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THE MEDICARE DRUG BENEFIT: ARE PRIVATE INSURERS GETTING GOOD DISCOUNTS FOR THE

TAXPAYER?

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JULY 24, 2008

Serial No. 110–213

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

JACKIE SPEIER, California

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on July 24, 2008 ............................................................................... 1

Statement of:

Merritt, Mark, president and chief executive officer, Pharmaceutical Care

Management Association; Rick Smith, senior vice president for policy,

Pharmaceutical Research and Manufacturers Association [PhRMA];

Paul Precht, director of policy and communications, Medicare Rights

Center; and Judith Stein, executive director, Center for Medicare Advocacy ................................................................................................................. 112

Merritt, Mark ............................................................................................ 112

Precht, Paul ............................................................................................... 139

Smith, Rick ................................................................................................ 128

Stein, Judith .............................................................................................. 155

Schondelmeyer, Dr. Stephen, Pharm.D., Ph.D., professor and head, Department of Pharmaceutical Care and Health Systems, University of

Minnesota; Dr. Gerard Anderson, Ph.D., professor and director, Center

for Hospital Finance and Management, Bloomberg School of Public

Health, Johns Hopkins University; and Fiona M. Scott Morton, Ph.D.,

professor of economics, Yale School of Management, Yale University ..... 31

Anderson, Dr. Gerard, Ph.D. .................................................................... 33

Morton, Fiona M. Scott ............................................................................. 45

Schondelmeyer, Dr. Stephen, Pharm.D., Ph.D. ...................................... 31

Weems, Kerry, Acting Administrator, Center for Medicare and Medicaid

Services, U.S. Department of Health and Human Services ...................... 80

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

Anderson, Dr. Gerard, Ph.D., professor and director, Center for Hospital

Finance and Management, Bloomberg School of Public Health, Johns

Hopkins University, prepared statement of ............................................... 34

Merritt, Mark, president and chief executive officer, Pharmaceutical Care

Management Association, prepared statement of ...................................... 114

Morton, Fiona M. Scott, Ph.D., professor of economics, Yale School of

Management, Yale University, prepared statement of .............................. 47

Murphy, Hon. Christopher S., a Representative in Congress from the

State of Connecticut, statement of America’s Health Insurance Plans .... 173

Precht, Paul, director of policy and communications, Medicare Rights

Center, prepared statement of ..................................................................... 141

Smith, Rick, senior vice president for policy, Pharmaceutical Research

and Manufacturers Association [PhRMA], prepared statement of ........... 130

Stein, Judith, executive director, Center for Medicare Advocacy, prepared

statement of ................................................................................................... 158

Waxman, Hon. Henry A., a Representative in Congress from the State

of California:

Prepared statement of ............................................................................... 20

Staff report ................................................................................................. 3

Weems, Kerry, Acting Administrator, Center for Medicare and Medicaid

Services, U.S. Department of Health and Human Services, prepared

statement of ................................................................................................... 82

(1)

THE MEDICARE DRUG BENEFIT: ARE PRIVATE INSURERS GETTING GOOD DISCOUNTS FOR THE TAXPAYER?

THURSDAY, JULY 24, 2008

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

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

2154, Rayburn House Office Building, Hon. Henry A. Waxman

(chairman of the committee) presiding.

Present: Representatives Waxman, Cummings, Kucinich,

Tierney, Watson, Higgins, Yarmuth, Braley, Van Hollen, Murphy of

Connecticut, Sarbanes, Speier, Davis, Burton, Shays, Platts, Issa,

Marchant, McHenry, Foxx, Bilbray, and Jordan.

Staff present: Kristin Amerling, general counsel; Caren Auchman

and Ella Hoffman, press assistants; Phil Barnett, staff director and

chief counsel; Jen Berenholz, deputy clerk; Brian Cohen, senior investigator and policy advisor; Miriam Edelman, Jennifer Owens,

and Mitch Smiley, special assistants; Earley Green, chief clerk;

Karen Lightfoot, communications director and senior policy advisor;

Karen Nelson, health policy director; Andy Schneider, chief health

counsel; Leneal Scott, information systems manager; John Williams, deputy chief investigative counsel; Lawrence Halloran, minority staff director; Jennifer Safavian, minority chief counsel for

oversight and investigations; Ali Ahmad, minority deputy press

secretary; Larry Brady, minority senior investigator and policy advisor; Patrick Lyden, minority parliamentarian and Member services coordinator; Brian McNicoll, minority communications director;

John Ohly and Molly Boyl, minority professional staff member; and

Jill Schmaltz, minority senior professional staff member.

Chairman WAXMAN. Good morning. The committee will please

come to order.

Today, the committee is holding another hearing in our series on

how to make government work better. Our subject is the Medicare

Part D program that provides a prescription drug benefit to seniors

and individuals with disabilities.

Providing drug coverage to seniors and the disabled is essential,

but it is also expensive. Over the next decade, the benefit will cost

taxpayers hundreds of billions of dollars. We need to make sure

this money is spent responsibly and with good value for the taxpayers.

This committee has been investigating Medicare Part D for 18

months. During our investigation, we have conducted the only inVerDate 11-MAY-2000 11:03 Jul 27, 2010 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 U:\DOCS\56580.TXT KATIE PsN: KATIE
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depth oversight of the Part D program. GAO and the Congressional

Budget Office have been unable to review how well the program is

working because the Centers for Medicare and Medicaid Services

won’t give them the data; and CMS, which does have access to

data, refuses to acknowledge fundamental flaws in the program.

Last October, I and other members of the committee released a

staff report that examined the administrative costs of Medicare

Part D. We found that the private insurers that delivered the

Medicare benefit are charging taxpayers and beneficiaries $4.6 billion in administrative costs annually. In percentage terms, that is

over six times more than it costs to run traditional Medicare. And

we found that the Part D program is exceptionally lucrative for private health insurers. They made a billion dollars in profit last year

alone.

Today, I am joining with 10 members of the committee to release

a new staff report, which I ask to be made part of today’s hearing

record. Without objection.

[The information referred to follows:]

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Chairman WAXMAN. Last year’s report looked at the profits of the

private insurers. Today’s report examines the windfall revenues of

the drug manufacturers. In this report, we compare the prices that

the drug companies charge the new Medicare Part D program with

the prices that the companies charged the Medicaid program.

What we discovered is that the taxpayers are paying far more for

drugs under Medicare Part D than they do under Medicaid. In effect, Medicare Part D has given the major drug companies a taxpayer-funded windfall worth billions of dollars.

Our report focuses on the cost to the taxpayer of providing drugs

to the 6 million beneficiaries who are enrolled in both Medicare

and Medicaid. These are Americans who are old or disabled enough

to qualify to be on Medicare, and they are poor enough also to qualify for Medicaid. They are often the oldest and sickest Medicare

beneficiaries and their drug coverage is almost fully subsidized by

Federal taxpayers. ‘‘Dual eligibles’’ is what they are called, and

these dual-eligible beneficiaries account for about half of all drug

spending in Medicare Part D.

The multibillion-dollar windfall is a result of a provision in the

Medicare Part D law that switched drug coverage for the dual eligibles from Medicaid to Medicare Part D. The transfer took effect 2

years ago. Since then, the drug manufacturers have been paid billions more for the drugs used by the dual-eligible beneficiaries than

they would have been paid if the dual eligibles had continued to

receive their drug coverage through Medicaid.

Under Medicare Part D, the 6 million dual-eligible beneficiaries

take the same drugs they got under Medicaid; the only difference

is that the Federal taxpayer is now paying 30 percent more. Add

it up and it amounts to a drug manufacturer windfall worth at

least $3.7 billion in just the first 2 years of the Medicare Part D

program. In fact, the actual windfall could be worth billions more

if all drugs used by dual-eligible beneficiaries were taken into account.

Let me describe some examples. Johnson & Johnson earned over

$500 million in additional profits, much of it from just one drug,

the antipsychotic medication Risperdal. Bristol Myers earned a

windfall of almost $400 million thanks to the higher prices for the

stroke medication Plavix. This is an enormous giveaway, and it—

it has absolutely no justification. The drug companies are making

the same drugs, they are being used by the same beneficiaries, yet

because the drugs are being bought through Medicare Part D instead of Medicaid, the prices paid by the taxpayers have ballooned

by billions of dollars.

The privatization of Medicare Part D is a great deal for the drug

companies, And it is a great deal for the private insurers. It is the

taxpayers who are taking it on the chin.

The circumstances that led to passage of the Medicare Part D

were controversial. The chairman of the House committee that

wrote the Part D law now runs PhRMA, the drug manufacturers

trade association. The administration’s top negotiator left the government to lobby for health insurers and drug companies.

There were allegations of threats and arm-twisting on the House

floor. But that is not the focus of today’s hearing. The Medicare

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drug benefit is providing real help to seniors and the disabled, and

it is going to be part of our health care landscape for years to come.

The key question for us is, how we can fix the program so that

more of the benefit goes to seniors and the disabled and less winds

up in the pockets of the drug companies and insurers.

Medicaid is one proven model for how the government can use

its purchasing power to ensure that it gets low prices. Medicaid is

a voluntary program. No drug manufacturers are required to participate. Medicaid gets its low prices by making discounts a condition of manufacturers participating. The program says that if a

manufacturer wants to sell their drugs to Medicaid beneficiaries,

they have to offer Medicaid their lowest prices. The manufacturers

also have to agree to protect the taxpayers from price increases

that exceed the rate of inflation.

We have well over a decade of operational experience with the Medicaid rebate. It works. It delivers $10 billion annually in savings to the Federal and State governments. In many ways, this is

the exact opposite of what is going on under Medicare Part D.

Under Part D, the drug manufacturers can charge essentially what

they want. Despite their high administrative costs and billion dollar profits, the private insurers have been unable to stand up for

the interest of the taxpayers.

Now, many of our hearings on waste, fraud and abuse identify

problems that the executive branch can fix administratively; that

is not the case with Medicare Part D. The waste in this program

is the direct result of the statutory design of the law. Congress

wrote this law and must lead the way to a solution. To start this

process, I will soon be introducing legislation that will protect the

taxpayer by bringing down the high drug prices in Medicare Part

D. This bill will guarantee that Federal taxpayers cannot be

charged higher prices for the dual-eligible beneficiaries under

Medicare Part D than under Medicaid.

The potential savings to Medicare and the Federal taxpayers are

enormous. Passage of reform legislation could save the taxpayer almost $90 billion over the next 10 years; even more could be saved

if the Federal Government were to authorize to negotiate prices on

behalf of all Medicare beneficiaries.

I am looking forward to hearing more about this issue today and

working together with the members of this committee to improve

the Part D program. I will be introducing our witnesses, who I’m

grateful are here today. All of them are here voluntarily.

But before we do that, I want to recognize Mr. Davis for an opening statement.

[The prepared statement of Chairman Waxman follows:]

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Mr. DAVIS OF VIRGINIA. Well, thank you, Mr. Chairman.

The Medicare prescription drug program, known as Part D, has

successfully provided needed medicines to millions of American

seniors. The proof is in the pudding: Overwhelming number of seniors have opted into this program. It is an optional program that

speaks for its success. While only in its third year of operation,

Part D continues to come in below initial budget projections.

Nevertheless, even with all of its successes, Medicare Part D, like

any Federal program, could benefit from thoughtful, evenhanded

oversight; and I hope that is our goal here today. But I’m not convinced there is much constructive to be learned simply by comparing controlled prices under Medicaid and market prices under Part

D and labeling the entire difference a windfall.

The majority staff analysis released this morning focuses on dual

eligibles, seniors eligible for both Medicare and Medicaid. Before

2006, they received prescription drug insurance through Medicaid

which uses statutory price controls. At the request of States and

many senior citizen advocates, dual eligibles were included under

Part D. Not surprisingly, market-negotiated drug prices for this

special population were found to be higher than the legally mandated, below-market Medicaid rates.

But any alleged windfall, however large, tells really less than

half the story. That difference buys dual-eligible seniors access to

drugs not available under Medicaid’s more restrictive pharmacy

rules, and capturing the alleged savings would be short lived and

painful. It would come at a very, very high cost as other segments

of the health care delivery system, nongovernment segments—we

are talking about employer plans, union plans—payments for the

uninsured would then absorb the cost shifts that are inevitably

generated by price controls.

This is not just a theoretical argument about how free markets

work. The Federal Government does have almost 20 years of experience with the implications of prescription drug price controls. The

Congressional Budget Office and the Government Accountability

Office both have repeatedly found that Medicaid price controls increase prescription drug prices to every other purchaser.

Transplanting Medicaid price controls onto Part D could have

other unwanted implications. We should be very concerned about

a Federal Government process to set Part D prices that would turn

into a political exercise. There would be enormous political pressure to pick winners and losers.

Elsewhere in Medicare, relentless lobbying shifts and shapes reimbursement policies for some services or specialties over others;

and it is not a very pretty process. Just a couple of weeks ago,

Medicare physicians almost took a 10 percent reimbursement cut

at the hands of a government-run pricing system.

Given the critical role of Medicare in caring for seniors as they

age, we should conduct oversight of the program, but it strikes me

that this committee’s discussion of Part D is stuck in a rut. With

every new report and each successive hearing, I understand Yogi

Berra’s concept of ‘‘deja vu all over again.’’ Repeatedly making economically and plausible arguments about the efficiency of government-run drug pricing or plucking artificial windfalls from thin air

won’t make Part D, a good program, work any better.

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It is running well under the original 2003 budget projections, due

largely to lower-than-anticipated bids from prescription drug plans.

That is what happens in the free, competitive market. And most

importantly, opinion surveys report that 85 percent of Part D beneficiaries are happy with the program, the 15 percent obviously on

the other side of the aisle here, with the satisfaction rate even

higher among the dual eligibles.

Meanwhile, other aspects of the program urgently need scrutiny.

We could be talking about Medicare payments for durable medical

equipment prescribed by physicians or the serious financial trouble

facing Part A, Medicare hospital insurance, which is due to go

bankrupt in 11 years.

The bedrock of the program, Part A, is in dismal shape. The

Medicare trustees reported this year the Hospital Insurance Trust

Fund will be insolvent in 2019. When that happens, payments can

no longer be made to cover seniors’ hospital care. There is no authority in current law to allow general revenue funding of that

shortfall. We obviously—we fund Part B.

I look forward to our oversight hearings on these pressing issues

today.

Chairman WAXMAN. We are pleased to welcome for our first

panel, Dr. Stephen Schondelmeyer, who is a Ph.D. and professor

and head of the Department of Pharmaceutical Care and Health

Systems at the University of Minnesota; Dr. Gerard Anderson,

Ph.D., professor and director for the Center for Hospital Finance

and Management, Bloomberg School of Public Health at Johns

Hopkins University; Fiona M. Scott Morton, Ph.D., professor of economics, Yale School of Management, Yale University.

We are pleased to have the three of you here today. It is the

practice of this committee that all witnesses testify under oath. So

if you would please stand.

Mr. DAVIS OF VIRGINIA. Mr. Chairman, could I just note for the

record, Dr. Schondelmeyer is the majority’s witness who, 2 weeks

ago, was given notice of this; and we have not yet received written

testimony from him.

Our minority witness has submitted his for the record ahead of

time for scrutiny. Thank you.

Chairman WAXMAN. Thank you, Mr. Davis. If the three of you

would please stand and raise your right hands.

[Witnesses sworn.]

Chairman WAXMAN. The record will indicate that each of the witnesses answered in the affirmative.

Dr. Schondelmeyer, we are going to start with you, but Mr. Davis

made a very good point that we expect witnesses to submit their

statements in advance under the rules. Please go ahead.

Did you submit a statement to us, a written statement?

Mr. SCHONDELMEYER. I have not yet. I can after this meeting. I

do apologize.

Chairman WAXMAN. Turn on the mic. Yes, there is a button on

the mic.

Mr. SCHONDELMEYER. I do apologize. I accepted this assignment

with many other commitments, and this was a very tight schedule

for me, given other commitments. But I was pleased to do so

and——

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Chairman WAXMAN. We’re happy to have you here anyway.

Thanks.

We are going to ask each of you, as we will all of our witnesses,

to try to keep within 5 minutes. I think you all have been informed

of that in advance. And if you have submitted written statements,

they will be part of the record in full. We’re going to have a clock

that will be green for 4 minutes, yellow for 1 minute and then

when the 5 minutes is up, it will turn red. We’re not going to be

abrupt in stopping you, but I hope that red will be an indication

that it is time to get ready—get ready and to conclude.

Thank you. Please go ahead.

STATEMENTS OF DR. STEPHEN SCHONDELMEYER, PHARM.D.,

Ph.D., PROFESSOR AND HEAD, DEPARTMENT OF PHARMACEUTICAL CARE AND HEALTH SYSTEMS, UNIVERSITY OF

MINNESOTA; DR. GERARD ANDERSON, Ph.D., PROFESSOR

AND DIRECTOR, CENTER FOR HOSPITAL FINANCE AND MANAGEMENT, BLOOMBERG SCHOOL OF PUBLIC HEALTH,

JOHNS HOPKINS UNIVERSITY; AND FIONA M. SCOTT MORTON, Ph.D., PROFESSOR OF ECONOMICS, YALE SCHOOL OF

MANAGEMENT, YALE UNIVERSITY

STATEMENT OF DR. STEPHEN SCHONDELMEYER, PHARM.D.,

Ph.D.

Mr. SCHONDELMEYER. Thank you, Mr. Chairman, for inviting——

Chairman WAXMAN. Pull your mic a little closer.

Mr. SCHONDELMEYER. Thank you for inviting me and thank you

to the rest of the committee. I will skip the normal formalities and

broad background descriptions, because you’ve done that well in

your introduction.

The dual eligibles, as was noted, however, represent a large

share of the expenditures both under the previous Medicaid program and under the current Medicare Part D program. Just to put

that in perspective, in the year 2005, total Medicaid drug expenditures were about $43 billion a year. In 2006, after those dual eligibles moved from Medicaid over to Medicare, the Medicaid drug expenditures dropped to less than half of that $43 billion, somewhere

around $21 billion. So it is very real that this shift did move dollars

from the State-run Medicaid programs to the private, market-run

Part D Medicare programs.

At the same time that shift occurred, also the access to the rebates under the State-run Medicaid programs disappeared.

Let me put in perspective rebates, briefly, under Medicaid. The

Medicaid drug rebate program began back in 1991 and continues

to this day. There is a Federal component to the Medicaid drug rebate program which mandates 15.1 percent rebate for all brandname drugs, and in addition for brand-name drugs, they are subject to a best-price additional rebate and an inflation adjustment

rebate that often adds substantially beyond that 15.1 percent for

all brand-name drugs. For generic drugs, all generic drugs must

provide an 11 percent rebate.

Now, notice in both brand-name and generic drugs, all prescription drugs are subject to rebates. That is not necessarily the case

today. Under the Medicare Part D program, not all drugs are subVerDate 11-MAY-2000 11:03 Jul 27, 2010 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 U:\DOCS\56580.TXT KATIE PsN: KATIE
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ject to rebate; and particularly those drugs that are covered under

the must-cover categories, the categories where the Part D plans

can’t negotiate or opt to cross different drug categories, those don’t

appear to receive as much rebate, although under the Medicaid

program they did receive the same amount of rebate—at a minimum at least—as the other brand-name drugs.

Second, the amount of rebates from 1991—it took a year or two

to get the program stabilized. From 1993 to 2000, about 18 to 191⁄2

percent of total drug spending came back to Medicaid programs as

rebates. So about 18 to 191⁄2 percent came back.

Beginning in 2000–2001, though, the States woke up and realized that the Medicaid legislation also authorized States’ supplemental rebate programs. In those State supplemental rebate programs, it said States could negotiate on their own rebates above

and beyond the Federal rebate, and that has started to grow.

In the early—2000 through 2003, we saw rebates grow to 20–21

percent. And then we saw a dramatic growth; in 2004 rebates grew

to 24 percent of the total drug spend, 2005 rebates under Medicaid

grew to 28.8 percent of the drug spend.

Unfortunately, to the best of my knowledge, CMS has not released the rebate data for the years 2006 and 2007 under Medicaid,

so we can’t look to see what the total amount is. As best I can tell

from talking with various States out there, however, the number

is probably somewhere above 30 to 31 percent total drug spend returned in rebates.

Now, that compares with—this committee did a report a year ago

that suggested only about 8 percent of the drug spend under Medicare Part D was coming back as rebates, and that wasn’t for all

drugs and all classes. So if you compare 28.8 or 30 percent rebates

on Medicaid to 8 percent on Medicare—and I understand your new

report shows that the number has gone up under Medicare Part D,

but it is still less than half of what the rebate amount was under

the Medicaid program—it is obvious that if these same dual eligibles remained in the Medicaid program, the taxpayers and the

beneficiaries themselves would benefit from lower drug spend, as

you pointed out, Mr. Chairman, on the same drug, the same people.

It—just at a lower price in the marketplace. And those are based

on State-negotiated supplemental rebates, not mandated rebates.

They are negotiated with the States above and beyond the Federal

rebate.

So it is also important to realize, under the Medicare Part D program, that the dual eligibles and the people on the private side do

not receive the benefit of these rebates in lower drug price for most

cases. You can find the odd drug, there may be a handful of 10 or

15 drugs where a lower price is actually passed on to the recipients, but for the most part, lower prices are not passed onto the

recipient. And the coverage gap, the person pays the entire cost of

the drug without the benefit of any of the rebate. And for specialty

drugs, where they may be paying 50 to 75 percent coinsurance,

they’re paying the entire cost of the drug without the benefit of the

rebates.

In conclusion, it is not just observations of State accountants and

academics like myself that say this was a shift in resources. Also

Wall Street and corporate annual reports in both 2006 and 2007

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noted that drug companies had substantially increased revenues

that heretofore had been unexpected due largely, in part, to volume

increases under Medicare Part D and the decreased payment for

rebates under Part D versus under Medicaid.

