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68–441 PDF 2011

S. HRG. 112–125 

A PRESCRIPTION FOR SAVINGS: REDUCING DRUG 

COSTS TO MEDICARE 

HEARING 

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

WASHINGTON, DC 

JULY 21, 2011 

Serial No. 112–7 

Printed for the use of the Special Committee on Aging 

( 

Available via the World Wide Web: http://www.fdsys.gov 

(II) 

SPECIAL COMMITTEE ON AGING 

HERB KOHL, Wisconsin, Chairman 

RON WYDEN, Oregon 

BILL NELSON, Florida 

BOB CASEY, Pennsylvania 

CLAIRE MCCASKILL, Missouri 

SHELDON WHITEHOUSE, Rhode Island 

MARK UDALL, Colorado 

MICHAEL BENNET, Colorado 

KRISTEN GILLIBRAND, New York 

JOE MANCHIN III, West Virginia 

RICHARD BLUMENTHAL, Connecticut 

BOB CORKER, Tennessee 

SUSAN COLLINS, Maine 

ORRIN HATCH, Utah 

MARK KIRK III, Illnois 

DEAN HELLER, Nevada 

JERRY MORAN, Kansas 

RONALD H. JOHNSON, Wisconsin 

RICHARD SHELBY, Alabama 

LINDSEY GRAHAM, South Carolina 

SAXBY CHAMBLISS, Georgia 

DEBRA WHITMAN, Majority Staff Director 

MICHAEL BASSETT, Ranking Member Staff Director 

(III) 

CONTENTS 

Page 

Opening Statement of Senator Herb Kohl ............................................................. 1 

Statement of Senator Bob Corker .......................................................................... 2 

PANEL OF WITNESSES 

Statement of Jonathan Blum, Deputy Administrator and Director, Center 

for Medicare, Centers for Medicare and Medicaid Services, U.S. Department 

of Health and Human Services, Washington, DC ............................................. 3 

Statement of Philip Rosenfeld, M.D., Ph.D., Professor of Opthamology, 

Bascom Palmer Eye Institute, Miami, FL ......................................................... 19 

Statement of Anthony Adamis, M.D., Vice President, Global Head of 

Opthamology, Genentech, Inc., South San Francisco, CA ................................ 21 

Statement of Sean Tunis, M.D., MSc., Founder and Director, Center for 

Medical Technology Policy, Baltimore, MD ....................................................... 23 

Statement of Lisa Swirsky, Senior Policy Analyst, Consumers Union, Washington, DC ............................................................................................................. 25 

Statement of Scott Gottlieb, M.D., Resident Fellow, American Enterprise 

Institute, Washington, DC .................................................................................. 27 

APPENDIX 

WITNESS STATEMENTS FOR THE RECORD: 

Jonathan Blum, Deputy Administrator and Director, Center for Medicare, 

Centers for Medicare and Medicaid Services, U.S. Department of Health 

and Human Services, Washington, DC .............................................................. 42 

Philip Rosenfeld, M.D., Ph.D., Professor of Ophthalmology, Bascom Palmer 

Eye Institute, Miami, FL ..................................................................................... 53 

Anthony Adamis, M.D., Vice President, Global Head of Ophthalmology, 

Genentech, Inc., South San Francisco, CA ........................................................ 61 

Sean Tunis, M.D., MSc, Founder and Director, Center for Medical Technology 

Policy, Baltimore, MD .......................................................................................... 69 

Lisa Swirsky, Senior Policy Analyst, Consumer Union, Washington, DC .......... 79 

Scott Gottlieb, M.D., Resident Fellow, American Enterprise Institute, Washington, DC ............................................................................................................. 83 

ADDITIONAL COMMITTEE DOCUMENTS: 

‘‘Prescription Drug Prices: Findings from International Comparisons and a 

Domestic Story,’’ A Report of the Majority Staff of the Special Committee 

on Aging ................................................................................................................ 97 

ADDITIONAL STATEMENTS SUBMITTED FOR THE RECORD: 

Senator Robert P. Casey, Jr. (D-PA) ...................................................................... 109 

Senator Jay Rockefeller (D-WV) ............................................................................. 111 

Senator Mark Udall (D-CO) .................................................................................... 114 

Academy of Managed Care Pharmacy, Alexandria, VA ....................................... 115 

Alliance for Aging Research, Washington, DC ...................................................... 118 

AMD Alliance International, Woodstock, MD ....................................................... 121 

National Community Pharmacists Association, Alexandria, VA ......................... 124 

National Venture Capital Association, Arlington, VA .......................................... 129 

(1) 

A PRESCRIPTION FOR SAVINGS: REDUCING 

DRUG COSTS TO MEDICARE 

THURSDAY, JULY 21, 2011 

U.S. SENATE, SPECIAL COMMITTEE ON AGING, Washington, DC. 

The Committee met, pursuant to notice, at 2:08 p.m. in Room 

SD–106, Dirksen Senate Office Building, Hon. Herb Kohl, Chairman of the Committee, presiding. 

Present: Senators Kohl [presiding], Whitehouse, Udall, Manchin, 

Blumenthal, Corker, and Kirk. 

Also Present: Senator Brown. 

OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN 

The CHAIRMAN. Good afternoon. This hearing will come to order, 

and we thank you all for being here. 

As we all know, rising health care costs are threatening our 

economy. While the health care reform bill of last year was a start, 

it certainly has not done enough to address costs at this point. We 

need to do more, and we need to look at every option as we seek 

to provide quality care for all Americans at a cost that we can afford. 

According to testimony provided by the Special Committee on 

Aging by the Organization for Economic Cooperation and Development, OECD, in 2009 the average price of pharmaceutical drugs in 

the U.S. was 30 percent higher than in the other 30 OECD countries. These are the most advanced and developed countries. 

Another study found, the McKinsey study, that the difference in 

price may actually be as high as 50 percent between what we 

charge for pharmaceutical drugs here in this country versus those 

other 29 countries. 

As I’m sure we can all agree and understand, rising health care 

costs are hurting America’s global competitiveness and are a drag 

on family wages as potential increases have been used to pay for 

the rising costs of health care and prescription drugs instead of 

augmenting the wages of our working families. 

In 2010, the American people spent more than $300 billion on 

prescription drugs, and a third of that was paid for by Medicare 

and Medicaid. Left unchecked, these costs threaten our country, 

our economy, and every American family, and we all, I think, 

would agree that this kind of a condition is not acceptable. 

Today’s hearing will focus on one aspect of health costs, namely 

prescription drugs, and provide an opportunity to talk about possible solutions. The committee will also release an investigative reVerDate Nov 24 2008 12:04 Oct 20, 2011 Jkt 068441 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\68441.TXT SHAUN PsN: DPROCT
2 

port that indicates that drug companies charge American consumers more because we lack the negotiating power used by other 

countries. 

We already have prescription drug programs in place which do 

cut costs through negotiation, including the Veteran’s Administration and a program in Wisconsin called Senior Care, and we should 

look, I believe, to emulate those examples. 

The 91,000 beneficiaries enrolled in Senior Care in my state cost 

the Federal government a third of what it would cost for them to 

be enrolled in Medicare Part D with the same benefits. 

By negotiating prices, Senior Care in Wisconsin did save my constituents $80 million in 2010. The VA demands a minimum discount of 24 percent on wholesale drug prices. If Medicare were able 

to save 24 percent, taxpayers would then save more than $350 billion over 10 years. 

We also need to look at giving the government the ability to address sizeable price differences between drugs that are similarly effective. The National Institutes of Health recently sponsored a 

lengthy comparative clinical trial between two highly effective 

drugs used to treat macular degeneration, a condition that often 

causes blindness among seniors. The trial found that both drugs 

worked equally well in treating this condition. However, one cost 

$2,000 a dose, while the other cost $50. So we will be hearing testimony today about these two drugs on which Medicare is spending 

more than a billion dollars a year. 

Today we’ll be releasing a number of additional cost savings policy options suggested by experts to hugely reduce prescription drug 

costs. Some of these options would save billions, while others would 

be more modest. These options include ways to increase transparency and expand discount programs and reduce the financial incentives for doctors to prescribe the most unnecessary or expensive 

drugs. 

This morning, the Judiciary Committee passed on one of these 

bipartisan proposals which would limit delays in getting generic 

prescription drugs to consumers. Several of our witnesses will discuss how these and other policies result in lower costs without sacrificing access, choice, or quality of care. I urge my colleagues to 

be open to considering all of these ideas, and I hope that together 

we can put additional solutions on the table. 

We thank you all again for being here today. 

And now we turn to the ranking member of this committee, Senator Bob Corker. 

STATEMENT OF SENATOR BOB CORKER 

Senator CORKER. Mr. Chairman, thank you for having the hearing, and I want to thank all of our witnesses who are here. I know 

that we have two panels. We had expected actually numbers of 

Senators on both sides of the aisle, and in order that we not have 

a lot of long, drawn-out opening comments, I’d rather hear from the 

witnesses. I’m not going to make an opening statement. 

I will say that I think all of us are concerned about the cost of 

prescription drugs. Obviously, we may have differing views as to 

how to solve those, but I think that’s the purpose of our hearing 

3 

today. I look forward to hearing the witness testimony and thank 

the chairman for calling the hearing. 

The CHAIRMAN. I thank you very much, Senator Corker. 

Senator Kirk, do you have a comment or two to make? 

Senator KIRK. I do not, Mr. Chairman. I’ll be brief, and let’s go. 

The CHAIRMAN. Thank you very much. 

So now we turn to Panel 1 and our one witness. He is Jonathan 

Blum, the Deputy Administrator and Director of Medicare at the 

Centers for Medicare and Medicaid Services. Mr. Blum previously 

served at the Office of Management and Budget, and for the Senate 

Finance Committee. Mr. Blum is also the former vice president of 

Avalere Health. 

We welcome you back, and we look forward to your testimony. 

Go right ahead. 

STATEMENT OF JONATHAN BLUM, DEPUTY ADMINISTRATOR 

AND DIRECTOR, CENTER FOR MEDICARE, CENTERS FOR 

MEDICARE AND MEDICAID SERVICES, U.S. DEPARTMENT OF 

HEALTH AND HUMAN SERVICES, WASHINGTON, DC 

Mr. BLUM. Chairman Kohl, Ranking Member Corker, Senator 

Kirk, thank you for the opportunity to talk about Medicare’s payments for prescription drugs. 

All four parts of the Medicare program, Part A, Part B, Part C, 

and Part D, pay for drugs in some form or fashion. All use different 

payment systems under different statutory authorities and frameworks. 

I’d like to focus today on payments for drugs under our Part B 

and Part D payment systems, the two payment streams that receive the most policy attention. 

All of our payment systems for drugs are similar in one respect. 

The Medicare program does not reimburse drug manufacturers directly for drugs provided to Medicare beneficiaries. Instead, Medicare pays physicians, hospitals, dialysis facilities, and insurance 

plans, who in turn purchase drugs or pay a pharmacist for drugs 

provided to Medicare beneficiaries. That is, we have no direct payment relationship with drug manufacturers. 

Under Medicare Part B, the most common payment for drugs is 

to physicians who provide drugs to their patients. The program 

also pays outpatient hospital departments for drugs provided during outpatient procedures such as chemotherapy drugs, and dialysis facilities for drugs provided in the context of dialysis care. 

The Congress has authorized the Part B program to pay for only 

certain drugs through Part B. These drugs include drugs administered by a physician or under the supervision of a physician; drugs 

provided through durable medical equipment such as nebulizers or 

IV pumps; and drugs that are directed by statute. These include 

certain drugs provided to dialysis patients, oral cancer drugs, and 

certain vaccines. 

The Part B program covers about 800 drugs total that fall under these three categories. In 2010, CMS spent $12.5 billion for Part 

B-covered drugs, and the CMS actuaries project that total spending 

for these drugs will double over the next 10 years. 

Today’s spending for Part B drugs is highly concentrated in a relatively few number of drugs. Thirteen drugs account for half of the 

4 

total spending. About $6.25 billion is comprised of 13 drugs, and 

the top spending drug is Lucentis, that accounted for 16 percent of 

total Part B drug spending. 

Congress reformed the payment system for these drugs in 2005, 

or most of these drugs in 2005. Prior to 2005, Medicare’s payments 

for these drugs were based on the so-called average wholesale 

price, or the sticker price. There were numerous studies finding 

that payments to physicians under this pricing system far exceeded 

physicians’ own costs to purchase the drugs. This created a payment spread for physicians. 

Congress changed the system in 2005. CMS now uses a system 

based upon the average sales price, or ASP. The ASP is the average of each manufacturer’s sales price net of most discounts and rebates and other price concessions. The ASP accounts for most sales 

from manufacturers to entities in the U.S. who purchase the drug 

from the manufacturer. 

CMS, for the Medicare Part B program, pays physicians who administer these drugs a payment of ASP plus 6 percent. 

The Part D prescription drug program works somewhat differently. Private insurance plans compete to provide outpatient 

drug coverage to beneficiaries who choose to participate in the Part 

D drug program. CMS contracts with hundreds of drug plans which 

must meet program requirements. 

Virtually all Part D plans build their own drug formularies or 

lists of preferred and non-preferred drugs. CMS must approve plan 

formularies, and plans must cover at least two drugs in each therapeutic class, and the formularies must be deemed by CMS not to 

discriminate. 

