Statement to U.S. House of Representatives, Committee on Ways and Means
Hearing on Implementation of the Medicare Drug Benefit
June 14, 2006

Barbara Kennelly, President and CEO
National Committee to Preserve Social Security and Medicare

Mr. Chairman and Members of the Committee:

The National Committee to Preserve Social Security and Medicare represents 4.6 million members and supporters. Our primary mission is the preservation of these two critical programs for seniors, as well as support for other programs that improve our country’s retirement security.

We thank you for holding this important hearing on Medicare Part D—a program that has the potential to affect 43 million of our nation’s seniors and disabled individuals. The National Committee has advocated for adding a prescription drug benefit to Medicare for many years. Since enrollment began last year, we have been carefully listening to the concerns of seniors across the country as they attempt to understand this confusing prescription drug benefit. Today’s hearing provides us with a special opportunity to present the opinions and experiences of our members as they navigate the maze of Medicare Part D. We also appreciate this opportunity to lay out our concerns with the elements of privatization enacted as part of the Medicare Modernization Act that go beyond Part D, and we urge the Committee to hold hearings on these important issues.

The Part D benefit

We look forward to learning more about enrollment in the prescription drug benefit from the Administration witnesses testifying today. According to recent press reports, the Administration has stated that 38.7 million Medicare beneficiaries are now receiving prescription drug coverage. While we have not yet received the official breakdown of prescription drug enrollment, I would like to make a few points about the figures touted by the Administration.

• The Administration figures include millions of beneficiaries who have prescription drug coverage through other sources. The Department of Health and Human Services reported that as of May 7, 2006, 20.7 million beneficiaries were enrolled in a stand-alone prescription drug plan (PDP) or Medicare Advantage prescription drug plan (MA-PD) and the remaining 16.2 million had prescription drug coverage through other sources such as an employer or union plan, Medicaid, Medicare Advantage, or the Department of Veterans Affairs.
• The prescription drug program was not voluntary for millions of beneficiaries who were automatically enrolled into a plan that did not necessarily cover the drugs they take. As of May 7th, 5.9 million dual eligibles were automatically enrolled in a Part D plan. Other beneficiaries were automatically enrolled by their Medicare Advantage plan or by the government because they were eligible for the low-income subsidy.
• Low-income seniors have been particularly slow to enroll in the prescription drug benefit, despite their great need for help in paying for their prescription drugs. One impediment for many has been the asset test, which has resulted in over one-half of applications for the low-income subsidy being rejected. These seniors are not wealthy, but their modest resources, after a lifetime of savings, exceed the extremely low thresholds established by the law. Raising the limit or eliminating the asset test would go a long way toward providing more affordable prescription drug benefits to these seniors.
• The availability of multiple plans dilutes their negotiating power. While a handful of private plans have emerged as clear front-runners in attracting enrollees, none cover more than a fraction of total Medicare beneficiaries. A Medicare-operated prescription drug benefit would have created a larger and diverse risk pool resulting in a more generous, economically efficient, and stable benefit.

Over the past seven months, we have listened to our members as they have struggled to understand this new benefit. We have participated in town hall meetings and held informational workshops across the country. We have also answered the questions and listened to the concerns of countless seniors through our 1-800 telephone line, our website, and our mail operations. Since January 2004, when the Medicare Modernization Act became effective, we have heard from almost 950,000 of our members, who have signed over 1.8 million letters and petitions. Based on what we have learned, we developed a series of recommendations to immediately improve and strengthen the prescription drug benefit and the overall Medicare program:

Improvements to Part D:

• provide a Medicare-operated prescription drug benefit and allow Medicare to negotiate prices;
• lift the lifetime penalty for the remainder of 2006;
• prohibit insurance companies from dropping medications or raising prices while seniors are locked into their plan; and
• repeal the large government subsidies to private plans, using the savings to enhance the Part D benefit.

Provide a Medicare-operated prescription drug benefit in which Medicare utilizes the purchasing power of millions of beneficiaries to negotiate lower prescription drug prices.
The Medicare Modernization Act of 2003 (MMA) does not allow seniors the choice of staying with traditional Medicare for their prescription drug coverage. It also prohibits Medicare from using the strength of its purchasing power to negotiate prices, thus keeping costs low. This despite the federal government’s long history of negotiating significant price discounts on prescription drugs for both veterans and Medicaid beneficiaries. One study by the Congressional Budget Office found that, on average, the Veterans Administration pays only about 42 percent of the Average Wholesale Price (AWP) – otherwise known as the suggested list price – for brand-name drugs. Similarly, the Medicaid Rebate Program, negotiated by the federal government with drug manufacturers, pays only about 51 percent of the AWP for brand-name drugs.