Thank you very much, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Schondelmeyer.

Dr. Anderson.

STATEMENT OF DR. GERARD ANDERSON, Ph.D.

Mr. ANDERSON. Thank you, Chairman Waxman. It is a pleasure

to return to this committee to talk about the issue of drug pricing.

My testimony can be summarized in two observations and three

recommendations.

My first observation is that Part D plans paid even higher prices

for drugs than Medicaid programs were paying. My second observation is the United States pays significantly higher prices for prescription drugs than other countries and that, in the United States,

the private sector pays generally 20 percent higher prices than the

public sector pays for drugs.

These two observations lead me to three recommendations. First,

there should be greater price transparency in the pharmaceutical

market. Second, drug pricing data should be readily accessible to

congressional agencies and academic researchers so they can easily

know if Part D plans are paying higher prices than Medicaid. And

third of all, all government agencies should be paying the same

prices for drugs.

The remainder of my testimony will explain in greater detail the

rationale behind these observations and recommendations.

When the responsibility for providing drug coverage for the dual

eligibles was transferred in 2005, the expectation, or even the hope,

was that Part D plans would be able to obtain lower prices than

the Medicaid programs. Unfortunately, a growing body of data, including the report today, suggest that Part D plans are paying even

higher prices than Medicaid programs. Amazingly, all the data

seems to confirm that the windfall to the drug companies is about

$2 billion a year.

The first indication of higher prices came from the disclosures by

the pharmaceutical companies themselves in their 10-Ks and 10-Qs

filed with the Security and Exchange Commission. My written testimony cites specific documents, showing that the pharmaceutical

companies were getting higher prices than Part D. Pfizer alone, for

example, estimated in its 10-Q an additional $300 million in profits.

Second, in my report, I show how CBO-CMS actuary data estimate using that data that Part D plans were paying 22 percentage

points more than Medicaid was paying for the same drug. This

committee says 30 percent; the CMS testimony today says 20 percent. So they are all in pretty much the same range.

The third indication was the report by this committee last year.

So basically all the different sources—and as a researcher you want

to have multiple sources—then, the transfer from the dual eligibles

will result in about a $2 billion annual windfall to the drug companies; and it is currently in line with the report of this committee.

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Surprisingly, the Medicare program is not the insurer paying the

highest prices for drugs in the United States. Typically, the private

sector pays 20 percent more for drugs than the Medicare and Medicaid programs.

The fact that Part D plans were unable to obtain substantial discounts from the pharmaceutical companies is surprising to me,

given the difficulties that the Medicaid agencies have obtaining actual transaction prices to set their own rates. In a series of recent

court decisions, judges and juries have found that this lack of price

transparency has made it difficult for the Medicaid agencies to actually set prices.

President Bush has argued that there should be greater price

transparency in the health care sector. When the Bush—while the

Bush administration has promoted major efforts to increase the

level of price transparency in the hospital and physician sectors,

surprisingly there has been very little emphasis on price transparency in the pharmaceutical sector.

In order to make greater price transparency, I believe the Secretary of Health and Human Services should determine in the markets are actually working for pharmaceuticals. One way to determine this is to compare the lowest prices that any of the Part D

plans are obtaining and compare to the prices that the Medicaid

programs, the VA or even Canada are obtaining.

Unfortunately, provisions in the MMA limit disclosure of information on drug prices and drug utilization. This data should be

given to CBO, CRS, MedPac and other government agencies to analyze the effectiveness of the Part D program. It should also be

given to academic researchers.

My third and final recommendation is that all government programs should pay the same rate for each drug. I cannot think of

a compelling reason, either economically or ethically, why one government program, save the VA, should pay a higher price or a

lower price through the Medicare program; all the money comes

from the taxpayers. Governments in other countries manage to pay

one price for drugs. Why not the United States?

Thank you for the opportunity to testify this morning.

Chairman WAXMAN. Thank you very much, Dr. Anderson.

[The prepared statement of Dr. Anderson follows:]

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Chairman WAXMAN. Dr. Morton.

STATEMENT OF FIONA M. SCOTT MORTON

Ms. MORTON. Good morning to the chairman and members of the

committee. Thank you very much for inviting me to testify. I just

have some short remarks.

The report that was released this morning repeatedly says that

manufacturers charge more to Part D than they charge to Medicaid. I just would like everyone to keep in mind that the manufacturers—under Medicaid, they sell to drugstores in the normal way,

and then they are required to give a rebate back to the government. And that is how we get a net price; it is not a charged price.

And the size of that rebate is set in law; and the important

thing, I think, that we see today, that we didn’t see in the early

1990’s, was the size of the inflation component of that. And that

is not something that Part D can negotiate for. That inflation component is big, and it is mandated under Medicaid.

So I would say that the findings of the report are completely predictable in the sense that we knew that Medicaid was required to

get the lowest price, and we knew it had these big rebates. And so,

of course, that is going to be, as Mr. Davis said, the place where

you’ve got the lowest prices, and we wouldn’t expect Part D to be

able to do as well as that.

So I think if Congress is concerned about just the cost of covering

duals, then you should move them back into Medicaid. I mean, that

is where you’re going to get the lowest prices for these people. It

would also reduce confusion for them and plan shifting as the plan

they are in becomes too high cost and they’re moved to another

plan that—I believe that kind of transition is difficult.

Second, the report finds that the protected classes in Part D get

small discounts. Again, I’m going to take this opportunity to say

that when I testified for the Senate in January 2007, I predicted

this, because you can’t move market share in these groups. The

formularies are restricted and the Part D plans have to cover all

drugs, essentially; and if you can’t bargain with the manufacturer,

saying, I’m going to move market share to Drug A from Drug B,

you can’t get a discount. And I think it is very reasonable then to

see that you’re not getting discounts in these protected classes.

Again, this is something you could change with respect to the

regulation. You could have fewer protected classes, you could loosen the formulary restrictions so that plans can do a bit more shifting of market share from one drug to another; and then you’d expect to see bigger discounts.

Third, we have talked a lot about the windfall that has arisen

from moving guys from Medicaid into Medicare. I have some research looking at the opposite effect, which is the movement of the

uninsured from paying cash to having coverage under Medicare,

and there the windfall appears to have gone in the opposite direction. So the prices that an uninsured, cash-paying person pays are

a lot higher than—now, I don’t have the same access to information

as you do, Mr. Waxman, so I’m inferring it from some less-good

data, but it looks like the prices are going down quite drastically.

So we do have success of the program in helping the uninsured

get access to drugs at lower prices. But—so I just would like to

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point that out, since we have the windfall going the other way as

well.

Then two—just points that are longer run. First of all, I think

this committee might want to return to this question next year because the way the negotiations work is, they happen in February

for prices to set in November for the next year. So when you think

about the experience with the program, it wasn’t until February

2007 that plans and everybody could watch a whole year of operation of this program. And so it wasn’t, therefore, until prices were

set for 2008 that you see kind of informed outcomes, as opposed to

just guessing what are people going to do and where are they going

to enroll. So I think we can learn more going forward.

And then, last, it seems messy and costly to me to try to have

a Medicaid rebate applied to some purchases inside Medicare. It

seems just—because you get those rebates. The supplemental rebates come from shifting, having a preferred drug; the Medicare

Part D rebates come from having a preferred drug. So trying to get

a plan to have a Medicaid rebate for a guy who is in their Medicare

plan that they are trying to negotiate over with the manufacturers,

that seems very complex to me. I think it would be just easier to

move them, for the plan.

And I think that—oh, the last thing about the Medicaid rebates

is, they are large and they really reduce the profitability, of course,

of selling to the Medicaid program. I think that works partly because the Medicaid program is small, so if it is 12, 15, 18 percent

of the Nation’s drug spending, the manufacturers can afford and

should be interested in providing medications at low cost to those

poor people who are also sick.

But when you think about Medicare, 40 percent of all prescriptions are doled out to people who are eligible for Medicare. I mean,

by the time you add on Medicaid—that’s half the market—you’re

then talking about a very serious change in the market structure

of the pharmaceutical industry.

Thank you. That’s all.

Chairman WAXMAN. Thank you very much.

[The prepared statement of Ms. Morton follows:]

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Chairman WAXMAN. I’ll start off the question—5 minutes of questions.

That was an interesting point you just raised about the Medicaid

population being so much smaller than the Medicare population,

but when we talk about dual eligibles, we are talking about half

the budget for pharmaceuticals under Part D.

You’re shaking your head. You acknowledge that fact?

Ms. MORTON. Yes, I think not everybody who is Medicare eligible

is enrolled in Part D. So the current proportion of duals is quite

high relative to all the people who could be signing up for Part D

going forward.

Chairman WAXMAN. If we paid the Medicaid price for those dual

eligibles, there would be a tremendous savings. Do you agree?

Ms. MORTON. Oh, there would. Because we used to have them in

Medicaid where these regulated prices were below market level.

Absolutely.

Chairman WAXMAN. Do you think that did any harm to the ability of the prescription drug industry to do their research, market

their products?

Or is it a small amount so that the controls on those prices, requirements of discounts—it did not have an adverse effect?

Ms. MORTON. It is hard to know what the ideal amount of research and development is, so I won’t tread in that area. But in

terms of where we were before with kind of 18 percent of spending

in Medicaid, seemed like, you know—if you take that as a benchmark, you know, it seemed not so terrible to me; whereas I feel like

half of all spending being subject to these rules is really pretty

drastically different and moves us a lot more toward a single

payer—you know, national health almost.

Chairman WAXMAN. As I hear the testimony of the three of you,

you all seem to agree that our report is accurate. Is that a fair

statement?

Start with Dr. Schondelmeyer.

Mr. SCHONDELMEYER. Yes, it is. I think it is quite accurate. And

I’m not sure it takes fully into account the effect of State supplemental rebates.

I would point out that your own State of California gets about

40 percent of their total drug spend back in rebates. And those

State supplemental rebates are negotiated, not government-set

prices. They are negotiated with the drug companies based on

movement of market share and the same tools that the private

Part D plans have available.

So why is it that States can negotiate up to a 40 percent rebate,

an additional 20 percent on top of what the Federal rebate is, and

the private Part D plans can only get 8 to 14 percent rebates? I

don’t know.

Chairman WAXMAN. And, of course, our report was only on the

100 most-prescribed drugs. There are other drugs beyond that, as

well, for which there could be a greater savings or that we are paying far more for than we otherwise might have to.

Mr. SCHONDELMEYER. Could—but given what I know about the

market and how rebates work, I would be willing to wager that

there are even smaller rebates on the rest of the drugs in the market than the 100 you looked at.

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Chairman WAXMAN. I see. OK.

Dr. Anderson, what is your view?

Mr. ANDERSON. I agree that these numbers are quite accurate.

I think you have to look at it from a variety of different perspectives. One is from the 10-Ks and the 10-Qs, and you add up those

that they report, you’ll get to about $2 billion. Then you sort of look

at the differential in the prices between Medicare and Medicaid,

and it is about a 20–25 percent differential. You do those and you

get about a $2 billion number.

So I think, from a variety of sources, we are seeing that your

numbers are quite accurate; and I wish we had access, actually, to

your numbers so we could look at them. As researchers, I think it

is really important.

Chairman WAXMAN. And, Dr. Morton, as I heard your testimony,

you confirmed the committee staff’s findings? You can’t tell us exactly that we are correct because you don’t have the same data, but

you confirmed the fact that we’re paying far more under Part D for

these dual eligibles?

Ms. MORTON. That’s consistent with what I know.

The States get supplemental—can negotiate for supplemental rebates. They get the best price on a brand and there is the inflation

component, and Part D can’t mimic those latter two. They can

mimic the supplemental, but they can’t get the inflation piece, for

example.

And then, second, looking outside the drugs that you examined,

I would actually think the rebates would be bigger for Part D. And

the reason is——

Chairman WAXMAN. You would agree with Dr. Anderson?

Ms. MORTON. Yes. Because the big drugs for the duals are largely in the protected classes where, as I said, there is less ability to

negotiate.

Outside the protected classes, you would expect more negotiation,

more market share shifting and bigger rebates.

Chairman WAXMAN. These are protected classes because they are

drugs that—there is no other alternative to those drugs and they

are life saving; is that basically right?

Ms. MORTON. I think there is also a second factor, which is that

you’re trying to stop Part D plans from engaging in adverse selection, from cream-skimming in taking healthy people. And if you

offer only one HIV drug on your formulary, you’re not going to attract the sick people.

Chairman WAXMAN. So we protect those classes of drugs, and it

is important that we do so for the well-being of the people.

Ms. MORTON. That’s right.

So in some sense that is why I suggest moving these guys back

into Medicaid, given—if you’re concerned, for this reason, about

having a restrictive formulary, then, you know, that going to cost

you.

Chairman WAXMAN. Thank you.

Mr. Davis.

Mr. DAVIS OF VIRGINIA. Thank you.

Of course, the problem is, these folks don’t want to go back into

Medicaid. But that is a political issue the other side will have to

deal with.

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Dr. Scott, let me ask you. We keep referring to private sector

price controls that would result from Medicaid price regulation

being extended to Part D. Can you elaborate on the expected impact of extending price controls to the Part D program on the following groups: employers, employees, unions and uninsured?

Ms. MORTON. Certainly. If you have—the best price provision of

the Medicaid rebate rules is the critical thing. So if I, as a manufacturer, offer a low price to any private-sector buyer, I have to

offer that same—effectively, the way the rebate works—I have to

offer that same low price to Medicaid. So the bigger—so that gets

expensive as the group that gets that forced rebate gets bigger.

So as that group getting bigger and bigger, which it would be if

you put in duals or all of Medicare or whatever, then I don’t want

to give a discount anymore, as a manufacturer, because if I give a

discount to even one party, I have to give to the entire portion of

the market covered by that best price. And that causes discounts

for private-sector employers, for everybody else.

Mr. DAVIS OF VIRGINIA. The extension of the philosophy over

there is just, why not just fix prices for everybody; that at the end

of the day, if you fix prices, that somehow the drug companies are

going to go along and just take it?

What you are arguing is, they make it up somewhere else along

the way.

Ms. MORTON. Well, they are going to have an incentive to eliminate those discounts elsewhere in the economy and will move toward a more uniform pricing where everybody pays the same price

and nobody can negotiate for a discount.

And that is dangerous, I believe, because the way we run our intellectual property is that these brands have patent protection, and

the way to create price competition when two molecules have patent protection is to threaten to substitute one for the other and get

a discount. If you can’t do that because of the best price regulation,

then you undermine price competition.

Mr. DAVIS OF VIRGINIA. One of the problems with Medicaid is

that you don’t get the same breadth of offerings, isn’t that right,

that you would get Medicare Part D?

Ms. MORTON. Technically, it is supposed to be an open formulary,

but I believe the supplemental rebate States are negotiating for depend most now on having a preferred drug and then a list where

the physician has to get prior authorization to prescribe the drug,

so that effectively you’re getting a narrow formulary. That’s right.

Mr. DAVIS OF VIRGINIA. Dr. Anderson, do you want to comment?

Mr. ANDERSON. I would say, if you would compare the

formularies between Medicaid and any of the private-sector plans,

you would see that Medicaid has a much broader formulary than

most of the private-sector plans.

Mr. SCHONDELMEYER. I would agree with that.

Mr. DAVIS OF VIRGINIA. But they limit the number of prescriptions that can be filled at any one time, right?

Mr. ANDERSON. Some of the States do have those as ways to control expenditures, yes. But the formularies are quite extensive.

Congress essentially mandated that in OBRA 1990 and essentially said that all State Medicaid programs had to offer all drugs

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and have access provisions in there to make sure that they are

available to all communities, all beneficiaries.

So it is quite an open program.

Mr. DAVIS OF VIRGINIA. But does a large formulary matter if you

can’t fill the prescription?

Mr. ANDERSON. Essentially, that is the problem of the States

having not enough money in their Medicaid programs, and so they

are making choices here as to how to save money; and I would not

do that, but that’s the choices that they have, given limited resources.

Mr. DAVIS OF VIRGINIA. Well, I know in Virginia we have gone

from Medicaid, 10 years ago, being zero percent of the State budget

to, now, 17 percent of the State budget. It has crowded out education and everything else. It is a huge—I wouldn’t say completely

unfunded Federal—but it is a Federal mandate that carries with

it a lot of costs.

And, of course, States have to balance their budgets. We don’t.

There is just, I think, a huge problem.

Let me ask, long term on price controls; I’ll ask each of you. Are

you surprised to learn that in the first 4 years after the government mandated Medicaid price controls in order to control prescription drugs spending, that spending actually increased by 40 percent? Does that surprise anybody?

Dr. Morton.

Ms. MORTON. I think spending on drugs—it doesn’t surprise me,

but it might be due partially to the best-price legislation that was

passed in 1991, but it also might be due to technological change.

We invent new drugs, people want to consume them. The population is aging, more people are on the disability rolls; we’re just

consuming more health care.

Mr. DAVIS OF VIRGINIA. Do prescription drug price controls hold

down spending over time? I mean, immediately, obviously, price

controls, we know they have an immediate effect; but over time,

how does the marketplace reflect that?

Ms. MORTON. One of the things you have to realize when you’re

engaging in this kind of price regulation is that the manufacturer

will have some kind of optimal response. So they will raise prices

or alter their mix of drugs or change their forms or whatever, if

that is going to get them bigger reimbursement. So that is one

thing to keep in mind.

Then the second thing to keep in mind is just the research and

development consequences. If we cut by half our spending on pharmaceuticals, then, you know, that’s going to help us today, but it

has consequences for future generations because we have privately

funded R&D. And unless we’re willing to think of some other way

to do R&D, I think we have to make sure there is some money to

be earned for somebody who develops a novel therapy.

Mr. DAVIS OF VIRGINIA. Of course.

Mr. SCHONDELMEYER. Earlier, you asked all three of us to respond to the question, are we surprised that 40 percent expenditure increase occurred in the first 4 years. That is expenditure increase, not price increase; and the number of recipients increased

in that time and a number of other factors unrelated to price.

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Also I point out, you ask, do price controls result in lower prices

or higher prices over time. I would point out, the other major governments around the world that do have price controls—I’m not

saying we have to do that—but do have price controls, do pay lower

prices than we do. So price controls for many markets in many governments seem to work.

The last thing I’d point out is, the United States—today, our government pays for 50 to 60 percent of all drugs in the United States.

We have become the largest buyer in the marketplace. Whether

you act as a regulator of price or a prudent buyer in the marketplace, you’re going to have an impact in the marketplace. But I

would say our government is not working as a prudent buyer in a

market—in a marketplace. And there are behaviors that they can

undertake that do facilitate markets, but use the power of a 50-to60 percent player in a marketplace.

Mr. DAVIS OF VIRGINIA. Governments are rarely prudent buyers

is my observation.

Mr. SCHONDELMEYER. You guys can change that.

Mr. DAVIS OF VIRGINIA. I don’t think you want Congress to get

involved.

Chairman WAXMAN. Thank you, Mr. Davis.

Mr. Cummings.

Mr. CUMMINGS. I have sat here and I have listened to all of you;

and I have to tell you, I’m confused. Because the bottom line, Dr.

Anderson and Dr. Schondelmeyer, as I understand it, is that the

government is spending more money now, in moving these folks to

Medicare Part D, than they were before. Is that the bottom line?

Mr. ANDERSON. That’s $2 billion more per year.

Mr. SCHONDELMEYER. True.

Mr. CUMMINGS. OK.

Now, maybe I’m missing something, but Mr. Davis, whom I have

tremendous admiration for, talked about ‘‘deja vu, here we go

again.’’ But the fact is that Americans, hardworking taxpayers that

are watching this right now, are probably sitting there scratching

their heads and saying, OK, what does all this mean?

Now, Dr. Morton has given us a few suggestions. And as I sat

here and I listened to the suggestions, this is what I asked myself.

I asked myself, what is the problem with her suggestions? And I

want you all to answer.

One of the things she says, we should move the folks that are

now on Medicare Part D—correct me if I’m wrong—back to Medicaid. Is that right?

Ms. MORTON. Just the duals. I mean, my understanding is, Mr.

Waxman’s concern is just the duals.

Mr. CUMMINGS. So that we won’t be confused and the public

won’t be confused—see, what happens here in Washington is, people talk past each other, and so then—but when the bottom-line

clears, we are still in the same predicament. And we’ll be in the

same predicament 10 years from now, but it will be far worse.

Is there something wrong with what she said? Is there an issue

with that?

Mr. ANDERSON. Well, I think you could do that. The problem is

that you want to have one program really be in charge for the person’s health care, and that should be through the Medicare proVerDate 11-MAY-2000 11:03 Jul 27, 2010 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 U:\DOCS\56580.TXT KATIE PsN: KATIE
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gram or the Medicaid program. And by putting—in the past, they

have been separate, so drugs have been part of the Medicaid program, and lots of other things have been part of the Medicare program; and that makes it much more difficult to get good, quality

care.

So there are pricing reasons why you should follow her ideas, but

there are clinical reasons why you might not want to.

Ms. MORTON. Now, can I say, the clinical side is not represented

so well by our current system of a PDP and then a set of doctors

who aren’t part of the same organization.

I agree with you, but I think we could fix it for everybody.

Mr. ANDERSON. We should fix this for everybody, and essentially,

potentially having separate payment systems makes it more difficult to solve it, because you want to have one system, one insurer

really being responsible for the care of an individual.

Mr. SCHONDELMEYER. I agree that could work, to shift them back

to Medicaid; but a downside of that is, markets work also based on

the principle of volume, and larger volume should get lower price.