Today, Part D plans cover more than 6,000 drugs, and the average Part D private plan formulary includes about 1,000 drugs on 

average. CMS pays Part D plans a fixed monthly payment which 

is based upon the average premium bid of all participating Part D 

plans. Medicare also provides other payments to these Part D plans 

to offset the insurance risk that these plans bear, and Part D plans 

that enroll low-income beneficiaries receive greater subsidies from 

the Medicare program. 

According to the CMS actuaries, total Part D costs were about 

$62 billion in 2010, and the CMS actuaries project that total Part 

D spending will rise to $156 billion by 2020, an average growth 

rate of about 10 percent per year. 

The rising cost of drugs will consume a greater overall share of 

Medicare spending over the next 10 years. This spending growth 

will require all of us to work together to ensure that costs remain 

affordable while maintaining access to necessary treatments. 

I’d be happy to answer your questions. 

[The prepared statement of Jonathan Blum appears in the Appendix on page 42.] 

The CHAIRMAN. Thank you, Mr. Blum. I’m sure you are familiar 

with the general fact that many of these prescription drugs are 

available in other countries for much less than what they cost here 

in the United States. Why do you think this is so? 

Mr. BLUM. Well, I think a couple of reasons. One is that the public programs, Medicare and Medicaid, operate our payment systems 

according to very strict statutory formularies. Different countries 

5 

use other payment mechanisms. We have a policy within CMS not 

to require formularies. Private Part D plans are able to implement 

formularies. So we have different statutory frameworks than I 

think other countries can operate under. 

The CHAIRMAN. Well, would that suggest that, in a sense, we’re 

shooting ourselves in the foot? 

Mr. BLUM. Pardon me. I don’t understand the question. 

The CHAIRMAN. Would that suggest that we are making mistakes 

in how we operate our programs here in this country if our goal 

is to provide the product at the least possible cost? 

Mr. BLUM. Well, I think one thing that we observe within both 

the Part B and the Part D payment systems is that when drugs 

have competition, meaning they have generic alternatives or they 

have multiple drugs competing in the same therapeutic class, we 

see much more pricing pressure. We see less pricing pressure for 

drugs that don’t have competition, that don’t have generic substitutes. So I think that’s one observation. 

And I think to CMS’ observation, when we have competition for 

drugs in particular classes, when we have generic alternatives, we 

see greater pricing pressure through both the Part B payment system and also the Part D payment system. 

The CHAIRMAN. Mr. Blum, as you know, I sent your agency a letter yesterday requesting that Medicare ensure that Avastin is 

available to all patients who choose to use it as a treatment for 

macular degeneration. As you note in your testimony, Avastin was 

recently shown by an NIH trial to be similarly safe and effective 

to Lucentis. I hope that CMS will bring immediate attention to this 

matter and make an affirmative national coverage decision for 

Avastin. 

Mr. BLUM. We currently cover both drugs. Both drugs are covered through the Part B program. We note that the majority of 

physicians that treat this condition choose to use Avastin. Lucentis 

is an on-label drug, and the Avastin for the condition that you’re 

concerned about is an off-label marketed drug. CMS currently pays 

for both drugs, and physicians have the option to use both drugs. 

But while the majority of physicians use Avastin, a vast majority 

of the spending is for Lucentis, a higher priced drug through our 

payment system. 

The CHAIRMAN. Why doesn’t CMS obtain discounts on the much 

more expensive drug, Lucentis? 

Mr. BLUM. We don’t have any authority to do so under our current law. The pricing system is based upon the average sales price, 

which takes into account more or less the private purchasers of 

these drugs. I think what is true is that for Lucentis, this is a condition that’s particularly focused within the Medicare program that 

I believe about 75 percent or so of the drug is delivered to Medicare 

beneficiaries through our fee-for-service program. 

But the statutory construct is such that CMS pays based upon 

the average sales price, but we also note that the Medicare program is by far the largest part of the spending for this particular 

drug. 

The CHAIRMAN. Thank you very much, Mr. Blum. 

And now we turn to Senator Corker. 

6 

Senator CORKER. Thank you, Mr. Blum, for being here and for 

your testimony. 

You mentioned that Part D plans negotiate rebates, and there’s 

been some legislation put forth by a couple of Senators looking at 

that ceiling issue and other kinds of things that introduce Medicaid-style drug rebates into Medicare Part D. Is that something 

you support or do not support? 

Mr. BLUM. Well, I think what the President has said is that he 

is open to all ideas in the context of the debt ceiling discussions. 

In April, the President put out a framework—— 

Senator CORKER. I was asking you specifically, since this is what 

you do, whether you support Medicaid-style rebates or not. I understand what the President may or may not—— 

Mr. BLUM. Sure. Well, as an official of CMS, I have to support 

the official position of the administration. 

Senator CORKER. So did the President take a position on Medicaid-style rebates? 

Mr. BLUM. I think what the President said is that he’s open to 

all ideas in the context to reduce overall costs, both in the Medicare—— 

Senator CORKER. Just sort of let me move away from the talking 

points. Do you, as an official that deals with health care issues on 

the issue of prescription drugs, which is why we’re all here, do you 

or do you not support Medicaid-style rebates for Medicare Part D? 

Mr. BLUM. I believe that the Medicare program has proven successful in lowering drug costs through competition. I also believe 

that there are certain drugs that are provided through the Medicare program that don’t have as much competition, and there are 

more opportunities for us to reduce costs. 

Senator CORKER. So I think what you’re saying is in the overall 

Medicare Part D program, you think it’s worked pretty well. There 

may be some isolated cases where you would recommend a different type of approach. 

Mr. BLUM. I believe that the Congressional Budget Office has 

scored a policy that would require Medicaid-level rebates for certain drugs at about $120 billion savings for the next 10 years. The 

President has said that he’s open to all ideas and offered that as 

one suggestion to reduce overall Medicare spending. 

Senator CORKER. Would it make any sense in those areas to 

maybe have the same type of competitive structure that we have 

in Medicare Part D now? 

Mr. BLUM. In terms of the parts of the program? We know that 

when we structure competition in parts of the program, like durable medical equipment, that we get lower costs, get better prices for 

both the beneficiaries and for taxpayers. The Part D program in 

general has produced much lower Part D premiums than I think 

our actuaries had predicted when the program was enacted. 

But at the same time, in order to get competition, you have to 

pick winners and losers. In cases where there aren’t alternatives or 

there isn’t competition for products or suppliers, it’s very difficult 

to get lower prices through competition. Where you have lots of 

choice and you have lots of suppliers, like in the durable medical 

equipment context, or in the Part D plan context where we have 

25 or 30 stand-alone drug plans competing in the same market, we 

7 

see that competition produces good results. In the cases where we 

have a single item for a single product, it’s very hard to get lower 

prices through competition. 

Senator CORKER. Thank you. I think, again, to restate what 

you’re saying is Medicare Part D works really, really well as far as 

the competition goes in lowering prices for seniors, but there are 

some isolated cases where when only one type of drug is available, 

we might look at some other ways of dealing with that. 

Mr. BLUM. The total cost of Part D is certainly lower I think than 

the actuaries for the Congressional Budget Office estimate. I think 

part of that is that we have seen much more rapid generic diffusion 

through the Part D program than I think the actuaries would have 

said. I can’t speak for the actuaries, but I think what they would 

say is that the main reason we’re seeing lower costs than expected 

is that we have much more generic competition and diffusion than 

they had predicted back in 2003 when the benefit was enacted. 

We also see robust premium competition for Part D plans, and 

we see beneficiaries gravitate to the plans that offer the most competitive premiums. 

So I think to my observation, the number one reason why Part 

D costs remain low is that we have more generic use through the 

Part D program than in other payment systems, but we also see 

very robust premium competition for Part D plans, and we have a 

very rich market. 

Senator CORKER. Thank you. That’s quite an endorsement. 

Let me ask you, on the Medicaid programs in general where we 

have a different type of situation, we’ve seen tremendous cost increases on the prescription drug side of Medicaid, which has a very 

different type mechanism. Is that not true? 

Mr. BLUM. My observation is that when you compare Medicaid 

paid net prices to other purchasers, that oftentimes Medicaid is a 

lower price. I don’t know the reasons why Medicaid drug spending 

is growing like you say, but I would guess that most of that growth 

is due to the fact that we have more beneficiaries in the program, 

not necessarily higher prices for prescription drugs. 

Senator CORKER. I see my time is up, and I thank you again for 

answering the questions the way you have. I appreciate it. 

Mr. BLUM. Thank you. 

The CHAIRMAN. We turn now to the Senator from Ohio, Sherrod 

Brown. 

Senator BROWN. Thank you, Mr. Chairman, and Ranking Member Corker. I appreciate especially being here at the request of the 

chairman because I’m not on this committee, and I appreciate the 

opportunity to share some information and ask you something. 

I first appreciate the chairman’s work on Avastin/Lucentis. 

I want to bring another issue to you on a progesterone called 

P17, marketed by KV Pharmaceuticals out of St. Louis as a drug 

called Makena. I think you know the story, that for several years 

women, at the cost of $10 to $20 a dose and 20 doses, 20 weeks 

once a week of a shot they get typically in a hospital or doctor’s 

office. So the cost overall of $200 or $300 for the whole regimen of 

this P17 progesterone has dramatically cut the rate of low birth 

weight babies born in this country. Medicaid pays for about 42 perVerDate Nov 24 2008 12:04 Oct 20, 2011 Jkt 068441 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 C:\DOCS\68441.TXT SHAUN PsN: DPROCT
8 

cent of the nation’s more than 4 million annual births. Twelve percent of live births involve a preterm baby. 

So compounding pharmacists were making these drugs. Often 

one in a community or in a major city hospital or whatever were 

producing these drugs, and women’s lives or babies’ lives were 

saved in many cases. Babies were born full course, full term much 

more often. 

KV Pharmaceuticals, a company I’d not heard of before this, 

went to FDA, got approval for exclusivity for seven years. They 

raised this $10 to $20 a dose for 20 weeks, $200 to $300, $200 to 

$400, to $1,500 a dose times 20. Do the math. Under pressure from 

many of us, they dropped the price to $690. That’s still a significant public health problem. Call it greed, call it gaming the system, 

call it what you want, it’s a significant public health problem. 

It’s also a significant insurance company and Medicaid/taxpayer 

problem. 

We have seen a similar kind of gaming the system on a drug 

called Colcrys, as you know, treating gout. It used to be 4 cents a 

pill. After URL Pharma went to get FDA approval, the price went 

from 4 cents a pill to $5 a pill. Gout is a serious problem for a lot 

of people in this country. 

My question is—oh, one more thing. The FDA—oh, I’m sorry. 

Yes, the FDA did something that is highly unusual. FDA, when KV 

Pharmaceuticals sent a cease and desist order to compounding 

pharmacists all over America, the FDA stepped in and said we will 

not enforce that cease and desist order, implicitly saying carry on 

and keep compounding this drug. 

Now, there is not a public safety issue here. There’s never been 

any accusation the compounding pharmacies, pharmacists and 

pharmacies have contaminated this drug, have made it in a way 

that’s not safe for these women, never that I’ve read any accusation 

about that. 

So my question is what do you do about this? On Colcrys, on 

Makena, it’s such a public health issue, it’s such a taxpayer issue 

where even today, after CMS or—I’m sorry, after FDA stepped in, 

only three states, according to the American College of Obstetricians and Gynecologists, only three states are solely covering 17P. 

Five are covering only Makena. Twenty are covering both. So if the 

physician is not on her toes here, and if the ultimate buyer of this 

drug or the user of this drug or the hospital is not paying enough 

attention, they’re paying more like $690 a dose instead of the $10 

to $20 that compounding pharmacists are still making this for. 

What is your role and what is CMS really going to do to make 

sure the public health isn’t at risk and taxpayers aren’t paying billions of dollars more, whether it’s Colcrys, whether it’s Makena, 

whether it’s the next drug that some opportunistic—I won’t use the 

word ‘‘greedy’’ but opportunistic drug company decides to move forward on? 

Mr. BLUM. A couple of observations on the examples that you 

raised. I think it shows that when a drug or a product that doesn’t 

face competition from other products or generics, that they can exercise monopoly pricing power, and that’s the incentive to do so. 

So I think one thing that CMS and every other part of the public 

health infrastructure needs to do is to ensure that we create conVerDate Nov 24 2008 12:04 Oct 20, 2011 Jkt 068441 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\68441.TXT SHAUN PsN: DPROCT
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sistent and quick pathways consistent with the law to generics to 

ensure that we have competition. But outside of—— 

Senator BROWN. That’s not—sorry to interrupt. That’s not good 

enough here because they have seven years of exclusivity. So that’s 

an answer in some cases. I don’t think it’s an answer to the chairman’s issue, and it’s certainly not an answer to these two drugs. 

Mr. BLUM. I think, in complete frankness, Senator, the authorities that you’re suggesting aren’t authorities that CMS has today. 

If Congress would like CMS to exercise those authorities, the law 

would have to be changed in order for us to do so. 

Senator BROWN. You have no role in negotiating drug prices in 

that narrow window? 

Mr. BLUM. No part of my testimony said that our payment systems don’t tie to drug manufacturers directly. CMS pays physicians. CMS pays drug plans. CMS pays hospitals, who in turn purchase drugs, and our payment systems are set based upon very 

tight statutory constructs. So, today, CMS does not have any negotiating authority directly with drug manufacturers. 

Senator BROWN. Thank you, Mr. Chairman, for your time. Thank 

you. 

The CHAIRMAN. Thank you very much, Senator Brown. 

Now we turn to Senator Kirk. 

Senator KIRK. Thank you, Mr. Chairman. Thank you for having 

me on this committee. 

