Some Successful Models Ignored as Congress Works on Drug Bill

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Some Successful Models Ignored as Congress Works on Drug Bill

By Robert Pear and Walt Bogdanich, The New York Times

September 4, 2003

By most measures, the Department of Veterans Affairs has solved the puzzle of making prescription drugs affordable for at least one big group of Americans without wrecking the federal budget.

Wielding its power as one of the largest purchasers of medications in the United States, the V.A. has made it possible for millions of veterans to pay just $7 for up to a 30-day prescription. Thousands are signing up for the program every month.

Yet for all its apparent success, lawmakers have disregarded the V.A. model — and others like it that use the government's immense power to negotiate lower prices — as they try to give older Americans relief from rising drug costs while reshaping how the elderly get medical services.

Instead, a Congress deeply divided by ideology has given birth to legislation that would add prescription drug coverage to Medicare, but that many experts say would fall short of meeting the needs of the elderly. The benefits, costing $400 billion over 10 years, are complex and limited, and the legislation relies in part on cost control mechanisms that are untested or unproven.

In fact, Congress would exempt the drug industry from the kind of cost controls that are in place for virtually every other major provider of Medicare services.

"The legislation pending in Congress does more to deform than to reform Medicare," said Dr. Paul M. Ellwood, a noted health policy analyst who was an early proponent of managed care. "Instead of creating a system of readily understandable choices based on cost and quality, Congress is writing legislation that will increase the complexity of Medicare, so it will be more difficult for seniors to navigate."

The effort to forge a final deal on Capitol Hill, blending separate House and Senate measures, was high on the agenda as Congress returned to work this week. Lobbyists and health policy experts say the likelihood that a comprehensive drug bill will become law this year seems no better than 50-50. But Thomas A. Scully, administrator of the federal Centers for Medicare and Medicaid Services, said yesterday that he was "95 percent sure we will get a Medicare bill out of Congress."

Politically, the legislation is a marriage of convenience, combining drug benefits, long sought by Democrats, with a Republican approach to administering the benefits, through private health plans and insurance companies. To secure votes, the Senate bill was festooned with provisions aiding various interest groups. There is language that would, for examples, aid chiropractors; marriage and family therapists; doctors in Alaska; hospitals in Iredell County, N.C.; operators of air ambulance services; and many other groups.

The need for bipartisan support "led to a series of compromises that resulted in a hodgepodge of a bill," said Senator James M. Inhofe, Republican of Oklahoma, who opposed the Senate bill.

Michael Valentino, a manager of the V.A.'s drug benefit program, praised Congress for trying to help Medicare patients buy prescription drugs. But he added that the coverage could be expanded if Medicare took full advantage of its purchasing power.

John C. Rother, policy director for AARP, the lobbying group for older Americans, said the legislation was a "real godsend" for people with low incomes or high drug expenses.

"But for many others," he said, "the benefits will be seen as inadequate."

Premiums and drug benefits could vary from plan to plan, state to state and year to year. The Senate and House bills both establish a standard drug benefit, with substantial coverage upfront and catastrophic coverage for high costs. But beneficiaries would have to pay all drug costs in the middle, until their out-of-pocket costs reached a certain level — $3,700 a year under the Senate bill and $3,500 under the House bill.

Robert D. Reischauer, former director of the Congressional Budget Office, said the gap in coverage "defies rational policy analysis" and was not found in commercial insurance. Congress engineered the gap to keep the drug plan's cost under the $400 billion limit.

`Political Judgment'

Drug companies say they support covering prescription drugs under Medicare. But in the last few years, they have invested several hundred million dollars in campaign contributions, lobbying and advertising to head off price controls.

The legislation "reflects a political judgment that the pharmaceutical industry" would block "price controls or any arrangement that used the concentrated purchasing power of the government to buy prescription drugs," said Paul B. Ginsburg, president of the Center for Studying Health System Change, a private research institute.

The V.A. plan, by contrast, owes its relative success to its buying power — and a willingness to use it. Its doctors and pharmacists analyze research to establish a list of preferred drugs for various conditions. The V.A. obtains discounts through bulk purchasing arrangements — using generic drugs where possible — and competitive bidding.

"We are so far ahead of anybody else, it's almost ridiculous," Mr. Valentino said. In 2000, the National Academy of Sciences found that the V.A.'s methods had achieved nearly $100 million in savings over the previous two years.