But here we have the government paying 50 to 60 percent of the

drugs on the market, and paying a higher price and moving the

dual eligibles from Medicare Part D back to Medicaid means that

the government is dividing up their pie again to lots of smaller

pieces, and essentially Medicare Part D does that. Instead of the

government saying, we’re going to pay for all Medicare Part D

under one pricing system, we’re going to let each plan and hundreds of these plans across the country negotiate prices. So we

want a whole bunch of small people negotiating instead of one big

party negotiating. So we structurally built into Medicare Part D

principles that fight against markets working well in ways that do

derive better prices in the marketplace.

So we need to ask, should we keep them in Medicare Part D and

find ways to better use the government’s role in the marketplace.

Mr. CUMMINGS. Dr. Morton, I’m running out of time. What was

your second most powerful suggestion?

Ms. MORTON. I think that we need to study the protected classes

quite carefully. I think what Mr. Waxman said about how these are

vulnerable populations that are very sick and need access to correct

drugs is absolutely right. However, when you give the plans no

tools to shift market share or weak tools, then you are going to

have expensive prices.

Mr. CUMMINGS. Dr. Anderson, would you react to that, please?

Mr. ANDERSON. Sure.

Essentially what we did when we passed OBRA 1990 was, we

said everybody in the Medicaid program had—for all the drugs,

and so essentially you took out the ability to do formularies. But

then you gave them the ability to do rebates.

So essentially what you’d want to do in these protected classes

is to institute either the best price or the rebate system, so that

when there is no competition, the Federal Government or the dual

eligibles get the best prices.

Mr. CUMMINGS. Thank you, Mr. Chairman.

Chairman WAXMAN. Mr. Marchant.

Mr. MARCHANT. Thank you, Mr. Chairman.

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Dr. Morton, in your testimony, you explained that expanding

Medicaid, the Medicaid best-price requirement, to Part D would

make prices more uniform across the board. Dr. Anderson seems to

advocate uniform prices.

What would be the implication of a uniform prescription price

policy?

Ms. MORTON. The implications are twofold. One is that because

the production cost of these drugs is quite low relative to the research and development costs, it is worth giving them—it is worth

selling at low prices to people who are poor or who can’t pay, because you’re still covering your manufacturing costs and you’re extending the benefit of the drugs to those people. If you have to

charge a uniform price to everybody, then those people can’t afford

it, they don’t buy and you don’t get as many people being helped.

So it is useful to be able to sell at different prices to different consumers.

Second, plans—PBMs and insurers and HMOs—in this country

have invested a lot in changing their organizations to be able to

shift market share from one molecule to another, and that requires

education of doctors and a lot of organizational effort. And that

ability to shift market shares is what drives prices down, because

it creates price competition between drugs. I buy A and you buy

B. A and B compete. I get a good price on B; that is why I bought

it. You get a good price on A; that is why you bought it.

So your price on A is low and mine is high because we’ve engaged in this kind of bargaining. And if you make everything uniform, then all of that system of extracting price concessions is no

longer worth doing.

Mr. MARCHANT. Thank you.

Dr. Anderson, you seemed to express surprise that Part D prices

are higher than Medicaid. Does any other payer in the United

States get Medicaid prices?

Mr. ANDERSON. Sure. The VA actually gets lower prices, DOD

gets lower prices than Medicaid does in most cases.

Mr. MARCHANT. Does GM get Medicaid prices despite their—the

fact that they are a very large purchaser?

Mr. ANDERSON. I haven’t—I don’t have access to it. That’s where

we need price transparency to know whether or not GM gets the

same prices at Medicaid. We don’t, as researchers, have access. My

guess is that they do not, which is what I’m concerned about, that

the marketplace for drugs does not seem to be working.

All the discussion that Fiona Scott Morton talks about in terms

of the marketplace is resulting in the private sector paying 20 percent more than the public sector. And why would I want to emulate

a system where you’re paying 20 percent more?

Mr. MARCHANT. Well, it seems to me that someone in their 20’s

or 30, that had a disease that they felt like there was a time horizon available to them for that disease or that—to be cured with

some kind of a medicine, would hope that the drug companies

would not just flatten their product line to a price point, but would

build something into the product line for profit and R&D, so that

there would be some hope later. And, of course, the government

would have that hope, too.

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Mr. ANDERSON. And I would share in that hope. Right now, however, the pharmaceutical industry is spending anywhere from 14 to

18 percent of its revenues on R&D. It is spending 30 percent on

marketing and spending 25 percent on profits.

So I would love them to increase the percentage—certainly as a

researcher, certainly as a professor at Johns Hopkins—to increase

them from 14 percent to 20 percent or 25 percent. But that is not

what has happened, and as the profits have increased, the percentage has remained absolutely stable.

Mr. MARCHANT. Ms. Morton, do you see a danger in that theory?

Ms. MORTON. The marketing expenses of a pharmaceutical firm

are all driven toward getting more revenue, which—and those expenses wouldn’t be spent if they weren’t worthwhile in bringing in

more revenue, so that increases the incentive to invent something.

The more revenue you can collect from it, then the more incentive

you have to invent it.

So the marketing, per se, is not a disaster. Profitability is very

difficult to calculate here because the percent profit has to be calculated on something—percent of sale, percent of assets, percent of

whatever—and typically we would do it as percent of assets. And

R&D is an asset for these firms, but it is not counted as such when

the accountants look at assets. So pharmaceutical companies look

like they have tiny assets and few factories when, in fact, they

spend millions on R&D.

So I’m just always leery of profit numbers, because they can—

you can calculate them so many different ways.

Mr. MARCHANT. Thank you, Mr. Chairman.

Chairman WAXMAN. Mr. Yarmuth.

Mr. YARMUTH. Thank you, Mr. Chairman. I want to thank all the

witnesses for their testimony.

I think we are in general agreement that the treatment of dual

eligibles through Medicare Part D is costing the government and

the taxpayers more money than it otherwise would. And the staff

report estimates that the savings to the taxpayer down the road,

or the additional cost to the taxpayer for failure to do something

different, would be in the neighborhood of $85 billion over that 10-

year period.

Dr. Schondelmeyer and Dr. Anderson, does that seem like a reasonable estimate to you? Is that possible? Is that understating it?

Mr. SCHONDELMEYER. I think if the program continues as designed, that is a reasonable estimate. But I would point out that

it is probably even more than that because the States have gained

even more in their supplemental rebates in the last year or two,

and I think the savings could be even greater than what that represents.

So it is probably a reasonably accurate estimate if not an underestimate.

Mr. ANDERSON. And I would agree.

Mr. YARMUTH. And it is possible, because the States have the

protection of the inflation cap, essentially, it could be more than

that in terms of savings if the inflation rate ended up being significantly higher as it has been in many years.

Mr. ANDERSON. I think in OBRA 1990, that was a very smart

thing to include in there, to put it in, because when the drug comVerDate 11-MAY-2000 11:03 Jul 27, 2010 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 U:\DOCS\56580.TXT KATIE PsN: KATIE
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panies increase the prices, then essentially the Medicaid programs

gets the advantage of that. And that doesn’t exist in Medicare Part

D.

Mr. YARMUTH. Dr. Morton, you said in your testimony that the

result of the study, the staff study, the staff report was predictable

given what we’re talking about.

Would you say that the impact that we’ve seen over the last few

years was predictable when the legislation was passed to create

Medicare Part D?

Ms. MORTON. Certainly, the magnitude, I wouldn’t have wanted

to speculate on. But the fact that Medicaid has a required bestprice provision for brands and then the inflation component on top

of that makes me think that it would be extremely difficult for a

private sector—I mean, it would be impossible if the Part D plans

were included in the best-price provision.

But actually they are exempted, so you could give Part D a low

price, and it wouldn’t trigger a Medicaid rebate.

But having said that, I still think it would be very difficult to

match the Medicaid price.

Mr. CUMMINGS [presiding]. Mr. Bilbray.

Mr. BILBRAY. Mr. Chairman, with your condolence—I mean, your

support, I’d like to yield my time to the ranking member.

Mr. DAVIS OF VIRGINIA. He is always happy to give you his condolences.

Dr. Schondelmeyer, let me ask you. Prior to 2006, dual-eligible

seniors who qualify for both Medicare and Medicaid had prescription drug coverage through Medicaid. Of course, now they’re moved

into the Part D.

The majority report argues that by moving dual-eligible seniors

from Medicaid price controls to Part D market prices, prescription

drug companies receive a financial windfall.

Do you disagree with CBO’s assessment that mandating Medicaid price controls in Part D would increase the cost of drugs to all

other private payers?

Mr. SCHONDELMEYER. I haven’t looked recently at CBO’s assessment or quantification of that.

I would point out that the Medicaid rebate is partly based on the

best price, which comes from a price negotiated in the marketplace.

And it means that there are at least one——

Mr. DAVIS OF VIRGINIA. The total marketplace or a restricted

marketplace?

Mr. SCHONDELMEYER. In various buyers in the private marketplace.

So there is at least one other buyer in the marketplace that is

smaller than Medicaid and smaller than Part D plans that have

negotiated a better price. And I find it contradictory that the larger

Part D plans can’t negotiate similar prices in the private marketplace that the best-price buyer—so I would argue that not all of the

prices are regulated.

I would give you that the mandated rebate amounts are set by

government law or regulated, but any rebate above and beyond

that is affected by the best price of negotiations in the marketplace.

Mr. DAVIS OF VIRGINIA. Dr. Scott Morton, let me just ask you.

You have to look at the marketplace as a whole; isn’t that right?

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When you are cutting in one place, don’t costs somehow rise—the

drug companies, or whoever, in their marketplace are going to

make allowances for that?

Ms. MORTON. Yes.

I think we have a problem in our country because, for our gov- ernment purchases, we tend not to like to say we will pay $2.43

for that pill. We like to say we are going to pay as much as the

private sector pays, or 15 percent less than the private sector, or

we are going to pay as much as Canada pays.

And then the problem for all those sorts of reference prices is

that industry then would like—if they can move the reference

price, they can shift how much Medicaid and Medicare pay for

their drugs.

So if we say ‘‘average prices,’’ then the private sector prices are

going to go up, because that is what triggers——

Mr. DAVIS OF VIRGINIA. It is kind of like everybody taking the

lowest seat price on the airplane. If everybody paid the lowest price

that somebody pays on an airplane, they would be in worse shape

than they are.

Ms. MORTON. They would raise the lowest price. That lowest

price price wouldn’t be where it was before.

Mr. DAVIS OF VIRGINIA. And that is basically the argument here,

as I understand. It is economics that I took.

Mr. ANDERSON. But I am not sure why the Federal Government

should pay the highest price.

Mr. DAVIS OF VIRGINIA. Well, they don’t in many cases.

Mr. ANDERSON. They don’t. But essentially——

Mr. DAVIS OF VIRGINIA. Dr. Morton, do you think the government

is paying the highest prices?

They don’t pay the highest prices. In fact, Medicare, Part D, the

increases are way below what was initially estimated as we bring

some marketplace into health care. One of the problems today is

the Federal Government is such a large buyer, you don’t have basically a market in some of these places.

Dr. Morton, would you react to that?

Ms. MORTON. I think you said it correctly before, Gerry, when

you said that Medicaid pays the lowest and then Medicare and

then the private sector. So I think the private sector is paying the

highest prices, and the danger of having a best-price provision that

extends to a large group of consumers is that those prices go up.

Mr. DAVIS OF VIRGINIA. So are senior taxpayers paying unfairly

high prices for prescription drugs in Part D?

Ms. MORTON. I think—since I am an economist, I am not going

to comment on the ‘‘unfair’’ part. I think my own research shows

there is a huge benefit to moving the cash-paying uninsured into

a plan, OK, because then you have someone larger working on your

behalf.

Mr. DAVIS OF VIRGINIA. They are the ones that took the brunt

of it, aren’t they, before this?

Ms. MORTON. Our data show that is a big effect. Moving into a

plan, having been uninsured, means you get access to much better

prices, and of course, your utilization goes up.

Mr. DAVIS OF VIRGINIA. You would agree with that, wouldn’t you,

that the biggest beneficiaries of this are the uninsured, the poor,

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in terms of moving them into Part D, that they get a great reduction?

Mr. ANDERSON. Oh, absolutely, the same thing as, we should try

to cover the uninsured in the United States. I mean, we want to

cover as many people as possible. So absolutely you want to do

that; you just don’t want to pay more than you need to pay for

services. And I think that is what this committee’s report shows,

that you are paying too much for services. And $2 billion is $2 billion.

Mr. DAVIS OF VIRGINIA. Are they saying too much, or are they

saying they are not paying what Medicaid pays, which is clearly

the lowest? I think there is a difference between ‘‘too much’’ versus

what Medicaid pays.

If you argue that everything over Medicaid prices is too much

and you put Medicaid prices across the board, it couldn’t happen,

could it, economically? Wouldn’t it raise Medicaid prices?

Mr. ANDERSON. I don’t think it would raise Medicaid prices.

Mr. DAVIS OF VIRGINIA. So if you think the drug companies,

across the board, charged everybody at Medicaid rates, that life

would just go on and there would be no ramifications throughout

the system?

If that is your opinion, that is fine.

Mr. ANDERSON. They still would be paying more, the United

States would still be paying more than Canada would be paying.

You would have to bring the rates down to VA in ordered to get

down to Canada or U.K. or French rates.

Mr. DAVIS OF VIRGINIA. One thing we have with the U.K. is you

do not have—and a lot of veterans have complained about this—

you don’t have the choices in VA because not everybody is bring

their costs down to those levels.

They can’t afford to sell their drugs at that level, isn’t that correct?

Mr. ANDERSON. Well, they essentially have a formulary, and

within a therapeutic class they will have a one-drug, which is exactly the same thing that the Part D plans have; they don’t offer

every drug. It is Medicaid that offers every drug.

Mr. DAVIS OF VIRGINIA. I have one more question.

Dr. Scott, when proponents of a national formulary are confronted with the counterargument that a structure would limit seniors’ ability to get drugs, their response is often that seniors can

just appeal the decision.

I would ask, are the lower prices on formularies only achieved by

the ability to move market share?

Ms. MORTON. My understanding is, that is the main reason why

you get a low price, that you can promise to move market share.

And if you are a senior and you look at PlanFinder, for example,

in the Part D context, you can see which plans have a preferred—

have a good price on the drug you are interested in. If it is A versus B, you can see that, and then you can join the plan that has

the low price on the one you want.

Mr. DAVIS OF VIRGINIA. On the one you want, you get more

choice. Thanks.

Mr. CUMMINGS. Mr. Sarbanes.

Mr. SARBANES. Thank you, Mr. Chairman.

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Whenever we have a hearing on the pharmaceutical industry or

drug pricing, I feel like I am in a magic show because it is all

sleight of hand. I mean, it is incredible, the questions.

When you say, well, if the price is this much higher than you

would get in another way, isn’t it really lower because of X, Y and

Z? I mean, people see that the prices are higher. The report makes

it clear that we have spent $2 billion or $3 billion more as taxpayers than we needed to.

By the way, yesterday we were considering trying to get full

funding for the LIHEAP program, which is the Low Income Home

Energy Assistance Program. The cost of that is about $2 billion to

$3 billion. Just so people understand, when you lose that much

money that the taxpayers have put forward, you can’t do other

things that we ought to be doing to help people.

To me, this is a classic case of, if it’s not broken, why would you

fix it? Not only is it a chief criticism of the Medicare Part D program that you didn’t take advantage of the opportunity to create

a beneficiary pool that could negotiate in a significant way with the

pharmaceutical industry directly, but in fact with the dual eligibles, what you did was, you took 6 million people out of a pool that

was in a position to negotiate directly with the pharmaceutical industry and you put them into a place where they couldn’t.

Not only that, you took a system where you had PhRMA on this

side, the pharmaceutical industry on this side, the beneficiaries on

the other side, and you interposed the insurance companies and the

insurance plans and insurance industry in the middle, which is notoriously inefficient in terms of its administrative costs.

So you took a situation where you were paying 3 to 5 percent

overhead administrative costs through the Medicaid program; you

put in the middle of the stream, the dollar stream, a system that

has overhead costs of about 17 to 20 percent, right—which is very

inefficient—which is a great result for both the pharmaceutical

companies who now get all this interference run between them on

the pricing, right, so you can hide the ball very easily, and it is

good for the insurance companies, who get to come in here and

charge these huge overhead costs.

It is absolutely madness.

So my first question is, what was the reasoning? What possible

rationale was offered up to justify taking the dual eligibles and

moving them from Medicaid as the payer to Medicare as the payer?

Mr. ANDERSON. Well, I think it was, as I explained to Mr.

Cummings, that essentially you wanted to have them in one system, and that would be the Medicare system as being the controlling system for insurance. And what it meant, unfortunately, is a

$2 billion windfall to the pharmaceutical companies.

Mr. SARBANES. That is a neat idea to get them into one system,

but you could move them into one system that works or you can

move them into one system that doesn’t work. So what they did

was, they moved them into one system that they made sure wasn’t

going to work by setting them up in a way that we couldn’t negotiate.

Mr. ANDERSON. Well, essentially, you put them into a system

with 20 percent higher administrative costs and paying 20 percent

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higher prices, and then trying to say ‘‘provide good care.’’ And that

is really hard, because you are down at 40 percent already.

Mr. SARBANES. Isn’t central to this the fact that the Medicare

Part D program is not a directly administered program? You have

Medicare Part A, which is directly administered for hospital benefits. You have Medicare Part B, which is directly administered for

physician services. You have Part C, which is a managed care program, which isn’t working so well.

But Part D was not designed that way. Part D is not directly administered. Part D is a subsidy to the commercial industry, which

has all of these inefficiencies in it. So why you would want to set

it up that way, who can imagine?

Now, on the price control thing, we keep talking about price controls, but you put it better. This is really just about a customer

called the U.S. Government that goes into the marketplace and has

a lot of bargaining power, presumably.

Do people have to sell? Do insurance plans that provide drugs

and prescription drugs, do they have to sell to the government, are

they required to sell to the government? Or do they want to sell

to them because it is a big pool of beneficiaries that they can make

money on?

Mr. SCHONDELMEYER. They don’t have to sell to the government.

And I would point out, when we talk about using market share

movement under State supplemental rebates or VA, we call it

‘‘price controls.’’ When we talk about using market share movement

under Part D private plans, we call it ‘‘the market.’’ It is the same

mechanism.

So you can’t call VA’s—VA gets a lower price largely because it

is a closed system and a very tightly controlled market share movement formulary, and that works. And Medicaid did that because

they could do that much better than the Part D plans are right

now.

Mr. SARBANES. If we are going to pray at the altar of market economics, we ought to at least bring the basic principles of how you

negotiate in the market to the table, right?

Thank you.

Mr. CUMMINGS. Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman.

Market distortion is a serious concern, and I think for all three

of you, you have been trying to deal with it—perhaps in different

ways.

Because, Dr. Morton, none of you are here to make a political

statements, I will make a short, simple one to open this up. I come

from California, where we mandate prevailing wage. I come to Congress where we vote back and forth and debate and argue, over

partisan lines, prevailing wage.

Now, prevailing wage, in at least this Congressman’s opinion, is

distorted, so we pay a lot more to build our homes—not our homes,

but our schools and our roads, at least in California, than we would

pay if the large buyer, this $150 billion entity called California,

went out and went to the low bidder and said, you know, You don’t

have to pay higher wages to build roads just to please the State

of California. So I want to be sensitive here that we don’t send that

message from the government.

66

Dr. Morton, I will start with you. VA is a buyer-seller, we want

a good price, and we may not buy every drug if it isn’t the best

price, or we may not dispense two competing drugs as often, if it

is more expensive. Would you say that was, as an buyer, as a government buyer, a fair market relationship as an economist?

Ms. MORTON. Yes, I think it is, and I think it is something that

most Americans think that they don’t want, that they would like

something better than that, because it is a very tight formulary.

Also, there is no retail component. So the VA pulls its truck up

to the factory, gets the drugs and brings them to VA hospitals. You

can’t go down to your local pharmacy and get a VA-dispensed drug.

Mr. ISSA. Dr. Morton, I happen to have Indian health care in my

district, quite a bit of it, and they get that rate, and they are

thrilled to get it. And my centers, my Native Americans, take advantage of it. And by the way, they also look, in some cases, to buy

outside those formularies, and they pay a lot more, but they do it

with discretion because of the obvious price advantages.

When we are looking at Medicare Part D, as we are here today,

is it fair to say from a pure economic standpoint that if you take

VA’s advantage of single buying, low administration, back-up-thetruck-to-the-dock, that in fact you’re going to spend more when you

offer people individual, broad formulary choices and you add the

administrative burden, that it is essentially where you are, not

where we are? And have you ever calculated that cost?

In other words, if we were to take—because I want to do a reality check on whether or not we are distorting and whether or not

we are paying too much. If you take the VA rate and you take

those elements, where should you end up as a hypothetical for

Medicare Part D and where do you end up?

Ms. MORTON. That is a really good question. I haven’t done that

calculation, but that is exactly the right way to think about it. And

part of what makes this difficult is that I know that there are some

components; most of these Federal agencies have some component

of mandated discounts and some component of ‘‘we negotiated it because we have a tight formulary.’’ And you would want to just look

at the cases where it is negotiated, as opposed to mandated.

Mr. ISSA. Let me ask a question I think for all three of you, because this is of interest to me.

Obviously, when we deal with seniors and we deal with drugs developed only for seniors in America, we are dealing under Medicare

Part D, Medicare in general, that is the market.

So my question is, how does the U.S. Government, in each of

your opinions, ensure that drugs which are geriatric in nature only

are fairly priced if there is very little alternative way of buying it,

other than our VA seniors? Except for that group for the most part,

some of these things have no other market in the United States.

So each of you, have you thought about how we get the fair interpretation? Because I am here today believing that I can’t use Medicaid because it is a distorted market. I can use VA, but I have to

add those costs that I mentioned with Dr. Morton. So if that is all

true, when I have a drug that is limited in its reach. Other than

seniors in VA and Native Americans, how do I fairly make sure

that the price is achieved?

