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LESSON’S LEARNED: THE DEPARTMENT OF VETERANS AFFAIRS PRESCRIPTION DRUG PURCHASING PROGRAM

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY,

VETERANS AFFAIRS AND INTERNATIONAL

RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

JULY 22, 2002

Serial No. 107–214

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

JOHN SULLIVAN, Oklahoma

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON NATIONAL SECURITY, VETERANS AFFAIRS AND INTERNATIONAL

RELATIONS

CHRISTOPHER SHAYS, Connecticut, Chairman

ADAM H. PUTNAM, Florida

BENJAMIN A. GILMAN, New York

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEVEN C. LATOURETTE, Ohio

RON LEWIS, Kentucky

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

DENNIS J. KUCINICH, Ohio

BERNARD SANDERS, Vermont

THOMAS H. ALLEN, Maine

TOM LANTOS, California

JOHN F. TIERNEY, Massachusetts

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

LAWRENCE J. HALLORAN, Staff Director and Counsel

KRISTINE MCELROY, Professional Staff Member

JASON CHUNG, Clerk

(III)

C O N T E N T S

Page

Hearing held on July 22, 2002 ............................................................................... 1

Statement of:

Ogden, John, Chief Consultant, Veterans Health Administration, Pharmacy Benefits Management, Department of Veterans Affairs; and William Conte, Director, Department of Veterans Affairs Medical Center,

Bedford, MA .................................................................................................. 78

Waxman, Judy, deputy executive director, Families USA; Dr. Alan Sager,

professor of health services, director, health reform program, Boston

University School of Public Health; and Cynthia Bascetta, Director,

Health Care, Veterans’ Health and Benefits Issues, General Accounting

Office .............................................................................................................. 19

Letters, statements, etc., submitted for the record by:

Allen, Hon. Thomas H., a Representative in Congress from the State

of Maine, prepared statement of .................................................................. 17

Bascetta, Cynthia, Director, Health Care, Veterans’ Health and Benefits

Issues, General Accounting Office, prepared statement of ........................ 45

Conte, William, Director, Department of Veterans Affairs Medical Center,

Bedford, MA, prepared statement of ........................................................... 92

Lynch, Hon. Stephen F., a Representative in Congress from the State

of Massachusetts, prepared statement of ................................................... 58

Ogden, John, Chief Consultant, Veterans Health Administration, Pharmacy Benefits Management, Department of Veterans Affairs, prepared

statement of ................................................................................................... 81

Sager, Dr. Alan, professor of health services, director, health reform

program, Boston University School of Public Health, prepared statement of ........................................................................................................... 35

Shays, Hon. Christopher, a Representative in Congress from the State

of Connecticut, prepared statement of ........................................................ 3

Tierney, Hon. John F., a Representative in Congress from the State

of Massachusetts, prepared statement of ................................................... 7

Waxman, Judy, deputy executive director, Families USA, prepared statement of ........................................................................................................... 22

(1)

LESSON’S LEARNED: THE DEPARTMENT OF

VETERANS AFFAIRS PRESCRIPTION DRUG

PURCHASING PROGRAM

MONDAY, JULY 22, 2002

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON NATIONAL SECURITY, VETERANS

AFFAIRS AND INTERNATIONAL RELATIONS,

COMMITTEE ON GOVERNMENT REFORM,

Boston, MA.

The subcommittee met, pursuant to notice, at 9:30 a.m., in

McCormack Courthouse, 1500 John W. McCormack Post Office and

Courthouse, 90 Devonshire Street, Boston, MA, Hon. Christopher

Shays (chairman of the subcommittee) presiding.

Present: Representatives Shays, Tierney, Allen and Lynch.

Staff present: Lawrence J. Halloran, staff director and counsel;

Kristine McElroy, professional staff member; and Jason M. Chung,

clerk.

Mr. SHAYS. The quorum being present, the Subcommittee on National Security, Veterans Affairs and International Relations, hearing entitled ‘‘Lessons Learned: The Department of Veterans Affairs

Prescription Drug Purchasing Program’’ is called to order.

We welcome our witnesses. We welcome our guests. Good morning to everyone.

At the invitation of Congressman Tierney, the subcommittee has

come to Boston today to discuss the Department of Veterans Affairs, VA, prescription drug benefit program and the impact of Federal pharmaceutical purchases on the national effort to made medicines more affordable. These are important issues to veterans, senior citizens and to all of us as health care consumers.

In the current debate on how best to structure a Medicare prescription drug benefit, VA and the Department of Defense programs offer important lessons and cautions about how to expand

and access and control costs.

As the General Accounting Office [GAO] recently concluded,

‘‘Considerable leverage can be exerted when the departments commit to buy increased volumes of a particular drug when there are

generic drugs or brand name drugs that are interchangeable in efficacy, safety and outcomes.’’

Bringing the benefit of that leverage to patients is a matter of

fiscal discipline and effective medical management. Savings from

national contracts and use of evidence-based formularies can work

to make therapies more affordable in the context of a complete

health care delivery system.

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But VA cannot afford to become a mere prescription window. VA

health facilities in many areas are already straining under the

weight of increased demand by veterans who once had access to affordable care elsewhere.

To save costs, not just shift costs, strategies to reduce prescription drug expenditures must focus on health outcomes as well as

a healthy bottom line.

In this area, and on other important issues, Mr. Tierney has

been a thoughtful, hard working partner in our partnership oversight of Federal programs. The subcommittee is grateful for the opportunity to be here today and we look forward to the testimony

of all of our witnesses.

[The prepared statement of Hon. Christopher Shays follows:]

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Mr. SHAYS. I would extend that by saving gratitude to Mr. Allen

and I think Mr. Lynch will be joining us. I am fortunate to chair

a committee of just outstanding members, any one of whom could

take this gavel and make sure this committee served well.

At this time I would recognize Mr. Tierney, and again, thank you

for asking us to be here.

Mr. TIERNEY. Thank you, Mr. Chairman. I want to extend my

gratitude to you for having this hearing and bringing it up to the

Boston area in Massachusetts. Like everywhere else in this country, this is a very significant issue in Massachusetts and in my District, as well as others.

I want to also thank Tom Allen, who has been a leader on this

issue for some time, particularly with regard to the cost aspects of

it. No matter what we do in terms of trying to make prescription

drugs accessible to people, the cost is always going to be an issue

and that’s one thing we both are going to address here today.

The fact of the matter is that we’re bankrupting many, many individuals, many of them seniors right now by the high cost charged

to individuals for prescription drugs and if we were to put an end

to Medicare or any other program, we’d run the risk of bankrupting

that program if we didn’t also attend to the issue of cost.

Once again, last year we saw double digit increases in prescription drug spending in this country, an increase of 17.1 percent in

2001. Once again, prescription drugs are one of the facet growing

components of health care. Once again, seniors remain the hardest

hit because they were the most in need of prescription drugs while

remaining of the least likely groups to have prescription drug insurance. And Judy Waxman will testify to that, that 50 percent of

Medicare beneficiaries were without prescription drug insurance at

some point during the year and nearly 30 percent had no drug coverage at all. And once again, it remains my hope that this situation

will change and that Congress will demonstrate the political will

to protect its most vulnerable citizens by passing a comprehensive

Medicare prescription drug benefit.

In the past, as a Nation, when we had the political will to protect

and serve the most vulnerable, we have been up to the task. There

are lessons to be learned from these efforts and today we’ll focus

on Department of Veteran Affairs’ efforts to manage a pharmacy

benefit that is both cost effective and able to provide a high quality

benefit to its patients.

One of our charts paraphrases a GAO study that reported that

the VA national contract prices were up to 70, 72 and 88 percent

lower than the recommended retail price for cholesterol lowering

drugs.

It’s clear from VA’s success at negotiating lower drug prices that

drug manufacturers have the ability to make a profit without

charging their highest prices. We can also see that there’s room for

negotiations in drug manufacturers’ profit margins when, even in

the most dire circumstances, the manufacturers can still make a

profit.

Last October, when this country suffered from a terrorist attack

in the form of anthrax sent through the mail, we needed affordable

antibiotics. Health and Human Services Secretary Tommy Thompson convinced Bayer to provide Cipro to the United States at a disVerDate 11-MAY-2000 08:03 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 D:\DOCS\87140.TXT HGOVREF1 PsN: HGOVREF1
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count. Because of the size of the order placed by our government,

Bayer still walked away with millions of dollars in profit.

We have a chart that shows that in 2001, the pharmaceutical industry was the most profitable industry in the United States with

18.5 percent of its revenues going to profits. The next most-profitable industry, commercial banking, had 13.5 percent of revenues

going to profits. The median for the Fortune 500 companies was

profits at 3.3 percent of revenue.

Some of our witnesses today will talk about how drug companies

use that money. The companies claim that their high prices are

necessary to support research and development, but we’ll hear

today about where the money really goes. We’ll hear that the companies spend significantly more money on marketing, advertising,

and administration than they do on research and development. And

we will also hear that drug companies make more in profits than

they spend on research and development.

I think it’s also important to remember that a large portion of

the dollars for pharmaceutical research and development comes

from taxpayers. Pharmaceutical companies have benefited from the

basic drug research conducted primarily through the National Institute of Health. Of the 21 most important drugs introduced between 1965 and 992, 15 were developed using knowledge and techniques from federally funded research. That research has contributed to the development of drugs to treat cancer, HIV, depression

and other diseases—drugs that are now reaping billions of dollars

in revenues for drug manufacturers.

We have to find a way to bring down the costs of drugs, especially for the elderly. As we’ll hear today, we don’t need to reinvent

the wheel. Instead, we can learn from the VA’s success at getting

lower drug prices and adapt those lessons to other settings. And

we’ll see that there is room for negotiation in the drug manufacturers’ profit margins.

I believe the time has come to put patients over profits, to learn

from our successes and to protect our most vulnerable citizens with

a cost effective and high quality drug benefit.

The fact of the matter is that we can do all of that while providing manufacturers with the resources for research and development

and a decent profit. So I look forward to the testimony of all the

witnesses that are here today. I thank them for coming and I welcome them to the hearing. And again, thank you, Mr. Chairman,

for being so strong on this issue for letting us have this hearing

here.

[The prepared statement of Hon. John F. Tierney follows:]

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Mr. SHAYS. I thank the gentleman. At this time I recognize Mr.

Allen from Maine.

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

Congressman Tierney for organizing this hearing. I came down

from Maine this morning because I knew I would learn something

from our panelists and from the interaction with our—as we go on

through the hearing.

Congressman Tierney has been a tireless advocate, absolutely

tireless advocate for our seniors and others in need of assistance

with the high cost of their prescription drugs. And Chairman

Shays, I have to say is my model chairman. We all should hope

that if we ever do get the gavel, we handle it the way he does.

Congress has been working on legislation to provide Medicare

beneficiaries with prescription drug coverage. Although the structure of the various plans we have considered have varied greatly

in administration, benefit structure and cost sharing, the urgent

need for a Medicare prescription drug benefit is clear. Seniors in

Maine cannot wait any longer for prescription drug price relief.

Prescription drug expenditures have continued to rise almost 20

percent each year for the last 6 years or so. By comparison, spending for physician and clinical services grew by approximately one

third and expenditures for hospitals increased by one fifth between

1995 and the year 2000. Escalating drug costs contribute to higher

insurance premiums and higher out of pocket spending for everyone with insurance. According to a recent Families USA study, over

one third of the increase in national prescription drug spending

from 2000 to 2001 was directly attributable to increases in drug

prices. And the other one third is basically related to increased use

of prescription drugs and the substitution of newer, high cost prescription drugs for older, lower cost prescription drugs. Because of

high premiums, fewer and fewer Medicare recipients in Maine can

afford the Medicare supplements that have the prescription drug

coverage.

These trends lead to more and more veterans seeking to enroll

in the VA health care system in order to obtain the prescription

drug benefit. The $7 co-payment for prescription drug is very enticing for those individuals with little or no prescription drug coverage. However, the increased number of veterans coming into the

system leads to higher case loads and longer waiting lists. At

Togus, Maine’s only VA hospital, for example, there are over 4,000

veterans awaiting assignment to a primary care physician.

The average wait for an initial appointment is now back up to

1 year. It was better a while ago. I know one veteran who had to

wait 9 months to get in to see a doctor. When it finally came time

for his appointment, the veteran was diagnosed with prostate cancer. His doctor said if he had seen him 6 months earlier, his life

could have been saved.

In Maine, over the last 2 years, the VA medical system has

added over 500 veterans to its practice every month. Under the

current compensation formulary, this should mean a commensurate

increase in funding for those facilities. Unfortunately, the formula

also contains a huge 2 year lead time in recognizing this increase.

So we’re getting paid for the number of veterans that we had 2

years ago.

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I would like to this opportunity just to commend the staff at

Togus. They’re not here, but they do a terrific job. They’re dedicated, hardworking. They do feel understaffed and underworked

and I am convinced they work hard and do the best they can and

with limited resources. The fundamental problem is the lack of affordable prescription drugs in the civilian market is resulting in a

deluge of veterans forced to turn to the VA in order to afford the

drugs their doctors prescribe.

If we fail to address the prescription drug pricing issue and don’t

add a prescription drug benefit to Medicare, the VA system will

continue to be overwhelmed. The increasing backlog created by the

influx of veterans seeking lower cost prescription drugs means that

more and more patients with chronic illnesses will not receive timely and appropriate care.

I believe one lesson to be learned is that the VA system works.

It provides affordable prescription drugs through bulk purchasing

using the buying power of more than 90 million veterans. While

the model works, the capacity of the VA health system is totally

inadequate. We should be replicating the model in one way or another, the model of the VA, for the entire Medicare population so

we can leverage the buying power of the 40 million Americans who

are Medicare beneficiaries.

Thank you, Mr. Chairman, and thank you, Mr. Tierney. I’m very

pleased to be with you today.

[The prepared statement of Hon. Thomas H. Allen follows:]

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Mr. SHAYS. Thank you. I’d like the record to note that Mr.

Tierney will be chairing this entire hearing.

Mr. TIERNEY. Thank you, Mr. Shays. We’re going to have our

first panel testify today with Judy Waxman who is the deputy executive director of Families USA; Dr. Alan Sager who is professor of

health services and director of the health reform program at Boston

University School of Public Health; Ms. Cynthia Bascetta, who is

the Director of Health Care for Veterans’ Health and Benefits

Issues at the General Accounting Office and with her is Jim

Musselwhite who is the Assistant Director of the General Accounting Office, who I understand will not be testifying.

Those people who are going to testify, will you please rise.

[Witnesses sworn.]

Mr. SHAYS. Let the record reflect that the witnesses have testified in the affirmative.

Ms. Waxman, why don’t we start with you.

