Tom Scully was confirmed as the country’s Medicare and Medicaid chief in May 2001, just a month before Health and Human Services Secretary Tommy Thompson announced the first set of reforms for the programs. The reforms included a new moniker for Scully’s agency: Centers for Medicare and Medicaid Services. The agency, formerly the Health Care Finance Administration, placed new emphasis on serving the program’s users.

Since then, Scully has been President Bush’s point man on reform. Now, as the House and Senate begin to hash out their differences on the long-awaited prescription drug benefit for seniors, the former head of the Federation of American Hospitals is preparing to oversee the biggest change to the Medicare program since its creation in 1965.

ROLL CALL EXECUTIVE EDITOR MORTON KONDRACKE: What do you rate the chances of a prescription drug benefit passing this year?

CENTERS FOR MEDICARE AND MEDICAID SERVICES ADMINISTRATOR TOM SCULLY: With the reforms in the package, I think probably 95 percent up from about — if you had asked me four weeks ago — I probably would have said 20 percent. You know these things take on a life of their own for God knows what reasons, a whole series of votes that for some reason changed the momentum of this thing in the last few weeks massively. The substance hasn’t changed. The policy and the editorials and the whole tone around this debate has gone from an uphill fight to a speeding freight train, faster than anything I can remember.

ROLL CALL: So do you think the bill can actually be signed before the August recess?

SCULLY: I think it’s possible. The House and Senate, they’ve got a tax conference to do in July. My impression is that people are not in a giant hurry. They’re going to conference it, but I don’t think they’re going to do an artificial deadline. It wouldn’t surprise me if this thing spent a lot of time in conference in July and didn’t get it finally done until September. There’s no hurry about it. There’s an awful lot of details to work out. The House and Senate bills are philosophically pretty similar, but, boy, the details differ. There are a lot of the details we worked out. And when you get involved with Sen. [Chuck] Grassley [R-Iowa] and Rep. Bill Thomas [R-Calif.], throw in a little bit of Mr. [Speaker Dennis] Hastert [R-Ill.] and Mr. [Senate Majority Leader Bill] Frist [R-Tenn.], there’s a lot of strong views of people.

ROLL CALL: Now, is the White House going to weigh in on behalf of one or the other bills?

SCULLY: We are totally unbiased arbiters doing the best thing for humanity. [laughs] You know, there are things we like about — I don’t want to pick on either of the House or Senate bill. I think they’re both within about 5 degrees of what the president proposed. I think it’s astonishing to me that it’s as close to what we proposed. It’s structurally very similar to what we proposed in March, or whatever it was.

ROLL CALL: You don’t see anything that could stand in the way of passage?

SCULLY: Oh sure, there are huge differences in the House and Senate bill. … There is a group of conservatives in the House and in the Senate that don’t like it, and obviously most of the Democrats in the House don’t like it and a group of liberal Democrats in the Senate don’t like it. The key [was] that Sen. [Max] Baucus [D-Mont.] and Sen. Grassley stuck together. Plenty of things to complain about if you’re a Republican that we don’t like in the bill, and there’s plenty of things if you’re a Democrat not to like in the bill. But when you have Sens. Grassley and Baucus together and you get Sen. [Tom] Daschle [D-S.D.] and Frist both voting for it in the Finance Committee, you’ve probably found the middle reasonably well. I think there’s a lot of accidental reasons that we’ve picked up votes, and I won’t torture you with the details on them. But Republicans think this is going to cause a huge amount of reform on a market basis. Democrats don’t think that’s going to happen. A lot of it’s philosophical. If these competitive plans don’t work, you’ll get the same old Medicare. The one thing you’re going to get is $400 billion of new drug benefits, no questions about that, and in a really market structured way. Democrats don’t think that’s going to happen and everybody’s going to stick in existing Medicare. And if they want to they can. Republicans think that this is going to lead — and I happen to agree with this — to a huge movement for people to go into PPOs and choose private health plans that will radically modernize the system and make it work better. And if we’re right and that’s what people choose, we’ll win. And if we’re not, people can stay on the old Medicare program. So Democrats get to see what they want and believe it’s going to be their way, and Republicans get to see what they want and believe it’s going to be their way. Does that mean that nobody for sure knows what’s going to happen? Probably so.

ROLL CALL: There is a lot of criticism of these bills that they are incredibly complex.

SCULLY: It’s an incredibly complex program.

