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Letter to the Honorable William "Bill" M. Thomas 1 (July 2002)

handle is hein.congrec/cbo9243 and id is 1 raw text is: July 27, 2002 Honorable William Bill M. Thomas Chairman Committee on Ways and Means U.S. House of Representatives Washington, DC 20515 Dear Mr. Chairman: You asked for further explication of CBO's cost estimate for H.R. 4954, the Medicare Modernization and Prescription Drug Act of 2002, in regard to three issues: the construction of our cost management factor (CMF), the explanation for savings from eliminating Medicaid's best-price requirements, and our estimates of participation in the proposed benefit. I appreciate the opportunity to add whatever clarity I can to those issues. There has been confusion about the meaning of the 30 percent cost management factor that CBO applied in analyzing H.R. 4954. The CMF is an analytical construct to estimate the effects of policy changes on total drug expenditures, not on prices. The CMF does not solely represent expected lower prices. It is an amalgam of three types of savings from management -savings due to price discounts or rebates from manufacturers and pharmacies, savings due to controlling overall drug use, and savings due to changing the mix of drugs used. Many factors dampen the full effect of the CMF. First, many beneficiaries are expected to have drug coverage from another source (such as an employer or Medicaid). To the extent that their other coverage insulates enrollees from out-of-pocket spending, it will be harder for the plan to manage costs. Second, adding or expanding insurance coverage for prescription drugs is expected to increase both the use and price of drugs. Third, if a proposal requires competing plans that bear financial risk, savings from the CMF are offset by the plans' costs for marketing to beneficiaries and for being at financial risk for the benefit (such as the cost of purchasing reinsurance). Thus, the CMF for H.R. 4954 reflects potential savings but not the costs of the mechanisms to achieve those savings. Further,

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