I’d like to raise—I’ve got a chart here. I’d like to raise an issue 

with regard to IPAB, the Independent Payment Advisory Board, 

and the British equivalent, the National Health Service. Their 

equivalent of IPAB is called the National Institute for Health and 

Clinical Excellence, called NICE. 

And what I’m worried about is NICE is not so nice, generating 

clinical outcomes significantly worse for patients who are unfortunately under its jurisdiction rather than American seniors, who are 

under Medicare. 

When you look at several of the indicated medicines that are 

available, you see, for example, in postmenopausal women, 

Herceptin is indicated and is available under Medicare for treatment. But NICE denies this, and that would total about 46,000 

women in the United Kingdom that are not allowed Herceptin because a British bureaucrat has said to all British doctors, under 

every circumstance, no matter what your clinical judgment regarding this patient is, you may not provide this. Luckily, we still give 

this freedom to U.S. physicians. 

For liver cancer, the indicated treatment may be Nexavar. And 

in England, the NICE bureaucrats have now denied authority for 

all British physicians to provide this. 

This may be one of the reasons why the United Kingdom now 

ranks 16th out of 18 EU states in cancer survival in this area. 

They simply are dying, and part of the reason might be that what 

is indicated and especially could be provided by a physician under 

Medicare is not allowed. 

In colorectal cancer, we all understand Avastin, and Avastin has 

been shown as being clinically indicated to cut off the blood supply 

of a tumor. For Americans suffering from kidney cancer, they may 

be prescribed with Affinitor. Affinitor is indicated if the other drugs 

10 

are not working, and it has also been helpful when you have a 

transplant. It helps the body accept this. 

In the case of British patients, they are denied Affinitor and its 

benefits. 

Probably a bigger disease, leukemia, the cancer of white blood 

cells, for Spyrocel, this is used if Gleevec is not seen as effective. 

American physicians under Medicare are allowed to do this. NICE 

under the NHS then denies all care for this. 

And then for lung cancer, Tarceva, which is used for small cell 

cancer if other chemotherapy fails, and also in pancreatic cancer, 

denied. 

Here’s my question. What is going to prevent IPAB from metastasizing—and I use that word directly—into NICE? Because I think 

for many Americans, we go to England, especially on holidays, and 

normally an American will not get on a plane and leave the United 

States for a holiday unless they’re in a good health status. And so 

Americans’ personal experience with the NHS is minimal to none. 

I lived and worked in Britain for three years, and I can tell you 

my first experience inside a British hospital was shocking as to its 

level of physical infrastructure, some hospitals being not improved 

or expanded since the blitz, and then the denial of care and lack 

of technical expertise, as opposed to what I saw at Evanston Hospital near my own town. 

What actions are you taking to make sure that IPAB can never 

metastasize into NICE? 

Mr. BLUM. I think a couple of things. One is that as the Affordable Care Act structured the IPAB, that it was structured as an 

independent body from CMS. And I think that the goal, as I understand it, of the legislation was to create mechanisms to ensure that 

overall costs of the Medicare program and other parts of the health 

care system remain affordable. And I think we can all agree that 

the ultimate goal is to ensure that per capita cost growth remains 

affordable to ensure that the Medicare program remains strong, 

and for current beneficiaries—— 

Senator KIRK. Wait, wait. When you lay out that mission, NICE’s 

view is NICE is connected to a bankrupt government. The British 

government has almost as many debt loads as we do. And so the 

bureaucrats then use comparative effectiveness research to then 

support the kind of decisions that I just laid out that then deny 

care, driving cancer survival rates in Britain to the lowest in the 

EU. 

Mr. BLUM. Sure. Well, my understanding of the legislation is 

that the IPAB provides recommendations to the Congress. Congress has the right to choose to accept those recommendations or 

not. The Congress can overrule those recommendations. 

Senator KIRK. And then this is regardless of what a physician 

thinks is indicated for their patient. What if the physician disagrees with what IPAB recommends? 

Mr. BLUM. Well, I think a couple of things. One is that the IPAB 

legislation, consistent with the Medicare framework today, I believe 

prohibits coverage decisions or any coverage decision from factoring 

costs to those coverage decisions. So I think the chart that you’re 

suggesting suggests that NIHCE takes into account cost considerations for particular drugs. 

11 

The current coverage authority that CMS operates under in the 

Medicare program does not allow us to consider cost in making coverage decisions, and I believe the IPAB legislation doesn’t change 

that framework that we currently operate under today. 

Senator KIRK. Mr. Chairman, I would just say I’m highly worried 

that before the legislation we didn’t even have an IPAB. Now we 

have an IPAB, and I think its goal inevitably will be to metastasize 

into what the British have. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Kirk. 

Now we turn to Senator Udall. 

Senator UDALL. Thank you, Mr. Chairman. 

I listened to my colleague from Illinois with interest. 

I do understand, Mr. Blum, that if the IPAB recommendations 

are not acceptable to the Congress, we can simply override them 

with our own ideas and our own proposals about how to contain 

costs. Is that correct? 

Mr. BLUM. That’s my understanding, Senator, yes. 

Senator UDALL. That’s your understanding? And I also understand that we have had a similar advisory committee attached to 

CMS, MedPac some have called it, which has made a series of insightful recommendations in retrospect about ways in which to contain costs but also maintain quality of treatment. 

Mr. BLUM. Right. 

Senator UDALL. Would you agree? 

Mr. BLUM. MedPac serves the Congress. They don’t serve CMS. 

So they’re an independent agency that provides the Congress recommendations about how to improve Medicare/Medicaid payment 

policy. They provide recommendations to the Congress each year 

that the Congress can choose to accept or not. 

I think what is different about the IPAB is that, if the Congress 

does not act upon the recommendations, the Secretary of Health 

and Human Services would have the authority to implement those 

recommendations. 

But you’re absolutely correct that the recommendations go to 

Congress. Congress can choose to accept or to suggest other ways. 

And so I see it as a body that serves the Congress to provide recommendations to contain overall per capita spending. 

Senator UDALL. And that’s the point of the hearing today, and 

I want to thank Senator Kohl and Senator Corker for convening 

this. 

If I might, Mr. Chairman, I’d like to ask unanimous consent that 

my initial statement be included in the—— 

The CHAIRMAN. Without objection. 

Senator UDALL [continuing]. In the record. 

And if I could, I’d just like to turn to the earlier comments you 

made about generic drugs. They’re obviously a focus of the Medicare Part D, and I know there’s some good news on that front. 

Would you talk about your sense of how branded drug costs have 

affected costs at CMS, as opposed to generics? 

[The prepared statement of Senator Mark Udall appears in the 

Appendix on page 114.] 

12 

Mr. BLUM. Sure. Well, I think we operate under different statutory frameworks and different competition within different therapeutic frameworks in the Part B program and the Part D program. 

What is driving Part B drug spending? These are drugs largely 

provided through physician offices. The spending is concentrated on 

a handful of drugs. They’re often new drugs coming on the market 

that I think are in the brand category. 

In the Part D program, we continue to see robust generic competition for many of the most commonly prescribed drugs for conditions like diabetes, heart care, et cetera. In the Part D context we 

see very strong generic competition, less so in the Part B drug context. Many of the drugs that we pay for in Part B are drugs used 

to treat cancer that are new treatments that still are in their market exclusivity. But on the Part B side, we have a concentration of 

spending in a handful of drugs due to the newness of the treatments, and due to the popularity of the treatment. 

Senator UDALL. On balance, do you see a flattening out of the 

costs on whatever metric is the most useful on the branded side? 

Mr. BLUM. Well, I think—— 

Senator UDALL. Again, the point of the hearing is how do we 

maintain quality, how do we encourage the pharmaceutical sector 

to innovate and take some risks, but how do we get a handle on 

the enormous cost of providing drugs to Americans. 

Mr. BLUM. And I think one observation is that while we need to 

have strong incentives for manufacturers to bring new markets to 

market, we see that when drugs do face competition from generics 

or other treatments, that the prices that are fed through our payment system reflect that competition. 

So I think the question is how do you always find the right balance between creating strong incentives to ensure that new markets come to market, and also that competition can happen when 

it’s appropriate for it to happen. 

Senator UDALL. Let me turn to outcomes. The Affordable Care 

Act was focused in part on outcomes. What are you doing to pay 

for services based on health care outcomes, and how does evidence 

on health care outcomes affect CMS determinations on what drugs 

they cover? 

Mr. BLUM. Well, a couple of things. One is the Affordable Care 

Act clearly gives CMS a very strong direction for us to develop the 

next generation of payment systems for hospitals or for physicians 

to really focus on the overall value of care rather than the volume 

of care. We have different authorities that we’re implementing, or 

different programs that we’re implementing with this direction. 

One is accountable care organizations to ensure that physicians 

working with all parts of the health care system really focus on the 

long-term outcomes of the patient rather than a single episode of 

the payment. We are starting to receive stronger evidence that, 

when beneficiaries continue to follow drug regimens, when beneficiaries have access to drug benefits, that it saves the program 

long term. I think these are initial studies. I’m not sure that our 

actuaries have given them kind of absolute certainty, but there is 

stronger evidence that, when we focus on the overall preventive 

care, that we save long-term costs. 

13 

And so, hopefully with our direction, and I think the health care 

system’s direction of focusing payment on the outcome of the patient, the value of the care rather than the volume of the care, that 

physicians will make the best possible choices with their patients 

to ensure that care is better coordinated, better managed for the 

long term. 

Senator UDALL. Thank you, Mr. Blum. 

Mr. BLUM. Thank you. 

The CHAIRMAN. Thank you very much, Senator Udall. 

Now we turn to Senator Manchin. 

Senator MANCHIN. Thank you, Mr. Chairman, appreciate it. 

Thank you, Mr. Blum. 

Basically, with rising costs, especially of Medicaid or Medicare 

Part D costs, they’re estimated to rise about 9.7 percent, I think, 

for the next nine years. And with the waste, fraud and abuse that 

we see an awful lot throughout government and throughout basically the programs that we’re responsible for, what are you all’s intentions and what do you think can be done within your confines 

in order to remove or eliminate or reduce significantly the waste 

that’s in as far as the billing, overbilling, or wrong prescription? 

And rebates, I think, as I had done a little bit of investigation, 

the Inspector General’s findings suggest that the underreporting of 

drug rebates has led to excess rebate payments of approximately 

$1.9 billion per year. And do you all, are you looking at that? Do 

you have a group or a task force to eliminate that? 

Mr. BLUM. Sure. I think the Part D program is administered 

through private Part D plans, private insurance plans, who then 

pay pharmacists and then sign up beneficiaries and operate the 

benefit through pharmacy benefit managers. 

Part of our strategy to address the concern that you’re raising is 

to ensure that we set very strong requirements for our Part D 

plans, to have compliance programs in place to share data. So 

when we see a fraud issue on the fee-for-service side, we share that 

information with private insurance companies so they can act accordingly. 

We’re doing a lot more with sophisticated data, data analysis, to 

highlight and kind of bring to bear when spending is concentrated 

within a particular physician or a particular pharmacy. 

So our strategy I think is twofold. One is to ensure that we 

incent and require our Part D plans that are providing the benefit 

on behalf of our beneficiaries to have the strongest compliance programs in place. When we see plans have weak compliance programs, we take action very quickly. But also our strategy is to 

share information, to share data so it’s not just the fee-for-service 

Medicare program that’s responding to a fraud hot spot. We’re 

sharing that information with all of our partners to ensure they 

can respond as well. 

But if we know that folks that are trying to commit fraud, if one 

spigot gets cut off, they move to another spigot, so our strategy is 

to make sure we’re working in unison to ensure that all the spigots 

get cut off, to the extent possible. 

Senator MANCHIN. With the cost of drugs, prescription versus 

generics, do you all play a role in your rulemaking as far as what 

we are to prescribe first, or go to low cost? 

14 

Mr. BLUM. We allow Part D plans, consistent with the statutory 

framework, to establish formularies, to set differential cost-sharing 

policies, to encourage beneficiaries to use generic drugs or lowercost drugs relative to higher-cost brands. So those formularies have 

to run through our checks and balances to ensure that they’re fair 

for our patients, but we provide the incentives, and also we provide 

the framework for private Part D plans to set those cost-sharing 

policies to encourage the—— 

Senator MANCHIN. So you’re telling me that basically our prescription prices for our drugs are anywhere from 30 to 50 percent 

higher than most other nations. 

Mr. BLUM [continuing]. We operate within current statutory 

frameworks, and our payments are consistent with those statutory 

frameworks. 

Senator MANCHIN. Do you have any opinions on that? Do we 

have the right statutory provisions in place, or do we need to make 

some adjustments? 

Mr. BLUM. I think what—— 

Senator MANCHIN. To reduce the costs, just to lower the costs so 

we’re able to provide to more people in need. 

Mr. BLUM. What I can say, Senator, is that the President has 

made it very clear that lowering Medicare costs and all costs in the 

health care system is one of our highest health care challenges, and 

he has said that all ideas and options are on the table in the context of the overall debt ceiling discussions. 

Senator MANCHIN. Would you agree basically that if you would 

use prescriptions, that you would have a reduced cost if they were 

available for the same type of treatment where a higher-cost drug 

is available? 

Mr. BLUM. I’m sorry. I don’t understand the question. 

Senator MANCHIN. Well, basically if you all had a policy or if you 

want us to change the law that would require you all to use the 

lowest-cost provider or the lowest-cost drugs for their treatment, 

then there would be tremendous cost savings. 

