MEDICAID PRESCRIPTION DRUG REIMBURSEMENT:

WHY THE GOVERNMENT PAYS TOO MUCH

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

DECEMBER 7, 2004

Serial No. 108–126

Printed for the use of the Committee on Energy and Commerce

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MEDICAID PRESCRIPTION DRUG REIMBURSEMENT: WHY THE

GOVERNMENT PAYS TOO MUCH

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MEDICAID PRESCRIPTION DRUG REIMBURSEMENT:

WHY THE GOVERNMENT PAYS TOO MUCH

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

DECEMBER 7, 2004

Serial No. 108–126

Printed for the use of the Committee on Energy and Commerce

(

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

2

COMMITTEE ON ENERGY AND COMMERCE

JOE BARTON, Texas, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

RALPH M. HALL, Texas

MICHAEL BILIRAKIS, Florida

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi, Vice Chairman

VITO FOSSELLA, New York

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

DARRELL E. ISSA, California

C.L. ‘‘BUTCH’’ OTTER, Idaho

JOHN SULLIVAN, Oklahoma

JOHN D. DINGELL, Michigan

Ranking Member

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

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

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

TOM ALLEN, Maine

JIM DAVIS, Florida

JANICE D. SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

BUD ALBRIGHT, Staff Director

JAMES D. BARNETTE, General Counsel

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

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

RICHARD BURR, North Carolina

CHARLES F. BASS, New Hampshire

GREG WALDEN, Oregon

Vice Chairman

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

JOE BARTON, Texas,

(Ex Officio)

PETER DEUTSCH, Florida

Ranking Member

DIANA DEGETTE, Colorado

TOM ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Balland, David J., Associate Commissioner for Medicaid and CHIP, Texas

Health and Human Services Commission .................................................. 123

Catlett, Timothy P., Senior Vice President of Sales and Marketing, Barr

Laboratories, Incorporated ........................................................................... 155

Jones, T. Mark, President, Ven-A-Care of the Florida Keys, Inc.; and

John Lockwood, Vice President, Ven-A-Care of the Florida Keys, Inc ..... 75

Marrs, Pamela R., Senior Vice President and CFO, DEY, Inc ..................... 150

Marshall, David, Director of Category Management for Generics, CVS

Corporation .................................................................................................... 159

O’Connell, Patrick J., Texas Attorney General’s Office ................................. 127

Paoletti, Lesli L., Roxane Laboratories, Inc ................................................... 153

Reeb, George M., Assistant Inspector General, Centers for Medicare and

Medicaid Audits, accompanied by Robert Vito, Regional Inspector General for Evaluation and Inspections, Philadelphia ..................................... 115

Reinhart, Paul, Michigan Medicaid Director ................................................. 94

Seagrave, Frank, Vice President of Pharmacy, Wal-Mart Stores, Incorporated ........................................................................................................... 160

Smith, Dennis, Director, Center for Medicaid and State Operations, Centers for Medicare and Medicaid Services .................................................... 100

Stratemeier, Edward H., former Vice President and General Counsel,

Aventis Pharmaceuticals .............................................................................. 147

Ziebell, John, Category Manager for Pharmacy, Health & Wellness,

Walgreen Company ....................................................................................... 160

Additional material submitted for the record:

Balland, David J., Associate Commissioner for Medicaid and CHIP, Texas

Health and Human Services Commission, letter dated January 6, 2005,

enclosing response for the record ................................................................ 184

Michigan Department of Community Health, memorandum dated January 3, 2005, enclosing response for the record ........................................... 183

Paoletti, Lesli L., Roxane Laboratories, Inc., letter dated January 18,

2005, enclosing response for the record ...................................................... 187

(III)

(1)

MEDICAID PRESCRIPTION DRUG REIMBURSEMENT: WHY THE GOVERNMENT PAYS TOO

MUCH

TUESDAY, DECEMBER 7, 2004

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room

2322, Rayburn House Office Building, Hon. Joe Barton (chairman)

presiding.

Members present: Representatives Bilirakis, Walden, Ferguson,

Rogers, Barton (ex officio), Waxman, Markey, and Dingell (ex officio).

Also present: Representative Stupak.

Staff present: Mark Paoletta, majority counsel; Andrew Snowdon,

majority counsel; Brad Conway, majority counsel; Mike Abraham,

legislative clerk; Edith Holleman, minority counsel; and Turney

Hall, minority clerk.

Chairman BARTON. The subcommittee will come to order.

Today we are going to hold a hearing on Medicaid Prescription

Drug Reimbursement: Why the Government Pays Too Much.

We have got a number of panels and a number of witnesses. This

is a very important hearing. Medicaid is a program for the poorest

and sickest people in our country. We in the Congress have a responsibility to make sure that every possible dollar available under

the program goes to those who need it the most. We also have an

obligation to make sure that the American taxpayer gets what he

or she is paying for.

Unfortunately, the current system by which we reimburse health

care providers for prescription drugs under Medicaid flies in the

face of both of these principles. The system is broken, and it needs

to be fixed. The Government pays far too much for many prescription drugs under Medicaid, primarily because most States continue

to use a system that is called average wholesale price, or AWP, as

the basis for their reimbursement.

For example, during our investigation, the committee has obtained documents showing that in the summer of 2002 one drug

manufacturer’s direct sales price of 2,000 20 milligram capsules of

Fluoxetine, the generic version of the popular antidepressant

Prozac, was $82.62, while the average wholesale price was more

than $5,300. Let me repeat that. The generic version, $82.62, but

the average wholesale price was $5,300.

2

I would like to commend the former subcommittee chairman, Mr.

Jim Greenwood, and the current vice chairman, Mr. Greg Walden,

who is sitting to my right, for their work on this issue over the last

year. What they have done is very, very important.

Chairman Greenwood, in particular, was tenacious in the pursuit

of average wholesale price reform, first in Medicare where we did

change the system, and now in Medicaid where, so far, we have

not. In fact, today’s hearing is an outgrowth of the committee’s

prior work on AWP drug-based drug reimbursement under Medicare.

During a hearing back in September 2001, Chairman Greenwood

noted that the term AWP could just as easily be an acronym for

‘‘ain’t what is paid.’’ sadly, this remains true today. As you will

hear shortly, the Federal Government and, ultimately, the American taxpayer could save hundreds or millions or even billions of

dollars a year if States would bring drug reimbursements more in

line with what they actually cost the pharmacy and other health

care providers to purchase these drugs.

Today’s hearing, which is a culmination of an extensive investigation by the subcommittee staff on a bipartisan basis, will focus

on systemic problems with the structure and administration of prescription drug expenditures under Medicaid, as well as abuses of

the system.

The committee’s prior AWP work ultimately led to important

changes in last year’s landmark Medicare Modernization Act,

MMA, changes that will save the Medicare program $15 billion

over the next 10 years. It is my profound hope that this hearing,

by exposing some of those same problems and abuses, will set the

stage for similar Medicaid reform on a bipartisan basis in the upcoming Congress.

Medicaid is supposed to reimburse pharmacists the estimated acquisition cost of the drugs, plus a reasonable dispensing fee. Over

the years, AWP has emerged as a proxy for estimated acquisition

costs. Currently, all but eight States rely on AWP as the basis of

Medicaid reimbursement. Unfortunately, and all too often, AWP

bears little or no resemblance to what these providers really pay,

particularly in the generic marketplace where multiple manufactures compete to sell identical drugs that are, for all intents and

purposes, a commodity.

During the course of this investigation the committee has uncovered evidence that several manufacturers either inflate their AWPs

or actively market their products not based on the lowest price but

on the difference between the price and the reimbursement

amount, better known in the industry as the spread.

Although the manufacturer’s practice of marketing the spread

appears to have waned in recent years due in large part to litigation and the heightened scrutiny generated by the work of this

committee and others, the existence of substantial spreads remains

a fixture of Medicaid prescription drug reimbursement.

Let me say that again. The existence of substantial spreads remains a fixture of Medicaid prescription drug reimbursement.

Generic manufacturers initially set the AWP of their product at

89.9 percent of the brand name’s AWP. In the words of one manufacturer, we ‘‘set it and forget it.’’ Meanwhile, fierce competition

3

drives down the actual sales price of these generics, therefore increasing the spread, often dramatically.

I want to be clear here that the price competition is a good thing.

Generic drugs have a critical role in play in containing soaring

drug costs. Concern, however, is that because of AWP the Medicaid

program all too often misses out on these cost savings. Medicaid’s

use of AWP corrupts the market and turns what would otherwise

be a positive development, namely price competition, into abuse

that deprives Medicaid of the benefits.

The primary beneficiaries of the current Medicaid reimbursement structure are the retail pharmacies. Data obtained by the

committee from five of the largest retail pharmacy chains reveals

that during the period of July 1, 2002, to June 30, 2003 the average acquisition cost for seven widely prescribed generic drugs was

22 cents, while the average Medicaid reimbursement just for those

drugs alone was 56 cents, more than double the cost; and you can

see that on the chart that is up on the overheads.

Indeed, evidence gathered by the committee suggests that Medicaid reimbursement is more generous than that of most private

payors. The pharmacies do not generally deny that they reap substantial margins on certain prescription drugs under Medicaid.

Their argument is that any overpayments for prescription drugs

are necessary to offset Medicaid dispensing fees, which they assert

do not cover the true cost of the services that they provide to the

Medicaid population.

This situation is analogous to physician-administered drugs in

Medicare. In the new Medicare law, we have attempted to make

significant changes to the way that physician-administered drugs

are reimbursed, scrapping AWP in favor of a new market-based average sales price and increasing payments for physician services.

A recent Government Accountability Office study released just

last week shows that, the appropriateness of the new payments

here as is in Medicare.

I believe that we should pay providers fairly for their services.

I have got absolutely no problem with increasing dispensing fees,

if that is what we need to do. But we should pay them accurately

so that we can achieve cost savings while ensuring that Medicaid

beneficiaries will continue to have access to critically important

drugs.

In this context, I am especially pleased to welcome David

Balland from the Texas Health and Human Services Commission

and Patrick O’Connell from the Texas Attorney General’s Office.

Texas is one of the States on the forefront of Medicaid reform;

and the approach that the State of Texas Medicaid program has

taken to address these problems, an approach that should serve as

a model to other States, in my opinion, is one of flexibility, transparency and fairness.

Texas has imposed an aggressive reimbursement formula and requires manufacturers to provide transaction data as a means of

verifying acquisition costs, while at the same time having one of

the highest dispensing fees of any State. These reforms have resulted in substantial cost savings for both the State and to the Federal Government, yet not one pharmacy has left the program as a

result of underpayment.

4

This is work that was begun under then Attorney General John

Cornyn, who is now one of our Senators from Texas. I want to commend him for his work in that area.

As the Texas Attorney General in 1999, Senator Cornyn identified Medicaid fraud as a priority and created a special section devoted entirely to this issue. Senator Cornyn was invited to testify

here today, but, due to a scheduling conflict, he is not available.

I want to thank all of our witnesses at today’s hearings. I think

that with the amount of money that we are spending on prescription drugs under our Medicaid program it is very important that

we identify reforms to get the biggest bang for the buck.

I want to think the committee staff on both sides of the aisle for

the strong work that they have done over the last year and a half

on this issue, and I look forward to this being one of the landmark

hearings of this subcommittee.

[The prepared statement of Hon. Joe Barton follows:]

PREPARED STATEMENT OF HON. JOE BARTON, CHAIRMAN, COMMITTEE ON ENERGY

AND COMMERCE

Medicaid is a program for the poorest and sickest people in this country, and we

in Congress have a responsibility to make sure that every possible dollar available

under this program goes to those who need it the most. We also have an obligation

to make sure that the American taxpayer gets what he or she pays for. Unfortunately, the current system by which we reimburse health care providers for prescription drugs under Medicaid flies in the face of both of these principles. The system is broken, and it needs to be fixed.

The government pays far too much for many prescription drugs under Medicaid,

primarily because most states continue to use Average Wholesale Price, or AWP, as

the basis of reimbursement. For example, during this investigation, the Committee

obtained documents showing that in the summer of 2002 one drug manufacturer’s

direct sales price of 2000 20-milligram capsules of fluoxetine—the generic version

of the popular antidepressant Prozac—was $82.62, while the AWP was more than

$5,300.

I would like to commend former Subcommittee Chairman James Greenwood and

current Vice Chairman Greg Walden for the tremendous work that they have done

on this very important issue. Chairman Greenwood, in particular, has been tenacious in the pursuit of AWP reform, first in Medicare and now in Medicaid. In fact,

today’s hearing is largely an outgrowth of the Committee’s prior work on AWPbased drug reimbursement under Medicare. During a hearing back in September

2001, Chairman Greenwood noted that the term AWP could just as easily be an acronym for ‘‘ain’t what’s paid.’’ Sadly, this remains true today. As you will hear shortly, the federal government—and ultimately the American taxpayer—could save hundreds of millions of dollars per year if states would bring drug reimbursements more

in line with what it actually costs pharmacies and other health care providers to

purchase these drugs.

Today’s hearing, which is the culmination of an extensive investigation by Subcommittee staff, will focus on systemic problems with the structure and administration of prescription drug expenditures under Medicaid, as well as abuses of the system. This Committee’s prior AWP work ultimately led to important changes in last

year’s landmark Medicare Modernization Act, changes that will save the Medicare

program approximately $15 billion over the next ten years. It is my profound hope

that this hearing, by exposing some of these problems and abuses, will set the stage

for similar Medicaid reforms in the 109th Congress.

Medicaid is supposed to reimburse pharmacists the estimated acquisition cost of

the drugs, plus a reasonable dispensing fee. Over the years, AWP has emerged as

a proxy for estimated acquisition cost: currently, all but eight (8) states rely upon

AWP as the basis of Medicaid reimbursement. Unfortunately, all too often AWP

bears little or no resemblance to what these providers really pay, particularly in the

generic marketplace, where multiple manufacturers compete to sell identical drugs

that are, for all intents and purposes, a commodity. During the course of its investigation, the Committee uncovered evidence that several manufacturers either inflated their AWP’s or actively marketed their products not based on the lowest price,

5

but on the difference between the price and the reimbursement amount—better

known as the ‘‘spread.’’

Although the manufacturers’ practice of marketing the spread appears to have

waned in recent years, due in large part to litigation and the heightened scrutiny

generated by the past work of this Committee and others, the existence of substantial spreads remains a fixture of Medicaid prescription drug reimbursement. Generic

manufacturers initially set the AWP of their products at 89.9% of the brand-name

drug’s AWP, and, in the words of one manufacturer: ‘‘We set it and forget it.’’ Meanwhile, fierce competition drives down the actual sales prices of these generics, thereby increasing the spread, often dramatically.

I want to be clear here that price competition is a good thing, and generic drugs

have a critical role to play in containing soaring drug costs. My concern, however,

is that because of AWP, the Medicaid program all too often misses out on these cost

savings. Medicaid’s use of AWP corrupts the market and turns what would otherwise be a positive development—namely price competition—into an abuse that deprives Medicaid of the benefits.

The primary beneficiaries of the current Medicaid reimbursement structure are

the retail pharmacies. Data obtained by the Committee from five of the largest retail pharmacy chains reveals that during the period July 1, 2002 to June 30, 2003,

the average acquisition cost for seven widely-prescribed generic drugs was $0.22,

while the average Medicaid reimbursement, just for the drugs alone, was $0.56—

more than double the cost. Indeed, evidence gathered by the Committee suggests

that Medicaid reimbursement is more generous than that of most private payors.

The pharmacies do not generally deny that they reap substantial margins on certain prescription drugs under Medicaid. Rather, they argue that any overpayments

for prescription drugs are necessary to offset Medicaid dispensing fees, which they

assert do not cover the true cost of the services that they provide to the Medicaid

population. This situation is analogous to physician-administered drugs in Medicare.

In the new Medicare law, we made significant changes to the way that physicianadministered drugs were reimbursed, scrapping AWP in favor of a new marketbased Average Sales Price and increasing payments for physician services. A recent

Government Accountability Office study released just last week by this Committee

confirmed the appropriateness of the new payments. Here, as in Medicare, I believe

that we should pay providers fairly, but accurately, so that we can achieve cost savings while ensuring that Medicaid beneficiaries will continue to have access to critically important drugs.

In this context, I am especially pleased to welcome David Balland, from the Texas

Health and Human Services Commission and Patrick O’Connell, from the Texas Attorney General’s Office. Texas is one of the states on the forefront of Medicaid reform, and the approach that the Texas Medicaid program has taken to address

these problems—an approach that should serve as a model to other states—is one

of flexibility, transparency, and fairness. Specifically, Texas has imposed an aggressive reimbursement formula and requires manufacturers to provide transaction data

as a means of verifying acquisition costs, while at the same time having one of the

highest dispensing fees of any state. These reforms have resulted in substantial cost

savings for both the state and the federal government, yet not one pharmacy has

left the program as a result of underpayment.

Much of the good work done by Texas Medicaid and the Attorney General’s Office

is due, in no small part, to the foresight and dedication of Senator John Cornyn,

and I would like to pay Senator Cornyn a special tribute here this morning. As the

Texas Attorney General in 1999, Senator Cornyn identified Medicaid fraud as a priority and created a special section devoted entirely to this issue. I invited Senator

Cornyn to testify here today, but, due to a scheduling conflict, he was unfortunately

not available. Senator Cornyn did submit a written statement for the record that

I would like to attach to these remarks.

I want to thank all of the witnesses at today’s hearing for taking the time to attend today’s hearing. Given the tremendous amount of money spent on prescription

drugs under the Medicaid program, I think that this is an issue worthy of the Committee’s attention, and I hope that this hearing will help to reform a system that

is plainly in a state of disrepair.

Chairman BARTON. Senator Cornyn has submitted a written

statement for the record, and we will put that into the record.

[The prepared statement of Hon. John Cornyn follows:]

6

PREPARED STATEMENT OF HON. JOHN CORNYN, A UNITED STATES SENATOR FROM THE

STATE OF TEXAS

Thank you, Mr. Chairman, for inviting me to testify today before the Subcommittee on Oversight and Investigations concerning government payments for

Medicaid prescription drug reimbursement. I was disappointed my schedule did not

permit me to appear in person, but I am deeply appreciative of the opportunity to

submit these written remarks.

I would also like to thank Patrick O’Connell, Chief of the Civil Medicaid Fraud

Section of the Texas Attorney General’s Office, for his comments. I share Mr.

O’Connell’s pride that Texas was the first state to move from AWP based reimbursement to wholesaler cost and that the Texas Vendor Drug Program is one of the best

Medicaid programs in the country, if not the best. I especially applaud the dedication and enthusiasm that the current Texas Attorney General Gregg Abbott and

Chief O’Connell have shown in continuing the work we initiated during my tenure

as Texas Attorney General combating Medicaid fraud and abuse.

As you are aware, suspicions of overpayments for prescription drugs in Medicaid

programs across the nation have been alleged since the programs were first implemented. In 1977, the U.S. Congress enacted the federal Medicare/Medicaid AntiFraud and Abuse Act, which provided federal funding to states that established

Medicaid fraud and abuse control units. In 1997, Texas’ ability to combat Medicaid

fraud improved when the Texas Legislature enacted Senate Bill 30, which provided

for implementing fraud detection technology, additional monitoring of service providers along with administrative penalties, civil remedies, and criminal sanctions for

fraudulent and abusive actions.

I was sworn in as Texas Attorney General in 1999 and became increasingly concerned about overpayments for prescription drugs in the Texas Medicaid Program

and other specific instances of fraud and abuse. In August of 1999, I created the

Civil Medicaid Fraud Section within my Elder Law Division. Prior to that time, few

investigations, and no lawsuits, regarding civil Medicaid fraud had been pursued.

With the creation of this special Section, we dedicated resources and efforts to fighting fraud, waste, and abuse in the Medicaid system.

I was deeply troubled by some of our discoveries. While there are several examples upon which I could draw, there is one that continues to resonate. In September

of 2000, we filed a landmark case against three drug companies—DEY, Inc., Roxane

Laboratories, Inc., and Warrick Pharmaceuticals Corporation—for civil Medicaid

fraud as part of a complicated scheme to corner the market in respiratory disease

medications.

Typically, when a doctor prescribes medication for a Medicaid patient, a pharmacy

dispenses the medication and then bills Medicaid for reimbursement. In order for

the drug to be eligible for Medicaid reimbursement, the drug manufacturer must

certify the prices at which it sells the drug in writing with the Texas Department

of Health (TDH). TDH uses that certification to calculate the amount of reimbursement pharmacies will receive. Texas at the time was the only state that required

drug manufacturers to certify their prices in order to be eligible for Medicaid reimbursement.

These drug companies falsely reported inflated prices for their respiratory medications to TDH. Then, they turned around and sold these drugs to pharmacies at drastically reduced prices while the pharmacies were reimbursed at the inflated price.

This scheme ensured that pharmacies would dispense the defendants’ drugs over

other less profitable medications. All of this was part of a strategy by the drug companies to increase their market share and ‘‘capture’’ the market. To be blunt, this

was tantamount to stealing from taxpayers. Medicaid funds should be spent only to

provide necessary medical care and prescription medications to those who need it.

Instead, elaborate schemes such as these steal scarce tax dollars to finance corporate market strategies and to inflate illegally the bottom line. Plain and simple:

it is wrong

Two of the defendants ultimately settled for $45.5 million collectively, and the

third is set for trial. This lawsuit sent a clear signal to participants in Medicaid programs across the country that those who try to steal from the Medicaid program

may be prosecuted with a heavy price inflicted.

This is but one example. However, it effectively emphasizes the importance of remaining vigilant in our efforts for those of us charged with protecting the public

trust. I commend you, Mr. Chairman, and the members of this Subcommittee, for

continuing to examine these important issues. And, I appreciate the opportunity to

share with you some of my experiences.

Thank you.

7

Chairman BARTON. Now I want to recognize my distinguished

friend from Massachusetts, one of the members who has been a

real watchdog on this subcommittee, Mr. Markey of Massachusetts,

for an opening statement.

Mr. MARKEY. Thank you, Mr. Chairman, very much and thank

you for having this very important hearing today.

We are going to hear from the Department of Health and Human

Services Inspector General, indicating that the Federal Government is paying far too much for prescription drugs under the Medicaid program.

This is not the first time that such concerns have been raised.

We have been getting reports of these overpayments since the early

1990’s. Yet the Centers for Medicare and Medicaid Services have

continually failed to address their international mismanagement

and the systematic problems that enable drug companies and pharmacies to commit fraud and inflate the prices of their drugs.

Prescription drugs are one of the fastest growing expenses for

Medicaid. Between 1992 and 2002, expenditures for prescribed

drugs increased by 19 percent per year, and by 2003 the Medicaid

program spent over $31 billion on prescription drugs alone. If we

do not address the rising costs of prescription drugs, it will drain

the Medicaid program of the funds needed to provide health care

to our Nation’s most vulnerable populations.

There are three problems with the current system that I hope to

hear more about in today’s hearing. The first is that CMS has been

slow to implement simple cost-saving measures within the agency.

The second problem is that the price the States pay for prescription

drugs has nothing to do with the actual cost of the drug. The third

problem is that the Federal Government is not allowed to use its

market power to negotiate lower prices for consumers.

The Inspector General has identified several simple ways that

CMS could save money if they were more diligent in their administration of the problem. Putting qualified drugs on the Federal

upper limits list as soon as they are approved, for example, could

save over $100 million.

Unfortunately, not all of Medicaid’s problems can be solved so

easily. We also have to address the fact that the current reimbursement system practically begs to be exploited.

The fact that numerous pharmacies and drug companies have

pled guilty to overcharging Medicaid, lying about their costs, taking

kickbacks and submitting false claims show the vulnerability of the

system. We currently have a system where companies are asked to

simply make up the price that the States will pay for their drugs.

This price, called the average wholesale price, has no relationship

to the actual cost of the drug, and the companies that set that price

do not have to provide the States any information about the real

costs of manufacturing the drugs.

It is like being asked to pay $50 for a T-shirt without having access to any information about what others have paid for the same

T-shirt. If the vendor tells you that it is a fair price but doesn’t

have to give you any evidence that it is reasonable, you have no

choice but to trust that seller, that that seller is being honest.

When it comes to spending taxpayer money, we cannot base our

decisions on trust. We need to base them on evidence. In order to

8

ensure that States are not overpaying for prescription drugs, they

should have access to pricing information and the actual costs of

the drugs.

We will hear today about the new program that has been successful in actually reducing spending on prescription drugs. In

April, HHS allowed Michigan, Vermont, New Hampshire, Alaska

and Nevada to form a purchasing pool. By combining their programs, they were able to increase their market power and to negotiate better drug prices. At a time when drug prices were rising at

a rate of almost 20 percent per year, Michigan’s drug prices actually declined about 1 percent in the first year of their pooling program. In response to their success, Administrator Mark McClelland

stated that pools are a proven legal and safe way to lower drug

costs.

However, if evidence suggests that pools work, and CMS acknowledges that they are an effective way to lower costs, then why

is the Federal Government forbidden from creating one large pool

and using its market power to negotiate the best price for Medicaid

and Medicare beneficiaries with the drug companies across our

country?

Today, we are going to hear from Wal-Mart about how they are

reducing costs through the purchasing power of their Sam’s Clubs.

But why can’t we establish an Uncle Sam’s Club that can link up

all of the States to pool their enormous purchasing power of the

Federal and State governments to further drive down the costs of

prescription drugs for every ordinary American in our country?

Why are they forbidden from pooling their resources in order to

help those most dependent upon prescription drugs who are in fact

being tipped upside down and having money shaken out of their

pockets to pay for prescription drugs that every American knows

is overpriced to those vulnerable consumers of needed prescription

drugs?

In order to preserve this critical health care program, we need

to find ways to curb the costs of prescription drugs. Instead of

wasting taxpayers’ dollars on overinflated drug prices, Medicaid

funds could be spent on providing better health care to our country’s most vulnerable populations, the children, the elderly, the

poor and the disabled.

I look forward to hearing from the recommendations of the IG,

the States and other witnesses, and I am compliment you on having this hearing, Mr. Chairman.

Chairman BARTON. Thank you, Mr. Markey.

We now ask our distinguished vice-chairman of the subcommittee, Mr. Walden, for an opening statement.

Mr. WALDEN. Thank you very much, Mr. Chairman.

Let me begin by saying that I, too, share the concerns that the

States and the Federal Government are paying too much for drugs

dispensed to our Nation’s poorest individuals under the Medicaid

program. I look forward to learning more about what we can do to

remedy this situation.

In September 2001, as you have mentioned, this committee held

a hearing that addressed similar problems with the prescription

drug reimbursement under Medicare. The systemic problems and

abuses brought to light during that hearing helped pave the way

9

for significant reforms under the Medicare Modernization Act,

scrapping Medicare’s reliance on the flawed average whole price, or

AWP.

And I note in your committee about Mr. Greenwood saying ‘‘ain’t

what is paid.’’ I think it is maybe always worst price, at least when

it comes to the Government.

We now turn our attention to Medicaid. Despite differences between the two programs, there is one common denominator, and

that is AWP. We have allowed a system to develop where AWP, a

number not defined by statute or regulation, has become the reimbursement standard for the vast majority of Medicaid prescription

drug programs.

Because AWP is not, in many cases, reflective of actual market

prices, it opens the door for the abuses that we will hear about

today. At the very least, it serves to deny the taxpayer the full benefit of price competition in the generic marketplace. Let me give

you an example.

Ipratropium Bromide is a popular inhalation drug used to treat

patients with respiratory problems like bronchitis, emphysema, and

asthma. Data obtained by this committee during this investigation

reveals that between 1998 through 2003 the AWP for most generic

manufacturers in the marketplace for a particular size and

strength of the drug remained constant at $44, while the sales

price dropped from the mid teens to the low single digits. In mid

2000, however, another competitor entered the market with an

AWP of $56 for that same drug; and internal drug company documents show that the existing manufacturers immediately began to

lose business because pharmacies could make more money off of

the higher AWP.

Data obtained by the committee from five of the largest retail

pharmacy operations also show how the Medicaid program failed to

capture the cost savings. In fiscal year 2000, the average cost to

these pharmacies for a single unit of this particular Ipratropium

Bromide product was roughly 20 cents, while their average Medicaid reimbursement was 41 cents for the same product, not including any dispensing fees. And by 2002 the average cost had dropped

to 13 cents, but average Medicaid reimbursement remained at 41

cents.

We will hear today from the Department of Health and Human

Services Office of Inspector General about the substantial cost savings, perhaps totaling hundreds of millions of dollars, that could be

achieved by eliminating AWP as a reimbursement standard, as

well as by placing drugs on the Federal upper limit in a more timely fashion.

I am also pleased that Edward Stratemeier, former Vice President of Legal, Government Relations and Public Policy at Aventis

Pharmaceuticals, a manufacturer of brand name drugs, has agreed

to appear before the committee to discuss problems that he and his

former employer had identified with the use of AWP as a reimbursement standard and the need for AWP reform.

Medicaid prescription drug costs are enormous. We all know

that. And they continue to rise. In fiscal year 2002, total Medicaid

expenditures for prescription drugs exceeded $23 billion; and the

Office of the Actuary at CMS projects that Medicaid expenditures

10

will increase at an average of 12.7 percent per year through 2011.

A recent report from the National Association of State Budget Officers predicts that in 2004 States will, for the first time, spend more

on Medicaid than any other program, including education.

In light of these soaring drug costs under Medicaid, it is imperative that the Federal and State governments do everything possible

to ensure that drug reimbursement is adequate and fair not only

to the taxpayers but also to the pharmacies dispensing the drugs.

To date, the solution adopted by many State Medicaid programs to

the problem of bloated AWPs has been to modify their reimbursement formulas with larger discounts off of AWP. This is a bandaid, not a long-term solution.

A discount off of a bad number is still a bad number, and at

what point does it simply become nonsensical? AWP minus 15 percent? AWP minus 50 percent? AWP minus 80 percent? As in the

case of Medicare, I recognize that, as we consider how to reform

prescription drug reimbursement under Medicaid, we must also

consider the impact on the service providers.

So let me say up front that no one expects pharmacies, or any

other health care providers, for that matter, to serve the Medicaid

population at a loss. If the pharmacies are, in fact, underpaid for

their services, then let’s examine that issue more fully, analyze the

relevant data and take steps to ensure they are reimbursed fairly

for their services and expenses.

The answer is not to proceed with the status quo, however, making up shorts in one area through overpayments in another and

hoping at the end of the day everything comes out in the wash.

I would point out, however, that, according to figures obtained by

the committee, Medicaid dispensing fees are far more generous

than the pharmacies receive from their largest private payors.

I would also like to thank all of the witnesses for appearing here

today, and I hope this hearing will serve as a springboard for

meaningful Medicaid reform in the near future. AWP is a convention that has long outlived its usefulness, and it is time for us to

adopt a reimbursement standard for Medicaid that is more reflective of actual market cost.

AWP, we are told, has been described as the devil we know. But

I guess I would prefer not to dance with this devil at all.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Greg Walden follows:]

PREPARED STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OREGON

Let me begin by saying that I too share the concern that the States and the federal government are paying too much for drugs dispensed to our nation’s poorest

individuals under the Medicaid program. I look forward to learning about what we

can do to help remedy this situation while still maintaining the quality of care that

Medicaid beneficiaries deserve.

In September 2001, this Committee held a hearing that addressed similar problems with prescription drug reimbursement under Medicare. The systemic problems

and abuses brought to light during that hearing helped pave the way for significant

reforms under the Medicare Modernization Act, scrapping Medicare’s reliance on the

flawed Average Wholesale Price, or AWP.

We now turn our attention to Medicaid. Despite differences between the two programs, there is one common denominator: AWP. We have allowed a system to develop where AWP—a number not defined by statute or regulation—has become the

reimbursement standard for the vast majority of Medicaid prescription drug proVerDate 11-MAY-2000 07:48 Feb 24, 2005 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 97275.TXT HCOM1 PsN: HCOM1
11

grams. Because AWP is not, in many cases, reflective of actual market prices, it

opens the door for the abuses that we will hear about today. At the very least, it

serves to deny the taxpayer the full benefit of price competition in the generic marketplace.

Ipratroprium bromide—a popular inhalation drug used to treat patients with respiratory problems (bronchitis, emphysema, and asthma)—serves as an excellent example. Data obtained by the Committee during this investigation reveals that from

1998 through 2003, the AWP of most generic manufacturers in the marketplace for

a particular size and strength of the drug remained constant at $44, while the sales

price dropped from the mid-teens to low single digits. In mid-2000, however, another

competitor entered the market with an AWP of $56 for the same drug, and internal

drug company documents show that the existing manufacturers immediately began

to lose business because pharmacies could make more money off of the higher AWP.

Data obtained by the Committee from five of the largest retail pharmacy operations also shows how the Medicaid program failed to capture these cost savings.

In Fiscal Year 2000 (7/1/00-6/30/01), the average cost to these pharmacies for a single unit of this particular ipratroprium bromide product was roughly $0.20, while

their average Medicaid reimbursement was $0.41 for the same product, not including any dispensing fees. By FY 2002, the average cost had dropped to $0.13, but

the average Medicaid reimbursement remained at $0.41.

We will hear today from the Department of Health and Human Services Office

of Inspector General about the substantial cost savings—perhaps totaling hundreds

of millions of dollars per year—that could be achieved by eliminating AWP as a reimbursement standard, as well as by placing drugs on the Federal Upper Limit in

a more timely fashion. I am also pleased that Edward Stratemeier, former Vice

President of Legal, Government Relations and Public Policy at Aventis Pharmaceuticals, a manufacturer of brand-name drugs, has agreed to appear before the

Committee to discuss problems that he and his former employer had identified with

the use of AWP as a reimbursement standard and the need for AWP reform.

Medicaid prescription drug costs are enormous, and they continue to rise. In Fiscal Year 2002, total Medicaid expenditures for prescription drugs exceeded $23 billion, and the Office of the Actuary at CMS projects that Medicaid prescription drug

expenditures will increase at an average of 12.7% per year through 2011. A recent

report from the National Association of State Budget Officers predicts that in 2004,

states will, for the first time, spend more on Medicaid than any other program, including education.

In light of these soaring drug costs under Medicaid, it is imperative that the federal and state governments do everything possible to ensure that drug reimbursement is adequate and fair, not only to the taxpayers but to the pharmacies dispensing the drugs. To date, the solution adopted by many state Medicaid programs

to the problem of bloated AWPs has simply been to modify their reimbursement formulas with larger discounts off of AWP. This is a band-aid, not a long-term solution.

A discount off of a bad number is still a bad number, and at what point does it simply become nonsensical: AWP minus 15 percent? 50 percent? 80 percent?

As in the case of Medicare, I recognize that as we consider how to reform prescription drug reimbursement under Medicaid, we must also consider the impact on the

service providers. Let me say up front that no one expects pharmacies, or any other

health-care providers for that matter, to serve the Medicaid population at a loss. If

the pharmacies are, in fact, underpaid for their services, then let’s examine that

issue more fully, analyze the relevant data, and take steps to ensure that they are

reimbursed fairly for their services and expenses. The answer is not to proceed with

the status quo, making up for shortfalls in one area through overpayments in another and hoping that, at the end of the day, everything comes out in the wash.

I would point out, however, that according to figures obtained by the Committee,

Medicaid dispensing fees are far more generous than those that the pharmacies receive from their largest private payors.

I too would like to thank all of the witnesses for appearing here today, and I hope

that this hearing will serve as a springboard for meaningful Medicaid reform in the

near future. AWP is a convention that has long outlived its usefulness, and it is

time for us to adopt a reimbursement standard for Medicaid that is more reflective

of actual market cost. AWP has been described by some as ‘‘the devil we know,’’ but

I guess I would prefer not to dance with the devil at all.

Chairman BARTON. Thank you, Mr. Walden.

The Chair would note that we have, in order of appearances, the

distinguished Member from California, Mr. Waxman, and the

equally——

12

Mr. WAXMAN. The more distinguished gentleman.

Chairman BARTON. They are both equally distinguished. One is

the ranking member of the full committee, however. We will recognize Mr. Dingell for an opening statement.

Mr. DINGELL. Thank you, Mr. Chairman; and I thank my colleague. I think he is overly kind to me. And I want to express my

respect and appreciation to him and also to you, Mr. Chairman.

This morning, we are having a very interesting hearing in which

we are trying now to figure out what is going to happen in the future with regard to drug prices under the legislation enacted during the past Congress with regard to Medicare and Medicaid and

prescription pharmaceuticals. The situation is not one in which we

can look forward with any particular comfort.

This committee has been addressing the use of AWP, or the average wholesale price, as the basis of reimbursement for Federal and

State prescription drug programs for several years. As we will

learn today, the drug reimbursement system for Medicaid is built

on layers of artificial price structures, most of which in no way reflect actual costs.

It has also created an environment that puts providers in situations where they can charge higher drug prices to Federal and

State governments and also to private insurers. There have been

piecemeal efforts to address this flawed system and to reduce

prices. There is a rebate program which covers $7 billion a year of

the $30 billion spent for Medicaid prescriptions.

Since 2001, aggressive U.S. Attorneys and State Attorneys General, with the assistance of whistle-blowers such as the ones we

will hear from today, have uncovered efforts to game the system

and have recovered over $1 billion in Medicare and Medicaid overcharges and fines. These lawsuits will continue, with New York

City and the State of Pennsylvania filing the most recent ones.

The States are taking their own steps to reduce drug prices. My

own State of Michigan has been a leader in pooling its bargaining

power with other States to get lower prices. I welcome Paul Rinehart, head of Michigan’s Medicaid program, to this hearing; and I

look forward to his testimony.

The Texas Vendor Drug program, which obtains actual drug acquisition prices from vendors, was recently recommended by an expert panel as one that the Centers for Medicare and Medicaid Services should consider implementing nationwide. I would ask, Mr.

Chairman, at this time that the report be placed in the record.

Chairman BARTON. Without objection, so ordered.

Mr. DINGELL. Thank you, Mr. Chairman.

[The information referred to follows:]

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Mr. DINGELL. We also look forward to learning more about this

program and hearing from our witnesses from Texas.

But these measures alone are not going to solve the health care

problems of our poorest citizens. Nor will taking away health insurance from the poor to reduce the Medicaid rolls.

Medicaid is now an essential part of the Nation’s health care system. In 2003, there were 40.4 million persons covered by Medicaid

for their health needs, or 13.6 percent of our population. If this program did not exist, almost one-third of this Nation’s total population would be totally uninsured. We need to be stepping up our

assistance, and billions of dollars in tax cuts should not come at the

expense of the health of our most vulnerable citizens.

We also need to look at what the Medicare Modernization Act

will do to the States and the elderly poor. Mr. Rinehart will tell

us that Michigan may pay more under MMA for drugs than it ever

did before.

On Sunday, the New York Times ran a disturbing article about

the unworkability of the new Medicare drug plan for the 1.5 million

Americans who live in nursing homes, many of them in different

stages of dementia are receiving drugs through feeding tubes, people obviously unable to come to a judgment about what plan it is

that will serve their interests best.

These people are not on the Internet studying the various drug

cards, nor are they able to. It appears that CMS has no strategy

for serving these people, and I look forward to inquiring of CMS

about these matters at a suitable time. We must address this critical issue then in the next Congress at the earliest time.

Mr. Chairman, I commend you and I thank you for continuing

to focus on the Medicaid drug pricing issues; and I look forward to

the testimony from all of our witnesses.

Chairman BARTON. We thank the distinguished gentleman from

Michigan.

We would ask our distinguished subcommittee chairman of the

Health Subcommittee, Mr. Bilirakis of Florida, for an opening

statement.

Mr. BILIRAKIS. Thank you, Mr. Chairman. Good morning to all.

Today’s hearing, obviously by now, focuses on an issue of great

importance, Medicaid prescription drug reimbursement. Prescription drug payments are one of the fastest growing health care

costs. In 2001 alone, Medicaid spent approximately $20 billion on

drugs; and from 1997 through 2001, Federal Government Medicaid

expenditures, Federal Medicaid expenditures, I emphasize, grew at

more than twice the rate of total Medicaid spending.

The Medicaid program is the largest payor for prescription drugs

nationally, representing about 14 percent of the market. The Federal Government contribution ranges from, as we know, from 50 to

83 percent in matching payments, depending on the State’s per

capita income.

Examining the amount of money the Federal Government pays

for drugs is not an issue—is not a new issue for the Energy and

Commerce Committee. In both the Medicare and Medicaid programs there have been concerns that the Federal Government is

paying too much for drugs. Congress addressed some of those concerns, hopefully, in the Medicare Modernization Act that was

73

signed into law last year. But there is still more work to be done

to ensure that prescription drugs are reimbursed at an accurate

rate.

Medicaid reimbursement for prescription drugs is complicated, as

is already obvious to all of us, and as we will see here today varies

greatly from State to State. The Federal Government sets the maximum drug reimbursement limit.

But within those Federal parameters each State establishes its

own estimated acquisition cost formula. This calculation is based

on data from published drug prices, average wholesale price info,

and wholesale prices. However, States do not necessary have access

to the actual price paid for drugs, as has already been stated.

According to a recent Department of HHS Inspector General report, the difference between the highest and lowest State Medicaid

drug payments ranged between 12 to 4,073 percent. At a glance,

this definitely seems odd, doesn’t it? However, there are many complicated factors as to why State reimbursement policies vary, the

most visible being the acquisition price formula, but there are other

factors as well.

