SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 5014 words

COMMITTEE: HOUSE ENERGY AND COMMERCE

SUBCOMMITTEE: HEALTH

HEADLINE: TESTIMONY PRESCRIPTION DRUG BENEFIT

TESTIMONY-BY: JEANNE M. LAMBREW , ASSOCIATE PROFFESOR.

AFFILIATION: GEORGE WASHINGTON UNIVERSITY

BODY:
May 16, 2001 CORRECTED COPY Prepared Witness Testimony The Committee on Energy and Commerce W.J. "Billy Tauzin" Chairman Medicare Reform: Providing Prescription Drug Coverage for Seniors Subcommittee on Health Dr. Jeanne Lambrew PhD Associate Professor Department of Health Services Management and Policy George Washington University COST ISSUES FOR MEDICARE PRESCRIPTION DRUG BENEFITS Statement of Jeanne M. Lambrew Associate Professor, George Washington University i Chairman Bilirakis, Congressman Brown, and distinguished Subcommittee Members, thank you for the opportunity to offer my views on prescription drugs. By way of introduction, I worked for the previous Administration as the Principal Associate Director for Health, Personnel and Veterans at the Office of Management and Budget and as the lead health policy analyst at the White House National Economic Council. Part of my job was coordinating the analytic work for President Clinton s Medicare reform plan. Today, I am an Associate Professor at George Washington University. Covering prescription drugs in Medicare is a top health care priority. As AARP and BIO will testify, prescription drugs are essential to the health of seniors and people with disabilities. Yet, too many beneficiaries face financial barriers to needed medications since Medicare does not cover them. ii This problem will only grow worse over time since there inevitably will be a greater reliance on ever-improving pharmaceutical therapies at the same time that there is a deterioration of private insurance coverage for prescription drug coverage for the elderly. iii Although extending Medicare to cover prescription drugs is a major policy challenge, this nation has never been better able to undertake it. We have a budget surplus - in no small part created by recent reductions in Federal health care spending. iv Given the cost of a Medicare drug benefit, revenues from this surplus will be essential to funding a prescription drug benefit. There appears to be bipartisan support for at least two basic principles for a prescription drug benefit. First, most Members of Congress agree with states, advocates of seniors and Americans with disabilities, and policy experts that a prescription drug benefit option should be offered through Medicare to all beneficiaries - not just through states to the low-income. Low- income policies like the President s Immediate Helping Hand not only exclude millions of middle-class beneficiaries with incomes over $20,000 who lack insurance, but are unlikely to help even those it targets (all states will not expand coverage and, in states that do expand coverage, not all eligible seniors will participate). v Instead, most Members are now concluding that a Medicare drug benefit option should be available and affordable to all beneficiaries. Second, there appears to be widespread support for a drug benefit that is meaningful, defined as having reasonable cost sharing and protection against catastrophic prescription drug costs. Agreement on these principles, coupled with the budget surplus and the urgency of the problem, may mean that this Congress successfully accomplishes what others have failed to do, which is to enact a bipartisan, meaningful Medicare prescription drug benefit. My remarks today focus on the issue of cost. Cost estimates for prescription drug benefits - and, indeed, most public policies - have taken on unparalleled importance in developing the policies themselves. This is, in part, due to the budget process. The Budget Committees must decide on how much to allocate for prescription drugs and other policies often in the absence of a Congressional Budget Office (CBO) cost estimates of specific policies. Last week, Congress passed a budget resolution that allocates up to $300 billion from 2002-2011 for Medicare reform and prescription drugs -- without knowing what that would buy. The Committees of authorization, thus, will be instructed to retrofit policies, using CBO estimates, to hit these targets. So, rather than beginning with policies, you and other Members of Congress are expected to begin with the cost constraint and work backwards. vi Given this expectation, I d like to discuss three questions related to the cost of a Medicare prescription drug benefit. First, is $300 billion enough for a drug benefit that is meaningful and helps all uninsured beneficiaries? Second, if $300 billion is not enough, is higher spending affordable? And, third, will decisions about the approach to Medicare payment policy for prescription drugs affect costs? The answers to these questions will help determine whether bipartisan support