STATEMENTS OF JUDY WAXMAN, DEPUTY EXECUTIVE DIRECTOR, FAMILIES USA; DR. ALAN SAGER, PROFESSOR OF

HEALTH SERVICES, DIRECTOR, HEALTH REFORM PROGRAM,

BOSTON UNIVERSITY SCHOOL OF PUBLIC HEALTH; AND

CYNTHIA BASCETTA, DIRECTOR, HEALTH CARE, VETERANS’

HEALTH AND BENEFITS ISSUES, GENERAL ACCOUNTING OFFICE

Ms. WAXMAN. Thank you, Congressman. Mr. Chairman and other

Members of Congress, thank you so much for asking me to testify

today. Families USA is a national organization that represents consumers and I’ve been asked this morning to give an overview of

what’s happening with drug crisis.

Since 1995, national spending on prescription drugs has grown

double the rate of growth of spending in other parts of the health

care system, particularly hospital care, physician care and clinical

services. Three trends have been driving this rapid sustained

growth: the number of prescriptions per person is increasing,

newer, higher cost prescriptions are replacing older, less costly

drugs, and the prices of prescriptions keep rising. As already has

been said this morning, more than a third of the increase in national prescription drug spending from 2000 to 2001 was directly

attributable to increases in drug prices.

As you are all aware, older Americans are the population most

likely to need drugs and they are the least likely to have insurance

coverage. For a number of years now, Families USA has monitored

the 50 prescription drugs that seniors are most likely to take. Last

month, we issued a report called ‘‘Bitter Pill, the Rising Crisis of

Prescription Drugs for Older Americans.’’ And we found a number

of interesting facts.

The prices of the 50 most-prescribed drugs for seniors rose, on

average, by nearly three times the rate of inflation. This is not a

1-year phenomenon.

Forty-two of the 50 drugs were on the market for the 50-year period from 1997 to 2002 and they rose, on average, twice the rate

of inflation during that 5 years.

Twenty of the 50 drugs had been on the market for 10 years. The

prices for nine of those drugs increased at least three times the

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rate of inflation and five of those drugs rose at least four times the

rate of inflation.

Now why are the prices rising so much? There’s a couple of reasons I’d like to highlight this morning, two of them being brand

name monopolies and also advertising.

Generic drugs can offer seniors a lower cost alternative to higher

cost brand names. Another fact, we found was that the yearly average for brand new drug for seniors was $1,106 compared to $375

for generics. Additionally, in the last year, the price of generic

drugs rose only 1.8 percent as compared to 8.1 percent as an increase in brand name drugs. Not surprisingly, the brand name

companies go to great lengths to prevent generic drugs from entering the market. This is a serious problem that Congress can address.

Not coincidentally, high price drugs, some of which are among

the most commonly prescribed for seniors are the most heavily advertised. Direct consumer advertising plays a major role in increasing the demand for many high priced drugs. I want to give you one

example. In 2000, AstraZeneca, the maker of Prilosec, spent $107.5

million in direct-to-consumer advertising for this drug. In 2001,

that company had sales of $5.68 billion for that drug alone. That

shows you that direct-to-consumer advertising works for the manufacturers.

As public concern mounts about the explosion of prescription

drug costs, the pharmaceutical industry argues that the high drug

prices are necessary in order to finance research and development.

We’ve decided to look at how much profit the companies are actually making and where the money is going. So this month, just last

week, we issued a report entitled ‘‘Profiting from Pain: Where Prescription Drug Dollars Go.’’

What we did was we examined the SEC filings of the companies

that offered those 50 drugs I spoke about earlier and there were

nine publicly traded companies we could examine. As has already

been said, the pharmaceutical industry is the most profitable industry in the United States for each of the past 10 years. In 2001,

their profits were 5.5 times as large as the median return for all

Fortune 500 countries. Additionally, the nine companies we looked

at generated $30.6 billion in profits last year which was more than

60 percent higher than expenditures on research and development.

Many of the companies report marketing, advertising and administration together, so what we did is we looked at those items as

compared to their spending on research and development and we

found that in the nine companies, spent a total of $45.4 billion on

marketing, advertising and administration and only $19.1 billion

on research and development. Eight of the nine companies actually

spent twice as much on those items as they did on research and

development.

We think it’s fair to say that the gap between the cost of medications Americans and particularly seniors need, and what they can

afford is growing wider and wider. And as also has been mentioned, there are 50 percent of seniors do not have drug coverage

at some time during the year and 30 percent don’t have it at all.

Sixty-five million Americans in total do not have drug coverage,

pardon me, do not have insurance coverage for prescription drugs.

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So one obvious solution is to add a meaningful drug benefit for the

Medicare program, but they must include systems to moderate the

prices. One, for the seniors and two for the Medicare program

itself, so the drug—so the program does not become unaffordable.

But I wouldn’t finish my testimony without saying that drug

price moderation is necessary for Medicare, for insurers, for employers and for all others because we’re in a situation now with

consumers, all consumers are in jeopardy of facing the time when

more and more drugs will simply be unaffordable and out of reach.

Thank you.

[The prepared statement of Ms. Waxman follows:]

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Mr. TIERNEY. Thank you for your testimony.

Dr. Sager.

Mr. SAGER. Congressman Tierney, Congressman Shays, others.

Good morning. Thank you very much for inviting me to appear before you. After distilling six lessons from the VA’s recent experiences in paying for prescription drugs and from Congress’ experiences in designing a Medicare medication benefit, I’ll apply these

lessons to crafting a new approach to a Medicare drug benefit.

The six lessons. 1. The VA has become one of the main lightning

rods in the electrical storm caused by the collision of soaring drug

prices and lack of adequate insurance. The number of 30-day equivalent prescriptions filled by the VA in fiscal year 2001 was more

than 21⁄2 times as much as 5 years earlier.

2. Owing to rising volumes and prices, the VA’s drug costs are

expected to double from $1.6 billion in fiscal year 1999 to a conservatively projected $3.3 billion in fiscal year 2003.

3. The VA has shown that winning lower drug prices is a far

more effective way to contain costs than is restricting use of drugs.

But costs are projected to soar despite the VA’s efforts.

4. Unless we find a way to finance affordable drugs for all elderly, disabled and chronically ill Americans, the VA drug budget will

explode or human suffering will magnify. Indeed, both are possible.

Most of the VA’s future efforts to limit its own obligations can

succeed only by adding to the obligations of others. There has been

too much of this already. Congress has won lower drug prices for

Federal programs while allowing drug makers to charge higher

prices to ordinary citizens.

5. The VA’s own problems would be eased by creating a strong

Medicare prescription drug benefit. Building such a benefit has

been stymied by the combination of one, high drug prices and two,

the need to find new Federal dollars both to protect people who

haven’t been able to afford drugs in the past and to replace most

of today’s private spending by people who can somehow struggle to

afford their medications. This dilemma appears to create a choice

between continued suffering and much higher spending.

6. Fortunately, there is a third choice which is reform. We’ve

spent $200 billion on medications a year, this year. That makes the

prescription drug problem literally the easiest one to solve in the

United States of America. There are some unique opportunities.

It’s easy to design an inferior Medicare drug benefit with high

premiums, co-pay and multi-thousand dollar donuts, holes, and

other patient financial exposure. It’s also easy to design a benefit

that costs the Federal Government many new dollars. But low patient cost can and must be combined with low, new Federal costs

and with comprehensive benefits.

What are the costs of a good Medicare prescription drug program? My colleague, Deborah Socolar and I estimate the gross cost

of a good Medicare prescription drug benefit at $2.2 trillion for the

full decade from 2002 to 2011 before factoring in opportunities for

savings. Now this is for a full 10 years that needs to be compared

carefully with other estimates that might be for 5 or 6 or 7 years.

The costs includes, they start with three quarters of the spending

projected by the CBO for its baseline in the absence of a new drug

program, how much people are expected, Medicare eligible patients

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are expected to spend on drugs. An additional $440 billion, we estimate, would be necessary to buy drugs for previously uninsured

Americans to pick up the higher volume of medications, if we pay

retail price. We also budget $80 billion for a new center to measure

which medications are effective, which are safe and who needs

them and to disseminate that information to doctors and patients.

Other minor costs for administration, building pharmacy capacity

and the like.

How to cover those costs. Through modest patient payments, substantial cost cuts capturing existing revenue and new Federal dollars. Patient payments cover one tenth of the amount. Premiums

would be set at between 2.5 and 3 percent on a sliding scale of Social Security checks, so this could be a progressive premium that

would not impoverish people who are getting $200 and $300

amount Social Security checks. Also, modest co-pays between $5 and $10 with substantial protections for low income patients. So that raises a tenth of the

money. Reducing costs will cover a third of this money, of the $2.1 tril- lion we need, $2.1 trillion we need to raise.

We would propose to cap the rise in total spending after this year

at 8.5 percent a year instead of the 11.5 or 12 percent or 12.5 percent that CBO projects will happen in the absence of intervention.

This means that drug spending doubles only every 10 years instead of every 6 years as CBO projects. I think the drug makers

can live with revenue that doubles every 10 years. Indeed, we

would protect drug makers’ profits as return on revenue, return on

equity. Also, to save $400 billion over the 10 years, we would pay for

higher volume of medications that newly covered people would be

able now to afford, not at retail price, but at the marginal cost of

producing the pills, to cover the drug makers’ actual costs. We estimate that at 7.5 percent of retail. Once the drug makers do the research and bill the factories, the added cost of making more pills

is tiny.

We cover 40 percent of the cost by capturing existing revenue.

$400 billion of that would be drug makers’ own marketing and advertising costs, costs that they would no longer need to bear as part

of a drug peace treaty, whereby information on which medications

are needed would be disseminated by the new Public Refinance

Center. We’d also capture $60 billion worth of State Medicaid

spending, frozen at today’s revenue levels, today’s spending levels.

$160 billion in Federal Medicaid spending and about $50 billion in

VA spending. Also, about $175 billion in captured employer maintenance of effort, frozen at 20 percent of this year’s level. These are

obligations that employers take on to retirees and others.

So we raise—recover, $1.75 trillion in cost, leaving about $375

billion to be covered by new Federal dollars. That’s 18 percent of

the bill. And this $375 billion, 90 percent of that replaces existing

private spending by Medicare patients as part of the new Medicare

prescription drug program. Patients’ financial exposure would be

measured in the hundreds, not in the thousands, no donut, no hole.

The pie chart included in the testimony itemizes the revenue

sources.

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I’d be happy to provide additional supplementary information, either now or in writing and thank you very much for the chance to

speak today.

[The prepared statement of Mr. Sager follows:]

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Mr. TIERNEY. Thank you very much, doctor.

Ms. Bascetta.

Ms. BASCETTA. Good morning. I’m pleased to be here today. I’ve

been asked to discuss the factors that have contributed to pharmacy costs, reductions in pharmacy costs in the VA and DOD as

well as the continuing challenges that they face in procuring drugs

jointly. Reflecting national trends, VA and DOD pharmacy expenditures have risen significantly, and they consume an increasing

share of the Department’s health care budgets. But pharmacy costs

would have been even greater if not for the efforts taken by VA and

DOD.

In my remarks today, I would like to highlight formularies, purchasing agreements, mail order dispensing and joint procurement,

four ways that VA and DOD have been able to reduce their spending on drugs. My comments are based on work that we conducted

last year for you, Chairman Shays, and other requesters.

First, VA and DOD have been able to control spending on drugs

by establishing formularies. Through formularies, health care systems can control costs by effect physician-prescribing patterns. VA

and DOD, for example, substitute lower or higher cost drugs on

their formularies when they determine them to be therapeutically

interchangeable, that is, essentially equivalent in terms of efficacy,

safety and outcomes.

In these cases, VA and DOD may restrict provider choice in

closed classes or they may encourage the use of lower cost drugs

in preferred classes. The Institute of Medicine studied VA’s formulary and found that it was well-managed and not overly restrictive. In addition, IOM recommended that VA use more contracts to

carefully limit drug choices in more classes based on quality and

cost considerations.

Second, VA and DO have reduced costs by using different purchasing arrangements to obtain substantial discounts on prescription drugs. For example, VA and DOD obtained favorable prices

through the Federal Supply Schedule which accounted for the bulk

more than 80 percent of their combined drug expenditures. These

FSS prices are intended to be no more than the prices manufacturers charge their most favored, nonFederal customers under comparable terms and conditions. Also, by statute, they can purchase

brand name drugs at a price at least 24 percent lower than the

nonFederal average manufacturer price which may be lower than

the FSS price.

VA and DOD have also been able to obtain even lower prices

than FSS prices. For therapeutically equivalent drugs, they’ve used

a competitively bidding process which has resulted in prices that

average 33 percent below FSS prices.

Third, VA has been able to cut dispensing costs for prescription

drugs through its consolidated mail outpatient pharmacy centers.

These CMOPs reduce costs through economies of scale. Mail-in refills by using highly automated CMOP technology is several times

more productive than refilling prescriptions at VA hospitals and

clinic. VA and DOD are currently working on a pilot demonstration

to test the feasibility of using CMOPs to lower the cost of refilling

military pharmacy prescriptions.

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Finally, VA and DOD have secured additional savings through

joint procurement. In 2001, VA and DOD estimated savings of

about $170 million per year from current and planned joint procurements. The Departments can exert considerable leverage when

they commit to jointly buy increased volumes of particular generic

drugs or therapeutically equivalent brand name drugs. Nevertheless, joint procurement remains one of their most important challenges. Significant differences between the VA and DOD health

care systems make the joint purchasing of brand name drugs more

difficult. According to Department officials, differences in their populations result in dissimilar patterns of drug use and demand. For

example, VA serves mostly older men while DOD also serves

younger men as well as their dependents, women and children.

Also, finding overlap between their formularies has been complicated because VA’s national formulary lists about 1,100 drugs in

more than 250 classes, compared to DOD’s much smaller basic core

formulary of 175 drugs in only 70 classes.

Finally, DOD is concerned about its ability to persuade nonmilitary providers to prescribe drugs contracted for jointly. In 2000,

private providers wrote about half of DOD’s prescriptions. The Departments are continuing to pursue joint procurement of brand

name drugs because they make up a far higher share of expenditures than generic drugs.

Consequently, jointly procuring them could yield much greater financial benefits. For example, VA’s brand name drug purchases in

fiscal year 2000 were 36 percent of the volume, but 91 percent of

their expenditures.

Mr. Chairman, it would be crucial for VA and DOD initially and

individual and together to stay focused on potential pharmacy cost

savings to maintain control of their overall health care budgets.

This concludes my statement and we’d be happy to answer any

questions you might have.

[The prepared statement of Ms. Bascetta follows:]

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Mr. TIERNEY. Thank you. I want to thank all of you for your testimony. We are, in fact, going to have a round or maybe several

rounds of questioning as we go forward.

First, let me do some housekeeping. I ask unanimous consent

that all members of the subcommittee be permitted to place any

opening statement in the record and let the record remain open for

3 days for that purpose. Without objection, so ordered.

