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Prepared Witness Testimony The House Committee on Energy and Commerce
Designing a Twenty-First Century Medicare Prescription Drug Benefit.
Subcommittee on Health
Mr. Bruce Vladeck
Mr. Chairman, Mr.Brown, Members of the Subcommittee, my name is Bruce C. Vladeck. I am currently Professor of Health Policy and Geriatrics at the Mount Sinai School of Medicine in New York City, and engaged in a number of other activities in health care, including Chairmanship of the Board of a developmental, pre-PACE, Medicaid managed care plan for the frail elderly. As you know, I was Administrator of the Health Care Financing Administration from 1993 to 1997, and subsequently served as a Presidential Appointee along with Mr. Bilirakis and Mr. Dingell on the Bipartisan Commission on the Future of Medicare. It is a pleasure to have the opportunity to appear before you again. While we have not always agreed on every issue, I have always been treated with the greatest of courtesy and consideration by you, Mr. Chairman, and the Members of this Subcommittee, and I very much appreciate the opportunity to renew those acquaintances. I will not take much of your time this morning describing the importance of a prescription drug benefit for Medicare beneficiaries. I believe that, by now, the necessity of such a benefit is almost universally acknowledged, as is evidenced not only by the Members' opening statements today but by the range of proposals already being considered by this Congress. To me, it continues to be rather astonishing that, at this juncture in our history, some ten million senior citizens of the world's wealthiest nation lack even the most basic coverage for the costs of prescription drugs that might prolong their lives, reduce pain and discomfort, or prevent disability. But I am hopeful that, through the work of this Subcommittee and your colleagues in both Houses of the Congress, 2003 might finally prove to be the year in which a worthwhile, effective benefit is enacted. I will also not take up your time this morning commenting in detail on any specific proposal for a Medicare prescription drug benefit. One of the great advantages of my current circumstances is that I no longer need to remain current with all of the details of specific proposals, and I hope and expect that the legislative process before you is one in which useful concepts and innovative ideas from a variety of different sources will ultimately be melded into final legislation. Instead, given my perspectives and my experience, I thought the most useful thing I could do today would be to describe and comment on a handful of issues and themes that I think must be adequately taken into consideration in order to craft a Medicare drug benefit that will meet the needs of beneficiaries, make administrative and fiscal sense, and not hold out a promise to the nation's disabled and senior citizens which their government is then unable to fulfill. Specifically, I think there are five critical points that must be considered: First, a Medicare prescription drug benefit must be universal. This is a large and heterogeneous country, and Medicare beneficiaries are a diverse and heterogeneous group. Their needs - including their needs for prescription drugs - vary from one individual to another, and for individual beneficiaries over time. Further, while those needs are strongly correlated with socioeconomic and health status, they are not perfectly and uniformly connected to them. For example, nearly half of Medicare beneficiaries who lack adequate prescription drug coverage have incomes in excess of 200% of the federal poverty level. So any benefit designed to cover only part of the Medicare beneficiary population or only part of their costs will invariably exclude at least some people who really need it; will create inequities across geographical, social, and disease groups; and will unavoidably create a series of notches or boundaries which will invariably create resentment and perceptions of unfairness - not to mention significant headaches for the Congress in the future. Medicare's universality is one of its greatest strengths - both in terms of popular support and simple administrative practicality. Virtually every individual eligible for the program is enrolled, and once enrolled, they receive the same level of Medicare-funded benefits regardless of age, income, residence, or delivery system choice. Dr. Karen Davis, President of the Commonwealth Fund, has recently produced some estimates of the overall costs to the American health care system of the very fragmentation and decentralization of our health care system. Whether one agrees with every aspect of Dr. Davis's analysis or not, the underlying point is that universality simply takes off the table what is otherwise the source of considerable complexity, confusion, and expense. As the history of Medicare Part B over more than thirty-five years well demonstrates, one can have a universal benefit for which enrollment is voluntary. Every contemporary proposal for a Medicare prescription drug benefit that I have seen calls for such voluntary enrollment, and I agree that it is essential that beneficiaries have the option of declining a drug benefit for which they would have to pay an additional premium. But I would also remind the Members of this Subcommittee that, of all the possible insurance benefits for services heavily used by Medicare beneficiaries, insurance for prescription drugs is especially susceptible to adverse selection - a phenomenon that has already priced Medigap policies that cover prescription drugs out of the market in most of the country. This