Several studies have shown that private Part D plans cannot deliver the same low prices found in other federally-negotiated programs. One study by Families USA found that the VA negotiated substantially lower prices for 19 of the top 20 drugs prescribed to seniors, compared with private Part D plans. Another study by the Minority staff at the House Government Reform Committee found that the average drug prices offered by the ten leading Part D plans were 84 percent higher than federally negotiated prices (Federal Supply Schedule). A third study by the Prudential Equity Group forecasted that drug companies could receive up to $2 billion in extra profits in 2006 alone because private Part D plans cannot match the low prices that the Medicaid program paid for prescription drugs. Based on this study, a pharmaceutical economics professor at the University of Minnesota has concluded that drug companies could stand to gain $40 billion in extra profits over the next decade unless Medicare is permitted to negotiate lower prices just as the VA does.

Although the drug benefit is still in its early stages, studies such as these indicate the competition envisioned by the proponents of a privatized drug benefit has not resulted in drug prices that are as low as could be achieved through negotiation. The lack of meaningful drug cost containment will allow drug prices to continue growing faster than the economy in future years. This makes it increasingly hard for seniors, many of whom rely on Social Security as their primary source of income, to keep up. According to the new 2006 Trustees Report, the national average Part D premium is expected to reach almost $60 per month by 2015, and the prescription drug deductible will grow from $250 to $475 per year. In addition, CBO has estimated the $5,100 threshold for catastrophic coverage will almost double, to over $9,000, in seven years. By 2020 the premiums alone for Part B and Part D are projected to consume one-half of the average senior’s Social Security check.

Lift the lifetime penalty for the remainder of 2006.

As I stated earlier, over 4 million Medicare beneficiaries are lacking prescription drug coverage. Many of these seniors were overwhelmed with their choices that included dozens of plans with varying benefit structures. Those who tried to research the plans were often greeted with long wait times, busy signals, and misinformation. Seniors should not be punished with a late enrollment penalty that increases their premiums by at least seven percent for the rest of their lives. Congress should recognize the burden it placed on seniors when designing this benefit and pass legislation to eliminate the penalty for the remainder of 2006.

Prohibit insurance companies from dropping medications or raising prices while seniors are locked into their plan.
One of the most common complaints from seniors about Medicare Part D is that a prescription drug plan that can drop medications or raise prices throughout the year. Seniors are unable to respond to these changes because they are “locked-in” to the plan until the next annual enrollment period. We applaud the Administration for alleviating the most egregious effects of the “lock-in” provision by requiring drug companies to continue providing drugs to beneficiaries who are already using the drugs at the time they are dropped from a plan’s formulary, and by prohibiting some types of cost increases from being passed through to enrolled seniors. However, Part D continues to lack a guaranteed benefit, and insurance companies can still drop medications seniors believed would be covered when they enrolled. They can also raise prices even though seniors are locked into the plans for an entire year, and they can raise prices to “locked-in” seniors on drugs that are not subject to flat-dollar co-payments. None of these elements are “beneficiary friendly”.

Repeal the large government subsidies to private plans, and use the savings to enhance benefits.
In addition to the subsidy inherent in a privatized Part D, the Medicare Modernization Act institutionalized and expanded a network of direct subsidies to the private sector in Medicare Part B. These subsidies are designed to compensate for the financial failings of a privatized system and to provide incentives for the private sector to cover a beneficiary population that otherwise would not make sense economically. They take forms that are both visible – such as the $10 billion dollar stabilization fund – and invisible – such as the billions each year in inflated per capita reimbursements and the failure to permanently risk adjust payments to private plans. And they have two interrelated impacts – subsidies break up the risk pool that makes Medicare work, and they ultimately raise costs for seniors.

The lack of a large and diverse risk pool creates a cycle of increased costs, which then triggers more abandonment of traditional Medicare by the healthier, wealthier seniors. Ultimately, the financial stability of the Medicare program itself is undermined. Every person who switches from traditional Medicare to a private plan increases the Medicare program’s overall costs. According to Medicare’s Actuaries, subsidies to private health plans have already shortened the solvency of the Part A trust fund that covers hospital visits, and are expected to continue reducing solvency in the future. In addition, all beneficiaries, whether they enroll in a private plan or not, subsidize payments to private companies by paying higher Part B premiums. In 2006, seniors experienced the second largest Part B premium increase in dollar terms in the history of the Medicare program. According to CMS Actuaries, almost one-quarter of this increase was due to excessive payments to private plans.

Estimates vary, but it is clear eliminating these subsidies will save Medicare billions of dollars which could be used to enhance the Part D benefit. One specific enhancement we strongly recommend is to close the coverage gap, also known as the “donut hole”. Few seniors are even aware their benefit includes such a gap, yet about 80% of drug plans include one. Because underlying drug prices have remained high, millions of these seniors will be unable to afford the full cost of their prescriptions while in the ‘donut hole’, and therefore will never reach the threshold for catastrophic coverage.

Beyond Part D: The privatization of Medicare

The Medicare Modernization Act (MMA) is not only a mechanism for enacting a drug program that provides considerable financial benefit to the drug and insurance industries. For many, offering seniors prescription drug coverage for the first time was the “sweetener” intended to mask the taste of the medicine of privatization. As it has turned out, the drug benefit itself has become an increasingly bitter pill to many seniors. But for the designers of the MMA, it was conceived as a way to smooth the passage of massive long-term changes leading to the privatization of the Medicare program – a goal that the debate on Social Security shows us might not have been supported by the American public had it been standing alone. This was done despite the success and popularity of the traditional fee-for-service Medicare program, and despite the failure of past privatization efforts such as Medicare+Choice.