[The prepared statement of Hon. Stephen F. Lynch follows:]

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Mr. TIERNEY. I ask for further unanimous consent that all the

witnesses be permitted to include their written statements in the

record. Without objection, so ordered.

And what we’re going to do is because we’re all getting along so

well up here, everybody is deferring to everybody else, I’m going to

start the questioning just to take that issue off the table and we’ll

go for 5 minutes and then we’ll allow each of the Members—we’ll

probably go around for a number of cycles here until we get satisfied that we’ve got all the information that we think we can get

this morning. Because what you’re saying is obviously very helpful

to us.

Let me begin the question by asking Ms. Waxman, your testimony talked about a lot of places where the money goes once the

pharmaceutical companies get their money in. We heard a lot of

stock options, CEO pay, lately. I know that Families USA has done

a report with respect to the CEO pay in the pharmaceutical industry.

What have you learned from that report?

Ms. WAXMAN. Yes, I actually have the report with me and I think

it might be appropriate to enter it into the record as well.

Mr. TIERNEY. So ordered.

Ms. WAXMAN. I did not put in my testimony the exact numbers,

but I do have it here. For example, what we looked at in the SEC

report was not just the salary, but also the unexercised stock options as well. And so when you look at and I’m looking for my chart

here, the total compensation for a number of the top executives, for

instance, the total compensation for the top executive laboratories

was over $10 million. This is last year. And others are $12—I’m

sorry, that wasn’t the highest one. That was just the A. The highest one was almost $75 million.

Mr. TIERNEY. $75 million?

Ms. WAXMAN. Yes, for 1 year. So the point really of that is just

that—the point we were really trying to make with those numbers

is that while the companies are screaming that they need high

costs to cover R & D, when you look at some of the ways they

spend their money such as many, many millions of dollars for their

top executives’ compensation and you look at all the money spent

on advertising, administration and marketing, then some of their

claims about the need for high prices to cover R & D just don’t live

up.

Mr. TIERNEY. Well, staying on that just for a second, one of the

comments in here was that prices for prescription drugs have risen

four times inflation, is that right?

Ms. WAXMAN. Yes, this past year was almost three times.

Mr. TIERNEY. Am I wrong in assuming that when a company gets

the prescription drug ready to put on the market in the first place,

no doubt sets the price at a level they think will give them a return

on their investment?

Ms. WAXMAN. I assume that’s true.

Mr. TIERNEY. And then I would think that the only adjustment

after that would be necessary on that figure would be something

that would account for inflation or increase in their costs?

Ms. WAXMAN. I would think so.

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Mr. TIERNEY. Is it at all likely that the cost associated with marketing these pharmaceutical products are four times that of the

cost of marketing any other product?

Ms. WAXMAN. I think the reason we looked at the SEC reports

and looked at how much profit there was, was really to make the

connection that those prices are going up so much higher than inflation, really has more to do with profit for the industry than it

does for research and development.

Mr. TIERNEY. Thank you.

[Pause.]

Mr. ALLEN. Thank you all very much for being here. Ms.

Bascetta, I wanted to ask you some questions about—I think you

were saying that for therapeutically equivalent drugs you were able

to enter into contracts and get reduced prices, but most of those are

generic drugs as I recall.

Ms. BASCETTA. That’s correct.

Mr. ALLEN. And when you try to deal with brand name drugs

you run into the problem of proving they are therapeutically equivalent and there are lots of steps. I think I was looking for the number here, but I remember the number 91 percent, whether that was

in your testimony or in the materials that 91 percent of your purchases are brand name drugs, not generic?

[Microphone interference.]

Ms. BASCETTA. Ninety-one percent of the expenditures are for

brand name drugs.

Mr. ALLEN. OK, so 91 percent of the expenditures are for brand

name drugs. Just by—do you know how much of the purchases are

for brand name drugs, what percentage of the purchases? If you

don’t have it——

Ms. BASCETTA. We have that. We believe it’s around 40 percent.

Mr. ALLEN. So 40 percent of the purchases are brand name. We’ll

correct that later, are brand name, but 91 percent of the cost.

Ms. BASCETTA. Thirty-six percent of the brand name and they account for 19 percent of the expenditures.

Mr. ALLEN. Now I’ve introduced legislation in the Congress that

would allow one of the existing Federal agency to do studies independent studies of the pharmaceutical industry that would look at

the cost effectiveness and the comparative effectiveness of different

drugs. The reason for doing that, this is a way of offsetting the impact of direct-to-consumer advertising, but if we had some sanctioned studies looking at the comparative effectiveness of drugs,

different drugs, let’s assume two brand name drugs, the thought is

that then we could tell what we can’t find out from the advertising,

then we know which of the two drugs works the best and that’s the

kind of information you can’t get now very easily in an independent

way.

Would that help or would you have to do something further than

measuring comparative effectiveness in order to decide whether

drugs were therapeutically equivalent?

Ms. BASCETTA. I can only tell you what I know the VA and DOD

goes through and what similar large purchasers go through in

making those decisions. And one of the first steps that they take

is to look at their own populations and determine which drugs

their populations need and then primarily to gain the support of

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their clinicians they use their pharmacy and therapeutics committees to go through these scientific processes of determining whether, in fact, the drugs are interchangeable and then as you’ve pointed, once they make that determination, they can competitively bid

for the—solely on cost. But as to whether or not a process like that

for the country would work, I don’t know. I don’t know enough

about what FDA does in determining therapeutic equivalence of

interchangeability, for example. Perhaps the VA witness, John

Ogden, would be able to comment on that.

Mr. ALLEN. Just to clarify some of your testimony, when you—

you set up—the VA has a formulary. It operates its formulary.

Does that—I just wasn’t quite clear. Is that a formulary that operates with respect to both brand name drugs and generic drugs or

do you run into the same kinds of problems you do with getting a

contracted discount?

Ms. BASCETTA. No, they have both generic and brand name drugs

on their formulary.

Mr. ALLEN. So they basically pick—they’re doing enough studies

to figure out which drugs are preferable in which classes, whether

or not they are brand name or generic.

Ms. BASCETTA. That’s right.

Mr. ALLEN. Thank you.

Mr. TIERNEY. Mr. Shays.

Mr. SHAYS. Thank you, let me—what I’m going to do is just tell

you my attitude and then in the rounds of questions I have you can

respond based on my general conception which may be true or not.

Theoretically, the system, as I saw the pharmaceutical program

in the United States to work was that you had incentives to drug

companies to spend colossal sums of money in research. They

would have an exclusive ability to sell their product if they were

successful, make a very general profit and then ultimately that

would become a generic drug in which the price would drop significantly and what you would have is this constant feeding of new

brand breakthroughs plus older drugs that had proved quite successful.

What I sense has happened is that the drug companies, particularly before the end of the cycle, if it’s 17 years, mas o menos, they

would trump that drug and convince the consuming public that the

drug that they had just had the monopoly on is no longer the drug

of choice. And in some cases that may be true. In other words, they

may have come through with a significant break through or it may

just be the difference between 98 percent and 100 percent.

There is a challenge though because people always want the best

and then the issue for me is when does the government step in and

say we’ll fund the drug that does 85 percent of what this new drug

does at 100 percent.

The other point that I would just bring to the table is I view the

VA as being one of their greatest successes is that they have managed to buy drugs in large quantities, reduce the cost of those

drugs 30 percent, give or take, and you then wonder why we don’t

do that for Medicare, in general, but in Medicare, we allow individuals to buy drugs as individuals, so there’s no mass buying. So

when I’m looking at the Department of Veterans Affairs, I’m also

saying OK, we learn lessons how we can, under the Medicare proVerDate 11-MAY-2000 08:03 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 D:\DOCS\87140.TXT HGOVREF1 PsN: HGOVREF1
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gram be buying at those, at that mass volume. So that’s kind of

my view.

Ms. Waxman, you basically said that drug companies can extend

their monopolies in a number of ways including marketing, what

is essentially a new and improved version of an existing drug.

Ms. WAXMAN. Right.

Mr. SHAYS. That’s one point. You say the claim the generic companies has infringed on patents holding the entry of the generic

drug for up to 30 months. And then the last point was by entering

into deals with generic manufacturers to delay their marketing of

generic, that intrigues me first and that’s the one I want to take

up.

Anyone can make a generic drug basically, so how would a drug

company be able to prevent the generics from coming in under that

third scenario, could you respond? I’d like a nice, loud voice.

Ms. WAXMAN. What has happened is because the way the Federal law now is that governs generics, there is a Federal law now

that governs the way generics can come into the market. There’s

a whole system. And so what happens is the generic would, the generic company would file a claim, let’s put it that way, that the

patent in existence is not infringed by this generic coming into the

market and as to my third point, that one generic, if the company

is successful gets 180 days exclusivity in the marketplace.

Mr. SHAYS. Let me ask you this. Do different generic companies

have to race to see which one gets there first?

Ms. WAXMAN. Yes, they do have to race under current law, if

they want that extra 180 days exclusivity; the theory being they

did all the paperwork, they had to do other research, they did some

work to be able to offer the generic, so they get this benefit of 180

days exclusivity. That is the theory.

So what has happened, unfortunately, is as you might imagine,

the generic companies are usually not as profitable, not as big as

the big brand name companies, so on occasion the brand name has

gone to the generic company and say I’ll make you a deal. You’re

going to make X money in your 180-days exclusivity. I’ll give you

this much money. You don’t even have to put the product on the

market. I get to keep my patent for a longer period of time and everybody is happy. Everybody but the American consumer——

Mr. SHAYS. Any company can jump into the marketplace?

Ms. WAXMAN. Well, after that 180 days, then other companies

can——

Mr. SHAYS. Which company gets that first 180-day crack?

Ms. WAXMAN. The first generic company that’s ready to go to

market. They get 180 days exclusivity on their generic product and

so does that make sense? So what happens is the grand name says

to the generic company, I’ll make a deal with you. You don’t even

have to go to market. Just don’t go to market and I’ll give you this

money. I get to keep my patent which I can charge a lot more, and

both companies come out ahead. The problem is, of course, the

American consumer is the loser and that has happened on a number of occasions. The FTC is actually looking into that problem and

indeed, there are certainly different bills coming out of Congress

that would fix that.

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Mr. SHAYS. Is there anyone else who wants to comment on this

issue, the issue of the different ways the pharmaceuticals try to

prevent the generics from coming in the marketplace, either adding

a slight variation to their exclusive product or claiming the infringement. Do you basically accept all three of her points, Ms.

Waxman’s points, Dr. Sager?

Mr. SAGER. We might add pediatric exclusivity, if you test for pediatric use, you get an extension on your patent.

Mr. SHAYS. Is that because companies tend not to invest as much

in pediatric drugs because there’s not a bigger market?

Mr. SAGER. The theory was that it costs additional money to conduct the additional trials, although it seems that typically the extra

revenue garnered far exceeds the cost of the testing for pediatric

use.

Mr. SHAYS. I mean there’s no question, if you make the generic,

the cost of production can be quite small, so generic companies still

can still make a very nice return.

Mr. SAGER. To which, of course, the brand name manufacturers

would claim well, we need the high profits to finance their research. I think that’s why——

Mr. SHAYS. Let me just tell you, I happen to accept that part. I

mean I was out with a company in California that invested $1 billion in a drug to retard the deterioration that would cause Alzheimer’s, and so far they’re out $1 billion. If they didn’t get some—

if they had succeeded, they would have had a license to print

money, but frankly, we all would have benefited. So I accept some

bit of that concept.

Mr. SAGER. I think it’s a matter of balance.

Mr. SHAYS. OK.

Mr. SAGER. We have some evidence recently that a massive effort

to push generics would save only about 1.3 percent over a decade.

I think we’re skirmishing about unfortunately areas that are peripheral.

Mr. SHAYS. Do you think the generic issue is peripheral?

Mr. SAGER. I think today it’s a big focus and it’s a way that many

people hope in the short term to save money. For the long haul,

I don’t think it takes us very far. If we look at Western Europe,

for example, most nations very little on generics. That’s because

they negotiate and set fair prices on the brand name drugs.

Overall, what I think we need to do is design a package deal.

Mr. SHAYS. I’m sorry, who sets a fair price on exclusive drugs?

Mr. SAGER. The government does, Cigna funds do. It’s really a

matter of public regulation that set the prices on the brand name

drugs. And the prices are low enough so that there’s just not—they

don’t rely on the very high prices on the brand name drugs followed by lower prices.

Mr. SHAYS. I don’t understand who they is. I’m sorry——

Mr. SAGER. I’m sorry, Western Europe governments.

Mr. SHAYS. Yes, but I’m not aware that Western European governments have seen great breakthroughs in pharmaceuticals.

Mr. SAGER. I think that issue is——

Mr. SHAYS. Canada controls prices. Are they having great breakthroughs as Western Europe?

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Mr. SAGER. The new molecular entities, the new medications that

come out of Western Europe pharmaceutical companies seem to be

about proportionate. And their investment in research seems to be

about proportionate to ours. I know Pharma denies that. But

what’s interesting is the world pharmaceutical companies earn a

disproportionate share of profits in the United States because our

prices are not regulated, but British, Swiss, Swedish, French, German and other pharmaceutical companies are quite innovative.

They just don’t make as much of their profit in their own companies.

You might think of this as equal opportunity, pillaging and plundering of the American patient.

Mr. SHAYS. I think that.

Mr. SAGER. And I don’t think we can sustain that. I’m not saying

that other countries need to pay more, but we need to pay less and

I think that’s part—a lower price for medications, but allow the

drug companies to develop effective new breakthrough drugs to

garner the higher profits they deserve through higher volume.

Mr. SHAYS. Ms. Bascetta, is there any comment you’d like to

make in this area?

Ms. BASCETTA. Only to say that GAO hasn’t done any work on

research and development and profitability in the drug industry.

Mr. SHAYS. OK. Mr. Chairman, I’ll do the next round, but I appreciate we’re going to be doing 10-minute rounds?

Mr. TIERNEY. Yes, I think that helps a lot. Let me just followup

on that. I know that one of the mechanisms that VA would allow

them to get 24 percent lower than the average of nonFederal price,

is that right? Anybody want to step up on that?

Mr. SAGER. A minimum effect.

Mr. TIERNEY. A minimum effect. And they do that how? Just by

establishing that by Federal law that this is as much as you can

charge? Is that a mandate? How does it come into play?

Mr. SAGER. My understanding is that they will get a price equal

to the lowest price prevailing anywhere else, which is the way the

Federal Government buys most things, not just medications.

Mr. TIERNEY. So Ms. Bascetta, in the report, you indicated GAO

had some concern that if we were to take the Medicare population,

combine that with the VA and Department of Defense and all that,

that one of the problems would be that other prices would go for

other populations?

Ms. BASCETTA. That’s correct.

Mr. TIERNEY. So what we have here instead is that because other

countries manage to find a way to negotiate a better price, the

price in this country goes up. Wouldn’t we be all better off if we

also joined the fray and got some better prices and maybe it would

even out a little bit as opposed to the people who just get whacked

with higher prices all the time?

