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75–756CC 2001

MEDICARE DRUG REIMBURSEMENTS: A BROKEN

SYSTEM FOR PATIENTS AND TAXPAYERS

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

AND THE

SUBCOMMITTEE ON OVERSIGHT AND

INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

SEPTEMBER 21, 2001

Serial No. 107–65

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

DAVID V. MARVENTANO, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON HEALTH

MICHAEL BILIRAKIS, Florida, Chairman

JOE BARTON, Texas

FRED UPTON, Michigan

JAMES C. GREENWOOD, Pennsylvania

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

Vice Chairman

BARBARA CUBIN, Wyoming

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

JOSEPH R. PITTS, Pennsylvania

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

SHERROD BROWN, Ohio

HENRY A. WAXMAN, California

TED STRICKLAND, Ohio

THOMAS M. BARRETT, Wisconsin

LOIS CAPPS, California

RALPH M. HALL, Texas

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

PETER DEUTSCH, Florida

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

Vice Chairman

CHARLES F. BASS, New Hampshire

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

PETER DEUTSCH, Florida

BART STUPAK, Michigan

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

CHRISTOPHER JOHN, Louisiana

BOBBY L. RUSH, Illinois

JOHN D. DINGELL, Michigan,

(Ex Officio)

(III)

4

C O N T E N T S

Page

Testimony of:

Bentley, Zachary T., President, Ven-A-Care, Inc ........................................... 46

Connaughton, Thomas A., President, American Association of Homecare .. 110

Emanuel, Ezekiel, Chief, Clinical Bioethics Department, Warren G. Magnuson Clinical Center, National Institutes of Health ................................ 117

Grob, George F., Deputy Inspector General, Department of Health and

Human Services ............................................................................................ 38

Lamphere, JoAnn, Lewin Group ..................................................................... 115

Martyn, Kevin, Executive Director, Care For Life ........................................ 107

Norton, Larry, President, American Society of Clinical Oncologists ............ 101

Scanlon, William J., Director, Health Care Issues, General Accounting

Office .............................................................................................................. 30

Scully, Thomas A., Administrator, Centers for Medicare and Medicaid

Services .......................................................................................................... 82

Material submitted for the record by:

Sands, Leo E., Executive Vice President, Chief Compliance Officer, US

Oncology, Inc., letter dated September 19, 2001, to Hon. James Greenwood, enclosing material for the record ...................................................... 145

Stark, Hon. Pete, a Representative in Congress from the State of California, prepared statement of ...................................................................... 143

(V)

(1)

MEDICARE DRUG REIMBURSEMENTS: A BROKEN SYSTEM FOR PATIENTS AND TAXPAYERS

FRIDAY, SEPTEMBER 21, 2001

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEES ON HEALTH,

AND OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittees met, pursuant to notice, at 9:40 a.m., in room

2123, Rayburn House Office Building, Hon. Michael Bilirakis and

Hon. James C. Greenwood presiding.

Members present Subcommittee on Health: Representatives Bilirakis, Barton, Upton, Greenwood, Burr, Ganske, Norwood, Bryant,

Buyer, Pitts, Tauzin (ex officio), Brown, Barrett, Capps, Hall,

Pallone, Deutsch, Stupak, Engel, and Green.

Members present Subcommittee on Oversight and Investigations:

Greenwood, Bilirakis, Stearns, Gillmor, Largent, Burr, Bass, Tauzin (ex officio), Deutsch, and Stupak.

Staff present: Chuck Clapton, majority counsel; Yong Choe, legislative clerk; and Edith Holleman, minority counsel.

Mr. GREENWOOD. Good morning. This joint hearing of the Energy

and Commerce Committee’s Subcommittees on Oversight and Investigation and Health will now come to order. Before we proceed

with the members’ opening statements, Mr. Bilirakis and I would

like to make a few remarks.

Among the thousands of lives so hideously taken from us on September 11 was that of Lisa Raines. Lisa Raines was the senior vice

president of government relations for Genzyme Corporation. Those

of you who knew her know she was a giant in the biotech and

pharmaceutical industry for at least the past 15 years and a friend

to many. Her memorial service is scheduled for 11 o’clock this

morning, and for that reason these subcommittees considered very

seriously postponing once again this hearing. We wish we could

have done that.

By the conclusion of this hearing, I think it will be apparent to

all the urgency to fix this broken AWP system. Given the fact that

we have only about 4 weeks for session for this year, we concluded

that it was impossible, particularly given next week’s short schedule, to postpone this hearing once again. We regret we had to make

that decision because we know there were many who would like to

be here, but also felt their priority was to be at the memorial service.

2

Having said that, I would like to recognize Chairman Bilirakis

for his comments.

Mr. BILIRAKIS. Thank you, Mr. Chairman.

On September 11 of this year, American’s calm was shattered by

a horrendous act of terrorism that will long be remembered. Our

thoughts and prayers are with those whose lives have been forever

altered by this tragedy.

When American Airlines flight 77 went down, the health community lost a dear friend and respected colleague, Lisa Raines. Lisa

was a senior vice president of government relations for Genzyme

Corporation. Lisa had worked closely and often with the Energy

and Commerce Committee through the years, working to enact the

Drug Export Amendments Act of 1986, the prescription drug user

fee, PDUFA, the FDA Export Reform and Enhancements Act of

1996, and the Food and Drug Administration Monitorization Act,

or FDAMA.

A vital member of the Washington biotechnology and pharmaceutical community, Lisa previously worked for the Industrial Biotechnology Association, now BIO, and the Congressional Office of

Technology Assessment. Lisa’s expertise and insight as well as her

bright personality and charm will be missed by this committee, the

Congress and the health community. I think the publication BioCentury said it best when it said Lisa was as much a fixture of the

biotech industry as a double helix, and it is hard to comprehend

that she is gone. She leaves a hole in the industry’s relationship

with the outside world that will be difficult to fill.

I join with the chairman and members of this committee as we

offer our condolences and prayers to Lisa’s family and friends.

Please join us in a moment of silence in honor of Lisa Raines.

[The prepared statement of Hon. Michael Bilirakis follows:]

PREPARED STATEMENT OF HON. MICHAEL BILIRAKIS, CHAIRMAN, SUBCOMMITTEE ON

HEALTH

I’d like to thank Chairman Greenwood for joining me today to examine the issues

surrounding the current system for Medicare drug reimbursement. The Health Subcommittee has spent a considerable amount of time in this Congress examining how

best to add a comprehensive prescription drug benefit to the Medicare program.

This hearing builds off of work we began in the last Congress where we examined

the reimbursements for the limited drug coverage currently available in the Medicare program.

I’d like to welcome and thank all of the witnesses, including Tom Scully from

CMS and Bill Scanlon from GAO. We rely often on these government officials and

their offices for factual information and detailed analysis, thank you for coming

today. I’d also like to welcome Mr. Zachary Bentley from my home state of Florida.

I know that your testimony, and that of all the witnesses, will help inform the Committee and the public about the issues regarding Medicare’s current reimbursements

to health care providers for certain drugs used to treat patients.

The Medicare program currently provides coverage for a small number of drugs,

limited principally to those that are administered incident to a physician’s treatment or in conjunction with covered durable medical equipment, such as inhalation

drugs used with a nebulizer. Since at least 1992, Medicare has determined the appropriate reimbursement price for these covered drugs by referring to an industry

trade publication known as the Red Book, which lists what manufacturers purport

to be the Average Wholesale Price for their drugs. Since 1997, providers who administer these drugs to Medicare beneficiaries have been reimbursed for their cost at

prices equal to Average Wholesale Price (AWP) minus five percent. Of this set

amount, Medicare Part B covers 80 percent, while Medicare beneficiaries can be required to pay the remaining 20 percent as a co-payment. Today’s hearing will examine how Medicare’s current reimbursement system, for the relatively few drugs that

3

are covered, is costing beneficiaries and taxpayers more than is necessary and may

be having an adverse impact on the health of some of our most vulnerable citizens.

I recently toured a Clearwater oncology center in my Florida district and I can

tell you what great work oncologists do and how important their work is to so many

Americans. At the request of my constituent Dr. Marcos Joppert I would like to

admit this white paper on oncology payments into the record.

This will prove to be a lengthy hearing and thus I will limit my opening statement so that we may get to the important testimony of the witnesses—who I again

thank for their effort and cooperation.

Mr. GREENWOOD. Thank you, Chairman Bilirakis, for your comments. As the President said, let us get back to work.

Let me begin by thanking all of the witnesses who have agreed

to testify today at today’s hearing. Your testimony will shed light

on an insidious problem about how the Medicare program reimburses health care providers for certain drugs used to treat very

sick patients. Today’s hearing, which is a culmination of years of

investigative and audit work performed by subcommittee staff and

the witnesses from our first panel, will examine how Medicare’s reimbursement system for the relatively few drugs currently covered

by the program is costing Medicare and its beneficiaries roughly $1

billion every year in overcharges while having an adverse impact

on the health care of some of our most vulnerable elderly and disabled citizens.

We will hear how the manufacturer of a chemotherapy drug like

Vincasar sold it to health care providers for $7.50, then reported

the price to Medicare as $740. Medicare paid the doctor almost

$600 for the same drug, and the poor sick patient got hit up for

another $150.

We will also hear today from the Department of Health and

Human Services Office of Inspector General about how many other

overcharges result in Medicare paying more than $886 million

every year in inflated prices for just a sample of 24 Medicare-covered drugs reviewed by that office. The total figure for all Medicare-covered drugs very likely exceeds a billion dollars each year.

It should be noted that Medicare currently reimburses for a very

limited number of drugs, chemotherapy agents, blood-clotting factors used to treat hemophilia and inhalant drugs used to treat respiratory diseases, the total cost of which is approximately $4 billion

a year. A billion dollars of taxpayer dollars is wasted every year

in this program because under current Federal law and regulations, Medicare is paying for drugs at AWP. AWP, or average

wholesale price, could also be an acronym for ‘‘ain’t what’s paid.’’

It is quite clear that despite its name, AWP is not the average

wholesale price at which these drugs are sold to health care providers or anything close to it. To the contrary, it appears that for

many of these drugs, AWP is simply an artificial price established

by certain drug manufacturers and reported to industry trade publications for purposes of third-party reimbursement, a price which

bears little, if any, relationship to what is actually paid for these

drugs by health care providers.

Before we go further, however, let us be clear about one thing.

Most drug companies establish AWPs that are, in fact, fairly reliable indicators of average wholesale prices, but in those instances

where they do not, the difference between what providers actually

pay and what Medicare reimburses results in what is commonly reVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 E:\HEARINGS\75756 pfrm09 PsN: 75756
4

ferred to as a spread, an unwarranted profit pocketed by the health

care provider each time he or she utilizes that particular drug. We

will see evidence today demonstrating how some drug manufacturers have manipulated the reported AWPs and thus the spreads on

their drugs in order to create financial incentives for providers to

use their drugs over competitors’ products. In doing so they have

provided a financial windfall to the health care providers that enables them to sell more of their drugs. In the words of one manufacturer, this is a win-win-win situation for manufacturers, wholesalers and health care providers. The big losers in these marketing

ploys are the Medicare program, its elderly and disabled beneficiaries, and the American taxpayer, all of whom have to foot the

bill for greatly inflated drug costs.

Of even greater concern to America’s seniors than the impact of

having to pay inflated copayments on drugs based on prices that

are sometimes tens or hundreds of times higher than what their

health care provider actually paid for the drugs is that they also

may have had the quality of their health care adversely affected by

this perverse system. We will hear how the profits available for utilizing certain drugs appear to be improperly affecting some health

care providers’ clinical decisions, influencing them to provide unnecessary care and utilize drugs based on profit margins rather

than therapeutic efficiency.

For example, we will learn of cases in which the utilization of

certain drugs skyrocketed without any reasonable clinical justification after manufacturers created large Medicare-funded financial

windfalls to health care providers to encourage them to use their

drugs. In one such case, and the case is on the screen there, Medicare utilization and reimbursements of the inhalation drug

ipratropium bromide used to treat respiratory diseases increased

more that twentyfold between 1995 and 2000, from $14 million in

1995 to more than $300 million in 2001, a time period in which the

drug went from having no spread to having a Medicare-covered

spread of 300 percent.

We will also hear about how terminal cancer patients received

aggressive courses of chemotherapy, raising questions about whether the motivation for providing such care was the profit available

from the use of Medicare-covered chemotherapy drugs.

Congress has long championed the fight against cancer. We supported increased funding for research at the National Institutes of

Health and to improve the quality of clinical care. We fought to ensure that the proper incentives exist to develop new and innovative

drugs. To then learn of the instances in which quality of patient

care might have been adversely affected by the financial benefits

available to providers from utilizing certain drugs is nothing short

of outrageous. While providers and their associations strongly denied being influenced by any such considerations, we cannot tolerate a system that could leave such motivations even open to

question.

Providers do not generally deny that they often reap huge profits

on the utilization of certain Medicare-covered drugs. Instead they

argue that they currently depend on these profits in order to make

up for other services in which Medicare under-reimburses them.

We will hear testimony today that will confirm that like many

5

other groups of providers, these providers who administer Medicare-covered drugs are not fully reimbursed for all the costs associated with treating their patients.

We should reimburse all providers fairly for their expenses; nevertheless a system in which the use of certain drugs can influence

clinical medical decisions is not the answer. Life-and-death decisions about the treatment of those who suffer from the scourge of

cancer should be governed exclusively by a concern for the patient

and not the margin of profit.

When this hearing is over, my colleagues and I will work with

this new administration as well as providers and drug companies

to scrap this flawed system. We will need to develop a solution that

results in Medicare paying prices for drugs that are closer to the

actual prices paid by health care providers. Similarly we will need

to take steps to ensure that health care providers are sufficiently

reimbursed for all of their services so that the quality of care they

provide to the Medicare patients is not diminished by changes

made to the drug reimbursement system.

I look forward to hearing from CMS Administrator Scully today

about what steps his agency can be directed to take to guarantee

that this scandal is resolved as quickly as and effectively as possible. In these new and perilous times when our Nation and our

people may be called upon to make great personal and financial

sacrifices in the defense of our country, Congress has the heavy

burden of making sure that every available resource is used wisely,

and if we hope to find a way to pay for an expanded Medicare drug

benefit that will assist seniors to purchase prescription drugs even

as we take on a renewed and determined defense of our homeland,

these abuses cannot be tolerated.

If we are going to provide Medicare beneficiaries with a comprehensive prescription drug benefit, and we must, we have to stop

wasting billions of dollars on the existing program. We will need

every Medicare dollar we can find. In addition, our efforts to resolve this problem will hopefully serve as an example for those

State Medicaid problems and other third-party payers who face

similar issues in their reimbursements for the costs of drugs. This

in turn could result in billions of additional dollars in taxpayers’

savings beyond those amounts that were discussed above applicable only to Medicare.

There is one more important lesson in all of this. Governmentrun programs such as this, which escape the rigors and discipline

of the marketplace, inevitably end as expensive failures. It is only

by forming an honest partnership between Government and private

sector that we can hope to build a new and better Medicare program on a sound financial footing.

Again, I wish to extend my thanks to all of the witnesses who

agreed to appear at today’s hearing to inform us about this serious

problem. While I am disappointed that the invited drug manufacturers declined to testify today about these practices and how the

system could be reformed, I am nonetheless committed to moving

forward on this issue in a positive and productive manner with all

parties so that we can fix this system quickly and protect America’s

Medicare beneficiaries from further financial and personal harm.

6

The Chair yields 5 minutes to the ranking member of the Oversight and Investigations Subcommittee, Mr. Deutsch.

Mr. DEUTSCH. Thank you, Mr. Chairman. Thank you also for

your opening comments. I think for any of us not to mention September 11 would be a mistake. This is, I know, my first hearing

since then, and I think for all of us on this dais, and America and

the world changed on September 11, and even our work here in a

sense has changed. I think if we do everything we do in our lives,

I think all Americans do everything they do a little bit differently,

in fact maybe a lot differently than—after September 11.

Let me mention three things and summarize an opening statement. The three things in terms of the issue in front of us that are

most disconcerting, the first issue is there appears to be some evidence, and I hope it is developed in the course of the hearing, that

some manufacturers, by increasing the spread on the average

wholesale price, have encouraged physicians to actually do substitutions on medication. That is obviously incredibly disserving from

best medical practices to best financial incentives for that individual position or office, and that is obviously a system which is

fundamentally broken.

The second issue, which again is a very disconcerting issue, is

that for Medicare beneficiaries, as most people are aware, their copayments are based upon Medicare reimbursements, not on the reimbursement that the physician is paying for the drug. So there

apparently, again, the testimony, I think, will be brought out during the course of this hearing cases, and apparently many cases,

where the 20 percent copayment is, in fact, more than the physician actually paid for the drug, and obviously the situation of Medicare beneficiaries, that is an absolutely absurd situation.

As we develop this—and this is part of the problem, and I am

looking forward to testimony about this as well—is we have a situation where we have a reimbursement system which I don’t think

anyone can honestly defend in terms of the average wholesale

price, but I think we also have a reimbursement system on the

physicians’ side that is hard to defend as well. Obviously these two

things are related. I guess there is debate about how related they

actually are, but I think that we need to acknowledge that, and we

need to do our part in terms of fixing it.

I have a lengthy statement, which I think at this point, based on

the time, I would rather submit for the record. So I will submit

that for the record as well as Mr. Dingell has a statement and the

chairman of the Ways and Means Committee, Mr. Stark, also has

a statement that they were going to submit for the record as well.

[The prepared statement of Hon. Peter Deutsch follows:]

PREPARED STATEMENT OF HON. PETER DEUTSCH, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF FLORIDA

Thank you, Mr. Chairman, for holding this very important and long overdue hearing. For many years, the Inspector General of the Department of Health and

Human Services—like a voice crying in the wilderness—has been issuing reports

telling the Department and the Congress that the taxpayers were being gouged for

drug payments under both the Medicaid and the Medicare programs. These federal

programs were paying providers the published Average Wholesale Price or AWP for

prescription drugs which was, in truth, far more than the drug manufacturers were

charging them. The program now has spun so far out of control that the annual

overpayments may be as high as $1.9 billion. We will hear testimony today of a

7

scheme where doctors prescribing drugs to be administered in patients’ homes wanted a kickback from the infusion companies based on the AWP spread over actual

cost. The Justice Department and numerous states have been investigating this situation, and hundreds of millions of dollars have been recovered.

Only Congress and the reimbursing agency have been silent. In fact, we—particularly those on the other side of the aisle who are concerned about anything that they

think might resemble setting prices—have stopped almost every reform effort. We

must take steps now to eliminate this abuse.

Over the years, Medicaid at both the federal and state levels has been able to get

a 15 percent discount from the AWP plus a rebate from the manufacturer that can

reach up to another15 percent based on the reported Average Manufacturers Price

or AMP. But drug manufacturers, the Medicare carriers, the Centers for Medicare

and Medicaid Services (CMS) and its predecessor, the Health Care Financing Administration, or HCFA, the Congress and the providers have all combined to establish, further and abuse the fraudulent Medicare drug reimbursement system. The

drug companies—who, Mr. Chairman, are notable by their absence at this hearing

since they were, I believe, the instigators of this scheme—reported artificial and

false Average Wholesale Prices to the public for reimbursement purposes while at

the same time not one of their customers was paying those prices.

The Medicare carriers paid those prices and failed their responsibility to assure

that actual drug prices were being paid. HCFA tried to reform the system, but often

gave up because of provider objections. Congress and the Executive branch also

aborted HCFA’s reform attempts by citing the Paperwork Reduction Act and requiring reports from the General Accounting Office before any changes could be made.

The reports we are receiving today are the most recent mandated by Congress in

place of real action.

As we will hear in testimony today and is verified by the documents to be placed

into the record, the pricing abuses have reached the point at which drug manufacturers use the ‘‘spread’’ between the AWP and the actual price paid as a marketing

tool to sell their products. Not only does the taxpayer get gouged; so does the Medicare beneficiary who is required to pay 20 percent of the total cost of the drug. A

chart prepared by one of the witnesses provides nine examples in which the 20 percent copayment covered the entire cost of the drug to the provider. A breast cancer

treatment costs the provider $450; it charges Medicare $1,359. The co-pay is $272;

the profit is $909.

Some of the providers of out-patient drug treatment that we will hear from today

will say that they are using these excessive payments to cover their treatment costs

in other areas. They allege that they will not be able to continue providing service

if this is not remedied. If that is true, their arguments and those of other specialities suffering from similar under payments should be documented and presented to

CMS. However, there is a pilot Medicare drug program in Texas underway in which

competitive drug pricing is used. The costs are down, and there is no evidence of

the withdrawal of any providers. We must also remember that the General Accounting Office has found a number of times that there is little or no evidence of underreimbursement of providers under either Medicare or Medicaid.

Mr. Chairman, I look forward to hearing from these witnesses.

Mr. GREENWOOD. Without objection, all members’ opening statements will be submitted for the record.

The Chair recognizes the chairman of the full committee, the

gentleman from Louisiana, Mr. Tauzin.

Chairman TAUZIN. Thank you, Mr. Chairman.

Mr. Chairman, I, too, want to thank you for the moment of silence for the recognition of Lisa Raines and the loss of so many

friends across America, but also your determination to move forward with this important hearing, and I want to congratulate the

staff who worked with you to develop this hearing, which I believe

will highlight one of the most important abuses within the Medicare system that this committee has ever uncovered.

What you will see today is a situation that has turned Adam

Smith on his head; a situation which, because of the system in

which we reimburse physicians for the cost of certain drugs particularly in chemotherapy and inhalants and several other categories, but the Government of the United States is paying in some

8

cases many times the price that the physician is actually buying

the drugs for. Worse than that, worse than this loss of billions of

dollars of Medicare dollars that taxpayers put up to make sure that

our mothers and fathers and grandmothers and grandfathers and

all our relatives are properly cared for in the Medicare health system and in the Medicaid system, by the way, worse than this loss

of the funds that are critical to sustain the program is the fact that

the patients, those loved ones we protect under this system, are

being required under this system to put up not 20 percent of the

cost of the drugs to the doctor, but in one case—and I have a chart

I want to show you up there, the Medicare 20 percent copay

chart—in one case with a drug called Doxorubicin, the patient is

putting up not 20 percent, but 200 percent of the cost. The patient

who is supposed to put up 20 percent is putting up 200 percent of

the true cost of the drug.

Look at the drug etoposide. In that case the patient is putting

up not 20 percent, but 300 percent of the cost, triple the cost the

doctor spends on the drug. The poor Medicare patient ends up tripling his contribution for the total cost of that drug instead of putting up just one-fifth of the cost.

Look at the drug Leucovorin. It sounds like a character in The

Godfather, maybe properly named. In that case the Medicare patient is putting up 500 percent of the cost of the Medicare drug as

a copay.

Look at the column of the Florida Medicare allowable. Look at

what the doctor is getting back from the Medicare system in Florida for those three drugs. The doctor is paying for Leucovorin $1.25

for 50 milligrams, and the patient is putting up $7.09, and the

Medicare system is paying the doctor up to $35.47. That is the

spread we have been talking about. The spread between the real

cost of the physician and the cost the Medicare system is paying

for the drug, and perhaps the copay cost the poor patient has to

put up, in some cases as high as 500 percent of the real cost of the

drug to the doctor. How can we tolerate such a system any longer?

Mr. Chairman, I really appreciate your uncovering this and allowing this hearing literally to go forward when I know most people are concerned about us getting back to work too fast. We have

got to get to work on this one fast. Not only does this rob the

Treasury and the Medicare fund of billions of dollars that should

not be paid because they are not the average wholesale prices, they

are some kind of awful artificial wholesale price, but, again, it

turns Adam Smith on his head.

Think about this with me for a second. We introduced generic

drugs into the system to create competition. Do you know what

happens to the system when a generic drug comes into play? Evidence we have that we will develop today indicates that when a generic drug comes into competition with a patent drug finally, the

price doesn’t come down. The price goes up because both of the

drug companies understand that if they are going to sell that drug

to the doctor, they have got to give them a bigger spread. So they

are in competition to give them a bigger spread, and they both post

higher and higher artificial wholesale prices to the Medicare system.

9

It is a game that turns ordinary economics on its head. As competition comes into the field, prices go up not only to the government, but to the poor patient who has to pay not 20 percent, but

300, 400, 500 percent of the cost of the drug. It is a rotten system.

And, Mr. Chairman, perhaps the most pernicious part of it all is

the evidence you uncovered with our staff that indicates that—at

least some evidence that in some cases chemotherapy may be

dumped into patients in the last 3 years of life because there is so

much profit to be made. There is so much profit to be made on

some of these drugs, when that chemotherapy just literally rips up

bodies and the welfare of those patients in the last 3 months of

their life, maybe chemotherapy that might not be needed. Maybe

drugs are being substituted when a better drug is available because the drug substituted has a better kickback, if you will.

Now it is time the system be reformed, Mr. Chairman. I want to

thank you and the staff for uncovering it as much as you have. If

there was one thing certain about this, it is that the responsibility

lies in this Congress to straighten it out. We permitted this to happen. We have got to straighten it out. And I have asked you to do

one thing before you went forward with this hearing, and that was

to be prepared to straighten it out; not just to talk about it, not

just to make Americans understand how rotten the system is and

how all the players in it hate it as much as I hope we all do now,

because we are all forced to play this ugly game with one another,

but more importantly you are prepared to cure it. You and Mr. Bilirakis, the chairman of our Health Subcommittee, are prepared to

offer solutions not next year, but immediately, and I think every

patient in America who is getting skinned by this system to the

tune of 500 percent of the real cost of the drug when they ought

to be paying one-fifth of it, I think they will thank you today for

doing the Nation a real favor by getting rid of a system that robs

the American taxpayer, the Medicare system, corrupts the system,

deprives patients of their critical dollars at a time most needed,

and in some cases may encourage the few, I hope, unscrupulous

people to improperly medicate people in their worst hours, in their

last final hours on this Earth.

I yield back the balance of my time.

[The prepared statement of Hon. W.J. ‘‘Billy’’ Tauzin follows:]

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

Let me begin by thanking Subcommittee Chairmen Greenwood and Bilirakis for

holding this joint hearing today. I appreciate their efforts to highlight the problems

that this Committee has uncovered concerning Medicare drug prices. I sincerely

hope that, by holding this hearing, we can begin the process of fixing these problems.

As Chairman Greenwood has pointed out, the Committee has uncovered disturbing evidence that Medicare may be wasting over one billion dollars a year, paying unnecessarily inflated prices for drugs. This intolerable situation not only affects

the finances of the Medicare program and the American taxpayer, but also directly

impacts the finances of America’s Medicare beneficiaries.

We all have parents, grandparents, friends, or neighbors who depend on Medicare

to help them pay for the small number of drugs that Medicare currently covers. It

is unacceptable that—because of the government’s ineptitude in the way it pays for

these drugs—our loved ones are being forced to pay inflated co-payments for their

chemotherapy drugs to cure their cancers, inhalation drugs to treat their respiratory

diseases, and antibiotics to treat their infections.

10

The Inspector General’s Office at the Department of Health and Human Services

recently prepared a report for me that shows how, last year alone, Medicare beneficiaries paid an extra one hundred and seventy seven million dollars in co-payments

due to inflated reimbursements for Medicare-covered drugs. For example, this

means that cancer patients are paying an extra $6.56 for each dose of Doxorubicin,

and an extra $3.01 for each dose of Leucovorin Calcium. These costs quickly add

up in treatment regimens requiring multiple doses, and often can make an enormous difference for somebody living on a fixed-income.

Of even greater concern to me is the evidence uncovered by the Committee indicating that these overpayments to health care providers may be affecting the quality

of care received by Medicare patients. Patients may not be receiving the most clinically effective treatments, due at least in part to the perverse incentives of the

Medicare reimbursement system. The Committee has learned of instances in which

the Medicare reimbursement ‘‘spreads’’ on certain older, less clinically effective

drugs were so large that drug manufacturers were unable to successfully market improved, more clinically effective drugs to health care providers.

The Committee also has learned that some patients may be receiving unnecessary

medical therapies—again due at least in part to the excessive reimbursements available to health care providers for use of certain drugs. Given the powerful effects that

these drugs can have on patients, we must ensure that no patient receives a particular drug regimen for any reason other than to provide the best clinical care.

Medicare’s broken reimbursement system also turns Adam Smith’s conception of

market competition on its head. Only under Medicare could a drug manufacturer

raise its prices, or at least the ones it reports for purposes of government reimbursement, to increase sales. The Committee has uncovered evidence that at least one

manufacturer has done exactly this. Upon learning that a competitor raised its reported Average Wholesale Price and thus its Medicare reimbursement spread, this

manufacturer responded promptly in the same fashion, noting how simple it was to

change its AWP—something that could be done overnight—in order to maintain

sales.

Here’s another example of this crazy AWP system at work: an internal drug manufacturer document from 1994 discusses the consequences of increasing the spread

on one of its top drugs, quote, ‘‘in order to increase the amount of Medicaid reimbursement for clinical oncology practices.’’ In a particularly blunt assessment, the

author notes with irony how, quote, ‘‘on the surface, it seems that in response to

the entrance of a competitor in the market, Glaxo has actually raised its price on

Zofran—perhaps twice in one year.’’ The memo goes on to ask: ‘‘How do we explain

a single 9% increase in the AWP? What arguments can we make to explain to congressional watchdogs that we are cost-shifting at the expense of government?’’ Despite recognizing the troubling issues raised by such a pricing strategy, Glaxo succumbed to the system anyway, raising its Zofran AWP two months later, while actually lowering the real costs of the drug to providers.

Medicare also distorts the benefits of the generic drug market. Generic drugs hold

the potential to decrease pharmaceutical costs dramatically, through price competition with brand-name drugs. Under Medicare, however, the Committee has uncovered situations in which some generic manufacturers competed for market share by

raising the prices they reported to the government—thus increasing costs to taxpayers and patients—while actually selling the drugs to providers at steep discounts.

Today’s hearing will highlight these abuses. It is my hope that, by bringing this

information to the attention of Congress and the American public, we can build support for reforming the currently flawed Medicare drug reimbursement system.

Chairmen Greenwood and Bilirakis should be commended for their role in this effort, and I look forward to working with them and all the Members of this Committee in solving this problem. I believe that Medicare’s beneficiaries and America’s

taxpayers deserve no less.

Mr. GREENWOOD. I thank the gentleman for his comments and

cooperation and support in this project and inform the chairman

that it is our intent to have legislation included in an omnibus—

whatever omnibus appropriations bill is finally adopted by the Congress that will fix this system soon.

The statement of the ranking member of the full committee has

been entered into the record, and with that the chairman then

turns to the ranking member of the Health Subcommittee for 5

minutes.

11

Mr. BROWN. I thank the chairman. I thank both Chairman Bilirakis and Chairman Greenwood for holding these hearings.

A recent poll conducted by Pew Research Center told us that

Americans are finding it difficult to reengage in their daily lives

after the heart-breaking events of last week. We certainly didn’t

need a poll to tell us that. I think most people in this room are

struggling, as all of us up here are, to regain our footing and return

to their lives despite the anger and sense of loss that has paralyzed

in some sense many of us. But I think most of us also feel it is time

to get back to work.

Staggering prescription drug costs are still pushing retirees deeper into poverty. Forty-four million Americans are still uninsured,

and that number pretty clearly is rising. The uncertain economic

climate makes it more important than ever to fortify the Nation’s

core public programs, Medicare, Social Security, Medicaid, our public health infrastructure.

Our job today is to look at some shady dealings between drug

companies and the Medicare program. The Medicare program and

Medicare beneficiaries are being scammed to the tune of $800 million annually. Some drug companies mark up their prices before reporting those prices to Medicare. What do the drug companies gain

from this deception? They gain a higher volume of sales. What do

doctors gain from this? They gain a healthy margin in the drugs

they administer to Medicare beneficiaries. What do Medicare beneficiaries gain? They gain significantly higher out-of-pocket cost

when the copayment is artificially inflated. Medicare pays more

than it should, Medicare beneficiaries pay more than they should,

and doctors not only receive higher reimbursements than they

should, they have an incentive to overtreat patients. There is evidence that a few doctors actually take the bait and administer

more medication than is necessary.

When you think about the type of drugs Medicare currently covers, chemotherapy, immunosuppressives, respiratory therapy

drugs, other medications for serious, serious illness, it is truly disturbing to think that any doctor would compromise the Hippocratic

oath in this manner. On the face of it, the so-called average wholesale price scam looks like a textbook case of fraud, waste and

abuse. AWP is a bit like the Holy Roman Empire we learned about

in school. The Holy Roman Empire to be sure was not holy, and

it wasn’t really Roman, and you could hardly call it an empire. It

is the same with the average wholesale price. They aren’t the average of anything, they certainly aren’t wholesale, and, in fact, they

aren’t even prices. They are a marketing tool.

Unfortunately in some cases the excess Medicare spending appears to compensate for inadequate Medicare reimbursement. That

makes the job of this subcommittee or both subcommittees and this

committee more difficult. Not only do we have to figure out how

much to pay for these drugs, we have to figure out how and how

much to pay providers who are not receiving adequate reimbursement for administering these drugs.

But there are also opportunities here. When we look at how to

pay appropriately for this limited set of prescription drugs, we

should also think about how to pay appropriately for all prescription drugs. We can tell that the prices Medicare pays are artifiVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HEARINGS\75756 pfrm09 PsN: 75756
12

cially inflated across the board, in the majority of cases are artificially inflated, by comparing them to the prices other U.S. Purchasers, large HMOs, the VA, certain big hospitals that other U.S.

Purchasers pay. We can tell that the drug prices that American

consumers pay are artificially inflated by looking at the prices consumers in other countries, in other developed wealthy countries,

pay.

Consumers, employers, and other purchasers in the United

States pay two, three, sometimes four times more than their counterparts in every other developed country in the world for prescription drugs. As a Nation we are the worst equipped to weather artificially inflated drug prices. Every other developed country has universal health insurance. We have 44 million uninsured individuals

under age 65. We have 12 million Medicare beneficiaries who have

no prescription drug coverage.

Mr. Chairman, we have a lot of work to do. Thank you.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for his opening statement the chairman of the Subcommittee

on Health, Mr. Bilirakis.

Mr. BILIRAKIS. Thank you, Mr. Chairman. I, too, would like to

thank you for raising and staying with this issue surrounding this

current system of Medicare drug reimbursement which has resulted in this joint hearing. The Health Subcommittee has spent a

considerable amount in this Congress examining how best to add

a comprehensive prescription drug benefit to the Medicare program. This hearing builds off the work that began in the last Congress where we examined the reimbursements for the limited drug

coverage currently available in the Medicare program.

I would like to welcome and thank our witnesses, including Tom

Scully from CMS and Bill Scanlon from GAO. We rely on these

government officials for factual information and detailed analyses.

I also would like to welcome Mr. Zachary Bentley from my home

State of Florida, the southern part, and I know your testimony, Mr.

Bentley. All the witnesses will help inform the committee and the

public about the issues regarding Medicare’s current reimbursements to health care providers for certain drugs used to treat patients.

The Medicare program currently provides coverage for a small

number of drugs, as we know, much too small, but a small number,

limited principally to those that are administered incident to physicians’ treatment or in conjunction with covered durable medical

equipment such as inhalation drugs used with a nebulizer. Since

at least 1992, Medicare has determined the appropriate reimbursement price for these covered drugs by referring to an industry

trade publication known as the Red Book, which looks at what

manufacturers purport to be the average wholesale price for their

drugs. Since 1977, providers who administer these drugs to Medicare beneficiaries have been reimbursed for their cost at prices

equal to AWP, average wholesale price, minus the 5 percent. Of

this set amount, Medicare Part B covers 80 percent—this has all

been said, I realize—while Medicare beneficiaries can be required

to pay the remaining 20 percent as copayment.

Today’s hearing will examine how Medicare’s current reimbursement system for the relatively few drugs that are covered is costing

13

beneficiaries and taxpayers more than is necessary and maybe having an adverse impact on the health of some of our most vulnerable

citizens.

I recently toured, Mr. Chairman, Clearwater Oncology Center in

my Florida district, and I am sure we are all aware of what great

work oncologists do and how important they are to us and just to

all Americans. At the request of my constituent Dr. Marcus

Chopart, I would like to admit this white paper prepared by U.S.

Oncology, which is entitled Reimbursement Versus Reality, into the

record and ask unanimous consent for that.

Mr. GREENWOOD. Without objection.

[The following was received for the record:]

REIMBURSEMENT VS. REALITY

A US ONCOLOGY DISCUSSION PAPER ON MEDICARE PAYMENTS FOR CANCER TREATMENT

Introduction:

Today, the Medicare program makes a significant and well-recognized overpayment for oncology drugs. The program also makes a nearly equivalent but less wellrecognized underpayment for practice expenses associated with the delivery of cancer care. This paper is intended to discuss the causal factors and current experience

of this practice expense underpayment. It is offered in the hope of furthering the

public policy discussion and the cancer community’s longstanding support for balanced reform, which will address Medicare’s overpayment of drugs and underpayment of services. In this manner, the Medicare program will provide a stable

source of adequate reimbursement for cancer care supplies and services and preserve patient access to community-based cancer services.

Discussion:

Medicare practice expense reimbursement for chemotherapy administration was

established to accommodate a delivery system profile that no longer exists in the

US. Whereas most chemotherapy was administered in hospital settings as recently

as the late 1980s, Centers for Disease Control and Prevention (CDC) data currently

indicate that more than 80 percent of all chemotherapy treatment encounters occur

in non-hospital outpatient settings (freestanding oncology physicians’ offices and

community cancer centers). Reimbursement policy changes, managed care cost-saving pressure, patient preference, the advent of more effective ambulatory therapies,

and the advanced capability of freestanding facilities to provide highly-complex care

are the major causal factors that fueled the migration of patients from hospital to

non-hospital settings.

This historical perspective is important because it helps to explain the flaws

plaguing the Medicare program’s practice expense reimbursement policy for cancer

care. When the Resource-Based Relative Value Scale (RBRVS) was established in

1992, the Practice Expense (PE) components within the RBRVS were based upon

historical ‘‘usual and customary’’ physician fee schedule systems that evolved at a

time when most chemotherapy was administered in hospitals. As a result, reimbursement levels for the RBRVS codes relating to physicians’ offices and other freestanding facilities were based on the few resources that were used in those settings

during the period preceding the RBRVS implementation.

The evolution of cancer care and the resulting reimbursement discrepancy described above has long been recognized by Congress and HCFA/CMS. For example,

after it became clear in the mid-1980s that chemotherapy was moving to freestanding facilities, Congress required the Secretary (in section 4055(d) of OBRA

1987) to study and report to Congress on possible Medicare reimbursement changes

to more accurately reflect the costs associated with providing chemotherapy in physicians’ offices. HCFA subsequently published a notice in the Federal Register that

recognized that Medicare payment for chemotherapy administration may be inadequate:

‘‘Changes in treatment methods and advances in technology now allow chemotherapy to be furnished to many patients in the physician’s office, thus reducing

the need for hospitalization to administer chemotherapy. Furnishing these services in the physician’s office is more convenient for some patients and may provide other benefits as well.

14

‘‘Current Medicare Part B payment rules for physicians’ services, however,

may fail to compensate adequately for these services because the usual reasonable charge methodology may not fully recognize the overhead costs involved in

these procedures. Some sources of additional costs include employment of nurse

oncologists, special patient rooms, and safety equipment required because of the

toxicity of the chemotherapeutic agents and safety procedures issued by the Occupational Safety and Health Administration.’’ Unfortunately, this recognition has never been translated into more accurate

Medicare reimbursement for cancer care services. As a result, inadequate and inaccurate payment levels have been utilized since the creation of RBRVS, with updates

for inflation but without any significant revision, even though the locus of non-surgical cancer care has moved from hospital settings to freestanding physicians’ offices

and community cancer centers.

In other words, the resource-based codes currently used by Medicare to reimburse

for oncology practice expenses do not reflect the transfer of resources from hospitals

to freestanding facilities and the additional costs that have arisen consistent with

advances in and the complexity of today’s more effective treatment regimens. Put

another way, hospital care and complex services moved to freestanding facilities— but Medicare’s practice expense reimbursement policy has never been significantly

and continuously updated to reflect that fact.

Summary Points:

The implications of the above can be identified through examination of the many

instances of shortfall which exist between the delivery and reimbursement of cancer

care in freestanding facilities. The following bullet points summarize just a few of

these:

• Today, nursing and pharmacy time comprise the principal components of the direct labor costs of oncology practice expenses (PEs). However, the allocation of

values and minutes within the CPT codes does not match the actual cost and

duration of nursing services and does not address pharmacist and pharmacy

technician labor and related medical supplies and quality control processes. For

example, CPT 96410 (first hour of chemotherapy infusion) does not adequately

reimburse for the actual costs of the activities which currently fall under the

definition of that code. In addition, activities which need to be performed in the

care of a typical patient often exceed 96410’s 121 minute estimate of total nursing time. This is a commonplace problem in oncology due to:

• The compromised physical and mental condition of many seniors with cancer, • The complex procedures integral to the care provided to all cancer patients

undergoing chemotherapy treatment (for example: patient assessment prior to

chemotherapy administration, evaluation of laboratory data such as blood

counts and renal and liver functions, calculation of drug dosages based on

body surface areas to prevent medication errors, insertion of intravenous or

central venous catheter devices, continuous monitoring to address potential

adverse reactions, a variety of assistive care activities, and hazardous materials preparation and disposal).

• The amount of patient and family member training required due to the delivery of outpatient rather than inpatient care, the complexity of care provided,

and the side effects and potential complications associated with multi-drug

agent chemotherapy regimens,

• The time-intensive nature of patient care-related follow-up and monitoring required due to the life threatening side effects and complications routinely experienced by cancer patients during a typical chemotherapy protocol, and

• The recently-established standard of practice in which pharmacists and pharmacy technicians are utilized within cancer care facilities to enhance the safety of the drug administration process. As the recent Kansas City experience

clearly demonstrates, on-site skilled pharmacy services are integral to the delivery of safe and effective cancer care.

• Medicare utilizes chemotherapy administration codes published in the AMA’s Current Procedural Terminology (CPT) manual but applies rules that differ from

the CPT’s descriptions. For example:

• Medicare only allows code 96408 (administration by push technique) to be reported once per day for a patient regardless of the number of drugs administered by push. Many treatment regimens require the administration of multiple drugs, however, some of the most common of which are vesicant. Drugs

classified as vesicant are agents that will cause serious tissue damage (including potential loss of limb) if they leak into the tissues of the patient’s hand

or arm; as a result of the potential for this serious complication, the administration of vesicant drugs requires prolonged one-on-one nursing care. As a reVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 E:\HEARINGS\75756 pfrm09 PsN: 75756
15

sult, caregivers routinely bear significant multiple push and specialized care

costs that are not adequately reimbursed under current practice expense policy. • CPT 90784 (intravenous push of therapeutic medication) is a code that was

established to cover the costs of administering non-chemotherapy agents such

as anti-nausea medications, anti-sensitivity drugs, and steroids. Despite the

intention that code 90784 provide reimbursement for therapeutic agents and

despite the fact that such agents are often a necessary component of a chemotherapy regimen, Medicare will not make a payment for 90784 activities that

are undertaken on the same day as the infusion of a chemotherapeutic agent.

CPT 96410 includes a general description of the service (first hour of chemotherapy administration). Based upon that description, CMS’ Clinical Practice

Expert Panel (CPEP) process has estimated a time allotment of 121 minutes,

an allotment included in published Medicare payment policy. However, actual

Medicare reimbursement does not currently cover 121 minutes of nursing

time and instead provides for a payment level that covers just an estimated

20 percent of costs associated with 96410. • Current Medicare practice expense reimbursement for oncology either does not

take any account of a wide variety of activities which are common and integral

to the delivery of cancer care in freestanding facilities or allocates significantly

insufficient minutes and resources to them. For example:

• Triage and patient/family education, which consumes an estimated 25-40 percent of a typical oncology nurse’s day (versus the 15 minutes now allocated

by Medicare) and involves frequent and lengthy phone interaction with the

patient and/or the patient’s family support person, • Tumor registry-related activities (required by most state health departments

and managed by the Centers for Disease Control and Prevention), • Clinical research-related activities (recently approved for Medicare coverage

but currently lacking any PE adjustments for the significant labor adjustments required due to the data intensive nature of the clinical research process), • On-site pharmacy-related activities (increasingly becoming the standard of

practice due to the increasingly complex nature of new chemotherapy drugs

and biotechnology agents and due to the necessity to free up oncology nurse

time in light of the national shortage of trained nurses), • Biohazardous waste disposal (including federally-mandated disposal systems

and required monitoring of disposal by specialized vendors in federally approved disposal sites), and • Financial counseling and financial aide assistance (requiring an estimated 10-

20 percent of a typical oncology nurse’s day due to the aggressive denial of

benefit standards-of-practice within the insurance industry and by Medicare

intermediaries).

• As a result of the scope of services that are not currently being reimbursed or that

are inadequately reimbursed, oncology nurses estimate that a majority of their

time is devoted to activities that are not currently ‘‘billable’’ (i.e. considered

within the components of the various CPT-4 codes) under Medicare. Of those

activities which can be billed today, the vast majority are reimbursed at levels

that are far below the actual cost of undertaking them (at levels estimated to

be less than 20 percent of actual costs reimbursed).

• Current Medicare practice expense reimbursement for oncology does not take into

adequate account a wide variety of processes, supplies and equipment which are

common, frequently mandated by federal law or regulation, and integral to freestanding facilities. For example:

• Hepa-filter equipped hoods for admixture (to prevent exposure and contamination),

• Safe-needle systems (to prevent caregiver needle sticks),

• Biohazardous waste containers (to prevent exposure and contamination),

• Reinforced gowns and gloves (to prevent exposure and contamination),

• Specialized devices required to access implantable central venous ports to

safely administer toxic chemotherapeutic agents and reduce the complications

(especially life threatening infections) associated with frequently repeated intravenous drug administration processes,

• Business and clinical record audits and internal reviews required to ensure

compliance with billing regulations as recommended by the OIG Guidelines

For Medical Practices, and

• Business and clinical record audits required by the FDA, OIG, and Medicare

intermediaries associated with standard of care procedures and drugs utilized

in the clinical research process.

16

• In the late 1990s, Medicare practice expense components were made resourcebased, a process which presented an opportunity for the inadequacy of drug administration payments to be addressed:

• HCFA initially pursued an approach that would have increased payments to

cover costs; the Agency adopted a ‘‘bottom up’’ approach under which clinical

practice expert panels (CPEPs) were formed to estimate the staff time, supplies, and equipment used in each service. • Because the bottom up methodology would have resulted in significant shifts

of Medicare payments among various specialties, however, legislation was enacted that postponed implementation of the resource-based practice expense

components for one year and specified new criteria for HCFA to consider in

adopting a methodology.

• As a result, HCFA changed to a ‘‘top down’’ methodology, which resulted in

the preservation of the status quo.

• On November 1, 2000, HCFA published the final rule for the FY 2001 physician

fee schedule that also presented an opportunity for the inadequacy of drug administration payments to be addressed:

• HCFA accepted and published recommendations made by the American Medical Society’s Relative Value Update Committee (RUC) and Practice Expense

Advisory Committee (PEAC) for CPT codes 96408 and 96410. [42 CFR Parts

410 and 414, 65392-65393]

• In its rule, HCFA stated ‘‘We will now use the RUC-recommended total times

of 102 minutes of clinical staff time for CPT code 96408 and 121 minutes for

CPT code 96410.’’ HCFA also posted a complete database on its website (http:/

/www.hcfa.gov/stats/resource.htm) that provided dollar values (inclusive of direct and indirect expenses) for the updated codes, as follows:

Code Published

Value

Actual

Value

Percent

Difference

96408 ...................................................................................................................... 183.67 37.11 495%

96410 ...................................................................................................................... 267.05 59.684 47%

• Despite being accepted and published by HCFA in its final rule, the significant increases were not adopted into the Medicare program’s actual payment

levels.

• For codes lacking a physician work value (such as all chemotherapy administration codes), HCFA adopted a methodology in which a special ‘‘zero work value

pool’’ was created. HCFA has never published an explanation of this methodology, but the pool reportedly is assigned dollars based on the practice expenses

per hour of the average physician, and non-physician time for each procedure

is substituted for the physician time that would otherwise be used.

• As a result of this methodology, Medicare payment amounts were kept at approximately the same levels as existed prior to the institution of the resourcebased system (in fact, it has been suggested that HCFA selected this methodology to maintain the status quo in payment amounts).

• Medicare pays a ‘‘bad debt credit’’ to offset uncompensated care provided by hospital settings but does not currently have any provision for such a payment to

freestanding facilities (which provide the majority of uncompensated chemotherapy services to Medicare beneficiaries who cannot meet their coinsurance

obligation, among other needy patients).

• According to the Medical Group Management Association (MGMA), the typical physician office setting experiences a non-collection rate equivalent to 7.5

percent of allowable reimbursement.

• In many community-based cancer care facilities—where a large segment of

the Medicare patient population is dependent upon Social Security as a main

source of income—non-collection levels may be much higher than MGMA’s estimate.

• A number of activities and infrastructural resources are needed to operate an efficient and compliant oncology office. However, many of the costs associated with

those activities and resources are not currently reimbursed. As a result, additional practice expense allotments or reasonable returns on services, products,

and other resources are needed to: attract and retain staff (due to the inadequacy of current practice expense reimbursement); invest in facilities, therapy

inventories, and required diagnosis and treatment technology; finance accounts

receivable; invest in information and operational systems to meet NCI/FDA clinical trial research data requirements; retain outside compliance advisors and

auditors; and meet HIPPA regulatory requirements.

17

Conclusion:

It is our hope that this information will be helpful as Congress and the Administration seek to address the disparity between typical, necessary practice expenses

and the reimbursement currently provided under the Medicare program (and, as a

consequence, by private payers). It is also our hope that a clear focus on the nature,

complexity, resource intensity, and technological advances of community-based cancer care—as well as the reliance by the vast majority of Americans with cancer on

care provided in community-based settings—will lead to an updating of Medicare

practice expense reimbursement to accurately reflect the realities of cancer care delivery today.

Mr. BILIRAKIS. This will prove to be a lengthy hearing, and thus

I am limiting my opening statements so we may get to the important testimony of the witnesses, who, again, I thank for their efforts and cooperation. Thank you, sir.

Mr. GREENWOOD. I thank the gentleman and thank him also for

limiting his remarks. I will ask if the opening statements of the

Members could be limited to 3 minutes, and all opening statements

will be entered into the record.

The Chair recognizes for the opening statement the gentleman

from New Jersey Mr. Pallone.

Mr. PALLONE. Thank you, Mr. Chairman, and I want to thank

you both, you as the Oversight Chairman and also Mr. Bilirakis as

the Health Subcommittee Chair for holding this hearing.

The issue on the table today critically analyzing the marketing

practices of drug companies will show the immense amount of

fraud perpetrated on the taxpayers and the senior citizens of this

country. I along with all of my colleagues condemn practices that

raid the Federal Treasury of at least $800 million annually. Further, I am particularly outraged at the impact of this pervasive

fraud on Medicare beneficiaries by massively increasing the dollars

coming out of pocket to cover the drug costs of sick and dying seniors as a result of the 20 percent copay overcharges.

Mr. Chairman, the GAO, the HHS, inspector general, and some

particularly well-informed whistleblowers will testify today and

leave no doubt that this system is broken and that the people who

can least afford the cost, our seniors, are the primary victims.

Let us take a look at the winners and losers in the way HCFA

pays for the few outpatient drugs that Medicare covers under Part

B. The winners are obvious. They are the brand name drug companies and some unscrupulous physicians that administer the chemotherapy and other infusion drugs in their offices. There have been

some discussions that generic competition is the cause for the broken system, but make no mistake, it is not independent generics,

but rather the brand name firms that are the root cause of this

fraud.

The companies named publicly in news stories as having pled

guilty to crimes are under active investigation. In addition, Mr.

Chairman, the competition is not always among drugs that the

FDA says are generic equivalents. The competition is also among

brand name drug companies that go to great pains to claim that

their products are not therapeutically interchangeable.

