Statement of Kim Glaun, Washington Counsel,
Medicare Rights Center, New York, New York

Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means

Hearing on Medicare Payments for Currently Covered Prescription Drugs

October 3, 2002

Good morning, Madame Chairman.  My name is Kim Glaun, and I am the Washington Counsel at the Medicare Rights Center.

The Medicare Rights Center is a national consumer service organization, with offices in New York and Washington, working to ensure that older and disabled Americans get good, affordable health care.   Under a contract with the New York State Office for the Aging, with funding from the Centers for Medicare and Medicaid Services, we operate New York State’s Health Insurance Assistance Program hotline. We also operate a National Medicare HMO Hotline that assists elderly and disabled Americans who are struggling to get needed care and coverage from their HMOs. 

Every year the Medicare Rights Center hears from more than 60,000 Americans with Medicare, who have questions about their Medicare benefits, rights and options and problems accessing critical care.  Their greatest problem by far is securing affordable prescription drugs.  We thank you for inviting MRC to share with the Ways and Means Committee Subcommittee on Health the consumer perspective on the issue of prescription drug costs for people with Medicare.

Ensuring Older and Disabled Americans Get the Prescriptions They Need 

Every day, MRC hears from scores of older and disabled Americans who cannot afford their prescriptions.  Even those fortunate enough to have coverage for some of their medications under Part B or through a Medicare HMO struggle to afford premiums and copays for this coverage.  Medicare’s current policy of covering only a limited number of drugs—and paying 95% of the Average Wholesale Price for these drugs—often forces elderly and disabled individuals with cancer and other serious medical conditions to spend more out of pocket than their small fixed incomes allow and they should be expected to pay.  This policy should be changed.

Take for example, Mrs. Thomas, an amalgam of Medicare Rights Center’s clients.  She is 75 years old and lives in Texas, which, like most states, does not have a state pharmaceutical assistance program.  Like the majority of people with Medicare, Mrs. Thomas suffers from two chronic conditions, congestive heart failure and cancer.  Like the typical person with Medicare, her annual income is about $16,000, too high for her to qualify for Medicaid or other low-income assistance programs.  Like most people with cancer and congestive heart failure, she is on multiple medications. 

The Centers for Medicare and Medicaid Services estimates that out-of-pocket costs for medications and other health care needs relating to congestive heart failure alone can easily cost someone like Mrs. Thomas close to $5,000 a year.  On top of that she would pay about $1,500 a year for Medicare supplemental coverage to fill other gaps in Medicare.  If she cannot afford to pay for this coverage and opts to pay the coinsurance costs herself, she will have to spend even more and is likely to go without critical treatment.  Like many people the Medicare Rights Center hears from, Mrs. Thomas is thinking about buying her drugs from Canada on the Web, a practice that is illegal but that more and more older and disabled Americans are following as a way to get affordable medications.       

Like most older and disabled Americans, Mrs. Thomas needs Medicare to offer a good, affordable prescription drug benefit.  Instead, Medicare only offers her limited coverage for some of her cancer drugs. The current policy of paying 95% of the Average Wholesale Price for these drugs directly harms Mrs. Thomas and millions of other vulnerable older and disabled men and women.  It also needlessly saps money from the Medicare program and taxpayers to the clear benefit of the pharmaceutical industry and certain providers. 

First, the AWP is a price that manufacturers derive using their own criteria and is not defined by any federal law or regulation.[i]  The fact is, as recognized by the U.S. General Accounting Office, the Average Wholesale Price is neither “average” nor “wholesale.”[ii]  It is much higher than what most other American purchasers are paying for these drugs. So long as Medicare pays for drugs based on the average wholesale price—and not on the much lower prices paid by other large purchasers—people with Medicare will often end up paying much higher coinsurance for their covered drugs than they would otherwise be paying. 

Second, these inflated prices for Part B medications drive up the cost of Medicare supplemental insurance, which millions of people with Medicare purchase to fill Medicare’s coverage gaps.  Medigap insurers must pay more in coinsurance for Part B covered prescription drugs than they would be paying if the federal government paid a lower price for these drugs.   Of course, Medigap insurers simply pass these costs on to their policyholders by raising their premiums.  As a result, the data shows that an increasing number of older and disabled Americans with Medicare, people like Mrs. Thomas, can no longer afford these policies.[iii]  

Third, the AWP creates perverse financial incentives that could result in inappropriate prescribing at the expense of people with Medicare’s health and quality of care.[iv]   The difference, or “spread”, between the AWP-based price and the price a physician actually pays for the drugs is essentially profit.  The greater the difference between the Medicare price and actual price, the more profit a physician keeps.[v]  The government should not be perpetuating a system that motivates doctors to prescribe drugs based on their own financial gain rather than the best treatment for the thousands of people with Medicare like Mrs. Thomas.[vi]

Finally, when the federal government overpays for prescription drugs, it drains the Medicare Trust Fund and harms all U.S. taxpayers.[vii]  The federal government negotiates discounted drug prices on behalf of veterans, Department of Defense employees and retirees, and other federal employees and retirees. [viii]  The federal government should assure real discounted prices for Medicare-covered drugs.