adverse-selection problem also helps explain the concerns that so many have raised about a stand-alone drug benefit. Designing a prescription drug benefit that really works for Medicare beneficiaries will therefore require setting a premium level low enough to maximize enrollment, and thus avoid self-selection by high-risk beneficiaries. I am also aware that roughly one third of Medicare beneficiaries currently receive prescription drug coverage through employment-related retiree benefits - although that proportion is expected to fall steadily in the coming years - and that it would be highly desirable, both for beneficiary convenience and federal fiscal purposes, to keep as many employers in the game as long as possible. There are a variety of ways in which employers could be given financial incentives to maintain such benefits, and so long as the net costs of the subsidies is no greater than direct Medicare coverage would cost, I would think we should want to do so. Second, a Medicare Prescription Drug Benefit Must Be a Meaningful Benefit In an understandable effort to minimize program expense or hit some sort of arbitrary budgetary target, many proposals for a Medicare prescription drug benefit have contained complex combinations of variable coinsurance, "collars," "caps," and "donuts," to precisely define the relative shares to be paid by insurance and coinsurance at each level of beneficiary drug expense, and in many instances as well to target insurance benefits on certain sub-categories of beneficiaries. Yet many of those efforts run counter to the basic underlying realities of Medicare beneficiaries and their expenditures for prescription drugs. About one third of Medicare beneficiaries spend $500 a year or less on prescription drugs; another ten percent spend more than $6,000. But the majority of beneficiaries are pretty evenly distributed across intervening levels of expenditure, with the average for all beneficiaries being somewhere between $2,500 and $3000. At the same time, the median Medicare beneficiary living alone has an income of roughly $15,000 a year, and will be paying close to $800 of that for Part B premiums in 2004; the median couple, with an income of slightly more than $25,000, will pay $1600 in premiums. Assuming that any new drug benefit will carry an additional premium and some form of coinsurance, it's clear to me that any additional holes in coverage, above ordinary coinsurance, will vitiate the value of the supposed benefit for many beneficiaries, and leave us right back where we started in terms of the inability of beneficiaries to afford the drugs they need. Third, We Shouldn't Fool Ourselves About the Ability to Target Lower-Income Beneficiaries Cognizant of the extremely limited incomes of many Medicare beneficiaries, the authors of most of the proposals for a Medicare prescription drug benefit currently being discussed have sought to provide additional protection for low-income beneficiaries, through lower premiums or coinsurance or both. Some proposals have extended prescription drug benefits to lower-income beneficiaries only. I certainly share the belief that lower-income Medicare beneficiaries not currently eligible for Medicaid are desperately in need of assistance in paying for prescription drugs, and I am sympathetic to efforts to tilt the design of any benefit structure in favor of those with lower income, but I think it's critically important that we not deceive ourselves about our ability to target benefits nearly as precisely as we would like. First, it's important to remember that something like 40% of all Medicare beneficiaries live in households with incomes below 200% of the federal poverty level. For some of those households, Medicaid currently provides prescription drug coverage, but that still leaves perhaps eight to ten million beneficiaries with low incomes and limited coverage, if any, for prescription drugs, while millions more with incomes just slightly above that level also have very limited financial resources. So even relatively narrowly-targeted coverage will still cost a substantial amount of money while leaving many beneficiaries with very real needs uncovered. Second, many of you will remember from our discussions of income-related premiums during our work on the Balanced Budget Act the basic fact that neither the Centers for Medicare and Medicaid Services nor the Social Security Administration maintains any income information on beneficiaries, other than that which is obtained from sample surveys. The only comprehensive data on income of individual Medicare beneficiaries is that maintained by the Internal Revenue Service, and even that is extremely incomplete, since almost half of the elderly population has insufficient taxable income to require filing of income tax returns. IRS data, of course, is also retrospective and lagged; some time this coming summer, we will have information on the 2002 income of roughly half of beneficiaries. Thus, any prescription drug benefit in which premiums, coinsurance, or benefits vary by income will require creation of an entirely new administrative apparatus, or reliance on existing State Medicaid agencies or, in a few instances, other State agencies that do income determinations for state-operated pharmaceutical assistance plans. This is not just a problem of bureaucratic complexity or expense; as our more recent experience with the SCHIP program has taught us all too well, effectively reaching individuals who are legally eligible for publicly-subsidized health insurance benefits requires a systematic investment of administrative commitment, time, and resources. In short, policy proposals for income-related