Ms. BASCETTA. It’s certainly a vexing problem. The concern that

we and others have raised is that as you pointed out, the more people have access to the FSS prices, the more that manufacturers

would be inevitably driven to offset any decreases in revenue by increasing prices for those nonFederal purchasers.

Mr. TIERNEY. Or people in other countries?

Ms. BASCETTA. Yes, wherever else they would have their——

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Mr. TIERNEY. Right now, every time they cut a deal with Canada

or England or some other country, they just turn to the United

States and say well, that’s what we’re going to get back. We’ll just

jack the prices up over there.

Ms. BASCETTA. I’m not familiar with the——

Mr. TIERNEY. We’ve done studies in this committee, this subcommittee, the minority side have done studies to show that cost

shifting actually occurs in a significant way.

Ms. BASCETTA. I’m certain that it does. But the tail chasing that

occurs, unfortunately, is that those FSS prices ultimately go up

because——

Mr. TIERNEY. Well, they may go up, but they go up a little bit

all across a much larger board instead of just going up over here.

I guess I’m saying at some point people take advantage of the

United States because we’re the only country that seems to say

these prescription drug companies just go out and treat us any way

they want to treat us no matter no shabbily, but if we want to say

that we’re going to get in there and start negotiating for some better prices, then the prices everywhere in the world may have to

shift a little bit as opposed to taking a lower price over Europe and

decide we’re going to make the profits in the United States and just

take it on to them, right?

Ms. BASCETTA. I suppose that would be true.

Mr. TIERNEY. Dr. Sager, let me go over—I assume my colleagues

and other people hopefully have your charts. You put a proposal

out here as to what you might do and I suspect that one of the good

parts of your proposal is that you deal with that issue that we always hear about, if you lower our prices, we’re not going to do any

research, we’re all going to die. That’s essentially the comeback we

get from the companies. You do that by making sure that the companies get a decent profit and that they get money for research and

development?

Mr. SAGER. That’s right.

Mr. TIERNEY. Would that keep in place all the tax credits that

they currently get for research and development which, as I understand it, reduces their taxable rate right now to something about

17 percent instead of 35 percent?

Mr. SAGER. I think it would be necessary top ut together a package deal, really sit back and negotiate all of the arrangements by

which drug makers garner revenue to first of all sustain competition by protecting businesses, allow them to ride out the dry seasons. Competition requires competitors. Competition will prompt

more breakthroughs. Mergers probably will reduce innovation.

I think that profits should be commensurate with risk and with

the value of the drug they produce. Unfortunately, in today’s market, where we lack a competitive marketplace, drug makers set

prices to maximize revenue and they may be able to persuade doctors and patients to prescribe and buy drugs out of proportion to

the value of the medications because we don’t have a free market

at work.

Mr. TIERNEY. I’m going to just for the sake of time here, I’m

going to assume that your calculations on the gross constant elements of the medication prescription drug benefit are accurate and

we have time later, we can go over that, but you basically come

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down to the figure $2,153,000,000 for a 10-year period, 2002 to

2011. That’s for everybody being able to get their prescription

drugs, that’s the veterans’ population, the seniors’ population,

being able to get them at a reasonable program that you’ve described for very low co-pay and a very low deductible and then help

them from then on in.

Mr. SAGER. For all Medicare eligibles.

Mr. TIERNEY. For all the Medicare eligibles. And whether or not

they’re veterans or anybody, right, you include them?

Mr. SAGER. Yes sir.

Mr. TIERNEY. Now I’ll cover the gross cost, the way that you

would expect to pay for this and maybe you can explain a little bit

more so even I can understand. The patient payments you indicate,

you would charge a premium of 2.5 to 3.5 percent of someone’s Social Security check and that small amount would then rise by 2.5

percent a year.

Mr. SAGER. Yes.

Mr. TIERNEY. What do you suspect would be the lowest premium

somebody would pay, what would be the highest somebody would

pay under Social Security?

Mr. SAGER. Premiums would range from about $6.50 a month up into the $40 range.

Mr. TIERNEY. And that would be pretty much the extent of it. And you would have co-pays of $5 or $10 with one third that are

given to low income patients?

Mr. SAGER. That’s right. The one third of the total co-pay amount

would be directed toward lower income people.

Mr. TIERNEY. And they would pay no co-pay or just a smaller copay?

Mr. SAGER. There might be a nominal $1 co-pay.

Mr. TIERNEY. All right, then you get back a sizable amount of money, almost $964 million by capping the annual rise in total

spending after 2002 at 8.5 percent annually and you would just

have this—this law would just mandate to the companies to make

8.5 percent per year increase and that’s it.

Mr. SAGER. Increase in revenue, yes. And that would also be— actually, that would garner around, that would save around $300

billion and we’d save around $400 billion by paying for new prescriptions that Medicare patients were now able to afford, by virtue

of the Medicare benefit at the cost of manufacture. So the manufacturers don’t earn windfall profits on the higher volume, but their

actual costs of making more pills are covered.

Mr. TIERNEY. So if I’m making Medicine A and I’m selling to one

population now, I’ll be able to make every year after this 8.5 percent annually, increase on that?

Mr. SAGER. In total revenue.

Mr. TIERNEY. In total revenue. And how do we check that? How

do we police that?

Mr. SAGER. We check their financial reports year by year and if

they generated too much money, next year’s prices would be adjusted down. And so this would be reconciled year by year.

Mr. TIERNEY. And how do we keep track now, the second part of

that, how do we keep track of the additional people coming on because we’ve now created this new benefit and separate them out

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from the others so that we know that the manufacturers are going

to get their marginal cost on that group? How do we logistically do

that?

Mr. SAGER. We could translate this into an overall price discount

on all drugs because that would be—it would make the record

keeping far easier. This translate into a 22 percent effective price

discount.

Mr. TIERNEY. And then you would capture your existing revenue

in a number of different ways. the largest capture seems to capture

offset marketing and advertising by growing at 12.5 percent annually. Explain to me what you mean by that, please?

Mr. SAGER. Well, the drug makers, if they accepted this arrangement, would no longer be marketing and advertising their own

medications. Instead, a federally financed, publicly financed organization, maybe a separate nonprofit organization, would be evaluating the safety and efficacy of new medications and indicating which

patients the medication would be useful for and provide that information to patients and to physicians. One source, objective information. In that case, we would say to the drug makers, you no

longer need to market and advertise. Provide the dollars that you

would have spent on marketing and advertising to help pay for the

cost of this new benefit.

Mr. TIERNEY. I see some problems with that. One is you’re only

going to get people to compete through advertising and marketing

and they say I won’t play. I think I do a better job of effectively

advertising than the guy next door and that’s how I want to effectively get the market share, so that’s going to have to be more of

a mandate than a voluntary mode, I suspect.

Mr. SAGER. And that’s tough because of first amendment issues.

That’s why it might be a contractual arrangement. If you’d like

Medicare to pay for your medications, you need to sign on board.

Unfortunately, I think the prescription drug industry is thinking

short-term bottom line next quarter, higher prices, profits, making

more through marketing, through breakthroughs, through higher

prices on existing medications as Judy Waxman testified.

Unfortunately, I don’t think that’s going to work forever. It’s not

going to work for them and it’s not going to work for us and unless

they’re willing to consider alternative arrangements, we may suffer

something like World War I, 4 years of blood and machine guns

and gas and no progress. Better to have an armistice and a peace

treaty in 1914. And I think we need new ways of thinking about

medications and paying for them.

Mr. TIERNEY. Well, how do you stop a company from saying that

arrangement, well, I wasn’t going to advertise at all this year, so

I’m not going to put any money in the pot.

Mr. SAGER. We would look at the historical record and extrapolate forward.

Mr. TIERNEY. And marry them for life on that. And what about

new products coming on market? How do we determine how they

would have advertised for that? Again, just use some extrapolation

out of previous products?

Mr. SAGER. I think that would be right. Or we could take the historic average for that company, looking how it marketed new medications.

69

Mr. TIERNEY. And then you would capture the Medicaid dollars

from States, whatever they were paying to Medicaid and now

they’re paying through this program?

Mr. SAGER. Right, and that would be frozen at today’s levels. So

they would have instant relief.

Mr. TIERNEY. And the same with the Federal dollars with the

projected rise, you’d now apply them to that and the VA dollars the

same way?

Mr. SAGER. Yes.

Mr. TIERNEY. And capture employer maintenance of effort. Explain to me what you mean by that last item there?

Mr. SAGER. Employers provide—employers still finance very substantial amounts of prescription drug for employees who are Medicare eligible, over 65 and especially for retirees. The employers are

finding it very difficult to sustain, as you know, their retiree health

benefits owing to the rising costs, principally of medications.

In many instances, these are contractual obligations or in other

instances, moral obligations and employers suffered terrible black

eyes in the public and in the relations with existing workers and

retirees if they reneg on commitments. So we would engage employers that now have these obligations and say we’ll buy you out,

but you maintain your effort at 20 percent of today’s level.

Mr. TIERNEY. So you’re counting the fact that all of them are

substantially would participate as opposed to turning down your

offer?

Mr. SAGER. Those that now pay.

Mr. TIERNEY. Thank you. Mr. Allen.

Mr. ALLEN. Thank you, Mr. Tierney. Ms. Bascetta, I want to

come back to you for a moment.

Mr. Tierney did a good job of laying out what I have always

taken to be the GAO argument about what happens if you reduce

prices for one group that is on the Federal Supply Schedule and

again, we’re getting the benefit of the Federal Supply Schedule.

Mr. Tierney said and he extended it to other countries, and this

is common currency in the debate in Washington among Members

in Congress too. And the suggestion is that if you give someone

who is not getting a discount now, that the industry will be forced,

this is sometimes a verb, encouraged, whatever, given an incentive,

to raise prices to other groups.

I want to make an argument to you as to why that argument and

it is an estimate about future behavior. It is, in its nature, it’s not

so much a matter of fact as a matter of opinion, but let me give

you this argument. I spent some time talking a few years to someone who used to set prices, who used to work for a pharmaceutical

company setting prices and basically, what the said they did was

they charged what the market would bear in every market that

they were dealing with.

The point I am making is this. I suggest that what they are

doing now is maximizing their return from every group to whom

they sell prescription drugs, whether that group is Aetna or Cigna

or the Veterans Administration or France or Germany or anybody

else. They’re always trying to get as much as they can because

their job, the CEO’s job is to maximize revenues and income and

keep the stock price up.

70

If that’s the case, it is—they’re getting as much out of Aetna

now. If they lose—if there is pressure, if all Medicare beneficiaries

got a discount now, there’s still—it doesn’t change the incentive to

maximize the revenue from Aetna. This is not a case of—set of bottles of water where they all have to even out at the same level. So

that’s the conceptual argument. Here’s the evidence to back it up.

In January I was down at a conference in Florida with Mr. McConnell, the CEO of Pfizer. Pfizer has just announced its new discount

program. They just said we will sell to every American senior

under 200 percent of the poverty level all of our medication which

averages $61, $62 per month, we will sell them those drugs for $15

a month. If you move away—that’s a 75 percent discount. You

move away from Pfizer and look to the discount cards, every company that’s advertising a discount card is saying we will give you

a discount of 25 to 40 percent. Well, that’s the discount that all of

us are talking about.

Now so the industry itself in the last year is really saying we can

discount, provide substantial discounts to the Medicare population,

but we certainly want Medicare to require that of us. That’s one

point.

Second point, there are 330 million people in Europe. There are

25 million in Canada. There are 127 million in Japan. There are

280 million in this country. The Medicare population that we’re

talking about when we get to a Medicare benefit, it’s probably

about half. Let’s say 19 million Medicare beneficiaries that cannot—that have either no coverage or inadequate coverage. It’s simply, I would argue, it simply cannot be true that these 19—charging the highest prices in the world to these 19 million Americans

is what shores up an international multinational pharmaceutical

industry. That’s a long ramp in many ways. But the point I’m trying to get at is and I’m here asking for your response, let me pose

a question. Why isn’t it the case that if you give all Medicare beneficiaries the same kind of discount or benefit, let’s say discount

through the Federal supply schedule, why isn’t it the case that the

industry will sell more drugs than they are now? That’s what Mr.

McConnell said down in Florida. He said I’m now going to Wall

Street and telling them that this will not reduce our revenues or

our earnings. Even though we’re giving a 75 percent discount to a

significant number of seniors, it won’t reduce our revenues or earnings. They’ll sell more drugs and in any event, the market is expanding so fast that what’s really going on, this is all about maximizing revenue and has almost nothing to do with the recovery of

their costs. I’m sorry for doing that to you, but you see the conceptual challenge here that we face and I would like your reaction.

Ms. BASCETTA. I see the point that you’re making and I have a

few reactions.

Mr. ALLEN. Can you talk a little louder, please?

Ms. BASCETTA. Yes, certainly. One is that in some of the work

that we’ve done, we’ve looked at what would happen, we’ve looked

at how difficult it would be to predict exactly what would happen

if the Medicare population, for example, were able to buy the FSS

prices and there we’re simply comparing the size of that population

compared to essentially VA and DOD. And of course, it’s much bigger. We haven’t looked at all the other markets and drug pricing

71

is segmented by market, so we didn’t look at the Medicare population compared to the world or all the other populations who

would potentially be purchasing drugs at different prices. So that’s

one observation.

Another though is that in situations where Medicaid has obtained rebates, in fact, what did happen is that prices to HMOs

and other purchasers did go up. So I guess the cautionary note is

that much of this very complicated. There’s been a proliferation of

these complex relationships and financing arrangements. Much of

the information is proprietary. It’s very difficult to tell, in fact,

what is actually going on with regard to pricing. That’s one of the

reasons that we didn’t—we were careful to say that you couldn’t

predict exactly how much FSS prices might go up, for example. It

would depend on the specific drug, the number of people who would

have access, the competition in that particular market, the price

sensitivity of other purchasers. It’s very hard to figure it out and

our concern would be that without much better, much, much better

data, there could be some unintended consequences of picking a

particular way to solve the problem.

Mr. ALLEN. And just for clarification, you said FSS prices could

go up. And that’s because, if I’m correct, and correct me if I’m

wrong, that’s because the FSS price is tied to something called the

average manufacturer’s price, is that right, in the statue?

Ms. BASCETTA. No. The FSS is based on the most favored price

to a nonFederal customer.

Mr. ALLEN. Right.

Ms. BASCETTA. So what would happen would be as the number

of people having access to the FSS price rises, the supposition is

that the drug companies would face a decline in revenue which

would cause them to raise the price for those nonFederal customers. And because the FSS is benchmarked for the nonFederal

customer, you come around full circle and end up raising the FSS

prices for everyone.

Mr. ALLEN. And no nonFederal customers, you’re talking about

Aetna or Cigna or Anthem Blue Cross or whomever?

