Statement of Barbara B. Kennelly, President and CEO
National Committee to Preserve Social Security and Medicare

 U. S. House of Representatives
Committee on Ways and Means, Subcommittee on Health
Hearing on Beneficiary Protections in Medicare Part D

June 21, 2007

Mr. Chairman and Members of the Committee:

The National Committee to Preserve Social Security and Medicare represents 4 million members and supporters. As our name suggests, 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 advocated for adding a prescription drug benefit to Medicare for many years. We shared many seniors' expectations that a drug benefit would take the form of a simple expansion of the traditional Medicare program. Providing prescription drug coverage through traditional Medicare would have given beneficiaries a simple, standardized benefit, and allowed the federal government to leverage the purchasing power of millions of beneficiaries to lower drug prices.

As you know, this benefit structure is not what seniors received. The current Medicare Part D benefit is complicated, confusing and fragmented, and whatever competition exists between private plans has not been sufficient to slow the continued upward spiral of prescription drug prices. Because the drug benefit is provided entirely through private plans, it also represents the first major step toward the full privatization of the Medicare program.

While the National Committee still believes that a drug benefit provided entirely through traditional Medicare would have represented a better program design than the privatized system that exists today, we understand the difficulties of putting that genie back in the bottle. However, our members do not understand why traditional Medicare is the only option not available to them among the myriad of private plan choices they must navigate every year to receive prescription drug coverage. We continue to urge Congress to provide seniors the choice of receiving their prescription drug coverage through traditional Medicare.

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 because we believe, over the long term, they will be responsible for the destruction of Medicare as we know it.

The Part D benefit

Since the Medicare Modernization Act was signed into law, we have listened to our members as they have struggled to understand Medicare Part D. 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 over one million of our members, who have signed over two 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;
• repeal or improve the asset test for low-income beneficiaries;
• prohibit insurance companies from dropping medications or raising prices while seniors are locked into their plan;
• lessen the hardship of the donut hole; and
• simplify or standardize plan offerings.

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. Repeated studies have shown programs that provide similar price negotiation - such as the prescription drug program run by the Veterans Administration or the Medicaid Rebate Program - pay only about one-half of the Average Wholesale Price (AWP) - otherwise known as the suggested list price - for brand-name drugs.

It is becoming increasingly clear that 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 a traditional Medicare option with the government negotiating prices. 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 2007 Trustees Report, the national average Part D premium is expected to reach almost $60 per month by 2016, and the prescription drug deductible will grow from $265 to $530 per year. In addition, they estimated the $5,451.25 threshold for catastrophic coverage will almost double, to $10,837.50, in nine years. By 2020 the out-of-pocket expenses for Part B and Part D are projected to consume one-half of the average senior's Social Security check.

Repeal or improve the asset test for low-income beneficiaries.

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.

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".

Lessen the hardship of the donut hole.

When the Medicare Modernization Act of 2003 (MMA) established the Medicare Part D prescription drug benefit, it defined a standard benefit that includes a gap in coverage as a way of limiting federal spending. When beneficiaries fall into this so-called donut hole, they are responsible for the full cost of their prescription drugs, plus they must continue paying their Part D premiums even though they are not receiving benefits. In 2007, Part D's standard plan has a donut hole of $3,051.25. Until Congress can find a way to fill this large coverage gap, the National Committee supports two interim steps to help Medicare beneficiaries. First, premiums should be waived for any month a senior is in the doughnut hole and not receiving Medicare prescription drug coverage. And second, all prescription drug expenses incurred in the doughnut hole should count toward the amount needed to reach catastrophic coverage.

Simplify or standardize plan offerings.

Selecting the right plan is a complicated ordeal for many seniors, and this complexity may well have resulted in many beneficiaries being enrolled in plans that do not suit their needs. In most areas of the country, beneficiaries are confronted with dozens of plan options, many of which have confusing or overlapping benefit structures. Because of this, numerous seniors have gravitated toward plans with familiar names or well-known marketing interrelationships, whether or not those plans represented the best value for them. And once beneficiaries selected a plan the first year, few bothered to go through the complicated re-evaluation process for 2007 to make sure the original plan choice still suited their needs. We believe some form of plan standardization or design simplification is essential to minimize this problem in the future.

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 was a bitter pill for 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 have been able to temporarily halt the march of Social Security privatization. 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 making improvements to Medicare Part D, we urge Congress to repeal the following four provisions in the law, which we believe are especially harmful to the future of the traditional Medicare program:

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

Eliminate the large government subsidies to private plans.
Private health plans, now called Medicare Advantage plans, were first allowed to participate in Medicare because some policymakers believed they could provide better services at a lower cost than traditional Medicare. In fact, because it was anticipated private plans would be so efficient, the government initially paid them 5 percent less for each beneficiary they enrolled than it would have cost to cover that same beneficiary in traditional Medicare.