This subject is, as I think, again, obvious to all of us, will be a

top priority for this committee in the 109th Congress. We all look

forward to hearing what our witnesses have to say. I believe and

hope that the information they share with us will help us move forward in the next Congress.

Thank you, Mr. Chairman. I yield back.

Chairman BARTON. Mr. Waxman,the distinguished gentleman

from California is recognized for an opening statement.

Mr. WAXMAN. Thank you very much. I am pleased that the subcommittee is holding this hearing today on issues involving Medicaid prescription drug reimbursement.

Medicaid, as you know, is a critical program for over 52 million

low-income families and children and aged, blind and disabled people who rely on it for their health care services. It is a program

that is costly, and it is a program that strains the budgets of the

States who are struggling to meet the needs of their citizens. It is

a program that needs better tools to control costs and spend dollars

efficiently, and it is a program that, frankly, needs increased fiscal

support from the Federal Government.

While members of this subcommittee might disagree on the best

ways to improve and strengthen Medicaid, what surely all of us

can agree on is that our scarce dollars be spent effectively. We

should not be wasting dollars by overpaying for prescription drugs.

First, of course, in this program as in Medicare, we should be

taking all of the steps we can to lower the price for prescription

drugs. We should be using the bargaining power of negotiation in

order to get better prices. Medicare represents millions of people,

Medicaid represents millions of people, as does private insurance.

We ought to be using that collective buying clout to get better

prices for the prescription drugs in both programs.

Interestingly enough, Medicaid in some ways has been a leader

in this effort. In fact, it was in 1990 when we established that Medicaid would be given the more favorable of the best price for brand

name drugs or a minimum rebate of dollars off the average manufacturer’s price, or AMP.

74

Years before Medicare took similar action, we broke away from

the concept of accepting the average wholesale price, or AWP, as

the price the program should pay. It was an early recognition that

the AWP was an essentially bogus price that bore little relationship

to the actual acquisition police of drugs.

Further, we attempted to ensure competition if there were three

or more generics on the market by limiting the price the program

would pay. But we made a critical mistake when these policies

were developed. Even then, the drug industry was powerful, and

they succeeded in securing a provision in the basic legislation that

kept the best price and the AMP information a secret.

Can you imagine that? The Federal Government knew this information, but we kept it a secret from the States. This has proved

to be a costly error. Without this crucial piece of information,

States who are, after all, responsible for establishing the reimbursement rates for prescription drugs could not set their reimbursement rates appropriately.

As a result, they continued to rely on the average wholesale price

minus some arbitrary amount simply because they did not have the

information they needed to set a more appropriate reimbursement

rate. Well, we at the Federal level bear responsibility for this, but

we can remedy it. We need to make the information on the AMP

and the best price available to the States.

I would hope this administration would ask for the authority to

do this and that Members of the majority party would support it,

even though the pharmaceutical companies might well oppose it. It

might mean taking on these drug companies who seem opposed to

transparency, but it makes a lot more sense to save money this

way than to slash the Federal commitment to the people who depend on Medicaid.

As we will learn today, some States have been very aggressive

in attempting to get this information and require drug companies

to provide it. Too often, they have found that the Federal Government has undercut their ability to do this.

There is a further irony in the fact that the so-called claw-back

provision of the recently passed Medicare prescription drug bill is

designed so that the States that have spent the last few years in

aggressive efforts to control increases in prescription drug expenditures will be disadvantaged for their efforts. They will have their

fiscal obligation to the Federal Government grow at a higher rate

than would have been the case if their prescription drug price control efforts had continued. This is also wrong, and we should fix it.

I hope this hearing today will shed some light on these issues

and help show us a way to save money in Medicaid that will, in

the end, benefit not hurt the millions of Americans this program

is designed to serve.

Thank you, Mr. Chairman.

Chairman BARTON. Thank you, Mr. Waxman.

Not seeing any other members who have not yet made a statement, the Chair would ask unanimous consent that all members of

the subcommittee not present have the requisite number of days to

put their written statement in the record.

Hearing no objection, so ordered.

75

We now want to welcome our first panel. We have Mr. Mark

Jones, who is President of Ven-A-Care in Florida, and we have Dr.

John Lockwood, who is Vice President of that same company also

in Florida.

Gentlemen, we welcome you. Your statements are in the record

in their entirety. We will recognize you, Mr. Jones, and then Dr.

Lockwood for 7 minutes to elaborate on your statement. Welcome

to the subcommittee.

TESTIMONY OF T. MARK JONES, PRESIDENT, VEN-A-CARE OF

THE FLORIDA KEYS, INC.; AND JOHN LOCKWOOD, VICE

PRESIDENT, VEN-A-CARE OF THE FLORIDA KEYS, INC.

Mr. JONES. Mr. Chairman, members of the committee, good

morning. My name is Mark Jones. I am President——

Chairman BARTON. Excuse me. This is an oversight hearing. I

am not used to doing hearings where I have to swear people in.

It is the tradition of this subcommittee, since it is an oversight

and investigation subcommittee, to take all testimony under oath.

Do either of you gentlemen oppose testifying under oath?

Mr. JONES. No.

Chairman BARTON. You also have the right, under the Constitution, to be represented by counsel during your testimony. Do either

of you have counsel here that you wish to advise you during your

testimony?

Mr. JONES. No.

Chairman BARTON. Would you then each of you stand and raise

your right hand.

[Witnesses sworn.]

Chairman BARTON. Now we can start with you, Mr. Jones, for 7

minutes.

Mr. JONES. My name is Mark Jones. I am the President of VenA-Care of the Florida Keys. I wish to thank you for the opportunity

to appear before you today to discuss a matter of vital importance

to the government health care benefit programs such as Medicaid.

Before I go on, this is Dr. John Lockwood, he is the Vice President of Ven-A-Care as well.

Today’s hearing focuses on excessive reimbursement for pharmaceutical products by the States’ Medicaid programs. Deceptive price

reports by some drug manufacturers are causing hundreds of millions in damages to our country’s joint State and Federal health

care programs for the poor. The inflated reimbursements resulting

from deceptive reports of prices have a corruptive effect on our

health care system.

Ven-a-Care has learned this firsthand when it suffered economic

retaliation for its refusal to enter into a business arrangement

where inflated reimbursements were used to enrich the physicians

in order to induce them to increase orders of expensive drugs.

Many Federal and State health care programs establish or ultimately determine reimbursement rates for pharmaceuticals, either

prospectively or retrospectively, using price and sales data directly

or indirectly furnished by pharmaceutical manufacturers.

The government sets reimbursement with the expectation that

the data provided are complete and accurate. The knowing submission of false, fraudulent or misleading information is actionable.

76

The difference between the amount a provider is reimbursed for

a drug and the provider’s cost is known as the spread. In the context that we are addressing today, it means the difference between

the cost of the drug to the pharmacy or other provider and the

amount Medicaid reimburses for the cost of the drug. The greater

the spread the greater the profit.

When a manufacturer reports a price that exceeds the price at

which its drug is selling for in the marketplace, the States’ Medicaid programs determine a reimbursement amount that are higher

than the government intends. The participating manufactures then

engage in conduct known as marketing the spread, by means such

as the following:

Some manufacturers take action to increase reimbursement by

further inflating their reported prices in order to persuade customers to buy their drugs. Some manufacturers train their sales

personnel to pitch the higher reimbursement spreads on their

drugs as compared to their competitors’ drugs.

Reimbursement spreads on manufacturers’ drugs are routinely

marketed through software programs and data provided by wholesalers and group purchasing organizations that show the pharmacy

the comparative spreads on different manufacturers’ drugs so that

pharmacy can choose the drug with the greatest spread.

Notwithstanding the explicit warnings from the OIG, the drug

manufacturer executives who report inflated drug prices and direct

their subordinates to market the spread often contend that their

deceptive conduct should be blamed on the government reimbursement programs themselves. They argue that their reported prices

are no more than list prices and need not be good faith representation of what their drugs actually sell for in the marketplace. Executives and other representatives from these companies have actually

contended that it is the industry standard for them to make up any

price they choose and report it for use by government reimbursement programs, even if the reported prices are more than 10 time

the true prices they know are generally and currently available in

the marketplace.

Such assertions have been rejected by the courts. For example,

in a recent case involving the drug Lupron, United States District

Court Judge Stearns spoke directly to such preposterous assertions

by the drug company defendants.

Judge Stearns wrote, ‘‘Defendants repeatedly assert that they

had no duty to disclose what was publicly known to everyone, that

is, that the Lupron AWP was a sticker price and never intended

to reflect the drug’s true average wholesale price. In support of this

argument, defendants cite a number of government reports acknowledging that published AWPs for prescription drugs often exceed their acquisition cost. The argument is ultimately

unpersuasive. There is a difference between a sticker price and a

sucker price.’’

Judge Stearns then addressed an argument often made by drug

manufacturers who are caught reporting inflated prices. They

argue that the U.S. Congress actually condones and even encourages such deception. Judge Stearns wrote again, ‘‘The suggestion

that Congress would deliberately condone a bribery scheme using

77

public funds to enrich drug manufacturers and physicians is, to say

the least, unusual.’’

It is my hope that my testimony as well as the information gathered through this committee’s investigation will eliminate certain

factors and concerns which I believe are critical to understanding

the Medicaid reimbursement problem. They are: Drug manufacturers choose to have their drugs covered by Medicaid; they are not

required to do so.

Drug manufacturers know that State Medicaid programs rely on

the prices that the manufacturer reports directly or through their

price reporting compendia. As with any system of government reimbursement, pharmaceutical reimbursement is based upon trust,

in this case trust that the drug companies will report their prices

in good faith.

The root of the problem of excessive Medicaid reimbursement for

pharmaceuticals lies with those drug manufacturers who choose to

deceive rather than tell the truth about their prices.

The excuse that a company will lose market share if it reports

prices truthfully should not be accepted from pharmaceutical manufacturers. Other industries such as banking, communications,

electrical power and defense manufacturers have been faced with

similar integrity issues.

Any legislation directed at improving the Medicaid reimbursement system should not inadvertently create a potential defense

through which manufactures may argue that Congress has somehow absolved them from their past defalcations.

Judge Stearns’ decision quoted above illustrates that the manufacturers who have participated in this scheme seek to misconstrue

the intent of Congress as somehow approving their deceptive conduct.

In closing, I would ask that this committee consider the insidious

damage which such deceptive practices have on our free market

system. The contention by drug manufacturers that deception is

somehow justified when it becomes widespread in their industry reveals a serious and fundamental integrity flaw that, if left

unaddressed, threatens the taxpayer, the patient and the industry

itself.

Mr. Chairman and members, thank you for the chance to appear

before your committee. Dr. Lockwood and I are happy to answer

questions.

[The prepared statement of T. Mark Jones follows:]

PREPARED STATEMENT OF T. MARK JONES, PRESIDENT, VEN-A-CARE OF THE FLORIDA

KEYS

Mr. Chairman and Members of the Committee, good morning. I am T. Mark

Jones, President of Ven-A-Care of the Florida Keys. I wish to thank you for the opportunity to appear before you today to discuss a matter of vital importance to government health care benefit programs such as Medicaid: The diversion of hundreds

of millions of taxpayer dollars because some pharmaceutical manufacturers report

falsely inflated prices, knowing that government programs use those reports in setting reimbursement amounts. Ven-A-Care’s past president, Zachary Bentley, appeared before this Committee on September 21, 2001 and testified about the impact

of the same deceptive practices on the Medicare Program. Due in large part to the

hard work of this Committee, protections against such drug manufacturer misconduct were included in the Medicare Modernization Act. I would draw the Committee’s attention to the extensive evidence presented during the September 2001

hearing that exposes how drug manufacturers’ deceptive reports of prices has damVerDate 11-MAY-2000 07:48 Feb 24, 2005 Jkt 000000 PO 00000 Frm 00085 Fmt 6633 Sfmt 6621 97275.TXT HCOM1 PsN: HCOM1
78

aged the Medicare Program and its elderly and disabled beneficiaries. Today’s hearing focuses on excessive reimbursement for pharmaceutical products by the States’

Medicaid Programs, where the same kinds of deceptive price reports, by some drug

manufacturers, are causing wide scale financial harm to our country’s joint state

and federal healthcare program for our poor.

As the information from this Committee’s prior investigations revealed, Medicare

reimburses pharmacies directly for a limited number of drugs, such as the inhalant

drug Ipratopium Bromide when administered with a nebulizer. However, a very

large portion of Medicare Part B drug expenditures directly reimburse physicians

who administer the drug and may receive a direct financial benefit from their decision to use a particular drug. State Medicaid Programs, on the other hand, reimburse all providers for a much larger number of drugs than does Medicare Part B,

and the vast majority of Medicaid drug expenditures are paid to pharmacies that

dispense the drug to the Medicaid beneficiary. Accordingly, the manufacturers’ marketing of the financial inducements, made possible by their false price reports, is

usually directed at pharmacies when Medicaid reimbursement is at issue. As the

cost of the War On Terror climbs and our national deficit grows, Congress faces increasing pressure to reduce federal contributions to State Medicaid Programs. Congressional and Executive Branch scrutiny of deceptive price reporting practices by

drug manufacturers will do much to insure that the scarce dollars remaining are

no longer diverted from their intended purpose of caring for our poor. Federal and

State Medicaid funds must not be used as financial incentives that support individual drug companies’ marketing efforts.

A brief discussion of Ven-A-Care’s history will help put my remarks in the proper

context. Ven-A-Care is a very small specialty pharmacy that was created in the late

1980s to provide infusion, inhalation and injectible pharmaceuticals to seriously ill

patients, outside of the hospital setting, in the Florida Keys. We immediately experienced a high demand for our services due to the large numbers of patients suffering

from HIV related illnesses in Key West. Our early success attracted the attention

of National Medical Care, then the health care subsidiary of WR Grace Corporation,

that organized the referring physicians in the community into a single venture and

attempted to recruit Ven-A-Care’s principals with promises of making us multi-millionaires within a few short years. Our examination of the NMC business plan revealed what appeared to be an unlawful arrangement where excessive reimbursement for pharmaceuticals would be used to generate exorbitant profits. Our concerns about the propriety of the venture were elevated by then recent experiences.

In one instance, we received from Medicare a payment for a cancer therapy in an

amount many times our cost as a very small pharmacy. Assuming that a mistake

had been made, we voluntarily returned the money to Medicare. In another instance, we became concerned that the Florida Medicaid Program was paying excessive amounts for certain infusion therapies and we informed the program supervisors. The organizers of the NMC venture made it very clear to us that ‘‘success’’

would result from using funds generated by inflated pharmaceutical reimbursements to financially induce the participating physicians to increase their prescriptions, of expensive pharmaceutical therapies, many fold beyond that which had previously resulted from their best medical judgment. We did not believe that we could

properly participate and we declined. As a result, the participating physicians redirected their referrals to the new venture in which they had an economic interest

and Ven-A-Care soon lost virtually its entire market. After reporting our concerns

to the appropriate federal authorities and assisting them in their investigations of

NMC’s business practices, Ven-A-Care brought its first action under the Federal

False Claims Act which ultimately led to the United States recovering nearly

$500,000,000 and WR Grace divesting itself of its healthcare businesses.

Our experience with the NMC venture was soon followed by other opportunities

to share in other business arrangements where excessive government reimbursement for pharmaceuticals was used to fund kick-back arrangements and increase

utilization of expensive drug therapies. Again we reported these situations to the

government, gathered evidence through our own investigations and took other actions to assist the United States Department of Justice, the HHS OIG and later the

States’ Attorneys General in their efforts to identify and address the causes of the

inflated reimbursement that was fueling the kinds of kick-back arrangements to

which Ven-A-Care had been exposed.

As an industry insider, Ven-A-Care has had access to information that the federal

and state governments needed to understand the root cause of the inflated Medicaid

drug reimbursements. The following summarizes what we discovered:

a.) The United States government’s policy has been that Medicaid reimbursement

for drugs should be based upon the cost of the drug to the pharmacy, or other

health care provider, who purchases the drug in the free marketplace and must

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not be based upon government price controls or government negotiating power.

This is significantly different from the situation where the government agency

buys the drug directly, such as for the public health service, and gets the benefit of the much lower Federal Supply Schedule Prices.

b.) Medicaid programs pay pharmacies a dispensing fee over and above the amount

reimbursed for the cost of the drug itself. The drug manufacturers’ deceptive

price reports cause the Medicaid Programs to pay excessive reimbursement for

the drugs’ cost to the pharmacy or other provider. All state Medicaid Programs

as required to limit their reimbursement for the cost of the drug itself to an

amount no greater then that based upon the program’s estimate of the acquisition cost (EAC) which in turn is to be based upon prices ‘‘generally and currently available’’ in the marketplace.

c.) Therefore, ‘‘reimbursement’’ in the context of the Medicaid pharmacy benefit, is

the amount that a state Medicaid Program pays the pharmacy, or other provider, for the cost of the drug that it dispenses or otherwise provides to a Medicaid beneficiary.

d.) State Medicaid programs look to prices reported directly to them by the manufacturer, as in the case of the Texas Program, or indirectly through prices the

manufacturer causes to be reported by the three recognized drug price compendia; Red Book, First Data Bank and Medi-Span.

e.) The manufacturers report prices, and cause prices to be reported by the compendia, in three basic formats: Average Wholesale Price (AWP)—a representation of the price of the drug from the wholesaler to the pharmacy or other provider. Wholesaler Acquisition Cost (Cost)—a representation of the cost of the

drug to the wholesaler from the manufacturer. Direct Price (DP)—a representation of the price the manufacturer charges the pharmacy when it buys the drug

directly from the manufacturer.

f.) The term ‘‘spread’’ denotes the difference between one price or cost and another.

In the context that we are addressing today, it means the difference between

the cost of the drug to the pharmacy or other provider and the amount Medicaid

reimburses for the cost of the drug. The greater the spread, the greater the profit.

g.) When the manufacturer of a drug reports, or causes the reporting of, an AWP,

WAC or DP that is materially and deceptively greater than the actual prices

in the marketplace, it causes the Medicaid Programs to calculate an estimated

acquisition cost that is higher than the cost at which the drug is generally and

currently available in the marketplace and thus reimburse at an inflated

amount that causes the spread on the drug to be inflated.

h.) The manufacturers who have chosen to provide deceptive price reports have actively, albeit surreptitiously, taken steps to counteract government efforts to

better estimate drug acquisition costs of prudent purchasers in the marketplace.

—Medicaid reimbursement at a discount off of AWP (eg AWP-15%) is counteracted by companies who report AWPs resulting in spreads of hundreds and even

thousands of a percent.

—Medicaid reimbursement based upon WAC plus a percent, such as that paid by

Florida and Massachusetts, is counteracted by companies that report, or cause the

reporting of, false inflated WACs.

—Medicaid reimbursement based upon DP, such as that paid for some drugs by

California, is counteracted by companies that report, or cause the reporting of, false

inflated DPs.

—Efforts by states that require direct reporting of prices, such as Texas are counteracted by companies that report false prices directly to the state program.

—Efforts by CMS to set caps based on the Federal Upper Limit (FUL), are similarly counteracted because FULs are based upon 150% of the lowest publicly available price for a generic and FULs are inflated when the underlying reported prices

are false.

i.) The participating manufacturers then engage in conduct known as ‘‘marketing

the spread’’ by means such as the following.

—Some manufacturers will have direct discussions with large customers after

which they will take action to increase reimbursement by further inflating their reported prices in order to persuade the large customers to buy their drugs.

—Some manufacturers will train their sales personnel to pitch the higher reimbursement spreads on their drugs, as compared to their competitors’, directly to the

pharmacies.

—The reimbursement spread on manufacturers’ drugs is routinely marketed

through software programs and data provided by wholesalers and group purchasing

organizations that show the pharmacy the comparative spreads on different manufacturers’ drugs so that the pharmacy can choose the drug with the greatest spread.

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Over the last several years, Ven-A-Care has been vigilant in reporting industry

insider information to the United States Department of Justice, the HHS OIG and

the States’ Attorneys General that has enabled them to identify and begin to address pharmaceutical pricing fraud by drug manufacturers. I am only at liberty to

discuss a small portion of those efforts in this open proceeding; however, they are

instructive:

1.) The United States ex rel. Ven-A-Care v. Bayer: Settled in 2001, the ‘‘Bayer 1’’ case resulted in the recovery of $14,000,000 by the Medicaid program and set the

stage for similar actions throughout the United States, as well as more focused

Congressional interest such as this Committee’s September 21, 2001 hearing.

The concept of reimbursement based upon Average Selling Price (‘‘ASP’’) was

included in the Bayer settlement agreement and later incorporated into the

Medicare Modernization Act.

2.) Texas ex rel Ven-Care v. DEY Laboratories and Schering-Plough/Warrick: VenA-Care brought the first case under the Texas False Claims Act against drug

manufacturers for reporting falsely inflated pricing information in order to

cause the Texas Medicaid Program to pay inflated reimbursement which was

in turn used as a marketing tool to induce pharmacies and other health care

providers to select the manufacturers’ drug over their competitors. Then Texas

Attorney General, now United States Senator, John Cornyn, joined with VenA-Care and became the first State Attorney General to pursue action against

pharmaceutical manufacturers for such deceptive price reports that cause Medicaid to overpay for drugs. To date, DEY Laboratories has paid $18,500,000 and

Schering Plough has paid $27,000,000 to compensate the Texas Medicaid Program.

3.) Texas ex rel. Ven-Care v. Roxane and Bohringer Ingelheim: In this case the Texas

Attorney General has joined with Ven-A-Care to pursue recoveries of excessive

Medicaid reimbursements allegedly caused by deceptive pharmaceutical manufacturer price reports. This case is currently in active litigation.

4.) Texas ex rel. Ven-Care v. Abbott Laboratories, Baxter, B. Braun McGaw: In this

case the Texas Attorney General has joined with Ven-A-Care to pursue recoveries of excessive Medicaid reimbursements allegedly caused by deceptive pharmaceutical manufacturer price reports. This case is currently in active litigation.

5.) California ex rel. Ven-A-Care v. Abbott Laboratories: In this case the California

Attorney General has joined with Ven-A-Care to pursue recoveries of excessive

Medicaid reimbursements allegedly caused by deceptive pharmaceutical manufacturer price reports. This case is currently in active litigation.

6.) Florida ex rel. Ven-A-Care v. DEY, Schering-Plough and Roxane Laboratories: In

this case the Florida Attorney General has joined with Ven-A-Care to pursue

recoveries of excessive Medicaid reimbursements allegedly caused by deceptive

pharmaceutical manufacturer price reports. This case is currently in active litigation.

In addition to the above, the following states have brought similar actions against

drug manufacturers for deceptively reporting drug prices resulting in their Medicaid

Programs paying excessive reimbursement: New York, Massachusetts, Connecticut,

Minnesota, Kentucky, Wisconsin, Arkansas, Ohio, Montana, and Nevada. Since the settlement of the Bayer 1 case in 2001, approximately $2,400,000,000

has been recovered from drug manufacturers in cases, brought under the federal

and various states’ False Claims Acts, seeking recovery of excessive reimbursements

paid by the Medicare and Medicaid Programs or recoveries of amounts underpaid

to the Medicaid Rebate Program. (See, ‘‘The Role of the False Claims Act in Reducing Medicare and Medicaid Fraud by Drug Manufacturers: An Update’’, prepared for

Taxpayers Against Fraud Education Fund by Andy Schneider, Principal Medicaid

Policy, LLC, November 2004.) Perhaps more importantly, the industry insider information provided by Ven-A-Care has assisted the HHS OIG to better understand

how drug manufacturers’ deceptive price reports cause immense damage to the

Medicare and Medicaid Programs. The HHS OIG addressed this in the OIG Compliance Program Guidelines for Pharmaceutical Manufacturers, 68 Federal Register

No. 89, pages 23731-23743 (May 5, 2003). The OIG has made it clear that it considers such conduct to be fraudulent and to violate the False Claims Act and the

anti-kickback laws. I have attached a full copy of the OIG’s Guidelines. However,

the following excerpts are directly relevant to today’s proceedings:

‘‘Integrity of Data Used To Establish or Determine Government Reimbursement. Many federal and state health care programs establish or ultimately determine reimbursement rates for pharmaceuticals, either prospectively or retrospectively, using price and sales data directly or indirectly furnished by pharmaceutical manufacturers. The government sets reimbursement with the expecVerDate 11-MAY-2000 07:48 Feb 24, 2005 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6621 97275.TXT HCOM1 PsN: HCOM1
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tation that the data provided are complete and accurate. The knowing submission of false, fraudulent, or misleading information is actionable. A pharmaceutical manufacturer may be liable under the False Claims Act if government

reimbursement (including, but not limited to, reimbursement by Medicare and

Medicaid) for the manufacturer’s product depends, in whole or in part, on information generated or reported by the manufacturer, directly or indirectly, and

the manufacturer has knowingly (as defined in the False Claims Act) failed to

generate or report such information completely and accurately. Manufacturers

may also be liable for civil money penalties under various laws, rules and regulations. Moreover, in some circumstances, inaccurate or incomplete reporting

may be probative of liability under the federal anti-kickback statute.’’

Average Wholesale Price. The ‘‘spread’’ is the difference between the amount

a customer pays for a product and the amount the customer receives upon resale of the product to the patient or other payer. In many situations under the

federal programs, pharmaceutical manufacturers control not only the amount at

which they sell a product to their customers, but also the amount those customers who purchase the product for their own accounts and thereafter bill the

federal health care programs will be reimbursed. To the extent that a manufacturer controls the ‘‘spread,’’ it controls its customer’s profit.’’

‘‘Average Wholesale Price (AWP) is the benchmark often used to set reimbursement for prescription drugs under the Medicare Part B program. For covered drugs and biologicals, Medicare Part B generally reimburses at ‘‘95 percent

of average wholesale price.’’ 42 U.S.C. 1395u (o). Similarly many state Medicaid

programs and other payers base reimbursement for drugs and biologicals on

AWP. Generally, AWP or pricing information used by commercial price reporting services to determine AWP is reported by pharmaceutical manufacturers.’’

‘‘If a pharmaceutical manufacturer purposefully manipulates the AWP to increase its customers’ profits by increasing the amount the federal health care

programs reimburse its customers, the anti-kickback statute is implicated. Unlike bona fide discounts, which transfer remuneration from a seller to a buyer,

manipulation of the AWP transfers remuneration to a seller’s immediate customer from a subsequent purchaser (the federal or state government). Under

the anti-kickback statute, offering remuneration to a purchaser or referral

source is improper if one purpose is to induce the purchase or referral of program business. In other words, it is illegal for a manufacturer knowingly to establish or inappropriately maintain a particular AWP if one purpose is to manipulate the ‘‘spread’’ to induce customers to purchase its product.’’

‘‘In the light of this risk, we recommend that manufacturers review their

AWP reporting practices and methodology to confirm that marketing considerations do not influence the process. Furthermore, manufacturers should review

their marketing practices. The conjunction of manipulation of the AWP to induce customers to purchase a product with active marketing of the spread is

strong evidence of the unlawful intent necessary to trigger the anti-kickback

statute. Active marketing of the spread includes, for example, sales representatives promoting the spread as a reason to purchase the product or guaranteeing

a certain profit or spread in exchange for the purchase of a product.’’

Notwithstanding such explicit warnings from the OIG, the drug manufacturer’s

executives, who report inflated drug prices, often contend that their deceptive conduct should be blamed on the government reimbursement programs themselves.

They argue that their reported prices are no more than ‘‘list’’ prices and need not

be good faith representations of what their drugs actually sell for in the marketplace. Executives and other representatives from these companies have actually

gone so far as to represent that it is ‘‘the industry standard’’ for them to make up

any price they choose and report it for use by government reimbursement programs

no matter how many hundreds or, in many cases, thousands of a percent that their

represented prices exceed the true prices that they know are generally and currently

available in the marketplace. Such assertions have been rejected by the courts. For

example, in a recent case, In re Lupron Mktg. & Sales Practices Litig., 295 F. Supp.

2d 148 ( D. Mass. 2003), brought to recover such price fraud damages for Medicare

beneficiaries whose 20 per cent co-payment had been inflated, United States District

Court Judge Stearns spoke directly to such preposterous assertions by the drug company defendants:

‘‘But this is not a case of nondisclosure. Defendants did not stand mute. As

alleged in the Amended Complaint, defendants trumpeted a lie by publishing

the inflated AWPs, knowing (and intending) them to be used as instruments of

fraud.’’ Id at 647.

‘‘Defendants repeatedly assert that they had no duty to disclose what was

publicly known to everyone, that is, that the Lupron  AWP was a ‘‘sticker

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price’’ and never intended to reflect the drug’s true average wholesale price. In

support of this argument, defendants cite a number of government reports acknowledging that the published AWPs for prescription drugs often exceed their

acquisition cost. The argument is ultimately unpersuasive. There is a difference between a sticker price and a sucker price. If one were confronting a modest markup of the actual AWP for Lupron  (which 300% is not),

intended to make sales of the drug for the treatment of Medicare patients commercially viable (given the 95% of AWP reimbursement rate), it is unlikely that

there would have been a government investigation of TAP’s marketing practices. Similarly, if the same inflated AWP had not been used to set reimbursement rates for private purchasers and insurers, the Amended Complaint would

not have been filed. The Blues, in their response to defendants’ argument, have

it exactly right: ‘‘[I]f everything [about Lupron ] was known to everybody, why

did [d]efendants emphasize secrecy?’’ Blues Memorandum, at 7. Finally, the recognition on the part of government regulators of inefficiencies in the administration of Medicare does not, as defendants contend, amount to condonation of

fraudulent conduct. (Emphasis added) Id at 648.

‘‘. . . As defendants portray the Congressional purpose in setting the reimbursement rate at 95% of AWP, Congress meant to turn a blind eye to the inflated

AWPs as a means of enticing physicians to treat Medicare patients. In other

words, Congress deliberately invited the very fraud of which defendants are accused. As defendants describe it, ‘‘a determination that AWP must be set at the

actual cost to providers would result in lower Medicare payment levels to physicians, prompting many of those physicians to stop treating Medicare patients

because it is not cost-effective for them to do so.’’ Defendants’ Memorandum, at

32. The suggestion that Congress would deliberately condone a bribery scheme

using public funds to enrich drug manufacturers and physicians is, to say the

least, unusual.’’ Id at 648.

The above excerpts from Judge Stearn’s decision illustrate the following corrupted

logic underlying certain drug companies’ rationalization that they have no duty to

tell the truth about prices: government reimbursement systems that trust price representations by drug companies are easy to cheat; therefore many companies cheat;

therefore cheating is the industry standard; therefore cheating isn’t really cheating.

After Judge Stearns rejected the proposition that such a complete lack of integrity

is somehow excused, if it occurs within the pharmaceutical industry, the drug companies in question agreed to pay $150,000,000 in damages.

Like the Defendants in the Lupron case, the manufacturers, who choose to have

their drugs covered by Medicaid, know that state Medicaid Programs are relying on

their price reports to estimate the drug’s cost for reimbursement purposes. For a

significant portion of the dollars expended by the states’ Medicaid Programs, reimbursement is based upon reported prices that fairly and reasonably reflect the price

at which the drug is generally and currently available in the marketplace. It is only

where the manufacturers choose to falsely report their prices that Medicaid pays an

inflated amount. This inflated ‘‘spread’’ is what enables the manufacturers participating in this scheme to use the taxpayers’ money to arrange financial inducements

which are then used to persuade customers to purchase their drug instead of a competitor’s. Moreover, in many cases, the government dollars that are diverted in this

manner encourage excessive utilization of the drug therapy and otherwise have a

corruptive influence on the healthcare delivery system.

Testimony and documents secured from employees of pharmaceutical companies

merely corroborate that the drug manufacturers participating in this deceptive practice are fully aware that they are misleading the States’ Medicaid Programs. We understand that the Committee has also been provided with some of this evidence. We

hope that it will be carefully considered, because it reveals scenarios such as:

1.) A drug company executive suggesting further inflation of price reports, but presented with subordinates’ concerns about the increased government scrutiny of

price reporting practices in 2000, articulated his conscious decision to risk government sanctions in order to maximize sales for as long as he could get away

with it.

2.) A drug company executive presented with a competitor, who had caused a greater spread on WAC based reimbursement in Florida and other states reported

admittedly false inflated WAC prices to the compendia in an effort to gain

greater market share.

3.) The four most senior executives of a drug company crafted a written marketing

plan directly based upon creating and marketing financial incentives to their

customers arising from the company’s manipulation of Medicare and Medicaid

reimbursement through false price representations.

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4.) Drug company executives choose to inflate the reported AWPs for many of their

drugs by several hundred percentage points in order to create greater financial

incentives for their customers and thus avoid price reductions that would otherwise occur due to natural market forces.

5.) Competing drug companies each inflate their price reports for generic versions

of the same drug and thus cause the FULs set by CMS to be themselves inflated because they are based upon 150% of the lowest publicly available price.

6.) After a branded drug comes off patent, competing drug companies each continually decrease their true price due to competition while continually increasing

the spread through their inflated reported price reports, while utilization of the

drug increases exponentially.

7.) Drug company executives testify that they never change the AWP for a drug once

it is established. The evidence shows that they routinely increase AWPs to gain

or retain market share.

8.) Some, but not all, manufacturers fail to report declining AWPs even though they

know the market price of the drug, to all customers, is falling precipitously in

the competitive marketplace and that their deceptive price reports will deprive

the Medicaid Program of the benefits of declining prices.

It is my hope that my testimony, as well as the information gathered through this

Committee’s investigation, will illuminate certain factors which I believe are critical

to an understanding the Medicaid reimbursement problem. They are:

a.) Drug manufacturers choose to have their drugs covered by Medicaid. They are

not required to so.

b.) Drug manufacturers know that Medicaid Programs must estimate the acquisition costs of drugs in setting reimbursement. Millions upon millions of claims

are paid by Medicaid programs each year and scarce dollars cannot, and should

not, be taken away from benefits in order to investigate and determine the individual cost of each prescription.

c.) Drug manufacturers know that the State Medicaid Programs rely on the prices

the manufacture reports directly or through the price reporting compendia.

d.) As with any system of government reimbursement, pharmaceutical reimbursement is based upon trust, in this case trust that drug companies will report

their prices in good faith.

e.) The root of the problem of excessive Medicaid reimbursement for pharmaceuticals lies with those drug manufacturers who choose to deceive rather than

tell the truth about their prices.

f.) Dissembling excuses, such as protestations that a company will lose market share

if it reports prices truthfully, should not be accepted from pharmaceutical manufacturers. Other industries, such as banking, communications, electrical power,

and defense manufacturers have all been faced with similar integrity issues.

g.) Congress addressed the evil of drug manufacturers’ false price representations

in the Medicare Modernization Act by requiring manufacturers to report the Average Selling Price for their drugs. These prices are in turn published by CMS.

Unfortunately, similar tools have not been provided to the Medicaid Program

as evidenced by a comparison of Medicaid FULs with Medicare ASPs for certain

drugs, such as Ipratopium Bromide which are reimbursed by both programs.

The drug’s Medicaid FUL, which is still based on inflated price reports by manufacturers, is several times greater than the ASPs now reported to Medicare.

h.) Any legislation directed at improving the Medicaid reimbursement system,

should not inadvertently create a potential defense through which manufacturers may argue that Congress has somehow absolved them from their past defalcations. Judge Stearns’ decision quoted above illustrates that the manufacturers

who have participated in this scheme seek to misconstrue the intent of Congress

as somehow approving their deceptive conduct.

i.) Insuring now that drug manufacturers, that have reported inflated prices in the

past, face the full consequences of their actions under the law, will provide the

best assurance that drug manufacturers will not misrepresent ASP or other

price information vital to reimbursement decisions in the future.

In closing, I would ask that this Committee consider the insidious damage that

such deceptive practices have on our free market system. The contention by drug

manufacturers, that deception is somehow justified when it becomes widespread in

their industry, reveals a serious and fundamental integrity flaw that, if left

unaddressed, threatens the taxpayer, the consumer and the industry itself. The

noble effort to generate profits must never be permitted to subjugate the higher

duty to tell the truth.

Mr. Chairman and Members, thank you for the chance to appear before your

Committee. I am happy to answer any questions that you may have.

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Chairman BARTON. Dr. Lockwood, you don’t have a statement

that you——

Mr. LOCKWOOD. No, I don’t.

Chairman BARTON. Okay. The Chair would recognize himself for

10 minutes.

Dr. Lockwood or Mr. Jones, explain in layman’s terms what average wholesale price should be. What should it mean?

Mr. LOCKWOOD. Average wholesale price has been a benchmark

for the industry for over 30 years, and for brand drugs AWP is a

fairly reliable benchmark. About 80 percent—at least based on our

studies and government studies and talking to Medicaid program

directors, about 80 percent of the Medicaid dollars are paid on

brand drugs and are fairly accurately reimbursed.

Chairman BARTON. But I want to—I don’t want to know what

the tradition is. I want, in layman’s terms, average wholesale—I

am trying to think, if I go out and I grow cotton, I know what it

costs me for the seed. I know what it costs me for the tractor. I

know what it costs me to own the land, if I am paying on it, or

to rent the land if I don’t own it.

And when I—when that cotton crop is ready to go to market, I

have got a pretty good idea what my costs are. And I add some

profit margin, which is a little bit based on the market and demand

and supply, and that is my average wholesale price, I think.

So, in drugs, all of these different manufacturers who tend to be

running around like we didn’t know what average wholesale price

is, it is some number that we can stick out there, and the higher

the better, because it increases the spread that we can then discount to encourage the pharmacies to use our drug, because they

get a bigger markup on it.

What should it be? I mean, how—if we wanted to set some sort

of a Federal standard in law for average wholesale price, what

should it be? That is my question.

Mr. LOCKWOOD. We believe that average wholesale price should

be a number that is reflective of the underlying marketplace that

the drug manufacturer sees when they look at their own books.

Chairman BARTON. It is——

Mr. LOCKWOOD. Some people interpret it—because AWP is not

defined—but they have sometimes interpreted average to mean

usual, meaning the average or usual wholesale price.

Traditionally, it has been 20 percent higher than the invoice

price that the wholesaler gets. So that when a drug manufacturer

sells to a wholesaler, there is an invoice price.

Chairman BARTON. It is not a cost-based price? It is not based

on the cost of the manufacturer of the drug to actually produce and

market that drug? It is not a cost-based price? It is a market-based

demand price?

Mr. LOCKWOOD. It is a marked-based price. In this country, we

have never instituted price controls. And my partner and I are certainly capitalists, and we don’t believe in price controls. We believe

drug companies should be able to set their own prices. But we

think those prices should be reflective of their underlying marketplace.

We don’t want to get into the business of manufacturers. If they can produce something for $1 and sell it in the market for $10, that

85

is their business. But they shouldn’t report to the government that

when they are selling—actually selling it for $10 that they are selling it for $100. And that is what is happening with AWP, is that

they are saying that this drug costs a hundred dollars, while everyone in the market is buying it for $10.

Chairman BARTON. So we ought to do away—I mean, if it is okay

for the manufacturers to set the price wherever they want, what

we should do from the Federal Government perspective is whatever

you actually sell it for is what you report it for? You sell it for

$1,000, you report it. If you sell it for 10 cents, you report it. But

don’t say I am going to sell it for $1,000, and I am really selling

it for $10.

Mr. LOCKWOOD. Correct. We believe in capitalism. We think that

drug companies should be able to set their prices. They just need

to report them in an accurate, fair and responsible way, much like

the OIG has recommended in their compliance guidelines.

Chairman BARTON. Are the people that are setting this average

wholesale price, is that the manufacturer or is that a middleman

that sets that price?

Mr. LOCKWOOD. Well, there has been argument about that. But

I don’t think anyone argues that compendia certainly use prices

they get directly from manufacturers to calculate AWP.

In some circumstances, manufacturers send the AWP directly to

the compendia and tell them that is their price. In other circumstances, they send a price that they know the compendia are

going to mark up 20 percent, for instance, which has been a common industry amount. So they know that when they send a price

of $100 that the compendia are going to make an AWP of $120.

There is no confusion there.

What is more, our investigations have shown that all of the compendia send a report to the drug manufacturers every year and ask

them to verify that the prices they are reporting are, in fact, correct, accurate, appropriate, and if they are not right, they need to

be changed.

Chairman BARTON. Well, if we have some manufacturers testify

later and I ask them what is wrong with reporting what you really—what your true selling price is, what is wrong with that? What

is it that is so scary or so negative toward their continued existence

as a for-profit entity that they can’t report what the real selling

price is?

Mr. LOCKWOOD. Transparency seems to scare them dramatically.

Exactly why, you may need to ask them. I can speculate, but——

Chairman BARTON. Well, speculate.

Mr. LOCKWOOD. We believe that the real market prices may actually become lower as a result of transparency. My point being that

if you have a drug that you are selling at a high AWP, you may

actually be able to sell that drug for more money than your competitor because you have a better spread.

Look, I don’t want to confuse you, but if you are selling a drug for $10 and your spread, your AWP is $100, you might be able to

get $10; whereas another company might be selling the drug for $5,

but because their AWP is $50, nobody is buying their drug, so that

high AWPs help drag up, in some circumstances, the transaction

prices.

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Chairman BARTON. But if we switch to a system where they actually report real selling price and document and verify it, not price

controls, but some sort of—like we have in the natural gas market

or the oil market or any other market where there is buy and sell

and some sort of a commodity function, over time, everybody is

going to know what the true prices are, at least at the selling price,

not the proprietary cost, but the actual selling price, and the best

win. Right?