Ms. BASCETTA. Right.

Mr. ALLEN. Kaiser?

Ms. BASCETTA. Correct.

Mr. ALLEN. And the foundation of that theory is that adding

more people to FSS would actually reduce revenues for the industry. My point is it’s a nonstatic world. There’s an explosion in drug

expenditures and pharmaceutical use?

Ms. BASCETTA. That’s exactly right. It would reduce revenues for

that segment of the market that the industry is dealing with and

the belief is that they would—to make that up they would raise

prices elsewhere.

Mr. ALLEN. All right, thank you.

Mr. TIERNEY. Mr. Shays.

Mr. SHAYS. Thank you, Mr. Chairman. One of the reasons we

have this panel is to identify and then we’ll have our second panel,

to identify what is it that they do right that we can learn from and

what other things in the process of their doing what they’re doing

with pharmaceutical drugs can we learn, in general, about the industry.

72

Ms. Bascetta, you identify four important factors that have contributed to reducing pharmaceutical spending by the VA and DOD.

First, you say the two Departments have used formularies to encourage the substitution of a lower cost drug that is determined to

be just as effective as a higher cost drug.

Now the challenge we have in Medicare is—first of all, it’s being

paid for by the individual. But the challenge we have there is that

you will have customers, patients, who basically if they’re sick and

they take one drug does 95 percent of what another drug, they

want 100 percent, even if it’s three times as expensive. And they

will clearly want that if someone else is paying for it.

So I happen to believe that particularly if the Federal Government is going to pay for it, they should have some right to say

what it’s willing to pay for it.

And I guess I would ask you, Dr. Sager or Ms. Waxman, will you

be troubled if you were in our shoes and we designed a Medicare

program that basically says we will pay for this drug at this price

and we won’t pay for this drug because we think this drug does almost as much and it’s one third of the cost. Do you think that is

the way that ultimately we might design a Medicare program, that

we will pay for some drugs because we think they’re almost as good

and we’ll pay a lot less and then let the consumer decide whether

they want to pay all on their own or pay—or have the drug almost

free? Comments, real short.

Ms. WAXMAN. I’ll make one comment.

Mr. SHAYS. Keep your voice a little louder.

Ms. WAXMAN. Many private companies do that kind of thing. It’s

a practice that’s used very widely.

What we have always said on behalf of the consumer is there has

to be some way for the consumer to get that other drug if the doctor thinks it’s really necessary.

Mr. SHAYS. I think you have a breakdown. You’re not going to

be able to take advantage of what the VA does. Because the VA

basically decides they’re going to get one drug over another——

Ms. WAXMAN. That’s right.

Mr. SHAYS. They get it for a lot less. And you’re saying we can’t

learn anything from that?

Ms. WAXMAN. I’m saying we can learn something and we can direct people to that lower cost structure, but I don’t think it’s tenable to say if in certain circumstances doctor thinks—you posed the

example of 85 percent is good, just hypothetically. If the doctor

says for this particular patient, that person really needs the 100

percent drug, there has to be some kind of mechanism or way to

get that.

Mr. SHAYS. We know that doctors basically, just in terms of lawsuit, even if they thought one was 98 versus 100, they’re going to

go with the 100 because they’re not taking any chance.

Ms. WAXMAN. There does need to be education of physicians. I

think physicians need to be educated on looking at the drugs that

can do just as well as relying on the manufacturers.

Mr. SHAYS. I get your point. In other words, it’s not obvious here.

Yes.

Mr. SAGER. There are several choices. One thing they could do

as physicians, you’ve got $1 million worth of drugs you can preVerDate 11-MAY-2000 08:03 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 D:\DOCS\87140.TXT HGOVREF1 PsN: HGOVREF1
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scribe this year for your patients or half a million, whatever the

appropriate amount would be. And you spend that money to do as

much clinical good as possible for your patients because we have

to balance it out somehow.

Mr. SHAYS. Fair enough.

Mr. SAGER. That would give the people with the greatest information the choice.

The other thing we could do is go to the person with the firm

that’s manufactured this valuable new medication that’s much

more expensive than saying what if we give you all the business,

how far can you lower your price and recognizing that you will offset the lower price with much higher volume.

Mr. SHAYS. Would you agree that one of the challenges is basically you’re going to have to decide how much better is one drug

over another? The government would be stepping into that process

and obviously a difference between 185 might be too big a gap, but

I have a feeling that sometimes we’re really talking about almost

a horsehair’s difference between one and another.

Mr. SAGER. There may be a tiny difference in value and there

may actually in real world be a tiny difference in cost, once you

talk with the drug makers about how much does it really cost to

make that pill?

Mr. SHAYS. Ms. Bascetta, but bottom line, do you think we can

learn a lesson from your Point 1?

Ms. BASCETTA. Yes, but I’d like to point out that in the VA one

of the most significant differences is that the physicians work for

the VA and so the VA has a distinct advantage of being able to influence their prescribing patterns from either restricting their

choice for some of the drugs in the closed classes or for strongly encouraging and prescribing particular drugs in the preferred classes

or in the formulary, whereas in the Medicare world——

Mr. SHAYS. When you say ‘‘preferred classes’’ is that the 100 percent versus the 85 percent? What do you mean by ‘‘preferred classes?’’

Ms. BASCETTA. Preferred class, a closed class is one from which

the VA has a committed use contract. In a preferred situation they

don’t have that committed use contract, but the drug is on their

formulary and physicians are strongly encouraged to——

Mr. SHAYS. And the formularies, I view, as a laundry list of

drugs that the VA buys?

Ms. BASCETTA. That’s correct.

Mr. SHAYS. Let me ask you again, you said DOD had some difficulty getting private providers to adhere to a limited formulary,

in other words, that’s——

Ms. BASCETTA. Yes.

Mr. SHAYS. Explain what you mean by that?

Ms. BASCETTA. Thank you for asking me to explain that because

that’s where the analogy to Medicare comes in. In the Medicare situation in the DOD tri-care situation, you have private providers

who are writing in the DOD case, about half of the prescriptions

for the military beneficiaries. In the Medicare world, all of the providers would be private physicians and it’s much harder in that situation for the DOD or potentially for CNS to exert influence over

its providers to write for the drugs that are on the formularies. It

74

becomes much more complicated, particularly if the beneficiaries

are asking for different products than happen to be on the formulary.

Mr. SHAYS. So that’s an indication of trying to go to Medicare

under this, then dealing with the private folks, that they seem less

receptive to the formularies?

Ms. BASCETTA. That’s right.

Mr. SHAYS. Let me get to your point 2. You say VA and DOD

have been able to effect different arrangements to pay for or purchase prescription drugs at substantial discounts. I don’t really how

that’s different from 1. How is that different from 1?

And by the way, Mr. Musselwhite, sometimes a person who says

nothing has got more to say because they have been thinking about

how they would answer it. I’m going to allow you to jump in with

Ms. Bascetta’s permission any time you want to. Fair enough?

Mr. MUSSLEWHITE. Sure.

Mr. SHAYS. So feel free to respond. Ms. Bascetta, explain to me

Point 2 how it differs from Point 1?

Your Point 1 is formularies. Your Point 2 is are you saying are

there other things besides formularies that they’ve been affecting

employment, different arrangements to pay for it, purchase prescription drugs at substantial discounts. What are some of the

other things you’re talking about?

Mr. MUSSLEWHITE. They are related, the different contract arrangements and the formulary, but because VA buys the FSS

schedule, any drug that buys is going to begin—it’s going to be less

expensive than what others have purchased. That if in addition to

that VA is able to identify a class, a particular drug that is either

to be used all the time or merely all the time or is preferred, then

it’s possible to compete a contract for that drug and get even better

price than FSS.

Mr. SHAYS. The third one is you basically talk about the mail

order process. And that seems like there would be significant savings. It would seem to me that would—one of the problems that we

have been told is that the VA buy sin bulk, whereas Medicare is

bought by individuals. But if you had a mail process, there would

obviously be significant savings. The challenge, I guess, that some

would suggest is that you’re not sure who ultimately is using that

drug that’s mailed. You’re also raising the question of whether the

mail discontinues even when the person doesn’t need the drug anymore. So maybe you could just tell me, do you believe, all four of

you, do you believe that the mail order concept has a parallel to

the Medicare program and does that illustrate a potential benefit

for the Medicare program.

Ms. Waxman.

Ms. WAXMAN. I have to say quite frankly I don’t exactly understand how the mail order saves money. It sounded to me like it was

cheaper to send it out than have people come in and deal with a

clerk and fill it that way. Is that correct or is there something else?

Mr. SHAYS. Dr. Sager, why don’t you respond and then we’ll have

Ms. Bascetta.

Mr. SAGER. I don’t think the savings are very substantial. And

also, you reduce the availability of community pharmacies to provide the medications that you need stat, pain killers, antibiotics,

75

after hospitalization. They are covering their fixed costs on a smaller volume so they may have to raise their dispensing fees.

Mr. SHAYS. Thank you. Jim.

Mr. MUSSLEWHITE. The spending in VA is a dispensing cost and

as we indicated in the testimony, the volume of prescriptions for

pharmacists is much greater through the use of automation. These

are refills for the most part. You get your first prescription at the

clinic or at the hospital so that’s where the efficiency or the cost

savings——

Mr. SHAYS. I would think that would be quite significant under

those terms. You don’t have dialog. You don’t have—it almost can

be automated, it would strike me.

Mr. MUSSLEWHITE. In VA, it is automated. And it would have an

effect on local retail pharmacies.

Mr. SHAYS. Is there any study that you’ve done that is shown

and Mr. Chairman, I think I’ve run over a little bit, is there any

study that you’ve done that’s looked at the negative and that is

drugs being sent out because it was refilled and the person may

have passed away or the families get it and just chuck in the mail

because the person——

Ms. BASCETTA. I’m not aware of any studies that we’ve done on

that issue. I believe that VA will tell you that they have pretty

strict controls over their mail order operation, but that would be

a good question to pose to them.

Mr. SHAYS. Or to you all. Last point, last, you talk about the

DOD joining forces and you mentioned VA has a much smaller list,

over 1000 versus a much smaller number.

Ms. BASCETTA. 175.

Mr. SHAYS. What is it?

Ms. BASCETTA. 175.

Mr. SHAYS. 175, just basically quite a significant difference. But

I would imagine that the DOD is using more of that 175, so it’s

pretty big volume stuff.

Ms. BASCETTA. That’s correct.

Mr. SHAYS. And so they are working together to get the purchasing of that?

Ms. BASCETTA. Yes, we believe they’re making good progress in

their joint procurements. Also, I might point out that the Congress

directed DOD to expand its national formulary and they are working on that. They have a draft regulation that was issued in April

to do that.

In addition, with the expanded benefits to the retiree populations, there’s more commonality now between the VA population

and the DOD population.

Mr. SHAYS. I’m just going to comment on something Mr. Allen

that you said. I’m struck by the fact that when we allow a monopoly pricing, a monopoly sets it at the highest amount they get, they

look at their marginal costs and they set the highest price they can

get before they reduce sales so significantly that they get revenue

or profit. So when they’re looking at the lowest market, I think

they’re saying that market isn’t buying anything or very little and

they’re going to price it in a way that gets them above their marginal cost and they’re going to get some benefit, but they don’t

want to do it, they don’t want to price their product in a way that

76

others then start to argue that the market that is buying at the

higher cost starts to say we want to pay less because there’s a disincentive. So they’re looking at both the economics, but they’re also

looking at the political issue of whether they start the price at less.

Are they going to say that people can afford who are paying at that

much higher price are going to demand that lower price and so

they look at both the political—now they’re beginning to see people

that might want to set price and they’re saying well, how can they

take the air out of this movement so they’re willing to take a little

bit of a chance and show that they can sell to a lower income.

But I don’t look at it as mercenary—if it’s mercenary, maybe I

could. It’s very logical to me and we, in government have said you

have this monopolistic price because we’re saying you can go out

and spend a lot of money in research which is to just have shared

a view that I don’t know where it leads, but I just would want a

response from you.

I thank the chairman for his generosity of my time.

Mr. TIERNEY. Following along that line, I think part of the problem we have here is this whole corporate climate right now where

people are recognizing that most people in industry are by and

large fair and honest and know that they’re doing a good job, but

that a number of people are greedy and not as scrupulous as we

would like them to be and then we look at an industry that is particularly important to people right now and it seems to be price

gouging and there’s a reason to be concerned.

Ms. Waxman, in your testimony, your written testimony, you

talk about favorable tax refunds that the industry gets. And say

that it does, in a sense, it encourages them to invest in R & D, research and development, but there’s a question that the pharmaceutical company research dollars are funding. What are they funding that they demand high prices. They have a special tax exceptions for funding of research and development, but studies show

that there are fewer and fewer new drugs that offer significant

clinical improvements over existing therapies and we have a number of studies that recently show the industry has focused resources on developing knockoffs, so called ‘‘me too’’ drugs as opposed to significantly clinical improvements in drugs and instead

use the money also to invest in marketing the existing products.

With that in mind, and the fact that, as I mentioned earlier, the

studies also show that total tax credits, that these companies are

getting are significant. It’s lowered their Federal tax rate from 35.2

percent to 17.1 percent, but we can’t really tell how much of that

is for research and development because they’re all lumped in to

a general business tax credit category.

Ms. WAXMAN. Right.

Mr. TIERNEY. I think the problem is people think they’re getting

away with murder and wondering why they’re not being fair about

this and seeing that the plan will obfuscate things so nobody can

sort of catch a bouncing ball.

Is there a way—do you think it would matter if we knew the

exact amount of the tax credits that went to research and development, can we somehow separate that out on tax returns to give us

an idea of how much of this tax credit is going into research and

development?

77

Ms. WAXMAN. Yes, absolutely. I think it would be a good thing

to know how much is going for what and also to look even deeper

into the issue of what are the drugs that are coming out.

Mr. TIERNEY. That was my next question was going to be and

would it also make sense to track just which of the drugs they’re

researching and developing are significant clinical improvements

versus the knock offs and the so-called ‘‘me toos.’’

Ms. WAXMAN. Absolutely. Unfortunately, what we’re seeing now,

for example, on the case of Prilosec where the patent is almost up.

I mean sure we’ve all seen those ads for the new purple pill. The

new purple pill is an improvement in that it’s a once a day as compared to Prilosec which you have to take a few times a day. And

I assume for some populations that is a significant improvement,

but it isn’t necessarily for all of us and that’s the kind of new research that’s being done mostly, unfortunately.

Mr. TIERNEY. Mr. Shays raised an important point about somebody made a determination of which branded name, in this case,

or generic in that case, which one should be prescribed if it isn’t

the 100 percent new one or to give the example you give, if it’s the

same thing, but it’s given less times a day, who makes a decision

that you go for the one that’s less expensive as opposed to the

other?