Mr. BLUM. I think the overall framework that CMS operates 

under is that the physician and the patient should make those 

choices together. 

Senator MANCHIN. We’re paying for it, though. 

Mr. BLUM. Absolutely. And so our payment policy should support 

the physician and the patient to make those best possible choices. 

We also know that, due to our cost-sharing policies, higher-priced 

drugs generally have higher-priced copayments attached to them. 

And so we have to be very sensitive that it’s not just the taxpayers 

who are paying higher prices, but it’s out-of-pocket costs that are 

also impacted as well. 

And so our payment framework pays for drugs indirectly, but we 

also have coverage policies that support physicians and patients 

making the best possible choices, and hopefully part of that discussion is taking into account the out-of-pocket costs that are being 

borne by our beneficiaries. 

Senator MANCHIN. I’d like to go into it in more depth with you, 

because I think in these budgetary-constrained times that we have, 

we should be looking at trying to get the best bang for our buck, 

and right now it doesn’t seem that we’re doing that. 

15 

Mr. BLUM. I’d be happy to follow up with that, Senator. 

Senator MANCHIN. Thank you. 

The CHAIRMAN. Thanks a lot, Senator Manchin. 

Now we turn to Senator Blumenthal. 

Senator BLUMENTHAL. Thank you, Senator Kohl, and thank you 

for again having a very, very informative and useful hearing. And 

thank you, Mr. Blum for your testimony here today. 

Would you agree with me that the Veterans’ Administration has 

greater leeway or authority to negotiate lower drug prices? 

Mr. BLUM. The VA operates I think relative to the Medicare program but with a much tighter what I would call formulary or drug 

list, and that provides them more negotiating leverage than I think 

what we operate within the Medicare program. And so the way 

that the statutory construct for the VA payment system has been 

constructed is giving the VA the freedom to kind of manage a much 

tighter formulary, which gives them more negotiating leverage to 

extract overall lower prices than what the Medicare program would 

pay. 

Senator BLUMENTHAL. And in effect, just cutting through what 

you just said and putting it in layman’s terms, the VA can negotiate lower drug prices by using the Federal Government’s bargaining power on its formulary. Is that not correct? 

Mr. BLUM. Sure, and I think—— 

Senator BLUMENTHAL. And under Medicare, that practice, that 

use of the Federal Government’s bargaining power is essentially 

barred; correct? 

Mr. BLUM. Correct. 

Senator BLUMENTHAL. And don’t we have an obligation to enable 

taxpayers and seniors to have lower drug prices by using the Federal Government’s bargaining power to lower those drug prices? 

Mr. BLUM. I think it’s fair that we have an obligation at CMS 

in the Medicare program to ensure that we are managing costs 

throughout the program to the best of our ability, and we pay for 

drugs today within the confines of the statute that’s been given to 

us. 

Senator BLUMENTHAL. And it really is, in fairness to you, Mr. 

Blum, the confines of the statute that, in effect, straightjacket you. 

There’s really no other word for it, in my view, straightjacket you 

from serving the public interest by saving taxpayers and seniors 

money by using the Federal Government’s bargaining power to 

lower drug prices. 

Mr. BLUM. Sure. My observation is that the payment system that 

we use for Part B drugs is set very clearly by statutory formulas. 

CMS operates those payment systems, but we cannot influence 

those payment systems. 

Senator BLUMENTHAL. And there’s no other way to view it than 

as a kind of loophole, giveaway, sweetheart deal that raises the 

cost of drugs at a time when the cost of drugs is already spiraling 

upward; correct? 

Mr. BLUM. I’m sorry. I don’t understand the question. 

Senator BLUMENTHAL. Well, let me put it a different way. 

Wouldn’t you recommend that the confines of the statute, as you 

have adroitly put it, be changed so that the public interest could 

be better served to lower drug prices? 

16 

Mr. BLUM. I can’t speak to a specific policy recommendation, but 

what I can say is that if we—the Congress believes that the pricing 

mechanisms or the pricing outcomes should be different, then I believe that the statutory construct would have to be changed. 

Senator BLUMENTHAL. Just to put it in very practical terms, my 

understanding is that, in FY 2010, the VA in fact spent $3.9 billion 

in drugs and realized cost savings from negotiations of $700 million. If you were to extrapolate from the current expenditures on 

Medicare and prescription drugs, there would literally be billions 

of dollars in savings; correct? 

Mr. BLUM. Well, I think you’d also have to extrapolate the coverage that the VA programs provide relative to the Medicare program. And it’s my understanding that the VA operates a tighter 

formulary, if you will, which gives them more leverage. In order to 

have leverage, you have to say yes to one product and no to another product to create that negotiating clout. 

Senator BLUMENTHAL. But even with—and I apologize for interrupting, but my time is about to expire. Let me just make the 

point, whether the formulary is tight or expansive, negotiations enable lower prices; correct? 

Mr. BLUM. When there’s competition, yes. 

Senator BLUMENTHAL. And the Federal Government, it seems to 

me, has an obligation to taxpayers and seniors to take advantage 

of competition where it exists, or enhance it where it should be 

more robust in order to achieve those savings. I recognize you operate within the confines of the statute, so I am not asking these 

questions in a way that is meant to be hostile to you personally, 

but I thank you very much for your testimony today. 

Mr. BLUM. Thank you, Senator. 

The CHAIRMAN. Just one point before we turn to Senator Whitehouse. Senator Blumenthal, of course, you were on legislation that 

would authorize Medicare to negotiate directly with the pharmaceuticals. Is that right? 

Senator BLUMENTHAL. I am indeed, and thank you for your leadership on that legislation, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Chairman, and thank you for 

holding this important committee hearing. 

Why is it, Mr. Blum, that you aren’t prepared to make a policy 

recommendation to this committee? Is that a restriction related to 

your position at CMS? 

Mr. BLUM. Well, I think I can speak for the administration’s position, and what the President has said is that he is open to all 

ideas. He has suggested some possible ways in April for us to reduce Medicare and Medicaid costs. One suggestion was to think 

about requiring that the Medicare program receive deeper discounts for certain drugs that are provided through the Medicare 

program. But that is a statement that I’m prepared to say here 

today. 

Senator WHITEHOUSE. We’re often told that government should 

try to run more like a business. Can you think of any business that 

doesn’t exercise its buying power to achieve price advantages? 

17 

Mr. BLUM. I would assume the answer is yes, that businesses 

have a clear incentive to maximize revenue and lower costs, and 

part of that would be through negotiations. 

Senator WHITEHOUSE. And you can’t think of an example to the 

contrary. I mean, that is the way business behaves; correct? 

Mr. BLUM. That is my understanding. 

Senator WHITEHOUSE. So it is unusual for government to be, at 

least with respect to the business model, it is a departure from government operating more like a business to have government be 

constrained by the statutory confines you talked about and forbidden as it was in the Part D act from exercising its negotiating leverage. 

Mr. BLUM. Well, the Part D legislation that was enacted in 2003 

provides CMS the leverage to negotiate with Part D plans. That 

authority was expanded through the Affordable Care Act. The leverage that we have is through our contracting with Part D private 

plans. But you’re correct, we have no authority to negotiate with 

manufacturers to receive better prices paid or provided to our private Part D plans. 

Senator WHITEHOUSE. And does that relate back to the Medicare 

Modernization Act of 2003 and its so-called noninterference provision? 

Mr. BLUM. The noninterference provision prohibits Medicare 

CMS from interfering with private negotiations, with private 

health plans, with pharmaceutical companies, hospitals, any other 

service that is being purchased by the private plan. Our authority 

is to contract with the plan, but by and large we cannot interfere 

with the negotiations with the plan and their other providers or 

suppliers. We have authority to make sure that the benefits are 

consistent with the program’s requirements, but the prices that are 

contracted with the plan and the manufacturer are outside of CMS’ 

purview. 

Senator WHITEHOUSE. Setting aside the merits or the policy recommendations just for a moment, the National Committee to Preserve Social Security and Medicare has estimated that nearly $240 

billion could be saved in the Medicare program over 10 years if the 

Secretary were authorized to negotiate drug prices. As an estimate, 

do you have any comment on its accuracy? 

Mr. BLUM. I’ve seen different estimates on such authority, but I 

had not personally seen that estimate that you cite. 

Senator WHITEHOUSE. What estimate do you have or do you credit that is out there that would reflect the potential savings from 

such a change in law? 

Mr. BLUM. I believe the Congressional Budget Office may have 

scored a similar policy. I don’t recall the results, but I believe it 

was lower than the numbers that you have cited. 

Senator WHITEHOUSE. One of the things that I hear from Rhode 

Island seniors pretty often is that they have signed on to a Part 

D plan, and once they were signed on, the formulary then changed 

and the drug or drugs that they’re using and dependent on, or the 

reason they signed on to that Part D plan, are suddenly either no 

longer available or require a different and higher copay. In any 

event, they signed up for one thing, and in midterm they got dealt 

another set of conditions that they had never agreed to. 

18 

Can you tell me what role CMS can play to ensure that Part D 

plans have to—can’t make these midterm changes and that they 

can only become effective after a period has expired that would 

allow the senior to make a different set of choices, and that you basically get what you signed up for and you’re guaranteed to get 

what you signed up for until you can find something different? 

Mr. BLUM. Sure. What CMS requires, I believe, and this may not 

be 100 percent accurate, that when that drug plan changes a drug 

that’s provided on the formulary midyear, the plan is required to 

notify the patient, to provide a transition fill to ensure that the 

beneficiary can go back to their physician to get a new prescription. 

But I—but drug prices change throughout the year, and some 

manufacturers have the freedom to raise and lower prices throughout the year. So I would be hesitant, in the interest of ensuring 

that prices remain low and affordable, both for the program and for 

the taxpayers, to take away Part D plans’ ability to change 

formularies for different circumstances, whether the drug is 

deemed not effective, whether the price goes up and the Part D 

plan needs to respond to keep premiums affordable. 

So our policies require that the plans provide notice and transition, but at the same time I would be hesitant, personally, given 

that we want to make sure that Part D plans have the freedom to 

respond to different circumstances. 

Senator WHITEHOUSE. Thank you, Chairman. 

The CHAIRMAN. Thank you very much, Senator Whitehouse. 

Mr. Blum, we thank you for being here. You’ve been very helpful, 

very informative. We’re looking forward to continuing our work 

with you. 

Mr. BLUM. Thank you very much, Senator. 

Senator CORKER. Mr. Chairman, could I make one comment? 

The CHAIRMAN. Go ahead. 

Senator CORKER. I want to thank you for coming, too. And I 

think in spite of the push by many of my colleagues on the other 

side of the aisle to push you into direct negotiations on Medicare 

Part D, I think what you said is that it has been very, very successful at keeping prices low because of the tremendous amount of 

competition that exists, and that there may be a need in some isolated cases where only one type of drug is available to look at a 

different type of arrangement. 

But in Medicare Part D, generally speaking, the costs are far 

lower than ever imagined, seniors have far more choices than they 

ever would have, including the VA I think as you mentioned, and 

from your perspective this competitive nature of Medicare Part D 

has been very, very successful, and messing with it in any way 

would likely lead to some unintended negative consequences. So I 

thank you very much for being here and appreciate your testimony. 

The CHAIRMAN. Thank you. 

We’ll turn now to our second panel, if you would approach the 

witness stand. 

First we’ll be hearing from Dr. Philip Rosenfeld, Professor of 

Ophthalmology at the University of Miami. Dr. Rosenfeld has 

worked on many clinical trials involving innovative treatments for 

eye diseases. 

19 

Next we’ll be hearing from Dr. Anthony Adamis, who serves as 

a Global Head of Ophthalmology at Genentech. Dr. Adamis was 

formerly a professor at Harvard Medical School and is cofounder of 

Eyetech Pharmaceuticals. 

Next we’ll be hearing from Dr. Sean Tunis, who is founder and 

director of the Center for Medical Technology Policy. 

After that we’ll be hearing from Lisa Swirsky. She is a senior 

policy analyst for Consumers Union Health. 

Finally, we’ll be hearing from Dr. Scott Gottlieb. Dr. Gottlieb is 

a resident fellow at the American Enterprise Institute. 

We welcome you all. We’re looking forward to what you have to 

say, and we’ll now start with you, Dr. Rosenfeld. 

STATEMENT OF PHILIP ROSENFELD, M.D., Ph.D., PROFESSOR 

OF OPHTHALMOLOGY, BASCOM PALMER EYE INSTITUTE, 

MIAMI, FL 

Dr. ROSENFELD. Chairman Kohl, Ranking Member Corker and 

other distinguished members of the committee, thank you for inviting me today to testify on this important topic. I’m Dr. Philip 

Rosenfeld, Professor of Ophthalmology at the Bascom Palmer Eye 

Institute of the University of Miami Miller School of Medicine. This 

statement represents my own opinion and not those of the University of Miami or the Bascom Palmer Eye Institute. 

I bring to the discussion today a real-world perspective of the 

forces influencing the choice between two commonly used drugs for 

the treatment of wet macular degeneration. By studying this example, I believe we can better understand how the current incentives 

in our health care system promote the use of the most costly alternatives. 

These drugs are being used to treat wet macular degeneration, 

a leading cause of irreversible blindness among the elderly worldwide. When I say wet macular degeneration, I’m talking about the 

abnormal growth of blood vessels in the back of the eye. These 

blood vessels leak, they bleed, and they accelerate vision loss. 

