Copyright 2000 Federal News Service, Inc.
Federal News Service
March 29, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 4383 words
PREPARED TESTIMONY OF MARJORIE DORR CHIEF OPERATING OFFICER ANTHEM BLUE CROSS
AND BLUE SHIELD OF CONNECTICUT BLUE CROSS AND BLUE SHIELD ASSOCIATION
BEFORE THE SENATE COMMITTEE ON FINANCE
SUBJECT - PRESCRIPTION DRUG BENEFITS AND THE MEDICARE PROGRAM
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.
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
1. Background on the costs of providing prescription drug
2. Strategies used by BCBS Plans to manage prescription drug
3. BCBSA recommendations on providing Medicare beneficiaries
access to prescription drugs; and,
4. Comments on proposals currently
under consideration in the Congress.
I. BACKGROUND ON PRESCRIPTION DRUG
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.
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:
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
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
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
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.
STRATEGIES FOR MANAGING DRUG COVERAGE
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.
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.
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.
name drugs not usually used as the first line of treatment.
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.
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
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
III. BCBSA RECOMMENDATIONS
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
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.
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.
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.
IV. CONCERNS ABOUT MEDIGAP PROPOSALS
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
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.
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
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.
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.
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
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.
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