Statement of William D. Novelli, Executive Director and Chief Executive Officer, AARP

Testimony Before the House Committee on Ways and Means

Hearing on Integrating Prescription Drugs into Medicare

April 17, 2002

Mr. Chairman and members of the Committee, I am Bill Novelli, Executive Director and CEO of AARP.  On behalf of our organization and its 35 million members, I want to thank you for convening this hearing and for continuing your efforts to consider approaches for adding a much needed prescription drug benefit to the Medicare program.

As AARP looks toward building retirement security for today’s older Americans and the baby boom population, we believe no person is economically secure without adequate medical insurance.  The structure of retirement security is no longer simply the “three-legged stool” of Social Security, private pensions, and personal savings, but rather four pillars consisting of:  Social Security, pensions and savings, earnings, and, importantly, stable, affordable and adequate health insurance. 

Consequently, now more than ever, Americans of all ages are looking to Medicare’s guarantee of affordable health care coverage as part of the foundation of their retirement planning.  But there is a serious gap in Medicare’s protection – the absence of reliable prescription drug coverage. 

While modern medicine increasingly relies on drug therapies, the benefits of these prescription drugs elude more Medicare beneficiaries every day.  Drug costs continue to rise unabated.  Employer-based retiree health coverage is eroding.  Managed care plans in Medicare have scaled back their drug benefits.  The cost of private coverage is increasingly unaffordable.  State programs provide only a limited safety net.  Therefore, the need for a Medicare drug benefit for all beneficiaries will only continue to grow. 

Given the prominence of drug therapies in the practice of medicine, if Medicare were being designed today – rather than in 1965 – not including a prescription drug benefit would be as absurd as not covering doctor visits or hospital stays.  That is one of the reasons why ensuring that prescription drug coverage is included in Medicare’s defined benefit package is AARP’s number one legislative priority this year.  Our members and their families need and expect a meaningful benefit that is affordable and available to all beneficiaries.  They expect us to be their champion on this issue, and we will be. 

We are pleased to be here today to discuss the need for a Medicare prescription drug benefit, some of our recommendations for moving forward, and some initial findings of the public’s reaction to prescription drug proposals as well as comment on the President’s prescription drug proposal.

The Need for a Medicare Prescription Drug Benefit

Increasing need, high drug prices, and inadequate insurance coverage pose serious problems for today’s Medicare beneficiaries.  A chronic health problem necessitating new and expensive prescription drugs can quickly deplete a retiree’s financial resources.  Even a beneficiary who has planned well for his or her retirement may not be prepared for drug bills that exceed several hundred dollars a month.  Further, it is important to note that support for making a prescription drug benefit part of Medicare is overwhelmingly high for all of our members.  Americans of all ages recognize the value of prescription drug coverage.  In recent polling conducted for AARP, eight in ten Americans age 45 and over favor making prescription drug coverage part of Medicare.  Support was, in fact, greatest among the younger age brackets.

The majority of Medicare beneficiaries – not just those with low incomes – need drug coverage.  While AARP strongly supports additional financial assistance in Medicare for low-income individuals, low-income assistance is not a substitute for a prescription drug benefit in Medicare.  It will not solve the problem for millions of people with Medicare who are unable to afford their medications.  Further, because AARP opposes means-testing within the Medicare program, we could not support a low-income-only drug benefit unless it were outside of Medicare.

Because of Medicare’s current lack of prescription drug coverage, many beneficiaries must pay for all or some of their prescription drugs out-of-pocket.  Although about two-thirds of Medicare beneficiaries have some type of coverage for prescription drugs, this figure can be very misleading.  The principal sources of coverage that offer a prescription drug benefit – employer-based retiree coverage, private supplemental coverage, or Medicare HMOs – are often inadequate, limited, expensive, and unstable.  Moreover, many Medicare beneficiaries do not have continuous prescription drug coverage.  A Commonwealth study released earlier this year reported that nearly 42 percent of beneficiaries lacked drug coverage at some point in 1998.  More recently, a new study published by Health Affairs reports that nearly 40 percent of Medicare beneficiaries had no drug coverage in the fall of 1999.  It is also important to understand that those Medicare beneficiaries without coverage pay top dollar for their prescriptions because they do not benefit from discounts negotiated by third party payers.  Most of those currently covered by insurance, including most workers, benefit from such discounted prices.

Let me give you some illustrative examples of how middle income people have difficulty in obtaining access to affordable and dependable drug coverage:

• A retired couple has significantly saved for retirement and has an income of $40,000 a year.  Both take prescription drugs for heart disease and high cholesterol and the wife also needs medication for breast cancer and osteoporosis.  They do not have access to retiree health benefits through a former employer, there are no Medicare+Choice plans available in their area, and a Medigap plan offering some drug coverage would cost them $260 a month each.