Genentech performed groundbreaking scientific research that led 

to the discovery of two fabulous drugs, Avastin and Lucentis. Both 

drugs block the factor that causes the blood vessels to grow. Both 

drugs are derived from the same mouse monoclonal antibody. 

Avastin is a full-length antibody; Lucentis is a fragment of that 

antibody. Avastin is infused through an arm vein every two weeks 

in cancer patients; Lucentis is injected into the eye as often as 

every month. Avastin was FDA approved for colon cancer therapy 

in February of 2004; Lucentis for eye injections for wet macular degeneration in June of 2006. 

I don’t have time to go into the background of why I first injected 

Avastin into an eye, but it was clinically and scientifically justified. 

This off-label injection was successful and led to the international 

use of Avastin for a wide range of eye diseases. The rapid spread 

in 2005 was fueled by the availability of Avastin, its apparent efficacy and safety, its low cost, and the fact that Lucentis was not yet 

available, though everyone was seeking Lucentis. Even after 

Lucentis was approved, though, Avastin continued to be used as 

the low-cost alternative to Lucentis. 

20 

When a pharmacy follows strict USP—that’s United States Phar- macopeia—guidelines, Avastin can be prepared for $20 to $40. 

Lucentis costs $2,000 a dose. Since 2005, 1,500 scientific papers 

have appeared in peer-reviewed journals exploring the safety and 

efficacy of Avastin. However, definitive data was not available until 

the CATT trial results were published in the New England Journal 

of Medicine in May of this year. Dr. Dan Martin, chairman of the 

Cole Eye Institute of the Cleveland Clinic and chairman of this National Eye Institute-sponsored multicenter clinical trial, is here in 

the audience today. 

In this two-year study, injections of Avastin and Lucentis were 

compared in 1,200 wet AMD patients. After one year, the Lucentis 

injections given monthly were comparable to the Avastin injections 

given monthly. When Lucentis was given as needed, it was comparable to Avastin given as needed. Overall, the two treatments 

seemed equivalent. 

There were no apparent expected adverse event differences between the two drugs. However, Avastin was associated with an increase in unexpected adverse events that are not thought to be 

drug-related. However, these adverse events are closely being studied in the second year of the trial. 

To understand how these drugs are used in the United States, 

I collaborated with Ross Brechner at Medicare, and we found that 

60 percent of physicians in 2008 used Avastin, 40 percent used 

Lucentis. This is looking at 100 percent database from Part B 

Medicare. We saved Medicare approximately $800 million in 2008 

alone by the use of Avastin. 

So what determines why clinicians use one drug or the other? We 

have found there are several incentives in the system that promote 

Lucentis use. First, Medicare promotes the use by the 6 percent average sales price reimbursement to physicians. Not only does Medicare cover the cost of the drug, but they also add 6 percent of the 

average sales price. That’s $115 every month for a $2,000 investment. That investment is returned every month. So overall, the 

physician makes a 70 percent return on that initial $2,000 on 

Lucentis. 

In addition, CMS decreased the reimbursement for Avastin from 

$50 to $7 in a hospital-based setting. This was part of a bigger reduction that was blocked by a number of my colleagues, specialty 

societies, and government officials. However, the $7 reimbursement 

in a hospital-based setting is still in effect. In addition, in what’s 

called a disproportionate share hospital, the 340B discount program allows Lucentis to be purchased at $1,600 and get reimbursed at $2,000. That makes a $400 profit for each injection of 

Lucentis. This profit or this rebate should go to Medicare. 

Finally, Genentech has two incentive programs. One is a rebate 

program reported by Andy Pollack of the New York Times, November 2010. It’s very lucrative to clinical practices. It’s based on volume use and increase in usage of Lucentis. This rebate should not 

go to the clinician. It should be going to Medicare. 

And Genentech also allows the direct purchase using a credit 

card, allows cash back up to 2 percent to the physician. This rebate 

should go to Medicare and not the clinician. A transaction fee 

should be charged by Genentech. 

21 

So while these historical details surrounding the use of Avastin 

and Lucentis are unique in the annals of medicine, the financial incentives driving the use of expensive drugs and procedures are not. 

These incentives and disincentives should be eliminated. 

And finally, I inject over 4,000 eyes per year. I use about half 

Lucentis, half Avastin, and as a clinician I don’t want Medicare 

telling me which drug to use, but I don’t want my patients worrying that my decision to inject their eyes is being influenced by 

these incentives. The choice between drugs should be based between the physician and the patient based on efficacy, safety, and 

cost. It is noteworthy that, despite all of these financial incentives, 

most ophthalmologists use Avastin. This suggests that most ophthalmologists really do care about the cost of health care. 

Thank you again for this invitation, and for your attention. 

Thank you. 

[The prepared statement of Dr. Philip Rosenfeld appears in the 

Appendix on page 53.] 

The CHAIRMAN. Yes. We’ll turn now to Dr. Adamis. 

Before I do, did I hear you say you inject half of your patients 

with one and half of your patients with the other? 

Dr. ROSENFELD. When I look at my 4,000 eyes that are injected, 

I use on average half Avastin in those eyes and half Lucentis, and 

the decision is based between discussions with my patient and 

their decision after all the options are presented whether they want 

one or the other drug. 

The CHAIRMAN. You let your patient make that decision? 

Dr. ROSENFELD. Once they’re given all that information. I strongly believe that full disclosure is required for a patient to understand the reasons why a needle is going to be stuck into their eye. 

The CHAIRMAN. I understand. You seem to be indicating your 

independent opinion is that the drugs are similar. 

Dr. ROSENFELD. That’s my clinical opinion. 

The CHAIRMAN. Okay. Thank you very much. 

Dr. Adamis. 

STATEMENT OF ANTHONY ADAMIS, M.D., VICE PRESIDENT, 

GLOBAL HEAD OF OPHTHALMOLOGY, GENENTECH, INC., 

SOUTH SAN FRANCISCO, CA 

Dr. ADAMIS. Chairman Kohl, Ranking Member Corker, honorable 

members of the committee, thank you for inviting me here today. 

I ask my full written testimony be submitted for the record. 

My name is Tony Adamis. I’m the Vice President, Global Head 

of Ophthalmology at Genentech. I’m an ophthalmologist and vascular biologist by training. Prior to joining Genentech in 2009, I 

served in other positions in the biotech industry, as well as 11 

years at the Harvard Medical School where I treated patients and 

conducted research. 

Genentech is based in South San Francisco and as part of the 

Roche group currently employs over 30,000 people in the United 

States. Our commitment to innovation is unparalleled within the 

industry, with more than 100 projects in clinical development. In 

2009 alone, Genentech Roche spent $9.1 billion on R&D, an 

amount greater than any other company in the world. 

22 

Genentech’s mission is to develop innovative medicines to treat 

serious diseases. One of the most impactful medicines we’ve ever 

developed is Lucentis. Before Lucentis was available, wet AMD was 

the leading cause of blindness in older Americans. The average patient lost central vision until the ability to read, recognize faces 

and drive was lost. 

In addition to the personal suffering and loss of independence, the total annual cost to the U.S. GDP was estimated to be $5.4 billion. Everything changed with the development of Lucentis. For the 

first time, the average patient with wet AMD recovered vision. 

When the results were first presented at a major medical meeting, 

Lucentis was publicly compared to the discovery of penicillin. 

Since then, Lucentis has reduced the rate of legal blindness by 

72 percent. As a result, wet AMD may no longer be the leading 

cause of blindness in older Americans. Subsequent investments in 

Lucentis trials by Genentech have demonstrated sustained gains in 

vision in two additional serious diseases, retinal vein occlusion and 

diabetic macular edema. So to date, Lucentis has exhibited heretofore unseen efficacy in three of the major causes of blindness in 

the United States. 

Drug development is lengthy, expensive, and risky. Drugs entering clinical development have a 92 percent failure rate. Lucentis 

was one of the 8 percent that succeeded. The price of Lucentis 

therefore funds not only its own development but also the 92 percent that fail and our future successes. Eleven years and almost 

$1.4 billion have been spent on the development of Lucentis, involving over 18 clinical trials and 7,100 patients in the United 

States, and over 10,000 around the world. 

In 1989, Napoleone Ferrara discovered vascular endothelial 

growth factor, or VEGF, at Genentech. His research showed that 

blocking VEGF might prove useful in the treatment of cancer, a 

line of research that eventually resulted in Avastin. Around the 

same time, my colleagues and I working with Dr. Ferrara determined that VEGF was also a potential target for eye disease. Dr. 

Ferrara, however, was concerned that Avastin may not be ideal for 

the eye, so his team set out to create something better. That drug 

became Lucentis. 

For his work on Lucentis, Dr. Ferrara was awarded the Lasker 

Prize in 2010. Seventy-six Lasker laureates have gone on to win a 

Nobel Prize in medicine. 

There are four scientific reasons why Lucentis was created. 

Today I will focus on one of them, systemic safety. When drugs are 

administered to the eye, they often find their way into the bloodstream. When that happens, side effects are more likely. 

Avastin was designed to last a long time in the bloodstream so 

that it can have sustained activity against tumors. Lucentis, however, was designed to exit the bloodstream very quickly. 

VEGF-blocking drugs can result in rare but serious side effects. 

When an interim safety analysis in 2007 revealed a potential 

stroke risk with the use of Lucentis, Genentech sent a letter to doctors, notified the FDA, updated the package insert, and presented 

the data to the medical community. 

Today, there’s a growing body of data that suggests off-label 

Avastin may pose a greater risk than Lucentis. Two large Medicare 

23 

claim studies, one from Duke and a second from Johns Hopkins, 

both identified a potentially greater risk of stroke and death when 

using Avastin in wet AMD. The CATT trial also showed a safety 

difference. A 29 percent increased risk of serious side effects was 

seen with Avastin, with over 80 percent requiring hospitalization. 

Genentech’s internal analysis indicates that part of the increased 

risk is consistent with VEGF blockade in the blood stream. 

These data are not yet conclusive. However, it is notable that the 

three largest studies to date have shown statistically significant 

safety risks with the use of Avastin in wet AMD. As the data 

emerge, we agree with the American Academy of Ophthalmology 

and the written testimony of the American Society of Retinal Specialists that a treatment plan must be selected by an ophthalmologist and a patient, considering important benefit/risk information 

that empowers them to make evidence-based decisions. 

Genentech is also committed to ensuring that no patient goes 

without treatment due to financial barriers. Since 1985, we have 

donated $2.3 billion in free medicine to uninsured patients and 

more than $550 million to various independent nonprofit organizations for copay assistance. 

We’re committed to working with the Congress, public health 

agencies, CMS and the FDA to ensure the safety and effectiveness 

of our products. Today, innovation continues at Genentech as we 

seek to improve Lucentis and develop additional breakthrough 

medicines. This work depends in part on the success of Lucentis. 

Thank you for the opportunity to provide my views today, and I 

look forward to your questions. 

[The prepared statement of Dr. Anthony Adamis appears in the 

Appendix on page 61.] 

The CHAIRMAN. Thank you very much, Dr. Adamis. 

Now we’ll hear from Dr. Tunis. 

STATEMENT OF SEAN TUNIS, M.D., MSC, FOUNDER AND DIRECTOR, CENTER FOR MEDICAL TECHNOLOGY POLICY, BALTIMORE, MD 

Dr. TUNIS. Mr. Chairman, Senator Corker, thanks for the invitation to appear before the committee today. My name is Sean Tunis. 

I’m the founder and CEO of the Center for Medical Technology Policy, which is an independent nonprofit that works to improve the 

quality and relevance of clinical research. I was previously chief 

medical officer at the Centers for Medicare and Medicaid Services, 

and I was there at the time when some of the predecessor treatments to Avastin and Lucentis for macular degeneration were introduced. 

I just wanted to mention what hasn’t been mentioned today, that 

prior to Avastin or Lucentis, the treatments that were available for 

macular degeneration only slowed the rate of degradation of vision. 

None of them actually reversed it, and yet Medicare was paying 

$2,000 to $3,000 a dose for those drugs. So Genentech deserves 

some credit for having developed the first two effective treatments 

for macular degeneration that actually improve vision. 

The Medicare program can almost certainly spend less on drugs 

without any negative impact on health outcomes for Medicare 

beneficiaries. In my view, there are at least three important strateVerDate Nov 24 2008 12:04 Oct 20, 2011 Jkt 068441 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 C:\DOCS\68441.TXT SHAUN PsN: DPROCT
24 

gies that can be pursued to achieve that, at least one of which has 

been discussed today. 

First, Medicare should have the authority to link drug prices 

more directly to health outcomes. Secondly, Medicare should implement additional policies to promote high-priority clinical research 

such as the CATT trial, which has provided invaluable information 

that would support any sort of additional clinically sensitive policies that Medicare might introduce. And third, Medicare should develop a systematic policy approach to promoting drug innovation. 

The agency is certainly tremendously impactful on biomedical innovation, and there’s a number of potential tools that the agency 

could use to promote innovation. Drug pricing is only one potential 

tool and probably not the most efficient tool for promoting innovation. 

I recognize that the approaches to reducing drug spending that 

we’re going to talk about today are not going to save the Medicare 

program from bankruptcy. These are going to require more fundamental payment reforms and systems innovations. However, I 

think it’s still worth pursuing policy interventions that can save 

$100 million a year or $500 million a year, et cetera, even though 

by themselves, obviously, much more significant cost savings are 

going to need to be pursued. 

So one relatively straightforward approach to reducing Medicare 

spending on drugs without negatively affecting patient outcomes 

would be to restore the agency’s authority to pay the same price 

for drugs that produce similar benefits and harms. Medicare’s regional contractors have been adjusting prices based on clinical effectiveness evidence for more than 15 years through their authority 

called least costly alternative. 