Documents which will be introduced at this hearing will show

that the salesmen peddling these drugs were not arguing that their

medicine was therapeutically superior to the competition, but rather the internal company documents make clear the field of battle

18

was who could misrepresent their prices more outrageously to

Medicare so as to provide the fattest profit. There are some greedy

doctors, of course, who pocket sums approaching a million dollars,

and they are obviously making a lot of money; however, it is the

drug companies’ fraud that makes the money possible.

The Medicare reimbursement system is flawed, clearly, but no

law, no regulation, no guideline issued by HCFA or any other government agency directed drug companies to commit fraud. Just because a system can be gamed doesn’t provide any person or any

firm with the right to defraud the government or their fellow citizens, and the proof of that is that not all drug companies played

this game. Some chose to compete only on traditional terms, and

I certainly commend them for that. Unfortunately, at least in segments of the market, the honest firms were the exception and not

the rule, and I find that very tragic.

Thank you very much, Mr. Chairman.

Mr. GREENWOOD. I thank the gentleman and recognize the gentleman from Florida Mr. Stearns for his opening statement.

Mr. STEARNS. I thank the chairman, and I also want to thank

Mr. Bilirakis for all the work he is doing on this hearing, too. And,

of course, I want to thank Administrator Scully for coming here

with Deputy Inspector Grob and Director Scanlon for their dedicated analysis. And perhaps this is a quagmire that they can help

us out of by suggesting legislation, what we should do.

This is sort of an embarrassing thing to be here, this many people. Obviously when I see a lot of people like that, there are pocketbooks involved here, but we have got to do something, and as

Chairman Tauzin mentioned, we cannot sit here and let this continue. I almost think there is moral obligation to go back and try

to rectify this. No one is talking about all the American citizens

who have paid all this money and have paid too much, and it is

out of their pockets, and it has gone in the wrong directions, and

it is difficult to go back in retrospect and try to come back with

something to rectify this but just move forward. Maybe that is all

we can do.

I also want to thank Mr. Zachary Bentley from my State of Florida. I know it is a little difficult for him to come up here with airline travel, so I appreciate his efforts in coming up here.

This is a very thorny question, reimbursing for drugs. Who would

have thought that when Medicare started, that you would actually

be doing a lot of the caring for patients in outpatient clinics? I had

the opportunity to visit and to tour an oncology center in my hometown of Campbell, Florida, and it is very satisfying to see patients

cared for in this outpatient clinic. The drugs are administered by

nurses and doctors, and these patients have their family right

there. It is an informal situation, but all the while this is happening and they are administering these drugs and taking care of

them, obviously the question they brought to my attention is that

Medicare is overpaying for drugs, but underpays for services associated with the administration of therapies. So this is a very poor accounting practice.

It is immoral what we are doing. It is unsettling to patients, and

many patients, as the chairman has pointed out, are paying 300

and 500 percent in their copayment. This cannot be tolerated, and,

19

Mr. Chairman, I commend you for your hearing today, and your

commitment to do legislation is very important.

Finally, it is hoped that whatever drug reimbursement system is

employed, it should not impose burdensome accounting requirements on the medical facilities and providers. So whatever we do,

let us try to rectify the problem without creating another overlay

of government upon government with some kind of accounting procedure. Remember, the caregivers who take care of patients with

cancer and all these respiratory problems and devastating illnesses

are healers. They are not bean counters. They don’t want to spend

the rest of their life filling out government forms to rectify this

problem.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentlelady from California Mrs. Capps.

Mrs. CAPPS. Thank you, Mr. Chairman.

Obviously for most of us our thoughts are elsewhere today. They

are in New York, at the Pentagon, in the homes of the families

across America who have lost loved ones in last week’s terrible

events. I think especially of Lisa Raines, so closely involved with

many in this room today. Those events and their ramifications will

certainly be with us for a long time, and clearly we need to spend

significant time on our Nation’s many responses to them.

But I am very pleased that at this time this committee is making

an effort to continue its business. Although the attacks have

changed many of our priorities, we still must address Medicare and

Medicaid and other issues that may seem mundane in comparison.

So I want to direct my attention to the issue at hand. It is very

disheartening to learn about efforts to take advantage of our Nation’s seniors and America’s taxpayers. And clearly if what we have

been told is true, that is what has happened. Pharmaceutical companies have worked to increase their profits by artificially raising

the Medicare reimbursement rates for certain prescription drugs,

particularly oncology drugs. Sometimes this happens to the point

where our beneficiary pays more in his or her copayment than it

costs to buy the drugs outright. Clearly, given the current budget

situation, Medicare cannot afford to be paying too much for the

services and prescription drugs, and certainly our seniors are already too strapped to afford most of their prescription drugs. To

take money from their already overextended pockets this way is

terrible.

It is even worse that this is being done with something as important as oncology drugs. People suffering from cancer should not be

the target of anyone trying to make a profit. Many provider groups

are arguing that their reimbursement rates for the services they

provide are too low, and they need the surplus payments to cover

extra costs. It is true that reimbursement rates for certain services

are too low. This is certainly true for oncology nursing, which I

know from personal experience is essential to cancer treatment. In

fact, last year I taped a message for a video about the importance

of oncology nursing and nurses and the need to improve their rates

of reimbursement. But I want to make it clear that just because

these rates are too low does not mean it is all right for other rates

to become too high.

20

Congress and the Centers for Medicare and Medicaid Services

need to act now to end this practice. We need to make sure that

Medicare is neither overpaying nor underpaying for any services.

To do otherwise threatens the very stability of Medicare and the

ability of our doctors to provide important health care. We must

stop the gouging of our seniors and constituents by drug companies

looking to gain a little market share.

Mr. Chairman, I am glad you are holding this hearing, and I look

forward to working with you in the future.

Mr. GREENWOOD. The Chair thanks the gentlelady and recognizes the gentleman from Georgia Mr. Deal for an opening statement. Mr. Deal’s not here.

Dr. Ganske for an opening statement.

Mr. GANSKE. Thank you, Mr. Chairman.

I think it is important to have this hearing. We need to look at

the concept of the average wholesale price. In my mind the question is, is it the wrong concept for us to be using in terms of reimbursement, or is the information-gathering and the actual way that

it is being implemented wrong, and does that need to be improved?

We have to remember that we are not just talking about Medicare, we are talking about Medicaid and also proposals to provide

prescription drug coverage for Medicare recipients. I have a proposal, for instance, that would extend Medicaid coverage to the

neediest, and so I think that—and the way the AWP has done is

important. We need to address issues of potential fraud.

But I want to say this: This last Sunday I gave a speech at my

church on September—about the events on September 11, and it

was pretty emotional, but it was especially emotional for me because I sat next to my former district staff director, who has advanced lung cancer and is getting chemotherapy. And I will tell

you, Mr. Chairman, it makes me rather angry to hear people sit

up here and pontificate about the motives of the physicians who

are taking care of Luke. What is medical necessity in his case?

Some of the things that I have heard would indicate that we questioned the motives of the doctors who are taking care of him because they can’t cure him, but they are giving him chemotherapy

that may give him a couple extra months of life. I would ask my

colleagues how much is that worth?

So let us get away from some of this rhetoric up here about the

motives. Let us talk some of the facts. Here is a fact. When Luke

goes in for chemotherapy, his doctor is paid $62 for the administration of that chemotherapy. Just the cost of the nursing help is

probably over $100. We are not even talking about if he is a Medicare patient. We are not even talking about the cost of the overhead. It is likely that the cost for that physician to administer that

type of chemotherapy for a Medicare patient, reimbursement by

Medicare is less than one-half, maybe less than one-fourth of what

the actual costs are, and that isn’t even taking into consideration

the amount of time for the personnel and the physicians involved

with the multiple phone calls that chemotherapy patients put in to

a physician’s office.

So when we’re talking about this threat, let us also talk about

the threat in Medicare and the totally inadequate payment of

Medicare services for this, because this is really important. If this

21

isn’t addressed, then those Medicare patients ultimately will not

get the type of care that they need, like my friend needs right now.

So let us look at fixing this AWP. Maybe it can be fixed. Maybe

we can prevent some of the problems. But you know what? I’d have

to say this. If a Medicare HMO negotiates a discount with a pharmaceutical company and thereby increases its profits, is that

fraud? Should we be looking at that?

My suggestion is this: Why don’t we get the actual data on the

average wholesale price. Let us collect the slips and find out what

the pharmaceuticals are actually charging and being paid. I would

predict then that you will see, when you get a more accurate AWP,

you’ll see some changes in that, in those amounts, and you’ll then

get a more accurate index of what, for instance, the reimbursement

truly ought to be for the physician services.

So, Mr. Chairman, I think it’s a pretty important hearing, and

I would just ask my colleagues to look at this in a rational way.

Thank you.

Mr. GREENWOOD. The Chair thanks the gentleman and assures

the gentleman that it is our intention to make sure that oncologists

and all providers are adequately compensated—appropriately compensated, and, in fact, it will be the testimony of the General Accounting Office that will give us the facts that we need to determine what that reimbursement should be.

The Chair recognizes for an opening statement the gentleman

from Texas Mr. Hall.

Mr. HALL. Mr. Chairman, thank you, and I think Mrs. Capps

really hit the nail on the hit when she talked about priorities, because we all have priorities, and I think it is great of this chairman

and the ranking member to hold this hearing in the midst of all

the anxieties that the people have all across this country.

This is very important, and I suppose if I could say anything to

add to the opening statements that’s been made, it would be that

I’d like to see us come together, not slapping one another around,

but to come together to solve these problems, Medicare, Medicaid,

Social Security, the needs that the people have out there, and come

together as closely as we’re together after the President’s speech

last night on foreign affairs and offense and defense. That is what

is really needed.

I’m very interested in the studies that have been made by GAO

and CMS. I hope they’re on current data on costs for physicians,

particularly in chemotherapy, because in my family I have that

problem, have had that problem to one very dear to me. We’ve all—

we are all what our experiences are. But I think the very fact that

we have all these empty seats here indicates that we are in a busy

time, in an anxious time, and I thank you for having this hearing.

I support the hearing and the things that we’re going to have

here, and I’d make a request, if it has not already been made, that

we be allowed to submit questions and leave them on the record

to have their answers put into the record to where the rest of the

Congress and the rest of the Nation might have the benefit of this

hearing, and I yield back my time.

Mr. GREENWOOD. Without objection, questions posed by members

of the committee will be included in the official record.

22

The Chair now recognizes the gentleman from Pennsylvania Mr.

Pitts for his opening statement.

Mr. PITTS. Thank you, Mr. Chairman. I want to commend you

and the staff and the whistleblowers for uncovering this serious

abuse in the Medicare drug reimbursement system. The system

deeply is in need of reform, and I want to thank you for holding

this important hearing. I look forward to hearing from your distinguished witnesses today. Thank you. I yield back.

Mr. GREENWOOD. The Chair recognizes the gentleman Mr. Stupak for an opening statement.

Mr. STUPAK. Thank you, Mr. Chairman. I’ll waive my opening

statement. Just thanks for having this hearing. I look forward to

the testimony we’re going to hear today.

Mr. GREENWOOD. The Chair recognizes for an opening statement

the gentleman from Georgia Mr. Norwood.

Mr. NORWOOD. Thank you, Mr. Chairman.

I wonder if I could identify who developed that slide while I’m

beginning my opening statement so we can know who to talk to

about it and try to understand it. But I do thank you for holding

this important hearing this morning, and in the interest of time,

I’m going to try to be brief.

It is clearly obvious that CMS needs to be in a responsible way

paying for drug therapies that it does cover under Medicare, and

if CMS is overpaying, then that problem needs to be corrected, period, now. If there is fraud in any way occurring with the AWP,

that problem needs to be corrected now.

But the tone of the hearing is one in which I think we ought to

be a little concerned about, and I’ll spend my time talking about

that. If our effort here is to try to find somebody to blame or scapegoats, we need to look, I believe, at other obvious points and the

bigger picture that might be leading to some of these type of

things.

I don’t think it’s a joke or anybody misunderstands that Medicare significantly underpays providers for many services, and you

may not believe me or Dr. Ganske or Dr. Coburn or others who

have been saying for years that is the case, and it is getting worse

and worse, but it is the case, whether you believe us or not.

I don’t think we need to pat ourselves on the back today and

think we’re making real progress on this one particular problem

through this hearing, because the truth of the matter is we are still

ignoring the fundamental problem of Medicare. Health care costs

money, folks, and it is hard to understand sometimes why—when

a patient is dying, perhaps the oncologist is continuing to inject

that patient to buy them a few more months or weeks or make

their life a little bit better.

Now, maybe we don’t want to pay for that. Maybe we want to

say that we don’t want to pay for that, but let us be honest with

our constituents. Let us be honest as a government entity. If we

don’t want to pay for that or can’t, for pity sakes, stand up and say

so. Don’t try to find a scapegoat to blame.

Now, I don’t understand the slide in the back of the room. I have

a hunch the implication there is that, for example, Leucovorin costs

$1.25, and isn’t it absolutely awful that the provider might be

charging $42 to use that injection? How could he possibly charge

23

so much money when it only costs $1.25? Well, how about extending that slide all the way out over to here and show the real cost

rather than to imply that one of our oncologists is just trying to rip

you off. That is all it is. The poor government is getting beaten up

by the medical profession because they would dare charge $42 for

a chemical that costs $1.25. Now, I don’t know if $1.25 is the right

cost or not, but I do absolutely know that slide is fraudulent. It is

set up there to imply that somebody is ripping somebody off. Yet

it ignores all the other costs that Dr. Ganske started to begin to

talk about that is inherent in the price of giving that injection.

Now, if our staff is going to present to us information, I would

kindly recommend that they present to us factual information and

let us get at the truth, not have a witch hunt.

Now, Mr. Scully, you’re here. We’re going to talk to you about it.

If there is fraud going on, get after it. If there are doctors absolutely cheating the system, get after them. But let us be honest

about what we are discussing in a government program that year

after year after year keeps trying to salvage the problem by paying

people less than it costs to deliver services. Maybe we can’t change

that, but for pity sakes, let us be honest about that with the American people.

I wasn’t as brief as I intended, Mr. Chairman. I’m sorry. I yield

back the balance of my time.

Mr. GREENWOOD. The Chair thanks the gentleman. We’ll deduct

that from his round of questioning.

I’ll simply indicate to the gentleman that we will recognize that

many providers are underpaid. If we can recoup this billion dollars

that is being wasted on underpayment for drugs, we’ll probably

have more than sufficient funds to pay a whole lot of providers.

The Chair recognizes for an opening statement the gentleman

from Wisconsin Mr. Barrett.

Mr. BARRETT. Thank you, Mr. Chairman. Thank you for chairing

this important meeting.

I agree with the previous speaker that we shouldn’t be looking

for a scapegoat, but I think at the same time we have a very serious responsibility to make sure that the taxpayers in this country

are treated fairly, and according to the information that I have

seen in fiscal year 2000, according to the Office of the Inspector

General, Medicare could have saved between $887 million and $1.9

billion by paying prices that other government to nongovernment

purchasers were paying. These amounts range from 17 to 32 percent to the total $5 billion Part B costs to the government, and the

recipients paying the bills.

So we do have an obligation, and we’re not just talking about

chump change here. This is a large amount of money, and it is our

responsibility, I believe, to hold hearings like this to find out exactly what the problem is. So I, again, applaud you, Mr. Chairman,

for holding the hearing.

On another note, I know Mr. Scully will be testifying, and I just

want to highlight an issue that I think that we also have to address, which is not 100 percent on point, but there is a Federal barrier right now which prevents safety net hospitals from negotiating

better prices on in-patient pharmaceuticals. There is an unreasonably narrow interpretation by CMS of a Medicaid provision passed

24

by Congress to facilitate free market negotiations between drug

manufacturers and safety net providers. We need to make it possible for safety net providers to negotiate better prices on in-patient

and out-patient drugs, and I hope to explore that further, and I

would yield back the balance of my time.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for his opening statement the gentleman from Michigan Mr.

Upton.

Mr. UPTON. Thank you, Mr. Chairman, and at the same time, I,

too, will ask unanimous consent to put my entire statement into

the record.

I just would like to add, we do need reform in the system. It appears to be broken in lots of different ways. We need to help both

the beneficiaries as well as the taxpayers. We need to make sure

that the providers are adequately compensated in a fair way to

make their expenses as well.

We have a good task ahead of us. I welcome the hearing on the

debate this morning, this afternoon, and yield back.

[The prepared statement of Hon. Fred Upton follows:]

PREPARED STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF MICHIGAN

Mr. Chairman, thank you for calling today’s hearing on Medicare’s system for reimbursing prescription drugs administered in physicians’ offices and certain other

settings. As the title of the hearing indicates, the current system serves neither

Medicare patients nor the taxpayers well.

What our committee investigators and the GAO have uncovered is not pretty and

reflects badly on everyone involved. Medicare’s reimbursement system is being used

as a tool in the intense competition for drug market share, leading drug manufacturers to overstate—sometimes grossly overstate—the average wholesale prices for

their drugs. The often substantial differences between what Medicare will pay for

drugs and what the drugs actually cost physicians may be influencing prescribing

practices. And Medicare patients—already grappling with the ravages of cancer or

other terrible diseases are having their pockets picked—paying twenty percent of

sometimes grossly inflated Medicare prices rather than the often much lower actual

cost of the drug the doctors are using to treat them. Then they pay again when

Medicare premiums rise in response to rising program costs. And the taxpayers,

who foot 75 percent of the program’s costs, are having their pockets picked as well.

Mr. Chairman, I think all of us will agree today that we need to act quickly to

fix the system in the interests of both Medicare beneficiaries and taxpayers.

I hope that today’s hearing will give us the information we need to do it right—

and the impetus we need to do it quickly. We need to figure out a way to get real

data on real acquisition costs so Medicare payments can be adjusted to reflect reality. At the same time, to ensure continued access to care in community-based settings, we need to fix portions of the physician fee schedule to ensure that the true

costs of administering these drugs are reimbursed. In short, we need to give CMS

the tools it needs, legislatively and administratively, to do its job right and to protect some of the sickest and most vulnerable of Medicare patients.

Mr. GREENWOOD. The Chair thanks the gentleman and turns for

an opening statement to the gentleman from Indiana Mr. Buyer.

Mr. BUYER. Thank you for the hearing, and I ask unanimous consent that my statement be placed in the record, and I would also

be hopeful—I’m most hopeful that we will not try to demonize

those who are dedicated to saving life, whether it be our health

care providers or the those of whom manufacture these great drugs

that help extend life. I yield back my time.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for an opening statement the gentleman Mr. Bass from New

Hampshire.

25

Mr. BASS. Thank you, Mr. Chairman.

It is clear this is not a simple problem. It will not demand a simple conclusion. I appreciate the two subcommittee chairmen holding this very important hearing, and I’ll yield back.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for an opening statement the gentleman from Texas Mr. Barton.

Mr. BARTON. Thank you, Mr. Chairman, and Chairman, both of

you, for holding this joint hearing. Let the record show they come

to hearings other than energy hearings, that I’m on this subcommittee.

I was visited yesterday in my office by a pharmaceutical chemotherapy company located in my district. They had done some mathematical analysis, financial analysis, not as extensive as what our

subcommittees have done, and showed that just based on their review, there was almost a billion dollars that could be saved in the

numbers that they looked at and the drugs that they were prescribing, that others were. So I’m going to have to be convinced

that the current system is worth saving before I agree to save it.

If I had to vote today, I would vote to say that physicians could

not prescribe and treat cancer patients. They can choose one or the

other, but they can’t do both, because it seems to me that the system that we have today is broken. We can’t fix it. So we need to

change it. So I’m going to lock forward to the testimony, but put

me down as a Doubting Thomas that the current system is worth

saving. And with that I yield back the balance of my time.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for his opening statement the gentleman from Oklahoma Mr.

Largent.

Mr. LARGENT. Mr. Chairman, in the interest of time, I want to

submit my full statement for the record, and I’ll yield back my

time.

Mr. GREENWOOD. The Chair thanks the gentleman.

Mr. GREENWOOD. The gentleman from North Carolina for an

opening statement, Mr. Burr.

Mr. BURR. Mr. Chairman, let me thank you for this hearing.

Mr. Chairman, every time we look at health care, we find a more

difficult animal than sometimes on the surface we think it is. I

think what we’re looking at today is, in fact, very complicated. I

think the important thing for Members to remember is that over

the years it has been, in fact, this body that legislates much of

what we do in health care. We respond to providers, we respond

to patients, and hopefully sometimes we respond to need, the needs

that exist in the delivery systems that we have some jurisdiction

on.

We seldom get it exactly right. Most of the time we do get some

things wrong, and, yes, in the last 7 years with the leadership

changes, we have gotten some things wrong. But one thing that I

have learned as a member of this committee as we talk about

health care policy is that, one, we always have to strive to do a little bit better; and, two, we also have to be very cautious as we

make change that we don’t make things worse, that we look outside of the area that is our focus to make sure that changes that

26

we make don’t adversely affect other areas of the health care delivery system.

I believe that we’ll hear a lot of information today. I as one will

take that information and try to put it through that test of how do

we make it a little bit better. How do we make sure that we don’t

adversely affect other areas by not just the actions of this committee potentially in the future, but by some of the questions and

some of the documents that, in fact, we put on the record, because

I think, as we all know, throughout the health care system, whether you’re in a hospital or whether you’re in a provider’s office today,

your legal counsel watches what Congress says and what we do

and eventually what we pass. And all of it to some degree is interpreted the same way when lawyers look at liability, and my hope

is that Members will remember that as they ask questions, that

they make sure that they clarify everything, and that in the end

we do something that addresses exactly the problem that we’re trying to get to, a faulty average wholesale price for pharmaceuticals

in this country. If there are other areas we need to address, I note

that this committee will have the will and the patience to do it.

Mr. Chairman, thank you for your time, and I yield back.

Mr. GREENWOOD. The Chair thanks the gentleman.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. ROBERT L. EHRLICH, JR., A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF MARYLAND

Mr. Chairman, thank you for holding this important hearing on legislative measures to address the Medicare reimbursement for pharmaceuticals. As you know,

Medicare drug reimbursement levels affect millions of Americans who face a variety

of serious illnesses.

As we will hear today from the GAO testimony and others, our already-strapped

Medicare program, which pays for a limited number of critical drug therapies, overpays for the costs of these drugs. For instance, the Committee notes that 24 highly

used drugs may be resulting in a Medicare overpayment of at least $750 million annually. I am eager to hear the testimony before us today to learn more about this

overpayment and consider ways to save the Medicare program—and Medicare beneficiaries who pay co-payments on these inflated values—a considerable amount of

money.

While it is crucial to address the overpayment calculation for these drugs, I also

see the other side of the argument. As I learned during the August District Work

Period, providers of care depend upon these overpayments to provide critical care

to their patients. As we will also hear today, Oncology treatment facilities represent

the front line of defense for nearly 80% of cancer patients in our country.

Many in the cancer community acknowledge that the Medicare program employs

a flawed reimbursement structure which overpays them for drugs. At the same time,

however, they argue that Medicare also underpays for many services. For example,

Medicare does not adequately support the critical role played by oncology nurses in

the care of seniors and people with disabilities. In visiting an Oncology treatment

facility in my district recently, I saw first-hand that preserving patient access to

cancer care may only be achieved by simultaneously fixing Medicare’s flawed reimbursement of cancer drugs and cancer services. Such serious flaws have forced these

caregivers to engage in a form of ‘‘cost shifting’’ in which they use drug overpayments to offset Medicare’s underpayment for the treatment services provided to

beneficiaries. This is source of great uncertainty for seniors with cancer and places

significant pressures on the professional caregivers who treat them. Given these two

sides of the argument—with patients in the middle simply seeking quality care—

I am eager to review the testimony of our witnesses and hope that we move forward

to reform Medicare appropriately with the best interests of patients in mind. Mr.

Chairman, I realize your deep concern about these issues as well and thank you for

your leadership. I look forward to our witnesses’ testimony and to working with you

and our colleagues to ensure patient access to high quality care.

27

PREPARED STATEMENT OF HON. ELIOT ENGEL, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF NEW YORK

Mr. Chairman, let me first express my profound sadness over the events of last

week and extend my sincerest sympathy to the families of all the victims. But we

must continue the business of the people. Today’s hearing is focusing on how Medicare reimburses for drugs. It is apparent that it is a complex problem that affects

many different areas, from patients, to physicians, to drug companies. Any proposed

fix must consider the ramifications for all of these groups, however, the interests

of Medicare recipients must be our top priority.

Congress must consider any proposed fix carefully. There have been several attempts to address this issue, which have either failed to become law or failed when

they became law and were repealed. The goal that we must keep in mind here is

that seniors receive safe, effective, low-cost care. In order to achieve that end, providers must be adequately reimbursed for drugs and the services they provide but

fraud and abuse must be rooted out. In the past, Congress has fallen back on AWP

(average wholesale price) when providers have said that they were not being reimbursed for their costs. Instead of considering new reimbursement policies, AWP was

used to cover these costs. Now, this money may be taken away and providers will

be left with inadequate reimbursements for their services. Clearly we must be sure

to consider these circumstances.

There is no doubt that there is fraud and abuse because of AWP. I think we do

need to fix this problem, but we need to make it better, not worse. I have introduced

legislation to address one of the major problems with home infusion therapy. My

bill, HR 2750, the Medicare Home Infusion Therapy Act, addresses the particular

problems associated with home infusion therapy. Medicare’s reimbursement policy

for home infusion therapy is simply outdated. Modern medicine has made the administration of many drugs safe and effective in the home. However, because of ludicrous reimbursement provisions seniors are forced to stay in hospitals or trek to

physicians offices on a daily basis to receive their treatment. In many cases, this

treatment can be conducted in the home safely and at a fraction of the cost. To address this issue, HR 2750 directs the Secretary of Health and Human Services to

set up a fee schedule for drug reimbursements and provider reimbursements that

would ensure adequate and fair payments to providers. I feel that this legislation

appropriately addresses the needs of seniors and providers and could serve as a

model for a broader approach to the problems with AWP. I urge this Committee to

examine this legislation closely and I also ask you, Mr. Scully, to work with me on

this issue.

I want to thank all of our witnesses for attending this hearing today under such

difficult circumstances. I look forward to hearing your testimony.

PREPARED STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TEXAS

Thank you Mr. Chairman for holding this hearing on Medicare’s reimbursement

system for oncology treatments.

In light of last week’s events, it is difficult to get too worked up about issues like

Medicare reimbursements and practice expenses.

But the truth is that we must continue to do our job in Washington, and as members of this committee, we must continue to improve our Medicare system for beneficiaries and providers.

This issue is an important one. Each day, 3,400 Americans learn that they have

cancer. Every minute, another American dies from some form of this disease. Cancer costs our country more than $107 billion each year.

And with more than 60 percent of all cancers being diagnosed in individuals over

age 55, the Medicare programs is bearing a significant burden for treating cancer

patients.

When the Medicare reimbursement system was first developed, most cancer patients went to the hospital to receive treatment.

But nowadays, eighty-five percent of these cancer patients are receiving their

treatment at out-patient cancer centers.

Our reimbursement system does not reflect the changing world of cancer treatment.

Medicare’s reimbursement system for cancer drugs is based on an artificial average wholesale price or (AWP).

As our witnesses will testify, however, this AWP is dramatically inflated for cancer drugs, causing the Medicare program and its beneficiaries to pay exorbitant

costs for their life-saving cancer therapies.

28

Medicare reimburses for 95% of the AWP for oncology drugs.

But, because the AWP does not actually reflect the costs of oncology drugs, physicians are being reimbursed for considerably more than they are paying.

As a result, physicians could be prescribing drugs based on how much they’ll profit from them.

There are allegations that physicians won’t prescribe a newer, more effective drug,

because they don’t profit enough.

Now oncologists, like most other Medicare providers, are underpaid for their practice expenses.

As the GAO will testify, oncologists are underpaid by as much as 15%. They use

the windfall from the AWP to make up for the underpayment from practice expense.

This system is bad for patients, is wasteful, and is poor public policy.

There is no question on either side of this debate that the current system is broken.

But we must be careful to repair it in a way that does not endanger cancer patients.

We were all troubled by recent media reports where a pharmacist in Kansas was

adulterating chemotherapy drugs, reducing their potency, and endangering the lives

of cancer patients.

We must ensure the integrity and quality of our cancer treatment system.

But the reimbursement system we have in place must be changed.

It encourages dishonest behavior by both the pharmaceutical manufacturers and

the oncologists.

It results in higher costs for both the program and the beneficiaries—patients who

are probably facing the most daunting health crisis of their lives.

But whatever solution we craft over the coming months, we must ensure that all

Medicare beneficiaries have access to the life saving cancer therapies that they

need.

I look forward to the testimony of our witnesses, and I yield back the balance of

my time.

PREPARED STATEMENT OF HON. BOBBY L. RUSH, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF ILLINOIS

Mr. Chairmen, I want to express my thanks to both of the Chairmen for holding

this very important joint hearing on the reimbursement system for prescription

drugs under the Medicare Part B program. While the Part B prescription drug program is a relatively small component of universe of prescription drugs used by seniors and others, it is, nonetheless, of critical importance to its users.

The Part B program covers those drugs used with durable medical equipment

(DME) or infusion devices, and the host of drugs administered in the treatment of

cancer, hemophilia, organ transplantation, emphysema, asthma, kidney dialysis,

AIDS, and pain management therapies which are administered on an out-patient

basis or in home settings. Many Medicare beneficiaries rely on these life-giving

medications and we must ensure their availability and affordability.

Since the beginning of the Medicare Part B program for drug reimbursements, the

cost of medications for beneficiaries under this program has grown significantly.

Current estimates are that the cost of drug reimbursements has doubled in the last

five years.

I am particularly concerned about the special needs of some of the users of these

drugs, and have a number of questions about the coverage provided. For example,

in hemophiliacs, what is the difference in cost between home infusion and hospital

treatment for a bleeding incident?

I look forward to hearing the testimony of the distinguished panel of witnesses

and to getting the answers to these, and many other questions regarding the reimbursement rates and processes under Medicare Part B program.

Thank you.

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Chairman Greenwood and Chairman Bilirakis, thank you for convening this hearing on Medicare’s payment policy for prescription drugs. I realize that this hearing

may not seem terribly important in light of the tragedy that struck our Nation on

September 11th. The victims of these horrific attacks, their families, friends, and

coworkers, and the security and safety of the American people are all at the forefront of our minds.

29

Yet in a time when government resources may be needed for purposes none of us

could have imagined two weeks ago, we have an added responsibility to ensure that

more routine government expenditures are not wasteful. This hearing concerns improper and excessive payments on behalf of the Medicare program. As stewards of

Medicare, the Committee cannot and should not allow this practice of overpayments

for prescription drugs to continue.

However, before we rush to fix the problem with legislation, we must ensure that

any solution will do nothing to harm the patients who need these drugs. We must

also be conscious of the impact any change we consider would have on the overall

Medicare reimbursement system and other health care payers.

Medicare pays for prescription drugs on an outpatient basis in limited circumstances. One of these circumstances occurs when drugs are administered by a

physician, oftentimes during the treatment of cancer. Medicare’s reimbursement formula is set at 95 percent of the drug’s average wholesale price, or ‘‘AWP.’’ The problem with this formula is that AWP is an artificial number reported by the drug

manufacturer. In fact, some drug manufacturers deliberately inflate the AWP that

they report in order to make the drug more attractive to physicians. The results of

this dubious behavior are higher copayments for seniors, an incentive for patients

to receive wrong or unnecessary drugs, and waste to the Medicare program.

Congress has been aware of the problem with the current formula for many years.

Today, however, the stakes are higher, because any solution we create could have

a far-reaching effect on the senior citizens of this country. This Committee will be

considering a broad prescription drug benefit in Medicare. It is crucial that the

Committee focus on developing a new reimbursement formula that is accurate and

workable, based upon a benchmark price that cannot be manipulated.

At today’s hearing, some groups will testify that these outrageous overpayments

for prescription drugs are necessary to make up for Medicare’s under-payments for

administering them. In correcting the drug reimbursement formula, the Committee

should carefully examine this issue. We certainly do not want to create a situation

where patients who need these drugs cannot find the drugs or a physician to administer them.

However, the primary issue before us today is that of prescription drug pricing.

Billions of dollars have already been wasted—dollars that could have been spent

providing broader prescription drug coverage to seniors. We have a duty to make

sure that this practice stops, and to concentrate on creating a Medicare drug benefit

where seniors are protected from price-gouging incentives.

Mr. GREENWOOD. The Chair now calls forward our first panel:

Mr. William J. Scanlon, the Director of Health Care Issues for the

General Accounting Office; the honorable George Grob, Deputy Inspector General, Department of Health and Human Services; and

Mr. Zachary Bentley, the President of Ven-A-Care, Inc.

Thank you, gentlemen, for your presence today. This is a joint

hearing between the Energy and Commerce Subcommittee on

Oversight and Investigations as well as the Subcommittee on

Health. The Oversight and Investigation Subcommittee is an investigative subcommittee, and as such we’ve had the practice of taking

testimony under oath. Do any of you object to testifying under

oath?

Seeing no such objection, the Chair then advises each of you that

under the rules of the House and the rules of the committee, you

are entitled to be advised by counsel. Do any of you desire to be

advised by counsel during your testimony today?

Seeing no such request, in that case, would you please rise and

raise your right hand, and I will swear you in.

[Witnesses sworn.]

Mr. GREENWOOD. Thank you. You are now under oath, and we

will recognize first Mr. Scanlon for his 5-minute opening statement.

Welcome, sir.

30

TESTIMONY OF WILLIAM J. SCANLON, DIRECTOR, HEALTH

CARE ISSUES, GENERAL ACCOUNTING OFFICE; GEORGE F.

GROB, DEPUTY INSPECTOR GENERAL, DEPARTMENT OF

HEALTH AND HUMAN SERVICES; AND ZACHARY T. BENTLEY,

PRESIDENT, VEN-A-CARE, INC.

Thank you very much, Mr. Chairman, and members of the subcommittees. I’m pleased to be here today to discuss this important

issue and wish to share with you some of the work that we’ve been

doing on the payment by Medicare for prescription drug coverage— the prescription drugs that it covers. We are releasing today a

study that was requested in the Beneficiary Improvements and

Protection Act on Medicare’s pricing of these drugs and will soon

release a related study on payments for drug administration services under Medicare’s physician fee schedule.

Today I’d like to provide highlights of these two studies, both of

which underscore the need for payment method modifications. Our

drug pricing study’s findings echo those of the Inspector General,

the Justice Department, CMS and this committee’s. All reveal that

Medicare’s method, as we’ve heard, for establishing drug payments

is flawed. Simply put, tying Medicare’s drug payment to AWP is a

recipe for inflation and excess payments.

Even though AWP is often labeled a retail or sticker price, it’s

not even that. A price is what a purchaser pays for a product. AWP

is closer to just a number that manufacturers can specify without

rules or criteria, a number not constrained by the need to have a

purchaser willing to pay it.

Like the Inspector General, we found that in 2001, wholesalers’

catalog prices that would be available to any physician or pharmacy or supplier involved sizable discounts from the AWP. These

conservative estimates of providers’ acquisition costs indicated that

discounts on physician-billed drugs, mostly chemotherapy drugs,

ranged from 13 to 34 percent on most drugs and in some cases

were even higher. Discounts on two inhalation therapy drugs that

account for three-quarters of all the drugs billed to Medicare are

startling: 78 percent for one and 85 percent off of AWP for the

other.

Medicare’s troubling experience in terms of drug pricing is often

contrasted with that of the Veterans Administration. As the VA is

essentially a health care provider and not a third-party payer like

Medicare, its approach cannot simply be transferred to the Medicare program, but key elements can be emulated.

The VA uses the leverage of its and other Federal purchasers’

volume to secure prices that are similar to those of other volume

purchasers’ market prices that someone actually pays. To accomplish this, it uses its leverage to get verifiable data on actual market transactions to establish price schedules. Furthermore, for selected drugs, it has consolidated purchasing power even more and

used competition to secure even lower prices.

CMS is in a similar position in that it has available to it comparable information on market prices through the Medicare drug

rebate program. We are recommending that CMS assess how it can

use those data to ensure that Medicare’s payments more closely reflect market prices and to explore how competitive procurements

might be effectively used.

31

Let me turn now to the issue of payments for drug administration. As has been indicated clearly, there is widespread agreement

in terms of drug pricing. Our findings are not controversial. However, providers have indicated that underpayment in terms of drug

administration needs to be made up for by overpayments in the

drug purchase area.

Our second report looks at payments for drug administration

under the physician fee schedule, which include the bulk of chemotherapy administration services provided by oncologists.

In the past, we have examined the then-named HCFA’s development of the resource-based practice expense component of physicians’ fees. That is the part of physician fees meant to reflect the

cost of operating a practice, like nursing and administrative staff,

equipment, rent and utilities. We concluded then that the Agency’s

basic method of computing these fees was sound. It achieves the

goal laid out by the Congress; that is, to stop having the money

Medicare pays physicians distributed according to what physicians

historically charge for their services, and to have that money distributed according to the relative amounts of resources needed to

provide each service.

The implementation of the revised fee schedule, though, has been

controversial. Since Medicare payments in the aggregate were

deemed adequate, the Congress required that the new fees be

budget-neutral. Then if one specialty’s fees increased on average,

some others would have to decline. Such redistributions have occurred, and some are quite significant. Oncology is one of the specialties that gain under the new fee schedule. Its practice expense

payments are 8 percent higher than they would have been if the

prior method of setting fees stayed in place. However, that does not

mean that we do not believe there is a problem in the way fees for

services, like chemotherapy administration by nurses, are calculated.

HCFA modified its basic method in computing payments for services delivered without direct physician involvement, which include

chemotherapy administration as well as some services provided by

other specialties. The modifications were intended to correct for

perceived low payments for these services, and while they did increase payments for some, they lowered them for many others.

Moreover, the modifications increased payments on average for

services that did involve physicians directly. Oncology payments

were more affected by these modifications, because their services

not involving direct physician participation constitute a bigger

share of their billings than other services. These services for

oncologists are about one-third of their billings compared to 5 percent for all physicians.

The payments for nonphysician chemotherapy administration are

on average 15 percent lower than if HCFA used this basic method.

On the other hand, practice expense payments for services provided

by oncologists themselves are 1 percent higher because of these

changes. Using the basic method, which we believe is correct, for

all services would increase practice expense payments to

oncologists by 6 percent.

We don’t think that the HCFA’s adjustments, as I’ve indicated,

were appropriate, and our study will recommend that they use the

32

1 In the case of chemotherapy drugs, the common practice is for a nurse to provide the services

to administer the drug and for the physician to bill Medicare accordingly. 2 A nebulizer is a device driven by a compressed air machine. It allows the patient to take

medicine in the form of a mist (wet aerosol). 3Medicare-covered drugs and biologicals that can be self-administered include such drugs as

blood clotting factors and some oral drugs used in association with cancer treatment and immunosuppressive therapy. 4Our statement refers to HCFA when discussing actions it took under that name.

basic methodology—that CMS use the basic methodology to determine practice expense payments for all services.

Oncologists have raised other concerns about the physician fee

schedule, including the representativeness of data used to estimate

these practice expenses and whether the data reflects current practices in delivering services.

We are currently conducting another study to determine how

CMS can improve and update the information used to estimate

practice expenses; however, what impact improved data may have

on payments is uncertain. Payments are based on the differences

in expenses of one specialty compared to another. Some of the data

concerns raised by oncologists may apply equally well to other specialties so that additional and many current data may reveal that

the relative cost of different specialty services would only change

modestly.

Overall, let me say in conclusion, we believe that it should be a

principle of Medicare payment policy to pay for each service appropriately and not to rely on overpayments for some to offset inadequate payments for others. An efficiently operated Medicare program needs payments that reflect market prices so that it benefits

from the discipline imposed by other payers. It also needs to judiciously use the buying power associated with its size to secure even

greater efficiencies, though that must be balanced with its responsibilities to assure access for beneficiaries and to treat providers

fairly.

Thank you very much, Mr. Chairman. I’ll answer any questions

you have.

[The prepared statement of William J. Scanlon follows:]

PREPARED STATEMENT OF WILLIAM J. SCANLON, DIRECTOR, HEALTH CARE ISSUES, UNITED STATES GENERAL ACCOUNTING OFFICE

Messrs. Chairmen and Members of the Subcommittees: I am pleased to be here

as you discuss the pricing of Medicare’s part B-covered prescription drugs. The pricing of these drugs—largely drugs that cannot be administered by patients themselves—has been under scrutiny for several years. Most of the part B drugs with

the highest Medicare payments and billing volume fall into three categories: those

that are billed for by physicians and typically provided in a physician office setting

(such as chemotherapy drugs),1 those that are billed for by pharmacy suppliers and

administered through a durable medical equipment (DME) item (such as a respiratory drug given in conjunction with a nebulizer 2), and those that are also billed

by pharmacy suppliers but are patient-administered and covered explicitly by statute.3 Studies by the Department of Justice, the Department of Health and Human

Services’ (HHS) Office of the Inspector General (OIG), and the House Committee on

Commerce show that Medicare’s payment for these drugs in some cases is significantly higher than the actual costs to the physicians and other providers who bill

Medicare for these products.

In September 2000, the Health Care Financing Administration (HCFA)—now the

Centers for Medicare and Medicaid Services (CMS) 4—took steps to reduce Medi- care’s payment for part B-covered drugs by authorizing Medicare carriers, the contractors that pay part B claims, to use prices obtained in the Justice Department

investigations of providers’ drug acquisition costs. HCFA retracted this authority in

November 2000 following concerns raised by providers. In December 2000, as part

33

5The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (P.L.

106-554, Appendix F). 6Medicare: Payments for Covered Outpatient Drugs Exceed Providers’ Costs (GAO-01-1118,

Sept. 21, 2001.) 7For the remainder of this statement, we will refer to ‘‘drugs and biologicals’’ as ‘‘drugs.’’

of recent Medicare legislation,5 the Congress asked us to study Medicare’s payments

for part B-covered drugs and make recommendations for pricing methodology refinements. We have reported our findings and made recommendations, as mandated,

today. 6

My remarks today will focus on (1) Medicare payment policies to cover part Bcovered drug costs and costs of administering the drugs and (2) key features of other

payers’ reimbursement policies that suggest opportunities to improve the appropriateness of Medicare’s payments. My comments are based primarily on our study

of Medicare payments for part B-covered drugs and a forthcoming study of physicians’ practice expense payments under Medicare’s fee schedule.

In summary, our study shows that Medicare’s method for establishing drug payments is flawed. Medicare pays 95 percent of the average wholesale price (AWP),

which, despite its name, may be neither an average nor what wholesalers charge.

It is a price that manufacturers derive using their own criteria; there are no requirements or conventions that AWP reflect the price of any actual sale of drugs

by a manufacturer. Manufacturers report AWPs to organizations that publish them

in drug price compendia, and Medicare carriers that pay claims for part B drugs

base providers’ payments on the published AWPs.

We found that, in 2001, widely available prices at which providers could purchase

drugs were substantially below AWP, on which Medicare payments are based. For

both physician-billed drugs and pharmacy supplier-billed drugs, Medicare payments

often far exceeded widely available prices. Despite concerns about what discounts

may be available to smaller-volume purchasers, physicians who billed Medicare for

low volumes of drugs reported receiving discounts from AWP, for most drugs, that

were similar to or greater than those afforded by the widely available prices we documented.

Physicians and pharmacy suppliers contend that the excess payments for covered

drugs are necessary to offset what they claim to be inappropriately low or no Medicare payments for services related to the administration or delivery of these drugs.

For administering physician-billed drugs, Medicare makes explicit payments under

the physician fee schedule. Our forthcoming review of practice expense payments

under the fee schedule will make several points regarding oncologists’ payments. It

will show that Medicare’s payments to these specialists were 8 percent higher than

they would have been if the program’s prior payment method had remained in place

and will show that oncologists’ payments relative to their estimated practice expenses were close to the average for all specialists. However, we will also show that

HCFA made questionable modifications to its basic method of setting practice expense payments, which resulted in lowering the average fees paid for the administration of drugs by physicians’ staffs.

For delivering pharmacy supplier-billed drugs, Medicare’s payment policies are

uneven. Pharmacy suppliers billing Medicare receive a dispensing fee for one drug

type—inhalation therapy drugs—but there are no similar payments for other DMEadministered or oral drugs. However, Medicare pays DME suppliers for the rental

or purchase of equipment and supplies, and long-standing problems in the program’s

payments for these items may result in overpayments that implicitly compensate for

some service delivery costs not covered.

Other payers and purchasers, such as health plans and the Department of Veterans Affairs (VA), employ different approaches in paying for or purchasing drugs

that may be instructive for Medicare. In general, they make use of the leverage from

their volume and competition to secure better prices. The federal purchasers, furthermore, use that leverage to secure verifiable data on actual market transactions

to establish their price schedules. Private payers’ practices—such as negotiating

prices that result in selecting certain products or suppliers and arriving at terms

without open competition—would not be easily adaptable to Medicare, given the program’s size and need to ensure access for providers and beneficiaries. How other federal agencies have exercised their leverage may offer more applicable lessons.

BACKGROUND

The traditional Medicare program does not have a comprehensive outpatient prescription drug benefit, but under part B (which covers physician and other outpatient services), it covers roughly 450 pharmaceutical products and biologicals. 7 In

34

8Spending is defined as Medicare’s total payment, of which Medicare’s share is 80 percent and

the beneficiaries’ share is 20 percent. 9Our analysis excluded some high-volume and high-expenditure drugs because of inadequate

pricing data. Volume for a drug is measured in terms of the number of units provided. Analyses

exclude data on services supplied in Puerto Rico and the U.S. Virgin Islands and exclude payments made on behalf of Railroad Retirement Board beneficiaries. 10These two drugs are ipratropium bromide and albuterol (unit dose form). 11Technically, the payment equals 95 percent of AWP for the drugs grouped under each HCFA

Common Procedure Coding System (HCPCS) code. Individual drugs are identified by the National Drug Code (NDC). NDCs are assigned by the Food and Drug Administration and are the

universal product identifiers for drugs for human use. Each NDC specifies a chemical entity,

manufacturer, dosage form, strength, and package size. For example, a single drug—marketed

by one manufacturer in one form and strength but in three package sizes—would have three

NDCs. Because one HCPCS code may have multiple NDCs, the carriers determine the Medicare

payment by analyzing multiple NDCs’ AWPs. For multisource drugs, the payment allowance is

95 percent of the lower of (1) the median AWP of all generic forms of the drug or (2) the lowest

brand name product’s AWP.

1999, spending for Medicare part B-covered prescription drugs totaled almost $4 billion. 8

Small Number of Products Accounts for Largest Shares of Program Spending and

Claims Volume

A small number of products accounts for the majority of Medicare spending and

billing volume for part B drugs. In 1999, 35 drugs accounted for 82 percent of Medicare spending and 95 percent of the claims volume for these products. 9 The 35 products included, among others, injectible drugs to treat cancer, inhalation therapy

drugs, and oral immunosuppressive drugs (such as those used to treat organ transplant patients).

The physician-billed drugs accounted for the largest share of program spending,

while pharmacy supplier-billed drugs constituted the largest share of the billing volume. Three specialties—hematology oncology, medical oncology, and urology—submitted claims for 80 percent of total physician billings for part B drugs. Two inhalation therapy drugs accounted for 88 percent of the Medicare billing volume for pharmacy-supplied drugs administered in a patient’s residence. 10

Medicare Payments for Drugs Are Based on Published AWPs

Medicare’s payment for part B-covered drugs is based on the product’s AWP,

which is a price assigned by the product’s manufacturer and may be neither ‘‘average’’ nor ‘‘wholesale.’’ Instead, the AWP is often described as a ‘‘list price,’’ ‘‘sticker

price,’’ or ‘‘suggested retail price.’’

The term AWP is not defined in law or regulation, so the manufacturer is free

to set an AWP at any level, regardless of the actual price paid by purchasers. Manufacturers periodically report AWPs to publishers of drug pricing data, such as the

Medical Economics Company, Inc., which publishes the Red Book, and First Data

Bank, which compiles the National Drug Data File. In paying claims, Medicare carriers use published AWPs to determine Medicare’s payment amount, which is 95

percent of AWP. 11 Thus, given the latitude manufacturers have in setting AWP,

these payments may be unrelated to market prices that physicians and suppliers

actually pay for the products.

Drug Supply Chain Involves Multiple Parties and Arrangements That Influence the

Net Price to the End Purchaser

The actual price that providers pay for Medicare part B drugs is often not transparent. Physicians and suppliers may belong to group purchasing organizations

(GPO) that pool the purchasing of multiple entities to negotiate prices with wholesalers or manufacturers. GPOs may negotiate different prices for different purchasers, such as physicians, suppliers, or hospitals. In addition, providers can purchase part B-covered drugs from general or specialty pharmaceutical wholesalers or

can have direct purchase agreements with manufacturers.

Certain practices involving these various entities can result in prices paid at the

time of sale that do not reflect the final net cost to the purchaser. Manufacturers

or wholesalers may offer purchasers rebates based on the volume of products purchased not in a single sale but over a period of time. Manufacturers may also establish ‘‘chargeback’’ arrangements for end purchasers, which result in wholesalers’

prices overstating what those purchasers pay. Under these arrangements, the purchaser negotiates a price with the manufacturer that is lower than the price the

wholesaler charges for the product. The wholesaler provides the product to the purchaser for the lower negotiated price, and the manufacturer then pays the wholesaler the difference between the wholesale price and the negotiated price.

35

12We conducted a telephone survey of a sample of physicians who billed Medicare for a lowvolume of cancer treatment drugs in 1999. For more detail, see GAO-01-1118. 13Medicare Reimbursement of Albuterol (HHS OIG, OEI-03-00-00311, June 2000) and Medicare Reimbursement of Prescription Drugs (HHS OIG, OEI-03-00-00310, Jan. 2001).

MEDICARE’S PAYMENT FOR PART B-COVERED DRUGS IS SIGNIFICANTLY HIGHER THAN

PRICES WIDELY AVAILABLE TO PROVIDERS

For the part B-covered drugs accounting for the bulk of Medicare spending and

claims, Medicare payments in 2001 were almost always considerably higher than

wholesalers’ prices that were widely available to physicians and suppliers. This was

true regardless of whether the drugs had competing products or were available from

a single manufacturer. Physicians who billed Medicare for relatively small quantities of these drugs also obtained similar prices.

Wide Disparities Exist Between Drug Acquisition Costs and Medicare Payments

Our study shows that there can be wide disparities between a drug’s estimated

acquisition cost and Medicare’s payment for that drug. Physician-billed drugs account for the bulk of Medicare spending on part B drugs. Of those billed by physicians, drugs used to treat cancer accounted for most of Medicare’s expenditures.

Specifically:

• Widely available discounts for 17 of the physician-billed drugs we examined averaged between 13 percent and 34 percent less than AWP.

• For two other physician-billed drugs, Dolasetron mesylate and Leucovorin calcium, average discounts were considerably larger—65 percent and 86 percent

less than AWP.

The discounts on physician-billed drugs, based on wholesaler and GPO catalogue

prices, are notably lower than Medicare’s payment, which reflects a discount of 5

percent below AWP. The discounts indicate that Medicare’s payments for these

drugs were at least $532 million higher than providers’ acquisition costs in 2000.

Further, the discounts we report may only be the starting point for additional discounts provided to certain purchasers, as chargebacks, rebates, and other discounts

may drive down the final sale price.

Concerns have been expressed that small providers either could not or do not obtain such favorable prices. Therefore, we surveyed a sample of physicians who billed

Medicare for low volumes of chemotherapy drugs to see if they were able to obtain

similar discounts. 12 All of the low-volume purchasers who responded to our survey

reported obtaining similar or better discounts than the widely available prices we

had documented. More than one-third of these physicians reported belonging to

GPOs and obtained the GPOs’ substantial discounts, while others said they had contracts with manufacturers and wholesalers.