Couldn’t we set up an independent group? It doesn’t necessarily

have to be a government group, but a quasi-public group of very

qualified people to make those types of determinations?

Ms. WAXMAN. I assume that would be possible.

Mr. TIERNEY. Ms. Bascetta, does that sound beyond reach or does

it?

Ms. BASCETTA. No.

Mr. SAGER. Our plan calls for that, Congressman Tierney. And

also, I think the pricing of new drugs should be commensurate with

their value and with the risks that drug makers undertake, incur

to develop the drug.

Ms. WAXMAN. May I add one thing?

Mr. TIERNEY. Sure.

Ms. WAXMAN. There is a condition when a drug is—the research

is done with Federal money, there is a condition in the statute that

says the drug must be priced reasonable. No one has ever interpreted what reasonable means or ever enforced any particular definition of that term.

Mr. TIERNEY. And that’s in which statute?

Ms. WAXMAN. In the tax credit statute.

Mr. TIERNEY. It’s my throwaway question for a moment, is this,

suppose we condition a drug manufacturer’s eligibility for reimbursement and the tax credits and their use of National Institute

of Health money for research and development, suppose we condition all of that on manufacturer offering their product at the most

favorable price that they offer any non-U.S./Federal entity, including other countries.

Ms. BASCETTA. The consumer would certainly benefit from that.

Mr. TIERNEY. Anyone else?

Mr. SAGER. We then move toward one price for the same medication in every country, every wealthy country, and that’s pretty close

to the way things work for steel and bread and milk.

78

If we want to mimic what the free market will achieve, we will

see one price.

Mr. TIERNEY. It’s not a free market. Let’s be serious on this. The

NIH money owns 50 percent of what they get for research; tax

credits, they’re one of the lowest tax payers in the country; they get

a patent. So I assume that none of us are laboring under the false

notion that this is a free market.

Mr. SAGER. Absolutely and that’s why I said mimic what the free

market would achieve if we had one. I agree with each of your

points, absolutely.

Mr. TIERNEY. Ms. Bascetta, Mr. Musslewhite, do you have any

closing remarks you want to make? Comment on that last question?

Does anyone have any remarks they want to add as we wrap this

up? Mr. Allen, Mr. Shays, any questions?

Mr. ALLEN. No.

Mr. SHAYS. No.

Mr. TIERNEY. Thank you very much. I just always like to know

is there anything that you all, that you stayed up last night preparing to answer that we never asked you? I mean that seriously.

Is there any question you want to put on the record that you think

has not been put on the record that needs to be?

Thank you. In that case, thanks for coming here and enlightening us this morning. You’ve been very helpful. I recommend we

take about 5 minutes and then we’ll start with our second panel.

[Recess.]

Mr. TIERNEY. I think we’ll get started on this second panel.

First, I do have to swear you in as we do to everybody. If you

would raise your right hands and stand.

[Witnesses sworn.]

Mr. TIERNEY. Thank you. Let the record that the witnesses have

responded on the affirmative.

Our witnesses on the second panel are Mr. John Ogden who is

Chief Consultant to the Veterans Health Administration, Pharmacy Benefits Management, Department of Veterans Affairs. And

our friend, Mr William Conte, Director of the Department of Veterans Affairs Medical Center in Bedford, MA who is a great friend

of our Congressional District and the Commonwealth of Massachusetts particularly this area. He has worked with us in opening a

number of community-based and outreach clinics and is a great

ally to veterans in the area. We appreciate all that you do, Mr.

Conte.

Mr. CONTE. Thank you.

Mr. TIERNEY. Mr. Ogden, would you care to start? We’re going

to give you 5 minutes, but if that’s too restrictive, we’ll——

Mr. OGDEN. No, I’m going to paraphrase my statement.

STATEMENTS OF JOHN OGDEN, CHIEF CONSULTANT, VETERANS HEALTH ADMINISTRATION, PHARMACY BENEFITS MANAGEMENT, DEPARTMENT OF VETERANS AFFAIRS; AND WILLIAM CONTE, DIRECTOR, DEPARTMENT OF VETERANS AFFAIRS MEDICAL CENTER, BEDFORD, MA

Mr. OGDEN. Mr. Chairman, and members of the committee, I am

pleased to have this opportunity to address the significant accomVerDate 11-MAY-2000 08:03 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00082 Fmt 6633 Sfmt 6633 D:\DOCS\87140.TXT HGOVREF1 PsN: HGOVREF1
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plishments that the Department of Veterans Affairs has made

since 1988 toward effective and efficient management of pharmaceuticals and I refer you to the attachment to this statement that

reflects those accomplishments over the past 14 years.

The Department organizational element that has been and continues to provide leadership for these efforts is the Veterans Health

Administration, Pharmacy Benefits Management Program. The

mission of VHA PBM is to enhance the appropriate use of pharmaceutical in the veteran population. Easy to say, difficult to accomplish.

The five major core functions of the PBM are utilization management, that is, development of pharmacologic guidelines, portions of

clinical practice guides that include pharmacotherapeutics, a major

part of our effort. No. 2, managing the distribution of drugs and related services. And Mr. Conte is going to talk about that in a few

minutes.

No. 3, managing the cost of pharmaceuticals. No. 4, developing

and conducting outcomes research that we’ve talked about and

heard about earlier this morning. And No. 5, education. That’s education of patients and education of providers regarding

pharmacotherapy.

The business strategy for managing pharmacy benefits within

VA is a simple one. Leverage national contracts are used whenever

clinically possible in contracting for high volume, high cost pharmaceuticals. In addition, VA has a longstanding policy of using generic

pharmaceuticals whenever they are the clinically acceptable choice.

The contracting process is clinically driven with a goal of product

standardization. The process is grass roots in nature, is driven by

clinicians in the field, employs evidence based class reviews including data in the VA population where it exists and involves evaluating products and groups of products based on efficacy, outcomes,

safety, compliance, VA patient needs and pharmacy factors.

VA has been very successful in these types of contracts and other

similar contracting strategies.

Now I’d like to talk a little bit about utilization and expenditures. Our internal analysis inside VA shows that the increasing

number of patients treated is the primary driver for increasing

pharmaceutical expenditures in the veterans health system. In

fact, when we analyze fiscal year 2001, 85 percent of the increase

in outlays was because of new patients coming to VA and receiving

pharmaceutical benefits. The increased utilization of pharmaceutical per patient or intensity of therapy and use of newer pharmaceuticals account for approximately 12 percent of our increase

and 3 percent can be attributed to pharmaceutical or medical inflation, very small proportion of our increased outlays is caused by increased prices for existing products.

While our overall outlays for pharmaceuticals has increased, the

cost for a 30-day equivalent outpatient prescription over the past

43 months remains relatively flat, essentially a little over $13. This

fact demonstrates that a managed formulary process can serve as

the framework for an affordable robust drug benefit.

Let me make a comment about a lack of a Medicare benefit and

impact on VA expenditures. While it’s difficult to quantify the impact on increased utilization and related expenditure pharmaVerDate 11-MAY-2000 08:03 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00083 Fmt 6633 Sfmt 6633 D:\DOCS\87140.TXT HGOVREF1 PsN: HGOVREF1
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ceuticals due to the lack of a Medicare drug benefit, VA staff report

anecdotal cases where dual eligible veterans have chosen to access

VA for the drug benefit that is a part of our overall health care system. Some of these veterans indicate a desire to have VA serve as

a pharmacy only. The Secretary has testified before the Congress

and provided written comment to the Congress that VA should not

be a pharmacy only, nor do we believe that Congress in enacting

provisions of Title 38 contemplated that VA act only as a pharmacy.

We believe that when such veterans become aware of the positive

patient outcome associated with VA’s continuum of care delivery

model and to safety and health risk inherent in a fragmented pharmacy-only benefit, they will want their care coordinated and managed by VA health providers.

From a financial and clinical perspective, the important lessons

learned from VA’s experience concerning pharmaceuticals is that

effectiveness and efficiency can be achieved when providers who

treat patients are actively involved in formulary decision when best

clinical practices are employed, when volume based and committed

use contracting are used when clinically feasible and when clinical

pharmacists are fully integrated into the medication use process.

In conclusion, VA has many lessons learned to share in the area

of drug contracting, drug utilization management, drug distribution

and achieving positive clinical outcomes from drug therapy. While

significant milestones have been reached in achieving cost avoidance through contracting activities within VA and jointly with the

Department of Defense, even greater cost avoidance has been

achieved by identifying and encouraging best practices, developing

and promulgating drug treatment guidelines and through recognizing the value of pharmaceuticals in the treatment of diseases. It is

gratifying to know that our cost avoidance efforts have been accomplished while improving the consistency of drug therapy across the

VA health care system. Indeed, as a result of our clinically driven

cost avoidance efforts, VA has been able to partially offset the cost

of providing care to the large number of veterans enrolled in the

veterans health care system.

This completes my statement and I’m prepared to answer questions.

[The prepared statement of Mr. Ogden follows:]

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Mr. TIERNEY. Mr. Conte.

Mr. CONTE. I want to thank you for that nice introduction and

I want to thank the chairman and members of the committee for

the opportunity to testify on ‘‘Lessons Learned by VA’’ and for providing an effective and efficient management of pharmaceuticals.

The key component in providing these services has been the creation of the Consolidated Mail Outpatient Pharmacies. This is a

service we provide for our veterans, to provide timely, accurate and

cost-effective mail out prescriptions.

Mr. Ogden highlighted the entire Department’s success and the

overall pharmaceutical management program. I’d like to concentrate on the CMOP production concept and its ability to deliver

these cost-effective services to the veterans we serve.

It’s pretty tough to do in a very short period of time, but first,

I’d like to explain the CMOP operations. These systems are really

quite unique and complex. A CMOP is a Federalized operation utilizing a assembly line techniques, robotics and software interfaces

and automated filling systems to produce an accurately filled prescription with an acceptable pharmaceutical practice and packaged

for delivery. And along with that good management practices to include inventory management, quality assurance and accounting

practices and these are all the core of that operation. Patient specific information is sent daily from the individual facilities or we

call them host sites to the CMOP via a software interface. The

CMOP processes the request and mails the package containing the

prescription to the veteran. All labels and patient information reflect the host facility, not the CMOP information, which makes the

entire CMOP process transparent to the patient. It is as if the prescription were mailed from the host facility. One could view the operation as a vending service for the host facility. Information on

cost, lot numbers, dates of fill, everything is electronically returned

to the sending station upon completion of the order and placed in

the patient’s electronic medical record.

Next, I’d like to underscore a few of the critical elements that

were addressed by the VA over a long period of time to make this

happen. And we’ve heard this before: creation of a national formulary. A strong commitment to provide appropriate drugs for use

by the local medical staff with an emphasis on best value was historically predominant in all VA hospitals. In 1992, the VA created

a national utilization data base of actual dispensing actions system-wide. This forms the basis for national contracts for high volume, high cost pharmaceuticals. I mentioned our current Secretary

was the Under Secretary at the time when we did this and this

was really a major initiative in the VA.. The VA National Formulary system is a product of centralized coordination of grass

roots process, which reflects evidenced-based medicine at the patient/provider interface.

Next came along the computerized pharmacy software. The VA

clearly, currently possesses the most sophisticated automated medical record system I think in the country, in most countries. Standardized software gave the VA the opportunity to link these facilities to these CMOPs and we can download these prescriptions to

the CMOPs in minutes. And Bedford currently downloads data

from 50 sites across the Northeast.

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Then came the national contracting of pharmaceuticals and use

of generics when efficacious, has been a contributing factor of holding down overall drug costs. Without this national approach, we’d

not be able to achieve these results. Use of national contracts and

a strong, clinically based National Formulary allows local medical

centers to maximize the utilization of resources. As John referred

to earlier, we can take those resources and maybe buy staff.

Creation of the CMOP operation was another key milestone in us

being able to provide this as centralized highly automated prescription operation. The first systems were in Bedford, Los Angeles and

Leavenworth. The new system fills 60,000, 80,000 prescriptions a

day. We’re currently filling 26,000 to 28,000 a day.

The national average CMOP dispensing cost, that includes light,

heat, this is truly a business operation within government. It’s

about $2.15 a day per prescription. That includes everything, plus

the cost of the drug. So you’re looking at—except for $2.15 a major

savings.

Another significant factor the VA looked at was the creation of

a prime vendor concept. This enabled us to order drugs just in

time, reduce our inventory. CMOP currently in Bedford turns its

inventory over 60 times a year which is an amazing factor. You’re

looking at a couple million dollars a day that comes in and out of

that place.

So with that kind of coordinated ordering, we’ve been able to do

a lot of things to drive our costs down.

Mr. TIERNEY. That was a day you were talking about?

Mr. CONTE. Yes, a day. This brief description of CMOP, I’d like

to highlight a few advantages. This coordinated system decreases

error rate. This is a totally bar coded system and it’s got numerous

balances and checks in it. CMOP was accredited by the Joint Commission on Hospitals. It received a 100. There was a maximization

of pharmacist expertise at the facility because we have taken the

burden of filling these prescriptions away from the facilities. This

has enabled the facilities to put pharmacists on the front line and

have them interface with a clinical staff which is a key component

to holding your prices down because they can then interact with

the clinical staff and pick the best drugs with them.

Maximization of production of staff. Right those pharmacists in

that CMOP fill between 1500 and 2000 prescriptions a day. Meeting demands for service, I don’t think without that we could recruit

enough pharmacists in the Northeast to keep the operation going

with the workload we’ve got, so because we’ve automated, we’ve

been able to do that.

In summary, there’s five things, six things or five things we really do: an extremely efficient system for the effective clinical review

of pharmaceuticals; a distribution system of pharmaceuticals of

CMOPs; a data system which is your software interface; a method

to procure pharmaceuticals nationally and the software necessary

to effectively enable the coordination of these efforts.

Thank you for your time.

[The prepared statement of Mr. Conte follows:]

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Mr. TIERNEY. Thank you for your testimony.

Mr. Allen, why don’t we ask you to go first?

Mr. ALLEN. Thank you, Mr. Chairman. Thank you both for being

here.

Mr. Ogden, let me begin with you. I’ve heard so much about

PBMs and how now Medicare benefit program could be designed

with private sector PBMs to be operating the program, that it’s

nice to hear about a Veterans Administration PBM, even though

it’s a little different, but you’re not contracting that work out to a

private entity, I take it?

Mr. OGDEN. No sir, we are not.

Mr. ALLEN. You do it in-house?

Mr. OGDEN. Yes.

Mr. ALLEN. Tell me in connection, you facilitate this national formulary process. In the private sector, of course, formularies are a

key component holding down costs to the major buyers of prescription medication in this country, the major insurance companies, for

example. And I was wondering if you could describe a little bit of

the interaction between the industry and your organization as industry tries to get one of its drugs on a formulary and you try to

evaluate the comparative effectiveness of drugs, how does that

work?