The policy rationale is that Medicare, beneficiaries, and taxpayers should not pay more for a service or a drug when a similar 

drug can be used to treat the same condition and produce the same 

outcome at lower cost. There is no statutory provision giving specific authority or prohibiting the application of least costly alternative. CMS has considered its reasonable and necessary statutory 

authority to provide the needed legislative basis for this approach. 

However, a recent court decision has constrained Medicare’s ability to use LCA determinations, and therefore restoring that authority legislatively would restore Medicare’s ability to adjust the prices 

of drugs to reflect their clinical outcomes. And as John Blum said 

earlier today, Medicare is moving towards a policy approach that 

links payment to outcomes, and there’s no reason that that should 

not also apply to the outcomes for specific technologies, not just the 

outcomes that providers, hospitals, and others achieve. 

The CATT trial underscores the importance for Medicare of having the capacity to rapidly identify, design, and implement trials on 

questions of substantial importance to the Medicare program. Senator Kohl was actually instrumental in addressing the challenges 

with handling copays for patients enrolled in the CATT trial and 

helped to craft language addressing this problem in the Medicare 

Improvements for Patients and Providers Act of 2008. It is my understanding that that statutory language has not been the basis for 

developing implementing instructions for Medicare, and therefore it 

remains as difficult as it was before to address those problems. 

25 

So one step that Medicare could take would be to develop implementing instructions for the language that you develop, Senator 

Kohl, in order to facilitate future trials like the CATT trial, which 

are still quite difficult to do. 

Medicare could also promote critical research by making more 

systematic use of coverage with evidence development. Coverage 

with evidence development is a policy tool that links coverage of a 

drug or device or procedure with a requirement that patients receiving the service are enrolled in prospective clinical studies that 

would inform future decisions. 

Medicare has the authority to implement coverage with evidence 

development, but because it’s a vague statutory authority, the 

agency is reluctant to use that approach, and therefore their ability 

to support the costs of new clinical interventions in the context of 

clinical trials is extremely limited, and giving them explicit statutory authority to do so would substantially improve their ability to 

generate the kind of evidence that would give not only the Medicare program but patients and clinicians more of the kind of information they need to make good judgments based on clinical effectiveness. 

And last, I see my time has expired, but I just wanted to make 

the point that Medicare does have an important influence on biomedical innovation just by the virtue of the huge role that it plays 

on the use of devices and other biomedical services globally. So it’s 

impossible for them to avoid having an impact on innovation, and 

I think it would be extremely valuable for the Medicare program 

to take a comprehensive approach to looking at the relationship between various medical policies and biomedical intervention, think 

about the range of policy mechanisms through which innovation 

could be promoted, including potentially differential drug prices. 

But again, it seems that it would be useful to systematically look 

at ways that this could be done rather than defaulting to a singular 

approach of drug pricing. 

So again, I thank you for the opportunity to share some ideas 

with the committee today. 

[The prepared statement of Dr. Sean Tunis appears in the Appendix on page 69.] 

The CHAIRMAN. Thank you very much, Dr. Tunis. 

Ms. Swirsky. 

STATEMENT OF LISA SWIRSKY, SENIOR POLICY ANALYST, 

CONSUMERS UNION, WASHINGTON, DC 

Ms. SWIRSKY. Good afternoon. Consumers Union is the nonprofit 

publisher of Consumer Reports magazine. It has a long history of 

advocating for improving health care and lowering costs of drugs 

for consumers. So I very much appreciate the opportunity to testify 

in front of the committee today. 

Our popular Best Buy Drugs report reaches 100,000 readers per 

month and provides rigorous evidence-based comparative effectiveness information on a range of commonly used drugs through our 

website. It’s available through our website at 

www.consumerreportshealth.org. We’re proud to say that we make 

that available free and that we do not accept any advertising. 

26 

Best Buy Drugs reports rely on credible systematic reviews of 

available clinical evidence conducted by expert researchers. We use 

price information from a leading health care data and analytics 

company. The value added that we think we bring to the table is 

that our editors and writers then translate this very complicated 

clinical evidence for our readers into consumer-friendly language 

and format, which is the hallmark of our publications. 

To earn a Best Buy Drug designation, a drug must generally be 

at least as effective and safe as other medications in its class and 

less expensive. If the data show that the brand name drug is notably safer or works better than a lower cost medicine, that drug gets 

the Best Buy designation, and I think that’s important to stress. 

We have done a lot of work in the area of statins. Consumer Reports has found that for cholesterol lowering drugs, one of the most 

common medications, lower cost generics are just as effective and 

safe as more expensive brands. If you are taking this type of medicine for preventive reasons and you have not yet had a heart attack, the generic lovastatin is as effective, just as safe, and considerably less expensive than the brand Lipitor. A daily dose of Lipitor 

will cost an individual without insurance about $112 a month, compared to $4 a month for lovastatin. 

Diabetes medication is another area where our organization has 

found low-cost alternatives to be effective and safe, and actually in 

this instance even safer. An older diabetes drug, generic 

metformin, is our Best Buy recommendation. It clocks in at about 

$4 a month and is a bargain compared to the pricey drug Actos, 

which would cost consumers $280 a month. Metformin is also the 

safest. Newer medications Actos and Avandia both carry a higher 

risk of increased heart failure. It’s worth noting that FDA restricted Avandia’s use, proving that you don’t always get what you 

pay for when it comes to drugs. 

We have found similar findings when it comes to pain medications, which you can read more about in our prepared testimony. 

These real-life examples show how effective and safe generic 

drugs are and how they can save consumers precious dollars, and 

purchasers by the way. Our organization strongly believes that 

Congress should pursue policies that improve access to generic 

drugs, including passing Senator Kohl’s and Senator Grassley’s bill 

to end collusion between brand and generic companies to delay generic competition. CBO and the FTC have found that these paidfor delay agreements cost Americans billions of dollars. 

In addition to promoting generics, Congress should do more 

about the safety and efficacy of drugs, including reforming Medicare and Medicaid payment processes to make use of available evidence that lower-cost drugs are as effective as more expensive 

drugs. We agree with Dr. Tunis that Congress should consider legislation to authorize CMS to reinstate the least costly alternative 

policy. 

Congress may also create incentives to ensure that Part D 

formularies and state Medicaid formularies carry the generic as a 

preferred drug when there’s strong evidence of comparability. Of 

course, it goes without saying that doctors must always have the 

ability to specify a brand alternative if that’s in the best interest 

of the patient. 

27 

Finally, Congress should act to improve the way pharmaceutical 

companies convey safety and efficacy information to consumers so 

that they can better understand and use available clinical evidence 

to make better choices about their treatments. Consumers Union 

looks forward to working with Congress to improve the way patient 

safety and efficacy information is presented to consumers so that 

they can make better informed decisions about their choices. We 

believe in a lot of instances when consumers are provided and 

armed with good information, they will often choose the lower-cost 

option. A lot of times, that’s just not what they’re getting from the 

marketing. 

In conclusion, I wanted to thank the committee for hearing me 

out, and we look forward to working with the committee. 

[The prepared statement of Ms. Lisa Swirsky appears in the Appendix on page 79.] 

The CHAIRMAN. Thank you very much, Ms. Swirsky. 

Now Dr. Gottlieb. 

STATEMENT OF SCOTT GOTTLIEB, M.D., RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC 

Dr. GOTTLIEB. Thank you, Chairman Kohl, Ranking Member 

Corker. Thank you for the opportunity to testify before this committee. 

Over the past decade, the drug space stands apart from other 

segments of the healthcare industry in terms of how much the underlying business model has changed. The life sciences sector has 

undergone a fundamental transformation to focus on delivering 

more value and more basic innovation to consumers. 

Industry pipelines have also had more new compounds in latestage development than at any time before. More of these new 

drugs are aimed at fundamentally new targets, and more address 

unmet needs in medicine, including many orphan diseases. 

But despite recent progress, challenges remain. There are still 

consumers priced out of health care. The cost of developing drugs 

is rising sharply, and new biotech company formation has fallen 

off. Too many diseases remain poorly treated. 

So we must craft policies that provide proper incentives for new 

technology while making sure we are getting more value for programs like Medicare. 

Any discussion of policies that have worked to bring more price 

competition to the prescription drug market and lower overall 

spending has to begin with Medicare’s Part D prescription drug 

program. Competition between more than 1,000 drug plans has resulted in costs that are substantially less than what was first envisioned, wider use of generic medicines and deep discounts on 

branded drugs. 

Now, I know there is discussion around imposing mandatory rebates in the Part D program. These are a form of price controls 

that distort commercial forces. Mandatory rebates create a strong 

incentive for companies to launch drugs at higher prices in anticipation of the payments that they will have to provide. These rebates also discourage additional discounting. 

Moreover, as more beneficiaries come under these kinds of tacit 

price control regimes, it will erode the ability of health plans to use 

28 

competitive negotiations to move their market share and improve 

profit margins. This in turn will reduce their incentive to try and 

drive hard bargains with drug companies. 

I know members of this committee have also considered proposals to give the staff of Medicare least costly alternative authority. There is nothing inherently wrong with a payer carefully judging the clinical data supporting the use of a particular medical 

product or service to determine what it will reimburse, but Medicare is no ordinary payer. Its decisions are widely followed. As 

such, Medicare has an outsized impact on what the U.S. patients 

will have access to. 

If Medicare were to make clinical judgments about new technology at the time of their launch, it would also undermine the way 

innovation unfolds in the life sciences. In many cases, much of the 

innovation takes place post-market as new technology is introduced 

and demonstrate additional benefits from real-world use. Demanding early life cycle demonstrations of value, however measured, 

skews heavily against this sort of postmarket innovation. 

We should also consider how past treatments we now view as 

profound advances would have fared under an LCA policy, and we 

should also consider how such a construct would affect future investment decisions. 

Policies that encourage more price competition and more clinical 

competition between similar drugs can help drive more value for 

beneficiaries while encouraging more opportunities for new innovation. This gets me to the idea of merging Medicare’s drug and medical benefits, folding Part B into Part D. There is good clinical and 

economic rationale for providing drugs under a single unified program. Many private plans have already merged their drug and 

medical benefits. Folding Part B into Part D could provide substantial savings to Medicare. The savings would be a result of greater 

therapeutic substitution between oral and injectable drugs, and 

more price competition between similar agents. 

Now, moving Part B into Part D is enormously complex and full 

of potential damaging unintended consequences. It would need to 

be considered carefully. It is also worth noting that if doing it only 

invites more temptation to import price controls into the resultant 

drug program, that will erode competitive forces that ultimately 

drive value. 

Moreover, not all the savings would actually accrue to Medicare. 

Some of it would need to be used to help offset the rise in premiums and out-of-pocket costs incurred by beneficiaries. Medicare 

would also have to create new codes to compensate doctors directly 

at a fair and sustainable rate for the cost of infusing drugs in their 

offices. 

In conclusion, the drugs that are in late-stage development and 

have recently been launched are more promising than at any time 

in recent memory. Yet the model that has made life science successes possible is fragile. The decisions that we make about how we 

regulate these products and pay for their cost have direct effects 

on whether these endeavors get undertaken in the first place. 

Thank you. 

[The prepared statement of Dr. Scott Gottlieb appears in the Appendix on page 83.] 

29 

The CHAIRMAN. Thank you very much, Dr. Gottlieb. 

We’ll start now by asking everybody on the panel to respond to 

the question of where do we have the greatest opportunities, in 

your opinion, in Medicare to help lower the costs? 

We’ll start with you, Dr. Rosenfeld. 

Dr. ROSENFELD. Well, I think in my testimony today I’ve outlined 

some important measures that Medicare can take. Medicare can 

address the 6 percent average sales price payment to physicians. 

It’s really preposterous, if we think about it, that we should be paid 

a percentage of the cost of the drug. It develops a codependency between the clinician and the pharmaceutical industry. 

Moreover, we should look at this disproportionate share hospital 

discount and ask why that isn’t passed through to Medicare. And 

we should look at these unusual decreases in reimbursement that 

are still in place that incentivize the use of Lucentis in hospitalbased settings. 

Moreover, if drug companies offer rebates for increased use and 

the rate of increased use to physicians, it implies that physicians 

are not injecting the patients they should be and they have to be 

incentivized to do that. I doubt that’s the case. Those rebates are 

really focusing on increased utilization by the physician, and if 

there is a rebate, it should be passed on to Medicare, and there 

should be a limit on how physicians purchase drugs with credit 

cards, and there should be an added transaction fee or that cost 

should be rebated directly to Medicare. 

The CHAIRMAN. Thank you so much. 

Dr. Adamis. 

Dr. ADAMIS. It’s beyond my area of expertise to make recommendations how we could lower costs for Medicare, but whatever is chosen by the committee and by Congress, we should make 

sure that it preserves a physician’s ability to choose which medication they feel is most appropriate for a patient. I think that’s very 

important. 

And then the second piece of it, because this is my job, is to 

make sure that the incentives are still there to develop new therapies. We’re working on drugs that have to be dosed just twice a 

year as opposed to injections every month, and we’re working on 

drugs that work better than Lucentis, hopefully. I want to make 

sure those incentives stay in place so that we can consider those 

programs. 

The CHAIRMAN. Thank you. 

Dr. Tunis. 