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Mr. SCHONDELMEYER. Actually, we have at least one drug that

falls into the category you described. There is a drug called Epogen

that 80 to 90 percent of the market is the government, and the government is the only payer. So there really is no such thing as a

market-based price, because the government is the monopolistic

buyer in that market; and the government does set and establish

the payment rates for that drug, and they come up with the value

of, here is what it is worth.

I think Dr. Morton earlier said the government is afraid to say,

here is what we will pay for a drug. But on the one hand, they do

try to do that, but any time they do that, we call it ‘‘control’’ rather

than ‘‘market behavior.’’

I think we have to look for the line between price regulation and

prudent market behavior for government. Let’s focus on the prudent market behaviors and try to avoid the regulation that drives

up the price. But I think you can do prudent buying as a large

buyer government and keep some element of market in place.

Mr. ANDERSON. We have done that. Just to explain in a little

more in detail, for SRD and renal disease drugs, I think we have

gotten good value for those, and we have essentially with a government-administered price.

The other thing, Mr. Issa, I would suggest, is the United States

is not the only place where there are seniors. There are millions,

billions of them around—a billion of them around the world, and

pharmaceutical companies are not just selling to the United States,

but they are selling to the U.K. and Canada and other places as

well; and we have to recognize that.

Mr. ISSA. Dr. Morton, quickly.

Ms. MORTON. I would say, one of the things that you will get in

Part D is this same substituting and bargaining, and I can shift

share from A to B. So if your drug for seniors has substitutes,

therapeutic substitutes, then I think you can trust to a PBM or a

Part D plan to be able to extract discounts on that drug.

I think the very difficult question, which we aren’t facing at the

moment so hugely, is what happens if somebody invents a pill that

cures Alzheimer’s, and it is the only one, or something like that?

Then really the government becomes the only buyer, and there is

no good substitute, and how are you ever going to get a discount

in that circumstance?

But as long as there are therapeutic substitutes, they buy like

everybody else buys.

Mr. ISSA. Thank you, Mr. Chairman, for your indulgence. Hopefully the followup will be how government gets better if we are

going to set prices. Obviously, it hasn’t been one of our strengths,

but I look forward to working with you on that.

Chairman WAXMAN [presiding]. Thank you, Mr. Issa.

Ms. Watson.

Ms. WATSON. Thank you very much, Mr. Chairman, for this

hearing. I want the witnesses to know we value your input. I am

concerned too about the real cost of these drugs and the increases,

so—I have heard you allude to a way we should really model this.

Can the three of you explain more how the government can model

the Part D drug program so that it really works for seniors?

A big smile there. What does that mean?

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Mr. SCHONDELMEYER. Well, first, the point that was brought up

by Dr. Anderson: price transparency in the marketplace. The basic

issue, that we don’t see how much rebates are flowing without having a congressional investigation in the Part D program, to me,

tells us that is not a market. We are going to hide behind the black

box and do what we want, and you guys pay the bills.

So we need to have price transparency and transparency of the

flow of dollars in this marketplace. Markets work with information.

When you hide information, markets cease to work properly. So one

is that price transparency.

Second, I think, look to the Medicaid programs and especially

what States are doing in their State supplemental rebates and obtaining these much larger discounts above the already-mandated

Federal Medicaid rebate and say, How can you use those mechanisms or apply those to the Medicare Part D plans; and ask why—

the Part D plans, why aren’t you negotiating the same kind of rebate? If this is a market, why can’t you get the same level of rebate

out there?

And then look to see, are there reasons, maybe reverse, perverse

incentives, that keep these Part D plans from wanting to get more

rebates from the drug companies.

I would argue that no one in America is really managing or regulating prices very well, whether it is government regulated or private regulated. What we do is, we get bigger discounts and rebates,

but the top keeps floating up faster than inflation by a factor of two

to three times the inflation rate, every year, year after year, no

matter what we do.

So prices keep going up no matter what we have done, and we

fool ourselves into thinking getting more rebate dollars back is saving us money. It really isn’t. It is not controlling the net we pay

overall in the first place.

Rebates are simply a loan to the drug companies for 9 to 12

months, and then we collect the money back and spend a lot in administrative costs doing so.

Mr. ANDERSON. I think if are going to have a marketplace, we

have to have price transparency. We don’t have price transparency

in the pharmaceutical market, whereas we are pushing it in the

physician market, we are pushing it in the hospital market.

But I am not sure that we can ever get good prices when we have

given the drug companies substantial reasons not to negotiate

prices, and that would be the patents that we have given them for

up to 17 years. This essentially takes away their reason for negotiation.

So I think what we have to do is take a look at what other countries are doing in this area. They are paying about half the prices

that we are paying for pharmaceuticals, in other countries, and

that is why Americans are going to Canada and other places for

these things. So one of the things the Medicare program could do—

and I know many of you voted on this a year ago—is to have the

Medicare program negotiate directly with the pharmaceutical industry in order to get a best price.

The other thing that I would just add to that is, I am not sure

why the VA, the Medicare program, the prisons and all the other

places don’t negotiate. I don’t understand why the government pays

69

different prices for exactly the same drugs, depending on whether

it is a prisoner who needs it or somebody who is part of the community health center or somebody who is the Medicaid recipient.

The government should be paying one price for drugs.

Ms. MORTON. I am a little less enthusiastic about transparency

than my colleagues, because I think in the context of Medicare Part

D, if I am a plan and I am negotiating hard in a particular class

and I get a good deal on drug A, I don’t really want to publish that

for all my competing plans to see. And they might in fact be negotiating on drug B and drug C. So there is going to be differences

across us, and the plans are going to be trying to get that lowest

price as a way to lower their costs and attract more seniors.

So requiring manufacturers to publish that price is going to lead

the manufacturers to be less willing to give those discounts and

less willing to price aggressively. So I worry about transparency.

Second, I completely agree with Dr. Schondelmeyer in terms of

the supplemental rebates the States are getting through Medicaid

being a good model, but that actually is what Part D is doing. They

are negotiating those rebates based on preferred drugs on a formulary. And what they can’t do, which Medicaid can do, is get a

best price or an inflation component, which are big parts of the discount that Medicaid gets.

Then, last, I would say—Dr. Schondelmeyer said, why can’t Part

D do some of these supplemental rebates, negotiate for lower

prices? Part of the reason Part D can’t is because there are protected classes, and in these protected classes, the plan is restricted

from making a drug preferred and saying, You have to consume

this HIV drug instead of that other one until there is a medical

need for you to switch. And when you have that kind of restriction,

then it is not possible for the plan to negotiate aggressively and get

a discount.

Now, there are good reasons for having those restrictions, but I

am just saying those restrictions are expensive.

Mr. SCHONDELMEYER. That is exactly when government needs to

step in, is when you have on the one hand, the market should work

by negotiating lower prices and preferring one drug over another,

but on the other hand, it is clinically not appropriate.

Government has a role in that, and that is why you are here, and

you do have a role in establishing a mechanism to deal with something the market can’t do effectively.

Chairman WAXMAN. Thank you very much, Ms. Watson.

Mr. Shays.

Mr. SHAYS. Thank you, Mr. Chairman, for having this hearing.

I am struck by the fact that Medicare Part D is about $40 billion

and Medicare Part A is about $220 billion; and we want to save

money, but we are having a hearing on the Medicare Part D program. I think we should, and I think we should because I think it

has worked, frankly, phenomenally well.

For years, politicians talked about having a prescription drug

program, and in 2003 a Republican Congress, believe it or not,

passes a prescription drug program. The program they wanted was

going to cost about $400 billion over a certain period of time, and

the Democratic program was going to cost $800 billion. I chose the

less expensive plan because I thought it would cost twice as much

70

when we finally adopted it, because most programs that we pass

under Medicare turn out to be twice as much as the estimate.

And, believe it or not, it is like one-third less than it was going

to be, not twice as much.

Dr. Anderson, when you come in with a beaming face as though

you have made this great discovery that those products that are

controlled may be less expensive, I say, Whoopie, you are exactly

right.

I would like to make a proposal. Do you ever get any Federal

grants?

Mr. ANDERSON. I do.

Mr. SHAYS. I want to save the government money. How much do

you get paid as a salary?

Mr. ANDERSON. $175,000.

Mr. SHAYS. I want you to only accept $50,000. I am going to tell

you that is what you get for that grant. I want to save the Federal

Government money. But we don’t do that, because we want you to

have your talents and we want you to have your creativity. But we

don’t control what you get, at least I don’t think we do.

We do it with doctors. That is not negotiation; that is, take it or

leave it. They are underpaid; our doctors get less for the service

than it costs them, but we act like somehow this is a great program

because we have price controls.

Tell me why I shouldn’t be grateful that this program costs less

than it was supposed to cost, that the seniors who are in it have

9 out of 10—excuse me, 85 percent satisfactory rate—and 9 out of

10 who are part of the dually eligible don’t want to go back into

the old system nor do the States want them to go back into the old

system.

Nobody wants to go back into the old system, But you are using

that as a price comparison.

Mr. ANDERSON. First of all, you said the $400 billion. If you look

at Kerry Weems’ testimony that he is going to give today and you

add up the numbers of the expenditures that are projected, you will

see it is $400 billion. So essentially you talk about a 30 percent reduction; but essentially when you voted on the bill, it was $400

billion——

Mr. SHAYS. You are talking about a shifting 10-year timeframe.

Let’s talk about the same numbers we were using when we did it,

compare apples to apples.

Mr. ANDERSON. Right, I think that is what we have.

Mr. SHAYS. Sir, you are not.

Mr. ANDERSON. We will take a look at that.

Mr. SHAYS. Dr. Morton, what is your comment?

Ms. MORTON. I just wanted to say that underlying all of this discussion, we should remember that pharmaceuticals are really unusual, because the research and development that was used to

produce the drugs we are consuming today occurred 15 or 20 years

ago.

So part of the problem is, if you say to a doctor, We are going to reduce your salary from $200,000 to $100,000, they can take it

or they can drive a taxi. And if they go to drive a taxi, then we

have no more doctors left. And that constrains what you do as a

body for paying for physicians.

71

Mr. SHAYS. I know how we can build twice as many bridges. We

will just pay the construction workers half the price. But I don’t believe in that, and I am for the prevailing wage. But here we have

a competitive model that is working.

Ms. MORTON. I am sorry. I just want to say one thing.

So the thing about the drugs is that if I say today, as Congress,

I am going to pay half as much as I was paying yesterday, that

drug is already invented. It costs a tiny amount to manufacture,

so, of course, the drug company is going to sell it at half the price.

Mr. SHAYS. Let me ask you about price controls. I went to California about 15 years ago, and a company was developing something to slow the beginning stages of Alzheimer’s. They spent $800

million.

I checked 2 years later, they had spent about $200 million more

and it failed; they lost $1 billion. But they told me at the time they

wouldn’t have spent a darn penny if they had price controls.

And it seems to me this is really a debate on whether we with

we have price controls or not; that is what it is really about. And

I don’t buy into price controls. I think what we will have is less

discovery. I think we won’t have the drugs that we see today.

And if you disagree, either one, tell me why.

Mr. SCHONDELMEYER. First of all, your statement, or the framing

of the issue, isn’t exactly correct, because price controls were in effect. If you call Medicaid rebates pricing controls, then they were

in effect and they did spend the money, and VA price controls were

in effect and they did spend the money.

So I find the statement that if price controls were in place, we

wouldn’t have spent the money to be a little bit specious of an argument, because there were price controls, by your definition.

Mr. SHAYS. Excuse me, you don’t believe that when we tell doctors, this is the payment, that is not a price control? Do you really

think we negotiate with our doctors?

Mr. SCHONDELMEYER. No, and the same with pharmacists and

others in California. The States cut the fees.

Mr. SHAYS. Do you think we negotiate with our doctors, or do you

think we basically say, this is it?

Mr. SCHONDELMEYER. No, it is take it or leave it.

Mr. SHAYS. Yes, it is price controls.

Mr. SCHONDELMEYER. But it is different. I would point out, there

is not a best-price provision for doctors like there is in the Medicaid

State rebate programs, and there are not State supplemental rebates like there are.

So there are some aspects of this that are market based in terms

of the prices Medicaid pays. It is not all just to fix, we will only

pay this.

Chairman WAXMAN. The gentleman’s time has expired.

Ms. Speier.

Ms. SPEIER. Thank you, Mr. Chairman.

This lively debate is interesting to me because I believe that

California is a great example. The Medicaid system in California

is one in which we have historically negotiated rebates and discounts in the Medicaid system, and they have been healthy discounts. And the pharmaceutical companies have flocked to CaliforVerDate 11-MAY-2000 11:03 Jul 27, 2010 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6633 U:\DOCS\56580.TXT KATIE PsN: KATIE
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nia because it is a great universe from which to sell their product,

and there has been great competition there.

So, I guess my question is—and I would disagree a little bit with

what my colleague has just said—if you look at how many dollars

are actually spent on R&D, at least historically, the majority of

those dollars have come from the taxpayers of this country and

NIH grants, if I am not mistaken. So it is the government that

funds the lion’s share of this research that goes on.

All the other industrialized countries in the world have price controls in effect, and we end up subsidizing the prices of pharmaceuticals in these other countries.

So, I guess my question is, you have spoken a lot about transparency. But in trying to identify which is more important, just lifting the language in the bill that was passed by Congress, it says

that the Federal Government can’t negotiate.

Isn’t that the most important thing we can do in terms of trying

to bring the costs of these drugs down?

Mr. ANDERSON. I think it is, in fact, the most important thing,

and I would strongly support that as an idea. I mean, it is very

close to what the other countries are doing, as you suggest; and I

don’t understand why we want to be spending twice as much for

drugs as other countries are spending.

Mr. SCHONDELMEYER. Also, we can look at both the market and

other things that have worked. State supplemental rebates are negotiated and operated by States on behalf of the entire Medicaid

program within the State.

Somebody earlier referred to General Motors or large corporations and their behaviors. I don’t see General Motors turning over

their drug benefit to each local plant and telling each local plant,

you go out and negotiate drug prices on your own.

Hey, centralize it and do it centrally.

The equivalent of that in terms of Medicare would be for the

Federal Government to use State supplemental rebate negotiation

tactics on behalf of all Medicare Part D programs and then pass

the benefit on to those local Part D plans out there.

So we see in the private market centralized behavior, large prudent buyer behavior and using the market to work. And I think the

government can do that and be a prudent buyer and not be a price

regulator, per se.

Ms. MORTON. The problem I see with that is, if Health and

Human Services negotiates directly with pharmaceutical companies, it depends on your interpretation of the word ‘‘negotiate.’’

If you are going to say, I am a large buyer, I am the Secretary,

I mandate you give me 20 percent less, of course, that is going to

work. If you say, I would like you to give me 20 percent less, then

the question is, why?

A regular plan says, I want you to give me 20 percent less because I am going to consume your competitor if you don’t. I am

going to consume drug A if you don’t give me a price cut on drug

B.

The Secretary presumably wants to include all drugs, doesn’t

want to tell American seniors, you can only have drug A and you

can’t have drug B. So if the Secretary can’t exclude somebody, then

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I don’t quite understand how they negotiate a lower price. I understand how they instruct, you will give us a lower price.

Ms. SPEIER. Well, California has a MediCal medical formulary,

and drugs get on or off the formulary, and, you know what? They

do make those decisions.

Furthermore, these drug companies want to make sure their

drug is on the formulary. So it is not like it is so much an exclusion

as much as it is, we want to be on your formulary and we will give

you this.

Ms. MORTON. Right.

But California Medicaid is excluding some drugs, and the people

in California Medicaid are getting this benefit for free, and they

don’t really have the ability to complain and say, ‘‘I would like a

choice of all cholesterol drugs,’’ whereas I think seniors and employed people expect to have more choice in their formulary or

choice of cost plans.

Ms. SPEIER. I have a mother on 15 drugs right now. She doesn’t

know which cholesterol-busting drug is the best. She is on three or

four of them.

So I think it is kind of—it doesn’t make a lot of sense to say that

these seniors want these drugs. They tend to want the drug that

they have been on, as opposed to wanting some drug. And if we

didn’t have direct-to-consumer marketing, we would have a whole

lot better system in this country to start off with.

Mr. SCOTT MORTON. So suppose you have a national formulary.

They have been on drug A all the time; they arrive at Medicare,

and the Secretary has negotiated a good price on B, and that is it.

The question is, what does the person do at that point?

That is a system we could have. That is what the Government

of France does.

Ms. SPEIER. You know what it is called? It is called prior authorization. We have done it in California, and it has worked. For that

individual who does better on the drug that is no longer on the formulary, you can still have that drug, it just needs prior authorization.

Frankly, that is what we should be doing on the Federal level.

It is not like it hasn’t already been done. It is done, it is done effectively, and it saves a lot of money.

Ms. MORTON. And Part D plans do that.

Chairman WAXMAN. The gentlewoman’s time has expired.

Mr. Burton.

Mr. BURTON. My first wife, who died 6 years ago, was taking

chemotherapy in Indianapolis. And there were two women sitting

there next to her, they all had the needle in their arms taking their

chemotherapy. And one of the women was saying—she was actually complaining because, she said, My Tamoxifen costs so much,

I can’t afford it; it is $325 a month.

And the other lady said, I am getting mine for $50 a month.

And she says, No, that can’t be right. And I am sitting there as

a legislator, and I said, No, that can’t be right.

And the lady said, No, I am getting it from Canada for with

about one-sixth the cost of what it was in America.

I held hearings on this when I was chairman of the committee,

and I couldn’t figure out why, right at the border between Canada

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and the United States, you can go across the border and get the

same pharmaceutical product for one-fifth, one-fourth, one-third,

one-half. So I started being supportive of a process called reimportation, and that was because I couldn’t figure out why Americans should pay more for pharmaceutical products than people in

other parts of the world.

I found out, along with my colleagues, that in Spain, France,

Germany, all over the world, the price is one-half, one-third, onefourth, one-fifth or one-sixth of what it is in the United States.

The argument was, well, in the United States we have to do research and development, we have to do advertising and all that

other sort of thing.

My problem is, why isn’t the rest of the world paying for part of

that? Why in the world should the American people have the burden of advertising, research and development and everything, and

then pay five or six times what it costs for the same pharmaceutical product someplace else?

So we supported the reimportation program. The pharmaceutical

companies went to the FDA and started talking about purity and

whether or not there could be tampering and all that sort of thing,

and they, in effect, have been able to block reimportation. They

have been very effective, so they can protect their margins here

and protect their market share. I don’t understand that, and I don’t

think anybody in America who really thinks about it understands

that.

We should not be paying more for pharmaceutical products than

the rest of the world simply because, you know, we can afford the

R&D, and we can afford that and load it on the back of the American people.

So we passed the prescription drug benefit, and we guaranteed

in there that there would be no control whatsoever by the Federal

Government in the price of the pharmaceutical products that the

government is going to be involved in. So they, once again, are able

to block and say, It is going to cost a lot more here in America; and

they have been successful in blocking pharmaceuticals from the

rest of the world.

We can, with the new technologies, guarantee that drugs coming

in are the product that we say they are. We can encapsulate them

in plastic. We can put microchips or those mini, very small chips

in there, to make sure that the product is the same as it is here

in the United States, to guarantee the purity and everything. And

yet we can’t do that. And we can’t do that because the pharmaceutical industry wants to keep the prices at a certain level here

while they are able to give discounts way, way down the line, much

lower costs, in other parts of the world.

I would like for somebody to explain to me why we can’t have

a process where the pharmaceutical companies can say, OK, since

you in the United States are going to make sure you are going to

get comparable prices, we are going to go out and negotiate or tell

the other countries in the world we are not going to allow you to

charge this much less.

I sat down with the president of Eli Lilly, a company in my

State. I sat down with people from Merck, vice presidents and

presidents. And I said, why don’t you come up to the Hill and sit

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down with us, Members of Congress, and let’s try to negotiate some

type of solution to this problem so Americans aren’t burdened with

a huge price while the rest of the world is getting off relatively

scot-free. And they wouldn’t do it.

Rather than doing that, they had PhRMA, their organization

here in Washington that has tons of lobbyists, some of whom I am

sure are here today—they had PhRMA go to the FDA and say, Oh,

my gosh, these pharmaceutical products coming in from the rest of

the world may not be pure; they may be tampered with, while at

the same time they knew full well there were mechanisms we could

use to protect those products coming into the country.

In addition, many of the products they are talking about are

made in India and other parts of the world and coming in here in

bulk anyhow—Viagra being one of them, which is used very widely

here in the United States and, I understand in India, which really

doesn’t need it. It is only costing them about 10 or 12 cents a pill,

whereas here, it is costing over $10.

Anyhow, I would like for you to give me an answer to that problem. Why do Americans pay three, four, five, six times what they

are paying in Canada and elsewhere? Why can’t we do something

about negotiating? And why do we pass a Medicare prescription

drug benefit that protects the pharmaceutical companies from negotiation with our government? I mean, it just seems to me there

ought to be a question of fairness here.

I want the pharmaceutical industry to make a lot of money. I

want them to be very profitable. I am for the free enterprise system. But while I say that, I say, why should Americans bear the

burden of all this, while the rest of the world is, in effect, getting

off scot-free?

Thank you, Mr. Chairman, for giving me the time.

Chairman WAXMAN. The gentleman’s time has expired.

We will give a short opportunity for an answer. I think you answered a question there.

Ms. MORTON. I have a short answer. So, one, I like the way you

phrase the question, which is, Why doesn’t everybody else pay

more?

I mean, we have two choices: One, there is too much R&D, we

should pay less, pay the same as France, and we have a new industry that responds to that. Or we think the amount of R&D we want

is good right now, or it should be more, in which case everybody

else is free riding. They are as rich as we are, and they are not

contributing to the cost of R&D.