ROLL CALL: Yeah, but too complex. That seniors looking at the prospects of co-pays and premiums and deductibles and stuff like that simply won’t participate.

SCULLY: I rabidly disagree with that. I think Medicare is incredibly complicated. … I testified about this in the Finance Committee. You look at the average senior right now about to turn 65. Say you’re 64 and you work for General Motors and you’re in the Blue Cross of Michigan PPO. You hit 65 and you have to drop out of that, even if you’re happy, sign up for Medicare, which is about on average nationally a $7,000 per year benefit. It covers 60 percent of your costs.

Then the average person goes out and buys Medigap. The average costs of the AARP’s midrange Medigap for a single person this year is $2,200. That’s all 100 percent beneficiary’s money, 2,200 bucks. The AARP’s plan is pretty good, but a lot of the others are very poorly structured, horribly structured insurance programs that are very inefficiently put together, which is just the nature of Medigap. Seniors get first dollar coverage — everything gets paid for. My example is, my mom has been in the hospital for nine weeks. My guess is her bills are between 400,000 and 600,000 bucks, and she’s not going to pay a penny. Medicare will pay the largest chunk of it, her Medigap insurer will pay everything. She doesn’t pay a penny. She’s very sick, but the fact is, seniors generally don’t pay anything in health care because they are overinsured with Medigap. So you have Medicare plus their entire 100 percent Medigap, and then what you’re going to have is this free-standing drug-only benefit, which will probably work. But if you think about it, the people who voluntarily sign up for a drug-only benefit are likely to be sicker. It’s not going to be probably the perfect insurance design. It will work, but it’s not going to be perfect.

On the other hand, what we’re saying is if you give somebody the option when they hit 65 of sticking with your Blue Cross PPO, it’s got much more rational co-payments and deductibles, it provides an entire network of cities, it doesn’t give you first dollar coverage on your Medigap, but it provides you damn good coverage that you were happy with until you turned 65, you’re not going to have to buy Medigap and you’re not going to have to make any choices. We’re going to pay 90 percent of your premium, we’re going to buy out GM plus. You get the same health plan basically and you get 90 percent of your premium. Which is more complicated: Medicare plus Medigap plus a free-standing drug benefit where you have three plans, or buy a Blue Cross PPO and we’ll pay 90 percent of the premium. I think an awful lot of people will like this new system. And if they don’t, nobody loses.

ROLL CALL: One of the criticisms is that companies that are now covering their employees or covering their retirees will drop the plan.

SCULLY: Yeah, they are, and I’ve looked at that a lot, but they’re doing it now. The problem is, if you look at it now, about 32.9 percent of people right now get drug coverage through a retiree benefit plan. That number’s been dropping like a rock because companies don’t have to do it. They’re dropping them now. We don’t like it. We’re trying to incentivize them to stay in, but they’re dropping it now because it’s expensive. And even in the Senate bill we still buy out GM or GE to about, on average, 400 bucks per senior per year — buy out their existing expenses because we’re trying to keep them in as long as we can, but they’re dropping them anyway. We don’t want to encourage them to drop them any faster. We’re trying to keep them on the hook as long as we can, but there’s no mandate that requires them still to cover it, and increasingly larger employers are dropping this coverage. It’s one of the reasons seniors have an increasingly big problem with seniors that don’t have drug coverage. More and more they’re traditionally not staying with employers 30, 40 years, they’re not getting the retiree benefits and even when they do, the companies are dropping them.

ROLL CALL: So what percentage of seniors do you think will sign up for this program?

SCULLY: Ninety-eight percent, 99 percent. For which — the PPOs or some part of the drug program?

ROLL CALL: Some form of the drug program.

SCULLY: It’s a big new federal subsidy. The bottom line is, it depends on the House and the Senate bill. Both of them are important, different, very important.

ROLL CALL: But aren’t there some levels at which people will be paying more?

