hope the members of the committee will learn from the vast experience of the BCBS Plans and also consider our calls for caution.

The BCBS Plans stand ready to work with Congress to develop a comprehensive plan to reform Medicare and ensure that seniors have access to meaningful and affordable prescription drug coverage through the next century. Until such a plan can be implemented,BCBSA urges Congress to provide federal block grant funds to states so they can assist those seniors who need the most help in paying their high prescription drug costs.

Thank you again for the opportunity to testify today.


1 A recent survey showed that 29 of the top 100 selling generic drugs were priced higher in the first quarter of 1999 compared to the first quarter of 1998. The majority of these price increases are double- digit increases, and are coming from a range of generic manufacturers, not just a few.


LOAD-DATE: March 30, 2000

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