But Congress decided not to adopt the V.A.'s approach; in fact, it was not seriously considered. Lawmakers also passed up other alternatives, including vouchers for the purchase of health insurance and proposals to assist only people with low incomes.

Representative Michael Bilirakis, the Florida Republican who is chairman of the House Energy and Commerce Subcommittee on Health, said that if Medicare pooled its purchasing power, it would amount to "a form of price controls."

"That's not America," Mr. Bilirakis said. "Many of my constituents would feel that price controls are a great thing. But ultimately some of us have to be responsible."

The political imperative that seems to have produced today's fragile consensus stems from complaints that every lawmaker has heard from constituents: prescription drugs cost too much.

At Medicare's inception in 1965, policy makers chose not to cover outpatient drugs, because medicines now so indispensable to treating disease either did not exist or were relatively inexpensive.

Instead, Medicare focused on big-ticket items like hospital care and doctors' services. For years, Medicare mostly paid whatever bills health care providers submitted, but by the 1980's Congress decided it needed to restrain rising costs. In subsequent years, Medicare prospectively set limits on what it paid major health care providers, including hospitals, doctors, skilled nursing homes and home health agencies.

The controls have never been popular with the health care industry.

"In Medicare, the tendency is to set prices too low," said Dr. Donald J. Palmisano, president of the American Medical Association. Indeed, Carmela S. Coyle, senior vice president of the American Hospital Association, said 67 percent of hospitals lose money on Medicare.

By and large, however, the measures have managed to slow the growth of Medicare costs, say many health policy experts, including Bruce C. Vladeck and Nancy-Ann DeParle, who ran Medicare under President Bill Clinton. Drug costs, however, have skyrocketed, and while most of the elderly get some help from retiree health benefits, Medicaid or state programs, at least one-fourth of Medicare beneficiaries have no drug coverage.

Under the bills passed this year, the government would subsidize drug coverage provided to Medicare beneficiaries by private insurers and health plans. They would bargain with drug companies to secure discounts and rebates, a task likely to be delegated to pharmaceutical benefit managers, or P.B.M.'s, the companies that already perform the service for many employers. Both bills stipulate that Medicare officials cannot "interfere in any way" in those negotiations.

For President Bush and Republicans in Congress, the concept makes sense: let the marketplace set the prices, rather than government. For years, lawmakers have found fault with Medicare's arcane and voluminous regulations. Congress has frequently intervened to tweak the formulas, taking money from some providers while giving more to others — often to those with the most persuasive lobbyists.

That, in turn, contributes to anomalies in medical care, because doctors have financial incentives to perform certain services and not others. Mr. Scully, the Medicare administrator, said such anomalies were inevitable because Medicare was "a big dumb price-fixer."

Still, Medicare has been a boon to the elderly and their children. Surveys show that beneficiaries are overwhelmingly satisfied with their care. Before Medicare, only 56 percent of the elderly had hospital insurance; the program has contributed to an increase in life expectancy and a sharp reduction in poverty among the elderly.

Moreover, some studies show Medicare has done better at controlling medical costs than private health insurance. Cristina Boccuti, a researcher at the Urban Institute, and Marilyn Moon, a former public trustee of the Medicare program, said Medicare spending grew more slowly than private health insurance costs from 1970 to 2000. Republicans say such comparisons are misleading and contend that Medicare's cost controls have slowed access to new treatments and technology.

Negotiated Discounts

But that does not seem to be a problem for the V.A. The study by the National Academy of Sciences found that its approach had "meaningfully reduced drug expenditures without demonstrable adverse effects on quality."

Mr. Valentino said: "When we make our recommendations, it's not because Doctor A, in his or her opinion, believes it is the best drug. It is because the evidence says it's the best drug." Echoing the criticisms of government investigators, he added that P.B.M.'s, by contrast, sometimes make deals favoring expensive drugs for their own financial benefit.

Under the House and Senate bills, Medicare beneficiaries would have access to drug discounts negotiated on their behalf by private insurers and P.B.M.'s. Supporters of the legislation say these discounts could reduce retail drug prices by 20 percent. But Congress consciously decided to disperse Medicare's purchasing power. It did not want Medicare to establish a uniform nationwide list of preferred drugs or a price list for those drugs — mechanisms that the drug industry opposes.

"Price controls cause artificially low prices," said Jeffrey L. Trewhitt, a spokesman for the Pharmaceutical Research and Manufacturers of America. And low prices for a government program, he added, would reduce the money available for researching new drugs and could prompt drug makers to seek higher prices from patients with private insurance.