I think that is a very good question. Designing a regulation to

get that to happen, I have some thoughts which I would be happy

to share with you. But I think it is quite tricky.

Mr. ANDERSON. Fourteen percent R&D, 30 percent marketing.

Mr. SCHONDELMEYER. And they don’t spend as much on marketing in other countries because their systems aren’t as open.

Others today have commented, if you do this, if you do that, it

will raise prices in the rest of the market. But I would bet most

of those people who made that comment weren’t talking about

prices in the rest of the world.

I think we need to take actions and communicate to drug companies we expect them not only to look at raising prices in the rest

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of the U.S. market, but the rest of the world market; and they do

need to look at other countries also to get back the money for R&D

and to subsidize their development.

I would also point out that the drug that was involved in many

cancer drugs was actually discovered by the National Institutes of

Health. One of the leading cancer companies that has more products I think on the market than any other company, the last time

I looked, 3 or 4 years ago, had about 21 cancer drug entities. And

how many of those had that company discovered in their own

R&D? Zero. The largest company that sells cancer drugs, at least

3 or 4 years ago, hadn’t discovered a one; they had come from Federal Government funding.

Chairman WAXMAN. Thank you, Mr. Burton. Your time has expired.

Mr. Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman.

I am always amused when Mr. Burton and I come down on the

same side of an issue here. I was sort of hoping that he had made

that passionate plea to his caucus a few years back, and maybe we

wouldn’t be here discussing what we are discussing today.

Look, I think the manufacturers have a hard time justifying the

high prices. I think they have gotten a bit of a windfall out of it.

But I know one of the arguments we are going to hear back is just

what we are talking about right there, that if you do anything

about this, research is going to stop and everybody is going to go

to hell and die.

So I really want to knock that out of the box right now. It is nonsense and foolishness, as far as I am concerned.

They reported, what, about $90 billion of profits last year, up $20

billion previous to that, or whatever, and I don’t for a moment

think that a change in the price situation here is going to stop

them from doing research.

So let me start with Dr. Anderson, if you would. Would reducing

the high prices that they are now charging on the Part D program

have an impact on the industry’s research and development?

Mr. ANDERSON. It is hard to answer that one analytically, but I

don’t think so.

Mr. TIERNEY. All right.

Dr. Schondelmeyer, what do you think? Can we reduce Part D

prices without adversely impact the research?

Mr. SCHONDELMEYER. I think you can certainly go back to the

Medicaid prices that you had and not affect research dramatically,

because we were there and they were accepting those prices and

they were living with that. So I think you can at least go back to

that level, without a major effect on the market.

Mr. TIERNEY. Dr. Morton, do you want to weigh in?

Ms. MORTON. I would more or less agree with that, although I

will say that a lot of these entities are discovered by venture-capital-funded small firms that are then bought by the larger firms,

and anybody who is in venture capital or that kind of finance is

investing because they expect a return. So anytime you alter the

return, that goes into the calculation of whether they are going to

spend money in the biopharma area.

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So I don’t think you can ever assume no effect. It is just, are we

making a small shift of duals? Or are we making a big shift of everyone who’s eligible for Medicare?

Mr. TIERNEY. Thank you.

Let me ask you—Dr. Schondelmeyer, you can start on this—what

is the difference or what is the variation between how much research is done from government-funded projects versus what the

industry does? And which drugs are involved, the more commonly

used drugs or the less commonly used drugs, and all of that?

Mr. SCHONDELMEYER. I haven’t examined that systematically in

recent years, but the evidence seems to suggest that drugs for categories that are most critical, such as cancer, tend to come more

from government-funded research, and that drugs that come from

the pharmaceutical companies tend to be more the lifestyle drugs,

the drugs that—you know, feel good, live-well-type drugs, come

from the drug companies that have broader populations.

So the government tends to fund more critical, life-threatening

drug discovery and drugs for smaller populations, while the drug

companies tend to fund drugs for broader populations and maybe

for more symptomatic or feel-good purposes.

Mr. TIERNEY. We have all heard the expression of ‘‘me too’’ drugs

out there and the research on that. Do you want to comment on

that a little bit?

Mr. SCHONDELMEYER. Well, I would be careful. There is an issue

of ‘‘me too’’ drugs; I think it is often misunderstood, too, though.

I do think for a legitimate disease-state category, where there is

three or four or five companies in the race to find a drug in that

category, among those three, four or five, for whatever reason,

whether it is regulatory or company performance, one of them is

going to come out first.

I wouldn’t say that the other four or five that were legitimately

in the race are ‘‘me too’’ drugs because they were in the race. And,

in fact, those other drugs could—if our market works, which it

doesn’t work well—could create competition.

Where ‘‘me too’s’’ come in is when the company that first discovered it or other companies 15 years later come out with an extended release dosage form, a right-handed or left-handed molecule, those are ‘‘me too’’ drugs and those are kind of ways of extending patent pricing without adding a whole lot of value to the

market in most cases.

Mr. ANDERSON. The NIH would suggest that more money is actually being spent by PhRMA than by NIH right now. We would have

to take a look in terms of what it is spending it on.

NIH is much more basic research kinds of things. PhRMA is a

lot more drug development kind of things. But I think overall, the

numbers from NIH would suggest that PhRMA is spending a little

more.

Ms. MORTON. I would second that.

I mean, NIH doesn’t do the testing. So you can invent a molecule, but then you have to show that it is safe in thousands and

thousands of people and go through the FDA. All of that is actually

quite expensive, and NIH doesn’t do that.

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You can also see why the lifestyle drugs wouldn’t be coming out

of the government. I mean, I imagine the grant application to NIH

for Viagra would not get funded.

Mr. TIERNEY. You have more confidence than I do. I would hope

you are right on that.

Thank you, Mr. Chairman. I yield back.

Chairman WAXMAN. Thank you, Mr. Tierney.

Ms. Foxx.

Ms. FOXX. Thank you, Mr. Chairman.

I want to make one brief comment. As I have been sitting here,

listening to the comments that you all have been making—and I’ve

made this observation on a couple of other occasions—I grew up in

the mountains of North Carolina in the late 1940’s, early 1950’s,

in the poorest county in North Carolina when I was growing up.

My family was extraordinarily poor, yet we could afford health

care. Everybody in our county could afford health care. In fact, I

didn’t know many people who had any kind of really big problems

with health care. We had a hospital. We had doctors.

And I have thought a lot about why it was that we could get

health care in those days, and we have such a problem now with

people, who are much better well off than we were, not getting

health care.

My observation is, it is two things: No. 1, government involvement, and I think any time you get the Federal Government involved in just about anything, you get more of a problem than you

get a solution; and the other is third-party payer, when people are

not in charge, I think you create problems.

I would just say that as a statement, because when I hear people

say, get the government more involved, the Federal Government,

it is just like scraping a fingernail across a blackboard for me, because I think what you are doing is simply creating more problems.

But I want to ask a question of Dr. Scott first, and then I have

a general question.

Do you think that pharmacy benefit managers are sophisticated

negotiators on behalf of seniors? We have heard about the problems

with getting prices. Tell me what you think about that.

Ms. MORTON. Yes, I think they are sophisticated negotiators. A

lot of the Part D plans that have been most successful in the sense

of being taken up by many people are run by quite large and sophisticated insurance companies.

Ms. FOXX. Then the other question I have, my understanding is

that under Medicare, some drugs are paid for by federally set

prices. They are injectable drugs under Part B. I would ask each

member of the panel—and I know we have a limited time—do we

set the prices for those drugs well? What is the history of the Federal Government setting those prices? My understanding is that

there is a mixed history there; sometimes we have done well, sometimes we have done poorly.

Relate that to what you are recommending now. Those are the

folks on the upper end of the panel who are recommending that

primarily.

Mr. SCHONDELMEYER. First, I would comment on, Are PBMs a

sophisticated buyer? They are, but they don’t have a fiduciary responsibility to act on behalf of the recipient. They act on behalf of

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their own stockholders and corporate entities, and those are different financial decisions that they make. So they are very sophisticated at taking care of themselves and meeting the requirements

that are made of them for the recipients, but not acting in the best

financial interest of the recipients.

I would also bet that hospital you had in your area was government subsidized under the Phil Burton program——

Ms. FOXX. No. Well, it may have gotten some, but it was primarily supported by the people who used it.

Would you mind answering the question I asked you to answer?

Mr. SCHONDELMEYER. Yes. And what was that question? Remind

me.

Mr. ANDERSON. Let me answer. I will get it.

Basically, if you take a look the Medicare program, the seniors

in 1964, only about half of them had health insurance after Medicare. The other half got——

Ms. FOXX. You have just made my point.

Mr. ANDERSON. I did? I thought you said that everybody had coverage.

Ms. FOXX. I just said I think what created the problems with our

not being able to get health care is third-party payer and the involvement of the government.

Mr. ANDERSON. Well, I would disagree.

Ms. FOXX. Do you mind answering the question I asked?

Mr. ANDERSON. On the Part B thing, sure, essentially there was

a problem with Part B drugs, that they were essentially giving serious discounts to doctors, but the Medicare program did not know

those serious discounts, did not have price transparency, did not

know that.

Part of the Medicare Modernization Act of 2003, hopefully, with

the average sales price, solved that problem, and now the discounts

are less.

So I think the Medicare program can learn and solve the problems.

Ms. FOXX. What kind of learning curve is there for the people in

the program?

Mr. SCHONDELMEYER. Well, I would answer your first question

about the ASP and the government buying.

First of all, Medicare Part B is a very different market. It is primarily through physicians and a totally different distribution system, and there were incentives for doctors to actually prescribe

more higher-priced drugs.

I would argue, though, similar incentives are in place in the

Medicare Part D program for the very reasons I stated. There is

no fiduciary responsibility on behalf of PBMs, and they can make

more money by negotiating rebates from drug companies, but not

passing it on in lower costs to the recipients.

So I think the problems we had and the learning curve we have

hasn’t really stuck in Medicare Part D.

Chairman WAXMAN. Mrs. Foxx, your time has expired.

Ms. FOXX. Thank you.

I would like to say for Federal bureaucrats, there is no fiduciary

responsibility either.

Chairman WAXMAN. The last word.

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I want to thank the three of you very much for your participation. I think that all the members on the committee and all the

people in the audience should get college credit for this discussion.

It was a very high-level one, and I think a very worthwhile one.

Certainly you have been helpful to us.

Mr. DAVIS OF VIRGINIA. Let me just add to that and thank our

panel. It has been very informative.

Chairman WAXMAN. Our next witness is Mr. Kerry Weems. He

is Acting Administrator for the Center for Medicare and Medicaid

Services, Department of Health and Human Services. I would like

to ask him to come forward.

Before you even sit down, it is the policy of this committee that

all witnesses testify under oath. So if you would please raise your

hand.

[Witness sworn.]

Chairman WAXMAN. The record will show that the witness answered in the affirmative.

We have your prepared statement and it will be part of the

record in its entirety. What we would like to ask you to do is try

to stay within 5 minutes for your oral presentation.

I think you know the routine; it is green, 4 minutes; yellow for

1 minute, and when it is red, we would like you to certainly conclude.

Thank you for being here.

STATEMENT OF KERRY WEEMS, ACTING ADMINISTRATOR,

CENTER FOR MEDICARE AND MEDICAID SERVICES, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

Mr. WEEMS. Thank you, Mr. Chairman, and thank you, distinguished members of the committee. It is a pleasure to appear before you today.

The success of the Medicare prescription drug benefit provides

strong evidence that competition through private plans has contributed significantly to lowering costs to both the government and

beneficiaries. Through Part D, Medicare beneficiaries are extremely

satisfied with their current prescription drug coverage and have

been given meaningful choices for drug coverage at a cost much

lower than originally estimated.

Experience with Part D thus far demonstrates that competition

is working for beneficiaries and taxpayers alike. According to the

fiscal year 2009 President’s budget, the necessary cost of the Medicare Part D program is 40 percent lower than the projections at the

time the bill was passed, and beneficiaries are reaping these savings.

Independent surveys have consistently shown that more than 85

percent of Medicare beneficiaries and nearly 9 out of 10 dual eligibles are satisfied with their Part D coverage. High satisfaction

rates are directly related to the other successes in the Part D program, including meaningful and affordable choices, unprecedented

information and transparency for beneficiaries, lower-than-projected costs from effective private sector negotiation, and increased

generic utilization.

With the overwhelming success and popularity of Medicare’s Part

D benefit, we should be vigilant against attempts to use governVerDate 11-MAY-2000 11:03 Jul 27, 2010 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6633 U:\DOCS\56580.TXT KATIE PsN: KATIE
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ment mechanisms to intervene in the market and move to administered government pricing.

When Congress enacted Part D, the decision was made to move

dual eligibles to Part D, which offered the dignity of choice and a

market-based approach to the drug benefit structure and pricing.

congressional research agencies like CBO and GAO widely agree

that direct government negotiation of prescription drug pricing in

Part D is unlikely to lead to lower costs. As the chart demonstrates, simply comparing Medicaid’s rebates to Medicare does

not capture all the other efficiencies and savings achieved through

Part D by encouraged use of generic, lower-cost drugs, lower-cost

sharing opportunities for copayments and coinsurance.

What is more, through drug utilization management, Part D has

improved health outcomes by reducing the possibility of adverse

drug events.

The record from implementation of mandatory price controls and

rebates in Medicaid reveals that these price-setting policies have

the potential to increase costs in the private sector and others not

subject to the government-imposed price controls.

CBO examined the implementation of the Medicaid drug rebates

on the market and found that, while access to rebates lowered

Medicaid’s outpatient drug expenditures, spending on prescription

drugs by non-Medicaid patients may have increased as a result of

the Medicaid rebate program. Further, GAO found that in the first

2 years of the Medicaid drug pricing program, the average price for

medicines purchased by HMOs and Group Purchasing Organizations increased.

With Medicare beneficiaries accounting for nearly 40 percent of

prescription drug spending in the United States, it is not at all unreasonable to expect that a change from market pricing in Part D

to a government-mandated rebate structure could have an even

stronger ripple effect on the cost of prescription drugs for those not

subject to government-imposed price controls.

With a combination of more than 50 percent of the market subject to a statutorily dictated pricing structure, these two Federal

programs could eliminate the potential rebates for any other purchasers. More specifically, it could lead to higher prices at the

pharmacy, may compromise incentives to move enrollees toward

low-cost therapeutic equivalents or generic drugs, or may undermine utilization management activities that the participating plans

use for important safety protections as well as cost controls.

The Part D Program has been successful beyond expectations

even in its infancy. Beneficiaries have meaningful choices for drug

coverage at a cost that is much lower than estimated; and, more

importantly, they are satisfied with their coverage.

Thank you for the opportunity to appear before you today. I look

forward to your questions.

Chairman WAXMAN. Thank you very much, Mr. Weems.

[The prepared statement of Mr. Weems follows:]

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Chairman WAXMAN. Without objection—I think we’ve discussed

this with the minority—we want to do an initial 10 minutes on

each side, 10 controlled by the Chair and 10 controlled by Mr.

Davis. And without objection, that will be ordered.

I want to start off my questions with you.

Mr. Weems, we are here today because we want to know whether

we can make the Part D program work better for the taxpayers.

You testified that the program is highly successful. You told us

that beneficiaries are satisfied with the program. They have affordable choices, and they have good information with which to make

choices and that they have greater, better access to generic medicines. If that is true, it is good news. And to be honest, after we

have spent almost $100 billion on this program, I would hope that

would be the case.

The issue for us is whether the taxpayers are getting the best

value for their $100 billion, and that is why the findings of the report released this morning are so troubling. The report finds that

the prices paid by Part D insurers for the 100 drugs most used by

dual eligibles are a lot higher than the prices Medicaid pays. On

average, Medicare Part D is paying 30 percent more.

Mr. Weems, the central finding of the report is that Medicare

Part D is paying significantly higher prices for drugs than Medicaid. Do you agree with this finding?

Mr. WEEMS. Mr. Chairman, I had the opportunity to be briefed

on your report; and I appreciate the opportunity for that. I have

not had the opportunity to examine it in depth, but I would find

that, for those particular drugs, that a government-enforced pricesetting system likely can produce lower prices, but that does not

take into account the cost that may spread through the rest of the

system. Yes, the prices may be lower in a government-administered

pricing system, but, as a result, they may be higher in the Federal

employees benefits. So I would say that we would need to perform

the rest of the analysis to see where those costs flow to.

Chairman WAXMAN. Well, we had the Medicaid system in place

for 10 years with pharmaceutical rebates. Do you know that—if

there is any evidence to show that there was a flow throughout the

whole system of higher drug prices?

Mr. WEEMS. Yes. We have evidence that suggests that, yes, costs

were higher in the private sector as a result and also that there

was a——

Chairman WAXMAN. Can you say that those higher prices were

attributed to the Medicaid payment? Or are drugs getting higher

every year?

Mr. WEEMS. Well, I believe there is research that attributes to

that, and it is also no accident that the amount of rebates that

were available under the best price began to go away under under

the—in the private sector.

Chairman WAXMAN. We have looked at all the research on this

subject, and we can’t find any studies that substantiate your position. So we would like you to submit that to us for the record.

You’re in charge of Part D; and what we see is that, according

to this report, taxpayers paid more than $3.7 billion over the first

2 years of the program as a result of the dual eligibles not being

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given the Medicaid price and now going to the Medicare price. Does

that concern you?

Mr. WEEMS. Again, I think the analysis may be incomplete. It

may be that the prices were—you know, there could be a lower

price there, but it is also likely that those prices would have shown

up higher someplace else, probably in the non-dual part of the Part

D program.

Chairman WAXMAN. You have emphasized that Medicare Part D

is costing less than projected——

Mr. WEEMS. Yes.

Chairman WAXMAN [continuing]. And that is true. But the biggest reason the costs are less is that fewer seniors have enrolled

than projected. It is obvious that if Part D is serving fewer seniors,

it’s costs are going to be lower.

On the central issue of drug prices, Part D is overpaying. Before

January 2006, the 6 million dual-eligible beneficiaries were getting

their drugs through Medicaid. After January 1, 2006, they started

getting their drugs through Medicare Part D. The only thing that

changed is how much the taxpayers have to pay for these drugs.

The cost for just 100 popular drugs increased by $3.7 billion. That

is indisputable.

Are you putting the interest of the big drug companies ahead of

the interests of the taxpayers when your concern is not for the

extra costs that we are actually paying for these very same beneficiaries?

Mr. WEEMS. Let me dispute one of your premises, if I might, that

the only thing that changed was that the price changed. No, something else changed; and that is that the beneficiaries were moved

from a State-run, price-fixing program—in some cases, of States

with restricted quantities—into a risk-based insurance product,

where they have in many cases, even for the low income, the dignity of choice, which they didn’t have in Medicaid, broader access

to more drugs and no limits on the——

Chairman WAXMAN. That depends on what plan they joined. Because the plans could restrict the drugs’ formulary.

But the Medicaid rebate program, which I helped design—I was

around when we adopted it. It is all voluntary. The drug company

didn’t have to participate. And the drug companies participated on

the basis that we would demand the best price for them that they

were charging others in exchange for adding all their drugs on the

formulary. So the companies benefited by making sure that all

their drugs could be available to Medicaid patients.

This wasn’t a fixed price or price fixing. It was a negotiation by

the government for a lower price for that population. Now we have

no negotiation; and, as a result, I believe, we are seeing higher

prices. We are definitely paying higher prices. Would you say it is

because we don’t negotiate it any longer? Is it because we don’t

have the Medicaid reimbursement formulary that—for that same

population for those same drugs?

Mr. WEEMS. Again, I would say there is only half the analysis;

and that is the analysis that, you know, the States pay. You can

look at the—you know, the price that is mandated by the rebate.

The analysis that needs to be complete is what happens on the

other side of the equation, the market equation, when—press down

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prices here, they are going to go up someplace else. The Federal

employees benefit program, private insurer, we’ve seen it happen.

Chairman WAXMAN. We’d have to see if that is the case. I’m looking forward to see what documentation you have for that.

If we had lower prices in the United States, it would probably

lead to higher prices in the other countries. Should we worry about

that?

It just seems to me that for the dual eligibles that we actually

provided drugs to under the Medicaid program at a lower cost and

we are now paying for that same population at a much higher cost

and for that group we are paying a lot more money. I don’t think—

I don’t see what we’re getting for that extra money.

Mr. WEEMS. If we were to—let’s take one of the suggestions that

one of the academics made here. And that is if we were to take that

dual-eligible population and apply the rebate, the Medicaid rebate,

to that population, the most likely initial result would be an increase in Part D for everybody else who is not dually insured. Is

that, you know, the consequence that we would like to have? Is,

you know, a secular increase in Part D that then spread beyond

Part D and other parts of private market?

Chairman WAXMAN. I don’t believe that would be an accurate

statement of what would happen. I think the drug companies are

trying to maximize the amount they can get for their drugs; and

if you provide more money for their drugs, they are going to be

happy to take it. So I don’t see evidence for that statement.

I’m going to reserve the balance of my time, which is 1 minute

and 37 seconds and yield to—now 10 minutes to Mr. Davis.

Mr. DAVIS OF VIRGINIA. We just have a fundamental disagreement between us over if you reduce costs in one area, does it raise

costs in other areas. Somehow I think the chairman and advocates

on that side think that this just comes out of the drug companies’

hides and that is the end of it and it has no effect on research and

development or anything else. And I don’t think that is borne out.

The majority staff report found that Part D rebates are smaller

than Medicaid rebates. You’re not surprised by that finding, are

you?

Mr. WEEMS. Not at all.

Mr. DAVIS OF VIRGINIA. Is this new information?

Mr. WEEMS. No.

Mr. DAVIS OF VIRGINIA. In Congress, we often lobby to change reimbursement for different services covered by Medicare or to expand those services all from political perspectives. The drug company or somebody could be—or a manufacturer could be from your

district and there is pressure to slip this in here or slip this in

there or expand services to one needy group over another.