In 25 years time, the powerful health insurance industry lobby has been extremely successful in turning this rationalization on its head. Instead of paying private plans less to reflect the efficiencies they argued would save the government money, Medicare now pays them significantly more than it would cost to cover the same beneficiaries through traditional fee-for-service Medicare. In fact, today the government pays an average of 12 percent more to cover a beneficiary in a private Medicare Advantage plan than it would cost to cover that same beneficiary in traditional Medicare. And some types of private plans can receive much larger payments. For example, Private Fee-For-Service plans are paid about 19 percent more than traditional Medicare and plans in some localities are paid 50 percent more than traditional Medicare. In simple dollar terms, Medicare pays about $1,000 more a year to cover a beneficiary in a private plan than it would cost to provide care to that same beneficiary under traditional Medicare.

All beneficiaries, whether they enroll in a private plan or not, subsidize payments to private companies by paying higher Part B premiums. Today, Part B Premiums are almost $50 per year higher per couple than they should be because of overpayments to private plans. This number will clearly continue to grow exponentially in future years. In addition, the Medicare Actuaries estimated that eliminating these overpayments would add two years of solvency to Medicare's hospital insurance trust fund.

The National Committee believes that Medicare should equalize payments between the traditional program and private plans. We support Medicare Payment Advisory Commission's (MedPAC) recommendation of financial neutrality between payments in the traditional fee-for-service program and payments to private plans. Equalized payments would level the playing field and remove private plans' unfair advantage in attracting beneficiaries. Continuing to overpay private insurance companies to provide services that could be more affordably and efficiently provided by the traditional Medicare program is unconscionable. According to the Congressional Budget Office (CBO), leveling the playing field could save taxpayers $149 billion over the next ten years. Congress should remove these unwarranted subsidies and use a portion of the savings to improve benefits for low-income Medicare beneficiaries.

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 2007, the Actuaries predicted the second of these years inside the seven year projection window. Based on that projection, the President is required to submit legislation next February that will be considered by Congress on expedited basis with minimal opportunity for debate or amendment. Only proposals which bring federal contributions below the cap are subject to the expedited process - legislation to change or eliminate the cap itself, or to raise revenues to bolster the Medicare program, would be required to go through the normal legislative process.

The 45 percent threshold itself is a completely arbitrary limit set in the MMA without hearing or public debate. While proponents have labeled it a "cost containment" provision, in fact the 45 percent threshold does nothing to reduce the overall cost of the Medicare program, only the federal government's obligation to shoulder a portion of that cost through general revenues. The fact that more than 45 percent of Medicare financing may come from general revenues poses no more of a problem in itself than the fact that 100 percent of the financing for defense, veterans' benefits, education or most other federal programs comes from general revenues. The problem facing Medicare is the cost of health care, not how the cost is allocated between revenue sources, yet the 45 percent threshold provides no insight into the program's sustainability and is completely unrelated to solvency.

Limiting the federal government's contribution to the Medicare program ignores Medicare's financing structure, which was designed to rely on general revenues to finance about 75 percent of Part B and Part D. This structure allows the revenue raised by income taxes to shoulder a higher portion of responsibility for Medicare's funding, placing the burden on a revenue source which is relatively progressive and is intended to tax all income. If general revenue contributions are limited, the burden would shift to beneficiaries, who are typically retirees on fixed incomes or the disabled, or increased payroll taxes, which only tax wages and fall disproportionately upon those with lower incomes. Neither of these policy considerations is reflected in the funding limit.

Measuring Medicare's financial health solely by considering the percentage of general revenues contributed to the program produces a meaningless number, which will nonetheless be used as a catalyst for policy decisions that could have a devastating effect on the health care of seniors and people with disabilities. For example, the 45 percent limit has been triggered in part because more beneficiaries are being treated in outpatient settings than in hospitals. While this shift may disproportionately increase costs for Medicare Part B, where the federal government picks up about 75 percent of the cost, and therefore accelerate the date at which the cap will be reached, it is generally considered a positive development in health care.

Medicare faces fiscal challenges in the future, but they are not unique to the Medicare program - they reflect the same pressures driving health care costs for those under age 65. Congress should repeal the 45 percent trigger and focus its attention instead on making healthcare affordable for all Americans.

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 were 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 both his most recent budgets 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 Medicare Modernization Act of 2003 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.