Critics of the drug industry dispute such arguments — and say that they obscure the obvious.

"The obvious is that if you control prices, you pay less," said Mr. Vladeck, the former Medicare administrator. "There are some problems with it, and not all price controls work as well as others. But the pharmaceutical industry does have enough political juice to prevent any reasonable price controls."

The idea of giving people a choice between traditional Medicare and private health plans has deep roots.

"We must promote diversity, choice and healthy competition in American medicine if we are to escape from the grip of spiraling costs," the Nixon administration said in 1970, in words similar to those of President Bush in 2003.

In 1978, Alain C. Enthoven, a Stanford University economist, called for regulated competition among private health plans. Medicare, he said, would subsidize premiums, and the most efficient health plans would pass on their savings to consumers, so patients would have a financial incentive to enroll.

Prompted by such thinking, the government offered new private alternatives to the traditional Medicare program in the 1980's, and Congress encouraged the development of health maintenance organizations. Enrollment grew, in part because many H.M.O.'s offered drug benefits not available in traditional Medicare.

Medicare beneficiaries generally praised the care they received in H.M.O.'s, but the plans did not control costs as their proponents had hoped. Many H.M.O's began reducing some benefits, including drug coverage.

They also pressed Congress for more money, saying that their costs were rising 10 percent a year — five times the increase in payments from Medicare. Unable to persuade Congress to close the gap, many H.M.O.'s abandoned Medicare or curtailed their participation.

That track record has heightened critics' skepticism about the current legislation.

"The myth of the market," said Lynn M. Etheredge, who worked at the White House Office of Management and Budget from 1972 to 1982, "has a powerful sway over people's minds, despite evidence that it is not working in the Medicare program."

The Congressional Budget Office estimates that under the legislation, many private plans will cost slightly more than traditional Medicare. Moreover, there is widespread doubt that insurers — who do not now sell stand-alone drug insurance — will begin to do so.

Even Mr. Scully concedes that such drug coverage "does not exist in nature" and would probably not work in practice. The elderly are heavy users of prescription drugs, so few insurers are eager to write coverage for their drug costs alone, separate from their other medical expenses.

"It would be like providing insurance for haircuts," Charles N. Kahn III said several years ago, when he was president of the Health Insurance Association of America.

Limits of Coverage

Even if President Bush signs a Medicare drug bill in the coming year, it will not be the last word.

Health policy experts say that costs may well grow faster than the official projections suggest. That would increase pressure on Congress to hold down drug costs, just as lawmakers continually try to slow the growth of Medicare payments to hospitals.

At the same time, when Medicare beneficiaries realize the limits of the new drug coverage, they can be expected to lobby for more generous benefits. In supporting the Senate bill, Senator Edward M. Kennedy, Democrat of Massachusetts, made clear that it was only a down payment, a foundation for more comprehensive drug benefits.

Ms. DeParle predicts that the legislation will produce a huge demand for drugs, and she is far from certain that competition will do much to control costs. "It is pretty much theory, and that is what worries me about it," she said. The Congressional Budget Office estimates that per capita drug spending for the Medicare population will increase about 10 percent a year over the next decade.

Critics of the legislation doubt its cost can be kept to the $400 billion budgeted by Congress. "Utilization will go up dramatically, and costs could explode," said Senator Don Nickles, Republican of Oklahoma.

For now, however, politicians have chosen to favor drug companies over Medicare beneficiaries, said Prof. Uwe E. Reinhardt, a health care economist at Princeton University.

"On one hand, there is the taxpayer and, in fact, patients who would benefit from having costs controlled," Dr. Reinhardt said. "But on the other hand, those people do not finance the campaigns of these legislators."

Ms. Coyle of the hospital association declined to address the question of why her industry, but not the pharmaceutical industry, had been subject to price controls. Her group's biggest concern about the legislation, she said, is that "we are not addressing the larger problem: a health care system that is fundamentally broken." The nation, she said, wants the best care for everyone, but needs to decide if it is willing to bear the cost.

So who would be the big winners if the legislation is signed into law?

"The short-run political winner is George Bush, because this law will not be understood by anyone," Dr. Reinhardt said. "It is so complex. But he can go in 2004 and say, `Look, for 30 years you tried to get a drug benefit — I got you one.' "

And, he added: "The elderly will benefit, too, relative to nothing. Who loses? Obviously the people who pay for it."