SCULLY: It’s an insurance program. I mean Medicare right now, if you’re a senior in the Medicare program, you’re paying $58.20 a month. So you’re paying 600 bucks a year premium. There are huge numbers of seniors who don’t use $600 a year in the Medicare program. It’s an insurance plan. I mean, this is not the government guarantees everybody the same cost. The way both bills are structured is, if you’re poor you get a huge benefit. In the Senate bill, for example, up to 160 percent of poverty, which is 17 million people, 44 percent of the population, you get a very plush drug benefit. And some people said, on the conservative side, that they think it’s too big, and they well may be right. But the House provides significantly less. You get about a $3,000 per beneficiary drug benefit with about 2.5 percent cost sharing if you’re poor in the Senate bill. It’s a big drug benefit. There are no gaps. There are no doughnut holes. It is a big very thorough benefit. And that’s the goal: help poor people. Some people would argue that the Senate goes a little too far and the House doesn’t go far enough, and we’ll find somewhere in between. Above that, in the Senate bill, it’s the 56 percent of the population that’s not poor of seniors that have gaps and co-payments and deductibles. And a lot of people don’t understand that. There are no gaps, no thresholds, no doughnuts, no nothing if you’re the 17 million people below 160 percent of poverty in the Senate bill. They get terrific coverage.

ROLL CALL: And are those the people who are mainly now not covered by any benefit?

SCULLY: Yes, it’s the vast bulk of the people who don’t have coverage now. When you get above 160 percent of poverty — that’s in the Senate bill, the House goes to 150 — but in the Senate bill when you get above that you get into $275 deductibles, you only cover 50/50 above that, you have doughnut holes. Those are the people who are relatively wealthy.

ROLL CALL: Are those people going to sign up for …

SCULLY: Yes, because they are still going to get on average right now about a $900 on average per year per beneficiary subsidy. Right now the basic subsidy in nationwide Medicare is the federal government pays, on average, because there is some variation geographically, 6,300 bucks a head. The government pays for the average Medicare benefit, and the beneficiary pays 700 bucks a head. OK. What you’re going to do with the drug benefit for higher-income people in the Senate bill, and again this is the national average, they’re going to have to put up an initial 400 bucks in current terms to pay for a drug benefit, and they’re going to get 900 bucks from the government. So basically our actuaries believe that most people they look at it and say you’re going to get $900 a head toward an increased drug benefit and you’re going to put 400 bucks of your own benefit. That’s going to be a big subsidy, and people are going to show up in droves because it’s going to be a good deal.

ROLL CALL: What percentage of all people are going to fall into one of these doughnut holes?

SCULLY: The number of people that hit the catastrophic stop loss in the Senate bill is about 2 percent. The number of people who hit the doughnut hole where coverage stops and you get nothing for a while is about 6 percent. So the vast bulk, most of those people already have coverage. We’re buying out their existing coverage. I mean, these bills are a great deal for poor people. For higher-income people, it’s an insurance package, which is what it should be for the federal government. We’re not buying out every dollar and giving a handout. We’re saying we’re giving a highly subsidized insurance benefit that says if you get really sick and you’re one of the 2 percent of the people that actually sees — I forget the number in the Senate bill — $5,820 of drug costs, the federal government is going to pay for 90 percent of it. It’s an insurance plan.

ROLL CALL: Now one other objection is that the private insurance companies are simply not going to get in the business of drug-only coverage.

SCULLY: Well, they will, but they’re going to have to be subsidized to do it.

ROLL CALL:But if they have to be subsidized, is this a free market?

SCULLY: Well, they’re not, it’s not subsidized. There’s no experience with it. We think they will do it. Most of your readers are Capitol Hill folks. If you’re a Congressional staffer or Member of Congress and you look at your Blue Cross card, like mine, the bottom of it says PCS. Advance PCS is the biggest pharmacy benefits manager. There are 210 million people in this country who happen to get drugs through PBMs. Almost everybody under the age of 65 gets their drugs through one of these networks. And there are seven or eight big ones. They generally operate as subcontractors to Blue Cross plans, Aetna, Cigna and have not been risk-bearing entities. There’s a concern that they’re not going to want to be risk-bearing entities. It will be a new business flow. And we think it will be a good business and they will do drug-only plans.

But we believe to get it started the government might need to come in and provide some significant reinsurance. And that’s the great debate. Democrats say, well, if there aren’t at least two drug [insurance] plans in each of the 10 regions, the government should come in with a back-up plan and be the insurer. Well, we’re very concerned that that’s going to lead to my agency fixing prices for drugs. How would you like to sit down with me every day and figure out what you’re paying for Lipitor or Previcid or pick your drug, Procrit? That’s a political nightmare.