• A retired couple has an income of $30,000 a year, significantly above the threshold for Medicaid and most state and private pharmacy assistance programs.  They have prescription drug coverage through a Medicare HMO.  This year they learn, however, that their HMO plans to terminate its contract with Medicare, effective December 31.  There are no other Medicare HMOs in their area, and while they can afford supplemental insurance and are guaranteed access to certain Medigap plans (A,B,C, and F), none of these plans include drug coverage.

• A 75-year old widow is enrolled in a Medicare HMO that offers drug coverage.  She currently has prescriptions for a cholesterol-lowering medication at $97.51 a month and an allergy medication at $46.94 a month.  While initially her drug coverage was quite generous, this year her drug benefit is capped at $300 a year.  As a result, she basically has no drug coverage for three-quarters of the year.

As the Committee moves forward with a prescription drug proposal, it will be critical to judge the proposal on not only whether it could improve the situation for people illustrated in the examples above, but also if it is both affordable and attractive enough to yield a broad risk pool and viable program.

What Older Americans Need

Affordable Drug Coverage –Older Americans need affordable drug coverage.  A voluntary drug benefit needs to be affordable to assure enough participation to avoid the dangers of risk selection.  The government contribution will need to be sufficient to yield a beneficiary premium that is affordable and a benefit design that is attractive to the majority of beneficiaries.  If the benefit is not set at an affordable level, only those beneficiaries who have high risk will want to purchase it.  This will lead to a risk pool composed only of those with high drug costs, and program costs will escalate rapidly into what is often referred to as an “insurance death spiral.”  This is not simply a matter of what beneficiaries would like to pay, it is an issue of how to assure fiscal viability of the risk pool.  Medicare Part B is a model in this regard. 

The Part B benefit is voluntary on its face, but Medicare’s contribution toward the cost of the benefit elicits virtually universal participation.  Actuarial work done for AARP last year by the William M. Mercer Company that we shared with the Committee identified the keys to success for a Medicare prescription drug benefit:

√  develop a benefit design that will encourage participation by a broad range of beneficiaries in order to spread risk;

√   ensure clear and concise communication to improve participation;

√   balance the breadth of coverage and beneficiary premium;

√   implement cost-containment techniques; and

√   limit the enrollment period.

Dependable Drug Coverage –Older Americans also need dependable drug coverage.  Current prescription drug coverage options are not reliable.  For example, beneficiaries who obtain prescription drug coverage from their former employer are finding that coverage to be unstable.  Retiree health benefits that include prescription drug coverage are becoming more scarce.  While an estimated 40 percent of employers with 500 or more employees offered retiree medical coverage in 1993, only 23 percent did so in 2001.  Of those employers who offered retiree medical benefits, 21 percent did not offer drug coverage to Medicare eligible retirees.

In addition, beneficiaries who have drug coverage through Medicare HMOs cannot depend on having this coverage from year to year, as plans can change benefits on an annual basis or even terminate participation in Medicare.  For example, this year many beneficiaries in Medicare+Choice plans are living through abrupt changes in their prescription drug coverage that they did not foresee when they enrolled.  Some of the most visible of these changes include:

• Increasing premiums.  Over the past few years, more and more Medicare+Choice plans have been charging premiums for their coverage, and those premiums are escalating.  For example, between 2001 and 2002, the percentage of Medicare HMO enrollees with zero premiums declined from 47 to 39 percent.  This year, nearly one-third of Medicare HMO enrollees (32 percent) will have basic premiums over $50 compared to 14 percent in 2001.

• Higher cost-sharing – Unlike the 1990s, all Medicare HMOs that offer prescription drugs are charging copays for prescription drugs and the average beneficiary copay has increased significantly.

• Decreasing benefit – More plans are lowering the annual cap on the typical Medicare+Choice drug benefit.  While in 1999 10.6 percent of Medicare HMOs had an annual cap of $500 or less on their drug benefit, 20.6 percent of plans had a $500 cap in 2000.

• Loss of benefit – Over the last few years, several Medicare+Choice plans have dropped their prescription drug benefit entirely.  While 88 percent of Medicare HMOs offered some drug coverage in 1999, that number declined to 63 percent in 2001.  Although Medicare+Choice has provided beneficiaries with an opportunity for drug coverage, the volatility of the Medicare+Choice market has made that coverage unpredictable and unstable from year to year.