targeting that look extremely elegant on the spreadsheets and PowerPoint presentations of Washington policy analysts are often highly inapplicable in the real world. This is not just a theoretical problem; we only have to look at the experience of the Medicare Savings Programs to recognize that, even under the best of circumstances, benefit programs that require specialized outreach and income-eligibility determinations are extremely unlikely to reach all who should be able to benefit from them. Under the most recent estimates, for example, more than 40% of Medicare beneficiaries eligible for SLMB/QMB benefits are not enrolled, and in some states that proportion exceeds 60%. What should also be recognized, in addressing the problems of low-income Medicare beneficiaries, is of course the interaction with Medicaid. States are now spending some $13-15 billion a year on prescription drug benefits for dually-eligible Medicare-Medicaid beneficiaries, of which $5-6 billion is their own tax-levy money, with the balance being federal match. Even a relatively modest, universal Medicare prescription drug benefit would thus generate very substantial savings for the states, at a time when fiscal relief is desperately needed. Conversely, even with all of the fiscal pressure on state Medicaid budgets, it is not hard to envision building into Medicare prescription drug legislation some expectation of continued Medicaid wrap-around coverage not only for beneficiaries for whom Medicaid is currently paying the whole bill, but for a somewhat expanded pool of low-income beneficiaries in addition. Such an approach would be particularly desirable because the actual benefits provided under Medicaid are far superior to those offered by even the most generous Medicare prescription drug benefit proposals now before the Congress. Fourth, the Design of a Medicare Drug Benefit Should Be Grounded in Actual Experience with Private Health Plans, Not Rhetoric or Special-Interest Pleading For those of us who participated in the debates leading up to the enactment of the Balanced Budget Act in 1997, the current preoccupation with the potential role of private plans in provision of a Medicare prescription drug benefit can't help but generate a disconcerting sense of deją vu. I am also reminded of the old adage about second marriages: that they represent the triumph of hope over experience. For while much of the rhetoric about the potential role of private plans is essentially unchanged from what we heard five or six years ago, we now have another five or six years' worth of actual experience from which we can deduce some pretty clear-cut conclusions. Private managed-care plans have participated in Medicare throughout its history, and significant participation by private plans paid on a capitated basis has now been going on for almost twenty years. We have a lot of actual experience, and a lot of data. While analysts can argue ad infinitum about almost any point that has ideological or political implications, I believe that several conclusions from that experience are crystal clear: 1. To date, participation of private plans in Medicare has yet to save the Medicare program a nickel. Prior to the BBA, Medicare's rate methodology, interacting with favorable risk selection for the plans, produced payments to private plans significantly in excess of what Medicare would have paid had those beneficiaries remained in fee for service. Changes in the payment formula contained in the BBA, along with the fact that private sector costs have increased much more rapidly than those in Medicare FFS, have largely eliminated this phenomenon by now, but have also driven many plans out of the program. 2. Even if one could establish a perfectly "level playing field" in payments between Medicare fee-for-service and private plans, private plans would still incur marketing, enrollment, and administrative costs (in addition to any possible profit) that don't affect "traditional" Medicare. In order to provide precisely the same services at the same costs, therefore, private plans have to either be at least 15-20% more efficient in their use of services than Medicare, or else extract prices from providers lower than those Medicare pays, something that was quite prevalent before the BBA, but that is no longer possible in most communities. While private plans are often more economical in their use of services than the traditional system, documented evidence of a 15-20% differential is extremely hard to come by. 3. Thus, historically, private plans have been able to provide additional benefits to Medicare beneficiaries without additional premiums only when they were overpaid. 4. When private plans are not happy with Medicare payment levels or other environmental conditions, they leave the program. They also leave as a side-effect of continuing consolidation, reorganization, and corporate restructuring in the private health insurance industry. One should hardly expect anything different from private, for-profit firms, but the effect of such departures on beneficiaries can be quite significant. Plan turnover certainly raises significant issues about continuity of care for beneficiaries. It should also be emphasized that the widespread withdrawal of private plans from Medicare in 2001 and 2002 was hardly unprecedented: a proportionately similar number of plans withdrew in the late 1980s. 5. In general, managed care plans are much more prevalent, and much more successful, in urban than rural areas. Few rural communities have the kind of oversupply of providers that gives managed care plans their greatest leverage over prices and patterns of care, and marketing and enrollment costs per beneficiary are much higher in rural areas. 