MEDICARE Rx DRUG COVERAGE COULD COST SEVERAL BILLION DOLLARS, WITH "OUTSIDE" FIGURE OF $20 BIL., HCFA’s VLADECK ADVISES REP. STARK SUBCOMMITTEE

Establishing a Medicare prescription drug benefit could cost "several" billion dollars, perhaps as much as $20 bil., Health Care Financing Administration chief Bruce Vladeck told the House Ways & Means/Health Subcommittee June 22 in his first congressional appearance since his confirmation as HCFA administrator. Vladeck was reluctant to estimate the cost of establishing a Medicare outpatient prescription benefit, citing the impact of variations in benefit design, patient premium and deductible levels, and the degree to which Medicare would replace beneficiaries' drug coverage now purchased from private insurers. However, when pressed by Rep. McCrery (R-La.) to provide cost estimates, Vladeck replied: "The numbers that have been talked about in terms of the Medicare drug benefit range anywhere from several billion dollars to probably $15 bil. to $20 bil.," with the latter being a "very outside" figure. Placing Medicare outlays this year in the $160 bil. range, Vladeck added that the likely net outlay for a drug benefit "is almost certainly less" than the annual inflation increase in Medicare spending. When Congress enacted a drug benefit in 1988 as part of the now defunct Medicare Catastrophic Care Act, the Congressional Budget Office projected the benefit would cost $2.5 bil. in 1993, which would have been the first full year of implementation. The June 22 hearing was convened by subcommittee Chairman Stark (D-Calif.) to address "Health Care Reform: Expansion of Medicare Benefits to Include Prescription Drugs." Vladeck told the committee that HCFA's experience in implementing the Medicaid outpatient rebate law would provide "invaluable" experience for considering a Medicare drug benefit, including the "major" hurdle of an "enormous" increase in claims volume. HCFA estimates that a drug benefit would add more than 1 bil. Medicare payment claims annually, the agency administrator said. In comparison, the entire current Medicare program, including both hospital and physician care, generates about 660 mil. claims annually. "Such volume would be best handled by electronic on-line systems in pharmacies for drug utilization review and claims payment purposes," Vladeck said, and "would require sufficient lead time to accommodate the procurement process for system development." While "complex, an electronic drug claims processing system seems much more accessible now than five years ago, when we were working on the Medicare catastrophic drug benefit," he added. The logistics of a nationwide drug claims system for Medicare had posed major challenges for implementing the earlier drug benefit. To comply with Medicaid rebate law requirements, Vladeck noted, 19 states will have Medicaid electronic claims processing systems in place by the end of 1993, with all but four using the system to perform prospective drug use review as well. More states will implement these systems in 1994, he said. Additional knowledge will be gained from other parts of the Medicare program -- more than 88% of Part A claims and 62% of Part B claims are now handled electronically. Vladeck said the agency is "developing a state-of-the-art Medicare transaction system that will consolidate the current 15 claims processing systems across the country into a single, uniform system at a limited number of sites." The Medicaid drug rebate program also has established HCFA's "good track record with drug manufacturers and states in developing working relationships [and] establishing new data and reporting systems," Vladeck maintained. Despite his reputation as a health care rate regulator, which had raised questions about his support for the Clinton Administration's managed competition approach to health reform, Vladeck expressed initial approval of the rebate system. During an interchange with Chairman Stark about the Medicaid rebate program, Vladeck suggested that savings on pharmaceutical purchases might not be any greater with direct price controls. "At the moment," he said, "the rebate program is permitting the government to get the advantage of its relative market power as a buyer; and it's not clear to me that directly government- administered prices...give you a better deal." Vladeck noted that there have been issues of industry research costs and broader "national policy" concerns that have also affected the drug price debate. In his opening remarks, the HCFA chief said the savings from rebates "are real" and totaled $1.1 bil. in combined federal and state funds in 1992. Stark maintained that the "rebate system, at least in Medicaid, is more complicated than what we did in catastrophic care." He added that "what I have trouble with" regarding the Medicaid approach is that "you set up all this tracking and price monitoring which in itself is a complex" effort. "What I for the life of me can't understand is why you go through this round- about, six ways and over the top and under [method], to get to the results, when you could set a reasonable price, either through negotiation or bidding, and then that's the price." Vladeck replied: "It might well be simpler to just establish a price-setting [or] rate-setting system for prescription drugs from an administrative point of view. I'm not sure from the government's perspective that it would necessarily be cheaper." "Cheaper to administer?" Stark asked. "No," Vladeck replied, "cheaper in what you're actually paying for the drugs." Perhaps alluding to his advocacy of a drug price review board for the U.S., Stark joked: "I know how to make it that way." The subcommittee chairman also prodded Vladeck about the potential value of switching to a bidding system to set Medicaid drug prices. "That's close to what we're doing now," Vladeck commented, venturing that it "might be worth experimenting with pure bidding models." "My assumption has to be that, given the other mechanisms available to me at the moment, I don't have a whole lot of confidence in my ability to do price-setting for pharmaceuticals," Vladeck said. Such an undertaking would be "probably a good deal more complex" than some other areas of health care, he maintained. "In an imperfect world, choosing the second best [method], at the moment I think I'm doing okay on the rebate mechanism. I don't yet know enough about what a real [drug] price control system would look like to feel confident about how I would [design one]." Vladeck was followed at the hearing by congressional Office of Technology Assessment Senior Associate Judith Wagner, PhD, who reviewed OTA's recent analysis of the pharmaceutical industry ("The Pink Sheet" Feb. 15, p. 11). "Without a strategy for cost control," she advised the subcommittee, "universal coverage of the Medicare population for prescription drugs, when combined with strong patent protection on new drugs and physician ignorance and indifference to price, will create a tinderbox for price escalation." Wagner suggested that health maintenance organizations or "other tightly managed health care plans" are probably best suited to increase physician price sensitivity and "exact price concessions" -- but it is "probably unrealistic" to expect most Medicare beneficiaries to join such plans in the near future. A new political figure as the House begins relooking at Medicare drug coverage is Rep. Thomas (Calif.), who succeeds former Rep. Gradison (Ohio) as the ranking Republican on Stark's subcommittee. In addition to drug prices, Thomas told the hearing that he is "concerned about the role of government in bringing drugs to market, the approval process, the patent process, [and] timelines for [FDA] approval." He added: "I'm also concerned that as we move forward with health care [reform], that it not just be government intervention that determines the price of drugs or any other form of health care but that we make sure the market reforms are in place." Thomas has recruited Ann LaBelle to the Republican staff of the Ways & Means Committee. LaBelle was a health policy aide to Sen. Hatch (Utah) when he was the ranking Republican of the Senate Labor & Human Resources Committee.