AARP Recommendations

Adequate Funding - AARP knows that to craft the kind of prescription drug coverage that beneficiaries will find affordable and reliable – and will thus voluntarily choose to sign up for – will require a sizable commitment of federal dollars.  We also recognize that budget constraints are greater than last year.  But while the budget situation changes from year to year, the situation facing millions of older and disabled persons who cannot afford the drugs they need continues to worsen, and constitutes a health care and financial emergency that cannot continue to be ignored.

We do not, at this point, have an estimate of what an adequate drug benefit will cost.  We know the plans costing $300 billion offered last year did not find public acceptance.  However, we believe the new CBO estimates for drug proposals that include beneficiary monthly premiums starting in the $50, $60, and $70 range will not yield an acceptable benefit.  We believe Congress and this Committee should focus on the design of a sustainable benefit that will work for beneficiaries and remain flexible as to the projected cost.

That is why in our budget recommendation we asked Congress to renew its commitment from last year, adjust it for inflation and another year of coverage, and earmark $350 billion for prescription drugs and reforms that strengthen the program.  However, because we believe that even this level of funding is inadequate to pay for what our members would consider an adequate and affordable benefit, we also recommended that Congress create a reserve fund of about $400 billion, or an amount roughly equal to the amount of the 10-year surplus in the Medicare Hospital Insurance (HI) Trust Fund.  A majority of the respondents to our recent poll favored borrowing from the Medicare surplus to pay for a prescription drug benefit.  The range created by the $350 billion commitment based on last year, plus the roughly $400 billion reserve fund, will give the Congress the flexibility it needs to craft a prescription drug benefit that beneficiaries will perceive as having real value.  

Priority for drugs - In addition to our prescription drug recommendation, we also have said that it would be inappropriate to use Medicare or Social Security surplus dollars to increase provider payments without first ensuring that older Americans get the prescription drug coverage they need.  Our members would not understand why Congress could find money to help providers but not to meet their increasing prescription drug needs.  Further, every dollar for a “givebacks” package means one less available dollar for a Medicare prescription drug benefit.  And any giveback package that increases Medicare Part B spending will increase beneficiary premiums because monthly premiums represent 25 percent of Part B costs.  We, therefore, would strongly oppose funding for a givebacks package before agreement is reached on a Medicare prescription drug benefit.

Cost Containment – We recognize that strong and effective cost containment measures are a necessary part of a Medicare prescription drug benefit.  In order for a drug benefit to be sustainable over the long run, mechanisms must be in place to control the rising costs of prescription drugs.  AARP actively supports solid cost containment methods as long as patient safety and well-being is not compromised and access to needed prescription drugs is not impeded.  Therefore, we support the use of formularies, such as a 3-tiered approach, as long as they are developed in a responsible manner and include an exceptions process. 

We also support the responsible promotion of generic drugs as one effective cost containment tool in a Medicare benefit.  In fact, because we believe both the government and the consumer have an important role to play in helping to control costs, AARP is rolling out a national public education campaign, beginning this month, to educate our members and the public at large about the wise use of medications – including generic drugs.  We will encourage our members to talk with their doctors and pharmacists to reduce unnecessary costs associated with use of medications. 

In addition to these cost containment methods, we also would like to work with the Congress in other efforts to control drug costs, including correcting the current AWP pricing structure and stopping abuse of current drug patent laws.  AARP has already begun to pursue the need to correct abuse of drug patents through the courts.  AARP intends to be involved in litigation against certain brand and generic companies that made agreements that delayed the entry of a generic drug into the market and in litigation against a brand name drug company that unfairly extended its patents to forestall its generic competition.

We have asked our members and the general public what kind of benefit package would generate the kind of high level of participation necessary for a viable benefit, and we have learned the following thus far:

• Beneficiaries will generally perform what we call the “kitchen table test” in determining whether they would purchase a new voluntary drug benefit.  That is, they will likely calculate their current prescription drug costs, their Medicare premium ($54 a month in 2002 and rising to $104.90 in 2012), any drug coverage they might have, and their present financial situation, to determine whether a proposed benefit is a real value for them.

• Medicare beneficiaries are willing to pay their fair share for a solid prescription drug benefit, but the premium and coinsurance must be reasonable.  We know, for instance, that beneficiaries would not be likely to enroll in a prescription drug plan with a premium of $50 a month.

• While the amount of the beneficiary premium drives the equation, our members also look at the program design features in combination with one another.  This means it is difficult to simply assess a single component of a package.  For instance, some beneficiaries might look more favorably on a higher level of coinsurance if the premium was lower, or vice versa.  In a recent poll conducted for AARP of 885 individuals age 45 and over, only one-third of those 65 and over would be likely to participate in a prescription drug plan that included: a $35 monthly premium, 50% coinsurance, a $200 annual deductible, and a $4,000 stop loss.  Clearly, this low level of voluntary participation is not enough to create a broad risk pool and sustainable program.