Mr. OGDEN. I’ll try to be succinct. I’ll try to speak a little louder.

This is a long story. Formularies in the VA go back, at least as far

as I can determine, back to the early 1950’s. I’ve seen a copy of the

formulary dated 1951, so I can make that statement.

And I’ve got to tell you, up until about 10 years or so ago, I did

not believe that we could move to a national formulary in our organization and the reason I believed that is because we have these

affiliations with the medical schools across the Nation, that local

practice customs would prohibit us, because of those two factors

and ever moving to a national formulary.

As Mr. Conte indicated, when Mr. Principi, our present Secretary

was the Deputy Secretary back in the early 1990’s, he used to ask

me repeatedly, what is happening the VA health care system? And

my comment would be we all have to go to Austin. We would have

to meet an army of people and we could give you a snapshot after

working feverishly for many, many, manhours and come up with

a picture at that point in time and that would be the best that we

could do.

With his support, we established the National Drug Utilization

Data base which captures the actual dispensing actions across our

systems and we collect and collate and analyze that data in Chicago and in my offices in Chicago. That step, that program change

has helped us change our mindset and allowed us to move toward

the national formulary. When Ken Kaiser, our former Under Secretary for health came on in 1994, 1995, one of the first questions

he asked me was why don’t we have a national formulary? I explained our situation, the historical issue, the cultural issues, the

different medical school affiliations, etc., and he said I want a national formulary and I want it next week. I said well, boss, it would

be better if we kind of do it in a timed approach if you will, a tiered

approach as opposed to going right to a national formulary. So

what we did was we went to Network, the 22 VISN, the Veterans

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Integrated Service Network first in 1995, 1996. A year later, we

went to the national formulary and the key here for us again is

that data base and that grassroots involvement. People in Washington don’t make decisions about the drugs that are used to treat

veteran patients. The people who make the decisions are two

groups, basically. The first group is what we call our medical advisory panel and that’s a group of 12 physicians who are field-based.

They see patients. One of those 12 physicians is a Department of

Defense practitioner. The second group that makes decisions is our

VISN, our network and formulary leaders. These are individuals

who are agents, if you will, of the network director regarding pharmaceutical matters in the particular VISN and a subset of that

group is the number of clinical pharmacists who work in my office

who do most of the staff work to prepare an issue for debate by the

Medical Advisory Panel and the VISN formulary leaders. So those

two groups make the decisions. So it’s grass roots. It reflects the

care that is being provided veterans.

I know the title of this hearing concerned lessons learned in our

drug procurement. It’s really not drug procurement. It’s lessons

learned in managing a benefit. And as I said in my statement, yes,

we have been very successful in contracting, but that’s not where

the return on the investment comes. The return on the investment

comes in being an aggregate of all of the factors that we would describing including one Mr. Conte described in how we distribute

drugs, but the use and embracement, if you will, of those clinical

practice guidelines and those pharmacologic treatment guidelines

by our providers has to be one of the foremost factors in why we’ve

been successful.

So the formulary is important, absolutely important. It’s driven

by what’s actually happening out there at the front line.

Mr. ALLEN. When you say it’s driven by what’s actually happening, you’re talking about patterns of prescribing by the VA physicians in the field.

Mr. OGDEN. Yes.

Mr. ALLEN. What is the role of the outcomes research that you

referred to in your testimony? What kind of research is it? How

does it use—does it get to the kind of research I mentioned before

the earlier panel and just by way of background, let me explain

that for one moment. Right now for drugs to get approval from the

FDA it has to be proven that it is safe and that it is effective, that

is, it treats the condition for which it is being prescribed. The two

missing components are how comparatively how effective it is to

other drugs on the market, No. 1, and No. 2, is it cost-effective?

That is, does it treat the condition for which it’s prescribed in a

way that makes financial sense to whomever is paying the price.

So my question to you is with that said, can you talk about your

research, your outcomes and how, if at all, what your research is

connected to the formulary and the decisions about the formulary?

Mr. OGDEN. Our intent is exactly what you just described. Our

efforts inside the PBM regarding outcomes research, those efforts

are in their infancy, but I can tell you that our colleagues in the

research portion of VA are very interested in this issue as well and

we get more and more interest in conducting these types of studies

as time goes on and as the outlays for pharmaceuticals increase.

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After we are absolutely interested in head to head studies inside

therapeutic classes where these kinds of questions are being asked

by our providers and by our managers and in some cases by our

patients, let me just come over here to the chart that you have over

here. On the right hand side of that chart you show two drugs,

Prevacid and Prilosec and a few years ago when we decided clinically that one of those two drugs would meet the clinical needs of

most veteran patients we competitively bid them with the idea in

mind that marketshare would go to the formulary listed produced.

I’m going to tell you at the time, the drug on the right, Prilosec

which has the generic name of omeorazike, it had 97 percent of the

marketshare in the Department. They lost. Prevacid received the

bid. Because that happens to be a therapeutic class——

Mr. ALLEN. Excuse me 1 second, Mr. Ogden, did they win the bid

on a lower price or something else?

Mr. OGDEN. Yes, they did. They won the bid on a lower price because we determined clinically that they were both efficacious.

They delivered similar clinical outcomes, so cost becomes a greater

consideration. You can’t say that for every drug or every class of

drugs, but in this case there were only two drugs at the point in

time and we made that clinical decision. Based on the evidence

that was available, not only in the United States but worldwide at

the time.

Well, as I just indicated, Prilosec had 97 percent or 98 percent

of the VA business at the time. They lost the bid. This happens to

be a class of drugs where again, clinically, they produce very similar clinical outcomes. So to convert patients, you don’t have to titrate the patient. You can just make a conversion which is what

we did.

The turnaround in market share from Prilosec to Prevacid, the

generic name is Lansoprazole, was almost overnight, almost overnight. Again, that doesn’t happen in every therapeutic class that

we made that decision, but Prilosec’s marketshare went like this.

Lansoprazole’s market share went like this. And obviously, the veterans that we treat benefited because we can treat more veterans

because we’re treating veterans who used this product and it is a

highly prescribed product. It allows us to treat more veterans. So

that happens to be a good example. You can’t do that in every class

of drugs or with every drug, but when we can do it, we can make

a clinical call, we will do it and do do it as evidenced by the successes that we have demonstrated over the years.

Mr. ALLEN. Thank you very much.

Mr. TIERNEY. Mr. Shays.

Mr. SHAYS. Mr. Ogden, just refresh me. You’re a consultant to

the VA, not an employee?

Mr. OGDEN. In statute, I’m the Director of Pharmacy Services for

the Department, but in the re—reformation, if you will, the reinvention of the veterans health system in 1995, they changed the

title of people like myself, Director of Nursing, Director of Optometry, Director of Prosthetics to Chief Consultants. So I had been

the Director of Pharmacy Services by law, but our title is Chief

Consultant.

Mr. SHAYS. I think that’s weird. [Laughter.]

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Mr. OGDEN. We can talk about that. That would probably take

a couple of hours.

Mr. SHAYS. OK. See I think of consultants as having less authority but getting paid more.

Mr. OGDEN. I’m a Federal employee.

Mr. SHAYS. Fair enough. That’s why I asked the question. I want

you to help sort out a few things. The Department of Veterans Administration charges $7 co-pay and that the average cost per veteran in the 30-day period is $13.50.

Mr. OGDEN. Ingredient cost, yes.

Mr. SHAYS. Pardon me?

Mr. OGDEN. That’s ingredient cost. I neglected to say that $13 is

a cost of the drug ingredients, not any labor, not any other—it’s

just the cost.

Mr. SHAYS. It’s the cost of the drug?

Mr. OGDEN. Yes.

Mr. SHAYS. That surprised me. I thought it was going to be higher. I think it’s going to have to change significantly because what

I’ve seen in my part of the country, the greater New York area, it’s

still part of New England, closer to New York, I’ve had some very

well to do constituents telling me almost with some bit of embarrassment that they are joining the VA system to get prescription

drugs because they feel like they are taking $300 a month and

throwing it in the waste paper basket by not taking advantage of

it because they say their drug costs are hundreds of dollars and for

a small co-payment they can buy into the system. But they have

the ability to pay it on their own. They’re fairly—I come from a

fairly—overall, they have the ability to pay for it.

And so is there anything statistically that you had that tells us

that $13.50 cost is going to go significantly—because frankly

they’re not pulling in my wealthier constituents are going to save

$7 a month. They’re coming in because they can save hundreds of

dollars a month. So is there any projection that $13.50 goes to

$26.50 goes to—over a short period of time?

Mr. OGDEN. I don’t think it’s going to go in a short period of

time. It’s going to increase dramatically. I think we can all expect

that the average price is going to increase for a lot of reasons.

Mr. SHAYS. What that says though is that veterans pay half the

cost.

Mr. OGDEN. But that $7 co-pay does not include—I think by statute does not include any amount. The $7 is for the ingredient cost.

Mr. SHAYS. So the $7 is basically the—well, how much, if you

looked at costs, how much of the $13.50 represents the full cost?

Mr. OGDEN. You mean labor, depreciation, etc?

Mr. SHAYS. The full cost of providing the service. Tell me we

know that cost.

Mr. OGDEN. Pardon me?

Mr. SHAYS. Tell me we know that cost.

Mr. OGDEN. I’m going to tell you it’s probably under $13, under

$20.

Mr. SHAYS. Do we know how much it costs to provide a prescription service to our veterans, the total cost? If we don’t know, tell

me, but——

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Mr. OGDEN. I think what I told is pretty representational. We

know that the average ingredient cost for a 30-day supply is right

around $13.

The cost to deliver that product, including this facility, the CMOP facilities and the up front processing is another $7.

Mr. SHAYS. How do you know that?

Mr. OGDEN. Its cost on average $2.50 to process a prescription.

That includes the mailing costs, all the overhead, everything to run

those facilities.

Mr. SHAYS. The employees?

Mr. OGDEN. Yes. The professionals involved, the pharmacists, the

technicians, the lights, the overhead.

Mr. SHAYS. So basically you’re saying that the entire drug costs

is paid for by the government?

Mr. OGDEN. Yes, for the veterans who are accessing our system

for service connected. There is no co-pay as you know.

Mr. SHAYS. You were generous. I wasn’t aware of that. There is

no co-pay for the service connected.

Mr. OGDEN. Let me back up for just a second. If, in the Department, the pharmacy co-pay is not the type of co-pay that you or I

would pay in an outside—those co-pays are generally based upon

generic, brand, formulary, nonformulary. When Congress that legislation back in the early 1990’s, the co-pay was based on eligibility. So if a veteran was rated 50 percent or greater service connected, they pay no co-pay, whether it’s drugs or otherwise.

Mr. SHAYS. Mr. Conte, do you agree that the nonmedical, the nonprescription sole cost is $7?

Mr. CONTE. It’s pretty close. I know that $2.15 is right on the

target because the CMOPs have costed it very, very effectively. As

far as the balance of that $7, that would depend on each facility

and what the staff is. So John has a good handle on that. He’s darn

close.

Mr. SHAYS. It’s hard for me intuitively and sometimes when I

bring my intuition it gets me into trouble. But intuitively, based on

moccasins that I wear, it strikes me that your costs have got to go

up significantly—well, first off, we’re allowing queuing and if you’re

in the line, you may not be part of the system. So let me just parenthetically ask how many people are waiting to be part of the

pharmaceutical program in Massachusetts?

Mr. CONTE. In Massachusetts, I think the last figure we looked

at was around 3,000, but these tend to be categories that are nonservice connected.

Mr. SHAYS. Right, and I predict to you that they’re the ones who

a good number of them will be the ones who are joining because

they see significant savings. And I don’t believe that they are going

to go through the hassle of joining the system if they’re just going

to save $75 a month—excuse me, $13, a net of $7 a month. I think

they have to basically see that there’s significant savings by joining.

Mr. CONTE. I think what they’re doing now is paying to a large

amount their prescriptions through the private sector and they’re

coming in and paying $7 also.

Mr. SHAYS. But the cost to you will not be $13 per average. That

average cost will go up significantly.

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Mr. CONTE. That’s a tough thing for me to answer. If a drug costs

$50 and we pay $50, you’re right. They’re paying $6.

Mr. SHAYS. Do you want to say something, Mr. Ogden?

Mr. OGDEN. Yes, I was just thinking about your question and if

a nonservice-connected veteran presented with a prescription written by a private doctor, we would simply fill that prescription, the

cost could go up significantly, if that prescription was for an item

not in a formulary process. It was for an item in our formulary

process, then, in fact, it could be the—the price wouldn’t go up because it would be—that’s the average—those are the problems we

use to dispense to all veterans who currently access our system.

Mr. SHAYS. But frankly—right, and the formulated would be they

buy this drug. No, but they don’t care—does the veteran care if it’s

in the formulary or not because they still get the drug at just a copay cost. You care, but the veteran doesn’t.

Mr. CONTE. Yes, they do. Veterans in our system realize that the

pharmacy benefit is, in fact, an integrated benefit as far as VA providing health care.

Mr. SHAYS. Let me just interrupt, just so I can follow the rest

of your—I make an assumption that when a veteran goes, if he

needs the drug that’s not in your formulated list, they’re entitled

to that drug?

Mr. CONTE. If the veterans is enrolled for care and he presents

and the physician orders that drug that doesn’t happen to be on

our formulary, we do provide that drug.

Mr. SHAYS. Sorry to interrupt you.

Mr. CONTE. Let’s don’t discount here the power of direct consumer advertising. When the patient is sitting home watching the

evening news and they see every commercial has to do with the

purple pill or for arthritis of the knee, etc., what do you think happens when they present in the exam room? They mention that commercial to the provider and for those veterans who have not been

in our system very long, it’s hard for them to appreciate that the

pharmacy benefit is an in-bred part of our health care delivery system. We do have a formulary process and we do analyze products

and we do when the evidence suggests and that’s the type of product we use.

Mr. SHAYS. But that’s irrelevant to them.

Mr. CONTE. It’s irrelevant to them. It’s hard for them to understand.

Mr. SHAYS. All I’m saying to you is that your point is well taken.

If they get the formulary product, it is going to be a lot less. They

say it’s not a big cost to you because you got it at a lot less, but

maybe this should be my last question, I see my red light, how

much of your products end up being formulated and how much

aren’t? In other words, when you add up all what the veterans

bought, how much is formulated and how much——

Mr. OGDEN. I don’t have the figures of what we bought, but I can

tell you what that is in the context of what we dispense. Last year,

in fiscal year 2001, we dispensed approximately $98 million prescriptions, actual prescriptions. Of those $98 million, approximately

90 percent or 91 percent were for items listed on the VA National

Formulary.

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Mr. SHAYS. Let me ask you one last question. Of that 91 prescriptions, what was the cost? Was it 91—it wouldn’t be. The 9 percent remaining, not part of formulary turned out to be how much

of your expense.