6. The data are also quite clear, and consistent over the past fifteen years, that the overwhelming majority of the small minority of Medicare beneficiaries enrolled in private plans are highly satisfied with the choice, while the overwhelming majority of those who have chosen not to enroll in, or who have left, private plans are also highly satisfied with Medicare, and don't want to enroll in private plans. One would hardly expect anything different. Nor is it surprising that Medicare beneficiaries, in general, are substantially more satisfied with their health insurance than enrollees in private plans who are denied the opportunity to make those kinds of choices. 7. Finally, as those private plans that have remained in Medicare + Choice over the last several years have sought to adjust their benefit and premium structures to survive economically in a more difficult and rapidly-changing market, they have come up with a variety of limits, coinsurance arrangements, and premium structures for their prescription drug coverage that make inter-plan comparisons increasingly difficult to describe, let alone making the choice process more difficult and confusing for beneficiaries. In sum, whatever the rhetoric may be, I think the data concerning the participation of private plans in Medicare leads unavoidably to the conclusion that, for a minority of beneficiaries, when payment levels and benefit structures are roughly equivalent with the fee-for-service program, private plans can produce some benefits - although cost savings are clearly not among them. Requiring beneficiaries to enroll in private plans in order to obtain affordable prescription benefits, on the other hand, would be inherently inflationary, would discriminate against rural beneficiaries and those in other low-managed care markets, would make a lot of beneficiaries very unhappy, and would cause considerable administrative and political turmoil when market exigencies induced lots of plan exits. Fifth, No Matter How Much Privatization is Involved in Construction of a Medicare Prescription Drug Benefit, There Will Still Be A Complex, Unavoidable, Difficult Federal Role One of the great attractions of private managed care for purchasers both public and private, I've long believed, was the illusion that turning health insurance functions over to private plans would reduce the burden on purchasers of making difficult decisions about coverage, benefit design, and access to care. But both employers and legislators have learned that it's not so easy to get off the hook; the same problems come back in new forms. Widespread participation by private plans in the delivery of a Medicare prescription drug benefit, for example, might produce considerable variation in benefit design, formulary composition, substitution policies, and customer service strategies, but if Medicare beneficiaries throughout the country are to receive relatively uniform benefits and relatively equal access to needed drugs, and if there is to be sufficient accountability in the expenditure of public funds, then the more participation there is by private plans, and the more freedom they are given in benefit design and administration, the more formidable the federal standards-setting and monitoring task will be. Unless private plans were required to cover every drug listed in the US Pharmacopeia with uniform coinsurance, the opportunities for manipulating formularies, appeals mechanisms, and/or tiered coinsurance levels to achieve favorable risk selection are so substantial and so pervasive that uniform national policies will be unavoidable, and someone will have to not only figure out how to establish them, but how to enforce them. Marketing practices and public disclosure issues pose similar challenges. And as the growing volume of litigation around PBMs suggests, ensuring program integrity in an industry in which rebates, proprietary pricing information, and sophisticated, complex, promotion schemes are widespread will also require considerable effort by the federal government. Indeed, given the history of the pharmaceutical insurance and distribution industries over the last decade or so, I think it's no exaggeration to suggest that widespread participation by private plans in delivery of a Medicare prescription drug benefit would leave the Congress with a policy choice between a highly regulated private "market" and a scandal waiting to happen. Either of those alternatives is likely to be more expensive, in the aggregate over time, than a uniform benefit directly administered by government contractors through well-established, existing mechanisms. In summary, I think that there are many who believe that we now have an historic opportunity to enact a real, effective, administrable prescription drug beneficiary that will provide critical access to needed pharmaceuticals for millions of Medicare beneficiaries, ease the financial burden on millions of hard-pressed families, and make available to Medicare patients and their health care providers the full armamentarium of modern medicine, with all the benefits that can produce. But I very much hope that we can get it right the first time; that our policies will be guided more by realism and experience than by theories or ideologies - no matter how seductive some of those might be; and that we do our best to avoid policies or processes that are bound to fail. Again, it's been a pleasure and a privilege to have the opportunity to appear before you again, and I'd be delighted to try to respond to any questions you might have. Thank you very much.
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