• Most Medicare beneficiaries are concerned about the unpredictability of health care costs and want to know what they will be expected to pay out-of-pocket.  This makes real catastrophic stop-loss protection that limits out-of-pocket costs an important component of any package.  We know from past experience that a $6,000 catastrophic stop-loss is viewed by beneficiaries as too high, and even a $4,000 cap is not viewed as providing meaningful benefit protection.  For example, if there were a $4,000 cap included in a benefit that also imposed 50 percent beneficiary co-insurance, a beneficiary would have to incur $8,000 (and a couple $16,000) in prescription drug costs before the stop-loss protection would kick in.  With the majority of beneficiaries earning less than $25,000 a year, those figures are not seen as providing realistic protection.

We realize that some on the Committee may believe that we are asking for a “Cadillac plan,” however, we emphasize we are bringing to you what our members are telling us they need and expect to join a voluntary drug benefit.  We will continue to try to educate our members about what is realistic and seek the views of current and future members on specific design packages.  We will be happy to work with the Committee as your proposals are developed to test our members’ reactions.

As for the President’s FY 2003 budget request and proposal to modernize Medicare that was released at the start of the year, AARP is pleased that the President continues to make Medicare prescription drug coverage a priority for his Administration and has indicated his willingness to work with the Congress on this issue, but we believe that the dollar amount proposed is insufficient to provide an affordable and meaningful drug benefit for all Medicare beneficiaries.  We also have raised several questions about how the various components of the proposal would help people with Medicare.

In particular, we have raised questions about $77 billion earmarked for low-income drug coverage.  The budget proposes an enhanced federal match to enable states to cover drug costs for Medicare beneficiaries between 100 and 150 percent of poverty. 

However, the Administration’s proposal does not provide details on how the proposed targeted low-income assistance would be used (e.g., in Medicaid expansions or state pharmacy assistance programs), how this effort would improve the current patchwork of drug assistance available, and how many people would actually be helped.  Further, the Administration’s budget leaves open the question of whether states that could not raise their Medicaid thresholds would be eligible for the new enhanced federal match between 100 to 150 percent of poverty. 

The Administration’s proposal also does not prevent “dollar trading” by the states that already have higher thresholds.  The end result for $77 billion in federal funding could be little or no extension of prescription drug protections for more needy seniors than are being served now.

The President’s budget also includes the Administration’s proposal to implement a Medicare drug discount card that would give beneficiaries immediate access to drug discounts and other pharmacy services.  

AARP is working with the Administration as it continues to refine its drug discount card proposal.  There are several issues that we will try to clarify and some consumer protections we will try to add, including:  defining what constitutes a “substantial” discount, obtaining firm details on how manufacturer discounts will be disclosed and passed on to consumers, assuring that consumers can compare drug card discount rates to actual retail prices, and making sure drug cards help consumers get generic drugs whenever they are medically appropriate and the least costly option.   

However, AARP is encouraged that – unlike current industry card proposals – the President’s proposed discount card is designed to establish the drug card program as a building block for a full Medicare drug benefit.  We emphasize, however, that neither the Administration’s discount card nor the current industry cards are a substitute for a real drug benefit.

We also believe that while the actual discounts would be relatively modest, the President’s discount card program would provide at least some help to beneficiaries in buying the drugs they need.  It could provide important safeguards to improve the appropriate use of prescription drugs, and this could help avoid unnecessary health care costs due to drug interactions, mis-medications, or poor compliance.  It also, importantly, would help the federal government learn valuable lessons about the pharmacy benefit managers (PBMs) that run discount card programs and are included as the delivery system in virtually every drug benefit proposal before Congress. As a result, it will help the Medicare program become more familiar with how PBMs and drug benefit programs work.

Finally, we are concerned that the limited amount of funding in the Administration budget for both drug coverage and other program changes is insufficient to add a meaningful drug benefit and strengthen the program for current and future beneficiaries. 

AARP supports efforts to modernize the Medicare program.  Clearly, the creation of a prescription drug benefit that is available in all Medicare options is the most significant improvement, but other changes are also important and would serve beneficiaries and the program well.  For instance, most private health insurance plans offer a cap on out-of-pocket expenses, yet there is no such limit in the Medicare program.  Creating an out-of-pocket cap for services currently covered by Medicare Parts A and B would not only bring Medicare more in line with what individuals under the age of 65 currently have, but would also make the program more affordable for beneficiaries.