At CMS, we are tasked with creating a national formulary or setting prices. Do you think the process would be open to meddling

by Congress by disease advocates and drug manufacturers?

Mr. WEEMS. Absolutely. And, you know, we can see the evidence

of this. You know, if you look at the mail that CMS receives, we

receive virtually no mail—I don’t think I’m in a position to say

zero—but virtually no mail about the price of specific drugs under

Part D. We receive huge volumes of mail about those drugs for

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which we do administer pricing under Part D. A lot of mail, a lot

of pressure and, in some cases, there is even legislated prices——

Mr. DAVIS OF VIRGINIA. When you say mail, are you talking

about mail from Members of Congress?

Mr. WEEMS. Members of Congress, manufacturers, lobbying organizations, you name it. We receive virtually none of that under

Part D. One of the great success stories of Part D is it has depoliticized the price of individual drugs.

Mr. DAVIS OF VIRGINIA. What would be—is that one of the reasons, you think, that the costs that were projected originally are far

and above what has actually taken place?

Mr. WEEMS. That and the effects of competition.

Mr. DAVIS OF VIRGINIA. I mean, there is a fundamental difference, that some of us believe competition brings down costs,

some of us think that the government is smart enough to be able

to just negotiate the best cost because of our buying power. In fact,

there are some formularies that have greater potential buying

power than the Federal Government.

Mr. WEEMS. The PBMs, the prescription benefit managers, the

ones that the Part D program use, represent about 240 lives across

the Nation. So that is real buying power.

Mr. DAVIS OF VIRGINIA. If CMS—we talk about we are tasked

with creating a national formulary, setting prices. What impact

could that have on seniors in Part D?

Mr. WEEMS. If it is a highly restrictive formulary, it might mean

that they don’t get the drugs that they need.

Mr. DAVIS OF VIRGINIA. Mr. Weems, you have been a career employee, haven’t you?

Mr. WEEMS. I am a career employee, sir.

Mr. DAVIS. So you are a career employee on there. You weren’t

some administration lackey or anything else that they were able to

take because you had given contributions to a campaign or been active in political causes, right? You’re a career employee, and you

have worked at this all your life?

Mr. WEEMS. I started my career in 1983 as a junior budget analyst with the Social Security Administration.

Mr. DAVIS OF VIRGINIA. How does the financial outlook for Medicare Part D compare to the Part A program which covers hospital

care?

Mr. WEEMS. They are financed entirely differently. Part A is financed by FICA taxes. Part D is financed by premiums and by general fund transfers. So the financing schemes are different.

Part A, because of its financing schemes and because of the rising costs in Part A, is going to go broke in 11 years, according to

the trustee’s report.

Mr. DAVIS OF VIRGINIA. And you concur with that from your observations?

Mr. WEEMS. I do.

Mr. DAVIS OF VIRGINIA. And Part D?

Mr. WEEMS. Part D is financed, as I said, from—it is financed

entirely differently, and so it is not subject to the same sort of constraint that the Part A is.

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Mr. DAVIS OF VIRGINIA. But, in fact, the projections on Part D,

are they greater or less than were projected in terms of the costs

to the government?

Mr. WEEMS. In fact, you can see the original cost estimate is the

upper line.

Mr. DAVIS OF VIRGINIA. That is the third chart over?

Mr. WEEMS. That is the third chart over. The lower line is the

most recent cost from the President’s budget, most recent cost estimates.

Mr. DAVIS OF VIRGINIA. So Part A has basically been overruns

and Part D has been underruns in terms of——

Mr. WEEMS. Again, Part A—in fact, this year in Part A, the expenditures of—in Part A will exceed what we take in in taxes for

Part A.

Mr. DAVIS OF VIRGINIA. Now, in the previous panel we heard—

I think it was Dr. Anderson testified that all Federal prices for prescription drugs should be uniform. Outside of prescription drugs,

does Medicare, Medicaid, the VA and FEHBP pay uniform prices

for health care services?

Mr. WEEMS. No, they don’t. Not as a matter of policy. There

might be times when they——

Mr. DAVIS OF VIRGINIA. Coincidentally.

Mr. WEEMS. Yeah, by coincidence.

Mr. DAVIS OF VIRGINIA. How do you think an effort to make

prices uniform across these programs to the lowest denominator

would be received by physicians or hospitals?

Mr. WEEMS. Well, you know, Mr. Davis, it is an interesting question. And the question—the answer to that question depends on

your philosophy.

If you were to do it through competitive means, you would allocate resources correctly. If you were to turn it over to CMS with

my very well-meaning Federal employees who fix prices every day

for A and B, we likely would not get it right.

Mr. DAVIS OF VIRGINIA. There is sufficient evidence that Medicaid price controls increase prescription drug prices to private payers, which in the United States are generally employers. These are

like GM and Ford who are competing in a global marketplace. Although we may get a reduction for Medicaid recipients, in effect,

I think there is evidence that drives up the costs to these companies that has an effect downstream in terms of their ability to compete.

GM and Ford have both cited higher health care costs as one of

the factors affecting their decline in global competitiveness. What

do you think would be the impact of requiring Medicaid prices in

Part D on Ford or GM?

Mr. WEEMS. For the entirety of Part D?

Mr. DAVIS OF VIRGINIA. And union pension plans I guess you

could throw into that as well.

Mr. WEEMS. Sure, sure. So Part D, together with Medicaid, represents over half of the pharmaceutical market in the United

States. Applying government cost controls to more than half the

market and pushing down that half of the market to some specified

pricing scheme would definitely—and I say this without reservation—cause cost increases in the rest of the market, which specifiVerDate 11-MAY-2000 11:03 Jul 27, 2010 Jkt 000000 PO 00000 Frm 00104 Fmt 6633 Sfmt 6633 U:\DOCS\56580.TXT KATIE PsN: KATIE
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cally would be the private sector. And, you know, for companies

like Ford and GM, it would substantially increase the pharmaceutical costs in every vehicle.

Mr. DAVIS OF VIRGINIA. You don’t think the pharmaceutical companies would just say, we’re going to continue the same amount on

research and development anyway. We’re just going to take this

out of our bottom line, reduce advertising costs and the like?

Mr. WEEMS. I think that is unlikely, but the next panel will have

somebody from pharmaceutical companies on it, and I would invite

you to ask them.

Mr. DAVIS OF VIRGINIA. OK. I happen to agree with you.

Much has been made about the Medicaid coverage of prescription

drugs, but prices are only one factor in determining the success of

any new benefit. How do you think seniors’ access to drugs in Part

D compares with Medicaid recipients’ access to drugs?

Mr. WEEMS. They have more access and more choices. The main

feature of Part D is the ability to choose a plan that works best

for the individual.

Mr. DAVIS OF VIRGINIA. You may have a rare disease or something that is not covered, for example, by Medicaid——

Mr. WEEMS. Correct.

Mr. DAVIS OF VIRGINIA [continuing]. That is covered by Part D,

and you can choose that particular——

Mr. WEEMS. A lot of it just has to do with choice. You know,

what is the level of premium that I want to pay each month? What

is the amount of co-pay that I want to be exposed to? Do I want

to use my neighborhood pharmacy?

Those are the kinds of things that seniors find extremely agreeable about this program, that it is not a government one-size-fitsall, the government picks winners and losers. It is that there is

choice and a lot of choice, and their drugs are available to them in

a very convenient way that—where they can get what they want.

When I talk to seniors around this Nation—and I spend a lot of

time talking to them—we hear great satisfaction with Part D. And

what they say over and over again is don’t take this benefit away

from us. Make sure you keep this benefit. This benefit is working

for us.

Mr. DAVIS OF VIRGINIA. I think that is why you don’t hear the

majority saying let us move these dual eligibles back to Medicaid.

Because it would be politically very, very unpopular with these

groups. And now they’d like to have a hybrid, it seems to me, of—

well, we are going to have Medicaid pricing in Part D for some

items and the like.

Mr. WEEMS. In fact, satisfaction rates for the duals are higher

than those even of the regular population. For one of the first

times, they have been given the dignity of choice from a government program.

Mr. DAVIS OF VIRGINIA. As opposed to a one-size-fits-all, take-itor-leave-it?

Mr. WEEMS. That’s correct.

Mr. DAVIS OF VIRGINIA. The purpose of the Medicaid price regulations was to control the cost to States and the Federal Government. That is why they put the price controls in. Since implementing price controls 18 years ago, do you have any observations on

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the cost of prescription drugs in Medicaid? Have they remained

flat? Have they gone up? Have they gone down?

Mr. WEEMS. Well, you know, the best price provisions, the provisions with respect to rebates, are fixed from a price. So drug prices

continue to go up. You know, they have been effective in reducing

the liability for drugs in the Medicaid program while increasing the

liabilities in other places and causing market distortions in other

places on the market.

Mr. DAVIS OF VIRGINIA. OK. My time is up. Thank you.

Mr. YARMUTH [presiding]. We have a series of votes, as you

might have noticed. So we’ll at this point recess the hearing and

reconvene at 1.

[Recess.]

Chairman WAXMAN [presiding]. The meeting of the committee

will come to order.

The Chair recognizes Mr. Murphy to pursue questions.

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

I wanted to make a brief comment off of the chairman’s concern,

Mr. Weems, over the terminology you used regarding the Medicaid

rebate program and that is peppered in your testimony, both written and oral, is the idea that this is price control, that this is price

fixing. When it seems to us that it is merely using the market leverage and market power of the Federal Government to do exactly

what private industry does, what the HMOs do in negotiating these

prices, which is to say, through a choice of a particular pharmaceutical company, that this is the price that we’re willing to pay.

And if you don’t pay it, then you’re not going to be part of our plan,

which is essentially what the Medicaid rebate program does.

Price control strikes me as something very different. I mean, that

is a statutorily imposed price that everyone has to accept for their

product.

This is a voluntary program. I would hope that we’d be a little

careful in mixing what is a voluntary rebate program that the

pharmaceutical companies pay as a means of selling their drug in

a particular plan, the Medicaid plans versus what is traditionally

thought of as price controls.

But my question is a little bit different, and that is—your testimony, Mr. Weems, as to the disruption in the delivery of health

care that would result from imposing Medicaid rebates on the dually eligible population. And I want to just ask you to elaborate a

little bit on that as to what evidence you have that gaining these

discounts for taxpayers would lead to this potentially troublesome

disruption of the health care delivery system.

Mr. WEEMS. Thank you for the question.

And, you know, I don’t mean to get into a semantic battle. But,

in my view, a system which fixes a specific rebate amount and fixes

it through statute is very different than a negotiation. And the 15.1

percent rebate in Medicaid is fixed and fixed in statute. So I would

stand by my terms, sir.

You know, as for the disruptions—I mean, we can—we can see

this. You know, it was the GAO report that found that, in the 2

years following the implementation of the Medicaid best price rebate program, the best price discount for outpatient drugs purVerDate 11-MAY-2000 11:03 Jul 27, 2010 Jkt 000000 PO 00000 Frm 00106 Fmt 6633 Sfmt 6633 U:\DOCS\56580.TXT KATIE PsN: KATIE
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chased by HMOs and PPOs decreased to about 14 or 15 percent,

which is approximately the minimum required by the statute.

CBO found that the best price rebate program, found that drug

purchasers in the private sector, their discounts weren’t as good.

Between 1991 and 1994, the best price discounts that pharmaceutical manufacturers gave off of wholesale prices fell from 36 percent to 19 percent.

Mr. MURPHY. For private insurers?

Mr. WEEMS. That’s correct.

Mr. MURPHY. So you’re suggesting that there is a movement—

there is also testimony that you give about we would have a discouraging of employers from continuing to provide prescription

drug coverage at the same level they do today. Is that——

Mr. WEEMS. If it is more costly, we can expect less of it, yes.

Mr. MURPHY. I guess it strikes me as strange that the testimony

here is that we are essentially going to be—that today we are, in

essence, subsidizing privately held plans purchased through employers?

Mr. WEEMS. No, not at all.

Mr. MURPHY. Wouldn’t that be the converse of suggesting that—

if your suggestion is that by the taxpayers paying less that you’re

essentially pushing the bubble in somewhere and it comes out

somewhere else, that private employers are going to pay more,

wouldn’t the suggestion be currently today then we are subsidizing

private employers’ purchase of——

Mr. WEEMS. Not at all. You need to compare the two systems.

If, in fact—if you had a competitive pricing system on both sides,

then you can make a direct comparison. But, in fact, on the Medicaid side, there are mandatory rebates. The simple hydraulics of

supply and demand means that, as you force down those prices,

they are going to go up someplace else. That, in fact, means that

the private sector currently is subsidizing Medicaid.

Mr. MURPHY. And currently, though, how does that not lead to

an argument that we are currently, through our inflated prices

that we are paying—and you admit that the prices we are paying

today are not commensurate with what Medicaid is paying—isn’t

providing a subsidy on the other side to the private insurers?

Mr. WEEMS. No. The market—the market prices—you’re asking

to compare a risk-based market price to a government-imposed

price. They don’t compare. Because you have the cross subsidy and

you’re not able to capture the cost of forcing down the lower price

and the cost that imposes on the rest of the nongovernment costcontrolled part of that sector.

Mr. MURPHY. And I know my time has expired, Mr. Chairman.

But to get back to, I think, a fundamental disagreement, I think

that the government rebate program is not completely risk independent. I mean, we obviously are setting a price at which we believe that the drug provider will continue to provide the pharmaceutical product. We are incorporating risk because we know if we

set the rebate price too high that pharmaceutical company will no

longer sell the product. So it may be different than the negotiation

in the back and forth that occurs in the private sector, but it is

completely interdependent upon risk. Wouldn’t you agree that is

part of the——

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Mr. WEEMS. No. I think we’re talking about risk in two different

ways. When I refer to a risk-based insurance product, that is what

we have in Part D where the—the profit, the equity of the firm is

in fact at risk for achieving a good bid, for lowering drug prices and

for bringing in recipients into their plan. That’s the risk. That’s a

much different kind of risk than the kind you’re describing.

Mr. MURPHY. You’re right. I am mixing terms.

I guess what I’m suggesting is that the fundamentals of supply

and demand that underlie a negotiation between an HMO and a

pharmaceutical company are not absent from the determination of

what the rebate will be under the Medicaid program. Because if

the rebate again is set too high, then that drug will not be provided

as part of the Medicaid program. So many of the same economic

factors that underlie those negotiations are present in the determination of the——

Chairman WAXMAN. Your time has expired.

If you want to make a comment. Otherwise, we can move on.

Mr. WEEMS. We can move on, sir.

Chairman WAXMAN. OK. Mr. Issa.

Mr. ISSA. Thank you.

Are you aware of the history of this best price practice that Medicaid has where, a year after its implementation, the Department

of Veteran Affairs asked Congress to exempt it from the calculation

of Medicaid’s best price because in fact it was raising their prices?

Isn’t that true?

Mr. WEEMS. To the best of my knowledge, yes.

Mr. ISSA. So here we have the gold standard to a certain extent.

The Veterans Administration buys selected drugs at the best possible price, makes decisions, including formulary decisions, based

on the best value for our veterans and then makes it available to

other—certain limited other government agencies such as Bureau

of Indian Affairs and so on for Indian health, and they choose to

always take advantage of it because the prices are good. And they

are saying, when you mandate a discount, you distort the market

and you distort the likely retail price. Now, isn’t that really what

we’re really talking about?

Mr. WEEMS. Sure. And we’ve seen that, since the best price mandate, that best prices have gone up, unsurprisingly, I would say.

Mr. ISSA. So a question I asked the economist earlier today—and

I will challenge you on this side some—isn’t our gold standard—

the Veterans Administration, it backs up a truck, takes a whole

truckload, reduces reliability, administration, takes the drugs and

makes a good price. Isn’t that the gold standard for pretty much

as good as you would do, assuming you don’t simply distort the

market and demand a lower price, regardless of merit?

Mr. WEEMS. Well, I might disagree with that characterization,

because I think it—first of all—and we are probably trying to get

to the same place here. But, first of all, the Veterans Administration is a government agency that actually takes custody——

Mr. ISSA. And maybe I can clarify. What I’m saying is, when you

do all of those things, you get the price maybe lower than any other

plan.

Mr. WEEMS. Quite possibly.

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Mr. ISSA. But when we’re looking for the lowest possible price,

we should not look to Medicaid with a mandated price, we should

look to a bulk buyer buying by reducing administration and risk to

these companies. When they make a buy, they make a big buy; and

you just ship it.

Mr. WEEMS. That’s right.

Mr. ISSA. OK. So, earlier today, I said, when we want to evaluate

Medicare Part D’s performance, shouldn’t it be taking, if you will,

if possible arithmetically, take the VA, put back in the administrative cost of not buying from a single payer but rather allowing people to get drugs where they want to be, where their doctors and

their pharmacies are, rather than going to a VA facility to pick

them up. Recognizing there is distribution costs, administrative

costs, but that convenience is something our seniors demand because they want that capability. They’re not asking us to please

have 35 locations around the country they can drive to to get their

drugs.

If you add back in those reasonable costs and so on, isn’t that

the standard where we would like to see Medicare Part D close to?

And in your estimation are we, when you add back in those costs,

somewhat close?

Because here today it seems like everybody wants to use Medicaid, which is an artificial mandated price, as the gold standard,

rather than any other comparison. Or they want to use Canada,

where they say if you don’t give us a lower price, we’ll simply void

your patent and knock it off. So that is my real question. Can you

progress on how you see it should——

Mr. WEEMS. Sure. That makes the comparison more fair. But the

thing that—that Part D offers that—you know, is that you need to

layer in again here is the choice of plans, you know, the many,

many choices that are available to seniors and the way that they

can, you know, structure their payments. They can choose, you

know, a higher premium level in return for lower structured copayments, those kinds of things. All of that adds to the value of

Part D. And, you know, once you step up from a highly restricted—

all the way up to a program that offers considerable choice——

Mr. ISSA. Right. And, look, I have no question at all that my seniors want the features of being able to choose between formularies,

to have some choices, to decide sort of good, better and best.

One of the controversial things by some here on the dais is, well,

why don’t we just have one formulary? Why don’t we just have one

solution? In a sense, the price that Medicare Part D gets, which is

better than originally forecasted, isn’t one of the most important

parts of that. The fact that independent companies compete based

on their formulary and features and by the way offered to pharmaceuticals, do you want to be with us, and will you give you a better

price for it, because they are not necessarily taking every therapeutic solution.

Mr. WEEMS. That’s absolutely true.

Mr. ISSA. If we come up with one mandated solution, although

we might get a lower price on that, don’t we distort the market for

what the seniors want?

Mr. WEEMS. Yes. And I would say that there are two aspects to

that. First of all, that a restricted formulary may mean that some

106

people don’t get the drugs they need; and, second, it puts the government in the position of choosing winners and losers in the marketplace.

Chairman WAXMAN. The gentleman’s time has expired.

Ms. Foxx, do you have questions?

Ms. FOXX. Thank you, Mr. Chairman.

I think that last point was really important, that we should not

be putting the government in charge of picking winners and losers,

especially when it comes to health care.

I have a couple of questions that I’d like to ask you, Mr. Weems;

and I would say that I’m not always happy with the way CMS operates. There are things that I disagree with that you all have

done, and so there are lots of things that I think could be done better over there, And we’ll have another conversation about that

sometime after this.

But let me ask you a question. According to the material that

you all have produced, Medicare Part D enrollees continue to save

about—excuse me. I’m asking the wrong question. You show that

Part D costs are lower than the initial estimates. Can you tell us

what accounts for that?

Mr. WEEMS. Sure. There are a number of things. First of all, that

the degree of competition that occurred in the system was more robust than originally estimated; second, the price of drugs has not

risen as fast as originally estimated; then, last, the total population

enrolled is somewhat lower than originally estimated.

Ms. FOXX. The second question has three parts to it.

You have been around the Department for a long time, and you

probably will remember during the debate about Part D there were

a lot of doomsday predictions. I was not here during that debate.

I didn’t vote on Medicare Part D. But tell me in your opinion

which—how these doomsday predictions have worked out.

No. 1, did plans refuse to offer drug-only insurance? I’ll ask all

three of the questions, and then you can respond. Did plans cherrypick only the healthiest seniors? And you’ve already mentioned this

about drug prices not rising exponentially. If we have time, I would

like you to also say something about the price of drugs holding

down the cost of health care in other areas.

Mr. WEEMS. You know, clearly, there was a lot of concern at the

beginning that there wouldn’t be marketplace entry. There has

been robust and substantial marketplace entry. In fact, the complaints are reversed, from nobody is going to get into this to aren’t

there too many.

As for cherry-picking, that is something that we still remain

very, very vigilant about in CMS. Every year when the bids come

in, we examine the bids, we examine the formularies to make sure

that there are not discriminatory bids as part of that.

You know, as for pricing, you know, if you—73 percent of our enrollees are in plans where the price index did not increase by more

than 3 percent; 50 percent are in plans where the price index did

not increase more than 2; and 14 percent are in plans where the

price actually fell. So we not only see good price stability, we also

see that our seniors are able to protect themselves against the risk

of higher prices in the plans and also during the plan year by

choosing tiered co-payments. Ninety-five percent of our beneVerDate 11-MAY-2000 11:03 Jul 27, 2010 Jkt 000000 PO 00000 Frm 00110 Fmt 6633 Sfmt 6633 U:\DOCS\56580.TXT KATIE PsN: KATIE
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ficiaries buffer themselves against the risk of payment increases by

having set co-payments, rather than percentage co-payments.

Ms. FOXX. Thank you.

Mr. Chairman, I would just like to make a brief comment.