As with physician-billed drugs, Medicare’s payments for pharmacy supplier-billed

drugs generally far exceeded the prices available to these suppliers. For the drugs

we examined, Medicare’s payments were at least $483 million more than what the

suppliers paid in 2000. Further, the discounts we report were largest for products

that could be obtained from more than one source. Inhalation therapy drugs administered through DME and oral immunosuppressive drugs represent most of the

high-expenditure, high-volume drugs billed to Medicare by suppliers. Specifically:

• Two drugs, albuterol and ipratropium bromide, used with DME for respiratory

conditions, account for most of the pharmacy-supplied drugs paid for by Medicare. In 2001, they were available to pharmacy suppliers at prices that averaged, respectively, 85 percent and 78 percent less than AWP.

• Other high-volume DME-administered drugs had prices averaging 69 percent and

72 percent less than AWP. These findings are consistent with prior studies of

the prices of similar drugs. 13

• Two of the four high-volume oral immunosuppressives were available from wholesalers with average discounts of 14 percent and 77 percent. Wholesale price information on the other two was not available, but retail prices from online pharmacies were as much as 13 percent and 8 percent below AWP.

Policies to Pay for Related Delivery and Administration Services Vary by Provider

Medicare payment policies for administering or delivering a drug vary, depending

on who provides the drug to the patient. Physicians are compensated directly for

drug administration through the physician fee schedule. Pharmacy suppliers are

compensated for dispensing inhalation therapy drugs used with a nebulizer, which

make up the majority of their part B drug claims. No explicit payments are made

to pharmacy suppliers for dispensing other drugs, but they may receive payments

for equipment and supplies associated with DME-administered drugs. Both physiVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00039 Fmt 6633 Sfmt 6621 E:\HEARINGS\75756 pfrm09 PsN: 75756
36

14Practice expenses constitute one of three components in Medicare’s physician fee schedule.

The other two are work and malpractice expenses. For the physician’s average fee in 1999, practice expenses accounted for about 42 percent; work, about 55 percent; and malpractice, about

3 percent. 15The source for these figures is our analysis of 2001 practice expense fees, based on 1999

Medicare utilization. 16The source for these figures is our analysis of 2001 practice expense fees, based on 1999

Medicare utilization.

cians and pharmacy suppliers contend that the excess in Medicare’s payments for

part B-covered drugs compensates for related service costs inadequately reimbursed

or not explicitly covered at all.

In prior work on the Medicare physician fee schedule, we concluded that the agency’s basic method of computing practice expense payments to physicians was

sound. 14 The implementation of this fee schedule, however, has been controversial.

The Congress required that payments be budget neutral relative to prior spending.

Medicare’s physician payments were, in the aggregate, seemingly adequate, as most

physicians were participating in Medicare and accepting the program’s fees as payment in full. Because of the budget neutrality requirement, if one specialty’s fees

increased on average, some others would have to decline. Such redistributions have

occurred and some are significant.

Oncologists, who represent the majority of physicians billing for drugs, argue that

Medicare’s payments for administering chemotherapy are inappropriately low and

that the excess Medicare drug payments are needed to offset their losses. Yet oncology is one of the specialties to gain under the resource-based physician fee schedule.

In our separate study on physicians’ practice expenses under Medicare’s fee schedule, we will show that payments to oncologists were 8 percent higher than they

would have been if the prior charge-based payment method had been maintained;

the study will also show that oncologists’ payments relative to their estimated practice expenses, which include chemotherapy administration, were close to the average

for all specialties.

While oncologists do not appear disadvantaged overall under the fee schedule, adjustments HCFA made to the basic method of computing payments reduced fees for

some oncologists’ services. In those adjustments, HCFA modified the basic method

in computing payments for services delivered without direct physician involvement,

like much of chemotherapy administration. The modifications were intended to correct for perceived low payments for these services. While they increased payments

for some of these services, they lowered them for many others. Moreover, they increased payments on average for services involving physicians. Oncology payments

were particularly affected, as services without physician involvement constitute

about one-third of oncologists’ Medicare-billed services, compared to about 5 percent

of all physician-billed services. Because of the modifications to the basic method, oncology practice expense payments for nonphysician chemotherapy administration

were on average 15 percent lower, while payments for physician-administered services were 1 percent higher, than if HCFA had used the basic method. Across all

services, the modifications resulted in oncology practice expense payments that were

6 percent lower. 15 Using the basic method for all services would eliminate these reductions and add about $31 million to oncology payments. Our study will recommend that CMS revert to the use of the basic methodology to determine practice

expense payments for all services.

We will also recommend that CMS address a data adjustment it made that affects

oncology payments under the new fee schedule. The agency reduced oncology’s reported supply expenses to keep from paying twice for drugs that are reimbursed

separately by Medicare. Oncologists acknowledge that the supply expense estimate

needed to be reduced, but argue that the reduction was too large. We have recommended that the agency develop the appropriate data to more accurately estimate oncology supply expenses. Substituting a supply expense estimate based on a

methodology developed by the American Society of Clinical Oncology would raise

practice expense payments an additional $20 million,16 if done in conjunction with

our recommendation to use the basic method to calculate payments for all services.

Oncologists have raised concerns about whether the data used to estimate their

practice expenses constituted a representative sample of practices surveyed and

whether these data reflect current practices in delivering services. How improvements in the data to estimate practice expenses may affect payment levels is uncertain. Payments are based on the differences in expenses of services of one specialty

compared to those of others. Some of the data concerns raised by oncologists may

apply to other specialties as well, so that additional and more current data may reveal that the relative cost of one service compared to others may have changed only

37

17See Medicare: Need to Overhaul Costly Payment System for Medical Equipment and Supplies (GAO/HEHS-98-102, May 12, 1998). 18The equipment and supply payment is determined from a DME fee schedule, whose rates

are based on a state-specific fee schedule and subject to national minimum and maximum payment limits. Fees are based on average historical supplier charges that are adjusted for inflation

over time. 19 Under federal procurement regulations, the government seeks to obtain the price is intended to equal or better the price that the manufacturer offers its most-favored nonfederal customer under comparable terms and conditions. 20 Because the terms and conditions of commercial sales vary, there may be legitimate reasons

why the government does not always obtain the most-favored customer price. Hence, under the

regulations, VA may accept a higher price if it determines that (1) the price offered to the government is fair and reasonable and (2) awarding the contract is otherwise in the best interest

of the government.

modestly. We are conducting a separate study to determine how CMS can improve

and update the information used to estimate specialties’ practice expenses.

Similar to the physicians who bill for part B drugs, pharmacy suppliers and their

representatives contend that the margin on the Medicare drug payment is needed

to compensate them for costs not covered by Medicare—that is, the clinical, administrative, and other labor costs associated with delivering the drug. These include

costs for billing and collection; facility and employee accreditation; licensing and certifications; and providing printed patient education materials. Medicare pays a dispensing fee of $5.00 for inhalation therapy drugs used with a nebulizer, which are

the vast majority of the pharmacy-supplied drugs. This fee was instituted in 1994.

It is higher than dispensing fees paid by pharmacy benefit managers, which average

around $2.00, and is comparable to many state Medicaid programs, which range

from $2.00 to over $6.00. For other pharmacy-supplied drugs, Medicare makes no

explicit payment for dispensing the drug.

Besides the profits on the DME-related drugs, pharmacy suppliers may receive

additional compensation through the payment for DME and related supplies. Our

prior work suggests that, for two reasons, Medicare DME and supply payments may

exceed market prices. 17 First, because of an imprecise coding system, Medicare carriers cannot determine from the DME claims they process which specific products

the program is paying for. Medicare pays one fee for all products classified under

a single billing code, regardless of whether their market prices are greatly below or

above that fee. 18 Second, DME fees are often out of line with current market prices.

Until recently, DME fees had generally been adjusted only for inflation because the

process required to change the fees was lengthy and cumbersome. As a result, payment levels may not reflect changes in technology and other factors that could significantly change market prices.

OTHER PURCHASERS’ PRACTICES ARE INSTRUCTIVE FOR REFORMING MEDICARE’S

METHOD OF PAYING FOR PART B-COVERED DRUGS

Private insurers and federal agencies, such as VA, employ different approaches

in paying for or purchasing drugs that may provide useful lessons for Medicare. In

general, these payers make use of the leverage of their volume and competition to

secure better prices. The federal purchasers, furthermore, use that leverage to secure verifiable data on actual market transactions to establish their price schedules.

Private payers can negotiate with some suppliers to the exclusion of others and arrive at terms without clear criteria or a transparent process. This practice would

not be easily adaptable to Medicare, given the program’s size and need to ensure

access for providers and beneficiaries. How other federal agencies have exercised

their leverage may be more instructive and readily adaptable for Medicare.

VA and certain other government purchasers buy drugs based on actual prices

paid by private purchasers—specifically, on the prices that drug manufacturers

charge their ‘‘most-favored’’ private customers. 19 In exchange for being able to sell

their drugs to state Medicaid programs, manufacturers agree to offer VA and other

government purchasers drugs at favorable prices, known as Federal Supply Schedule (FSS) prices. So that VA can determine the most-favored customer price, manufacturers provide information on price discounts and rebates offered to domestic customers and the terms and conditions involved, such as length of contract periods

and ordering and delivery practices. 20 (Manufacturers must also be willing to supply

similar information to CMS to support the data on the average manufacturer’s price, known as AMP, and best price they report for computing any rebates required

by the Medicaid program.)

VA has been successful in using competitive bidding to obtain even more favorable

prices for certain drugs. Through these competitive bids, VA has obtained national

contracts for selected drugs at prices that are even lower than FSS prices. These

38

contracts seek to concentrate the agency’s purchase on one drug within therapeutically equivalent categories for the agency’s national formulary. In 2000, VA contract

prices averaged 33 percent lower than corresponding FSS prices.

Medicare’s use of competition has been restricted to several limited-scale demonstration projects authorized by the Balanced Budget Act of 1997. In one of these

demonstrations under way in San Antonio, Texas, suppliers bid to provide nebulizer

drugs, such as albuterol, to Medicare beneficiaries. While Medicare normally allows

any qualified provider to participate in the program, under the demonstration only

11 bidders for nebulizer drugs were selected to participate. In exchange for restricting their choice of providers to the 11 selected, beneficiaries are not liable for any

differences between what suppliers charge and what Medicare allows. Preliminary

CMS information on the San Antonio competitive bidding demonstration suggests

no reported problems with access and a savings of about 26 percent realized for the

inhalation drugs.

CONCLUDING OBSERVATIONS

Our study on Medicare payments for part B drugs shows that Medicare pays providers much more for these drugs than necessary, given what the providers likely

paid to purchase these drugs from manufacturers, wholesalers, or other suppliers.

Unlike the market-based fees paid by VA and other federal agencies, Medicare’s fees

are based on AWP, which is a manufacturer-reported price that is not based on actual transactions between seller and purchaser. Physicians contend that the profits

they receive from Medicare’s payments for part B drugs are needed to compensate

for inappropriately low Medicare fees for most drug administration services. Similarly, the case argued by some pharmacy suppliers for Medicare’s high drug payments is that not all of their costs of providing the drugs are covered.

In our view, it should be a principle of Medicare payment policy to pay for each

service appropriately and not to rely on overpayments for some services to offset inadequate payments for complementary services. If Medicare were to follow this principle and lessons from other payers in setting fees for part B drugs, it would use

information on actual market prices net of rebates and discounts—similar to information currently available to VA and CMS—to establish Medicare payments. It

could also determine market-based fees, where appropriate, through a competitive

bidding process. Medicare would pay for administration and delivery of these drugs

separately, as it does currently for drugs supplied by physicians and for inhalation

therapy drugs. As the way drugs are supplied and administered varies, different

methods of determining payments would be necessary. Paying for these services explicitly would enable Medicare to eliminate implicit payments that may have been

made through excessive payments for DME and the drugs associated with the DME

payment. In our report, we make recommendations reflecting these lessons to revise

the program’s payment methods.

Messrs. Chairmen, this concludes my statement. I would be happy to answer any

questions that you or Subcommittee Members may have.

CONTACT AND ACKNOWLEDGMENTS

For more information regarding this testimony, please contact me at (202) 512-

7114 or Laura Dummit at (202) 512-7119. Other contributors to this statement include Carol Carter, Iola D’Souza, Hannah Fein, Kathryn Linehan, and James Mathews.

Mr. GREENWOOD. Thank you, Mr. Scanlon, for your testimony.

And I recognize Mr. Grob, the Deputy Inspector General for

Health and Human Services, for your testimony, sir.

TESTIMONY OF GEORGE F. GROB

Mr. GROB. Thank you, Mr. Chairman, for the opportunity to testify here today. Everyone said Medicare pays too much, and listening to all the opening statements, I’m not sure that I have a whole

lot to add to the knowledge that has already been presented.

Mr. GREENWOOD. I’m sure you have more credibility than we do.

Mr. GROB. What I’ll try to do, perhaps, is to add some additional

pieces of information that may help. First of all, with regard to the

amount that we pay too much, the number that is being bandied

around is about a billion dollars, and I think that is a fair bottom

39

line. Here is the reason. Our studies have shown, using the catalogs available that we’ve been able to find for 24 drugs, which represent about $3.7 out of the $5 billion in the year 2000 that Medicare authorized for the payment of these drugs, that we saw a loss

of about $880 some-odd million. Of course, if we had looked at all

the drugs, that would have been higher and perhaps pressing a billion dollars. So that is a fair benchmark for people to have in their

minds.

But we have to remember that these are catalog prices. These

are the numbers that are sort of out there. So when the drugs are

actually paid for, it is very likely that the prices are even lower

than that. We ourselves did not obtain those lower prices. Ours are

the more conservative, just catalog price.

Now, we’ve also looked at the Federal Supply Schedule which is

negotiated by the Veterans Administration, and there, of course, we

found a $1.9 billion difference in the spread. Now, many people

would say that that’s unfair because of the special position that the

Veterans Administration is in; that you really can’t say, well, Medicare ought to be able to get drugs at those prices. That may be

true, but here are some things to think about.

First of all, we assume that the drug companies are making a

profit on those drugs, so that that represents a price that they are

willing to offer to at least some large buyers. And we’re not at all

certain, since we ourselves did not look at the actual invoices, of

what the spreads are that physicians and others—large suppliers—

are actually obtaining on their drugs. Perhaps it’s an outer limit,

but I think it’s fair to say that the actual loss to Medicare is probably in the vicinity of $1 to $2 billion, as best we can tell.

Another point that I would make is that we have reviewed these

drug prices intensely, starting in the mid-1980’s because, of the effects to Medicaid program as well, but we have been looking particularly hard since 1997. And over the last 4 years, we have never

found it to be any way other than what has been described at this

hearing. Every study that we do finds these same results. But near

the end of my testimony, I’m going to reflect that the gap is widening, and the loss is increasing.

We’ve talked about the system being flawed, and I think most

people describe it well. And I do take to heart the admonition not

to get to the motives of people. But I just would like to give two

insights about this.

If you were to sit down in an office with an individual, a representative of the drug company here and perhaps a physician

here, and say, ‘‘Listen, I will sell you the drug for $100, but I will

tell Medicare that I sell it for $200, you will have $100, and I will

have $100. It’s not a bad deal.’’ Someone then might comment that

a kind of deal has been made, perhaps games are being played to

achieve a higher market share by that drug company, presenting

its drug in that way. But that would still be true, even if the meeting doesn’t occur in the room. This is not too hard to understand.

Simply posting of these numbers on a public list is enough to

achieve the same effect. So we have to be wary of the effect even

if in the studies that I have done we have not reached the motives

of the individuals.

40

There’s also something here that I call ‘‘upside-down economics.’’ If I were to ask an undergraduate economic student the following

question: ‘‘Which company would likely achieve the greatest market share? Is it the one with the highest average wholesale price

or the one with the lowest?’’ And the student were to say: ‘‘It’s the

one with the highest.’’ The professors would say; ‘‘That is incorrect.

Obviously the company whose wholesale price is the lowest would

be the one that would expect to sell more of their product.’’ That

is the answer the professor would have to give, of course, unless

you’re talking about Medicare’s payment for prescription drugs—in

which the whole theory simply reverses.

The physician community has raised its concerns here, and we

certainly take that to heart. We fully support a fair reimbursement

under the Medicare program.

Perhaps another insight will help here. What I believe is wrong

with the current system is that it’s behaving this way. If an individual felt that his mortgage payments were too high, he might

want to go to the bank and say: ‘‘Since you’re charging me so much

there, could you reduce my automobile payment?’’ Well, that’s not

a good way to do banking, but it might not be an unreasonable

question.

The problem with the Medicare program is that in an analogous

situation, the automobile dealer and the automobile purchaser are

telling the bank how much they will pay for the car payment as

opposed to the Medicare program, the Secretary, the Department

and the Congress deciding what that amount is. And I believe that

that’s fundamentally what’s wrong, even if we do have some compassionate concern for the dollars that the medical profession needs

to carry out what it does.

In any event, whatever system that we do use should not be

based on a number that is misnamed, misleading, and make believe.

There are a lot of options to handle this problem, and we’ve listed them extensively in the testimony that we’ve provided. It’s too

detailed to discuss here in my short version of my testimony, but

we have made ourselves available and will continue to answer as

many technical questions as we possibly can.

Let me end now by making one other remark. I think that we

have all felt strongly that we have a problem here that needs to

be fixed. What I would like to emphasize is that we fix it now. The

first really detailed study that we did of the current phenomenon

was in 1997 based on 1996 dollars, and here were the facts then:

Medicare’s authorization for drugs was $2.3 billion that year. We

looked at $1.5 billion and found $447 million that was probably

wasteful. Four years later, looking at the data from the year 2000,

the amount that Medicare authorized for drugs had more than doubled to $5 billion. We looked at $3.7 billion, and even the conservative estimate, the catalog estimate, we found was double what we

found in terms of waste—possible waste for the government was

$900 million and possibly as much as $1.9 billion. So every day,

every month, every period that we don’t solve the problem, the

problem gets bigger, and the Medicare expenditures rise. Thank

you.

[The prepared statement of George F. Grob follows:]

41

PREPARED STATEMENT OF GEORGE F. GROB, DEPUTY INSPECTOR GENERAL FOR

EVALUATION AND INSPECTIONS, OFFICE OF INSPECTOR GENERAL, HHS

Good morning Mr. Chairman. I am George Grob, Deputy Inspector General for

Evaluation and Inspections, Department of Health and Human Services. I am here

today to discuss Medicare payments for prescription drugs.

Medicare pays too much for prescription drugs—more than most other payers.

The method it uses to determine the amount to be paid is flawed. In fact, it makes

no sense at all. It allows the price to be set arbitrarily by drug manufacturers, not

the marketplace. Their published wholesale prices for many drugs are far above

what suppliers and physicians actually pay for them. This allows physicians, for example, to make substantial profits from the drugs they administer during the course

of treatment in their offices. For the year 2000 we found that Medicare’s authorized

payments for 24 leading drugs were $887 million more than actual wholesale prices

available to physicians and suppliers and $1.9 billion more than prices available

through the Federal Supply Schedule. Until the system is changed, Medicare and

its beneficiaries will continue to pay excessive amounts for prescription drugs; and

the amount of excessive payments will increase every year.

MEDICARE COVERAGE AND PAYMENTS FOR PRESCRIPTION DRUGS

Medicare’s coverage of outpatient drugs is limited primarily to drugs used in dialysis, organ transplantation, and cancer treatment. Medicare also covers certain

vaccines and drugs used with durable medical equipment such as infusion pumps

and nebulizers. However, Medicare’s total payments for prescription drugs have

risen steadily over the past decade. In 1992, Medicare paid about $700 million for

prescription drugs; by 2000, it paid $5 billion. Between 1999 and 2000 alone, payments increased by $1 billion. This rapid growth illustrates the necessity of ensuring that Medicare pays reasonable prices for the drugs it covers.

Physicians and suppliers purchase these drugs, administer or provide them to

Medicare beneficiaries, and then submit a bill to Medicare for reimbursement. In

general, Medicare reimburses physicians and suppliers for 95 percent of the average

wholesale price (AWP) published by the drug manufacturers. Of this amount, Medicare beneficiaries are responsible for a 20 percent coinsurance payment.

EXCESSIVE PAYMENTS

Over the past 4 years, the Office of Inspector General has produced a number of

reports, all of which have reached the conclusion that Medicare and its beneficiaries

pay too much for prescription drugs. Although it might be sufficient for me to quote

only from our most recent studies, I would like to summarize all of our work here,

because it demonstrates the consistency of our findings and the relentless growth

of the problem.

A table summarizing the results of our reports is provided on the next page, followed by a more detailed description.

Summary of OIG Medicare Prescription Drug Reports

Year of Report 1997 1998 2000 2000 2000 2001 2001

Drugs Reviewed ... 22 drugs 34 drugs 5 ESRD

drugs

Albuterol 24 drugs Albuterol 24 drugs

Year Reviewed ..... 1996 1997 1998 1999 1999 2000 2000

Medicare Expenditures for Reviewed Drugs ... $1.5 billion $2.1 billion $379 million $246 million $3.1 billion $296 million $3.7 billion

Excessive Payments Based

On:

VA .................... $1 billion $162 million $209 million $1.6 billion $264 million $1.9 billion

Catalogs .......... $447 million $761 million $245 million $887 million

Medicaid .......... $42 million $120 million $425 million

Beneficiary Share

of Excessive

Payments ......... $89 million $200 million $32 million

$8 million

$42 million

$24 million

$320 million

$152 million

$85 million

$53 million

$49 million

$380 million

$177 million

42

Drugs in general

In December 1997, we released a report which compared Medicare payments for

22 drugs to actual wholesale prices available to the physician and supplier communities. These 22 drugs accounted for $1.5 billion of the $2.3 billion in Medicare payments for prescription drugs in 1996. The wholesale prices were computed using

catalogs from drug wholesalers and group purchasing organizations which sell drugs

to physicians and suppliers.

The report found that Medicare allowances for the 22 drugs exceeded wholesale

prices by $447 million in 1996. Medicare paid more than the available wholesale

price for all 22 drugs under review. For more than one-third of the drugs, Medicare

reimbursement amounts were more than double the wholesale prices available to

the physician and supplier community.

We followed up this report in November of 1998 by comparing Medicare allowances for prescription drugs to prices available to the Department of Veterans Affairs (VA) and several other Federal agencies through the Federal Supply Schedule

(FSS). (The supply schedule provides agencies lie the VA with a simple process for

purchasing commonly-used products in various quantities while still obtaining the

discounts associated with volume buying. Using competitive procedures, contracts

are awarded to companies to provide services and supplies at the FSS prices over

a given period of time.) This report included 34 drugs which accounted for $2.1 billion of the $2.8 billion in Medicare spending for prescription drugs in 1997.

We found that Medicare and its beneficiaries would have saved $1 billion in 1998

if the allowed amounts for the 34 drugs were equal to prices obtained through the

FSS. The potential savings for just one drug, leuprolide acetate, accounted for over

$275 million. Medicare paid more than double the VA for 14 of the drugs. Overall,

it paid between 15 percent and 1600 percent more than the VA for each of the 34

drugs. The biggest difference was for the drug leucovorin calcium, with a VA price

of $1.18 and a Medicare price over $20.

In January of this year, we released another report comparing Medicare reimbursement to prices available to the physician/supplier community, the Department

of Veterans Affairs, and Medicaid. This time, we studied the prices for 24 drugs

which represented $3.1 billion of the $3.9 billion in Medicare drug expenditures in

1999.

We found that Medicare and its beneficiaries would have saved $1.6 billion for

these 24 drugs by paying the VA’s Federal Supply Schedule price. For half of the

drugs, Medicare paid more than double the VA price. The savings would have been

$761 million a year by paying the actual wholesale prices available to physicians

and suppliers. For every drug in our review, Medicare paid more than the wholesale

price available to physicians and suppliers and the VA Federal Supply Schedule

price. For example, Medicare reimburses $43 for 10 mg of the drug doxorubicin,

more than four times the wholesale price of $10. The VA pays even less, with a Federal Supply Schedule price of $6.29. We also found that Medicare would have saved

over $425 million or almost 15 percent a year for the 24 drugs by obtaining rebates

similar to the Medicaid program.

We have recently updated the findings of this report with more current drug pricing information. We found that Medicare would have saved $1.9 billion of the $3.7

billion it spent for 24 drugs in 2000 if the drugs were reimbursed at prices available

to the VA. Over $380 million of this savings would directly impact Medicare beneficiaries in the form of reduced coinsurance payments. In some cases, the VA price

for a drug was less than the amount a Medicare beneficiary would pay in coinsurance. More conservatively, Medicare and its beneficiaries would save $887 million

a year by paying the actual wholesale prices available to physicians and suppliers

for these 24 drugs. Beneficiaries would pay over $175 million less in coinsurance

if Medicare paid for these drugs based on catalog prices. The potential savings to

both Medicare and its beneficiaries is probably higher, assuming data for all Medicare drugs is similar to that for the 24 we analyzed.

Nebulizer and End Stage Renal Disease (ESRD) Drugs

In addition to our reports summarizing a number of drugs, we have also produced

targeted reports on specific nebulizer and end stage renal disease (ESRD) drugs that

Medicare covers.

In June 2000, we released a report which looked at Medicare’s reimbursement of

albuterol, a drug used with a nebulizer to treat asthma, emphysema, and other respiratory problems. Albuterol is one of the top drugs covered by Medicare, with more

than $250 million per year in Medicare allowances. This report updated the findings

of several of our prior albuterol studies, all of which noted that Medicare’s reimbursement amount exceeded prices available through other sources.

43

We found that Medicare paid nearly double the Medicaid payment amount and

almost seven times what the VA pays for one milligram of albuterol. Furthermore,

nearly every pharmacy we contacted sold generic albuterol at prices less than Medicare paid for it. According to our survey results, consumers could go to popular drug

stores across the country and buy a monthly supply of albuterol for around $95. For

the same monthly supply, Medicare and its beneficiaries would pay a total of $118,

with Medicare paying $94 and the beneficiary paying the remaining $24. The VA’s

entire monthly payment of $17.50 for albuterol is less than just the beneficiary’s $24

coinsurance payment under Medicare. We calculated that Medicare could save between $47 million and $209 million per year by setting prices for albuterol equal

to those available through these other sources.

Once again, we have recently updated this report with new pricing data. Preliminary findings show that VA prices for albuterol have decreased since last year. The

VA price for albuterol has fallen by more than 50 percent over the last 3 years, from

$0.11 per mg in 1998 to $0.05 per mg in 2001. During the same time period, Medicare’s reimbursement amount (based on reported average wholesale prices) has remained constant at $0.47 per mg.

In 2000, published wholesale acquisition costs for albuterol ranged from $0.09 to

$0.18 per mg. These wholesale acquisition costs were provided by manufacturers to

drug compendiums such as Red Book. The Medicare reimbursement rate of $0.47

per mg was anywhere from three to five times the wholesale acquisition costs reported by manufacturers.

Recently, we have begun to look at who actually supplies albuterol to Medicare

beneficiaries. We found that Medicare reimbursed more than 6,500 pharmaceutical

suppliers for albuterol claims in 2000. However, less than 3 percent of these suppliers (184) accounted for approximately 80 percent of albuterol reimbursement.

Each of these suppliers had over $150,000 in paid Medicare claims for albuterol last

year. Thirty-four of these suppliers were each responsible for more than $1 million

in Medicare reimbursement for albuterol in 2000, with five having between $11 million and $35 million in reimbursement. Thus, the vast majority of the albuterol supplied to Medicare beneficiaries was provided by suppliers that purchase and bill for

a large quantity of the product. We believe that suppliers that purchase albuterol

in such large quantities are likely to receive volume discounts similar to those provided to the VA and other large purchasers. Our work in this area is continuing.

Also in June 2000, we released a report comparing Medicare payments for ESRD

drugs to those of the VA and Medicaid. We focused this inspection on five drugs

used by renal dialysis facilities to help treat renal failure. These five drugs accounted for $379 million in total charges to Medicare in 1998.

We found that Medicare paid between 37 percent and 56 percent more than the

VA for these drugs. Medicare would have saved up to $162 million in 1998 if they

paid the same amount as the VA for the five drugs. Furthermore, Medicare paid

between 5 percent and 38 percent more than Medicaid. Medicare would have saved

as much as $42 million in 1998 by using Medicaid reimbursement amounts.

FLAWED PAYMENT METHOD

Our reports have shown time after time that Medicare pays too much for drugs.

Why does Medicare pay so much? We believe that it is because Medicare’s payment

methodology is fundamentally flawed. By statutory requirement, Medicare’s payment for a drug is equal to 95 percent of the drug’s average wholesale price (AWP).

However, the AWPs which Medicare uses are not really wholesale prices.

For the most part, AWPs are reported by manufacturers to companies that compile drug pricing data, such as First DataBank and Medical Economics which publishes the Red Book. As our reports have indicated, the published AWPs that Medicare uses to establish drug prices bear little or no resemblance to actual wholesale

prices available to physicians, suppliers, and large government purchasers.

Aside from the obvious problem of inflated AWPs resulting in inappropriate Medicare payments, the use of AWP also has other potential adverse side-effects. For instance, because physicians and suppliers get to keep the difference between the actual price they pay for the drug and 95 percent of its AWP, this ‘‘spread’’ can serve

as an inducement for suppliers or physicians to use one brand of drug product over

another. Thus, publishing an artificially high AWP can be used as a marketing device to increase a drug company’s market share. Such a tactic would increase the

profit of the suppliers or physicians who purchase the drug because, while not paying the artificially inflated AWP amount, they can bill Medicare for it and get paid

at that inflated amount. While the published AWP does not increase the amount

the manufacturer receives for each unit of the drug product, it may induce an increase in market share because of the higher profits made by physicians and supVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 E:\HEARINGS\75756 pfrm09 PsN: 75756
44

pliers. This in turn increases the profits of the drug company. All of this occurs at

the expense of the Medicare program and its beneficiaries.

For the drug albuterol, the spread is so large and Medicare reimbursement so lucrative that mail-order pharmacies have been tempted to capitalize on the difference

by making illegal kickback payments to durable medical equipment suppliers for patient referrals. A civil settlement totaling $10 million has been reached with one

pharmacy that succumbed to this temptation.

PHYSICIANS’ CONCERNS

Some physician groups have raised concerns about Medicare’s attempts to lower

reimbursement for prescription drugs. For example, some oncologists have stated

that Medicare does not adequately reimburse physicians for the practice costs associated with providing treatment to cancer patients. These physician groups say that

overpayments for prescription drugs simply make up for inadequate payments for

their practice costs.

We agree that physicians need to be properly reimbursed for patient care. However, we do not believe that the payment of artificially inflated drug prices is an

appropriate mechanism to compensate them. We do not think that the decision as

to how much Medicare pays for physicians’ practice costs should be made by them

or by drug manufacturers. The Medicare program or the Congress should have responsibility for this calculation. We certainly do not believe that the basis for their

compensation and medical practice expenses should be artificially inflated, misleading, and mis-named average wholesale prices.

The Medicare program already has a procedure for determining and the amount

of paying physicians for their practice costs. If the current calculations are incorrect,

they should be modified. Physicians deserve fair reimbursement for their valuable

services. There is no reason to resort to a make-believe process to accomplish this.

OPTIONS FOR REFORMING THE PAYMENT SYSTEM

There are a number of options for revising Medicare’s drug reimbursement methodology. We recognize that there may not be one perfect solution to solving all of

Medicare’s drug pricing issues. However, we believe these options provide reference

points for considering how to reform the Medicare drug payment system.

A few general remarks are in order before discussing specific options. First, some

of the options offer a way to calculate a base amount for Medicare reimbursement.

These include using the Federal Supply Schedule, the average manufacturer’s price,

or the AWP, for example. For each such option, additional sub-options are possible.

One would be to set Medicare prices at a fixed percentage above or below the base.

For example, Medicare currently has its payment rate set at 95 percent of AWP.

That percentage could be dropped. Alternatively, if the Federal Supply Schedule

were used as a base, then Medicare’s payment could be set at, say, 105 or 110 percent of this number.

Second, the options are not necessarily exclusive of one another. In the Medicaid

program, most States set payment rates at a percentage below AWP, but they also

get rebates from manufacturers. The same could be done for Medicare. Another example might be basing Medicare payment rates on average manufacturer prices

(AMP) (used for calculating rebates in the Medicaid program), but making upward

or downward adjustments on the basis of surveys of amounts paid by of large institutional health care providers such as hospitals or managed care organizations.

Each option has its own advantages and disadvantages. Some things to consider

when comparing them are: the cost of gathering data to set the base, the reliability

of the data, the time needed to collect and analyze it; how easily it can be gamed

or misrepresented.

Logistical considerations are important too, such as: who will collect and analyze

data, who will propose the Medicare payment rate, and how often this will be done;

how will the underlying data be verified, by whom, and how often; what method will

be used to periodically update the payment amounts, and how frequently will this

be done.

Finally, some broader principles and concerns need to be addressed, such as: how

proprietary data will be protected; the consequences of drug manufacturers, suppliers, wholesalers, and medical care providers not providing the needed data or

misrepresenting it; ways to minimize the burden of public reporting associated with

data collection; the need for, nature of, and length of a transitional phase in introducing the new payment method; and whether any adjustment is needed in the

practice cost component of Medicare’s physician payment rate.

Keeping these factors in mind, the following options may be considered for reforming Medicare’s drug payment method:

45

1. Authorize a commission to set payment rates. A commission could be established similar to MEDPAC, which recommends rate increases for Medicare hospital and physician payments and analyzes prices and economic trends. Such a commission could recommend a periodic update of Medicare prices based on a market

basket of drugs, including any new drugs. It would be granted authority to require

manufacturers to provide them with drug wholesale prices, but would not disclose

any of the proprietary data collected from manufacturers.

2. Calculate national estimated acquisition costs based upon the average

manufacturer prices (AMP) reported to the Medicaid program. The Centers

for Medicare & Medicaid Services (CMS) could calculate reimbursement rates using

AMP and send these rates out to the Medicare carriers. Average manufacturer

prices are currently reported to CMS under the drug rebate program, and they more

accurately reflect the prices paid by drug wholesalers to manufacturers. If this option were used, it would eliminate the need to go to the manufacturers for more

pricing information. This option would require legislation to allow Medicare access

to AMP data. Prior to this option being implemented, it would be useful to clarify

or refine certain definitions. We also believe an initial, intensive effort should be

made to audit AMP data reported by manufacturers to validate its accuracy. We estimate that in the year 2000 Medicare and its beneficiaries would have saved $1.4

billion of the $3.7 billion spent on just 24 drugs if reimbursement for the drugs had

been based on AMP.

3. Collect more accurate average wholesale prices from drug pricing catalogs or other sources. This option would entail requiring manufacturers or wholesalers to provide their pricing information or catalogues to an appropriate commission or federal agency. Protection of the confidentiality of proprietary data could be

guaranteed in the authorizing statute.

4. Increase the discounting of the published AWP. If this option were used,

a provision would be needed to prevent manufacturers from just raising AWP by

an amount greater than the newly discounted rate.

5. Base payment on physician/supplier acquisition costs. This option would

require obtaining invoices of actual payments made. Payment could not be based

solely on the listed invoice price as that price often gets discounted by rebates and

volume discounts. Net cost would need to be obtained and this might be difficult

because many of the manufacturers rebates are not calculated until the end of the

year. Additionally, since Medicare would be reimbursing drugs based on cost there

would be little incentive to get the best price.

6. Establish manufacturers’ rebates similar to those used in the Medicaid

program. A Medicare rebate program could be modeled on Medicaid’s program.

However, if a Medicare rebate program were used in conjunction with, instead of

as a replacement for the current AWP system, then the rebates should be based on

AWP rather than the AMP used by Medicaid. This would minimize manufacturers’

incentives to inflate AWP because rebates would increase as AWP increased.

7. Create a fee schedule for covered drugs based on the Federal Supply

Schedule negotiated by the Department of Veterans Affairs. The payment

amounts could be set at the Federal Supply Schedule price or that price plus a certain percentage.

8. Use CMS’s inherent reasonableness authority. This authority allows CMS

to reduce its payment rates if it can be shown that payment amounts are excessive.

A recent study by the General Accounting Office (GAO), mandated by the Congress,

found this authority to be appropriate, and it supported some recent studies performed by CMS in its proposed used of it. According to the law which mandate the

GAO study, the inherent reasonableness authority may be used as soon as CMS promulgates regulations for it.

9. Use competitive bidding. The CMS currently has the authority to demonstrate the efficacy of competitive bidding for medical supplies. The demonstrations

have already proven that inhalation drugs can be obtained at prices lower than 95

percent of AWP. A statutory amendment to make general use of this authority

might be appropriate, at least for some categories of drugs, particularly those which

are provided by a small number of suppliers or by mail-order firms.

CONCLUSION

There can be no doubt that Medicare pays too much for prescription drugs. This

finding has been confirmed year after year. At the same time, Medicare payments

overall, including excessive amounts, are increasing substantially. This adversely affects the Medicare trust fund and Medicare’s beneficiaries, who are responsible for

20 percent of the bill. While no payment method will perfectly address all conceivable technical problems, many options are available that are superior to the current

46

payment method, with its misleading nomenclature and artificially inflated prices.

Currently, Medicare payments are being set not by the Medicare program but by

drug manufacturers and indirectly by health care providers. Until this problem is

corrected Medicare and its beneficiaries will unnecessarily pay more and more each

year.

I hope this testimony has been constructive in explaining the problem and offering

some ideas for its solution.

Mr. GREENWOOD. I thank the gentleman and would note that

even if we passed legislation that was signed into law tomorrow,

it’s probably going to take 6 to 9 months to begin to achieve the

saving just because of the bureaucratic necessities.

The Chair recognizes Mr. Zachary Bentley, President of Ven-ACare Inc., for your testimony, sir.

TESTIMONY OF ZACHARY T. BENTLEY

Mr. BENTLEY. Mr. Chairman, members of the subcommittee, good

morning. I am Zachary T. Bentley. For the last 13 years, I’ve been

an officer and a business manager of Ven-A-Care of the Florida

Keys, a small pharmacy located in Key West, Florida. Early on, I

was shocked to receive a payment from Medicare for the infusion

cancer drug Leucovorin that exceeded our costs by approximately

1,000 percent.

Mr. GREENWOOD. Mr. Bentley, could you pull the microphone just

a little closer, please?

Mr. BENTLEY. The tenfold profit on this drug being paid for by

Medicare was so excessive that the beneficiary’s 20 percent copayment actually exceeded the cost of the drug to Ven-A-Care.

I attempted to return the payment, only to learn that the Medicare carrier did not believe it had made a mistake. The prices used

by Medicare, Medicaid and many private health insurers for setting

drug reimbursements are the prices reported to those entities by

drug manufacturers. We have discovered that some, not all, drug

manufacturers report falsely inflated prices so that their customers

will reap exorbitant windfall profits.

In 1991, Ven-A-Care was solicited to enter into a physician joint

venture designed to split the proceeds of such excessive reimbursements with doctors in a position to prescribe expensive infusion

drugs to AIDS patients. The venture was crafted by one of the

country’s largest health care companies, National Medical Care,

then a subsidiary of W.R. Grace. We were promised by NMC that

we would become wealthy if we cooperated. We refused because we

believed that this proposal was nothing more than a kickback

scheme, which would ultimately lead to overutilization of drugs

and possibly patient harm.

National Medical Care then proceeded with the physician joint

venture on its own and effectively ran Ven-A-Care out of business.

Later when Ven-A-Care attempted to rebuild its business with a

focus on oncology drug therapies, we encountered demands that we

enter into a similar kickback arrangement with oncologists associated with yet another large national health care company. Again,

we declined to participate. Instead, we redoubled our efforts to

shine the light of day on these shadowy schemes.

We have worked diligently to educate those who administer

Medicare and Medicaid programs about this serious problem, including personally briefing the previous HCFA Administrator. We

47

have assisted the HHS Office of Inspector General, the Department

of Justice, and have prosecuted false claims actions that resulted

in the government’s nearly $500 million recovery against National Medical Care and the more recent $14 million Medicaid settlement

with Bayer Pharmaceuticals Corporation. We also initiated the

pending Texas Medicaid false claims action against inhalation drug

manufacturers Warrick, Roxane and Dey Laboratories. Texas Attorney General John Cornyn has joined with us in that case.

Last year we were subpoenaed by your committee to provide our

information relating to this drug pricing fraud. The information we

provided reveals some troubling things. A fraud scheme costs the

government billions of dollars each year and encompasses not only

chemotherapy drugs, but drugs used for inhalation, biologicals, IV

fluids, IV antibiotics, and now it is in the community retail marketplace.

Medicare and Medicaid patients are harmed when health care

providers’ decisions to prescribe and dispense drugs are based on

profit rather than the best interest of the patient. The fraud adds

to the spiralling Medicaid drug expenditures that have forced some

States to curtail other needed public health services. Medicare patients are defrauded because their 20 percent copayment alone

often exceeds 100 percent of the true cost of the drug.

Americans are being deprived of newer and safer drugs when

manufacturers inflate price reports of newer drugs to encourage

physicians to keep prescribing the older drugs. Government programs are deprived of the benefits of vigorous price competition

when expensive drugs become subject to competition by generics,

other patented drugs or other kinds of treatments. Prices drop in

the marketplace, but prices reported to the government remain at

the same level or in some instances actually rise. Those drug manufacturers making false price representations have effectively

usurped the right and duty of Congress to determine Medicare

drug payments and the right and duty of your State legislators and

Congress to determine Medicaid drug payments. Our existing

Medicare drug reimbursement system is broken only because some,

not all, drug companies have chosen to falsely report inflated

prices.

And finally, no expanded Medicare drug benefit can successfully

be implemented unless drug companies are required to tell the

truth about their prices.

Thank you very much. I’ll be happy to answer any questions.

[The prepared statement of Zachary T. Bentley follows:]

PREPARED STATEMENT OF ZACHARY T. BENTLEY, PRESIDENT, VEN-A-CARE OF THE

FLORIDA KEYS, INC.

Mr. Chairman and Members of the Subcommittees: Good morning. I am Zachary

T. Bentley.

For the last thirteen years I have been an officer and the business manager of

Ven-A-Care of the Florida Keys, a small pharmacy located in Key West, Florida.

Early on, I was shocked to receive a payment from Medicare for the infusion cancer

drug, Leucovorin, that exceeded our cost by approximately 1000%. The ten-fold profit on this drug, being paid for by Medicare (80%) and the beneficiary (20%), was

so excessive that the beneficiary’s co-payment actually exceeded the cost of the drug

to Ven-A-Care. I thought the Florida Medicare carrier had made a mistake. I attempted to return the payment, only to learn that the Medicare program in fact assumed that the cost of Leucovorin was many times greater than the true price available to even a small company such as Ven-A-Care.

48

We communicated pricing information about Leucovorin and other drugs which

we discovered had similar pricing and reimbursement disparities, to the Health

Care Financing Administration and other federal and state agencies, in an effort to

alert them to the problem. We learned that the prices used by Medicare, Medicaid,

and many private health insurance programs for setting drug reimbursements were

the prices reported to those entities by the drug companies. When the manufacturers report falsely inflated prices, providers reap exorbitant windfall profits. Those

windfall profits serve the drug manufacturers as government-funded kickbacks to

induce the providers to order their drugs.

I must emphasize, however, that not all pharmaceutical manufacturers engage in

this nefarious scheme.

In 1991, Ven-A-Care was solicited to enter into a physician joint venture designed

to split the proceeds of such excessive reimbursements with doctors in a position to

prescribe expensive infusion drugs to AIDS patients. The venture was crafted by one

of the country’s largest healthcare companies, National Medical Care, then a subsidiary of WR Grace. We were promised by NMC that we would become wealthy

if we shared drug revenues with the treating physicians, because they would order

large quantities of pharmaceuticals that cost far less than the reported prices. We

believed that this proposal was nothing more than a kickback scheme, which ultimately would lead to over-utilization of drugs and possibly to patient harm, and we

elected to not participate. National Medical Care then proceeded with the physician

venture on its own and effectively ran Ven-A-Care out of business.

Later, when Ven-A-Care attempted to rebuild its business with a focus on oncology drug therapies, we encountered demands that we enter into similar kickback

arrangements with oncologists associated with yet another large national healthcare

company. Again, we declined to participate. Instead, we redoubled our efforts to

shine the light of day on these shadowy schemes.

We learned that almost every third-party payer, including Medicare, Medicaid,

the Federal Employees Health Benefits Plan, and most private insurers, relied on

the drug companies’ representations of drug prices when setting the reimbursement

amounts paid to providers. It became apparent to us that many drug manufacturers

reported truthful prices, while others falsely inflated their price reports so that their

targeted customers—oncologists, urologists, home care companies, ESRD providers,

DME companies, and others—would be induced by the resulting windfall profits to

order their drugs.

We have worked diligently to educate those who administer the Medicare and

Medicaid programs about this serious problem, including personally briefing the

previous HCFA Administrator. Ven-A-Care also has taken direct action to stop this

major hemorrhage of tax dollars. We have assisted the HHS Office of Inspector General and the Department of Justice and have prosecuted False Claims actions that

resulted in the government’s nearly $500,000,000 recovery against National Medical

Care/Fresenius and the more recent $14,000,000 Medicaid settlement with Bayer

Pharmaceutical Corporation.

We also initiated the pending Texas Medicaid false claims action against Schering

Plough’s Warrick drug division, Boehringer Ingelheim’s Roxane drug division, and

Dey Laboratories. Each of those companies manufacture inhalation drugs used to

treat severe respiratory ailments. Texas Attorney General John Cornyn has adopted

our claims, and we are currently assisting him in that litigation. The Texas Medicaid Program has led the Nation in its efforts to secure accurate price reports from

drug companies by requiring written certification of a range of prices.

Last year, pursuant to subpoena, we provided to the House Committee on Energy

and Commerce our documents and other evidence relating to the inflation of price

reports by certain drug companies. In preparing for my testimony today, I have

again reviewed the information now in the Committee’s possession. The Committee’s

commendable oversight and investigative efforts have alerted the Congress and the

public to the following issues:

1.) The evidence reveals that the fraud scheme encompasses a wide range of drugs

including chemotherapy, inhalants, biologicals, IV fluids, and, IV antibiotics.

More recent reports reveal that the fraud is also directed at oral drugs reimbursed by Medicaid and which will be the focus of an expanded Medicare drug

benefit.

2.) Falsely inflated drug price representations enrich certain health care businesses,

including some drug companies, home care pharmacies, oncologists, and inhalation providers, while cheating Medicare beneficiaries of their current drug benefits. This shameful fraud levies a cruel tax on Medicare beneficiaries, whose

20% co-payment alone often exceeds 100% of the true, reasonable cost of the

drug to health care providers.

49

3.) This fraud compromises the health and safety of Medicare and Medicaid patients. The excessive reimbursements are used as inducements to physicians

and other health care providers in a position to cause the companies’ drugs to

be ordered. Oncologists and other providers are thus financially induced by certain drug manufacturers to prescribe such vital drugs as chemotherapies, not

on the basis of what is best for the patient, but based on what is most profitable

for the medical provider. Such kickback schemes impair independent medical

judgment and interfere with the physician/patient relationship. A case in point

involves the prostate cancer drug Lupron, manufactured by TAP Pharmaceuticals, a joint venture between Japan’s Takeda Pharmaceutical Company

and Abbott Labs. Recently announced criminal indictments of several urologists

illustrates the seriousness of the problem.

4.) The price fraud costs Medicare and Medicaid billions of dollars each year in the

form of excessive reimbursements and over-prescribing of medications.

5.) False, inflated drug price representations effectively deprive Medicare and Medicaid patients of access to medical care because:

a.) Seniors are overcharged in their co-payments and thus have less money

available to purchase other needed drugs not covered by Medicare.

b.) Scarce health care program dollars are diverted to fund these overpayments

and kickbacks that benefit practice specialties in a position to increase drug

company sales. The Wall Street Journal reported last February 7 that ‘‘states

say the drug-cost component of Medicaid is rising more than 20% annually,’’ forcing states to cut funding for other services. Missouri budget director Brian

Long told the Journal that Medicaid costs are responsible in part for his

state’s inability to fund increased costs for school transportation and special

education. An Ohio budget official said ‘‘The rest of state government is dramatically impacted’’ by rising Medicaid drug costs. Similarly, scarce Medicare

dollars are diverted and thus not available, therefore, to increase reimbursements to other practice specialties such as cardiology, surgery, and gynecology.

6.) Certain drug manufacturers and health care provider groups have actively misled Congress and the Medicare and Medicaid programs in an effort to conceal

and perpetuate this fraud. Examples include

a.) Seeking to deflect scrutiny by contending that Congress and the Executive

Branch have created a flawed reimbursement system. This argument is specious, because the system works well as long as drug companies tell government insurance programs the truth about their prices. If a flaw exists, it is

the fault of the drug companies who choose to give the government false

prices.

b.) Contending that the inflated reimbursements are needed to defray other provider costs not adequately covered. Some health care providers may be justified in requesting higher reimbursements. The recent GAO study, however,

will confirm that the drug companies in question (and I reiterate that not all

drug companies are guilty of this practice) have generated exorbitant reimbursement schedules for certain drugs. The scheme benefits only the companies and their provider customers, to the detriment of government health insurance programs and patients. These inflated reimbursements are created

only when a drug company desires to fend off competition; they are not calculated to cover administration costs, and they far exceed any reasonable

level of reimbursement.

c.) Some health care professionals have stooped to extortion tactics by threatening that they cannot continue to care for cancer patients if their gravy train

is derailed. The false premise for this threat is revealed by the fact that those

same health care professionals were making the drugs available to patients

before manufacturers contrived to create such lucrative ‘‘spreads’’ to stave off

competition by other manufacturers.

I find it offensive that the drug companies that are engaging in these practices have tried to conceal their actions while at the same time piously holding themselves out as stewards of the public good. In fact, the sub-committees’ subpoenaed records reveal that one major drug manufacturer inflated

price reports for a broad range of cancer drugs while touting itself as America’s ‘‘most admired’’ pharmaceutical company.

7.) The federal government and many states have taken action to improve reimbursement systems by requesting additional price data. For example, California

often bases payments on manufacturers’ reports of direct prices and submission

of manufacturer invoices; Texas requires written certification of different kinds

of prices and costs; many States rely on reports of Wholesaler Acquisition Cost

rather than AWP; HHS regulations were modified to provide for a federal MedVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 E:\HEARINGS\75756 pfrm09 PsN: 75756
50

icaid Upper Limit; and Congress enacted the Medicaid rebate law. Each of these

efforts, however, has been circumvented and frustrated by certain drug companies that falsely inflate any form of price or cost data the government attempts

to use to set reimbursements.

8.) The fraud scheme deprives government programs of the benefits of vigorous price

competition that occurs when expensive drugs become subject to competition by

generics, other patented drugs, or other kinds of treatments. Prices drop in the

marketplace, but prices reported to the government remain at the same level,

or rise. As a result, Medicare, Medicaid and the public are misled to believe that

the drugs remain highly expensive when in fact they sell for a fraction of their

pre-competition prices. The current example of the cancer drug Taxol is illustrative. When Taxol’s patent protection expired recently and a competing generic drug entered the market, the prices of both drugs began to fall. Nevertheless, the reported prices remained at the pre-competition level, creating a

‘‘spread’’ that is used to market both drugs, and government health insurance

programs have not benefitted from the reduced (but unreported) prices set by

the marketplace. It is ironic that there was no ‘‘spread’’ before Taxol had a generic competitor, but now a ‘‘spread’’ exists and is used to market both drugs.

9.) Those drug manufacturers making false price representations have effectively

usurped the right and the duty of Congress to determine Medicare drug payments, and the right and duty of state legislatures and Congress to determine

Medicaid drug payments. Increased oversight by the Congress and enforcement

by the Executive Branch, have resulted in at least two drug manufacturers reporting markedly lower prices to the Medicaid Programs, however, even those

companies continue to report inflated prices for Medicare purposes.