Mr. OGDEN. Let me just finish by saying another 6 percent is

listed on our network or VISN level formulary, so when you have

3 or 4 percent nonformulary, you use—the nonformulary use, as far

as a percent in dollars, of total outlays would be insignificant.

Mr. SHAYS. It would be interesting to know—I mean I think this

is great news, but it is surprising to me. My prediction intuitively

would be that 3 percent will start to soar, but I could be wrong and

if it doesn’t, then we are truly on to something quite significant.

Mr. CONTE. I will tell you there are challenges and Mr. Allen

asked a while ago about the interface between the industry and

ourselves. It really should be about the interface between the industry, ourselves and you all just because we’re a public institution. And that interface is constant and when we make these decisions in some cases we have for lack of a better way to put it, winners, and you have perceived losers. They are not happy about

that. The ones who don’t have the formulary listing, if you will. So

it’s a constant—maybe what I really want to say is a tug of war.

But I think as long as we’re patient, we have been validated by

the Institute of Medicine. We have been validated in our process

that Cindy mentioned from the General Accounting Office. Again,

it’s a public institution. What we’re trying to do here is to do the

best we can——

Mr. SHAYS. I get that. Let me just say to you, it strikes me and

thanks, Mr. Chairman, for having a long red light, but it strikes

me as a very positive story and it’s—I’m grateful one member of

the press is here, but this is a story that more people need to hear.

They’re hearing a lot of negative stories. Thank you.

Mr. TIERNEY. I think all the Members here share the idea that

what we really want to do is get the information and we don’t really care who asks the questions, as long as we get answers, the

credible answers that you’re giving.

Mr. Ogden, can you envision this type of a process that you have

at VA being enlarged to cover a larger population to include Medicare people?

Mr. OGDEN. I have thought about this a lot and I don’t think it

has to be a Federal program for Medicare to be successful and I’m

going to digress a minute here, but I’ve spoken to Mr. Allen in the

past and his staff in the past, for example, linking Medicare pricing

to be a pricing and we have, as the Department testified, that’s not

in our interest to do that and as Cindy mentioned, the GAO has

looked at that. The reason that we feel that way and it’s not because we’re parochial, we’re trying to just provide a service to veterans and everybody else who doesn’t get that opportunity is because when you think about the population, the size of the Medicare population and we’re all going gray, that Medicare has the potential to achieve much greater pricing than we do. The VA and

DOD combined, the Coast Guard and Indian Health Service for

that matter, I think we comprise like 3 percent of the U.S. market

in terms of outlays. Medicare is huge. The current population in

Medicare, I think it’s like, the dollars out there now are like 42

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percent. And it’s just going to get greater as the boomers age. But

I think that again, Medicare through emulating the kinds of strategies that we have emulated that they can get far better pricing

than we receive. And I’m going to go back to this example here. If

Medicare can deliver the marketshare and that’s the key, it’s what

was mentioned earlier, what will the market bear? If Medicare can

deliver the marketshare, they will, in fact, receive better pricing.

But another key area is the patients, of course, when the patients

buy in, they get total free choice, because they get total free choice

about all drugs and all drug facets that causes—it’s a higher price.

Mr. TIERNEY. What if they put together a formula in process

much like the one that you’ve got?

Mr. OGDEN. I think it could work and as long as we’ve got the

providers, the physicians in this part of the country to make those

decisions and drive it, it can work and it can work very successfully.

Mr. TIERNEY. But you need a data base?

Mr. OGDEN. And that’s where the Department comes in and services the public good and the patients we treat are very geriatric.

They’re mostly male at this point in time, but there are a greater

number of female patients that we’re treating, but we have an excellent research and longitudinal, if you will, research base that

can demonstrate people like yourselves, the types of public policy

that will best serve in this case, the Medicare population and affordable cost. I think the difficult thing for us and Mr. Shays mentioned our costs are going to go and everybody’s costs are going to

go up is we’re sitting here today, and pharmaceutical outlays are

going up. But I don’t think anyone will argue that pharmaceuticals

aren’t a good value. Because we all know they are a good value.

The problem for all of us is with pharmacogenetics and genomics

and biotechnology is the percent of our health care dollar that we

outlay as a society for pharmaceutical has the real potential, in a

very short period of time to climb dramatically. This is going to involve all of us to design a system that integrates pharmaceuticals

much more so than we have up until this point in time.

Mr. TIERNEY. Excuse me, it seems like an interesting exercise

would be to have somebody who does just that, design a system

that could be laid over the Medicare population using what we’ve

learned from the VA in setting it up and plainly is the direction

to go. And I would suspect whatever cost that would be to do that

design and get everything ready to go would be reasonable to consider what the benefits in the long run would be and maybe that’s

something we can all think about up here.

Mr. Conte, I’m curious to know your consolidated outpatient mail

pharmacies, that network, how would you compare your CMOPs to

the distribution systems used by private sector people like

Pharmco, Merck and Expresscrips?

Mr. CONTE. Well, you know, they all visited us. I think we’ve

been the model for that as far back as the early 1990’s and I think

we have some significant advantages in that we use technicians

more than they do in the private sector and we’ve been able to

automate our system using technicians and maximizing the pharmacy output. I can’t give you exact figures, but I know our pharmacist to technician ratio is very different than what you see in the

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private sector. It’s still a very accurate system because of bar coding the way we support those pharmacists.

The system itself has got a history of being extremely cost effective versus those companies you mentioned. I have no figures on

their actual cost, but we’ve seen their operations and they tend to

have a lot more pharmacy staff and a lot more of staff than we do.

I think the VA has demonstrated unequivocally that it’s been able

to produce the most cost-efficient mail out system for pharmacy.

It’s a service that we provide. The clinical aspects are sort of

linked, the host facilities. We can’t just mail it out. This is linked

with those facilities on the clinical side.

Mr. TIERNEY. How long did it take the VA to get its architecture

for this pharmaceutical program together from the concept to actually implementing it where you get to the point where you’re comfortable and you feel that you’re getting the maximum benefit from

it?

Mr. OGDEN. The architecture has been in development during the

past 12, 13 years or so. It’s an evolving architecture. These facilities that we have are in laboratories and for example, Bill mentioned what the capacity of the current Bedford facility is and by

the way it was one of the first generation facilities.

I was just in Chicago Thursday and Friday and they just added

some technology at the Chicago facility and they anticipate, when

it’s debugged, that they’ll be around 25,000 prescriptions per day.

It’s evolving not only in VA, but it’s evolving in the private sector

as well. Merck has some very excellent technology. Our people have

been into their plant in New Jersey and have looked at it and it’s

very good, we all have very good technology, but it’s an evolving

situation. I think that ours is totally different than what you’d see

in the private sector because we’re a mail service pharmacy, not a

mail order pharmacy.

Our intent was to have the patient talk to the doctors, nurses,

the pharmacists, etc., when they access the VA system. What we

designed over here far, far away, if you will, is an economies of

scale distribution facility to maximize productivity dispensing the

actual prescription. I have to give you credit to our IT people, information technology, people. Think about moving massive amounts of

patient data day in and day out. We hand it off to commercial software processes who fills the prescription. We hand it back to put

it back over the wires and we print the patient’s medical record.

It’s absolutely phenomenal what our IT people have done over the

past 12 years. It’s evolving. It’s a very good success story.

Mr. TIERNEY. If we supposedly thought about setting up a parallel system for Medicare patients and we wanted to learn what

you were doing and we decided we’re just going to take and replicate what you’ve done using what benefits we think we would

learn on that, set it up with the Medicare and move forward, what

cautionary notes would you give us on that?

Mr. OGDEN. Well, I think my primary cautionary note was it has

to be gradual. If for some reason we decided to make a national decision what the formulary was, I don’t think it would be successful.

Mr. TIERNEY. How do you envision that a grassroots

operation——

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Mr. OGDEN. I’m a proponent of allowing States to form consortiums.

Mr. TIERNEY. To do what?

Mr. OGDEN. Allowing States to form consortiums or a State like

Maine that doesn’t have a big population, if you will, with regards

to New York, could partner with large other potential buyers and

so that when they did determine what a formulary was, that they

could actually affect better pricing in the marketplace just because

of the numbers. So I think that’s the key. I don’t think we’re ready

for a national program under—and I’m not saying I’m a proponent—I’m obviously talking for myself and not for the Department.

Mr. TIERNEY. Right.

Mr. OGDEN. We’re not a proponent of that. Again, our whole

process has been in effect since 1995. We’ve been evolving this

process. The buy-in is superior to the buy-in yesterday, superior to

the buy-in 6 years ago. And we don’t bat 1,000, but we’re batting

pretty good and it causes me to appreciate that unless it’s grass

roots, it won’t work.

Mr. TIERNEY. I have some legislation that basically would give

States, grants to States or regions to devise a system by which they

could deliver health care services and then a second grant if they

did that would let them implement that. Of course, part of that

would be dealing with prescription drugs and there are some State

efforts, particularly here in New England, where people are looking

to have consortiums with States that do just what you’re talking

about and so there’s nothing that you see that would stand in the

way of doing what—state consortiums, getting together and deciding that they’re going to establish formularies, maybe model it in

a way that you’ve done yours and then go about their business in

that respect.

Mr. OGDEN. I would certainly like to see that.

Mr. TIERNEY. Well, maybe we’ll hear some of our gubernatorial

candidates talk about it.

Mr. Conte, do you agree with that assessment, that it’s worth it?

Mr. CONTE. Absolutely. I’m sitting here as John as talking, it

really comes down to getting your providers on board because

they’re the ones who are actually going to do the prescribing and

getting the software up and going, a formulary and an automated

process, and that’s what we’ve done.

Mr. TIERNEY. Mr. Allen, any more questions?

Mr. ALLEN. Just a couple, some comments. I’m struck by how

much, at least up here, how much progress we’ve made during the

course of this hearing. I hear two things that seem to me of great

significance. Aside from the fact that VA has got a system that is

moving along and that really does shed some light on where we’re

going. One of the points is and this is not acknowledged in the debate over a Medicare prescription drug benefit by either side of the

aisle. One is that if you’re going to save money, you need to do it

as the private sector does and as the Veterans Administration does

and accept the formulary. This is something that those who want

a Medicare prescription drug benefit based on the insurance industry and the private sector say they don’t want to go close to that

and on our side of the aisle people say you can get any drug you

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want under our plan, any drug you want. Again, a rejection of the

formulary.

The second component is that if you have a formulary in order

to hold that price, you have to have an independent way of doing

the research that will allow you to conclude that Prevacid and

Prilosec are equivalent effectiveness and without that research capability you’re basically sunk and it has to a research capability

that is not tainted by the pharmaceutical industry itself. And so to

me what you’ve been saying is very helpful in sort of shaping that

conclusion.

I want to give you both a chance to say is there anything that

I’ve said that concerns you, troubles you or is incomplete? That was

an effort to summarize sort of how, where my mind has been going

as a result of what you’ve been saying and I don’t want to take

away a lesson that you didn’t mean to convey.

Mr. CONTE. I think that we could have a formulary process, but

I think we also could have access to any product on the market.

And so they’re not oxymorons. And the way to do that is to decide

what clinically reflects the clinical care of most patients who are

going to receive that benefit and then if patients want above and

beyond, then you could just make the co-pay, make it co-pay, so if

they want that particular product, then they could acquire it just

with co-pay. Let’s leave it open to allow any drug to be accessed,

but do that through co-pay.

Mr. OGDEN. I hear what you’re saying and absolutely, when I

was the Chief of Pharmacy, how drugs came on the formulary, clinical people in that facility where I worked needed that drug for a

particular reason and we would make a decision on putting a drug

on the formulary based on cost, based on dosing, like you’ve heard

and many times we made a decision to keep that drug and make

it available for a specific clinical reason, an individual may be not

able to take pills twice a day. Maybe that person needs—we can

make exceptions. Give the purchaser the option to buy up if they

want.

Mr. ALLEN. Mr. Conte, I have a smaller question and I just wanted to know and you may have covered it, but I missed it, if you

could just talk about the impact on your facility of more veterans

signing up for—to get the prescription drug category, veterans

signing up for their prescription drug benefits. How big an influx

have you had and how have you dealt with it?

Mr. CONTE. As Congressman Tierney knows, we were fortunate

enough to enforce—John was working with us on this—and because of that our veteran population went from around 9,000 to

16,000 a year, so we’ve had a tremendous increase in veterans coming. Service has been good, yet it generates a large prescription volume. I would say we’re probably going to expend just on volume

alone. It doesn’t increase costs. We have $2.5, $3 million in the

budget for prescriptions for those patients that come in. That’s

really the impact, the volume of people coming to the VA because

we do provide something more than just prescriptions. I think

John’s alluded to that. If you come to the VA system, we’re asking

you to join that system to provide continuity of care, not just prescriptions. I as a—my pharmacy had the honor—a friend of my is

a physician—would not want to be just a writing service and not

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have any responsibility, yet legally, he’s responsible for the medical

care of that individual by dispensing the prescription and/or writing that prescription. So when people come in to join our primary

care clinic and then you become part of the VA system, so that

alone also has impacted us because we need more staff to do that

and I think you’ve talked about, someone on the committee talked

about the funding mechanism where the VA system gives you a

couple years later, so there’s a lag in terms of that. We’re constantly stressing the system trying to deal with those people who

are on the waiting list, but it’s had a major impact on the staff and

I’m lucky enough that I have staff who is able to adapt and change.

The other thing is centralized mail out pharmacy. I mentioned it

briefly. We’ve never been able to recruit pharmacists for other

issues, partly pay. We’ll stay out of that area, but the issue becomes how will you take care of this large volume to bring in new

patients and this mechanism has helped us to do that.

Mr. ALLEN. Thank you very much.

Mr. TIERNEY. With the indulgence of my colleagues here and

panel members, we’re going to break protocol a little bit. If there’s

anybody out in the audience area that has a question for members

of this panel or a question for members of the committee, provided

that you’re willing to share with us your name, we’re willing to

open the microphone to give you that opportunity for a brief period

of time. We still have some time. And if we could get an idea of

how many people might be interested in that opportunity, we’ll be

able to judge how much time each person would have. Is there anybody that today has a question, a comment? That saves us a lot of

time.

I want to thank both of you, gentlemen, very much for your testimony. I’m sure that you’ll be hearing from us and we’ll try to work

together. I thank Mr. Shays, again for his generosity, Mr. Allen for

his work in the area. I thank all of you.

Mr. SHAYS. I thank the chairman, again for your encouraging us

to come up here. I would just take the liberty to thank Michael

McEneamy, State Administrator and Mr. Anthony Lopez, the Court

Officer and Marilyn Franklin, the Court Reporter. I thank all three

for their help and I obviously thank our staff for their work on both

sides of the aisle, and again, thank you, Mr. Chairman.

Mr. TIERNEY. Thank you also and we’ll look forward to working

with you on this issue.

[Whereupon, at 12:30 p.m., the hearing was concluded.]

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