The National Committee believes that privatizing Medicare is just as likely to ultimately destroy the health care safety net for seniors as privatizing Social Security is to dismantle the foundation of retirees’ income security. Through much hard work and education, groups such as ours were able to temporarily halt the march of Social Security privatization last year. Unfortunately, we were not similarly successful with Medicare, so our efforts must be concentrated on reversing the most egregious provisions of the Medicare Modernization Act.

In addition to eliminating the subsidies for private companies mentioned above, we urge Congress to repeal the following three provisions in the law, which we believe are especially harmful to the future of the traditional Medicare program:

• the new 45% limit on federal contributions to the program,
• the privatization demonstration project which begins in less than four years; and
• means-testing the Part B premium.

Repeal the limit on federal contribution.
The Medicare Modernization Act for the first time imposes a cap on the amount of general revenue that is paid into Medicare. Once the Actuaries project two successive years in which the federal contribution will exceed an arbitrary 45% threshold, it sets in motion a process that will inevitably result in significant program cuts. In 2006, the Actuaries predicted the first of these years inside the seven year projection window, in large part as a result of the creation of the new Part D benefit. We fully expect the second “trigger” to be reached in their 2007 report, particularly since the lack of meaningful cost containment in the drug program will inevitably result in increased costs to both seniors and the federal government.

No public debate was ever held on what level of federal revenue contribution is appropriate, and most seniors are unaware the provision even exists. Although not as dramatic as a literal cap, this provision will clearly make it easier for those who oppose the Medicare program to shrink it dramatically.

Prevent the privatization project from taking effect.
The National Committee believes Congress should prevent the “comparative cost adjustment demonstration project”, also known as “premium support”, from taking effect in 2010. The demonstration project would require traditional fee-for-service Medicare to compete, based on cost, with subsidized private plans in certain areas. Seniors will receive the equivalent of a voucher in an amount reflecting an average of the private plan and government costs for their region. If they can find a less expensive plan, they can pocket a portion of the savings from their voucher-like payment. If their medical needs are high, they will pay out-of-pocket for any costs beyond their allocation. As the price for participating in this process, seniors will need to give up their traditional fee-for-service coverage and go into managed care instead. Many seniors will decide not to make the switch, especially those older and sicker beneficiaries who have long-standing doctors who know their medical histories by heart. As the risk pool shrinks, their costs will rise.

As part of this process, seniors will also lose any kind of consistency in premiums. Before the MMA was passed, Medicare’s Actuaries did an analysis of the impact such a system would have on Part B premiums. Their work showed dramatically different premium amounts based on where a senior happened to reside – with wide differences in costs even for seniors living in neighboring counties. Confusion, complexity and uncertainty are unavoidable, and the damage the upheaval will create to the Medicare program could well be irreversible. This demonstration of bad health policy must be stopped before it has a chance to further undermine Medicare.

Eliminate the means-testing of the Part B premium.
Beginning on January 1, 2007, Medicare Part B premiums will be linked to incomes for the very first time. When fully phased-in, higher-income seniors will be paying premiums that are double or triple the amount of the standard premium everyone else will be paying. These seniors have already paid a greater share of Medicare’s cost compared to low and middle-income seniors by the time they retire, either through higher payroll taxes or through the income tax system. After they retire, they are also subject to higher income taxes on their Social Security benefits, which are used to strengthen Medicare’s Hospital Insurance trust fund.

At some point, the economics simply become unsustainable, and individuals subject to higher Medicare Part B premiums will leave the program for the private sector. Because wealthier seniors also tend to be healthier, that results in an erosion of the risk pool, and increased costs for those left in traditional Medicare.

More importantly, however, it is likely that policymakers will use means-testing as a way to force middle-income beneficiaries to pay larger Part B premiums in the future. Currently, the thresholds established by the legislation are set at such a high-income level that they do not save the program a significant amount of money. The President has already submitted a proposal in his FY 2007 budget that would remove the inflation-adjustment for the income thresholds—meaning that over time more and more middle-income seniors would be subject to means-testing. Further “tinkering” which impacts these middle-income seniors is almost inevitable.

In conclusion, we urge Congress to revisit the MMA before this year’s adjournment and implement our recommendations to improve and strengthen the prescription drug benefit and the overall Medicare program. Medicare has worked for over 40 years because of its large risk pool made up of most seniors and many disabled Americans and because it is a government-operated program. Privatizing Medicare will not improve it; rather it will destroy the only universal, affordable health care system that works for seniors.

Thank you, Mr. Chairman.

The National Committee is a nonprofit, nonpartisan organization that acts in the interests of its membership through advocacy, education, services, grassroots efforts and the leadership of the board of directors and professional staff. The work of the National Committee is directed toward developing a secure retirement for all Americans.