After concluding the first stage of its investigation last year, Congress enacted

legislation requiring the General Accounting Office to investigate and report on the

true costs of the drugs in question and the expenses incurred by health care providers in administering them. The legislation also requires the recently renamed

Center for Medicare and Medicaid Services (CMS), formerly known as the Health

Care Financing Administration (HCFA), to review the GAO report when issued and

take appropriate action with respect to Medicare drug reimbursements. State Medicaid programs already have taken actions based on the results of investigations by

the Department of Justice and the National Association of Medicaid Fraud Control

Units, and many of those programs have already reported saving tens of millions

of dollars as a result. I am hopeful, that after considering the GAO report, CMS Administrator Thomas Scully will take similar action to stop these excessive payments

that are costing the Nation’s health care systems billions of dollars each year.

In conclusion, the evidence amassed by the sub-committees demonstrates without

doubt: No drug reimbursement system will succeed unless drug companies tell the

truth about their prices. Our existing Medicare Drug Reimbursement System is broken because certain drug companies lack honesty and integrity. Any expanded drug

benefit will be doomed to fail if those same companies continue to lie about their

prices.

Thank you for the opportunity to bring to the sub-committees’ attention this widespread, institutionalized fleecing of Medicare, Medicaid and other health care programs funded by the American taxpayer.

I will be happy to answer any questions the sub-committees may have.

Mr. GREENWOOD. Thank you for your testimony.

The Chair recognizes himself for 5 minutes for questions, and

would refer to document N1 and ask the staff to have that projected. That’s the document that was projected earlier.

N1. Staff, N1. There we go.

Let me start with you, Mr. Bentley, and let us look on that chart

at Mitomycin. Mitomycin is what kind of drug, Mr. Bentley?

Mr. BENTLEY. It’s a chemotherapy agent.

Mr. GREENWOOD. It’s a chemotherapy agent.

Let me understand—let me make sure that I understand and we

all understand this chart. Your company, Ven-A-Care, the one to

purchase that drug, at catalog price from the manufacturer would

pay $180. Is that correct?

Mr. BENTLEY. Yes, sir.

51

Mr. GREENWOOD. Okay. And the Red Book, the document that

Medicare uses in order to determine the reimbursement to the physician, then is posted by the manufacturer at $869.33. Is that correct, sir?

Mr. BENTLEY. That is the Medicare allowable, which would be 95

percent of the AWP that is posted in the Red Book.

Mr. GREENWOOD. So Medicare pays $869 to the physician for a product that he paid $180 for—95 percent of that?

Mr. BENTLEY. Correct.

Mr. GREENWOOD. So the overpayment is in the vicinity of 680

some dollars Medicare is overpaying for that drug?

Mr. BENTLEY. Yes, sir.

Mr. GREENWOOD. Now, let us look at the impact of that particular chemotherapy drug on the patient. The patient’s requirement under Medicare is to pay 20 percent, 20 percent copay. If, in

fact, the copay was based on the—what was actually paid for the product, I would assume that that would be a $36 cost. Is that correct?

Mr. BENTLEY. Yes, sir.

Mr. GREENWOOD. Okay. Instead, the copayment is $173.86, which I would calculate is $137 more than the patient should pay

in copayment. So the patient gets ripped off for $137. And whether

or not we believe that the oncologists—and I do believe that the

oncologist needs to recover more than we’re paying him now. I’m

looking at the patient here. What if the patient doesn’t have the

$173.86? What if the patient could afford $36 for the treatment,

but doesn’t have the $173. What happens?

Mr. BENTLEY. That’s correct.

Mr. GREENWOOD. The patient could conceivably do without treatment.

Mr. BENTLEY. That’s correct. Or other family members may have

to help pay the successive copayment amount, which only puts a

burden on other family members when a loved one has cancer. And

I would also say that Mitomycin is also paid to pharmacies by the

DMERC’s under Medicare, not just oncologists.

Mr. GREENWOOD. Let me pose this question to Mr. Scanlon. Mr.

Scanlon, the crux of this whole—there is no question that AWP

system is broken. I’ve talked to every pharmaceutical company that

I could find. They all agree. I’ve visited my own oncology doctors

in my county. They agree that the system doesn’t—that the system

doesn’t make sense as it’s constituted. There is this question of

whether the oncologists in particular and other providers are

undercompensated and what we need to spend to pay them fairly.

Is it your testimony that—what was the figure in your report for

the overpayment to oncologists for these drugs? What was that

number?

Mr. SCANLON. It’s approximately $530 million.

Mr. GREENWOOD. $530 million——

Mr. SCANLON. Based on the conservative estimate of—— Mr. GREENWOOD. $530 million per year, half a billion dollars a

year just for oncological products.

And, sir, what does your study reveal as to what it would cost

to bring oncologists up to the rest of the medical profession in

terms of the way they’re compensated by Medicare?

52

Mr. SCANLON. There are a number of elements in that. I mean,

to put the oncologist on par with other physician specialties, first

of all, there’s the issue of the adjustment of their fees for chemotherapy administration and the substitution of an alternative

method for the basic method. Restoring the basic method would

add about $31 million to their payments.

Oncologists have also raised issues about an adjustment that

HCFA made in terms of their supplies, and they’ve indicated that

they believe that HCFA has reduced their supply estimates too

much in terms of taking the drug costs out of what was reported

in the survey data used to set up the fee schedule. We don’t have

a firm estimate of what supply expenses should be. The oncology

profession has indicated that it should be about double of what

HCFA uses, which would add another $20 million to oncology payments.

Other issues that they raise, we cannot make an estimate now

as to what impact that might have on their fees, and as I indicated,

they might not have a big impact at all because other specialties

might have the same types of issues, in terms of practice expense,

keeping pace with changes in practice.

Mr. GREENWOOD. My time has expired. The Chair recognizes the

gentleman from Florida Mr. Deutsch for 5 minutes.

Mr. DEUTSCH. Thank you, Mr. Chairman.

Mr. Scanlon, if I can follow up on that, because I think one of

the interesting things in your very, you know, insightful testimony

was really this whole issue of the alternative approach. I mean,

there’s a clear consensus it’s broken. How do we fix it? I mean, specifically, if you can elaborate. You were starting to elaborate in

terms of the physicians themselves, the reimbursement, the AWP

reimbursement. I mean, can you offer some specific suggestions to

us?

Mr. SCANLON. Well, in terms of the physician payments for

chemotherapy administration and other services that don’t involve

a physician directly, to restore the basic method, what it means is

that you use differences in the resources—the types of inputs—that

are needed to provide a different service as the basis for determining Medicare fees. The alternative method that was used by

HCFA involved the substitution of historical charges, what physicians actually charge, and which oncologists have said were based

on the past and do not reflect current experience or practices in the

delivery of these kinds of services. So we believe in substituting information about actual resources that are required, that HCFA has

developed through expert panels and may need to update through

additional expert panels to keep current, but that kind of information is key to put the physician fees on par with——

Mr. DEUTSCH. If I can follow up on that, your study points out

almost a 10-to-1 differential between hat government—what we

would save or what Medicare would save if we changed up AWP

versus switching the physician payment. The oncologist group—

and I don’t know if they are going to testify to this later, but I’m

aware of at least a study that they did, not as extensive as yours,

which was saying it was almost a 1-to-1 tradeoff. Have you looked

at their study, and how do you respond?

53

Mr. SCANLON. We have looked at their study. We have not been

able to replicate their study, but at the same time we have concerns about the method of the study. I mean—— Mr. DEUTSCH. That is obviously a pretty big differential.

Mr. SCANLON. There is no question about it. There’s a number

of differences in terms of what we’ve done and what they have

done. We have built this estimate based upon all the services physicians provide, which we think is key to understanding this problem. The physician fee schedule is a relative value fee schedule. It

sets fees for one service based on the comparison of the resources

required for it versus other services, and it distributes an amount

of money that we found to be adequate in order to get physician

participation in Medicare. So that’s the criteria for setting physician fees.

To build an estimate of expenses from looking at individual procedures is not nearly the same, because what it ignores is the fact

that the fees that become paid to a physician includes three components. One is the practice expense component. The second one is

the physician work component, for which there is no comparable

sort of accounting cost, and that accounts for over half the fee. And

the third thing is the malpractice expense component. So in some

respects it becomes—when you start to look at this as a piece, you

have the potential of being misled, and it’s much more important

to look at this in the aggregate.

Mr. DEUTSCH. If I can sort of open this up to each of you individually, and let me also welcome Mr. Bentley as a constituent. I’m

glad you made your way up to Florida. It’s not as easy—from Florida. It’s not as easy as it used to be. Hopefully that will change.

But in my opening statement I mentioned what I think in some

ways is as big, if not the biggest, concern is the substitution based

on market forces, and we all can, you know, come up with theories

that it’s going on. Do we have empirical or even anecdotal evidence

that, in fact, there has been substitution based upon the increased

spread of particular drugs? I mean, do we have either anecdotal or

empirical evidence, besides theoretical evidence, which clearly we

do have? If you don’t know, that’s fine.

Mr. BENTLEY. I believe there is evidence that—— Mr. DEUTSCH. Can you point to anything specific that you’re

aware of?

If you can pull the mike closer as well. It gives—I mean, we can

all see that it should be occurring, or it could be occurring. Obviously we hope it’s not occurring.

Mr. BENTLEY. This was part of a drug I was referring to in my

opening statement, which is a new version of an older drug called

Vepesid, which is——

Mr. GREENWOOD. Mr. Bentley, why don’t you lift your microphone up. I know everyone wants to hear you. And make it—speak

as directly into the microphone as you can. Point it toward

your—— Mr. BENTLEY. Okay. This is an internal Bristol-Myers Squibb

document that shows Etopophos, which is a second-generation

etoposide that was developed, and they say that it’s clearly superior to that of etoposide and for various reasons. And then they go

on to the next document, where it says, the Etopophos product proVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00057 Fmt 6633 Sfmt 6602 E:\HEARINGS\75756 pfrm09 PsN: 75756
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file is significantly superior to that of etoposide. Now, what they

were concerned about was there was a big spread already in

etoposide, so how were they going to market and sell the better, in

their own words, clinically superior, second-generation drug?

Now, they admit right here, currently physician practices can

take advantage of the growing disparity between Vepesid—that’s

etoposide—list price and subsequently the average wholesale price,

AWP, and the actual acquisition cost when obtaining reimbursement for etoposide purchases. If the acquisition price of Etopophos

is close to the list price, the physicians’ financial incentive for selecting the brand is largely diminished.

And they go through some different scenarios. And I can tell you

right now that the spread differential on etoposide, as was pointed

out earlier, Medicare is reimbursing approximately $135 for the old

version of etoposide, and it costs less than $10. And literally we

have a, quote, clinically superior drug that Bristol-Myers Squibb

has been unable to market because of the spread on the older

version of the drug.

Mr. GREENWOOD. Your time is—— Mr. DEUTSCH. Can I just ask a very short follow-up question?

Mr. BENTLEY. Sure.

Mr. DEUTSCH. And I know my time is expired. I guess I have a

copy of this, and it’s up there. I’m just curious. You were able to

ascertain this information through your whistleblower lawsuit.

How were you able to—— Mr. BENTLEY. This—I obtained this from the Justice Department, cooperating with them. They obtained this by an OIG subpoena issued to Bristol-Myers Squibb.

Mr. GREENWOOD. The time of the gentleman has expired.

The Chair recognizes for 10 minutes the gentleman from Florida,

the chairman of the Health Subcommittee, Mr. Bilirakis.

Mr. BILIRAKIS. Thanks, Mr. Chairman.

Mr. Bentley, the Mitomycin that’s on that chart, 40 milligram,

and the dollar figures attached thereto, how many doses is that?

Is that one dose?

Mr. BENTLEY. Well, that’s one vial. Depending on how it is administered, that could take two or three vials to equate to a dose.

Mr. BILIRAKIS. All right. So if it took 2 or 3 vials for one dose—— Mr. BENTLEY. You multiply all of those figures times 2 or 3. And

if I can interject to shine some light on some previous remarks that

were made, the Mitomycin, that AWP, that was established by the

drug manufacturers, and that is what Medicare is relying on to determine the reimbursement. And I can tell you I have examined

tens of thousands of internal drug company documents, and there

is not one scintilla of evidence that shows that the drug companies

established an inflated price for Mitomycin in order to offset practice expense for oncologists or to give the pharmacists any more

money. It just—that is not the focus.

Mr. BILIRAKIS. So who created the AWP, then? Is it created by

HCFA, by HHS, by—— Mr. BENTLEY. It’s been around, sir, for the better part, that I’m

aware of, about 40 years. And for a great number of those years,

it’s always worked, and there are still a great number of companies, Merck, Lilly, Johnson & Johnson, DuPont, who do not engage

55

in this type of gaming the system. When they make a representation about the price of the drug, you may not like it because it may

be high, but that’s the price they sell it for.

Mr. BILIRAKIS. Let me ask you, about the $180 figure which is

the Ven-A-Care cost. Is HCFA, in your opinion, aware that that’s

really all that it cost?

Mr. BENTLEY. I think they are now, sir.

Mr. BILIRAKIS. Mr. Scanlon, are they aware of it?

Mr. SCANLON. Yes, Mr. Chairman.

Mr. BILIRAKIS. Have they been aware of it?

Mr. SCANLON. They have been aware of it, and last year they did

take steps to try and change this, but then because of concerns

raised by providers, they backed off and—— Mr. BILIRAKIS. Concerns raised by providers to HCFA?

Mr. SCANLON. About the imbalance between the drug prices and

the drug administration compensation.

Mr. BILIRAKIS. Concern was raised by providers, being—— Mr. SCANLON. Yes, sir.

Mr. BILIRAKIS. [continuing] let us say in that case the

oncologists?

Mr. SCANLON. Yes, sir.

Mr. BILIRAKIS. Mr. Grob, do you agree with that?

Mr. GROB. That’s correct.

Mr. BILIRAKIS. Because concerns were raised by providers, it just

remained status quo?

Mr. GROB. The status quo has remained. In fact, the Congress

required that it remain that way.

Mr. BILIRAKIS. That’s what I want to get to. The Congress did

what?

Mr. GROB. The Health Care Financing Administration had advocated making available more realistic drug prices to the carriers,

but because of the concerns that were raised, the Congress placed

a moratorium on any reductions in those prices, and it commissioned the study of the General Accounting Office.

Mr. BILIRAKIS. And that’s what we have today. I’m almost

speechless.

Is there a substitute or an equivalent drug that will do the same

job Mitomycin will do? Mr. Bentley?

Mr. BENTLEY. I’m not a pharmacist. I’m not—I don’t know. Really my expertise is on pharmaceutical pricing and the economics.

Mr. BILIRAKIS. Do any of you know?

Mr. GROB. I don’t know, Mr. Chairman.

Mr. SCANLON. Nor do I.

Mr. BILIRAKIS. Mr. Grob, do you know, can HCFA, the administration, HHS, et cetera, et cetera, can they fix this in a way that

it should be fixed? You know, and I’m not—I realize this is more

complex. It’s certainly not a simple situation, but can they fix this?

Do they have the power to fix this, or does it have to be Congress?

Mr. GROB. Theoretically, CMS does have the power through an

authority called their ‘‘inherent reasonableness’’ power, which allows them to conduct studies to determine what the true prices are,

and if there is a price that is, as the phrase says, inherently unreasonable, they can reduce it. However, that’s a very lengthy process

to conduct the studies. The studies are almost——

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Mr. BILIRAKIS. Yeah. But then we get the figures up there, the 7 cents for the one and 94 cents for the $1.20. What kind of studies

are we talking about?

Mr. GROB. Well, they would be studies to determine what the

market prices are, what comparable prices are.

Mr. BILIRAKIS. But those are the prices, aren’t they?

Mr. GROB. We believed for some time that there’s good, strong

evidence for reducing those prices, and CMS would have that authority. And, in fact, CMS had the means even just by making the

prices available to the carriers to do it, but there has always been

resistance to this.

CMS to its credit in the past had advocated other ways to deal

with the high prices e.g., to increase the discount on the AWP, but

these proposals—— Mr. BILIRAKIS. I guess my time did expire. I’m sorry, Mr. Chairman. I didn’t notice that.

Mr. GREENWOOD. Thank you.

We are going to collect a dollar for the firefighters of New York

for everyone who says HCFA for the remainder of this hearing.

Is the gentleman Mr. Brown available for questioning now?

In that case, the gentleman from New Jersey Mr. Pallone. He’s

recognized for 5 minutes.

Mr. PALLONE. Thank you, Mr. Chairman, and, Mr. Bentley, I just

want to continue with some of these documents in an effort basically to show that, you know, companies consider doing what’s

right, but then they choose to do what’s wrong, so to speak. And

if I could ask that we successfully look at, I guess, B-1, B-2 and

B-3, and we’ll start out with B-1, which is an internal Glaxo document. And I just wanted to—you know, Mr. Bentley, if you just

wanted to comment on that first document in this regard.

Mr. BENTLEY. Sure. This is very interesting. Glaxo was the first

company to market the antiemetic Zofran that’s used to control

nausea and vomiting in chemotherapy patients. And they had a

natural monopoly for a number of years, because they had the only

drug that was FDA-approved for this indication. And in approximately 1995, SmithKline came out with a competing drug, not a

generic, but a drug that was effectively controlling nausea and

vomiting. And Glaxo noticed that their market share declined dramatically right from the onset of the introduction of Kytril. Now,

they expected obviously they were going to lose some market share,

because there was competition in the marketplace. They didn’t expect to lose the amount that they had lost so rapidly. And the marketing department told Glaxo, well, it was an easy answer. Physicians were actually being courted by SmithKline representatives to

switch from Zofran to Kytril based on the opportunity to make

money from Medicare and Medicaid.

So they came up on some proposals on how they were going to

level the field and this was an internal memorandum. Obviously

somebody with some conscience in Glaxo was concerned about the

ramifications of what Glaxo was proposing to do and that was to

raise the net wholesale price in AWP, which would effectively increase the amount paid by Medicare and Medicaid while simultaneously lowering the price to physicians and to specialized pharmacies like Ven-A-Care in order to create a spread to compete with

57

SmithKline’s competing product, and that spread that they were

going to compete with was not their own money. It was the government funds being used to fund a kickback essentially for their marketing efforts to compete with SmithKline, and they were obviously

very concerned about what Congress was going to look at.

Mr. PALLONE. This was the second document, right, B-2? Oh, we

are still in B-1, okay.

Mr. BENTLEY. The next document shows what Ven-A-Care received in the mail from Florida Infusion announcing this great revolution, and that was Glaxo had raised the AWP but lowered the

price, effectively creating a spread to induce Ven-A-Care and physicians to go back to Zofran for those that were using the competing

Kytril.

Mr. PALLONE. Then let us go to B-3. This is the Smith Kline document where, I guess what is it called, Health IQ, where they talk

about possibly turning Glaxo into Medicare and that that might be

a reasonable approach but then they worry about the whole industry going down. Do you want to comment on that?

Mr. BENTLEY. Yes. This is interesting because there was actually

a series of letters written by Health IQ under the letterhead Physician Home Care Associates, and they were written to every medical

director of the Medicare Part B carriers and to the Medicaid medical directors and they were ostensibly representing themselves as

this great group that represented home care doctors and pharmacies. However, it was nothing more than a lobbying group that

was being paid for by SmithKline, and if you look at bullet point

No. 4 it says from the communication received to date the letters

received by Physician Home Care Associates, ostensibly written on

behalf of physicians and other health care providers, appear to be

greatly appreciated by the medical director. That is the Medicare

Part B directors. A follow-up letter apprising Medicare of an increasing in Glaxo’s AWP and a proffered discount to purchasers

which would seem to benefit providers might appear peculiar and

prompt questions as to the true identity of Physician Home Care

Associates.’’ And then they go on that they——

Mr. PALLONE. Read that next section.

Mr. BENTLEY. Sure. ‘‘As a result of these issues raised above,

Health IQ’s concern that highlighting the difference between the

actual acquisition cost and the published AWP may not only increase attention to Glaxo’s pricing practices but may provide the

impetus for HCFA to implement a system that could impact not

only reimbursement of antiinfectives but all pharmaceutical and biological products. The ramifications could extend well past Medicare to include Medicaid programs also administered by HCFA as

well as private payers who tend to mimic policies and procedures

implemented by public payers.’’ Mr. PALLONE. Obviously that was the point that they were concerned that the whole industry was going to go down.

Mr. BENTLEY. Absolutely.

Mr. PALLONE. Thank you. Thank you, Mr. Chairman.

Mr. GREENWOOD. Thank you. I recognize for purposes of inquiry

the chairman of the full committee, Mr. Tauzin.

Chairman TAUZIN. Thank you, Mr. Chairman. First let me respond to concerns that we have somehow questioned the motives

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of any physicians involved in this payment system. First of all, the

concerns expressed by oncologists as we have reviewed this matter

was to the effect that if we did not simultaneously repair the deficiencies in practice reimbursements under the Medicare system

while we are curing the unfairness of the system that reimburses

way beyond the cost of the medicines that are provided to Medicare

patients that we would be disrupting the provision of health care

services to patients in America. That is a real concern of this committee, and so let me turn quickly to the—I guess to the first question for the GAO. The numbers you have submitted to us is that

practice reimbursements are about $51 or so million dollars short;

is that correct.

Mr. SCANLON. The adjustments that we think should be made

would approximate that.

Chairman TAUZIN. I understand Mr. Scully is going to put a fig- ure of about $48 million or so. It seems the two of you are close,

but even if you multiply the numbers you have given us by three,

if you provided reimbursements to the physicians three times what

you estimate is a shortfall at $150 million, we are still talking

about overpayments of a billion dollars. So if we correct the overpayment problem in the system because of this artificially high

AWP wholesale price posting, there is ample room, then, to correct

the deficiencies that you and Mr. Scully have found in the payment

to physicians for services; is that correct?

Mr. SCANLON. That is correct.

Chairman TAUZIN. So that in correcting this problem, if we handle it properly, if we make adjustments for physicians’ practices

three times as much as you estimate is a shortfall, we could still

save the system $850 million or more each year in the overpayments for these drugs; is that correct?

Mr. SCANLON. That is correct, but I would also note, Mr. Chairman, the changes that we have talked about in terms of implementing the fee schedule as you have specified do not involve an

additional expenditure because the fee schedule has been budget

neutral. If you decide to increase——

Chairman TAUZIN. The problem there is it would come out of

other physicians’ reimbursements. So if we added to that pool,

three times what you recommended as the deficiencies paid to

these physicians so that it could be spread out more equitably without denying other physicians their reimbursements, we would still

save $850 million to the Treasury in the—— Mr. SCANLON. You could still save considerable money.

Chairman TAUZIN. Let me turn to the other issue that disturbed

me so much, and I want to tell my friends Mr. Ganske and Mr.

Norwood that I didn’t make these comments lightly and I stand by

them. I am looking at the IG report now that is number Q-1. It

contains some rather chilling language. It says in that report a review of 22 skilled nursing facilities, that at these facilities $4.8 million out of the $9 million in claims, 53 percent were not medically

necessary. They went on to say that in addition financial effects we

noted about overutilization and overpricing were potentially harmful to the patients. ‘‘Medical reviewers who were part of our

audit’’—this is a quote. ‘‘Medical reviewers who were part of our

audit concluded that patients receiving unnecessary infusion servVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 E:\HEARINGS\75756 pfrm09 PsN: 75756
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ices were placed at undue risk for complications,’’ and it went on

to say, ‘‘Furthermore, infusion services are invasive procedures

that are painful and when unnecessary reduce the quality of life.’’ That IG study, did it not, also went on to say that maybe one

of the inducements for this overutilization was this crazy system

where overreimbursements were provided for some of these infusion drugs?

Mr. GROB. Again, we didn’t tie analytically the two together, but

the thing that concerns me is that it is in the air. I think where

we want to be—I think we would all feel better if it just wasn’t

that big of a possibility.

Chairman TAUZIN. That is the point. Let me try to say it maybe

a little more accurately, as you have tried to say it, Mr. Grob. The

fact that these overpayments are there next to the fact that there

is evidence not only in that study but in one reported by the New

York Times on May 13, 2001 indicating how much overuse of chemotherapy seems to occur in some cases in the last stages of some

cancer patients’ lives when there is strong medical evidence that

the chemotherapy had no effect at all upon the quality of life or the

treatment of the cancer, that these studies standing out there with

this overpayment system also present, if nothing else, creates the

image that something is wrong and that is bad and the notion that

anyone in this country would be given infusion drug therapies that

would harm them or could possibly harm them or make life less

pleasant for them in those last days with a system that overcompensates for doing that is a juxtaposition that we ought not to permit. Isn’t that a point in your study?

Mr. GROB. It is. We feel that we all wish you would not have to

ask me that question.

Chairman TAUZIN. Exactly, and I am going to quote you. Abusive

billing arrangements between the skilled nursing facilities and infusion suppliers resulted in tremendous profits, and here is your

quote, ‘‘which encouraged the overutilization of infusing services

when no treatment was necessary.’’ You did tie it together.

Mr. GROB. Yes.

Chairman TAUZIN. Even if you hadn’t, the juxtaposition of those

two elements, overutilization where it could be harmful to patients

and make their lives miserable in the last days and overpricing

that could possibly encourage it is a situation we should not tolerate; is that correct, sir?

Mr. GROB. That is right .

I think the reason we could say that was in that case we found

representatives, nurses from the infusion company, that were

screening the nursing home patients as they came into the nursing

home. So there was actually a presence there. So it went beyond

mere speculation——

Chairman TAUZIN. Again, my apologies to any physician who

thinks I may have slammed them. My mother is a three-time cancer survivor. I pray at the altar of this medicine that has saved my

mother’s life. So don’t get me wrong. I love any doctor that I know

takes his oath seriously and practices it. I defend my own profession, the legal profession, against slams whenever they come unfairly, but I don’t defend unscrupulous lawyers, and I will not defend an unscrupulous system that puts people into this position or

60

creates this image when it should not exist. So I hope that clarifies

it a bit. The bottom line is we ought not create a system that even

creates an image that anyone is providing infusion medical services

to a patient in those kinds of conditions with any kind of connection to the fact that there is this availability of huge profits involved for doing it rather than the needs of that patient and the

wonderful care and concern that almost every doctor I know provides to those patients, and I am talking about the fact that in

every profession there could be a few bad apples and we ought not

encourage them.

Thank you, sir.

Mr. GREENWOOD. I thank the gentleman, and the Chair recognizes for 5 minutes the gentlelady from California, Mrs. Capps.

Mrs. CAPPS. I have to acknowledge I am struggling a bit to figure

out how to pose it. I have two different things I would like to talk

about, but I am curious, Mr. Bentley, you gave kind of an autobiography in a way, if you will, of your company in the beginning with

the treatments that you provided and then blowing the whistle, if

you will, or noticing the discrepancies that you did, and I am curious to know—you were squeezed out of—you opted out of certain

partnerships or relationships that were offered to you. What is the

status of Ven-A-Care now?

Mr. BENTLEY. Right now we spend most of our time trying to

educate and shine the light on what we feel that are abusive practices and abusive reimbursements so that we can hopefully have a

level playing field some day and go back and do what we have always done.

Mrs. CAPPS. So you are actually in this business of doing these

studies or looking into these discrepancies pretty much full time

now.

Mr. BENTLEY. Pretty much full time, yes, ma’am.

Mrs. CAPPS. If I could turn to Mr. Scanlon and/or Mr. Grob, I am

sort of anticipating the testimony of the next panel because you

have been doing a number of studies that point out what we are

all sort of flabbergasted to hear today, to have discovered. To me,

and I know all too personally that it isn’t coincidental that this is

the field of oncology where we have regulating agencies’ reimbursement standards that are being set for a field where, because of the

investments that the Congress has made in the National Institutes

of Health and other research arenas, cancer treatments that were

clinical trials 5 years ago are standard today or even 2 years ago.

That makes a challenge for a regulating agency to come up with

pricing and all of the scheduling, and I would mention also that

there have been some discussions about—that oncologists don’t

have any allowance within their offices for administering for the

nursing care that goes into this as well and so some of the incentives for part of our problem come out of what I call the inability

of our Medicare and Medicaid organizations to keep up with the

changes, and I would like to have your comment on that.

Mr. SCANLON. There is no issue that it is a real challenge to keep

something as complicated as a physician fee schedule up to date because we all know that medicine is changing for the better and we

would not want to have any kind of system discouraged. At the

same time I think the changes are sometimes not as dramatic as

61

they are portrayed and it is more of an evolution than a revolution,

and we can keep data more current and keep our systems more in

line.

Now, in this regard, in terms of the physician fee schedule, the

Congress stipulated that specialties could provide information, current information, to allow CMS and previously HCFA to update the

fee schedule, and some specialties have. The oncologists have not.

There are standards for the submission of this information in that

the information has to be representative of the profession, it has

to be information that is collected from a large enough sample to

provide a reasonable basis to proceed forward. That is part of this

and I mentioned we were doing another study to see how information can be updated.

Another piece is the issue of how has the delivery of a service

changed in terms of the nursing time, other staff time, supplies

and other resources? That part needs to be continuously updated

as well. There are some mechanisms in place. We will be looking

at those to see how adequate they are.

But let me go back to another issue you raised, which is that certain costs are not being recognized within the system. All costs in

the data that are available to CMS were recognized. There was the

one adjustment in terms of supply expenses but all nursing costs

that were in the data that were available were recognized. It is a

system that does compensate for some weaknesses by recognizing

these costs and then trying to allocate all of these costs across the

different procedures. So we have some faith in the system. We have

some concerns about how one keeps the data to operate the system

as timely as one needs, and that is what we are studying at this

point.

Mrs. CAPPS. Just one follow up if I have another minute. You are

saying that the discipline of oncology, that those associations of

doctors have not been forthcoming with data that you asked for?

Mr. SCANLON. In terms of information that we have asked for,

they have provided some of that. In terms of information they could

have provided to CMS to allow their fees to be recalculated, they

have not done so.

Mr. BENTLEY. May I add to that question?

Mrs. CAPPS. Please.

Mr. BENTLEY. There is a drug that came off of patent, Taxol. It

is a very important cancer drug. It has been on patent for approximately 5 years, originally derived from a California tree. So it is

now being challenged by generic competition. So you would think

the government would start saving some money because there is

price competition, and this came across our fax, where this came

across May 9, the first generic Taxol is introduced in the market,

and they are already touting the spread, and the manufacturer

came in with an AWP that was only slightly under Bristol-Myers

Squibb’s AWP; so the government is not benefiting nor are the patients nor Medicare or Medicaid from the fact that there is price

competition occurring. And I question the fact that for 10 years

Taxol was on patent and I don’t think any oncologist was refusing

to give Taxol to patients because there was no spread for those 10

years. When Bristol-Myers Squibb made a representation about the

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price, that is what they sold it for. How did Bristol respond to the

generic competition?

Here is the next, where you see that Bristol-Myers’ Taxol, they

lowered their real price in order to meet the competition but they

didn’t report a lower price to the reporting services, and yet again

yesterday I got another fax that now then there is a second generic

that has come onto the marketplace and the prices have dropped

about another 20 percent in the last 48 hours but yet they put an

AWP on their generic, exactly the same AWP that IVAX put on the

first generic. So again Medicare and Medicaid and all the private

insurers are not going to reap any benefit. And Taxol, the government currently spends, just Medicare, about $250 million a year on

Taxol.

Mrs. CAPPS. It is now standard treatment for breast cancer.

Mr. BENTLEY. Correct.

Mr. GREENWOOD. The Chair thanks the gentlelady and recognize

the gentleman from Iowa, Mr. Ganske, for 5 minutes for inquiry.

Mr. GANSKE. Thank you, Mr. Chairman. The area of oncology is

kind of a special one as it relates to drug expenses because what

one person may say is medically necessary, another person may say

isn’t. Let me give you a real life example. You have a patient with

lung cancer, it spreads to his chest, lymph nodes and to his neck,

not a very good prognosis. The oncologist tells that patient, you

know, we could put you on chemotherapy, you have a 30 percent

chance of responding, and if you do, it may extend your life 2 or

3 months. Now, is that medically necessary or not? And in addition

you may not feel very good for some of that time. You know, one

person may say I don’t think that is—I don’t want to do that and

another person may say those 2 or 3 extra months with my family

may mean a great deal to me that I think is necessary. That is how

difficult it is to make some of these determinations.

That said, I think I want to thank this panel for being here; Mr.

Bentley, you in particular for some of the data that you provided

to us because I agree. I mean I agree with you, Mr. Grob, when

you say the average wholesale price is a number that is misnamed.

It is clear that we are not getting real numbers and so when you

look at—I think this committee should look at the recommendations that you make. We co-authorize a commission to set payment

rates. We could calculate a real rate. We could collect the invoices

and do a real number if that is what we want to do. But I think

there is a bigger question that this committee should look at, and

that is do we want to continue in this way and what are the options? What are the options if the Federal Government is going to

pay for these drugs? Well, we co-pay at cost. We could just pay

what the invoice says. I mean does anyone want to do that? What

are the controls on that? Then you can get any type of cost you

want.

Okay. We could pay at any true average. That is where you have

had it in terms of your recommendations. Well, what do you do

about then a large purchaser who is able to get a discount off that

true average vis-a-vis a smaller purchaser who doesn’t have that

kind of leverage?

And finally, you know, we could just set the prices and, quite

frankly, I think if you chose the first option of paying at cost, that

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is exactly what the Federal Government would do because that is

what it has done on every other aspect of Medicare. So I think that

whenever we are looking at simply paying at cost or coming to a

true average, we need to think about this big picture here as well.

My personal preference at this time is we need to reform this, we

need to get the actual numbers and then somehow take into account the fact that you can’t ask certain smaller purchasers to actually take a loss if they cannot achieve the average, and I am not

sure exactly how we do that.

Mr. Bentley, do you have any comments?

Mr. BENTLEY. Well, I would like to say that the prices that we

have provided to the committee we think represent those that are

available to an extremely small provider. Ven-A-Care virtually has

no buying power, and yet there are much better prices for large

purchasers and so what we are showing you is just the disparity

that is occurring between the reimbursement prices and what a

very small provider is very able to acquire these drugs for.

Mr. GANSKE. So do we throw out the AWP or actually make it

into a real AWP?

Mr. BENTLEY. There are a lot of drug companies that think AWP

really means something and when they make a representation

about their average wholesale price that is effectively what it is.

Mr. GANSKE. So for those who are playing the game honestly, it

shouldn’t affect them that much?

Mr. BENTLEY. That is correct. And in fact I don’t think you have

physicians that are saying we are not going to prescribe or dispense Lilly drugs or Merck drugs because there is no financial incentive or inducement for us to provide those drugs. I am not

aware of any evidence of that.

Mr. GANSKE. Mr. Scanlon, have you looked over the IG’s recommendations? Do you have any preference in terms of this list of

ways we could go?

Mr. SCANLON. I think taking into account market prices, which

is to recognize the average price being sold, is important. Whether

it needs to be at the average or somewhat above, to recognize that

there may be small purchasers who cannot obtain the average is

the key. And we think that the data that CMS has available would

allow us to look at that. We did look at small physician purchasers

in terms of prices they could get and we did a survey of them and

among the ones that responded and gave us prices, they all could

get prices that were as good as the discounts that were reported,

which are catalogue prices, and these catalogues are something

that any physician can buy from.

We talked about it as a starting point and the Inspector General

has talked about it. If you are willing to use the catalogue and pay

that price, you will get it. If you negotiate, if you can deliver some

volume, you may get a much better price. I don’t think we are in

a position where we want to begrudge the providers that get better

prices and say we have to find a way to get it down to the absolute

minimum. We are more concerned about the system that is out of

control at the other end—the price that is being paid by Medicare—which is so far and above the price that is actually being

paid by even the provider getting it at the highest price.

Mr. GANSKE. Thank you, and thank you, Mr. Chairman.

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Mr. GREENWOOD. I thank the gentleman and recognize Mr. Burr

for inquiry.

Mr. BURR. Mr. Scanlon, is this something that we have just realized for the first time that Medicare pays too much for prescription

drugs?

Mr. SCANLON. As Mr. Grob indicated, the Inspector General has

been looking at this for a long time and the conclusion has been

the same.

Mr. BURR. Why haven’t we fixed it?

Mr. GROB. We started it in the mid-eighties but we intensified

our work a few years ago, in 1997, and we have issued updated

studies every year since then.

Mr. BURR. Why haven’t we fixed it?

Mr. GROB. I can’t hear your question. I am sorry.

Mr. BURR. Why have we not fixed it?

Mr. GROB. There have been impediments, including a legislative

impediment.

Mr. BURR. It would actually require a legislative fix?

Mr. GROB. I believe that would be better—— Mr. BURR. Could HCFA have made changes in the past?

Mr. GROB. CMS could have used its inherent reasonableness authority to do so. It could have obtained better data and made it

available. It has tried to do that.

Mr. BURR. Have you ever looked at any other area of Medicare

reimbursements and found that people game the system?

Mr. GROB. Yes.

Mr. BURR. All areas? Some areas?

Mr. GROB. Very many areas.

Mr. BURR. As a matter of fact, we reacted to a number of them

when we did BBA 1997—— Mr. GROB. Exactly.

Mr. BURR. Did we get them all right?

Mr. GROB. We made a lot of them better.

Mr. BURR. But we got some wrong?

Mr. GROB. I don’t know which ones you have in mind.

Mr. BURR. Because in essence we try, like HCFA did, to calculate

what a proper reimbursement is based upon the delivery of a product and that delivery can change based upon geographically where

you are in the country, what the rental rate is. There are a lot of

factors that come into play?

Mr. GROB. Exactly.

Mr. BURR. You from the standpoint of the Inspector General’s office have come up with nine suggestions as to how we fix it. I will

attempt to refocus everybody here on the solution because I think

that everybody here is in agreement that we have a problem.

Mr. GROB. Yes.

Mr. BURR. That the average wholesale price is flawed, that we

have lived with it for way too long, that we have not shown the

backbone within the agencies that have jurisdiction over it that

could have done it or within the halls of Congress where we could

have legislatively fixed it. For whatever reason let us put that behind us and all agree it is wrong. You have come up with nine suggestions. Are there any of those that you would highlight more

than the others?

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Mr. GROB. Yes. I like the idea of the commission, and that is why

I put it first. Another one I think would be good would be to use

the manufacturer’s price that is used in connection with the Medicaid rebates as a source of data. I think it might be more helpful

if I could give a few general principles that—— Mr. BURR. Go right ahead.

Mr. GROB. I would agree that I don’t think we need to have the

bottom amount. I think, as several have mentioned, there is room

for some play here. I don’t think we should base it on cost. What

we have done basically with Medicare is move completely away

from that. Hospital payments were based on cost and we had double digit inflation. And then there was Medicare physician payments, and we had very high inflation; so we went to a fee schedule. We have just gone to a fee schedule in the form of prospective

payments for nursing homes, home health, and other types of facilities such as outpatient hospital costs. We have learned our lesson.

If you go on cost, the actual cost an individual has occurred, you

immediately come across two problems. One is looking over everyone’s shoulder as they write every check wondering exactly what

it is. And you can never keep up with it. And then if you actually

could succeed, then no one would care what their costs were because they would get reimbursed for them, and that would drive

the prices up.

So cost based reimbursement has been the bane of Medicare

since its existence and we have gradually corrected it in almost

every area. So I wouldn’t base it on the actual cost the person has

incurred. I would substitute some kind of a Medicare payment rate

which I think has to take into account primarily what the market

is. We have to have some sense of what is going on out there in

the market. That could be obtained from something like the actual

manufacturer’s price that, the data that is submitted for the Medicaid program.

Those dollars are available. They can be audited. They need a little definition. You could do some market surveys, and I think that

periodically, once a year or so, maybe more frequently, there can

be a price set, and then that is the price. I would agree with what

you are saying here. I don’t think we look over a doctor’s office and

say you can never make a penny on every piece of gauze in your

office. We know there is some give and take. I think people just

don’t want it to be very big or be a source of gaming and

incentivizing.

Those are some general principles. And out of that you could

choose one or more of those options, none of which would be perfect, but they all would be better than what we have.

Mr. BURR. Let me mention—Mr. Scanlon can comment on it and

also Mr. Bentley—these highlighted solutions to fix an AWP.

Mr. SCANLON. I concur with Mr. Grob, relying on the market.

This is one of the few instances where Medicare may be able to rely

on the market and what other purchasers are doing. Normally

Medicare is such a dominant purchaser that to say we are going

to pay what other purchasers pay would distort the market. But in

the case of prescription drugs right now Medicare is paying for a

very small share of them and they are easily defined commodities.

So you are able to specify what you are getting and you are able

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to look to other purchasers and what their experience is. CMS has

access to the information it needs. It doesn’t just need an average

price. It needs to know the circumstances under which buyers are

getting different prices to be able to set a fee that is going to be

adequate so that purchasers in different circumstances are able to

buy drugs and supply them to Medicare patients.

So using that information, which is market driven and therefore

I think a reflection of the efficiencies of what a market can

produce, is key here to setting market prices on a more rational

basis.

Mr. GREENWOOD. The Chair thanks the gentleman and

recognizes—— Mr. BENTLEY. Could I just comment briefly?

Mr. GREENWOOD. Yes, sir.

Mr. BENTLEY. I would like to add that the hallmark of any

change in reimbursement system has got to be some truth and honesty from the drug manufacturers because without that any system

you go to is going to be doomed to fail, and I point to a number

of Medicaid programs who do not use representations of AWP to

formulate reimbursement decisions. They use wholesaler acquisition costs. California for 12 companies uses manufacturers’ direct

prices. There is also cases where in some States they are actually

using invoices that are submitted by providers. So if you have manufacturers who are willing to make false statements about the

wholesaler acquisition cost, about the direct prices they are selling

it to, trumping up invoices so that provider submits an invoice for

a thousand dollars when in 30 days they receive $500 worth of free

goods and so they really paid $500, any system is doomed.

Mr. BURR. Clearly I think the panel would agree, and I appreciate the Chair’s indulgence, that we have the tools available to us

to fix the average wholesale price. The question is do we have the

willingness to fix the average wholesale price? No matter what we

choose, whether it is option one or nine, we will still be susceptible

to people who find a way to game the system; correct?

Mr. BENTLEY. Absolutely.

Mr. BURR. We will still need an Inspector General to help us on

that.

Mr. BENTLEY. There has to be consequences for those who choose

to break the law.

Mr. BURR. We can do better than what we have. I thank the

Chair.

Mr. GREENWOOD. The Chair thanks and recognizes Mr. Stearns.

Mr. STEARNS. Thank you, Mr. Chairman. I want to lead off with

the comment that Mr. Burr mentioned that there has to be consequences. I wonder if the staff could put up on the screen document number F-2, which is dealing with Bayer Pharmaceutical Division. Let me say while we are trying to find it that this is an internal company e-mail that states—in talking about their competition, it is a an e-mail that says, ‘‘Chris, if Baxter has increased

their AWP, then we must do the same. Many of the whole care

companies are paid based upon a discount from AWP. If we are

lower than Baxter, then the return will be lower to the HHC. It

is a very simple process to increase our AWP and can be done overnight. Let us talk about this at our meeting at Old Saybrook.’’

67

So there we have it pretty clear that Bayer Pharmaceutical Division in this case is working to increase the AWP not based upon

scientific evidence but based simply upon trying to work out that

they get paid more, they give the medical providers incentives, and

of course it works out that the wholesaler gets paid more too. So

everybody makes it and this continues to go forward.

Let me ask the staff to put document number 7. This is a document from Baxter. I just read one from Bayer and now I would like

to read one from Baxter, where they are talking about the AWP

and they are saying ‘‘This price is being promoted by certain manufacturers’ sales forces as a financial incentive to use their product.’’ So here again we have Baxter Pharmaceutical as saying we have

got to get on board here because people are using this as a financial incentive to use their product. They go on to say, ‘‘The deliberate manipulation of AWP or WAC prices is a problem that we

need to address. The spread between acquisition costs and AWP/

WAC is a direct profit for customers and is being used to increase

product positioning in the market by certain manufacturers.’’ So I thank the staff for these documents and I obviously thank

the staff for what they are doing here and you, Mr. Chairman, and

the chairman from Florida, Mr. Bilirakis. But on a larger note, Mr.

Burr touched upon the idea of what can be done. One of the things

that can be done is to have the Justice Department enforce under

the antitrust rules what has been accomplished simply in this

memo.

Now, this was not a big, big problem at Medicare until the nineties, but this has been going on for almost a decade. So in a larger

sense Medicare, HCFA, has been a little bit asleep at the wheel because they don’t necessarily—I mean I don’t think you can blame

Congress totally here because they could have done something like

Medicaid is doing. Medicaid did something on their own to establish a new AWP system where the rebates will be based upon a

more accurate model.

So I think, you know, when you come to these hearings, and I

have been to a lot of them and it is almost numbing to see these

things, there is a lot of blame to go around, but I don’t think Congress is totally at fault. I think HCFA should have done something

about this in the early nineties, and obviously I think the Justice

Department should have taken examples where Baxter and these

other pharmaceutical companies were in collusion in trying to raise

AWP without any reason other than to increase the spread for

their medical providers to give them incentives.

So I am always a little bit nonplused to sit here and we talk and

talk and I say where is there someone that is going to take some

action on this.

Another question I have for you, Mr. Grob, you mentioned that

we could save as much as a billion dollars a year if we stopped this.

Mr. GROB. I believe at least a billion.

Mr. STEARNS. That goes to a larger question that President Bush

has mentioned that he wants to reform Medicare to give pharmaceutical help to those who are poor who need this. So here the government is squandering a billion dollars a year and this could be

going to beneficiaries who can’t afford pharmaceutical drugs. So

this is an area where this whole package of reform is what PresiVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 E:\HEARINGS\75756 pfrm09 PsN: 75756
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dent Bush has talked about in the campaign and in the presidency.

With a simple quick decision by HCFA to move to the Medicaid position on this, wouldn’t that solve it immediately?

Mr. GROB. The Medicaid program is complicated and has two features to it.

Mr. STEARNS. One of your recommendations—but instead of Congress sitting here and debating this thing, we go through the subcommittee and the full committee and the House, what can HCFA

do tomorrow to make this so that we stop this?

Mr. GROB. CMS would have its options limited to obtaining the

most accurate market data it can find and making it available to

the carriers in setting their prices and reducing them.

Mr. STEARNS. Well, couldn’t they say every pharmaceutical has

to give us your wholesale price, certify it, and if it is incorrect, you

will go to jail? Is that——

Mr. GROB. We basically have almost the equivalent of that in the

Medicaid program, which is why I brought that up. Because of the

rebate program the manufacturers are in fact required to submit

that data, the manufacturing price we will call it, to the government, and that data is available. Now, if there were legislative authority to use it, that would probably be the quickest fix.

Mr. STEARNS. Okay. Mr. Scanlon, anything you would suggest?

Mr. SCANLON. We believe very strongly that using the data that

is available through the Medicaid rebate program would be the

quickest vehicle in terms of trying to improve this pricing because

it is data that details what manufacturers are selling drugs for

under different circumstances. There are statutory requirements

here and Medicare under the Balanced Budget Act must pay 95

percent of average wholesale prices. Whether that has to be this

fictional price in terms of what is reported in the Red Book for

some manufacturers or whether it can be actual average wholesale

prices is another issue, and that is where I think reasonableness

authority would be something that the agency could do.

Mr. STEARNS. I want to conclude my statement, if I can have additional 30 seconds in my conclusion here, Mr. Chairman.

Mr. GREENWOOD. Without objection.

Mr. STEARNS. Mr. Bentley sent to Dr. Bruce Vladek a memo on

June 12, 1997, in which he outlined all of this, and I would say,

Mr. Bentley, there has got to be a place for you in the pearly gates

up there and if you have any trouble after this hearing call us because we are with you 100 percent and appreciate what you have

done. But I would say to the former Administrator what we have

here from Bentley’s memo here, which is part of the records I believe, shows that we have a scandal like we had with the $400 toilet seats in the military, we have the equivalent of that here in

HCFA, and I think Mr. Bentley actually showed this photograph to

the head of HCFA back in 1997, saying, look, your legacy is going

to be the $400 toilet seat, that this is going to apply to this whole

problem dealing with AWP.

Thank you, Mr. Chairman.

Mr. GREENWOOD. Thank you, Mr. Stearns. Each of the members

has had an opportunity to ask—except for Mr. Green from Texas,

who joins us now and is recognized for 5 minutes to inquire.

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Mr. GREEN. Thank you, Mr. Chairman, and I appreciate the appearance of our witnesses simply because those of us who are moving in and out and representing Intercontinental Airport in Houston with Continental Airlines, obviously we have a much bigger

issue, but I am glad this postponed hearing is taking place, and the

issue I think is so important because of the criteria that, Mr. Grob,

you talked about in your testimony, and in your testimony you referenced the considerable savings that the Medicare program can

recognize if they utilize Federal Supply Schedule as the basis for

prescription drug benefits or reimbursements. A number of us in

Congress have been advocating this approach for years, not only for

the few prescription drugs we provide for under Medicare but for

prescription drugs for seniors as a whole.

Now I know in this issue seniors may pay more for their 20 percent co-pay based on this pricing aberration, but generally overall

would you say that the high cost by using the Federal Supply

Schedule would benefit not only the issue we are here today about

but also seniors in general who may not have a prescription plan

as part of Medicare?

Mr. GROB. On the surface it would certainly seem to provide a

lower cost for the beneficiaries. But I would really have to say that

that really is beyond the scope of other studies that were done because there would be other ramifications concerning the market,

and so I would say on the surface it would have that effect, but

what the other effects are we haven’t studied.

Mr. GREEN. I understand. I was looking at your statement. Again

I think we have made that issue here in the committee a number

of times and just by using the Federal Supply Schedule we cannot

only save the Federal Government maybe a billion dollars under

Medicare but how many billions do you think we can save the average senior citizen who—— Mr. GROB. If you were to use the Federal Supply Schedule

amounts for the drugs that we looked at, you would save almost

$400 million a year for the beneficiaries.

Mr. GREEN. That is just on the oncology—— Mr. GROB. No. We looked at 24 drugs and I think it was about $350 million or more of savings for the co-payment for Medicare

beneficiaries for the 24 top selling drugs in Medicare, top drugs.

That included inhalation drugs.

Mr. GREEN. That is for the co-payment for those 24 drugs?

Mr. GROB. Exactly.

Mr. GREEN. I know neither of us can extrapolate too well but if

we would provide that to the gamut of pharmaceuticals that seniors have to pay that is not subject to a co-pay, they just—if they

are under regular Medicare, they go down and buy their prescription from their doctor, and the Federal Supply Schedule is much

less than what I may go down to buy at my pharmacist or my sister or mother or father may do.

Mr. GROB. Exactly.

Mr. GREEN. Mr. Scanlon, you admit in your testimony that the

oncologists are often underpaid by as much as 15 percent, and you

stated that if we modified the practice expense payments on college

practices it could increase their reimbursement by 8 percent, or $31

million. You also reference a modification of the formula used to

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calculate supply expenses, which would increase oncology practice

expenses by about $20 million. I understand that the Medicare

statute requires that any changes to the practice expenses for one

specialty be budget neutral, therefore if we increase oncology payments we would have to cut payments from another specialty, and

I guess that is—I know I followed my chairman a little bit. If we

are going to save maybe upwards to a billion dollars in Medicare

and we should reimburse oncologists 15 percent, can that come out

of savings or are we going to have to take it from cardiologists or

other reimbursements?

Mr. SCANLON. It is your decision whether or not you want to add

to the pool of dollars that are being paid physicians and whether

it is going to come out of the savings. One of the important things

to remember here is that the budget neutrality principle was applied at the very beginning, so therefore when the oncology fees

were calculated, and they are $51 million less than what they

would have been if a different method would have been used, and

that $51 million was then spent on other specialty services. And

some of that $51 million was also earned by oncologists because

some of their physician services had higher fees associated with it,

and the $51 million in terms of the overall physician fee schedule

is about two-tenths of 1 percent. So we are talking about a redistribution of a very small amount of money.

Mr. GREEN. But your testimony is we wouldn’t necessarily by increasing oncology have to decrease other specialties?

Mr. SCANLON. No.

Mr. GREEN. Thank you, Mr. Chairman.