can be translated into enactment of a bipartisan, meaningful Medicare prescription drug benefit in this Congress. Is $300 Billion Enough? As Mr. Crippen has testified, CBO has not yet provided any official estimates of prescription drug proposals this year. However, it has, in the interim, provided to Congressional staff a useful tool to assess the effects of different premium subsidies and cost sharing policies on total costs and beneficiary premiums. This ballpark estimator" tool is used in the analysis that I have prepared for today s testimony. vii It is important to note that these are not CBO estimates and that the ultimate CBO scoring may be quite different. Using this tool, it appears that $300 billion will probably buy a limited Medicare prescription drug benefit. Two illustrative policies that could be affordable at this level include: - No catastrophic protection and $500 deductible. One $300 billion option would maintain a 50 percent premium subsidy (the lowest subsidy that would likely ensure that all currently uninsured Medicare beneficiaries participate viii ) but constrain Federal spending by increasing beneficiary cost sharing. Such an option would have $45 to $50 monthly premium, a $500 deductible, and 50 percent coinsurance for spending above the deductible, with no catastrophic protection. This deductible / copay structure is less generous than virtually all previous Congressional proposals and is not significantly better than Medigap. - Catastrophic protection with high premium. A different approach to spending $300 billion would be to make the deductible/ copay structure more comparable to private plans but reduce the premium subsidy. This option would have a $200 deductible, 50 percent coinsurance, and $4,000 stop-loss - but a $65 to $70 premium. This premium is about equivalent to the premium that beneficiaries are expected to pay in 2004 for all Part B services (e.g., physician and hospital outpatient department care). ix This premium is probably too high to encourage all seniors who lack prescription drug coverage to participate in a voluntary benefit and thus would leave millions uninsured. One could, with $300 billion, create a hybrid proposal that includes a 50 percent premium subsidy and catastrophic benefit but has a gap" - meaning that, Medicare pays 50 percent coinsurance up to a fixed dollar limit, then the beneficiary is liable for 100 percent of costs until out-of-pocket spending hit a particular stop-loss threshold. However, such policies have come under criticism from beneficiary groups and experts and, as Mr. Crippen testified in March, it is unlike anything available in the private sector." x Since the definition of what is adequate" is relative, it is useful to compare the type of benefit affordable at $300 billion with other benchmarks that make sense for Medicare. One such benchmark is private health insurance. For 2002-2010, the percent of private insurance spending on prescription drugs is projected to be 19 percent, according to the Administration s Office of the Actuary. xi If Medicare were to spend the same percent of total spending on prescription drugs as does private insurance, then the cost of a Medicare drug benefit would be about $750 billion over 10 years (see chart 1). xii Another benchmark is the prescription drug benefit enacted last year for military retirees. This benefit, which has no beneficiary premium and low copays would, if extended to the entire Medicare population, cost about $1 trillion from 2004 through 2011 xiii - clearly much higher than any proposal under consideration. This helps explain why organizations such as AARP advocate for significantly higher spending on a prescription drug benefit. In summary, this analysis suggests that $300 billion is well below the amount needed for a benefit equivalent to a standard private insurance benefit, and is probably insufficient to extend a meaningful prescription drug benefit to all Medicare beneficiaries. Is $300 Billion - Or Even $400 Billion -- Too Much? If, in developing options for a prescription drug benefit, the policies cost estimates rise above the budget target, questions will surface about whether this is too much to spend on a Medicare drug benefit. Some still argue that $300 billion itself is excessive. One way to evaluate this claim is to compare the proposed prescription drug spending to other types of health spending and other budget priorities. For illustration, this analysis assumes that $400 billion over the 10 years is being proposed for a prescription drug benefit, since this is probably closer to cost estimates for proposals introduced in the 106th Congress using this year s baseline. The most immediate way to assess whether $400 billion is too large is to compare it to projected Medicare and overall Federal health services spending. A prescription drug benefit of this size would comprise about 11 percent of