Dr. TUNIS. Yes, I think the several ideas offered in my testimony 

were some of the notions that I had in terms of what might, both 

in the short term and long term, lead to reductions in prices, and 

that included least costly alternative, giving the CMS, taking a 

more proactive role in promoting the kinds of studies like the 

CATT trial, and also looking at ways in which they could specifically incentivize high-value innovation. 

The only thing I would add is you heard numerous times from 

John Blum how constrained they are with their existing statutory 

authority to do anything around negotiating drug prices or responding to or setting drug prices in any way to reflect the clinical 

benefits of a drug. I suspect if John was sitting here in a few years, 

30 

no longer working for the administration, he would have told you 

more explicitly what kind of authorities that they would like, but 

I imagine they would be things like least costly alternative authority and perhaps something like the ability to vary patient costsharing according to the value of a drug. 

So a drug that’s highly cost effective would have a very low copay 

so that patients would be inclined to prefer that for economic reasons, and drugs that are extremely expensive and produce very 

small incremental benefits would have higher copays so that the 

patients would have to take on more of the incremental costs, and 

that way the patients and clinicians are still free to make choices. 

It’s just not all of the financial responsibility for the difference falls 

on the taxpayer; some of it falls on the patients as well. 

Currently they have no ability to vary cost-sharing based on 

some judgment about the clinical effectiveness and costs of a drug. 

The CHAIRMAN. Thank you very much, Dr. Tunis. 

Ms. Swirsky. 

Ms. SWIRSKY. I just would kind of highlight some of the same 

things that Dr. Tunis said about least costly alternative policy as 

being a ripe avenue. I also would agree with earlier comments 

about changing incentives in the Medicare program so that physicians aren’t incentivized to promote or prescribe a higher-cost drug. 

I’d also kind of reiterate or maybe go back to some of the examples we weren’t able to use in my testimony because of time. But 

I think a lot of our examples of statins, proton pump inhibitors, 

which are basically heartburn medications which we can use very 

inexpensive generics as opposed to the expensive version of Nexium 

and so forth, all of these things are used by seniors, many seniors 

on a daily basis and I think are all really ripe for policies that promote their use. 

The CHAIRMAN. Thank you, Ms. Swirsky. 

Dr. Gottlieb. 

Dr. GOTTLIEB. Thank you. I think the problems with Medicare 

are long-term problems, and they need long-term solutions with respect to changes in the structure of how Medicare pays for services. 

I think a lot of what we’ve done in recent years in terms of just 

across-the-board cuts or targeting individual products or freezing 

market basket rate increases doesn’t tackle the long-term underlying problems in the Medicare program. In some cases, I think it 

makes true, fundamental reform more difficult. 

I think Medicare looking for ways to try to tie what it pays for 

and how it reimburses to notions of value and looking at outcomes 

are the kinds of payment reforms we need to pursue. I think most 

of the spending, if you look at it, and most of the waste is probably 

on the services side and not on the technology side. I think it becomes much more, much easier to target the technologies and the 

introduction of technologies because you typically have one product 

and one sponsor, as opposed to trying to tackle reimbursement that 

affects hundreds, if not thousands of providers across the country. 

So that becomes politically much more difficult, even though that 

I think is what we need to ultimately address. 

On the drug side, ultimately I think we need to concede the Part 

D plan is working. The competitive structures in Part D are bringing down the rate of inflation on small molecule spending and drivVerDate Nov 24 2008 12:04 Oct 20, 2011 Jkt 068441 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 C:\DOCS\68441.TXT SHAUN PsN: DPROCT
31 

ing higher generic drug utilization. If we accept that, then most of 

the growth, if there is growth, is on the Part B side, and Mr. Blum 

testified that most of that is confined to just a handful of drugs. 

And quite frankly, those are oncology products. I think as a political matter it’s going to be hard to really address some of the utilization in oncology. I think it will be hard to tackle that. 

If I put forward one competitive market-based reform that I 

think could work to try to drive some higher-value utilization of 

drugs, it would be moving B to D. It would address the injectable 

drugs, but this would be a very hard reform, frankly, to implement. 

The CHAIRMAN. Dr. Rosenfeld, as you know now in his prepared 

testimony, Dr. Adamis made reference to a study funded by his 

company, Genentech, which shows safety concerns for Avastin. I 

think you’re in some disagreement with that, but do you want to 

talk a little bit about that? 

Dr. ROSENFELD. At our annual research meeting, which is called 

ARVO, held in Ft. Lauderdale at the end of April, beginning of 

May, Dr. Gower presented data which had been much publicized 

before the presentation which has not been submitted for publication as far as I know, and it certainly isn’t peer reviewed yet as 

far as I know, that there was increased risk of hemorrhagic stroke 

with Avastin. 

When I attended that presentation, that’s not what I heard. 

What I heard, and it’s a common problem with Medicare databases—and I want to thank Dr. Ross Brechner from Medicare because he’s taught me a lot about looking at Medicare databases and 

all the confounding variables that one needs to be concerned with, 

because the Medicare databases show you what doctors claim happened to their patient, but you know nothing about the patient. 

So what Dr. Gower presented was that the overall stroke rate in 

the United States for Medicare beneficiaries was 0.4 percent. The 

stroke rate among patients getting Avastin was 0.4 percent, the 

same, but it was lower for the Lucentis patients, which was 0.26 

percent, a difference of .15 percent. 

Now, for those of us working with the Medicare databases, and 

in particular knowing the distribution of how Avastin is used and 

how Lucentis is used, those patients with Medicare and full secondary insurance are more likely to get Lucentis than Avastin. If 

you don’t have secondary insurance and you have to pay out of 

pocket, you get Avastin. These are less wealthy patients and generally less healthy patients. 

So looking at Dr. Gower’s data, the Lucentis rate was lower than 

the average Medicare patient, while the Avastin rate was the same, 

suggesting either Lucentis protects against stroke, which seems unlikely, or it’s a different population. And that, in fact, is what we’re 

finding in our analysis of the Medicare database. There are so 

many confounding variables. You have to adjust particularly for 

wealth and concomitant diseases. 

Now, the other report that was talked about was a report out of 

Duke, and contrary to what we heard today—in fact, I brought the 

paper along. And when these confounding variables are addressed, 

the concluding paragraph is as follows: ‘‘In conclusion, we found no 

evidence of increased risks of mortality, myocardial infarction, 

32 

bleeding or stroke among Medicare beneficiaries who received 

intravitreous Lucentis or Avastin for wet AMD.’’ 

So when authorities who deal with Medicare databases analyze 

the data, they understand that you have to do this analysis, this 

adjustment for confounding variables. It’s an ongoing problem and 

something that we’re acutely aware of in our ongoing analysis of 

the Medicare database. 

So to answer your question, I do not believe there’s any data at 

this point in time to suggest an increased risk with Avastin, 

though it needs to be monitored and studied further. 

The CHAIRMAN. Dr. Adamis, your company has paid for a research study that purports to show safety concerns with the use of 

Avastin for macular degeneration. But the National Institutes of 

Health has provided the committee with a written statement that 

indicates they may not agree with these findings. Other experts 

consulted by the committee also believe that there are shortcomings in the methodology of the study that you all conducted. Is 

Genentech willing to address these criticisms? 

Dr. ADAMIS. Of course. These were Medicare claims database 

studies. The first was the one that was sponsored by us at Johns 

Hopkins. It was an unrestricted grant, which means that Dr. 

Gower had full control over the data and the conclusions that she 

made. We had that study done because, to date, prior to CATT, 

there was zero data on the safety of Avastin versus Lucentis in 

large populations. 

So if, for instance, the drug increases the risk of stroke by 1 percent, you can’t learn that unless you study tens of thousands of patients. You don’t have the power in the small number of patients 

studied in some other trials to detect that difference. And so the 

only way you can do that is with a Medicare claims database study. 

And Medicare claims database studies are not conclusive. I agree 

with that. However, it was the best way to look to see if there is 

a safety signal. What was surprising to us was, when Dr. Gower 

completed her analysis, she in fact found the same signal that was 

found in the Duke study, and that was an increased risk of both 

stroke and death. 

So when two studies that are very large—the Duke study looked 

at the 2006 patient Medicare claims database, and the Gower 

study looked at 2008 and 2009—show you the exact same signal, 

although not conclusive, you don’t ignore it. 

And then it was surprising when the CATT data came out; and 

although CATT was a 1,200 patient trial, it wasn’t powered to detect those 1 percent differences. Nonetheless it showed this 29 percent increased risk of serious side effects, with 80 percent of them 

landing the patient in the hospital. 

So now you have three large studies showing this, none of them 

definitive, but I don’t think we can ignore them. 

The CHAIRMAN. Okay. All right, Dr. Tunis, many people believe 

that more needs to be done to give the government the tools to address rising drug costs. In your time at CMS as chief medical officer, Dr. Tunis, what did you find were the biggest policy barriers 

to lowering drug costs and preserving high quality? 

Dr. TUNIS. Again, I think this comes back to the statutory formulas that determine what Medicare, what price Medicare has to 

33 

pay for a new drug that are completely insensitive to how much incremental clinical benefit it provides. And one example that’s fairly 

well known was the example of the drug Aranesp for anemia that 

was caused by cancer chemotherapy, which was a new version of 

a previous and very closely related to another drug called Procrit, 

which treated the same problem, anemia from cancer chemotherapy. 

Because of the pricing systems in place at the time, Procrit 

would have been a substantially cheaper approach and achieve the 

same clinical outcomes as patients treated with Aranesp. But because Medicare was forced by statutory formula to pay 95 percent 

of average wholesale price for Aranesp, the Medicare program 

would end up spending $150 to $200 million more per year with 

no additional clinical benefit, no better treatment of anemia than 

if the program used only Procrit. 

The agency, CMS, had no statutory authority to do anything 

about that, other than pay 95 percent of average wholesale price. 

What happened at the time was they used an authority in the outpatient payment system called the equitable adjustment authority 

to try to come up with a price for Aranesp that was what was appropriate based on getting the same clinical results. That was actually put in place. But then because of that approach and the Medicare Modernization Act, there was language put in that actually 

prohibited Medicare from ever doing that again. 

And so it seems to me that whether it’s the least costly alternative or some other version of statutory flexibility to set prices of 

drugs in some way sensitive to how much additional benefit, if any, 

is provided, would be a very important way for Medicare to be able 

to spend less on drugs and not harm Medicare beneficiaries in any 

way at all. It wouldn’t be rationing. It would just be paying the 

least that the program could pay for a given level of clinical benefit. 

The CHAIRMAN. All right. Before I turn it over to Senator Corker, 

Ms. Swirsky, Consumers Union recently advocated to instill a fiduciary responsibility on the pharmacy benefit managers, the PBMs. 

It would require them to work for employers and insurers rather 

than drug companies. So why did you take that position, and how 

important do you think it is? 

Ms. SWIRSKY. I’m not sure where that information came from. 

We have not done anything on PBM since I’ve been there. It may 

be that that was something done prior to my coming on board. I’ve 

been at the organization for about a year. But I will be happy to 

find out and to make that—— 

The CHAIRMAN. Are you familiar with the issue? 

Ms. SWIRSKY. A little bit, but I don’t—we have not done anything 

on that recently. 

The CHAIRMAN. All right. 

Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. 

It’s interesting sitting up here and listening to testimony, and 

Dr. Rosenfeld and Dr. Adamis seem like very good folks who have 

a very strong disagreement, yet the testimony from both of you is 

very credible. 

34 

The issue that Dr. Rosenfeld brought up regarding the rebates 

and the fact that physicians shouldn’t be paid those rebates on 

some of the drugs he was mentioning that you make as a company, 

what is your response to that? 

Dr. ADAMIS. When I was practicing medicine, you would prescribe a medicine based on what you thought was best for your patient, and you never thought about what it meant for your practice 

or your hospital, and I think that’s the way it should be done 

around the country. 

There are these rebates, and this can’t be looked at in a vacuum 

because I have colleagues in South Carolina who don’t prescribe 

Lucentis because there’s a $140 tax on it when you use it, so it’s 

a money loser every time you give it. 

So as I said at the outset, if we could set the system up so we’re 

not incenting or disincenting people one way or the other, and that 

really you approach the issue with equipoise and a doctor can just 

be free to choose based on the evidence, the scientific evidence, I 

think that would be the best of all worlds. 

Senator CORKER. And so this is really—what you’re leading to is 

that this is something that the Federal Government has set up regarding the rebates, not something your specific company is doing 

relative to trying to drive this product. 

Dr. ADAMIS. No. I didn’t mean to convey that. So there are rebates that the company provides, but they’re—— 

Senator CORKER. But let me just say, if it’s not to—if physicians 

should make decisions based on what’s good for their patient, and 

you say the physicians really don’t make decisions based on their 

own economic benefit, then why do you guys do that? 

Dr. ADAMIS. So the rebates actually lower the cost of the drug 

to Medicare, because what happens is you’re required to report that 

to Federal authorities, and that goes into a formula—and this is 

getting beyond my area of expertise—that calculates that average 

sales price. So the average sales price actually moves down, and 

the amount that Medicare reimburses moves down. So the rebates 

actually lead to a lower cost of the drug. 

Senator CORKER. But this is not something that you’re required 

to do; is that correct? By the Federal Government. 

Dr. ADAMIS. No, but it’s something that is pretty routine in the 

industry. But we’re not required to do it. 

Senator CORKER. Wouldn’t it also lower the price to Medicare if 

you just charged a lower price without the rebate to the physician? 

Dr. ADAMIS. Correct, it would. 

Senator CORKER. I mean, again, you sounded pretty credible on 

the front end, but what you’re telling me right now is not particularly credible. 

