President and CEO, Barbara B. Kennelly's Statement before the House Committee on Ways and Means, Subcommittee on Health

Hearing on Implementation of the Medicare Drug Benefit
May 4, 2006

Madam Chairman and Members of the Subcommittee:

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, and support for other programs that improve our country's retirement security.

The National Committee has advocated for adding a prescription drug benefit to Medicare for many years.  We agree with President Bush and Congress that modern medical practice has evolved to include a robust use of prescription drugs, which keeps seniors out of much costlier hospitals and nursing homes and results in a higher quality of life.  However, while we agree with Medicare coverage of prescription drugs, we heartily disagree with the method the President chose to implement this form of modernization.  After listening to our members over the years, we have concluded that the simplest and least expensive method of adding prescription drug coverage to Medicare would be to simply expand Part B to include prescription drugs – much as Medicare has been expanded over the years to cover many procedures as they were adopted into medical practice.

Since January 2004, when the Medicare Modernization Act (MMA) began to phase in, we have heard from over 650,000 of our members, who have signed over 1.8 million letters and petitions asking Congress to overhaul the legislation.  They are frustrated, confused and angry about both the privatized Part D drug plan and about the impact of the MMA on the rest of the Medicare program.  What they want and need is a traditional Medicare prescription drug plan which would provide them simple, cost-effective coverage and affordable drugs.

What they got instead is a privatized prescription drug plan so confusing and complex that millions of seniors have not enrolled.  A prescription drug plan which actually prohibits Medicare from offering a drug benefit directly and negotiating for the lowest prices possible for seniors.  We applaud the Administration for alleviating the most egregious effects of the “lock-in” provision by preventing drug companies from dropping or changing the cost of a drug for beneficiaries currently using the drug.  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.  What seniors got when the Medicare Modernization Act was signed into law was a prescription drug plan designed by and for the insurance and drug industries, not this nation's seniors. 

Despite how much the Administration attempts to pump up its enrollment numbers by counting millions of seniors who have not actually enrolled in Part D (e.g. those who already have better coverage from another source), or who have been automatically enrolled, the new program is clearly a case study in what can happen when a privatized program is imposed upon seniors.  While this is not the bill we would have written, the National Committee has always accepted the view that some seniors would benefit from this program, despite its many flaws.  For this reason, we have made intensive efforts to inform seniors of the benefit, educate them on its intricacies, and provide materials designed to guide them through the decision-making process.  We have done this through repeated mailings to our members, public meetings, the creation of a Frequently Asked Questions booklet for distribution, and through other materials both in print and on our website.  Despite these efforts, however, only about one-half of our members who have responded to our surveys are enrolling in Part D. 

The reasons for this are varied.  Some seniors already have better coverage through previous employers.  Others are still confused about the benefit, unsure which plan best suits their needs.  They and are not receiving the information they need from either the plan sponsors or from CMS.  The GAO report released yesterday offers a litany of enrollment problems, including long wait-times at phone centers and inaccurate information from both CMS and the plan information lines.  We have heard similar horror stories from our members as well. 

But a significant number of seniors have done the math and realize Part D is very expensive and inadequate.  They simply cannot afford to spend the extra money it would cost them to enroll.  Proponents of Part D are working particularly hard to pressure these low-utilization seniors into the program, whether or not it makes sense for them financially, because they are an essential part of the insurance risk pool.   

That is clearly the primary reason the Administration has, to date, refused to extend the Part D enrollment date beyond May 15 th .  Millions of seniors will either be pressured into enrolling in a program that does not suit their needs or will face late enrollment penalties for the rest of their lives, simply because proponents persist in promoting a privatized drug benefit.  Instead of acknowledging that these seniors may be justified in refusing to participate in a program that is too expensive and complex, the Administration appears determined to pressure them into enrolling with the threat of lifelong penalties. 

Despite how inadequate the drug benefit appears to many seniors today, this is its high water mark, because coverage will become more expensive with time.  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.   

The National Committee believes these problems can be avoided by overhauling the program to allow seniors the choice of staying with traditional Medicare for their prescription drug coverage.  Relying on the strength of Medicare beneficiaries' purchasing power to directly negotiate prices would keep costs low.  The federal government has a 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.   

But the MMA is not only a mechanism for enacting a drug program that provides considerable financial benefit to the drug and insurance industries.  In passing the MMA, the President and Congressional majority used the lure of prescription drug coverage as a smokescreen for passing legislation intended to ultimately privatize all of Medicare – a goal that the debate on Social Security shows us might not have been supported by the American public had it been proposed explicitly.  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.  Not only is the prescription drug benefit delivered only by private stand-alone prescription drug plans or private Medicare Advantage plans, but the law threatens traditional Medicare by providing numerous subsidies that favor private companies over the traditional program and by establishing a “premium support” demonstration that places the two in head-to-head competition over price in a few short years. 

The subsidies built into the MMA create an uneven playing field that will siphon away healthier and wealthier beneficiaries into private plans, while our country's most vulnerable seniors – those who are among the oldest, poorest and sickest – are left in the traditional Medicare program, where costs will keep rising.  Although proponents of privatization have argued that private companies can provide health services to seniors less expensively than Medicare, actual experience with private plans in Medicare has been unequivocal – private plans do not reduce Medicare's cost, they increase it .  And these extra costs have been confirmed by the government's own estimates, as Medicare's Actuary has estimated that overpayments to private plans under the MMA would total $46 billion in the first decade alone.

Subsidizing private plans exacerbates the fracturing of the insurance risk pool that has been essential to the success of the Medicare program.  It creates a downward spiral as increased costs – including the costs of the subsidies themselves – are spread over a pool of seniors that continues to shrink as younger, healthier beneficiaries are enticed into the more profitable managed care plans.  Because the subsidies are mostly hidden from view, many seniors are unaware that they are helping pay for the process that is undermining the only universal, affordable health insurance they can rely upon throughout their retirement.

The National Committee strongly believes that beneficiaries who choose to remain in the traditional Medicare program should not be asked to subsidize the inflated costs of private Medicare plans, nor should they unknowingly be required to contribute to the dissolution of the Medicare program.  We also strongly believe that traditional Medicare can outperform the private sector when allowed to compete on a level playing field, using the purchasing power of America 's 43 million seniors to lower costs and to create broad risk pools that spread the insurance burden among all beneficiaries.  Savings achieved through a strengthened traditional Medicare program should be used to reduce costs to participants or further enhance benefits.

We urge Congress to revisit the Medicare Modernization Act before this year's adjournment and implement the following four changes: modify Part D so seniors can receive their prescription drug coverage directly from Medicare and require Medicare to negotiate the lowest possible drug prices; eliminate the lifetime penalty for seniors until this confusing plan is overhauled; eliminate the “lock-in” by prohibiting insurance companies from dropping medications or raising prices while seniors are locked into their plan; and repeal the government subsidies to private plans, using the savings to improve the drug benefit for seniors. 

Thank you, Madam 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.