Mr. LOCKWOOD. Absolutely. We believe that is fair and appropriate. We think they have that obligation now. There is some disagreement on that. But we believe that the government should be

benefiting from transparency in price transactions. That will lead

to a true marketplace. Currently, Medicaid, Medicare—until your

recent bill—and consumers are price-shielded from true competition that’s occurring in the marketplace. We are seeing these AWPs

but not seeing the real marketplace.

Chairman BARTON. But if we did that, if we went to a requirement for true price reporting, gave some flexibility on the dispensing fee for pharmacies so that, if their cost of dispensing the

prescription for Medicaid is truly high or something, they get reimbursed for that; implement that, have a transition period, a year,

2 years, to go from the old system to the new system, is there any

reason that that wouldn’t work and result in significant savings to

both State and Federal coffers for Medicaid and to the consumers

from the copayment side if they have a Medicaid co-payment?

Mr. LOCKWOOD. We believe it would work, and we believe it’s

ideal. It preserves capitalism in the marketplace, and it fosters

competition, and it’s what should be happening in this market.

Chairman BARTON. Is there anything I haven’t asked you that I

should in the next 10 seconds before my time expires?

Mr. LOCKWOOD. We need more than 10 seconds probably.

Chairman BARTON. Okay. My time has expired.

I recognize the gentleman from Massachusetts, Mr. Markey, for

10 minutes.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

So what you have got here is a situation where a drug company makes a drug, they are selling 100 pills for $100 wholesale to a

company, and so it looks like the price is $100 for 100 pills. But,

actually, there’s a 10 percent discount to the wholesaler, so it’s

really only $90 for 100 pills to the wholesaler, and then the wholesaler can further try to make a profit as a wholesaler on their sale

down the chain.

Meanwhile, the report to Medicaid is that it actually costs $125

for the 100 pills, which is then the price which the Federal Government and the taxpayer has to pay, although we know that the actual price is $90 for 100 pills, because that is the real world. The

made-up number, the average wholesale price, is the price that we

have to pay, Americans have to pay for these pills.

Now, how do they make up this average wholesale price, which

is perhaps 35 percent higher than the actual cost to an actual

wholesaler to purchase these drugs? How do they make up that

number?

Mr. JONES. I think more importantly than how they make it up

is what they are doing with it. Basically, in the generic marketVerDate 11-MAY-2000 07:48 Feb 24, 2005 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6602 97275.TXT HCOM1 PsN: HCOM1
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place right now, manufacturers are—they are always in control of

their prices. They own every price that is ever published; it’s theirs.

They are taking those published prices, using the difference between what they are selling them for and what the end buyer that

is going to build a program gets reimbursed for as their marketing

tool to sell their drugs. So that is called the spread. A manufacturer reports price; $125 is the AWP. Medicaid uses that $125 to

reimburse whomever is billing it, yet they sell it for $90. Well, the

difference between $90 and $125 is the spread. That is the financial incentive that these companies use to sell their drugs, because

you are talking about a generic market. You are talking about a

marketplace in general where this is 7 or 8 different manufacturers

of the same drug.

Mr. MARKEY. Okay. Well, we held our first hearing on average

wholesale price in 2001. The drug companies have paid over $2 billion in fines, penalties, reimbursements to the Federal and State

governments. Now, that’s a lot of money. But has anything really

changed in the marketing of prescription drugs to the retailer since

2001?

Mr. JONES. Well, I think, for those manufacturers that have participated in paying that money, it has changed.

Mr. MARKEY. Okay. How about for the marketplace in general?

Mr. JONES. I think the marketplace obviously has an awareness

of what they are doing. I mean, maybe a little anecdotal evidence

here: Over the time period that we have been investigating this, we

have heard drug manufacturers first claim that they didn’t know

where AWP came from; it wasn’t their number. And then that

evolved into, yes, we set the AWPs. And then we heard drug manufacturers say, we don’t know anything about marketing the spread.

We are not interested in marketing the spread; we are only interested in the price that we charge our customer. But we finally

evolved into, yes, there is a spread out there, and, yes, we do market it. And, now, we are at the point with this industry where they

are saying, look, it is so messed up, everybody wants to buy drugs

based solely on the spread value, and we can’t stop it even if we

want to.

Mr. MARKEY. So has the spread between the average wholesale

price paid by the retailers been reduced, or is the average wholesale price as false as it always was?

Mr. JONES. Well, obviously, depending on the drugs, because different drugs have different methods of being—you know, pricing.

But I think——

Mr. MARKEY. Which drugs still have a false price?

Mr. JONES. The generic industry drugs. Basically, your generic

drugs. That’s how they are marketing them in this country right

now.

Mr. MARKEY. So the industry argues that they still need a very

high average wholesale price whether it is openly marketed or not.

Is that correct?

Mr. JONES. Yes.

Mr. MARKEY. That’s their argument. Now, is it a justified argument?

Mr. JONES. Absolutely not.

Mr. MARKEY. Why not?

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Mr. JONES. Because they are using precious government funds as

the incentive for selling their drugs, to market their drugs with.

Mr. MARKEY. So one of the witnesses on the third panel will testify that the real acquisition costs for wholesalers is the reported

wholesale acquisition cost plus 5 percent. Is that a good base price

to use for reimbursements?

Mr. LOCKWOOD. Well, for some brand drugs, that is an accurate

number. But for a whole host of other drugs, the wholesale acquisition cost has been altered over time and is no longer an accurate

number. We discovered that in Texas certainly. Texas has paid off

of a price to the wholesaler, and we have found essentially that

there is fraud in the WAC marketplace as well.

Mr. MARKEY. So what is your view of the Federal upper limits

set on drugs by CMS, by the Federal Government? Do they reflect

the real cost of the drug?

Mr. LOCKWOOD. The Federal upper limit has been an attempt by

the government to ensure prudent purchasing in generic drugs, and

they essentially are saying, this is a ceiling price, we are not going

to pay anything more than this. The problem with the FUL is that

it is based on reported prices and that, if a manufacturer or a

whole host of manufactures are reporting inflated prices, whether

it be WAC, direct price or average wholesale price, if those are inflated, the resulting FUL is inflated.

Mr. MARKEY. FUL means?

Mr. LOCKWOOD. Federal upper limit. It’s an upper limit price

that CMS creates to limit reimbursement on generics. So that the

lowest generic price reported, if it’s $100, the FUL basically says,

we are not going to ever pay more than $150.

Mr. MARKEY. Well, a markup of a spread of 25 to 35 percent

seems incredibly high and unreasonable to me for a markup in a

commodity marketplace. Don’t you agree?

Mr. LOCKWOOD. We agree with that. We are proponents of average sales price.

Mr. MARKEY. So if every wholesaler is able to reap a 25 to 35

percent spread, doesn’t that suggest that there isn’t real price competition in the prescription drug market?

Mr. LOCKWOOD. Well, in fact, wholesalers don’t receive those

kind of benefits. Generally speaking, wholesalers are probably

making 1 or 2 or 3 percent.

Mr. MARKEY. How about the pharmacies? The pharmacists are

then taking advantage of their spreads. And, you know, we are not

against paying pharmacists appropriately and fairly. Do the pharmacies deserve to get a 25 to 35 percent markup in the price of

drugs to grandma who is standing there in front of the counter? Do

they deserve that kind of markup?

Mr. JONES. Medicaid is trying to estimate acquisition cost; 30

percent markups over acquisition costs are not realistic in the Medicaid program.

Mr. MARKEY. So what is the fix then? How do you make sure

that grandma isn’t digging through her pocketbook standing there

to pay a 25 to 35 percent markup for a drug that we all know is

nowhere near that cost in terms of its manufacture and delivery

right to that counter? Why should she, knowing she should have

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to take that pill in a half an hour, have to pay that money? And

how do we fix that problem at that counter?

Mr. LOCKWOOD. In fact, your 25 and 30 percent is very low. If

we could bring up slide number 6, perhaps, this will give you an

idea. And it is in your binder under number 4. If you will look at

it, you can see that there are huge, huge spreads involved in some

of these common generic drugs. In the case of Fluoxetine, we are

talking about an AWP of $259.85, and the current cost last week

is $4.25 for that bottle, for the whole thing. And even the FUL isn’t

capturing this.

Mr. MARKEY. So we have got a situation here where the pharmacist is saying that, for grandma, she has to pay—that is, the

Federal Government or the States have to pay—25 to 35 percent

more for the drugs. But the States could be using that money to

lower the cost for grandma to be in a nursing home, to lower the

cost for more children to be covered by a medical program that

would increase the health of the children in that State. And yet the

pharmacy is saying, we won’t give this drug to grandma unless you

give us this 25 to 35 percent markup.

So what we need from you in 30 seconds is, how do you fix that?

What do you recommend to fix that at that counter to make sure

that the drugs are what—are a price that they should be, so that

all the rest of the money could then be used to help grandma and

the children in that community to have a higher level of health

care?

Chairman BARTON. And the gentleman’s time has expired. We

will let the witnesses answer the question, and then we are going

to have to go to Mr. Walden.

Mr. LOCKWOOD. I think we like average sales price. The GAO

study that just came out I think 6 days ago, I think, has verified

that average sales price is an effective way of estimating drug

costs. And then, by all means, taking care of the pharmacies, paying them a reasonable dispensing fee for their services. They have

to make a profit. They have to stay in business. They have to help

distribute our drugs.

Mr. MARKEY. In other words, use the Medicare system to determine the price, rather than this system that Medicaid is now using,

because the Medicaid system allows for the taxpayer and grandma

to get ripped off in terms of the benefits they receive. Is that correct?

Mr. LOCKWOOD. We like the ASP system.

Mr. MARKEY. You like the Medicare system better than the Medicaid system.

Mr. LOCKWOOD. The new Medicare system, yes, sir. Yes, sir.

Mr. MARKEY. Thank you.

Chairman BARTON. I would like to point out before we recognize

Mr. Walden that we have changed in Medicare to the average sales

price in this MMA, the Medicare Modernization Act. CBO says that

should save about $15 billion over the next, I think, 10 years. So

I am not saying we have got it right in Medicare, but we are moving in the right direction. And the purpose of this hearing is to see

if we can’t do a similar thing in Medicaid. And we obviously see

that there are lots of areas we can improve in.

With that, we would recognize Mr. Walden for 10 minutes.

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Mr. WALDEN. Thank you, Mr. Chairman. And before I start asking questions, I would just like to move that the documents that

are contained in the exhibit binder be made a part of the official

record.

Chairman BARTON. Without objection, so ordered.

Mr. WALDEN. Thank you, Mr. Chairman.

You know, gentlemen, it seems to me like this is the proverbial

$500 toilet seat of Medicaid, the AWP is. And I am wondering what

the FUL is, because if you look at your chart there, the Federal

upper limit doesn’t seem to be a standard that works either, compared to the price that is being paid. Is that correct?

Mr. JONES. Unfortunately, it’s a price that is determined off of

the manufacturer’s reported prices. So it is as vulnerable to price

manipulation as any other.

Mr. LOCKWOOD. Could we bring up slide 8?

Mr. WALDEN. I was just going to go to slide 8. Indeed. There you

are. All right. Go ahead.

Mr. LOCKWOOD. This slide is based on current prices, and the

ASP plus 6 from the second quarter of 2004. So I don’t—we are

mixing apples and oranges a little bit here. The current cost price

is listed in the column that is highlighted.

Mr. WALDEN. Okay. So let us take Ipatropium; $3.50 is the current price?

Mr. LOCKWOOD. Yes, sir.

Mr. WALDEN. As of when?

Mr. LOCKWOOD. About 3 days ago.

Mr. WALDEN. And the Federal upper limit is as of a year ago?

Mr. LOCKWOOD. Yes.

Mr. WALDEN. And why is that price from November 2, 2003?

Mr. LOCKWOOD. Well, that was the date the FUL was changed.

Mr. WALDEN. And isn’t that another issue that we face, is updating the FUL list?

Mr. LOCKWOOD. Yes, we do. But I don’t know if the reported

prices have changed or not. In fact, they may not have changed in

the past year. If the manufacturers are continuing to report the

same prices they did at that time, the FUL won’t change.

Mr. WALDEN. Well, I think there is also an issue in the IG’s report about how often these prices get adjusted, once it is determined there are generics on the market, that there is a continuing

problem there that may date back a decade it seems like or at least

a half a decade if not more. Well, how current is the AWP? Is that

the same issue?

Mr. LOCKWOOD. The AWPs are current now.

Mr. WALDEN. So the $44.10 AWP for Ipatropium is a current

price?

Mr. LOCKWOOD. Yes, sir.

Mr. WALDEN. So you are looking at more than 10 times the price.

The spread is more than 10 times the actual price.

Mr. LOCKWOOD. Yes, sir.

Mr. WALDEN. And who is pocketing that difference?

Mr. LOCKWOOD. In general, the pharmacies, the providers.

Mr. JONES. And manufacturers are also benefiting by market

share.

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Mr. WALDEN. Getting market share. So there is a marketplace

working here. Isn’t there?

Mr. LOCKWOOD. Absolutely.

Mr. WALDEN. It’s just not to the benefit of the person paying the

bill. And generally, in America, marketplaces we like are the ones

that benefit the buyer. Isn’t that how you foster competition?

Mr. JONES. The consumer is not benefiting here.

Mr. WALDEN. The consumers are losing. The States are losing.

The Federal Government is losing, and the people in between are

making at least what would appear to be a tidy profit.

Now, we also have to recognize that this AWP isn’t necessarily

the price being paid. Right?

Mr. LOCKWOOD. That’s correct.

Mr. WALDEN. Because they will discount off of that.

Mr. LOCKWOOD. And it would default to the FUL for most State

Medicaid programs.

Mr. WALDEN. And are these FUL current cost AWP prices, are

they fairly representative of all the drugs, or are these the worstcase examples?

Mr. LOCKWOOD. These are not the worst cases. In fact, I have—

I’ve included a couple of charts over a wide range of drugs.

Mr. WALDEN. Do you want to reference those?

Mr. LOCKWOOD. It’s in your binder under number 4. And these

represent drugs that are antidepressants, inhalant drugs, antibiotics, cancer drugs, such as tamoxifen used in breast cancer, and

high blood pressure drugs. So this is over virtually the entire drug

marketplace; it’s not just one little niche where this is occurring.

Mr. WALDEN. Now, you are seeing some—I will probably not pronounce this correctly, but Ranididine.

Mr. LOCKWOOD. Ranididine.

Mr. WALDEN. I got that wrong.

Mr. LOCKWOOD. It’s a drug used to control stomach acid that is

now actually over-the-counter.

Mr. WALDEN. And we’re paying $44.90; well, the current cost is

$44.92 over-the-counter?

Mr. LOCKWOOD. That’s for a bottle of 1,000 pills, the current cost is $44.92.

Mr. WALDEN. And the AWP is $1,480?

Mr. LOCKWOOD. Yes, sir.

Mr. WALDEN. And that is a current AWP?

Mr. LOCKWOOD. Yes, sir.

Mr. WALDEN. All right. Have you done any analysis of how good

a job these Federal upper limits do in capturing cost savings?

Mr. LOCKWOOD. Well, they certainly reduce, as you can see in

that drug. If the government is paying $341 instead of $1,480,

that’s a significant cost savings. But when you compare the FUL,

if you look at the FUL spread on that column, you can still see that

there is a huge, huge profit involved there. And it is because the

FUL is based on reported prices that manufacturers do what—

seem to do what they want with.

Mr. WALDEN. What I have struggled with is why this isn’t considered some sort of fraudulent billing practice.

Mr. LOCKWOOD. I believe we consider it fraud.

Mr. WALDEN. Why?

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Mr. LOCKWOOD. Because of—actually, the OIG probably did a

much better job of explaining it than I could. I am not an attorney.

But the OIG really set down the guidance to manufacturers in

2003, and they point out that these type behaviors may be actionable under the False Claims Act and under the Anti-kickback Statute. And I am no attorney, but I am relying on them.

Mr. WALDEN. Can you—well, several drug manufacturers have

asserted in their written statements that the current Medicaid reimbursement system effectively puts them between a rock and a

hard place. They can’t lower their AWP to make it more reflective

of actual market prices without losing all of their business. How do

you respond to that argument? And I have got some e-mail traffic

from one agency that indicates very clearly there is enormous market pressure to raise the AWP or you lose market share.

Mr. JONES. Certainly they use the reported prices to gain market

share in the generic marketplace. Off the top of my head, when I

think about that statement, they corrupted the system. They are

the ones that are responsible for reporting the prices. Those prices

come from them, and the selling prices come from them. So, now,

they find themselves in that untenable position of not being able

to adjust or correct a system that they have already corrupted.

Mr. LOCKWOOD. They can’t stop the fraud.

Mr. JONES. They did too good of a job educating the consumers

who are going to build the programs, the pharmacists or the doctors or whomever is receiving the benefit of selling that drug. They

have educated them so well, they have——

Mr. WALDEN. They are marketing the spread.

Mr. JONES. Absolutely.

Mr. WALDEN. And the idea is that the bigger spread, the more

the take.

Mr. JONES. The higher the utilization in certain circumstances.

Mr. LOCKWOOD. Manufacturers will tell you they can’t quit doing

this unless everyone stops at once.

Mr. WALDEN. Which is why it is up to us to make that change.

Isn’t it?

Mr. LOCKWOOD. Because if there is a half a dozen companies in

the market and one of them stops——

Mr. WALDEN. They are out of business.

Mr. LOCKWOOD. They are out of business. Now, Abbott Laboratories did some significant price changes in 2001 that significantly

lowered their prices in the marketplace, and I think they should be

commended for it.

Mr. WALDEN. And what was the impact of that? How are they

doing?

Mr. LOCKWOOD. Well, they lowered AWPs on a whole host of

drugs enormously. Now, I don’t have that information in front of

me, but they made a substantial change in their price reporting on

a whole host of drugs.

Mr. WALDEN. Can you turn to tab 5 in your binder there, please,

sir, in the final minute and a half I have here. This exhibit is information on pricing from a company called Innovatix—is that right?

Innovatix, your home infusion specialists. And I am intrigued, because this would seem to be a document available—how? Through

prescription service or something?

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Mr. LOCKWOOD. To members, it’s available over the Internet.

Mr. WALDEN. Members of?

Mr. LOCKWOOD. Innovatix.

Mr. WALDEN. Okay. And it lists the AWP spread, the AWP. It’s

pretty hard to read on this graph. And then the contract price,

right?

Mr. LOCKWOOD. Yes, sir.

Mr. WALDEN. Doesn’t this give us the data where we could make

more informed decisions about actual costs of drugs being sold out

on the market?

Mr. JONES. These reflect prices in the marketplace.

Mr. WALDEN. And isn’t that what Medicaid and Medicare and

other consumers should be paying based on that?

Mr. JONES. Absolutely.

Mr. LOCKWOOD. We believe that.

Mr. WALDEN. Now, there are some who would make an argument

that, if you just add a percentage to this price, say contract price

plus 6 percent for overhead, you are going to distort the market as

well and just continue to try and drive up price to get the higher

percentage. How do we wrestle with that?

Mr. LOCKWOOD. Those are difficult issues. It’s hard unless you

have a prospective payment program like Medicare has for hospitals to control every cost. I think our effort has been to try to get

to real market prices and then deal with that.

Mr. WALDEN. Because what we don’t want to do here is create

another AWP, another system that functions in an inverted way,

if you will. So, appreciate your testimony today. Thank you, Mr.

Chairman.

Chairman BARTON. Before we go to the next panel, the key

though is the government reimbursement rate has got to be based

on an actual price that somebody pays, not on some artificial posted price.

Mr. LOCKWOOD. Yes, sir.

Chairman BARTON. We have got to change like we have in Medicare from some sort of a, I won’t say a made-up price, but a—just

a sticker price to what somebody who is actually going to use the

drug is paying.

Mr. JONES. Something that has a basis in reality in the marketplace.

Chairman BARTON. And that has to be transparent. It has got to

be verifiable, and there has to be some ability for willing buyers

and willing sellers to have some degree of certainty that that is a

real price that is available to anybody that meets the terms and

conditions of quantity and deliverability and things like that.

We want to thank you for your testimony. There may be some

written questions for the record, and we would ask that you reply

as quickly as possible because we are going to attempt to legislate

in this area in the next Congress.

Mr. WALDEN. Trust but verify, Mr. Chairman.

Chairman BARTON. Trust but verify. I have heard that somewhere. But thank you, gentlemen. You are excused.

We would now like to have our second panel come forward. We

have Mr. George Reeb, who is the assistant inspector general, Centers for Medicare & Medicaid Audits. He is accompanied by Mr.

94

Robert Vito, regional inspector general for evaluations and inspections, from the Philadelphia region.

We also have Mr. Dennis Smith, who is the director of the Center for Medicaid & State Operations, Center for Medicare and Medicaid Services here in Washington.

We have Mr. Patrick O’Connell, who is the assistant attorney

general for civil Medicaid fraud in the Texas Attorney General’s Office in Austin, Texas.

Mr. David Balland, who is the associate commissioner for Medicaid and CHIP, the Texas Health and Human Services Commission in Austin.

And Mr. Paul Reinhart, who is the Medicaid director for the

State of Michigan in Lansing, Michigan.

Welcome, gentlemen. It is the tradition of this subcommittee to

take all testimony under oath. Do any of you object to testifying

under oath?

You also have the right to be advised by counsel during your testimony. Do any of you have counsel with you that you wish to also

swear in?

Will you all please rise and raise your right hand.

[Witnesses sworn.]

Chairman BARTON. Your testimony is in the record in its entirety. We are going to start with you, Mr. Reinhart, and we are

just going to go right down the row and give each of you gentlemen

that wish to elaborate on your testimony 7 minutes to do so. So

welcome to the subcommittee, Mr. Reinhart.

TESTIMONY OF PAUL REINHART, MICHIGAN MEDICAID DIRECTOR; DENNIS SMITH, DIRECTOR, CENTER FOR MEDICAID

AND STATE OPERATIONS, CENTERS FOR MEDICARE AND

MEDICAID SERVICES; GEORGE M. REEB, ASSISTANT INSPECTOR GENERAL, CENTERS FOR MEDICARE AND MEDICAID

AUDITS, ACCOMPANIED BY ROBERT VITO, REGIONAL INSPECTOR GENERAL FOR EVALUATION AND INSPECTIONS,

PHILADELPHIA; DAVID J. BALLAND, ASSOCIATE COMMISSIONER FOR MEDICAID AND CHIP, TEXAS HEALTH AND

HUMAN SERVICES COMMISSION; AND PATRICK J.

O’CONNELL, TEXAS ATTORNEY GENERAL’S OFFICE

Mr. REINHART. Thank you. Good morning, Mr. Chairman, and

members of the subcommittee.

Chairman BARTON. Pull that microphone directly toward you, sir,

please. Thanks.

Mr. REINHART. Good morning, Mr. Chairman, and members of

the subcommittee. Thank you for this opportunity to discuss Medicaid prescription drug policies. My name is Paul Reinhart, and I

am the director of the Michigan Medicaid program.

While we work very hard to constrain cost increases in all areas

of the Medicaid program, Michigan’s pharmacy cost containment

efforts have been particularly effective. Unfortunately, one aspect

of the Medicare Modernization Act will increase Medicaid pharmacy costs, at least in the short term.

The Michigan Medicaid program utilizes many strategies to hold

down the cost of the pharmacy benefit. The three major initiatives

we have used in Michigan are: Preferred drug lists; the multi-State

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prescription drug purchasing pool; and limiting reimbursements to

pharmacists to their actual acquisition drug costs. These strategies

have been quite successful and have produced savings not only for

Michigan but also for the Federal Government. In fiscal year 2003,

the first year of our preferred drug list program, per script cost increases declined to 4 percent from the 11 percent increases that

routinely occurred in prior years.

Similarly, in fiscal year 2004, the first year of our multi-State

purchasing initiative, per beneficiary costs for prescription drugs

actually declined by about 1 percent. We believe our aggressive cost

containment programs saved us $130 million in fiscal year 2004.

The Michigan Medicaid program, like a growing number of

States, uses a preferred drug list or PDL to discourage physicians

from prescribing high-cost drugs when lower-cost but equally effective drugs are available. Here is how the PDL works.

A committee of physicians and pharmacists and Medicaid staff

use evidence-based information and cost to decide which drugs will

be included on the preferred list. Drugs not on the list are available, but the prescribing physician must secure prior authorization

from our pharmacy benefit manager. This program has substantially increased the use of low-cost generic drugs.

The ability of the preferred drug list to generate savings is greatly enhanced by our multi-State pharmacy purchasing program.

When Governor Granholm began her term in January 2003, she directed the Medicaid agency to develop a multi-State pharmaceutical purchasing program. She believed that manufacturers

would be willing to give State Medicaid programs a better price for

their products in exchange for access to a larger market. And she

was right. In mid 2003, Michigan and Vermont began a joint purchasing program for Medicaid prescription drugs and asked the

Centers for Medicare and Medicaid Services for permission to add

additional States to the program.

After a series of delays, in April 2004, CMS finally authorized

Michigan, Vermont, Nevada, Alaska and New Hampshire to create

an even larger pool and jointly negotiate better prices from pharmaceutical manufacturers. This larger pool will save Michigan an

additional $13 million this year. CMS has also recently authorized

Minnesota and Hawaii to join the pool, which should increase savings even more.

We have also generated substantial savings in Michigan by limiting Medicaid payments to pharmacists to their actual acquisition

costs. We do this by significantly discounting payments for brandname drugs and through daily adjustments of our payments for generic drugs to the best price available that day from pharmaceutical distributors.

Finally, while the Medicare Modernization Act certainly has

many positive aspects, one component of that act is likely to increase costs for States that have effectively managed the drug benefit for dual eligibles. Michigan has been able to hold down the rate

of growth in pharmacy spending to well below 5 percent, but the

MMA’s mandatory State contribution will be determined using

much higher inflation factors. Even after adjusting for the declining contribution percentage, we estimate that the clawback will inVerDate 11-MAY-2000 07:48 Feb 24, 2005 Jkt 000000 PO 00000 Frm 00103 Fmt 6633 Sfmt 6602 97275.TXT HCOM1 PsN: HCOM1
96

crease Michigan’s costs by about $20 million in fiscal year 2006 and

$30 million in fiscal year 2007.

Conclusion: I hope my remarks today demonstrate that, at least

in Michigan, we are not paying too much for the pharmaceutical

products used by Medicare beneficiaries.

[The prepared statement of Paul Reinhart follows:]

PREPARED STATEMENT OF PAUL REINHART, REPRESENTING THE STATE OF MICHIGAN

Good morning Mr. Chairman and distinguished members of the Subcommittee. I

want to thank you for this opportunity to discuss the Michigan Medicaid pharmacy

program. My name is Paul Reinhart and I am the director of the Michigan Medicaid

program. Prior to working in this capacity in Governor Granholm’s Administration,

I served as the Director of the Office of Health and Human Services in Governor

Engler’s Department of Management and Budget.

While we work very hard to constrain cost increases in all areas of the Medicaid

program, our pharmacy cost containment efforts have been particularly effective and

I appreciate the opportunity to tell you about them. I would also like to discuss the

effect the Medicare Modernization Act will have on our ability to constrain Medicaid

costs.

Pharmacy Cost Containment Programs

As you know, each state chooses a reimbursement methodology for its Medicaid

program. The Michigan Medicaid program utilizes many strategies to hold down the

costs of the pharmacy benefit, but the three major initiatives we have used in Michigan are:

• A preferred drug list;

• The multi-state prescription drug purchasing pool; and

• Limiting reimbursements to pharmacists to their actual drug acquisition costs

These initiatives have been extremely successful in constraining our prescription

drug costs, producing savings not only for Michigan, but also for the federal government..

In fiscal year 2003, the first year of our preferred drug list program, our per-script

cost increase declined from 11% to only 4%. In fiscal year 2004, the first year of

the multi-state purchasing initiative, per-beneficiary costs for prescription drugs actually declined about 1%. We believe our aggressive cost containment programs reduced pharmacy spending in fiscal year 2004 from $770 million to $640 million, a

savings of $130 million.

I have attached some charts at the back of this presentation that detail these

trends.

Preferred Drug List

The Michigan Medicaid program, like a growing list of states, uses a preferred

drug list (PDL) to discourage physicians from prescribing high cost drugs when

lower cost, but equally effective, drugs are available. Michigan instituted the PDL

in the last quarter of fiscal year 2002. A ‘‘Pharmacy and Therapeutics Committee’’

of physicians and pharmacists appointed by the Governor uses evidence-based information to decide which drugs will be included on the preferred list. Drugs not on

the list are, of course available, but the prescribing physician must secure prior authorization from our pharmacy benefit manager or from one of the physicians employed by the Medicaid agency. This program has substantially increased the use

of generic drugs. Generic drugs now account for well over 50% of the drugs paid

for by the Michigan Medicaid program.

Multi-State Prescription Drug Purchasing Pool

The ability of the preferred drug list to generate savings is greatly enhanced by

our multi-state pharmaceutical purchasing program. When Governor Jennifer

Granholm began her term in January of 2003, she directed the Michigan Medicaid

agency to develop a multi-state pharmaceutical purchasing program. She felt that

manufacturers would be willing to give state Medicaid programs a better price for

their products in exchange for access to a larger market. And she was right.

In mid-2003, Michigan and Vermont began a joint purchasing program for Medicaid prescription drugs and asked the Centers for Medicare and Medicaid Services

(CMS) for permission to add additional states to the program. After a frustrating

series of delays, in April of 2004, CMS finally authorized Michigan, Vermont, Nevada, Alaska and New Hampshire to create an even larger pool and jointly negotiate

better prices from pharmaceutical manufacturers. This new larger pool generated

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price discount proposals from over 40 manufacturers (when only two states were involved in FY03, 26 pharmaceutical manufacturers submitted discounted price proposals). These new prices are estimated to save Michigan an additional $13 million

per year on prescription drugs. CMS has also recently authorized Minnesota and

Hawaii to join the pool, which should produce further savings when prices are renegotiated with pharmaceutical manufacturers next year.

We strongly encourage CMS to expedite approvals of additional states that want

to enter the pool. This will allow additional cost savings to both state and federal

governments.

Limiting Product Reimbursements to Pharmacists

In addition to the efforts just discussed, we have generated substantial savings

in Michigan by limiting product reimbursements paid to pharmacists to the pharmacist’s actual product acquisition cost.

We accomplish this in two ways. First, our payment for brand name drugs is set

at the AWP, or ‘‘average wholesale price’’ less 13.5%-15.5% depending on the size

of the pharmacy. Any pharmacist who is willing to accept this level of reimbursement is able to participate in the Medicaid program. This practice has been in place

since fiscal year 2000.

Second, we use a contractor to adjust payments for generic drugs on a daily basis

to the actual acquisition costs for that day. This is a practice also known as ‘‘maximum allowable cost, or ‘‘MAC’’ pricing. Michigan began aggressive daily MAC pricing in October 2004.

Michigan’s successful program was recognized by the 2004 Department of Health

and Human Services’ Office of Inspector General report that concluded Michigan

had the lowest product reimbursement costs in the country.

Medicare Modernization Act

I would now like to briefly discuss how the Medicare Modernization Act (MMA)

will impact state Medicaid programs’ ability to constrain prescription drug cost increases. Not surprisingly, we had hoped that a Medicare pharmacy benefit would

relieve states of the responsibility of paying for the drugs used by Medicaid-Medicare dual eligibles—or at the very least that the benefit would not increase our

pharmacy costs for these dual eligibles. While the MMA certainly contains many

positive aspects, we have concluded that it, unfortunately, will increase our costs in

Michigan.

The MMA requires states to continue subsidizing the pharmacy benefit for dual

eligibles. While prescription drug costs for dual eligibles will be covered by Medicare

Part D, states will be responsible for making monthly payments back to the Department of Health and Human Services for a large portion of the drug expenditures

for these individuals. This financing mechanism is also known as the ‘‘clawback,’’

or what some call a ‘‘reverse block grant.’’ States will be required to pay the federal

government for 90 percent of the state portion of dual elgibles’ pharmacy costs in

2006, 88.333 percent in 2007, and this amount continues to gradually decline to 75%

in 2014. The Department of Health and Human Services (HHS) will determine the

state payment amount and base part of the formula on double digit growth factors

(National Health Expenditures and then average per-capita expenditures for Part

D drugs) which will be considerably higher than the low, single digit growth rates

we have been able to achieve in Michigan for prescription drugs. We estimate that

the clawback will increase state costs by $20 million in fiscal year 2006 and $30

million in fiscal year 2007 (see attached chart). In Michigan, this is quite a blow

because we have been so effective managing these costs.

Additionally, since Medicare will manage the pharmacy benefit for dual eligibles,

the size of our multi-state purchasing pool will be significantly reduced, which

means our ability to leverage better Medicaid pharmaceutical prices from manufacturers will be reduced. The other states in our pool will find that their Medicaid

savings will be greatly affected too.

I hope my remarks today demonstrate that, at least in Michigan, we are not paying too much for the pharmaceutical products used by our beneficiaries, but rather,

we have been very proactive, aggressive, and successful in our cost containment initiatives. Thank you for the opportunity to share our experiences. I would be happy

to answer any questions.

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Mr. WALDEN [presiding]. Thank you.

Mr. Smith.

TESTIMONY OF DENNIS SMITH

Mr. SMITH. Thank you, Mr. Chairman. I appreciate the opportunity to appear before the subcommittee today.

I will have a full statement for the record. I did also want to provide for the subcommittee a broader picture of Medicaid drug purchasing as a whole. We are providing to the subcommittee a number of charts that show that, indeed, there is variation State by

State within drug classes, et cetera. We hope this information will

be helpful to the subcommittee as it is looking at the issues of Medicaid prescription drugs.

There are a number of underlying assumptions that we all are

faced with in terms of looking at the cost of prescription drugs in

the Medicaid program.

First, that the States themselves operate within a Federal reimbursement framework. But just as States set reimbursement for

hospitals, nursing homes, and physicians, they also are the ones at

the front line to set reimbursement levels for prescription drugs.

We have a large number of pharmacies that participate in the Medicaid program. States are looking at guaranteeing access to coverage for low-income individuals, many of them with special needs.

We have great participation rates among the Nation’s pharmacies

in the Medicaid program. So the States and the Federal Government are looking at balancing different interests between access for

the Medicaid beneficiary and being prudent purchasers of the services themselves.

So, first, we start off with the fact that Medicaid is a matching

program, a shared cost between the States and the Federal Government. And as the first line of that program the States, when they

have their dollars at risk, indeed have a basic incentive to be prudent purchasers for the Medicaid program. The framework sort of

broadens from there in terms of the different options that the Medicaid program has to set prices for prescription drugs, including the

Federal upper limit, which we have focused on a lot here this

morning already, and that I know is something the subcommittee

is very much interested in.

But States also have an option to adopt what is called the ‘‘maximum allowable costs’’ or a MAC. And a number of States do that.

Those MACs are generally more stringent than the Federal upper

limits. So, again, we are looking at a Federal framework that says

a State cannot pay more than this amount, but the States have

great flexibility underneath those amounts as I mentioned, again,

in relationship to other types of payers as well.

The Federal statute that was adopted, I believe was alluded to

earlier, back in 1990. The statute requires manufacturers who

want coverage of their products to enter into an agreement with

CMS to provide rebates for the prescription drugs paid for through

the rebate plan. So we have a different way of looking at getting

the best price and the lowest price, and best value for the taxpayers for the Medicaid program. The acquisition of the drug itself

is part of it, but the rebate is another part of it as well.

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Obviously, in the Medicaid program, there are a number of different types of purchasers and providers involved in the decisionmaking itself when you are looking at the overall cost of the Medicaid program. Pharmacies, physicians, and the consumers themselves all have a role in ultimately determining what the price that

Medicaid will pay for a prescription. Approximately 550 pharmaceutical companies participate in the rebate program and in fiscal

year 2003, the manufacturers paid rebates of about $6.4 billion for

outpatient drugs.

In terms of the focus over the last few years of how CMS is helping States to find ways to be more prudent purchasers of prescription drugs, our focus has been through the various State plan

amendments which Mr. Reinhart alluded to. States have adopted

a variety of different approaches with the help of CMS. We have

more States than ever before negotiating supplemental rebates

with the manufacturers. There is the national rebate, and States

are negotiating further rebates on top of that. More States than

ever before are doing those supplemental rebates. Other tools, such

as prior authorization, are an important key at the point of access

with the physician to help educate physicians about being pricesensitive in the Medicaid program. A number of States have adopted prior authorization in recent years as well. So the focus has

been on several different areas, not just one particular area, to help

States negotiate lower prices for the Medicaid program.

Mr. Reinhart referred to the purchasing pool that had never existed before this administration approved it and expanded it to help

States pool the lives that are involved in order to get deeper discounts for the programs. I think that a lot of the discussion this

morning is about information, and I think we are taking further

steps, steps that had not been taken ever before, about making

that information available to the general public as a whole.

With the prescription discount card under Medicare, the administration took the unprecedented step of actually putting on the Web

site price comparisons to give the general public access to information. We believe that information is indeed an important component. In the marketplace, people having access to that information

is obviously a very important part of making marketplace work

successfully.

I see my time is ready to expire. I appreciate the opportunity to

appear before this subcommittee and ask that my entire statement

be included in the record.

[The prepared statement of Dennis Smith follows:]

PREPARED STATEMENT OF DENNIS SMITH, DIRECTOR, CENTER FOR MEDICAID AND

STATE OPERATIONS CENTERS FOR MEDICARE AND MEDICAID SERVICES

Mr. Chairman, members of the subcommittee, thank you for your invitation to appear this morning to discuss Medicaid prescription drug reimbursement. Coverage

of outpatient prescription drugs is an optional benefit for Medicaid programs. All

states currently provide prescription drug coverage, which is critically important to

Medicaid beneficiaries. However, this benefit is one of the greatest costs for the

states. In fiscal year 2002, Medicaid drug expenditures were $29.3 billion out of

$258.2 billion in total Medicaid spending or 11.3 percent. In addition, Medicaid drug

spending increased at an annual average rate of 19 percent from fiscal years 2000

to 2002, while Medicaid spending as a whole grew 12 percent annually during that

period. In 2003, Medicaid spent more than $34 billion on prescription drugs (See

Chart 1). Of this amount, 23 percent was spent on drugs commonly prescribed to

treat mental health conditions (See Chart 2). Furthermore, spending varies based

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on the specific medication prescribed. For example, under analgesics and anesthetics, the mean reimbursement for Celebrex is $112 per prescription, compared to

$12 for ibuprofen (See Chart 3). In addition, the 29 most commonly prescribed drugs

account for 25% of Medicaid spending on prescription drugs (Chart 4). Spending on

prescription drugs claims varies by state. The average claim ranges from approximately $40 to more than $60 (See Chart 5). Therefore, it is important that both the

Federal government and the states ensure that Medicaid programs pay for prescription drugs appropriately.

States Determine Payment to Providers

Medicaid operates as a provider payment program. States may pay health care

providers directly on a fee-for-service basis, or states may pay for Medicaid services

through various prepayment arrangements, including payments to managed care

plans. Within Federally imposed upper limits and specific restrictions, each State

has broad discretion in determining the payment methodology and payment rate for

prescription drugs, and what to pay pharmacists in dispensing fees. Generally, payment rates must be sufficient to enlist enough providers to ensure covered services

are available at least to the extent that comparable care and services are available

to the general population within a geographic area. Providers participating in Medicaid must accept Medicaid payment rates as payment in full. It also is important

to note that prices have increased between 5 percent and 7 percent in recent years.

An increase in utilization, as well as an increase in the Medicaid population has

helped to increase the mean reimbursement per prescription (See Chart 6).

CMS Involvement with Medicaid Drug Pricing

While the States are largely responsible for managing their prescription drug benefit, Federal law authorizes CMS to ensure the Federal government receives a good

price for prescription drugs. For example, the Medicaid Drug Rebate Program affords Medicaid programs the opportunity to pay for drugs at discounted prices,

which are similar to those offered by pharmaceutical manufacturers to other large

purchasers. In addition, Medicaid programs have a number of options to set prices

for prescription drugs, including the Federal Upper Limit (FUL), maximum allowable cost (MAC), and wholesale acquisition cost (WAC) programs.

Medicaid Drug Rebate Program Controls Costs

Federal statute requires manufacturers to enter into an agreement with the Secretary of Health and Human Services, on behalf of the states, to provide rebates

for covered outpatient prescription drug products paid for by Medicaid through the

Medicaid Drug Rebate Program. Manufacturers that do not sign an agreement are

not eligible for Federal Medicaid coverage of their product(s). Except for some statutory limitations, if a Medicaid program opts to cover prescription drugs for their

beneficiaries, it must provide coverage and reimbursement for all covered outpatient

drug products manufactured by companies that have entered into a rebate agreement with CMS, as Congress has guaranteed access to the Medicaid market for

those drug manufacturers that provide rebates. Approximately 550 pharmaceutical

companies participate in this program. Currently, 49 states and the District of Columbia participate in the Medicaid Drug Rebate Program (Arizona has an 1115

waiver that exempts it from participating in the Medicaid Drug Rebate Program).

Manufacturers submit their Average Manufacturer Price (AMP) and Best Price

(BP) to CMS. Using the AMP and BP, CMS calculates the rebate amount and informs the states. The rebate is calculated differently depending on the type of drug.