Mr. GREENWOOD. Each of the members has had a round of questioning. There are a couple more points that need to be made. So

we are going to go through a second round for those who want to.

It is not mandatory.

The Chair recognizes himself for 5 minutes and would ask the

staff to bring up chart P-1. I want to go to the question of utilization because we have talked about the way in which savings could

rendered to the Medicare program and overpayments were made

just based on normal levels of utilization, but I want to look at

ways in which the spread and the false AWP payments can affect

utilization, and let us look at this product here, which is

ipatropium bromide, which I believe is a therapy for emphysema,

and similar pulmonary diseases.

In 1995, when there was no spread on the drug, Medicare paid

a little more than $14 million in that year. As you can see, as each

year passes and the spread becomes larger, utilization skyrockets.

Today, 6 years later, Medicare pays more than $347 million, over

a third of a billion dollars, for this drug alone.

Mr. Bentley, I am going to ask you if you could further illuminate this issue.

Mr. BENTLEY. Yes, sir. This is an interesting drug because prior

to 1995 it was a patented drug with no generic competition and

here again, like the Taxol example, once generics came into the

marketplace the prices started dropping precipitously; that is, the

prices to the providers. However, the government, both Medicare

and Medicaid, has not achieved any savings due to price competition and in all likelihood it is kind of a double whammy because

71

we believe a lot of this utilization is directly attributable to the

spread.

A case in point, recently Texas, their Medicaid program, based

on some information Ven-A-Care provided for another inhalation

drug, albuterol sulphate, where there was a rather large

spread—— Mr. GREENWOOD. Perhaps the staff can bring up document P-2.

Mr. BENTLEY. [continuing] cut its Medicaid reimbursement in

Texas. Now, they were cutting their reimbursement, so that would

affect access to care. I can tell you this. They reduced the prices

dramatically that they reimburse under the Texas Medicaid program to the real prices in the marketplace. They have not experienced any access to care issues, and I heard yesterday from an Assistant Attorney General in Texas that not only are they achieving

the savings by the reduction in the prices, they have also started

achieving about a 20 percent reduction in the utilization.

Mr. GREENWOOD. Mr. Scanlon and Mr. Grob, do you care to offer

any comments in this regard?

Mr. GROB. We have done additional work on nebulizer drugs,

looking at the utilization of those, and based on 1994 data we

found about $30 million of the nebulizer drugs that were used were

drugs that should never be used in combination. We also found instances of amounts that differed from prescriptions. We also had

amounts that varied from the Medicare guidelines for these drugs.

So we did find improper utilization and inappropriate utilization of

these nebulizer drugs when we looked at them. This is primarily

albuterol.

Mr. SCANLON. Mr. Chairman, we haven’t studied this beyond the

issue of pricing, and the pricing gap is the same that we observed,

and I would note this is the kind of disturbing pattern that we

have been talking about, increased utilization as the spread increases, and I would also note that there is some very aggressive

advertising of these inhalation drugs.

Mr. GREENWOOD. Your study, the GAO study that showed roughly built-in savings that we could achieve only assumed the same

utilization and it did not, as I understand it, acknowledge savings

from more of a dynamic scoring, if you will, that would occur if the

spread was not in fact driving utilization. So when given these two

charts where we have seen how change in the spread dramatically

affects utilization, would it be fair to assume that a billion dollars

is a conservative number because without the incentives driven by

the spread we would probably see a change in utilization? Is that

a fair statement?

Mr. SCANLON. I believe that is a fair statement. We hope it

would be a change in utilization driven by overutilization declining

as opposed to genuine access changes as well.

Mr. GREENWOOD. The Chair yields back the back his time and

yields 5 minutes to the gentleman from Florida, Mr. Deutsch.

Mr. DEUTSCH. You have a very insightful panel in so many ways,

and hopefully it is our commitment to follow up on this. I want to

focus on something we have talked about a little bit, and that is

what can HCFA do and Medicare do without legislative action? The

GAO issue today was in response to a Congressional mandate to

do a comprehensive report on drug pricing before the Centers of

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Medicare and Medicaid Services be allowed to change the payment

structure for Medicaid drugs. Now that the study has been done

and we have shown that the average wholesale price is flawed, it

would seem as if the CMS should be able to go forward and use

the catalogue pricing data obtained by the Justice Department as

the basis for drug disbursement. Would you agree with that? Is

that possible at this point in time?

Mr. SCANLON. I think it’s preferable to use the information that’s

available through the Medicaid rebate program, in combination

with the wholesale catalog discount——

Mr. DEUTSCH. Right. I guess the question, though, specifically is,

can they do it now without legislative action?

Mr. SCANLON. They can do it without legislative action. As Mr.

Grob indicated earlier, they would do it through the inherent reasonableness process, which is more cumbersome and over the years

has resulted in very few changes in prices.

Now, you did give them expedited authority in the Balanced

Budget Act to make modest reductions on an annual basis of 15

percent in prices. So that would be immediately accessible.

But we’re talking about bigger changes here for a number of

drugs, and that would take the more elaborate process. Obviously,

if you provide them further statutory authority, it’s going to expedite things even more.

Mr. DEUTSCH. Right. I guess I would just follow up, though. I

mean, knowing the legislative process as well as you do, it’s—you

know, one of the reasons we delegate issues like this is administratively it’s just a lot easier, especially, you know, in hearings like

this when we’re clear of what the situation is in the world.

Mr. Grob, did you want to respond?

Mr. GROB. I would hope that you would consider legislative action. Our experience has been that for the use of the inherent reasonableness approach that, actually, that has not been a lot easier

than the legislative process. For some of the reductions that have

been made, for example, for Oxygen, an initial attempt was made

to use the inherent reasonableness, but it ended up getting made

by the Congress, and that was done pretty effectively and fairly

timely. Your point is that every means should be used and to the

extent that there are administrative means those should be used

right away. But I think the system is so flawed that we need a

brand new system.

Mr. DEUTSCH. Well, let me throw it back. As far as you’re aware

in either HCFA or in HHS directly, I mean, is this something that

the policymaker level—has this been presented to policymakers as

an option for them to implement these changes administratively?

Mr. GROB. Okay. Sir——

Mr. DEUTSCH. What is the official, you know, sort of response to

that?

Mr. GROB. Well, you’ll have to follow up with Mr. Scully on this

administration, but certainly our reports have been public and

have always been written to the administrator of HCFA, now CMS.

So they’ve always been in the mill, and there have, in fact, been,

as I’ve said, some legislative proposals from the prior administration. So I think it’s been on the table.

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I think the value of this hearing is the dramatizing and the clarification. I think the subject takes intense study, and the work that

went into this hearing has provided that, so that the insights are

a lot clearer to more people now.

Mr. BENTLEY. If I could add, I believe the problem could be remedied tomorrow if the drug companies that are the culprits who are

reporting these false prices contacted first Data bank and Red Book

and submitted new prices, honest prices. And I point to the fact

that approximately 90 days ago Abbott laboratories did that for

Medicaid purposes, and there were a number of very important

drugs where they made representations—I’ll point to Vancomycin,

one gram as an example—where they were representing the aver- age wholesale price of being around $56 per gram. They were really

selling it for less than $10.

Now, then, for Medicaid purposes, they initiated a new pricing

to, First Databank where they repriced some 200 or 300 drugs with

fairly honest representations. The State Medicaid programs across

the United States started generating the savings immediately from

Abbott’s representations and from their actions.

So all we need is for these companies—maybe the hearing will

be the impetus for them to have a change of heart and report new

prices. CMS doesn’t have to do anything. Congress doesn’t have to

do anything.

Mr. DEUTSCH. Let me follow up. Mr. Grob, what about that as

a solution administratively? Could you or through—actually

through—could HCFA change the definition of the average wholesale price and then just define it in a different way to—in such a

way that would basically be the average wholesale price, for that

matter?

Mr. GROB. I think the law says ‘‘average wholesale price,’’ and

I don’t even believe that that phrase uses capital letters. I think

the people who voted for that law, everyone who cast a vote for

that law, probably thought it meant the ‘‘average wholesale price.’’ So certainly CMS would have it in its authority to define that ‘‘average wholesale price’’ to mean what the English phrase means.

And I think then if they could get the data to back that up, use

data that’s available, then in fact it could be done. And I do agree

with what’s been said here by Mr. Bentley about the publication of

the data.

Now, these companies have had that option for many years. So

I hope they do—I hope they do do it very soon.

Mr. GREENWOOD. The Chair thanks the gentleman from Florida.

Mr. Tauzin.

Chairman TAUZIN. Thank you very much, Mr. Chairman.

Let me mention a solution that didn’t work, so we don’t do that

one again, the Balanced Budget Act. We said we’d reimburse the

average wholesale price minus 5 percent, and we all went, we’ll be

danged; we saved a lot of money. And the average wholesale price

jumped 10 percent the next year. We didn’t only not save money;

we lost money. That was a non-solution.

A number of members have talked about the effect of this system

on the Medicaid programs of America. In the Medicare program,

we’re talking about drugs generally that are used in three areas,

right, and chemotherapy oncology-type drugs, inhalants and some

74

other specialties like urology. In the Medicaid system, it’s wide

open, isn’t it?

Mr. GROB. Yes.

Chairman TAUZIN. We’re talking about all drugs.

Mr. GROB. That’s correct.

Chairman TAUZIN. In fact, Mr. Bentley, you brought a chart for

a number of my colleague a few months ago. It’s document S-2. I’d

like to put it up. It’s involving the drug Cefadroxil. And I want to

look at the Louisiana Medicaid effect. This Cefadroxil—the chart

indicates what the spread looks like on this drug in Louisiana,

Pennsylvania, Florida, Michigan, Texas and Ohio. Texas and Ohio

have apparently done a lot of work, yet the spread is down. They’ve

got the spread, the difference that the State Medicaid program is

paying out as opposed to the real price of the drug.

Mr. BENTLEY. Yes, sir.

Chairman TAUZIN. They’ve got it down to $16 and $35. But in Louisiana the spread on this drug, which costs Medicare $82, because of a Medicaid reimbursement of $274.50, is $191. The spread,

the extra money made by the system to the provider, is more than

twice as high as the—the spread, the additional profit, is more

than twice as high as the cost to Ven-A-Care. Is that correct?

Mr. BENTLEY. Yes, sir.

Chairman TAUZIN. Let me turn to—anybody have any idea what

this system is costing the Medicaid systems of America?

Mr. GROB. Yes. They spend about $16 billion a year, and the last

time we studied it recently looking at the brand name drugs, we

calculated a loss of about a billion dollars for the brand names.

Now, we’re working on the generic drugs right now, hoping to have

a report—— Chairman TAUZIN. So we’re talking not just about the billion in

savings to Medicare. We’re talking about billions in cost to the

Medicaid systems of America—— Mr. GROB. Exactly.

Chairman TAUZIN [continuing]. Which is trying to provide medicine for the poorest of our Nation.

Mr. GROB. Exactly.

Mr. GREENWOOD. Would the gentleman yield for a second?

Chairman TAUZIN. Yes, I’ll be glad to yield.

Mr. GREENWOOD. So, on average, since the Federal Government

pays 50 percent of the cost of Medicaid drugs, would you argue

that, if we changed the system, that there’s a potential to save

minimally now a billion and a half dollars to the Federal Government. Is that a fair statement?

Mr. GROB. I’m sorry. I didn’t quite follow.

Mr. GREENWOOD. Given that the Federal Government is paying—reimbursing the State Medicaid programs for, on average, 50

percent of the price, if they’re squandering at least a billion dollars

additional——

Chairman TAUZIN. The chairman is making the point that any

dollars we save to the Medicaid system, 50 percent is a Federal

saving. Right?

Mr. GROB. I’m not sure whether the billion is the total of Federal

and State or only the Federal part.

Chairman TAUZIN. And it may be much more than a billion.

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Mr. GROB. As I said, we’ve only done the brand names—— Chairman TAUZIN. Let us look at examples of excessive reimbursements with pharmaceuticals by the Louisiana Medicaid Pharmacy Program, one I’m very interested in. If we can put—that

chart is up now. And we can look at one drug—Elkins-Sinn’s drug

called Leucovorin again. The lowest price according to this report,

Mr. Bentley, that you’ve seen in the marketplace, the real price, is $2.39.

Mr. BENTLEY. We actually prepared this chart a couple of years

ago, and that is why there is the discrepancy between the Leucovorin here of $2.30 and I believe our other chart where it was $1.25.

Leucovorin has actually gone down in price, yes, sir.

Chairman TAUZIN. But the average Medicare price is $21.70. The Louisiana Medicaid reimbursement is $50.34.

Mr. BENTLEY. Twice what Medicare was—— Chairman TAUZIN. Twice what Medicare is reimbursing. And,

what, 30 times the price of the drug in the marketplace today or

more? That’s amazing.

And you go down the list. I mean, you see another one that

stands out again, Vancomycin, a price then of 3.45. I don’t know

what it is today. Medicare was reimbursing it at $9.44. Louisiana

reimburses at $30.43. How on earth are we going to keep our Medicare programs alive if they’re being drained at that kind of rate?

Mr. BENTLEY. That’s correct.

Chairman TAUZIN. In fact, I’ve got a quote from the Wall Street

Journal about the program in Missouri where they’re saying

they’ve got the biggest core cuts in their Medicaid program in history, and it’s going to affect the amount they can spend on education and other vital State needs because it’s driving the cost of

the Medicaid system into near bankruptcy.

Mr. GANSKE. Would the gentleman yield?

Chairman TAUZIN. I’ll be glad to yield to my friend.

Mr. GANSKE. Well, Mr. Chairman, we’ve all in the past been

rather amazed at how cagey those Cajuns down there in Louisiana

are on the Medicaid program, but I wondered if we could——

Chairman TAUZIN. Well, I don’t believe I want to yield to the

gentleman if he’s going to insult my Cajun but—— Mr. GANSKE. I want to tie this, though, to the point that Mr.

Grob made in No. 2, in how, Mr. Grob, you suggested that maybe

we ought to look at—in fixing AWP, we ought to look at what Medicaid has done.

Chairman TAUZIN. That’s part of my point. That’s the last place

we ought to go for advice is what I’m trying to point out.

Mr. GANSKE. Well, maybe that’s not the case, because maybe

Louisiana is an exception over what has gone on with AWP.

Mr. GROB. Can I make an important distinction?

Chairman TAUZIN. Yes, please do.

Mr. GROB. The Medicaid program achieves savings in two different ways. One of them is that they get discounts off of AWP the

same way Medicare does, except they generally get more generous

discounts. Now, that’s not what I was talking about. There’s another part about Medicaid, which is the rebate program, where the

manufacturers must return money to the Medicaid in light of the

expenditures made, and that is the part I was talking about.

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Chairman TAUZIN. That can be instructive. I agree with that.

But the point I’m making is that the Medicaid reimbursement is

still worse than the Medicare. That’s the last place you want to go

for advice on how to set an average wholesale price for the Medicare program.

And I want to point out something else, too, and that is that if

we’re going to correct this the obvious place to look for the real

numbers is in the real marketplace with the numbers, Mr. Bentley,

you provide for us—you’ve been providing for us as to what VenA-Care can really buy these drugs for. I mean, we’re talking about

reimbursing two categories of services: one, the service, the practice; and the other, the drugs that are used. In both cases we ought

to look at the real marketplace, what is the private sector costing

these two systems. And the government ought to reimburse close

to those numbers.

If we don’t—if we are reimbursing $50 for a drug that costs a

dollar and a quarter, you were telling me, Mr. Bentley, what are

we, just insane? And are we going to drive these programs to the

point where they can’t provide the services they were intended to

provide for citizens of this country? We entitle this effort. I want

you all to know it.

I think Mr. Burr came up with the title to this whole effort we’re

trying to undertake in reforming Medicare and this whole pricing

system and getting more drug coverage for more Americans. We

called it Patients First. Patients are last in this program. They’re

getting killed.

Mr. SCANLON. Mr. Chairman, I just wanted to note that what we

are talking about here is trying to use private sector transactions

and information to try and set Medicare prices on a more rational

basis. The Medicaid program at the Federal level has the requirement that manufacturers turn over to CMS information on private

transactions with genuine net prices, not the types of catalog prices

that we’ve been talking about——

Chairman TAUZIN. Well, tell me about Texas. Texas has been trying to do that, hasn’t it? Mr. Bentley, aren’t you involved in that?

Aren’t you involved somehow, and isn’t Texas going through

hellacious problems? And they’re probably leading the country in

trying to get this straightened out.

Mr. BENTLEY. That’s correct. Texas does not rely on prices that

are submitted to either of the publication services, Red Book or

First Data bank. They actually go to a certification form, and that’s

sent directly to the manufacturer.

Chairman TAUZIN. They’re ahead of the rest of the States, and

they’re having a heck of time, aren’t they?

Mr. BENTLEY. That’s correct. And also, unfortunately, when a

manufacturer makes false representations about their prices, the

Federal rebate program is not making the States whole for the difference. So they are not—the Congressional intent, as I have read

it, of OBRA 1990, which was the State Medicaid rebate program,

was to give the State Medicaid programs the benefit of the manufacturers’ best prices. But if you start out with false prices, even

though they’re giving a rebate back to the States, the States are

not anywhere close to being at the manufacturers——

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Chairman TAUZIN. They’re taking a lot more than they’re giving

back. Is that right?

Mr. BENTLEY. That’s correct. Yes, sir.

Mr. GROB. One last clarification. What I was referring to in using

the Medicaid program is that there is a very rich source of data

that the manufacturers must submit to CMS, not to the States,

which is their actual manufacturers’ prices, taking into account the

discounts that have been offered that are maintained confidentially

by CMS but that are used by them. That source of data, which is

auditable, is already available. It’s submitted every year, and it reflects the actual prices that the manufacturers are charging for the

retail sale of drugs. All I was saying is that that data could be used

as a basis——

Chairman TAUZIN. I agree with you. I’m not arguing that. I think

you’re correct. I think there’s a good wealth of data there.

My time is up. I just want to make the point again, everything

we do to correct this problem—and I love the way Mr. Burr focused

on that, on the different solutions you come up with, because that’s

really what we’ve got to get to. In every way we correct that problem, we’re not only going to save the Medicare program this billion

dollars; we’re going to save the Medicaid programs of the States

possibly their life, their function, their capacity to do their job. And

50 percent of those savings will be inured back to the Federal Government, because we have a 50 percent responsibility in those

State programs. I mean, this is very well worth doing, and you’re

helping us, I think, see our way to it.

Thank you very much.

Mr. GREENWOOD. The time of gentleman has expired.

Does the gentleman from New Jersey, Mr. Pallone, seek recognition? The gentleman is recognized for 5 minutes.

Mr. PALLONE. Thank you, Mr. Chairman.

I wanted to ask Mr. Bentley to comment on some documents. I

have a series of documents that were obtained by the committee

from Glaxo that detail at least part of their marketing strategy

around the Zofran market. And we have those. Okay. I’d like to

read, Mr. Bentley, parts of several documents and ask for your

comments and ask, Mr. Chairman, that the documents in their entirety be placed into the record if they haven’t been already.

Mr. GREENWOOD. I believe they have been, but without objection,

they certainly will be.

Mr. PALLONE. Thank you.

The first is a memo dated January 31, 1994 in which this—do

we have it up there, or should I wait a minute? Oh, it isn’t part

of that. Okay. All right then. I’m going to have to read this, Mr.

Chairman.

The first is a memo dated January 31, 1994, in which this bullet

point appears: Telemarketers who could sell the reimbursement

issues with Zofran: Example, because of the contract price on

Zofran, there is almost a 20 percent spread between doctors’ acquisition costs and AWP. With the price of Zofran being most likely

higher than Kytril, it will be to the physicians’ best interest to continue to use Zofran.

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As you can see, Zofran will mean more profit for the physician.

Oncologists seem to be more business-oriented than most physicians. This will be an excellent selling point.

Did you want to comment on that?

Mr. BENTLEY. That’s correct. Unfortunately, a lot of manufacturers’ representatives are going out and marketing their respective

drugs not based on the efficacy of the drug but what in fact will

put the most money in either the physician’s pocket or the pharmacy’s pocket, and so you have a case where there’s marketing actually going on to encourage the utilization of one drug over a competing drug by using government funds that fund the kickback as

a marketing mechanism.

Mr. PALLONE. And how common is this kind of telemarketing?

Mr. BENTLEY. It is very common.

Mr. PALLONE. Okay. Well, the second——

Mr. BENTLEY. Especially with the drugs that are at the focus of

this committee’s interest. I guarantee you that their sales representatives are out pounding their beats every time they’ve raised

an AWP or they’ve lowered a price. Just like those Taxol examples,

they get faxes out immediately, followed by telephone calls that,

hey, our price has gone down in the market. Buy my drug over my

competitor’s drug.

Mr. PALLONE. Okay. Thank you.

And then, Mr. Bentley, another of these documents dated October 15, 1997, was developed in anticipation that a third drug,

Anzemet, will enter this market. And if I could read a section there

for you to comment on.

It says, the package insert includes a warning concerning cardiovascular side effects and describes one episode of complete heart

block and one death. A bolded precaution supports the warning.

Now, you’re familiar with the actual competition in the marketplace between these three drugs that I’ve mentioned. Would you

say that side effects such as the apparent FDA concern about

Anzemet play a prominent role in physician choice of drugs?

Mr. BENTLEY. I would think that that would be a consideration,

absolutely.

Mr. PALLONE. But, you know, they’re still competing with regard

to price.

Mr. BENTLEY. That’s right.

Mr. PALLONE. I just—you know, it’s amazing to me when I see,

you know, some of the things that the committee has uncovered.

And, again, I want to thank you for all that you’ve done. I appreciate it. Thanks.

Mr. GREENWOOD. The gentleman yields back the balance of his

time.

Does the gentleman from Texas seek recognition?

Mr. GREEN. Thank you, Mr. Chairman. I have just another series

of questions for Mr. Bentley.

Mr. Bentley, you provided us with such an unprecedented view

of the world of drug pricing, and it’s not obviously a pretty one to

those of us—who do you blame for this scheme, the drug companies

or the providers or maybe those of us who passed the Balanced

Budget Act in 1997 or 1996?

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Mr. BENTLEY. I think there’s enough blame that can go around

for everyone. Certainly, you know, right now, as I’ve said, the manufacturers that are causing these inflated prices, they have it within their power to make the price changes immediately so that the

programs can start achieving these savings that are very much

needed. I don’t know, other than their motives for profits, why

they’re not doing that.

Mr. GREEN. That’s why people rob banks, too, their motive for

profit. But later this morning we’re going to hear from the American Association for Home Care, which is what your company did.

You’re a home health care company?

Mr. BENTLEY. Yes, sir.

Mr. GREEN. This witness will say that the infusion companies

cannot make money if they don’t get the inflated AWP. Is that true

of your company?

Mr. BENTLEY. Well, I can’t say that was absolutely true, because

our company was merely a pharmacy. We worked in conjunction

with home health and nursing agencies who actually went out and

administered the drugs. And I will tell you this, that in Florida

nursing agencies are paid separately for those services. So if there

is an issue that a company is not able to hear, again like the

oncologists get enough money on the professional side, I think that

is a totally different issue than whether there are false prices being

reported on pharmaceuticals.

Mr. GREEN. Did any of the groups, whether infusion companies

or doctor/providers—did any of these groups go to the drug companies? Have you had any evidence that they asked for increases in

the AWP so that they could survive or that—something that was

already readily available?

Mr. BENTLEY. Absolutely. There’s evidence in the committee’s

possession. There’s a Baxter internal memorandum where they

admit that raising their AWPs was a large part of their negotiations with two large national home health care companies. We’re

looking for it now.

Mr. GREEN. Okay. And that was already—that’s in the documents?

Mr. BENTLEY. Yes, sir.

Mr. GREEN. Thank you, Mr. Chairman.

Mr. BENTLEY. Here it is here. Increasing AWPs was a large part

of our negotiation with the large home care companies. And, in

fact, there’s other documents in the committee’s possession where

there are providers and GPOs that actually go to the manufacturers and say, we’re going to buy your drugs, our members will buy

your drugs, and the basis is going to be on the greatest spread, and

so we’re telling you up front that is going to be the prerequisite as

to whether we’re going to buy your company’s drugs or not. If you

have the biggest spread, we’ll buy yours over your competitor’s.

Mr. GREEN. Mr. Chairman, do we have a copy of that memo that

was just up? Is that available?

Mr. BENTLEY. Here it is here. H, low price and best spreads. Contract pricing will be evaluated on lowest price and/or best spread

between AWP and the contract price for multisource products.

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This was a GPO document. However, it was in the possession of

a drug manufacturer who turned it over pursuant to the OIG subpoena.

Mr. GREEN. I’d like to see the whole document. I guess that is

my concern, because I see quoted, and you said it was from Baxter?

Mr. BENTLEY. No, sir. This particular document was from

Gerimed, which is a large group purchasing organization. But it

was presented—or it was produced under an OIG subpoena, so I’m

not sure which pharmaceutical company, one of the pharmaceutical

companies.

Mr. GREEN. So your testimony is that——

Mr. GREENWOOD. Mr. Green, would you yield for a moment?

Mr. GREEN. Sure.

Mr. GREENWOOD. Would you identify the document in your hand?

Mr. GREEN. I was just looking for something that was reflective

of this.

Mr. GREENWOOD. Did you give us the document number?

Mr. GREEN. Mr. Bentley must have that.

Mr. BENTLEY. It’s probably in this book. I just don’t have the tab.

Mr. LOCKWOOD. It’s under O. Either 5 or 6.

Mr. BENTLEY. It’s 05. It was produced by Dey Laboratories.

Mr. GREEN. So this information is that some of the providers obviously also worked with the manufacturers to game the system?

Mr. BENTLEY. I believe that Dey had this in their possession, because Gerimed had told Dey Laboratories that in order for Gerimed

to consider whether their members would purchase Dey’s products,

they wanted Dey to know right up front that one of the requisites

was going to be who was going to provide the biggest spread on

their drugs.

Mr. GREEN. Thank you, Mr. Chairman.

Mr. GREENWOOD. The time of the gentleman has expired.

Does the gentleman from Iowa, Mr. Ganske, seek recognition?

Mr. GANSKE. Thank you, Mr. Chairman.

Mr. GREENWOOD. The gentleman is recognized for 5 minutes.

Mr. GANSKE. Mr. Grob, I want to go over your recommendations

in a little bit more detail. No. 1 says that we could look at authorizing a commission similar to MedPAC to set payment rates. Quote,

it would then be granted authority to require manufacturers to provide them with drug wholesale prices.

Then on No. 2, you say we could calculate the national estimated

acquisition costs based on average manufacturer prices, AMP,

which you already testified some on, but you go on to say, we believe an initial intensive effort should be made to audit AMP data

reported by manufacturers to validate its accuracy.

Mr. GROB. Yes.

Mr. GANSKE. No. 4 says, or we could increase discounting of the

published AWP.

The point that I’m getting at is that—or even on No. 6, we could

establish manufacturers’ rebates similar to those used in the Medicaid. It would minimize manufacturers’ incentives to inflate AWP.

But, anyway, the point I want to get at is we have to have accurate data.

Mr. GROB. Exactly.

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Mr. GANSKE. Now, you mentioned a little while ago that CMS

has data. How accurate do you think that is?

Mr. GROB. They don’t have very much. They have some data that

has resulted from some work with the Justice Department on a

number of drugs that they were able to make available to the carriers earlier. That data is available—some efforts have been made,

I think, as Mr. Bentley mentioned, to get some of the drug companies to produce more accurate prices in their public documents, but

systematically the best source of data today is that average manufacturers’ price, the actual manufacturers’ price, which is submitted

to CMS every year to be used in conjunction with the Medicaid program. That is the best data that is generally available and is updated, you know—— Mr. GANSKE. Well, how do you know that that’s accurate?

Mr. GROB. We know that it’s not completely accurate. That’s why

we said that would have to be audited. I don’t know what data we

could trust right now, except that with that data there already is

a statutory requirement for it to be submitted to the Department.

So there is an obligation for it to be done right.

If the manufacturers don’t tell the truth there, then they have

submitted false data. And the data then—it does come in regularly.

So it is much more susceptible to definitions and audits than any

other source, which comes from a variety of different sources and

doesn’t come so regularly. It’s the best set that you could work with

right now.

Mr. GANSKE. It seems to me that, you know—if you use that set

or whatever, you’re going to have to use actual—you’re going to

have to use actual invoices at some point to cross-check.

Mr. GROB. I think that that idea of the commission sort of encompasses that kind of thinking, that basically you would—I think

you need a baseline of data, and then, if you want to, you can use

sampling or other means in order to make sure it sounds realistic

and that it really does reflect things.

What I was talking about earlier—and I wasn’t meaning to respond specifically to another comment that you made—I don’t

think you’d want to do that for each and every payment that each

and every physician makes each and every time. I think that would

be overwhelming. But I do think that your point is a good one that

trying to get some real live market data, at least on a sampling

basis, in order to see if what you have is real I think is a good idea.

Mr. GANSKE. I’m very interested in this. Because as Congress

looks at providing increased prescription drug coverage for Medicare, one of my ideas has been that we utilize the State Medicaid

drug programs and extend that benefit to the qualified low-income

Medicare beneficiaries, CLMBs, SLMBs and others. It’s clear we

need to make sure that, you know, that program is utilizing accurate data as well.

Mr. GROB. That, by the way, is an excellent point I think, for efficiency. Because again—laying aside the other part of the Medicaid,

their use of AWP and this kind of thing, which has the same problems if not worse than Medicare in some cases—going back to the

single data source, I think the point is excellent, because then you

would have one set of data, which the manufacturers are saying is

correct, submitting it to the government under a statutory requireVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00085 Fmt 6633 Sfmt 6602 E:\HEARINGS\75756 pfrm09 PsN: 75756
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ment, subject to audit and review. It forms a good base case for

anything else you want to do.

Now, you could then take that base case, you could, say, make

our percentage higher than that, or something lower. You could

then test it with some samples. But it gives you a nice centralized

piece. When we tried to come up with these ideas, we know that

none of them will work perfectly, but we were looking for some

practical ideas, something that is within the means to actually do

it. That one kept emerging as one of the good starting points, if you

will, for data.

Mr. GANSKE. I thank you. Thank you, Mr. Chairman.

Mr. GREENWOOD. The Chair thanks the gentleman.

The Chair thanks the witnesses for their 31⁄2 hours of endurance.

Your testimony has been extremely valuable to us, and the interest

has been high. We appreciate your contributions. Thank you, and

you are excused.

Mr. GREENWOOD. Now we call forth Mr. Thomas Scully, the Administrator for the Centers for Medicare and Medicaid Services;

and we thank you in advance for your forbearance. As has been

your habit, you have been here for the entire hearing, and probably

only adding to the agony of waiting is watching the membership

dwindle from 25 to three. But we look forward to your testimony.

Mr. SCULLY. Thank you, Mr. Chairman, Chairman Tauzin, Mr.

Brown——

Mr. GREENWOOD. Before you begin your testimony, you’re aware,

Mr. Scully, that this is a joint hearing between the Oversight and

Investigations Subcommittee and the Health Subcommittee, and it

is our practice—the practice of the Oversight and Investigations

Subcommittee to take our testimony under oath. Do you have any

objections to testifying under oath?

Also consistent with the rules of the House and the committee,

you have the right to be represented by an attorney. Do you wish

to be represented by an attorney?

Mr. SCULLY. I used to be a bad attorney.

Mr. GREENWOOD. So saying, I’ll administer the oath.

[Witness sworn.]

Mr. GREENWOOD. You’re now under oath, and you’re recognized

for your testimony.

TESTIMONY OF THOMAS A. SCULLY, ADMINISTRATOR,

CENTERS FOR MEDICARE AND MEDICAID SERVICES

Mr. SCULLY. Thank you, Mr. Chairman, for having me.

I will quickly get to AWP. I’m not sure how much I have left to

add after that, but a few ideas I hope.

If I could, just quickly, before I get to that, I just wanted to

thank a lot of the—you talked about New York earlier, and I’d just

like to thank the New York hospitals who we spent a lot of time

working with the last few weeks. I wish we had more people in the

hospitals. But a lot of you also don’t realize that outside the hospitals in the bottom part of Manhattan there are also a lot of disabled people that weren’t getting home health. And since I have a

chance to publicly, I’d like to thank the home health agencies. The

Visiting Nurse Association of New York was particularly terrific in

the last 2 weeks. But I think a lot of the health care problems that

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weren’t directly related to the World Trade Centers in the southern

Manhattan have been dealt with incredibly well by the City, the

State and hopefully with a little bit of help from CMS but with a

lot of help from some incredibly selfless providers in lower New

York.

Second, if I could just before I get into the AWP issue, one issue

that I’ve become extremely focused on the last 2 weeks since I’ve

now been at the CMS about 31⁄2 months has been a problem you’re

probably going to get to, if not this year certainly next year, which

is HIPAA compliance. And I’ve recently been extremely focused in

the last week on the fact that, like it or not, in a year we have to

have a completely new coding system put in place for all providers—Medicare, Medicaid, everyone else.

I don’t think I’ve talked about it enough since I’ve been on the

job. I’ve only recently begun to understand what a gigantic mission

that is, and I think it’s obviously like Nancy-Ann’s mission to focus

the industry on Y2K; and my predecessor, I think it’s our mission

in the next year to focus people on HIPAA. And whether Congress

changes or delays the law or not, we could have a debate about

that, I’m sure, at a future time. We have a big, big mission in front

of us with HIPAA in the next year, and I intend to—in every

speech I give and every time I testify or talk about it, if nothing

else, raise the awareness of providers that we have a major, major

change in the health financing system that we have to deal with

outside this.

Anyway, switching back to HIPAA, the one thing I can say to

start with—and I’ll try not to go through every issue again—is we

agree. And my frustration with the hearing, if anything, is that I

hope most of the members that were here didn’t leave with the idea

that CMS all the way back to Bruce Lanakin before has not been

focused on this. And the press also may have already left.

I was involved in this in 1991 in the first Bush administration.

We tried to fix it, and there’s a long track record from 1991 to

1992.

I was very involved, by the way, in Andrews Air Force Base in

creating Medicaid drug rebates with Chris Jennings who was on

the Hill, President Clinton’s most recent—so I have a long history

in Medicaid drug rebates.

This whole issue, people have been trying to fix this for years.

And back to Secretary Shalala and Nancy-Ann DeParle last year,

they tried to fix it. Got an outpouring of screaming from every affected party, appropriate or inappropriate, and then were hit with

a Congressional prohibition for a year not to look at it.

So where we are currently at CMS is we’re prohibited, until the

GAO report that came out today and until the Secretary reads it,

is what the law says, we cannot respond to it. Certainly it will take

us a while to put out a rule. But also we’re required by law to pay

95 percent of AWP.

Now, could I creatively go back and change it? I’m sure we probably could, and we’d be willing to look at that, but I also have no

doubt we’d be sued and it’s not the easiest way to fix it.

So I’m here to talk about a number of issues today, but one thing

I would ask for is I think this cries out for a legislative solution.

We’re very anxious to work with you on a legislative solution. I

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hope we can do it this year before you leave, and we’ll give all our

staff resources and everything we can to help you fix it. It’s an

issue that’s been around for a long time, and I’m excited that

Chairman Tauzin, you, Mr. Brown, Mr. Deutsch and everyone else

seem to be in agreement that we need to fix it; and whatever help

you need from CMS on a technical basis to fix it, we are very, very

anxious to do so.

We have been paying more than any other purchaser for Medicare drugs on an outpatient basis for a long time, and we’re determined to get the price down to a reasonable level. What that is, I’ll

try to give you a few ideas.

In the meantime, I do think, however, the concern—it is a legitimate concern for the providers—is that if you’re going to lower— do we always fix the right price in Medicare, which is what we do

for providers? Probably not. Do we have the right price for

oncologists and their practice expenses? Probably not.

I think at the same time we reduce the prices for the drugs we

need to go back and look at oncologists. I think we probably need

to look at the ESRD clinics, dialysis centers that also use these

drugs quite a bit. Hemophiliac agencies also rely on this to a large

degree. DME providers probably have some argument.

I’m not saying they should all have their rates increased, but

there is a substantial amount of money to be saved here. And I

think at the same time we do that I think we should also go back

and look at the base payment rates and make sure there’s a balance. I have very little doubt it’s not dollar for dollar, as you’re

aware and we’ve talked about, but I do think it’s appropriate to

make sure that, to the extent we can set prices right for drugs,

then for practice expenses, then for practice patterns, we should set

them right. And I think there’s very little doubt they’re not right

right now.

But in fairness to Nancy-Ann DePerle, my predecessor in the

agency, I think this is something the agency has been trying to do

for years, and every time it’s put its head up, it’s got creamed. So

we’re anxious and excited that many Members of Congress are now

aware of it and are interested in fixing it as well.

Let me just talk quickly and give you a couple of suggestions.

One is, Mr. Deutsch and Chairman Tauzin both mentioned that

this is not just a problem with the Medicare program, it’s a huge

problem for beneficiaries. And I totally agree. The fact that the

beneficiaries pay the 20 percent copayments is a gigantic problem.

There are a lot of things wrong with the Medicare problem. There

are very few places where beneficiaries feel the inequities of the

program as much as they do here. So I think it’s important that

the chairman focused on that, and I think that we need to focus

on that in the fix. Seniors are paying a big chunk of the inequities

in the drug payments that we have here.

Second point, 20 drugs account for 75 percent of the spending in

this area. So do we have the tools to look at it? We do, and we can

talk a little bit about Medicaid and what we have available in Medicaid. The numbers are big, but the number of drugs you’re dealing

with are relatively small. Single source drugs account for 60 percent of all the Medicare drug spending. So it’s relatively narrow.

The numbers are big, but the numbers of drugs we’re talking about

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are relatively narrow. So I think if we focus on this problem, hopefully legislatively, it is very fixable.

A fourth point I’d make is that I think we need to be sensitive.

Physicians do in fact—back as far as I believe it was 1997—actually it was 1991 was the first time I believe that then HCFA proposed to have 85 percent of AWP. Then physicians came back and

said we can’t get it for 85 percent of AWP. And that may be the

case. I think it’s important when we look at new reimbursement

systems that we understand it’s not like the Federal supply schedule where the VA sets prices. Doctors actually have to go out and

buy this on the market. And while the prices may be outrageous,

they actually have to go get it.

So our real issue is to focus on the manufacturers and how we

get the money back at the end of the game from the—to the manufacturers—hopefully no game at the end of the day from manufacturers. And it is a legitimate problem that physicians out there

around the country can’t always get it for less than a certain

amount of AWP.

So I think we need to look at the bottom line of what the program is paying without squeezing providers to the point where

physicians out there in the real world can’t get ahold of it. And I

think in our legislative—hopefully legislative fix, we need to look

at that.

There are a number of different approaches that you have talked

about, and I’ll just try to run through a couple of them that I think

are possible.

The Federal supply schedule has been mentioned. I think that

when you look at the VA and when you look at the agencies, Coast

Guard and others in the Federal supply schedule, it’s really not an

apples to apples comparison. I think that probably wouldn’t work.

Those are really Federal agencies buying the drugs for direct use

in Federal agencies.

Average manufacturers’ price, which is the bottom line number

that was used in the Medicaid program, and we do in fact have

those numbers and they are audited and I think they’re pretty

solid, but again, by statute they’re confidential and we’re not allowed to use them. In fact, our Medicare staff doesn’t have access

to them. Only the Medicaid staff does. So is that a more legitimate

number? Absolutely.

I think there may be some problems there, but average manufacturers’ price, which GAO seemed to suggest is a very auditable and

very reasonable number, I think if you went to average manufacturers’ price, you might run the risk of squeezing access to physicians out there in the market trying to buy them. So I think there’s

a possibility.

I think the Medicaid program has some flaws, but there’s a

model there, and I’ll suggest that in a second.

You’ve talked about wholesale acquisition costs which I think is

a better price than AWP. But, again, AWP is largely air, and I

think wholesale acquisition costs may be a little better, but it’s still

potentially air, and you can raise it and lower it as you like, and

I think it’s a very—the potential for manipulation of that is relatively high as well. As a short-term fix it might work, but I think

there are probably better ones.

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People have proposed that we do a survey of market prices,

which also might work. I talked to my staff about trying to do a

survey of what nursing homes pay, for instance, because nursing

home chains usually have—they’re not as big as the Federal supply

schedule, but large nursing homes, Manor Care, somebody like that

frequently buys—you know, has a similar group of patients buying

in large bulk volume.

The problem in doing that—and I think that’s a possibility—is

that you’re looking back a year. And obviously, as you can see from

the earlier testimony, the prices change by the day, and looking

back and doing a snapshot looking back a year at anybody, for us

to do a survey of 2000 prices to set 2001 prices is never going to

be quite right. So I think that has its flaws as well.

There is a concept similar to average manufacturers’ price called

average sales price that you could possibly use, but I think a combination of these we certainly could work on legislatively, and I

think the bottom line is that the manufacturers know at the end

of the day how many units they’re selling to Medicare. They know

how many we’re paying for.

If we can, in fact, require them, as we do in Medicaid, to tell us

what the price is and calculate at the end of the year how many

they sold to Medicare and what the price is and recover that price

and there is a mechanism to do that, I think to find that balance

that we end up getting the right price charged us by the manufacturer, while not limiting and denying access to the physicians that

are actually out there in the market, potentially in a small town

trying to get it, is the mix that we need to find, and I think it’s

very doable.

Can we do this administratively? I think we probably won’t in

the near term, because we probably would get sued. We’d certainly

prefer to do it legislatively. I think we could. And if Congress

doesn’t act, it would probably take us a year to a year and a half

to do it. It would take a long rulemaking process. I have zero doubt

that we’d be sued, because of what the law says on 95 percent of

AWP.

So I would strongly, strongly, strongly prefer to work with Congress hopefully in the next month to find a legislative solution that

works, that is fair to the oncologists, that is fair to the dialysis clinics, that is fair to the other patient groups involved and that gets

our payment back on the right track. Because it’s clearly a very

messy system we’re in right now.

So I know you’ve had a long hearing already. That’s about as fast

as I can talk, and I skipped over a whole bunch of other things I

was going to say, but I hope—it may be more valuable just to answer questions. But there is zero doubt that the administration,

while we don’t have the set solution, is extremely interested in

working to fix this problem.

[The prepared statement of Thomas A. Scully follows:]

PREPARED STATEMENT OF THOMAS A. SCULLY, ADMINISTRATOR, CENTERS FOR

MEDICARE & MEDICAID SERVICES

Chairman Greenwood, Chairman Bilirakis, Congressman Deutsch, Congressman

Brown, distinguished Subcommittee members, thank you for inviting me to discuss

Medicare payment for outpatient prescription drugs. As you know, prescription

drugs are becoming an increasingly important component of modern health care,

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particularly for Medicare beneficiaries. We are working with Congress to modernize

Medicare to cover prescription drugs and provide relief to seniors from high drug

costs. In addition, it is clear that the payment system for selected outpatient drugs

that are now covered by Medicare is a mess. Medicare now pays more than many

other purchasers for the drugs we cover due to the way that drug manufacturers

report their prices and Medicare’s payment policies. Medicare should pay appropriately for all Medicare benefits, including the drugs we currently cover, and it is

unacceptable that the current system results in Medicare paying excessive prices.

We also need to pay appropriately for the services required to furnish these drugs.

I appreciate your dedication and leadership on this issue, and I look forward to

working with you and your colleagues to ensure that Medicare beneficiaries have

access to the drugs they need and that Medicare pays competitive prices for these

prescription drugs.

By law, Medicare does not pay for most outpatient prescription drugs. However,

there are some specific exceptions where Medicare covers pharmaceuticals, such as

drugs furnished incident to a physician’s covered services, and in these cases, the

law mandates that we pay physicians and other providers based on the lower of the

billed charge or 95 percent of the drugs’ average wholesale price (AWP). Numerous

studies have indicated that the industry’s reported wholesale prices, the data on

which Medicare payments are based, are vastly higher than the amounts that drug

manufacturers and wholesalers actually charge providers. That means Medicare

beneficiaries, through their premiums and cost sharing, and U.S. taxpayers are

spending far more than the ‘‘average’’ price that we believe the law intended them

to pay. Some affected physicians and providers have suggested that they need these

Medicare ‘‘drug profits’’ to cross subsidize what they believe are inadequate Medicare payments for services related to furnishing the drugs, such as the administration of chemotherapy for cancer. I believe we need to pay appropriately for both the

drugs and the services related to furnishing the drugs.

Clearly, Medicare drug pricing is a complex issue. Over the years, numerous legislative efforts have failed to develop an effective alternative to AWP and ensure that

Medicare and its beneficiaries do not pay more than they should for the limited

number of prescription drugs that Medicare covers. We are committed to working

with Congress on a bipartisan basis to ensure that Medicare pays accurately for all

of its benefits. As we look to the future, particularly in the context of developing

a Medicare drug benefit that does not make the same mistakes, I think it might

be important to review previous efforts to reform the AWP payments so that together we can develop a workable solution.

MEDICARE’S LIMITED DRUG BENEFIT

The Centers for Medicare & Medicaid Services (CMS) pays most of the health care

expenses of almost 40 million Medicare beneficiaries. If we were creating the Medicare program today, a prescription drug benefit certainly would be included. However, in 1965, prescription drugs played a less prominent role in health care, and

the emphasis then was on ensuring access to inpatient hospital care in Medicare

Part A and providing access to physicians in Medicare Part B. Today, Medicare

beneficiaries rely on prescription drugs as an integral part of their health care. Although by law, Medicare does not generally cover over-the-counter or outpatient prescription drugs, currently Medicare does cover some drugs, including:

• Drugs that are not self-administered and furnished ‘‘incident to’’ a physician’s

service, such as prostate cancer drugs;

• Certain self-administered oral cancer and anti-nausea drugs;

• Certain drugs used as part of durable medical equipment or infusion devices, (e.g.,

the albuterol that is put into nebulizers, which are devices used by asthma patients);

• Immunosuppressive drugs, which are used following organ transplants;

• Erythropoietin (EPO), far and away the drug Medicare spends the most money

on, is used primarily to treat anemia in end stage renal disease patients and

in cancer patients; and

• Osteoporosis drugs furnished to certain beneficiaries by home health agencies.

These drugs are typically provided in the hospital outpatient setting, dialysis centers, or in the doctor’s office, and are purchased directly by the physician or provider. Additionally, vaccines for diseases like influenza, pneumonia, and hepatitis

are considered drugs, and are covered by Medicare.

By law, we generally pay for these drugs based on the actual charge or 95 percent

of the AWP, whichever is lower. This adds up to more than $5 billion a year for

currently covered drugs, approximately 80 percent of which is paid for by the Medicare program. In general, Medicare beneficiaries must also share in the cost of purVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00091 Fmt 6633 Sfmt 6621 E:\HEARINGS\75756 pfrm09 PsN: 75756
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chasing these drugs through their Part B premiums, and except for the flu and

pneumonia vaccines, the $100 Part B annual deductible, and a 20 percent coinsurance.

MEDICARE PAYMENT FOR CURRENTLY COVERED DRUGS

The AWP is intended to represent the average price at which wholesalers sell

drugs to their customers, which include physicians and pharmacies. Traditionally,

AWP has been based on prices reported by drug manufacturers and published in

compendia such as the Red Book, which is published by Medical Economics Company, Inc. However, manufacturers and wholesalers increasingly give physicians

and providers discounts that reduce the actual amount that the physician or provider actually pays for the drugs. These discounts are not reflected in the published

price and reduce the amount providers actually pay to levels far below those prices

published in the Red Book. Furthermore, use of the AWP, as reported by manufacturers to companies which compile such prices creates a situation where a manufacturer can, for certain drugs, increase the reported AWP and, in turn, offer physicians a deeper discount.

This Committee, CMS, the Department’s Office of the Inspector General (IG), and

others have long recognized the shortcomings of AWP as a way for Medicare to reimburse for drugs. The IG has published numerous reports showing that true market prices for the top drugs billed to the Medicare program by physicians, independent dialysis facilities, and durable medical equipment suppliers were actually

significantly less than the AWP reported in the Red Book and like publications. As

competitive discounts have become widespread, the AWP mechanism has resulted

in increasing payment distortions. However, Medicare has continued to pay for

these drugs based on the reported AWP amount. By offering physicians and providers deep discounts compared to the price they could bill Medicare, the drug manufacturers are able to use profit margins to manipulate physicians and providers to

use their products for Medicare beneficiaries. It is simply unacceptable for Medicare

to continue paying for drugs in a way that costs beneficiaries and the program far

more than it should.

In the past, the Agency has attempted to remedy disparities between Medicare

payments based on AWP and the amount actually paid competitively by physicians

and providers. However, these efforts have not been successful. For example, in

CMS/HCFA’s June 1991 proposed physician fee schedule, the Agency proposed that

payment be based on 85 percent of AWP. We also proposed that certain very high

volume drugs be reimbursed at levels equal to the lesser of 85 percent of AWP or

the physician’s or provider’s estimated acquisition cost. We received many comments, primarily from oncologists, indicating that this 85 percent standard was inappropriate. Most comments indicated that while many drugs could be purchased

for less than 85 percent of AWP, other drugs were not discounted. Others suggested

that while pharmacies and perhaps large practices could receive substantial discounts on their drug prices, individual physicians could not. As an alternative, beginning with 1992, a policy was established for Medicare to pay the AWP or the estimated acquisition cost, whichever was less.

Since the Estimated Acquisition Cost approach proved to be unworkable, subsequent legislation was proposed that would have required Medicare to pay physicians

their actual acquisition cost for drugs. Under this proposal, physicians would tell

Medicare what they paid for the drugs and be reimbursed that amount, rather than

the Agency developing an estimate of acquisition costs and paying physicians based

on that estimate. After considering this proposal, Congress adopted an alternative

approach in the Balanced Budget Act of 1997 (BBA), setting Medicare’s payment for

drugs at the lesser of the billed charge or 95 percent of AWP. While this brought

Medicare payments closer to the prices that physicians and providers pay for drugs,

Medicare payments were still significantly greater than the competitive discounts

obtained by physicians and the system still tied Medicare payments to the artificially inflated industry-reported list prices. In fact, in a December 1997 report, the

IG found payments based on AWP to be substantially greater than the prices available to the physician community. As an alternative to actual acquisition costs, Congress considered proposals to pay all Medicare drugs at 83 percent of AWP, a compromise between 95 percent of the AWP and the average discount found by the IG.

In May 2000, the DOJ and the National Association of Medicaid Fraud Control

Units made accurate market wholesale prices for 49 drugs covered by Medicaid

available to State Medicaid programs and to First Data Bank, a drug price compendia owned by the Hearst Corporation. These wholesale prices, culled from wholesale catalogs circulated among the provider community, reflected the actual Average

Wholesale Prices for these drugs far more accurately than the drug manufacturers’

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AWP. Last year, HCFA sent this new information to Medicare carriers and instructed them to consider these alternative wholesale prices as another source of

AWP data in determining their January 1, 2001 quarterly update for many of these

drugs. However, due to concerns about Medicare payments related to the administration of the chemotherapy and clotting factor drugs, the Administration instructed

our carriers not to use the data for those drugs at that time.

In December 2000, Congress enacted the Medicare, Medicaid, and SCHIP Benefits

Improvement and Protection Act (BIPA), which established a moratorium on decreases in Medicare drug payments while the General Accounting Office (GAO) conducted a study of Medicare drug pricing and related payment issues. HCFA postponed Medicare carriers’ use of the DOJ data until we could review the GAO report.

We look forward to reviewing the GAO’s findings and working with you to revise

Medicare’s drug payment policy. We must ensure that beneficiaries and Medicare

pay appropriately for both the drugs that we cover and the services related to furnishing the drugs.

CONCLUSION

Medicare beneficiaries rely on prescription drugs, and the coinsurance they pay

for covered drugs is tied directly to the prices that Medicare pays. We must find

a competitive way to ensure that Medicare beneficiaries and taxpayers are no longer

paying excessive prices for drugs that are far above the competitive discounts that

are widely available today. We need to pay appropriately for all Medicare benefits,

including the prescription drugs we cover and the services required to furnish those

drugs. We look forward to reviewing the GAO report, and working with you Mr.