I fix prices for every hospital and every doctor in the country right now for Medicare. It doesn’t work very well, and that’s what we’re trying to get away from. And as we reinvent drug coverage we don’t want my agency sitting down and deciding, you know, as a government entity in an incredibly politicized system, what we’re going to pay for drugs. We pay for about $8 billion worth of drugs right now in the outpatient department of hospitals and in the doctors offices. And by all accounts — this is called the average wholesale price debate — we overpay by 25 percent. Why? Because it’s entirely politicized. We’re trying to get it out of that and give it to private contractors. They don’t have a lot of experience in this. We think we’re probably going to have to, in the first couple of years, have to come in and say, “Look, we want you to be a bidder to provide this drug benefit in the Southeastern United States, and the benefit’s worth 1,300 bucks per person. We may have to come in and have you share only 5 percent of the risk instead of all the risk.” So the real issue here is, we believe, the secretary has the authority in the bills to keep providing reinsurance until a bidder shows up. And theoretically, at some point, we’ll tell Advance PCS we insure 99 percent of your risk if you’ll show up and do it for us.

ROLL CALL: How much of the kind of Republican reform that the president advocated in the beginning is in these bills?

SCULLY: A ton. A ton. I mean, if you look at the real issue of the president’s package to begin with, our fundamental goal here was that if you’re under the age of 65, 70 percent of the people are in PPOs or point-of-service plans, which are very similar. You’ve got about 25 percent of people in HMOs and 5 percent of people in traditional indemnity insurance, which is generally vanishing in the under-65 population. Our fundamental view coming into this is we want to give people what they want. If you’re a senior citizen you have the choice of an HMO, but generally the financing of that has been screwed up, so it’s been less available in the last five or six years. You’ve got about 10 percent of people in HMOs and about 90 percent of people in traditional Medicare. What people have gone to in droves in the past 10, 15 years in the private sector are PPOs — kind of the best of both worlds. A little bit of utilization management oversight, which Medicare has almost none of, but very little managed care. You can get any doctor, any hospital you want if you are willing to make a little differential co-pay. That is what private insurance has turned into. That doesn’t exist to Medicare. And our fundamental philosophical view from the beginning has been people don’t like HMOs, they rebelled against them, but they’re very comfortable with PPOs and they like utilization management, disease management, coordination of care, as long as it’s not overbearing. That’s what they’re going for in droves.

ROLL CALL: So are these reforms going to do something about the problem that the Medicare system was going to go bankrupt in 2026?

SCULLY: No.

ROLL CALL: So what is the answer?

SCULLY: The answer is that if you’re going to make the assumption you’re going to get a drug benefit. That’s the first leap you’re going to make. But are we going to save enough money on the reforms to pay for the drug benefit? The answer is no. We have a big new entitlement plan. It’s going to cost $400 billion in the next 10 years. Nobody knows. Some people would argue that by adding a drug benefit and keeping people out of the hospital, you save money, but nobody knows that. The actuaries don’t know that, nobody really does. You can’t predict Medicare that well. We are going to spend a lot more money on drugs. $400 billion is not enough for some, too much for others, but it’s what the president suggested. And once you get over that leap of faith and you get an added Medicare drug benefit, if you compare old Medicare with the drug benefit vs. this modernized program with the drug benefit, we think it is going to save money. And it’s probably going to grow about 1 and 2 percent a year less. We’re going to save 1 to 2 percent a year we believe off the existing program while people go over to these private competitive plans. That’s what our actuaries think. So is that enough to pay for a new drug benefit? No. I mean, you’re going to slow the growth of Medicare and have 1 to 2 percent a year cheaper cost for people to go on the new plan.

ROLL CALL: So how do you solve the bankruptcy problem?

SCULLY: You know, the bankruptcy problem is a label, largely. Part A Medicare is collecting significantly more than it’s spending. When the baby boomers come in and the taxpayers go down, the numbers cross at about 2026, so theoretically you can say that’s bankrupt. But it’s basically a cash-flow problem. And as the baby boomers die or cease to be Medicare beneficiaries and the population changes, then the numbers will come back the other way, when you have more people working and fewer baby boomers. It is an actuarial payment problem. But to say the system is bankrupt, you know, you’re going have the same problem you’re going to have in Social Security. At some point, you’re going to have fewer workers and more beneficiaries and that will ebb and flow over the next 40 or 50 years. I mean, it is definitely a problem, and it becomes a more acute problem when you have a drug benefit added in. On the other hand, it’s extremely clear that Medicare needs a drug benefit. It’s also extremely clear that if you add a drug benefit and you don’t reform the program, it’s even worse. So I guess you have to make the first leap of faith that you need a drug benefit. But is it going to save money vs. the original program? No. It’s probably going to speed up the actuarilly imbalance by a couple of years, but it’s going to be a hell of a lot better than if you just added a drug benefit and didn’t reform the program.