For generic drugs, the rebate is 11 percent of AMP. For brand-name prescription

drugs, the rebate is calculated in two ways. Basic rebates for brand-name drugs are

the greater of 15.1 percent of the AMP or AMP minus BP. In addition, if the price

of a drug increases at a rate faster than the consumer price index from a base year,

the manufacturer would owe the state the difference dollar for dollar. States receive

rebates from manufacturers based on states’ quarterly data on the utilization of the

manufacturers’ drugs. The Drug Rebate Program was enacted out of concern for the

costs the Medicaid program was paying for outpatient drugs. In FY 2003, manufacturers paid rebates to states of about $6.4 billion for covered outpatient drugs. The

program gives Medicaid programs the opportunity to obtain discounted prices similar to those offered by pharmaceutical manufacturers to other large purchasers.

States that wish to pursue Medicaid supplemental rebates in addition to rebates

already received under the National Drug Rebate Agreement have the option to negotiate such rebates with drug manufacturers as specified in Federal law. In recent

years, CMS has approved plan amendments that allow states to negotiate additional

state-specific supplemental rebates for their Medicaid population or participate in

a multi-state pooling supplemental rebate agreement. Rebates received under state

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supplemental agreements are shared with the Federal government at the same rate

as the national rebates.

Currently, 33 states have Medicaid supplemental rebates, including those states

in multistate pooling arrangements. Twenty-six states have negotiated rebates on

their own. For example, Florida began collecting state-only supplemental rebates in

2001 in conjunction with the establishment of its Preferred Drug List (PDL). Currently, the state receives supplemental rebates on brand name drugs, but not on

generics. The state received rebates of $51 million in FY 2003 and does not expect

to lose participation from any of the approximately 80 manufacturers that currently

pay supplemental rebates.

Medicaid Federal Upper Limit Cuts Costs

One proven method to reduce drug costs for States and to ensure the government

is a prudent purchaser of prescription medications is the use of generic medications

instead of more expensive brand name pharmaceuticals. As you know, Mr. Chairman, generic drugs are typically significantly less expensive than their brand-name

counterparts (See Chart 7). This is achieved through the use of the Federal Upper

Limit (FUL), a program that caps Medicaid payments for brand name drugs that

have therapeutically equivalent generic medications available. As a result, the FUL

program, which achieves savings by taking advantage of current market prices,

helps to significantly reduce pharmacy costs for both the states and the Federal government.

Through the FUL program, CMS sets an upper limit reimbursement amount for

drugs that meet certain criteria. However, not all drugs are subject to the FUL pricing. To establish the FUL for a drug, CMS examines the FDA’s Orange Book data

to determine whether all the formulations of a drug product approved by the FDA

are therapeutically equivalent. When all of the versions of that drug are not therapeutically equivalent, there must be at least three therapeutically equivalent drug

products. Once a product has met the FDA criteria, CMS verifies that it meets the

necessary compendium criteria by consulting the national drug-pricing compendium

(Red Book, First Data Bank, and Medi-Span) to verify that there are at least three

suppliers of the drug listed. If there are three suppliers, CMS sets the FUL at 150

percent of the lowest price (Average Wholesale Price, Wholesale Acquisition Cost,

or Direct Price). A state’s aggregate payment for all Medicaid prescription drugs

with a FUL must not exceed, in the aggregate, the payment levels established by

the FUL program. The aggregate cap allows states to increase or decrease the cost

of individual prescription drugs in accordance with state or local markets while

maintaining the overall savings created by the FUL program. States may exceed the

FUL price for individual prescription drugs as long as their aggregate expenditures

do not exceed the amounts that would have otherwise been spent by applying the

FUL limit plus a reasonable dispensing fee.

CMS uses a 150 percent mark-up so that FUL prices are high enough to ensure

that pharmacists can stock an equivalent product without a loss on acquisition

costs. The mark-up also assures that FUL prices are low enough so that Medicaid

will not pay too much for a prescription drug that is included on the list. The 150

percent mark-up is intended to balance the interests of both pharmacists and the

government in achieving efficiency, economy, and quality of care. In addition, to ensure the most accurate prescription drug pricing data, CMS has actively worked

with the publishers of the compendium to resolve FUL pricing issues and to encourage the collection of accurate data. Because of the complexity and volatility of the

drug marketplace, it is impossible to be certain that pricing or the inclusion of a

drug on the FUL list is 100 percent accurate. CMS has an on-going process in place

to ensure that any necessary revisions to the list can be identified and completed.

As new information becomes available, CMS compiles a list of changes that is released periodically to the agency’s regional offices. The regions provide the information to the states, which notify providers. CMS also posts the changes on its website

at www.cms.hhs.gov/medicaid/drugs/drug10.asp.

We greatly appreciate the various reports of the Office of Inspector General on

its review of prescription drug prices and the FUL program. While we value their

work, in regards to the FUL program, it must be examined in its entirety. Specifically CMS must establish a drug product’s eligibility for the FUL list that includes

verification with the suppliers of the drugs that are necessary to assure availability.

Utilizing Maximum and Wholesale Costs

Maximum Allowable Cost (MAC) programs are designed to ensure Medicaid programs pay appropriate prices for generic and multi-source brand drugs. Typically,

States administering the MAC programs will publish lists of selected multi-source

and generic drugs with the maximum price at which Medicaid will reimburse for

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those medications. Pharmacies generally will not receive payments that are higher

than the MAC price. These programs differ from the FUL list, as states have more

discretion in determining what drugs to include on the MAC list. Instead of the

MAC, some states use wholesale acquisition costs (WAC), which is the listed price

supposedly paid by a wholesaler for drugs purchased from the wholesaler’s supplier,

typically the manufacturer of the drug.

Additional Tools Are Available to States to Address High Prescription Drug

Costs

In addition to the rebate program, and as a result of increasing prescription drug

costs, State Medicaid programs have implemented a variety of cost-containment

mechanisms in their drug programs over the past few years. These mechanisms

have allowed States to reduce their pharmacy expenditures and maintain beneficiary access to a vital part of their overall health care. While some of the pharmacy

techniques employed by the States represent prudent management of program costs,

the Medicaid drug benefit remains a State option with benefits and limitations that

vary from State to State. CMS can provide consultation and support to assist states

in using these and other methods to lower their drug costs without compromising

quality of care. However, aside from federal regulations, most Medicaid cost containment decisions ultimately are made at the state level. States use a variety of methods to pay for prescription drugs. In addition, they use a variety of cost control

measures. For example, the use of copayments, generic substitution, and disease

management programs are handled at the state level (See Chart 8).

Copayments Contribute to Cost Containment

At their discretion, states may impose nominal deductibles, coinsurance, or copayments on some Medicaid beneficiaries for certain services. Nominal copayments are

a tool available to states as a cost containment measure. The use of copayments for

prescription drugs varies from state to state. Nineteen states have no copayment,

and the vast majority of the remaining states require a copayment ranging from 50

cents for generic drugs to $3.00 for brand-name prescriptions. Cost sharing limits

are set by Federal regulation and have not changed in many years. In addition,

some groups are totally exempt from cost-sharing by law. Pregnant women, children

under age 18, and hospital or nursing home patients who are expected to contribute

most of their income to institutional care are exempt from cost-sharing.

States’ Aggressive Generic Substitution Saves Money

Generic drugs account for more than half of all prescriptions in the United States.

Many private health plans have generic drug use rates of more than 90 percent, but

generics are not as widely used in some Medicaid programs. The low prices of generic drugs in the United States are an important potential source of savings for

states. The potential cost-savings by the use of generic drugs has prompted 39

states to require that the generic version of a drug be dispensed to Medicaid beneficiaries when available. Under these mandatory generic substitution policies, the

brand name drug remains available to beneficiaries through prior authorization. Examples of ‘‘best practices’’ involving generic drugs include Minnesota and Idaho. For

example, Minnesota has had a mandatory generic substitution policy in place for

nearly a decade. This saves the State $10 million annually. Idaho also has a mandatory generic substitution policy, which increased the percentage of generic drugs dispensed from 46.7 percent in fiscal year 2002 to 53 percent in fiscal year 2003. Idaho’s policy saved $11.7 million in State and Federal funds.

Drug Utilization Review Protects Patients and Reduces Costs

Congress created the Medicaid Drug Utilization Review (DUR) Program through

the Omnibus Budget Reconciliation Act of 1990. The program promotes patient safety by an increased review and awareness of outpatient prescribed drugs. Under the

law, states are required to complete annual reports, which provide an excellent

measurement tool to assess how well states have implemented the DUR program

and the effect DUR has had on patient safety, provider prescribing habits and dollars saved. In addition to promoting patient safety and positive health outcomes, the

DUR program serves as a cost savings strategy by avoiding problems such as adverse drug interactions, drug-disease interactions, therapeutic duplication and overprescribing by providers.

State Medicaid Disease Management Programs Reduce Expenses

Disease management programs are an emerging strategy for states to improve

care and are designed to reduce overall expenditures, including drug expenditures,

through more appropriate medication use for Medicaid beneficiaries with chronic illnesses. Both North Carolina and Washington have instituted successful disease

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management programs. For instance, North Carolina’s Pharmacy Management Initiative has lowered drug costs of participants by 22 percent through use of a preferred drug list and is expected to save $9 million in 2004 through its pharmacy

program that reviews the drug regime of nursing home residents and recommends

changes consistent with appropriate prescribing practices.

States’ Additional Techniques to Control Costs

States use a number of additional techniques to control Medicaid prescription

drug costs.

• Approximately 9 states have strict limits on the number of brand name prescriptions that can be filled.

• About 37 states employ refill and/or monthly or annual prescription limits.

• Virtually all states (50 with the exception of Tennessee but including DC) report

using day supply limits ranging from about a 30 to 100 day supply.

• About 32 states have fail-first or step therapy programs in place. Fail-First policies require that the patient fail on at least one other medication as a prerequisite for authorization of a specific, often non-formulary, medication. Step

Therapy is a prescription pattern based on the state of illness that involves

using the drug believed to be the most cost-effective first, followed by more expensive therapies.

Approaches for Cost Containment in Medicaid and the Private Sector Differ

The private sector utilizes a number of techniques to control their prescription

drug costs, including significant consumer cost sharing, which would not be appropriate in the Medicaid setting. For example, private health plans use tiered copayments, which vary depending on whether the drug is generic, preferred, brandname, or not included on a plan’s formulary. Utilizing a range of copayments encourages patients to select lower-cost options. State Medicaid programs, however,

may institute only a nominal copayment or coinsurance for prescription drugs, as

Federal regulation sets a mandated $3 limit or a 5 percent coinsurance limit. Furthermore, as mentioned above, by law states cannot require prescription drug copayments for pregnant women, children under age 18, and hospital or nursing home

patients who are expected to contribute most of their income to institutional care.

Some private insurers also require their members to obtain their prescriptions

solely through mail-order pharmacies to control costs. In Medicaid, there is freedom

of choice of provider and any willing provider. While Medicaid programs could apply

for a waiver to use mail-order pharmacies to dispense medications to those with

chronic conditions, states do not have the authority to restrict people with Medicaid

to mail-order pharmacies for all their prescriptions.

Private insurers use formularies with tiered cost sharing and exclusion of certain

drugs as a cost saving strategy. However, Medicaid must cover all FDA-approved

drugs for every manufacturer that has a national rebate agreement, with some exceptions. States may utilize a preferred drug list, which would exclude certain

drugs, but Federal law requires these excluded drugs be made available through

prior authorization. In addition, private insurers may not cover particular drugs,

such as oral contraceptives and antihistamines, topical nasal products, and cough/

cold products. These drugs account for 4 percent of Medicaid spending on prescription drugs (See Chart 9).

Conclusion

Mr. Chairman, members, thank you again for the opportunity to testify. CMS will

continue to assist all states in adopting safe, proven approaches to lowering drug

costs while providing access to prescription drugs and quality care. In addition,

CMS will fulfill its role as a partner through the Federal Upper Limit and Medicaid

Drug Rebate programs to ensure the government is a prudent purchaser of prescription medications. Thank you again for hearing my testimony, and I am happy to

answer any questions you might have.

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Mr. WALDEN. It will be. Thank you, Mr. Smith.

Mr. Reeb, thank you for being with us.

TESTIMONY OF GEORGE M. REEB

Mr. REEB. Good morning, Mr. Chairman. I am George Reeb; I am

assistant inspector general for the Centers of Medicare and Medicaid Audits within the HHS Office of Inspector General. Robert

Vito, regional inspector general for evaluations and inspections in

Philadelphia, accompanies me. We appreciate the opportunity to

appear before you today.

In short, the Medicaid program continues to pay too much for

prescription drugs. My written statement describes the OIG’s work,

showing that the Medicaid drug program could save money if it is

improved on four particular fronts.

First, States need better methods for estimating pharmacy acquisition costs. Second, CMS must ensure that qualified drugs are

placed on the Federal upper limit lists in a timely manner. Third,

States must do a better job of accounting for their billing and collections of the rebates from the rebate collection process. And,

fourth, CMS, we believe, should seek legislation to correct the inconsistencies which exist between the rebate and the reimbursement calculations.

Most States have used and continue to use the average wholesale

price to estimate pharmacies’ acquisition costs of drugs. The published AWPs that States use to establish their Medicaid drug reimbursements generally bear little resemblance to the prices incurred

by retail pharmacies to purchase drugs. In prior audit reports that

we issued in 2001 and 2002, we estimated that pharmacies’ actual

acquisition costs for brand-name drugs in 1999 was an average of

21 percent below AWP and for generic drugs was an average of 65

percent below AWP. The effect of the difference between the pharmacy invoice costs and the amount Medicaid would have paid for

those drugs was about $1.5 billion, a spread from which the States

could have derived savings through better reimbursement methods.

After additional analyses based on both State and industry interests, we recommend that, if States continue to use a reimbursement system based on AWP, they should consider adopting a fourtiered payment system that is described in my written statement.

Next, I would like to mention our findings with regard to the

Federal upper limit program. For multiple-source drugs, Medicaid

limits reimbursement to Federal upper limit amounts if at least

three generic equivalents are available and certain other requirements are met. Medicaid misses savings opportunities when qualified drugs are not placed on the Federal upper limit list in a timely

manner. In a report we issued in February of this year, we estimated that Medicaid could have saved $123 million in 2001 if CMS

had added just 55 more products to the Federal upper payment

list.

As a follow-up to that report, your committee requested that OIG

conduct additional work on this subject. Today, we are releasing

the results of that work. Again, we found that qualified drugs needed to be added more timely to the Federal upper limit list. Delays

in adding the drugs we reviewed cost the Medicaid program an estimated $167 million between 2001 and 2003.

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Another area we reviewed is the extent to which States vary in

their Medicaid reimbursements for the same drugs. We estimated

that, overall, Medicaid could have saved as much as $86 million in

fiscal year 2001 if the 42 States that we reviewed had reimbursed

at the same price as the lowest paying price—lowest paying State

for each of the selected drugs. Overall, we believe that States could

reduce their spending on prescription drugs by adopting various

strategies that other States have successfully used to contain costs.

States also spend too much on prescription drugs because they

do not adequately manage their Medicaid rebate billings and collections process. We recently completed audits at the rebate programs

in 48 States and the District of Columbia. We found that rebate accounting systems were inadequate, and information submitted to

CMS was unreliable, thereby undermining CMS’ ability to oversee

the drug reimbursement rebate process.

My written statement also describes concerns we have about the

negative effect of inconsistencies between the key values that are

used for calculating rebates and reimbursements. We estimate

that, if rebates and reimbursements had been calculated using the

same value, Medicaid would have achieved a substantial increase

in added rebates. Audit work in progress confirms that Medicaid

continues to overspend because of this inconsistency in the rebate

and the reimbursement processes. Medicaid reimbursement should

reliably reflect the actual cost of the drugs to the pharmacy. We do

not believe that occurs now, and States need assistance in

strengthening their ability to make reasonable payments for the

drugs they do cover.

Mr. Chairman, this concludes my testimony, and we welcome

any questions you may have.

[The prepared statement of George M. Reeb follows:]

PREPARED STATEMENT OF GEORGE M. REEB, ASSISTANT INSPECTOR GENERAL FOR

THE CENTERS FOR MEDICARE AND MEDICAID AUDITS, OFFICE OF INSPECTOR GEN- ERAL, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

Good morning, Mr. Chairman. I am George M. Reeb, Assistant Inspector General

for the Centers for Medicare and Medicaid Audits at the U.S. Department of Health

and Human Services’ Office of Inspector General (OIG). Robert Vito, Regional Inspector General for Evaluation and Inspections in Philadelphia, accompanies me.

We appreciate the opportunity to appear before you today to present information regarding Medicaid’s payments to pharmacies for prescription drugs.

In short, the Medicaid program continues to pay too much for prescription drugs.

My testimony provides a brief overview of OIG’s body of work over the last several

years related to Medicaid-covered drugs that provides the basis for our belief that

Medicaid is paying too much for prescription drugs and offers suggestions for controlling Medicaid spending.

The testimony describes OIG’s findings regarding (1) pharmacy acquisition costs

and average wholesale price, (2) the Federal upper limit program, (3) State variations in reimbursements for the same drugs, and (4) the Medicaid drug rebate program. I am also providing additional analytical information on pharmacy acquisition

costs, highlights of Medicaid-related settlements with pharmaceutical manufacturers and chain drug stores, and a list of selected OIG reports and other guidance that

are available on our Web site at http://www.oig.hhs.gov.

The Centers for Medicare & Medicaid Services estimated that calendar year 2003

Medicaid expenditures for prescription drugs totaled more than $31 billion, triple

the $9.4 billion spent in 1994. Both the States and the Federal Government share

these expenditures. Under Federal law, States have wide latitude in setting their

reimbursement rates for prescription drugs. Federal regulations require that each

State’s reimbursement for a drug not exceed, in the aggregate, the lower of estimated acquisition cost plus a reasonable dispensing fee or the providers’ usual and

customary charge to the public for the drug. For certain multiple-source (generic)

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drugs, Medicaid regulations set Federal upper limits that are contained on a list

published by CMS. Within this general framework, the States use a variety of different pricing mechanisms when setting reimbursement amounts.

States must reasonably reimburse pharmacies for prescription drugs provided to

Medicaid beneficiaries; yet, they lack access to pharmacies’ actual acquisition costs.

Due to this lack of data, they rely on estimates to determine Medicaid reimbursement. These estimates include formulas for estimating pharmacy acquisition cost,

pharmacies’ ‘‘usual and customary’’ charges, Federal upper limits, and State maximum allowable costs.

PHARMACY ACQUISITION COSTS AND AVERAGE WHOLESALE PRICE

Most States have used and continue to use the average wholesale price (AWP) to

estimate pharmacies’ acquisition costs of drugs. For the most part, AWP’s (which

are not clearly defined by law or regulation) are compiled in drug compendia such

as Medical Economics’ Red Book. As our audit findings have demonstrated, the published AWPs that States use to establish their Medicaid drug reimbursements generally bear little resemblance to the prices incurred by retail pharmacies to purchase drugs.

Until the passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Medicare also used AWP as the basis for most drug reimbursements. Although the Congress recently took action to help lower excessive payment levels for Medicare, Medicaid’s reimbursement methodology continues to be

based largely on the same inflated AWPs that had plagued Medicare.

To compare actual pharmacy acquisition costs to AWP, for calendar year 1999 we

obtained from 217 pharmacies in 8 States pricing information that included thousands of invoice prices for both brand and generic drug products. We compared each

invoice drug price to the AWP for that drug and calculated the percentage, if any,

by which the invoice price was discounted below AWP. We estimated that pharmacy

acquisition costs for brand name drugs in 1999 were an average of 21.8 percent

below AWP and for generic drugs were an average of 65.9 percent below AWP. Both

estimates were higher than our previous studies of 1994 data that showed 18.3 percent below AWP for brands and 42.4 percent below AWP for generics.

Our comparisons of pharmacy acquisition costs to AWP for 1999 did not adjust

the invoice prices for the net effect of discounts available to most pharmacies, such

as volume discounts, prompt pay discounts, and related rebates provided to pharmacies by manufacturers and/or wholesalers that would further lower the total

pharmacy acquisition costs. For that one year, 1999, we estimated that the combined pharmacy invoice costs alone for brand name and generic drugs may have

been as much as $1.5 billion lower than Medicaid would have paid for those drugs

using the States’ national average discount from AWP of 10.3 percent. This $1.5 billion constitutes a spread from which States could have derived savings through better reimbursement methods. We used a single average discount in the calculation

because, in 1999, most States used the same discount for brand name drugs as they

did for the generics that did not have an upper limit.

In the audit of 1999 data, we did not attempt to assess the adequacy of dispensing

fees paid by the States to pharmacies. Based on information available from CMS,

it appears that States have significantly varying amounts of dispensing fees.

In 2002, in response to requests by the industry and the States’ interest in having

more information on pharmacy purchase prices for additional categories of drugs,

the OIG conducted an additional analysis of the 1999 data. That analysis provided

a more comprehensive breakdown of percentages for a variety of drug categories.

The analysis demonstrated a wide range of discounts from AWP for pharmacy purchases, depending on the category of drug that was being purchased. We concluded

that the common method of reimbursing for brand name drugs and certain generic

drugs using a single percentage discount does not adequately consider the large fluctuations in actual discounts between brands and generics. We recommended that,

if States continue to use a reimbursement system based on AWP, they should consider adopting a four-tiered payment system. More information about the additional

analysis and the recommended four-tiered payment system is provided in Appendix

A.

States continue to use a discounted AWP for estimating pharmacy acquisition

costs. However, many have established separate discounts for brand name and generic drugs. CMS estimated that for the year 2003, for brand drugs, the States’ discounts from AWP ranged from 5 percent to 16 percent. For generic drugs, CMS estimated that the States’ discounts from AWP ranged from 5 percent to 50 percent.

A small number of States use wholesale acquisition cost rather than AWP when estimating the acquisition cost.

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One reason States continue to rely on AWP, despite its widely recognized deficiencies, is that States lack access to alternative, more accurate price information.

One option that could be studied is the feasibility of developing a base payment

methodology that uses actual pharmacy invoice prices adjusted, if necessary, for a

profitability factor after netting post-invoice discounts and other considerations.

FEDERAL UPPER LIMITS

For multiple-source (generic) drugs, Medicaid limits reimbursement to Federal

upper limit amounts if at least three generic equivalents are available and certain

other requirements are met. The Federal upper limits restrict the amount that Medicaid can reimburse for drugs that have available generic equivalents (42 CFR

§ 447.332). Medicaid misses savings opportunities when qualified drugs are not

placed on the Federal upper limit list in a timely manner.

To quantify the missed savings opportunities, we obtained a list of the top 200

multiple-source drugs based on retail sales for the year 2001 and determined whether the drugs were on CMS’s November 2001 Federal upper limit list. In a report

issued in February 2004, we reported that 90 drugs were not included on the list

despite meeting the established criteria. We estimated that Medicaid could have

saved $123 million in 2001 if CMS had added just 55 of these 90 products to the

Federal upper limit list. Four products alone accounted for 71 percent of the $123

million in potential savings. Subsequently, CMS added 9 of the 90 products to the

Federal upper limit list. Seven of the nine products accounted for $94 million of the

$123 million in savings we calculated for 2001.

As a follow-up to this report, your Committee requested that OIG conduct additional work to answer the following questions:

• Since 2001, how many generic drugs have met the criteria for inclusion on the

Federal upper limit list? • How many of these drugs have been included on the Federal upper limit list? • How long, on average, did it take CMS to add newly qualified drugs to the list? • How much does lag time between when a drug meets the criteria and its inclusion

on the Federal upper limit list cost the Medicaid program?

Today, we are releasing the results of our work related to the Committee’s request. Again, we found that CMS does not consistently add qualified drugs to the

Federal upper limit list in a timely manner. Of the 252 first-time generic drugs approved between 2001 and 2003, 109 products met the statutory and regulatory criteria for inclusion on the list. CMS had added only 25 of the 109 drugs to the list

as of July 15, 2004 (date of analysis), and very few of these were included in a timely manner. It took CMS an average of 36 weeks to place these products on the list

once they met the statutory and regulatory criteria for inclusion. Only 3 of the 25

drugs were included on the list when they first became qualified. The longest delay

was for two versions of Metformin Hydrochloride, which were qualified for 102

weeks before being added in March 2004.

An additional 84 of the 109 drugs we reviewed had still not been added to the

Federal upper limit list as of July 15, 2004. The delay in adding these 84 drugs

averaged 55 weeks as of that date.

Delays in adding the reviewed drugs cost the Medicaid program an estimated

$167 million between 2001 and 2003. A majority of the losses were attributable to

delays in adding just eight drugs, which accounted for 85 percent ($143 million) of

the estimated losses. The product with the highest losses for Medicaid, Fluoxetine

20 mg capsules (brand name Prozac), illustrates the potential effect of not adding

drugs to the Federal upper limit list in a timely manner. Fluoxetine met all criteria

for inclusion on the Federal upper limit list by April 1, 2002. However, CMS did

not place Fluoxetine on the list until December 1, 2002. We estimate that this delay

in adding the 20 mg dosage size of Fluoxetine capsules cost Medicaid an estimated

$57 million dollars. The Federal share of the loss on Fluoxetine was approximately

$32.6 million. The Federal share of the $167 million loss on all the drugs we reviewed was approximately $95.5 million.

Based on the findings of this report, we recommended that CMS establish an administrative procedure and schedule to govern the determination and publication of

Federal upper limits. We also suggested that CMS focus its resources on ensuring

that high-volume drugs that have recently come off patent are added to the list expeditiously. The report is available on OIG’s Web site today under ‘‘What’s New,’’

and I have provided the report to the Committee.

STATE VARIATIONS IN REIMBURSEMENTS FOR THE SAME DRUGS

As previously mentioned, States have wide latitude in setting their reimbursement amounts for prescription drugs. In September 2004, we issued a report of a

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study in which we assessed the extent to which States vary in their Medicaid reimbursement for the same drugs. We analyzed fiscal year 2001 State Medicaid prescription drug reimbursement data for a sample of 28 national drug codes. A national drug code is a numeric identifier issued by the Food and Drug Administration

(FDA) for each drug. The code indicates the manufacturer of the drug, the product

dosage amount, and the package size. Forty-two States agreed to participate in our

review and provided us with their total ingredient reimbursement amount (excluding dispensing fees) and the total units reimbursed for each of the 28 national drug

codes. Using the data supplied by States, we calculated an average unit price per

drug and found substantial variations in States’ payments for the same drugs.

These variations translate into overspending by Medicaid.

Based on State data, we estimated that, overall, Medicaid could have saved as

much as $86.7 million in fiscal year 2001 if all 42 States had reimbursed at the

same price as the lowest paying State for each of the drugs reviewed. In fact, Medicaid could have cut its spending by more than half if all States had paid the same

price as the lowest paying State for just 9 of the 28 drugs. These savings estimates

derive from only 28 national drug codes that were randomly selected from 600 national drug codes for which there were substantial Medicaid outlays. Medicaid covers over 50,000 national drug codes, implying a potential for even greater program

savings.

We believe savings could be achieved if CMS would: (1) share with the States the

various types of price data it collects to help States develop better estimates of pharmacy acquisition costs, (2) conduct further research on the factors that affect States’

drug prices to be able to advise States more effectively on ways to set their reimbursement levels, and (3) annually review the States’ drug prices in order to share

comparative State prices and methods to reduce costs.

MEDICAID DRUG REBATE PROGRAM

State Accounting for Rebate Billings and Collections

In addition to paying too much up front for Medicaid prescription drugs, States

exacerbate their overspending of State and Federal funds by poor management of

their rebate billings and collections. Pursuant to the Medicaid Drug Rebate Statute,

States collect rebates from drug manufacturers for drug purchases made under the

Medicaid program. The drug rebate program allows Medicaid to receive pricing benefits commensurate with its position as a high-volume purchaser of prescription

drugs.

The statutory drug rebate program became effective in January 1991. After a

start-up period, we audited the effectiveness of the new program in eight States. In

June 1993, we reported that CMS had not ensured that States had established proper accountability and controls over the billing and collection of drug rebates. In addition, CMS could not develop a nationwide total of the uncollected portion of Medicaid drug rebates because States were only required to report the rebates that were

collected. We replicated our review recently on a national scale, using 2002 information, and found that, while accountability had improved since our 1993 report, improvements are needed in most States. Weaknesses included the following:

• Rebate accounting systems were inadequate.

• Information submitted to CMS was unreliable, undermining CMS’s ability to oversee the program.

• Accounting for interest on late rebate payments was improper.

• The dispute resolution and collection processes were inadequate.

We are in the process of developing a national roll-up report. The individual final

reports for each State and the District of Columbia are currently available on our

Web site.

Drug Rebate Calculations

Additional Medicaid overspending occurs because of an inconsistency between the

key values used for calculating rebates and reimbursements. Currently, Medicaid

requires that rebates be based on a specifically designated value, average manufacturer price (AMP), while, at the same time, allowing reimbursements to be calculated using other values (usually a discounted AWP). This creates a situation

whereby fluctuations in reimbursements do not result in a corresponding adjustment in the associated rebates. When a State increases its payments for a drug, it

would not receive a correspondingly higher rebate on that drug purchase because

there is currently no connection between the reimbursement and rebate calculations. Legislation is needed to establish a connection.

In a 1998 audit report, we recommended that CMS seek legislation requiring drug

manufacturers to pay Medicaid drug rebates on the same basis that States deterVerDate 11-MAY-2000 07:48 Feb 24, 2005 Jkt 000000 PO 00000 Frm 00127 Fmt 6633 Sfmt 6621 97275.TXT HCOM1 PsN: HCOM1
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mine reimbursements. The recommendation was supported by our review of data for

calendar years 1994 through 1996 for 100 brand name drugs that had the greatest

amount of Medicaid reimbursement in that period. We estimated that if rebates had

been based on AWP (instead of on the statutorily required AMP) for that period,

Medicaid would have achieved over $1 billion in added rebates. We used AWP to

calculate the rebates for the period because most States were basing drug reimbursements on AWP minus a percentage discount. According to information States

have reported to CMS, most States continue to use AWP in their reimbursement

methodologies. Audit work in progress confirms that Medicaid continues to overspend because of the inconsistent bases used for reimbursement and rebates.

Manufacturers’ Calculation of AMP

AMP is supposed to represent the price at which the manufacturers sell their

drugs to wholesalers for use in the retail class of trade. In addition to the situation

described above, our work at selected manufacturers has shown they are making inconsistent interpretations as to what components are included in AMP. The inconsistencies have included how to treat Medicaid sales and accounting for sales and

price concessions that flow through organizations that represent both retail and

non-retail customers. It is important that all manufacturers report consistent and

accurate information in order for the rebate process to work as intended. We therefore suggest that additional clarification of the definition of AMP be provided by

CMS. This would both improve the rebate process and assist States that may consider the use of AMP data in estimating pharmacy acquisition costs for reimbursement purposes.

CONCLUSION

All States could reduce their spending on prescription drugs by adopting various

strategies that other States have successfully used to contain costs. The savings

could be even greater if states had better access to accurate pricing information. Reimbursement should reliably reflect the actual costs of the drug to the pharmacy

and be grounded in information that can be validated. There is an urgent need for

the Medicaid policymaking community to assist States in strengthening their ability

to make reasonable payments for the drugs they cover. This concludes my testimony, and I welcome your questions.

APPENDIX A

ADDITIONAL ANALYSIS OF PHARMACY ACQUISITION COSTS AND AVERAGE WHOLESALE

PRICE

OIG collected brand name and generic drug acquisition costs for calendar year

1999 and compared those costs to the average wholesale price (AWP) for each drug.

After issuing separate reports on brand name and generic drugs, we conducted an

additional analysis that provided a more comprehensive breakdown of percentages

for a variety of drug categories. We found that:

• For single source innovator drugs, pharmacies purchased the drugs at an estimated discount of 17.2 percent below AWP.

• For all drugs without Federal upper limits (single source innovator, multiple

source innovator, and multiple source non-innovator), pharmacies purchased the

drugs at an estimated discount of 27.2 percent below AWP.

• For multiple source drugs without Federal upper limits, pharmacies purchased

the drugs at an estimated discount of 44.2 percent below AWP. A further breakdown of these drugs showed the estimated discount for innovator multiple

source drugs to be 24.4 percent and 54.2 percent for non-innovator multiple

source drugs.

• For multiple source drugs with Federal upper limits, pharmacies purchased the

drugs at an estimated discount of 72.1 percent below AWP.

These percentages do not consider discounts available to most pharmacies, such

as volume discounts, prompt pay discounts, and related rebates that would further

reduce acquisition costs.

The analysis shows that there is a wide range of discounts from AWP for pharmacy purchases depending on the category of drug that is being purchased. We concluded that, if States continue to use a reimbursement system based on AWP, CMS

should encourage States to consider adopting a four-tiered payment system consisting of a percentage discount off AWP for:

(1) single source brand name drugs;

(2) innovator multiple-source drugs without a Federal upper limit; and

(3) non-innovator multiple-source drugs without a Federal upper limit.

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(4) The fourth tier would be to pay the Federal upper limit price for qualified multiple source drugs.

As in the audits on which this additional analysis was based, we focused our efforts on evaluating the pharmacy’s acquisition costs for the drugs and offer no opinion on the adequacy of the dispensing fees being paid.

APPENDIX B

MEDICAID-RELATED PRESCRIPTION DRUG SETTLEMENTS

Settlements with Pharmaceutical Manufacturers

Recent Federal investigations of pharmaceutical manufacturers that led to settlements involving Medicaid prescription drug cases serve to illustrate weaknesses and

vulnerabilities in the Medicaid drug reimbursement arena. Following are descriptions of some, but not all, relevant cases. Both the United States and individual

States have negotiated other settlements that are not mentioned here.

The OIG’s ‘‘Compliance Program Guidance for Pharmaceutical Manufacturers’’ is available on the OIG Web site at http://www.oig.hhs.gov/fraud/

complianceguidance.html.

Schering-Plough Corporation. Recently, ScheringPlough Corporation agreed to pay

$345.5 million as part of a global settlement with the Government and entered a

5year corporate integrity agreement (CIA) with the OIG. As part of the settlement,

Schering-Plough agreed to pay $293 million to resolve its civil and administrative

liabilities in connection with illegal and fraudulent pricing of its allergy drug

Claritin under the Medicaid drug rebate program. The civil portion of the case focused on ScheringPlough’s alleged failure to include the value of certain incentives

offered to two managed care organizations in Schering-Plough’s determination of the

best price reported for purposes of the Medicaid drug rebate program. By failing to

include the value of the incentives in its determination of best price, ScheringPlough

allegedly underpaid rebates due to the States and overcharged entities (such as

community health centers) that purchased drugs at ceiling prices that are based on

Medicaid drug rebate prices. With regard to the criminal portion of the case, a subsidiary of ScheringPlough, the Schering Sales Corporation, pled guilty to a kickback

charge and was sentenced to pay a $52.5 million criminal fine. Schering Sales Corporation was charged with paying a kickback of almost $2 million in order to keep

Claritin on the formulary of a managed care organization.

Pfizer Inc. As part of a fiscal year 2004 global settlement of $430 million plus interest, Pfizer Inc. (Pfizer), Warner-Lambert Company LLC (Warner-Lambert), and

the Parke-Davis Division agreed to pay $190 million in a civil False Claims Act settlement relating to Warner-Lambert’s promotion of the drug Neurontin. Pfizer acquired Warner-Lambert and its Parke-Davis Division in June 2000. Between July

1995 and June 2001, Neurontin was approved by FDA only for use in treating epilepsy, but Warner-Lambert allegedly engaged in a wide-ranging program to promote

Neurontin for other uses. The Government alleges that these activities caused the

submission of false and/or fraudulent claims to Medicaid. To resolve its criminal liability, Warner-Lambert pled guilty to violating the Federal Food, Drug and Cosmetic Act and agreed to pay a $240 million criminal fine. Pfizer entered a comprehensive 5-year corporate integrity agreement with OIG.

AstraZeneca Pharmaceuticals, LP and Zeneca Inc. In June 2003, the United

States announced a global settlement with AstraZeneca. The company agreed to pay

a total of almost $355 million and enter a 5-year CIA with OIG to resolve its criminal and civil liabilities relating to the marketing and pricing of its prostate cancer

drug, Zoladex. AstraZeneca pled guilty to conspiracy to violate the Prescription Drug

Marketing Act by causing the submission of reimbursement claims for Zoladex that

had been provided free of charge as samples. The Government also alleged that

AstraZeneca paid illegal remuneration (in various forms including grants, travel,

and entertainment) to induce the purchase of Zoladex; that AstraZeneca created and

marketed an average wholesale price (AWP) spread between the Medicare reimbursement for Zoladex and its cost; and that AstraZeneca misreported and underpaid Medicaid rebates for Zoladex. AstraZeneca also agreed to enter separate settlements with the States.

Bayer Corporation. In April 2003, Bayer Corporation agreed to pay $257.2 million

in criminal fines and civil assessments to settle a False Claims Act case relating

to the Medicaid drug rebate program. Bayer agreed to plead guilty to charges that

it violated Federal law by failing to report certain information to FDA. The case focused on Bayer’s failure to include certain sales to Kaiser Permanente Medical Care

(an HMO) in its calculation of Best Price reported for purposes of the Medicaid drug

rebate program. The Medicaid drug rebate program requires drug manufacturers to

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report their Best Prices to CMS and to pay rebates to the State Medicaid programs

based on those reported prices.

GlaxoSmithKline. Also in April 2003, GlaxoSmithKline settled a Medicaid drug

rebate case for almost $88 million, based on facts similar to the Bayer matter discussed above. In connection with the settlement, GlaxoSmithKline entered a 5-year

CIA with OIG. GlaxoSmithKline also agreed to enter into separate settlement agreements with the States.

Pfizer, Inc. In October 2002, the United States settled a Medicaid drug rebate case

with Pfizer, Inc., Warner-Lambert Company and the Parke-Davis Division. The Government alleged that Warner-Lambert failed to include the value of certain unrestricted educational grants in the best price reported for purposes of the Medicaid

drug rebate program and, as a result, underpaid rebates due. The government alleged that Warner-Lambert paid the grants to a managed care organization in order

to obtain unrestricted formulary status for the cholesterol-lowering drug, Lipitor. As

part of the settlement, Pfizer paid $49 million and entered a five-year CIA with

OIG.

TAP Pharmaceutical Products, Inc. In October 2001, the United States announced

a major global health care fraud settlement with TAP Pharmaceutical Products Inc.

TAP agreed to pay a total of $875 million to resolve its Medicare and Medicaid liability. TAP agreed to plead guilty to violating Federal law governing the use of

drug samples. In addition, TAP allegedly set and reported AWPs for its prostate

cancer drug, Lupron, at levels far higher than the actual acquisition cost of the majority of its customers (such as physicians) and caused those customers to receive

excess reimbursement from Medicare and Medicaid. TAP also allegedly underpaid

rebate amounts due to the States under the Medicaid drug rebate statute.

Bayer Corporation. In February 2001, the United States entered a $14 million settlement with Bayer Corporation in connection with Bayer’s AWP pricing and Medicaid drug rebate practices relating to six drugs. The Government alleged that Bayer

set and reported AWPs for the drugs at levels far higher than the actual acquisition

costs of the products; that Bayer made misrepresentations to the Medicaid programs

of certain States; and knowingly misreported and underpaid Medicaid rebates for

the drugs. As part of the settlement, Bayer entered a five-year CIA with OIG.

Settlements with Chain Drug Stores

Rite Aid Corporation. In 2004, Rite Aid Corporation agreed to pay $7 million and

enter a 4year CIA to resolve its civil and administrative liability relating to the submission of claims to Medicaid and other Government health care programs for partially-filled prescriptions for drugs that were not delivered to the beneficiaries and,

in some instances, were ultimately returned to stock. In addition to the settlement

with the Federal Government, Rite Aid entered settlements with 28 States and the

District of Columbia to resolve alleged liability to the States for the Medicaid damages.

Wal-Mart Stores, Inc. In 2004, Wal-Mart Stores, Inc., agreed to pay almost $2.87

million and enter a 4-year CIA to resolve alleged civil and administrative liabilities

relating to the submission of claims for partially filled prescriptions between 1990

and 2000. The settlement resolved a False Claims Act qui tam suit alleging that

Wal-Mart submitted false claims each time it dispensed only a portion of a prescription to a customer yet billed Medicaid, TRICARE, or the Federal Employee Health

Benefits Program for the full amount of the prescription.

Eckerd Corporation. In May 2002, Eckerd Corporation entered a settlement with

the United States and a group of States for $9 million. Eckerd also entered into a

5-year CIA with OIG. The Government alleged that Eckerd submitted false claims

each time it dispensed only a portion of a prescription to the customers but billed

for the full amount of the prescription. The claims at issue were submitted to Medicaid, TRICARE, and the Federal Employee Health Benefits Program between 1986

and 2000. Previously, ECK M.D., Inc., an affiliate of Eckerd, pled guilty to submitting false claims to Medicaid and to violating certain record-keeping requirements

of the Controlled Substances Act.

CVS Corporation. In July 2001, the U.S. Department of Justice and the OIG,

working jointly with representatives of the States, reached settlement in a qui tam

action against CVS Corporation, involving allegations that the company submitted

claims for partially filled prescriptions to Medicaid, TRICARE, and the Federal Employee Health Benefits Program. In addition to paying $4 million to the Government, CVS also agreed to a 4-year CIA.

Walgreen Co. In 1999, the Federal and State governments (through the Medicaid

Fraud Control Units) entered the first settlement with a major retail pharmacy

chain for conduct involving partially filled prescriptions billed to Medicaid and other

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Federal health care programs. Walgreen Co. paid $7.6 million and entered a 4-year

CIA to resolve its liability.