Chairman, this Subcommittee, and the Congress to revise Medicare’s payment policy for currently covered drugs. Thank you for the opportunity to discuss this important issue with you today, and I am happy to answer your questions.

Mr. GREENWOOD. Thank you, Mr. Scully. We appreciate your testimony and your presence and again your endurance in staying

with us all this time.

Let me, first of all, comment on why the 85 percent of AWP obviously won’t work. Because, as we’ve seen, some AWPs are actually

straight; and particularly when there’s no competition there’s no

incentive for the drug companies to falsify the AWP. So to reimburse 85 percent wouldn’t be fair for those who are paying a hundred percent of the AWP, because the physicians would lose money

every time. So clearly that won’t work.

We do have five principles that my staff and I have worked out

in terms of what we think the direction of the legislation that we

hope to enact into law in the next month is, and I’d just like to tick

these off for you and see if we have general conceptual agreement

on how to proceed.

No. 1 is that any new drug reimbursement should not adversely

impact Medicare patient access to quality health care. Would you

like me to repeat that?

Mr. SCULLY. I’m sorry. I was trying to find your——

Mr. GREENWOOD. The question is, would you agree in concept

with these five principles for legislation: Any new drug reimbursement should not adversely impact Medicare patient access to quality health care?

Mr. SCULLY. Sure. Absolutely.

Mr. GREENWOOD. That is a no-brainer.

Mr. SCULLY. That was an easy one. Thank you.

Mr. GREENWOOD. Medicare’s reimbursement for coverage drugs

should be closely linked to the prices that providers actually pay

for the drugs.

Mr. SCULLY. I think that is the bottom line goal, yes.

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Mr. GREENWOOD. Three, Medicare services and administration

should be reimbursed according to their costs, exclusive of any reference to drug reimbursements?

Mr. SCULLY. The only caveat I’ll put into that is, having been in

the hospital business for years, costs—but, yeah, actual, real expenses, yes, because cost is what we paid for for years, and that

is real life.

Mr. GREENWOOD. Understood.

Fourth, the impact of Medicare’s drug reimbursement policies

have—upon the making of clinical decisions should be eliminated

or reduced to the greatest extent possible.

Mr. SCULLY. Yes. I think absolutely.

Mr. GREENWOOD. Okay. And, fifth, Medicare’s reimbursement for

treatments in related settings should be equalized to discourage

migration between settings based upon relative levels of profit

available to providers.

Mr. SCULLY. Yes.

Mr. GREENWOOD. Bottom line there is we don’t want to drive

these patients certainly back to a hospital setting which costs

Medicare more and is sometimes a less pleasant experience for the

patient.

Let me ask you this. These principles are not rocket science. This

is a very manageable issue, as far as I’m concerned, based on my

research here. The GAO report today gives us the foundation in

terms of the expenses or costs for the oncologists. I hope we’ll erase

what has been an obstacle before, which is the legitimate concern

raised by Members of Congress, frankly, because we do not have

the data to forestall anything that might have some of these adverse effects on patients or providers.

If in fact we can put a legislative solution into some kind of an

omnibus package that we sign into law—have signed into law, let

us say sometime in October, do you have a sense from talking with

your staff yet how long it might take CMS? How much time do you

need to enact this so that we get a good system that works well,

meets all of these objectives and begins to save the beneficiaries

and Medicare the billions of dollars that we’ve talked about?

Mr. SCULLY. Well, clearly you can start paying different drug

prices in AWP pretty quickly. The real issue is making—I think

there is some legitimate argument that oncologists, as I mentioned,

dialysis clinics—there are a variety of practice groups, at least an

argument I’ve heard, on DME providers. The issue is that we put

out our rates on January 1. Most of those rates are already in

place. The systems are hard to change. The issue is from an equity

point of view, and if there are providers that rely on inappropriately high AWP payments—— Mr. GREENWOOD. If I may, I should have included—incorporated

that in my question. But if we give you the objective of coordinating in time this two-step process, move from AWP to a more

cost-related—price-related reimbursement rate and reset the practice expense and the reimbursements for these specialties who

are—specialists who will in fact lose revenue as a result of this

change, how long would that take?

Mr. SCULLY. The quickest way we could rationally do it—again,

I can tell you what my—all the people that have to do the actual

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work, which a lot of people forget. There’s actually lots of people

in Baltimore here that have to actually do this. The quickest way

you really do it is fiscal year 2003, for the fee schedules that come

out in January of 2003, because that is really only the time you go

back and recalibrate up the practice expenses and everything else.

It’s possible—nobody is happy with this answer in CMS, I can

tell you, but it’s possible that if you directed us and you put money

into the second half of 2002, that for the last two quarters of 2002,

we could possibly—and I’m not even certain of this now—recalibrate some of the payments up.

We certainly can pay less on AWP, but if you’re trying to find

the balance, what I’ve heard from oncologists and others is, if

you’re going to cut the AWP, which we rely on, you need to fix the

practice expense at the same time and in the same bill. I imagine

they wouldn’t be very happy to have the drug reimbursement cut

at the same time the practice expenses don’t go up. So pushing the

envelope as much as it possibly can be—and I can tell you this is

an extremely unpopular opinion with the staff at CMS—the fastest

we could possibly do it is probably next July, and under normal circumstances, the fastest we could do it is January of 2003.

Mr. GREENWOOD. That is very helpful. I appreciate that.

My time has expired. The Chair recognizes the gentleman from

Ohio, Mr. Brown, for 5 minutes.

Mr. BROWN. Thank you, Mr. Chairman.

Mr. Scully, nice to have you in front of the subcommittee.

You have the authority now to use an inherent reasonableness

standard to reduce reimbursements for Medicare drugs which basically bear no resemblance to actual costs or actual cost plus. Do

you have that story?

Mr. SCULLY. I think we do. I think the issue here is, as I mentioned, the agencies have a hard time getting around that. We actually sent out guidance of what we thought was an AWP—not me,

but, as you know, Nancy-Ann DePerle and Secretary Shalala—

about a year and a half ago to have our carriers interpret what was

a low AWP, and there was quite an uproar about that, and the result of it was a legislative prohibition about changing it. So it’s

very debatable from a legal point of view as to whether we do have

the authority. So if Congress doesn’t act, we’ll certainly look into

it, but it would be far preferable to have legislative guidance.

Mr. BROWN. Wasn’t there a GAO review and they said it was

adequate? GAO did a review and said it was adequate?

Mr. SCULLY. A review of the practice expenses or the——

Mr. BROWN. Of the inherit reasonableness.

Mr. SCULLY. I think I read the report last night, and I think

that—their view was we have an inherent reasonableness authority

to interpret what the AWP is, and I believe he said in his testimony that it says average wholesale price in the statute. But as

a former pretty bad lawyer, somebody who has had—been sued numerous times this fall, I would say that with the track record of

having the government use the AWP for 30 years, I would have

very little doubt that our authority to do that would be challenged.

We certainly are willing to do it if it comes to that, but it would

be much sounder I think if we get legislative guidance.

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Mr. BROWN. Would it be appropriate first, Mr. Chairman, or Mr.

Scanlon to address that, that the GAO did in fact find that. Correct?

Mr. SCANLON. We reported on the expedited inherent reasonableness authority that you gave to the agency in the Balanced Budget

Act which allows for up to a 15 percent reduction, again, in an expedited fashion. Whether we have the ability to redefine AWP and

define it any way we’d like is a somewhat dicey legal issue. We’re

happy to—believe me, we’re very anxious as you are to fix this. I

would say it would be certainly much more likely to succeed if we

had additional legislative guidance.

Mr. BROWN. Could you submit a legal opinion for the record on

that?

Mr. SCANLON. Sure.

Mr. BROWN. Let me shift gears for a second. Before that, I just— if in fact you can do that, using an inherent reasonableness standard to reduce reimbursements, I would hope that CMS could be

more aggressive. I guess you have a pilot project in Texas and look

to do more of that for competitive pricing in the months ahead.

All the talk about the solutions that have been bandied about in

the prior panel and from opening statements and others, if Medicare changes the way that Congress pays for prescription drugs, obviously then changing the reimbursement rate for oncologists and

saying that the practice expense payment system needs to be adjusted, what does that do—my understanding is the entire pool of

practice expense payment needs to be budget neutral. Does that

mean any increase in practice expenses for oncologists would then

cause a reduction in practice expenses for other specialties?

Mr. SCULLY. Well, under current law it would or wouldn’t

change, and I personally would not recommend us doing that, because I don’t think we should be taking funds from other practice

expenses to fund oncology. I think the discussion that’s been had

in some quarters about legislation is that if you’re going to change

the AWP legislatively you will get significant baseline savings, and

some of that could go back into just adding in a nonbudget neutral

fashion back into the practice expense pot, which you can do legislatively to increase, where appropriate, some practice expenses in

some areas without taking it from others.

But, clearly, without legislation, any practice expense change has

to be budget neutral.

Mr. BROWN. So if we were to do that, do you have any suggestions on the amounts of—you, first of all, say we in a sense legislatively break the budget neutral concept of practice expense, at least

for this particular case. What kind of money do you talk about in

terms of the oncologists then versus what we’ve done?

Mr. SCULLY. Chairman Greenwood and I talked about this a little bit, and he—apparently in the GAO reports read last night,

they suggested $51 million. It’s not always easy to get a quick

back-of-the-envelope read from my staff, but I think that number

is in the ballpark. It’s close, somewhere in the 40—I mentioned to

him that our back-of-the-envelope number was pretty close to that,

in the $45 to $55 million range.

Mr. BROWN. What are you hearing from other physicians, other

specialties about the practice expense issue?

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Mr. SCULLY. You know, in fairness, I was one of the drafters of

my first job and the first—one of my first jobs in the first Bush administration was passing RVRS in 1989, since I was primarily responsible for the administration’s position back then.

One of the reasons I like it——

Mr. BROWN. A lot of complaints should be directed to you then.

Mr. SCULLY. Yeah. It’s all my fault. They didn’t like it much back

then, but, in fairness, I think the system has worked reasonably

well. If you look at all the other reimbursements over the last 15

years, nursing homes, hospitals, everything else has been an upand-down roller coaster. Physician reimbursement has been relatively—as I’m sure the physicians on the committee might not

agree, but I think generally even the AMA would tell you that, relative to other reimbursements in Medicare, it’s been more predictable and more stable and the system has worked reasonably well.

The thing about practice expense is that basically we rely 98 percent of the time on the—what’s called the RUC, which is essentially the committee through the physician groups to recommend

what the practice expenses should be. So if the oncologists think

they’re underpaid, they have to come argue why it should come out

of the oncologists versus the surgeons, versus the gastroenterologists, and they sit around a table every year and make recommendations, the vast majority of which we take. But it’s a finite

pot, and I think it works reasonably well.

So the issue here is—it’s the physicians all sitting around the

table with CMS saying who is underpaid and who is overpaid, and

they’re all arguing over a finite pot that you’ve authorized. And I

think it works actually reasonably well. I mean, everybody is unhappy, but once everybody is unhappy that usually means it’s

working right.

Mr. BROWN. Thank you, Mr. Chairman.

Chairman TAUZIN. I thank my friend. The Chair recognized him

so briefly for a round of questions.

Thanks for coming, Mr. Scully. Of course we appreciate you

being here.

Let me ask you in regard to that finite pot. If we are going to

work out a solution that establishes a responsible AWP, something

more akin to the real cost of the drug, and it reduces the income

to the oncologists significantly and the oncologist does have a claim

that he is under-reimbursed for practice expenses, which you and

I think GAO both have conceded is true, at least to some extent—

you’ve identified it around $50 million. If we simply say that we’re

going to permit the oncologist to have a larger share of that finite

pool, does that ipso facto mean that other physicians, other service

providers will lose reimbursement as a result?

Mr. SCULLY. If we were directed to do that administratively without new money in the pot, it would, but my hope would be that in

the same—what I’ve heard from responsible oncologists, of which

there are many, is that they agree that many of the things in the

system are broken and in fact if we fixed in the same bill simultaneously AWP and adjusted their practice expenses, they don’t think

that is necessarily unfair. Now some may disagree with that.

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Chairman TAUZIN. Provided we increased the pool to accommodate to whatever few reimbursements we ought to provide for those

physicians. Is that correct?

Mr. SCULLY. Once again, in fairness, Mr. Chairman, I think—and

I’d like to work with your staff on—I do think it’s not oncologists

who’ve made the most noise on this. I do think dialysis providers

of a number of drugs and I think hemophilia agencies do. And, to

a lesser degree, we ought to look at other providers and make sure

they also are made whole.

Chairman TAUZIN. We’ve got to look at every single provider that

may be losing income as a result of a change in AWP and examine

whether or not in fact their practice is being properly reimbursed

under the current system. Is that correct?

Mr. SCULLY. Yes.

Chairman TAUZIN. And we need to come up with a number that

we need to add to the pool to make it fair, and there is a disagreement on that number, right? I mean, you and GAO have a number

around 50——

Mr. SCULLY. Pretty close. I think we’re pretty close.

Chairman TAUZIN. I’ve heard some extraordinary numbers coming from some of the care providers. So we’re going to have to

somehow provide some rationale for a proper number. Is that correct?

Mr. SCULLY. Yes, sir.

Chairman TAUZIN. Second, why don’t you now use the average

manufacturers’ price and best price under the Medicaid rebate program in establishing an average wholesale—or average wholesale

price? I think I know the answer why you don’t, but tell me.

Mr. SCULLY. I believe it’s statutory. That’s another thing that I

hate to say that I helped create at Andrews Air Force Base in——

Chairman TAUZIN. So if you’re going to use it, we have to change

the law?

Mr. SCULLY. If you wanted—the way it works is we do use average manufacturers’ price, I believe, and my staff might correct me

if I’m wrong, but the rebate—it comes up that the difference between the AWP that’s charged and the average manufacturers’

price is just a small piece of it. So you could, in fact, correct Medicaid law as well and arguably make it more appropriate.

Now, the two sides—just to give the other side, you probably

hear from private insurance companies is there’s no doubt what

we’re paying in Medicare in a big way and arguably in Medicaid

in a smaller way, but when you put those two programs together

and you squeeze the pot that’s going to bounce back on the private

insurers. So—to some degree.

Now, there’s no question to some it’s excessive margin. But if you

take Medicare and Medicaid which are—at least in the hospital

outpatient setting, 40 percent of that is usually Medicare. Maybe

12, 14 percent is Medicaid. Then you squeeze down on their reimbursement there, which we certainly need to do, you’re going to

have the insurers and others on the private payer side come back

and say our drug prices just went up.

Now, again, I would very much doubt that is a wash. I think the

margins on the Medicare side are extreme, to say the least.

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Chairman TAUZIN. And you both tend to say that. We have at

least some evidence coming in from the other side claiming that it’s

a wash. We’re going to have to again get some sort of arbitration

on that number to find out what it is.

Mr. SCULLY. I think generally the insurance plans are—you

know, they have the flexibility to negotiate prices, and they generally can fend for themselves pretty well, but you will hear a push

back from the other side.

Chairman TAUZIN. Let me ask you a very simple question that

I think I know the answer to, but you might give us some insight

on it. Why on earth do we have a system that requires a Medicare

beneficiary to pay 20 percent as a copay of an artificial price? It

can exceed the real cost of the drug to the physician. What would

happen if the law would change or some provision were made, either administratively or by change of law, to require that the 20

percent copay would be 20 percent of the real price paid by the care

provider for the drug? What is wrong with that?

Mr. SCULLY. Other than the budget spending, it sounds like a

great idea, and I think——

Chairman TAUZIN. It would save American patients $177 million

that they’re spending on excessive copays, because copays are

based on fictitious numbers. I mean, when a patient has to pay 500

percent for this one drug I cited of the amount the doctor is having

to pay for that drug as a copay, I mean, citizens look at that and

say, you know, that’s Alice in Wonderland. It’s just crazy. Shouldn’t

the copay be based upon the real cost of the drug to the doctor, and

what would it take to do that?

Mr. SCULLY. Well, that may be—that gets into the delicate difference, as I said. But we can probably figure out exactly what we

should be paying the manufacturers and recoup it, much the way

Medicaid does through a reconciliation.

The issue is, if you’re trying not to squeeze, the physician is trying to buy it out in the market at the beginning of the year. Finding out what—the right number to charge the 20 percent copay

against is one the tougher things to figure out.

Chairman TAUZIN. It is not hard to figure out. You simply have

a provision that says you can’t charge the doctor or physician as

a co-pay more than 20 percent of the drug——

Mr. BROWN. Will you be able to do that administratively, the

chairman’s suggestion, simply so that the patient would pay the 20

percent of what the actual charge, what the doctor’s actually charging for the drug? Could you do that?

Mr. SCULLY. Well, the closest thing we have right now, the ability to actually determine what the actual price paid is, is the average manufacturer’s price which we have for the purposes of Medicaid the worst——

Chairman TAUZIN. Let me say it again. If the law said that the

doctor can’t charge the patient more than 20 percent of the actual

cost, it is the health care provider’s obligation then not to send a

bill that is represented on 20 percent of some fictitious price, he’s

got to look at what he has actually paid and send a bill based on

20 percent of what he really paid for the drug. Otherwise he is in

violation. That is pretty stiff, but what is wrong logically with that

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if at the same time we are making the proper adjustments for practice reimbursement to the physician?

Mr. SCULLY. Nothing. It seems logical, and I think the question

from Mr. Brown was can we do it now administratively and I don’t

think we can.

Chairman TAUZIN. Also doing it administratively without correcting the reimbursement on the fund is disjointed. I understand

that. There is a $177 million hit for health care providers. But the

fairness of asking a Medicare patient to pay 20 percent of a price

that is totally fictitious, way in excess of what the physician actually bought that drug for, seems to me to be absolutely insane. It

contradicts what we did in the Medicare program, which was literally to provide a co-pay requirement on the patient that was supposed to be one-fifth of the actual cost and, because of this crazy

system of average wholesale pricing, can run as high as 500 percent of the cost. And I mean not only is it unfair basically to think

about that but think about it in terms of if you happen to be the

wrong patient, you happen to need that drug that is 500 percent

as opposed to another patient that is paying closer to the real 20

percent. There is an inequity in the requirements under the Medicare system depending upon how unlucky you are, what disease

you have got, what drug you need to help you.

I would think that we should all look at expediting a cure for

that particular problem. Perhaps we can do that sooner than later.

Mr. SCULLY. We would love it. We are totally with you. I think

the best thing about this hearing was for the health care policy

wonks in the world, many on your committee, this issue has been

around about 10 years and I never heard this thorough a discussion on it, and usually what happens is somebody tries to cut a

rate and somebody screams that patients are going to be hurt,

which is frequently not the case, and we are legislatively prohibited

from fixing it.

Chairman TAUZIN. You said the right thing, legislatively prohibited from fixing it, and that can’t stand any longer. It is our obligation right here to fix it. We have allowed this to exist too long, as

we thoroughly understand it, as we understand its pernicious effects upon the health care system, and particularly upon the very

people it is designed to help, we have got to fix it, and if there are

legislative impediments to your fixing it, we need to take them out

of the way.

Thank you very much. I will recognize Mr. Ganske for 5 minutes.

Mr. GANSKE. Thank you, Mr. Chairman. I want to follow up on

your line of questioning. It seems to me that the problem with instituting a limit on the co-pay to the actual cost without doing the

rest is just what we have been talking about multiple times this

morning; that is, that you are not taking into account the overhead

involved with the administration, with the storage, with the ordering, with the time involved for personnel and things like that, and

so I think that that issue of the co-pay is corrected when you actually have the inaccurate index of the cost, I mean of the drug,

whether it’s an AVP, or whatever letters you want to use.

Mr. Scully, I want to go to this issue of the AMP data. This is

a quote from the IG report. ‘‘This option would require legislation

to allow Medicare access to AMP data. Prior to this option being

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implemented, it would be useful to clarify or refine certain definitions. We also believe that an initial intensive effort should be

made to audit AMP data.’’ We don’t want to just substitute some

letters. We need to have some accuracy. Do you have any idea of

what the definitions that we would need to address to clarify and

define what the IG is talking about in terms of AMP?

Mr. SCULLY. That is considerably lower and I think it generally

works. It is confined to Medicaid by statute, and our Medicaid staff

has access to what the Medicare staff does not. It is audited. If we

use it for a broader chunk of the market and used it for Medicare

as well as Medicaid, obviously incentives for people reporting their

prices would—we’d have to probably audit more carefully, as the

IG said, and be much more thorough in making sure the prices are

accurate. But the idea of AMP, which is similar to an average sales

price concept, is to actually find out what the manufacturer sells

it to all customers in the country in any particular year and then

come back and make it that that is the average price that we pay.

I think the data is there now to make it work, and it is certainly

the best measure to make it work.

The problem is if you go out to many areas of the country where

physicians and oncologists may actually have to pay more for it,

there may be places where somebody can’t get access to that. That

was the argument about paying 85 percent of AMP back in 1991.

If a physician in Iowa, for instance, couldn’t get access to the drug

for that price, he might never get it. So some have suggested that

just consensually what we would do is allow the companies charge

whatever they want, but then at the end of the year come back and

reconcile, similar to what Medicaid does now, and say you sold us

a million units of the drug times whatever the average manufacturer’s average sales price is, you owe us the difference. That way you

keep access to the physician out there buying in the market while

actually recovering from the manufacturer.

The problem with that, which is what I was trying to get to Mr.

Brown, is then what do you do up front as far as charging 20 percent of what, the inflated AMP or the real end of the year price

the government ends up paying, and that is difficult.

All things I think we can talk about fixing legislatively, but it is

a complicated problem to make sure we don’t overpay, but that we

also don’t shut off access to physicians who may not in some parts

of the country be able to get access to the drugs. So it is a complicated problem. I think we can fix it, but I have only been looking

at it intensively the last 2 or 3 days and I can’t tell you all the answers yet.

Mr. GANSKE. Can this committee expect from the administration

and from you and CMS some specific suggestions for instance on

the, quote, clarification and refinement of certain definitions, unquote, that we would need to do legislatively if we were looking at

going the AMP route?

Mr. SCULLY. Sure. Obviously we are hoping, and if we are only

here for a month to spend a lot of time on legislative issues, we

certainly have a lot of suggestions in this area. We have already

spent a lot of time talking to committee staff.

Mr. GANSKE. We are dealing with 24 drugs; is that right?

Mr. SCULLY. I think the bulk of the 24 is about 90 percent.

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Mr. GANSKE. It would seem to me that we ought to be able to

get a handle through sampling of real invoices on 24 drugs, what

the real average wholesale price, or the AMP, should be to address

this.

Mr. SCULLY. Actually the companies that report AMP are required to tell us what their average price was to all their buyers

in the course of the year in any category, and we audit that. So

it should be a pretty accurate number. We just can’t use it right

now for Medicare.

Mr. GANSKE. How do you audit that?

Mr. SCULLY. I believe the IG—the Medicaid actually goes into

the companies and audits—— Mr. GANSKE. It goes into the company books and then checks—— Mr. SCULLY. That is right. It is the OIG who actually does it for

us.

Mr. GANSKE. And then checks back with the customers of those

companies to see whether that in fact—— Mr. SCULLY. Yeah. The only potential flaw I have seen is that

some drugs, once you put Medicare and Medicaid together, it is— you know, to figure out what the rest of the market is paying and

piggyback on that. A few of these drugs, the market is mostly

Medicare and Medicaid. So it is a little difficult to figure out the

prices if the non-Medicaid/Medicare market is 10 percent. That is

the only flaw I have seen so far in looking at it.

Mr. GANSKE. We both know it has been difficult to get accurate

indices of practice expense. There has been a lot of controversy in

those areas. If we are talking about changing this reimbursement,

what will be the process to get an accurate assessment from these

medical specialties that will be affected?

Mr. SCULLY. I believe, and again I hope somebody will jump in

here if I am wrong, all the specialties already have the ability to

put in their own surveys. The oncologists could have put in their

own practice survey and did not. The data that we had on oncology

combined their actual drug costs so close to their practice expense

costs that we made the decision, which I believe GAO agreed with,

that we couldn’t use that data. So we used the average physician’s

practice expense. I think that was defensible because arguably the

physicians are already, from what we have heard today, being overcompensated on the drug side; so using the average physicians

practice expense is reasonable.

If you in fact reduce the AVP and you made the judgment that

we should go back in and do a survey of oncology data or have

them submit their own, we believe that would result in their practice expenses going up, but right now the practice expense component for oncologists is the actual average practice expense for all

physicians because we don’t use oncology specific data.

Mr. GANSKE. We have testimony today from Dr. Norton to the effect that the Medicare payment for services for administration may

be one quarter what the actual costs are. Do you have a feeling for

that?

Mr. SCULLY. I have not, to be honest with you, looked at that

level of detail. Totally independent of each other, both the GAO

and our staff looked at this number and came up with a remarkably close initial determination. So I am happy to go back and

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spend time with the oncologists discussing it, I am sure I will if

you are looking at legislation, but I have yet to find a physician

group that was not unhappy with their practice expense allocation.

I think that is the nature of the beast.

Mr. GANSKE. Thank you, Mr. Chairman.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman, Mr. Norwood, for 5 minutes.

Mr. NORWOOD. I thank the chairman and I only have one question. I am curious to see what Mr. Scully has to say. You implied

earlier there seems to have been a problem at least as far as 10

years back, that HCFA has been concerned and has raised questions about this for a long time, however generally when you raised

questions very loud and stuck your head up very far, Congress

pounced on you. Is that where we have been?

Mr. SCULLY. That is fair, but sometimes in fairness it is Congress, sometimes it is, you know, groups coming in and screaming

within your own administration, whether it is—Gail Walinsky was

the first person to get involved in this in 1991 and I was in the

White House then, and I remember not knowing very much about

it but I remember we got a lot of heat for it. I think the level of

understanding and interest this year is an all-time high and that

is positive. I think generally whether it is Congress or just people

complaining about it, when you have talk about cutting, the groups

that are affected are always upset, and generally they are upset because in the past the issue has generally been lowering reimbursements without being sensitive to the fact that maybe there is an

unfortunate—but reality is cautious. As I mentioned, I know for

ESRD clinics, they argue that their rates are too low as well and

that they rely on AVP transfers and cost shifts. Generally the answer in the past has been cut the rates and don’t be sensitive to

the other side, which does not seem to be the case this year.

Mr. NORWOOD. My question, Mr. Scully, though, is since this has

been a problem for a long time, I am a little bit surprised that why

would not CMS or GAO or somebody be coming to this hearing

today with a solution?

Mr. SCULLY. It is not an easy solution. I spent 4 hours the other

day with probably 10 people at CMS that have worked on this for

the longest time and went around with the options I put in front

of you today briefly, and I am not sure we have a consensus in our

agency about what is right. We are going to have to pick one. I

think it will be a hybrid of a bunch of these, but I am not sure that

you could find a consensus solution anywhere. I would be happy to

sit down with the committee and give you my opinions.

Mr. NORWOOD. I was struck by the different options that you sort

of threw at us pretty quickly, and I guess is this not solvable?

Mr. SCULLY. I think it is very solvable. I think there are shortcomings to every solution and some benefits to every solution, and

some people are not troubled by just saying let us pay the Federal

Supply Schedule. I don’t think that that—which the VA pays,

which the Coast Guard and other agencies pay. I think that probably causes significant access problems for some physicians in some

places. So there are pros and cons to every option and, if you would

like, I would be happy to share my staff paper on the pros and cons

with you.

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Mr. NORWOOD. I think my feeling is this, the Energy and Commerce Committee is going to do something about this one which

way or the other and it certainly should be and is our responsibility, but I also think it is the responsibility of the Federal agency

to also come up with a solution. It doesn’t necessarily mean we will

adopt that. It doesn’t mean that that will be the final solution. But

I think you need to lead your organization to the plate, get up to

bat, let us hear what you want to do. And at the same time our

chairman, all of them along the line are going to be doing the same

thing. But I am not sure I feel like we, the members of this committee have—should have had the experience dealing with this

problem for 10 years at the same level as your agency has had experience dealing with this problem, and I am suggesting that you

have some responsibility in my mind to not give us a dart board

and hope we hit the right one. Come in here and say what you

want to do.

Mr. SCULLY. Mr. Norwood, I almost have never been accused of

not having strong opinions about things for better or worse. The

problem is that we are legislatively prohibited at least until today

from considering this. So there is not an administration position.

As I have——

Mr. NORWOOD. Are you prohibited from coming up with a solution?

Mr. SCULLY. No. But the fact is we have an administration with

a White House and the Secretary—I have talked to the Secretary

a little bit about it. I am not sure that the White House is aware

of this. I can’t state the administration’s position publicly today. I

have opinions. I will talk in the next week or so with people in the

administration, and I have no doubt we will have a strongly held

administration position. I am just not in a position today to go any

further than I have.

Mr. NORWOOD. I didn’t expect today for you to come up with a

solution. I expected for you to turn to some of that staff that has

been over there over the last 10 years and I presume are working

on this. At some point in time the agency itself should make a recommendation as to how they think we would best solve this problem and hopefully this committee and the subcommittees and full

committee will go along with that, maybe alter that, maybe change

that. But you need to have a position.

Mr. SCULLY. I hope we can come up with a joint position with

the committee, and we will give you lots of technical input, and

whatever the committee decides I have a feeling will be the administration’s position as well and we will hopefully do it together aggressively and on a bipartisan basis.

Mr. NORWOOD. Thank you, Mr. Chairman.

Mr. GREENWOOD. The time for the gentleman has expired. Let

me comment that in fairness to everyone, we have all been on hold

until the GAO study came out, which has been released today, and

we now feel that we have a solid footing upon which to build our

solution. The wholesale acquisition costs will almost certainly be

the basis for the new reimbursement rates, will take care of the

oncologists and others based on the data that we have now, and I

think we will be prepared to work with CMS over the next couple

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of weeks and have a firm detailed legislative product in short

order.

Mr. Scully, thank you for your excellent testimony. Thank you

for your patience and you are excused. Look forward to working

with you.

I call now the third and final panel: Dr. Larry Norton, President

of the American Society of Clinical Oncologists; Mr. Kevin Martyn,

Executive Director of Care for Life; Mr. Thomas Connaughton,

President of American Association of Homecare; and Dr. Ezekiel

Emanuel, Chief, Clinical Bioethics Department, Warren G. National Magnuson Clinical Center, National Institutes of Health.

Welcome. We thank you for your patience in waiting all morning

and all afternoon to testify, but we are glad to have you with us.

As you probably heard me say to the previous witnesses, this is

a joint committee hearing between the Health Subcommittee as

well as the Oversight and Investigation Subcommittee, and when

the Oversight and Investigation Subcommittee is involved, we take

testimony under oath. Do any of you object to providing your testimony under oath?

Seeing no such objection, I would inform you that you are entitled under the rules of this committee and under the rules of the

House to be represented by counsel. Do any of you desire to be represented by counsel? Seeing no such desire, if you will rise I will

give you the oath.

[Witnesses Sworn.]

Mr. GREENWOOD. Thank you. You are each under oath now, and

we will begin with you, Dr. Norton. You are recognized for 5 minutes for your testimony. Make sure your button is—— Dr. NORTON. Am I on?

Mr. GREENWOOD. Yes.

TESTIMONY OF LARRY NORTON, PRESIDENT, AMERICAN SOCIETY OF CLINICAL ONCOLOGISTS; KEVIN MARTYN, EXECUTIVE DIRECTOR, CARE FOR LIFE; THOMAS A.

CONNAUGHTON, PRESIDENT, AMERICAN ASSOCIATION OF

HOMECARE; JoANN LAMPHERE, LEWIN GROUP; AND EZEKIEL EMANUEL, CHIEF, CLINICAL BIOETHICS DEPARTMENT,

WARREN G. MAGNUSON CLINICAL CENTER, NATIONAL INSTITUTES OF HEALTH

Mr. NORTON. Hi, I am Larry Norton. Pleasure to be here. I am

a physician, an oncologist, and this year I am President of the

American Society of Clinical Oncology. I am also a New Yorker. So

I don’t have to belabor this. It has been a really rough couple of

weeks, but I am delighted that you are having this hearing at this

time because this is a topic of great urgency and importance to cancer doctors and cancer therapists in the United States.

My organization represents cancer therapists, physicians, nurses,

patient advocates, and others who take care of people with cancer

and also people doing clinical research. I currently am also the

head of Medical Oncology, called the Division of Solid Tumor Oncology, at Memorial Sloan-Kettering Cancer Center in New York.

I have dedicated my life almost 30 years to cancer treatments,

largely chemotherapy treatments and largely for breast cancer, and

it is of critical importance to me and my colleagues that the theraVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00105 Fmt 6633 Sfmt 6602 E:\HEARINGS\75756 pfrm09 PsN: 75756
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pies that we develop that have been improving the life-span, cure

rates, and the quality of life for our patients, that this can actually

be delivered to our patients. So this is an issue of really critical importance to us.

We agree that the system has to be fixed. We think that the payments for the drugs have to be aligned more closely to the actual

costs, but we also think that the payments for the services that are

rendered in the administration of these therapies have to be made

more realistic, and we think this has to be done very carefully, has

to be done jointly, or else we see the possibility of severe disruption

to the care of our Medicare patients, and for this reason I underscore the urgency of this particular activity.

We have made really significant progress in cancer therapy over

the years. Many therapies that developed initially in the inpatient

setting can now be given in the outpatient setting safely, the advances in treatment of nausea, advances in treatment of low blood

cell counts, and many other improvements as well as the therapies

themselves that have made such a difference. Therapies that used

to require inpatient administration not that long ago can now be

given—complex skill requiring therapies can now be given routinely in doctors’ offices and this is more than just a convenience.

This is an essential contributor to the quality of life as well as the

length of life for our patients. We want to be sure whatever happens, whatever you decide to do and however you go about this,

that the net result must be that doctors will be able to give chemotherapy to their patients in their offices. We calculate that about

70 percent of chemotherapy treatments are given in doctors’ offices

right now. If the payments, the total payments, for these therapies

are not adequate, doctors will not be able to afford to do it. Some

people said then they will refer them to hospitals or cancer centers.

Cancer centers could be very far away from the patient in many

parts of the country, and I don’t know any cancer center that can

handle a large influx of patients in this particular setting, certainly

not my own.

I am in charge of the Outpatient Breast Center of Memorial

Sloan-Kettering Cancer Center and if we had a sudden influx of

cancer patients with—breast cancer patients in the community for

us to treat, we just couldn’t handle it. So I don’t think that is really

a solution. Therefore, whatever we do if we don’t do it carefully, we

could see a real massive disruption in the system.

So much of the discussion today is concerned with reimbursement for the drugs that are administered. We think the system

does need to be fixed. There is no question about that, but I want

to emphasize there has to be a simultaneous change in the reimbursement for the physician administering the therapy. Right now

there is a gross underpayment, as everybody has acknowledged,

and that the payments for drugs have to some degree compensated

for that.

If we don’t reform the whole system at the same time, things are

going to get thrown out of whack. It is like a car with a bad axle

and a bad tire rim. You fix one. If you don’t fix the other, you can’t

drive the car. I think that’s exactly the situation that we find ourselves in. Medicare has determined this and I haven’t heard anybody say this is not the case.

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I have a quote here that says Medicare payments for services related to provision of chemotherapy drugs are inadequate. We agree

with this assessment. Actually our own calculations are that Medicare now pays for less than a quarter of the actual costs to the doctor in administering principal chemotherapy treatments. We think

that part of this is the way that the—the methodology for calculating the payment amounts for services that do cost the doctor a

lot but not directly furnished by the patient. In 1998, when Medicare adopted this particular methodology, it called its approach an

interim approach, but it still hasn’t been revised.

We also feel there has to be a new type of Medicare payment for

services that are directly related to administration of chemotherapy, directly related but right now not covered by any explicit

reimbursement. There are many services that oncologists and their

staff provide that are absolutely essential for taking care of these

patients, such as social work, such as nutritional counseling, such

as psychological support, and these are not really being covered. A

big difference between oncology and the specialties is in other specialties an occasional patient has this requirement, for the

oncologist essentially all the patients, and this has to be provided

as an intrinsic part of the procedure.

We believe that the costs of the chemotherapy administration

has to be covered, but if it’s just covered, then there is not going

to be sufficient funds to provide these other critical services, and

this has to be taken into account.

Now, concerning the payment for the drugs themselves, we agree

with pretty much everything that’s been said. The AWP really

overstates by varying amounts the amount, and clearly this is a big

problem. We think this is not right. Mr. Chairman, you use the

word ‘‘outrageous,’’ and I think it is a well chosen word. We actually have—we have proposals on the table. We have proposed a solution. It is in the form a white paper, and I would like to request

that it be included in the record.

Mr. GREENWOOD. The document will be included in the record.

Mr. NORTON. Thank you. And in that we talk about the surveys

of the drug sellers to determine market prices or a correction in the

actual published prices, and that’s really what should be used to

determine the reimbursement. But fundamentally we believe that

if the cost is not covered, it’s going to be impossible for the doctors

to administer the therapy. Our job is to take the best possible care

of our patients with cancer. It’s a very hard job. I want to emphasize that. It’s not just the intellectual challenges. The field is

changing all the time. It’s the psychological challenges, the emotional challenges, the spiritual challenges and I’ve got to tell you

the hours are just unbelievable.

We want to provide the very best care for our patients. We think

that we need to have accurate reimbursements so we can do it financially. Anything that we do that is going to throw the system

out of whack is going to hurt us from doing that. We are totally

dedicated to quality cancer care and we want to work with Congress to make sure that the care we’re now administering is provided at the highest possible quality level.

Thank you very much.

[The prepared statement of Larry Norton follows:]

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PREPARED STATEMENT OF LARRY NORTON, PRESIDENT, AMERICAN SOCIETY OF

CLINICAL ONCOLOGY

My name is Larry Norton, President of the American Society of Clinical Oncology

(ASCO). ASCO is the national organization representing physicians who specialize

in clinical research and the treatment of cancer. ASCO has over 17,000 members,

including nonphysician healthcare professionals and cancer specialists located

abroad.

I appreciate the opportunity to appear before the Committee today to present

ASCO’s views on the important subject of Medicare payment for the drugs and related services furnished in outpatient cancer treatment. ASCO agrees that Medicare

payments for drugs and related services should be restructured to more closely align

the payment amounts with the cost of providing cancer care. Payments for drugs

should be reduced while payments for the related services should be increased. It

is imperative that this be done carefully, however, to insure that delivery of treatment to Medicare beneficiaries is not disrupted.

NEED TO PRESERVE OUTPATIENT CHEMOTHERAPY

I am Head of the Division of Solid Tumor Oncology at Memorial Sloan-Kettering

Cancer Center in New York. As a specialist in the treatment of breast cancer, I am

very familiar with chemotherapy and its importance in cancer treatment. Any reform of the Medicare payment system for chemotherapy must insure that cancer patients can continue to receive what they need to fight their disease. Chemotherapy

is central to modern cancer treatment and is likely to be even more important in

the coming years. Chemotherapy treatment was once considered far worse than the

disease, requiring extensive hospital stays. Now, with better drugs to control side

effects, patients can receive treatments in outpatient settings most convenient for

them—and for their families. This is usually in physician offices.

In restructuring the Medicare payment system for chemotherapy, the net result

must be aggregate payment amounts that enable physicians to continue offering office-based chemotherapy. It has been estimated that 70% or more of chemotherapy

treatments are furnished in physician offices. If Medicare payments are not adequate to cover the costs of this service, physicians will be forced to have chemotherapy delivered in some other setting. It is far from clear, however, whether hospital outpatient departments have the capacity or the resources to handle a large

inflow of chemotherapy patients. Any significant reduction in office-based chemotherapy could therefore result in a massive disruption in the care of Medicare patients with cancer.

PAYMENTS FOR DRUG-RELATED SERVICES

As I stated above, ASCO supports a reduction in the Medicare payments for

drugs. Before discussing that aspect, however, I want to speak first about the simultaneous change that must be made to insure that Medicare cancer patients will still

be able to obtain chemotherapy treatment after the drug payments have been reduced. Under the current reimbursement system, the payments for drugs compensate for the underpayment or lack of payment for the related services, and all

parts of the system must therefore be reformed at the same time.

In the 1970s, there were few drug treatments available for cancer and, as I mentioned earlier, those that were available were generally administered to hospital inpatients. The few types of chemotherapy that were first furnished in the office setting were relatively simple, but they established the basis for the low Medicare payment levels for chemotherapy administration services that continue to exist today.

There has been no major revision, even though the complexity of chemotherapy furnished in the outpatient setting has increased enormously. This problem was noted

by Congress as early as 1987, when the Omnibus Budget and Reconciliation Act required the Department of Health and Human Services to conduct a study of the

costs of furnishing chemotherapy in the office and assess whether payments are

adequate. Unfortunately, this study was never conducted.

Last year, however, the Health Care Financing Administration, now the Centers

for Medicare & Medicaid Services (CMS), reviewed the matter and wrote Congress

that ‘‘Medicare payments for services related to the provision of chemotherapy

drugs... are inadequate.’’

The inadequacy of the Medicare payment amounts is illustrated by the costs of

one of the principal services. Under the physician fee schedule, the current Medicare

payment level for the first hour of a chemotherapy infusion (CPT 96410) averages

about $62. The cost of the supplies and equipment used in this procedure are estimated to be about $29, based on the 1994-95 prices used by CMS for these estiVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00108 Fmt 6633 Sfmt 6621 E:\HEARINGS\75756 pfrm09 PsN: 75756
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mates. The salary and benefits of the oncology certified nurses who furnish chemotherapy are currently estimated by CMS to average about $35 an hour, and the

total nurse time involved in furnishing an hour of infusion is estimated at about

two hours. Among other elements, this work includes reviewing the patient’s medical history, verifying the drug orders, preparing the drug, educating the patient, assembling the necessary supplies, administering the drug, documenting the procedure, and follow-up phone calls.

Thus, the costs of the supplies, equipment, and nurse time for an infusion by

themselves significantly exceed the Medicare payment amount. Moreover, there is

nothing in the Medicare payment to cover the other costs of the office, including the

administrative staff and the overhead, which CMS, using American Medical Association data, estimates to be about two-thirds of a physician’s costs. The Medicare

payment amount for chemotherapy services are far less than the costs incurred to

furnish the services. ASCO estimates that Medicare pays less than one-fourth of the

total costs of the principal chemotherapy procedures.

ASCO believes that this underpayment results at least in part because of the way

in which the methodology for the Medicare physician fee schedule sets payment

amounts for services that may represent significant expense to a practice but are

not directly furnished by the physician. Chemotherapy is one example. At the time

CMS adopted this methodology in 1998, it characterized its approach as ‘‘interim’’

but the methodology has not yet been revised.

ASCO believes that the payment amounts for services of this kind—those that do

not have a physician work component—should be based on information about the

costs of providing those services, and not on the current ‘‘top-down’’ methodology

that is used in general to set payment amounts. Although it would be desirable to

collect new cost data, any restructuring in the near future must depend on information that currently exists or can be promptly developed. Consequently, ASCO recommends use of the data on costs that was initially developed by the Clinical Practice Expert Panels and has subsequently undergone review in the American Medical

Association refinement process and analysis by CMS. Medicare should pay the full

direct and indirect costs of chemotherapy services as estimated in that process.

There should also be a new type of Medicare payment for services that are related

to chemotherapy but are not part of the chemotherapy procedure itself. Oncologists

and their professional staffs typically furnish a variety of services to cancer patients

for which there is no explicit reimbursement. These services include the extensive

support that seriously ill cancer patients frequently require, including social worker

services, psychosocial services, and nutrition counseling. Social worker services encompass a variety of services intended to help patients carry out their therapy, such

as help with insurance, arranging transportation to treatment, and filling prescriptions. Psychosocial support includes services such as counseling patients on their activities of daily living, support groups that meet in the physician’s office, and grief

counseling. In addition, physicians treating cancer patients perform an extraordinarily high amount of work outside the patient’s presence, including family counseling, telephone calls, arranging for entry into clinical trials, and so forth. While

other types of physician specialists may provide such services to occasional patients,

oncologists and their staffs typically provide these services to the bulk of their entire

patient load. If the Medicare payments for the drugs and drug administration are

aligned closely with their costs, there will not be sufficient funds available to continue these services, which are so important to the seriously ill cancer patient population. Medicare patients need to continue to receive these services to deal with

their disease, and the services should not be cut off to save money.

PAYMENTS FOR DRUGS

Finally, let me turn to the Medicare payments for the drugs themselves. The current Medicare payment amount for covered drugs is based on 95% of published average wholesale price (AWP). As is widely known, published AWP overstates, by a

varying amount, the prices at which drugs can actually be purchased. This circumstance does not necessarily make AWP useless, however, and AWP is widely

used by public and private insurance programs in their reimbursement methods for

drugs that are dispensed by pharmacies or administered in physician offices.

In recent years, the difference between AWP and actual prices for some drugs has

become very large. This situation typically occurs for multiple-source drugs or drugs

with close competitors, where competition forces down the actual price even though

the list price, on which AWP is based, remains high. The large discrepancy between

price and reimbursement amount for some drugs is not an appropriate situation.

As part of restructuring the Medicare payment system, ASCO recommends one

of two approaches to revising the payments for drugs. First, Medicare could deterVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00109 Fmt 6633 Sfmt 6621 E:\HEARINGS\75756 pfrm09 PsN: 75756
106

mine the market prices of each drug. Instead of using AWP, the law could require

drug wholesalers to report to a Medicare contractor the prices at which they sold

each Medicare-covered drug, considering all discounts, and the quantity sold at that

price. The contractor could then compile those reports into a picture of the range

of market prices for each drug and set a Medicare payment level accordingly.

If this market approach is adopted, ASCO believes that a number of features

should be included to insure that the survey results in an appropriate payment

level:

• The price reports should be frequent so that they reflect changing market conditions. ASCO recommends that the wholesalers submit reports every month and

that the contractor process the data promptly so that it can be used for reimbursement purposes in the second following month. For example, prices of drugs

sold in January would be used to set the payment amounts for March.

• Since there will be a variation in the prices, the Medicare payment level for each

drug should be set at an amount that will cover the prices actually paid by the

vast majority of physicians. ASCO recommends the 95th percentile. Prices actually paid may vary greatly because physicians in larger groups are able to negotiate lower prices based on their volume purchases. It would be extremely unfair to pay based on the median price or some similar price because that would

systematically discriminate against physicians who are unable to negotiate

lower prices. Oncologists who are routinely reimbursed less than what they pay

for a drug would be unable to continue furnishing drugs to their patients.

• The payment methodology should be flexible enough to take known manufacturer

price increases into account immediately. For example, if data on wholesale

prices is collected during January for use in March, but the manufacturer raises

the price of a drug by 5% on February 1, that should be taken into account in

setting the March payment amounts.

• There should be an add-on amount to reflect certain costs associated with use of

the drug. These include costs such as spillage, wastage, the opportunity cost of

the capital tied up in drug inventory, procurement and storage costs, and unpaid patient coinsurance (bad debt). Although Medicare Part B does not ordinarily cover bad debt, bad debt here represents an out-of-pocket loss to the physician and should be treated specially. The various components of these extra

costs are difficult to estimate, so ASCO recommends a flat 10% add-on to cover

them.

• Sometimes physicians will encounter especially high prices for drugs, such as if

they have to purchase a drug from a pharmacy in an emergency. The system

should always allow a physician to be reimbursed for the actual acquisition cost

by submitting documentation as to the purchase price.

• In states that impose a sales or gross receipts tax on physician-administered

drugs, Medicare should also cover that amount so as to keep the physician financially whole.

An alternative approach to using a survey of market prices would be to make the

published prices used by Medicare more accurate. The main concern expressed

about the published prices has been the particularly large differences between the

published prices and actual prices for some drugs. The law could be changed to require manufacturers to submit accurate prices to the publishers. This approach

would have the advantage of not requiring a government contractor to compile data.

ASCO could support either of these approaches and we would be happy to work

with Congress to develop the details of an appropriate methodology. Our concern is

only that the resulting Medicare payment must be adequate to cover the full costs

incurred by oncologists. Oncologists pay varying amounts for drugs, with large practices and entities able to obtain volume discounts not available to everyone. The

methodology adopted must be adequate to insure that all oncology practices, regardless of size, obtain full reimbursement of all their drug-related costs.

HOSPITAL OUTPATIENT DEPARTMENTS

The Medicare statute ties payments under the hospital outpatient prospective

payment system to AWP by paying for drugs used in cancer therapy based on 95%

of AWP for a two to three year transitional period. As the payment methodology for

drugs furnished in physician offices is revised, it is important that possible effects

on payments for services in hospital outpatient departments be kept in mind. Hospital outpatient departments are an essential part of the delivery system for cancer

care, and Medicare payments must be adequate to support their continued operation.

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CONCLUSION

In summary, ASCO supports restructuring Medicare payments for chemotherapy

related services by reducing the payments for drugs and appropriately increasing

the payments for related services. It is essential that the cumulative payments after

this restructuring fully cover the costs of the items and services that oncologists furnish to cancer patients. If their costs are not covered, oncologists will be unable to

continue furnishing chemotherapy in their offices, and the result could be extreme

disruption of the cancer care delivery system.

Oncologists have dedicated their professional lives to treating patients with cancer, and our only objective here is to insure that our patients can continue to receive

the therapy and services that they need in the setting that is most convenient and

accessible. We believe that Medicare payments can be restructured without adverse

consequences if our recommendations are adopted, and we look forward to continued

work with the Congress toward that end.

Mr. GREENWOOD. Thank you very much, Dr. Norton. We appreciate your testimony. And now, Mr. Martyn, you are recognized for

5 minutes.

TESTIMONY OF KEVIN MARTYN

Mr. MARTYN. Thank you, Mr. Chairman and members of the

committee, for allowing me the opportunity to testify today. This

hearing addresses a subject that has a potential to impact directly

the quality of care that our patients receive, and I would ask that

the prepared testimony that I have submitted be included for the

record.

I am the Executive Director of Care for Life, which is a pharmacy and home health care provider. We provide blood clotting factor products and related services and support the persons diagnosed with hemophilia who self-infuse at home. The ability of our

patients to treat their conditions by self-infusing at home instead

of being treated in a hospital emergency room or treatment center

allows individuals suffering from this condition to lead more normal, healthy and productive lives. We believe that home infusion

also saves the government money.

Mr. Chairman, as a health care provider who has served the hemophilia community for many years, I very much appreciate this

committee’s concerns over the high cost of medications and providing care. I am aware that there has been considerable criticism

for paying providers based on the average wholesale price, and I

would agree that the AWP may not be the right mechanism for all

parts of the Medicare program.

Having said that, Care for Life experienced firsthand last year

what happened when AWP was reduced without adequate consideration for the impact on patient care. When AWP was suddenly

lowered for blood clotting products, my company faced the difficult

task of telling some patients that we could no longer provide care.

We delayed this decision in every case for several months while operating at a loss, but as a business we cannot do that for long. Fortunately, in all but a handful of cases the State Medicaid directors

decided to switch back to the previous accepted AWP levels or

made modifications to their reimbursement level accordingly, and

we were able to continue to provide care.

At least with respect to disease that we treat, the current payment mechanism has resulted in good care at a fair price. I would

like to describe briefly how we arrived at this system, the system

that at least for hemophilia works quite well.

108

Mr. Chairman, many years ago the primary way for hemophiliacs

to receive care was to go to a hospital emergency room. There the

doctor would examine them and continue to infuse and to notify

the patient that they were having a bleeding episode, and of course

in this diseased state many patients are aware previous to that of

that situation. They would then be admitted, given an IV, or infusion, and then released.

Eventually policymakers, the health care industry, and the hemophilia community realized it would be just as effective medically

to encourage a shift to self-infusion at home and that doing so

would in many cases be better for patients. Home infusion is better

because patients begin to infuse sooner, which stops the bleeding

faster, thereby decreasing likelihood of greater damage. In addition, Medicare and Medicaid pay dramatically less than if a patient

had to go to the hospital for treatment.