total Medicare spending from 2002-2011. Such an amount would be about equal to projected spending on Medicare s long-term care benefits (hospice, home health and skilled nursing facility care), even though many more beneficiaries would use a drug benefit. xiv In addition, a new Medicare drug benefit that costs $400 billion would comprise about 5 percent of the total national public spending on health services (see chart 2). It is also instructive to compare $400 billion to projected spending on prescription drugs. CBO projects that prescription drug spending by the Medicare population will total $1.5 trillion from 2002 through 2011. A bill whose cost estimate is $400 billion would cover only about one-fourth of this spending (less if some of the $400 billion replaces existing spending or pays for administrative costs). A different type of comparison looks at private pharmaceutical industry spending. A rough estimate suggests that the pharmaceutical industry s budget for activities to promote prescription drugs (e.g., marketing, physician detailing") will total about $300 billion from 2002-2011. xv This is as much or a large fraction of the amount that Congress is contemplating spending on the entire prescription drug benefit for 39 million beneficiaries (see chart 3). A more conventional way to assess how much is too much is to compare proposed prescription drug spending to other budget priorities. The Joint Committee on Taxation recently estimated that, if the estate tax repeal were fully implemented immediately, it would cost $662 billion over 10 years. xvi The President s proposed top tax bracket change alone, which would help only about half a million households, would cost $237 billion xvii - slightly less than the budget resolution s allocation for Medicare, but helping tens of millions fewer people. These comparisons are not intended to imply that $300 billion is an insignificant commitment. Indeed, such a dedication is a major step forward. They are intended to help frame the discussion of the numbers, and to illustrate that spending that is more commensurate with proposals that provide a meaningful prescription drug benefit to all beneficiaries is not necessarily excessive". Will Medicare payment policy for prescription drugs affect costs? The third and final question is how will the structure of a Medicare prescription drug benefit affect costs? As described previously, most of the cost of a prescription drug benefit will result from its benefit design: the level of premium subsidy, amount of cost sharing, and level of catastrophic protection (if any). Last year, CBO assumed that there was basically no difference in the overall cost of a prescription drug benefit administered through the two major approaches, all else held constant. xviii I d like to make the case that total costs should differ depending on how the prescription drug benefit is structured, and that paying for drugs on a fully capitated basis will be more costly than assumed - and could have serious side effects. To review, two major approaches have been proposed for paying for and administering a Medicare prescription drug benefit. The first relies on pharmaceutical benefit managers (PBMs) which would be competitively chosen to negotiate price discounts and deliver prescription drugs in a local area. The second relies on private, risk-based insurers that compete directly for beneficiary enrollment to deliver prescription drugs. xix These approaches have some common elements. Both give private organizations primary responsibility for the management and delivery of the benefit. Both give these organizations similar tools to reduce prescription drug prices (e.g., authority for prior authorization; incentives for generic substitution). And both contract with private organizations to negotiate prices for covered drugs. The major difference is that, under the PBM approach, the government pays a percent of the negotiated prices to PBMs selected by Medicare because they offer low prices. Under the risk-based plan approach, the government pays a fixed, capitation rate to risk plans selected by beneficiaries. In 2000, CBO assumed that, relative to PBMs, risk-based plans would achieve lower prescription drug spending per beneficiary, but that this extra savings would be offset by their higher marketing costs and a risk premium" (a contingency amount built into premiums to offset risk). It is true that full capitation is a powerful incentive for plans to contain costs. Plans paid this way are liable for all excess costs. The key question is how will insurers respond to this incentive. Will they reduce prices through more aggressive negotiation with drug manufacturers, reduce use of and/or access to medications, or risk select" (seek out enrollees whose average cost falls below the capitation rate). To my knowledge, no major employer or insurer pays for prescription drugs through