APPENDIX C

SELECTED MEDICAID DRUG REPORTS AVAILABLE ON THE OIG WEB SITE (HTTP://

WWW.OIG.HHS.GOV)

A-06-91-00092: HCFA Needs to Provide Additional Guidance to Drug Manufacturers

To Better Implement the Medicaid Drug Rebate Program. 1992. (Inconsistencies

in manufacturers methods used to determine AMP.)

A-06-91-00102: Improvements Needed in HCFA’s Procedures To Implement the

Medicaid Drug Rebate Program. 1992. (Errors in AMP and best price.)

A-06-92-00029: Management Controls Over the Medicaid Drug Rebate Program.

1993. (Inadequate State controls and accountability over billing and collection

of rebates.)

A-06-96-00030: Medicaid Pharmacy: Actual Acquisition Cost of Prescription Drug

Products for Brand Name Drugs. 1997. (Based on invoices, in 1994 pharmacy

acquisition costs for brand name drugs averaged 18.3 percent below AWP.)

A-06-97-00011: Medicaid Pharmacy—Actual Acquisition Cost of Generic Prescription

Drug Products. 1997. (Based on invoices, in 1994 pharmacy acquisition costs for

generic drugs averaged 42.5 percent below AWP.)

A-06-97-00052: Need to Establish Connection Between the Calculation of Medicaid

Drug Rebates and Reimbursement for Medicaid Drugs. 1998. (Increases in reimbursement do not trigger corresponding increases in rebates.)

A-06-00-00023: Actual Acquisition Cost of Brand Name Prescription Drug Products.

2001. (Based on invoices, in 1999 pharmacy acquisition costs for brand name

drugs averaged 21.84 percent below AWP.)

A-06-01-00053: Medicaid Pharmacy—Actual Acquisition Cost of Generic Prescription

Drug Products. 2002. (Based on invoices, in 1999 pharmacy acquisition costs for

generic drugs averaged 65.93 percent below AWP.)

A-06-02-00041: Medicaid Pharmacy—Additional Analyses of the Actual Acquisition

Cost of Prescription Drug Products. 2002. (A 4-tier discounting methodology

would bring reimbursement more in line with acquisition costs.)

OEI-05-99-00611: Containment of Medicaid HIV/AIDS Drug Expenditures. 2001.

(Comparison of Medicaid payments to other pricing methods.)

OEI-03-01-00010: Medicaid’s Use of Revised Average Wholesale Prices. 2001.

(States’ use of price revisions by First Databank.)

OEI-05-02-00080: Medicaid’s Mental Health Drug Expenditures. 2003. (Comparison

of Medicaid payments to 4 other Federal payers.)

OEI-05-02-00680: State Strategies to Contain Medicaid Drug Costs. 2003. (Review

of States’ methods to control spending on drugs.)

OEI-03-02-00670: Omission of Drugs from the Federal Upper Limit List in 2001.

2004. (CMS did not ensure timely placement of drugs on the FUL list.)

OEI-03-02-00660: Medicaid Rebates for Physician-Administered Drugs. 2004. (Some

States’ systems are inadequate to ensure rebate collections.)

OEI-05-02-00681: Variation in State Medicaid Drug Prices. 2004. (States’ reimbursements vary widely for the same drugs.)

OEI-03-04-00320: Addition of Qualified Drugs to the Medicaid Federal Upper Limit

List. 2004. (CMS did not ensure timely placement of drugs on the FUL list.)

Mr. WALDEN. Thank you, Mr. Reeb.

Mr. Vito, do you have any comments? No.

Mr. O’Connell, or Mr. Balland.

TESTIMONY OF DAVID J. BALLAND

Mr. BALLAND. Good morning, Mr. Chairman. Mr. O’Connell has

agreed to allow me to go first as his statement will follow logically

after mine.

Good morning, Mr. Chairman. Thank you for having Texas attend this very important hearing. I am David Balland, the associate commissioner for the Medicaid and Children’s Health Insurance Program for the State of Texas, and I appreciate this opportunity to be with you today.

Mr. WALDEN. Thank you for being here.

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Mr. BALLAND. Our main goal in setting reimbursement for the

Texas Medicaid Prescription Drug Program, referred to as the Vendor Drug Program, is to make the reimbursement formula as fair

as possible to all parties involved by reimbursing as close as possible to the pharmacy’s actual cost and the pharmacies—allowing

the pharmacies to set an adequate fee to cover their costs to dispense that product and working with the pharmacies. We do this

in a proactive and transparent manner.

In Texas, we spend approximately $2 billion a year on prescription drugs for Medicaid clients. Most States currently use private

companies to access prescription drug pricing information by drug

in order to set reimbursement levels for their pharmacies for prescription drugs dispensed in their Medicaid programs. These companies request pricing information from manufacturers by drug,

and then make this unregulated pricing information available to

their clients for a fee. Unlike most other States, Texas does not

solely rely on the pricing information provided by these private

companies to set our reimbursement for prescription drug products.

We take the proactive approach and do this due to the potential inaccuracy of the reported information and the actual cost of the

product to the pharmacies.

Texas Medicaid used similar pricing services as most States until

the early 1980’s when the Texas Vendor Drug Program studied

ways to more accurately pay for drug products paid to pharmacy

providers since we were having problems obtaining accurate pricing information. Once we recognized that the average wholesale

price was greater than the amount that Texas pharmacies paid the

wholesaler for a drug product, we decided to do this. In other

words, Texas Medicaid was reimbursing our pharmacies at a higher amount than the pharmacies’ actual price to purchase the drug

product.

Texas started requiring drug manufacturers to fill out an application and questionnaire in the early 1980’s for their products to

be considered for the Texas Medicaid list of covered prescription

drugs. We required drug manufacturers to provide pricing information on a number of different kinds of actual prices for each prescription drug product in order to determine the appropriate reimbursement level for those products purchased from different

sources, including the average wholesale price, the wholesale acquisition cost, the chain warehouse price, the direct price to the pharmacy, and similar pricing information. Our Vendor Drug Program

took specific steps to further refine the reimbursement amount

paid to our pharmacies, including putting into place targeted prescription drug audits and pharmacy invoice audits and requesting

additional pricing information directly from drug manufacturers.

Based on information from some out-of-State pharmacies and our

Texas Medicaid regional pharmacists, Texas Medicaid Vendor Drug

Program initiated two targeted audits—drug invoice, one in early

2000 and one in early 2001. We selected drug products with the

greatest estimated discrepancy in pricing from drug manufacturers

to review during these audits, including over 300 brand-name and

generic prescription drug products. The audits found significant

discrepancies between Texas Medicaid vendor drug reimbursement

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to our pharmacies and the amount the pharmacies were actually

paying for most of the 300-plus products reviewed.

As a result of these two targeted audits, we updated the base reimbursement amount for most of these specific drug products. The

reimbursement updates to pharmacies for most of the products reviewed saves Texas Medicaid an estimated annual $20 million in

all funds.

Additionally, we completed an invoice audit of more than 674

pharmacies in 2001 through 2002. This audit also indicated that

Texas was reimbursing the pharmacies at a significantly higher

amount than the pharmacies’ costs. We proposed to change the prescription drug reimbursement formula after this audit. Unfortunately, the program was unable to proceed with the proposed

changes due to legal challenges by the pharmacy association. This

proposed rule was estimated to save Texas Medicaid millions of

dollars annually due to setting more accurate reimbursement levels

for prescription drugs.

In addition to moving toward a more accurate reimbursement for

product cost, we are working to determine the most accurate dispensing fee that our program should pay the pharmacy. An August

2002 study completed by Myers and Stauffer L.C. Indicated that

the actual statewide median cost of dispensing a drug in Texas

Medicaid is estimated at about 90 cents higher than the current

dispensing expense.

Texas will continue to develop tools and request additional pricing information that will assist us in setting the most accurate reimbursement fee for our pharmacies. We will proceed with the following activities: One, continue developing aggressive State maximum allowable costs; two, require drug manufacturers to also report average manufacturer price; three, further define the accuracy

of the price the wholesaler pays the manufacturer; and, four, analyze the feasibility of implementing a more accurate dispensing fee.

These additional price points will allow Texas to cross-check all

the reported pricing information to reach the most accurate product

cost and dispensing fee for a product.

In conclusion, Mr. Chairman, again, thank you, members of the

committee, for giving Texas Medicaid an opportunity to be a part

of this important panel. Texas Medicaid works very closely with

our partners, drug manufacturers and pharmacies in a transparent

manner, in a proactive way, and has tried to establish a fair process that works for all parties involved.

[The prepared statement of David J. Balland follows:]

PREPARED STATEMENT OF DAVID J. BALLAND, ASSOCIATE COMMISSIONER FOR MED- ICAID AND THE CHILDREN’S HEALTH INSURANCE PROGRAM, TEXAS HEALTH AND

HUMAN SERVICES COMMISSION

My name is David J. Balland, Associate Commissioner for Medicaid and the Children’s Health Insurance Program (CHIP) at the Texas Health and Human Services

Commission.

Before I begin my testimony, I would like to thank you, Mr. Chairman, and the

members of the Committee for inviting Texas to speak on such an important topic.

We look forward to sharing our prescription drug reimbursement best practices with

our federal and state partners.

Our main goal in setting reimbursement for the Texas Medicaid prescription

drug program, referred to as the Vendor Drug Program, is to make the reimbursement formula as fair as possible to all parties involved by reimbursing as close as

possible to the pharmacies’ actual cost of buying prescription drugs. Texas then

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works with the pharmacies to set an adequate fee to cover their costs to dispense

that product to Medicaid recipients. In Texas, we spend about two billion dollars a

year on prescription drugs for Medicaid clients (in state and federal dollars).

Current Pricing System: Most states currently use private companies to access

prescription drug pricing information by drug in order to set reimbursement levels

for their pharmacies for prescription drugs dispensed in their Medicaid programs.

These companies request pricing information from drug manufacturers by drug and

then make this unregulated pricing information available to their clients for a fee.

Unlike most other states, Texas does not solely rely on the pricing information

provided by these private companies to set our reimbursement for prescription drug

products due to the potential inaccuracy of the reported information and the actual

cost of the product to the pharmacies.

Problems with Earlier Pricing Systems: Texas Medicaid used similar pricing

services as most states until the early 1980’s when the Texas Vendor Drug Program

studied ways to more accurately pay for drug products paid to pharmacy providers.

The Texas Vendor Drug Program had long recognized that the average wholesale

price in the commercial price database was greater than the amount that Texas

pharmacies actually paid the wholesaler for a drug product. In other words, Texas

Medicaid was reimbursing our pharmacies at a higher amount than the pharmacies

actual price to purchase the drug product.

In the early 1980’s, Texas started requiring drug manufacturers to fill out an application (later referred to as a questionnaire) for their products to be considered

for the Texas Medicaid list of covered prescription drugs (otherwise known as a formulary). In the questionnaire, drug manufacturers are asked to provide pricing information on a number of different kinds of actual prices for each prescription drug

product in order to determine the appropriate reimbursement level for products purchased from different sources including:

• Average price pharmacies paid for product from a wholesaler, known as Average

Wholesale Price;

• Price paid for product by the wholesaler and/or prescription drug distributor,

known as Wholesaler Acquisition Cost;

• Chain warehouse price;

• Direct price to the pharmacy; and

• Similar pricing information.

Steps Taken to Further Refine Pricing: The Texas Vendor Drug Program took

specific steps to further refine the reimbursement amount paid to our pharmacies

including:

1. We put into place targeted prescription drug audits and pharmacy invoice audits;

and

2. We requested additional pricing information directly from drug manufacturers.

Based on information from some out of state pharmacies and our Texas Medicaid

regional pharmacists, who gather acquisition cost information in the public sector

out-patient pharmacy market, Texas Medicaid Vendor Drug Program initiated two

targeted drug invoice audits, one in early 2000 and the other in early 2001. Texas

selected drug products with the greatest estimated discrepancy in pricing from drug

manufacturers to review during the audits, including over 300 brand name and generic prescription drug products.

The audits found significant discrepancies between Texas Medicaid Vendor Drug

Program reimbursement to our pharmacies and the amount the pharmacy was actually paying for most of the 300-plus products reviewed.

Texas Medicaid Vendor Drug Program Targeted Audit Savings: As a result of

these two targeted audits, the Texas Medicaid Vendor Drug Program updated the

base reimbursement amount for most of these specific drug products. The reimbursement updates to pharmacies for most of the products reviewed saved Texas

Medicaid an estimated annual savings of over $20 million in state and federal

funds.

In addition to the targeted specific product audits, Texas Medicaid Vendor Drug

Program also completed an invoice audit of more than 670 pharmacies in 2001-2002.

This audit also indicated that Texas was reimbursing the pharmacies at a significantly higher amount than the pharmacies’ cost to purchase their products from

drug manufacturers or prescription drug wholesalers. Even though Texas Medicaid

Vendor Drug Program proposed to change the prescription drug reimbursement formula after this audit, the program was unable to proceed with proposed changes

due to legal challenges by the pharmacy association. This proposed rule was estimated to save Texas Medicaid millions of dollars annually due to setting more accurate reimbursement levels for prescription drugs.

127

Dispensing Fee: In addition to moving towards a more accurate reimbursement

for product cost, the Texas Medicaid Vendor Drug Program is also working to determine the most accurate dispensing fee that our program should pay the pharmacy.

An August 2002 study completed by Myers and Stauffer L.C. indicated that the

actual statewide median cost of dispensing a drug in Texas Medicaid is estimated

at about 90 cents higher than the current dispensing expense. The dispensing costs

were especially higher with specialty and urban pharmacies.

Next Steps: Texas will continue to develop tools and request additional pricing

information that will assist us in setting the most accurate reimbursement for our

pharmacies. Texas Medicaid Vendor Drug Program will proceed with the following

activities:

• Continue with developing aggressive state maximum allowable cost (MAC) on certain products;

• Require drug manufacturers to also report average manufacturer price (AMP) for

products in the Texas questionnaire;

• Further define the accuracy of the price the wholesaler pays the manufacturer,

known as Wholesaler Acquisition Cost, and

• Analyze the feasibility of implementing a dispensing fee that reflects actual cost

to pharmacies in Texas.

These additional price points will allow the Texas Medicaid Vendor Drug Program

to cross check all the reported pricing information to reach the most accurate product cost and dispensing fee for a product.

Conclusion: Thank you, Mr. Chairman and members of the Committee, for giving Texas Medicaid and opportunity to be part of this important panel. Texas Medicaid works very closely with our partners, drug manufacturers and pharmacies, and

has tried to establish a fair process that works for all parties involved.

In addition, we will proceed to be as flexible as possible while maintaining the

best prescription drug prices for the state and federal government in the Texas Medicaid program. We must continue to seek the best value in order to be able to sustain this program that is so essential to the health of our vulnerable clients.

Mr. WALDEN. Thank you. And I always try and do whatever I

can to help Texas. It is important. My chairman appreciates that,

too.

Mr. O’Connell, thanks for being here.

TESTIMONY OF PATRICK J. O’CONNELL

Mr. O’CONNELL. Thank you, Mr. Chairman. My name is Patrick

O’Connell; I am an assistant attorney general and chief of the civil

and Medicaid fraud section of the Texas Attorney General’s Office.

We thank you very much for giving us the opportunity to testify

today.

In 1999, then Texas Attorney General, now United States Senator John Cornyn, became concerned about fraud against the Texas

Medicaid program and created a special Civil Medicaid Fraud Section within our Attorney General’s Office. Our section utilizes the

Texas Medicaid Fraud Prevention Act to initiate civil litigation to

recover funds wrongfully taken from Texas Medicaid.

One of the first cases we received was filed by a small Florida

pharmacy, Ven-A-Care of the Florida Keys, whom you heard from

today. Ven-A-Care brought information to us showing that certain

drug manufacturers—not all—but certain drug manufacturers violated Texas law by intentionally reporting prices to the Medicaid

program that did not remotely equal the prices they really charged

for their products. As Mr. Balland has indicated, unlike most other

States which derive their pricing information from third parties,

Texas requires the manufacturers who want their products to be eligible for Medicaid reimbursement in Texas to fill out this questionnaire for each drug they wish placed on the formulary. When

Texas relies upon an inflated price report in calculating a proVerDate 11-MAY-2000 07:48 Feb 24, 2005 Jkt 000000 PO 00000 Frm 00135 Fmt 6633 Sfmt 6602 97275.TXT HCOM1 PsN: HCOM1
128

vider’s estimated acquisition cost, the resulting reimbursement to

providers is well above the provider’s actual acquisition cost, thus

providing pharmacies with unintended windfall profits.

Based on the information that we received from Ven-A-Care as

well as information we discovered in our own preliminary investigations, General Cornyn authorized us to intervene against three

defendants in September 2000. This Texas lawsuit was the first

ever State intervention in a qui tam case involving pharmaceutical

manufacturer pricing fraud.

The evidence we discovered in our lawsuits and investigation

shows that some manufacturers make conscious deliberate business

decisions to create enhanced spreads and to market the sale of

their products based on those spreads. For example, we found that

some manufacturers have engaged in the following activities: Purposefully reporting false and inflated wholesale prices to the Medicaid program in Texas; deliberately failing to report prices to certain classes of trade in violation of Texas law; instructing their

sales personnel to market spreads to customers; creating spread

sheets showing pharmacies how much more profit they can make

off of Medicaid when purchasing one manufacturer’s product over

another; and tying sales personnel compensation to success in marketing the spread.

We also found that some manufacturers actually kept two sets of

computer records with prices, one with the inflated prices that

were reported to their price reporting services and to Texas Medicaid, and another with their real contract prices that are used in

their everyday business transactions with the manufacturers’ customers.

As of May 2004, we have settled with two defendants in our lawsuit for a recovery for the State and the Federal Government of

$45.5 million. In both cases, Texas recovered more than two times

the actual damages to the Medicaid program plus our costs, our attorneys’ fees, and the attorneys’ fees of the relater. It’s important

for the committee to remember that these were Texas State settlements only. Texas is approximately 8 percent of the national Medicaid budget. So if you multiply it by 10 or 12, I think you can see

the numbers involved.

Our office continues to provide assistance to those authorities in

other jurisdictions who are pursuing these defendants and other

companies. We have developed close and cooperative working relationships with the United States Department of Justice and with

the other State attorneys general who have initiated similar litigation. So far, 13 other States have followed Texas’ lead and have

sued various drug companies for false price reporting.

The litigation in Texas is still pending against one of the three

defendants we sued in 2000, and we are scheduled to go to trial

against that manufacturer in the fall of next year. We have also

intervened against three new additional defendants. The cases

against those three defendants is in the discovery phase, and we

anticipate trial in those cases to be reached in the spring of 2006.

Despite our efforts, some unscrupulous manufacturers continue

to devise ways to defraud our Texas Medicaid program, and we are

doing everything in our power to bring those companies to justice.

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Our current Texas Attorney General Greg Abbott has committed

the resources of the agency to these efforts.

I would like to make clear that while Texas is pleased to have

recovered these significant sums of money in the qui tam cases,

litigation is clearly not the most efficient way to run this system.

Our Texas Medicaid program has been required to spend thousands of man hours responding to discovery requests and preparing

for hearings and preparing for and attending depositions in our litigation. The program could have used those hard earned tax dollars

to provide more and better services if the Vendor Drug Program

personnel were not tied up in the litigation caused by the very

manufacturers who have been gaming our system. Thank you for

your attention, and I will be available for questions.

[The prepared statement of Patrick J. O’Connell follows:]

PREPARED STATEMENT OF PATRICK J. O’CONNELL, CHIEF, CIVIL MEDICAID FRAUD

SECTION, OFFICE OF THE ATTORNEY GENERAL OF TEXAS

Mr. Chairman and members of the Subcommittee: Good morning. My name is

Patrick O’Connell. I am an Assistant Attorney General and Chief of the Civil Medicaid Fraud Section of the Texas Attorney General’s Office. Thank you for inviting

us to testify this morning. In my remarks, I will describe for you the efforts undertaken by the Texas Attorney General to identify and vigorously litigate against

those persons and companies that defraud the Medicaid system in Texas.

As you are aware, the federal False Claims Act has been in place since the Civil

War. Texas adopted our version of the FCA in 1995. Our statute, the Texas Medicaid Fraud Prevention Act, is specific to fraud against the Medicaid Program. In

1999, then Texas Attorney General, now United States Senator, John Cornyn became concerned about fraud against the Texas Medicaid Program and created a special Civil Medicaid Fraud Section within the AG’s office. Our Civil Medicaid Fraud

Section utilizes the Texas statute to initiate civil litigation to recover funds defrauded from Texas Medicaid. One of the first cases we received was filed by a small

Florida pharmacy, Ven-A-Care of the Florida Keys, Inc., who you heard from earlier

today.

Ven-A-Care brought information to us showing that certain drug manufacturers

violated Texas law by intentionally reporting prices to the Texas Medicaid Program

that did not bear a reasonable relationship to the prices for their products that were

generally and currently available in the market place. Unlike most other states

which derive pricing information from third party price reporting services like First

Data Bank, Texas requires manufacturers who want their products to be eligible for

Medicaid reimbursement to fill out a questionnaire for each drug they wish placed

on the Texas Medicaid formulary. For each drug, the manufacturer must report its

prices to various classes of trade: e.g., its AWP; its price to wholesaler and/or distributor; its direct price; special price to chain warehouse, etc. A drug company representative is required to sign the form and certify that the information included

in it is accurate. Texas law also requires drug companies to update the Medicaid

Program with any changes in reported pricing within 15 days of the change.

When Texas relies upon an inflated price report in calculating a provider’s estimated acquisition cost (‘‘EAC’’), the resulting reimbursement to providers is well

above the providers’ actual acquisition cost, thus providing pharmacies with windfall

profits. The information brought to us by Ven-a-Care indicated that certain drug

companies may have knowingly and purposefully misrepresented their reported

prices to Texas in order to enhance or drive up the reimbursement to their provider

customers.

Under the Texas statute, we have broad powers to compel document production

and testimony of potential witnesses. In 1999 and 2000, we used these civil investigative demand powers to require several manufacturers to produce documents. We

also took examinations under oath of several industry representatives. Based on the

information that we received from Ven-a-Care, as well as the information we received pursuant to the CID process, General Cornyn authorized us to intervene

against threeVAC defendants in September 2000. The Texas lawsuit was the first

state intervention in a qui tam case involving pharmaceutical manufacturer pricing

fraud.

The evidence we have discovered in our investigations shows that some manufacturers make conscious, deliberate business decisions to create enhanced spreads and

130

to market the sale of their products based on the spreads. For example, we found

that some manufacturers engaged in the following activities:

• purposefully reported false and inflated prices to Texas Medicaid—as well as to

third party price reporting services—in order to create enhanced spreads;

• deliberately failed to report prices to certain classes of trade in violation of Texas

law;

• instructed their sales personnel to market spreads to customers;

• created spread sheets showing pharmacies how much more profit they can make

off Medicaid when purchasing one product over another;

• tied sales personnel compensation to success in marketing the spread.

We also found that some manufacturers actually kept two sets of computer

records with prices: one, with inflated prices that are reported to the price reporting

services like First Data Bank, or in Texas’ case, directly to the Medicaid Program;

and another with real contract prices that are used in every day business transactions with the manufacturer’s customers.

In June 2003, we settled our case with one defendant drug company for $18.5 Million, and in May 2004, we settled with another for $27 Million. The total recovery

in both settlements was $45.5 Million. In both cases, Texas recovered more than two

times the actual damages to the Medicaid Program, plus our costs and attorneys’

fees. Since the federal government supplies approximately 62 cents of every dollar

spent on Medicaid in Texas, so approximately 62% of the net settlements went to

the United States Treasury.

It is important to remember that these were Texas State settlements only. My office continues to provide assistance to those authorities in other jurisdictions who

are pursuing these and other companies. We have developed close and cooperative

working relationships with the United States Department of Justice and with other

state attorneys general who have instituted similar litigation. So far, California,

Kentucky, Florida, Minnesota, Connecticut, New York, Ohio, Arkansas, Wisconsin,

West Virginia, Massachusetts, and Nevada have sued drug companies for false price

reporting.

Litigation in Texas is still pending against one of the defendants we sued in September 2000, and we are scheduled to go to trial against that manufacturer in the

fall of next year. We have also intervened against three additional defendants. The

case against these three defendants is in the discovery phase where we are taking

depositions and exchanging documents. That trial is scheduled to begin in the

Spring of 2006.

I would like to briefly follow-up on the remarks from the Texas Medicaid Program. We have consistently found over the last five years of litigation that our Vendor Drug Program in Texas is one of the best, if not the best, program in the country. Texas is the only state thus far to require drug companies to report and certify

their prices directly to our Medicaid administrators. This distinguishes Texas from

all other Medicaid programs, which derive their pricing information from third party

publishing services like First Data Bank. In addition, as you heard, Texas was the

first state to move from AWP based reimbursement to wholesaler cost and the first

to differentiate payments to chain pharmacies. In addition to these efforts, our

Texas Program continues to search for new ways to improve. They have passed a

law requiring drug companies to report their AMP to Texas Medicaid, and they intend to use the AMP as another benchmark for comparison with the prices reported

by manufacturers. Unfortunately, to date, only 16% of manufacturers are reporting

their AMPs.

Despite our efforts, some unscrupulous manufacturers continue to devise ways to

defraud Texas Medicaid, and we are doing everything in our power to bring those

companies to justice. Our current Texas Attorney General, Greg Abbott, has committed the resources of the agency to these efforts. Through his leadership and vision, we have obtained the funding to increase our staffing to 8 lawyers plus support

staff. With this additional staffing, we will be pursuing every manufacturer that we

find has engaged in this type of activity.

I would like to make clear that, while Texas is pleased to have recovered significant sums of money in these qui tam cases, litigation is not the most efficient way

to run this system. The Texas VDP has been required to spend thousands of man

hours responding to discovery requests and preparing for and attending depositions

in our litigation. The program could have used our hard earned tax dollars to provide more and better services if VDP personnel were not tied up in litigation caused

by manufacturers who game the system. In addition, without the help of relators

like Ven-A-Care, who took great personal and financial risks to present their allegations, we would not have been able to obtain the significant recoveries in the DEY

and Schering. We hope that you will ensure that, in whatever system implemented

131

in the future by Congress, the States and the Department of Justice continue to

have laws with strong penalties to force compliance.

My time is about up. Thank you for your attention. I am happy to answer any

questions.

Mr. WALDEN. Thank you very much, Mr. O’Connell. I want to

thank all of the panelists. Your testimony has been very helpful in

our process here.

Mr. Reinhart, I want to start with you with a question, because

I think I heard you say in your testimony that Michigan updates

its list of prices on a daily basis?

Mr. REINHART. For generic drugs, we do.

Mr. WALDEN. And how do you do that?

Mr. REINHART. Well, our agency has significant staff constraints,

so we have hired an outside entity that also is a pharmacist, and

they monitor the market, they—each of the distributors, and they

will adjust prices accordingly. If a pharmacist—and we do this all

over the Internet. So if a pharmacist indicates that they couldn’t

find the drug for that price, our consultant will send them back

and tell them two places where they can get it.

Mr. WALDEN. And is this a nationwide service that you subscribe

to, or is this a Michigan-only creation?

Mr. REINHART. This is a Michigan firm.

Mr. WALDEN. Do you know if they work in other States?

Mr. REINHART. Not to my knowledge.

Mr. WALDEN. All right. But you are able to update your pricing,

then, on a daily basis?

Mr. REINHART. Well, we do that for generic drugs.

Mr. WALDEN. Right.

Mr. REINHART. We still have the more traditional—for brandname drugs, we do use the average wholesale price.

Mr. WALDEN. And do you know what cost that is to the State to

have that service, to utilize that service?

Mr. REINHART. It is minor. I think that component of—you know,

I mentioned a $130 million savings. That component contributes

about $40 million, and this service is less than a half a million.

Mr. WALDEN. Per year?

Mr. REINHART. It’s very modest. Right.

Mr. WALDEN. Mr. Smith, why does it take CMS so long in some

cases, as identified by Mr. Reeb and his colleague Mr. Vito, to update these lists when these generics come out? And how many people do you have dedicated and at what cost?

Mr. SMITH. Right now, there are about 700 drugs on the Federal

upper limit. The last full update, I believe, was in 2001. We have

updated on a specific basis when drugs come on. And it is not just

one drug, but we have to assure that there are three.

Mr. WALDEN. Right.

Mr. SMITH. That is part of it. We have done 13 updates since

2001 to advise that these drugs would be put on the FUL.

I think part of the delay is waiting for three. Part of the intensity

is that we actually have to go back and do a verification ourselves

to make sure that those prices are indeed available at that price.

Mr. WALDEN. Would you admit that the system that’s being used

today or has been in use up until today simply isn’t functioning as

well as it should for the taxpayers?

132

Mr. SMITH. I would agree that we have done it on a historical

basis, and it’s time to update what we are doing and how we are

doing it. And, as I said in my opening statement, a lot of our activity has been involved with providing other tools to the States. Obviously, this is an operational one. But we appreciate——

Mr. WALDEN. I know. But I go back to—I’ve read through the

IG’s draft report and the testimony today, and it just seems that

the problem remains, despite repeated suggestions. And I am not

picking on you, but it is just something we all need to get involved

in and figure out from our end what we need to fix, and I think

from CMS’s end, specifically Fluoxetine—there were 8 or 9 generics

in the market the day that the exclusivity period ended, and yet

it took a considerable length of time to update the list. Right?

Mr. SMITH. Again, that update was our own verification that

those prices——

Mr. WALDEN. And how long did it take to update?

Mr. SMITH. It took approximately a year to do that verification.

Mr. WALDEN. And do you know how much loss to the taxpayer

occurred during that period?

Mr. SMITH. I have not calculated it.

Mr. WALDEN. Compared to if an update had been done quicker?

Mr. SMITH. I think this has shown us that we need to update our

internal procedures.

Mr. WALDEN. One of the findings in the OIGs report—or recommendations—is that there is a new group of generics about to

come onto the market that could have—there are substantial costs

associated with them. And so it seems clear to me as a business

owner that it is going to be important from a business standpoint

that your agency be ready to go to put those on the upgraded list.

What assurance can you give our committee that that will happen

short of a year or 10 months?

Mr. SMITH. We are looking at that in itself and understand windows will be coming into the market, and we will move quickly.

But again, it is incumbent on us to do that verification that they

are available as well. But we will do that.

Mr. WALDEN. Do you need better notification from FDA when

generics are going to come on the market? Do you get that today?

Mr. SMITH. I think we use the same resources that all purchasers

have available to them. This information is available. We look at

three different commercial products that are available just as other

purchasers and insurers do as well.

Mr. WALDEN. I want to go to that. Mr. Reeb, Mr. Vito, maybe you

can tell me. I am told that some of the big purchasers on the private side, on the insurance side, move pretty rapidly when generics

come to market in terms of adjusting their price structures. Are

you familiar with that?

Mr. VITO. We are not, sir.

Mr. WALDEN. Do you agree with what Mr. Smith says in terms

of the problems associated with trying to update? I mean, I have

read your recommendations. It seems like there is a real issue here

in terms of being able to move swifter than we are; is that correct?

Mr. VITO. We believe there is a problem. We believe that it can

be resolved by having a dedicated effort on CMS’s part. We understand the amount of significant work that is involved in maintainVerDate 11-MAY-2000 07:48 Feb 24, 2005 Jkt 000000 PO 00000 Frm 00140 Fmt 6633 Sfmt 6602 97275.TXT HCOM1 PsN: HCOM1
133

ing the list, adding the products to the list and deleting them. But

it is certainly manageable if the FTEs are applied to it, the resources are applied to it that are necessary. It is our estimation

that if you put these resources to that goal, the savings to the program, both the Medicaid and the Federal Government, will far exceed the cost that you would——

Mr. WALDEN. That is what seems obvious to me is, wow, you are

talking about literally hundreds of millions, if not billions of dollars, and we have got a big hole in the bucket draining out all

those savings quickly. How difficult would it be to update this on

a more timely basis? How many people do you think it would take?

Mr. VITO. In our estimation, I think that would be better answered by CMS. However we can say that if it is 1, 2, 3 FTEs,

whatever those numbers are, the cost of those FTEs will be certainly outweighed by the savings that can be achieved to the program.

Mr. WALDEN. I want to make sure I am not mixing the proverbial apples and oranges here. Is the price updating information

that Michigan is doing using this outside service comparable to

what we are talking about for updating these lists?

Mr. VITO. I am not familiar with what Michigan is using. I could

tell you, though, that it appears that they are doing more than just

looking at the red book and the blue book and the MediSpan, the

drug compendiums; is that correct?

So it would be different.

Mr. WALDEN. It would be different in terms of their resources to

identify the prices?

Mr. VITO. I believe that the Medicaid program, they are required

to use the drug compendiums to identify the lowest-priced product

and then add 150 percent to that. I believe that is what CMS does.

Mr. WALDEN. Is that correct, Mr. Smith?

Mr. SMITH. That is correct. The rebate provision of the Medicaid

law itself, established the parameters that we work with.

Mr. WALDEN. So that is where we need to come into focus here

to fix that if that is indeed the problem.

Let me ask about the rebates AWP versus AMP because it looks

like we are paying at one schedule and reimbursing based on a different price. Is that correct, Mr. Reeb and Mr. Vito?

Mr. REEB. We issued a report a couple of years ago exactly saying that. We estimated that about a billion dollars could have been

saved over a 3-year period had the rebates been paid using AWP.

We don’t like AWP, but if you are going to reimburse under AWP,

then it doesn’t seem to make sense to us to have a rebate process

that uses average manufacturers price. You are using two different

sets of numbers to basically try to bring a little bit more——

Mr. WALDEN. So how much are we losing as a result of this mismatched pricing?

Mr. REEB. We estimated about a billion dollars for a 3-year period ending around 1997 or so, but we are updating the data presently, and it is at least that much in present day——

Mr. WALDEN. I would think with the growth in the percentage

of Medicaid that is prescription drugs, it would be at least that, if

not significantly more, when you look at the rapid escalation in

costs in the last few years.

134

Mr. REEB. We believe—and again, we are not supporting AWP

as necessarily being a good basis, but if you are going—most States

use that in some form in their reimbursement process. Then, if in

the rebate process you use that, it would at least bring another

pressure point on the system, the industry, as to—if you are going

to raise AWP, then you run the risk of making the spread greater

to the best price which is how the rebate calculation uses those two

sets of numbers.

Mr. WALDEN. And just quickly, in your report from a couple of

years ago, you also looked at Oregon’s Medicaid system and found

that it wasn’t operating appropriately and some $20 million in

problems there. Do you know if they have responded in a positive

way to your recommendations?

Mr. REEB. I don’t know specifically, sir.

Mr. WALDEN. Okay. I will get back to you on that.

Mr. Stupak, I would like to turn to you now for 10 minutes.

Mr. STUPAK. Thank you, Mr. Chairman. I am sorry, most of this

hearing I was in another hearing. But it is good to be here and to

welcome Mr. Rinehart from Michigan. I did read your testimony.

A couple of questions, Mr. Rinehart, if I may. How much do you

estimate that Michigan saves each year under the preferred drug

list that you have been using?

Mr. RINEHART. It’s difficult to precisely partition—the preferred

drug list and the multi-State work hand in hand. I said it earlier

that our pricing strategies save about $40 million. So this other

component will be about $90 million.

Mr. STUPAK. Has anyone lost their prescription drug benefit as

you saved this money?

Mr. RINEHART. No. No one has lost money.

Mr. STUPAK. Michigan has been very aggressive in cutting their

Medicaid prescription drug costs, particularly in the generic area.

Do you think that your maximum allowable cost or MAC is more

aggressive than most States?

Mr. RINEHART. I think it is. I think the daily component and the

use of technology to convey those prices to pharmacists is a little

more aggressive.

Mr. STUPAK. The daily component, you said you MAC change

your prices every day?

Mr. RINEHART. We do.

Mr. STUPAK. In your testimony you outlined how Michigan has

benefited from prescription drug pooling purchase. The purchasing

pool plan was approved in April; correct?

Mr. RINEHART. April 22.

Mr. STUPAK. Okay. And I know you have explained the clawback

in your testimony as part of your Medicare prescription drug bill.

Can you please briefly explain it again? Specifically what does it

mean to Michigan, the clawback prevision in the Medicare bill?

Mr. RINEHART. Sure. States are required to help finance the drug

benefit for dual eligibles. And our contribution will be calculated

using our 2003 per person expenditures, per capita expenditures,

inflated through 2006, and the index that most people cite, it’s an

11 or 12 percent annual increase. And as I tried to argue earlier,

our annual increases are below 5 percent currently because we

have been so aggressive in managing the benefit. So even though

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in 2006, when the declining percentage will pay 90 percent of that

per capita amount, it is still more than we think we could have

managed the benefit to because of our lower growth rates.

Mr. STUPAK. Sure. Because you are below that 11 percent, and

making an assumption on 11, you are doing it at 4; therefore, you

are going to have to pick up that 6, if you will?

Mr. RINEHART. Yes.

Mr. STUPAK. How does this compare to other items in Michigan’s

Medicaid budget?

Mr. RINEHART. The pharmacy expenditure line grew at a much

lower rate than the balance of the program. I included a chart in

my written testimony that shows the caseload. The caseload has

dramatically increased in Michigan. So everything is growing, but

this particular line grew at a rate somewhat below the balance of

the program.

Mr. STUPAK. Is it fair to see that the clawback provision is going

to cost Michigan about $30 million in 2007?

Mr. RINEHART. On a full-year basis, in 2007, $30 million State

resources, yes.

Mr. STUPAK. What about other States? Do you have any idea

what will happen there?

Mr. RINEHART. In talking to my colleagues, States that have been

aggressive in constraining the growth in pharmacy spending, if

they started in 2002, 2003, and I think it is likely they will also

increase, my colleague from Ohio was talking about an $80 million

figure.

Mr. STUPAK. So the States that have been aggressive in trying

to provide prescription drug coverage underneath the Medicaid

plan, but still trying to save taxpayers money underneath the socalled Medicare reform bill that was passed are actually going to

be punished now with the clawback provision?

Mr. RINEHART. At least initially. The State percentage declines

to 75 percent. So at some point, perhaps we will reach a break-even

point, but certainly initially, we feel costs will exceed what we

would have spent.

Mr. STUPAK. Mr. Balland, you are a much bigger State than

Michigan. Do you agree with that that the clawback provision will

cost States money, and if so, how much in your State?

Mr. BALLAND. Yes, sir. I do agree it will cost—the estimate in

Texas, I am not certain what that figure is.

Mr. STUPAK. Mr. Rinehart, Michigan’s annual increases in prescription drug expenditures are below the national average than

the other States. So when you get to this clawback, the only thing

we can do to relieve you of that is to repeal that part of the bill?

Mr. RINEHART. You could—I would have——

Mr. STUPAK. Are there any other ways you can think of——

Mr. RINEHART. You could accelerate immediately to the 75 percent.

Mr. STUPAK. As opposed to the 90?

Mr. RINEHART. As opposed to the 90. That would be very helpful.

Or 100 percent.

Mr. STUPAK. 100 percent, I am sure, would be better. Let me ask

you in a different area, Sunday there was an article in The New

York Times that CMS has no plan for moving elderly nursing home

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patients on Medicaid to the new Medicare drug benefit program,

and that it is possible for these patients to select a drug card. How

is Michigan going to do that, because that is that dual eligible

again?

Mr. RINEHART. Sure. That is very important and we are very concerned about that. We are working hard. Michigan was one of the

States that did receive a grant from CMS for education and outreach. Recently, I know Mr. Smith has indicated, that there will be

an open enrollment period prior to December. But in December,

States will be allowed for those that haven’t selected—I think this

is true—States would be allowed to automatically enroll beneficiaries into a card. So that at least should avoid an interval with

no coverage, but it will be a fair amount of work.

Mr. STUPAK. Mr. Balland, do you care to comment on that aspect

of it about selecting the card there?

Mr. BALLAND. I am sorry. Say that again, sir.

Mr. STUPAK. Sure. The article—I don’t know if you saw it—in

The New York Times this past Sunday. It was about that CMS has

no plan for moving the elderly nursing home patients on Medicaid

to the new Medicare drug benefit program, and that it is impossible for these patients to select drug cards. So how would Texas

approach this? You have no longer dual eligibility underneath the

Medicare reform bill that has passed.

Mr. BALLAND. No. And we would have to analyze that further to

see exactly what the impact would be on Texas.

Mr. STUPAK. Mr. Reeb, if I can ask you a question. In a 2001 report on Medicaid’s use of the average wholesale price, the OIG concluded that the reliance on the reported average wholesale price as

a basis for drug reimbursement was fundamentally flawed and

CMS said it would look for solutions. In its October 2003, report,

the OIG recommended that CMS—and I am quoting now—‘‘review

the current reimbursement methodology, work with States to find

a method that more accurately estimates pharmacies’ acquisition

costs and initiate a review of Federal Medicaid rebates.’’ Did CMS

ever do this?

Mr. REEB. I don’t think any action, as such, directly has been

taken, but I believe CMS has brought the issue up to the States

as a part of normal operations. I don’t believe, as such, a fundamental change in the process has a occurred yet, but perhaps, Mr.

Smith——

Mr. STUPAK. I was going was going to say, Mr. Smith, could you

comment on that? Can you tell us why CMS has not worked to develop a more accurate acquisition cost for the States to work with?