Dr. ADAMIS. In what sense, sir? 

Senator CORKER. Well, if the purpose in doing this is to lower the 

cost of the drug to the end user or the end payer, and you could 

get there the same way by just charging 6 percent less or giving 

a rebate to the physician who, I guess, keeps that, it seems to me 

that you are, in fact, paying that rebate to drive physicians to use 

your drug. 

Dr. ADAMIS. I can’t say that that is the purpose behind it. The 

way it’s structured—and I’m getting out of my area of expertise beVerDate Nov 24 2008 12:04 Oct 20, 2011 Jkt 068441 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\DOCS\68441.TXT SHAUN PsN: DPROCT
35 

cause I don’t set these programs up, and I don’t work in the commercial area of the organization. But it’s for high-volume users of 

the drug. They’re the ones who are eligible for the rebate. 

Senator CORKER. So they make even more money by prescribing 

your drug, and yet your testimony was that their compensation 

isn’t what drives them to use your drug. 

Dr. ADAMIS. I think the rebate, in a vacuum, if you looked at it 

that way, could be viewed as an incentive. But as I said, there are 

some jurisdictions, South Carolina being one of them, where actually even with the rebate it’s a money loser. So in a perfect world 

it would be great if docs had an opportunity to prescribe what they 

want without any incentives. 

Senator CORKER. But in a perfect world, you could do that yourself, right? I mean, in the world we live in today, which is not perfect—— 

Dr. ADAMIS. I can’t control, our company can’t control South 

Carolina’s taxes. 

Senator CORKER. But let’s say in Tennessee, where I live—— 

Dr. ADAMIS. I don’t know, sir. 

Senator CORKER. I mean, am I missing something here? Am 

I—— 

Dr. ADAMIS. I’m just getting into an area that is not my area of 

expertise. I’m the scientist in the company. I work in development, 

and I came primarily to discuss CATT and the differences between 

Lucentis and Avastin. 

Senator CORKER. And I really didn’t come to chase the rebate 

issue. I just heard you mention it. So am I missing something, Dr. 

Rosenfeld? 

Dr. ROSENFELD. Well, Dr. Adamis is correct. In South Carolina, 

it’s a unique situation where there’s a state tax on drug revenues, 

even Medicare Part B drug revenues. But in the rest of the country, the rebate is focused on high-volume users with the intent to 

increase their use even more. 

Senator CORKER. So that a physician like you would prescribe 

that drug more than another drug because you’d make more 

money? 

Dr. ROSENFELD. Well, I’m not in the rebate program, but I know 

several large-volume practices that make a lucrative sum every 

month from the rebate program. 

Senator CORKER. I wasn’t really planning to chase that, but it 

was a comment made, and I appreciate the discussion. 

So, Mr. Gottlieb, on the idea of combining Parts B and D in 

Medicare and some of the difficulties you mentioned that might 

come with that, you threw it out there. It’s a pretty big idea. What 

are some of the immediate issues you think that might be problematic with that type of a combination? 

Dr. GOTTLIEB. I think the discussion around rebates gets us some 

of both the attraction of doing it and the complexities of doing it. 

I mean, part of why the rebates exist in the market at all, or even 

the spread on ASP, is to help compensate physicians for the cost 

of delivering drugs. 

And I think the existence of these rebates in the market, it’s 

hard to look at them in isolation around a particular product beVerDate Nov 24 2008 12:04 Oct 20, 2011 Jkt 068441 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 C:\DOCS\68441.TXT SHAUN PsN: DPROCT
36 

cause the existence of rebates market-wide, and they exist 

marketwide, creates terrible distortions in the market. 

If you look at what’s going on in the 340B program, which was 

mentioned here, that has resulted in terrible gaming where the 

340B hospitals are buying up local oncology practices for the purposes of capturing the spread on the drugs that they’re able to acquire at a lower price and then reselling them at a higher price. 

And so they’re capturing that revenue. So you’re seeing oncology 

practices consolidating around 340B hospitals, which is probably 

the last thing we want to see as a public health matter. 

So I think the existence of these things in the market across the 

board is creating bad distortions. 

In terms of just moving Part B into Part D, I think it would be 

enormously complex but doable, and we’ve talked about it in the 

past. I worked at Medicare and Medicaid in the 2004–2005 timeframe, and it was something that was talked about, and talked 

about even in the context of MMA. Premiums would go up, out-ofpocket costs would go up for beneficiaries, so you’d have to offset 

that. You’d have to figure out a way to pay physicians directly for 

the true costs of the administration of the drugs. Somehow you’d 

have to, if you still do it under a buy and build model, where the 

physicians acquire the drug, somehow you’d have to offset the cost 

of that acquisition for the physician. There are probably financial 

arrangements that could do that, but you’d have to also pay for the 

infrastructure for the physician to be able to do that. Those are just 

some of the complexities that would ensue. 

You’d also have the reality that for certain products that are 

truly breakthrough products for which there is no competition, 

under the Part D scheme you’d probably potentially see prices go 

up. I don’t think that’s necessarily a bad thing because I think it 

would reflect the fact that they’re able to take price increases because they represent true innovation in the marketplace. But in 

other cases where there might be oral drugs that compete with 

injectable drugs, you might see more utilization of the oral agents, 

which would invariably provide cost savings to Medicare because it 

would be cheaper to deliver. 

The last thing to keep in mind is that we’re also entering an era 

right now where there’s going to be multiple drugs on the market 

to attack a particular target. So if you have a target like VEGF or 

other kinds, CD20, CD30, there might be multiple agents that all 

attack the same target. You want the decision about using a particular agent to be driven by the clinical circumstances and what’s 

best for the patient, not which scheme it’s in. And right now you 

have examples where a decision might be driven by what scheme 

it’s in, Part B versus Part D. 

Senator CORKER. So those are a lot of complications. They seem 

like vague ones. As to the idea of combining B and D, it’s a real 

idea, or is that just a throw-out idea? 

Dr. GOTTLIEB. I think it’s a real idea, and it’s an idea we’ve 

talked about in the past. The reason I caveat it with all the complications is—— 

Senator CORKER. Sounds like one of these advertisements for 

drugs on television. 

37 

Dr. GOTTLIEB. What concerns me is that once it gets into a political context, some of these things that need to be addressed might 

not be adequately addressed. 

So, for example, where is going to be the assurance that physicians are compensated for the cost of truly delivering the drugs in 

their office? We’ve seen under the physician payment scheme that 

physician costs have increased and payments have stayed stagnant, so their effective income has been eroded. 

So those are the kinds of things that worry me, that once this 

kind of idea gets in the political context, the things that will truly 

make it successful and competitive won’t be adequately addressed. 

What’s the assurance that a future Congress two years from now 

isn’t going to want to impose price controls in the Part D scheme 

to address the previously Part B drugs? There is no assurance 

there. And so you would want to see those things addressed in the 

legislation. 

Senator CORKER. Dr. Tunis, you mentioned—you may have adequately discussed the notion of prescribing drugs based on outcomes, or paying for them based on outcomes, and we hear that a 

lot. You know, there was a lot of debate about that during the discussions regarding health care reform, and those of us who do what 

we do up here never were able to grasp a real way of making that 

happen with other providers. I know that CMS is working towards 

that end now, but do you want to expand any more on that notion? 

It’s hard for me as a layman to understand how you really make 

that happen, especially as it relates to prescribing drugs. 

Dr. TUNIS. So there’s complicated versions of it, I guess, but in 

some ways the simplest—— 

Senator CORKER. And those probably won’t work on us. 

Dr. TUNIS. Right. I won’t give you that one. 

But the simplest version again I think comes back to some notion 

of reference pricing, least costly alternative, or what we did back 

in Medicare with the anemia drugs, which was called functional 

equivalence at the time, which is—but I’ll give the example of what 

led to the court case that took away Medicare’s ability to use this 

least costly alternative approach. 

It was for two drugs to treat asthma in children and adults. But 

basically there was one drug that was a generic drug that was 10 

cents to inhale it, and then there was another drug that was developed which was very closely chemically related that was $1.10, so 

10 times the price. And when you actually looked at the clinical 

studies to see how much they opened up the lung airways, how 

much they freed up people’s ability to breathe, it was close to identical. There was no clear information to suggest that there was a 

clinical reason for either a patient or a physician to want to use 

the more expensive one. 

And so under those circumstances, after very careful review, the 

Medicare contractors tried to apply the least costly alternative approach, and basically to pay essentially 10 cents and you pick your 

drug. We’ll pay 10 cents whether you use the really expensive one 

or the cheap one based on the fact that there’s no clinical difference, and that was taken to court. And the reason, as I understand it, that the court decided that Medicare could not do that 

was because the Medicare Modernization Act told Medicare you 

38 

have to pay ASP plus 6 percent, and ASP plus 6 percent for the 

more expensive drug was 10 times the price. 

So, you know, that’s why in my testimony it seems that at a minimum, in situations where there’s a pretty good level of confidence 

that you get the same clinical benefits for 10 cents or for $1.10 per 

treatment, there’s no reason that the Medicare program should pay 

$1.10. The only argument that I’ve ever heard about why they 

should is that that extra money can then be circulated back to support innovation, or it creates an incentive for pharmaceutical companies to invest in new treatments, and that’s why I added the last 

part of my testimony, which was, well, that certainly does encourage innovation. If you spend more money for things, people are 

going to want to invest more money to create them. But if it’s not 

creating any more value for the Medicare beneficiaries, that doesn’t 

seem like the best way to incentivize innovation necessarily. 

I don’t know if that cleared it up at all, but that’s the—— 

Senator CORKER. It seems like that a competitive market and 

keeping things competitive, much as has been alluded to in earlier 

testimony regarding Medicare Part D, would actually drive towards 

that end anyway, would it not? 

Dr. TUNIS. I think because in Medicare Part D the prescription 

drug plans have a lot more freedom to use pricing tools to manage 

their benefits. That’s exactly how they get the costs down. When 

you have drugs that are paid for under Part B and under the statutory constraints or lack of statutory flexibility is where you get 

these what seem like unjustifiable price differences, I don’t think 

that would happen if those were products—— 

Senator CORKER. In Medicare Part D. 

Dr. TUNIS. Yes, exactly. 

Senator CORKER. So we had another Senator talk about some of 

his concerns about IPAB and just decisions that can be made by 

groups of unelected folks, if you will. 

But using the same line of thinking, if you were a patient who 

needed chemotherapy of some type and, to use the same analogy, 

there was only a 20 percent chance that it was going to be effective 

for you but it was the only thing left, the only chance left, if you 

will, for some type of treatment that might work on that type of 

disease, how would you employ the kind of thing you’re talking 

about? 

Dr. TUNIS. What I’m talking about wouldn’t really come into play 

there just because we’re talking about two choices that are clearly 

equivalent. In the case where you’re talking about something that’s 

better, a drug that’s better by some measure and lots more expensive, so it comes up questions about is it actually worth the money, 

for example, the recent Medicare decision to pay for Provenge to 

treat prostate cancer is a good example, where it’s $90,000 or 

$100,000 for a treatment that maybe on average extends life for 

three to four months, and that’s the kind of situation where really 

nobody wants to touch it. And the fact that the National Institute 

of Clinical Excellence in the U.K. might well decide that that’s not 

a cost-effective use of collective resources doesn’t seem to me like 

a place that you all want to venture into or I would really want 

to venture into. 

39 

When you really look at it in terms of all of the downward pressure that there’s going to be on finding some way to constrain 

spending in the Medicare program over the next 10 years, it’s hard 

to believe we’re going to be able to do all of that without getting 

into some sensitive areas of not being able to provide everything 

that doctors and patients might decide is what’s in their best interests. But I’m not able to provide a lot of solutions today. 

On that kind of example, the one thing I will say is, to some degree, all of the different options that are out there for trying to constrain spending are just a matter of who you decide is going to take 

on their shoulders the weighing of costs against benefits. And when 

the government does it, it’s government bureaucrats interfering 

with clinicians and patients. When you put financial incentives on 

doctors to be cost conscious, then essentially—there’s no polite way 

of saying it—doctors don’t want to ration care for their patients. 

And if you put more cost sharing on patients by higher deductible 

plans or adjusting benefit designs, you’re just asking patients to ration their own care. 

So it’s not a matter of whether or not you ration. It’s just who 

you decide is going to be the rationer. 

Senator CORKER. Mr. Chairman, I want to thank you for the 

hearing. It’s amazing to me. I know that most of these witnesses 

were chosen by the majority, which is the way things work around 

here. But it’s amazing to me that in every case, it seems like they 

believe that competitive market forces like we have in Medicare 

Part D are what drive choice and drive better decisions, and that 

rebates or things that are distortive like government getting involved in setting rebate levels and making choices really foul the 

process up tremendously. 

So I thank you for this very clear signal that everything we need 

to do, from these witnesses anyway, that everything we need to do 

needs to move us towards much, much greater competition and innovation, and I couldn’t agree with that more, and I thank you for 

providing these outstanding witnesses. 

The CHAIRMAN. Well, I too think, Senator Corker, that we’ve had 

a great hearing and shed much light on the question of prescription 

drugs, their costs, and what we might do to alleviate those costs 

on behalf of consumers. I think that my conclusions might be somewhat different than Senator Corker’s, but that’s why we’re here 

and that’s why we debate and hopefully move the ball forward. 

But you’ve all done a great job of shedding light on the issue, and 

we thank you for coming. 

[Whereupon, at 4:14 p.m., the hearing was adjourned.] 

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