The idea worked and today Medicare and Medicaid enjoy very

significant cost savings from home infusion. For example, according

to a study published in the Journal of Care Management in June

1998, treating a minor bleeding incident at home cost $4,400 less

than treating the same incident at the hospital. If only one-third

of the hemophilia population experiences 10 minor bleeds for which

they are needlessly required to visit the emergency room for treatment, the additional cost would be upward of $44,000 per person

for minor incidents per annum. Multiplying that by 8,000, roughly

one-third of the hemophilia population, that total cost of government could be as high as an additional $352 million annually. For

severe hemophiliacs the additional cost of emergency room treatment would be much higher, more than $100,000 per year. These

additional costs do not include those costs associated with treating

the increased physical injuries hemophiliacs suffer from the delay

involved in having to make a trip to the emergency room.

In addition to the health benefits, self-infusion at home reduces

administrative cost. For the service we provide the Federal Medicare program only makes one payment under Part B. With the reimbursement based on AWP, Care for Life performs all the services

associated with providing the clotting factor. These services include

having pharmacists on staff to dispense and track drug interactions, nurses, administrative personnel, shipping, storage, training, supplies, and the cost of advancing the money used for purchasing the clotting factor. Care for Life, like many of the providers

upon which Medicare relies, is a for-profit enterprise. Just like any

other business we must make a reasonable profit margin or investors will put their money elsewhere. After taxes we make roughly

7 percent, which I believe is a reasonable return.

If the reimbursement mechanism were changed so that the reimbursement was substantially decreased, providers like Care for Life

would be forced to send patients back to the hospital. That in turn

would ultimately lead to increased costs to the Medicare and Medicaid programs and the decrease in quality of care received by individuals with hemophilia. It is an outcome that I am confident this

committee will work to avoid.

Again, I thank you for holding this hearing and for giving me the

opportunity to testify. I share in your concerns, and I applaud your

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efforts to develop a reasonable approach to Medicare reimbursement, and I will welcome any questions you might have.

[The prepared statement of Kevin Martyn follows:]

PREPARED STATEMENT OF KEVIN MARTYN, PRESIDENT, CARE FOR LIFE

Chairman Bilirakis, Chairman Greenwood, Members of the Committee, good

morning. My name is Kevin Martyn. I would like to thank you for the opportunity

to testify today. This hearing addresses a subject that has the potential to impact

directly the quality of care that our patients receive. I would ask that the prepared

testimony that I have submitted be included in the record.

I am the President of Care For Life. Care For Life is a pharmacy and home health

care provider. We provide blood clotting factor products and all related services and

support to persons with hemophilia who self-infuse at home. The ability of patients

to treat their condition by self-infusing at home—instead of being treated in a hospital emergency room or treatment center—allows individuals suffering from this

condition to lead more normal, healthy, and productive lives. Home infusion also

saves the government money.

Mr. Chairman, as a health care provider who has served the hemophilia community for many years, I very much appreciate this Committee’s concerns over the high

cost of providing care. I am aware that there has been considerable criticism of paying providers based on the average wholesale price, or AWP, and I would agree that

AWP may not be the right mechanism for all parts of the Medicare program. Having

said that, Care For Life experienced first hand last year what happened when AWP

was reduced without adequate consideration for the impact on patient care. When

AWP was suddenly lowered for blood clotting products, my company faced the difficult task of telling some patients that we could no longer provide care. We delayed

this decision in every case by several months by operating at a loss. But as a business we could not do that for long. Fortunately, in all but a handful of cases the

state Medicaid directors decided to switch back to the old AWP levels, and we were

able to continue to provide care. At least with respect to the disease that we treat,

the current payment mechanism has resulted in good care at a fair price. I would

like to describe very briefly how we arrived at this system—a system that, at least

for hemophilia, works quite well.

Mr. Chairman, many years ago the primary way that hemophiliacs received care

when they were having a bleeding episode was to go to a hospital emergency room.

There, a doctor would examine them and tell them what they already knew: they

were having a bleeding episode and needed an infusion of clotting factor to stop the

bleed. The patient would be admitted, hooked up to an IV, given an infusion, then

released. Eventually, policymakers, the health care industry, and the hemophilia

community realized that it would be just as effective medically to encourage a shift

to self-infusion at home, and that doing so would in many cases be better for patients. Home infusion is better because patients begin to infuse sooner, which stops

the bleeding faster, thereby decreasing the likelihood of greater damage. In addition,

Medicare and Medicaid pay dramatically less than if the patient had to go to the

hospital for treatment.

The idea worked, and today Medicare and Medicaid enjoy very significant costsavings from home infusion. For example, according to a study published in the

Journal of Care Management in June of 1998, the cost to the government of treating

a minor bleeding episode in an adult male who self-infuses at home is $1,186.

Alternatively, if that patient had to make an emergency room visit to get treatment—for the same minor bleeding episode—the cost to the government would be

$5,620. That is a difference of more than $4,400 per incident, again, based on a

minor bleeding episode.

Light to moderate hemophiliacs may bleed around 12 times per year. Those with

severe hemophilia may experience a bleed 52 times per year. The Centers for Disease Control and the national organizations representing the hemophilia community

estimate there are 17,000 to 30,000 hemophiliacs in the U.S. The reported numbers

vary because not all hemophiliacs seek treatment at treatment centers that report

to the CDC.

Accordingly, if only one third (approximately 8,000) of the hemophilia population

experiences 10 minor bleeds for which they are needlessly required to visit the

emergency room for treatment, the additional cost to the government would be

$44,000 per person for minor incidents in that year. The total additional cost to the

government would be $352,000,000 annually.

For severe hemophiliacs, the additional cost of emergency room treatment would

be much higher, easily more than $100,000 annually per patient. These additional

110

costs do not begin to address the increased physical injury hemophiliacs suffer from

the delay involved in having to make a trip to the emergency room to get treatment

or the additional costs involved in treating those increased injuries suffered as a result of the delay in receiving infusion treatments.

In addition to the health benefits, self-infusion at home reduces administrative

costs. With respect to providing clotting factors to hemophiliacs, the federal Medicare program only makes one payment under Medicare Part B. Under the statutory

formula, the actual payment from Medicare equals 76% of the AWP for the clotting

factor used. We get 76% of AWP because the law directs Medicare to pay 80% of

the allowable cost, which is statutorily set at 95% of AWP. The provider must collect

the other 20% of the 95% allowable cost—the co-pay—from either the patient, private insurance, or the state Medicaid program. In the case of Care For Life, roughly

90% of the time we are successful in collecting some portion of that 20% co-payment.

With the reimbursement based on AWP, Care For Life performs all of the services

associated with providing the clotting factor. These services include having pharmacists on staff to dispense and track drug interactions, nurses, administrative personnel, shipping, storage, training, supplies, and the cost of advancing the money

used to purchase the clotting factor, to name a few.

Care For Life, like many of the providers upon which the Medicare system relies,

is a for-profit enterprise. Just like any other business, we must make a reasonable

profit margin, or our investors will put their money elsewhere. After taxes, we are

making roughly 7%, which I believe is a reasonable return. It is much less than the

margins earned by some of the country’s telecommunications companies, car companies, and entertainment companies, but enough so that it makes sense to be in this

line of business.

If the reimbursement mechanism were changed so that reimbursement was materially decreased, providers like Care For Life would be forced to send patients back

to the hospital. That in turn would ultimately lead to increased cost to the Medicare

and Medicaid programs, and a decrease in the quality of care received by individuals with hemophilia. That is an outcome that I am confident that this Committee

will work to avoid.

Again, I thank you for holding this hearing and for giving me an opportunity to

testify. I share your concerns and I applaud your efforts to develop a reasoned approach to Medicare reimbursement. I welcome any questions that you may have.

Mr. GREENWOOD. Thank you, Mr. Martyn. Mr. Connaughton for

5 minutes.

TESTIMONY OF THOMAS A. CONNAUGHTON

Mr. CONNAUGHTON. Mr. Chairman, I am President of the American Association for Homecare. Our association includes the full

spectrum of the home care industry, including providers of inhalation and infusion therapies in the home setting. Drugs provided in

these therapies have been relevant to this hearing.

I am accompanied by Dr. JoAnn Lamphere of the Lewin Group.

At our request Lewin conducted a survey of companies offering inhalation and infusion therapies across the country to determine the

costs of providing those therapies in the home. Dr. Lamphere will

report on Lewin’s analysis of this survey and after making a few

general statements I will defer to her.

I want to highlight that the pharmaceutical products used in inhalation and infusion therapies are not simply oral medications. In

the case of respiratory medications these drugs must be utilized in

conjunction with nebulizers. Infusion drug therapy involves primarily the administration of the drug into the body through a needle or catheter. These therapies cannot typically be administered

without a complex array of services.

There are some fundamental principles that are important to understand regarding home care and Medicare reimbursement for

prescription drugs.

111

First, our members provide these products in the home, which is

significantly more cost effective than providing them in an institution.

Second, the work of the home care provider begins with a prescription. The provider must furnish the drug prescribed by the

physician and is not engaged in the selection of a particular product.

Third, administering pharmaceuticals in the home setting involves a number of functions and services performed by the home

care provider. These services include the preparation of patient

specific sterile drugs, comprehensive training of patients and often

their families, and clinical monitoring to prevent infections and

other potentially life-threatening complications. Trained professionals are on call on a 24-hour basis. In most cases providing

these services is more costly than the drug itself, as the Lewin report will underscore.

Fourth, unlike managed care, which pays for a product plus services, the sole reimbursement under Medicare Part B for these products is for the drug itself. The difference between the reimbursement rate and the cost of the drug must cover all the services. Outside of a small dispensing fee for respiratory drugs, there is no fee

schedule for our services, unlike the physicians schedule.

Fifth, Medicare coverage for infusion therapies is very limited,

and Medicare is losing the advantage of efficiencies provided in the

home setting that the private sector is taking advantage of.

Sixth, we have not been able to make a recommendation for replacement of the AWP system, and I am somewhat comforted that

there has been a lot of questions from everyone who has come up

here. It is very complex and there are so many variables. That is

why we advise you to proceed with care. If, however, Congress revises the reimbursement system for Medicare Part B drugs, it

should make certain that it provides for reimbursement of all the

services and functions involved in providing these therapies in the

home setting based on standards that are widely used in private

sector. It should further expand the coverage of infusion therapies

for Medicare beneficiaries.

H.R. 2750, introduced by Mr. Engel and others earlier this year,

addresses these issues in the context of infusion therapy. We believe this approach is equally appropriate for inhalation therapies.

Dr. Lamphere?

[The pepared statement of Thomas A. Connaughton follows:]

PREPARED STATEMENT OF THOMAS A. CONNAUGHTON ON BEHALF OF THE AMERICAN

ASSOCIATION FOR HOMECARE

Mr. Chairman, my name is Tom Connaughton. I am President of the American

Association for Homecare (‘‘AAHomecare’’). Our Association was formed by the

merger of three national associations on February 1, 2000. We are the only national

association that represents every line of service within the homecare community.

Our members include providers and suppliers of home health services, durable medical equipment (DME) services and supplies, infusion and respiratory care services,

and rehabilitative and assistive technologies, as well as manufacturers and state associations.

We thank you for the opportunity to discuss the Medicare reimbursement system

for pharmaceuticals administered to beneficiaries by homecare providers and suppliers, in particular, home infusion therapies and inhalation therapies administered

to respiratory patients. Homecare providers and suppliers save Medicare money by

treating patients in the most cost-effective setting—their homes. The savings genVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00115 Fmt 6633 Sfmt 6621 E:\HEARINGS\75756 pfrm09 PsN: 75756
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1See National Institutes of Health, Global Initiative For Chronic Obstructive Pulmonary Disease, April 2001; Agency for Health Care Quality Research Evidence Based Practice Guidelines,

Management of Acute Exacerbations of Chronic Obstructive Pulmonary Disease.

erated by treating patients at home can be dramatically cost-effective when compared to the cost of the same therapy administered in an institutional setting.

Joining me is JoAnn Lamphere (Dr.P.H.) of The Lewin Group. At the request of

our association, The Lewin Group conducted a survey of providers and suppliers of

inhalation and infusion therapies in order to determine the costs associated with

these therapies. The Lewin Group has prepared a report analyzing the results of

this survey. To our knowledge, it is the most definitive report on the subject to date.

Dr. Lamphere will summarize the findings of that report and, of course, a complete

copy is attached for your information.

I want to begin by making an important distinction between infusion and inhalation therapies administered to patients in their homes and conventional outpatient

drugs such as pills and ‘‘patches.’’ The key difference is that pills and patches do

not require professional services to administer. An individual can consume a pill or

apply a patch himself after obtaining it from a retail or ‘‘traditional’’ pharmacy. In

contrast, infusion and inhalation therapies cannot be administered to patients at

home without a complex array of professional services. These medications are provided only on the prescription of a physician and as required by regulatory, accrediting and pharmacy licensing bodies, are prepared in high-tech, sterile settings similar to those found in a hospital. These services ensure the safe and effective administration of infusion and inhalation therapy in the home.

As we begin this discussion, it is also important to note that homecare providers

and suppliers are not paid separately for these important services. Medicare does

not have a separate benefit for these homecare therapies. Infusion and respiratory

medications furnished to homecare patients are covered under the Medicare DME

benefit. This means that the only items that are explicitly covered and reimbursed

are the drugs, the equipment, and the supplies. Unlike other health care professionals, homecare providers and suppliers do not have a mechanism that reimburses

the services necessary to administer the drugs in addition to the reimbursement for

the drugs. By comparison, the private managed care sector has recognized the tremendous cost-savings associated with homecare and it continues to provide coverage

for a growing list of home infusion and inhalation therapies. Moreover, such organizations contract with providers for extended periods of time, guarantee tremendous

volume, and structure their contracts with both a fee for the drug and a per diem

to assist in covering the providers’ costs of services.

INHALATION THERAPY

Inhalation therapy is administered to patients with respiratory disease, including,

for example, chronic obstructive pulmonary disease (COPD). COPD is the fourth

leading cause of death in the United States, affecting 16 million people.1 COPD includes a number of chronic respiratory diseases such as emphysema, chronic bronchitis, and asthma. Individuals with COPD have a progressive illness. The disease

can be stabilized, but it cannot be cured. Inhalation therapy is used to manage

COPD throughout the course of the disease, but in the more advanced stages of

COPD, other therapeutic interventions may be required.

Specifically, inhalation therapy is the process through which a drug or a combination of drugs is delivered into the airways and inhaled directly into the lungs via

a device called a nebulizer. These drugs may include beta-adrenergic bronchodilators, anticholinergic bronchodilators, mast cell stabilizers, anti-inflammatory

steroids, antibiotics, and sputum liquefiers. Patients receiving inhalation therapy at

home are monitored by respiratory therapists and highly trained pharmacists. Inhalation therapies reduce acute exacerbations of COPD, saving the Medicare program

money in emergency room visits and inpatient stays.

INFUSION DRUG THERAPY

Private sector insurance plans and private managed care plans increasingly have

embraced home infusion drug therapy since the 1980’s. Antibiotic therapy, chemotherapy, and pain management are among the spectrum of infusion therapies that

are now commonly provided to patients in their homes. Currently, there are over

twenty different drug therapies being offered in the home and other outpatient settings in the private sector. The private sector plans and payers typically recognize

expressly and separately the professional services necessary to provide infusion drug

therapy in a safe and effective manner in the home setting.

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Infusion drug therapy involves primarily the administration of the drug into the

body through a needle or a catheter. Typically, infusion drug therapy means that

a drug is administered intravenously, but it may also apply to situations where

drugs are provided through other parenteral (non-oral) routes. Generally, infusion

drug therapies are used only when less invasive means of drug administration are

clinically unacceptable or less effective. A team of patient service representatives,

clinical pharmacists, high tech infusion nurses, and delivery and reimbursement

professionals support patients and their caregivers throughout their treatment.

These services are inextricably linked to the therapies and are often mandated by

accrediting bodies whose standards ensure quality delivered in an alternate site setting.

Providing infusion therapies at home has several advantages over hospital-based

therapy. Most patients prefer to receive such therapies at home rather than in the

hospital or in a skilled nursing facility. Homecare therapy allows many patients to

lead normal lives throughout the duration of the therapy; it enables terminally ill

patients to spend valuable time with their families and loved ones. Also, the ability

to administer these therapies in the home reduces the risk of hospital-acquired infections that are sometimes associated with prolonged in-patient stays. In most

cases, the cost of infusion drug therapy when properly provided in the home is far

less than the cost of such care in the hospital.

MEDICARE COVERAGE OF HOME RESPIRATORY AND INFUSION INHALATION THERAPIES

It is important to note that Medicare covers very few of the infusion drug therapies when provided at home. Further, as I stated above, Medicare does not have a

separate inhalation therapy benefit or a home infusion therapy benefit. Medicare

coverage for these therapies in the home is found only under the DME benefit—but

only when equipment such as a nebulizer or an infusion pump is necessary. The fact

that coverage for these therapies is limited to the DME benefit is a very important

point in understanding the homecare community’s issues with drug reimbursement,

because the DME benefit explicitly covers only the drugs, supplies, and equipment.

There is no recognition of the professional services and other functions that are

widely recognized as necessary to providing inhalation and infusion drug therapies

in the home in a safe and effective manner.

The Medicare program’s lack of recognition of these professional services is illogical, potentially threatening to beneficiaries, and contrary both to how clinicians define and the private sector plans cover these therapies. The clinical value and necessity of the provision of professional services to deliver inhalation and infusion therapies is reflected in various accreditation standards commonly used by private sector

payers, such as the standards established by the Joint Commission on Accreditation

of Healthcare Organizations (JCAHO). Indeed, private payers pay for these services

as a specific component of the benefit. The Lewin Group’s analysis provides a good

picture of the costs involved in providing such services.

These therapies require specialized pharmacy services. Such services include the

compounding of many of the drugs in a sterile setting, responding to emergencies

and questions regarding therapy, and participating in the training and education of

the patient (and often the patient’s family). These therapies also require the services

of a nurse or respiratory therapist to perform a variety of functions, including patient screening and assessment, patient training regarding administration of the

pharmaceuticals, and general monitoring of the patient’s health status. In the case

of infusion therapy, these services also include care for the infusion site, and monitoring of the catheter exit site for signs of infection or other complications. In addition, the drug, supplies, and equipment are delivered to the patient’s home often

within four hours of the prescription. Patient satisfaction and other outcomes are

measured and reported to accrediting organizations as part of quality improvement

programs. Finally, staff, including licensed pharmacists, pharmacy technicians, respiratory therapists, and registered nurses, are on call 24 hours a day.

It is important to underscore that none of the specialized pharmacy services is

covered under any other Medicare benefit. In a minority of cases, Medicare home

infusion patients may meet the ‘‘homebound’’ requirement and qualify for the home

health benefit. In such instances, the nursing services described above would be covered under that benefit. For all other Medicare Infusion Patients, the nursing services are not covered by the home health benefit.

AVERAGE WHOLESALE PRICE AND DRUG PRICING ISSUES

Much has been said about how Medicare pays for the few outpatient drugs that

are covered currently. The use of the average wholesale price (AWP) as the principal

basis for determining reimbursement for drugs has received much criticism recently

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as being an inaccurate reflector of the physicians’ and pharmacists’ costs for these

drugs. There is little question that these criticisms are correct—if the payment

‘‘buys’’ drugs only. In actual fact, the drug payment calculated on the basis of AWP

has been used for far more than that. With regard to inhalation and infusion therapy in the home setting, the drug payment is the only available payment mechanism for needed functions that are essential to providing good quality care. In other

words, the spread between the providers and suppliers’ acquisition cost and the

Medicare reimbursement under Medicare Part B must cover all functions and services. The acquisition cost of the drug is only a fraction of the overall cost of caring

for these patients at home.

The conclusions of the Lewin report, which Dr. Lamphere will explain in more detail, reinforce the point that the cost of the drugs represents only one small portion

of the overall cost of caring for these patients in need of inhalation or infusion therapy. Indeed, the cost of goods represents 26% of total costs while direct patient care

costs average 46% and indirect costs such as accreditation, information systems, and

Medicare/Medicaid regulatory compliance amount to another 25%.

In the case of infusion therapies delivered to Medicare beneficiaries, providers,

and suppliers, costs exceed the revenues received under Medicare. For respiratory

medications, providers and suppliers report an average margin of 9.2% after taxes,

which is considerably less than the average after tax margin of 14.4% reported by

companies on the S&P index for the same time period in 2000.

It is important to note that homecare providers are not engaged in the selection

of a particular drug. Physicians prescribe exactly which drugs should be used. The

services furnished by homecare providers and suppliers are triggered by the physician’s prescription. Their jobs begin when they receive the physician’s order.

Policymakers simply cannot look at drug payment as an isolated issue, separate

from the other workings of a particular therapy. Reducing drug payments dramatically, without corresponding changes in other aspects of the payment methodologies,

would truly strain the ability of suppliers and providers to continue to provide these

drug therapies to Medicare beneficiaries. Indeed, homecare providers and suppliers

are in a far more tenuous position regarding drug reimbursement than are other

providers because they receive no payment whatsoever for the important functions

and services. Reimbursement for drug therapies delivered in the home is tied solely

to the drug supplies and equipment. There is no fee schedule for services. These

necessary professional services must be recognized, and they should be reimbursed.

While we have analyzed the AWP system and possible alternatives, we have not

been able to develop a recommendation for the Subcommittees for a system that accurately determines the cost of products to providers and suppliers. These costs vary

so widely among providers and suppliers that it is difficult to conceive of a system

that accurately accounts for all of these variables. Accordingly, we urge Congress

to proceed with caution. However, if Congress contemplates changing the reimbursement system under Part B for drugs administered in the home, it is critical that

it recognizes the services involved and provide a framework for reimbursing them.

It is not an option, in our opinion, to limit payment and coverage strictly to what

is covered under the DME benefit. If Medicare beneficiaries receive only what the

DME benefit currently recognizes—the drug, supplies, and equipment (pump or

nebulizer)—then the level of care for the Medicare beneficiaries will be far less than

that commonly provided in the private sector. Indeed, there are questions whether

there will be access for Medicare beneficiaries at all. That result would be neither

fair nor clinically appropriate. Medicare beneficiaries often are less able to deal with

the complexities of these technical homecare therapies than are people who are decades younger.

RECOMMENDATIONS

We believe that it is important to establish accurate definitions of home respiratory and infusion therapy, create quality standards based on those currently

and widely used in the private sector, and establish a fee schedule that reflects all

the covered components of the therapies. H.R. 2750, introduced earlier this year by

Congressman Engel of New York, Congressman Rush of Illinois, Congressman

Towns of New York, and Congresswoman Hart of Pennsylvania, would do exactly

that for Medicare coverage of home infusion therapy. This bill would remove coverage of home infusion therapy from the DME benefit and establish a new benefit

that accurately reflects how these therapies are and should be provided. If enacted,

this bill will bring the Medicare program in-line with the private sector as to how

these therapies are covered and defined. We believe this approach is equally appropriate for inhalation therapies provided in the home if Congress revises the reimbursement system for Medicare Part B and drugs.

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Mr. Chairman, AAHomecare thanks you for the opportunity to present views on

behalf of our member companies. Please do not hesitate to call upon us for additional information.

TESTIMONY OF JoANN LAMPHERE

Ms. LAMPHERE. Mr. Chairman, my name is JoAnn Lamphere.

Thank you for the opportunity to present key findings of the Lewin

Group’s study. The significance of this study is that it supplies the

most current and extensive estimates of the cost of respiratory and

infusion therapies and the cost of the services that accompany

quality patient care to Medicare beneficiaries in the home.

This past summer the Lewin Group surveyed 19 home pharmacy

companies that served Medicare patients in all 50 States. A description of the study’s analytic approach is in our report. Key findings of the study include pharmacy, nursing coordination, patient

education, and other direct costs account for 46 percent of the total

costs incurred by pharmacies providing respiratory and infusion

therapies to Medicare patients. Medicare does not currently recognize these costs. The acquisition cost of the drug itself accounts for

26 percent. Indirect costs and bad debt account for another 28 percent. The distribution of direct patient costs varies by type of therapy. For respiratory therapy service costs equal 46 percent. For

home infusion service costs range from 40 percent for chemotherapy to 26 percent for antiinfectives. Pretax operating margins

are 20.5 percent for respiratory and negative 22.2 percent for home

infusion services. The bottom line after-tax Medicare margin is 9.1

percent, which represents the combined margin for respiratory and

infusion therapies provided to Medicare patients by home care providers after corporate income tax and interest and depreciation are

recognized.

If we are to assure that Medicare beneficiaries across the United

States have access to medically prescribed respiratory and infusion

therapies in the home, these companies must continue to be financially viable.

Mr. Chairman, thank you.

[The prepared statement of JoAnn Lamphere follows:]

PREPARED STATEMENT OF JOANN LAMPHERE, THE LEWIN GROUP

Mr. Chairman. My name is JoAnn Lamphere, Dr.P.H. I am a Senior Manager in

the Health Care Finance Practice of The Lewin Group. Thank you for the opportunity to present key findings of a study that The Lewin Group conducted for the

American Association for Homecare. The purpose of this study was to determine the

costs to providers associated with the clinical and support services offered to Medicare patients receiving respiratory and home infusion therapies in the home.

The significance of this study is that it provides the most current and extensive

estimates of the cost of respiratory and infusion medications and the cost of the associated services that accompany quality patient care. This information should be

useful to you in the months ahead as you consider the adequacy of Part B payments

for drugs and biologicals under the Medicare program.

This past summer, The Lewin Group surveyed 19 home pharmacy providers. The

sample was selected with the intent of representing homecare pharmacy companies

nationwide. As a group, the sampled providers serve Medicare patients nationwide

in all 50 states. The sampled companies range in size from less than $1 million to

greater than $1 billion in annual net revenue. Sampled companies served 164,782

respiratory and 2,400 home infusion Medicare patients in CY 2000.

A chief financial officer (or designee) or head pharmacist from each participating

company completed a mail-in survey; the information they provided was based on

company financial records. The Lewin Group validated data submitted through folVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00119 Fmt 6633 Sfmt 6621 E:\HEARINGS\75756 pfrm09 PsN: 75756
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low-up telephone interviews and available secondary data sources. The information

that respondents provided included Medicare revenues, acquisition cost of goods,

cost of pharmacy operations and other direct patient care, and other major costs

that accompany the provision of respiratory and home infusion therapies to Medicare patients in the home. (Respondents were directed to exclude any costs and revenues associated with skilled nursing services that are reimbursed through home

health agency provisions of Medicare.) Respondents were asked to proportionally allocate specified Medicare service expenses based on the volume of Medicare patients

they served.

In a study such as this, it is important to assure that findings are not biased by

a small sample size. To achieve this objective, a double weighting process was adopted. First the sample of homecare pharmacies was divided into two groups, large

companies and small companies, based on volume of their respiratory and home infusion business. Revenues and costs were then pooled at the ‘‘large’’ and ‘‘small’’

company levels and sampled companies’ respiratory and home infusion service costs

and margins were calculated from these numbers. Next, an additional set of weights

was employed in order to ensure that calculations from the sample reflect the industry’s distribution of large and small firms with respect to Medicare respiratory and

home infusion services. Thus, the Lewin estimates of Medicare product and service

costs for respiratory and home infusion therapies and Medicare operating margins

were calculated in such a way that they are broadly representative of the homecare

pharmacy industry as a whole.

What was learned from this Lewin study? Our key findings include:

• Pharmacy operations, patient care and education, and other direct costs account

for 46 percent of the total cost incurred by homecare pharmacies providing respiratory and home infusion therapies to Medicare patients. The acquisition cost

of the goods themselves account for about 26 percent of the total cost, on average.

• The distribution of costs for pharmacy operations, direct patient care, and other

services varies dramatically by type of therapy. For respiratory therapy, service

costs equal 46 percent of the total cost of providing respiratory services in the

home. For home infusion therapies, service costs range from a high of 40.2 percent for chemotherapy and 38.7 percent for pain therapy and management to

25.8 percent for anti-infectives and 26.4 for inotropic therapy.

• Indirect costs, such as management systems, regulatory compliance programs,

field administration, and bad debt make up the remaining 28 percent of home

pharmacy costs.

• We analyzed pre-tax operating margins individually for respiratory and infusion

therapies. Pre-tax operating margins are 20.5 percent for respiratory and -22.2

percent for home infusion services. Combined, pre-tax operating margin for both

services is 20.4 percent.

• The bottom line after-tax margin for sampled companies is 9.1 percent. This 9.1

percent is the estimated combined margin for respiratory and home infusion

services provided to Medicare patients by home pharmacy companies after federal and state corporate income taxes, as well as interest and depreciation, are

recognized.

Assuring quality patient care and meeting established patient quality care standards (e.g., accreditation, federal and state licensure and regulatory requirements,

etc.) is an essential component of the service homecare pharmacy providers offer to

all patients, regardless of whether Medicare reimbursement policies expressly recognize these services.

Currently, Medicare Part B reimbursement for drug products offsets the costs of

important patient services for which there is no direct Medicare payment. The financial realities of the health care marketplace that provides respiratory and infusion therapies to Medicare patients at home require a positive after-tax margin in

order to attract equity capital for future operations. Thus, if we are to assure that

Medicare beneficiaries across the United States have access to medically prescribed

respiratory and home infusion therapies in the home, these companies must continue to be financially viable.

Mr. Chairman. Thank you for the opportunity to present these findings from The

Lewin Group’s study. A copy of the full report, on which this testimony is based,

is provided for your consideration.

Mr. GREENWOOD. Thank you very much for your testimony. Dr.

Emanuel for 5 minutes.

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TESTIMONY OF EZEKIEL EMANUEL

Mr. EMANUEL. Thank you, Mr. Chairman and members of the

subcommittee, for inviting me to testify. I am Ezekiel Emanuel, an

oncologist and bioethicist, and I work at the NIH as the Chair of

the Department of Bioethics. I also am Chairman of the American

Society of Clinical Oncology’s Task Force on Quality of Cancer

Care.

Let me start by saying what I am not. All my life I have worked

in an academic setting at Dana-Farber Cancer Institute at the

NIH, and I have never once billed Medicare for any chemotherapy

I administer, so I know very little about AWP.

The primary purpose of my testimony, however, is to talk to you

about a study we conducted to look at the use of chemotherapy at

the end of life. This is an area I’ve been interested in for about 15

years. As you know, there’s widespread perception among the public that dying cancer patients receive too much chemotherapy. Conversely, my colleagues believe that dying patients and their families often demand chemotherapy and that they use chemotherapy

judicially at the end of life to enhance quality of life and prolong

life. Ironically, there is no data on this subject and it’s never been

looked at before. We looked at nearly 8,000 patients in Massachusetts who died of cancer. Let me just summarize six of our findings.

First, in the last 6 months of life about 33 percent of patients

who died of cancer received chemotherapy and almost a quarter of

patients received chemotherapy in the last 3 months of their life.

When we compared—second point, when we compared patients

who had chemotherapy responsive tumors like breast cancer, colon

cancer, ovarian cancer, with patients who had at that time chemotherapy unresponsive tumors, tumors that did not shrink with

chemotherapy like pancreatic cancer or liver cancer or gall bladder

cancer, we found no difference in the frequency with which the

chemotherapy was given. So it was given as frequently to chemotherapy responsive tumors as chemotherapy unresponsive tumors.

Third, dying patients who were younger were much more likely

to get chemotherapy than older patients regardless of cancer type.

Fourth, how long dying patients receive chemotherapy, however,

differed very much by the type of cancer patients had, so that those

patients who had chemotherapy unresponsive tumors like pancreatic cancer or liver cancer got chemotherapy for only one cycle

whereas those people who had breast cancer and colon cancer tended to get more chemotherapy.

Fifth, unlike lots of other previous studies we found that patients

who received chemotherapy at the end of life had substantially

higher Medicare costs than patients who did not receive chemotherapy, up to a third more.

Finally, let me make the point that these data are not unique to

Massachusetts. We did a small sample just to verify looking at

California patients and found very similar data, although the exact

numbers varied.

How might these data affect the hearing here? One of the important questions is why are people getting chemotherapy at the end

of life? What motivates people? There are several potential explanations. Let me highlight several.

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First, I have to admit I can’t tell you from these data exactly why

each patient got chemotherapy. We just looked at the Medicare

data and it’s very hard to draw motivations. But one potential explanation is that many cancer patients, as mentioned by Congressman Ganske, need or want chemotherapy at the end of life, especially when they get diagnosed with a terminal illness, they go to

an oncologist, they have no previous relationship and they want to

try anything. Oncologists acquiesce, give the chemotherapy, and

patients then find out they may not like it and that is why you get

a lot of patients getting only one cycle of chemotherapy.

Another potential explanation is that chemotherapy does, we

know, improve quality of life of patients. It’s very hard for those

of us who are healthy, who have never had cancer, who recognize

the side effects, the nausea, the vomiting, baldness, that this might

improve quality of life, but there are a number of studies showing

that with lung cancer, colon cancer, ovarian cancer, chemotherapy

improves pain and improves quality of life of dying patients.

A third potential explanation is that we’re just uncertain about

this, how long in fact are they going to live, and we are always cautious, so we would use chemotherapy.

A fourth potential explanation is that oncologists may give chemotherapy for a financial reimbursement, the spread between AWP

and what they get.

I want to emphasize from my data I can’t tell you which of these

explanations is right, and we need a lot more research to tell how

much these factors influence people. But one of the major concerns

by our study I think is revealed when you contrast it with other

data we have from Medicare, and I want to highlight data from colleagues of mine at Memorial Sloan-Kettering. They recently looked

at chemotherapy administered to patients with colon cancer where

we know the chemotherapy prolongs life and can cure patients, and

they revealed that only 55 percent of Medicare patients with colon

cancer actually got chemotherapy. This is chemotherapy for which

doctors would be reimbursed the same amount as in other cases,

and so we know there are cases where there is overuse and cases

where there is under use.

And this leads me to this issue: While we are focusing on costs

here, let me suggest that there is a bigger issue, and that is that

we as oncologists cannot guarantee Americans who are diagnosed

with cancer get optimal cancer care. Sometimes they may get too

much chemotherapy, sometimes too little, even when oncologists

are being reimbursed to give them chemotherapy. And I think that

what we really need to figure out is how we’re paying for quality

cancer care and that people who need the drugs get the drugs, and

that’s actually why I have been working with ASCO on a $5 million

project to try to figure out how we can get quality cancer care and

what are the barriers to getting people the right drugs at the right

time that prolongs their life and improves their quality of life.

Thank you very much for inviting me, and I will be happy to answer any of your questions.

[The prepared statement of Ezekiel Emanuel follows:]

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PREPARED STATEMENT OF EZEKIEL EMANUEL, CHIEF, CLINICAL BIOETHICS DEPART- MENT, WARREN G. MAGNUSON CLINICAL CENTER, NATIONAL INSTITUTES OF

HEALTH

There is substantial concern about end-of-life care provided to Americans. In particular, a number of commentators are concerned that dying cancer patients are frequently overtreated with chemotherapy. Critics contend that many oncologists

overtreat dying patients with chemotherapy because they are reluctant to accept

death and apprehensive about discussing end-of-life care.1,2,3 Indeed, some critics

contend that oncologists prey on their patients’ vulnerability, implying that chemotherapy is the vehicle of hope, and pressing them to try it before reconciling themselves to death.4 Oncologists respond that it is terminally ill patients who demand

treatment. More importantly, oncologists contend that they use chemotherapy prudently in patients at the end of life, when it is likely to provide symptom relief and

enhance dying patients’ quality-of-life.

How can we determine if chemotherapy is used too frequently for terminally ill

cancer patients? There are no standards for the appropriate use of chemotherapy

at the end of life based upon either randomized controlled trials or expert, consensus guidelines. While there are some data on treatment of patients with metastatic cancers,5 even basic data on how frequently cancer patients are given chemotherapy in the months before death are lacking. To explore whether chemotherapy

is used prudently and rationally at the end of life, we separately examined its use

among Massachusetts and California Medicare beneficiaries who died of cancer in

1996. Dividing patients into two groups according to whether they died of cancers

responsive or unresponsive to chemotherapy, we evaluated the use of chemotherapy,

and the expenditures in the last year of life.

METHODS

Identifying Cancer Decedents: To focus only on persons who died from can- cer—not merely with cancer—based on the primary cause of death listed in the

death certificate, we followed a 3-step process. First, in both Massachusetts and

California we studied fully entitled Medicare beneficiaries who died in 1996, were

at least 66 years old at death and were not enrolled in Medicare’s End Stage Renal

Disease program. Decedents 66 years of age were selected to ensure we obtained a

full year of Medicare expenditure data prior to death. We studied all such decedents

in Massachusetts and 5% in California. Second, we merged HCFA’s denominator

files with each state’s 1996 death certificate files. In Massachusetts, 42,452 Medicare decedents met the criteria. In merging the files we used social security number

(SSN), date of birth (DOB), date of death (DOD) and sex. A match was accepted if

either of the following conditions was met: 1) there was a perfect match on SSN and

either sex or both DOB and DOD or 2) a match on at least 7 of SSN digits and

a perfect match on sex, DOB, and DOD. Of the 42,452 decedents, there was a match

between the HCFA files and death certificates for 39,447 (92.9%). Only beneficiaries

continuously enrolled in both Parts A and B Medicare insurance and who were not

enrolled in an managed care organization over the entire last 12 months of life were

retained, yielding 34,131 Massachusetts decedents. Third, we selected the 7,919 decedents whose primary cause of death listed on the death certificate was cancer.

In California, the same general protocol was applied to a random 5% of Medicare

enrollees yielding 4,715 total decedents overall, of which 956 died of cancer.

Classifying Cancer Types: We classified breast, colon, and ovarian cancers as

chemotherapy responsive solid cancers. Multiple chemotherapeutic agents shrink

these cancers, and randomized trials have shown chemotherapy to be effective in

prolonging lives of patients at least as adjuvant therapy. We classified pancreatic,

renal cell, hepatocellular, gallbladder, cancers, and melanoma as chemotherapy unresponsive solid cancers. In 1996, these cancers were known to be ‘‘refractory to virtually all chemotherapeutic agents’’ such that the general consensus in standard

textbooks is that ‘‘there are no particularly compelling cytotoxic chemotherapeutic

agents [with which] to treat’’ them.6

We examined data for other cancers that we did not categorize as responsive or

unresponsive. For example, while prostate cancer is generally considered a chemotherapy unresponsive solid cancer, hormonal injections may appear in claims data

as chemotherapy. To avoid uncertainty, prostate cancer is reported separately. Lung

cancer also examined separately because using claims data, it is impossible to differentiate lung cancers into small cell and non-small cell (NSCLC) tumors. Furthermore, while small cell cancers are chemotherapy responsive, using chemotherapy for

metastatic non-small cell lung cancers is highly controversial.7 Data suggest that

chemotherapy for NSCLC extends life by 6 weeks and may improve quality-of-life

despite toxicities.8,9,10 Finally, hematological malignancies, encompassing both acute

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and chronic leukemias, Hodgkin’s disease, and all non-Hodgkin’s lymphomas, were

analyzed separately. Although they are chemotherapy responsive, patients may die

acutely from treatment related toxicities.

Identifying the Use of Chemotherapy: Patients who had claims in the inpatient, outpatient or physician/supplier Medicare files for chemotherapy agents,

chemotherapy administration, or the medical supervision of chemotherapy were considered to as having received chemotherapy. The codes used were: intravenous

chemotherapy agents—HCPCS codes 964XX, 965XX, J9000-9999; chemotherapy administration—IC Procedure 99.25, HCPCS codes Q0083-Q0085; medical evaluation

for chemotherapy—ICD Diagnosis V58.1, V66.2, and V67.2. It is possible that our

method of identifying chemotherapy missed patients who received oral

chemotherapeutic agents. Patients without claims using these codes were classified

as not having chemotherapy.

We examined chemotherapy use for decedents for 30-day periods from the date

of death back for 12 months.

Expenditure Data: Total expenditure is calculated as the sum of HCFA payments and payments from other sources of insurance for Medicare covered services.

The average payment per person from other insurance accounts for only 0.15% of

costs. Expenditures for each decedent are calculated from 5 HCFA files: 1) Medicare

Provider Analysis and Review (MedPAR), including acute hospitalizations, long term

hospitalizations, and skilled nursing home care; 2) Hospital outpatient; 3) Part B

physician-supplier; 4) Home health care; and 5) Hospice. Durable medical equipment (DME) expenses were excluded, but in Massachusetts, they contributed just

$400 per person over the last year of life.

RESULTS

Frequency of Chemotherapy in the Last Months of Life: Figure 1 shows

that 41% of our study population in Massachusetts received chemotherapy in the

last year of life. Fully 33% of Massachusetts cancer decedents received chemotherapy in the last 6 months of life, 23% in the last 3 months of life, and 9% of

cancer decedents received chemotherapy in the very last month of life.

Table 1 provides data on the proportion of terminally ill cancer patients treated

in Massachusetts with chemotherapy in the last 6, 3 and 1 months of life. Patients

who died of hematological malignancies received chemotherapy most frequently,

with more than half getting chemotherapy in the last 6 months of life and 19% in

the last month of life. Massachusetts patients with chemotherapy unresponsive solid

cancers received chemotherapy at about the same frequency as patients with chemotherapy responsive solid cancers (Table 1). Among patients with chemotherapy unresponsive solid cancers taken together (pancreatic, hepatocellular, gallbladder, and

renal cell cancers and melanoma) 23% received chemotherapy in the last 3 months

of life, which was the same as the percentage of patients with chemotherapy responsive cancers (breast, colon, ovarian) that received chemotherapy.

An interesting example of the use of chemotherapy at the end of life is pancreatic

cancer. In the last 6 months of life, 33% of Massachusetts patients dying of pancreatic cancer received chemotherapy, 25% in the last 3 months, and 8% in the last

month of life. On May 15, 1996, the FDA approved gemcitabine as the first agent

shown to be effective in pancreatic cancer. Prior to this date, when there were no

effective agents, 28% of patients dying of pancreatic cancer received chemotherapy

in the last 6 months of life. After May 15th, 37% received chemotherapy (one-sided

p=0.04).

A comparison of the chemotherapy unresponsive melanoma and renal cell cancer

with chemotherapy responsive breast and colon cancers is also instructive. Of patients dying of melanoma, 21% received chemotherapy in the last 3 months of life

and 10% in the last month of life. Similarly, among patients dying of renal cell cancer, 22% received chemotherapy in the last 3 months of life and 7% in the last

month of life. Surprisingly the frequency of chemotherapy for dying breast and colon

cancer patients was almost identical. 22% of patients dying of breast cancer received

chemotherapy in the last 3 months and 8% in the last month of life. Similarly, 23%

of patients dying of colon cancer received chemotherapy in the last 3 months and

7% in the last month of life.

There are no substantial differences in the use of chemotherapy by sex (Table 1).

However, the use of chemotherapy at the end of life is age related. Among Massachusetts patients 65-74 32% received chemotherapy in the last 3 months of life, compared to 22% for patients 75 to 84 year old, and 11% for patients over 85 years of

age (Table 1). These variations by age were similar in chemotherapy unresponsive

and responsive solid cancers (Table 2). Overall, 13% of 85 year olds with chemotherapy unresponsive solid cancers received chemotherapy in the last 3 months of

121

life compared to 10% of 85 year olds with chemotherapy responsive solid cancers

(Table 2).

Number of Months of Chemotherapy in the Last Months of Life: Among

Massachusetts patients who received chemotherapy in the last 6 months of life, 41%

had a short ‘‘trial,’’ just one month or less of chemotherapy, with 36% receiving

chemotherapy for 1 to 3 months, 23% 4 or more months of chemotherapy (Table 3).

The number of months of chemotherapy did not depend on sex, but did depend upon

age (Table 3).

Importantly, the chemotherapy responsiveness of the solid cancers was associated

with a difference in the number of months of chemotherapy provided to decedents

(Table 3). Among Massachusetts patients dying of chemotherapy unresponsive tumors who received chemotherapy, over half received 1 month or less of chemotherapy and 31% received chemotherapy for 1 to 3 months. Conversely, among patients dying of chemotherapy responsive cancers who received chemotherapy a third

received 1 month or less of chemotherapy and 40% received chemotherapy for 1 to

3 months of the last 6 months of life. Notably, 17% of patients dying from chemotherapy unresponsive cancers had 4 or more months of chemotherapy (Table 3).

Returning to patients with pancreatic cancer, 49% received chemotherapy for 1

month or less, 34% for 1 to 3 months and 3% during each of the last 6 months. For

patients dying of breast cancer, 32% received chemotherapy for 1 month or less, 39%

for 1 to 3 months and 5% across all 6 final months.

The Use of Chemotherapy and Expenditures: Annual expenditures for dying

Massachusetts cancer patients who received chemotherapy in the last 6 months of

life were 32.5% higher than patients who did not receive chemotherapy ($39,707 v.

$29,974) (Table 4). Annual expenditure for patients with chemotherapy unresponsive cancers who received chemotherapy was $33,365 about 10% less than the expenditure for patients with chemotherapy responsive cancers who received chemotherapy ($36,684). Expenditures for patients with chemotherapy unresponsive cancers who received chemotherapy were 20% more than for patients with the same

cancers who did not receive chemotherapy ($33,365 v. $27,737), while expenditures

for patients with chemotherapy responsive cancers who received chemotherapy were

23.9% more than for patients with the same cancers who did not receive chemotherapy ($36,684 v. $29,610).

Comparison with Cancer Decedents from California: We used decedents our

sample of 956 cancer decedents from California to test whether our findings in Massachusetts might apply more generally (Table 5). Among California cancer decedents, 26% received chemotherapy in the last 6 months of life, 20% in the last 3

months and 9% in the last month of life. Among decedents with chemotherapy responsive tumors, 17% received chemotherapy in the last 3 months of life compared

to 20% for the chemotherapy unresponsive tumors.

Similarly, use of chemotherapy at the end of life was age related in California for

both chemotherapy responsive and unresponsive cancers. Among decedents aged 65-

74, 26% of those with chemotherapy responsive tumors compared to 32% of those

with chemotherapy unresponsive tumors received chemotherapy in the last 3

months of life. Similarly, among decedents aged 75-84 19% of those with responsive

tumors compared to 18% of decedents with unresponsive tumors received chemotherapy in the last 3 months of life. Overall, 25% of patients with chemotherapy responsive tumors receiving chemotherapy received less than 1 month of chemotherapy while 35% of those with chemotherapy unresponsive tumors did so.

DISCUSSION

This study provides insight into the frequency of use of chemotherapy at the end

of life. Overall 33% of Medicare patients dying of cancer in Massachusetts in 1996

received chemotherapy in the last 6 months of life and nearly a quarter in the last

3 months. Most surprisingly, patients dying of chemotherapy unresponsive cancers,

such as pancreatic, gallbladder, renal cell, and hepatocellular cancers, were just as

likely to receive chemotherapy at the end of life as patients dying of chemotherapy

responsive cancers, such as breast, colon, and ovarian cancers. This suggests overuse of chemotherapy at the end of life, at least among patients with chemotherapy

unresponsive cancers.

Traditionally, to document over- and underuse of health care services, studies

compare claims data with optimal practices established by randomized controlled

trials or by expert, consensus panels. Lacking randomized trials or consensus panels

to establish standards for the appropriate use of chemotherapy at the end of life,

we examined tumor responsiveness to chemotherapy. Cancers are traditionally divided in those that are chemotherapy responsive, in which chemotherapy can commonly induce complete and partial responses, compared to those in which chemoVerDate 11-MAY-2000 15:12 Mar 13, 2002 Jkt 077216 PO 00000 Frm 00125 Fmt 6633 Sfmt 6621 E:\HEARINGS\75756 pfrm09 PsN: 75756
122

therapy rarely leads to tumor shrinkage. In our data, lack of responsiveness of the

cancer to chemotherapy did not reduce the prevalence of chemotherapy use. Patients

with unresponsive cancers were just as likely to receive chemotherapy in the last

few months of life as patients with chemotherapy responsive cancers. Indeed, patients with unresponsive cancers were slightly more likely to receive chemotherapy

than patients with lung cancer in which data suggests chemotherapy in the last 6

months of life, may extend life by a few weeks and even palliate symptoms.

Although patients dying of chemotherapy unresponsive solid cancers received

chemotherapy as frequently as those with responsive cancers, they received fewer

months of chemotherapy. This suggests some selectivity in the use of chemotherapy

at the end of life. It is possible that after one cycle of therapy many patients and

oncologists are convinced by ineffectiveness and/or the side effects to stop treatment

for chemotherapy unresponsive cancers. Nevertheless, 17% of patients receiving

chemotherapy for chemotherapy unresponsive cancers received chemotherapy during

four or more of the final 6 months of life.

Many reasons may explain the use of chemotherapy at the end of life for patients

with unresponsive cancers. The most reasonable explanation may be that patients

and families demand to at least ‘‘try’’ to see if chemotherapy might shrink the cancer. Oncologists frequently meet patients for the first time right after they have

been newly diagnosed with chemotherapy unresponsive tumors that present a bleak

prognosis. These patients and their families often want to try anything that might

shrink their cancers. Indeed, data suggest that cancer patients are willing to endure

significant side effects for very small prolongations in life.11,12 Lacking an established relationship with the patient or family and confronting an emotional demand

to try anything, oncologists may acquiesce. One cycle of chemotherapy is often sufficient for patients and families to adjust and absorb the realities of the diagnosis,

prognosis, and to realize the ineffectiveness of the chemotherapy and the undesirable side effects. That over half of the patients receiving chemotherapy for unresponsive cancers received 1 month or less of chemotherapy strongly supports this

explanation. Obviously, additional research is necessary to provide insights into how

much of a role patient and family demand plays in the use of chemotherapy at the

end of life.

Other potential reasons for the use of chemotherapy at the end of life include uncertain prognosis and time of death, uncertain responsiveness of the cancer to chemotherapy, and use of experimental chemotherapies. These reasons are unlikely to account for our data on chemotherapy unresponsive solid cancers. While the exact

date of death cannot be known in advance, cancers, especially chemotherapy unresponsive solid cancers, are unlike the terminal phases of COPD or heart failure;

they tend to have a monotonic, unremitting decline to death despite all interventions.13 Typically within the last three months of life, oncologists can predict, with

reasonable certainty that the patient will die in a few months regardless of treatment. Furthermore, there is no real uncertainty about the chemotherapy unresponsiveness of the solid tumors we classified as ‘‘unresponsive.’’ Finally, although some

patients may be receiving experimental chemotherapy, this is likely to be rare

among Medicare beneficiaries who are often ineligible due to age and comorbidities.

Yet another potential explanation for the use of chemotherapy for patients with

unresponsive cancers is that chemotherapy may improve quality of life and palliate

symptoms for dying patients even if it fails to prolong life or shrink tumors.14,15

There are some data supporting the palliative effect of chemotherapy for lung and

colon cancer and some suggestions that this might also operate in ovarian cancer.16,17,18,19 Frequently, emotional functioning and fatigue are the quality-of-life

subscales with the most improvement. That these improvements occur without objective tumor responses suggests that they may be related to patient expectations

or possibly the placebo effect of chemotherapy, rather than any biological impact.20

The mechanism by which chemotherapy in terminal phases may palliate without objectively shrinking cancers requires further research.

The similar frequency of chemotherapy use regardless of the responsiveness of the

cancer may be because near terminal patients with breast, colon, and ovarian cancers may have been treated with many different chemotherapy regimens and their

cancers may have become chemotherapy resistant. In this way, patients dying of

chemotherapy responsive tumors may be more like decedents with chemotherapy

unresponsive cancers. This does not justify using chemotherapy for unresponsive tumors. It also raises the question of whether providing chemotherapy in the last 3

months of life to nearly a quarter of cancer patients whose tumors have become resistant to chemotherapy is itself an indication of overuse.