I find it so interesting that, in matters of choice, the majority

party here wants choice when it comes to destroying life but not

choice for citizens when they have the opportunity to save money

and have better health care. Because it seems to me that one of

the things that drives the majority party so crazy about Medicare

Part D is that people do have choice. We don’t want people to have

choice about where to go to school, but, again, we do want them

to have choice to kill babies.

The other thing that I think is not recognized that Mr. Shays

said earlier is Medicare is in deep trouble; and there is material

out all over the place today that the majority party is going to

avoid dealing with the trigger, going to sweep that under the rug.

We don’t want to deal with the big issue of Medicare, but because

there is this animus toward the drug companies, it is easy to pick

on drug companies and pick on the private sector whenever we possibly can and make them look bad.

So I think we need to be dealing with the real problems that we

have, which is the major Medicare program and what has come to

be called an entitlement, because that is where our real problems

are.

Chairman WAXMAN. The gentlelady’s time has expired.

Mr. Weems, I want to ask you some questions. Under Medicare

Part D, people can choose a plan that will offer them some drugs.

It doesn’t have to be every choice of drugs, but they have their formulary or they can join another plan that will have its formulary.

Isn’t that the way it works?

Mr. WEEMS. That’s correct, yes, sir.

Chairman WAXMAN. So they have a choice, but they may find one

drug on one plan but not on that same plan for another drug so

they have to—they really can’t pick and choose. They can’t belong

to two plans. They can only belong to one. So they don’t really get

the choices of all the drugs they need.

Under the old Medicaid, they had all the drugs on the list. So

I just say that rhetorically when we talk about how much choice

we are actually giving people.

Second, I want to point out you said with pride that a lot of insurance companies are out there competing and that just shows us

it is wonderful and really working. But it also might show that

they are making a lot of money; and if they’re making a lot of

money, why not go into that business? I just say that rhetorically

as well.

Then the other thing I want to ask you is, we had 6 million people on Medicaid, and we paid less for them. Now they are on Medicare Part D, and we pay more for them. It is your premise that,

if we paid less, the prices would go up in other areas where government spends on drugs; is that right?

Mr. WEEMS. That’s correct. Or in the private sector. I wouldn’t

just limit it to government, sir.

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Chairman WAXMAN. OK. Now that we’ve taken 6 million people

and we have paid less for them, are we seeing a drop in what is

being paid in other government programs or in the private sector?

Mr. WEEMS. Again, I think that is a question that bears examination. The question may be——

Chairman WAXMAN. It goes to your argument.

Mr. WEEMS. It bears examination, sir.

Chairman WAXMAN. Have you seen any evidence of the prices

dropping for other government programs?

Mr. WEEMS. One of the reasons that we did not see the top line

on that is prices have not increased in the way or at the speed that

was originally estimated. So I would point to that as evidence, sir.

Chairman WAXMAN. What prices haven’t increased at the speed

of——

Mr. WEEMS. Drug prices.

Chairman WAXMAN. Who estimated them?

Mr. WEEMS. The original estimate from the Office of the Actuary

for the——

Chairman WAXMAN. Is that the one we were never allowed to

see? We still haven’t gotten that one, as I understand. That was—

the actuary’s life—no, not his life, his job was threatened if he

shared with Congress the cost. Well, let me go into another question. Let us say we spent $3.7

billion for 6 million beneficiaries when they’re under Medicaid—

$3.7 billion less, now we’re paying $3.7 billion more. Is that the

best use of our $3.7 billion? The drug companies like it, but

couldn’t we use that for other purposes when we have so many uninsured?

For example, one of the reasons the President said he vetoed the SCHIP bill was because it cost so much money. Well, that $3.7 billion would have covered 3.3 million uninsured children. Which is

a better use of that money, paying it to the drug companies or paying less to the drug companies and using it for children?

Mr. WEEMS. Again, sir, I think that analysis ignores—is only half

the equation. It ignores the distortions that the price setting creates in other parts of the market. You may——

Chairman WAXMAN. We can’t be responsible for every distortion—you have never given us any evidence of that. But even if you

do, there are always distortions.

I want to ask you one question about this issue of distortion. Do

you think if we charge less—let me put it this way—if we charge

more for drugs that the drug companies say, well, since I’m making

so much money under this Medicare Part D, I’m going to give a

break to these other payers of the private sector?

I can’t believe that is the case. They are in business to make

money. If they can sell their drugs at a certain price to the private

sector, they’ll do it. If they can sell their drugs to the government

at a higher price, they’ll do it. It is when somebody says, no, we’re

not going to pay the higher price that they have to realize that

they’re not going to make the money they were making before and

then make their business calculations.

Mr. WEEMS. And I think you perfectly encapsulated the problem

with government-administered pricing. We know that in Part A

and B we overpay in some areas and underpay in others, and it

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creates distortions and costs that, frankly, we’re not able to measure.

Chairman WAXMAN. In Part D?

Mr. WEEMS. A and B. In Part A and B. It is a government-administered prices program. We know that we overpay.

Chairman WAXMAN. Would you be surprised if you found that

one plan was paying more for the same drug than another plan

under Part D?

Mr. WEEMS. For the same drug, no.

Chairman WAXMAN. You wouldn’t be surprised?

Mr. WEEMS. No.

Chairman WAXMAN. Would you be surprised if one plan was bargaining for lower prices and didn’t pass it onto the consumer but

increased their profits?

Mr. WEEMS. If it is a rebate, they have to pass it on in their premiums, sir.

Chairman WAXMAN. Well, it may not be a rebate. They just negotiated a better price because they did some deals. That’s what we

want in the market, right?

Mr. WEEMS. That’s correct.

Chairman WAXMAN. Pass on the lower prices to the Medicare

system or beneficiary or does it just simply make all those companies that to our surprise decided to go into the business richer?

Mr. WEEMS. If they are going to compete for beneficiaries, they’re

going to have lower premiums, and that drives down their profits.

Chairman WAXMAN. Do you think that’s the only reason signs up

on one plan as opposed to another, the price?

Mr. WEEMS. The price and the coverage of the drugs.

Chairman WAXMAN. Yeah. OK. Thanks.

The gentleman from North Carolina, Mr. McHenry is recognized.

Mr. MCHENRY. I appreciate it, and I hope we will still have the

same liberal time policies for me as for you. I know being chairman

has its privileges.

Chairman WAXMAN. I went over 30 seconds. If you want an extra

30 seconds, I’ll give you——

Mr. MCHENRY. That would be great, but I think you probably

just burned it.

So anyway——

Chairman WAXMAN. I can’t make you happy any way, huh?

Mr. MCHENRY. Well, actually, you know, your philosophy is very

different and your focus is different here because—based on the

studies——

Chairman WAXMAN. The gentleman’s time is just beginning at 5

minutes.

Mr. MCHENRY. OK.

Chairman WAXMAN. Take my generosity.

Mr. MCHENRY. I appreciate your generosity.

But in this particular case, I think we do have some disagreements. Because, based on the studies I have seen, Mr. Weems—

now, you know, Medicare Part D has cost both less for consumers

that are using the program and for the taxpayers than the original

cost estimate; is that correct?

Mr. WEEMS. Forty percent less, yes.

Mr. MCHENRY. Forty percent less?

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Mr. WEEMS. Yes, sir.

Mr. MCHENRY. So market forces are—have been much more powerful in bringing down the cost than the government setting an arbitrary dollar amount that they will pay for an arbitrary drug?

Mr. WEEMS. The power of Part D has been to use market forces

to bring prices down well below those that were originally estimated.

Mr. MCHENRY. OK. There is an IMS health report in 2007.

Generics—and it said, generics account for 13 of the 15 drugs most

prescribed by Medicare Part D. All right? And also according to

this study, generics accounted for 68 percent of all medicines prescribed in Part D.

Mr. WEEMS. Generic usage is in the 60 percentile. My number

is about 64 percent.

Mr. MCHENRY. So can you comment on the effect that has on the

cost for the consumer, the senior and for taxpayers?

Mr. WEEMS. Sure. And that was one of the points that I was

making earlier. It is not an exact comparison to compare somebody

who is in a price-fixed indemnity program to a risk-based program

that has some additional benefits to it, you know, such as therapy

management, such as therapeutic interchange. I mean, there can

be and, you know, we have seen scenarios where somebody who

was in Medicaid came over to Medicare, was able to get more of

the drugs, would be able to get more drugs, the ones that they

needed and, in many cases, to be able to get those at a lower price

and have better health outcomes and avoid costs in the A and B

part of the Medicare program.

Mr. MCHENRY. I have four questions here in succession. You can

answer them just briefly.

Do Medicare and Medicaid programs generally serve the same

type of beneficiaries? Yes or no?

Mr. WEEMS. No.

Mr. MCHENRY. OK. Are Medicare and Medicaid programs financed the same way?

Mr. WEEMS. No, they’re financed very differently.

Mr. MCHENRY. OK. So then is it fair to say that Medicare and

Medicaid are two fundamentally different programs?

Mr. WEEMS. They are.

Mr. MCHENRY. They serve different beneficiaries and have different benefit structures and are financed in different ways?

Mr. WEEMS. Yes.

Mr. MCHENRY. So if you and I understand this correctly—I

mean, obviously, by overseeing the program, you know, you have

a depth of knowledge. Do you believe that the price structure of one

program would work for the other program?

Mr. WEEMS. Well, clearly, it would not be wise to move the price

structure of the Medicaid program into the Medicare program

where there would essentially be an administered price-fixing arrangement for, you know, more than half of the pharmaceutical

market in the United States. That would have, at least in my estimation, you know, considerable effects that would spill over into

the private sector in terms of higher costs. So I would say that

would not be particularly wise.

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Mr. MCHENRY. There are some shortcomings with the program.

It is a government program. It is what government does very well.

Inefficiency is what government does very well. However, because

market forces are involved, it has been better in terms of the cost

and the benefits to consumers.

So we have talked about the negative aspects of the program.

That’s what this whole hearing is about, after all. That is why you

have a crowd behind you and the reason why the chairman had it.

But can we talk about some successes, and, you know, and answer

one general question? Has Medicare Part D shown to improve beneficiary access at a less-than-expected cost?

Mr. WEEMS. Certainly. And beneficiaries are getting the drugs

that they need. They are getting it in a way that is convenient to

them. It is a real challenge to find any program that has a satisfaction rate of 85 percent on the part of the beneficiaries, and that’s

what the Medicare Part D program has. Among the low-income

beneficiaries, it is 90 percent.

Mr. MCHENRY. Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. McHenry.

Mr. Weems, thank you very much for your participation. I know

you’re anxious to get back to the work that the government bureaucracies do so poorly, according to my friends on the other side

of the aisle. But I salute you for the work that you do, and we want

to make laws that will make sure that we protect the taxpayers

and the beneficiaries.

Mr. WEEMS. Thank you for the opportunity to appear, sir.

Chairman WAXMAN. For our next panel, we want to call forward

Mr. Mark Merritt, president and chief executive officer of the Pharmaceutical Care Management Association; Mr. Rick Smith, senior

vice president for policy, Pharmaceutical Research Manufacturers

Association [PhRMA]; Mr. Paul Precht, director of policy and communications, Medicare Rights Center; and Ms. Judith Stein, executive director of the Center for Medicare Advocacy.

We are very grateful for all of you coming to our hearing today,

and we thank you for being here. And I want to make mention of

the fact that we’re particularly grateful that you allow us to share

Mr. Merritt’s birthday with him and to have him here on this special occasion. You wouldn’t have wanted to be anywhere else on

your birthday.

Mr. MERRITT. It really is a dream come true. Thank you.

Chairman WAXMAN. OK. Well, you said that without being under

oath, but the rest of the testimony you all be asked to give—it is

the practice of this committee that it be done under oath. So I’d

like to ask you to all stand.

[Witnesses sworn.]

Chairman WAXMAN. The record will indicate that each of the witnesses answered in the affirmative.

Mr. Merritt, as a birthday gift to you, we are going to let you

start.

I think you all know the rules. Your prepared statements will be

in the record in their entirety. We would like to ask you to try to

limit the oral presentation to 5 minutes. We have the clock.

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STATEMENTS OF MARK MERRITT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, PHARMACEUTICAL CARE MANAGEMENT

ASSOCIATION; RICK SMITH, SENIOR VICE PRESIDENT FOR

POLICY, PHARMACEUTICAL RESEARCH AND MANUFACTURERS ASSOCIATION [PhRMA]; PAUL PRECHT, DIRECTOR OF

POLICY AND COMMUNICATIONS, MEDICARE RIGHTS CENTER; AND JUDITH STEIN, EXECUTIVE DIRECTOR, CENTER

FOR MEDICARE ADVOCACY

STATEMENT OF MARK MERRITT

Mr. MERRITT. Thank you, Mr. Chairman and Ranking Member

Davis, the rest of the Members who will be in and out throughout.

My name is Mark Merritt. I am president of the Pharmaceutical

Care Management Association. PCMA is a national association representing America’s pharmacy benefit managers. PBMs administer

prescription drug benefits for more than 200 million Americans

with health coverage. Our clients include the Nation’s largest public and private purchasers, including labor unions, Fortune 500

companies, FEHBP plans, and, of course, Medicare.

First, I would like to thank you, Chairman Waxman, for your

leadership on health care issues. PCMA is appreciative of the opportunity to work with your staff on generic biologics legislation

and on ensuring generic competition in the marketplace, and I am

pleased to be here today to testify about Medicare Part D and what

we do in it.

To begin, PBMs use a number of tools and strategies to maximize

value in terms of quality, access and convenience and overall drug

spending. First, let’s talk about PBMs and discounts and rebates

regarding manufacturers. There, PBMs pool the purchasing ability

of all our clients and consumers and encourage certain kinds of utilization to obtain discounts and rebates from brand-name manufacturers.

First, our panels of independent clinical experts, called P&T committees, or pharmacy and therapeutic committees, comprised of

independent doctors, pharmacists, academics and others, inform us

of which drugs are appropriate for certain therapeutic classes

which address particular medical conditions. Then we negotiate

with manufacturers who make competing products within that

class.

The manufacturer which offers the best discounts and rebates

typically has their drugs placed on formularies at lower copays

than their competitors. That encourages consumers to choose the

more affordable drug, although their physician can, of course, direct them to another, if clinically appropriate.

While discounts on individual drugs can vary widely, overall,

manufacturer rebates have decreased drug spending by up to 9 percent in FEHBP, according to their report. And I believe your new

report, if I read it correctly—and I just got it, of course—says we

save about 14 percent in Part D. But I am not sure about that.

Extracting manufacturer discounts, however, is only one way

PBMs deliver savings. The majority of our savings that we generate results from innovative and aggressive management of other

components of drug spending.

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First, we create more affordable delivery options, such as mail

service pharmacy, which can save 10 percent for payors and patients alike. Second, we aggressively negotiate more economical reimbursement and dispensing fees with drugstores in our pharmacy

networks. Third, we use formularies, medication, therapy management and other tools to increase generic utilization and create a

more affordable and often safer drug mix for patients. Four, we employ drug utilization review programs [DUR], to inform patients

and doctors when we identify unsafe or unnecessarily expensive

prescribing patterns. And, five, we are constantly developing new

innovative tools, like electronic prescribing, which improve efficiency, safety and savings across the whole system.

Today, we are proud of our accomplishments in Part D. Costs are

lower than expected, premiums are as well, generic utilization is

higher and getting better, beneficiaries have broad access to

formularies and drugs and have access to over 60,000 pharmacies.

Overall, our savings are comparable to those we generate in the

private sector and for FEHBP plans. Most importantly, of course,

beneficiaries themselves are highly satisfied with the program;

and, of course, that is our marketplace.

There are, however, additional policy options that would further

enhance our ability to generate savings that I would offer for the

committee’s consideration, some of which have been mentioned already today.

First, we desperately need to create competition among biologics

by pursuing legislation such as your proposal, Mr. Chairman, the

Access to Lifesaving Medicines Act. This is the fastest-growing

component of drug spend and will reach $100 billion sometime in

the next 10 years. We need more competition in that space.

Second, we would ask policymakers to build on the

groundbreaking new e-prescribing incentives that were just passed

as part of the physician pay package.

Third, we would ask you to take a closer look at the six classes

of clinical concern that have been mentioned earlier in which all

drugs from all drug makers are mandated for coverage in certain

classes, therapeutic classes. These are specifically important regarding dual eligibles, who are heavy utilizers of these drugs.

And this policy of mandating coverage, again, for all drug companies, all drugs in a certain class, we don’t believe it improves access, but it does make it difficult, more difficult, for PBMs to negotiate rebates for drugs in those classes. And, again, they account

for about 40 percent or more of the spending of dual-related spending.

In fact, the rebates in the six protected classes, we are only able

to generate about half as much—or half of significant rebates as we

are in other classes. Because when that leverage is taken away

from us, it inhibits our ability to get the right discounts from the

pharmaceutical manufacturers.

In conclusion, though, I appreciate the opportunity to share with

you our progress on my birthday and also look forward to answering any questions you might have and any concerns you might

have.

Chairman WAXMAN. Thank very much, Mr. Merritt.

[The prepared statement of Mr. Merritt follows:]

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Chairman WAXMAN. Mr. Smith.

STATEMENT OF RICK SMITH

Mr. SMITH. Thank you, Mr. Chairman and members of the committee. Thank you for the invitation to participate in today’s hearing.

My name is Richard Smith. I am senior vice president for policy

and research at PhRMA, which represents pharmaceutical research

companies.

Medicare Part D has greatly improved beneficiaries’ access to

needed medicines, reduced out-of-pocket costs and retained broad

choice among medicines. This has been accomplished at much

lower than anticipated cost to beneficiaries and taxpayers, and

data show that Part D enrollees are highly satisfied and they are

saving money.

Last week, Congress adopted an important PhRMA support improvement allowing more low-income beneficiaries to qualify for enhanced assistance.

The committee requested that I provide information on the nature of financial arrangements between pharmaceutical manufacturers and Part D plans, along with the extent of discounts. As a

trade association, PhRMA maintains a strict antitrust compliance

policy, so I can neither obtain nor discuss our members’ proprietary

information related to prices, negotiations or discount strategies.

As a result, my testimony reflects only publicly available information.

Part D was designed to achieve a range of objectives by carefully

balancing affordability, access choice and improved use of medicines. This careful balance requires assessing the program on an

overall basis, recognizing that its objectives are interrelated.

Part D saves beneficiaries money. Peer-reviewed research and

government studies report sizable reductions in seniors’ monthly

out-of-pocket costs, and premiums in 2008 are actually below the

level initially projected for 2006.

Part D’s competitive structure saves taxpayers money. Both CBO

and the Medicare Trustees report costs are far less than anticipated, largely because of vigorous competition. CBO concludes

plans have ‘‘secured rebates somewhat larger than the average rebates observed in commercial health plans.’’ And the Trustees report states many brand-name prescription drugs carry substantial

rebates, often as much as 20 to 30 percent.

I would also note, in the six classes, plans have an array of tools

used to negotiate savings. In these classes, plans have tiers, utilization management and many generics.

Comparing CBO’s 2008 and 2006 baseline shows that projected

total cost for 2007 through 2016 has dropped by $438 billion, or 37

percent. Actual plan bids, the best measure of the program’s per

person cost, are 12.8 percent lower than they were 2 years ago.

Part D offers beneficiaries choice of medicines through the medicines covered by individual plans and through choice among plans.

In fact, two of the largest Part D plans report covering all 100 of

the most commonly used drugs; and beneficiaries are picking plans

that combine no deductible, lower-than-average premium, and a

broad choice of medicines.

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While access to medicines has improved as intended under Part

D, IMS Health estimates that the program’s impact on retail pharmaceutical sales was an increase of about 1 percent in 2006. And

a recent academic study reports that, overall, Part D reduced average drug prices, and the trustees have reported that rebates increased in 2008. Moreover, drug costs growth has slowed since Part

D’s enactment to 3.8 percent in 2007, the lowest rate since 1961.

In assessing the program’s cost savings, it is important to consider the full range of populations covered and the full range of

cost-saving tools used. For instance, 14 million uninsured or underinsured beneficiaries before Part D did not have discounts and rebates routinely negotiated on their behalf. Now, powerful purchasers representing millions of covered lives each negotiate savings on their behalf.

And plans use a variety of tools, among them discounts, rebates

and incentives, to increase generic use to achieve savings. As was

mentioned previously, 13 of the 15 most commonly prescribed

drugs in Part D are generic. These tools have produced affordable

premiums and are largely responsible for the overall $438 billion

reduction in the program’s total projected cost.

In conclusion, Part D has achieved its objectives for beneficiaries

who clearly recognize its value. Vigorous competition has driven

down costs, both for beneficiaries and taxpayers. Changing Part D’s

market-based structure would undermine the balanced approach

which has produced sizable cost savings and greatly improved access to needed medicines.

We look forward to working with the committee to enhance the

program by building on its successful foundation, and I appreciate

the opportunity to testify.

Chairman WAXMAN. Thank you very much.

[The prepared statement of Mr. Smith follows:]

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Chairman WAXMAN. Mr. Precht.

STATEMENT OF PAUL PRECHT

Mr. PRECHT. Thank you, Chairman Waxman, members of this

committee, for this opportunity to testify.

I am Paul Precht, director of policy and communications for the

Medicare Rights Center.

The Medicare Rights Center is a national consumer service organization with offices in New York and Washington. Our hotline volunteers and caseworkers help older and disabled Americans deal

with every conceivable type of problem standing between them and

the health care they need.

Before the Part D benefit started in 2006, the most frequent call

came from people with Medicare who could not afford to buy the

medicines they were prescribed. Today, despite the billions in subsidies provided to the insurance companies and pharmacy benefit

managers running Part D, it remains the No. 1 problem we hear.

A typical call comes from someone making less than $20,000 a

year. More than half of the people with Medicare earn less than

that amount. They don’t have much to live on, but it is still too

much to qualify for extra help with their prescription drug costs.