full capitation. Thus, experience in the Medicare managed care system may help answer this question. Studies have found that HMOs have reacted to the pressure of capitation through risk selection. xx Avoiding sicker, more expensive beneficiaries while enrolling those with low to no costs may be a more effective strategy to managed fixed payments than reducing prices or utilization of services. Prescription drug coverage is particularly susceptible to risk selection since most seniors and people with disabilities use prescription drugs, and much of the expense is predictable by plans. While risk selection may reduce plans costs, it will not reduce the Federal government s costs since the government will ultimately have to pay for those beneficiaries in some type of plan. Even assuming no risk selection, risk-based plans may focus less on price and more on utilization to reduce costs. Numerous private insurers that compete for enrollment on an annual basis may have a harder time negotiating price discounts with manufacturers than PBMs (this is the experience in Medigap today). This may lead to aggressive attempts to limit utilization. Recent experience in managed care and in state pharmacy assistance programs suggests that increasingly popular cost containment tools include limiting participating pharmacies and tight appeals processes for medically necessary drugs. Congress can legislatively draw the line between cost containment tools that ensure appropriate utilization and those that limit access. If so, risk-based plans may not be able to constrain costs better than PBMs. If not, then the pressure of capitation may succeed in lowering costs - but at the expense of access to needed prescription drugs. For all these reasons, I would argue that CBO s assumption last year, that risk-based plans result in overall, lower spending per beneficiary (offset by their higher administrative costs), is overly optimistic. xxi The alternative approach for administering a prescription drug benefit is competitive contracting with PBMs. This approach has a different incentive structure for achieving lower costs. PBMs that have neither lower prices nor strong utilization control systems than their competitors would lose the Medicare contract and thus be denied access to Medicare beneficiaries. Since, once they have been competitively selected, PBMs are paid on a claims rather than a fixed capitation basis, they would not benefit from risk selection or access restrictions. And PBMs may be better positioned to get better price discounts since they are bidding for a local area with a known set of enrollees. This approach may not have the same incentives to control utilization but offers much lower administrative costs and fewer of the potential problems for beneficiaries that risk-based plans do. This may explain why virtually all private insurers and employers who offer prescription drug benefits today competitively contract with PBMs for prescription drugs. Thus, I believe that these very different approaches to paying private plans for prescription drug coverage will have different effects on Medicare costs. I hope that CBO considers these issues carefully before finalizing their estimates and would urge Members of Congress to seriously weigh the policy implications of alternative administrative structures. Importance of Putting Cost Estimates into Perspective The purpose of my testimony has been to discuss cost issues related to Medicare prescription drug proposals. How much a policy costs is clearly one of the most important pieces of information in a policy debate. It is essential, however, that these cost estimates be put into the proper perspective in the policy making process. As Members of this Committee know, cost estimates are informed guesses, not actual costs. Developing a prescription drug benefit by solving for total costs based on cost estimates may result in flawed policy. This was what happened in the Balanced Budget Act of 1997 when Medicare provider payment policy was changed to meet somewhat arbitrary budget targets using cost estimates that were, in retrospect, too pessimistic. We have been paying for this mistake ever since, and it is important that we not repeat it. To that end, I would respectfully suggest that this Committee focus on what prescription drug policy is best for the program and the beneficiaries it serves. We now have the resources necessary to provide for a basic benefit that can improve, extend, and literally save lives. We can assure taxpayers that even an investment of $400 billion is not overspending, relative to private insurance benefits and relative to Medicare and Federal health spending. This creates the opportunity to finally bring Medicare into the 21st century by adding a meaningful prescription drug benefit for all its beneficiaries. Thank you for the opportunity to share my views.

LOAD-DATE: May 17, 2001, Thursday