This study suggests that use of ineffective chemotherapy consumes substantial

medical resources. Annual expenditures for patients who received chemotherapy, regardless of the responsiveness of the cancer, were 32.5% higher than for patients

123

who did not receive chemotherapy in the last 6 months of life. Among patients who

died of chemotherapy unresponsive cancers, the use of chemotherapy in the last 6

months of life was associated with 20% higher annual expenditures, or more than

$5,500 per decedent. The extra amount spent on providing chemotherapy to patients

dying of unresponsive cancers is comparable to the average annual expenditure for

all Medicare beneficiaries and nearly one third higher than annual per capita health

expenditures in the U.S. These data contrast with studies suggesting that compared

to ‘‘best supportive care’’ chemotherapy for non-small cell lung cancer does not increase, and may even decrease medical costs.21,22,23 The disjunction between our results and these studies may arise because of the difficulty in translating results of

randomized trials into actual clinical practice. Care protocols in research may limit

use of unnecessary interventions, whereas in actual clinical practice use of treatments, hospitalizations, and other interventions vary more. Furthermore, the cost

data on best supportive care come only from Canada and are more than a decade

old21-23, and patients receiving best supportive care were frequently hospitalized,

using more hospital days than patients receiving chemotherapy. These old data, especially of hospitalizing patients receiving ‘‘best supportive care’’ reflect practices

not found in these data and unlikely to still be common. It may also be that in actual clinical practice patients not receiving chemotherapy may not be receiving ‘‘best

supportive care’’ reducing expenditures.

Finally, this overuse of treatment at the end of life is particularly wasteful when

placed in the context of the documented underuse of treatments proven by randomized controlled trials to be effective in prolonging life. Studies have shown that only

55% of Medicare beneficiaries receive adjuvant chemotherapy for Stage III colon

cancer.24 Indeed, among 85 year old patients the use of chemotherapy for Stage III

colon cancer is 11% less than the frequency of the use of chemotherapy in the last

3 months for 85 year olds with chemotherapy unresponsive cancers. Unfortunately,

it appears that there may be overuse of chemotherapies in the last few months of

life coincident with underuse of therapies known to be effective in prolonging life.

In health care, Massachusetts is known as a high use and high cost state.25 A

major issue is whether these data on chemotherapy use at the end-of-life are unique

to Massachusetts or are generalizable. While there are some differences in the absolute use of chemotherapy for some cancers, our data from California, although limited, suggest a similar pattern of use of chemotherapy at the end of life. In California one in five cancer decedents receive chemotherapy in the last 3 months of

life, and this does not differ between chemotherapy responsive and unresponsive

cancers. Clearly, these results need to be confirmed in other, larger populations.

However, these data show that the situation in Massachusetts is not unique.

This study has some significant limitations. First, the data may not generalize in

other ways. Chemotherapy use among decedents under 65 years of age might be different. The strong trends toward greater use of chemotherapy among younger decedents suggests these data might actually underestimate chemotherapy use in the

last 6 months of life among cancer decedents of all ages. Chemotherapy use in managed care settings also might differ. Second, we have no data on stage of cancer;

some patients may have died from acute toxicities of chemotherapy without being

terminally ill. However, data from trials suggest that acute toxic deaths among patients receiving adjuvant therapy are rare, and thus unlikely to account for a substantial proportion of cancer mortality.26 Indeed, adjuvant chemotherapies associated with high toxic mortality would be used infrequently. Third, the cause of death

listed on death certificates is not always accurate. However, listing cancer as the

cause of death may be insensitive, but it is specific, and Massachusetts and California are among the states with the most accurate death certificates. Fourth, annual expenditures were calculated but we tracked chemotherapy use only in the last

6 months of life. Decedents who received chemotherapy in the 7 to 12 months before

death only are classified in the ‘‘no chemotherapy’’ group, increasing the costs of this

group. This makes the difference in expenditures appear smaller than if the comparison had been with decedents who had received no chemotherapy in the entire

last year of life. Most importantly, these data provide no explanation for why chemotherapy is provided in any particular case. Additional study is needed to determine

the reasons why chemotherapy is used in the last 6 months of life, especially for

chemotherapy unresponsive cancers.

CONCLUSION

There is substantial disagreement about whether chemotherapy is used appropriately in patients near the end of life. This study demonstrates that one third of

patients in Massachusetts receive chemotherapy in the last 6 months of life, even

124

among those persons dying from chemotherapy unresponsive cancers. Oncologists

should reconsider the use of chemotherapy at the end of life.

ACKNOWLEDGEMENTS

We would like to thank Joan Warren, Deborah Schrag, and Peter Bach for helpful

advice and comments on the project and manuscript. We would also like to thank

many questioners at the 2001 Annual American Society of Clinical Oncology meeting for helpful challenges.

Frequency of Patients Receiving Chemotherapy in the Last Months of Life

(This will be a figure)

Massachusetts

(N=7,919)

Last 1 month of life ............................................................................................................................................. 9%

Last 2 months ...................................................................................................................................................... 17%

Last 3 months ...................................................................................................................................................... 23%

Last 4 months ...................................................................................................................................................... 28%

Last 5 months ...................................................................................................................................................... 31%

Last 6 months ...................................................................................................................................................... 33%

Last year of life .................................................................................................................................................... 41%

TABLE 1: Characteristics of Massachusetts Cancer Decedents by Receipt of Chemotherapy in the

Last 6 Months of Life

All Cancer

Decedents

Cancer Decedents Receiving Chemotherapy in Last:

6 months

of life

(N=2,625)

3 months

of life

(N=1,854)

1 month of

life

(N=715)

All Cancers ................................................. .............................................. 7,919 33% 23% 9%

Sex .............................................................. Male ..................................... 3,863 35% 22% 10%

Female ................................. 4,056 31% 26% 8%

Age .............................................................. 65-74 ................................... 2,926 44% 32% 12%

75-84 ................................... 3,392 31% 22% 8%

85+ ...................................... 1,601 16% 11% 5%

Chemotherapy Responsive Solid Cancers .. Total ..................................... 1,627 34% 23% %

Breast .................................. 612 30% 22% 8%

Colon .................................... 846 32% 23% 7%

Ovarian ................................ 269 47% 30% 7%

Chemotherapy Unresponsive Solid Cancers Total ..................................... 870 31% 23% 9%

Pancreas .............................. 408 33% 25% 8%

Melanoma ............................ 84 30% 21% 10%

Renal Cell ............................ 147 29% 22% 7%

Hepatic and Gallbladder ..... 231 29% 20% 8%

Other Types of Cancer ................................ Lung ..................................... 2,003 28% 19% 7%

Prostate ............................... 602 39% 28% 10%

Hematological* .................... 760 51% 42% 19%

All Other .............................. 2,057 30% 20% 9%

* Includes all acute and chronic leukemias, non-Hodgkin lymphomas, Hodgkin’s disease, but excludes multiple myeloma.

TABLE 2: Massachusetts Cancer Decedents Receiving Chemotherapy in the Last 3 Months of Life

by Cancer Type and Age

Number of

Patients

Getting

Chemotherapy in

last 3

Months of

Life

65-74

(N=2,926)

75-84

(N=3,392)

85+

(N=1,601)

All Cancers ................................................. .............................................. 1,854 32% 22% 11%

Chemotherapy Responsive Solid Cancers .. Total ..................................... 377 36% 21% 10%

Breast .................................. 135 38% 19% 7%

125

TABLE 2: Massachusetts Cancer Decedents Receiving Chemotherapy in the Last 3 Months of Life

by Cancer Type and Age—Continued

Number of

Patients

Getting

Chemotherapy in

last 3

Months of

Life

65-74

(N=2,926)

75-84

(N=3,392)

85+

(N=1,601)

Colon .................................... 191 33% 23% 11%

Ovarian ................................ 51 43% 22% 17%

Chemotherapy Unresponsive Solid Cancers Total ..................................... 199 30% 22% 13%

Pancreas .............................. 101 33% 24% 12%

Melanoma ............................ 18 27% 19% 13%

Renal Cell ............................ 33 36% 15% 10%

Hepatic and Gallbladder ..... 47 23% 21% 15%

Other Types of Cancer ................................ Lung ..................................... 371 28% 12% 6%

Prostate ............................... 170 32% 34% 11%

Hematological* .................... 321 54% 44% 17%

All Other .............................. 416 26% 20% 11%

* Includes all acute and chronic leukemias, non-Hodgkin lymphomas, Hodgkin’s disease, but excludes multiple myeloma.

TABLE 3: The Number of Months of Chemotherapy Provided to Massachusetts Cancer Decedents

Receiving Any Chemotherapy in the Last 6 Months of Life

1 Month or

Less>

1 to 3

Months> 3 Months

Mean

Number of

Months

All Cancers ................................................. .............................................. 41% 36% 19% 2.4

Sex .............................................................. Male ..................................... 38% 36% 20% 2.2

Female ................................. 45% 36% 16% 2.5

Age .............................................................. 65-74 ................................... 35% 39% 21% 2.5

75-84 ................................... 44% 35% 17% 2.3

85+ ...................................... 59% 28% 11% 1.9

Chemotherapy Responsive Solid Cancers .. Total ..................................... 33% 40% 22% 2.6

Breast .................................. 32% 39% 24% 2.6

Colon .................................... 35% 41% 19% 2.5

Ovarian ................................ 29% 39% 24% 2.8

Chemotherapy Unresponsive Solid Cancers Total ..................................... 52% 31% 14% 2.0

Pancreas .............................. 49% 34% 14% 2.1

Melanoma ............................ 56% 36% 0% 1.8

Renal Cell ............................ 51% 37% 10% 2.0

Hepatic and Gallbladder ..... 59% 21% 17% 2.1

Other Types of Cancer ................................ Lung ..................................... 45% 39% 13% 2.2

Prostate ............................... 30% 31% 31% 3.0

Hematological* .................... 32% 39% 22% 2.7

All Other .............................. 50% 33% 14% 2.1

* Includes all acute and chronic leukemias, non-Hodgkin lymphomas, Hodgkin’s disease, but excludes multiple myeloma.

TABLE 4: Expenditures in the Last Year of Life for Massachusetts Cancer Decedents by Receipt

of Chemotherapy in the Last 6 Months of Life

Decedents

who Received

No Chemotherapy (N=)

Decedents

who Received

Chemotherapy

(N=)

% Increase

for Decedents

Receiving

Chemotherapy

All Cancers ............................................................. ........................................... $29,974 $39,707 32.5%

Sex .......................................................................... Male .................................. $29,729 $39,539 33.0%

Female .............................. $30,193 $39,890 32.1%

Age .......................................................................... 65-74 ................................ $32,551 $43,042 32.2%

75-84 ................................ $31,155 $36,989 18.7%

85+ ................................... $24,803 $34,055 37.2%

Chemotherapy Responsive Solid Cancers .............. Total .................................. $29,610 $36,684 23.9%

Breast ............................... $26,817 $36,277 35.3%

126

TABLE 4: Expenditures in the Last Year of Life for Massachusetts Cancer Decedents by Receipt

of Chemotherapy in the Last 6 Months of Life—Continued

Decedents

who Received

No Chemotherapy (N=)

Decedents

who Received

Chemotherapy

(N=)

% Increase

for Decedents

Receiving

Chemotherapy

Colon ................................. $31,435 $32,972 4.9%

Ovarian ............................. $30,870 $50,400 63.5%

Chemotherapy Unresponsive Solid Cancers ........... Total .................................. $27,737 $33,365 20.3%

Pancreas ........................... $26,356 $35,371 34.2%

Melanoma ......................... $19,982 $32,717 63.7%

Renal Cell ......................... $32,923 $35,735 8.5%

Hepatic and Gallbladder .. $27,911 $29,275 4.9%

Other Types of Cancer ............................................ Lung .................................. $29,750 $38,967 31.0%

Prostate ............................ $27,685 $34,167 23.4%

Hematological* ................. $34,430 $52,619 52.8%

All Other ........................... $30,861 $39,830 29.1%

* Includes all acute and chronic leukemias, non-Hodgkin lymphomas, Hodgkin’s disease, but excludes multiple myeloma.

TABLE 5: The Characteristics of California Cancer Decedents by Receipt of Chemotherapy in the

Last 6 Months of Life

All Cancer

Decedents

Cancer Decedents Receiving Chemotherapy in Last:

6 months of life

(N=253)

3 months of life

(N=191)

1 month of life

(N=85)

All Cancers ...................... .......................................... 956 26% 20% 9%

Sex ................................... Male ................................. 437 30% 24% 11%

Female ............................. 519 23% 17% 7%

Age .................................. 65-74 ............................... 323 39% 31% 12%

75-84 ............................... 444 25% 18% 9%

85+ ................................. 189 8% 6% 3%

Chemotherapy Responsive Solid Cancers ...................... 175 25% 17% 6%

Chemotherapy Unresponsive Solid Cancers .................. 108 24% 20% 8%

Other Types of Cancer .... Lung ................................ 280 23% 17% 8%

Prostate ........................... 83 37% 27% 13%

Hematological* ................ 112 36% 29% 14%

All Other .......................... 198 25% 19% 9%

* Includes all acute and chronic leukemias, non-Hodgkin lymphomas, Hodgkin’s disease, but excludes multiple myeloma.

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Mr. GREENWOOD. Thank you, Dr. Emanuel, for your coming in

and your helpful testimony. I appreciate that.

The Chair recognizes himself for 5 minutes to ask questions. Let

me turn to Dr. Norton first.

It is evident from this hearing and from all of the work we’ve

done leading up to this hearing, which has been extensive, that

there is virtual unanimity among most Members of Congress with

the GAO, the IG, the pharmaceutical industry, and your association that we need to get rid of AWP, that it’s irrational, that it

causes overpayments, cruel overpayments to beneficiaries. That is

certainly inconsistent with what the intention of Medicare is. There

is also, I would say, virtual unanimous consent to the notion that

we need to then simultaneously, so that there is no disruption in

service or no inequity imposed by our changes, come back with a

way to make sure that your profession and all of the other professions that are here and that are not here who would be affected

by a change in AWP are adequately and appropriately reimbursed.

Now, the GAO study says that in order to do that, we need to

put about $51 million into increasing practice expenses. Mr. Scully

from CMS testified that he thought the number was somewhere between $45 and $55 million and that those figures were arrived at

totally independently, which gives us a fair amount of confidence

in the order of magnitude of those changes.

Does your association—you have submitted a white paper, et

cetera. I have a sneaking suspicion that your association thinks

that the number might be a bit higher than that. Are you putting

a number on the table here?

Mr. NORTON. We don’t think we have the data—we don’t think

that anybody has the data to come up with an accurate number,

128

frankly. It gets down to fundamental logical issues about what it

actually costs to give chemotherapy. The GAO report we haven’t

seen yet, the latest one. We thought that this issue is being studied

carefully. We’re—and I think we’re going to have to scrutinize the

report to see whether the report which just came out to today really does address the issue, but the only real way we feel that you

can actually figure out the cost is to measure the cost of what is

really required, how much nursing time is required, the cost of the

syringe, the cost of the IV tubing, cost of the needles, the cost of

the tape. All these things are costs, the inventory of drugs, spillage,

wastage, all these issues that are involved, and we really don’t

have that data.

We will be very happy to do a survey to collect that data. We’ll

be very happy to work with the government, anybody who Congress designates to work to actually get that data, but just looking

at this as a scientist, I don’t think that the methods really are giving us the numbers we really need to figure out what the true costs

are.

Mr. GREENWOOD. Thank you. While I am posing this next question, if Mr. Martyn and Mr. Connaughton would separate yourselves and, Mr. Scanlon, if you would bring a chair up and I am

going to ask you to comment after I ask Dr. Norton another question.

In your testimony, Dr. Norton, you said that—and I am

quoting—‘‘Oncologists and their professional staffs typically furnish

a variety of services to cancer patients for which there is no explicit

reimbursement. These services include extensive support that seriously ill cancer patients frequently require, including social work

services, psychosocial services, nutrition counseling. Social work

services encompass a variety of services intended to help patients

carry out their therapy, such as help with insurance, arranging

transportation to treatment and filling prescriptions. Psychosocial

support includes services such as counseling patients on their activities of daily living, support groups that meet in the physician’s

office and grief counseling. In addition, physicians treating cancer

patients perform an extraordinarily high amount of work outside

the patient’s presence, including family counseling, telephone calls,

arranging for entry into clinical trials, and so forth.’’

And I don’t doubt any of that and I have visited oncologists in

my district and I have heard from them and from their staff similar concerns.

Let me actually turn to Mr. Scanlon, and if you will pull the

microphone up. I would assume that there are other medical specialties that either provide or would like to provide and be reimbursed for these services. Does Medicare reimburse anyone for

these kinds of services in addition to their regular fees?

Mr. SCANLON. Not explicitly. The issue here with oncologists and

other specialities, the way that the system has been constructed,

is that the costs of these kinds of services to the extent that they

are incurred by a practice are included in calculating fees but they

are distributed across the procedures and the services that are

being recognized by Medicare. This is something that is related to

the American Medical Association, which is establishing the CPT,

the current procedural local terminology system, which identifies

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what are discrete services that physicians are going to provide, and

then there is some amendment or modification of those by Medicare. That process is what we need to look at, and as I mentioned,

we are doing work on additional data. This is one of the areas

where we need additional data. Should there be discrete activities

that are now recognized as services and sort of why isn’t it that

they haven’t been identified as discrete services under CPT?

Mr. GREENWOOD. Let me just ask you this. When you came for- ward with your $51 million estimate to compensate to raise the

practice expenses, were you assuming that any of these kinds of

services would be included in that?

Mr. SCANLON. We were not assuming they would be included explicitly, but we were assuming that the costs of those services were

reflected in the data that we had and that those costs were distributed—$51 million represented distributing those costs more appropriately across different services and across different specialties. So

we feel like the data and the method reflect these services, but better data may lead to a different change in fees.

Mr. GREENWOOD. Dr. Norton, your comments.

Mr. NORTON. We don’t think they have the data. If they are relying—like the AMA data, there are a small number of oncology

practices that were scrutinized and there was a tremendous

amount of estimation involved. One thing that makes oncology different from other specialties is other specialties it’s some patients

that require these services. In medical oncology it’s essentially everybody. As the therapies go on, as patients get sicker, as the medicines change, it sometimes gets more complex rather than less. The

time the nurse spends with the patient talking about the drugs,

talking about the side effects, monitoring for side effects during the

infusion and between infusions, this is just essential and it’s not

covered at all. It’s just—and it’s not really reflected in the numbers. It’s not really reflected in the data because it hasn’t been

scrutinized carefully.

Mr. GREENWOOD. Let me just bring forth, when we are talking

about data here, one piece of data. A recent survey in Modern

Health Care estimated that the average oncologist’s salary could be

as high as $334,000 per year. Is that a figure that you think is

within the ballpark, sir?

Mr. NORTON. That sounds high to me, and I’ve seen surveys of

various medical specialties. I don’t actually recall the absolute

numbers but they varied a lot, again depending upon the sample

that was used, the geography, and many other samples. But I do

remember that medical oncologists were not outliers in terms of

their income by any stretch of the imagination in terms of other

medical specialists.

You know, if medical oncology were a very attractive specialty for

financial reasons we would have an abundance of candidates. You

know, we’re having trouble filling our training programs. Everybody who trains medical oncologists is having trouble finding quality candidates for their training programs. It’s not a highly subscribed speciality because it is so difficult. It is such a difficult lifestyle and it’s not an especially lucrative life-style either.

Mr. GREENWOOD. Thank you, sir. The gentleman from Ohio, Mr.

Brown, for 5 minutes.

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Mr. BROWN. Dr. Norton, I have an article from the Journal of

Cancer Economics, March, 1997, and I was intrigued by a speech

made by a chief medical officer at United Health Care Corporation

in Minneapolis to the National Cancer Centers Network, which as

I understand the audience is made up of many oncologists and

other people. I want to read a little bit from what he said and ask

what’s happened in the last 4 years. This is March 1997.

He says, ‘‘You’re going to have to make chemotherapy a cost neutral equation. I would tell you that the industry is probably going

to do this for you. Without eliminating the markup on drugs, I really do fear that you are going to lose credibility within organizations

outside. Employers are already bringing this up to me. What are

you doing about oncologists who are making too much money on

drugs? My case managers are coming to see me and saying that

about half my patients are dying within 2 weeks of their last chemotherapy course. So where was the oncologist saying it is time for

quality of care? Let me give you good supportive care and pain relief. Let me get you into a hospice.’’ He then goes on to say, ‘‘The markups for chemotherapy medicines are going to be so high that the public is beginning to react.

You are losing credibility from that,’’ he tells the oncologist. ‘‘What

you will see happening in my company and I suspect others is that

you will no longer be getting reimbursed at average wholesale

price.’’ What you will see happening in my company, and I suspect others, is that you will no longer be getting reimbursed at average

wholesale price; you will be getting reimbursed at catalog prices.

The reason for doing that is to make this decision truly a decision

made, because it’s the right thing to do, not because you have a financial incentive.

It sounds to me, from taking these excerpts, that managed care

was not going to take it anymore; in a sense, that they were not

going to pay you the—they were not going to follow the price structure that Medicare seems to.

What has happened in these 4 years?

Mr. NORTON. No, that’s not an individual I know or an organization that I attend. So I don’t know exactly what transpired there,

what was, you know, sort of implied by all this.

Mr. BROWN. What has happened with managed care payments?

Mr. NORTON. The managed care payments generally are much

lower than the actual costs of administration of the therapy. You

know, sort of across the board, it really is a big issue.

Mr. BROWN. Lower than Medicare?

Mr. NORTON. I do not know the specifics, sir. I do not know the

specifics.

I do know, for example, in my own center that if I didn’t have

philanthropy pouring into the center, I couldn’t provide anyone

near the services I provide. I applaud my colleagues in practice, especially small practices, for doing as much as they can with the

amount of money that they have flowing in.

Mr. BROWN. So you can’t tell me if Medicare—if managed care

companies are paying more or less than Medicare?

Mr. NORTON. I personally cannot. I can’t provide that information for you in great detail.

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Mr. BROWN. Considering the markup, considering if a drug costs $200 and Medicare is reimbursing 1,000 and the oncologist is pocketing some amount of the 800, I would think you’d give us some

ball park about what might be happening with managed care companies.

Mr. NORTON. I would challenge the notion of the doctor pocketing

the money. The doctor is using that money to take care of the patient. That is what is happening. It is a broken axle and it’s a broken wheel. We have to understand the system is working, quality

is being provided and the money coming in that’s in excess of one

side is balancing the other. We’ve all said the same thing.

Mr. BROWN. I wish you were a little better informed about the

managed care side of it, because when I—I go back to Chairman

Tauzin’s comments earlier about the fact that the copay for many

seniors is actually more than the cost of the drug that the doctor

is paying. In some cases, that 20 percent is 20 percent of a much

larger, huge number in some cases than 20 percent of the real cost

of the drug; and I would think maybe if we were able—if anybody

on this panel could give us the information about how much a

drug—how much the managed care companies were paying, maybe

we could help Mr. Scully come up with ‘‘20 percent of what’’ figures, because we don’t know. We only know 20 percent of the AWP,

but it would be nice to know 20 percent of the lesser figure, and

perhaps the managed care companies have alighted on that figure,

if you will. But apparently nobody on this panel, with as much expertise as you have, can tell me what managed care has done in

the last 3 or 4 years.

Mr. NORTON. I’m not an expert in health economics, frankly. I

can get the information for you, and I’d be delighted to work with

you on it, but, no, I don’t know that.

But I do know—— Mr. BROWN. Would you submit that for the record, please, Dr.

Norton?

Mr. NORTON. Any information you need, you ask us, we’ll provide.

Mr. BROWN. Thank you.

I’d like to know what managed care companies, versus what—for

these 24 drugs; is that it—these 24 drugs, what managed care companies are paying, on average.

Mr. NORTON. As I said, we’ll be very happy to cooperate with

Congress in every way to give you the information you need.

Mr. BROWN. Good. Thank you.

Mr. EMANUEL. I just wanted to say one thing about the patients

and managed care companies.

Almost exclusively, in managed care companies they do not pay

a percentage of the drug, right, almost exclusively in managed care

companies. If Medicare is going to look like managed care companies, they are going to have a fee schedule that is like $5 and $10,

independent of the price of the drug. Okay? That is the way managed care companies are run now.

Now, they may be shifting because of rising prices—— Mr. BROWN. If I can interrupt, Dr. Emanuel. I don’t think that— because Medicare doesn’t have much of a track record of paying for

drugs. Only these drugs that—and it’s such a peculiar way you do

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it. I don’t know how you can say that Medicare will set a price and

it’s irrespective of the price that the drug actually costs.

Mr. EMANUEL. That is not what I said. Sorry. Maybe I was unclear.

Mr. BROWN. Tell me again. I’m sorry. I misunderstood you.

Mr. EMANUEL. In managed care, patients are—they have copays

of $5 and $10. They are unrelated to the price of the drug.

Mr. BROWN. The copay?

Mr. EMANUEL. And Medicare is different in that it makes the

copay related to the price of the drug.

If you want to make Medicare like managed care, then you fix

the copay independent of the price of the drug.

Mr. BROWN. I didn’t say I wanted to make Medicare like managed care in that way.

If, in fact, managed care has done what this article might suggest it will have done in the next couple of years, starting back 4-

plus years ago, then we might be able to use that as a real price

for these drugs. If that, in fact, is what these drugs cost from the

manufacturer that managed care is paying for, then we might be

able to talk more about Chairman Tauzin’s 20 percent of that figure rather than 20 percent of the AWP figure.

Mr. EMANUEL. I’m not an expert on managed care pricing either,

but let me just say one other thing.

One of the problems is that if you go to managed care and talk

to them—and one of the other things I do in my head is talk to

them about these things—they don’t have a price for the drug. Just

like manufacturers play around with prices to doctors and to pharmacies, they play around with drugs to managed care, so if you buy

three of our drugs, we’ll give you this kind of discount.

If you’re only putting one on the formulary—so there is no such

thing as ‘‘the price of a drug.’’

Mr. BROWN. We know that, and particularly when—in light of

the fact that Americans, out of pocket, pay about twice as much as

what managed care companies on the average pay for the cost of

prescription drugs.

So, so be it. Thank you.

Mr. GREENWOOD. The time of the gentleman has expired.

The gentleman—the chairman, Mr. Tauzin.

Chairman TAUZIN. Thank you, Mr. Chairman.

Dr. Norton, let me see if I can help understand this a bit better,

and maybe you can give us some history—a bit. In terms of the

way the different physician groups negotiate with CMS, formerly

HCFA, for their reimbursement for practice expenses, would oncology groups actually go in and make a case for the—all of the expenses you indicated were not now covered?

Mr. NORTON. Absolutely for——

Chairman TAUZIN. Have you made that case over the years?

Mr. NORTON. If we are asked to. We have offered it. We have offered to do that, and they have said that we’ll call you when we

need you, but we are still waiting for the phone call.

Chairman TAUZIN. You’ve never had the opportunity to make a

case on what your true practice expenses are?

Mr. NORTON. That is exactly right.

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Chairman TAUZIN. So are you telling me that HCFA, in the past,

was just not interested in hearing from you on those numbers?

Mr. NORTON. Again, what CMS or HCFA previously has done

is—you know, they will have to tell you that.

I do tell you, we are very anxious to help in trying to determine

these costs. We have offered it, and we’ve been told that we will

be called when they need us.

Chairman TAUZIN. Staff is advising me that every physician

group has the right on a yearly basis to submit data to refine the

practice reimbursement costs. Have oncologist groups taken advantage of that opportunity under the law?

Mr. NORTON. The—my understanding is that it’s done sort of collectively, but that oncologists are clearly, you know, part of a very

large number of physicians that—you know, that do this. But my

organization, ASCO, the American Society of Clinical Oncology, has

offered on many occasions to help in determining these costs, and

we’re still very willing to do that.

Chairman TAUZIN. Mr. Scanlon, you’re here. Could you help us

with that process?

I mean, my understanding is that every group can come in every

year and do that. If Dr. Norton has said they really haven’t had

that opportunity, I’d like to know why not and what’s wrong with

the process.

Mr. SCANLON. Groups do have the opportunity to come in individually. There has been additional information that’s been incorporated in the practice expense that comes from the American

Medical Association’s survey of all specialties, but individual specialties—and thoracic surgery is one that has submitted data of its

own—it involves doing a survey of its practices.

Chairman TAUZIN. So they weren’t invited to do it? They did it

on their own?

Mr. SCANLON. Congress gave them the right to do this in the Balanced Budget Reform Act.

Chairman TAUZIN. So the question, Dr. Norton, is why haven’t

oncologists on their own submitted data to have the——

Mr. NORTON. We have offered and we have been told that we will

be contacted when it’s appropriate for us to give the information;

and we’re still willing.

Chairman TAUZIN. What I’m hearing is that you don’t have to

offer to do it. You have a right to do it. You don’t have to have an

invite from them. You don’t have to make an offer that is accepted.

The law says that every year every specialty of practice has a right

to submit new data, revised data, to ask the agency to revise the

reimbursement under the pool. And my question is, why haven’t

you done that?

Mr. NORTON. We have had contact with numerous agencies, and

we’ve offered our assistance in determining these prices. There’s

issues in costs, in fact.

Chairman TAUZIN. Well, you tell me what you did, but you’re not

telling me why you didn’t do what you could do. So let me say it

again as clearly as I can.

If you have the right to submit it without an invitation, if the

law gives you the right every year to go to CMS now and say, these

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are our numbers on what it takes to properly reimburse us for

practice expenses, why haven’t you done that?

Mr. NORTON. Well, part of it is that it’s an expensive proposition

to do it properly, frankly. It’s—we are a voluntary organization,

and it’s a very expensive proposition to do that.

Chairman TAUZIN. But I don’t understand that. If you’re being

so underreimbursed, why would—if other companies have done

that, why wouldn’t you do that?

Mr. NORTON. You know, we didn’t create AWP; we inherited

AWP. You created AWP, and the fact is, it’s been working. It’s a

broken axle, broken wheel, but it’s been working.

Chairman TAUZIN. I thought that was the answer, because that

is our suspicion. The reason why we’ve never gotten a real definitive, you know, resolution of what the true practice costs are in

some of these fields is that you felt comfortable with the AWP reimbursement as taking care of whatever deficiencies exist. Right?

Mr. NORTON. We haven’t felt comfortable with AWP. We’ve been

opposed to the whole concept ethically, morally.

Chairman TAUZIN. I’m just saying in terms of the dollars.

Mr. NORTON. The economics have worked. We’re able to keep the

ship afloat.

Chairman TAUZIN. So that if you didn’t have the advantage of

the overreimbursements under AWP, you would probably be more

likely to do what other specialty groups have done every year, and

that is get in there and pitch a case for why you want to be reimbursed more thoroughly for your practice expense?

Mr. NORTON. We absolutely would help determine the proper reimbursement, absolutely.

Chairman TAUZIN. Now, recognizing that that hasn’t happened

and recognizing that if we do eliminate this practice of overreimbursing for drugs, which some specialty groups, like your own,

have relied on upon rather than seeking changes in that pool, if we

did that, you would—is there any doubt you would head straight

to that pool and seek a reassessment of your practice expenses?

Mr. NORTON. Oh, we would like to work to make a fair cost. Absolutely. Sure.

Chairman TAUZIN. And would it be helpful if we had your cooperation and the cooperation of other groups, specialty groups, affected, in eliminating this practice of the AWP—because it has

other pernicious effects, not just this financing thing—if we got rid

of it, would it be helpful if we asked you to work with GAO and

the IG and Scully and our own committee to determine what is, in

fact, a fair estimate of what practice—— Mr. NORTON. It would not only be helpful; it would be wonderful.

We would relish that opportunity.

Chairman TAUZIN. If we told you in advance that we were prepared, and this committee was able, to support additions to the

fund so that, in fact, there would be less pressure on you having

to go get your dollars from some other practice group, but there

would be room to make up a reasonable—in a reasonable way, commensurate with what other practice groups are getting—I’m not

saying that we should favor one practice group over another in that

process, but to give more room for you to adequately get a reevaluation of your practice——

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Mr. NORTON. See, again——

Chairman TAUZIN. Would such a proposal meet with your support?

Mr. NORTON. Yes. It sounds great. Frankly, you know, the point

is that we’re not talking about consultation costs or visit costs.

We’re talking about actually—the cost of actually treating patients,

the cost to treat patients. Any solution that enables us to be able

to continue to treat our patients is a solution we’d be happy——

Chairman TAUZIN. That is the solution we want. When we started this discussion, the chairman will tell you we had briefings, and

I, among a number of members, made it very clear that if we’re

going to do this, if we’re going to take this on, this massive project

to change this, when 10 years have gone by and nobody could do

it, that the one outcome we could not have is that somehow you

were not going to be out there taking care of cancer patients as a

result. And then that’s your leverage in this thing. We understand

that.

But our leverage is that—I want you to understand this. Our leverage is that I don’t think patients in America, upon learning that

they’re paying a 20 percent copay that is equal to 500 percent of

the cost of a drug that the doctor buys—I don’t think patients in

America are going to let anybody put up with this system, now that

that’s out in the open; and that patients are gradually going to understand how bad that is.

I mean, when my 82-year-old mom hears that she has to pay a

20 percent copay that’s equal to five times what the doctor is

charged for the drug, I can tell you, I’m going to get a few phone

calls from that lady, and I suspect every Member of Congress

would. And if there were a legislative stand-alone proposal to

change that, it probably would zip through this Congress.

So I guess my message is that we understand, I think, the problem of how we’ve gotten in this mess. I also want to say this again.

I think you’re the angels sent from God for the work you do, and

I know why you’re having a hard time recruiting in some cases.

It’s so awful to watch people go through what people go through

in cancer, and you guys do it all the time, and I admire you so

much for that. I want you to understand that.

We understand the problem you’re in, but we need your help to

fix it. And if we’re going to come up with a formula that works,

we’re going to need all the specialty groups working with us to

come up with a solution that answers it. If we don’t, we’re going

to end up having to sell parts of it at a time, like this 20 percent

copay thing, and that’s not going to be good. That’s just going to

take a chunk out of income.

But, in fairness, I can’t see asking my mom or anybody else to

pay 500 percent for some—for the cost of some drug, when the law

says they ought to pay 20 percent of it. There’s something wrong

there.

Bottom line, I guess what I’m saying is, I think we’re seeing our

way to some solutions, but we’re going to need the support, help

and encouragement of the provider groups, such as yours, in finding it in a way that you continue and can continue to serve America’s cancer patients; and at the same time that we can put an end

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to this system, not simply because it may be wrong financially, but

because it has some potential aspects to it that are so disturbing.

To think that the bonus paid for chemotherapy might encourage

anybody to use it when it’s not appropriate is just an awful

thought, and I hope it does—I hope it is not happening in America.

But the thought that it could is just so disturbing, that I think we

have to—we have to deal with this pretty soon.

And so, again, thank you for your contributions today, all of you,

and I hope we—I want to do one more thing, if I can, Mr. Chairman. I want to turn to Dr. Emanuel.

What is a nonresponsive chemo situation? You named a bunch

of cancers. Tell us what that means. That means that chemo

doesn’t help at all?

Mr. EMANUEL. Right. The chemotherapies we have available do

not shrink the cancers.

Chairman TAUZIN. Do they help with the patients in any other

way?

Mr. EMANUEL. Usually they are not recommended when they

don’t shrink the cancer.

Chairman TAUZIN. Well, that’s what I’m having a hard time understanding. Why in the Massachusetts study did you—and maybe,

Dr. Norton, you can help me.

Mr. NORTON. I can help you.

Chairman TAUZIN. Why did you find that doctors were doing

chemotherapy on patients when chemotherapy was known not to

work?

Mr. NORTON. Generally speaking, we define ‘‘responsive’’ as

about a 20 percent response rate. But somebody who is desperate

will take less than a 20 percent response rate, and that’s—frankly,

I think it’s one cycle. You say, Listen; the patient says, Listen, Doctor, please try.

Chairman TAUZIN. Very often, it’s a patient saying, I don’t want

to——

Mr. NORTON. I spent 45 minutes with the daughter of a patient

this morning before I came here. She was begging me to treat her

mother with chemotherapy, and I frankly said I didn’t think it was

appropriate.

Chairman TAUZIN. So I just—— Mr. NORTON. One cycle is what Dr. Emanuel found in his study.

You know, when a patient comes in, desperate, and says, Please

try; and you can find in the medical literature 5, 10 percent response rates in all these diseases to various—you say, We will try

one cycle; if the cancer doesn’t shrink, we will stop. And frankly I

don’t think that is so unreasonable. You know, you say the last 6

months, the last 3 months of life; you don’t know that until a patient has died. If they respond to therapy, it’s no longer 3 months.

Chairman TAUZIN. I’m trying to help you. So the fact is that the

bonus that exists in this reimbursement system may not be the

reason why even in a nonresponsive cancer case chemo is selected,

because the patient may want it in some cases.

Is that right, Dr. Emanuel? Do you agree with that?

Mr. EMANUEL. Yes. I think that’s—we’ve all experienced that situation.

Chairman TAUZIN. Thank you very much, Mr. Chairman.

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Mr. GREENWOOD. The gentleman’s time has expired.

The gentleman from New York, Mr. Engel, is recognized for 5

minutes.

Mr. ENGEL. Well, thank you, Mr. Chairman.

If this was another hearing in talking about Medicare and reimbursements and what Medicare pays for, I’d be talking about how

Medicare can pay for syringes but not for the drug insulin to— which is used in the syringes. I’m constantly confused by what goes

on.

But since we’re talking about home infusion, infusion therapy, I

want to talk a little bit—and I thank you, Mr. Connaughton, for

mentioning it in your testimony. I want to highlight my bill, which

is H.R. 2750. We called it the Medicare Home Infusion Therapy

Act, and what it does is it addresses the particular problems associated with home infusion therapy.

Medicare’s reimbursement policy for home infusion therapy is

simply outdated. Modern medicine has made the administration of

many drugs safe and effective in the home. Because of these ridiculous reimbursement provisions, many senior citizens are forced to

stay in hospitals or trek to physicians’ offices on a daily basis to

receive their treatment, when this treatment can be given to them

in their homes.

It’s much cheaper. It’s much easier for everyone around, and yet

we can’t do that. It can be conducted in the home safely, and it

could be at a fraction of the cost.

So, to address that issue, the bill directs the Secretary of Health

and Human Services to set up a fee schedule for drug reimbursements and provider reimbursements that would ensure adequate

and fair payments to providers. I very strongly feel that this legislation appropriately addresses the needs of seniors and providers

together and could serve as a model for a broader approach to the

problems with AWP, and I’m hoping that we as a committee will

examine the legislation.

Mr. Connaughton, since you mentioned it, I’m wondering if you

could expand on some of your remarks, because as I mentioned, the

bill doesn’t only reform how currently covered home infusion drugs

are regulated, but it would also extend coverage to drugs that are

not currently covered, such as home antibiotic therapy; and I wonder if you could just talk about that expansion. And what do you

think this bill would do for Medicare beneficiaries?

Mr. CONNAUGHTON. Let me just make a couple of comments.

First of all, I think your bill is absolutely consistent with the five

principles the chairman enunciated earlier when he was speaking

with Mr. Scully. Medicare, as I’ve mentioned in my testimony, is

losing the advantage of infusion therapy in the home. The coverage

by Medicare for home infusion is extremely narrow. Managed care

is taking advantage of that opportunity, and indeed Medicare’s use

of home infusion is less than 20 percent of what home infusion

companies do.

There are many therapies that are not covered by Medicare now

that could be covered by Medicare and are covered by managed

care in the home. It would make tremendous savings.

The key to your bill I think, Mr. Engel, is that it spells out a reimbursement scheme and recognizes that these services are a value

138

in the home, but it spells out a reimbursement scheme that is

based upon costs of a product and the costs of the services and recognizes that there are standards for those services that are recognized in the private sector; and we think it’s a very, very good piece

of legislation.

Mr. ENGEL. Thank you.

Let me ask you this: If Medicare were to adopt the same quality

standards that are used in the private sector, how do you think

this would affect the care provided to Medicare beneficiaries?

Mr. CONNAUGHTON. Well, it would ensure they are getting the

same quality of care that they’re getting in the private sector. In

the private sector there are standards; they spell out the services.

Medicare, for whatever reason, just does not recognize that these

services exist; and I think it’s important for them to recognize them

and spell out the standards.

Mr. ENGEL. And as things have evolved in health care—obviously, when Medicare was first put into place, we couldn’t have anticipated the changes and the improvements we’ve made, and

therefore I think it’s fair to say—and I’m sure you would concur— that we need to change some of the—to update, I think that’s a better word, some of the procedures that we have now.

Mr. CONNAUGHTON. I would agree with that.

In the case of home care, technology is going to allow us to do

a lot more things. Infusion therapy is a current issue, but I hope

over time that Medicare will be able to take advantage of those

technologies.

Mr. ENGEL. Now, I want to make sure that I understand something you mentioned earlier. I think the chairman also—I’m sorry.

Mr. Brown, I think, mentioned it before.

The costs of acquiring the drug for home care suppliers are in

many cases less than the cost of administering it.

Mr. CONNAUGHTON. That’s the case. On average—it varies from

therapy to therapy, but on average, our survey that was conducted,

about 26 percent of the cost of providing the therapy is the drug.

Mr. ENGEL. So obviously that is something we need to fix. I’m

sure that’s why Mr. Brown mentioned it, and I think it’s something

that the committee ought to look at.

I’m wondering if anyone else would want to comment on that.

Yes.

Ms. LAMPHERE. Indeed, the services that you were talking about

and the quality standards that you were talking about are very important. The nursing coordination, the patient education, the pharmacy operations, all of these direct services, at least in the case of

home infusion and respiratory therapy, account for 46 percent of

the total cost of providing respiratory and home infusion services

in the home.

Mr. ENGEL. Yes. I think that’s a shocking statistic, and I certainly think it shows that things are broken and need to be fixed.

I thank you.

Thank you, Mr. Chairman.

Mr. GREENWOOD. I thank the gentleman.

The gentleman from Iowa, Mr. Ganske, for 5 minutes.

Mr. GANSKE. I thank the members of the panel for staying for

a long day.

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I think that there’s been a consensus today, from the previous

participants, that the way that we’ve calculated reimbursement for

drugs and Medicare needs to be made more accurate, and that we

need to take into account the true costs of the administration and

the services to get those drugs to the patients. And I think your

testimony has been effective. I thank you and I yield back.

Mr. GREENWOOD. The gentleman, Mr. Norwood for 5 minutes.

Mr. NORWOOD. Thank you, Mr. Chairman. I will be relatively

brief, but I’m interested in a couple of things.

Dr. Norton, you listed in your testimony a number of services

that clearly the oncologist has to perform for the patient if they are

to get good care. Those services presently are not recognized by

Medicare.

Mr. Scanlon, I’m curious, since the GAO seems to know a lot

about this subject, why aren’t—well, let me go back a minute. You

said, ‘‘not explicitly.’’ That means no, I gather.

Mr. SCANLON. No, it doesn’t. Excuse me. Not recognized, but paid

for. And the difference is that the way that Medicare practice expense fees are determined is that all the costs of the practice are

taken into account, so presumably these kinds of activities generate

costs which are carried on the books; and those should be taken

into account when practice expense payments are determined.

Mr. NORWOOD. Dr. Norton, do you believe that that is actually

the case?

Mr. NORTON. You know, I am an expert in statistics; that, I am,

even though I’m not an expert in economics. And my understanding is that the methods that are used to actually make these

determinations are filled with approximations. It’s approximation

upon approximation—approximation of expense, approximation of

time, calculations, multiplications of submitted procedures and various percentages.

I question, just as a scientist—and I’m not an economist. As a

scientist, I question the validity of some of these methods, frankly.

I would like to see a method that starts with the actual procedure and builds up and calculates the cost on that basis. You know,

if it’s going to be a half an hour of somebody’s time to talk to a

patient, then it should be a half an hour of this hour that’s reported into the equation, and that’s the way it ought to be calculated.

If we do it that way, we very well might come up with a different

number. And I’m not even saying that I know for sure we’ll come

up with a different number. I just think that the science of actually

coming up with the cost estimates could be improved.

Mr. NORWOOD. Well, Mr. Scanlon, and then you.

It appears that the providers of this care, though their services

aren’t listed, feel that they aren’t compensated. That’s fairly clear

to me.

Now, Mr. Scanlon, I presume that a lot of your numbers are the

result of estimations.

Mr. SCANLON. The numbers are based upon samples, samples

both of the practices in terms of reporting their actual costs that

they incurred; and then panels of experts that were put together,

doing what Dr. Norton suggested, which is to take for each procedure and to say, this is our estimate as to how much nurse time,

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how much other staff time, how much supplies, et cetera, it takes

to provide that procedure.

The flaw that was discovered in that method is, when you add

it up, for all of the times and all of the different costs that the panels had, they didn’t match the data that the practices were actually

writing checks for. And that’s why it was critical to bring both of

these pieces of information together.

Think of it in terms of, if we were all asked to tell everyone how

we spent yesterday, give every activity that you were engaged in

and the amount of time, it might not add up to 24 hours, but there

were still only 24 hours in yesterday. And the problem is, it’s very

hard in the abstract sense to say this is going to take 50 minutes,

this is going to take an hour, et cetera. So the data of costs that

practices actually incur is a very good and strong benchmark in

terms of being able to calibrate these expert panel estimates.

I agree with Dr. Norton, in a sense, that the data need to be improved. We need to get data that are going to be more robust, have

smaller variance in terms of the estimate of the true values. I don’t

agree that the method is invalid.

The method is valid. We just need better information with which

to execute it.

Mr. NORWOOD. Well, isn’t it then true that perhaps the reason

we are having this hearing is, the data is not robust, as you put

it? As far as I know, the oncologist did not come up with a plan

for how to be reimbursed in terms of the cost of drugs. I presume

that our old agency, HCFA, dreamed that up.

Mr. SCANLON. There are two elements; I mean, in terms of why

we may be having this discussion. One is data, and we—and I’ve

talked about that. The other that I mention in my testimony is the

fact that the method that I’m saying is valid, the method I think

that needs to be applied for all specialties, is not the method that

was used to calculate the fees for chemotherapy administrative

services, as well as for other services where there’s not direct physician involvement.

We believe that CMS needs to calculate all fees, using what

we’ve referred to as the basic method, which in our mind, appropriately allocates total practice expenses across the procedures that

specialties have, takes into account to the greatest extent possible

differences in the costs of delivering a service by one specialty

versus another.

Oncology, again, is affected by what HCFA did in the past. It

took the chemotherapy administration services and put them in a

pool with all other similar types of services from other specialties

and calculated fees on the basis of that average. We don’t think

that is appropriate.

So if we were to apply the method appropriately, we would get

a different result. It’s the chemotherapy fee—administration fees

would change 16 percent; overall fees to oncologists would change

7 percent. So those are the kinds of things that we have been talking about.

Mr. NORWOOD. Dr. Norton, I heard Chairman Tauzin say that he

knew that Mr. Scully would be greatly interested in your organization’s input, and I know you’re interested in doing that. You’re

president of your society, are you not?

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Mr. NORTON. That’s right, sir.

Mr. NORWOOD. How many members do you have?

Mr. NORTON. About 17,000.

Mr. NORWOOD. American Society of Clinical Oncology.

What is your pay as president?

Mr. NORTON. Oh, I don’t get any pay at all. This is voluntary.

My institution gets some money—I actually don’t even know the

amount—to compensate partially for the time I spend. But since I

spend essentially 100 percent of my time doing this job as well as

100 percent doing my other job, it’s nowhere near compensation. I

receive no funds whatsoever.

Mr. NORWOOD. So I want to point out to our chairman that you

are a volunteer organization, and sometimes it is not as simple as

it seems when a voluntary organization is asked to defend itself

against a Federal organization—a Federal agency that has thousands and thousands of employees who sometimes don’t get in a

hurry.

I may be wrong about that, but a lot of times it’s very difficult

on the other end to do what we’re asked to do.

And I don’t frankly understand, for example, why CMS doesn’t

list the services and determine, with the help of people like Dr.

Norton, what a fair, reasonable fee is, and make it so much simpler

for everybody; rather than putting the onus on the back of a volunteer organization, oh, it’s all your fault because you’re not being reimbursed.

I know I’m running out of time. I’ve got two quick things, Mr.

Chairman, if I could finish.

Mr. Scanlon, just yes or no. Do you happen to know, is it GAO

that told President Johnson that the cost of Medicare in 1990 was

going to be $9 billion?

Mr. SCANLON. No.

Mr. NORWOOD. Okay. Just checking. I know one of the agencies

did. I just can’t remember which one.

Dr. Emanuel, God forbid if you should ever have cancer, where

would you choose to be treated?

Mr. EMANUEL. Think it depends on the kind of cancer. I would

try to find the right oncologist for the cancer.

Mr. NORWOOD. Would you prefer to be treated in the United

States?

Mr. EMANUEL. Well, certainly compared to other—certain other

countries which are struggling.

Mr. NORWOOD. You implied that our oncology care in America is

pretty poor and listed reasons why you thought perhaps they were

poor, and I wondered if that’s what you meant to imply.

Mr. EMANUEL. No. I think what I said, or certainly what I meant

to say, is that we at this moment cannot guarantee every American

who has cancer the highest quality oncological care for that cancer.

We know that there are problems. We know that there is underuse

and we know that there is overuse, and part of the issue is to make

sure that we can guarantee everyone that they get the right care

at the moment.

Mr. NORWOOD. We can’t guarantee everyone we can stay out of

the way of an airliner. How can we guarantee everyone?

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Mr. EMANUEL. Well, we don’t even have a monitoring system to

make sure that Americans do—— Mr. NORWOOD. And who do you want to determine who gets the

care, if you don’t want the people who are trained in oncology to

determine it?

Mr. EMANUEL. I think we need—— Mr. NORWOOD. Some oncologists decided a patient shouldn’t get

the treatment, or should. Okay. If you don’t like them deciding,

who do you want to decide?

Mr. EMANUEL. I’m—at the moment, I certainly think oncologists

have to be part of it. I’m actually at the moment the head of the

ASCO Task Force on the Quality of Cancer Care. One of the things

I think we do need is to have a monitoring system to make sure

that people who are diagnosed with cancer get referred to the right

person, get the right procedures, not too much and not too little,

and who—— Mr. NORWOOD. Who is ‘‘we’’?

Mr. EMANUEL. I think that’s a collective responsibility, and as a

matter of fact, ASCO, the American Society of Clinical Oncology,

has undertaken a $5 million study to try to find out where the

flaws in the system are. We know that there are flaws in the system and that it’s not working perfectly; and I think it would be

wrong at this point in time to say, just because I’d like to be treated in the United States, that we have a flawless system.

We know we have quality problems, and we know we need to

have oversight and to improve the quality of cancer care delivery.

The issue is, where are the problems, how can we monitor them,

and how can we collectively—oncologists, the government, nurses,

hospitals, insurers—improve that system.

Mr. NORWOOD. I see the red light, Mr. Chairman.

Mr. GREENWOOD. The time of the gentleman from Georgia has

expired. I thank the gentleman for his questions, and let me advise

the gentleman from Georgia that it is my intent, in the legislation

that we introduce, to fix this problem; that we will, in fact, direct

CMS to do the work with these associations, but certainly to provide the technical support so that we can develop the data, so that

they are adequately compensated. And that will not be a burden

placed on the backs of the voluntary organizations exclusively.

Mr. NORWOOD. And, Mr. Chairman, if the organization has a

white paper on—at least their opinion on how to go about fixing

the problem, shouldn’t at least CMS have a white paper on how

they think the problem ought to be fixed?

Mr. GREENWOOD. Well, we’re going to make them work so fast

that they won’t even have time for a white paper.

The Chair asks unanimous consent to submit for the record the

following documents: two volumes of committee documents; the

opening statements of—the statements submitted by Congressman

Stark and other members’ opening statements; two letters to the

committee from U.S. Oncology, clarifying the documents obtained

by the committee.

And I would ask unanimous consent that we hold the record

open for members to submit questions.

With that, we thank the final panel for your testimony, for your

presence, for your endurance as well. This committee does intend

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to fix this problem. We intend to fix it in short order. We intend

to fix it rationally and fairly for the benefit of the taxpayers, the

beneficiaries and the valued health care providers. Thank you.

The committee hearing is adjourned.

[Whereupon, at 3:15 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

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