AARP also remains open to the possibility of combining the Part A and B deductible, provided it is structured to be affordable and does not produce beneficiary “sticker shock.”   Since most beneficiaries meet the annual $100 Part B deductible but

significantly less meet the Part A hospital deductible, a combined and increased deductible will affect the majority of beneficiaries.  We are opposed, however, to merging the Part A and B Trust Funds.  The new solvency measure included in the President’s budget, and suggested in the recent Medicare Trustees’ Report, appears to indicate that Medicare should be financed wholly from its Trust Funds.  That is, its financing should come predominantly, if not exclusively, from payroll taxes and beneficiary contributions, with little or no contribution from general revenues.  This would represent a radical shift in funding for the Medicare program.  The impact of such a shift would be to significantly increase beneficiaries’ costs for Medicare, reduce provider payments, or a combination of both. 

AARP is pleased that the Committee is examining the issue of a Medicare prescription drug benefit and is developing a proposal.  The work you are embarking upon is extremely challenging; it is also immensely important to millions of Americans who take prescription medications.  It is our hope that today’s hearing will help focus attention on the need for an affordable and dependable Medicare prescription drug benefit for all beneficiaries.

Our members believe that Congress should be able to work across party lines to enact and begin to implement an affordable Medicare drug benefit.  We pledge to you that we will provide assistance in every way we can to work with members on both sides of the aisle and to promote a meaningful and broadly supported Medicare prescription drug benefit.  We also know that our members will not accept failure or delay.  The needs of older and disabled Americans who lack adequate drug coverage can no longer go unheeded.  We call on Congress to act now.  A prescription drug benefit in Medicare is an urgent priority for our members and for the American people.

• Eight in ten Americans aged 45 and over favor making prescription drug coverage part of the Medicare system.  67% strongly favor this benefit.

• Almost eight in ten Americans aged 45+ consider providing a Medicare prescription drug benefit to be an extremely or very important priority for the President and Congress.

• A majority of Americans aged 18 to 64, and 48% of Americans aged 65+, favor borrowing from the Medicare Trust Fund surplus to finance a Medicare prescription drug benefit.  Lower percentages among all age groups favor borrowing from Social Security Trust Fund surpluses to finance a Medicare prescription drug benefit.

• Respondents aged 65 or older (22%) are less willing than those between the ages of 45 to 64 (29%) to pay a $35 monthly premium for a Medicare prescription drug benefit that has a $200 deductible, pays for 50% of the cost of prescriptions, and has a catastrophic coverage cap of $4,000.  Overall, 27% of Americans aged 45+ are willing to pay a $35 monthly premium for this coverage.

• Of the 61% of Americans aged 65+ who identified a premium amount less than  $35, one-quarter (or 15% of all respondents aged 65+) said they would pay the $35 premium when asked directly if they would be willing to pay that amount for coverage.

• While 41% of the public aged 45+ would be likely to participate in the above Medicare prescription drug plan, only 33% of those aged 65+ would participate.  Almost half (47%) of those aged 45 to 54, and 41% of those 55 to 64, say they would be likely to participate in this plan. 

• Americans aged 65+ with prescription drug coverage are less likely to participate in this plan than those without coverage.  However, the lack of prescription drug coverage may not be a factor in whether or not a person would participate in this plan since individuals aged 65+ with no coverage are split as to whether they would participate -- 42% would be likely to participate in this plan while 39% would not be likely to participate.  

• The role existing coverage plays in individuals’ decision to participate in this plan is complicated by the fact that monthly out of pocket prescription drug expenses are also related to whether or not individuals aged 65+ will accept the plan.  Majorities of people aged 65+ (54%) without prescription drug coverage and with current monthly average out of pocket drug expenses of $60 or more are likely to accept the plan. 

• Among individuals aged 65+ who have prescription coverage, out of pocket drug expenses are also a factor in whether or not they will accept this plan.  Almost four in ten (38%) of those aged 65+ with drug coverage but with current average monthly out of pocket expenses of $60 or more are likely to accept this plan.  Only 23% of the 65+ population with drug coverage and monthly out of pocket expenses lower than $60 are likely to accept this plan. 

Methodology

Reed Haldy McIntosh collected the data contained in this survey for AARP through the Market Facts Telenation omnibus survey conducted March 1 through March 3, 2002.  All questions in the survey were asked of those aged 45 and over (n=885), with the exception of questions 10 and 11 which were asked of all age groups (18+) in the omnibus (n=2,000).  The margin of error for this survey is +/- 3.5 percentage points.