Mr. SMITH. I think we have provided updates to the full list. I

think much of our attention has been on helping States find other

ways, such as the purchasing pools and prior authorization, et

cetera. So I think we have had a great deal of activity with the

States in helping them to find ways to save money in the Medicaid

program.

Mr. STUPAK. But the report which said it was fundamentally

flawed really looked at CMS and the way the drug reimbursement

was done, and they said it was fundamentally flawed, and you said

you would look for solutions. Other than working with States have

you come up with any solutions?

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Mr. SMITH. Wgain, we have to work within a framework of making certain that there are at least three alternatives and to validate

that they are available at those prices. That is an intensive process. And as I stated earlier, we are looking internally at how we

can improve the way we do update the FUL on a quicker basis.

Mr. STUPAK. Yes. But the way you base it upon they said was

fundamentally flawed. So even if you are doing all of this, unless

you take care of the fundamental basis of it—I mean, is there any

logic to States reimbursing on the average wholesale price while

the rebates are actually based on the average manufacturing price,

and that is not really shared with the States? So, I mean, where

is the logic here?

Mr. SMITH. Mr. Stupak, in terms of that basis, that comes from

Title XIX itself. That comes from the law wherein Congress established how we do it back in 1990, in terms of having those two different standards.

Mr. STUPAK. So wouldn’t CMS recommend to the Congress having to change the law so you would have a real good basis, not an

average wholesale price, but the average manufacturing price

which would save everyone a lot of money?

Mr. SMITH. I believe we have twice put in the President’s budget

recommendations to address the pricing. On the pricing itself also

I would like to——

Mr. STUPAK. But in the President’s budget that won’t change it

unless we change the law.

Mr. SMITH. That is correct.

Mr. STUPAK. So shouldn’t you really come to Capitol Hill and ask

us to change the law on that so you could use the average price?

Mr. SMITH. Certainly Congress has to take that action itself.

Mr. STUPAK. Did CMS recommend that——

Mr. SMITH. We did not submit legislation, no.

Mr. STUPAK. Did you recommend that they do it in the Medicare

reform bill last August?

Mr. SMITH. In Medicare, I believe it went to the average sales

price instead. In terms of the consideration of changing Medicaid

at the same time, I don’t know to what extent that——

Mr. STUPAK. And we should do it for Medicare and Medicaid;

right? We shouldn’t have two different systems?

Mr. SMITH. We do have two different systems. We do have different systems on acquisition and in the rebate programs. I don’t

think that Medicare has the rebate program that Medicaid does. I

know we have focussed a lot on the manufacture side, but I do

want to at least bring to the subcommittee’s attention, when you

talk about AWP, it has an impact on the pharmacy as well. The

pharmacy is being paid not only for its acquisition, but also storage

and counseling the Medicaid patient as well. Most States price

their purchase on an AWP minus 10 percent to AWP minus 15 percent but they also add on a dispensing fee. That dispensing fee has

large variation among the States. So when you look at the price

that a State says in its State plan, ‘‘This is what I want to reimburse our pharmacies for,’’ they are looking not just at the cost of

acquisition, but also counseling that Medicaid patient. Many argue

that the Medicaid recipient needs additional time at the pharmacy,

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and you are compensating the pharmacy for that as well. And in

addition, again, how Medicaid differs——

Mr. WALDEN. I understand the gentleman has one more question.

Mr. STUPAK. Yes, one more question if I can. While I have you

here, the CHIPS program, as you know, back on September 30,

2004, more than a billion dollars of funding under the CHIPS program was reverted back to Treasury. This money is money that

States could have used for coverage. A number of States have insufficient funding this year, and over the next 3 years, more than

17 States are projected to have inadequate funds to cover their current children population. There is bipartisan legislation in the

House and Senate to address this matter, but the way I understand it, the administration objected, publicly stating he wanted to

spend the money to do more outreach instead. My question is if the

State doesn’t have enough money to cover the kids they currently

cover, what good does it do to do more outreach to bring more people in a program when you don’t have enough money to cover the

kids to start with?

Mr. SMITH. Sure. First, the money that expired, that money expired when Congress created S-CHIP. We created it on the basis

that States would have 3 years to spend their allotments. The authority to spend the money dated back to 1998, 1999, and 2000.

That money was unspent because the States themselves didn’t

have enough kids covered so that they needed those resources.

In terms of 2005, Congress gave the Secretary the authority to

redistribute unspent allotments. You are taking from one State

that didn’t use the money to give it to another State. That, in itself,

we project and the States project, will be sufficient funding through

the end of 2005, because you are adding that money plus 3 years

of allotments including the new 2005 allotments.

In terms of the legislation that was introduced that was based

on a formula, that formula, in itself, would have left States with

shortfalls in the long term. It did not solve all the problems.

Mr. STUPAK. We are not saying it is going to solve all the problems. We are saying States that don’t have enough money to cover

the kids, we wanted the money—a bipartisan group wanted the

money to go back to the States to cover kids. Instead, the administration said no, we are going to use it for outreach to bring more

kids in the program. We don’t have enough money to cover the kids

in the program. Why bring more kids in? A lot of us saw it as sort

of the way of administration saying we will give it to you next year

but only if we can block grant the Medicaid program back to the

States, which would leave the States even further underfunded.

Mr. SMITH. Well, I think what the President announced was that

we should use money that the States themselves said ‘‘We aren’t

going to use this money based on coverage.’’ The first step to increasing insurance is to actually enroll kids for programs they are

already eligible for. And the second part of that was that Congress

should come back and reauthorize the S-CHIP program. It has

done great things. We are at record levels in coverage for kids and

we want to do more.

Mr. WALDEN. Thank you, Mr. Stupak.

Mr. STUPAK. Thank you, Mr. Chairman.

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Mr. WALDEN. I am going to turn now to the chairman of the full

committee, Mr. Barton, for questions.

Chairman BARTON. Thank you, Mr. Chairman. Before I go into

questions, I have got a point of personal privilege. I would like to

introduce my wife, Terry Barton, who is right behind me; my district director, Ron Wright from Arlington, Texas; and his wife,

Susan Wright. I introduce them to the committee. Just a little bit

of a personal break.

I am going to direct most of my questions to our two friends from

Texas who have testified. And I am going to start by reading part

of the statement that Mr. O’Connell has already put into the

record. On Page 3 of his statement he talks about some of the

things that the State of Texas did in their investigation, and I am

going to read a part of it and then ask Mr. O’Connell a question.

‘‘the evidence that we discovered in our investigation shows that

some manufacturers made conscious, deliberate business decisions

to create enhanced spreads and to market the sale of their products

based on these spreads.

For example, we found that some manufacturer engaged in the

following practices: One, purposefully reported false and inflated

prices to Texas Medicaid as well as to third-party price reporting

services in order to create enhanced spreads; two, deliberately

failed to report prices to certain classes of trade in violation of

Texas law; three, instructed their sales personnel to market

spreads to customers; four, created spreadsheets showing pharmacies how much more profit they can make off Medicaid when

purchasing one product over another; five, tied sales personnel

compensation to success in marketing the spread.

We also found that some manufacturers actually kept two sets of

computer records with prices. One with inflated prices that are reported to the price reporting services like First DataBank or, in

Texas’s case, directly to the Medicaid program and another with

real contract prices that are used in everyday business transactions

with the manufacturers’ customers.’’ Mr. O’Connell, because of

these results of the investigations that Texas attorney general’s office found, what was the result of the lawsuits that were brought

by the Texas Attorney General?

Mr. O’CONNELL. As I indicated earlier Mr. Chairman, so far we

have collected $45.5 million, and that is more than twice the

amount of what we believe were the damages incurred by the

Texas Medicaid program. And in addition, we recovered the attorneys’ fees and costs of the Attorney General as well as related——

Chairman BARTON. Are there any lawsuits that are still pending?

Mr. O’CONNELL. Yes. We have one still pending against Roxane

Pharmaceuticals, which will be taking place in fall of 2005, and

then we have also sued three other manufacturers: Abbott Laboratories, Braun/McGaw Pharmaceuticals, as well as Baxter.

Chairman BARTON. So the only lawsuits that have been concluded that the State of Texas has won, and you’ve got four other

pending lawsuits?

Mr. O’CONNELL. And we have settled two. One with DEY Laboratories; one with Warwick, a division of Schering. And we have four

others. And then Senator Cornyn, when he was Attorney General,

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made clear that there were other investigations going on, and we

are proceeding as quickly as we can with the staffing that we have.

MChairman BARTON. Is it reasonable to expect that the lawsuits

that haven’t been settled that are still pending, the outcome is

going to be similar to what has already occurred?

Mr. O’CONNELL. We certainly expect so, yes, sir.

Chairman BARTON. That would be obvious—that is what I would

think. What has Texas done to change its Medicaid system as a result of these same investigations? Have there been changes in the

way Texas administers its part of Medicaid that deals with prescription drug reimbursement?

Mr. O’CONNELL. Absolutely. And Mr. Balland may be able to

speak to it more than I. But I do know that because of the prices

that we have found in our investigations, they have conducted audits, spent significant sums of money to conduct these audits,

which I don’t believe they should have had to do, in order to get

the real pricing that the pharmacies and wholesalers are paying for

these products. They then lowered the reimbursement rates in

Texas for those particular prices. And in addition, and more importantly, the maximum allowable cost that was referred to earlier

that Texas maintains in those MACs were lowered significantly as

well. And in most cases, my understanding is the Texas MAC is

significantly lower than the Federal upper limit that is currently

in place.

Chairman BARTON. Mr. Balland, do you want to elaborate on the

changes that Texas has made in its system?

Mr. BALLAND. Yes, sir. Thank you, Mr. Chairman. That is correct. We—75 percent of the time, Texas pays lower than the Federal upper limit. Also, we have refined the pricing methodology in

the State to make it much more accurate. We also have three

points that we feel makes the vendor drug program in Texas

unique, and that is, No. 1, we have a pricing system that is

proactive and transparent in determining the most accurate prices;

No. 2, we have within our vendor drug program a formulary unit

which is dedicated and focused to determining the most accurate

of prices; and then No. 3, we are the only State that has a questionnaire that we require the manufacturers to answer with specific pricing points that help us refine those true prices.

Chairman BARTON. Is there any manufacturer or distributor that

because of the changes that Texas has made or because of these

lawsuits has chosen to not serve Texas? Has somebody backed out

and said we don’t want to play in that market anymore?

Mr. BALLAND. No.

Mr. O’CONNELL. Not only that, Mr. Chairman, the number of

pharmacies that are participating in the Medicaid program have

gone up over the last number of years instead of gone down.

There was one thing that the Medicaid program did that I think

was particularly important, I think, and that is that a rule was

passed requiring manufacturers to report their AMPs directly to

Texas. The rule required that the AMPs maintain confidential—as

you know, CMS gets those AMPs but they are not provided to the

States. So far, only 16 percent of the manufacturers have complied

with that rule and we have a problem when——

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Chairman BARTON. The AMP is the average manufacturing

product——

Mr. O’CONNELL. The actual manufacture price for the previous

quarter, which would be akin to the average sale price that you

have instituted in Medicare. Only 16 percent of the manufacturers

have cooperated with us so far in that regard.

Chairman BARTON. I just want to recapitulate because I am

about to run out of time. The Texas Attorney General, who is now

the United States Senator from Texas, decided that there was reason to believe that fraud or corruption was occurring in the Medicaid program in terms of prescription drug payments in Texas; so

he instigated an investigation that has so far resulted in several

lawsuits being successfully concluded and the State and the Federal Government have recouped over $45 million. We have got 3 or

4 lawsuits that are currently pending. In addition, the State of

Texas has changed the way it administers the Medicaid program.

Because of those changes, there are significant cost savings. No

provider has chosen not to provide so that so far it is a win-win

for everybody in terms of honesty and good government.

My last question is, is there any reason to believe that some system similar to what the State of Texas has instigated would not

work at the Federal level if we did something similar?

Mr. O’CONNELL. In my opinion, no. Obviously the concern that

we have is Texas has spent a tremendous amount of money to institute this system, and I think most States, certainly the smaller

States, probably don’t have the funds to do that. And the more

money you spend trying to get the number right, the less money

you have to spend on your beneficiaries.

Chairman BARTON. But the two representatives from Texas think

that what Texas is doing in a similar way, obviously would have

to be massaged to some extent, could be used in other States?

Mr. BALLAND. Absolutely.

Chairman BARTON. All right. I want to ask Mr. Rinehart, who I

think is from Michigan, do you agree with that? Do you think that

what Texas is doing might be useful in Michigan?

Mr. RINEHART. Yes, I do.

Chairman BARTON. Mr. Smith, Mr. Reeb, Mr. Vito, do you all see

any reason to believe that something similar to what we’re doing

in Texas couldn’t be used at the Federal level and other State levels? Anybody?

Mr. SMITH. I think, Mr. Chairman, it goes back to part of the

fundamentals of Medicaid. The Federal Government is working

with upper limits and frameworks. You’ve heard two good examples today, of how the States themselves are involved in getting

prices lower than what the Federal upper limits would have allowed. So that’s the way Medicaid works.

Chairman BARTON. But I mean does anybody on this panel, before we turn it back because I have got about a minute left, fundamentally think we ought to just maintain the status quo? Is everybody in agreement that we ought to change the status quo and

if it is necessary to do that by Federal statute that we ought to do

that, we ought to actually change the Federal law? And I’m not

saying we go to exactly what Texas is doing, but to go to some system that really is based on actual sales prices with auditing and

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backup so that we have a transparency in the system so that anybody that has an interest can find out what’s really going on? Is

there anybody that disagrees with that? Let the record show that

all the heads are saying they——

Mr. SMITH. I think everybody wants better than what we have.

Chairman BARTON. All right. With that, Mr. Chairman, I yield

back the balance of my time.

Mr. WALDEN. The gentleman yields back the balance of his time.

The Chair now recognizes the gentleman from Michigan, Mr.

Rogers.

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

Chairman Barton for holding the hearing. One thing I have found

through this whole process is when you look at the monumental occasion that happened here not so long ago, the first time ever

under Medicaid trying to provide a prescription drug benefit, and

hopefully apply some common sense, it was so big, we have some

problems. And I know my good friend, Mr. Stupak from Michigan,

was talking about why don’t we fix the Medicaid portion of it.

We’re still trying to figure out if we exactly got reimbursement

right for oncology, and we’re really talking about pharmacies in the

Medicaid and trying to figure that out. We still have issues that

we have to work out. It is a complicated, complicated—too complicated obviously. I think we have decided that. Better transparency, better availability for information.

Mr. Rinehart, I want to congratulate you in the State of Michigan. You have been aggressive and you have certainly given credence to the old saying that no good deed goes unpunished, at least

in the first couple of years. But I want to make sure we are comparing apples and apples. I think you have acknowledged that

when it gets down to that 75 percent mark, that is going to be a

true savings for Michigan that is in this bill.

And as I understand your numbers, you didn’t add in that 28

percent subsidy that is being paid to a State like Michigan to its

retiree benefits. So there is a big chunk of money that is being able

to be applied to Medicaid or any other issue the State decides.

Mr. RINEHART. That is true. No, I did not. I just focussed on

Medicaid——

Mr. ROGERS. So it’s not really a true loss. What is really deceptive here is we have got the two best, I think, in the State. I think

you are No. 1 and No. 2 for keeping your costs down. I have imagined if we put all the States in a hat and drew two out, we’d have

a whole different story here about cost containment on Medicaid

prescription drugs. This has kind of given us a bit of a distorted

view on why we’re at and I think why that formula was there.

I will offer you this commitment, that I will work with Chairman

Barton to make sure that we institute at least a little fairness and

not punish the States that have been aggressive about keeping

their costs down. But I would caution that next year’s an estimate

for you. You’ve done a great job. You’ve come down. The numbers

over the last few years were very impressive. That is wonderful.

We just want to make sure that number continues, because it is

a guess right now, and you are making a best guess, and we want

to make sure we’re accurate. We don’t want to punish you for doing

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great things, but we don’t want to give you extra money for having

a little bit of progress and falling back either.

So as you can imagine, with 48 States in the mix, it is pretty

complicated for us to get to the right conclusion. These hearings

are incredibly important for us to understand how we tweak this

thing and make it better and more service-oriented, especially in

cases exactly like this.

And just to CMS, I’ll throw you under the bus. I am hoping—

you’ve really enjoyed that today. I can tell by that expression and

the sweat on your brow that you love that. I mean I hope that we

are going to allow—and my understanding and reading of this and

through staff consultations is that there is a little wiggle room that

is not hard, fast, and certain, that CMS will have some ability to

make some judgments to look at how their costs—how they’re

charging back on that clawback provision; is that correct?

Mr. SMITH. Offhand, I’m not certain what wiggle room you might

be referring to. But I think overall, the way the State contribution,

as we call it, is calculated, is off of a base year. Congress enacted

this a year ago. They had to establish something as a base so 2003

was the calendar year that they used because that way the expenditures were what they were. It was set, instead of basing it on estimates. And then it was indexed by national health expenditures.

That, in itself, historically, is of benefit to States because the

growth in prescription drugs in the Medicaid program is generally

higher and historically higher than national health expenditures.

So right off the bat, Congress provided a way for the States to save

money by doing a lower rate of growth.

When you get States like Michigan and Texas that then have become more aggressive than what the national health expenditures

have been, that is to the good on both sides because then they are

saving that much money for the rest of the Medicaid program as

well. So I don’t see——

Mr. ROGERS. You mean projected growth sayings is what you are

saying over time?

Mr. SMITH. Correct. Because they are saving that for the entire

population, not just——

Mr. ROGERS. So even States like Michigan and Texas, and I

heard Ohio mentioned, at the end of the day at the 10-year—they

are all reaping rewards from this bill.

Mr. SMITH. Yes. They all, compared to the baseline, will be

spending less than what they would be doing.

Mr. ROGERS. Which is a benefit. And, Mr. Rinehart, again, I congratulate what you are doing. I know in November you went to this

outside contractor. I think that’s a great way to do it. As I looked

at it, and I would just be interested in your thoughts on it, but one

of the immediate issues I guess that I looked at that raised my eyebrow was that you are only dealing with distributors. So there may

be even a better way to do it. And I’m not condemning what you

did. I think it’s a great thing. But have you look at other ways to

try to do that? Because you are contracting with a firm who is taking distributor prices. As you sat through the net and through

other places, can you tell me cost savings, can you tell me a better

way to do it?

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Mr. RINEHART. The savings on this firm we estimate that about $40 million in 2004. I have learned a lot today about—we are dealing with a distributor, and there’s a step before that that I think

could be done. I don’t know how Michigan could do it by itself, but

get better pricing information at that level. We still use the average wholesale price for brand name drugs, and that’s half of our

spending. So any attempts to—any efforts to improve the accuracy

of that, that would be very helpful as well.

Mr. ROGERS. I appreciate it. Mr. Smith, I just want to go back

to this New York Times article, and I didn’t get a chance to read

the whole thing, but my understanding is they are not ineligible,

they are just worried about their capacity in order to have access;

is that correct?

Mr. SMITH. That’s correct. Most definitely they are eligible, and

most definitely they will be enrolled. The issue is really trying to

take the overarching concept of competition among plans and applying it to a specialty market in long-term care. So, this is something that we believe we are making great progress on, and when

the final rule is developed, I think people will see that the concern

has been alleviated. But most definitely we are going to be autoenrolling all these individuals who are dual-eligibles so they will

become eligible and matching them up with a plan that will do

what they do today for low-income seniors. It’s kind of a specialty

market with the long term-care pharmacy providers themselves

and helping them to work with the plan sponsors, developing the

product that will meet the needs of low-income citizens.

Mr. ROGERS. And as I understand it, please correct me if I’m

wrong, but there was kind of a loose framework there under Medicaid that they hope will have a better management structure

under Medicare, just getting an understanding of the cost. It

doesn’t mean it is going to diminish the services, doesn’t mean it’s

going to diminish what they are certainly eligible for. But it is forcing us to go through an understanding of exactly how we implement it, which means we will have a better idea of what cost and

what it truly and accurately costs us to take care of those patients.

Mr. SMITH. I think you are correct, yes, sir.

Mr. ROGERS. Is that correct?

Mr. SMITH. Yes.

Mr. ROGERS. So this isn’t—we’re not pulling a rabbit out of a hat.

There is already a system under Medicaid. Now we have some

transfer, some mechanism to Medicare; is that correct?

Mr. SMITH. That’s correct.

Mr. ROGERS. So this isn’t an insurmountable the sky is

falling——

Mr. SMITH. We do not believe it is insurmountable at all. And we

believe that we will come up with models that guarantee access

and provide quality of treatment that people in nursing homes

need at a competitive price. It’s a specialty market and I think that

when the final rule comes up people will be very pleased with what

we come out with.

Mr. ROGERS. Thank you. I don’t have too much further other

than I just want to thank you so much. If we can be of any assistance as we move forward on this, again, I’d like to see States like

Texas and Michigan get rewarded. Being that you are from MichiVerDate 11-MAY-2000 07:48 Feb 24, 2005 Jkt 000000 PO 00000 Frm 00152 Fmt 6633 Sfmt 6602 97275.TXT HCOM1 PsN: HCOM1
145

gan, it is easy to say I think all those other 48 ought to pay for

the difference. I’m sure I have a lot of help here from that.

Mr. WALDEN. The gentleman’s time has expired.

Mr. ROGERS. But we do appreciate—especially Oregon. We do appreciate your efforts. I think we need to be cautious sometimes

about some of what we have heard from the State administration.

At the end of the day, this will save Michigan money in a very

large way. And I think it is counterproductive for this sparring, I

think even with the administration, about the cost of this. There

are some things that we can fix and make it better. Absolutely no

doubt. And this is a good thing for Michigan and they will save significant amounts of money, and I look forward to working with you.

Thank you, and I yield back.

Mr. WALDEN. I thank the gentleman from Michigan.

Mr. STUPAK. Mr. Chairman, in response to Mr. Rogers’ questions,

Mr. Smith said they have a plan that they have ready to fix this

nursing home thing. Could he submit that to the committee for the

record so we would have it so we can look at it.

Mr. WALDEN. I’m sure we can ask him for that.

Mr. STUPAK. This plan that you have in response to Mr. Rogers’

questions?

Mr. SMITH. The final rule on how the long-term care pharmacies

and the plan sponsors themselves will be working together to deliver the benefit.

Mr. STUPAK. But when you have that plan ready, could you submit it to the committee before the final rule?

Mr. SMITH. Before the final rule?

Mr. STUPAK. Yes.

Mr. SMITH. The proposed regs are already out. We are going

through all the comments, et cetera, and expect to publish the final

regs in early January.

Mr. STUPAK. Send those proposed rules up, would you please?

Mr. SMITH. The proposed, absolutely. Absolutely.

[The material referred to appears in the Federal Register of

Tuesday, August 3, 2004, Parts II and III.]

Mr. STUPAK. Thank you.

Mr. WALDEN. Thank you. I’m going to dismiss this panel now.

Thank you very much for your testimony and for your good work.

It is most helpful in our committee’s deliberations. We appreciate

your sticking with us today. I know other committee members may

have questions they may want to submit to you for a response

along the way.

Now I would like to call forward our final panel of witnesses

today. Mr. Edward H. Stratemeier, former Vice President and General Counsel of Aventis Pharmaceuticals; Ms. Pamela R. Marrs,

Senior Vice President and CFO of DEY, Inc.; Ms. Lesli Paoletti,

Roxane Laboratories, Inc.; Mr. Timothy Catlett, Senior Vice President of Sales and Marketing, Barr Laboratories, Incorporated;

David Marshall, R.Ph., director of Category Management for

Generics, CVS Corporation; John Ziebell, R.Ph., Category Manager

for Pharmacy, Health & Wellness, Walgreen Company; and Frank

Seagrave, Vice President of Pharmacy, Wal-Mart Stores, Incorporated.

146

You are all aware the committee is holding an investigative hearing and when doing so, has had the practice of taking testimony

under oath. Do any of you have an objection to providing your testimony under oath? Let’s start with Mr. Seagrave. Do you have any

objection to——

Mr. SEAGRAVE. No.

Mr. WALDEN. Mr. Ziebell?

Mr. ZIEBELL. No.

Mr. WALDEN. Mr. Marshall?

Mr. MARSHALL. No.

Mr. WALDEN. Mr. Catlett?

Mr. CATLETT. We need one more chair.

Mr. WALDEN. If we can get you a chair, that would be helpful.

We need one more chair at the witness table.

Ms. Paoletti, do you object?

Ms. PAOLETTI. I have no objections.

Mr. WALDEN. Ms. Marrs?

Ms. MARRS. No objection.

Mr. WALDEN. Mr. Stratemeier?

Mr. STRATEMEIER. No objection.

Mr. WALDEN. Okay. The Chair then advises you that under the

rules of the House Rules Committee, you’re entitled to be advised

by counsel. Do any of you desire to be advised by counsel?

Mr. Seagrave? Counsel? Do you want to be advised by counsel?

Mr. ZIEBELL. Yes, I do.

Mr. WALDEN. You do? Could you identify your counsel, please?

Mr. ZIEBELL. Mr. Frederick Robinson. Mr. WALDEN. Mr. Frederick Robinson, right there. Okay. Mr. Marshall?

Mr. MARSHALL. No counsel.

Mr. WALDEN. Mr. Catlett?

Mr. CATLETT. Mr. Mark Young.

Mr. WALDEN. Mr. Mark Young. Okay, thank you.

Ms. Paoletti?

Ms. PAOLETTI. Yes. Ed Miller.

Mr. WALDEN. Ed Miller is your counsel.

Ms. Marrs?

Ms. MARRS. Yes. Paul Doyle.

Mr. WALDEN. Paul Doyle. And Mr. Stratemeier?

Mr. STRATEMEIER. No, your honor.

Mr. WALDEN. ‘‘Chairman’’ is okay, as opposed to ‘‘your honor.’’

[Witnesses sworn].

Mr. WALDEN. You’re now under oath and you may give a 5-

minute summary of your written statement.

I’m going to have Mr. Rogers take over the Chair for just a moment, but please proceed, and Mr. Stratemeier, we will begin with

you. Thank you again for being here.

147

TESTIMONY OF EDWARD H. STRATEMEIER, FORMER VICE

PRESIDENT AND GENERAL COUNSEL OF AVENTIS PHARMACEUTICALS; PAMELA R. MARRS, SENIOR VICE PRESIDENT

AND CFO, DEY, INC.; LESLI L. PAOLETTI, ROXANE LABORATORIES, INC.; TIMOTHY P. CATLETT, SENIOR VICE PRESIDENT OF SALES AND MARKETING, BARR LABORATORIES, INCORPORATED; DAVID MARSHALL, DIRECTOR OF CATEGORY

MANAGEMENT FOR GENERICS, CVS CORPORATION; JOHN

ZIEBELL, CATEGORY MANAGER FOR PHARMACY, HEALTH &

WELLNESS, WALGREEN COMPANY; AND FRANK SEAGRAVE,

VICE PRESIDENT OF PHARMACY, WAL-MART STORES, INCORPORATED

Mr. STRATEMEIER. Thank you, Mr. Chairman, Members of Congress. My name is Edward Stratemeier. Until recently, I was senior

Vice President of Aventis Pharmaceuticals. My responsibilities included legal matters, government relations, and public policy in

North America.

Aventis is a global pharmaceutical company that has just been

acquired by Sanofi-Synthelabo to form Sanofi-Aventis. As a result

of that merger, I left the company. I’m here today at the committee’s request as a private citizen. I understand that the purpose of

today’s hearing is to address issues relating to AWP-based reimbursement of prescription drugs under Medicaid.

I have been asked to discuss with the committee the policy positions developed by Aventis during my tenure with respect to AWP

reimbursement for prescription drugs. And as much as I am no

longer employed by Sanofi-Aventis, I cannot say whether the company still supports the policy positions taken during my tenure, nor

can I speak to what the company will do in the future with respect

to these matters. I joined Marion Laboratories, one of the predecessor companies of Aventis, in 1982. Over the past 20 years, I’ve

been actively engaged in the prescription pharmaceutical industry

as an attorney and a senior executive. It was in my capacity as

head of government relations and public policy that I oversaw the

development of Aventis’s position on reimbursement for pharmaceuticals under Medicare and Medicaid.

The pharmaceutical industry has seen many changes since I

joined Marion. The complexity, potency, and value of the products

the industry develops have changed as had the entire distribution

system for those products. One thing, however, has not changed:

the reliance on AWP as a reimbursement benchmark by both government and private payors. To understand this reliance, one has

to look back nearly 40 years. In the late 1960’s, about the only people who did not pay for prescription drugs out of their own pockets

were employees of the pharmaceutical companies and people who

qualified for Medicaid.

Therefore, it fell to Medicaid to try to build systems to meet the

task of paying for these drugs. I think it is important to remember

that in the 1960’s, a computer with as much computing power

today as today’s notebooks had not been built and would have filled

an entire building. Medicaid needed simple manual systems. As a

result, the concept of average wholesale price, or AWP, was created

by the director of Medical, the California Medicaid Agency. The

idea was that rather than having a pharmacist report what he had

148

paid to purchase a product and then going through some type of

audit procedure to make sure that that was in fact the case, it

would be administratively simpler to always pay the same amount

for a given drug. At the time it was established, AWP was not intended to be what was actually paid by the pharmacist to the

wholesaler, but it was a good surrogate for administrative efficiency.

Beginning in 1969, Medical reimbursed pharmacies for Medicaid

patients’ prescriptions by paying AWP plus a dispensing fee. As

third-party coverage of prescription drug costs became more widespread by both government and private payers, the reliance on

AWP became more invasive.

Let me fast forward through two of the major trends in the pharmaceutical industry that have made AWP a problematic reimbursement benchmark. These trends are consolidation in the wholesale

drug industry and the rise of managed care, including pharmacy

benefit managers. For branded prescription drugs, AWP typically

reflects a 20 to 25 percent markup over the wholesale acquisition

cost, the manufacturer’s list price to wholesalers, also known as

WAC. This markup roughly corresponded to the wholesalers’ markup in early days of AWP. However, drug wholesalers have seen

technological change that has dramatically increased the efficiency

of scale in that industry. The change fostered incredible competition and led to consolidation of the industry. Three companies now

account for over 90 percent of the wholesale drug business and

they do it on gross margins of less than 5 percent. That means that

an AWP that remains static at a 20 to 25 markup over WAC began

to overstate the price paid by the retail pharmacist.

The 1980’s saw the rise of managed care and PBMs. Whatever

else they may have done, they forced big pharmaceutical companies

to aggressively compete on price. They did this by limiting the

number of drugs a drug plan would pay for and then negotiating

with the manufacturers for rebates to be on the preferred known

as a formulary. They also forced pharmacies to compete on price by

requiring pharmacists to sign contracts if they wanted to serve the

population covered by the plan.

I should point out that all of these agreements used AWP as a

benchmark price. While these trends were occurring, there was tremendous pressure to maintain AWP at a fixed markup from WAC.

AWP had been codified as the benchmark price by statute or regulation in the public sector and by contract in the private sector. As

the difference between AWP and real prices paid by pharmacists

and providers began to increase, that difference was used to compensate for lack of payment for services. A change in the current

well-known relationship of AWP to WAC would have had far-reaching effects on the provision of health care services.

In 1990, Congress recognized that private sector payers were

able to negotiate substantial discounts from pharmaceutical manufacturers. To take advantage of these negotiations for Medicaid,

Congress included provisions in the Omnibus Budget Reconciliation

Act, requiring pharmaceutical manufacturers to pay a rebate on

Medicaid purchases that was based on the best price negotiated by

private sector payers.

149

The 2002 policy document which was provided by Aventis to the

committee reflects the result of an effort to point out the problems

associated with relying on AWP benchmarking and government reimbursement of prescription drugs given the reality of the changed

environments in which those products were used. It was Aventis’s

view that appropriate methodology needed to reimburse providers

for the drugs they dispensed at or near their cost to acquire those

drugs while also fully and appropriately paying them for the professional services they provided in connection with dispensing those

products.

I appreciate the opportunity to appear before the committee

today and would be happy to answer your questions regarding the

use of AWP as a basis for reimbursement.

[The prepared statement of Edward H. Stratemeier follows:]

PREPARED STATEMENT OF EDWARD H. STRATEMEIER, ESQ.

Mister Chairman, Members of Congress, my name is Edward Stratemeier. Until

recently I was Senior Vice President of Aventis Pharmaceuticals. My responsibilities

included legal matters, government relations and public policy in North America.

Aventis is a global pharmaceutical company that has just been acquired by SanofiSynthelabo to form Sanofi-Aventis. As a result of the merger I left the company.

I am here today at the Committee’s request as a private citizen. I understand that

the purpose of today’s hearing is to address issues relating to AWP-based reimbursement of prescription drugs under Medicaid. I have been asked to discuss with

the Committee the policy position developed by Aventis during my tenure there with

respect to AWP based reimbursement for prescription drugs.

I joined Marion Laboratories, one of the predecessor companies of Aventis in 1982.

Over the past twenty years I have been actively engaged in the prescription pharmaceutical industry as an attorney and a senior executive. It was in my capacity

as head of government relations and public policy that I oversaw the development

of Aventis’ position on reimbursement for pharmaceuticals under Medicare and

Medicaid.

The pharmaceutical industry has seen many changes since I joined Marion. The

complexity, potency and value of the products the industry develops have changed,

as has the entire distribution system for those products. One thing, however, has

not changed: the reliance on AWP as a reimbursement benchmark by both government and private payers. To understand this reliance, one has to look back nearly

40 years.

In the late 1960’s, about the only people who did not pay for prescription drugs

out of their own pockets were employees of pharmaceutical companies and people

who qualified for Medicaid. Therefore it fell to Medicaid to try to build systems to

meet the task. I think it is important to remember that in the 60’s, a computer with

as much computing power as today’s notebooks had not been built and would have

filled a large building. Medicaid needed simple manual systems.

As a result, the concept of Average Wholesale Price or AWP was created by the

director of Medi-Cal, the California Medicaid Agency. The idea was that rather than

having a pharmacist report what he had paid to purchase a product (and then going

through some type of audit procedure to verify that he had truly paid such a price)

it would be administratively simpler to always pay the same amount for a given

drug. At the time it was established, AWP was not intended to be what was actually

paid by the pharmacist to the wholesaler, but it was a good surrogate for administrative efficiency. Beginning in 1969, Medi-Cal reimbursed pharmacies for Medicaid

patients’ prescriptions by paying AWP plus a dispensing fee. As third party coverage

of prescription drug costs became more widespread—both by government and private payers—the reliance on AWP became more pervasive.

Let me fast-forward through two of the major trends in the pharmaceutical industry that have made AWP a problematic reimbursement benchmark. These trends

are consolidation in the wholesale drug industry and the rise of managed care including Pharmacy Benefit Managers (PBM’s.)

For branded prescription drugs, AWP typically reflects a 20% to 25% mark up

over the Wholesale Acquisition Cost (the manufacturer’s list price to wholesalers

also known as WAC.) This mark up roughly corresponded to the wholesaler’s mark

up in the early days of AWP. However, drug wholesalers have seen technological

change that has dramatically increased the efficiency of scale in that industry. That

150

change fostered incredible competition and led to consolidation of the industry.

Three companies now account for over ninety percent of the wholesale drug business

and they do it on gross margins of less than five percent. That means that an AWP

that remained static at a twenty to twenty-five percent markup over WAC began

to overstate the price paid by the retail pharmacist.

The 1980’s saw the rise of managed care and PBM’s. Whatever else they may

have done, they forced big pharmaceutical companies to aggressively compete on

price. They did this by limiting the number of drugs that a drug plan would pay

for and then negotiating with the manufacturers for rebates to be on the preferred

list (known as a formulary.) They also forced pharmacies to compete on price by requiring pharmacists to sign contracts if they wanted to serve the population covered

by the plan. I should point out that all of these agreements used AWP as the benchmark price.

While these trends were occurring, there was tremendous pressure to maintain

AWP at a fixed markup from WAC. AWP had been codified as the benchmark price,

by statute or regulation in the public sector and by contract in the private sector.

As the difference between AWP and the real prices paid by pharmacists and providers began to increase, the difference was used to compensate for lack of payments

for services. A change in the current, well-known relationship of AWP to WAC

would have far reaching effects on the provision of health care services.

In 1990, Congress recognized that private sector payers were able to negotiate

substantial discounts from pharmaceutical manufacturers. To take advantage of

these negotiations for Medicaid, Congress included provisions in the Omnibus Budget Reconciliation Act requiring pharmaceutical manufacturers to pay a rebate on

Medicaid purchases that was based on the ‘‘Best Price’’ negotiated by private sector

payers.

In 2001, the Office of the Inspector General of the Department of Health and

Human Services and the General Accounting Office both issued reports that found

that Medicare providers were paying substantially less than AWP to obtain the

drugs they dispensed to patients and recommended government reimbursements to

providers for drugs be brought more in line with acquisition costs. As committee

staffs were considering the question, Aventis met with them to recommend adopting

acquisition cost as the amount for reimbursement. This recommendation was formally adopted by Aventis management in 2002.

The 2002 Aventis policy document, which was provided by Aventis to the Committee, reflects the result of an effort to point out the problems associated with relying on AWP benchmarking in government reimbursement of prescription drugs

given the realities of the changed environment in which those products are used.

It was Aventis’ view that an appropriate reimbursement methodology needed to reimburse providers for the drugs they dispensed at or near their cost to acquire those

drugs, while also fully and appropriately paying them for the professional services

they provided in connection with dispensing those products.

I appreciate the opportunity to appear before the Committee today, and will be

happy to answer your questions regarding the use of AWP as a basis for reimbursement.

Mr. ROGERS [presiding]. Thank you for your testimony.

Ms. Marrs.

TESTIMONY OF PAMELA R. MARRS

Ms. MARRS. Good morning, Mr. Chairman and distinguished

members of this committee. Thank you for the opportunity to appear before you today.

For the past 15 years, I have been the Chief Financial Officer of

DEY LP. Founded in 1978 and located in Napa California, DEY is

a specialty pharmaceutical company focused on the development,

manufacturing, and marketing of prescription drugs for the treatment of respiratory diseases and respiratory-related allergies. In

addition to our facility in Napa, we also have a distribution center

in Allen, Texas.

Last year Congress and the administration took important steps

to reform and improve Medicare reimbursement policy when it

passed the Medicare Modernization Act. As you know, the system

of reimbursement using a percentage of AWP badly needed to be

151

reformed and many in the pharmaceutical industry including DEY

supported reform. Medicaid reimbursement has typically had a

spread between the cost of the drug paid by the provider and the

reimbursement amendment. That spread goes to the provider, not

to the manufacturer. Until the mid 1990’s, my understanding is

that it was not unusual for salespeople when speaking to customers

to compare their spreads with those of their competitors. Beginning

in the late 1990’s as a result of litigation, government investigations, and the OIG compliance program guidance, my understanding is that the industry has become sensitive to this practice

and has largely stopped. At DEY we have developed and implemented a major compliance program over the last few years designed to ensure that our sales force is compliant with the OIG

guidance.

Is the spread still meaningful to providers? Yes. Because they

often depend on the spread to cover their cost of dispensing which

often exceeds the dispensing fees they receive from Medicaid.

How does DEY set AWP for generics? At DEY, our historical

practice for generic drugs has been to set the generic AWP as a

percentage off of the brand’s AWP when the product is launched.

Usually that percentage has been around 10 percent. After that,

our practice has been not to change AWP on generics.

Why doesn’t DEY lower its AWP on generic drugs? The simple

answer is that given the system that now exists, our customers

won’t buy from us if we lower our AWP. This was confirmed about

a year and a half ago when a reporting service lowered their published AWP for our drugs without consulting. Our customers told

us they would stop buying from us with the lower AWP. This could

have put many of our employees out of work overnight. So we went

to court and the court issued a temporary restraining order.

Why do we need AWP at all? At this point the current system

is based on AWP, and customers rely on it and won’t buy a product

without it. As evidence of this, about 2 years ago, because of the

litigation, we tried to market a new drug with no AWP. Our customers said they would not buy it. So we set an AWP which happened to be lower than those of our competitors. As a direct result

of this lower AWP, we sold almost nothing of a drug for which we

had projected to have sales of $6 million.

These experiences taught us that reimbursement reform has to

come from the government and be applied to the whole industry.

If a generic company, especially a small one like ours, tries to buck

the AWP system on its own, it can being be forced out of a whole

business line.

Do our profits on generic drugs increase as the spread increases?

In DEY’s case, the answer is no. First, it is important to keep in

mind that the drugs manufacturers don’t get the money from the

spread. The money realized from the spread goes to providers. Second, in the case of generic drugs, a larger spread actually means

a lower profit for the manufacturer.

Because generic drugs are a commodity, price competition is

fierce. If the spread for a particular generic drug is getting larger,

it almost always is because AWP is remaining the same while the

actual selling price is getting lower. At the same time, our costs are

increasing and our margins declining. This situation has shown

152

dramatically in the case of Albuterol, which has been repeatedly

cited in CMS reports as having some of the largest spreads of any

drug. For the last 10 years, the spread on Albuterol, which is one

of DEY’s biggest generic products in terms of volume, has been getting larger and larger as the price drops because of competition.

Have our profits increased as the spread has grown? No. At the

current time, we are actually close to breaking on Albuterol due to

the continuing erosion of the market price.

As I said at the outset, I am the Chief Financial Officer of DEY.