Multiple drugs to treat multiple chronic conditions put this person in the Part D coverage gap, the donut hole, where she—and it

is often a widow living alone who calls—must pay both the premiums for her Part D drug coverage and the full price of her drugs.

With a drug bill in excess of $500 per month for months on end,

on top of medical and other bills, the options are few. She can try

to get free samples from her doctor. She can head for the emergency room. When these strategies fail, too often, she may go without the medicine she needs.

Prescription drug prices are just too high, and Part D plans are

not delivering the lower prices that were promised when this benefit was created. They certainly are not providing discounts on par

with the prices the VA, State Medicaid programs, or our neighbors

in Canada have secured. That is widely acknowledged.

What is less well-known, however, is that the rebates and discounts that the Part D plans have been able to obtain are not

passed through to consumers in the form of lower prices. That

means each time a diabetic person with Medicare scrapes together

the money to buy a $400 specialty drug, the Part D plan pockets

a $30 or $40 rebate, based on the averages that this committee has

uncovered. That rebate is not used to lower the $100 coinsurance

she paid during the initial benefit period, and it does not bring

down the $400 price she pays during the donut hole.

Plans argue that rebate revenue is used to keep premiums down.

In effect, under this system, sick people who need expensive medicine pay a surcharge to keep costs down for their healthier neighbors. It is the opposite of the way insurance is supposed to work.

It is not just brand-name drugs that are too expensive under

Part D. People with Medicare are also being overcharged for

generics under some plan D plans. This scheme was described in

the Wall Street Journal this week. This is how it works.

The Part D plan, an insurance company, pays its pharmacy benefits manager $60, for example, for each prescription of generic

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Zocor that it covers. But the drug really costs only $20. The pharmacy receives $15 from the PBM and $5 from the consumer. At the

end of the month, the consumer gets a statement from the PBM

saying it spent $55 for the prescription, and the customer is $60

closer to the donut hole.

Consumers who take a few generic drugs that are subject to

these inflated prices can be pushed into the donut hole 2 or 3

months earlier in the year. What happens when consumers hit the

donut hole? Do they pay the $20, the reimbursement rate for the

pharmacy? They do not. They pay $60, and the pharmacy is forced

to kick back $40 to the PBM.

PBMs argue this pricing scheme keeps administrative costs down

for the insurance companies. But here is the twist: Sometimes the

Part D plan and the PBM running this pricing scheme are part of

the same company. In our view, prices are being manipulated to

gouge both the consumer and Medicare, which pays more for the

dual eligibles, since they pay the cost sharing.

We are 21⁄2 years into the Part D drug benefit, and even if the

administration follows through on its promise to end this scheme—

and they backed off last time they proposed to end it—it will continue through the end of 2009.

When the insurance industry and the PBMs talk about how Part

D has marshaled market forces to lower costs, this is the market

they are talking about. It is untransparent, it is rigged against consumers, particularly when they fall sick, and it does not deliver the

prices consumers could receive if Medicare was negotiating with

manufacturers and running the benefit.

People with Medicare should have the choice to receive drug coverage directly through Medicare. A Medicare plan that, for example, could encompass the duals, as a start, would be a good way to

deal with these overcharges that we are facing.

Just one last remark. Everybody talks about the satisfaction

rates with Part D. But those same polls also show similar percentages of people want a simpler benefit, they would like the option

to have coverage under Medicare, and they want the government

to be able to negotiate lower prices.

Thank you.

[The prepared statement of Mr. Precht follows:]

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Chairman WAXMAN. Ms. Stein.

STATEMENT OF JUDITH STEIN

Ms. STEIN. Good afternoon and thank you, Chairman Waxman.

Thank you for being here, Mr. McHenry and Congressman Murphy.

I am Judy Stein. I am testifying today on behalf of the Center

for Medicare Advocacy, of which I am the founder and executive director.

Since 1977, first at Connecticut Legal Services and then when I

founded the Center in 1986, I have dedicated my legal career to

representing Medicare beneficiaries. At the Center for Medicare

Advocacy, we have represented thousands of Medicare beneficiaries

and their helpers in Connecticut and across the country to understand and utilize Part D. We hear repeatedly from them about

problems that arise from the complexity of the program and its

ever-increasing costs. Unfortunately, problems go beyond just the

dually eligible population.

There are a myriad of plans, each with varying benefit structures, formularies, out-of-pocket costs, and it makes comparisons

all but impossible. Beneficiaries have insufficient information to

understand formularies, coinsurance, copayments and coverage

gaps. They lack sufficient information to make sound choices. Indeed, the Center has hired an experienced advocate who dedicates

all of her time just to handle the Part D problems just in Connecticut.

I thank you very much, Chairman Waxman for your leadership

in investigating prescription drugs and Part D in general and Congressman Murphy for all the work he has done in our home State

and now very happily here in Washington to help Medicare beneficiaries across the country.

Over the past several years, the Center has written extensively

about the effects on our clients of increased reliance on private insurance plans to provide Medicare coverage. Those plans lack the

stability and uniformity of the Medicare program, and they have

often decreased, not increased, access to care and increased costs.

Unfortunately, the only way to get Medicare coverage for outpatient prescription drugs is through private plans. Our clients

must decide each year which plan to choose from among dozens

and dozens with varied cost sharing and coverage rules.

This is the packet my mother had to look through, and she is a

relatively well woman who takes only three drugs. It took us hours

to go through the decisions for her.

If beneficiaries seek assistance, and if it is available, they must

divulge private information about their health and medications. I

don’t think this has been thought of at all as one the personal expenses of the program. This information is something that many

beneficiaries do not even want to share with their families. And,

frankly, I was not aware of the drugs my mother took until I had

to help her with Part D; and she would have preferred I didn’t. It

is also a step beyond to divulge this information to 1–800-MEDICARE representatives or a plan operator, and many people don’t

want to do that.

As a consequence, the vast majority of beneficiaries, because of

these problems and others, do not in fact change plans from year

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to year, so the whole issue of choice is increasingly becoming a red

herring. In fact, 17 percent—only 17 percent of people chose to

switch plans this last year, even though it would have been in their

best interests oftentimes to do so.

Our clients are subject to the whims of the companies that decide

to offer drugs to the Medicare program. They must either bear the

increased costs and reduced access to drugs or go through one or

another an onerous process, either to choose to appeal a decision

or to wait until next year when they may be able to get a better

plan. Because if your health changes or the plan changes the drug’s

pricing or the drugs on its formulary, all of which can happen, you

cannot get into a different Part D plan.

According to an ongoing study by AARP, any savings in drug

costs achieved by Part D were achieved through a reduction in the

cost of generic drugs. However, the prices for 169 brand-name

drugs went up 50.4 percent between 2001, when the first AARP

study happened, and 2007.

Higher drug costs mean that beneficiaries reach the coverage

gap, or donut hole, sooner. Increased costs are causing a terrible

impact on our beneficiaries, especially those who cannot take a generic equivalent, and that includes people with cancer, cardiac

problems and other very significant illnesses. No stand-alone drug

program offers brand-name drug coverage during the gap.

This week, a woman from California e-mailed us telling us, ‘‘I am

having terrible problems trying to find a way to pick the medication for my father’s chronic illness. He is diabetic, needs chemotherapy for bladder cancer, and has cardiac arrhythmia. Between

him and my mother, they have only $1,900 per month, and my father is already in the donut hole.’’ That was in July. There are 6

more months ahead.

One of our clients in Connecticut, a 52-year-old woman, pays $6,000 a month for her medications, if she could afford them, which

she cannot. She is on Social Security Disability because of her sickle cell anemia. Her prescription drug plan refused to provide coverage for the dose needed by this woman, even though it was ordered by her physicians, who referred her to the Center, and we

appealed outside the plan finally and got coverage.

One woman in Tennessee wrote she can’t afford and is therefore

not taking her drugs.

In conclusion, the program has untold expenses for beneficiaries,

for States who, like Connecticut, are wrapping around and paying

for Medicaid beneficiaries and people on their State pharmaceutical

assistance plans, and are putting ever-increasing costs of prescription drugs into the prices that taxpayers must pay for Medicare in

general.

In summary, we urge the Congress to take the following steps:

Include a prescription drug benefit in the traditional Medicare program and authorize the Secretary to negotiate the cost of drugs

within that program at least; require drug plans to pass along the

fullest extent of their rebates and include beneficiaries while they

are—and include those rebates when beneficiaries are paying

themselves in the gap; increase transparency by requiring drug

plans to make available information about their pricing and rebates; increase oversight of the Medicare Web page, which is often

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very different from the information given on the plan’s Web pages

themselves; and require CMS to provide greater oversight of the

Part D plans in their oversight.

Chairman WAXMAN. Thank you very much, Ms. Stein. We are

going to put that whole statement in the record and all of those

recommendations, which we very much appreciate.

[The prepared statement of Ms. Stein follows:]

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Chairman WAXMAN. I am going to start off the questions.

Our committee for the first time was able to analyze the drug

and insurance company proprietary data on drug pricing and compare the prices charged to the Medicare Part D program and the

prices charged to Medicaid, and the findings reveal that the private

Medicare Part D insurers are paying 30 percent more for drugs

than the Medicaid program. This has resulted in a windfall of over

$3.7 billion for the drug manufacturers on the sale of drugs to

dual-eligible enrollees.

These elderly and disabled individuals used to get their drugs

from Medicaid. They have switched to Medicare Part D, and now

their higher drug prices are costing taxpayers billions of dollars.

Mr. Weems argued that if Medicare Part D got the same discounts for drugs that the dual eligibles that Medicaid gets, there

would be a negative consequence for other Medicare beneficiaries.

Specifically, he said this could lead to higher prices at the pharmacy, compromised incentives to move enrollees to generic drugs,

undermine utilization management activities that plans for important safety protections as well as cost controls.

Ms. Stein, what do you think about what Mr. Weems’ concerns

are that he expressed to us about this issue?

Ms. STEIN. Thank you, Chairman.

Well, one of the things I think is that I added one of the economists who spoke this morning, the figures on the bottom line on

Mr. Weems’ chart, and they came to, I believe, $400 billion, which

I believe was also the original estimate of what the program would

cost. So it seems to me that I don’t understand where the savings

are in that explanation that was given. I think one of the things

we often find is that one has to add up the numbers and question

where they are coming from.

What I know is that we have 6,500 calls and thousands of emails every year at this Center. I sit in the real world listening to

real people. They cannot afford these drugs. They are in the donut

hole way earlier than was anticipated, and it is a problem with

them. They cannot afford the drugs, and they are not getting the

rebate in price when they are in the donut hole. Also, the plans

don’t cover their drugs, more often than not.

Chairman WAXMAN. Thank you very much.

Mr. Precht, what do you think of the argument that we are really

doing a favor for the rest of the Medicare beneficiaries by paying

a higher price for the dual eligibles?

Mr. PRECHT. I am not an economist, but it doesn’t make any

sense to me. It seems that there is money that is going into the

pharmaceutical manufacturers, rather than into providing coverage

for people with Medicare; and it certainly seems we could use that

money to get more people into the extra health program, for example, so they wouldn’t have to pay full price in the donut hole.

It seems to me that if there were competition between the private plans and a Medicare option that negotiated its rates that

would provide some price discipline and it could result in lower

prices, both in the Medicare option as well as the private option.

Chairman WAXMAN. Mr. Merritt and Mr. Smith, do you disagree

with the report’s findings that the manufacturers are charging

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more for drugs under Medicare Part D for dual eligibles than they

are under Medicaid?

Mr. SMITH. Mr. Chairman, I haven’t had an opportunity to review the report. It certainly wouldn’t surprise me if the type of

market-based system we have, with very powerful large purchasers, lots of tools at their disposal—Mr. Merritt described

those—negotiated a price that was different than the price that

was previously set through the administered pricing system of

Medicaid.

I think it is important to recognize that the——

Chairman WAXMAN. You say because of all the strong tools they

have they negotiated a price that is higher than Medicaid?

Mr. SMITH. I am saying there might be a valuation in the marketplace that is different than the valuation through the administered pricing system of Medicaid.

Chairman WAXMAN. So you think Medicaid is lower priced, and

we have moved to a higher price system under Part D through the

private plans?

Mr. SMITH. Mr. Chairman, without having had an opportunity to

review the report, I am simply saying that I can imagine that private purchasers with lots of tools negotiating come up with different valuations than does an administered pricing system.

And when we look at the entire population, including the 14 million individuals who previously weren’t typically having discounts

and rebates negotiated on their behalf, I think that we see that

there is considerable price pressure.

Chairman WAXMAN. How about just the 6 million that are dual

eligibles? With all these tools that the private plans have for negotiating better prices, why are we paying more for that distinct population for their drugs than we were under Medicaid?

Mr. SMITH. Well, I believe, first, that private plans negotiate for

entire populations, so average rebates for entire populations may

differ than average rebates for a segment of the population. They

may also use a different mix of savings mechanisms. They may use

more than rebates of savings mechanisms. And, ultimately, I think

it is difficult to pull the one population out, look at it separately

from the entirety the population being covered and for which savings is being negotiated.

Chairman WAXMAN. Would you include the private-sector coverage for non-Medicare? Would you put them in the overall picture?

Mr. SMITH. I am not quite sure I understand the question, Mr.

Chairman.

Chairman WAXMAN. I will send you a letter about it afterwards.

Mr. McHenry.

Mr. MCHENRY. Thank you, Mr. Chairman.

You know, this committee is trying to find efficiency in government, and I appreciate it. It has taken us a while to actually get

to hearings that get to that during this Congress, but I am glad

that we can actually have this discussion.

I do have a question. Mr. Precht, we are speaking about Medicare Part D today. But, admittedly, Medicare is a larger issue that

we are concerned about.

Ms. Stein, I appreciate your advocacy and help in this process

and helping American seniors get the information they need to

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make good decisions about this. But, you know, I would like to

know, because you are concerned about Medicare rights, Mr.

Precht, are you concerned about the financial adequacy of Medicare

Part A?

Mr. PRECHT. Yes, sir, very much.

Mr. MCHENRY. In terms of the amount of money the government

spends, isn’t it far greater in Medicare Part A?

Mr. PRECHT. That is correct. There is more money spent on hospital care than on prescription drugs.

Mr. MCHENRY. Do you think we should be looking at that as a

Congress?

Mr. PRECHT. Absolutely.

Mr. MCHENRY. OK. I mean, the price differential between the

two is significant. It is—what—about $200 billion—$220 billion for

Medicare Part A and about $50 billion for Medicare Part D. Is that

roughly correct? I am not trying to put you on the spot.

Mr. PRECHT. I will take your word for it.

I mean, there is certainly more spending. I guess I don’t know.

I am not as familiar as I should be with research that looks at the

spending under Part A and whether we could be saving money. But

I think probably there are ways to save money there as well.

Mr. MCHENRY. Ms. Stein, to your comment that beneficiaries are

struggling with ever-increasing prices—and, generally speaking, in

this time right now of inflation, we are all struggling with high

prices—gas prices, food prices and everything else. It is putting a

pinch on seniors, especially. But in terms of the Medicare Part D

beneficiaries and what they pay in premiums, has that gone up?

Ms. STEIN. Yes, sir. In fact, my—for instance, Humana has gone

up three times what it was in the first year of the program.

And, by the way, with regard to Part A, the Center for Medicare

Advocacy is extremely concerned about the cost of Medicare in general, and we do a great deal of work with regard to those issues.

Mr. MCHENRY. Sure. Back to the point of what the beneficiaries

are paying, according to the CBO, the cost estimate at the beginning of this program was, I believe, $37 or $35, and CMS estimated

about the same at the beginning of the program. I think CMS estimated $37. CBO said $35. In fact, the Democrats had an amendment in committee to set the price of premiums for seniors at $35.

Well, premiums are under $25 right now across the population for

all beneficiaries, is that not correct?

Ms. STEIN. For all beneficiaries, the premiums went down. For

plans that people were in, they often went up, and they didn’t

switch. So that people were in a plan in the first year, their premium went up three times in the second year for one of the entities

that has the largest population.

Mr. MCHENRY. Sure. But there are other entities by which they

can say, I am done with Humana. I am going over here. There are

enough forces out there——

Ms. STEIN. Because of the structure of the program——

Mr. MCHENRY. Ma’am, let me finish asking the question.

There are enough in the way of choices out there that seniors can

make an informed decision; and if on average the premiums have

gone down, isn’t that a good thing?

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Ms. STEIN. It depends, sir. In my mother’s case, for instance, yes,

she takes two drugs. She decided to stay in her plan because it was

a lower premium, she thought. But it didn’t cover one of her drugs.

So you could choose a premium that is lower this year but not get

your drug coverage. It is as not as simple as that.

Mr. MCHENRY. Because an individual makes a mistake doesn’t

mean it is a bad policy or bad program. Mistakes are made every

day. After all, look at the U.S. Congress. We have made mistakes.

We are all human.

Ms. STEIN. With all due respect, sir, just let me say this. There

is only 17 percent of people that switched plans. So the fact is that

people, for whatever reason—I believe the design of the program—

are not utilizing the choice option because it is so complex. And the

fact is that, if they do choose based on the lowest-cost premium,

they may well find themselves in the wrong plan.

Mr. MCHENRY. OK. Thank you. I appreciate your testimony.

I have one final question for Mr. Smith, if I may, Mr. Chairman.

Overall, we are talking about price negotiation. That is a part of

this. And the majority report, the Democrat report from this committee, expresses that there will be a ‘‘windfall’’ to the pharmaceutical industry unless government negotiated the price. Even

though what they failed to mention is that private entities, all

these different insurers, are negotiating for the price of drugs. So,

therefore, they want the government to step in and say all these

different insurers have to accept this price.

OK. If there is a windfall for the pharmaceutical industry, how

much has your business gone up? Because the statistic I have, in

your testimony, is that prescription drug sales have increased by

only 1 percent since Medicare Part D was implemented. Where is

the windfall?

Mr. SMITH. Yes, sir. I would, of course, view prices that are set

by very powerful purchasers negotiating very aggressively for

prices and the resulting prices as not generating a windfall. The

basic result has been that, in 2008, prescription drug costs in the

United States went up by the lowest rate since 1961, 3.8 percent,

and the slowdown in growth continues. IMS Health reports, for the

12 months ended May of this year, the growth rate for prescription

medicines in the United States, the entire cost for the whole country, was 1 percent.

Mr. MCHENRY. Thank you, Mr. Chairman.

Mr. MURPHY [presiding]. Thank you, Mr. McHenry.

Mr. Smith, I want to get back to followup on a few of Chairman

Waxman’s questions. I know he may followup with you in written

correspondence.

But with regard to the differences between the negotiations that

happened with private plans and the Medicaid rebate system, your

ultimate leverage in a negotiation with a particular health care

plan is to not sell that drug to that plan, to not be part of their

formulary, is that correct?

Mr. SMITH. Without suggesting proprietary information about

business practices, I think that would generally accurately characterize the market.

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Mr. MURPHY. With regard to the Medicare rebate system, your

ultimate leverage with the Medicaid rebate system is to voluntarily

not sell your drug as a part of the Medicaid system?

Mr. SMITH. That is correct. On a one-size-fits-all basis, you are

really excluded from a very large portion of the market entirely,

very different from the private sector.

Mr. MURPHY. Because the purchasing pool is so large from the

Medicaid side, because, as you say, it is a one-size-fits-all, the decision is much harder to not sell the drug to the Medicaid system.

Mr. SMITH. Well, there is no real opportunity to reflect value, because there is that statutory formula that sets the price. So I think

that one of the challenges is that there really is no negotiation in

that respect because it is a decision that is generated by a statutory pricing formula.

Mr. MURPHY. But you are not compelled to sell the drug?

Mr. SMITH. It is either sell at that statutory formula or be excluded from the entire Medicaid market.

Mr. MURPHY. Ms. Stein, the report that is released today details

a 6.6 percent increase in the average cost of a drug from 2006 to

2007, which is about twice the rate of inflation. You suggested

some of the impacts of this in your testimony.

But I just wanted to ask you, what is the impact of that 6.6 percent increase in the price of the drug to an average health care consumer in the Part D system, given I think the testimony that you

have given about the number of people falling into the donut hole

earlier than expected or earlier than people had hoped for?

Ms. STEIN. Sir, they are very often in the donut hole earlier.

Once they are there, they are paying the full cost of the drug, not

with the rebate. People, as you will see in my written testimony,

are taking less than the full prescription which has been given by

their physician, as someone is quoted in my testimony. Particularly

people on psychotropic drugs we find are not taking their medications. Many of them don’t like to take them in the first place.

So we have a lot of problems with the fact that people aren’t taking the medications or taking less than has been prescribed, and

they are falling into the donut hole earlier.

I would also like to suggest there are tremendous costs to the

States as a consequence, which, as you know in Connecticut, we

are also paying—when the people fall into the donut hole, we are

paying those coinsurances. And on specialty drugs that can be for

the individual as well as for the State up to 33 percent of the cost

of that special brand-name drug.

Mr. MURPHY. The last question, just to make this point clear,

when an individual falls into the donut hole, when they come to

pay for the price at the retail pharmacy, they are not getting the

benefit, certainly not of Medicaid, but they are not getting the benefit of the potential discount negotiated by the HMO they were covered which?

Ms. STEIN. That is correct. That is included and helps them get

into the donut hole sooner. Once they are in the donut hole, they

don’t have the benefit of that; and they pay more.

Mr. MURPHY. Thank you, Ms. Stein.

Thank you very much to the entire panel. We will keep the

record open for further comments and statements.

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I would like to add without objection for the record a statement

for today’s hearing submitted by America’s Health Insurance Plans.

Without objection, that is entered into the record.

[The information referred to follows:]

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Mr. MURPHY. Again, thank you to this panel. Thank you to our

previous two panels.

This hearing is adjourned.

[Whereupon, at 2:26 p.m., the committee was adjourned.]

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