ROLL CALL: Let me ask you about the 2004 health care debate. Medicare will be presumably a benefit to the president if the bill passes. But what about the issue that the Democratic candidates are raising — 41 million uninsured and the rising costs of health insurance in the non-aged segment?

SCULLY: I think we need to get to that next. The bottom line is most people didn’t expect President Bush and the Republican administration to tackle Medicare, period. And I think we’ve taken it on pretty aggressively. And we’ve got a problem with the uninsured too, and I think the president’s concerned about that, but we’ve got to do first things first. We’re going to take care of the Medicare problem and we’re going to try to fix the over-65 sector, which is 18 percent of the population but 40 percent of the spending. And then we’ll try to fix the under-65 sector, but it’s first things first, and I think it would be a huge step forward to fix the Medicare program and get it on the right track. The uninsured is a problem, and I’ve been working on that for a long time as well, and I certainly hope we move on and tackle that.

ROLL CALL: Is there a plan?

SCULLY: Well, we have a pretty significant tax credit which nobody gives us credit for. We’re going to put out a report I think in the next week or two showing that that would have a huge dent on the number of uninsured. Forty-one million is the number of — you can debate about the number. The number of true low-income, chronically uninsured people is probably closer to 20 [million] to 23 million. The bottom line is we have a problem. For low-income people, the president’s existing tax credit would knock down the number significantly; it would give a lot of people access to insurance. And that would be a good first step. It wouldn’t solve the whole problem.

One of the major problems you have in health care, and I wouldn’t advocate the Medicare structure to people under 65, but Medicare is community rated — if you’re 66 or 96 you pay the same rate. Under 65, there’s no rules at all except state by state. But part of it is the structure of the insurance system. If you’re sick, if you’re over 65 no matter how sick you are, you’re getting Medicare and you’re in a community-rated system that’s overly socialized. If you’re under 65 you get an incredibly dynamic insurance system where you can buy any product you want, but there are no rules.

So if you happen to be really sick or you happen to work for a small employer, you may well be out of luck. That’s all the people who fall through the gaps — where you’re poor. So part of it is structural reform. It’s not just spending more money. We need to make the insurance system work better if you’re under 65, and I think we’ve had some discussions — the secretary and the president — about how to do that, and that’s clearly next, and I think he’s going to be looking in that direction. It’s not just to spend more money, it’s finding a way to make sure that the insurance mechanism acts as an insurance mechanism.

This is one of the things you brought up in Medicare. If you have homeowners’ insurance or auto insurance, you pay a premium and you may never use it. It’s for if something bad happens. That’s the nature of insurance. And if you have a system where the only people that are insured are the people who are using the product, it’s not going to work very well. So we need insurance reform for the under 65 as well as we may need some more funding. But we’re already spending about $60 billion a year cross-subsidizing uninsured and hospital payments and other payments. We’re paying for people who are uninsured. We’re just doing it through some very perverse, strange ways. If you get sick and you’re low-income and you walk into George Washington [University] Hospital, you get taken care of. It’s not the best way to do it.

ROLL CALL: So will the president have an overall health reform package beyond the tax credits that he’s already come forward with in time for the 2004 election?

SCULLY: Well, it’s up to him, but certainly he’s interested in doing that. And I would be surprised if we don’t expand on our existing positions to do something more comprehensive.

ROLL CALL: Health insurance companies are notoriously inefficient, that they seem to rely still on paper instead of computers, and their administrative costs are very high, higher than Medicare.

SCULLY: You get what you pay for. We have a 0.5 percent administrative cost and we have absolutely no idea what we’re doing [laughs]. So I can tell you, I was on the board of Oxford Health Plans for eight years, and the well-run insurance company, which at most times Oxford has been, probably has an administrative cost of 8 to 9 percent, but they actually understand what’s going on and they have utilization controls and they track patients. Medicare is a wonderful program. We’re a check the box [fee payer]. Again, my mother’s been in the hospital for nine weeks, she’s now on her seventh MRI, three hospitals, two CT scans. There’s nobody looking at utilization, asking questions about what’s the best place to be, what’s the best hospital