Press Release Thursday, June 22, 2000

Contact: Gail Shearer or David Butler, 202-462-6262 Consumers Union's Washington, DC Office

Washington, DC - The following is a statement from Gail Shearer, Director, Health Policy Analysis, Washington Office of Consumers Union, publisher of Consumer Reports.

On June 21, 2000, the Ways and Means Committee voted 23-14 to approve H.R. 4680 (Substitute), the Medicare Rx2000 Act. A consensus has emerged across the country that Medicare beneficiaries need access to an affordable prescription drug benefit. H.R. 4680 relies on private insurance industry to offer coverage. With the mark-up completed, and the expectation that the House will consider this bill in the very near future, there are several issues that need public scrutiny and Congressional attention:

· H.R. 4680 relies on the private insurance industry to voluntarily offer prescription drug coverage (with some strict rules prohibiting underwriting and requiring community pricing). How will this work? What will happen if no insurance companies are willing to offer coverage? (This is an important question since the insurance industry has indicated that companies are unlikely to offer this coverage largely due to adverse selection concerns).

· H.R. 4680 outlines a standard benefit and then allows insurers to depart from the standard benefit (if benefits are of equal actuarial value), while also allowing insurers to increase benefits. With the absence of a standard benefit, how will consumers navigate the marketplace? How will they make apples-to-apples comparisons of benefits, as they do today in the standardized medigap market?

· H.R. 4680 subsidizes coverage for the poor, but limits this coverage to the lowest cost policy. It also requires those wishing to qualify for the subsidy to meet both income and assets tests. To what extent will this "welfarization" (and stigmatization) of the Medicare program decrease participation of the target low-income population?

· H.R. 4680 phases out direct subsidies for income levels above 150% of poverty. How will individuals with income just above this cut-off (about $12,525 for a widow) be able to afford prescription drug coverage, when they struggle to pay their Part B premiums, and possibly medigap premiums as well?

· H.R. 4680 puts a new entity in charge of implementing this program, and eliminates accountability of this entity to the Administration. How will the program be held accountable to the public interest, not the special interests of insurance companies and the pharmaceutical industry?

Consumers Union believes that H.R. 4680 fails to assure affordable, comprehensive prescription drug coverage for all Medicare beneficiaries. It lacks public accountability, and assures that there will be future special interest requests from insurers. It is destined to confuse consumers and to lead to a complicated marketplace with incentives for cherry-picking the healthy. It fails to guarantee fair prices for beneficiaries.

Consumers Union, Publisher of Consumer Reports magazine, is an independent nonprofit testing, educational and information organization serving only the consumers. We are a comprehensive source of unbiased advice about products and services, personal finance, health, nutrition and other consumer concerns. Since 1936, our mission has been to test products, inform the public and protect consumers.

On June 15, 2000, Congressman Bill Thomas (R-CA) and several other Members of the House, introduced H.R. 4680, the Medicare Rx2000 Act. On June 21, 2000, the House Ways and Means Committee approved H.R. 4680 (Substitute) by a vote of 23-14. This fact sheet provides some background information on Medicare prescription drugs, summarizes the key elements Consumers Union believes should be included in legislation, and raises concerns about the provisions of H.R. 4680.

Background information

· Seniors pay higher prices for prescription drugs than do people under 65 who have health insurance.

· Prescription drug expenditures vary dramatically across the elderly population, making it difficult if not impossible to design a voluntary system that can avoid splitting the risk pool (dividing the healthy from the sick).

· Prescription drug costs are increasing rapidly, with a growth rate of 15.4 percent in 1998.

· Medicare beneficiaries without prescription drug coverage use fewer prescriptions than people with such coverage: coverage affects drug utilization which in turn affects health.

· Medigap drug coverage is for the most part a very low value, with beneficiaries often paying premiums for the coverage that exceed the maximum value of the coverage.

Principles for Medicare prescription drug bill. While we are very pleased that Congress is seriously considering legislation that addresses the urgent need to provide a prescription drug benefit for Medicare beneficiaries, we believe that:

· Prescription drug coverage should be integrated into the basic Medicare benefits. It should be universal and mandatory, allowing for broad spreading of risks.

· Prescription drug coverage should be standard, with a defined, comprehensive benefit that includes catastrophic coverage to protect those most in need.

· Co-payments (e.g. deductibles and coinsurance) should not present financial hardship on those needing prescription drug.

· Medicare beneficiaries should have access to fairly priced pharmaceuticals.

· The program should be accountable to the public interest, not special interests.

· Costs for subsidies for people of moderate income should be spread broadly across all age groups, and beneficiaries who can afford to pay should pay for their new benefit.

H.R. 4680. While H.R. 4680 does offer some relief for the poor, it falls short of these ideals in many respects. Consumers Union is in the process of reviewing H.R. 4680, and has these preliminary concerns.

· Because of the voluntary nature of the benefit, we are concerned that (despite efforts to limit cherry-picking) insurance companies will seek to insure the healthy, and higher-risk consumers will seek the coverage they need. Because of the underlying variation in risks and the self-selection by consumers, there will be an unstable market and it will be difficult for this system to provide affordable coverage to all who need it. Prices will be higher than they would be if this were structured as a universal program.

· Because of the reliance on private insurers (who have told Congress they would be reluctant to offer coverage as proposed by this bill) there will be uncertainty and instability. In addition, the bill should, but does not, guarantee fair prices and deep discounts that are currently available to people who have private insurance.

· Because insurers are allowed to vary the benefit offered, there will be consumer confusion. This proposal flunks the kitchen table test because consumers will be unable to make apples-to-apples comparisons among the various drug benefits offered. Just as the medigap market varied prior to 1990 standardization, and led to market abuses, this proposal designs a marketplace destined to confuse consumers.

· While the legislation tries to prohibit cherry-picking, we believe that it will take a substantial enforcement effort to prevent insurance companies from following their incentive to increase profits. Because the incentives of insurers to cherry-pick the healthy, insurers' basic incentives will conflict with the intent of the legislation. This inherent conflict (the profit potential from cherry-picking vs. the bill's prohibition) creates an enforcement nightmare.

· Because there will be political pressure on Congress in the future to assure that beneficiaries can find prescription drug coverage, the special interests (both pharmaceutical companies and insurance companies) will exert pressure on Congress to increase pharmaceutical reimbursement levels and subsidies to insurers. This leaves the ultimate control in the hands of the special interests and outside the control of consumers.

· Because subsidies (to pay for catastrophic costs) go to insurance companies (not directly to consumers) there is no assurance that the subsidies will reach those most in need. People with income just above 150% of poverty (who would be ineligible for direct subsidies) are least likely to be able to afford the coverage, so are most likely to simply go without coverage.

· The relief for the poor is less than ideal, since they must choose a low-cost plan and because they must meet certain asset tests (as with the Medicaid program) to qualify for coverage.

In sum, H.R. 4680 fails to assure affordable, comprehensive prescription drug coverage for all Medicare beneficiaries. It lacks public accountability, and assures that there will be future special interest requests from insurers. It is destined to confuse consumers and to lead to a complicated marketplace with incentives for cherry-picking the healthy. It fails to guarantee fair prices for beneficiaries.

Consumers Union, Publisher of Consumer Reports magazine, is an independent nonprofit testing, educational and information organization serving only the consumers. We are a comprehensive source of unbiased advice about products and services, personal finance, health, nutrition and other consumer concerns. Since 1936, our mission has been to test products, inform the public and protect consumers. 

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