I have held that position since 1989. Most of the documents I was

asked about and my staff interview or that came to me afterwards

came out of our sales and marketing department, and with some

exceptions where I was copied or was the addressee, I saw them

for the first time during this litigation. Having said that, I hasten

to add that I have learned a lot about AWP in these documents

from the litigation and I will try to be as helpful as I can when

answering questions. Thank you for your time and I’d be pleased

to answer any questions.

[The prepared statement of Pamela Marrs follows:]

PREPARED STATEMENT OF PAMELA MARRS, CHIEF FINANCIAL OFFICER, DEY, LP

Good morning, Mr. Chairman and distinguished members of this Committee.

Thank you for the opportunity to appear before you today. For the past 15 years,

I have been the Chief Financial Officer of DEY, L.P. Founded in 1978 and located

in Napa, California, DEY is a specialty pharmaceutical company focused on the development, manufacturing and marketing of prescription drug products for the

treatment of respiratory diseases and respiratory-related allergies. In addition to

our facility in Napa, we also have a distribution center in Allen, Texas.

Last year Congress and the Administration took important steps to reform and

improve Medicare reimbursement policy when it passed the Medicare Modernization

Act.

As you know, the system of reimbursement using a percentage of average wholesale price, or AWP, badly needed to be reformed and many in the pharmaceutical

industry, including DEY, supported reform.

Medicaid reimbursement has typically had a spread between the cost of the drug

paid by the provider and the reimbursement amount. That spread goes to the provider, not the manufacturer. Until the mid 1990’s, my understanding is that it was

not unusual for sales people, when speaking to customers, to compare their spreads

with those of their competitors. Beginning in the late 1990’s, as a result of litigation,

government investigations and the OIG Compliance Program Guidance for Pharmaceutical Manufacturing issued in 2003, my understanding is that the industry has

become sensitive to this practice and it has largely stopped. At DEY, we have developed and implemented a major compliance program over the last few years designed

to ensure that our sales force is compliant with the OIG Guidance.

We have also seen many changes on the government side that are reducing the

emphasis on AWP. Last year’s Medicare law will, by 2006, virtually eliminate AWP

as a basis for Medicare reimbursement under Part B. The new Medicare Part D

drug benefit will not use AWP as a basis for government payment for drugs. So,

both by industry practice and government action, the situation is changing.

Is the spread still meaningful to providers?

Yes, because they often depend on the spread to cover their costs of dispensing,

which often exceed the small dispensing fees they receive from Medicaid.

How does DEY set AWP for generics?

At DEY, our historical practice for generic drugs has been to set the generic AWP

as a percentage off of the brand’s AWP when the product is launched. Usually that

percent has been about 10%. After that, our practice has been not to change AWP

on generics.

Why doesn’t DEY lower its AWP on generic drugs?

The simple answer is that, given the system that now exists, our customers won’t

buy from us if we lower our AWP. This was confirmed about a year and a half ago

when a reporting service lowered their published AWP for our drugs without consulting us. Our customers told us they would stop buying from us with the lower

153

AWP. This could have put many of our employees out of work overnight. So we went

to court and the court issued a temporary restraining order stopping the service’s

action.

Why do we need an AWP at all?

At this point, the current system is based on AWP and customers rely on it and

won’t buy a product without it. As evidence of this, about two years ago, because

of the litigation, we tried to market a new drug with no AWP. Our customers said

they wouldn’t buy it so we set an AWP which happened to be lower than those of

our competitors. As a direct result of the lower AWP, we sold almost nothing of a

drug for which we had projected to have sales of $6 million. These experiences

taught us that reimbursement reform has to come from the government and be applied to the whole industry. If a generic company—especially a small one like ours—

tries to buck the AWP system on its own, it can be forced out of whole business

lines.

Do our profits on generic drugs increase as the spread increases?

In DEY’s case, the answer is no.

First, it is important to keep in mind that the drug manufacturers don’t get the

money which comes from the spread. Money realized from the spread goes to the

providers.

Second, in the case of generic drugs, a larger spread actually means a lower profit

margin for the manufacturer. Because generic drugs are a commodity, price competition is fierce. If the spread for a particular generic DEY drug is getting larger,

it is almost always because the AWP of the drug is remaining the same, while the

actual selling price is getting lower. At the same time, our costs are increasing and

our margins are declining.

This situation is shown dramatically in the case of albuterol, which has been repeatedly cited in CMS reports as having some of the largest spreads of any drug.

For the last ten years, the spread on albuterol, which is one of DEY’s biggest generic products in terms of volume sold, has been getting larger and larger as the

price drops because of competition. Have our profits increased as the spread has

grown? No. At the current time, we are close to breakeven on albuterol due to continuing erosion of the market price.

Why doesn’t the industry get together and agree on a solution to the AWP

problem?

It is not within the purview of the industry to make such a change. We at DEY

are anxious to provide information and assistance so we can help the government

bodies that will effect such changes. We have provided written comments on multiple occasions to CMS as that body has worked toward reform of the current AWPbased system in an effort to assist with this process.

As I said at the outset, I am the Chief Financial Officer of DEY. I’ve held that

position since 1989. Most of the documents I was asked about in my staff interview

or afterwards came out of the sales and marketing department and, with some exceptions where I was copied or was the addressee, I saw them for the first time during the litigation.

Having said that, I hasten to add that I have learned a lot about AWP and these

documents from the litigation and I’ll try to be as helpful as I can in answering your

questions about them. q

Thank you for your time. I would be pleased to answer any questions you may

have.

Mr. WALDEN. Thank you, Ms. Marrs. We appreciate you being

here.

Ms. Paoletti. Thank you.

TESTIMONY OF LESLI L. PAOLETTI

Ms. PAOLETTI. Mr. Chairman and members of the subcommittee,

my name is Leslie Paoletti. I am appearing today on behalf of

Roxane Laboratories, where I am senior product manager. I am

here today at your request to assist you in your efforts to examine

Medicaid reimbursement.

Roxane is a leader in the development, manufacture and marketing of generic pharmaceutical products. We are proud to produce

medicines that extend and improve the quality of patient lives

while reducing reliance on more expensive alternative treatment

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options, including hospitalization stays, invasive medical procedures, and more expensive prescription products. We are committed to continuing to provide lower cost pharmaceuticals to meet

the health care needs of Americans.

As you know, Roxane is one of 26 manufacturers from whom the

subcommittee requested documents in connection with its investigation into reimbursements and rebates under Medicaid. Roxane

voluntarily produced several thousand pages of documents and provided witnesses for informal interviews on two separate occasions.

Roxane understands the importance of the congressional oversight process in determining the need for, and establishing a basis

for, legislation improving the Medicaid system. We therefore agreed

to the subcommittee’s request that we appear today to answer any

questions on which members believe we can provide useful information.

We have been advised that the Energy and Commerce Committee may develop legislative recommendations to reform Medicaid reimbursement policies, which we understand currently are

established on a State-by-State basis under a variety of complex

formulas. As you know, as a manufacturer of multisource products,

our revenues come exclusively from purchases by our customers

who, in turn, sell to parties or patients. We do not sell prescription

pharmaceutical products directly to patients, nor do we receive any

payments from Medicaid. However, we would support any effort by

Congress to bring greater efficiencies and simplicity to the system,

including much-needed guidance from the government.

We believe any reform should maintain an incentive for using generic drugs and ensure that an appropriate and viable economic

framework remains in place for health care providers to serve patients.

I would be pleased to answer any of the questions on issues you

have identified and on the materials we have previously provided

to you. Roxane looks forward to working with you as you address

these issues.

[The prepared statement of Lesli L. Paoletti follows:]

PREPARED STATEMENT OF LESLI L. PAOLETTI, ROXANE LABORATORIES, INC.

Chairman Barton and Members of the Subcommittee, my name is Lesli Paoletti.

I am appearing today on behalf of Roxane Laboratories, Inc., where I am Senior

Product Manager. I am here today at your request to assist you in your efforts to

examine Medicaid reimbursement.

Roxane is a leader in the development, manufacture and marketing of generic

pharmaceutical products. We are proud to produce medicines that extend and improve the quality of patient lives while reducing reliance on more expensive alternative treatment options, including hospital stays, invasive medical procedures, and

more expensive prescription products. We are committed to continuing to provide

lower cost pharmaceuticals to meet the health care needs of Americans.

As you know, Roxane is one of 26 drug manufacturers from whom the Subcommittee requested documents in connection with its investigation into pharmaceutical reimbursements and rebates under Medicaid. Roxane voluntarily produced

several thousand pages of documents and provided witnesses for informal interviews

on two separate occasions. Roxane understands the importance of the congressional

oversight process in determining the need for, and establishing a basis for, legislation improving the Medicaid system. We therefore agreed to the Subcommittee’s request that we appear today to answer any questions on which Members believe we

can provide useful information.

We have been advised that the Energy and Commerce Committee may develop

legislative recommendations to reform Medicaid reimbursement policies, which we

155

understand currently are established on a state-by-state basis under a variety of

complex formulas. As you know, as a manufacturer of multisource products, our revenues come exclusively from purchases by our customers who, in turn, sell to other

parties or patients. We do not sell prescription pharmaceutical products directly to

patients, nor do we receive any payments from Medicaid. However, we would support any effort by Congress to bring greater efficiencies and simplicity to the system,

including much needed guidance from the government. We believe any reform

should maintain an incentive for using generic drugs and ensure that an appropriate and viable economic framework remains in place for health care providers to

serve patients.

I would be pleased to answer any questions on the issues you have identified and

on the materials we previously have provided to you.

Roxane looks forward to working with you as you address these issues.

Mr. WALDEN. Thank you for being here today.

Mr. Catlett, thank you for being here.

TESTIMONY OF TIMOTHY P. CATLETT

Mr. CATLETT. Thank you, Mr. Chairman and members of the

subcommittee. I am Tim Catlett, Senior Vice President of Sales and

Marketing of Barr Laboratories. We are a leading manufacturer of

generic pharmaceuticals.

Mr. Chairman, I know that you and others want to reduce the

cost of prescription drugs for Medicaid patients. Your goal and

Barr’s business objectives are well aligned. Barr’s generic drug

business is designed to offer the same medicines as branded companies, but at a lower cost.

The products we manufacture and sell are mostly in tablet and

capsule form. They are dispensed to patients by others, not Barr.

Barr does not receive reimbursements under Medicaid.

Like other generic manufacturers, Barr does offer a vehicle for

reducing Medicaid costs. When a pharmacy dispenses a generic

drug to a Medicaid patient, the reimbursement to Medicaid is usually lower, and often substantially lower, than it would be for a

branded product. In that way, promoting the use of generic products helps to reduce Medicaid costs. For any drug reimbursement

system, providing incentives to pharmacies to dispense generic

drugs is vital to achieving cost reductions.

Generic drugs, by definition, are second to market, not first.

Pharmacies must be convinced to stock and dispense our products

as the alternative to a branded product which has been on their

shelves for years. If the drug reimbursement systems, including

Medicaid, do not create incentives to dispense generic drugs, substantial cost savings will be lost.

I know the subcommittee has questions about AWP, or average

wholesale price. As HHS found years ago, AWP does not represent

an actual wholesale price or an average of actual prices. Instead,

as set out in my written testimony, AWP is simply a publicly available reference price.

Many drug reimbursement systems, including some State Medicaid agencies, use AWP in certain instances as a reference point

to calculate reimbursement levels for those who dispense drugs to

patients. Because they recognize that AWP is not an actual acquisition price, these agencies reimburse at a percentage off AWP.

If a generic manufacturer lowered its AWP unilaterally in a

multisource generic environment, pharmacists might choose to dispense a competitor’s generic product.

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1More information about Barr and its role in the development of the generic drug industry

can be found at http://www.barrlabs.com. 2Drug Price Competition and Patent Term Restoration Act of 1984, 21 U.S.C. § 355 (1999 &

Supp.). 3See Kathleen D. Jaeger, Presentation to the HHS Task Force of Drug Importation, April 5,

2004, available at http://www.gphaonline.org/policy/pdf/2004-04-05-testimony.pdf.

I would be pleased to answer any questions the subcommittee

may have, and thank you for your consideration.

[The prepared statement of Timothy P. Catlett follows:]

PREPARED STATEMENT OF TIMOTHY P. CATLETT, SENIOR VICE-PRESIDENT OF SALES

AND MARKETING, BARR LABORATORIES, INC.

Mr. Chairman, thank you for inviting me to testify today. My name is Tim

Catlett, and I am Senior Vice-President of Sales and Marketing at Barr Laboratories, Inc. Barr is pleased to have the opportunity to answer any questions the Subcommittee may have on the company’s role as a manufacturer of generic pharmaceuticals in the context of the Medicaid program.

I would like to make two key points:

First, Barr is in business to offer its customers the same medicines as brand name

drug manufacturers but at a significantly lower cost, and we do. As a result, when

Medicaid patients receive a generic prescription product, they receive the same medicine as the counterpart branded product, but at a cost to the Medicaid system that

usually is substantially lower.

Second, Medicaid and other prescription drug reimbursement programs should encourage the maximum utilization of lower-cost generic drugs. Any proposed changes

must be carefully examined to ensure that they include appropriate incentives for

pharmacies to stock and dispense generic products.

AN INTRODUCTION TO BARR LABORATORIES, A GENERIC PHARMACEUTICAL

MANUFACTURER.

Barr is one of America’s leading manufacturers of generic drugs.1 A generic drug

is a product determined by the Food and Drug Administration (‘‘FDA’’) to contain

the same active ingredients, and provide the same therapeutic value, as its brandname counterpart. The FDA bases its sameness determination on detailed scientific

criteria, including clinical studies. These criteria include showing that the generic

product is pharmaceutically equivalent to the branded product (i.e., contains the

same amount of the same active ingredient); and that the generic product is bioequivalent to the branded product (i.e., has the same rate and extent of absorption

in the human body).

When the FDA determines that a generic product is therapeutically equivalent to

its branded counterpart, the FDA grants the generic what is called an ‘‘AB’’ rating.

The rating means that the generic product is interchangeable with the branded

counterpart. Once an AB rating is granted, the generic product can be substituted

for the brand at the pharmacy level, even in response to a prescription written for

the branded product, unless the physician writes ‘‘dispense as written.’’ When a

pharmacy dispenses a generic prescription product to a Medicaid patient, the pharmacy provides the patient with the same medicine as the branded product, but usually at a significantly lower cost to the Medicaid system.

Barr’s generic pharmaceutical research, development, and marketing efforts focus

on specialty products that are difficult to manufacture or otherwise require our

unique development skills. Often, Barr makes available the first low-cost generic alternative for a pharmaceutical product, either by developing generic pharmaceuticals to compete with branded drugs no longer under patent, or by challenging

patents on branded products under the Hatch-Waxman Act when those patents appear to be invalid, unenforceable, or not infringed by our product.2

Patent challenges brought by generic manufacturers under the Hatch-Waxman

Act have resulted in $27 billion in prescription drug cost savings.3 Barr brought several of these cost-saving patent challenges, including the one that resulted in the

first marketing of a lower-cost generic form of Prozac more than two years prior to

patent expiry. When Barr successfully develops a generic substitute, other manufacturers are thereby encouraged to bring generic products to market when allowed by

law. The resulting vigorous generic pharmaceutical competition brings even lower

prices and greater cost-savings for consumers and their insurers.

Currently, Barr manufactures and distributes more than 70 generic products in

core therapeutic categories, including oncology, female healthcare (including horVerDate 11-MAY-2000 07:48 Feb 24, 2005 Jkt 000000 PO 00000 Frm 00164 Fmt 6633 Sfmt 6621 97275.TXT HCOM1 PsN: HCOM1
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4 IMS Health, National Prescription Audit, November 2004.

5 Centers for Medicare and Medicaid Services, Safe and Effective Approaches to Lowering

State Prescription Drug Costs: Best Practices Among State Medicaid Drug Programs, available at http://www.cms.hhs.gov/medicaid/drugs/strategies.pdf.

6See, Congressional Budget Office, Analysis of Changes to the Hatch-Waxman Act, August 27,

2003, available at http://www.cbo.gov/ftpdocs/45xx/doc4513/Hatch-WaxmanLtr.pdf. 7See Report, Title XIX of the Social Security Act, Limitation on Payment or Reimbursement

for Drugs, Medicaid Transmittal No. 84-12, reprinted in Medicare & Medicaid Guide (CCH0

¶ 34,157, at 10,193 (Sept. 1984); Report, Use of Average Wholesale Prices in Reimbursing Pharmacies in Medicaid and the Medicare Prescription Drug Program, A-06-89-0037 (Oct. 1989), reprinted in Medicare & Medicaid Guide (CCH) ¶ 38,215 (1990). 8 United States General Accounting Office, Report to Congressional Committees GAO-01-1118,

Medicare: Payments for Covered Outpatient Drugs Exceed Providers’ Cost, 9 (September 2001).

mone therapy and oral contraceptives), cardiovascular, anti-infective, pain management, and psychotherapeutics. All of Barr’s generic products are in tablet, capsule

or oral suspension dosage form. We do not sell our generic pharmaceutical products

directly to physicians or their patients. Rather, our ‘‘customers’’ for these products

are pharmaceutical wholesalers, who in turn sell to pharmacies; large chains with

distribution centers and pharmacy operations; mail-order pharmacies; federal, state,

and local government institutions; and managed care organizations. Our customers

then either dispense our products to patients or sell our products to pharmacies,

which then dispense our products to patients pursuant to prescriptions written by

physicians.

The growth of generic pharmaceutical manufacturers over the last thirty years

has resulted in substantial prescription drug cost savings for consumers, private insurers, and public insurers. For example, during the third quarter of 2004, the average prescription cash price to a consumer of a branded pharmaceutical medication

was $97.52, as compared with an average price of only $26.35 for a generic prescription.4

Congress and federal agencies recognize that use of generic pharmaceuticals

should continue to be promoted, given the magnitude of savings that already have

been realized. According to the Centers for Medicare & Medicaid Services (‘‘CMS’’),

generic substitution is a ‘‘best practice’’ for lowering prescription drug costs.5 When

Congress passed the Medicare Prescription Drug, Improvement, and Modernization

Act of 2003, Pub. L. 108-173, Title IX §§1101-1104, it closed loopholes in HatchWaxman that delayed the development and marketing of generic products. According to the Congressional Budget Office, these statutory reforms ‘‘would accelerate

the availability of generic versions of prescription drugs’’ and ‘‘result in lower total

drug spending within the United States by $7 billion over the 2004-2013 period.’’ 6

Pharmaceutical Price Data.

Brand and generic manufacturers provide pricing data to independent publishers,

including Red Book, First DataBank, and others, which compile the data for drug

manufacturers, wholesalers, retailers, and third-party payors, including state governments and the federal government. These data are used as reference points for

numerous purposes, including calculating reimbursement levels under Medicaid and

other public and private health insurance programs.

Average Wholesale Price. It is generally known in the pharmaceutical industry

and related government agencies that average wholesale price (‘‘AWP’’) is a reference price only, and does not represent the actual selling price charged by a manufacturer for its products. The Department of Health and Human Services has repeatedly recognized that AWP does not reflect an actual wholesale price.7 A recent

General Accounting Office report confirms that ‘‘AWP is not necessarily the price

paid by a purchaser,’’ and that it is ‘‘often described as a ‘list price’ [or] ‘sticker

price.’ ’’ 8 A generic manufacturer typically establishes the AWP for the generic product at 90% of the corresponding brand AWP.

Wholesale Acquisition Cost. Wholesale acquisition cost (‘‘WAC’’) is the price that

wholesalers and distributors pay on the invoice for a given product, although discounts may be provided after invoice, for prompt-pay or periodic volume purchasing

incentives, or as rebates.

Average Manufacturer Price. Average manufacturer price (‘‘AMP’’) is the average

per tablet price for a product sold to a CMS-designated class of purchasers including

wholesalers, retail chains, and mail order pharmacies for resale in the retail pharmacy market after all discounts and rebates to customers are taken into account.

Manufacturers report AMP to CMS on a quarterly basis. For generic products, the

manufacturer then pays a unit rebate amount of 11% of the AMP to the state Medicaid programs based on utilization of the product by each state Medicaid program.

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9Letter from Thomas A. Scully, Administrator to Janet Rehnquist, Inspector General (March

7, 2002) (Commenting on Department of Health and Human Services Office of Inspector General, Medicaid Pharmacy—Actual Acquisition Cost of Generic Prescription Drug Products, A-06-

01-00053 (March 2002)). 10Quarterly reports of state reimbursement formulae are available at http://www.cms.hhs.gov/

medicaid/drugs/prescriptions.asp.

States can readily calculate AMP for a generic product from the unit rebate data

they receive from CMS.

Prescription Reimbursements Under Medicaid.

Pharmaceutical manufacturers, including Barr, do not seek or receive any reimbursements under the Medicaid program. It is pharmacies that are reimbursed,

under the contracts they negotiate with state Medicaid agencies, for the Medicaid

prescriptions they fill.

Because CMS ‘‘note[s] the shortcomings of using AWP as a basis for reimbursement,’’ the agency has agreed to ‘‘strongly encourage states to reevaluate their reimbursement methodology for drugs’ and to ‘‘continue to encourage states to look for

an alternate basis for reimbursement.’’ 9 Despite these admonitions, many States,

like many private insurers, choose to use AWP to establish the reimbursement formula for Medicaid prescriptions that they negotiate with retailers during each contract period. Notably, these formulae usually subtract a percentage ‘‘off’’ of AWP

(different States negotiate different percentages), reflecting the understanding that

AWP is a reference price.10

CMS can and sometimes does cap the reimbursement of Medicaid prescriptions

with a Federal Upper Limit (‘‘FUL’’). Because CMS does not always move to set a

FUL when additional competitors enter the market, thirty-eight states have established maximum allowable cost (‘‘MAC’’) programs to cap reimbursement under

Medicaid even absent a FUL. As soon as a FUL or a MAC is set, other reimbursement methods and reference price data—including AWP and WAC—diminish in significance.

THE IMPORTANCE OF INCENTIVES FOR GENERIC DRUG USE

In order for Barr and other generic manufacturers to continue providing these

dramatic cost-savings, generic medicines must be stocked and dispensed by pharmacies. As a practical matter, wholesalers, drug chains with distribution centers,

and pharmacies stock or maintain access to essentially all branded pharmaceutical

products. If a physician writes a prescription for a branded product for which no

generic exists, or if a physician writes ‘‘brand medically necessary,’’ the pharmacy

must be able to dispense the branded product.

Because a full catalogue of brand products already must be stocked or accessible,

pharmacies incur extra costs when they stock any generic products. Consequently,

pharmacies must have an economic incentive to carry and dispense generic products. Such an incentive exists when the pharmacy can purchase the generic product

for sufficiently less than the branded product and then dispense the generic product

at a lower price than the branded product and still make a ‘‘profit’’ on the generic

product that is greater than the pharmacy could make on the branded product. If

the profit to the pharmacy is greater on the branded product than on the generic

product, the pharmacy is not likely to stock or sell the generic product. Moreover,

because prices on generic products are almost always lower than prices on the

equivalent branded products, third-party payors (including Medicaid) will almost always pay a lower reimbursement amount for the generic product even though the

pharmacy makes a larger ‘‘profit’’ on that generic product.

As long as Medicaid agencies or other third party reimbursers continue to use

AWP-based reimbursement systems, AWP could be a factor in a pharmacy’s decision

as to which generic manufacturer’s product to purchase and dispense. If a generic

manufacturer unilaterally reduced its AWP for a given product relative to the AWPs

of other generic manufacturers for the same product, pharmacies would have an incentive to purchase another manufacturer’s drug that did not reduce its AWP.

If any changes to Medicaid prescription reimbursement are considered, these

changes must maintain Medicaid’s practice of promoting the use of lower cost, therapeutically equivalent, generic drugs by providing pharmacies with financial incentives to carry and dispense generic drugs.

Barr’s Fluoxetine Product.

Barr incurred millions of dollars in costs and years of patent infringement litigation in order to bring a low-cost Prozac substitute to market. When Barr ultimately

prevailed in the litigation, we were entitled to 180 days of exclusivity for our

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11Press Release, Indiana District Court Clears Way for Barr’s Generic Prozac(R) Launch,

available at http://www.barrlabs.com/pages/nprpr.html. 12 Centers for Medicare and Medicaid Services, Federal Upper Limit (FUL) Changes to Transmittal No. 37 at 17. (showing that CMS added fluoxetine hydrochloride to the FUL product list

for implementation on December 1, 2002). See also Department of Health and Human Services

Office of Inspector General, Ommission Of Drugs From The Federal Upper Limit List in 2001,

OEI-03-02-00670 (discussing delays in establishing FULs in a timely manner.)

fluoxetine product under the Hatch-Waxman Act, because we were the first to file

an Abbreviated New Drug Application challenging the patents on Prozac.11 Barr

brought this important generic medication to market more then two years prior to

patent expiry.

As is customary for generic products, Barr’s fluoxetine was a lower-cost alternative to the brand, Prozac. This provided pharmacies with an incentive to purchase

and dispense generic fluoxetine. The incentive Barr provided was effective: by the

end of the exclusivity period, generic fluoxetine products had gained more then 80%

of the prescription market for 20 mg Prozac. The early introduction of a generic

fluoxetine, and the incentives provided to pharmacies through a lower purchase

price for the generic medication, encouraged substitution of the generic for the

brand.

The day that Barr’s fluoxetine exclusivity period ended, nine other generic manufacturers entered the market, each establishing virtually the same AWP for

fluoxetine as Barr’s. Prices for generic fluoxetine dropped quickly and dramatically.

Of course, the establishment of a FUL or a MAC for fluoxetine immediately following the launch of multiple generics (January 29, 2002) would have effectively

eliminated the use of AWP as a reference point for reimbursement. Notably, this

is exactly what did happen with private third party payors (which account for approximately 87% of the market), almost all of which placed a MAC on generic

fluoxetine either before or immediately after January 29, 2002. CMS did set a FUL

for Prozac on December 1, 2002.12

Conclusion.

Barr is proud to be part of a highly competitive industry that offers generic products at a lower cost than the brands. In 2003, through the enactment of Hatch-Waxman reforms, Congress recognized the importance of generic drugs and their role

in easing the financial strain that prescription drug costs often impose on the budgets of many in our society, including federal and state budgets under Medicaid. For

the very same reasons, Congress should ensure that any potential changes to Medicaid reimbursement will encourage, rather than discourage, the continued substitution of generic drugs.

Mr. WALDEN. Thank you, Mr. Catlett. We appreciate your being

here.

Mr. Marshall.

TESTIMONY OF DAVID MARSHALL

Mr. MARSHALL. Mr. Chairman and distinguished Representatives, on behalf of CVS Corporation I would like to thank the committee for inviting CVS to appear today to participate in this important hearing.

CVS shares the committee’s goal of reducing the cost of prescription drugs for all of our customers. The single most effective action

that can be taken to achieve that goal is to promote the use of generic drugs wherever possible. It is my responsibility at CVS to

purchase generic drugs at the lowest possible cost.

I am pleased to have the opportunity to answer your questions

to the best of my ability today. Thank you.

Mr. WALDEN. Thank you, Mr. Marshall.

Mr. Ziebell, your comments.

TESTIMONY OF JOHN ZIEBELL

Mr. ZIEBELL. I have no comment, but I am ready to answer any

questions you may have.

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Mr. WALDEN. Thank you for being here.

Mr. Seagrave.

TESTIMONY OF FRANK SEAGRAVE

Mr. SEAGRAVE. Thank you, Mr. Chairman.

My name is Frank Seagrave. I am a registered pharmacist in

Louisiana, Colorado, and Mississippi. I am currently the Vice President of Pharmacy for Wal-Mart Stores, Incorporated.

I am familiar with the struggle that many States are currently

having with their Medicaid expenditures. The Medicaid business at

Wal-Mart represents about 11 percent of our prescription business.

I believe that Wal-Mart and our 11,500 pharmacists are part of the

solution.

Currently, retail pharmacy Medicaid reimbursement is based on

a formula consisting of two parts, estimated acquisition costs, plus

a dispensing fee. Everyday low price, or EDLP as we call it, is a

core belief of our company. It greatly benefits the Medicaid program in many States because our EDLP is often below the Medicaid allowable price. When this happens, the State gets charged

the lower price. Wal-Mart’s EDLP, therefore, is a value to the Medicaid program.

I believe that generic drugs are the best opportunity for savings

in the Medicaid program. The average price of a Medicaid prescription that was filled with a brand name drug at Wal-Mart in 2002

was $88.53. When a Medicaid prescription was filled with a generic

drug, the average price was $20.25, a savings of $68.28. Therefore,

the average Medicaid price of a prescription filed with a brand

name drug was 439 percent higher.

Generics are deemed to be bioequivalent and therapeutically

equivalent and should be mandatory when they are available. At

Wal-Mart, we dispense generic drugs over 94 percent of the time

when one is available. Wal-Mart is able to effectively negotiate

good costs on generic drugs because generics are available from

multiple manufacturers and are therefore commodities.

This is not the case with brand name drugs. Wal-Mart has no

greater leverage for branded drug products than any other retail

class of trade pharmacy provider. There is great disparity between

what brand name drug manufacturers charge retail pharmacies

and the lower prices they charge other classes of trades, such as

hospitals, mail order pharmacies and HMOs. Thus, an average

sales price, or ASP, model for drugs dispensed to Medicaid recipients would be inequitable for retail pharmacies.

Wal-Mart currently accepts all endorsed Medicare discount cards.

We have been aggressive in providing educational literature regarding the discount cards to our customers. The program has been

a success at Wal-Mart. We look forward to the opportunity to serve

the needs of our Medicare customers when the Medicare drug benefit starts.

Wal-Mart pharmacists and all retail pharmacists are a valuable

part of the health care system and the communities that we serve.

Pharmacists routinely consult with customers and answer questions about prescription and over-the-counter drugs as well as general health care issues. Pharmacists are consistently regarded as

the one of the Nation’s most trusted professionals.

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In summary, Wal-Mart is committed to continue to provide the

best service to our Medicaid customers in any reimbursement system as long as it provides fair payment for the service and product

delivered, protects the customer’s safety, and allows the Nation’s

retail pharmacies to fairly participate. Thank you.

[The prepared statement of Frank Seagrave follows:]

PREPARED STATEMENT OF FRANK SEGRAVE, WAL-MART STORES, INC.

INTRODUCTION

Mr. Chairman and members of the Committee, your efforts to gain more information about pharmaceutical reimbursements under Medicaid are well advised.

I am a registered pharmacist. I joined Wal-Mart Stores, Inc. (Wal-Mart) in 1986,

and after various roles in operations and merchandising, became Vice President of

Wal-Mart’s Pharmacy Division based in Bentonville, Arkansas. Part of my role includes ensuring that ‘‘Everyday Low Price’’ (EDLP) is practiced within the Pharmacy Division. In its purest form EDLP is as it sounds: the same low price every

time you visit the store. EDLP begins with ‘‘Everyday Low Cost’’ (EDLC). Purchasing at the best cost along with being a low cost operator and using technology

to be efficient allows us to sell at EDLP.

As a Medicaid pharmacy provider in 49 states, our job is to get the right medications to the patients who need them. As a retail pharmacy provider, we must stock

and dispense the majority of medications that are commonly prescribed. It is noteworthy that ‘‘pharmacies’’ do not practice pharmacy; it is the face-to-face interaction

with the 11,500 Wal-Mart pharmacists that benefit Medicaid recipients.

Our pharmacies operate in large urban locations and small rural towns across

America. Of our nearly 3,500 pharmacies, over 1,200 operate in rural areas with a

population of less than 50,000. Medicaid patients in both rural and urban areas

value their relationship with their Wal-Mart or Sam’s Club pharmacist. Wal-Mart’s

focus is on our retail pharmacy patients and their healthcare outcomes. To this end,

our pharmacists are advocates for the Medicaid patients they serve. This advocacy

includes: working with prescribers to select less expensive alternative medications;

immediate conversion of brand medications to lower cost generics when they become

available; and treatment with less expensive OTC medications. Wal-Mart pharmacists seek to limit ‘‘preventable’’ events by maximizing patient adherence to prescribed treatments. ‘‘Pharmacy is about relationships’’ has become the unofficial

mantra of the Pharmacy Division’s Associates.

Wal-Mart purchases most drugs centrally through its own pharmacy distribution

centers. We are described as a ‘‘self-warehousing’’ chain. Whenever possible, WalMart buyers order directly from manufacturers, who ship products directly to WalMart pharmacy distribution centers.

Wal-Mart’s purchasing decisions for generic products are straightforward. If ‘‘AB

rated’’ generic products—which mean products determined by the FDA to be identical to the brand drug—are available from multiple manufacturers, Wal-Mart will

purchase the drug product with the lowest acquisition cost. Product availability is

also a factor, because a reliable supply of product is essential to satisfy our patients.

Wal-Mart does not take into account the amount of Medicaid reimbursement,

known or anticipated, in determining whether to stock or sell any particular branded or generic drug product. We first and foremost follow our core tenet—‘‘ALWAYS

LOW PRICES.’’ Lower drug product prices to patients are made possible through

lower acquisition costs and operational efficiencies.

State Medicaid program beneficiaries represent an important patient population

to Wal-Mart. These patients represent 11% of our pharmacy business revenue. WalMart values its role as a Medicaid provider and has never withdrawn from participation in any program, in the Medicaid system, or threatened to do so. Wal-Mart

competes for Medicaid patients based on service. While we never provide a blanket

waiver of Medicaid co-payments for our patients, we do not collect the nominal copayment when a Medicaid patient is unable to pay it.

We do not sponsor a Medicare Discount Card Program, but accept all Medicareendorsed drug discount cards. Wal-Mart has been aggressive in providing educational literature regarding these discount cards and these approved discount cards

have been a success at Wal-Mart. The Pharmacy Division also strongly supports and

participates significantly in manufacturer-sponsored patient assistance programs,

such as TogetherRx.

My testimony today addresses two issues. First, the importance of ensuring access

to Wal-Mart’s retail pharmacies by America’s most needy, the elderly and the poor.

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Second, how can Wal-Mart partner with the states to have an effective Medicaid

drug program?

The importance of ensuring access to Wal-Mart’s retail pharmacies.

On a daily basis, our 11,500 pharmacists take care of patients in the Medicaid

program, fill their prescriptions that are subject to complex rules and regulations,

and provide the best patient-focused care.

When prescription-only products move to the over-the-counter (OTC) market, their

prices drop sharply. Wal-Mart pharmacists routinely consult with patients who have

OTC medication questions. This includes options such as our cost-effective private

label Equate  brand OTC products, for patients when therapeutically appropriate.

Wal-Mart’s private label diabetic testing and treatment products sold under the

ReliOn  diabetes brand are considered the best value brand in the United States.

All state Medicaid programs should include these products on their formularies and

provide reimbursement for them. Many states do this today.

Usual and Customary Charges (U&C)

Revenue from Wal-Mart’s ‘‘cash’’ pharmacy business for drug products is significantly larger than its revenue from Medicaid. Retail cash price or ‘‘U&C’’ is defined

as the usual and customary charge for a drug product offered to cash paying patients. Because this U&C is often lower than the reimbursement formula for Medicaid, this benefits both cash-paying patients and the Medicaid programs. Individual

Wal-Mart pharmacies have the ability to lower, but not increase, drug product

prices (U&C) within their marketplace as they see fit. Thus, Wal-Mart’s U&C

(EDLP) is often lower than the formula driven payment set by the state Medicaid

programs. Our estimates indicate that many times Medicaid prescriptions were reimbursed at Wal-Mart’s lower U&C. The impact of our aggressive lowering of U&C

is represented on the attached graphs and Fact Sheet.

Generic Utilization at Wal-Mart

When a generic is available for a prescribed branded product, Wal-Mart pharmacies dispense that generic over 94% of the time. This is true for all payers. Consumers need to know when generic options are available and that they are as safe

and effective as brand name drugs, but at a fraction of the cost. Wal-Mart pharmacists play an important role in educating patients about their drug treatment.

Our pharmacists help patients understand generic options and whether more affordable generics might be right for them.

In summary, Wal-Mart has low prescription and OTC drug prices everyday for

cash-paying patients and Medicaid benefits directly from this. Our pharmacists also

recommend generic drugs and shift patients to more cost-effective drug therapies.

How can the Wal-Mart partner with the states to have an effective Medicaid drug program?

One of the main reasons for the continuing rise in Medicaid drug expenditures

and the failure of cost-containment measures, is the introduction of new, more expensive brand name drugs. Drugs within a therapeutic class may be similar, but

their prices often vary substantially. Several state Medicaid programs took a major

step in passing legislation mandating a permanent commission to research and report on the comparative effectiveness of medications and prices. Wal-Mart encourages other states to implement similar tools.

Reimbursement mechanisms for generics should aim for price competition as the

main priority. To Wal-Mart, multi-source generics represent a commodity. Generics

save everyone money. The following charts demonstrate Wal-Mart’s experience in

Medicaid reimbursement for 2002.

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While almost half of the prescriptions are written for generic drugs, they account

for less than 20% of total Medicaid expenditures. Switching from expensive brand

drugs to lower cost generics can help alleviate this problem. Wal-Mart is strongly

committed to encouraging the use of AB rated generics—the exact same drugs at

a much lower cost. Generic substitution provides tremendous savings at the same

time. Generic drugs mean competition, and competition means lower prices, both to

the pharmacy and to the patient. Focusing on generics to reduce Medicaid prescription drug costs is not the answer, because the largest expense lies in the over-utilization and high cost of single source brand drugs. The chart below provides the average total reimbursement received by Wal-Mart from Medicaid programs for each

type of drug.

Wal-Mart endorses the continued adoption maximum allowable cost (MAC), with

frequent audits/updates, for multi-source generic drugs under Medicaid.

For branded drug products, Wal-Mart has little or no ability to negotiate discounts below the published wholesale acquisition cost (WAC). Wal-Mart has no

greater leverage for branded drug products than any other retail class of trade pharmacy provider.

There is a great disparity between what drug manufacturers charge retail pharmacies and the significantly lower prices they charge other classes of trade such as

hospitals, mail order pharmacies, and health maintenance organizations. Thus, an

average sales price (ASP, as defined in the Prescription Drug Improvement and

Modernization Act (PDIM)) reimbursement model for drugs dispensed to Medicaid

beneficiaries would be inequitable for retail pharmacies. ASP is intended to represent volume-weighted, average selling price to all purchasers, excluding certain

federal purchasers.

Conclusion

Wal-Mart supports any reimbursement system that provides fair payment for the

service and product delivered, protects the patient’s safety, and permits the nation’s

retail pharmacies to fairly participate. Wal-Mart’s motto—Always low prices—is carried out in its pharmacy operations. Actual substantial savings come from market

shifts to more cost-effective therapies. Wal-Mart and its pharmacists, as a low cost

pharmacy provider, are on the front line to effectuate such shifts.

Thank you for the opportunity to appear today. As always, Wal-Mart is willing

to work with state Medicaid programs to be part of the solution.

Mr. WALDEN. Thank you. I appreciate your comments, Mr.

Seagrave.

I just want to say at the outset that we don’t want to do anything here that would create a disincentive to generic use. I think

we all agree that that is an important component of holding down

costs and giving consumers choice. But we do need to make sure

that the taxpayer benefits from the savings, and I think—so we can

take care of those who need help that today are, frankly, robbed

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of that help because, in some cases, of lack of funds. So I want to

start by getting at this issue of the AWP with this panel. Do each

of you believe that the AWP reflects the actual selling price that

you charge for your products?

If we can get kind of a yes-or-no answer. Mr. Stratemeier.

Mr. STRATEMEIER. No, it does not.

Ms. MARRS. No.

Ms. PAOLETTI. No.

Mr. CATLETT. No.

Mr. MARSHALL. No.

Mr. ZIEBELL. No.

Mr. SEAGRAVE. No.

Mr. WALDEN. So all of you agree that it is not a legitimate selling

price, reflection of your selling price.

Do you adjust the AWPs of your products after you have set

them; and, if so, under what circumstances? Mr. Stratemeier.

Mr. STRATEMEIER. Well, in the brand industry, AWP generally

reflects a 20 to 25 percent markup over wholesale acquisition cost,

WAC. So as WAC is increased, AWP goes up accordingly.

Mr. WALDEN. You do adjust your AWP then on a regular basis?

Mr. STRATEMEIER. I can’t say that companies adjust the AWP.

The reported AWP by the reporting services, put out the AWP.

Most companies, including Aventis do not set an—most brand companies do not set an AWP.

Mr. WALDEN. Okay. Ms. Marrs.

Ms. MARRS. In our case, in the case of generics, we historically

have not had a practice of raising AWP. For the brand products,

we have increased AWP as the WAC has increased.

Mr. WALDEN. Okay.

Ms. PAOLETTI. Generally, we do not change our AWPs once they

are established. We have changed some AWPs for one reason or another.

Mr. WALDEN. Why wouldn’t you adjust them to reflect the market?

Ms. PAOLETTI. Why wouldn’t we?

Mr. WALDEN. Yes.

Ms. PAOLETTI. It is generally a standard in the generic industry

that you set your price for AWP and you don’t adjust it.

Mr. WALDEN. All right. Mr. Catlett.

Mr. CATLETT. An instance where I can think that AWPs are increased in our business would be in a sole-source generic situation.

We are the only generic on the market. If there was a brand price

increase and we felt there might be an opportunity and we would

make a decision to raise our generic price, we would raise both our

AWP and our price to maintain.