In sum, Medicare’s current policy of pegging drug reimbursement under Part B to 95% of an arbitrary AWP subsidizes physicians, suppliers and manufacturers, at the expense of older and disabled Americans and America’s taxpayers.

Helping People with Medicare While Preserving the Medicare Trust Fund

It is due time that Mrs. Thomas and the millions of people in similar financial and health situations be able to afford the medications they need.  It is long past time for Medicare to use its market leverage to lower prescription drug prices for people with Medicare rather than accept the pharmaceutical industries’ pricing structure as a given.  A Medicare policy of paying prices that the pharmaceutical industry charges its most favored customers is both consistent with Medicare’s pricing practices with doctors, hospitals and other providers and suppliers and in the interest of people with Medicare, the common good and the public purse.

Congress must respect the need to pay doctors and hospitals rates that encourage them to continue to serve people with Medicare.  But moving toward a system based on acquisition costs would institute much needed, reasonable reforms and success in lowering both people with Medicare’s cost-sharing and taxpayer expenditures for currently covered drugs.

Conclusion

In conclusion, we urge you to save the Medicare program from wasteful expenditures and help more people with Medicare to get good affordable prescription drugs.  Every dollar the federal government saves through lower prescription drug prices under Medicare Part B is money that can go to covering additional prescription drugs that millions of people with Medicare desperately need.   

I thank the Ways and Means Committee Subcommittee on Health for this opportunity to testify on behalf of older and disabled Americans.

[i] Gencarelli. Dawn M., Average Wholesale Price for Prescription Drugs; Is There a More Appropriate Pricing Mechanism? Issue Brief No. 775, National Health Policy Forum, June 7, 2002, 2, list visited on October 1, 2002 from http://www.nhpf.org/pdfs/8-775+(web).pdf.

[ii] Laura A. Dummit, Medicare Outpatient Drugs: Program Payments Should Better Reflect Market Prices, testimony before the Senate Finance Subcommittee on Health, March 14, 2002 (GAO-02-53IT).  William J. Scanlon, Medicare Part B Drugs: Program Payments Should Reflect Market Price, testimony before the Subcommittee on Health and the Subcommittee on Oversight and Investigations, US House Committee on Energy and Commerce, September 21, 2001, (GAO-01-1142T), US General Accounting Office, Washington, DC, 2, accessed October 1, 2002 at http://www.gao.gov/new.items/d011142t.pdf.

[iii] Pourat, N., T. Rice, G. Kominski, and R.E. Snyder, 200.  “Socioeconomic Differences in Medicare Supplemental Coverage.” Health Affairs 19 (5): 186-96.  The Detroit News, Business, B, August 14, 2002.

[iv] At root, the AWP is a marketing tool, utilized and manipulated by the physicians, suppliers and manufacturers to gain profit. See Rep. Sherrod Brown, Congressional Hearing: Medicare Drug Reimbursement: A Broken System For Patients and Taxpayers,September 21, 2001 Washington, DC, Energy and Commerce Committee- Subcommittee on Oversight and Investigations, last visited on October 1, 2002 at http://www.kaisernetwork.org/health_cast/uploaded_files/ACF121.pdf

[v] Janet Rehnquist, testimony before the Senate Committee on Finance, March 14, 2002 Washington, DC, last visited on October 1, 2002, 3, at http://oig.hhs.gov/testimony/docs/2002/020314fin.pdf.

[vi] Companies and individuals have taken advantage of these perverse incentives.   Recent litigation has highlighted how pharmaceutical companies can manipulate the AWP to increase profits.   Most recently, in October, 2001, TAP Pharmaceuticals agreed to pay almost $900 million to settle a civil and criminal lawsuit brought by the United States and other private and governmental entities. TAP paid substantial criminal and civil fines for allegedly developing and implementing a fraudulent pricing scheme, as well as for marketing misconduct, in connection with their drug Lupron. See U.S. v. Tap Pharmaceuticals Prod., Crim. No. 01-CR-1-354-WGY (D. Mass. December 4, 2001), sentencing memorandum available at http://www.prescriptionaccesslitigation.org/documents.htm (last visited October 1, 2002).   Similarly, Bayer agreed to pay $14 million to settle a lawsuit alleging that they had improperly inflated the AWPs for a number of Bayer drugs, including AIDS and hemophilia drugs. Associated Press, Report: Bayer to Pay $14 Million in Probe of Drug Prices, at http://fyi.cnn.com/2000/health/09/18/bayer.drugs.ap (last visited Oct. 1, 2002).

[vii] Chairman Bilirakis, Congressional Hearing: Medicare Drug Reimbursement: A Broken System For Patients and Taxpayers,September 21, 2001 Washington, DC, Energy and Commerce Committee- Subcommittee on Oversight and Investigations, last visited on October 1, 2002 at http://www.kaisernetwork.org/health_cast/uploaded_files/ACF121.pdf

[viii] Supra note 2, at 2 (“We found that Medicare would have saved $1.9 billion of the $3.7 billion it spent for 24 drugs in 2000 if the drugs were reimbursed at prices available to the VA.  Over $380 million of this savings would directly impact Medicare beneficiaries in the form of reduced coinsurance payments.”)