I think we heard earlier today that generally there is a 90 percent difference between the brand and the generic price. That is

the incident I can think where AWP might increase, sir.

Mr. WALDEN. Let me go to your testimony. I am going quote it

here, Mr. Catlett. You said, ‘‘It is generally known in the pharmaceutical industry and related government agencies that average

wholesale price, AWP, is a reference price only and does not represent the actual selling price charged by the manufacturer for its

products.’’

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I would like you to—they don’t have the notebook, do they—to

turn to Tab 1. Do we have—we don’t have that. They can’t turn to

Tab 1. There you go.

In our exhibit binder there, you will see OIG compliance program

guidelines for pharmaceutical manufacturers. And on the bottom of

page 23,733, it says, ‘‘The government sets reimbursement with the

expectation that the data provided are complete and accurate, and,

where appropriate, manufacturer’s reported prices should accurately take into account price reductions, cash discounts and free

goods,’’ et cetera.

In light of these ongoing—these OIG guidelines, if you report an

AWP, aren’t you required to make sure that it is up to date and

accurate?

Mr. CATLETT. Are you directing that question to me?

Mr. WALDEN. To you and Ms. Paoletti and Ms. Marrs.

Mr. CATLETT. I will take the question first, sir.

The practice in the industry is to report AWP as a reference

price. I believe what is reported that is updated is we do provide

our AMP, which is our average manufacturer’s price, which does

take into account all of those.

Mr. WALDEN. But given that AWP is also used as a reimbursement mechanism, shouldn’t it be accurate to the market? I mean,

to—shouldn’t it represent something?

Mr. CATLETT. It has been industry practice and the practice at

Barr that it is strictly a reference price and it is in relation to the

branded price.

Mr. WALDEN. Ms. Paoletti.

Ms. PAOLETTI. I would agree with that. And there really is no

clear guidance for us to follow that tells us how to calculate that

number.

Mr. WALDEN. Ms. Marrs.

Ms. MARRS. I would agree with my colleagues.

I think we have heard many times here today the system is broken. There is no statutory definition of AWP. To the extent that

there is clear guidance, as the gentleman from Barr said, we have

been reporting AMP. But the industry practice as it is and the lack

of statutory guidance, industry practice has prevailed.

Mr. WALDEN. All right. I want to go—turn to Tab 37, if you

would, Ms. Paoletti. This is document number 01999-02002. The

second page of the document, 02000, states that Roxane’s bids for

Furosomide business were rejected not because the sales price was

too high but solely because the AWP was too low. Our AWP and

reimbursement factors in negotiations with retail customers.

Do you want to talk about that, that document?

Ms. PAOLETTI. Furosomide was a very unique situation for us in

that there were some changes in the market that allowed opportunities for us to potentially gain new business.

When we tried to gain the new business, we were repeatedly told

that our AWPs were out of line with our competitors and, upon

looking at that, discovered that they were significantly below our

competitors such that, regardless of how low our contract price

was, no one would buy the product.

Mr. WALDEN. So AWP—I mean, okay. I guess what I see here is

that AWP is how you get market share. The higher it is, the better

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chance you have to get market share. Because somebody is making

money on the spread, and the people making the money are the

purchasers. Right?

Ms. PAOLETTI. I would disagree with that. I think it is in—in our

experience, it has been a rare occasion that customers have discussed any of that with us; and, in this occasion, it is my impression that the only reason it was discussed was because we were out

of line. They weren’t asking us to increase the spread over where

the current market was. They were just asking us to be on a level

playing field.

Mr. WALDEN. Okay. We will try and tell you what tab this one

is.

But there is—Tab 39, if you will go to that. And it says here—

this is to Judy Waterer from Anthony Tavolero. It says, Judy, as

you know, Caremark had shown interest with our Furosomide back

in April. After review of our AWPs on the product, the opportunity

was dead. Our AWPs are 78 percent below the rest of the industry.

I am not aware of any competitor where the AWP is below $100

for bottles of 40 milligram thousands. Miline and Zenith are approximately $120, ours is $29. Caremark has commented that they

could not possibly award the product to us unless we increased our

AWPs. Janet Miller also added that Roxane has a history of having

AWPs out of sync with the rest of the industry.

I don’t know why we have to wait until our customers complain

before we adjust an AWP. Major customers—Walgreen, Wal-Mart,

CVS, MEDCO, Caremart—expect their leading suppliers to maintain their AWPs. Not executing this core competency reflects negatively on Roxane and promotes a perception of Roxane not understanding industry dynamics. I hope this helps.

This would appear to me to reference more than just Furosomide.

Does it appear that way to you?

Ms. PAOLETTI. Well, he does say that we have a history. I am not

sure what he is basing that on. Typically, we set our pricing and

we don’t monitor it. We don’t monitor AWPs once they are set.

Mr. WALDEN. Then why would he say, I don’t know why we have

to wait until our customers complain until we adjust an AWP?

Ms. PAOLETTI. In this case, he is referencing Furosomide. And we

aren’t able to get business. Actually, we were on the verge of discontinuing the product because we couldn’t gain customers, and it

was based on the fact that our AWP was so far out of line with

where the rest of the market was.

Mr. WALDEN. Okay. And then if you would turn to Tab 38 in the

binder. This document also notes that when AWP is out of line

with the rest of the market it a bigger issue than a straight price.

But this e-mail goes on to mention concerns associated with the decision to raise AWP, including scrutiny and consumer backlash.

Can you discuss those concerns?

Ms. PAOLETTI. Any time pharmaceutical companies do a price increase, it is scrutinized, AWP in particular, because that is one of

the prices that is publicly available for every one to see.

Mr. WALDEN. But it appears, in this case at least, in order to get

market share—am I missing it? In order to get market share, you

are having to increase your AWP?

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Ms. PAOLETTI. We were having to bring it in line with our competitors, yes. They weren’t asking us to raise it above our competitors. That was not my impression.

Mr. WALDEN. What effect does raising the AWP have on the price

that they pay for that product?

Ms. PAOLETTI. That the customers pay? It would not have an impact on the price that they paid.

Mr. WALDEN. What is the benefit to them of a higher AWP set

by you, which I assume would be an arbitrarily set AWP?

Ms. PAOLETTI. Well, in this case, they weren’t buying our product. They were buying another competitor’s product, who was much

higher. So, in that case, there would not have been an impact on

what they were currently buying versus what——

Mr. WALDEN. No, my point is, your incentive to raise the AWP

is to get market share, is it not?

Ms. PAOLETTI. In this case, it was to bring ourselves in line so

that we could actually compete on a contract price basis.

Mr. WALDEN. Right. To get more market share.

Ms. PAOLETTI. Sure.

Mr. WALDEN. It doesn’t cost the purchaser any more and it

doesn’t cost you anything to have a higher AWP?

Ms. PAOLETTI. True.

Mr. WALDEN. So the loser in this is the government, right, the

taxpayers?

Ms. PAOLETTI. Well, I wouldn’t agree with that.

Mr. WALDEN. Why?

Ms. PAOLETTI. Because at the time they were already buying one

of our competitor’s products that was already at that—at that level.

My changing that price didn’t advantage——

Mr. WALDEN. Right. Okay. But your company would benefit by

changing if it allowed you to get market share.

I guess the point is not to pick on Roxane specifically. I don’t

mean to do that necessarily, other than as an example of the pressures within the marketplace that drive a higher AWP in order to

get market share. The actual price paid by the purchaser is no

more. You have indicated that. The AWP, you just all are competing up here to see who has got the highest, because that creates

the biggest spread?

Ms. PAOLETTI. I am not sure that is the way that it is really

done.

Mr. WALDEN. How is it done?

Ms. PAOLETTI. In our case, we set the AWP and we don’t monitor

AWPs of our competitors. We typically don’t change our AWPs.

Mr. WALDEN. In this case, you were monitoring and had all of

the data. It is in the e-mail.

Ms. PAOLETTI. Well, in this case, we weren’t monitoring it. It was

so far out of line that our competitors were bringing it to our attention that, hey, even if you have the best supply and the lowest contract price, I can’t pay your product because you are not in line on

this other reference price.

Mr. WALDEN. The other reference price does what for them?

Ms. PAOLETTI. It would have put us in line with——

Mr. WALDEN. No, it creates the spread, right? The AWP creates

the spread with the actual purchase price. Correct?

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Ms. PAOLETTI. It would be one of the factors that their reimbursement is based on, yes.

Mr. WALDEN. All right. My time has expired. Thanks for the patience of the committee.

Mr. Stupak.

Mr. STUPAK. Thanks, Mr. Chairman.

Well, going along that line, Exhibits 37, 38, 39, Mr. Catlett, your

testimony on page 8 says, if a generic manufacturer unilaterally reduces its AWP for a given product relative to the AWPs of other

generic manufacturers for the same product, pharmacies would

have an incentive to purchase another manufacturer’s drug that

did not reduce its AWP.

So basically what is going on here, if you keep the AWP high,

then the pharmacies make more money off it, right?

Mr. CATLETT. I believe what I tried to say in my written testimony is that the AWPs are set as a reference price. If a—in a

multi-source situation, if there are multiple competitors, I believe

that if a company such as Barr was to unilaterally reduce its AWP

and if we are still in a situation where it is not an FUL or not a

MAC in place and we are dealing with AWP reimbursement formulas, while I have no example or any experience and could you

give you an example of it, my fear might be that it would put a

situation in place where we may have that type of decision.

Mr. STUPAK. Well, Ms. Marrs, you testified that you had a product and you lowered your AWP and you couldn’t get any customers

to buy it, right?

Ms. MARRS. We have had a couple of situations. We tried to

launch a product without AWP.

Mr. STUPAK. You established an AWP. It was lower than the

rest, and your customers wouldn’t buy it?

Ms. MARRS. That is correct.

In the other situation, we did not lower our AWP, but one of the

reporting services chose to do so without our knowledge. And, as

a result of that, we got many calls from pharmacists basically saying that they wouldn’t be able to buy our products in the future if

that situation was not changed.

Mr. STUPAK. So if we lower the AWP, why won’t the pharmacies

buy the drugs? If there is a lower AWP, you are paying a lower

price, you could pass that savings on to your customers, as you

claim you like to do. So why wouldn’t you buy a drug at a lower

AWP? Mr. Marshall? Mr. Ziebell? Mr. Seagrave?

Mr. MARSHALL. As I stated earlier, my responsibility to CVS is

to purchase the lowest-possible-cost generic product. I do not focus

on the AWP value in negotiations. The market is very fluid and dynamic and a highly competitive marketplace.

Mr. STUPAK. That is not what these people are saying. They are

all saying you keep your AWP at the market standard. It is not

fluctuating. If you would bring it lower, you don’t get customers.

You are the customers. You are the pharmacists. Isn’t it true the

reason why you don’t want to lower AWP is if you have a lower

AWP your reimbursement from the government and from the insurance companies is discounted off of that AWP? So, therefore, if

the AWP is lower, your profit is lower on that drug. Isn’t that true?

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Mr. MARSHALL. Again, I don’t focus on the AWP. My initiative

or my——

Mr. STUPAK. How about just a yes or no? I don’t care if you focus

on it or not. Doesn’t it stand to logic if you have a lower AWP and

you are reimbursed—and that AWP is discounted by Medicaid and

by the big insurance companies, the lower the AWP, the lower the

profit for the pharmacy? Yes or no?

Mr. MARSHALL. Yes, if the reimbursement were based on AWP.

Correct.

Mr. STUPAK. Are you telling me it is not?

Mr. MARSHALL. No, I am agreeing with you, that that would be

the case.

Mr. STUPAK. Sure.

How about Mr. Ziebell? Would you agree with that? Lower AWP

means lower profit to—who do you represent? CVS or Walgreens?

Mr. ZIEBELL. It would depend on whether or not the product is

reimbursed based on AWP. If it were, than the profit would——

Mr. STUPAK. Well, Medicaid is reimbursed based on AWP?

Mr. ZIEBELL. In some situations, yes. There are Federal upper

limit and MAC situations put on by the Federal Government and

the individual States. But if it was based strictly on AWP, if you

lower AWP, the reimbursement would be lower.

Mr. STUPAK. Well, we are looking at the list right here. Medicaid

prescription reimbursement information by State. It is all based

upon an AWP, plus a little bit more. So the lower the AWP, the

lower the profit to you. So if you are really concerned about the

price the customer pays, wouldn’t you want to buy your drugs from

these manufacturers here who have a lower AWP to pass that savings on to your customers?

Mr. ZIEBELL. I haven’t had a situation presented to me where the

AWP has been lower.

Mr. STUPAK. Well, not you personally. But I mean to your company.

Mr. ZIEBELL. Well, I am the purchaser of generic pharmaceuticals. And that is the case, that no one has been——

Mr. STUPAK. You represent what company?

Mr. ZIEBELL. Walgreens.

Mr. STUPAK. So this e-mail then that they referred to, I believe

Exhibit 38: I don’t know why we have to wait until our customers

complain before we adjust an AWP. Major customers—Walgreens,

Wal-Mart, CVS, MEDCO, Caremart—expect their leading suppliers

to maintain their AWPs.

I guess you are mentioned in this one.

Mr. ZIEBELL. Well, from the manufacturer’s standpoint. I have

never indicated that direction to any manufacturer.

Mr. STUPAK. Okay. Mr. Seagrave, do you care to comment? If you

lower your AWP, you could lower the price for the customer, right?

Mr. SEAGRAVE. I would agree with the other two gentlemen. If

reimbursement is based upon the AWP only, then our reimbursement would be less if it was based on AWP.

I would comment, though, that we heard testimony on the previous panel from some gentlemen from Michigan and in Texas

where they indicated that they do have maximum allowable costs

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in place, and they base their reimbursement off of that and not off

of AWP.

Mr. STUPAK. Well, how can this side of the table over here—Mr.

Stratemeier, Ms. Marrs, Ms. Paoletti, Mr. Catlett—be saying they

can’t sell any unless it is based on a stable AWP, which is higher

price? You are saying that is not the only reason? I mean, what

side of the table is right here, left or right?

Ms. MARRS. I think the issue is there needs to be a level playing

field. I don’t think the manufacturer is as concerned with exactly

what the reimbursement rate is. The issue is it has to be the same

for all manufacturers competing with that specific product.

Mr. STUPAK. Well, a manufacturer wouldn’t be concerned, because you are trying to get part of market share. It makes sense,

you would lower your AWP to get a bigger market share. But if the

customers, the pharmacies won’t buy it unless you maintain a

higher AWP, because that is what their profit is based upon—so

the system really is broken.

Ms. MARRS. The system is broken. There really needs to be a reimbursement rate set by somebody outside of manufacturing so it

is a level playing field for all of the manufacturers.

Mr. STUPAK. Let me ask you this question, and go right down the

line. We have known for years and we have heard again today that

the average wholesale price, or AWP, and the WAC, or wholesale

acquisition cost, on which most States base their Medicaid drug reimbursement formulas are fictitious numbers. You know it, Congress knows it, CMS knows it, and the States know it. As the $2

billion in fines and settlement indicate, the manufacturers have

benefited from an AWP system, but so have the providers. The big

losers been the taxpayers and the poor who are most vulnerable to

losing their health care when there are budget crunches. Sicker,

uninsured, and untreated people don’t benefit any of us. The systems need to be changed. But any changes, any change needs to

be fair, transparent, efficient and effective.

The CMS expert panel recommends that reimbursement be based

on actual acquisition costs to the pharmacies. Aventis made this

recommendation in 2002. So I would like to hear from each of you

how would you change the system. Mr. Stratemeier.

Mr. STRATEMEIER. Well, as we said in our policy statement, that

we think that actual acquisition cost is the best way to start your

structure, your reimbursement system.

Mr. STUPAK. Then you can still put in a dispensing fee and a

copay?

Mr. STRATEMEIER. If a pharmacist dispenses drugs, there would

be a dispensing fee. For physician office drugs, there would be a

physician services fee. That needs to be adequately dealt with in

its own right. But the key is the actual acquisition.

Mr. STUPAK. The key is for the pharmaceuticals to use the actual

acquisition cost.

Ms. Marrs.

Ms. MARRS. I agree that it should be cost based, and a reasonable service fee should be provided.

In the case of getting the cost from the manufacturer, I just

would caution the committee that, in our case, most of our sales

are to wholesalers and distributors. So when we report an average

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selling price that may not be reflective of what the pharmacy is actually paying. That needs to be considered in developing the methodology.

Ms. PAOLETTI. I would agree that any system that is put in place

needs to encourage the use of generic, lower cost generics, and it

needs to take into account all of the issues that impact all of the

parties—the manufacturers, the pharmacies, the patients, and the

government.

I am not sure that we can sit here today and put forth a proposal.

Mr. CATLETT. I think the important issue here and what you are

getting at is, in a situation where we have many competitors entering the market and we are seeing a dramatic decrease in acquisition price by our customers, that an AWP-based reimbursement

system may not be the best solution.

I think that is the really the key issue here there needs to be

reliance upon.

Mr. MARSHALL. We would, at CVS, be open to dialog to discuss

a program that would provide coverage for Medicaid patients,

would offer a program that covered the cost and adequately covered

the dispensing fees associated with filling a prescription; and,

again, just to reiterate, that would promote the lower cost generics.

Mr. ZIEBELL. I think that is the most important part, is you don’t

want to take away the incentive to dispense the generic over the

brand. The focus here has really been on the markups on generic

pharmaceuticals, but not much attention has been paid to the

small markup that results from the calculations based on brandname pharmaceuticals. So I think you have to keep that in mind,

also.

Mr. STUPAK. Mr. Seagrave.

Mr. SEAGRAVE. Well, I think there are a lot of possibilities and

a lot of things that we can talk about and ways to fix the system.

I think primarily what we would want to do is focus on the increased use of generic drugs, and then I think we need to come up

with a fair and equitable formula where we address the adequate

dispensing fee, the adequate cost of goods and services, and we will

offer our support into finding that solution.

Mr. WALDEN. Thank you.

The gentleman from Michigan, Mr. Rogers.

Mr. ROGERS. Thank you, Mr. Chairman.

Wow, was it a great day when I got the health care committee

in Energy and Commerce. You know, I went to a reference point

to make sure we were taking about the same rule of law. I went

to page 23,733. I don’t know how you all do it.

And when I look at the fact that there is really no guidance in

this AWP, if we have found an enemy in this whole thing, it is us,

the U.S. Congress. To create a system that has a perverse incentive

in it for the customers of these manufacturers to try to establish

a price point that says, look, I know they are not going to cover

my proper dispensing costs so I have got to build that in, and I am

going to make sure that obviously we make a little bit on the drug

itself and the dispensing costs. So I have got to try to figure out

how to bump up this AWP to make sure, of which they are not givVerDate 11-MAY-2000 07:48 Feb 24, 2005 Jkt 000000 PO 00000 Frm 00180 Fmt 6633 Sfmt 6602 97275.TXT HCOM1 PsN: HCOM1
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ing me credit for, I get credit for when I am building in my profit

margin on running a pharmacy. Holy mackerel.

I don’t know how we got here. But this is broke. I appreciate you

all being here. Where there is profit, there is normally confusion—

or where there is confusion, there is normally profit.

I would venture to guess that most of you have been subject to

lawsuits on pricing. Has any of you experienced a lawsuit on pricing?

Let the record reflect that I think everybody on the panel has

been shaking their head. The only people smiling are your counselors on the other side of you.

I mean, this thing is absolutely amazing. And, Ms. Paoletti, can

you explain to me—I mean, what—when this lawsuit happens to

your company, based on confusion of which I think the Federal

Government is a big part of this problem, what does that do? What

does that cost structure do to the cost of your product, to your time

and talents dedicated to trying to run a business and getting lowcost drugs to the market?

Ms. PAOLETTI. It takes a tremendous amount of our resources,

both time and money, that, frankly, would be much better spent reducing our prices and our costs.

Mr. ROGERS. Do you have any idea—probably not a fair question,

but do you have any idea—I mean, what percentage cost—is there

any way I can get anywhere close to a figure of what—the lawsuit

problem of your cost structure? You build it in every year, I imagine.

Ms. PAOLETTI. I am sure that we can provide it for you.

Mr. ROGERS. That would be helpful.

Anyone else? Obviously, some of even the bigger pharmacies,

have you been subject to these suits as well?

Mr. ZIEBELL. I am not personally aware of that. I am in the purchasing department, and I try to keep the costs as low as possible.

I am not aware of pricing lawsuits.

Mr. ROGERS. I think we all know the answer to the question.

This is a significant cost. It is a confusion that we have created for

you to try to have to deal with. And I agree. I appreciate you all

being here. We are going to have to do something about this. This

is absolutely nuts.

Let me ask you this. Could you go to a Medicare pricing system,

ASP plus 6, fill in the blank? I mean, this—is this something that

is a structure that seems to be a little bit closer to taking into account your costs of distribution and the costs of the drug and the

ability for you to keep your doors and lights on and pay people?

Any thoughts?

Nobody wants to commit to a pricing structure. That is very

smart. I can see your lawyers tugging on the back of you. If you

do, don’t do that. That means no bonus this year.

Quite obviously, this pricing structure thing is a problem. Let me

ask you this other question. You can sense my frustration. I certainly sense yours, and trying to go through this and understand

it.

By the way, that first 22,000 pages was riveting. Loved it.

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Would it be—what problem would it cause for you—and I will address this to Ms. Paoletti—to provide your pricing structure to the

States? Is that a problem?

Ms. PAOLETTI. We would provide whatever information was required by the States, as we currently do.

Mr. ROGERS. For DEY as well?

Ms. MARRS. We would be fine with providing pricing information

to the States. We would hope that it would be kept confidential

from our customers.

Mr. ROGERS. Obviously. I am not sure that is the right answer.

But if I have learned nothing today, that we have got, A, a transparency problem, availability of information problem, and this godawful system of which we have created to build in these perverse

incentives for people to start dealing against each other, not for

lowering prices in a free market competition but to try to jack them

up a little bit to cover costs that we haven’t recognized at the Federal Government, is a real issue for you and your operations.

That is an issue that I hope, if nothing else, that we walk away

from this hearing today and try to deal with that very, very serious

issue. And I, again, I appreciate you all being here and your forthrightness, and trying to get us to this answer.

Again, I have found this out in this oncology issue that we have

created a really bad system, and then we blamed people for trying

to participate in applying any business sense that they could possibly muster in this god-awful system that we created, and then we

come back a few years later and said, how could do you that? That

is awful. It is a system that we created.

Thanks for having the patience to hang in there and trying to

offer low-cost drugs to your customers. Hopefully, we will have

some relief on this lawsuit side of it as well. I know that is just

an absolute waste of money in our healthcare system. We have got

to fix it.

And hopefully, Mr. Chairman, we can work to eliminate what is

obviously a very confusing, large, ugly system, trying to develop

and implement rules and regulations so you all know what you

doing.

With that, I yield back, Mr. Chairman.

Mr. WALDEN. The Chair now recognizes the gentleman from New

Jersey, Mr. Ferguson, for questions.

Mr. FERGUSON. Thank you, Mr. Chairman. I appreciate you holding this hearing. I don’t have any questions at this time, but I

share many of my colleagues’ concerns about AWP.

Clearly, this is an issue that is going to continue to draw a lot

of attention from folks on this panel, folks on our committee. And

I really look forward to engaging in that debate, because clearly

there are many problems which need to be addressed, and I thank

the chairman and the committee for holding this hearing.

Mr. WALDEN. Appreciate your participation.

Mr. Marshall, I want to come back on some questions. I would

like to turn your attention to Tab 37. In the exhibit binder, pages

2001, 2002, purportedly quote a voice mail left by a CVS buyer,

Matt Leonard. Do you know who Mr. Leonard is, Mr. Marshall?

Mr. MARSHALL. Yes.

Mr. WALDEN. Who is he?

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Mr. MARSHALL. I replaced Matt Leonard. He was the person in

my position prior to me taking the current role.

Mr. WALDEN. Is he still with the company?

Mr. MARSHALL. Yes, he is.

Mr. WALDEN. And what role does he have now?

Mr. MARSHALL. He is the Vice President of Pharmacy Merchandising.

Mr. WALDEN. So where is he in the hierarchy with you?

Mr. MARSHALL. I report to Matt.

Mr. WALDEN. So you report to Mr. Leonard.

This is a voice mail supposedly left by him in June, July 2000,

concerning Furosomide. And it says, and I quote, CVS would award

Roxane the product if we, Roxane, would adjust our AWPs to reflect where the other generic companies are. Otherwise, CVS would

award to Zenith Gold Line.

Does CVS emphasize AWP or reimbursement when negotiating

with these folks?

Mr. MARSHALL. Okay. I have not seen this document prior to this

time, and it was my understanding that counsel had spoken with

counsel for the committee, that documents that had not been reviewed previously would not be reviewed today. I would just like

to verify that.

Mr. WALDEN. Who did your counsel speak to on the committee

about that?

Mr. MARSHALL. I believe it was Mr. Stone.

Mr. WALDEN. My understanding is there was not an agreement

like that. They tried to show you all of the documents that we got.

Mr. MARSHALL. I would be more than willing to review this document and come back to you with a response.

Mr. WALDEN. Why don’t you take your time right now to take a

look at it, if you don’t mind.

Because it says: CVS is looking for a Furosomide vendor. Apparently, the HICFA MACs are changing shortly, and they are not

happy with the margins. And their current supplier—they did not

have the new MACs available to share with me, but, being public

record, I am sure that we should have them somewhere. In fact,

I think Bob has them on his desk.

In the past, CVS has asked for AWP less 55 percent to be competitive on generics. I am not sure how the MAC impacts this. I

would like to discuss this with Bob or Anthony before we bid. For

now, I have listed the requested bid price, AWP less 50.

And then it says: ML, CVS would award Roxane the product if

we would adjust our AWPs to reflect where other generic companies are. Otherwise, would award it to Zenith Gold Line.

If you look at Tab 38——

Mr. MARSHALL. Okay.

Mr. WALDEN. [continuing] Tab 38, you will see that the document

there, which I am told you have been made aware of prior to this

hearing, is almost identical in its language or reference points to

this issue.

Have you seen that document before, Tab 38? It is a set of emails. My counsel indicates that you were made aware of this document.

Mr. MARSHALL. I have seen the lower portion of that page. Yes.

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Mr. WALDEN. And for the record, this is an e-mail from Steve

Snyder to Judy Waterer at Roxane, right? It says: Gang, CVS is

looking for a Furosomide vendor. Apparently, the HICFA MACs are

changing shortly. And I just read most of this. That goes on to say,

can I request that we discuss this Thursday or Friday, et cetera,

et cetera, which is very similar to the document on page Tab 36.

So I guess the issue is, do you know if Mr. Leonard or you—do

you ever look at AWPs?

Mr. MARSHALL. As I mentioned earlier, regarding negotiation of

lowest cost, to the extent that a manufacturer provides me with a

published AWP or their AWP and references that AWP in a conversation or in a proposal, very often I will use that AWP value as

a point of negotiation, not to instruct or ask that the value be

changed in any way, shape or form, but, to the extent that I am

offered a discount off of AWP, for example, that a manufacturer indicates they would sell it to CVS for AWP less 40 percent, I may

say, well, gee, I would like to have it at AWP minus 60 percent as

a good negotiating tool, all within the context of that value having

been provided to me but for no other purpose other than to derive

a lower cost of goods.

Mr. WALDEN. I thought earlier you testified that you didn’t look

at AWP as a negotiating point?

Mr. MARSHALL. I believe I testified that I do not consider AWP

as far as requesting any changes to that value. But to the extent

that it is presented to me by a manufacturer, I will use that as a

point of leverage to try to get a lower——

Mr. WALDEN. Do you ever inquire about AWP, what it is and

what—how much off you are being offered?

Mr. MARSHALL. As a standard, the AWP is provided when a proposal is provided to me for a new product.

Mr. WALDEN. So it is something that you look at then?

Mr. MARSHALL. I am aware of it.

Mr. WALDEN. Do you require it to be provided to you when you

are looking at purchasing a product?

Mr. MARSHALL. We require it to put in into our systems.

Mr. WALDEN. Okay. So you are asking for AWP, the pricing on

AWP, right?

Mr. MARSHALL. Yes, I am asking for the value.

Mr. WALDEN. Why do you ask for that?

Mr. MARSHALL. We need it to set up an item in our current systems at CVS.

Mr. WALDEN. What purpose does it serve in your current system

then? It is to determine the spread?

Mr. MARSHALL. No. I am not certain, But it may have some role

in third-party processing downstream. But I am not sure as to the

purpose we need it.

Mr. WALDEN. You don’t know what use it has in your company?

Mr. MARSHALL. I need to have that value to set up a new item.

Correct.

Mr. WALDEN. I guess I am—but you don’t know why you need

it? You just know you need it?

Mr. MARSHALL. It is a value that I need to populate in our purchasing system.

177

Mr. WALDEN. But you don’t know what role it plays in the purchasing system?

Mr. MARSHALL. I believe that downstream it may be used in our

third-party processing systems.

Mr. WALDEN. And that third-party processing system does what?

Is that the billing system to the government?

Mr. MARSHALL. The third-party system would be responsible for

managing our third-party claims.

Mr. WALDEN. And who are third-party claims?

Mr. MARSHALL. Private as well as Medicaid.

Mr. WALDEN. So this does play a relationship then in the billing

to Medicaid?

Mr. MARSHALL. Yes, as far as me populating that value, and ultimately downstream it may be used for that purpose.

Mr. WALDEN. But you are telling me you don’t negotiate that

AWP value——

Mr. MARSHALL. That is correct.

Mr. WALDEN. [continuing] when you are making a purchase.

Mr. MARSHALL. That is correct. I may negotiate a discounted purchase price.

Mr. WALDEN. Let me be clear. I realize that you don’t necessarily

set the AWP. But you negotiate a percentage off of that AWP, is

that right?

Mr. MARSHALL. In some instances when I am presented with a

price by a manufacturer and it is referenced as a discount off of an

AWP. For example, the price we are willing to sell this to CVS is

at 40 percent off of our established AWP. As a good negotiator, I

may ask for 50 percent of AWP in that circumstance.

Mr. WALDEN. But you have never asked them to raise an AWP

or said it is hard to buy your product because your AWP is so low?

Mr. WALDEN. That is correct.

Mr. WALDEN. Ms. Paoletti, I am curious then—hold on just a

minute. I am sorry.

Mr. Marshall, can you go to Tab 42? You should have seen this,

I am told by counsel.

This is an e-mail—is that correct? I will let you get there.

Mr. MARSHALL. Yes.

Mr. WALDEN. This is e an e-mail to Matthew J. Leonard, subject

Roxane, cyclofosfamide.

It says, Matt, I thought an e-mail might be a little quicker and

easier than trying to exchange voice mails on this. We spoke about

cyclofosfamide a week or so ago. You indicated that our spread was

not significant enough to pique your interest.

I would like to approach by company about what it might take

to get CVS on board. Can you provide me with CVS’s annual volume of the 25 milligram and 50 milligram product? Also, pass me

the volume that you believe CVS would sway to the generic if I can

bring you a 50 to 60 percent spread via a contract price. Thanks,

Steve Snyder, National Account Manager, Eastern Midwest.

Does this not also reference the spread being important, AWP

versus what you pay?

Mr. MARSHALL. Yes. In this case, just to clarify, my interpretation is the spread here is the established AWP of the manufacturer

and a requested price to CVS.

178

Again, I can’t comment on something that was written by another individual. But my interpretation would be it would be similar to what I had described earlier as far as a lever in negotiating

a lower purchase price when you are presented with an AWP

value.

Mr. WALDEN. All right. Ms. Paoletti, if you could turn to Tab 36.

This is an e-mail to Judy Waterer from Robert Socora, I believe.

And it lists the AWPs for, I assume, your competitors. Is that correct?

Ms. PAOLETTI. That is correct.

Mr. WALDEN. They are like 151.90, 141, 151, 140. And then

Roxane is at 45.

Ms. PAOLETTI. Correct.

Mr. WALDEN. How did your AWP get so out of line with the others?

Ms. PAOLETTI. Again, we set our pricing, typically, when we

launch the product, and then we don’t revisit the AWP. It is typically set as a standard off of the brand in the generic industry, and

we wouldn’t typically readdress it. In this case, I can’t say why the

other competitors were higher.

Mr. WALDEN. Sure. Did you readdress it in this case,

Furosomide?

Ms. PAOLETTI. We had to.

Mr. WALDEN. Why?

Ms. PAOLETTI. Because our AWP was so far out of line, as you

can see with our competitors, that they wouldn’t want the product.

Mr. WALDEN. I am confused between you and Mr. Marshall here.

Because he says AWP—he doesn’t set it. He is going to negotiate

off of it for your purchase price, right? And you are saying it is not

high enough. We are talking about CVS here in the middle.

Ms. PAOLETTI. I think we are talking about a very rare occasion.

You know, we might talk about——

Mr. WALDEN. But I think it is indicative of a practice in the industry.

Ms. PAOLETTI. I am not sure that it is. This is a situation where

it was so far out of line with our competitors that——

Mr. WALDEN. What would be the purpose being of raising it?

Ms. PAOLETTI. Our purpose was to just put us on a level playing

field.

Mr. WALDEN. And for what purpose did you need to be on a level

playing field?

Ms. PAOLETTI. Because the——

Mr. WALDEN. To get market share?

Ms. PAOLETTI. Absolutely.

Mr. WALDEN. For market share you needed to raise your AWP,

which you said you didn’t normally do once it is set?

Ms. PAOLETTI. That is true. Again, this is a very unique situation. We were faced with discontinuing the product because nobody

would buy it, because no matter—even if our contract price was on

a level playing field with our competitors and our service level and

we were a-graded, the AWP, which is one additional factor, was so

far out of line, again, that——

Mr. WALDEN. Right. It was out of line because the spread matters to those buying the product.

179

Ms. PAOLETTI. In some cases, I would assume that is true.

Mr. WALDEN. I would assume in every case, although it may not

be as dramatic as this. If spread plays into it here, tell me why it

wouldn’t play into it everywhere else?

Ms. PAOLETTI. I think as long as you are relatively in the same

ballpark, it hasn’t been our experience that it is something that is

dwelled on. AWP is generally a reference price that is sometimes,

primarily in new launch products, used as a—just as a reference

point in contract negotiations.

Mr. WALDEN. But it is a reference point that is used?

Ms. PAOLETTI. Yes.

Mr. WALDEN. So, I mean—I am having trouble believing that it

is not an important part of this discussion.

Ms. PAOLETTI. I am sure it is an important factor in some decisions. I don’t know that it is something that is dwelled on in every

case.

Mr. WALDEN. So you don’t think it is a big deal, AWP?

Ms. PAOLETTI. Absolutely. I think AWP and the issues need to

be addressed. Is it something—is reimbursement something that

we discuss in normal discussions with our customers? No.

Mr. WALDEN. All right. This will be a question to the representatives from the various pharmacies. Medicaid dispensing fees vary

fairly widely from State to State. I think we have heard the national average for Medicaid dispensing fees appears to be somewhere in the neighborhood of $4 per prescription.

By way of comparison, the committee obtained data showing

what the pharmacies receive in the way of dispensing fees from

some of their larger third-party payors. One pharmacy chain also

submitted data showing the average dispensing fees for all of its

retail customers. These data showed an average of approximately

$2.25 per prescription on the private side.

Why should Medicaid being paying more in the way of dispensing

fees than private payors? Mr. Marshall, shall we start with you?

Mr. MARSHALL. Sure. I understand the data that you have presented to me. My understanding, there are two components to reimbursement. There is a negotiated formula component, which may

involve the AWP or Federal upper limit or a MAC price. There is

also the dispensing fee.

So I take your information at face value, but I really couldn’t

come to a conclusion as to, you know, whether we would be paying

for Medicaid versus the private plans, other than on that absolute

value of the dispensing fee.

Mr. WALDEN. Are the numbers correct, from your perspective, on

the dispensing fee?

Mr. MARSHALL. I believe. I am not as closely tied to this in my

current role. I knew that it was, you know, that Medicaid was a

little higher than $3 and on the private a little higher than $2.

Mr. WALDEN. So we are in the ballpark here, from your historical

background?

Mr. MARSHALL. Yes.

Mr. WALDEN. You can’t comment as to why Medicaid should be

paying more as a dispensing fee than other third-party payors?

Mr. MARSHALL. No. Again, I think you need to consider the entire equation as far as the overall reimbursement.

180

Mr. WALDEN. Mr. Ziebell.

Mr. ZIEBELL. I am not really familiar with the figures presented

or how they apply to Walgreens, but I would agree you have to—

you can’t look just at the dispensing fee. You have to figure the cost

component and how that figures in the calculation also.

Mr. WALDEN. All right. Mr. Seagrave.

Mr. SEAGRAVE. I think your numbers are fairly accurate. But I

will tell you that when we look at reimbursement, we don’t look at

one segment of the formula. We look at the ingredient costs as well

as the dispensing fee. We look at the total reimbursement. We

don’t look at one component or the other.

I will mention that, with respect to our Medicaid and Medicare

business, it is not a business that we would negotiate as we do

with the commercial payors such as the PBMs and the HMOs. So

when we are looking at the business we look at it in total. We look

at total reimbursement.

Mr. WALDEN. I appreciate that.

In fact, based upon the data provided by the pharmacies, Medicaid actually pays slightly more for ingredient costs, I am told.

And I guess—what I want to make sure of is that, as we move

forward on the policy side here, is that we do the best we can to

get it right, that we don’t have a situation where we are paying

more for drugs than we should and more than private payors are

paying or others. We ought to pay what is fair. I don’t believe AWP

is fair. Then we are just guessing off of a percentage off AWP.

There is all of these different systems.

I also want to make sure, though, that pharmacists are properly

compensated so that if we change how you are being paid or how

this system functions that we don’t shortchange it and pharmacists

suddenly write to all our constituents and say we are not going to

dispense any more because those miserly turkeys in Congress

changed the formula.

But I don’t think it’s right, either, to have a formula that ends

up overcompensating on the drug side and undercompensating on

dispensing or overcompensating on both. We need to try and figure

out how to get it right, because the costs are exploding around us,

and I would like to see a marketplace work, work honestly, work

ethically.

I think Aventis got at this issue a bit when they realized AWP

was going to become a tar baby for the industry. And I commend

you for noticing that and for taking action, because I am amazed

that AWP prior to this hasn’t been blown out of the water and,

after seeing what we went through on Medicare, that something

didn’t change for Medicaid prior to this.

Turn to the gentleman from Michigan, Mr. Stupak.

Mr. STUPAK. Thank you, Mr. Chairman.

Mr. Catlett, if I can go back to you. The statement you made in

your testimony states that, again, if a generic manufacturer unilaterally reduced its AWP for a given product relative to the AWPs

of other generic manufacturers for the same product, pharmacies

would have an incentive to purchase another manufacturer’s drug

that did not reduce its AWP. Why did you say in your testimony?

Mr. CATLETT. I believe that potentially could happen. I mean, I

could not think of an instance where it has happened. I think I

181

mentioned that earlier. But my fear, if there was a great disparity,

that—between AWPs of generic products, that potentially the company that had the lowest AWP may not be in a position to sell

their product in a system where there is AWP-based reimbursement in terms of how that’s how the system’s being based.

Mr. STUPAK. Has your company ever had the lowest AWP and

had it purchased by the pharmacies? Have you lowered your AWP

to be lowest and had that happen, where they had purchased your

AWP?

Mr. CATLETT. No, I have no recollection of that.

Mr. STUPAK. Ms. Marrs, if the pharmacies would purchase at a

lower AWP, could you lower your AWPs on your products and stay

in business?

Ms. MARRS. As I mentioned before, I think key to this, and similar to what Ms. Paoletti said, there has to be a level playing field.

The manufacturer has no incentive to keep their AWPs high. We

are just trying to compete in a fair market. So whatever the government chooses as their reimbursement system, we want there to

be a level playing field for all manufacturers of the same product.

Mr. STUPAK. Sure. But the point is, you could lower all your

AWPs and still stay in business, couldn’t you?

Ms. MARRS. Probably not. As I’ve testified, we had a similar experience to Ms. Paoletti.

Mr. STUPAK. And the reason why you couldn’t, because they

wouldn’t purchase it, right?

Ms. MARRS. I don’t believe they would.

Mr. STUPAK. Okay.

Ms. MARRS. In fact, the product I mentioned when we had a

lower AWP, we did not raise our AWP. We no longer sell the product because we could not compete.

Mr. STUPAK. And only because no one would purchase it.

Ms. MARRS. Correct.

Mr. STUPAK. But if they would purchase at a lower AWP, you

could probably lower all your AWPs of the products you sell and

still stay in business as long someone would purchase your product.

Right?

Ms. MARRS. Correct.

Mr. STUPAK. And in your testimony—and why wouldn’t they purchase your product?

Ms. MARRS. Well, because they are being reimbursed at a much

lower rate for our product than somebody else’s in this particular

case.

Mr. STUPAK. Correct. So the company wouldn’t make as much

money; and, again, the taxpayer/customers wouldn’t have to pay,

right?

Ms. MARRS. Correct.

Mr. STUPAK. Thank you.

I have nothing further, Mr. Chairman.

Mr. WALDEN. Thank you, Mr. Stupak.

We don’t have anything else at this time for the committee. We

greatly appreciate your insights and your patience, and we will

look forward to staying in communication with all of you.

182

With this, the third panel is dismissed. The record will remain

open for ample opportunity for members to submit other questions

or testimony; and, with that, the subcommittee is adjourned.

[Whereupon, at 2:02 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

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